Motley Fool senior analyst Maria Gallagher discusses:
- Meta Platforms' latest results in the midst of its transition.
- CEO Mark Zuckerberg's blunt comments on guidance.
- Etsy's positive results (and stock reaction).
The Motley Fool's investing interns wrap up their summer by pitching senior analyst Jason Moser on the bull case for three different stocks.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on July 28, 2022.
Chris Hill: We've got retail, the social network, and three stock pitches you're going to want to hear. Get something to take notes with. Motley Fool Money starts now.
I'm Chris Hill. Joining me from the financial capital of the United States of America: Motley Fool Senior Analyst Maria Gallagher. Thanks for being here.
Maria Gallagher: Thanks for having me.
Chris Hill: Let's start with the Facebook. Meta Platforms' second-quarter profits and revenue came in lower than expected. The stock's getting hit. This seems a little odd to say about a company this big, but Meta Platforms seems like a company in transition right now, and it seems like a rough patch because they are investing in the metaverse while trying to fight off TikTok while also continuing to deal with Apple's increased privacy, which is affecting their ad targeting. Where do you want to start with Meta Platforms?
Maria Gallagher: I think that that's a pretty good overview. I'll start with just a direct quote from the conference call from Mark Zuckerberg that says, "It's always hard to predict how deep or how long these cycles would be. But I'd say the situation seems worse than it did a quarter ago." He really didn't come out with a lot of reassurance right off the bat. I feel like you see a lot of CEOs saying, here are all the things we're doing, it's going to get better, but Mark Zuckerberg really just was not mincing words.
Revenue was down about 1%. They lowered their guidance a bit. They still have monthly active users of 2.9 billion, up 1%. They're still the most dominant social media platform. As you said, he talks about two strategic areas for them, as they're shifting, as the AI and the metaverse.
With the metaverse investments, Reality Labs revenue decreased from $695 million to $452 million, with an operating loss of $2.8 billion. They lost $2.8 billion on an operating segment that brought in $452 million. What we're seeing is their ability to acquire these more companies within the segment. I also think it's going to be slower in the future. They're guiding for revenue to be slower in that segment as well. The FTC is suing them to block the purchase of Within, which is the developer behind Supernatural, which is a fitness app. They're in that investing phase with the metaverse, and they're not seeing the benefit yet, but they're saying this is the long game, this is what we're seeing. We're really trying to be strategic with our view of the metaverse.
Then the other strategic priority is increasing AI. I think that one is also pretty interesting. It's shifting Instagram from less friends and family to recommending content. Like you said, they're trying to more directly compete with TikTok with their Reels. People are complaining the platform is becoming less friendly to creators, people are spending less time on it.
From a strategy position, I think you're right, in that it's in a transition period. I personally don't love the strategic plans in either of these segments. I think that they're really important to keep watching and see how those shift in the next couple of quarters, especially that AI spending on Instagram. Because I feel like the past couple of weeks, couple of months have seen more creators and more users of the platform step up and say "Stop trying to be TikTok, this is a different platform. We utilize it differently. We can use multiple things." People can have different places they go for different things, and right now they're trying to directly compete. I don't think that it is getting the positive attention, maybe, that they want it to.
Chris Hill: All things considered -- and I don't own shares of Meta Platforms, but all things considered -- I would prefer that the CEO of my company doesn't whistle past the graveyard and tells it like it is. Hopefully, people at least appreciate Zuckerberg's bluntness in terms of the current state of things.
Unfortunately for him and for shareholders, this stands in contrast to another big tech company, which is Microsoft, which came out earlier this week and reiterated their guidance for the next 12 months saying, "Yeah, no. Our view from three months ago to now has not changed at all." I think when Zuckerberg comes out and says, "Yeah, things have gotten worse," unfortunately for him, it stands in contrast to Nadella's comments.
Was there any color on the VR headsets, which reportedly are going to cost north of a thousand dollars? Because it seems like, among other things, for years of saying "No, we don't want to get in the hardware business," it's like well, but now, "If we can start selling hardware for $1,000 a pop, maybe we do want to be in the hardware business." I'm curious if there's any sense of how quickly that's going to be coming.
Maria Gallagher: I think it's interesting. They're raising the price of the Oculus now $100. That's what they're doing now, from $299 to $399. Just a history of the Oculus is they started selling that, I think, at about $800, and now it's been heavily discounted. They're selling them at a loss to just get more people interested in them. They're saying, I think, maybe by the end of 2022 for this new $1,500 headset.
But based on that history of they come out with something really expensive and then there's not an interest, again, just going off of anecdata, I haven't heard anybody talk about wanting to buy that. It's not like the next iPhone that everyone seems they want to have. It's not, I think, garnering maybe the excitement they want it to, but I am not really in that world, so maybe it is in different circles than I'm currently in. But I'm going to be interested to see what the actual price point is and how well it sells when it finally premieres.
