Motley Fool Money - Wake Me Up When September Ends

Episode Date: September 1, 2022

When it comes to the stock market, the 1st day of September is looking an awful lot like the entire month of August. (0:25) Jason Moser discusses: - Okta shares falling 30% as the company deals with ongoing challenges integrating its acquisition of former rival Auth0 - Snap's restructuring plans, layoffs, and increased focus on revenue growth, user growth, and augmented reality - Five Below's stock getting a boost from optimism for the discount retailer's plans for the holidays Host: Chris Hill Guest: Jason Moser Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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I'm Chris Hill, joining me today, Motley Full Senior analyst, Jason Moser. Thanks for being here. Hey, hey. Happy September 1st. Well, Chris. I was going to say, I'm so happy that August is over, but in terms of the stock market, September 1st seems to be picking up right where August left off. Well, it's conflicting, right? I mean, it is. You're welcoming in sort of the idea of fall and like the change in seasons. I love this time of year. But yeah, I mean, it is worth noting as difficult as August concluded.

Yeah, September doesn't have a very good track record when it comes to the market. And so it's reasonable, at least I think, for investors to keep their expectations in check here. It may be prepare for a tough month ahead. Let's hope for the best. Let's try to be glass at full. Let's just prepare ourselves for the possibility that the tough times may be here for a little bit longer. Let's try and be glass half full, although I think that's going to be challenging, given that the first thing we're going to talk about is Octa, because Octa's second quarter profits and revenue were higher than expected. Their guidance for the rest of the fiscal year was in line with

expectations, but shares of the identity management software company are down, a whopping 30%. Help me understand this. Management talked about the challenges they're running into with the integration of the acquisition they made of off zero. I get that. 30%. That's a lot. I mean, this, I don't want to just come out and say, well, this is an overreaction, but it sure seems like one. Well, I could certainly understand that sentiment based on the results in sort of the near-term outlook that management quoted, right? I mean, it was a good quarter. It was a respectable quarter. And at least in the near-term, it does seem like they feel like they'll have some control over the cost side of the business

for the remainder of the year. They suspect they'll continue to witness the top-line headwinds, but the aim is to focus on improving costs in order to ultimately bring some bottom-line performance into the back half of the year. And that's encouraging. But I think that when you look at, there was a point in the call where, and I think this is really what has the market spooked, management talking about headwinds and enterprise software, this is not just Octa. I mean, we're seeing it across the board with all of these companies, but ultimately forcing

them to reevaluate their longer term targets. And so they basically had pegged this $4 billion revenue target for fiscal 26. They're taking that off the table. They're basically reassessing the situation. And so when you look at the longer term picture, when you look at the next few years, I mean, anytime you see management basically take those aspirational targets off the table to sort of reassess, I mean, the market is going to, at the very least, put things on pause and try to reassess as well. But most of the time, in particular with a business like this,

I mean, you're going to see a lot of dumping there. I mean, because even today, I mean, this is still not by any stretch of the imagination what we would call a cheap or affordable stock. I mean, it's still valued at somewhere around 10 times sales. And I mean, it's a business that doesn't make any money. There's zero profits. I mean, there's zero free cash flow. I mean, You have to account for stock-based compensation with a business like this. It's 40% plus of total revenue. And that doesn't look like it's going to be changing anytime soon either. So, you put that all together. I certainly understand the markets concerns today. The stock has fallen to more than a three-year low. You talk about hitting the pause

button, I can see some investors looking at this and looking at how far this stock has fallen and think, oh, this might be a buying opportunity. But it sounds like, based on everything you said, there are enough question marks about where they're going over the next six, 12 months that sounds like you personally, I don't want to put words in your mouth, but is it safe to assume that you personally would want to see some progress from the business side before you maybe bought shares of this? Yeah, I'd say that's a fair statement. I mean, I don't own Octa shares.

I've not recommended the stock. I do find it to be a fascinating business. I like what they do, generally speaking. But yeah, I mean, it does feel like there are a lot of question marks that I'd like to see a little bit more clarity on. I mean, when you look at the Off Zero deal, for example, the integration there is presenting some near-term challenges. impacted the business. They referred to in the column, seeing the tightening of IT budgets, the spending is being delayed. They're seeing longer sales cycles. It's very consistent with what we're hearing from other enterprise software businesses. You have some leadership changes

there. The co-founder and CEO of the business is going to take a year-long sabbatical. The chief product officers taking off as well. And then you couple that with just the nature of the business itself, sort of the stage of its life cycle, right? It's still a young business, still growing, still investing a ton back into the business, which of course impacts the profitability picture. And that's something to keep in mind as well. And then the longer term revenue target now sort of up in the air. I mean, it's not to say this can't be a successful investment from here. I mean, I think the chances are pretty good that it will be actually. I mean, when you look at the actual numbers, I mean, the business continues to perform pretty well. I mean, revenue is up.

