Motley Fool Money - The Wild Swings of Earnings Season Continue

Starting point is 00:00:01 Big earnings moves today on Motley Fool Hidden Gems Investing. Welcome to Motley Full Hidden Gems Investing. I'm your host, Tyler Crowe. And today I'm joined by longtime full contributors, Travis Hoyum, John Kwas. Travis doing the full gamut this week with hosting and analyst duties. A lot of Travis time. Burning the candle on both sides this week. So I think today might be the busiest day when it comes to earnings out there.

Starting point is 00:00:29 I think it's something like 530 companies. Obviously, we can't get to all of them. So what we did before the show is, We wanted to look at, number one, companies that are moving or their stocks are moving big time after earnings releases. And also, we wanted to kind of pick companies that are either motley full favorites of our members or some of our analysts and some of our personal favorites as well. And we're going to start today with Mercado Libre. Shares are down about 7% after the company reported earnings. And across the board, they beat expectations. But one of the things that

Starting point is 00:00:58 was noticeable was that earnings have declined for a couple quarters now. Well, let's start with the top line there, Tyler. This is its fastest growth in the last four years. And that's really saying something because this is a company that has averaged 50% quarterly growth over the last 10 years. Growth is so important when it comes to the stocks that we're investing in. It's not the only factor, but it is a very crucial factor when it comes to market beating investments. Mercado Libre, as you look at what it has done, over the long term. This has to be near the top of investors' minds when it comes to creating a list of long-term compounders. Yeah, and that growth rate was 50% for this quarter, just to be clear. I think this is just the place that the market is in today is this was a phenomenal quarter from a growth perspective, but the downside is margins are down.

Starting point is 00:01:53 And this is an explicit tradeoff that management is making, saying, you know what, we're going to give people more perks, we're going to give sellers more perks, to try to drive more revenue to the business. In theory, you're playing something like an Amazon game where once people get used to both shopping on your platform and also building a business on your platform from a seller side, that should be a phenomenal place to be. But they're giving up that profitability short-term.

Starting point is 00:02:19 And so that's what investors are sort of, there's a yin-y-yang here going, okay, revenue growth is great, but I'm not seeing the profitability. How much do I really want to pay for this stock? And so I think that's the reaction today. And it's not just Mercado Libre. This is happening across the market.

Starting point is 00:02:34 You know, you look at a company like Duolingo also down big today, same exact tradeoff that they're making. Hey, we're going for user growth. We're not going for profitability today. And shares are selling off. So this is the challenge when you get to a relatively highly valued market is when you're starting to make those tradeoffs, you never know which one the market wants to see. Well, and Travis, if I could jump in there on that tradeoff, you look at the lower shipping that it chose to do, or the lower threshold for free shipping

Starting point is 00:03:02 that it chose to do in Brazil a while back, that is actually working when it comes to the Amazon game that you referenced. User growth is up over 20% when you look at that. And then also, I think really key, the ratio of daily users to monthly users is at its highest level ever. So this is becoming more of a daily habit

Starting point is 00:03:22 for Mercado Libre users in its key markets. And then also items per buyer in Brazil up 19%. I think that is a really crucial data point because this is basically saying that Mercado Libre is becoming more of a go-to platform on a daily basis for more things.

Starting point is 00:03:41 I think that's a habit-forming trend and I think that it's directly a result of that free shipping decision. Yeah, and let's just, this is where you want to know what kind of investor you are. If you are a foolish investor with a capital F, you're looking at this going,

Starting point is 00:03:57 hey, we want this company to be bigger, long term. This is a great discount if I have been looking at this stock because you know what, that profitability, that's not the short term answer that I want as an investor. I want that long term growth. But if you're trying to guess what's going to happen quarter to quarter, you maybe got this wrong. So that's where I think, you know, stepping back and going, hey, what do I really want from this company and knowing that going into earnings is really important. So we brought up the Amazon conversation because the comparisons are pretty easy. Look at this. It's, you know, digital fintech, e-commerce platform as well.

Starting point is 00:04:30 But one of the things I do think about, because we're talking about profitability margins and things like that, and the comparison is always Amazon. I think it's fair to say that Amazon had a very, very long leash with the market in its grow-up phase, willing to overlook profitability for a very long time because it was like, oh, it's growing, it's doing all these new things.

