On this episode of Industry Focus: Wildcard, host Jason Moser sits down with two of The Motley Fool's summer investing interns, Zane Fracek and Graham Haederle. Tune in as they discuss the latest earnings reports from Intuitive Surgical (ISRG +1.99%) and Chipotle (CMG +3.08%), as well as the two stocks they recently pitched to the Fool's investing team!
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This video was recorded on July 21, 2021.
Jason Moser: It's Wednesday, July 21st, I'm your host, Jason Moser, on this week's Wildcard show, we'll dig into earnings reports for Intuitive Surgical and Chipotle. We'll also hear a little bit more about a couple of stocks our guests think you need to have on your radar. Speaking of guests, joining me today, it's two of our five-star investing interns here at The Fool this summer, Zane Fracek and Graham Haederle. Guys, thanks for jumping in the mix and joining the show this week.
Zane Fracek: Thanks for having us.
Graham Haederle: Thanks for having us, Jason.
Moser: Well, so hey, let's jump right in here because it's earnings season. We're right in the middle of it now. We've got a lot of great companies reporting, and that's going to continue here for the next few weeks. But a couple of companies reported yesterday after the market closed. A couple of companies and a lot of our listeners are pretty familiar with Intuitive Surgical and Chipotle, of course. Let's start with Intuitive Surgical. Zane, you look at the stock today is relatively flat. It's certainly performed very well here over the last several years and hitting another 52-week high but Intuitive Surgical reported some very impressive results here for its most recent quarter, they exceeded expectations all the way around. But what stood out to you in the numbers?
Fracek: Intuitive is continuing to prove that they're picking de-risk in investment in the future of surgery, proving that they can be a resilient company even in the face of a global pandemic while growing their other channels of business as well. You said it all around very uplifting quarters of the company. It's a company that I like personally because you don't have to be a healthcare expert to understand it. Generally, in the healthcare industry, you're thinking of biotechs, pre-revenue, super risky companies to capture that growth. But here's an opportunity to get double-digit growth every year for the foreseeable future without having that expert knowledge to understand it. To get into the earnings a little bit, their revenue was $1.46 billion up 72% for the year, 13% since last quarter. Pretty solid numbers. I will try to stick to the last quarter comparison just because it's such an easy comparison from a year ago during the pandemic, their business was hit pretty hard in the second quarter. But on the bottom line, their earnings grew over six-folds since last year, and their procedures on their systems grew roughly the same amount, and now, this is their ninth earnings beat in a role and not by a slim margin either, 24% beat this quarter and 35% last quarter.
Moser: Wow.
Fracek: Really strong trend. We've also installed 328 systems this quarter up 10% from last quarter. Some of the numbers that I really want to point out are that 38% of the installations were trade-ins. This really shows that their business is from repeat customers as well. These are customers that have seen the instruments, seen the systems, and actually had a chance to use it and then been like, this is it, this is what we want, we're going to come back for it just because it's that good of a product. Then on top of that, the procedures per system is up 11% over the last quarter, so this is important to their business because even if there's no more installations the revenue can grow, there's more procedures. They're using up more of the consumables that they are selling to go with them.
Moser: I think that that's a great point that you make there, in regard to the instruments and the accessories. Because you said it so well, they de-risk the healthcare investments in the healthcare space and part of that it's the same, the technology's phenomenal. Those da Vinci systems are second to none. In the razor and blade business model that we love so much where you install that equipment, and then you keep selling those instruments and accessories. It's not surprising for most to see the stock is up over 300% over the last five years. How do you feel about this company? You made reference to last quarter, just sequentially, not year-over-year, but looking at the last quarter, beating the expectations from last year, from a year ago, not too terribly difficult given the situation that we were in. Let's talk about what this company is doing so well. That's a really interesting point you made there, and people are really trading up. That to me is almost a sign that they are really making that long-term commitment to being in that Intuitive Surgical universe.
Fracek: Yeah, they're doing a lot of things right. For some perspective on that, management is really holding themselves accountable. In 2019, based on their projections, they thought they would grow about 17% a year. In terms of procedure volume, they're exactly where they would've been or where they thought they would be absent COVID. Management has done a great job predicting what the growth is going to be like. They've known they're going to do well. But a lot of listeners probably know a lot of the advantages of Intuitive like their intellectual property, and how strong their business model is. But I wanted to talk about something a little bit less apparent, and that's actually their software and the consistency that they're updating the software. They are at about an average of three updates per year since 2014. Software updates are really bringing more value to the end customers like the physicians and the patients. But it's also simplifying processes and adding functionality with every update.
