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Transcript87 lines
- [00:00]
Lou Whiteman
Foreign.
- [00:06]
Travis Hoyam
Season has begun, but the drama at Netflix is where we're going to start. Molly, Fool Money starts now. Everybody needs money. That's why they call it money. But you can give them to the.
- [00:37]
Lou Whiteman
From Fool Global headquarters. This is Motley Fool Money.
- [00:40]
Travis Hoyam
Welcome to Motley Fool Money. I'm Travis Hoyam, joined by John Quast and Lou Whiteman. Guys, we got to start with the drama at Warner Brothers Discovery. This week, Paramount is begging the EU for help. Netflix has reportedly considered changing its bid to all cash. Remember, there was a piece of that value that they're saying that, that shareholders are going to get through the spin off of kind of the cable assets. The early trading at Versant has not gone very well. That's a spinoff from Comcast. Lou, what. What's going on here? Because it seems like there's a lot of moving pieces. The board at Warner Brothers is pretty resistant to Paramount. And depending on how you look at it, that either makes sense or you just want the most money and that's where they should go.
- [01:24]
Lou Whiteman
So I'm going to make a bold prediction here because you're right. There's a lot going on, a lot of moving pieces. But really, it's very simple. One of two things is going to happen. Either Netflix is going to end up buying Warner Brothers Discovery or there's not going to be a deal done. All right.
- [01:40]
Travis Hoyam
You don't think Paramount can actually get a deal done?
- [01:43]
Lou Whiteman
Look, Warner Brothers Discovery's board has already decided what they think. And for the upstart acquirer to try to poison the well in Europe and try and just kind of salt the fields, that's not going to help. Going score search really only helps when you are the bully, when you are the one that can dictate terms. If you're an underdog, you can't overwhelm this opposition. I don't see this going well. I think this is only going to get uglier. It's possible that what Paramount's trying to do will work and the deal will get blocked, but it is going to be a long time, I think, before the WBD board says, oh, you know what, nevermind, Paramount is the right choice.
- [02:25]
Travis Hoyam
What is the thinking there? Because it seems like you should just take the higher bid and if Paramount actually has the higher bid, that's what you do. But there's execution risk here. So what is the argument for just sticking with Netflix through thick and thin?
- [02:41]
Lou Whiteman
Well, for one thing, higher bid is sort of up for the bait because as you said, the Paramount bid is for the whole company. The Netflix bid is the whole company minus the cable assets. So it kind of comes down to what you might think those cable assets are worth. You know, what is going to give a shareholder more value? The other side of it, you never know in the back in the, you know, like just behind the scenes. It could be relationships, it could be golden parachutes, or it could just be.
- [03:12]
Travis Hoyam
You're saying there's egos involved in Hollywood.
- [03:15]
Lou Whiteman
There are. And it could simply be is that, you know, and we've talked about this offline, Paramount is a much smaller company in either of these. You know, they are doing everything they can to look big and to present themselves as a good option. But look, there's risk anywhere you go here. I think there's real risk there. And Netflix, look, this is a big deal for them, but they can handle this. They are more, I think, of a known entity, a trusted partner. If all else is equal, I can see the board saying, let's go with this. Let's go with this trusted partner. Whatever the cable upside is, we're preserving it for our shareholders and get a deal done.
- [03:53]
Travis Hoyam
The analogy that we were talking about was taking the higher offer on selling your house, but you're selling to somebody that doesn't. Isn't yet approved for a mortgage. So, you know, you just increase the risk of that deal actually closing. I want to just bring some stats in here for Versant, which is the spin off from Comcast, that started trading about a little less than a month ago, that has a $4.8 billion market cap. The shares have gone from about $45 per share down to $33 per share. So that's sort of the, you know, maybe these cable assets aren't worth anything. Paramount has actually argued that the, the equity will be worth zero, which, wait.
- [04:29]
Lou Whiteman
4.5 billion isn't nothing, though.
- [04:31]
Travis Hoyam
Yeah, it's something.
- [04:32]
John Quast
Yeah.
- [04:33]
Travis Hoyam
John, what are your thoughts when you look at this deal? Because there's just so many, not only egos involved, but weird financial implications as well.
