Motley Fool Money - This Is When Amazing Companies Are Born

Episode Date: August 10, 2022

While some tech companies announce lay-offs, others are posting blowout earnings. (00:21) Deidre Woollard and Tim Beyers discuss: - How a decrease in consumer spending is hitting SaaS companies in unexpected ways. - Why The Trade Desk is thriving in a tough environment. - A “cautious” view on tech layoffs (and why we aren’t hitting the panic button). - Why Walmart might join the streaming wars. - A brilliant, tiny company that’s not getting enough attention from investors. Plus, (15:00) Jason Moser and Matt Argersinger look at how companies are managing their share count, and one homebuilder that’s outperformed Amazon for more than a decade. Stocks mentioned: DDOG, TTD, WMT, SNAP, GRPN, JAMF, META, NVR, LOW, NVDA, AMZN Host: Deidre Woollard Guests: Tim Beyers, Jason Moser, Matt Argersinger Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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If you're 45 or older and at average risk, ask your health care provider about the Coligard test. Coligard is available by prescription only. Learn more or request a prescription today at colagard.com slash screen. The trade desk posts blowout earnings and will tell you about a home builder that's outperformed Amazon for more than a decade. You're listening to Motley Full Money. Welcome to Motley Full Money.

Today we are looking at those CPI numbers and potential for more tech layoffs. I'm Deidra Willard sitting in for Chris Hill, and I'm joined by Motley Fool Senior analyst Tim Byers. Hey Tim, how are you today? I'm well, Deidra. How about you? Doing well. Little hot here in the Alexandria area, but hanging in? Yeah, it's hot all around the world here.

But, you know, I got my caffeine. The wake-up juice is warm, which means I'm ready to go. Well, speaking of things that are warm, inflation. So, numbers came out, and the annual rate of inflation, according to the Consumer Price Index, is holding tight at 8.5%. So good news, unchanged from July, mostly because the gasoline index fell while the cost for food and shelter rose. So it's kind of this mixed bag, but the thing that I keep coming back to is the high price of food. So the food index has increased 10.9% over last year, which is the largest price increase since May 1979.

Tim, do I need to stop eating? I think we all need to stop eating, Deirdre. Yeah, this is not great. And I think we're going to see more stories of people really having a tough time here because these are essentials. I think what we're seeing is that essentials are getting more expensive. I've seen this recently. I'll just give you a really lame example, but over the weekend, I bought like a roast chicken and used to be able to go to the grocery store and you could get two roast chickens. If you had like your grocery loyalty card, you get two roast chickens for 10

bucks. Now it was one chicken for $8.99. It's like, okay, that's for real. That's new. Yeah. Yeah. I mean, the thing that I'm thinking about with this too is, Because it's in our faces, we all go to the grocery store at least once a week. Is this going to start really impacting consumer discretionary? Because we've still been in that kind of revenge spending mode, but I'm starting to wonder how fast is this really going to start impacting discretionary? There's no doubt it is. And it's certainly affecting guidance.

I'll give you just one company that's talking about this. So in the most recent quarter, when Datadog reported, now Datadog has nothing to do with, With consumer business, it is a cloud infrastructure provider, but it does have companies in the consumer discretionary sector that are just watching their spending. And so when Datadog issued guidance, he said, look, we have clients in the consumer discretionary spending. It looks like they're taking a look at all of their spend and their biggest buckets of spend. And Datadog has both a subscription product business model with usage,

attached to it. And so there are ways for those consumer discretionary companies to dial down some spend. So Data Dogg just issued conservative guidance. It was still really strong, but they did call out the consumer discretionary sector and said, yeah, there's some caution there. We're going to be really conservative in our guidance. So it is impacting, I think you're right to be thinking about this, Diedra. It's impacting companies across the sector, not just the consumer discretionary companies, but companies that are actually doing business with those companies and how they are generating revenue from those companies. That is a really interesting point, because you're absolutely right. We tend to think about

retail, restaurants, the things, grocery stores, the things that people are interacting with, but you're absolutely right. There's all of these other impacts that go kind of all the way down the line, which kind of brings me to our next segment. First, first, The earnings have been a mixed bag, but one of them that was really good the last couple of days was the Trade Desk. So, you know, people have been saying there's going to be this bumpy road for advertising, certainly tying into that sort of consumer discretionary thing. We've seen, you know, Roku got walloped meta, not so great either.

