Long-Term Investing Ideas in a Volatile Market
Simon recently spoke with a $35 billion global asset manager about how they're navigating the market volatility. The key takeaways are to think long term, tune out the noise...
Simon chats with the hosts of Chit Chat Money about 6 potentially opportunities in the stock market today.
October 6, 2022 – By Simon Erickson
Stocks have been selling off…so is it time to go buying?
The market’s recent volatility has sent several institutions fleeing to safety — replacing higher-risk equities for more defensive alternatives.
As individual investors, should we follow suit? Should we similarly look for more stable, less-volatile stocks that will provide a smoother ride in a turbulent macro? Or is now the time to buy riskier growth stocks, who have been unfairly sold off and now have quite attractive valuations?
We wanted to answer those questions by having some fun, bringing in our partners from Chit Chat Money to play the “Stockpickers’ Market” game.
On today’s podcast, 7investing CEO Simon Erickson spots CCM’s Brett Schafer and Ryan Henderson up with three head-to-head stock matchups with the following themes:
In the game, Brett and Ryan share their thoughts about each of the companies and then give each a score from 1-10 on how bullish (or bearish) they are about investing in them today. They reveal the winner of each matchup, as well as the stock that ultimately received the highest average score in the game.
Want more content like this? 7investing and Chit Chat Money have a partnership to dive deep into companies and promote a long-term investing mindset. Any users who sign up with 7investing using promo code “MONEY” will receive a 25% discount to our annual membership.
Simon Erickson 00:00
Welcome to our 7investing podcast where it is our mission to empower you to invest in your future. 7investing founder and CEO Simon Erickson and I think I speak for several of us when I say that 2022 has been a challenging year for the stock market. But even though several stocks have sold off, it could be a stock pickers market right now. There are hidden gems that are there for investors that want to take advantage of them. I’m excited to find some of those and take a closer look at some of those stocks. With my guest for the podcast today. They are the hosts of Chit Chat Money. It’s Brett Schafer and Ryan Henderson. Brett and Ryan. It’s always a pleasure. Thanks for joining me on the 7investing podcast today.
Ryan Henderson 00:39
Yea, thank you, Simon. Always a pleasure as well. Also, maybe this is a great time to shamelessly plug that if you are a listener to 7investing but haven’t subscribed yet. Feel free to use our code, money.
Brett Schafer 00:51
Money, yeah. If you use our code money and what is it $100 off the annual subscriptions so if you’re thinking of signing up for 7investing, we’ll do the advertisement for your service Simon. Use code money get $100 off. It helps out all of us if you subscribe. Now that the plug is out of the way though. Glad to be back, should have some fun discussion today. We’re going to do what, head to head competition but I’ll let you introduce it Simon.
Simon Erickson 01:17
We sure are, you guys make this so easy. We should have you on the podcast every time, use code money for 25% off the annual rate, $100 off of our $400 dollar rate for that. We are going to do a head to head stock competition, we kind of said how can we make this a little bit fun and look at a bunch of stocks in the same episode. You know, my colleague Matt Cochrane chatted with Anirban Mahanti and Alex Morris on a previous podcast we called ‘Record rebound’, we’re going to do something similar we’re going to have kind of subcategories of stocks we’re gonna match up head to head and I’m going to ask Brett and Ryan which of them they like the most. Gentlemen, are you ready to begin the thematic game of stock picking head to head?
Brett Schafer 01:53
Yeah, we sure are. Only you gotta promise though to have some takes on some of these as well. We’re going to flip, we’ll flip the question on you after we answer.
Simon Erickson 02:02
Fair enough, fair enough Brett I will jump in with my thoughts as well. The first one is going to be let’s look at the most beaten down stocks in the market. Let’s look at stocks in this theme that are down 90% from their highs, and see if the, if we like either of these in head to head comparison which one we like more. The two contenders in this bracket are Peloton (PTON) and Upstart (UPST). Let’s look at Peloton first this is a maker of home fitness equipment, really one of the darlings during COVID but certainly has sold off recently. Which one of you would like to take a look at this one?
Brett Schafer 02:31
Yeah Imean, I can maybe introduce it. If I’m looking at the chart here over the last year down 91%. So I mean, it’s just gotten beaten down terribly. The, I think this might tease well, when I pick here, the big issue is the hardware sales, the equipment sales. They had the inventory glut, they over expanded without the demand that was going to come through. They basically looked at COVID. The demand that kind of surged during COVID. I don’t know what their demand is up 400, 500% from usual, and they extrapolated it out to saying that was going to continue forever. And it didn’t once the pandemic kind of subsided in the United States. Now we’re seeing that hangover, they had the inventory glut, they’ve had to discount prices, although they’ve kind of discounted and raised prices, periodically that things got so bad that the founder had to leave and actually left the board of directors. They brought in Barry McCarthy, who was the ex CFO of Netflix and Spotify who has a great track record of building subscription businesses. And that kind of leads me to the really the only reason I think, me or any other investors attracted to Peloton at the moment and is that subscription revenue, its kind of held up. I can get some maybe numbers out there, but I know Ryan, any other thoughts on Peloton. Is there any dip worth buying here as we compared to Upstart?