Moser: I guess what they're saying is true. Software is eating the world. You could be great at what you do, but if you're not continually evolving and iterating the software becoming something more, becoming something better. It just feels like there are so many competitors out there in the space ready to come in there and eat your lunch, so to speak. It really does speak to not only the benefits of having that big installed base, but continuing to iterate how you use that installed base. To me, it does feel like this is the company that just continues to establish itself as the leader in the space. Now with that in mind, every investment has some level of risk. Is there something that you feel like investors need to be keeping an eye on in regard to Intuitive Surgical going forward, something that may be concerning you, or something that you'll be watching?
Fracek: Yeah. Generally, short-term risks though. Signing company is sometimes hard to find things wrong other than saying, hey, this is a generic market risk or competition or commodity prices and things like that. Some smaller short-term risk that I thought about would obviously be the pandemic. It's still on their radar for sure. It's come up a lot of times in their earnings report, and the resurgence could fill up hospitals pretty quickly, and that would push back elected surgeries as their normal customers and patients can't come into the hospital. Then the competition is worth mentioning; Medtronic and Stryker aren't just going to lay down and let them continue to basically monopolize the U.S. market for the surgical robots. They're definitely some players to look out that could eat into their margins a little bit or break down the pricing power.
Moser: I like how you noted those are more near-term or short-term risks, and that is Foolish investors who take the longer view, those are a little bit easier to stomach. Another item that's been in the headlines recently that seems to be spanning industries of all sorts, have heard a lot about the semiconductor shortage, a lot about potential inflation costs going up. Did they mention anything on the conference call regarding that situation? Is that something that's impacting this business today?
Fracek: Yeah. Short answer for inflation is no, they didn't really mention it. I wouldn't be too worried personally because they have such strong pricing power. But they did mention semiconductor shortage. But at the same time, they have a lot of safety stocks for their critical components in their instruments, so the shortage would have to be pretty bad to affect them, but they're not immune.
Moser: No, they're not. But it is nice to know that they, like us, have been saving for a rainy day. It seems like they're going into this pretty well prepared, which should be encouraging to investors. I guess the last question here, I feel like I may know the answer, but I got to ask you anyway. Is this a business you feel like investors should be owning today? Is this the stock that is still given its track record of success, given all that's done over the past five and 10 years, do you feel like this is still a business worth buying today?
Fracek: I think yes, regardless of the fact that it's up 300% over the last year. It's a stock that I like because it's growing without a lot of risk in my opinion. That said it does get a high valuation in the markets because of that. Well, let's think about why that is? They're providing so much value. Whether it's the patient where you get less scarring, quicker recovery, less infection risk, and things like that. Or you're the physician where you're using less tools, it's quicker, it's even easier to learn on your machinery. On top of that, they have some incredible market share, especially in the U.S because of their intellectual property, because of their repeat customers, and just how much people like their brand and their products. Then lastly, they're in a really good financial position. They have a clear runway to increase their offerings even more and optionality, which is really important. They can easily spin off new instruments, even new systems. They're working on expanding their distribution for two newer systems now. The ion, which is fairly long, biopsies, another one which is a single-port system, so just expanding more beyond the da Vinci System that everyone knows and loves.
Moser: Yeah, love to see companies leveraging their core competency and it certainly feels like Intuitive Surgical is doing just that. Okay, Graham, Chipotle. To say they reported another strong quarter, I feel like isn't quite doing it enough justice. This was another really impressive quarter. Another stock getting a 52-week high. The stock is up anywhere from 10%, 12% today, thanks to these results. It looks like, again, just like Intuitive, Chipotle beating expectations soundly on both the top and bottom lines. You follow this company, how do these numbers look to you?
