In this podcast, Motley Fool analyst Jason Moser and host Ricky Mulvey discuss:
- PayPal's move to become a commerce platform, and how it's impacting the business.
- What's next for Venmo.
- McDonald's traffic problems.
Then, Motley Fool personal finance expert Robert Brokamp and analyst Buck Hartzell finish their series on Berkshire Hathaway, and discuss some lesser-known names trying to follow Berkshire's path.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our beginner's guide to investing in stocks. A full transcript follows the video.
This video was recorded on Oct. 30, 2024.
Ricky Mulvey: One quarter founder. No onions, please. You're listening to Motley Fool Money. I'm Ricky Mulvey. Joined today by award-winning podcaster, Jason Moser. Jason, how are you doing, man?
Jason Moser: God, I feel a lot better the way you announced that right there, award-winning podcaster. That's obviously a team effort, but holy cow, that sounds good.
Ricky Mulvey: Talk about it a little later. You know what, we want to talk about upfront the reason you're an award-winning podcaster is you get straight to the facts, Jason, and we got PayPal earnings to talk about. Alex Chris wrapping up his first year on the job, his fourth quarterly earnings call for those do infractions in math at home. We can get the immediate reaction to the quarter, which was a little bit negative. But we're long-term investors here, we're long term focused. What has been your long-term reaction to Mr. Chris' first year on the job heading up PayPal?
Jason Moser: I think that negative reaction today. It seems to be muted, but that's just day to day stuff, so I don't worry too much about that. Generally speaking, all in all, very positive. Clearly, the stock has done very well. It's up around 56% over the last 12 months has had a good year this far. The way we are with the companies that we follow, we're focused less on the stock price and more on the business. I think in regard to PayPal's business, you look at it, the business fundamentals are all very strong, all of the key performance indicators, those KPIs, they all continue to trend in the right direction. When we see that, you can eschew the quarter to quarter movements, the daily stock price movements, the business is doing the right stuff, and it seems like in this case, PayPal is doing just that.
Ricky Mulvey: I've got some PayPal shares and when I'm looking through the earnings, when I'm looking through the conference call, I'm liking what I'm seeing. Business is getting more focused, sure. It's got a little bit of payment transaction pressure. But it seems like Alex Chris is really right sizing this business in hitting monetization levers where it makes sense. Let's get into some of the details. Revenue up 6% from a year ago. It's a little bit lighter than expectations. But hey, the financial modelers, those at home, driving the short-term stock fluctuations, got non-GAAP earnings guidance. They got a hike in that, they didn't seem to be too pleased. Also, 1,000 merchants taking up fast lane. This is a rollout from PayPal, which is a one click payment option that is intended to compete with something like Apple Pay. Fastlane also getting an interesting partnership with Adyen, who you normally think of as a competitor to PayPal. You're also seeing take rate slipping just a skosh, but PayPal is improving its transaction margin, which is how PayPal measures its core profitability. That's still in the 40s, that's a word salad. Jason Moser, what stands out to you?
Jason Moser: [laughs] I think it's reasonable to expect that take rate to continue to be challenged a little bit incrementally. The cost of moving money, I think just continues to come down, we as consumers we just don't want to pay a lot for having to send your money wherever it needs to go. But I think again, when you look at the key performance indicators with this business, they are all moving in the right direction. You noted some partnerships there, and I think that's really something to keep in mind. Partnerships with PiServe, and Adyen, and Amazon, global payments, Shopify. They're actively discussing more collaborations here in the coming quarters. That to me is really interesting in regard to PayPal because they continue to find new positions in the value chain. If you've studied the payments industry, you know that value chain, it's very extensive, and it's complicated. It's not the easiest thing to understand, and there's a lot of opportunity there, and PayPal continues to find their way into a lot more parts of that value chain. But speaking of key performance indicators, total active accounts actually increased almost three million from the quarter previously up to 432 million now, and monthly active accounts were up 2% from a year ago. I think that when you see the way the company continues to focus more on its core business, what they really do well, I think that makes a big difference for investors. When you think about, you've got the PayPal core business, you've obviously got Venmo, which is very strong, young, but still growing.