Ryan Henderson 03:55
Well, I think maybe something that’s worth mentioning. The theme here is stocks down more than 90% from their highs. So obviously things went bad. Yeah. If a stock is down more than 90%, there’s certain drawdowns where it was overvaluation. But I think if it’s more than 90%, something went wrong it’s not purely just overvaluation. So in Peloton’s case, there was, I think, several things that went wrong. And I do think Barry McCarthy has actually done a decent job, we haven’t seen it really reflected in the financials yet, but making what looks like the right decisions to make this more of a software business. I know they just basically took steps to outsource their, when, what was his name, the old CEO, Folley? John Foley when he was in charge. They took a lot of they really kind of wanted to make this a vertically integrated business to control all of like the manufacturing and the distribution and seeing that Peloton vans out there. Barry McCarthy has basically said, we’re going back to outsourcing. We’re focusing on what we do best, which is that subscription side and the actual connected fitness side. I think if he can, if anyone could probably right size it, I think it’s Barry McCarthy. And I do., it’s still to me even though they might not quite as many rides per month as they did when COVID at sort of the heart of COVID there’s still this cult like following around the classes, people still really enjoy the classes. So I think there is a business to salvage here, they just have to get rid. They have to become as much of a software business as they possibly can.
Brett Schafer 05:40
Yeah, I agree with all those.
Ryan Henderson 05:42
What do you think of the new rowing machine though?
Brett Schafer 05:44
It’s tougher, rowings… Here’s the thing. Peloton is class based, right? And that’s kind of the most important part. Is rowing, have any success? You know, bike classes, spin classes has been very successful. And they kind of you know, brought that to the say the internet. Rowing hasn’t really taken off. So I worry a bit that it’s more of just if it’s a rowing machine. Yeah, it’s a nice one. But it’s going to be more like, oh, gosh, all the other, you know, equipment makers in the past and doesn’t have that connected advantage. However, we’ll see. So I’m a little bit more pessimistic on say the rowers and the treadmills and stuff like that. Simon, any thoughts on this one?
Simon Erickson 06:25
They’re all great points. I really loved the point that you made Ryan about, you know, when something goes down 90% it’s a reset. Something was either wrong or is completely overvalued. And I think that that is certainly the case with with Peloton. Peloton was a COVID darling, everyone thought that those hardware sales were going to shoot through the roof and they didn’t. You know, it said it’s not, it’s not a COVID stock. And maybe it was a COVID stock. And also, at the end of the day, I think you also have a cap of how much you can charge for these, especially if it’s a subscription, like you mentioned Brett at some point, consumers are just going to say okay, if I don’t want to buy the treadmill, and the rower and every other new product that they introduce, I’m just going to spend the 40 bucks a month to go to my gym that has all that stuff anyway. Time is still a premium for every people. So I think there’s a cap on the market and I agree with basically what you guys said in terms of the reset. And maybe it was time for a new leadership change. I know they hired McKinsey to kind of come in there and tell them you know how they’re going to trim some of the fat no pun intended on that one. But you know, from a management perspective, this certainly looks like it is a turnaround story now. Let’s look at the other one you know if we’re gonna call Peloton a COVID stock, uh maybe we talked about Upstart (UPST) as a macro economic stock. This is one that also has fallen significantly from a high of over $400 in October 2021 last year, only $22 today. So it’s down you know, that’s about a 95% fall from its highs. Guys what’s going on with Upstart right now?
Brett Schafer 07:46
Yeah, I mean, that 95% that is that is just a tough fall. I look, I’m gonna be honest, I don’t follow Upstart closely. But I do think as opposed to maybe some other people I generally know what they’re trying to do as a business. I don’t know the nitty gritty I know they have their proprietary you know, stuff they like to talk about the machine learning models and models to bring credit based lending to more of the population expanded outside of the credit score. And the interesting thing about Upstart is that yes, they may have guided higher than what they originally thought on the year but it doesn’t seem to me that there was any execution, like, like Peloton had really bad execution they made some bad decisions and they got too much inventory and they basically over extrapolated what their demand would be. Upstart did that a little bit but it’s not like it was because, it was all just kind of macro that flows through in here and yeah, you know, the stocks probably down for a reason because they guided it down lower and the growth not going to be as strong as it was but and you know, we’ll see how their credit models do in a recession but it just seems to me like there wasn’t as much of a lack of execution it’s just really, really bad and macro effects. And on top of that, this specific type of stock, new IPO, fast growing, it is profitable, which is kind of you know, it gets thrown into the unprofitable bucket, but let’s say it is profitable, but it gets grouped in with a lot of the unprofitable companies. That specific type of stock has gotten absolutely hammered in 2022. I gotta be honest, I don’t invest in financials but Upstart. I don’t know why it’s down 95%. Maybe that can spur discussion with, with you guys. But it’s a little perplexing to be why the stock has fallen so much.
Simon Erickson 09:33
Ryan, anything you want to add to that?
Ryan Henderson 09:36
I think Brett makes a good point there that a lot of this was kind of out of their control. And if, I don’t know if you could have done anything differently from management’s perspective. What I guess did ultimately hurt the stock and investors was that, and I think Anirban has talked about this as well was guidance was too aggressive. This is a business , so much is out of their control that, like it’s a business that’s really, really hard to guide for because you’re so susceptible to the macro conditions that I don’t know, maybe, maybe don’t, maybe the guidance wasn’t necessary. And maybe that’s what drove, because this was one I think that now, now we can certainly say got overvalued, especially since we can look at the results that have come since, since it kind of got to its premium valuation. But that was probably a byproduct of the guidance. And so if if everything was the same, maybe they would have hit that guidance. But that was probably the only thing I can think missing a step on the management’s part. Perhaps now there’s a situation where maybe they’re over staffed, but that’s not really their fault, because they kind of have to. It’s kind of same thing that Shopify (SHOP) went through where you you take a bet on whether or not this is going to continue and you either hire or you don’t and you’re unable to service a lot of the customers. And it seems like they, if I remember correctly from Dave Gerards interview, that he did a podcast a while back, he talked about how much they had to hire recently. I wonder if potentially that comes back to bite him, but I, financials I tend to veer away from, but I’m looking at the chart right now.