43% from a year ago. Subscription revenue being, you know, such a strong driver of the actual business, added 600 new customers in the quarter now have 16,400 customers, and that was up 26%. They continue to do well on the larger customer side too, and the dollar-based net retention rate holding the line at 122%. So there are a lot of positive indicators that what the business is doing you know, its customers are liking, right? I mean, they're signing up more customers, they're expanding those relationships. There are some near-term challenges, clearly on that off-zero acquisition. That'll take some time, of course.

And then just to get a little bit more clarity on where they see the next few years for this business, I think would be helpful for investors. So it's very understandable on a dip like this to feel like, oh, okay, this is an opportunity. It could be. If you're interested in this business and you don't own shares yet, maybe this is a time to dip a toe on the water. I'm not telling investors not to add shares on this dip, but do so understanding the challenges and the question marks that exist, why they exist and ultimately what we're going to need

to see to get some resolution there. I want to get your thoughts on something that happened a little bit earlier in the week. Snap announced it's laying off 20 percent of staff as part of what, it would have been It appears to be a major restructuring. Snap says they're going to be focused on three areas, user growth, revenue growth, and augmented reality. As part of that, they are discontinuing several initiatives, including their photo taking drone and original programming and games.

And the stock, which has been crushed over the past year, popped about 10 percent. This is a business you and I have talked about since before it went public. What did you make of these announcements? Well, I think it's a good move. I mean, obviously it's a painful move, of course, for those who will be losing their jobs. And that's a significant number. I mean, you've got close to 6,500 employees as of the most recent earnings reports.

So we're talking around 1,300 people that are going to be impacted by this and their families. I mean, that's something always to keep in mind. So, tough, tough, obviously, from that angle, but I think for the business, it's absolutely the right thing to do. I mean, I think that what we've questioned with this company over the last several years, as they redefined what they were, right? I mean, that redefining of SNAP into ultimately a camera company, and what does that ultimately mean?

And what came with that was the pursuit of certain. hardware aspirations, right? The spectacles, the little flying drone, things like that. That really, you know, the investments, they just haven't seen the return on those investments. I think it made sense to dabble on the content side because you want to create a reason for people to go to your site or to your app, right? And I think oftentimes just exclusive content is a way to do that. Exclusive content in the social space, I think, is a little bit more difficult these days. It's tough to differentiate, right?

Social content is just, it does feel kind of the same across platforms anymore. So ultimately, they just don't see the returns on those investments. And this business that was spending 40 percent, still spending 40 percent of revenue on research development, which is a lot. I mean, you look at meta, it's like 25%. Even Twitter is something like 30%. And it's just, I think when you look at Snap and you look at this greater social space, I think it just, it's interesting to see how the space has turned. I mean, it almost feels uninvestable. I mean, I think Twitter is uninvestable just because of everything that's going on with all the Musk stuff and everything. I mean, Twitter to me is just uninvestable at this point because

it's such a coin flip. But I think just the greater chance of challenges in the social space. I mean, it's just maybe the low-hanging fruit has been picked. I mean, they are dealing obviously with a very competitive environment. You're seeing TikTok claim a lot of eyeballs there. So it makes a lot of sense for them to really get back to focusing on what they know how to do. Community growth, revenue growth, that all makes sense. Augmented reality, something they love to play in with all of their filters. I mean, those are in line with what they know how to do. I think the biggest challenge, the biggest question mark is, What is this beyond just Snapchat? What is Snap the company beyond just Snapchat?

We had some ideas over the last few years of what it could be, but it looks like that's not going to pan out. So now they're kind of back to square one. It really just boils down to what will they be able to become beyond just Snapchat. And I don't, I honestly don't know. I don't know that there is anything that they become beyond just Snapchat. And if that is the case, then from an investor's perspective, you definitely have to question what kind of growth this business could be lobbying up over the next several years because it's obviously become a much more challenging environment for the social space. I was thinking of you when I saw some comments from Joanna Stern from the Wall Street

Journal because knowing your interest in augmented reality, she was making the comment that she was happy to see that Snap was continuing to make those investments in AR because, in her opinion, they're doing some of the most interesting stuff with AR so far. Yeah, and I actually agree with that. I mean, the thing about augmented reality, and the reason why I think you can have such a greater impact, at least in the near term over something like a virtual reality, is because it's bringing the two worlds together, right?