Their vision, and I think this is something worth thinking about here, because we think of PayPal as just traditionally a payments company. But they are trying to make this shift to becoming more of a commerce platform. I don't want to get that twisted, they're not trying to become Amazon or something like that. But they're just trying to cement their place in the industry as a place where commerce is done. You consider the fact that total payment volume was up 9% from a year ago, $423 billion went through that network over the last quarter. That's really impressive.
Ricky Mulvey: Getting almost 2% of those hundreds of billions of dollars going through your network, ain't a bad business. The commerce platform that you're talking about. We saw that with Venmo. What Chris has been saying is, this isn't a place just to do a credit card transaction, we're going to give you a little more data about your consumers, we're going to make it so you can give them special offers to really reduce that cart abandonment. While I think it's easy to roll your eyes, we're much more than a payments company, we're a commerce platform, I think the results have been showing it. Let's get to Venmo, because Venmo is going to be, I think, a larger focus in Chris's sophomore year. There's a couple of short-term things, and then he hinted that there's more long-term stuff going on with Venmo. What's been rolled out so far, number one is Venmo debit cards, where people are getting cash back on debit cards, and number 2, which seems to be significant is pay with Venmo checkouts. This is where they're getting partnerships with companies, including DoorDash and Ticketmaster. First, what do you think of the short-term plan here to monetize Venmo? Do you like what you're seeing?
Jason Moser: Well, I do. I think Venmo for the longest time has just been seen as complimentary to the bigger PayPal network. But now what we're seeing is that they are learning how younger consumers, in particular, are using Venmo, and they're finding ways to capitalize on that opportunity. Venmo for the most part, it's just been peer to peer. It's a way for you to send money to a friend or that friend to send money to you. But now, that they're looking at other options or other opportunities within the business, things like the Venmo debit card. The Venmo debit card, for example, the average revenue per account with Venmo debit card is actually four times that of all other Venmo accounts, and yet only 5% of active Venmo active accounts are monthly active Venmo debit card users. That just goes to show you, we talk about this banking relationships, the unbanked. The new way people are doing their banking. I think Venmo, PayPal, and other options in the space are absolutely choices consumers can have there, but there are opportunities for companies like PayPal. With Venmo there, the debit card absolutely seems like an opportunity there, and pay with Venmo users were actually up 20% for the quarter, and the average revenue per account of those Venmo debit card users is actually three times of all Venmo accounts. You look at that, you look at the way they're trying to monetize Venmo. They're trying to monetize Venmo, ultimately the same way they've been able to monetize PayPal to this point, but maybe even a little bit further as this payments landscape continues to evolve.
Ricky Mulvey: Long-term, I see this turning into, I'm going to use the word everything app, but everything finance app. Right now, you can do payments, you can get a debit card. You can buy crypto on there long-term, and I know it takes a little bit more time. I ultimately see PayPal maybe moving into a place, maybe more like Robinhood, where you can buy and sell stocks and investments and ETFs on there as well.
Jason Moser: It definitely could happen. Now, I will push back a little bit in that.
Ricky Mulvey: Push back.
Jason Moser: Well, you remember Dan Sheldon, the former CEO of the company. He had that everything app vision, wanting to be able to do all of your stuff within this one app. But I think there's a line that maybe needs to be drawn. With PayPal and Venmo, for example, there are certain things that seemed very complimentary. One of those is commerce. I don't know about you, but whenever I log into PayPal or whenever I log into Venmo, I see more and more commerce relationships, deals from retail customers and the opportunities for advertising and whatnot. I think that's a big deal. I think there's going to be the opportunity there for incremental revenue growth, there are very high margin dollars when it comes to advertising for sure. Don't bother with stuff like stock brokerage stuff. I don't want to buy and sell stocks within the PayPal act. That's not really what I use it for. But giving that functionality with things like crypto, with things like buy now pay later, makes a lot of sense because that's how people are spending money more and more. Let's not think about this in the context of quarters, but let's think about this in the context of years and perhaps even decades. Ten years from now, I think we'll probably see more and more retail, more and more commerce being done through apps like PayPal. That absolutely is very complimentary with things like advertising. those are the things I think that make more sense for them to focus on. Don't necessarily have to be in everything app, but they can certainly do a lot of things.
