Motley Fool Money - The Latest Shut-Down

Episode Date: September 29, 2023

Friday’s deadline for government funding seems like it will pass without a resolution. We talk through the latest government shutdown and what it means for the market.  (00:21) Jason Moser and Andy Cross discuss: - The government shutdown and how investors and federal employees should be processing the news. - The FTC’s antitrust case against Amazon and what it means for big tech. - Earnings updates from Costco, Nike, and Carmax. (19:11) Motley Fool analyst Rick Munarriz gives a rundown on Rover, the petcare marketplace, and explains the tailwinds and tailwags pushing the company forward. . (33:01) Jason and Andy break down two stocks on their radar: EPAM Systems and Intercontinental Exchange. Stocks discussed: AMZN, META, COST, NKE, KMX, ICE, EPAM Host: Dylan Lewis Guests: Jason Moser, Andy Cross, Ricky Mulvey, Rick Munarriz Engineers: Dan Boyd  Learn more about your ad choices. Visit megaphone.fm/adchoices

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We've got thoughts on the government shutdown and the FTC's latest antitrust allegations. Motley Full Money starts now. That's why they call it money. Full Global headquarters. This is Motley Fool Money Radio Show. It's the Motleyful Money Radio Show. I'm Dylan Lewis. Joining me over the airwaves, Motleyful senior analysts, Jason Moser and Andy Cross.

Gentlemen, great to have you both here. Hey, Alan. We've got a curious case of gold bars, a mini-dive into a company for Fido and stocks on our radar. but we are kicking off today, talking about the government shutdown. Jason, Andy, I'm going to timestamp this conversation right here at the top. We are talking Friday afternoon at noon. Sometimes compromise is slow, and sometimes it moves incredibly quickly when it needs to. But based on what we are seeing, it seems like we are just hours away from a government shutdown,

and there's a high likelihood that we'll be seeing it. This would be the first since 2018, Andy. What are you thinking about with the investor lens on this story? Yeah, Dylan, Goldman Sachs puts the odds of a shutdown at about 90%. So, as you mentioned, unless we see some quick changes here, looks like we're going to go into the weekend with the 22nd shutdown of the past 50 years to the federal government, which means basically non-essential agencies and services have to stop operating their employees going furlough. The last time we had this shutdown, Dylan, 2018, the shutdown lasted 35 days, and that was the longest ever. Most of these

shutdowns over the past 50 years have been a day or so very minimally disruptive, but they've gotten a little bit more serious. And now, you know, we have more than $30 trillion of debt that we have to service. The cost of that debt now is running on an annual basis, running higher than what we have to spend on defense spending. So you're starting to see more and more politicians really start to amp up some of the rhetoric and certainly what we're seeing right now is that challenge. So the last time we had this deal in, the markets actually sold off going into the downturn 2018, but then they rebounded. Once the shutdown started, and they actually rebounded. And for that 35 days, the markets ended up 10% up for the year. And then for the entire time until COVID,

they were up more than 50%. So I think for investors, you have to understand, okay, I have to maintain my long-term horizon. There's going to be a lot of volatility around this, a lot of noise making, maybe maintain that cash position, maybe get a little bit more just selective on the kinds of businesses and investments I'm looking to make. And don't panic and act too rashly as you hear the news or you see the volatility happen in the stock prices. You really have to maintain that diligence because long term, even through many, many government shutdowns, the U.S. stock market has been able to return very handsomely for investors over time. Jason, we are based out of the Metro D.C. area at the Motley Fool. And so this is one of those stories that we appreciate because

it affects the markets a bit, but also because it affects where we are locally, especially for our furloughed workers. The National Federation of Federal Employees estimates that 2 million civilian federal workers could see delayed paychecks, and roughly 4 million federal contract workers may not be receiving a paycheck due to the shutdown. This is something, Jason, you're familiar with, and we're all kind of familiar with being with the area. Yeah, yeah, this is something, unfortunately, I've lived through before. Andy, thank you for bringing up that 35-day being the longest stretch there, because this is something that our family is unfortunately going to have to consider planning for. My wife works for the federal government, so we've dealt with this before.

