Motley Fool Money - RocketLab’s Neutron Update, On Holdings Earnings, and the eVTOL Rivalry Heats Up

Starting point is 00:00:01 Rocket Lab investors are still waiting on the pad. Motley Fool Hidden Gems Investing starts now. Welcome to Motley Full Hidden Gems Investing. I'm your host, Tyler Crow, and today I'm joined by longtime full contributors, Travis Hoyum and Matt Frankel. A little bit of an end of the summer sort of mix up as everyone gets those last-minute vacations in before kids go back to school. So earnings are still coming in.

Starting point is 00:00:25 We're starting to wind down in the earnings season, but we still got a couple coming online. We had On Holdings Report. We're going to talk about the state of the electric vertical takeoff and landing industry because there's been a lot of moves lately, but we're going to start today with Rocket Lab's earnings, which came in yesterday, but obviously didn't get a chance to talk about it yesterday. Shares of Rocket Lab are down a little, about 2% as we're taping after earnings. But let's be real, earnings wasn't really the topic de jour.

Starting point is 00:00:50 I went through the earnings called transcript and the word neutron appeared in the conference call 61 times, eridium, which is the acquisition it just made, came up 30 times, and only 17 times for electron. You know, the rocket they're actually used to generate those. those earnings. So guys, what did you see in the report and what were some of your reactions? I'm here because my kids started school today. I'll go ahead and say that. We start early in the South. Rocket Labs numbers, like you said, this real story is not the current revenue and the current profitability, but let's start there. So Rocket Labs numbers were strong on the top line.

Starting point is 00:01:23 Revenue was a little more than expected. The backlog grew a lot faster than expected, more than doubling year over year. The bottom line missed. It was a little bit of a wider loss than investors had expected. And that matters because the company is not profitable yet. Investors are skeptical about their near-term path to profitability. This is a company that has a roughly $50 billion market cap. So a larger than expected cash burn is justifiably a concern for investors. And that's especially considering that the Neutron, which you correctly mentioned, appeared 61 times in the conference call, it still hasn't gotten off the ground. Investors want to know that they're going to get the profitability without having to raise a ton more capital at this point. Yeah, I think this is a story

Starting point is 00:02:04 that we've seen over and over again this earning season. What is expectations and then what's reality? If you actually just take a step back and look at Rocket Lab and the stock's up 1100% over the past three years. So it's been a phenomenal run. Let's not take one day as too much of a positive or a negative. But, you know, Matt mentioned $50 billion market cap, $2.36 billion in backlog. that is a very small fraction of that market cap. So investors have very high expectations. Any sort of blip in, you know what, we may be a little bit delayed, has been just hammered by the market.

Starting point is 00:02:38 So I'm actually a little bit surprised that the market's not reacting a little bit more negatively since this is such a long-term growth story, you know, anything that pushes that revenue out is going to be a negative. But they're really trying to convince investors the reason that they're talking about these next generation products, about their acquisition of iridium, is because, they're trying to solidify that business model and sort of vertically integrate, show that they're going to be able to generate that value long term. So they're still trying to convince investors.

Starting point is 00:03:05 It's a little bit surprising that it's just a little bit of a ho-hum reaction from the market today. The Arridium deal is like a what we can be sort of investment that they're making. But at the same time, Aridium is a cash generative business. So you can kind of stem the cash burn that's been having for the rest of the business. You can use that to kind of maybe sharp the balance sheet a little bit. It's not going to solve all those problems, but it's certainly going to be a nice salve for what we've seen so far. Now, let's broaden out the lens a little bit here because there's some key things that have been

Starting point is 00:03:34 happening in the space industry. And I'm not even mentioning like, yeah, SpaceX did an IPO and everyone's been talking about space, but there's a lot of like trends to watch in space recently. And it's part of the reason why people are so excited about investing in space. We've got the Golden dome, this major defense space investment priority at Pentagon. We've got. a new international space station and then just a lot of commercial interests going on. So with all of this in mind, and yes, the space industry is kind of combed over in terms of investment at this point, but where do you see some of the compelling investment opportunities in this particular space? I don't know that anything is necessarily compelling to me right now

Starting point is 00:04:14 from a valuation perspective, but I do definitely want to watch what's the reality for these companies if you look at a company like an AST Space Mobile. A lot of hype behind that business are people actually going to sign up for a satellite connection for their phone? Is that going to be included in your plan if you're on Verizon or AT&T? What is the real business model behind it? Because we're currently in this phase of, hey, more rockets going up, more payload, more revenue for these rocket companies. All of this is great.