Brett Schafer 11:30
It’s bombed out. You talking about the stock chart?
Ryan Henderson 11:33
I mean, yeah, I’m looking at revenue right now. Even after what seems like a really precarious spot to be in, versus their 2020 results, they’re generating three times the revenue that they were on a quarterly basis.
Brett Schafer 11:50
Let me get a note here. Yeah, I said they weren’t profitable. Last quarter, they were not profitable. But I was kind of looking at the 12 month numbers just be clear for anyone that’s confused. They give good notes on their, gosh, investor presentation. Now, when I look at, again, I don’t follow this name too closely. But when you look at the numbers on kind of their core KPIs, a lot of stuff looks solid, the bank and credit union partners continue to grow at a really, really strong level. And then if we look at their expansion into the auto opportunity, and then there’s just going off their investor presentations, but the number of dealers they’re at is expanding quite a bit as well. And that’s just getting started. And that opportunity seems large. So I think listeners might know what, like our choice would be head to head here. There’s a little bit more to worry about with Upstart, but I think Upstarts in a much better position than that Peloton. Simon, any thoughts on here? I don’t know if you know, these two companies, well, or not.
Simon Erickson 12:52
Quite well, and thank you for mentioning Anirban too here, you know, our very own Anirban Mahanti at 7investing, lead advisor is a big fan of this company as well. I certainly agree. It’s interesting to see what these ex Google executives are able to make of this financial services platform, right? They’re exposed to things that they haven’t been exposed to when they were at Google (GOOGL). And now they’ve kind of got to say, okay, yes, this is a cyclical nature, to lending to people. You know, borrowing money or not borrowing money when interest rates go up. And we are certainly in a environment that is not very conducive now. Certainly not as conducive to lending to consumer lending as it was in 2020 and 2021, when interest rates were very low, and people were borrowing money for all sorts of things. Algorithms have held up well, I think the management decisions is a great point that you guys bring up and there’s been kind of both sides of that coin on whether or not Dave Geralds making the right calls. But he’s not necessarily making the wrong calls, at least in terms of being a very profitable business and getting plenty of people to work with them.
Brett Schafer 13:54
Last thing or sorry, the last thing I’d add on Upstart is on the flip side, you know, we talked about how a recession or deteriorating credit environment could hurt the company, it’s also a nice test. So if theystill holds up their algorithms hold up, compared to the FICO score and stuff like that, you know, that it could be I don’t know, it’s where, it’s validation for their algorithms.
Simon Erickson 14:16
Yep. Okay, now I’m gonna put you guys on the spot. Let’s do a score for each of these companies just to have some fun with it here. Again, we’re going off script and um, this is totally on the spot, so don’t hold Bret or Ryan to the numbers that they give but if one is the worst sell where you’re absolutely getting rid of this company and selling it as quickly as possible. 10 is the strongest buy we’re going on you’re buying shares right after we record this podcast, again 1 to 10 scale. Where is Peloton and where is Upstart on on that scale of 1 to 10. How about how about Peloton first for you, 1 to 10 where are we all know?
Brett Schafer 14:49
Okay and we’re gonna make a rule no sevens because seven is kind of a cop out answer. For Peloton, yeah for Peloton I am going to say 4. I’ve got to see some progress here. There is, there is bankruptcy risk at play and I think that’s just it just adds a lot more risk than someone like Upstart who I might give a higher score to right?
Ryan Henderson 15:10
Yeah, I’d probably go I’m not I think maybe I’m just like following the crowd here given what the stocks have done, but I’d say eloton is a 3 for me and Upstarts probably a 4. I just don’t have enough confidence yet. If I were gonna bet on financials, I think I would really skew towards something that’s been around for a long time, just to kind of err on the side of caution.
Brett Schafer 15:35
Yeah, and I guess for my Upstart pick, I’d, given where the price is that I might put a little higher maybe at the 6 range it’s not, again, it’s outside of where I’d like to invest but I think the opportunity there like if they’re right there, there’s a ton of opportunity at these prices. Again, like Simon said, no recommendation we don’t follow the company extremely well, but it seems like there’s a lot of opportunity.
Ryan Henderson 15:57
We might be eating our words here for both those.
Simon Erickson 15:59
Well that’s OK. Like I said, I am putting you on the spot and of course that’s harder than you know, then it sounds when you’re listening to the podcast, but it sounds like with the five average score for Upstart, a three and a half average score for Peloton it sounds like Upstart is the winner of the first matchup between the two of those and any final thoughts on that first matchup?
Brett Schafer 16:17
I think I would I would agree. I think Upstarts the winner for me, I don’t think I’m buying either right now but Upstart.
Ryan Henderson 16:23
No called strikes, so I think I’ll let both those pitches go bye for now.