And it's just one of those reminders. It really screams to me, to us, to our family. It's really always worth being prepared for that rainy day. You know, we see those headlines and those articles to talk about X percent of Americans. you know, don't have enough emergency savings to handle up $500 expense or a $1,000 expense. And those are all meaningful expenses. Now, you sort of take that to the next level and think about families that may be going without two weeks or four weeks or even six weeks of their paycheck, right? And you're talking about thousands and thousands of dollars that really impacts your budget

from your power bills and your water bills to your mortgage payment or your rent payment and the groceries and everything, all of the necessities. And so, unfortunately, it's something that we have to endure from time to time. Hopefully, it doesn't last too long. I do appreciate Andy's perspective there on the market's performance. Strategist research partners actually dug back into this, going back to the last 20 government shutdowns. Ultimately, the average return of the benchmark, the S&P 500 index, during these last 20 government shutdowns, has been essentially flat.

0.04%. So you're not looking at something where the markets are going to tank. on this news because basically the markets are already kind of anticipating this news. For me, it really hits more from the personal finance angle and just kind of a good reminder. Get that rainy day fund put together because at some point somewhere, even if you don't work for the federal government, Dylan, you're going to need it. All right, sticking with the government theme, but taking a slightly different angle. Jason, this week, the FTC and 17 states brought an antitrust case against Amazon,

alleging it is a monopolist that uses unfair and anti-competitive strategies to stop rivals. and sellers from lowering prices, degrading the quality for shoppers, overcharging sellers, among other things. Jason, I feel like this is one of those antitrust cases that we all kind of knew was going to come at some point. Yeah, I mean, it was pretty easy to anticipate. It's difficult to figure out exactly where it may go. I think the likely result here is years of litigation. Lawyers are going to make a ton of money out of this. Amazon maybe has to make a concession here or there at worst, pay a fine or something like that. But, but, but, but, you know, Officially, the FTC is approaching this.

They're not talking about breaking Amazon up, right? This, according to Ms. Con, at this stage, the complaint is focused on the issue of liability. And when we talk about liability, I think you need to look at this from two different angles. I think it makes a little bit more sense. And I think, you know, one angle seems a bit more plausible than the other. Where this could gain some traction, you look at Amazon in their relationship with third-party sellers. You go back to 1999. the third-party seller's share of physical gross merchandise sales sold on Amazon,

it was 3%. You fast forward to 2018, that had grown to 58%. That number just keeps on growing, right? And so from that perspective, those customers of Amazon's, I think they may have at least something to complain about here, right? The screws kind of get tightened on them a little bit. Those costs go up, and they become a little bit more reliant on Amazon's network and all of those services, the fulfillment services they provide over, over time.

So I do feel like that is where this could gain some traction, where this probably doesn't, where it falls a little short. You know, if you read through that FTC language, I mean, they're talking about the prime subscription fee and how it makes subscribers feel like they must pay that subscription fee, and they must purchase more from Amazon in order to justify that cost, as if we as consumers don't really have a choice. And so I think that's where it falls maybe a little bit on deaf ears, particularly now when you look at all the competition out there in the retail space and then e-commerce really is kind of the way of the world. So it's going to be interesting to see how this gets deliberated. There's no question I think it's going to take some time. But yeah, it was absolutely expected.

Andy, I liked what Jason did there with bringing the perspective of how this business has changed over time because the Amazon we knew of 15 years ago, 10 years ago, is very different than the Amazon of today. this is a company that you have been following for a very long time. Have you thought about antitrust being a risk for this business, or is it just something that you kind of expect as a company gets more and more important and bigger in the economy? Well, Dylan, as Jason was talking about the case, it just kept to come into mind what we are seeing from the FTC and from the DOJ, whether it's Alphabet, Google, whether it's Amazon, whether maybe it's Microsoft at some point. Apple has been relatively unscathed buy some of this, but you just never know when it comes to the app store and what's happening over there as well, too. So I think if you weren't investing in large cap tech or large cap

companies, you have to understand that is a big risk factor, unlike what you might have for small cap companies, which are much more executionally oriented. So there's risk factors to every investment. I think Amazon's been, you can't argue it's been one of the most successful and innovative and meaningful companies of the last 20 years or so, certainly in the stock markets. And so you have to respect what they've done. Certainly all these large-cap companies, as they were more successful, as we've seen over many, many years, we'll start to face antitrust and sort of phase monopolistic allegations or concerns in just regulatory environment.