Starting point is 00:04:44 We're not at the there there yet point, but we're getting really close where these companies are going to have to start showing revenue, margin, whether they have pricing power or not. So that's what I'm keeping an eye on. I don't have many or any investments in this space at this point, but I'm intrigued by the potential for growth. I just think we may be set for kind of a pullback when we get to that reality point. I agree with Travis that the valuations pretty much anywhere in the space economy aren't terribly attractive right now. There are some long-term trends that I think have a lot of potential. I mean, it sounded kind of ridiculous when I first started, I have to admit, but the data centers and space thing sounds pretty cool. And like it could

Starting point is 00:05:22 really be a solution to a lot of the problems that we're going to face. But of the things you mentioned, I'd say that Golden Dome is really the most investable on a near-term basis, at least in my mind. Now, that could call it a defense play, call it a space play, call it what you will. Depending on the scope and the timeline, I mean, estimates have ranged from anywhere from 175 billion to 1.2 trillion in total spending. And unlike a lot of the other things we're talking about, there are already real contracts being awarded, real money changing hands. It's a theme that has money moving now, and there are some real legitimate cash flowing businesses that have a big piece of it. I can't help, but whenever I hear data centers in space, this is not for anything investment

Starting point is 00:06:03 related, but every single time I hear it, I just hear like that Muppet show Pigs in Space sort of thing. And it's like that, you know, big cry at the end. Hopefully, I know it dates me incredibly as like an old person talking about the 1970s Muppet show, but I don't know why, just kind of etched in my brain. Coming up after the break, we're going to kind of come back down to earth a little bit. We're going to take a look at on holdings earnings. You just found out that your sales team is at risk of missing quota. Don't panic. Just ask Rippling AI. Since it's built on your real-time people and business data, Rippling AI can pull metrics from Rippling and Salesforce into a meeting-ready dashboard showing quota attainment,

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Starting point is 00:07:22 R-I-P-P-L-I-N-G-A-I-S-O-L. Sign up for exclusive access today, rippling. A-I-S-F-Fool. Shares of shoe retailer, well, they'll call it athletic, athleisure apparel footwear, a company on holding. Their shares are down to about 18.8%

Starting point is 00:07:42 after the company reported earnings earlier this morning. I mean, 18% sounds awful, but it seems like this quarter, that's just, that's what everything happens these days when we report earnings. Either everything jumps, 20% or down 15%. And then three days later, we're just right back where we were. We'll see if that happens here. But Travis, I know you follow this company a lot. So give me the rundown. What did you

Starting point is 00:08:03 see? Maybe the 18% is just another blip or was there actually something that might justify why the market is thinking this? Well, the justification in the short term is that their guidance was relatively weak. So if we look at the results and now on always reports in Swiss francs, which makes their results really confusing for investors because you look at revenue was up 13.5% in the quarter, that doesn't sound all that impressive. But on a constant currency basis, it was actually 21.6%. So it's always important to look at those constant currency numbers because most of their sales are in the U.S. So a week dollar is going to make those sales look smaller when you look through the lens of a Swiss franc. But what investors are really focused on right now

Starting point is 00:08:44 is that their guidance for the rest of the year was down a little bit. So they're expecting growth in the low 20% range instead of, I believe it was 23%. percent plus that they said last quarter, that's telling you that maybe the consumer is a little bit weaker. Maybe they're losing a little bit of market share if we're having some sort of recovery with Nike. I don't think we're seeing that yet. The interesting thing for Ana is that they have made a explicit decision to keep their pricing power. I mean, their margins are phenomenal. They're expecting a gross profit margin to be at least 65%. That is just crazy in an apparel business. So they're saying, you know what, we're going to focus on this profitability.

Starting point is 00:09:23 We're going to give up growth as a result. The markets are actually negatively to that today, but you could look back at the last five years or so with Nike, the last five years at Lula Lemon and see that, you know what, it's a slippery slope going down the, I'm going to start discounting my products, give people a little bit better price to move sales, to move volume, to increase that sales number. On says that they don't want to do that. Strategically, I think that's probably a good move long term. But it also means if your growth is a little bit slower, those growth investors are going to be disappointed, even if the profitability is going to be a little bit better than maybe we thought it was when the company was growing faster.

