Loading summary
Transcript25 lines
- [00:02]
A
Amazon's next target is shipping on Motley Fool. Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. As we've said before, new name, same great podcast. I'm Tyler Crowe. I'm your host. Today, I'm joined by longtime fool contributors Lou Wightman and Matt Frankel. As I mentioned in the headline, we're going to talk about this new move that Amazon is doing by going into the shipping and logistics business in ways that they've never done before. Also, we're going to answer some listener mailbag questions. But first we want to start with the topic that we started to the day. It is earnings season, so we wanted to get into earnings at Shopify. Shares of Shopify are down about 9% as we are taping this podcast today. And it was down as much as 10% both in pre market and early market trading this morning after the company released first quarter earnings of all the three of us here I am kind of the non Shopify follower hero. So I'm going to lean on you guys. But when I first looked at the press release, I would say in a vacuum, the numbers looked fine. You know, revenue was up 34% year over year. Gross merchandise volume, which the amount of stuff that was bought on its platform would pass a hundred billion for the first time. Net income, taking out some investment gains and losses that aren't really related to the actual operating business, was 360 million. Though here's the knock, it did miss expectations for the quarter. And this is the second quarter in a row that it actually missed Wall street expectations for operating earnings. So guys, I want to get your thoughts on this. And was this missing Wall street earnings for the second time kind of adding to AI jitters? Was it maybe just Wall Street's expectations being a little too high? Like when you saw these results, how did you look see at them? Matt, let's start with you.
- [01:47]
B
Well, like pretty much any other stock in earnings season, it's all about expectations. Shopify grew revenue by 34%, but they're guiding for full year revenue growth in the high 20s range. And you know, if you have 34% in the first quarter, high 20s the rest of the year, the law of averages tells you you're going to have a slowdown as you head into the rest of the year. I'm not as worried about the net income number and the net income miss. I don't think that's what's driving the stock here. If a company's growing sales at 34% year over year and is profitable Then you know, that's great. In and of itself. Shopify is in a very investment heavy phase right now, as you mentioned. It's trying to keep up with AI headwinds and things like that that can make bottom line income kind of lumpy. But we really need to show the revenue growth to justify the spending. So it needs to keep revenue growth at an elevated and enough level. And it doesn't sound like they gave an optimistic enough outlook to satisfy investors with the stock trading at 65 times forward earnings, more than 12 times sales, whatever metric you want to use. It's an expensive stock.
- [02:50]
C
Yeah. And that's the thing. It's funny because we're all guilty of it. We all like scoreboards, right? So we look at what the stock is doing and say, bad quarter, bad company. Good quarter, good company. And sometimes, usually it's not that simple. Tyler. Yeah, it looked good in a vacuum. It looked good in a dustbin. It looked good in a Swiffer. It looked good. This was a good quarter. But everything is relative. Valuation is returning to earth, but arguably not yet on earth. And when you trade at a premium, you are expected to deliver a premium return. Shopify's guidance doesn't clear the bar for me. Apparently it doesn't clear the bar for the market either. And I think that's basically, you know, not company bad, company good. I think that's the conclusion I'd note here too is like, oh, if you look at 5 years, Shopify is basically flat. They're like up, I think 1% now. They've been up 80% and cut in half during that period. So this is a company that tends to swing violently around different moods. I own the stock. To me it's a definition of a hold. If it comes down, it may begin to look interesting to add to it. But we also have the weaker consumer still looming. As a question mark, I think this is just focus on the long term and not get too caught up on 20% versus 30% in any one quarter.
