Motley Fool Money: Episode Summary – "Cyclical Stocks Cycle"

Release Date: February 13, 2025
Hosts: Dylan Lewis, Ricky Mulvey, and Mary Long

In this episode of Motley Fool Money, hosts Ricky Mulvey and Alicia Alfieri delve into the performance and future prospects of key cyclical stocks, dissecting recent earnings reports, market reactions, and broader economic impacts. The episode offers investors a comprehensive analysis of companies like The Trade Desk, Robinhood, and Celsius, while also touching upon unexpected topics like the egg shortage crisis.

1. The Trade Desk's Unexpected Earnings Miss

Overview:
Ricky Mulvey initiates the discussion by highlighting The Trade Desk’s recent earnings report, which marked the first time in 33 quarters the company fell short of its own guidance. Despite a robust 26% year-over-year revenue growth, the market reacted negatively to the miss.

Key Points:

• Business Performance:

  • The Trade Desk, a demand-side advertising platform, showcased a 26% revenue increase, surpassing the broader digital advertising market.
  • CEO Jeff Green acknowledged the miss, stating, "If this were a sporting event, we'd still have a championship caliber team. But in this particular game, we turned over the ball too many times." (02:41)

• Market Reaction:

  • Alicia Alfieri explains that The Trade Desk’s stellar historical performance has embedded high valuations and expectations, making any deviation a trigger for negative market sentiment (01:10).
  • Despite missing earnings, the company boasts a 95% customer retention rate over 11 years and has been a consistent top performer since its IPO in 2016.

• Future Outlook:

  • Value drivers identified include increased connected TV spending, challenges with Google’s advertising dominance, and the introduction of AI platforms like Kokai.
  • Alfieri emphasizes that while the miss is notable, it doesn’t "make or break a thesis" for long-term investors (05:03).

Notable Quote:
Alicia Alfieri reflects on the significance of the miss: "This is the first time in something like eight years that they've missed their expectations. And so we can give them a little bit of the benefit of the doubt, especially if we look back historically about how they grew and performed." (04:27)

2. Robinhood's Stellar Quarterly Performance

Overview:
Shifting focus to Robinhood, the hosts discuss the platform’s exceptional quarterly results, driven largely by a surge in crypto trading activity and record net deposits.

Key Points:

• Earnings Highlights:

  • A staggering 700% increase in revenue from crypto trading.
  • Net deposits soared to over $50 billion, a nearly 50% growth rate surpassing traditional brokerages.
  • Net income skyrocketed by 10x to $916 million compared to the previous year.

• Revenue Composition:

  • Transaction-based revenues, including equities, options, and crypto trades, outpaced net interest revenues for the first time (08:19).
  • The Legend platform, targeting active traders, contributed significantly with a $50 million annualized revenue rate.

• Cyclical Nature:

  • Alicia warns that trading activity is often cyclical, thriving in boom times but susceptible to declines when markets turn bearish (10:59).
  • The hosts caution investors about potential volatility and the importance of understanding the cyclical dynamics before investing.

Notable Quote:
Ricky Mulvey uses a sports metaphor to encapsulate Robinhood’s potential vulnerability: "This is a service a lot for retail folks. What did you learn about how people are investing and trading right now?" highlighting the platform's reliance on active trading cycles (09:50).

3. The Egg Shortage Crisis: Economic Implications

Overview:
In an unexpected turn, the conversation shifts to the soaring egg prices and the resulting shortages caused by avian flu, exploring the broader economic repercussions.

Key Points:

• Causes of Shortage:

  • Avian flu has decimated the egg-laying chicken population, leading to a drastic reduction in egg availability.
  • Wholesale egg prices have surged to over $8, severely impacting retailers and consumers.

• Economic Impact:

  • Large retailers like Costco can absorb the increased costs due to their bargaining power and long-term contracts.
  • Smaller businesses, such as diners and cafes, face tighter margins and may pass costs onto consumers, exacerbating food prices and consumer strain.