Simon Erickson 16:28
Fair enough. Well, we’ve got two more matchups we’re gonna get to in just a minute. Do you want to take a real quick break to hear a word from our sponsor. Our sponsor for this episode is Zacks investment research. OK, let’s take a moment to consider the times that we’re in right now. The current economic climate has people wondering when will this ever end? There’s record high gas prices, volatility in the markets, inflation and ongoing disruptions in the supply chain. Luckily, investors like you have Zacks Investment Research which provides in-depth financial data and expert analysis to help you make more strategic investment decisions. The Fed is doing all that it can to cool down inflation and stocks have already started to respond. When the market is gripped in pessimism, Zacks provides the invaluable resources that investors need to capitalize on volatility and to buy stocks when they’re selling for low prices. But also help you spot your losers so you know which stocks to avoid or eliminate from your portfolio. Experts know market volatility unearths great opportunities and current conditions have done just that. To provide value for our listeners, Zack’s is providing the opportunity to download their report ‘Five stocks set to double’ for absolutely free and with no obligation. Their experts are reviewing the top five stocks with the best chance of gaining 100% or more within the next 12 months. Imagine how that could affect your portfolio or retirement savings. Going off script for a minute, I have looked at those five stocks personally. I liked several of them and actually owned several of them as well. So endorsement from me on this list. I think it’s a very strong list. But remember to fight inflation and download your free report at www.Zacks.com/7investingpodcasts. That’s www.zacks.com/7investingpodcast. And also reminder that if you would like to sponsor an upcoming episode of our 7investing podcast, please email us at email@example.com. Guys, that’s my best game show voice and best advertising voice. Let’s get back to the game show part of this now. The second matchup we have we’re calling it fallen pandemic winners. Ryan, I like your your description. This is the hangover stocks. These are the companies that we like, and it’s still got some pretty solid business fundamentals. But they’ve certainly got whacked during the sell off here. The matchup for this one is Roku (ROKU) versus Shopify (SHOP). Brett, do you want to start with an overview of Roku and tell us a little bit about that company?
Brett Schafer 18:51
Yeah, sure. I think Roku how to start with this one. They sell hardware and they also have a software platform where people can access their connected TV apps. So what does that mean? They sell either TVs through partnerships with other TV manufacturers or little things that you plug into your TV that gets you access to the Roku platform and the Roku platform is can I call it they sort of copy the app based interface of a mobile phone, but put it onto a TV and try to make it very seamless to access your apps like Netflix, Amazon Prime, Hulu and the 1000s of other smaller apps out there. And the way they make money is either through revenue share agreements with subscription deals, advertising share agreements, with some of the companies that have apps on there, running their own advertisements on their own streaming channel called the Roku channel and then other smaller ancillary things. Now they also make money I guess selling the hardware but they sell it at cost and actually, that’s kind of a maybe a negative Ryan could hit on is the negative gross margins that they’ve had to sell some of the hardware on recently. For reference, I think they have about 63 million active accounts with the majority of them in the United States, but they also have been taking good market share in Canada and Mexico and are trying to expand internationally, mainly in Latin America and Europe, but only the only really success stories they’ve seen so far, or Mexico and Canada, or the US. And the US, obviously, they have a very large market share in the US. The thought, I guess, was that during the pandemic, you know, we’ve seen the acceleration of the transition to connected TV, Roku’s active accounts were growing really, really quickly. And the connected TV advertising revenue accelerated a ton. And they were also able to sell a lot of the dongles and TVs and all that good stuff, or the TV partnership agreements at a low cost. But now supply chain woes, the cost of the hardware that they’re trying to sell is just totally inflated. And there really have been only, historically, they’ve tried to sell those basically without trying to make money on them. They’re just trying to acquire customers for as cheap as possible. But that has kind of turned into a headwind because this stuff has gotten really expensive just because of, you know, inflation, commodity costs, whatever. And that’s hurt the revenue and gross profit growth. And on top of that, we’ve seen a slowdown in advertising connected TV and potentially a lack of execution from the company on their, say, their goal or their long term trajectory of how they’re trying to build a connected TV advertising company. Ryan, is there anything you want to add there before we talk about what we liked, and maybe disliked about Roku right now.
Ryan Henderson 21:31
I guess platform revenue, so I think you mentioned it, but there’s player revenue in this platform revenue, platform revenue makes up the majority of the top line. And they have been selling those players at a significant loss, because they believe the lifetime value of those users that they’re going to be able to make up for that cost by generating revenue, as the longer that they’re on the platform. I love, I have the Roku, I have a Roku TV. I love the platform. But I have difficulty saying that it has like some significant competitive advantage over other smart TV operating systems. There’s nothing really that keeps me there over peers other than they’re the low cost provider.
Brett Schafer 22:21
Or that you already have it and it has access to everything. I mean, one of the key points I think, is that YouTube and Netflix the two largest apps do not share any revenue with Roku. And I think the reason they’re able to do that is because Roku doesn’t have the operating leverage where say they said okay, no Netflix or YouTube on.
Ryan Henderson 22:39
Brett Schafer 22:39
Yeah, negotiating leverage. Now say they kicked off Netflix and YouTube. I personally say using a Roku device, which I have right now could just buy an Amazon fire TV stick for I don’t know much how they go for maybe Amazon basically gives them away, say $30. I plug that into my TV, basically replace the Roku, and I have access to Netflix and YouTube through that. That’s kind of the big downside, I guess we see. And maybe they’ll be able to navigate it. The execution on the Roku channel has been strong. But that’s kind of the big risk. Simon, you have any thoughts there? Ryan, you have anything else?