- [04:42]
John Quast
Now I get it. For, for Paramount, it's homecoming in the streaming service space and Paramount's running out of dance partners. I mean, there's consolidation happening and, you know, Paramount doesn't want to be the smallest player. So I get why it wants Warner Brothers, but, you know, it's very hard for it to pull off because it is such a small player. Netflix is going to be a lot easier. It's going to have much easier access to the capital to get this deal done. I'm still not convinced though, that this is a great move for Netflix. And I will give an example here of Disney acquiring fox back in 2019. Disney stock has underperformed since it did that move, and a big part of that is how much leverage it took on to make it happen. And so this would be a big move for Netflix. I don't know where it's gonna come up with all the cash either. Maybe some debt in that mix, maybe some equity. I'm not sure where that all comes from, but it's the one that can get the deal done for sure and it's gonna be able to do it a lot faster. And I think that's what it's trying to do by potentially switching that bid to all cash. Get the deal done as, as quickly as possible before too many people ask questions or a dark horse comes in with a competing bid.
- [05:55]
Travis Hoyam
Well, let's talk about some of those potential downsides if Netflix does get this deal done and they do it with cash. So let's say they have to take on a whole bunch of debt. Your analogy is that, yeah, Disney kind of hamstrung itself for a while there. They paid down some of that debt. The operations have gotten a little bit better coming out of COVID But you know, there are downsides of having that interest payment and that leverage. Maybe you can't bid on the next big football deal coming up, by the way. That's going to be in the next few years. You know, Disney's big advantage in the media space right now is they have all these theme parks. Netflix is trying to kind of move into this physical experience world. Do you still have the cash to do that? Build out a 5, 10, $15 billion theme park? If you've got $80 billion worth of debt, is that the risk that you just reduce your flexibility or what should you be worried about if you're a Netflix shareholder taking on a bunch of debt?
- [06:51]
John Quast
John, I think that that was the exact word I was going to use is flexible. You're just so much more flexible when you don't have a high debt burden and when you are generating a lot of cash, you have a lot of options on the table. You boost that debt up, you take the options off the table a little bit. And I'm not saying that it can't be a market beating stock, but your attention really becomes more devot on maintaining and running the business rather than how are we going to invest into growing the business for the next big thing.
- [07:22]
Lou Whiteman
So I don't want to be too Pollyanna here. But let's look at this. Okay. For one, the original deal was about 60 billion in borrowings for Netflix. They've already signed deals to get rid of the bridge on about 25 billion of that, which is going to help their interest rates. They generate 7 to 8 billion in free cash flow a year. Disney, it was a third of that or a quarter of that back in 2017 when they announced the Fox deal. I'm not going to say this is easy for them. Obviously, I agree that, you know, no debt is better than debt. But I think they can handle this. And look, yes, I think what Netflix is telling us is they need this. They, you know, I mean, look, they wouldn't be doing this if not. I mean, this isn't a luxury. They are looking at the world. Yeah, Travis, they may want to compete for boards. They've done a pretty good job transitioning from a world where everyone was desperate to sell them their content because it was added revenue to nobody wants to sell them that content because everybody's got a streaming service. They've done a good job adjusting to that, going to Korea, going elsewhere to find content. But that's hard. And I think I trust this management team. It's the smartest management team in the business. I don't think they would be doing this for empire building, doing it willy nilly. They know, yes, this is going to change our profile. But I think, you know, as a shareholder or I'm not a shareholder, but if I was a shareholder, I would trust this management team to set the course. And they are saying this is a, this is something we really need to make our lives easier, to make the company better versus this would be fun to own.
- [09:01]
Travis Hoyam
And that seems really shocking to me because even when this deal was announced, I, I think we talked about on, on Motley Fool Money that this seemed like a defensive move from Netflix. And they have not been playing defense for 20 years. And what they really need to think about and investors need to think about is that it's not really paramount, that they're probably worried about. It's YouTube. And the sort of random deal that came out yesterday that caught my eye was Sesame street is going to now be on YouTube. And if YouTube is already very popular for, for kids, there's more people streaming YouTube than Netflix. There's more revenue at YouTube than Netflix. But if the default for Sesame street for sports, for, you know, the award shows now moving to YouTube, that seems like an issue for Netflix. What do you think, John?
- [09:53]
John Quast
It's so crazy to even Imagine that we're underestimating YouTube right now because of how big it is and how popular it is. But I think that that's the case and I think that's the case with a lot of Google things. We'll probably talk about this later in the show, but it has such a massive scale in reach and distribution that there are a lot of options at Alphabet's disposal. And I think that the sesame street with YouTube is just another example of that.
