Motley Fool Money - Nike Looks Expensive, Some REITs Look Cheap

Episode Date: March 22, 2023

Inventory problems persist for the athletic apparel leader, but the latest results show improvement. (0:20) Matt Argersinger discusses: - Nike beating Wall Street's low expectations in the 3rd quarter - Why being a higher-end discretionary consumer business puts Nike at risk - How the banking drama is putting some commercial real estate businesses in peril while four REITs appear to have been oversold (8:20) Kirsten Guerra and Tim Beyers face off in the semi-finals of our stock investing version of March Madness! Companies discussed: NKE, MAA, ARE, O, PLD, GM, MNDY Host: Chris Hill Guests: Matt Argersinger, Kirsten Guerra, Tim Beyers Producer: Ricky Mulvey Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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We've got Nike, real estate, and two analysts going head to head over two different stocks. Motley Fool Money starts now. I'm Chris Hill joining me today. Motley Fool senior analyst Matt Argusinger. Thanks for being here. Hey, thanks for having me. Let me timestamp this. We are recording late morning on Wednesday.

This is before the announcement from the Fed and whatever comments J. Powell makes. So on tomorrow's show, Andy Cross is going to be here. We'll be talking about all of that. So for right now, let's you and me start with Nike. Is that you're a nice way of saying whatever we talk about now is really not going to matter by this afternoon? I don't know. I'm a Nike shareholder. I feel like what we're going to talk about matters to me. All right. Good. And we've got some other stuff to get to as well. I just want to, you know, for anyone who's listening, you know, this will come out after the comments. Why aren't they talking about the Fed? It's the morning. The Fed stuff hasn't happened yet.

I think it's fair to say that Wall Street's expectations for the holidays were pretty low in terms of Nike and not without reason, but third quarter profits in revenue beat those low expectations. Where do you want to start? Because it seems like inventory is getting better, but they still have work to do. Right. I think that's where you have to start because that's been the issue, I think, overhanging the business and the stock price for most of the past, say, six to nine months. I mean, when inventory is going one way and sales are going the other, it only leads to one thing, which is lower profit margins and lower earnings. That's what they're seeing, even though, as you mentioned, the expectations were better.

And global revenue was up 14%. Their direct channel looked pretty strong. Digital sales there were up 20%. But again, I think it's the earnings. That's really the story. Net income was down 11% year over year. Gross margin was lower. And it's not as if they're seeing, I mean, they're working on the glut, but inventories were still

up 16% in the quarter. And that's faster than sales are growing. So I still think they're in that situation. They're going to have to continue to mark down, continue to liquidate inventory. That's going to keep gross margins pretty low. And they're only seeing revenue growth of about high single digit percentages for the remainder of the fifth year year. So to me, the inventory is one thing, but I think the bigger risk with Nike right now.

is that they're kind of in that uncomfortable higher-end discretionary category that I think is susceptible to a slowdown in consumer spending. So if we see that, and we know that credit's getting a little tight, consumer credit card bounces are high, the job market is strong, but maybe teetering. So they've got this inventory issue. If sales then start to slow down, that could pretend some serious problems. And it's not as if Nike shares are cheap at the moment. Right. Even though the stock is treading water today, you look over the last six months, it's

up 25%. It has definitely rebounded from the low. I do like the fact that John Donahoe, the CEO at Nike, I feel like he's about as transparent as you would want to see in terms of talking about the business. You go back to last quarter, he said, we're past the worst of the inventory problems, but margins are going to take a hit during the holidays. And he was right about that. He was. Spot on. And I think you're right.

I think they're working through it as aggressively as they can. If you look at last quarter, inventory was up 43 percent year over year. So they've done a good job. That growth has come way down. Yeah, you mentioned the stock being up 25 percent. I just feel like the stock isn't really reflecting, I think, some of the issues that they're going to have with margins and a slower growth rate. I mean, if you look at what they're expecting to make for earnings this year, that means

the stock is trading roughly 38 times those earnings. Now, maybe those are, that's kind of a depressed earnings state, and earnings are going to bounce back in 2024, fiscal 20204. But I just think you're paying a high price for, you know, what, it's probably going to be a tepid next few quarters. We have talked so much over the last few weeks about Silicon Valley Bank, First Republic, Credit Swiss. and a bunch of the ripple effects from what we're all seeing in the banking industry.