Ryan Henderson 23:14
The last thig I would say there’s been a couple of huge tailwinds that have pretty much driven this business. One, the shift to streaming TV or smart TVs has been basically just pushing everyone towards Roku. Second is advertisers are beginning to follow the consumers. So there’s still a lot of advertisers that are going to shift over to smart TVs over time. And then I guess third, the content providers are spending tons of money to develop basically connected app or connected.
Brett Schafer 23:46
To convince people to switch to streaming.
Ryan Henderson 23:50
They’re gonna pull a percentage of the revenue through subscriptions from all those, I think.
Brett Schafer 23:55
Ryan Henderson 23:56
Well, maybe. Maybe if everyone starts to move away from Netflix to these other options, Netflix’s negotiating power might come down a bit.
Brett Schafer 24:04
So you say if you have to go long Roku, you might have to be bearish on Netflix. That could be.
Ryan Henderson 24:09
Maybe, but I think they could do well without Netflix still. There’s all these tailwinds that I think are gonna drive. Roku sits as the beneficiary of all those it’s really just a matter of how much are they going to be able to actually generate in cash over that time? And are they going to have to perpetually be the low cost provider of TVs because that would be sort of a downhill road it sounds like just given, given how much they’re losing on those already?
Brett Schafer 24:37
Simon Erickson 24:39
Yeah, it’s intersting. There were no doubt the the innovator right in in streaming TV and the advertising is attached to it. It’s so interesting we talked about Netflix and Roku because they kind of shared the same Genesis, right? They started from the same point. Netflix (NFLX) went on to go and do the subscription based model and then kind of handed off to Roku to pursue the advertising based streaming. And it just, I almost think that the hardware sales become irrelevant in the near future at least a couple of years in the future, because TVs are getting so much smarter, they have these platforms embedded directly in them, no one needs to have the hardware that you plug in, you know, it goes right to the auxilary jack of every TV anymore. And it’s interesting to me, I’ve seen decreasing average revenue per user, for Roku for several quarters, I think that goes into what you were saying about there were other options. And this is an industry that’s growing very quickly and innovating very quickly. And Roku was one of the very first horses to break quickly out of the gate and now it’s a question of what kind of staying power does it have. So it’s a good point that it makes sense, perhaps, that the stock has suffered. Hit a high of $350 last October, and it’s down to about $60 today, so almost 86% sell off with Roku. The one that we have it up against is Shopify. Shopify is also a pretty common, you know, pretty well loved name, I would say for the most part in the stock market. Certainly getting hit, hit a high of $176 last year down to about $30 here today. What do you guys think about Shopify?
Brett Schafer 26:05
Ryan, you want to go first with this one?
Ryan Henderson 26:07
Sure. I think most people know what Shopify is. But if you don’t, it’s basically, probably the most easy way of setting up a shop online. So basically, if you if you want to sell goods, you want to be a merchant that sell stuff online, you can go through Shopify and sort of build a custom website. It, I guess you could call them software’s. It’s, it’s a CMS providers or content management system provider. And so some of the companies they compete with are like Wix, Squarespace, I guess, GoDaddy.
Brett Schafer 26:40
Big commerce, some others.
Ryan Henderson 26:42
Yeah but they are are the best platform if you’re exclusively a merchant. So if you’re just trying to sell goods online, I think they have the best tools for you to do that. However, as of late, I get, well, for one, ecommerce sales kind of went through the roof during COVID. And there is this hangover that we’ve all talked about and it’s kind of reverted a little bit, which has hurt Shopify’s business. But additionally, I think this buy with prime option that’s being rolled out to a bunch of CMS providers, could be really detrimental to Shopify as a business. I know, some people think otherwise. But if I’m a merchant, and I’m able to give my customers the ability to get delivery through Amazon’s fulfillment network where it takes one or two days, if you’re a prime member, and it’s free, no additional charge. I think those I, I’m definitely going to offer that. And for my customer, I’m definitely going to take that which means a lot of the payment volume is not gonna be going through Shopify, it’s going to be going through Amazon.
Brett Schafer 27:44
The key thing for Shopify is the majority of their revenue is payments. So it’s the biggest risk for them compared to it’s kind of a, like, it’s a downside for them executing so well with their payments platform, or product over the last few years is that it’s such a large part of their revenue now that if I was Buy with Prime comes, it could take some share, however, I mean, it’s gonna take years for by the prime to buy to take some share. So it’s just, here’s the big thing that concerns me, I think with Shopify, outside of the Buy with Prime over the long run is their margins are not that high. And the price today of the stock is still fairly, I mean, it’s not like super expensive anymore. But I think the price to gross profit, which is kind of maybe a good metric for them, is still above 12. I think it’s 13 to 14 ranch. That is implying we need to you know, we still need some high growth here. And I just wonder, we still need I say 20% top line growth for a considerable time period, even at this font stock, right? And it gives me a little bit of pause. I mean, the execution of Shopify has been phenomenal. They’re clearly the best ecommerce provider where you’re not like, you know, outside of Amazon, where you have Amazon is selling themselves. I think people understand the difference there. But I think that’s all I had to say, Simon, any thoughts on Shopify? Before we
Simon Erickson 29:10
know if I have anything else to add other than just you know, it is kind of split between the subscription and the transactional revenue? I think the market is a little concerned about with everything going on with the economy. You know, there’s talk about recession, and everything’s tough for anybody that’s doing e commerce, are the transactions going to be lower? And should you get that same premium valuation like Shopify has enjoyed for so many years? Great points.