And that comes with investing in these stock prices. Perhaps even use it as a chance and opportunity to buy stocks that go on sale if you are a believer that the long-term viability of the business remains intact. We have an update from another big tech company this week for our final story in the segment, Meta unveiled a host of new products and AI developments at its Connect conference this week. And Andy, there's one in particular that seemed to soak up a lot of the attention. Meta's Rayban Smart Glasses, which will be able to incorporate the company's AI assistant and live stream to Facebook and Instagram.

Does that deserve the attention, or should we be focusing more on the AI stuff that the company was unveiling? I didn't even mention meta when I was talking about the big tech allegations, and clearly they have been in the crosshairs. And in fact, I think Mark Zuckerberg's worst part of his tenure, one of his worst parts was when he had to go out there and testify in front of Congress. So I think what we saw from the Connect, I found that very impressive, just the way Zuckerberg was presenting what they are releasing and announcing both MetaQuest 3, the Rayban smart glasses, a whole host of AI chatbots. But Dylan, I think what we are starting to see is that true integration from the meta side of the value of the. the AI investments plus the metaverse investments. And I know we've been very critical on the

metaverse investments, as we should. They've invested billions and billions into that space with very little return. But now we're starting to see this kind of play out. And as you mentioned, the Rayban smart glasses, the second generation of smart glasses at the same price. By the way, $300. You can pre-order them now, I think. Two styles, a better camera, more storage. You can record in 1080p now. You can live stream directly to Facebook or Instagram through your connected phone, and then you start to get back in that ecosystem where then the AI starts to kick in, and they're starting to pair these together now, which I think is very interesting. And they're in a unique spot because their AI, Dylan, is really much more integral to the

personal, I feel, like ChatGBT over to Open AI, and even Google Bard. It's somewhat distant, remote. But what we're starting to see from meta is that integration into platforms that we use so much in Facebook and Instagram and WhatsApp. app, and that's going to be a potential difference maker for them. So I was very impressed with what they had to release this week. Jason, Andy mentioned that $300 price point. At $300, are you buying a pair? I am not. I am not. I'd imagine you'll have a lot of early adopters that give it a world. But, you know, I mean, we have Snap to kind of look back here to get to gauge at least

the customer interest on this level. The technology is phenomenal. I don't want to take anything away from that. I'm just not certain it's something that consumers are really wanting yet. Now, that obviously can change in time. This may just be something that's a little bit before it's time. All right. Listeners, we want your thoughts on the latest from meta. Write in podcasts at fool.com. Let us know whether you're buying the pair. Coming up after the break, we've got something new in the used car market. Stay right here. This is Motley Full Money. Welcome back to Motley Full Money. I'm Dylan Lewis. Join again on the air by Jason Moser and Andy Cross. Earning seasons picking up momentum, and we've got updates on a few big names that might give us a look at what to expect as other

companies report in retail, big box, and autos. Jason, let's start with retail and apparel. On last week's show, our colleague Matt Argusinger, had Nike as his radar stock. Talked about how market expectations for the company were incredibly low heading into earnings. We saw a 10% pop immediately after the company reported. Safe to say there were some good surprises in there? Oh, Maddie, I duff, my proverbial cap to you. You hit the nail on the head there.

Yeah, and what's become an increasingly difficult environment for retail in virtually every regard. I mean, this was a quarter I think investors were hoping to see from a company like Nike, right? They didn't knock the cover off the ball, but it was a respectable quarter that really just speak to the strengths of the business. And, you know, shares have had a tough year date. I mean, they're down close to 25%. But first quarter revenue really showed the business doing well, right? They're maintaining in what is a difficult, difficult environment. Just revenue, $12.9 billion up 2% on a currency-neutral basis.

So earnings per share essentially flat at 94 cents. Nike direct revenue up 6%. Digital sales grew 2%. And gross margin fell just 10 basis points, right, to 44.2%. That really was just on higher input costs. Not terribly surprising they're giving the environment. They're maintaining inventory, inventory dollars down 10% from a year ago. So that is a good sign.