Trade Desk is forecasting 28% growth in Q3. So what's the advantage for them here? Well, I think a couple things. They are focusing on an area that's really important, which is first party data. have really shifted. So in the case of the Trade Desk where they're by side for bid, bid-level advertising, there is a real interest in figuring out how to work with customer data, first-party customer data directly and build advertisements around that instead of things like cookies, which are going the way of the dinosaur here. So the trade

Pardon me, has been pretty early on this in trying to figure this out. And I think because of that, they're getting a, you know, I think we're seeing the benefits of that. They're getting some more business here. They're becoming a provider of choice for, you know, a platform of choice, I think I would say here. But we're going to see a lot more of this. There's advertising spend will not go away. But I think two things will happen. The first is that it's probably.

going to be sharpened, so some budgets will be cut, but then the budget that remains, how do you get the most out of those dollars? And so you might get the most out of those dollars by looking at your existing customer base or cohorts like your existing customer base and putting advertisements in front of those cohorts because you've got more data about them. You're not really trying to guess, am I in the right demographics, figuring out, am I in the right space, I think I might be in the right space. The cookie data tells me this. Instead, I'm getting really focused using first-party data to get out in front of the customers where I think the chance of spend is much higher. So I think it's targeted and interesting,

and that's good for the Trade Desk. Is there any concern about the streaming consolidation and how that might impact Trade Desk? Because I was thinking about, like, we heard those rumors about Walmart making like a Walmart plus streaming service. And yet you've got, on the other side, you've got HBO Max and discovering that sort of consolidation. How is this all going to play out? I don't know, but I am strongly rooting for Walmart Plus streaming. If only because Walmart Plus is really interesting as an idea.

It's cheaper than Amazon Prime. It has most of the things that Prime has, including free grocery delivery. But it doesn't have the extras. like the original programming. All of that to say that there are more platforms than ever for placing things like advertisements. I think the streaming boon or maybe the normalization of streaming versus linear TV is a real tailwind for first party advertising, where you're using first party data to create relevant ads and put them in front of people. Like you want to make the ad tier on some of these streaming platforms, relevant and profitable. They ought to be really good

for the advertisers. And that requires a different level of engagement. And so using first-party data is going to be really important. So I think it's probably a net tailwind for the trade desk, but it's just too early to tell D-DRA. I mean, we're in the formative stages of this. So calling it right now feels really precise. but it sure looks like a tailwind to me. Interesting. Yeah, there's just, there's so much happening there that I find really fascinating. Another reason I want to talk to you today is because you and I are probably both studying tech layoffs from two different angles. So I'm studying it from this office-based perspective.

I'm watching my real estate investment trusts in, especially in markets like New York City and San Francisco. And I'm watching what some of the big companies are doing and trying to figure it out. We're probably studying it more from this tech company perspective. I saw that SNAP's doing another round of layoffs. Rupon just laid out about 15% of the workforce. Should we be worried? I'm worried. Are you worried? I am cautious. I would not say worried. I'd say cautious. And the reason is because this does happen. This goes in cycles. And unfortunately, Silicon Valley and the tech sector broadly has a habit of spending wildly and then, you know, cutting to the bone, and those two extremes, you know, continue to exist through cycles.

And it really stinks. So I think there's going to be more layoffs to come. There's a tracker called layoffs. FYI, which show a lot of, you know, they just kind of put in the latest layoffs, and it's heartbreaking to look at. You can see that there's a whole bunch. I would say it's more likely that the pain is going to be at the private company, maybe around Series B, Series C financing, or like trying to get to that financing and having trouble, you know, like making the capital work for a longer period of time.

And so they end up having to lay people off. And so you get real talented people that push back into the workforce. What's going to be interesting about this, DEDRA, is you're going to have a lot of really talented tech workers, particularly engineers, marketers, product designers, people like that who may throw up their hands and say, forget it, I'm moving to the middle of the country because, I mean, I got a package, you know, six months of severance or whatever it is. I'm like, I'm out of here. I'm leaving. And so that's really interesting for the companies that have committed to hybrid and or remote work. It's going to be fascinating. I predict there's

going to be a rush of really talented people who sign up for the remote first companies that are doing really interesting tech work. We don't care where you are. If you're in the middle of the middle of Iowa, fantastic. We'd love to have you. So I can see that being very interesting. It's probably more favorable for the companies with a lot of capital right now. So think the bigger companies and probably a lot worse for these smaller mid-tier companies that we're hoping to IPO in the next two years and may find that a lot more difficult now. Yeah, yeah, the amount of venture capital, you know, it was wide open for a while and now it's just narrowed.