Starting point is 00:04:52 It seems to be worth it. It was generating enough cash that could make those investments in other things. And then it found AWS, and that's when like profitability really took off here. With Mercado Libre, we're kind of at a point where it's making similar moves where it's like, we're going to forego profitability now, you know, credit card perks, lowering the threshold for order value for free shipping and things like that. It is running the playbook. One thing I am, I'm curious, though, is like to have that much growth and then still see earnings declining, it's like a, it's, That's a pretty aggressive choice in that, you know, cost versus revenue growth sort of paradigm.

Starting point is 00:05:33 And I do wonder, like, is revenue growth almost too prioritized here? 50% growth is amazing. It's incredibly hard to sustain, and you're doing it at a declining earning sort of environment. I can't help but think that management is too focused on revenue growth here and maybe not growth with economic scale. Well, I mean, Tyler, I push back on the wording here that you chose, with foregoing profitability because I'd be inclined to agree with you here, but Mercado Libre is not in the red. In fact, it invested $2 billion in its credit portfolio.

Starting point is 00:06:05 This is one area of the business that the market is a little bit concerned about, concerned about the riskiness of the portfolio, investing $2 billion into that credit portfolio, and still free cash flow positive. And I think that's a huge thing. It had nearly a 7% margin for income from operations. These are the free cash flow and the income from operations, these are two really important profitability metrics and still solidly in the black.

Starting point is 00:06:29 And think about this. This is 50% growth and this isn't tech. I mean, for the most part, this is actually people buying things on the platform. It is tech, but not in the same way that we're accustomed to with the strong growth rates in the market right now. This is kind of a retail play, and that is so interesting. To think about this in the reverse, okay, you pull back on some of this growth investment right now.

Starting point is 00:06:50 What's the alternative? Better profitability to what end? Are we going to pay a dividend? Are we going to buy back stock? I'm not really sure where the money is used for the benefit of shareholders if we pull back on the growth. I think that it needs to keep the pedal to the metal. Always a fascinating conversation. I'm sure that we're going to be having this next quarter when Mercado Libre reports earnings because this is always that push and pull that always happens. Coming up after the break, we're going to hit a stock that is doing much better, at least in the market reaction today. That's Unity Software. You just found out that your sales team is at risk of missing quota. Don't panic. Just ask Rippling AI.

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Starting point is 00:08:23 Sign up for exclusive access today, rippling.a-I-S-F-Fool. Unity software, sorry, Unity Technologies, they, official changes, they want to make sure that they're more than just software now. They've certainly surprised and delighted investors after this. Most recent earnings report, shares are up about 14 and a half percent, as we're recording right now. It beat revenue and it beat earnings expectations. Now, after a pretty lousy 2024.

Starting point is 00:08:49 in the first half of 2025, this is like four straight quarters where revenue growth has accelerated. It seems like they're starting to find attraction again after kind of wandering the woods a little bit. Yeah, this is such an interesting company right now. Remember, shares are down about 80% from their peak. So if you're a long-term shareholder, this still has not worked out particularly well. It almost seems to me like they're just figuring out this business and in particular figuring out how to monetize the software that they've been making in the ad, platform that they've been trying to build. Just as a point where the mobile business in general is getting kind of old and stodgy, it reminds me a little bit of the console business a decade ago.

Starting point is 00:09:29 And consoles have just kind of been in a steady decline over that period of time. I don't know. Are we still going to be excited about apps on an iPhone app store in 10 years from now? And that's really where Unity really dominates things. So it's just so interesting to see that this is, they have started to increase their revenue. The market is starting to react a little bit positively because, because they've kind of gotten their stuff together, but it still trades for almost 10 times sales,

Starting point is 00:09:53 and I just can't get my head around why I should be excited about this company long term. Tyler, you pointed out four straight quarters of accelerating revenue growth. I just have to ask, is that good? Because Mercado Libre has four straight quarters of revenue growth, too. Really keeping those seats here today. Sorry, I just had to get that point in. But it is interesting to Travis's point.

Starting point is 00:10:12 This is actually growing now with ads. And so there's two parts of the business. We have the create side of things. And that's really, I feel like what Unity's more known for, that game creation, that video creation software. And that's really plateaued here, only 5% growth in this quarter, all of this revenue growth coming from the ads network, 63% in the grow revenue segment. And expecting accelerating growth rate yet again in the upcoming quarter of 70% growth roughly. This is very interesting, kind of a business shift taking place. If you recall a few years ago when Unity really had problems, it was because the ads were suffering.