Ricky Mulvey: I think we have different friend groups on Venmo. I'm looking through the public transactions right now.
Jason Moser: I'm like 30 years older than you Ricky.
Ricky Mulvey: I'm so late to this. Don't tell Robert, And then also one that just says, Prison brunch. Let's move on to McDonald's. The threat of an E. Coli outbreak meeting the promise of a five-dollar value meal. After an E. Coli outbreak, a lot of it in Colorado, visits to McDonald's have dropped 10% nationwide, 30% here in my state. This is happening as earnings are announced, but the foot traffic has not been included in the latest release. This is just seems to be another blow to McDonald's, which is already struggling with traffic a bit. But do you think this is a long-term problem?
Jason Moser: I don't think it is. I think it's something that they'll get through. To me, whenever you talk about the restaurant space, it's more a matter of when not if they go through these types of issues. That's just the nature of slinging food, you're going to have to deal with this kind of stuff. But you have to think beyond that and try to address the question of how will the company handle. I think in this case with McDonald's, scale is a big deal here. A scale can work both ways. Supply chains can be somewhat nebulous at times, you don't quite understand where everything is coming from. But I think in this case, you look at McDonald's, you think, well, it's a big enough company. You have to ask yourself, why is there not a bigger reaction to the downside with something like this? Well, we know it was somewhat limited. They have been able to at least identify the problem. I think this is one of those situations where we talk a lot about AI and the benefits of AI and how companies are utilizing it. I think restaurant companies are doing a better job of utilizing AI to better understand their supply chains.
I think in McDonald's case, this applies, because we've seen where it's not necessarily the beef, perhaps it's just the onions, but when they're able to pinpoint where the actual problems are coming from, then all of a sudden they know how to correct it very quickly. With McDonald's, now we've got what the CDC saying, it's extended to 13 states, something like 75 people. But yet the CDC says the risk to the public is, and I quote, "very low." I look at something like McDonald's, they're able to cope with something like this, where if you compare it to something like a Chipotle that went through this back from 2015-2018, a much smaller company, bit more of a start up, at least in relation to something like a McDonald's. Now they're obviously starting to incorporate a little bit more transparency into their supply chain and exactly where all of this stuff is coming from. I don't know that I necessarily worry about this as a long-term threat. Again, because of that scale, because of their ability to invest in the business, the forward thinking, the nature of the business, they've obviously been investing in technology for a long time. They have a little bit more transparency into this stuff and exactly how to try to cut it off the path so to speak.
Ricky Mulvey: It's a big business. Let's focus on it. McDonald's is still having trouble getting customers in the door. This was before the E. coli outbreak, traffic declining 1.5% across the world, ticked up in the US a little bit with a lot of the five-dollar menu offers. When you hear Chris Kempczinski talking about it in the conference call, there's a lot of blame on the Macro, people eating at home, things hitting the lower income consumers. But for this traffic decline, is the Macro the biggest culprit here, McDonald's also do some things with pricing to themselves.
Jason Moser: Well, I think the Macro is definitely a question. That's definitely a concern, but it's not a McDonald's specific issue, and I think that's why McDonald's investors should feel OK about this. Value has been the underlying narrative for most of these companies, even companies in McDonald's market. But the good news is that for a company like McDonald's, that quick service restaurant space, value is there sweet spot. I don't know that it's something that I view is really a long-term issue, I think it's something they're more or less going to have to deal with for the short-term. But I think what will be very interesting to see in regard to things like traffic numbers and the value narrative. We've got Chipotle reporting numbers later this afternoon after the market closes. I'll be very fascinated to see what those numbers look like in regard to traffic, and transaction, and even more so, you know, the ticket size. That's ultimately what we're getting at. They're a little bit different markets, but they're still the same, it's all fast food at the end of the day. But that's something that McDonald's can really utilize is that value lever, and I suspect they'll continue to do that.