Chris Hill: For the first time in a long time, there was good news for Etsy shareholders. Second-quarter profits and revenue came in higher than expected. Shares of Etsy are up 10% today. What stood out to you?
Maria Gallagher: A bunch of things stood out to me. For some quick highlights, their gross merchandise sales were down about 0.4% to $3 billion. They acquired 6 million new buyers, but their revenue was up 10.6% to $585 million. That's with a higher take rate of 19.3%. I think we're really seeing the continued impact of that transaction fee that happened in April, which increased the transaction fee from 5% to 6.5%.
I don't know if you remember, but there was the whole pushback from the Etsy sellers. They tried to do a strike. It seems that that wasn't necessarily successful, even though I do think that they made some compelling points about the fee structure of Etsy and how it's changing. But Etsy has been talking about some of their investments, including they increase their employee headcount. They're working on improving search.
They're working on an Etsy purchase protection for items up to $250, so getting refunds. They're trying to enforce more of the handmade policy, so they've removed 50% more listings last quarter than they did in all of 2021. Trying to maintain the integrity of the platform and seeing more handmade items as opposed to the more manufactured things you might see on other platforms.
They did see some hit to their top categories, so home and living, which is about 30% of sales, was down double digits; craft supplies, which is about 10% of sales was about down on again double-digits.
I would say it was an OK quarter. They're maintaining their most profitable users. They seem to retain a lot of the buyers they got through COVID, but I am still pretty concerned about this friction between the platform and the sellers, and I hope that Josh Silverman takes more steps to reconcile that.
Chris Hill: Silverman is a CEO who seems like he's keenly aware of the challenge that he's facing here. Sometimes a company will come out with results and they're Rorschach test. If you're bullish on the company, you can find something in there that supports your bullishness. If you're bearish, you can find that as well.
As an Etsy shareholder, I'm not saying this was a great quarter and I share the concerns that you mentioned. There were a couple of things that I saw that I thought, all right, this is the thing that hopefully they can build on in the second half of the year. Adding 6 million buyers in the quarter. That's at a time when so much of the national economic conversation is around inflation. To me, that's a meaningful data point. Now, if it just stops there and the rest of the year, they flatline, well, then that's a problem. But hopefully as we think about the next half of the year, they can build on that.
This is an unfair question, but I'm going to ask it anyway: Where do you think this goes next? The tension you mentioned with the sellers, because Etsy is a business that, over the last few years, has made improvements. They have made investments to really appeal to sellers, to make the platform work, not just for the people who go to Etsy to buy stuff, but for the people who are there to set up shop to sell things. Where do you think it goes over the next 6 to 12 months?
Maria Gallagher: I think it's a really good question and I think it's the most important question for Etsy. I think for a long time, it was a symbiotic relationship. There was some friction when Silverman joined as CEO, but he, I think, really spent a lot of time working to improve the relationships with the sellers.
I think the problem is now, it's not just the transaction fee of 6.5% rate. It's that there's a listing fee, a transaction fee, a payment processing fee, an ad fee. By the time a lot of these sellers are done, Etsy is taking north of 30% to 40% of their profits. That's not including how much the sellers pay to get their supplies. It ends up being not worth it for a lot of sellers the way it was for a really long time.
For Etsy -- which is a platform that boasts that a lot of these sellers are women, a lot of representation within underrepresented communities, a lot of people this is their lone source of income -- I do think that that discrepancy has gotten larger in the past year or so. I think that it would be important to see Josh Silverman take some steps to reconcile that.
I think unfortunately, Etsy tries to say, "We're different than Amazon. We're really helping our sellers," and that hasn't been the reality. I think that there's two pathways. If it can get more like Amazon and lose some of those sellers, lose some of that ESG element that I think makes Etsy a really compelling company. Or it can try and work more with the sellers.
Honestly, I think there's kind of a 50-50 chance. I don't know which direction he's going to go in. I really admire him as a CEO and I've admired him, but the past years have been me personally, as both a shareholder and analyst, rethinking the way he is structuring it.
Chris Hill: We'll keep an eye on it. Maria Gallagher, always great talking to you. Thanks for being here.
Maria Gallagher: Thank you so much for having me.
Chris Hill: This summer, we've had three interns working with the Motley Fool investing team. Their internships wrap up this week, and they've each stock to pitch. Jason Moser joined them to discuss the companies they've been researching and why they could make for good investments.
Jason Moser: Today, we have three interns and three stock pitches for you. First up, it's Caitlin Choline, and Caitlin, you are bringing Tractor Supply to the table today for us. Tell us a little bit about Tractor Supply. What does this company do?
Caitlin Choline: Hi, Jason. Yes. Thank you so much for having me.