But one thing we haven't really talked about is the fallout for real estate stocks and reits. And I'm curious what you are seeing and what your reaction is to what you're seeing. Yeah, it's been something to behold, Chris, the fallout in reits and real estate-related stocks in just the past few weeks. I mean, I think the initial reaction to the Silicon Valley Bank fallout was, well, okay, overexposed to technology, venture capital, that part of the market. I think what now investors are waking up to is that, well, the fallout of SVB and kind of this small to mid-sized regional banking crisis that has ensued, it's heightening awareness

about the role that commercial real estate plays on the loan books of many of these banks. I mean, these smaller regional banks, they tend to be the life flood of commercial real estate lending in many markets. So you take away that liquidity, and a lot of commercial real estate is not going to be able to refinance or roll over debt this year and probably in the next few years. And so you've got to remember, in commercial real estate, especially office, was already facing a lot of fissures. Tentants aren't coming back to the office.

They're not renewing leases. So you have a slew of office landlords sitting on millions of square feet of empty office space. Leasing activities non-existent. and the debt is coming due. So remember, in commercial real estate, unlike the residential market, debt tends to have a lot, much shorter maturities, three years, five years, maybe seven years at the high end, and those interest rates are almost always floating. So there isn't like a 30-year fixed rate that you'll find, you know, that we have in the home market.

So that debt is coming due, interest rates are higher, and now with Silicon Valley Bank and a lot of banks, not in a position to lend, it's creating a real. real challenge for commercial real estate. Do you think the opportunity in commercial real estate is attractive enough, that the economics are attractive enough, that larger banks start to step in and essentially, among other things, take market share from the smaller regional banks? I think so. I just worry about the smaller to sort of mid-size areas, the real estate market, because unfortunately the bigger banks, like your JPMorgans, your Bank of America's, it's It doesn't move the needle enough for them to get involved.

I mean, they'll get involved in some of the bigger deals. And yeah, it will take market share for sure. It's that lower part of the market, but I do think the damage to the REIT market has just been way overdone. I mean, especially when it comes to large real estate investment trusts that have great assets, great balance sheets, plenty of access to the capital markets. A few to come to mind are, you know, mid-America apartment communities, which is the second largest apartment owner, Alexandria real estate, which is a blue chip to

Technology and Life Sciences office reet, Realty income, which is just a wonderful, diversified, very low risk net lease reet. And prologists, the leading industrial rate, these stocks have been killed. They're trading at some of the lowest valuations in years with dividend yields that are also at multi-year highs. And if you look at the overall reet picture, reits are kind of trading by most estimates at least 10% if not 20% below their net asset value. And that, and I'm not saying all reets are.

create equal. But that just, I think, presents a really interesting opportunity for investors that can take a long-term view because the damage has just been pretty severe. I really think at this point it's overdone. Matt Argusinger, always great talking to you. Thanks for being here. Thanks, Chris. While the Real March Madness gears up for the Sweet 16, our investing version moves on to the semifinals. Today we've got Kirsten Gera facing off against Tim Byers. Welcome to the Semi-finals of Stock Market Madness. This is going to work a little bit differently because there's going to be some rebuttals now that we know what the stocks are. In this semifinal matchup, we have Kirsten Gera and Tim Byers. Kirsten. We'll be talking about General Motors.

Kirsten, good to see you as always. Thanks for having me on, Ricky. Tim Byers coming in to DefendMunday.com. Tim, appreciate you being here. Thanks, Ricky. Ready to go. The way this will work is that Tim Byers has elected to defer, meaning that he will kick off and end the discussion. So he'll get two minutes at the start to recap the case on Monday. Then Kirsten will have five minutes to offer her rebuttal and recap her case for General Motors. Then Tim Byers gets three minutes at the end to make his rebuttal. I will be watching the stopwatch. And with that out of the way, Tim Byers, two minutes is yours to recap your case.