Ricky Mulvey: The CFO careful to point out that the five dollar value meals are profitable for the franchisees. Before we go, Jason, I want to say thank you to you and I want to say thank you to the listeners. We found out this morning that Motley Fool Money has won the Listeners' Choice Award and the Gold Award for best money and finance podcast in the Signal Awards, taken down two of them. In the judging category, going up against some big dogs from large financial publications. It's good to take home a win. Jason, I want to thank you for being a part of it, and I want to thank our listeners for helping us get there.
Jason Moser: Thank you, Ricky. It's always nice to get a win, and I feel like we've been at this for a while, and hopefully, the listeners continue to get a lot of value out of what we continued to offer.
Ricky Mulvey: Up next, Motley Fool senior analyst Buck Hartzell finishes off his series on Berkshire Hathaway with Robert Brokamp. This time, they look at the cultural advantages that Berkshire has and a couple of companies that share some striking similarities.
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Robert Brokamp: Let's start with discussing what you think makes Berkshire as a company, maybe some cultural aspects that make it so unique.
Buck Hartzell: Sure. There's lots of things that have helped make Berkshire successful over five plus decades now. But I think it's important to point out some cultural things first so I say first of all, it's built on a web of trust, from the company. There's a lot of trust at the corporate end where Warren Buffett and his kind of 25 other people sit, and then all those companies that sit below them, there's a lot of trust and freedom that's given to all those companies that run underneath Berkshire Hathaway. That's the first thing. I'd say a web of trust is kind of unique in the corporate world. The other thing I'd say is they've treated shareholders very much like partners, and Berkshire was originally founded as a partnership. That makes sense, and Warren Buffett himself is an owner operator. He's the largest shareholder of Berkshire Hathaway. He's given away tens of billions of dollars, but he's still the largest shareholder in the company, and he treats all those passive shareholders like us as partners, and that's unique. Then the last thing I'd say, it's a very unique corporate structure that's driven immense value for shareholders and Warren Buffett himself, and we'll talk more about that, I think as we get into things.
Robert Brokamp: That's like an umbrella way to look at it what makes it special. Let's dig a little bit more into the unique operating models. You find that there are three things in particular that you'd like to highlight?
Buck Hartzell: Yes, and when you look at other companies around the world, it's rare to find all three of these things. Let's just jump into it. The first thing is extremely decentralized operations. To a fault, and to give some context for that, Berkshire has at last count, and I looked it up, 396,500 employees, almost 400,000 people work across all the entities within Berkshire Hathaway. But there's only 26 people that reside in the headquarters. They have duplicate finance, HR, accounting, all these different functions within the 80 or 90 wholly owned businesses of Berkshire Hathaway, and so all these companies run independently, and that's really unique. Usually, Robert, when we see an acquisition, big guy that acquires them wants to come in, and they'll get rid of all the other people and consolidate things, and that's not what Berkshire does. They want them to run independently. I'd say even within that structure, the decentralized part, there are some people and executives that talk to Warren Buffett almost daily. A Gee Jane who runs their insurance operations is one that him and Warren Buffett talked regularly throughout many years. Then there are some CEOs that never choose to talk to Warren, maybe once a year or maybe less, and he's OK with that as long as they're doing great. That's the first part of it. Extremely decentralized operations across this huge entity.
Robert Brokamp: But the second part is, there's this decentralized operations, but centralized capital allocation.