Ryan Henderson 29:32
Yeah, the other. The other thing that concerns me is I don’t see a world where Shopify is fulfillment ever really rivals Amazon’s and it seems like they’re investing to do that, which given how much Amazon invest themselves, and how robust their fulfillment is already. I’m afraid that a lot of the cash is going to go towards competing with Amazon as opposed to what Shopify is already really good at which is serving merchants and providing value to them. Through intuitive website building,
Brett Schafer 30:03
right could be a waste. Yeah,
Ryan Henderson 30:04
yeah, just where does that cache end up going? It’s kind of my pick my big lingering question.
Simon Erickson 30:09
Okay, Ryan, I’ll start with you first on this one. Let’s go with Roku first one to 10. Where are you on the on the on the completely random scale? We came up with this game. What did you score? Roku
Brett Schafer 30:21
Reinis huge level Roku, but I’m saying lower now. Oh,
Ryan Henderson 30:26
yeah, I used to own shares. Like four years ago, I ended up selling it, which was like, not I was not me for seeing anything. I just needed the money. And so I like sold it. And it ended up being great timing. And so I’m, I’m gonna go with a five. I’m like, completely torn. I love the platform. But I have some worries about any whether or not they actually have any real competitive advantages. Yeah, I’m gonna
Brett Schafer 30:53
go with the cop out five as well, right down the middle. I think there’s opportunity here, if I’m looking at and again, price to gross profit is not perfect. But the price to go with profit is say five to six right now trailing. I mean, if they put up just some steady growth and regain that operating leverage, we were seeing the last couple of years before they had those major headwinds with the hardware costs. There’s a world where, you know, there is the path to I think generating nice profits and cash flow for shareholders is not out of the question. However, the only thing that makes it gives me concern is just the competitive landscape.
Simon Erickson 31:32
Or not, Brett? And how about Shopify? Where do we stand on Shopify?
Brett Schafer 31:36
Look, I think it’s a better business than roku. But the valuation just gives me pause on a big I know, this is not you know, everyone’s cup of tea. But me and Ryan are bid, you know, don’t overpay I guess investors more focused on the hardware? And we’ve learned the hard way on that regard. Yes. Not like we’ve Yeah, I think everyone does. So I think that’s just gonna make it a bit lower for me probably three, just because I still think it’s expensive. And the looming competitive threat with five prime makes me nervous, I think. Just kind of keep me away that those two things will keep me away.
Ryan Henderson 32:18
Although five and a half, pretty high. Yeah. Slightly above roku. I think it’s a better business. Oh, I think as much better competitive advantages, I guess, aside from one thing, and that’s the by with prime uncertainty, it just like it’s this lingering uncertainty that makes me makes it really difficult to forecast how much shot file generating revenue because obviously, you can take away a big chunk of their payments. So for that reason, I’ll go flat.
Brett Schafer 32:51
And for that reason,
Simon Erickson 32:54
the decimals we’re not just going with discrete numbers. Okay, so that gives the Roku have an average score of five Shopify, a 4.25. App Store with Ryan’s unique scoring. So I think you guys like Roku in the second round is the two of those.
Ryan Henderson 33:10
Yes. All right, rook is the winner
Brett Schafer 33:11
Roku is? Yeah, I forced it to be the winner by gaming shop by low score.
Simon Erickson 33:16
Well, guys, it’s been a little depressing. Talking about the stock price declines we’ve been discussing, you know, so many of them have been down so much over the last year, let’s talk in this third category about stocks that are actually higher in 2022, than they were on December 31. of 2021. These are stocks that are up for the for the calendar year in 22. This is going to be Lockheed Martin versus Costco. A lot of people would call these more defensive picks, at least compared to several others that you can buy out there. What do you guys think about maybe Lockheed Martin first,
Ryan Henderson 33:48
Lockheed Martin, is I’m gonna need you to talk a while. Super Well,
Brett Schafer 33:53
I mean, it. Like I don’t have the notes in front of me, but they do, you know, defense contracting with in space, aerospace and a few other categories. They make a lot of the fighter jets. And they also have this huge research area. I mean, look, they’re a giant defense contractor that had been around that for decades and decades, and the industry has consolidated over the years and Lockheed. Look, they have basically one customer and that is the US government. But that relationship has been reliable over the years. Here’s an example. My family member of mine works for the US Navy. And when I went and visited their offices, they had a lot, Lockheed Martin had a separate office at their office like, like, you know, like a separate area for them. So is seems to me that’s that’s just one example of the embedded nature of these relationships between the contractors in the US government seems like it’d be pretty hard to replace lucky mark from the government. So for that reason, and we can go over the kind of cheaper valuation It’s, I liked the company quite a bit. I know seven investing covers it. I forget to hear Matt Cochrane. Yeah, he’s been one of the ones that’s covered it, they have a great capital returns program, the share count has steadily gone down and they’ve had a solid dividend. And if we’re looking at, I guess we can talk we’ll talk valuation later and kind of, because Costco is a good business as well, but we’ll talk maybe valuation why Lockheed might be a little bit more of an attractive than than Costco
Ryan Henderson 35:29
to paint some numbers. So you talked about that buyback revenue over the last 10 years has only grown by 30%. So it’s been really it’s been steady growth. It’s just like very incremental. revenue growth each year, free cash flow per share, is up 200%, roughly, in that same time period. So it’s drastically outpaced, I do not know, aside from reading a few articles about them. Obviously, they seem very, very stable. And it’s one that the US government has a vested interest in them doing well, which I generally tend to like those businesses. It seems Pon actually intended bulletproof. Yeah. So yeah, I like Lockheed Martin, haven’t done enough work as far as like understanding the valuation.