being able to maintain those margins and keep that inventory number in track. You think about Jordan, right? The Jordan Footwear side of this business, and you kind of feel like that's yesterday's news. Jordan Footwear grew double digits. I mean, this is still a major part of this business. China grew double digits for the quarter. So I think when you add all of this together, you look at the fact that for the full year, they reiterated guidance. They expect their revenue to grow mid-single digits. They're calling for gross margin expansion. Maybe this thing has been a little bit oversold for what has been obviously a very, a very reliable business over long stretches of time. We also saw results from Costco this week. Andy, the story we've generally

been seeing with big box retailers is more spend on groceries, a little bit less on the discretionary items. Based on what you dug into with Costco, should we expect that story to continue this earning season? Interesting about that, Dylan, is Costco, the big ticket and electronic items going into this quarter have actually been a week. spot for their e-commerce business. E-commerce is a smaller part of their business, but are growing. They're seeing much more app usage now. 40-app downloads and usage was up more than 40%. But going into the quarter, the big ticket comp, those sales have been down 15 to 20%. They were actually down only 5% this last quarter. So there's actually seen a little bit of improvement there,

but still not where you wanted to go. I mean, Costco is one of the most resilient consumer businesses. I wrote about this earlier when they announced the earnings. Now the third largest global retailer with 861 warehouses, 71 million household members and 128 million cardholders with 93% renewal rates. Lots of questions and thoughts from many of us, many consumers and investors. What will happen with the membership fee where they drive so much of their profits? They haven't raised the price in about five years. And somewhere in the neighborhood of every six-ish years or so, that membership fee gets boosted a little bit, Dylan. And so lots of thinking that they will have to go out there. They were very coy, didn't give a leading. They said, hey, when we're ready to do it,

we will let you know investor analysts out there and you can start to put it into their market. But clearly, one of the best businesses on the retail side shrink, not an issue. They are seeing plenty of not having that challenge that so many other retailers have been challenged by. They said, where they do see it is mostly from self-checkout. So grid on the comp side, better than expected on the sale side. And really, Costco continues to look like a winner. The stock's up 25% year to date, and there's a good reason for that. Andy, we have to talk about the Costco gold story. The company was selling one ounce gold Lady Fortuna Variscan bars and reportedly cannot keep

them on the shelves. They are basically at spot price of $1,900, keeping with Costco's friendly ways. What do you make of this offering? I think Jason probably has them all under his desk there. He's just like boarding me. Hey, I'm not a prepper. All the gold bugs there going to Costco and shopping. Just another example of what Costco fewer skews, more opportunities, that kind of treasure hunt mentality

they have really optimized. And this is just another thing. They offered to their clients small little gold bars. And apparently, they're seeing a lot of interest from their client base. I can't believe they didn't stamp those gold bars with the Kirkland logo, right? I mean, we've heard from management before. Virtually anything that Kirkland logo touches turns to gold, with the exception of two things, which I thought was fascinating management called out, two things that they've not.

not done well with in regard to that private Kirkland brand. One, this is just way out there. Maunaise. Apparently, people don't want Kirkland mayonnaise. I'm not really sure I get that. I'm not a mayonnaise guy. The other one I understand, they have not seen any traction with a Kirkland branded beer. As a beer guy, I do get that. Now, Jason, I'm a loyalist to Duke's mayonnaise, so I understand why people maybe aren't willing to make that jump over to Kirkland. But, you know, when it comes to beer, I get it. I'm willing to experiment. I'm willing to try some new labels out. Rounding out our earnings takes here, shares of CarMax fell 8% after the used vehicle retailer reported second quarter results. And Jason, we don't have to spend too much time on this one,

but it seemed like mostly to me this was a sign of the Times type earnings report for this company. I think you hit the nail on the head there again. I mean, it's exactly what we expected. It's an okay start to the year. The response to this release didn't really help. But the stock, you know, is still still up for the year. It's been a very tough one over the last several years, Unfortunately, though, sales down 13% from a year ago. That was driven by lower retail and wholesale volume. We're seeing weakness across the board, right? I mean, retail use units, sales down, comp store units down, wholesale units down.

And you're seeing the weighted average contract rate of 11.1% going up from 9.4% from a year ago. Still some question marks in regard to how the strike could impact a business like this. They're kind of trying to put all of those pieces together in regard to the consumer the consumer remains pressure which is going to impact this business in the near term. All right, Jason, Andy, fellas, we'll see you a little bit later in the show. Up next, we've got an in-depth look at a company you might already be using when you head out of town. Stay tuned. This is Motleyful money. You get a fast car. I want a ticket to anywhere. Maybe we make a deal.

