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Tales of Unexpected Losses: AXON, TREX, WRBY

November 10, 20250 comments♥ 0
00:00We have tales of unexpected losses from last week's earnings.You're listening to Motley Fool Money.Fool fools.I'm your host, Tim Byers.And with me are longtime fools, Jason Hall and Emily Flippen, another podcast host.Friends, how are we today?Are you both fully caffeinated and enjoying the possibility of a reopening of the federal government?I mean, enjoying is one way to put it, but it's, we're not going to really talk about it here because there's, it's still so early in this story.
00:43It's a thing that's going on.It is a thing that is going on.We hope the market is up.There is hope, if you haven't followed it, there is hope for the ending of the governmentshut down, lots of things that political pundits will tell you about.We're going to tell you about some stocks.And let's start with Axon Enterprise, Emily.We're looking at three earnings reports that kind of surprised and disappointed.
01:08Axon was one of them.What we wanted to do is break down, what the street didn't like, what we think,and whether we think now is a time to buy, sell, or hold. So give me your take here, Emily. Sowhat did the street not like about the AXon report? What did you think of it? Well, the most obviousthing is their return to operating losses for the first time in nearly four years. I actuallythink that's largely what led to this mentality of like shoot first, ask questions later,because the headline numbers came in. And you can call it Wall Street, but I would also addalgorithmic traders, all of these different pundits that are going to be.
01:43coming in and trying to evaluate this quarter, they see that operating loss, and they seeguidance that came in weaker than expected, and it was, oh, my gosh, the growth story for Axonis over. I don't know what to make of this. But the reality is that a lot of this was expected.Some of the losses were driven by tariffs, which obviously weighed on margins. But in my opinion,this was actually a really strong quarter. And I know that sounds contradictory or counterintuitive,but the reason they're driven to operating losses is because they're investing so heavily intotheir different segments that are growing exponentially. I mean, this was their, I think,seventh consecutive quarter of 30% plus revenue growth. So yeah, expenses have gone up,
02:21but they're investing in future growth. And that's what I love to see. Yeah. I mean,it's an interesting one. The thing that I thought was super interesting here, Emily, is the effectivetax rate was, I don't think I've seen this before, 113.9% is what Alpha Sense reported for us here.So, I mean, I guess the nice thing about that is this is a very profitable, very well-scaled business that just keeps scaling.But we need to talk about another one that this is one of my favorite businesses, but the market decided that they were not so happy with Trex.What would happen?I've followed Trex for about 15 years now.And this is not the first time that we've seen this with Trex.
03:12Now, I'll say this. This is the first time we've seen the stock fall 75% from the previous highin the past 15 years. But going back since 2010, Tim, I've seen the stock fall 30% like 10 timesand 40% or more, about half of those. This is a very seasonal cyclical business.And the funny thing is, kind of like we just saw with, you just talked about with Axon,the numbers really weren't bad for the quarter. It's all about, you know, what are you going todo for me. That's the story. We saw a pretty solid 20 plus percent revenue growth.Margin was actually better. Profit margin dollars were better. There were some positivethings there. But when you start saying things like, you know what? Our customers, which are
03:56distributors, they're saying they're going to start pulling down, they're going to decline theirinventory a little bit. Oh, by the way, our margins are actually going to start our gross marginpercent was squeezed a little bit because of one of our fastest growing products. And that productis going to continue to probably grow faster than the rest of our business. That's going to hit ourbottom line. Oh, also, you know, that big new factory that we're opening? Well, expenses related tothat, because it's really not contributing revenue right now, but expenses related to that,they're going to hit us even more on the bottom line next year. And like in the anti-steve jobs,one more thing, that one more thing is, oh, by the way, we're maybe a little concerned that we've
04:36seen so much consolidation in our market. And now some of our competitors are now part of reallybig companies with really deep pockets. We're going to spend a lot more money on sales and marketingnext year, and that's going to hit our margin too. And everybody knows the housing market. The macro isbad, right? So all of those things together. And this is the cheapest that I've seen this stocksince I've covered it on a price to sales basis. And since, I mean, you've got to go back toin the early 2000s to find a time on a price-to-earnings ratio basis, the stock was this cheap.Emily?I have to say, as much as I like Trex and it's been an incredible role breaker for so many years now,
05:19I mean, competition is stiff out there now.It used to be that Trex was like the only composite on the market.So if you weren't doing traditional wood, you would do Trex.But I can't help but think to myself, I mean, part of the lack of performance recentlyhas to be because there's just so many alternatives.I mean, bamboo is cheap, accessible, and way more prevalent today than it was a decade ago.I think it's interesting.It's hard for me to know whether or not this is competitive issues, if it's channel issues, if it's macro issues.