Starting point is 00:09:58 So a lot of tradeoffs that they're making, what we don't know, like I said, based on some of those competitors, how many of those are macro tradeoffs and how many of those are on specific? As Travis said, to some that on beat on earnings, they missed on revenue. Sales were somewhat disappointing, especially on the wholesale side, which they framed this. They did that on purpose. and maybe they did. But margins expanded more than expected. Their gross margin, their adjusted EBITOM margin, were both pretty impressive compared to a year ago. The big geographical disparity in the results, the Asia-Pacific sales grew 55 percent. All of this is in constant currency, by the way, to not confuse anybody. And in the Americas, it was 13 percent in constant currency. So, you know, big sales disparity. America's, it's still their core market, but you're really seeing kind of a slowdown the strange consumer in America and things like that. The real reason for the decline,

Starting point is 00:10:45 and as he mentioned was the guidance, a guidance reduction. At the same time a company reports a big revenue miss, it kind of causes investors to take a step back and consider whether this growth story, which admittedly has been stellar for years, could be slowing down a little quicker than expected. So one of the things that stood out to me, Travis, you were talking about gross margins and being so strong.

Starting point is 00:11:08 I think part of the reason they do that is that on one of their strengths is direct to consumer channel sales, their own website, not necessarily going to doing things wholesale at like a dick sporting good, nearly as much relative to a lot of the other companies. You know, it mentioned DTC sales were up more than its overall growth numbers, which does tend to explain a little bit on that higher margins, because that tends to be a higher margin sale. What I find interesting about this point is kind of comparing it to like Nike, Adidas and companies like that, where the other larger companies, which haven't been as successful with DTC channels relative to them.

Starting point is 00:11:45 They're still trying to work really hard with the Dix Sporting's goods, the foot lockers, the companies that you end up doing a wholesale, it's larger volume, but much lower margin. So my question is whether like DTC sales, is this just how new companies that grow up in the age of the internet, in the age of DTC? Is this just how it's going to be? Or can on actually get to the scale of a Nike or Adidas relying heavily on this DTC? or is there going to be some point where like that channel starts to kind of limit growth and it will have to push into those other channels more?

Starting point is 00:12:19 They're definitely not going to reach the scale of Nike. I mean, I think, you know, we're all similar ages, you know, growing up in the late 80s and into the 90s, Nike was kind of everywhere. And the model there has just completely shifted because you're going from a supply driven environment where the supply is the power, having, you know, Jordan as a sponsorship, having TV commercials, all that kind of stuff, everybody was wearing Nike. Now you're in much more of a case where there can be individualized ads with those direct to consumer sales on Instagram or on Google, where Matt's going to see a different ad from me

Starting point is 00:12:51 and we're going to maybe buy different products as a result. So I think there is going to be more of kind of a disparate market. And the question for these companies is going to be, where do you fit in that market and what is your scale going to be? You're right that on maybe reaching a point where this isn't going to be a 30% compounding company anymore. but if they can compound their revenue growth at 15 to 20% and do so at a really, really high margin, that can still be a really phenomenal business.

Starting point is 00:13:17 I think when you're looking at onholding, when you're looking at Nike or Lulu Lemon, the question you have to ask yourself is, what are they going to be and what are they showing themselves to be? On showed you this quarter, hey, all that talk that we had about pricing power, about keeping margins high, that's exactly what we're doing. And what we're doing is we're giving up sales as a result. But that means that in five years, this is still going to be a premium brand. They're not going to go down that slippery slope of Under Armour, for example, which has been

Starting point is 00:13:47 disastrous for investors. So when you get to that DTC world, you've got to look at, yes, yes, the pie is smaller for an onholding to reach. But as long as you're reaching the customers at a very profitable level, that can still be a really phenomenal business. So it's a little bit of both. And I don't necessarily think that that means that they're going to, you're going to to give up sales or give up margin long term. It's just a very different business than you had in

Starting point is 00:14:11 the 80s and 90s when a lot of these other companies were growing up. Speaking of these companies growing up, like the three of us, Nike came up in a different era. The tools to grow direct to consumer relationships didn't exist yet. I don't remember anyone being on the internet back in the late 80s. It was a thing, but it wasn't commercialized yet. Yeah, there weren't Nike ads on Prodigy back then. Right. The TV didn't show you a targeted ad. It didn't exist yet. direct-to-consumer was the JCPenney catalog at the time. That was the closest thing we had to direct-to-consumer tools. Its identity was formed completely on its wholesale relationships. Companies these days have more control. Direct-to-consumer gives a company more control over pricing,

Starting point is 00:14:51 over margins. That's why we kind of mentioned that Onholding is somewhat engineering its margins right now deliberately by pumping the brakes on wholesale. It can control its brand image better. That's how you maintain that premium brand that On's doing. But I will say that a little more than Travis, I feel like the direct-to-consumer model is going to have more limits at scale when it comes to building out your own stores, building out your fulfillment logistics, especially, things like that. And it's going to come to a point where onholding is going to have to make a choice. Become a value stock that's growing at 10 to 15 percent annually, which it's approaching value stock territory right now, if I'm being totally honest.