Be together we can get somewhere. Any place is better. Some of the best lessons don't come from a classroom. They come from experience. On the power of advice, a new podcast series from Capital Group, you'll hear from CEOs, investors, and founders about how they built careers, took risks, and reinvented themselves. If you're starting your own journey, this is the kind of advice you won't want to miss. Available wherever you get your podcast, published by Capital Client Group, Inc. Welcome back to Motley Fool Money. I'm Dylan Lewis. Here at the Motley Fool, we are big fans of looking at the products and services we use as potential investments. Motley Fool Money's Ricky Mulvey is a customer,

of Rover, the Petcare Matchmaking Network. So he sat down with analyst Rick Binares to better understand the business and look at the tailwinds and tailwags pushing the company forward. So, Rick, have you used Rover as a customer? Because I'm actually a big fan of the products, and I want to find out if I like the stock. Yes, so I have used Rover. Unfortunately, we lost our Carc-Caspaniel a couple years ago. But living in Miami, I never really needed Rover. I have a lot of extended family here. I'm very good friends with our neighbors. And our groomer, our pet groomer, her mom would take care of our pets. We went going on a long trip. And she'd take them to her house. So we were very happy with that arrangement. But when we're up in celebration, which we were there about maybe a quarter to a

third of the year, there, it's no man's land. Our vet isn't there. Our groomer isn't there. So we, if we were up there in Central Florida, I needed to go somewhere, either, you know, just a weekend trip. I did use Rover on a couple occasions, and I was very impressed with it. I was very happy the service with the communication, with the tech tools on Rover's so that to get communicated and how my pet is doing. So yeah, I definitely had very favorable experiences. I'm petless right now for the time being, but yeah, I was a Rover customer, and I will be again if I need it. Yeah, but to your point, yeah, I recently, or I moved to Denver a couple of years. years ago, and I didn't have like a broad group of broad base of people here to kind of lean on.

And my girlfriend and I had had a cat in the apartment whenever we leave town. We had to get a rover. And then there were a couple of times where we had friends bailing on watching the cat at the last minute. So now we're extremely loyal to Rover. I think it's like 20 bucks to get a little drop-in visit. You get photos to make sure the cat is alive and you have people who know how to watch animals. So that might have explained it, but the business basically connects pet sitters with people who watch animals. How does the business actually make money, though? Yes. So just like any of their platform that matches a service provider with a service seeker like Uber or Angie's List, Rover gets a piece of the transaction. They're the matchmaker

in the middle. They're orchestrating, they're playing Cupid between pet owner and pet sitter and Pet Walker or Pet Border. It makes sense. So taking its more recent quarter as an example, there are 1.7 million bookings on the Rover platform for the three months ending. in June. And the pet owners paid a total of $266 million for the services. That's basically the gross gross booking volume, gross booking value rather, of the for the quarter. Rovers revenue was nearly $59 million. So Rovers take rate, the percentage of that gross booking value was 23.3%, which is up from 21.9%. So they get a piece of the action. It doesn't come from the pet owner. It's basically just like with Uber. It's just what you're paying and part of it goes, you know, goes, you know,

the person providing this isn't getting the full money. 20% is, I think, the base commission on Rover, but it fluctuates from any other things. Yeah, and there's some risks I want to get to in a sec. But, I mean, two things it seems to have is a narrative in tail wins. The narrative is this is sort of the business that saves the cat, if you will. And then it's also, when you think of broadly, more people are owning pets. You have more people seeing their, like, fur babies as children, some back-to-work trends. and also, I mean, I know you just went to Europe.

You have more travel kicking back up again that this business might be benefiting from. Yeah, absolutely. And these tailwinds, let's call them tailwags. Let's go all full pet on this. You do have a case where, especially early in the pandemic, the first two things you were talking about, people basically adopting pets, almost like Easter rabbits, you know, taking things they can't control. And they were treat the humanization, basically making pets part of the family, which you're seeing people take their pets everywhere.