I know like Y Combinators doing a smaller cohort. There's all of this stuff happening. But I think what you said there is really interesting because, and I know you've talked about this before is the idea that in these periods, it's sort of like after the dot com, you know, dot com bust, that's when the really amazing companies are born. So like right now, there is some engineer who like maybe got laid off or sees, you know, sees what's happening in his company. He's like, nope, I'm going to go start my own thing. And we don't know what that thing is. It could be five years from now. It could be 10 years from now. But it's probably going to be a thing

that changes our lives. And sometimes when I'm feeling a little depressed about this sort of thing, I think about those people who are out there and building the next thing that I'm going to love. That is exactly right. These are the best times for entrepreneurship. There is absolutely no doubt about it. And you can bet that venture capitalists are paying attention to this. The venture capitalists that are putting real money to work at the seed and A stages, early stages of the company, Those are the venture capitalists to be watching. The ones that are putting a lot of money or I've stopped putting money into the late stage companies, those are the ones that are giving up too early. And they just, really, those were the ones that were looking for an easy payout.

And they're going to get out of the game and that part of the market is going to dry up a little bit. So, yeah, it could take some time for these companies to emerge. But you're 100% right. It's a brilliant time. for entrepreneurship. Also, if you're a public company investor, it is a brilliant time to be watching companies that are being widely ignored, but still have capital, and they're not just going to go away. So I'll give you one that I think is small but beautiful in this sense. Like JAMF, JAMF, they're a tiny little company that nobody cares about, but they still provide a really valuable service

orchestrating Apple devices in the enterprise. They are not going away, Deidre. They have capital. They've been around for a long period of time. They get zero attention. They had, you know, as far as their earnings go, but they are not going away. So is it going to be a blockbuster over the next 10 years? I have no idea. But what I do know is that in a time like this, when things are weird and difficult, a disciplined company like that becomes more valuable. Well, Tim, I love that we start off a little bit depressing, but we've wrapped it up on an optimistic note. So thank you so much for chatting with me today. Thanks, Deidre.

Up next, a reminder that just because a company is buying back stock, that doesn't mean you win as a shareholder. Jason Moser and Matt Arger-Singer talk about some companies that are handling their share accounts well and some that could use a little work. Hey, Maddie, it's great to catch up again. Today, we're jumping into the wide world of watching your company's share account. Now, this is not a metric that you see published often, but it is a very valuable one that can offer some clues as to how management is allocating capital. And it, of course, plays along with the sherry purchases. Another headline, we see often

something management will often do to try to return value to shareholders. But it's not always a case of everything being as it seems. And when I say that share count is not something we often see published, I mean, in the financial media, right? We have ways that we can find it. And many, I think that's really what I want you to start us off with here. So first and foremost, let's start with what is the share account? And furthermore, where can I find it? Yeah, you bet, Jason. Great to be with you. So share count, I know most people listening probably know what that means. But sharecount refers to the number of shares a company has outstanding. So just remember when a company goes public or wants to raise money from the equity markets,

usually issue shares to do so. Some of these shares are held by insiders. But for a typical company, most shares are held by institutional investors, banks, and investors like us. And as you know, Jason, we like to talk about the size of companies a lot on this show. And we usually talk about the market capitalization or market cap. Well, to figure out the market cap, you can simply take the number of shares outstanding. Multiply it by the company's stock price, and bam, you have the market cap. So, for example, I was looking recently at a company called Iron Mountain.

Iron Mountain has just under 300 million shares outstanding. Its stock prices around 50 bucks. Multiply those two numbers together, and you get 15 billion, which is roughly the size of Iron Mountain's market cap. One pro tip, or maybe semi-pro tip, generally want to focus on diluted shares outstanding. You know that, Jason, rather than basic shares, the diluted share count includes all stock options, restricted stock that have invested yet, but are likely to. So to be more conservative, you want to focus on the diluted share count. As to where to find the info, I don't know if

you have a preferred way. I tend to go to the source. You can go to a company's investor-relation site, look at the press release for just the most recent quarterly earnings, for example. That should have an income statement. And usually at the bottom of an income statement, you'll find the list of basic and diluted share is outstanding. You'll see the number there. Let's take this one step further, because share account, I like the mechanics of that and how you explain how that helps us determine the size of a company. We also see in the financial media often, you know, a big headline. Companies love to get out there, share repurchase authorization, right?