Starting point is 00:15:26 Or maintain a 30 percent plus growth rate, but really lean into wholesale and give up a lot of your margins. they're going to have to kind of compromise a little bit within at some point. And I'm not sure what direction they're going to go. So far, I can't argue with anything they've done strategically. So I have no doubt that they're going to make the right call. But it's going to be more of a balancing act, I think, over the next five years. The holding the price thing always works out until all of a sudden there's a lot of inventory building up on the balance sheet. And then, you know, then you start to see a little bit more of that wholesale moving stuff, maybe in channels that they don't expect. So it seems as long as on can kind of keep that inventory supply chain

Starting point is 00:16:05 working efficiently and not having a lot of stuff build up on the balance sheet should work. So before we go, Travis, I know you're a fan of the company, also a fan of the shoes. What's the most recent on purchase you've had? I've got these new slip-on shoes where the back folds down, a little bit like, I don't know if you would be like a Kizik's, be kind of an example. So it's like a crock if you want it to be or a shoe if you want it to be. They're a little goofy, but I don't know. I'm, I'm liking him so far. Did you buy him wholesale or direct to consumer?

Starting point is 00:16:32 Direct to consumer, absolutely. There you go. Coming up over the break, we're going to look at the moving and shaking in the EVTol industry. This episode is brought to you by Accenture. When your advertising operations fall out of sync, everything else follows. Spotify and Accenture are working together to reinvent the rhythm of ad sales, using automation, analytics, and smarter workflows to simplify campaign delivery and access better data across the business.

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Starting point is 00:17:42 It's been a minute since the last time we had two companies persistently engaged in a game of anything you can do, I can do better than electric vertical takeoff in landing companies, like Archer Aviation and Joby Aviation. It's not even counting like the numerous times. Both have dragged each other into the court for various reasons, one suing the other for patent, whatever, stealing stuff. It's been quite a dramatic past couple of year or two. Now, it's only Tuesday, but we've already seen both companies announce significant acquisition. So again, one does one thing. The other's got to react. Archer announced a deal with Boeing to take over its E. Vitol and several of its other non-core Boeing properties. And then less than 24 hours later,

Starting point is 00:18:22 Joby announced it's acquiring a defense contractor Renaissance Sciences. So guys, I asked you guys to each, you know, pick one of the deals and give us a quick rundown and the reactions that you guys saw for each of the deals. Archer's deal, the market really liked it, it seems like. The stock was up roughly 20% afterwards. You mentioned they're acquiring three Boeing subsidiaries. There's the Evital developer. There's one company that makes air traffic management software, one that makes defense drones that's actually a very profitable business already. It's an all stock deal. So this didn't cost them any money. Gives Boeing a stake of nearly 20% in Archer, including some warrants that it's getting. And from a strategic standpoint, it makes a lot of sense for both companies.

Starting point is 00:18:57 I mentioned one of the acquired properties called Institute, it's the drone maker. They're already profitable. They have over $200 million of annual revenue. Archer is mostly a pre-revenue company other than like some grants and research funding and things like that. So this is a big deal when it comes to, I don't want to even say revenue diversification, but just having some. It also gets a fully autonomous Evital design that it didn't have to design itself that

Starting point is 00:19:20 was designed by Boeing, which you know, you can't really get mad at that. From Boeing's perspective, it gets rid of a lot of some of its non-core properties that it was still holding and can focus more of its efforts on its core aircraft business, commercial and military. It gets long-term upside from the Archer stake if these businesses turn out to be something. So it's getting rid of these businesses, but still getting financial benefit from them. So investors seem to like the deal. It makes Archer a much more credible defense sector player. And like I said, it adds some real revenue to a balance sheet that really needs it. Yeah, the reaction to Archer's was positive. And that's generally been the case when Archer

Starting point is 00:19:54 makes these press releases. And they're really good at the process. rest release game. But you look at since the beginning of 2025, Joby Aviation has outperformed Archer. And the reason for that, I think, was Joby was the more focused company. We knew what they were going to be doing. They were going to be flying their aircraft with commercial passengers before Archer, potentially more than a year before Archer aviation. So this was really a company that was scaling in the vertical takeoff and landing with air taxis. So building out, they bought a company called Blade last year. Blades currently running helicopters. We could just imagine just fitting in an EV-Tol aircraft and then taking that from LaGuardia to Manhattan,

Starting point is 00:20:31 for example. The interesting thing with this deal is this $500 million acquisition, so a much smaller acquisition, $450 million of it in cash, only $50 million in stock. But it does move Joby more into the defense space. And what they said in the release is that this is actually going to become their new defense business. And we're kind of kind of have two separate divisions because I think that they're worried about exactly what I said earlier, hey, where you're not a focused company anymore, we thought you were an air taxi company, and now you're a defense contractor.