Brett Schafer 36:28
And yeah, now that’s the main risk. And this probably is the long term only. Because even if the world like, the world goes into a recession, and we’ve seen the war, you know, stuff creep up and materialize, especially in Ukraine. You know, and that’s probably why Lockheed stock is up this year, is that they’ll do well in that environment, because that there’ll be suppliers for the United States and their allies. But there’s a lot of bureaucracy at Lockheed that has been complained about and the cost overruns, and all that good stuff. And there’s been some startups that have kind of, you know, expanded, there’s Andrew will go, Gosh, and it’s a nd you are i L or something like that started by I forget his name. But there’s been some defense tech startups recently that have done quite well. And they’re winning some contracts. And I kind of if I’m an investor in Lockheed, yeah, you know, that company, you know, the startups aren’t going to win the F 35. Contract anytime soon. But we could see some incremental contract wins from some of these places that are getting investments from you know, venture capital firms are investing heavily into this now. And I think that’s probably the main risk I’m looking at if I’m looking at Lockheed Martin.
Simon Erickson 37:41
Yeah, it certainly is defensive, pun intended purpose. You know, $67 billion in revenue last year, it is so embedded, like you said, with the US government’s almost impossible to displace, and it knows what it can price contracts that you know, captures about 8 billion of that as free free cash flow, after paying all its capital expenses, all the operating expenses of the business, it’s still churning out about 13%, free cash flow margin. And it’s using that to reward shareholders through dividends, and through share repurchases about 5050 on both of those. So, you know, what you’re getting into, you know, when when times are tough. The military doesn’t want to stop making fighter jets. So it certainly is a, you know, a safer play, if you can call it that, especially during times of contraction of the government. I mean, a fair economy.
Ryan Henderson 38:25
Yeah. All right, maybe Costco? A little bit. This is the one I heard.
Brett Schafer 38:30
Yeah, this is the one that I think everyone knows, right? Is it hard to explain it’s one of the best businesses they make money through those memberships and they sell things at really low prices in giant bulk at the warehouses and they have a lot on the families across the United States and in growing part of the globe, who are trying for a cost effective way to you know, feed especially you know, people have kids the cost effective way to feed them and there’s also other perks as well that attracts members to join and retain their Costco memberships the food court with the you know, inexpensive stuff, inexpensive gasoline, they sell much cheaper than any other station and forgetting other stuff as well. But
Ryan Henderson 39:14
But go ahead, Simon, sorry,
Simon Erickson 39:16
about the dollar 50 hotdog, Right
Brett Schafer 39:21
exactly. That’s the big pole and the food grabbing that people may you know that sort of people say that in a joking manner. But the that’s part of the small incremental reason why people will come back to Costco, and while they’re there, they’ve spent a lot of money at the store and yet Costco sells most things at cost. But they’re making the money through the retention of the memberships and the growing the memberships and the potential pricing power once they eventually raised those membership prices.
Ryan Henderson 39:47
Okay, Simon, are you a Costco member?
Simon Erickson 39:50
I not anymore, but I had been in the past.
Brett Schafer 39:55
We’re not going to Costco Ryan has access to one family
Ryan Henderson 40:00
Yeah. Brad and I have deliberated over this on several occasions. What do you think is the most valuable membership that you pay for?
Simon Erickson 40:09
Definitely the free samples when you walk through the aisles?
Ryan Henderson 40:14
What about any subscription? Like in your in your daily life? What
Simon Erickson 40:19
Disney plus for us? No doubt about it? Oh, that’s
Brett Schafer 40:25
a good one. That’s a good one. So I can tell you have some potentially younger kids, maybe they’d like to watch shows over and over?
Simon Erickson 40:32
Absolutely. Yes. Yeah, sure, exactly.
Ryan Henderson 40:39
I think I would say Costco. And I think a lot of people would say that, because it just saves a ton of money across the board. And yeah, really has been one of those, like, all stakeholders when investors when employees when I guess customers have one also, and it feels like there’s no real way to disrupt it. If if I had to bet on a company to be around in 30 years, which is like, obviously a really long time horizon, it’s down. It’s probably up there. He kind of kept captured most of the business proposition. But yeah,
Brett Schafer 41:20
I mean, do we want to move into the head to head, maybe talk about I mean, he’s both seem like good businesses. But the big difference for me is the valuation now, I like to look at usually price to free cash flow, but for some reason, and I’m just looking at the reference here. So I didn’t calculate it myself. But is this just like one of the data aggregators. So Costco is price to free cash flow is a little bit inflated. I think that’s probably just a timing issue. So I’m going to look at price to earnings, which I think is probably fine for both of these businesses. Affiliate cost goes P E, it is still 37. And if I go walk heeds, it is only 23.2 and lock its price to free cash flow. So the conversion is higher, the price of free cash flow is actually only 14.7. So I think that’s just seals the deal with me Costco, yeah, there’s embedded pricing power in there, they could probably raise their you know, they could raise their memberships a good amount, and they will eventually, and that’ll flow through all to the bottom line. But Lockheed is so cheap, and still a quality business that I think that it winds the magic for me.