We are buying back our own stock. And on the surface, that just sounds like such a bullish sentiment, right? I mean, wow, the company thinks their stock is worth buying. Well, certainly I should buy it too. Let's talk a little bit about share repurchases. What are they and why do companies do them? Right. In stock market history, it's a kind of a relatively new phenomenon. And I kind of actually have to blame Warren Buffett a little bit. I think if you go back, he was kind of the investor that was writing about share buybacks and was encouraging a lot of

the companies like The Washington Post or Coca-Cola, the companies where he was sitting on the boards at the time to buy back their shares because he thought they were cheap. And that's, of course, why Berkshire Hathaway was buying them. And it kind of took off, I think, especially in recent decades, I think, you know, a lot of companies with excess cash or generating a lot of cash, don't often have a really good way of putting that cash to work. A lot of the reasons, because there aren't really good places to put that to work. They're not finding good ideas to earn a good return on capital. So why not buyback are my own shares? Because I think it's undervalued and that's a good place to invest our money. And shareholders like it, because

the one thing share of purchases do, if they're done correctly, or I should say if they're done in a vacuum, let's say that. They will, should bring down the share count. And if you bring down the share count, that means your ownership stake is an investor in the company rises, and the company's earnings per share will go up, not necessarily because the company's raising earnings, but because the share count's going down. So the number of the denominator of earnings is shrinking, which means the earnings per share will increase. And that usually increases the value of the overall company. So it's a popular practice and one that's been put in place a lot, especially recently. Yeah, yeah. And it feels like you have two basic ways in returning value to shareholders,

sherry purchases and dividends. One being that cash in the pocket dividend, I know a lot of people love that. The other, sherry purchases, it can be a little bit more theoretical as to whether it really does enhance the value of that stock. And I think that's ultimately what I wanted to get into here next, is we want to look at some examples of companies that do the share repurchases well, that they do them effectively. And then we also look at some examples of companies that, yeah, they're repurchasing their own stock, but maybe it's not having necessarily the effect that you would hope it would. But let's start with a company that does a good job with share repurchases. What's an example you have for us? One company that comes to mind for me is NVR.

The ticker is NVR. They're one of the country's leading home builders. And they're kind of legendary almost for buying back their shares. They've done it really since they've been a public company. And it's one of the best performing stocks, actually, over the last 20 years. Believe it or not, NVR has actually outperformed Amazon. if you start from the beginning of the century, January 1, 2000. But that aside, so over the last, so I mentioned their big share of purchases, over the last 10 years,

they spent about $7 billion on share buybacks. It's pretty big. I mean, the company itself is only about 16 billion. By spending that money, they've been able to reduce the outstanding share account by more than a third. And a lot of those billions were spent when the share price was much, much lower than it is today. And one thing I like to see is, if a company's investing in their stock, then I want to also see earnings power increase. If you look at earnings per share over the last 10 years, it's gone up almost 14x. So you have a company that's share prices way up. Earnings are growing. They've been buying back a lot of shares. Investors have done really, really well because of those efforts. Yeah, a great example there. One that came to mind

that we'd spoken about recently on an episode of modeling full money is Lowe's. In Lowe's, Interesting business, because it had up to this point really kind of been in a little bit of a turnaround. I think that CEO Marvin Ellison has done a wonderful job really getting that company back on track. And we know the home improvement space is just a wonderful one, very resilient. And Lowe's has spent $29.5 billion over the past five years in repurchasing stock. And the good news for shareholders is that their share count has followed suit. It's down almost 23% all the way back since 2018. So, they're buying back a ton of stock.

They're bringing that share account down. And, oh, yeah, by the way, Lowe's is a dividend, aristocrat. So they pay a dividend on top of that, which I think is just really cool to hear. Double whammy. Yeah, I mean, you know, shareholders have really been winning on both fronts there with Lowe's. So another good example of a company that's done it fairly effectively. What's an example of a company that you feel like is maybe not doing it so well? Well, you mentioned Meta Platforms, formerly Facebook earlier.