- [04:07]
A
Matt, I want to dig a little bit more into what you were mentioning about this being an investment heavy phase for the company. Because this is something that I found a little peculiar. As I was looking through the press release, I was looking at the financial statements and this is where it gets. Something feels different for me and I'm trying to figure it out. It has lots of cash and it also holds a lot of equity in long term investments in other companies. Relative to the total balance sheet of its size, I would expect high amount of investments in Other companies, if it was like an insurance company or something like that, going out and making investments, investing in the float. But this is an e commerce software and platform company that's looking to invest in its platform, looking to build out better multichannel solutions for its clients as well as fending off this world of AI. Like how does Shopify fit in this world of AI? And yes, the company throws off a lot of free cash flow and it has more than its needs. And so holding onto equity is not a big deal. But three quarters of its balance sheet is either cash equivalents like Treasuries or investments in other companies. Now, considering the quarter missing earnings expectations, being in this investment heavy phase, as you mentioned, it seems like something's not squaring here. Is either management's, I would say, like distracted by, you know, side quests of owning other companies rather than dedicating and allocating that cash back into the business to build out what it wants to do. Now, Lou, I want to start with you and then we'll get to Matt.
- [05:39]
C
So look, they haven't done a secondary offering since 2021. They have almost no debt. They don't seem they are investing with free cash flow. I wouldn't sell these investments just because. Unless you need to. And it doesn't look like they need to. Matt can get into it. I don't think that this is really a distraction on management's time. I don't think they're out doing the Warren Buffett thing, reading through 10Ks, trying to find companies to invest in things like this. This is trying to capture upside of partnerships, I think Matt, I mean you can get into that. But this to me, I don't have a problem with.
- [06:15]
B
You correctly pointed out that three fourths of the balance sheet is investments and cash and equivalents, which I'm a big fan of having a lot of cash and equivalents on the balance sheet first of all. So that's a big positive for Shopify. But for the most part, and Lou kind of mentioned this, the outside investments were the results of partnerships. For example, the largest investment Shopify has in a publicly traded company that's not Shopify is affirm. They own a roughly one and a half billion dollar stake. And it started when a firm became the exclusive provider of shop pay installments. Even before they went public. They granted Shopify warrants as part of the deal at a $0.01 exercise price. So it was really a deal sweetener to be, you know, we want exclusivity on your new product and we'll give you some equity in our company. A similar situation occurred when Global Eve formed a cross border logistics partnership with Shopify in 2021. They got equity as part of the deal. And Shopify's management has specifically said several times that these investments aren't relative to the fundamentals of its business. They're not what management's focused on. They're smartly negotiated perks in exchange for partnerships, not a core part of their strategy. Like after all, like I said, a firm literally costs next to nothing. I don't dislike this part of the strategy. I don't think it's a distraction from management.
- [07:28]
A
Okay, that's fair. I mean, I guess looking at again in the vacuum, less familiar, you see all these equity investments, you're like, that doesn't make a lot of sense. The one thing I would point out though is that this is a company that does use a lot of stock based compensation and throwing off a lot of cash while throwing off a lot of stock based comp. You know, maybe start using some of that cash to pay some investors or pay your employees and you know, let the investors not get diluted as much.
- [07:51]
C
I wouldn't argue against that at all, Tyler.
- [07:53]
A
Coming up after the break, Amazon's daring move into supply and logistics.
- [07:57]
C
Get a concise daily market preview from Charles Schwab, including stock updates, U.S. and global economic news, monetary policy decisions and key results and statistics that may impact your trading. Schwab Market Update is an original podcast from Charles Schwab. Join host Keith Lansford for this information packed daily market Preview delivered in 10 minutes or less. Listen today@schwab.com MarketUpdatePodcast or wherever you get your podcasts. That's schwab.com Market Update Podcast.