Buck Hartzell: Yes. Here's the thing. If you have a really profitable enterprise and you're making lots of money, I think the first, the goal for Warren would be like, reinvest that money and earn me great returns. But there are some business, and we talked about those in a previous episode like Sees Candy, they can't reinvest all those profits so what he says is send that money back to us at HQ, and there's four of us now that'll take care of that problem for you. We'll reinvest that capital and earn good returns on to it. Obviously, Warren Buffett is one of those people, Greg Abel, who will be the next CEO of Berkshire Hathaway, and assume all those oversight of capital allocation duties is the second one. He came out of Mid American Energy and runs their utility businesses. Then the two other people that mostly invest in stocks are Todd Combs and Ted Weschler, though Todd also runs GEICO now. Those are four people, so all those entities can send back their excess capital if they can't reinvest it and earn high returns, and those four people will allocate it. Then the final thing is the three legged stool.
Yes. This is important. This is what has helped Berkshire become so resilient through good times and bad times, and there's three parts of their stool. The first part, I would say is the insurance companies started with National Indemnity, that provides float and profits that Warren Buffett can reinvest. As long as they underwrite profitably, there's excess earnings there and he can invest that money in anything he wants. Turns out, one of the things that he reinvest those profits in is buying whole businesses. Those are companies like Sees or Brooks or FlightSafety. There's a whole bunch of 90 some companies in there. Marmon is another one. They buy whole businesses. Those businesses, in turn, provide a solid state of free cash flow to Berkshire Hathaway that's not correlated with insurance or catastrophes or weather or hurricanes or any of that stuff. They're just money coming into the coffers, and then the third leg of the stool is they buy publicly traded stocks. Obviously, Apple is their largest position now, but he's had a long history of performing really well with buying stock so those three legs, the insurance business, non insurance businesses they buy the whole companies of, and then a large portfolio of equities.
Robert Brokamp: You mentioned Berkshire's been around for a long time. Warren Buffett is now well into his 90s. People listening to this might think, well, I've missed out. I should have bought Berkshire a long time ago. But there's good news because there are other companies that do something somewhat similar, in some cases, very similar to Berkshire, but also do some things different that might be worth considering. We're going to talk about some other companies, number one company, we're going to go to the Great White North looking at Constellation Software. Tell us about that company.
Buck Hartzell: Constellation Software. Most Americans have never heard of Constellation, even Canadians. It's a Canadian company. It's run by Mark Leonard. Who's a wonderful owner operator, and Constellation has earned about 30% a year for its shareholders since its founding. The really amazing thing is, even as its size now, it's about a $66 billion US market cap company. It's still growing at about 30% rate, which is pretty remarkable, and I call it the best company that no one's ever heard of, despite its size and everything else. A couple of things unique about it. First of all, it is Canadian, so it trades on the TSX. Ticker is CSU there, or for US investors, you can buy it over the counter on the OTC, and it's cnsw.f. One trick, I think, for some of these companies, and it's not different than Berkshire Hathaway is, they have a high share price. I don't mean a high multiple to earnings or book value or anything like that. This one does because it's a great company. But the actual to buy a share is expensive, Robert. If you're buying on the TSX, we're talking about $4,300 Canadian, or in the US, about $3,100 just to buy one share, and I'll tell you a little secret. Companies that have high share prices tend to perform very well.
Robert Brokamp: Which people would find surprising?
Buck Hartzell: Yes. Because, if you ask most people, they'd rather buy 100 shares at $10 than one share for $1,000. But it turns out that high priced stocks tend to outperform. That's a good lesson right there. It is a founder run operation, and it's a serial acquirer of really small vertical market software companies. What this means is mission critical software companies, typically, their acquisition sizes are $5-$50 million so these are really small, and they've done a ton of them, and there's a huge advantage here. Usually, as companies grow, they want to make bigger and bigger and bigger acquisitions because it takes a bigger company to move the needle. What happens when you do that is you tend to pay a higher multiple. When you buy smaller companies, you can pay less, and they've done over 1,000 acquisitions in their history, and what that means is if they're buying one company 1,000 times, they've optimized their acquisition engine to an incredible degree. They are unbelievably efficient and great at identifying, acquiring, and integrating these companies just to provide vertical market software so that's great. But there are some things that they've gotten from Berkshire Hathaway that I think have made them great. They are an owner operator model. Mark Leonard is the owner operator in this case. They have decentralized operations. We're talking 1,000 acquisitions, Robert.