Starting point is 00:10:51 And now it does seem like it's getting its act together there in that segment. But the grow, excuse me, the create segment not really showing anything. Yeah, management did put out a plan last quarter. They're going to shed some of those like mobile publishing divisions, things like that. Some of its ad networks, they're like, this isn't working for us. So there has been some deliberate changes. It does appear to be working. guidance for the next quarter is actually even faster revenue growth than we saw this most

Starting point is 00:11:17 recent quarter. So things are working. But to your point, Travis, this is a company that's been wandering the woods. They're starting to figure some stuff out, but there's also some like macro challenges related to, you know, what is the environment for its users, the mobile game space. How can this company kind of grapple with these challenges going forward and, you know, perhaps get back to not being an 80% down for its long-term shareholders. I don't know that I have a great answer for this. And I think this has been the frustrated thing, watching Unity as a business.

Starting point is 00:11:53 I mean, this is a piece of software that I started to learn a little bit, a handful of years ago when I was in the world of VR. This was the go-to thing. You had to use Unity. It was the best thing to use. That paradigm obviously didn't work out the way I think they hoped. But a lot of the changes that they made to the business and that are showing up now in the income statement,

Starting point is 00:12:11 are not really businesses that I want to be in as an investor. It's those kind of slimy ads that you see when you're playing a game. Or you maybe see your kids see. I know my son will come in and go, hey, dad, can I download this game? And I'm like, this looks like a terrible game. It's just built to be able to serve you even more ads, to try to get you to download more things. And guess what?

Starting point is 00:12:33 Most of those things are coming from Unity. So they're touting these developments that I just don't, they're not the kinds of things that I want to invest. And the problem is the core problem for them is they had a phenomenal platform game engine to be able to create these games, but they had no great way to monetize it. And when you don't know how to make money on the thing that you do really well, that's just a really challenging place to be in as a business. And I wonder if that great platform that it did have is really kind of the edge that it had is kind of being whittled away at by all the AI tooling that's out there. I know that it's implementing its own AI into its product, but at the same time, you kind of just wonder. And then it does become kind of an ads business. And to your point, is that where you want to be as an investor, you have to make that decision.

Starting point is 00:13:21 Tyler, I think one of the challenging things here going forward is stock-based compensation. One thing that's near and dear to your heart, I know, but, you know, management here clinking their champagne glasses saying it was down at its lowest level at 14% of revenue for the quarter, that's still really high. And if you look over the last five years, revenue, trailing 12 revenue is up 89%, but revenue per share is only up 24%. And a big part of that is the dilution that is ongoing. It's going to have to continue to deliver some incredible growth if it's going to continue to provide stock-based compensation at these levels. Right now it is growing really good with the ads, but is that sustainable? We'll find out. While we're on the topic of mobile gaming, coming up in the next section, we're going to talk about

Starting point is 00:14:06 Apploven and Celsius Holdings, who are maybe not having the best day today. In Toronto, every arrival is a statement, and nothing says it better than this. Cadillac Optic was the number one selling luxury EV in Canada for 2025. Find your rhythm across a seamless 33-inch display and an immersive 19-speaker AKG surround audio system. This city demands agility, and Optic delivers with precision to make every drive extraordinary. Let's take the Cadillac. Find out more at Cadillac Canada.ca.ca.

Starting point is 00:14:38 Luxury sales claim based on SMP Global Mobility Canadian New Vehicle Total Registrations for calendar year 2025 for the Cadillac definition of luxury. So two groups of shareholders that probably aren't having as good a time today as Unity Technologies or Celsius Holdings and Appleloving. Two stocks are both down double digits today. And while both of them posted relatively decent revenue growth, some of them didn't exactly meet expectations. So I kind of gave you a assignment for each of them. Travis, you did Celsius. John, you did Atlevin. Travis, what did you see in the Celsius report?

Starting point is 00:15:07 Celsius isn't in such an interesting spot right now because the results were fine, but that's not really what the market was looking for. You know, revenue was up 11% in the quarter, but you dig underneath that. 21% growth at Alani New. That's the company that they bought. It completed that acquisition about a year ago. So now you're lapping those easier comps. You might remember a couple of quarters ago.