I mean, you're seeing sort of the digital world overlaid with the physical world. I think for the mass consumer, I think that becomes a little bit more, just it's an easier hurdle to look clear. You can see where it might have some more applications in your day-to-day life, whether you're on the enterprise side or on the consumer side. So I do appreciate that they'll continue to make those investments in augmented reality, because they've done so much with it up to this point. There are certain things in regard to mixed reality, immersive technology that are a bit out their control. And so we'll sort of see how that plays out as the interface develops and the

consumer considers adopting things like that. But it's definitely one of those things that's very much in their wheelhouse. And so to see them, to see them focusing on that, I think makes a lot of sense. Second quarter results for discount retailer five below were weaker than expected. Their guidance was lowered. And yet shares are up 6% this morning. In some ways, this seems like the opposite of what's happening with Octa, although not to the same degree in terms of the stock movement. Help me understand this. This seems at least in part due to optimism that CEO Joel Anderson and his executive

team were expressing around holiday shopping. That when you go through the conference call, it really seems like they have a plan for the holidays. weren't revealing all of it, which I wouldn't either if I were them. But is, because Jason, the results themselves weren't great. No, no, they weren't. I mean, they weren't that bad, but they weren't that good, right? I mean, top line sales up three and a half percent. You saw comps down 5.8 percent versus the same quarter a year ago.

And that was driven by a decrease in both traffic and. ticket, not surprising. I mean, right? It's very easy to believe that traffic is down and the total ticket is down as well. But it does feel like management is very optimistic. They made this point in the call. Now it's all about execution. What I mean by that is they've really focused over the last couple of years of building out the capability of this business in making sure to reach their customer in any way and every way they can, kind of focusing on that Omnichannel experience, so to speak. And so you look at the investments in distribution, for example. I mean, they built out this five-node network ultimately that gives them capability

to service basically 90 percent of their stores within one day now. And so I think they're very excited about the investments they've made in distribution and completing that investment, more or less. Bopus. Chris, you remember last week? I said, Bopis, and you looked at me, you're like, bless you. And I was like, no, that's not it. It's Bopis, right? Buy online pickup in store, right?

I mean, that's something that they are investing in as well as they pursued that Omnachannel opportunity. And it was just fascinating. I've seen more Bopis this quarter, more mission of Bopis this quarter on calls than I think I ever have, which is just, it's just funny even to say, the word, but they've rolled that out now into, they rolled that out in 100 stores in July. They believe they'll have chain-wide rollout of buy online payments or by the end of September. So again, prepping for that holiday season.

And when you consider the state of the consumer and the state of the economy today, right, we're dealing with a heavy inflationary environment. The consumer is making all sorts of decisions here in weighing what to purchase versus what to delay. I mean, it does seem plausible at least that five below could be a decent option for some holiday season shopping, just given their focus on cost sensitivity, right? I mean, you're not going in there and spending a ton of money, but you can walk out with a ton of stuff. So I do understand the optimism there.

I mean, it's not to take away from the challenges that the business is facing. I mean, obviously, the numbers for the quarter weren't the greatest in the world. I mean, earnings per share were down 35 percent that was in management's range. It's worth mentioning. They pulled back on guidance. They're seeing, they adjusted guidance down on sales, about 3 percent, earnings about 13 percent. So that's something to keep in mind as well. But they also, they're coming off of just a phenomenal 2021 in the stimulus that flow through

the economy and how that ultimately played out in their business. So they're dealing with a bit of a difficult comparable to begin with. And I think investors are keeping that in mind as well. So sort of on the fence with this one, absolutely see management's enthusiasm for the holiday season. I guess it just remains to be seen whether that actually plays out. I agree with you 100 percent about the potential here in terms of everything we've talked about regarding inflation, the state of the consumer.

we have seen sort of this move towards value shopping. You know, this, Doug McMillan and his team talked about this recently at Walmart, about the number, the increase in the number of households earning over $100,000 a year shopping at Walmart in the most recent quarter. So it does play into that narrative. There just seems to be on a day when the market in general is not doing well in a week where the market's not doing well. After a month, which it didn't do it well. I just feel like the Five Below management team is getting slightly more benefit of the doubt than, I don't know, any other business I've seen in the last few weeks. So I'm not knocking them. I'm not rooting against them. I guess I'm just a little surprised

that they're getting this benefit of the doubt today. It just feels like maybe the best thing they've got going for them right now, Chris, today at this very moment is that they are not in Enterprise Software. chips. They're not in chips. Exactly. Jason, those are always great talking. Thanks for being here. You got it. Thank you. As always, people on the program may have interest in the stocks they talk about, and the Monty Fool may have formal recommendations for or against. So don't buy ourselves stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.