So, they started buying back stock pretty meaningfully about five years ago, but really stepped it up over the last couple of years. In fact, over the last five years, they spent around $105 billion buying back stock. Just in the last 18 months, they spent about $70 billion. So really gotten aggressive. And so roughly a quarter of Meta's current market cap is a stock they bought back. But if you look at meta shares outstanding over the last five years, down less than 6%. So they spent roughly 25% of the market cap buying back stock, but the share count has not shrunk

that much. And of course, like a lot of companies in the big tech space, meta issues a lot of shares because they're paying out a lot of stock options to employees. It's part of their compensation practice. Yeah. Unfortunately, offsets most of the vast majority of the share. share buyback money, they've invested. Yeah, well, I've got a bad example.

It's in line kind of with what you're talking about there with Meta. And it's actually, it's a business that I think a lot of folks in our universe love. It's a company that's performed very well over the past several years. But Invidia, you go all the way back to 2018, and they've spent $8.5 billion in share repurchases. The share account has actually gone up. Oh, wow. And that's the opposite, right? That's the George Costanza, right?

They're doing the opposite of what we're looking for. And here's, to add even more confusion to the mix, though, and this is what I found very fascinating. When I was looking at both lows and Nvidia, when you look at the performance of both companies' share prices over the last five years, Nvidia is up 313 percent, lows up close to 160 percent. And so even with that less than effective share repurchase strategy, Nvidia shares have performed very Well, in your speaking of meta, I wonder if maybe one of the reasons why that is, is when

we talk about tech companies, tech companies have a reputation for really using those repurchases to offset that share-based compensation. So if the expectation is already set going in, well, then there aren't really any surprises. I mean, I wish that NVIDIA was bringing that share account down, but it seems like the market, more or less, is just kind of giving them a pass and saying we know that it's more or less just to offset share-based compensation, and we're still okay with that. Yeah, that's true, and I think that's okay. I think companies that are growing earnings like NVIDIA or as META has done in recent years,

they definitely get a pass, and they should get a pass. I mean, share-re purchases shouldn't be the reason any kind of company that you're going to invest to the company because they're buying back stock or because you think the share account's going to go down, so earnings per share are going to get used. I mean, it really still comes down to earnings power, and those companies have demonstrated tremendous earnings power in recent years, and they should get the benefit of that. I still question investing so many billions of dollars, though, in doing that. If you really want to return value to shareholders and you don't have any better way to do it, consider doing a dividend because

at least an investor gets to make the choice and it's not being made by the company's CFO or the board, which may not have the best, you know, investors' best interest, especially if it's being used to offset, you know, as we talked about share-based compensation. Yeah. Well, before we wrap up here, I just wanted to get you take real quickly on a bigger picture issue. And obviously, we don't get politically here on these shows, but I mean, this is something where politics kind of intertwines here. It's the Inflation Reduction Act, which looks poised to pass. And this is going to include a 1% excise tax on share repurchases. So my question is, do you think that this tax, 1% doesn't sound like a lot,

do you think this will have an impact on how companies approach share repurchases in the future? You know, I'd love to get your opinion, too, Jason. I don't think 1% is quite enough of incentive for companies to stop buying back stock. You have to remember the cost of equity, depending on how much risk you're weighing, can be pretty high, ranging from, say, 8 to 12% for your average company. So if that's my cost of equity, a 1% haircut feels like a pretty low bar. However, I do think, I mean, we talked a little bit about dividends. I do think it will cause a few companies to consider paying a dividend rather than do buybacks. If not the companies themselves, I could see more shareholders, institutional investors,

demanding it, hey, don't do a buyback and incur this extra 1% cost on our capital when you know what, you can just keep paying a dividend or pay a dividend to us, let us decide what to do, especially when you consider there's so many bad examples. And we just mentioned a couple, but there's so many bad examples of companies who just don't do share buybacks well at all. I mean, gosh, we didn't bring about Bed Bath and Beyond, which I think is spent like three times its market cap on share of my fax. But anyway, most companies just don't do it really well. And so maybe this will just be another little kick for companies to pay dividends instead.

Yeah, I think I'm with you. I think for the most part, it probably doesn't have a material impact. I mean, it really is just a rounding error for many of these large authorizations. So it ultimately bumps up the cost basis by just a smidge. But it may force some companies to rethink their dividend policy. and maybe that's not such a bad thing. 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 ourselves stocks based solely on what you hear. I'm Deidra Woolard. Thanks for listening. We'll see you tomorrow.