Ryan Henderson 42:25
What’s your what’s your score?
Brett Schafer 42:26
What’s my score? Okay, we’ll move on to the score. I think walkie I’ll put a put an eight up at Costco, just because of the price. Six, it’s just, it’s expensive for a low grower. That’s right. I mean, the business doesn’t grow that quickly. I think that’s that he
Ryan Henderson 42:44
might be in your words here in a second. Let me pull this up. But
Brett Schafer 42:50
I think you’re gonna be just wanting to see that revenue growth number. It’s not revenue growth. I can pull it up right now. Revenue Growth. Sorry, Simon. Go ahead. And while
Simon Erickson 43:00
I’m just making sure I got it correct. Eight for Lockheed and six for Costco from you, Brett. I’m curious what your scoring would be to read.
Ryan Henderson 43:12
Alright, so free cash flow per share for Costco. Yeah, it’s really hasn’t been too crazy.
Brett Schafer 43:19
Well, cashflow might be a little bit different. We’ll look at revenue growth quarter over yearly year over year growth. It’s never been above 20%. And it’s typically hovered around the 6% 12% range historically, and it’s a little bit it’s elevated recently, but
Ryan Henderson 43:36
that income was up to 2% over the last five years. So assuming that one of those we haven’t really dug in is a good proxy for earnings. It seems like Costco has been the quicker grower. I think, if I had to bet Costco was would probably grow quicker between the two over the next five years. Assuming no,
Brett Schafer 43:59
that’s fair. Yeah. No, like
Ryan Henderson 44:01
horrible. war breaks out and people really need to fund Lockheed Martin, I would think Costco would grow a little quicker. I’m gonna go with sevens for both. Now you’re not a lot of sevens. All right. They’re both equal in my mind.
Brett Schafer 44:19
You really think walkies equal Costco 37. Pe that’s high. That’s very high. For a company that
Ryan Henderson 44:27
I remember reading the stat I think Todd Wenning first put it out that between 2002 1010 You could have bought Costco above 30 times. Anytime. If you bought Costco above 30 times earnings. You would have beaten the market still over like the following 10 year period.
Brett Schafer 44:43
Well, it’s not 20,000 to 2010.
Ryan Henderson 44:46
I think the future will look a lot like the last 10 years for Costco. All right.
Brett Schafer 44:53
So what’s the eight vs. Source? Split you’re gonna be sick Okay,
Ryan Henderson 45:01
sure, yeah, seven if I could. Well, okay, so right off the bat way to get there
Simon Erickson 45:08
and eat for Costco was at eight for Costco. Ryan did I get
Brett Schafer 45:11
that right away? We tied here
Simon Erickson 45:17
so Okay, so we got a write down the middle split for this guy, so you’re gonna do a tiebreaker how we’re gonna figure out between locking.
Brett Schafer 45:24
Oh, you got to check back in three years and see what stock did better than one
Simon Erickson 45:31
on that one. So to recap, you know, we kind of went with three different categories for the game here. The first recall the stocks are down 90% Or more peloton versus upstart peloton, had an average of 3.5 was the average for that one and upstart we gave an average of five. In the secondary fallen pandemic winners. We had Roku versus Shopify, we had Shopify 4.25, and Roku at five and then here at Lockheed versus Costco. Still a dead tie between the two right at seven. I think that’s a perfect number. For seven investing podcasts. We’re gonna follow up and come up with a tiebreaker going forward for these. Any final thoughts? Guys, as we wrap up the game, a lot of stocks we talked about here today.
Ryan Henderson 46:14
This is fun. I would say. I don’t think I think of the six we talked about today, the two that we probably know really well are Roku and Shopify. The rest of them were a little off the cuff. So if if we got any shareholders out there many of these businesses
Brett Schafer 46:31
of any Yeah, we could have gotten a few things wrong there. It’s just kind of a fun discussion. Feel free to give us a hard time. Yeah. But either way, right now is a great time to be investigating stocks, lots of deals out there. I think. I think a lot of people would agree. So whatever, even if it’s not the six stocks, there’s a lot of stuff out there and a lot of a lot of good research going out center investing, you know, we do with the DVDs and stuff as well. So yeah, I mean, that’s it.
Simon Erickson 46:57
Well share your thoughts and how you would scared or you would score these companies personally at seven investing there on Twitter or info at seven investing, if you’d like to send us an email. And if you go to seven investing.com/subscribe and use promo code money, you get the best deal of all which is $100 off of our annual rate. Brent Ryan, we’ve been partners for years, you know, it’s always been a pleasure having you on our podcast. Thanks again for being here with me this afternoon.
Ryan Henderson 47:21
Yeah, thank you, Simon. Appreciate it. Pleasure to join.
Simon Erickson 47:26
Reminder for everyone that you can also listen to Brett and Ryan more often in their own podcasts. That’s chit chat money. If you want to follow along with him. They provide some excellent excellent and thorough analysis on several stocks in the stock market today. That’s a wrap for today’s episode of the seven investing podcast. My name is Simon Erickson. We’re here to empower you to invest in your future. We are 7investing!
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