Haederle: Well, Jason, from the sentiment, from the earnings transcripts as well, I think a lot of investors who study Chipotle in great detail, they smashed all of the ballpark. This is quite a home run for them. Seeing the expectations they set for themselves, they surpassed them. But we're all familiar with Chipotle being a very innovative, fast-casual restaurant. They've been improving their dining experience even during the pandemic and spend a lot geared toward their business model, being able to get your food quickly in line, which makes sense in a pandemic where food can be prepared in a short amount of time and given out to customers. But one thing they've done really well during this quarter was increasing their delivery channels. They've always made a little bit of money from their delivery service, whether that be DoorDash or Uber Eats, but they've done a fantastic job of installing Chipotlanes, as they're called. These little drive-through services that allow customers to pick up their food. But jumping into a little bit of their key numbers that really were impressive this quarter, the revenue increased 38.7%, nearly 40% this past quarter in comparison to quarter one. They have about $1.9 billion in revenue. We take a look at a lot of restaurants and it's important to get a good sense if people are staying with that company and if they continue to go back and buy food. One metric we use to look at that is their comparable restaurant sales. What they had predicted would be about 30% in quarter one, actually became 31.2% in quarter two, showing how they were a bit conservative in their estimates of how well they've been able to keep people the same in store sales. Another, I guess, key thing to really look at is their digital sales growth. It grew about 10.5% in the past quarter, and that digital sales, also in part due to the pandemic, makes up almost about 50% of their total sales revenue.
Moser: That's really impressive when you think about this restaurant just a few years back, look at the stock. Again, like Intuitive Surgical, these are two peas in a pod today. This is a stock that's up close to 300% over the last five years. Clearly, they've been able to put these food safety issues of the past behind them. That's going to be a perpetual risk for restaurants. I think a lot of this is attributable to new leadership, I think that's part of the story for sure. But the investments they made so early on in digital, in the app, I don't understand how in this day and age you can prosper, not just restaurants, just business in general. You need some app game, you better have a good app, because that's where business is being done. Clearly, Chipotle has been no exception. Let's talk about the things that they've been doing so well here because you mentioned a few of them there. But let's dig into that digital sales a little bit and talk about why they're being so successful. What are the things that Chipotle is doing that's just keeping this ball rolling?
Haederle: It's an interesting point you're bringing up with digital sales. I agree with you in some part that with a lot of consumer and retail companies, whether it be a Walmart, a Target, or a McDonald's, they need to have some digital infrastructure there to keep their customers interested. A lot of these companies, and Chipotle is no stranger, have their loyalty programs, which are on these apps and you can get special menu offerings. One clever thing they did this quarter, that I think really intrigued consumers, was adding a customizable quesadilla. As delicious as it is, I think this really increased app usage among customers who are looking at Chipotle. It really spurts some amazing numbers. With the increase of the digital sales, which I expect to continue into the future, they've been able to increase their earnings per share, which were previously negative to about $6.6, which is crazy. Also, their margins are double-digits being about 13%.
Over the span of all this digital sales revenue, they've been able to use some of that money and invest it into the creation of new restaurants, including about 56 that they added in the quarter, and 45 of them were about those Chipotlanes I talked about. I would say the three things that really have pushed them, and to making them the cultural staple that they're known as, has been keeping fresh menu items like the quesadilla, increasing customer loyalty through their programs into the digital app that they've been providing, and finally, in some part, there's a little intangible benefit of things like TikTok and Instagram, and social media, really promoting them and giving them free advertisement as a lifestyle brand.
Moser: The lifestyle brand, I love it. We saw Starbucks so many years ago try to become that lifestyle brand. It's almost like if you state, you want to become a lifestyle brand that's the death blow. But if you just let it happen organically and let the consumer dictate that term and say, "Hey, this is a lifestyle brand," you can actually pull it off. It seems like Chipotle has really benefited from that. To put some numbers, I couldn't believe it when I read the call. A year ago, 15 million loyalty club members, 15 million loyalty rewards members. This quarter, a year later, I think they're seeing 23 million, which is just really impressive for a business that really just a few years ago, had no real major digital presence, had no real loyalty program. They've made some investments in this and really committed to it and it's clearly paying off. So many things are going well for this business, what could go wrong here? What are you keeping your eyes on here and going forward as a potential headwind or problem, or is there anything really on your agenda there?