05:49It feels like it could be any one of those three, Jason.Why not both? Can it be both?I guess it could be both.I think it's all of these things.But I think what we often forget with a company like Treks, that it's a class.classic rule breaker that's no longer rule breaker, it's become the rulemaker, is the thing that is probably its biggest competitive strength is its cost advantages. If you look at its manufacturing, 95% of its inputs are waste products, waste plastic and waste wood. If you look at timber tech, which is its largest direct competitor, as they move up the product into their nicer product, only about 70%, 65 to 70%, 70%,are those waste products, which means there's feeding a lot of virgin resin and other products in there,and it costs more. Cost advantages when you're a manufacturer in a cyclical industry really,
06:43really matter. And those are things that those costs they can pass along while still gettingbetter margins than the competitors. Sometimes I think we forget that.Yeah, that's a great point. All right, let's move on to Warby Parker, which was down significantly,primarily for two reasons. First, and I think this is the one that really left me feeling prettycold, they missed their own revenue guidance. Management had guided for larger than 15% revenue growthin Q3. They had to come out and say, well, we came in lower than planned, and they forecast Q4revenue growth of only 11 to 12% of revenue growth for that quarter. And that was apparentlyon macro weakness. They also saw average selling prices come under pressure as people went
07:32for the lower priced glasses, lower price contacts, lower price glasses. This, by the way, is also a companythat has been under serious pressure due to the tariffs. And tariffs, particularly in its primarysupply, the primary supply chain is out of Vietnam. And Vietnam has been absolutely crushedby tariffs. And that has really hurt Warby Parker to a large degree. We really did see it inthis quarter. Now, having said that, this is still the brand leader. I mean, I have myWarby Parker classes, I got them just about a year ago. I love them. I think they're great.And I'm not the only one here. Average customers grew 9.3%. There are now 2.7 million.These stores, and again, the four-wall EBITA margins on a Warby Parker store are absolutely
08:21outrageous. They are over 30%. They are close to 35%. And even in this quarter where things didn't goquite right. Overall, adjusted EBITA was up close to 50% to about 25.7 million. That is significant.So this is still a highly efficient business, even though the macro factors are really crushingit a bit. Do either of you have a pair of the, you have much better, both of you have muchbetter vision than I do. I'm going to guess you do not have Warby Parker glasses.I know video imagery shows really well for podcasts, but I'm holding up on the screen right now.two different pairs of glasses that I have to wear depending on the situation.So I do not.
09:03And the funny thing about it is Jeff Santoro, who's a close friend of mine, a colleague of ours,loves Warby Parker because he's used it because he has kids, teenage boys,one of whom needs glasses.And he knows that the glasses are just something that's going to get lost, right?And he, that experience has been mind-bogglingly good for his family and other peoplethat I've talked to in the similar situation.So I think there's a there there, but I think at the end of the day, the more they move into physical locations, the harder this business is going to get, right?Because it's expensive, this cyclicality and the reality, because this is the kind of thing that this isn't like traditional health care where it's fine through recessionary periods.
09:43People will wait another year to get classes if the finances are tight.So I do think those things are pressuring the business.But at the same time, I think because they are a bit of a low-cost leader already, that's part of their business model.it could actually be, the near-term headwind could, in the long run, could drive more peopleto Warby Parker that wind times are good, they're spending more money on the nicer stuff.Yeah, I mean, we'll see. I'm going to start us on our buy-sell hold here because I just didWarby Parker. I'm a buy. I've been buying this stock for a while now. I would like to be buyingmore, even though I tend to agree. There are some short-term pressures here, but I like this
10:24management team, I think they're heavily invested. I think they have a significant brand advantage.And even though stores are expensive, they have proven to be very, very good at capitalallocation with those stores. So I'm a buy here. Let's move on to Trucks. Jason, buy sellerhold. Where are you? Yeah, I'm absolutely a buy on Trex right now. I think it's so misunderstood.And the opportunity is still incredible. As we go through this big wealth transfer from boomersand their parents down to younger generations that are prioritizing things like outdoor living spaces,things that are easier to work on and think about the environmental impact.I think Trex is built.