Tractor Supply. I see a lot of Tractor Supply stores where I come from, but I come from more of a more rural area. If you're from an urban area, I understand if you're not familiar with the Tractor Supply store.
Really, what Tractor Supply does they sell to people engaged in the more rural lifestyle or "out here" lifestyle, as Tractor Supply likes to call it. That really includes your farmers and your ranchers. If you're a farmer or rancher walking into a Tractor Supply store, you can really expect to find anything you need to upkeep your ranch or farm. However, ironically enough, they don't have tractors. If you are a farmer or rancher looking for a tractor, don't go to Tractor Supply.
Jason Moser: We'll get into risks in a minute. But boy, I hope that's not a false advertising risk that we have to deal with here. We'll worry about that in a minute. Well, let's not talk about risks. Let's talk about why you think this is a good investment. That's really what we're trying to do is figure out why these can be good investments. What makes Tractor Supply a good investment in your eyes?
Caitlin Choline: Yeah. Tractor Supply has been around for a long time. They were founded in 1938, and with that, they've developed a really large and extensive product line. Within that product line, there's a lot of products that are applicable to the rural lifestyle.
This is a huge differentiator for Tractor Supply, because you can walk into a Tractor Supply to maintain your farm. Say you need some chickens or some dog food for your dog, you can get both of those at Tractor Supply. It's hard to find this kind of variety of products at their closest competitors. Because if you're looking at who their closest competitors are, that's your Home Depot or your Lowe's or your Petco. If you walk into a Home Depot, you can't get a box of live chickens and a bag of dog food at the same time. Their extensive product line may seem random to us, but to a farmer or a rancher, it really is really relevant, and it's good at attracting that customer that they want.
Something else that's really interesting about Tractor Supply is they really attracted this new customer during COVID. During COVID, everyone was stuck at home and doing home things, and that includes home renovations or gardening or raising chickens. This really attracted people to what Tractor Supply provides and is selling. Increasingly during COVID, that person was the millennial, and that's typically not who you see as a farmer or rancher. Now, Tractor Supply has been introduced to this entirely new demographic, and it really provides a really interesting opportunity for Tractor Supply.
Jason Moser: Yeah, I guess what, 10, 15 years ago, it must have been virtual chickens via Facebook and FarmVille, graduating up to real chickens. I don't know, that sounds like a pretty fun lifestyle, actually, as I get a little bit older. I think I might have to consider getting some chickens in the mix as well.
Caitlin Choline: For sure.
Jason Moser: I like that. A very differentiated offering and separating themselves from their competition. That's always a great thing.
Of course, no investment comes without risk. What do you feel like is the standout risk for a business like this that investors need to be aware of?
Caitlin Choline: Yeah, I think the biggest risk with Tractor Supply is just to watch out for their acquisitions. In the past, they haven't made many. In 2016, they made the acquisition of Petsense, and since that acquisition, in my opinion, I haven't been seeing the most favorable performance from Petsense, especially compared to their Tractor Supply stores.
In 2021, they recently announced acquisition of Orscheln Farms, which hasn't yet settled. I would just keep an eye out for those acquisitions because this isn't something they're experienced with and they typically grow organically. As for risks, I would say that's the biggest one.
Jason Moser: I think that's great to point out. Acquisitions can be very beneficial, but they could be a very risky strategy, particularly for management teams that just don't have that experience. You definitely learn from doing, but a big risk, and I'm glad you called that one out. Caitlin, thanks so much. Great idea there.
Caitlin Choline: Thank you.
Jason Moser: Okay. Next up, we've got Mr. Mason Tyndall. Mason, football season is just around the corner. I don't know about you, I'm a big football fan. I like what you're pitching today: Penn Gaming. Tell us a little bit about what Penn Gaming does.
Mason Tyndall: Yeah, thanks, Jason. I'll try not to go on a segue about how my Cowboys are going to win the Super Bowl this year. I'll save that for another time. Penn Gaming, they're a casino operator with a market cap of about $5.5 billion. They operate 44 casinos in racetracks across 20 different states.
They've really actually transitioned over the past couple of years, to be an omnichannel provider of gaming entertainment and news, with their acquisitions of 36% stake in Barstool Sports in 2020, as well as the acquisition of the Canadian company to Score Media and Gaming. They really provide, through Barstool, some of the top sports podcasts in the world, which is probably my take, and then the Score Media's app as millions of users, and both are very attractive options. I really enjoyed getting to learn about the business.
Jason Moser: This is a little bit of a more difficult one to fully explain and understand in some ways. But you've done a good job of breaking down the business, and so talk a little bit about why you think Penn Gaming is a good investment.
Mason Tyndall: With legalization of online sports betting there and just sports betting in general in the past couple of years, company's management, so with their acquisition of Barstool, they gained the Barstool Sportsbook, and then the Score Media's just actually launched their betting app in Canada as well over the past couple of months.