Haederle: All investors here at The Motley Fool, we'd be fooled if we don't look at some of these investments. But I think there's really two things that are potential headwinds for Chipotle going into the future. One, speaking about the labor shortage. Unfortunately, due to the pandemic, a lot of restaurants have been struggling to keep their workers interested in working there, even after some of these conditions start to subside. They've taken some action to go against that, but they have increased their minimum wage to $15 for all the current employees, and for new employees, it stays at about $11. Also, they really struggle with keeping employees that are wanting to go into management, to be other managers. They've seen a huge downturn right around the pandemic of people wanting to step up into those roles, and they've been looking to fill that in. Now, this is an industrywide trend and I think they've been taking the right corrective steps. Their status as a fast casual restaurant I think lends a little bit more to the idea that people who work there won't be making pennies on the dollar and not a livable wage. But I think management is paying a specific focus to their employees and starting to reinvest some of these amazing profits that they've had in the past two quarters into their own people.
Now, the second thing I think could be a potential headwind for them is inflation. It's been happening a lot with the pandemic. But the price of beef itself has gone up about 2.4%, while the rest of the food price index has been hovering around 2% as well. This can be a little bit alarming since a lot of the food that Chipotle provides are fresh ingredients, they make sure that they're using quality ingredients. So their supply chain is integral to the success of the business. They've taken and been able to mitigate some of the risks when it comes to some of those costs. But continually, I would keep my eye on at least the price of beef and the price of avocados, as those are two very energy-intensive ingredients that really can be costly for a business.
Moser: Absolutely. But it feels like their guacamole affords them a little pricing power, feels like. I can't eat a Chipotle without getting a guacamole. Guacamole equates to pricing power in my world, but maybe I'm wrong. Real quick for you, wrap this up. Graham, do you have a go-to menu item for Chipotle? You're ordering dinner from Chipotle tonight, what are you getting?
Haederle: To add a little bit to what I was saying before, as of June, prices have increased about 4%. All my friends, I guess it's a lifestyle thing, we all have our Chipotle order price memorized, and it's actually reset in the past month or so to combat inflationary effects. But my go-to order is, you've got to go with the burrito bowls, they'll fill you up. But I always get some rice, I get some black beans, I'll put some fajitas in there, chicken. I'm like you Jason, I got to have guacamole in it, cheese, sour cream corn, all the stuff that doesn't cost extra and you have a very tasty burrito bowl.
Moser: It'll take care of you for the whole day. What about you, Zane? You're ordering Chipotle for dinner tonight, what are you getting?
Fracek: We have a local chain in Delaware called El Diablo.
Moser: We're talking about the competition risk here, Graham.
Fracek: But I've only been to Chipotle one time. I've been to El Diablo a million times.
Moser: Very interesting. Well, then, Graham, that speaks to your competition risks there. We definitely want to keep an eye on that. They're not the only ones out there swinging some great Mexican food, that's for sure.
Guys, recently, one of the things we ask our investing interns to do every summer is to put together a couple of stock pages to deliver to our investing team. We're talking anywhere from 15 to 20, sometimes 30 folks depending on availability. It is a pressure pack situation, it's not easy to do. You both recently pitched your first ideas to the team. I want to say first and foremost you did an awesome job. I have been working with you all summer, I was not surprised, but I was thoroughly impressed. I wanted to give you a chance to talk a little bit about those pitches today to our listeners. Talk to our listeners about why you pitched those ideas to the team. Zane, you pitched Tesla (TSLA +1.97%). I think most people have probably heard of it, a polarizing business, if nothing else. Everybody seems to have an opinion. What was it that led you to pitch Tesla, because clearly when you pitched it, you're very passionate about this company?
Fracek: I'm extremely passionate about this company. It's only been getting more and more. What led me to pitch this company and led my thesis was from a wise man John Rotonti. He said when I talked to him, Tesla could be anything, could be bankrupt in 10 years, could be that Huawei company that makes everything and controls it in 10 years. You believe anything. I think I am even more on the more valuable side and spectrum from rising Tesla is going to end up, maybe not for any scientific reason but I have a lot of optimism for them because of their track record. They've shown that they can do these really difficult things. That's one of the pillars and my thesis as well as the engineering talent there, second to none. They do these really bold projects in-house. They take on challenging things. They realized that they don't want to just stamp their brand on something. They want to have a difficult project and do it, because then they deserve the value for it. I think it's a great mindset to have.