those first two trends didn't necessarily help Rover early on because you were at home, you were working from home, you weren't traveling because you couldn't go anywhere, at least for the first year or so. So a rover really wasn't going anywhere, whereas the Chewis, you know, basically the online pet retail, the fresh pets of the world that were providing fresh premium pet foods, those companies thrived early on. That was not the case with Rover, but the last two trends you mentioned, basically coming back to work, people are offices saying, hey, come back, we need you back in the office, maybe not

five days a week, but three days a week, like many offices are doing, or in my case and in many other cases, just travel. Now that you're free to travel, you're no longer limited to where you can go. In some places, you just can't take your dogs or cats. So that's why I think Rover's picking up. It was sort of a lagging pet stock as far as the trend goes, but it is benefiting from all those things right now that are really happening. A lot of positive things happening for Rover right now. One question I do have, though, and they do publish their dollar-based net retention rate, but it's the customer stickiness, right? I was talking to someone in the cafeteria here in the office. They were like, oh, yeah, I met a rover and it was great. And then she watched my dog a couple of

times. And then I just got her number. And then we started doing pet bookings off the platform. You don't have to pay the fee. Maybe it's a little cheaper. Is that a big issue for the company? And if so, how's Rover addressing that problem? Yeah, I think that's the biggest bear knock. And the explanation is great. I love saying the bullish, telling the bullish side of the rover story, because that is an obvious knock. But if you look at their numbers, 84%, so they had 1.7 million bookings, 84% of those bookings were repeat bookings. And there's some good reasons for both the pet owner and the pet services provider

to stay on the platform. For starters, let's talk over with the pet owner's side. So, the Rover offers what they call the Rover guarantee. So they will cover $25,000 in vet care reimbursements if something goes wrong. If it's eligible, if there was an injury at the pet owner or the, sitters pets. There's also property damage, not for the person taking care of the pet, but if it happens at your house, in your case you said you had someone come in to look after your cat, if they come in and they basically stumble over, you know, like a table or something or something breaks in the process,

that is covered. And some out-of-pocket medical costs for some injuries, you know, not complete coverage, but some degree. And more importantly, 24-7 support, which a lot of times when you just say, oh, I'm going to go off book. Let's just do this under the table, and I'll take care of you this way. You don't have that. Wait a minute. This person's not here. They didn't show up. What do I do now? Who do I contact? Rovers there to provide that kind of support. Then the other side, which is even more brilliant on the rover end, is that you have an incentive to keep, if you are a pet service provider, to keep a customer coming back to you. First of all, it's in the terms and conditions of the site. When you sign up, it says you can't do that. And obviously, that is very hard to enforce.

so that's not so much of a problem. But the secret sauce here, and this is where I think it's really brilliant, is the algorithm. So when you're looking up, I need a pet sitter, I need a pet walker, I need someone to walk my dog or take care of my cat. From October 8th to October 9th, you get the search results. And they're ranked in the algorithms based on the reviews that the service providers get. But baked into that algorithm is the number of repeat customers that they have on the platform, which you may think, well, that's sneaky, but it's also smart because you're thinking, hey, if someone's a repeat customer, that's sort of validating that that's a good pet service provider.

So Rover is justified in doing that, and it's why I think you see that it could happen. But again, to save 77 cents on the dollar, to save 23 cents on the dollar, who's going to give that up? The pet owner that doesn't want says, all right, I'll give up all these guarantees and all this insurance. Or the pet service provider who says, well, I'll just give up, you know, the fact that I'll just rank lower and have less visibility on a site where visibility is all I need right now. get noticed. If someone bails on watching your animal, we got you. That seems to deserve a premium. And I guess you addressed that a little bit. I think that would be when I started looking at the company, one of my big questions is how they handled the liability. Because, you know, more so than Airbnb, there's going to be a higher risk if someone is coming over to your house

to watch an animal on both sides, right? Like maybe the dog's not so nice. Maybe the cat's not so nice. I know there's another competitor in this space. It's called Wag. How does that play into the pet watching landscape and any other competitive threats investors should watch. Yes. So, most of the competitors are small companies like WAG. So WAG is growing quickly. It's an interesting company. Has a great ticker symbol, P-E-T. So right-of-way, pet. Better than ROVR, if I have to be a fan of generic ticker symbols, I like Cedar Fair, F-U-N. I like fun ticker symbols, like P-E-T for a pet care service. But in WAG's defense, in WAG's case, rather, not in their defense, but the argument against Wag. It's basically, it's a microcap. It's generating

less, about a little more than a third of the revenue that Rover is. And unlike Rover, which is now starting to break into profitability, Wag is at least a couple of years away from profitability because that's what happens when you're small. And the scalable business, the network, effect, all these things favor the larger companies, which is Rover. And again, Rover's not that large of a company, 1.1 billion dollar market cap, but clearly a leader in a, in a, in a, in a in a small little market, but a market that I think will continue to grow. Rover has broken through to that positive adjusted profit, which management has highlighted, is a curmudgeon, is a skeptic. I like to see positive free cash flow,