Starting point is 00:21:03 So I think the idea here is just like with Archer's acquisition, you are bringing in $100 million worth of revenue. It is a growth company. It can kind of operate on its own and yet still have a little bit of optionality in the defense side. But for Joby, I think the bigger question to me is, what does this company want to be long term? And if the answer is you want to be a big air taxi company, then just focus on that.

Starting point is 00:21:26 Don't take that $450 million and put it into a defense contractor, put it into scaling out your business and becoming an air taxi company. But, you know, the market's reaction ironically loved Archer yesterday. Pretty ho-hum on this Joby deal today. Stocks down about 3%. Two quick notes and things that I noticed with both of these deals for one. Boeing sold them an autonomous eVitol design, but kept the autonomous software for themselves. So interesting little fold in that development.

Starting point is 00:21:54 And also in the Jobi press release, I was very surprised how much they were talking about acquiring one million square foot manufacturing space. Kind of almost is a little bit of, yeah, we bought a defense business, but look at all this manufacturing space we have now so we can start to scale up. Maybe that was just to your point trying to stay focused and saying that's what we got, but we'll see. So here was my takeaway from kind of both of these announcements. It appears to be a deliberate move to diversify the holdings. And is this kind of an admission that this EVTAL deployment, commercial air taxi business is much harder than initially expected and will likely take a lot longer? I would call it more hedging against the possibility that EVTALs could take longer than originally thought, not necessarily an admission that they will. Both say that they're still on track to reach some key milestones they set this year.

Starting point is 00:22:44 But it's true that anytime you're building a new category of a vehicle that flies, I mean, look at Rocket Lab. a perfect example. It generally has taken longer and cost more money than originally expected. So it makes sense that investors are somewhat getting impatient with these essentially being pre-revenue businesses, but I think they're still on track to deliver the product that they promised just, you know, maybe a year or three later than they originally thought. I actually think that this shows that they are trying to diversify a business and not scaling that core businesses as quickly as they potentially could. And that's where I have a lot more questions than answers, especially on the Joby side, because Joby actually wants to have potentially

Starting point is 00:23:26 commercial passengers in 2026. I mean, they're potentially going to be operating in Texas in 2026, definitely in 27. So they do not have enough capacity to actually scale that operation today. I don't know where defense fits into that. You know, you could read into both of these deals, I think, and say that the bigger piece of it is actually autonomy. And they're looking at five or 10 years down the road and going, you know what, we don't even want to have a pilot in these aircraft. We want them to fly fully autonomously. And so we need to build these software pieces by the sensors. That's part of the Joby deal. But I think there's a lot to play out here. We'll get a little bit more information from both. Joby has a presentation for investors after the market closes today.

Starting point is 00:24:08 But I think this just does add a lot more questions because they're trying to be both commercial companies and defense contractors. And it's really hard to do both when you don't have either completed at this point. It's definitely. Definitely a wait and see sort of approach. I can see the logic on wanting to get into the defense business. It's steady. It's cash generative. You can use that to fund some of the stuff and maybe give yourself a lifeline and not have to go to the capital markets after issuing a slew of press releases. Just to pump your stock up enough to make it worthwhile. So we'll see. Again, the thing that scared me the most is when Matt said a year or three. I don't think a lot of investors would be too excited when they hear, well, we're three years behind. I think one year maybe. That's all the time we have for day. we have disclosure and we'll get out here. As always, people on the program may have interests in the stock that talk about and the Motley Pool may have formal recommendations for against it, so don't buy yourself stocks be solely with it here. All personal finance content follows Motley Fool editorial standards and it's not approved by advertisers. Advertisement's

Starting point is 00:25:04 your sponsor content provide informational purposes only. To see our full advertising disclosure, please check out our showbooks. Thanks for producer Christy Waterworth and the rest of the Motley Fool team. For Matt, Travis and myself, thanks for listening. We'll chat again soon.

Motley Fool Money - RocketLab’s Neutron Update, On Holdings Earnings, and the eVTOL Rivalry Heats Up

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