11:04It's a block and tackling business at its core.We always forget that.That's really what makes it so good.It's a better manufactured than anybody else.I'm absolutely a buy-on-tracks right now.All right, Emily, Axon, buy-seller, hold.What do you got?Well, let's round it out.
11:17I'm also a buy-on-axon.And similarly to Jason, I think this business can't be misunderstood.it's easy to look at the pullback from earnings and say, oh, it's fallen. Of course, it's a buy. The realityis Axon is still very expensive. Let's be very clear about that. Even after the pullback in earnings,this is an expensive company. But I think that this is the tax that you pay when you own what isbasically a quasi-monopoly that has been growing at a breakneck speed for decades with no signsthat that growth is expected to slow down. So I think the runway here is just too long to ignore.Fair enough. All right. Up next, we've got another game of faker or breaker.
11:53You're listening to Motley Fool Money.In a world full of noise, long-term thinking stands out.On the Capital Ideas podcast, Capital Group leaders explore the decisions that matter most in investing, leadership, and life.It's a rare look inside a firm that's been helping people pursue their financial goals for more than 90 years.Listen to the Capital Ideas podcast from Capital Group, published by Capital Client Group, Inc.All right, fools, it's another game of faker or breaker.as a reminder, this is the game where we ask our analysts here, we ask the panel, whether or notthese companies are either breakers that can deliver sustainable growth over really long periods
12:33of time. They have the attributes, the six traits of a rule breaker, or most of them. Or they arethe kinds of companies that are showing incredible growth over a short period of time, but aredestined to flame out because the traits just aren't there. And we're going to go three.of them and we're going to go around the horn. And I'm going to start us off on Archer Aviation,ticker ACHR. For those who do not know what this company is, it is a EVTol. This is an electric,vertical takeoff and landing. Think of really fancy, but kind of awesome looking helicopters thatthey call midnight, but they're not quite helicopters, their planes. But they have a significantin partnership with United Airlines. So faker or breaker, I think this one is a breaker in the making.
13:22Emily, what do you say? Faker or breaker? Well, a partnership with United, oh my gosh, that has tomake it a breaker. No, I actually, my least favorite airline on all the airlines available.No, this is, in my mind, this is a faker for now. And I don't want to downplay the technicalmilestones that they have achieved. And there is certainly an opportunity here. If you expand,out far enough. But I think that their timeline for FAA certification in the next two yearsis hilariously too aggressive. I think the concept of scaling is even challenging without regulatoryhurdles. It's pre-revenue, highly capex intensive. It's basically just a science project. So,for me, right now, this is a faker.
14:04All right, Jason, what do you got?Yeah, I don't think any of the companies in this space are going to prove to be rulebreakers.I think there's no real differentiation. I think you have to go through too much regulatory hurdlesto be successful.And United, Emily, I'll say this.This has actually been the best run airline in the U.S. for the past five years.It doesn't feel like it.But it's actually, they've done a pretty good job.
14:23But, yeah, I don't see that space at all as being one with any rule breakers coming out of it.All right.Let's move on to probably my favorite name in this list.Hippo Holdings, ticker HIPO.This is an insure tech company.And they have, you know, this looks like mostly multi-line.casualty, homeowners-related insurance. Jason, what do you got for me here? Where are you out oninsured tech and hippo? I think there's a there. This is a profitable company. I think that's an
14:58important thing to remember. A lot of times when you take a word and then you add tech to theend of it, that's a good way to like put a like a marketing wrapper around a financial businessthat you just haven't figured out how to make profitable. So this is a profitable business. And theyhave some things that they are doing that are working. But honestly, I think it's probably going to bemore of a traditional business than like an actual rule breaker. I don't think they're going tochange things in any fundamental way or disrupt markets. All right. So Faker, Emily, I saw,the head shake. I saw the frown. I'm guessing you think Faker. I actually, I take issue with Jasoncalling this company a profitable company. I mean, on an adjust, non-adjusted basis, on a gack.