because we're adjusting for that stock-based comp. They spend a chunk of revenue on that, about 10% of their revenue. So what do you think Rover needs to do to go from that positive, adjusted profit to a positive free cash flow? Yeah. So again, it's at that point. It's sort of coming around the bend. And sometimes it takes a long time for these companies to turn that corner, but it's clearly moving in that right direction where now it no longer needs to market and spend so much money when it has a 25% increase in bookings over the past year, 35% revenue increase in its latest quarter versus the prior year. It's getting to point the business is growing to the point that it doesn't have to go that hard to get there. Basically, it's adjusted

EBITDA went from 10% a year ago in the second quarter to 18%. percent in its most recent quarter, the three months ending in June. And its long-term goal is for 30 percent. And obviously, that's not free cash flow. That's just one metric. But it is something that the company is getting there. And I think you're seeing the finances with every quarter that comes out. So far this year, every quarter, they've raised their guidance and raised their adjusted EBITDA guidance. They don't provide a free cash flow guidance because it's not there yet. But I think it's right, it's getting close to the point where I think it can happen. All it has to do is just let inertia, momentum and its brand name, carry it there.

So when you're looking at a younger company like Rover, it hasn't broken in that free cash flow, the price to earnings multiple might not tell you that clear of a story about the company. What are the valuation measures that you're watching that you would suggest investors watch? Yeah, it's not the PE ratio, not at this point. It's right now, Rover, it's just a hard and fast rule. If a company's just starting to become profitable, you don't just automatically say, let's slap a P.E. multiple on this, and, oh, it's always going to be higher than you'd want to pay. In Rovers' case, it is small. The scalability is kicking in, but the stock is trading it 63 times

next year's analyst profit targets, and that is high. But when you look at where that comes from, it's analysts see 19% revenue growth, which is a slowdown from the 29% midpoint of the guidance that Rovers providing for revenue growth this time around, but they see earnings per share soaring 150%. It is at that point where its earnings is becoming profitable and it's growing faster than the revenue right now. The take rate is expanding. The margins are improving. A lot of these things are happening. But yeah, but don't go with the earnings multiple. Not right now. It's not established at that point. And even revenue multiple, which I think is obviously like, well, that's plan B. I don't think that's fair either. Rover's trading it five times revenue on its market cap. Four times its enterprise value because it has a net cash, a strong net

cash position. So it's $1.1 billion market cap, but a $900 million enterprise value. And these multiples, I'm based on what their guidance is for this year. We're already three quarters of the way through this year. I feel confident going with their guidance, especially when they've raised that guidance. But those multiples are not that well, but you mentioned stuff like retention, growth. All these things that I think are more important rather than an actual hard and fast metric. As long as the margins are improving, as long as everything's moving in the right direction, the earnings multiples, the revenue multiples will pay off in time. Yeah, and at least anecdotally, I know as a customer, I'll be using Rover more in the future.

Rick Munairis, appreciate your time and your insight on this young and interesting company. If you've got a company you want us to do a mini dive on right into the show, you can reach Motleyful Money at Podcasts at Fool.com, and if you're looking for more stock ideas, we've got them. Our top-notch analysts at Motley Fool Stock Advisor have put together a list of five quality dividend payers that are also recommendations in the Stock Advisor service. This report is free to you just as a thank you for listening to our podcast and radio show. No purchase necessary.

Just go to fool.com slash dividends and we'll email it directly to your inbox. That's fool.com slash dividends with an S to claim your five dividend stock recommendations now. Up next, we've got stocks on our radar. Stay right here. You're listening to Motley Fool Money. As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on.

what you hear. I'm Dylan Lewis, joined again by Jason Moser and Andy Cross. Two weeks ago on Motleyful Money, we talked with author Ben Mesrick about his book-turned movie, Dumb Money, and the GameStop Meme Stock saga. And this week, the plot there thickens. Ryan Cohen, former CEO of Chewy is taking the CEO role at GameStop. Andy, this means Cohen is upping his involvement in the company where he was the largest share and the executive chair. What do you make of all of this? A decade ago, GameStop was selling nearly 10 billion worth of whatever they sell, games and things, and making 600 million in operating profits. Today, it's losing money and sells less than $6 billion. So Ryan Cohn owns 12% of this, has built up the stake. As you mentioned, has a lot of history during some of those meme stock days, bedbath and beyond, of which, according to news reports, the SEC is looking into to see his activity around that.