They group them in areas, but for the most part, these companies are very decentralized, and they do have centralized capital allocation oversight. It's not as centralized as Berkshire Hathaway, we send us up all the money and everything else, but it is centralized oversight. If you want to acquire a company of any size, one of their subsidiary businesses, it has to get approved by the board at Constellation. But there are some things that are different at Constellation. First of all, it's a lot smaller than Berkshire Hathaway. It's about 7% the size of Berkshire Hathaway so it's got room to grow yet. The other thing is they've started to push capital allocation down in the company. Instead of just having people at corporate do all that, they're encouraging and training people throughout the company to smartly make their capital allocation decisions instead of it having to be done at the top. They've also spun off companies.
Where Berkshire likes to be run as a conglomerate, and there's some tax advantages from sharing money and profits between those businesses. They're actually pushing some of their companies out to be public on their own, and they think in that way, they can be more focused on what they do. They can provide stock and incentives and those types of things just on how that business does, instead of having be part of an umbrella of many different companies, so that's something that's different. Then the other thing I'd say is their subsidiaries share a lot more information than a lot of the Berkshire companies do, so they get together in an organized way and say, hey, what's really working for you, and what can we learn from you, and they share information a lot greater than I think happens at Berkshire Hathaway.
Robert Brokamp: Very interesting. Let's return to the US to a company founded in 1930, but first became publicly traded in 1986, and that is Markel.
Buck Hartzell: This is a little company down in Richmond, Virginia. It's another company with a high stock price. It's about $1,500 right now. The market cap is about 20 billion, so it's about only 2% of the size of Berkshire Hathaway so a lot of room to grow. There's a lot of deals that Markel can do that Berkshire couldn't because it just wouldn't move the needle for them. The other thing that we've seen happen recently there is they've transitioned leadership. This has been in the Markel family and run by them, but Tom Gayner now, their long time chief investment officer, and he was a co CEO, a couple of years ago, now he's solely the sole CEO of Markel, sorry, 3, 2, 1. The other thing that we can see is Tom Gayner, who is the long time chief investment officer at Markel, is now their sole CEO and chief capital allocator there at Markel. This company, they borrowed blatantly from Berkshire Hathaway. This is the one that we'll see as closely mirrors the three legged stool that we see at Berkshire. They have the same stools. They have an insurance business, it's specialty insurance that struggled a little bit over the last few years, and they're making some changes to that and fixing it. But over a long period of time, Markel has earned consistent profits off of their insurance businesses and generated float. They also own a ventures business, which buys whole companies that are non insurance related. They own one of the largest crane providers. They own the biggest maker of household plants that are sold in the United States. They own the company that makes the equipment that makes the buns for the McDonald's Big Mac. That's AMF bakeries, which is also at Richmond.
They own a weird conglomeration of companies that are non insurance related. We've seen recently, they bought back their own stock. This is something that Berkshire Hathaway has done as of late. They've slowed down recently at Berkshire, but Markel insiders have been buying, and they've ramped up their buybacks as the multiple in this stock has gone down. Currently, Markel trades at about 1.3 times book value, and that's less than Berkshire. Berkshire trades at about 1.65, and obviously a much bigger company so you're getting a little bit of a discount here from Markel as your company, I think over time should be able to grow faster, and Tom Gayner, who's their sole CEO, is also chief capital allocator. He has a long history of beating the market when he buys publicly traded stocks as part of that.
What's different from Berkshire Hathaway there? I'd say their ventures acquisitions aren't as extremely decentralized as Berkshire Hathaway. There is a group that oversees all of them. They report up to Tom Gayner, but they get more coordinated oversight than Berkshire Hathaway provides to the companies they acquire. I'd say it's not as much of an owner operator model, where Warren Buffett owns about a third of Berkshire Hathaway. Tom Gayner doesn't own as much, although he's been buying more, and I think most of his net worth is tied up in Markel shares. It's not as much insider ownership as you see at Berkshire Hathaway.
Ricky Mulvey: As always, people on the program may have interests in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.