- [08:29]
A
The transportation and logistics industry kind of got rocked yesterday after Amazon announced it was launching Amazon Supply Chain Services that would allow third party businesses to use Amazon's existing supply chain network that it uses for its internal shipping and transportation and all that stuff and allow those third party businesses to basically latch on and use these services just like it was cloud services or any other pay for type of service that Amazon provides. Now there were dozens of companies in trucking, shipping, logistics stocks that dropped sharply on the news. And I think the biggest examples of it, and probably the most well known names that this happened to was companies like UPS and FedEx both declining nearly 10% on the move. So I want to get into this question here is, is will this really upend ups and FedEx? I mean we can go in a lot of different ways. But the supply chain offering is much more than just shipping for what Amazon's doing. It's doing fulfillment, storage and warehousing, air and ground freight. Its ability to do store fulfillment, letting customers use its in house multi channel fulfillment software and integrations. This is not just like, you know, give us your stuff and we'll ship it for you. So my question is, is this the type of solution that would allow someone to buy logistics, a box solution and kind of bypass a lot of this other stuff? I would say kind of rendering ups, FedEx, I wouldn't say obsolete, but definitely less relevant. And I think it's a lot more on offer here than what a basic shipper can really can.
- [09:56]
C
Yeah, it's interesting because for one thing we don't know exactly what Amazon is going to offer here. They didn't really get into details reading between the lines. I don't think they're targeting logistics in the box like do the whole thing. I don't think they really necessarily want to get something to the house. They are doing B2B. So if you think about it, if you're say Honda and you are shipping parts to dealerships all over the country to get those parts from the Port of Los Angeles to all your dealers, store them until the dealers need them, that's the part they're going after. It's more predictable, it's more lucrative. And I think the concern for a ups or a FedEx is that if their margins disappear there, it puts pressure on the entire system. It makes some of the less profitable parts of the business that are maybe kind of subsidized by the B2B by this back office. It puts them at risk. All in all, I'm kind of curious. There's a weird kind of tension here between did Amazon really substantially overbuild to the point where they could actually take on even just a fraction of what UPS and Amazon has? Or are they going to commit billions in capex here to build this out at the same time they're building data centers, it has to be one or the other and I doubt it's A and I don't think they're going to be B. So I think they're a player here, but I don't think they're just going to annihilate everyone or take everyone's business.
- [11:22]
B
Yeah, Lou kind of alluded to this, but commercial freight, which is what he's talking about there with the Honda parts and things like that, that's the highest margin part of FedEx and UPS's business, period. Amazon, it specifically named some lucrative customers. Honda wasn't one of them, but Procter and Gamble and 3M were, and those are major shippers. Even if Amazon doesn't completely disrupt the businesses of FedEx and UPS, the emergence of a major player like Amazon, it does create pricing pressure. Especially because Amazon, with excess capacity like Lou mentioned, has, at least at the start, a favorable pricing structure. There's a solid argument to be made that if there was a real threat of disruption, we would have seen these stocks down more than 10%. If Amazon took a 10% share of the market, the hit to FedEx and UPS on the bottom line would probably be Significantly more than 10%, especially when you think long term. So I'm not that worried. I think it's really just a knee jerk reaction.
- [12:17]
A
Yeah, and here's the other part I'm trying to figure out too is from the Amazon side is the why now? Obviously UPS has been struggling a little bit lately with its decision to kind of shrink, to focus on B2B, to focus on healthcare shipping, less volume, more margin kind of business. Kind of what Amazon seems to be attacking here. And maybe it's a strike while the competitors are down or something like that. But what is most curious to me about Amazon's decision now, this is in the midst of a massive AI infrastructure buildout that it's taking on. It's hundreds of billions of dollars in capital to make it happen, not just this year, but for the next several years. Amazon's capital expenditures are in the $175 to $200 billion range already. So now we're going to layer on spending to meet growing supply chain and logistics businesses. I mean, yes, it has an existing system already, but if you were going to start taking on volume for the third parties, it's obviously going to require more capacity. And so I'm curious as to why go into this when you have this lucrative AI infrastructure section that you're going into? It makes me wonder like, how much money do you want to spend? Because this is already tallying up to be a very large bill.