• Industry Responses:

  • Waffle House introduced a 50-cent surcharge on eggs, reflecting the industry's struggle to manage costs (12:36).
  • In contrast, Cracker Barrel opted to maintain egg prices, emphasizing customer hospitality over immediate cost recovery.

Notable Quote:
Alicia Alfieri relates the situation to her personal experiences: "I didn't think we would be talking about Cracker Barrel today, which is one of my parents' favorite restaurants. I would say again, in the short term they can perhaps hold those prices steady." (13:48)

4. Celsius’ Rebranding: From Energy Drinks to Hydration Provider

Overview:
The latter part of the episode transitions to a detailed analysis of Celsius, the energy drink company undergoing a strategic rebrand to position itself as a broader hydration provider.

Key Points:

• Rebranding Strategy:

  • Celsius is expanding its product line to include hydration sticks with B vitamins and electrolytes, aiming to cater to consumers seeking less caffeine (16:06).
  • This move is seen as a brand extension rather than a complete overhaul, complementing their existing energy drink portfolio.

• Market Competition:

  • The hydration powder market is booming, projected to reach $2.5 billion by 2029.
  • Competitors like Element, Liquid IV, and Gatorade are notable players, intensifying the competition for Celsius.

• Distribution Challenges:

  • Despite a promising partnership with PepsiCo aimed at enhancing distribution, Celsius has faced inventory issues, leading to short-term frustrations for shareholders (19:26).

• Valuation and Growth Prospects:

  • Celsius’s valuation has normalized to around 30 times earnings, aligning with mature competitors like Monster and Coca-Cola.
  • Analyst Sanmeet Deo asserts that while past growth rates have slowed, Celsius still holds significant long-term potential compared to its peers (21:08).

• Investor Sentiment:

  • A lack of insider buying raises concerns, yet Deo encourages holding onto the stock, emphasizing the brand's continued presence and influencer endorsements (22:40).

Notable Quotes:
Sanmeet Deo advises patience for shareholders: "All great growth stocks tend to have these massive drawdowns where it shakes out people. You wonder if this is a true growth story, but you want to hang on if you think it even has the possibility." (22:40)

Ricky Mulvey connects the rebranding to broader health trends: "You're seeing this trend in your life. People are more interested in being healthy. And I think it's starting to show up in a lot of the earnings results." (24:55)

Conclusion

The episode of Motley Fool Money effectively navigates through the intricacies of cyclical stocks, providing listeners with a nuanced understanding of the factors influencing market performance and investor decisions. From The Trade Desk's high expectations and Robinhood's trading surge to the unexpected challenges in the egg market and Celsius's strategic rebranding, the hosts offer valuable insights for both seasoned and aspiring investors.

Final Thought:
As Ricky Mulvey aptly summarizes, investing in cyclical stocks requires a balance of recognizing growth opportunities while being mindful of inherent volatilities. Whether it's navigating the digital advertising landscape, capitalizing on active trading platforms, or adapting to changing consumer preferences in the beverage industry, informed decision-making remains paramount.

For more in-depth analysis and daily investment insights, tune into the next episode of Motley Fool Money.

Timestamp Key:

• 00:27 – Initial greetings
• 01:10 – Alicia on The Trade Desk’s performance
• 02:41 – CEO’s sports metaphor explanation
• 04:27 – Market expectations and accountability
• 05:03 – Long-term investment perspective
• 08:19 – Robinhood’s revenue composition
• 09:50 – Active trading on Robinhood’s platform
• 10:59 – Cyclical business nature of Robinhood
• 12:36 – Economic impact of egg shortages
• 13:48 – Cracker Barrel’s pricing strategy
• 16:06 – Celsius’s rebranding strategy
• 19:26 – Distribution challenges with PepsiCo
• 21:08 – Valuation and growth prospects of Celsius
• 22:40 – Investor sentiment on Celsius
• 24:55 – Health trends influencing market sectors