Starting point is 00:15:30 You'd see, oh my gosh, 100% growth. That was actually because of that Alani new acquisition. and then the course Celsius brand is actually down 12% in this quarter. So this is showing that sure that the portfolio is doing okay, but the entire space, this energy space, maybe it's like alternatives to traditional soda kind of drinks. It's just getting really, really competitive. You know, I know that a handful of years ago,

Starting point is 00:15:57 John talked about Celsius before we even had it here in Minnesota. And once we started getting it, oh, now suddenly Celsius is every well. Now I go down those same aisles and there's a dozen other brands. So it's not just Celsius. This isn't a world where, you know, Monster and Red Bull kind of dominated everything for, what, two decades? Now you're getting, it's easier and easier to bring up these brands, these co-packers that

Starting point is 00:16:22 Celsius was actually grown up on. Remember, they did not own their own manufacturing facilities. They had other companies manufacture their products and they were just a brand in a sales business, well, everybody else can just copy that. And that's something that we've seen more and more in this space. That's a real challenge. So, you know, now you're going from, is it a growth stock or is it a value stock 16 times forward earnings? It's maybe getting close to that value, value territory. But I don't know, investors just don't seem to know what to think about the company's future. Antidotally speaking, I live overseas. I've mentioned this a couple times on the

Starting point is 00:16:55 show. And when I go to the aisle, yeah, I see Red Bull. But other than that, there is no other, like, American comparable, at the same time, there's still like 20 different brands. So again, this is an intensely competitive industry where, you know, the barriers to entry aren't exactly the hardest in the world. So as I mentioned too, John, I assigned you to App Lovin, kind of a, I would say like growth numbers were kind of similar to Unity, but the market did not react nearly as well. Yes, and it's interesting that you bring up Unity because at this point they are more directly competitive than maybe they've been in the past because Unity growing with the ad network. And really, that's what App Lovin is. The same kind of business here. Mobile gaming is the

Starting point is 00:17:37 main focus, and that's where they display their ads. That's where they generate their revenue. Up 53% this quarter, that's really good growth. But it is behind what Unity posted. So that is worth noting. And also, revenue growth is decelerating to be fair. It had over 70% growth this time last year. It's also guiding for 47% growth in the upcoming third quarter. So 53% to 40%. 37%. It's still really great growth. And, you know, one of the things I want to point out here is that existing customers, their spend up 28% since the end of last year. That's actually a really meaningful data point, I think, is that the customers who are using them are now spending more than they were. To me, that signals that, hey, they're getting a return here and willing to

Starting point is 00:18:21 increase that spend. So I think that is good. But to be fair, the growth rate is slowing down. So I get it trading at 20 times forward earnings, growing at over 40%. Profits are growing faster than revenue. I mean, you're looking at a 66% net profit margin. I think this is getting a little bit interesting here. I also thought it was hilarious that it came up on the conference call that they should change their name. So this is one of the most strangely named companies in the market.

Starting point is 00:18:49 It does, you know, sound like from the movie McLevin. I can't get that out of my head every time I hear the company. So sometimes name changes are positive, and it's interesting that it's actually being brought up by investor. Yeah, the analysts there are mentioning maybe we should change it to Max, and that is the name of its ad product. And to point out, I think another thing that investors are responding to negatively today is that it updates its Max models, its AI models from time to time. And each time it has done that in the past, it has seen a jump in its revenue growth rate. And this time releasing the new model, still great growth, but not seeing it. that uplift right away. And I think that's a little bit concerning for investors, like,

Starting point is 00:19:30 especially in light of Unity's results, it's kind of like, oh, man, did they not make the right changes that they need to make? And so I think it just puts a question mark on it. But CEO saying, hey, we're not changing from app loving. We are app loving. I mean, stick to your guns. But, hey, look, I think the biggest takeaway that we have from this quarter, I mean, it wasn't just today's earnings. We've seen this across pretty much the entire earnings season so far. The market It seems very demanding right now. We have companies that are posting incredible growth and still getting like double-digit declines.

Starting point is 00:20:01 Whether that continues, who knows, we seem to be in very volatile individual stock time. But hey, you know what, that's just kind of how it is with long-term investing. Try to stay the course and plow through when we have all these volatile earnings times, even when the business is doing pretty good. As always, people on the program may have interest

Starting point is 00:20:17 in the stocks they talk about, and the Motley Fool may have formal recommendations for or against. So don't buy ourselves stocks based solely on what you hear. All personal finance content follows Montlifical editorial standards and is not approved by advertisers. Advertisements are sponsored content and provide for informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks for Chris of Dan Boyd and the rest of the multiple team. For John, Travis, and myself, thanks for listening and we'll chat again soon.

Motley Fool Money - The Wild Swings of Earnings Season Continue

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