Okay, Monday.com. For those who don't remember, Monday is a low-code productivity software. I consider it one of the innovators here born in 2012. I would say its primary closest competitor would be AirTable. They were born in 2013. The company it wants to be is Atlassian. I'm going to come back to that in the final here. But what I want to point out, two things about Monday. in the minute and a half I've got left here. It meets all six signs of a rule breaker. And that is very important because companies that meet all six signs of a rule breaker tend to be exceptional growth companies. And to recap what that is, the six signs of a rule breaker are the top dog and first mover. They have sustainable advantage. They have past price appreciation.

They have good management, smart backing. They have strong consumer appeal. and they are overvalued according to the media. So in my last case, I went through each of those six, so I'm not going to go through that right now. But what I will say is that this company has two very big things going for it. It is operationally efficient and growing more so with every passing quarter. And I'm going to point out how that is in just a second.

And then secondarily, the valuation considering the growth here is, actually pretty darn attractive. So first things first, operationally efficient. Monday.com, one of the arguments over companies like Monday.com, because it's a software company, it's a cloud company, is that there's far too much stock-based compensation here. And you could make that argument, except not really, not anymore, because in the latest quarter, even if you take out every bit of the stock-based compensation, it's still a cash generator, $5.3 million worth. This company has, generated increasingly improved operating margins. And we're out of time. Yes, we are. So I'm going to have to come back to that. Kirsten, Gera, you get the full five minutes to offer

your case and offer a rebuttal to Monday.com. And Tim Byers' case, five minutes is yours. Thank you. So I, as I mentioned last time, automakers right now, I think, are a more interesting space than maybe they have been for decades, given a few catalysts that are changing the industry overall, and because GM specifically is, in my opinion, priced to reflect automakers of the past and not necessarily the near future. So I like GM for a few reasons. Market share, margin story, and unprice optionality. I'll start with market share. GM is pushing harder than any other OEM I've seen into segment coverage. It plans to produce EVs covering 75% of U.S. segment volume by 2025. And together with the overall industry shift to EVs, this is a really strong opportunity for

them to gain market share above their historical average around 16%. But even if I'm wrong there, GM has a compelling margin improvement story as well. So EVs as a whole are generally viewed as having far fewer parts and being easier to manufacture at lower costs. GM's EBIT adjusted margins, which now sit around 8 to 10%, management expects to improve. that to 12 to 14% by 2030. And now, management has been very clear that it will not achieve Tesla-like margins just by virtue of producing vehicles that cover so many more segments than Tesla does. But that's fine.

A 4% percentage point average margin improvement for a company with revenues as large as GMs is a very meaningful improvement. And finally, that unprice optionality that I mentioned is Cruise, GM's autonomous ride-hailing subsidiary. GM believes Cruz can reach 50 billion in revenue by 2030. And so if we assume that that's correct, and then we assume an average of $25 per ride, which is taken from an average Uber ride, that would imply that Cruz in 2030 will facilitate two billion rides annually. And for comparison, Uber facilitated nearly $7 billion in 2019. So that seems very much within the realm of possibility. And if that $50 billion estimate was spot on, it would place Cruz at around 18%

of the company's revenues in 2030, which just makes it a far more appealing business model and margin profile than it stands at today. But enough about GM. Let's talk about why Tim's pick is trash. Here's what's tough about these two businesses, honestly. Monday.com and GM, they're very different. They could be honestly both great businesses and serve very different roles in the same portfolio, I think. So sorry to be a pacifist here in madness, but that's just the truth, I think. But I'll tell you why I personally feel more comfortable with GM compared to Monday.com. And that's because, in my mind, Monday.com feels a bit like a commodity. And I'm sure this sounds very rich from someone who just pitched an automaker, but hear me out here.