With that being said, I'm very bullish on the business of sports betting. I guess you can say being a younger adult who follows sports, and then that mindset, combined with the, CEO Jay Snowden's, vision for disciplined growth, really hits home. They're making acquisitions that really drive value to the business and diversify from the traditional bricks-and-mortar gaming that they had to offer. Whereas a lot of the sports-only like online sports betting companies such as DraftKings that operate only online -- and DraftKings is losing money -- is able to use their cash cow profitable bricks-and-mortar business to really fund their online sports betting offering.
I guess the second reason why I really like them is I think the market is actually misvaluing them compared to what management sees as their growth heading forward. You compare price-to-sales ratio with DraftKings or even MGM for that matter; Penn trades price to sales of less than 1, which is DraftKings' price to sales were 4. I really think there's a potential misvalue by the market moving forward.
Jason Moser: Yeah, that's what strikes me with an investment like this. I generally like to believe the market gets it right on any given day, but it does feel like a business in a space that could be very easily misunderstood in such a nascent stage. This is a space that really is just developing, and so that does seem like a potential opportunity there.
Now with that said, this is probably a little bit of a riskier idea than some, but what stands out to you as the risk that investors should be aware of with an investment like this?
Mason Tyndall: Especially since Penn right now, at least they're an online sportsbook. In some markets, it's a near the top, but in most markets, it's that third-, fourth-, or fifth-ranked provider. The legalization does not necessarily mean access in a lot of states. In some states like Oregon, for example, with the legalization , you have to go through their state lottery system. In states like New York, where Penn isn't authorized to actually operate, their barriers of entry are higher. It doesn't always mean just because it's legal in the state, it means access.
That's a potential investment thesis breaker for some states moving forward. I'm in Texas right now, where it's not legal. They were to get legal, but then, what if Penn can't get access to it? That's something you definitely have to watch moving forward because it's hard to control the politics of that stuff.
Jason Moser: Thanks, Mason.
Last up, wrapping up the show for us this week, it's Disha Chalala. Disha, you have, I think, what is probably could be considered a favorite among certainly many investors here at Fool HQ. But I think a lot of investors in our Foolish universe really do... They're familiar with the business that you're pitching today. They like this business. It's Costco. Tell us a little bit about what Costco does.
Disha Chalala: Costco is a multinational chain of membership-only warehouses. They offer their members low prices on a limited selection of products within a wide range of categories.
Jason Moser: Are you a Costco member, Disha?
Disha Chalala: I am a Costco member, an executive member.
Jason Moser: You speak from experience. You're one of the boils.
Disha Chalala: One hundred percent.
Jason Moser: That's very good to hear. Clearly, you have an affinity for Costco, as many do from the consumer side, but what do you think makes this a good investment?
Disha Chalala: One of the main reasons that I think Costco is a good investment is their business model of selling items in bulk out of warehouses. Because not only does it allow Costco to sell things at a lower price point than their competitors, it also gives them the ability to reduce overhead costs and keep their shrinkage rates down. They have an average warehouse space of 146,000 square feet. They're able to stack their merchandise on the racks above their sales floor. It allows them to reduce costs associated with extra storage facilities.
Then they also have people checking your cards as soon as you walk in and your receipts as you walk out. You have shrinkage costs of about 1% of sales in comparison to major retailers like Walmart at 3%.
Then also just their consistency. They have nearly 62.5 million households as members and an average renewal rate of 91%. With membership fees making up 77% of their net income, they have a very consistent source of income. They've also been consistent with their earnings growth paying dividends to consumers.
Even their management, with their CEO being part of the company since 1984, they're very focused on long-term goals and just consistent with the way they treat their employees, their business model, all of it.
Jason Moser: I feel like I should hang my head in shame, because I'm not a Costco member. We've got a house full of kids and dogs and a cat. I've got every reason in the world to be going to a Costco, and yet I don't. I think part of that is because every time I drive by our local Costco, the parking lot is so full, it makes airports jealous. It's always so busy. But hey, I guess that's a nice problem to have.
I think one of the nice things about a business like this, and you've mentioned it, it's stable, it's consistent, it's reliable. But again, as with any investment, there is always some level of risk involved. What would you consider the standout risk for a business like Costco today that investors should keep in mind?
Disha Chalala: Just that the retail business is highly competitive, especially with the current economic conditions. Costco will have to continue to have the ability to adapt quickly to changes in the market as well as changes in customer expectations. Spending habits for consumers are changing currently. I think that's something they have to be aware of and take into account and make sure that they can keep those prices as low as possible, even in the current economic environment.
Jason Moser: That's great stuff, Disha. Thanks so much.
Disha Chalala: Thank you.
Chris Hill: 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.
I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