15:43basis, yes, but that's just because they had a couple of non-cash benefits in the quarter. Now,they have produced operating income to Jason's point for the last two quarters, which is positive,but that's after so many quarters of operating losses here. It's actually, in my opinion,regardless of how they're doing in terms of the operating income, the question is, what space arethey operating in? And can they be a breaker in insure tech? And in my opinion, what defines whether or notsomebody is going to be a breaker in something like insuretech? And, in my opinion, what defines whether or not somebody is going to be abreaker and something like insuretech is, can you save me money? So I went and I was like,okay, let me quote my home here with Hippo and just curious what they give back to me.
16:20Every single option, more expensive than what I'm already paying. So until they're able to reducemy costs, it's a faker in my mind. Okay, fair enough. Let me say this. Just for clarification,I was looking at their combined ratio, which if I'm looking at a company that writes insurance,combined ratio is really important. They just got to 100%. It's like, okay, there's something workingthere. An emphasis on just got, though.Yeah. After years of producing.That's the key.Fair enough. All right.
16:48Last one, champion homes, ticker Sky, S-K-Y.This is not quite tiny homes, but definitely manufactured homes.Think of mobile homes here.So, Emily, how bullish are you on tiny homes, manufactured homes?It's not a big part of the overall home market in the United States.It's a single-digit percentage right now.at least for champion homes, but I do think this could be a breaker in the making. They're a leaderand manufactured and module homes. We've underbuilt housing in the United States for decades.
17:19So, obviously, despite the fact that there's cyclicality here and the macro backdrop is so challenging,I still think that this is a type of opportunity that could be a leader in its space. And to me,that's indicative of a breaker. It's never going to be a rule breaker until the financing issue getsresolved. You can go and get a 30-year or a 15-year fixed-rate mortgage on a house,regular house, but you cannot do that. You cannot do that on mobile homes. And until manufacturedhousing gets allowed to be included in the same kind of financing, then it's going to stay atiny portion of the market. It's the math that doesn't work around paying for the property.That's fair. Yeah, that's a really interesting point. All right. So to round it up,
18:01our panel says, mostly faker, although I'm the outlier on Archer Aviation, ticker ACHR,Faker on Hippo Holdings, H-I-P-O, but some curiosity, some hope for Champion Holmes, ticker S-K-Y.Coming up next, we preview tomorrow's show with tomorrow's host, Emily Flippin.You're listening to Motley Full Money.These days, I'm all about quality over quantity, especially in my closet.If it's not well-made and versatile, it's just not worth it.That's honestly what I love quince.The fabrics feel elevated, the cuts are thoughtful, and the pricing actually makes sense.
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19:35slash Motley.All right.Welcome back to Motley,Full Money.Emily, you've gottomorrow's show.You've got,wow, how about that?
19:43Jason's back.Jason's back tomorrow.Also, my Supernova Odysseyteammate, Keith Spites,on the show tomorrow.What have you got for uson tomorrow's show?Yeah, thanks, Tim.
19:54Obviously, Jason and Iare going to be back.We're going to be joinedby Keith Spites.And we're going to bediscussing what I'm callingquantum, but in space.So we're going to be
20:01looking at earningsfrom CoreWeave,while also looking at earningsfrom some of these spacecompanies, including Rocket Lab and AST Space Mobile, should be a really interesting episode.I mean, I don't think you can say it that way. If you're going to say it like that,it's like, quantum in space. Okay. Well, stay tuned for tomorrow's show. As always, people on theprogram may have interest in the stocks they talk about at the Motley Pool. They have formal recommendations
20:30for or against. So don't buy ourselves stocks based solely on what we're here.personal finance content follows Motley Fool editorial standards and is not approved by advertisers.Advertisements are sponsored content and provided for information purposes only.See our full advertising exposure.Please check our show notes.Thank you to my guest today, Jason Hall and Emily Flippin, our engineer, Stan Boyd, and our producer is Anand-Chukh, Lou.I'm your host, Tim Byers.See you again tomorrow, Fools.
21:01Thank you for tuning in to Motley Fool Money.Go on.