First off, a commodity for anyone unfamiliar is essentially just a product that's undifferentiated. So you can think oil or minerals, those are commodities. There's nothing distinct about the product itself. So in terms of a quality investment, it's all about how efficient the business itself is. And Tim has made a compelling case that Monday.com is a very efficient business. So clearly Monday.com is not a true commodity. But for me, it's just that if you imagine kind of a spectrum, and on one end of that spectrum, you have really highly differentiated vertical market software that requires like niche industry

knowledge, and there's maybe also not a lot of competition because the total addressable market is smaller. And then on the other end of the spectrum, you have like pure commodity. I would place Monday.com and all of its task management appears maybe leaning a bit more toward commodity, a bit less differentiated than a lot of other software plays out there. And I'm not a software developer, never have been. I could be totally wrong here. But to me, task management type software, like Monday, just seems to have one of the lowest barriers to entry in software. And that could be okay, as long as it's a large and growing market and everyone can

kind of grow their slice. But I do worry that there are some big expectations baked in. It trades around 140 to 160 times free cash flow, depending on whether you're factoring in leverage. So in comparing the two companies, GM, I just see as trading with lower expectations, but in my opinion, a lot of upside. And so if I'm right, that's a big win for me. If I'm wrong, I see it as not a huge loss, whereas Monday I worry is the opposite. If I'm wrong and it lives up to these big expectations, then, you know, I missed out on some upside. But if I'm right, I fear it would be a far bigger loss than GM could be for me. That is your time, Kirsten Gera.

Five minutes is up, and we can all get along, but only one person is going to make it to the finals of stock market madness, making his case that he should be the one. Tim Byers, three minutes is yours for a rebuttal to Kirsten's case. Okay, let me tell you why Kirsten's wrong. I mean, it's interesting. GM is never going to not only hit the margins of Tesla. it's going to have a hard time hitting the margins that it's going for.

And the reason for that is it's a disaggregated business. GM doesn't have control over a lot of that supply chain that would grant those margins. That's a problem. It's going to be very difficult to overcome. I would not over bet on those margins. In the case of Monday, they are very vertically integrated. They're integrated all the way down. And while it's true that low-code productivity software, there are a number of entrants in that,

it is a big market, it is growing fast, and there is a differentiation for Monday, and it is around how they make that software customizable for anyone that wants to use it. And so the number of use cases, it gets used for software development, it gets used for task management, it gets used for support, it gets used for customer relationship management. It is a highly flexible piece of software, and that shows up in the financials. But let me hit the valuation for a minute here, because this is really important. The argument for GM versus Monday is that you are getting GM at a crazy low price and that you're going to get a high return as a result of that. But here's what's true about Monday. When you look at the model, if it were to grow at 42 percent over the next 10 years annualized,

which is a high hurdle, I understand that. But if it were to do it, and it's already growing much faster than that right now, then that would be a 20% annualized return. Think about that for a minute. That's a 6x in 10 years. Now that, I would say that's unlikely. But the hurdle to a 10% return, which is probably what you're going to get from GM, if you're lucky, over the next 10 years, is 30%. And that's half, about half of where Monday is right now. So this is a business that's growing at an exceptional rate. It is getting more efficient. It is not firing people while its competitors are. And let me bank a little time and end on this. Can you imagine Monday becoming the business it wants to be, which is Atlassian? Because if you can, given all of its advantages,

given how it's growing, then that would make it a $35 billion company. Atlasian today, is over 40 billion. There is a very, it's a misunderstanding to think of the high hurdle here. It's not really as high as it looks. And that's why I really love Monday.com here. Tim Byers, thank you for the case on Monday.com. Kirsten Gera, thank you for the case on General Motors. Now it's up to you to decide who won. We're going to have a poll up at Motley Full Money on Twitter. You can decide who made the better argument. More importantly, who's moving on to the finals. market madness. Thank you both. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against.

So, don't buy yourself stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.