- [13:29]
C
Why now is a great question. And to some extent the answer is this was always the plan. So it might just be they've built out the critical mass to make it possible. That took time. And so they're just doing it now because they can. Tyler. I do think that this could be a sign of a capital constrained company because the weird thing about this is they have to build all of this for their own business. And so instead of adding capex in a way, this offsets Capex if you can monetize some of it, turn it into revenue. So in a world where Amazon does have to continue to scale logistics and they are trying to spend billions in a data center, maybe trying to get some of that logistics spending covered by third parties, if you think of it that way, instead of just kind of investing in the business kind of just for the revenue, I think it might make more sense. But again, I do think it speaks to what Matt was saying. It speaks to the limits to the ambitions here in terms of just wiping out an industry versus just trying to generate some revenue off of it.
- [14:33]
B
Yeah, this move might not require as much Capex at first as you might think. I mean, Amazon has just to give you some of the numbers, over 200 fulfillment centers already, over 80,000 trucks, 100 cargo aircraft that it owns and more. And it has excess capacity right now. And being able to fill that capacity cheaply is a big advantage to getting this started. But the idea is by the time Capex is needed, this will have been a proven business model. But on the other hand, FedEx and UPS have significantly greater capabilities when it comes to things like ocean freight, freight forwarding and other critical areas of the process that Amazon would have to spend heavily on. So it is a really good question, the why now? Why is this the optimal time to build this out?
- [15:14]
C
One thing I'd caution people on too is that the data center comparison is obvious with aws. I don't think it is a great like for like though, because chips are chips, data center is data center. You know, it's kind of just, if not commoditized, it's pretty close with this. What we're talking about is basically carving out a section of an Amazon warehouse for someone else's stuff. There are going to be some customers where that's very attractive. But GXL Logistics was one of the companies, was down almost 20%. What they are offering for a company like Apple is we're going to run your own warehouse, we're going to manage your inventories, we're going to manage all of that in a dedicated facility. I can't speak for Tim Cook, but I doubt Tim Cook wants all of his inventory just piled into the back of random Amazon warehouses. Capacity where you have it matters. Unlike data centers. I don't want to whistle past a graveyard here. I think there's a real threat to these companies, but I do think that it's going to be harder in practice than it is maybe just with data centers. And some of the other areas, I think these other companies can survive and thrive even with Amazon.
- [16:23]
A
Yeah. And it will also be an interesting topic to follow because perhaps we're being slightly market reactionary here. But obviously you hear shipping and logistics like oh, they're going after Amazon and ups, but they're and like I said at the top there are dozens of companies in the supply chain and logistics, whether it's freight forwarding, whether it's ground transport, less than truckload trucking. This could be a disruptive in a lot of different sectors and it'll be interesting really drill down and to figure out who is going to be affected the most. And you know how we can better invest in this. This was a thing that came out yesterday and I feel like this is something like a long term deep study project that would be worth coming up for the next couple of months. Unfortunately, this is a 20 minute podcast so we can't do that right now. And after the break we're going to hit our mailbag. Hey, it's Parker Posey. How did I get here? I love improvisation when it comes to acting, but when it comes to a
- [17:16]
C
real life plan, I stick to a script.
- [17:18]
A
Cue the music.
- [17:20]
C
Invest in your story with dia, the only ETF that tracks the Dow from State Street. Getting there starts here. Before investing, consider the fund's investment objectives, risks, charges and expenses. Visit statestreet.com im for prospectus containing this and other information. Read it carefully. DIA is subject to risks similar to those of stocks. All ETFs are subject to risk, including possible loss of principal. Alps Distributors Inc.