On top of that, like I said, with the engineering talent, they consistently ranked in the top five of 10, if not the No. 1 place where engineering graduates want to work. That leaves the competition with the rest. Basically, Tesla has the best engineering talent. Then people love the brand. They just have an absolute following. People pretty much buy anything, whether it's Teslaquila or those little baby Tesla cars. Then there's the optionality as well. They have the best products in my opinion. You saw Jay Leno with the AC on in a four-door sedan beat the quarter-mile time for a production car, which is just an absolute flex of engineering. But on top of what they have now they've plans to take on all of those forms of terrestrial transport, maybe even move into HV/AC and other things. There's really no telling. I think they've been chosen as a winner by the markets. People are realizing that they operate in only markets that they're disrupting. Trying to take on utilities and energy and renewable power and trying to take on the legacy automakers who lost out on the first-mover advantage in electric vehicles.
Moser: To your point there, in regard to going any which way I've always said, I don't own a Tesla. I absolutely appreciate the fact this is the direction the world's heading at. I look forward to buying an electric vehicle one day, but man, if they just made some killer battery-powered lawn equipment, that would be so great. We have all of that here at our house now, the battery-powered lawnmower and weed wacker and blower. But man, I just know Tesla could make it better. I would be in on that so fast.
Fracek: I wouldn't be surprised. That's a problem like lawn equipment, lawnmowers are producing orders of magnitude more pollution than vehicles, the cars in for that, which is just crazy.
Moser: Very believable. Graham, you pitched Bumble (BMBL 2.39%), another very interesting item particularly in this day and age. This captured my attention and part of that is just because I grew up in a different time where they just didn't even exist. But now, you've got Bumble which is playing in this online dating space. It has its own differentiator that makes it unique. What was it that led you to pitch Bumble?
Haederle: Been in quarantine for quite a bit, for some of my college career, I guess I had to, by necessity, join the dating apps.
Moser: Is it working out for you?
Haederle: I can only say only positive things about it.
Moser: That's good.
Haederle: It's like when they IPO'd this past February, very interesting for two reasons, being around Valentine's Day and being ready at the front of the pandemic which I think has set them up to really be just a great business to really look at. But one thing that Bumble does that other dating apps, specifically the ones owned by Match Group (MTCH 1.35%), like Tinder or OkCupid, is they flip the whole dynamic upside down. Instead, there are lots of these online dating apps filled with many guys and a lot of women.
Moser: The STDs, right?
Haederle: Yeah. A lot of the women just by sheer numbers are just disproportionate to the amount of men on these apps that they're not very interested in keeping or staying retained on these apps. But what Bumble does differently is that they make it a rule for the woman to make the first move and switch the whole pick-up line thing there, which I think is a fantastic philosophy to that. Going on a little bit into the company, Bumble itself was spun out of Tinder having one of its founders, Whitney Wolfe Herd, who went in and disagreed with some of Tinder's management and also had a lawsuit filed against them. It's an incredible story where she went and founded another company that went to grow its market share literally twice as much from 10% to almost 20% from 2019 to 2020, just by doing that one simple trick. What really stands out to me about Bumble is just how much it's been an empowerment app. There are about 46% of women on the app opposed to men, as you can see, 28% on Tinder, which shows that women generally enjoy this app much more. I think they have a lot of room to grow. I think one of the last things I will conclude with it's they're doing a lot of interesting things. A lot of these dating apps focus just on giving some premium features, maybe more swipes, but don't really go beyond that. With Bumble, they're making much more money per user, but they're also exploring other parts of the business like the Bumble Café, or growing a venture capital fund. These are some really engaging opportunities for singles, such as myself, to go in and meet new people. Bumble provides a way to facilitate that in-person.
Moser: Well, I like that idea. Between Tesla and Bumble, two very different businesses. But one thing they certainly have in common, they're both businesses that are really focused on the direction in which the world is headed. I think this is going to be the way that these things are being done in the future for some time to come. It's encouraging to see you guys pitching businesses that are playing a role in shaping how the future is going to look, both in transportation and social interaction. Really great pitches again. I was really proud to see you guys do so well. Looking forward to your second pitches. But I think that's going to do it for us this week, guys. Zane, Graham, thanks so much again for joining us this week. It was a lot of fun.
Fracek: Thank you.
Haederle: Thank you.
Moser: Remember, folks, you can always reach out to us on Twitter @MFindustryfocus, or you can drop us an email at [email protected]. As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Thanks, as always, to Tim Sparks for putting the show together for us. I'm Jason Moser. Thanks for listening. We'll see you next week.