but the reports from what he sent out to shareholders, I think is very interesting. He sent a letter that does not hold anything back. He said it is time to be extreme frugality is required with all waste eliminated so that GameStop is here for decades to come. And he hopes clearly that's the case because he owns 12%. Hopefully this is an investment that he can stick with and help turn this business around because it has really struggled and the stock has really struggled over the last few years or so. Jason, I know sometimes when people see a struggling business and a leader that has some star power, they get excited. What do you make of people trying to make a turnaround happen for businesses that otherwise seem to be struggling? Yeah, I mean, usually it goes well beyond just the

individual. And I mean, we've seen examples of that throughout history, of course. I mean, we talk about JC Penny, I think ad nauseum on the show for several years. And just, it, regardless of the leader, just they could never, never get it figured out. I mean, I can't help but wonder if maybe this just isn't really, you know, the beginning of the end for GameStop. So to be trying to figure out a way to sort of roll this into another entity so that they don't necessarily have to be in the spotlight anymore. You know, given Cohen taking over here and given the fact that he's not taking a paycheck,

I mean, time is of the essence. So I'd imagine he will be thinking very long and hard about this. All right. Let's get over to stocks on our radar. Our man behind the glass, Dan Boyd, is going to hit you with a question. Andy, you're up first. What are you looking at this week? Guys, I'm looking at Intercontinental Exchange, ICE, the owner and operator of the New York Stock Exchange, along with a few other different exchanges and different trading venues, clearing houses,

and energy options, future and more. It runs a fixed income and data service business. And also runs through its acquisition of L.A. a few years ago, loan origination, closing data analytics, has actually just made another big $12 billion acquisition. It's a $60 billion company, $12 billion acquisition to deepen of Black Knight trading, to deepen its investment into technology around the mortgage business. It's extremely profitable. The stock's up 8% year or date, so really has not kept pace with the market. It yields about 1.5, 1.6%. Very profitable. It's not very expensive. It sells less than 20 times earnings, and it's one of the leaders when it comes to electronic trading venues, Intercontinental Exchange, ICE.

Dan, a question for Andy, aka the Iceman, about Intercontinental Exchange. Isn't picking the company that runs the New York Stock Exchange kind of cheating when it comes to stocks on our radar? Because that's just like, I'm just going to pick all the stocks, Dan. What are you going to do about it? Well, it's very interesting because ICE was started as an energy trading firm many years ago out of Atlanta by Jeffrey Sprecker, who is the CEO today. And they ended up buying the NYSE, the vaunted, valued NYSE, as quite a little bit of a shock because of what they have built. So a lot of interests in what they are building, not just NYSE, Dan, but also in other venues,

including like I mentioned, mortgages and fixed income. All right, Jason, what do you have on your radar this week? I love it when Dan calls shenanigans. It just makes for a better show. Dan, this week, I'm taking a closer to look at a company called E-PAM Systems. The ticker is E-P-A-M. EPM Systems is a global technology consulting business, ultimately helping their customers with software and technology needs that span the markets.

So you look at the global software consulting market. It's expected to grow to more than $500 billion by 2028. And one of EPM's key advantages is global delivery model, right? I mean, they are able to deliver services and solutions to global customers across all geographies, But generally speaking, they keep their talent in lower cost areas of the world. So it helps them keep costs down and ultimately helping profits stay a little higher. But they've diversified the business nicely. If you look in 2020, their top five customers represented 22% of total revenue.

Top 10 customers represented 30.9% of revenue. In 2022, those numbers were 16.4% and 23.8% respectively. So nice to see them diversifying. I think you have a good business here valued around 30 times trailing earnings, a reasonable valuation for a company with attracted growth prospects and strong fundamentals. Dan, a question about a single stock, EPAM systems? It's one stock, so you know I like it more than all the stocks, I guess. Yeah, I think that's a good way to approach things.

Safe to say you're putting EPAM systems on your watch list this week? That's right. All right, guys, we're out of time. We'll see you next week.