- [17:39]
A
Distributor hey, just a quick reminder, if you want to get your questions into us, we love answering them. You can email us@podcastool.com that's podcastsool.com I've been saying there's two requests, but I feel like my laundry list of requests for this are getting longer and longer. But number one, keep it foolish. Number two, keep it relatively short so I can answer it on air. And three, we do have to remember we cannot give personalized advice. So if you want to ask a question, we can share our thoughts and opinions. But please don't misconstrue anything that we say to be personalized advice for anybody asking any questions. So with that guidance and disclosure, whatever you want to say. Our email today comes in from Pranjal Suntar. I hope I pronounced that name right. I apologize if I got it wrong. And here's this question. Hi Motley fool team. I'm a regular listen to the podcast. I'VE been having trouble executing or the refining the strategy of letting the winners run, or just buying and holding through the ups and downs in the market. I'll take two examples to showcase his dilemma. I'm long term bullish on two companies, Axon Enterprises, Axon and Sterling Infrastructure Strl. Both of them I've trimmed because I felt the valuation was too high, one I got right, one I probably got wrong. At times valuation seems too high and feel like taking the gains. But you can lose the long run of these stocks and never get a reentry if they continue to win. So any thoughts on how you guys like to manage this? Cheers. Matt, let's start with you.
- [19:08]
B
My short answer is the reasons for the profit taking matter. So for example, I've done this in the past. If the valuation became too high and became too high of a percentage of my portfolio for comfort. So even though if it ends up going higher, in my case it was Apple that I sold for that reason, it's not necessarily a bad move. But in general I ask myself, is the higher valuation justified by the recent results? Do I believe in the ability of management to keep the growth story going? And above all, do the reasons I bought the stock in the first place still apply? So I don't necessarily think you make a bad move by trining, especially if you have valuation concerns, but it really depends on the specifics of the situation.
- [19:51]
C
Yeah, sterling's up 47% last I looked today. That's brutal. And I get it. And I don't know if I've ever been there where 47% up a day on a stock I sold. But it feels terrible and I get that. I gotta say though, taking profits to me is never a terrible thing. So I do try and appreciate the fact, well, profit is good. I don't think there's a perfect formula. The closest thing is something Matt said is that I try and look at the reasons I bought in the first place and ask are they still valid? And if they're still valid, I'm probably one to hold on. But if not, or if the thesis has played out or I just got lucky and the reasons I bought weren't the reasons that went up, maybe that's a reason to look elsewhere. That's really hard to do. It's a good reason to write down or at least remember the reasons you buy, whether you journal something like that. But again, for me, I try to stay with something as long as I believe it, whether the stock is doubled in price or cut in half. And that's a lot harder in practice than it is to talk about.
- [20:57]
A
Yeah, I mean, there is no great answer to this because if everyone knew exactly how to execute the letting your winners run strategy, I think we'd all be incredibly good at this and everyone would be rich and nobody would have to worry about asking questions like this. But this is really that intersection of the emotional aspect versus the rational aspect, because valuation does have this very emotional component for it. How much am I willing to pay for growth? Or how much am I willing to pay for value? I mean, valuation regardless the type of stock is going to come into it some way or the other. Sometimes valuation is less of a concern, depending on the company, but it always is. In the back of your mind you see a large price gain and you're like, wow, can I really do much better? And to both Matt and Lou's point, it really depends. It depends on the growth trajectory of the business, whether they can maintain it for a long period of time and sustain it for years to come. If that's possible, then, yeah, then letting your winners run is great. But if you start to look at the fundamentals of the business, perhaps the thesis has changed, perhaps the growth is slowing. It's a cyclical business. All these things have to be considered. There is no tight, neat, perfect formula for any of this, and unfortunately, that's not the most satisfying answer for investors. But that's why it's hard. That's why we like to talk these things out. And it's why we like to answer your questions, because it makes it a lot of fun, interesting and engaging. But that's all the time we have for today. And I want to thank Matt and Lou for sharing our thoughts and I'm going to hit disclosure and we'll get out of here. As always, people, 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. All personal finance content follows Motley fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our advertising disclosure, please check out our show Notes. Thanks for our producer, Christy Waterworth and the rest of the Motley fool team. For Lou, Matt and myself, thanks for listening and we'll chat again soon.