- [10:20]
Travis Hoyam
Quick question for both of you. I'll start with you, Lou. At what point is Netflix stock a no brainer? Because I'm starting to get interested. We're down about 33% from the highs $400 billion market cap. Where do you start going, man? This is too cheap to pass up.
- [10:35]
Lou Whiteman
I mean, there is risk here. I think if you're a long term investor, though I do think Netflix, like I said, they have the best management team. They have a huge, huge customer base. I think if you got a long enough time horizon and you're willing to ride out the volatility, I don't know when it isn't a no brainer. So I think if you're interested in buying, then yeah, I do think whatever happens in the next six months, year, I like the chances of them making it work.
- [11:04]
John Quast
In the long run, I'd say it's probably lower to be a no brainer. I think it's probably a brainer here though. I mean, if you take some time to look at it, assess the risks that we are talking about, it could probably turn out to be a good investment.
- [11:16]
Travis Hoyam
Today when we come back, we're going to talk about the changes at Tesla and fsd. You're listening to Motley Fulmination.
- [11:25]
Dan Boyd
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- [12:33]
Travis Hoyam
Welcome back to Motley Fool.
- [12:34]
Lou Whiteman
Money.
- [12:35]
Travis Hoyam
FSD has had an up and down year for Tesla. Robo taxis began testing in Austin last summer. By now, we were supposed to see FSD driving fully autonomously all across at least the us that clearly hasn't happened. But the big news this week, Lou, is that pricing is changing. They're getting rid of this $8,000. You own FSD forever to go into a monthly or yearly subscription. So I think the most common would probably be paying $100 per month for FSD. What should we take away from this, not only for people who own a Tesla, but also Tesla shareholders?
- [13:05]
Lou Whiteman
So I'm going to focus on the shareholders because if you're a customer, you either have it or don't. But think about it this way. You very rarely see a company trade 8,000 upfront for 8,000 over, what, six and a half years or so, which, you know, 99 bucks a month is. You don't do this because you want to. You do this right after Nvidia at the Consumer Electronics Conference came out with basically what looks to me like Android for Autonomy, where instead of like this closed system and everybody has to develop their own iOS, you know, you suddenly have just a system that anyone can take on. That changes the costs and the economics for everybody in the industry. And I think it puts Tesla on the defensive. I mean, look, this price has always been just kind of a bogey. That changes. It was as high as 15, as low as 5 at various points. This has always been aspirational, I think, to charge 8,000 for it. We have a long history in the automotive business of things that are perks or safety features that just become standard over time. They become commoditized. That's what's happening here. And Tesla is on the defensive, realizing, okay, it's going to be harder to get eight grand for this in the future. Let's get what we can. And the $99 price point is an easier sell, I think.
- [14:29]
Travis Hoyam
Yeah, John, the interesting thing is that the $99 option was, was there. So they're just taking away the other option, which it just seems a little bit strange from an optics perspective. But is this a big deal or just kind of A nothing burger in the long run?
- [14:44]
John Quast
Well, as Lou points out, who knows if this is the final offer either? I mean, there are many, many changes to Tesla's pricing over the years, so who knows if this is the final deal, but yeah, it is. I think it is more of a nothing burger. I mean, Tesla is interested in the monthly subscriptions, and you do look at Elon Musk's new pay package. There is incentives tied in there to how many subscriptions that they have. And I don't know, maybe this is a way that it boosts monthly subscriptions and helps them reach that milestone. Maybe not. I guess that's up for debate, but certainly, yeah, I get Lou's point, and it's well taken.
- [15:23]
Travis Hoyam
Let's move on to Google. We talked a lot about them on Wednesday, if you want to go back to the Wednesday Motley fool money show. But since then, and the announcements just keep coming so quickly from Google, they announced personalized AI, so Gemini can now understand your personal context. So if you use gmail photos, your YouTube history, and more. Some of the examples were things as simple as what are the best tires for my car? Do you know what I mean? Put in what your car is. The AI has to figure out, based on your history what your car is. And then I love this one, what's my license plate number? Because I couldn't answer that question for either of our vehicles. Meanwhile, Claude showed Cowork, which can clean up your desktop. That was the first example. John, does Google get AI better than anybody else? They seem much more incremental. But the products, when I look at these announcements, they just seem like, oh, I can actually see myself using that. Whereas, like Claude, I don't have a messy desktop. Give me a better example.
- [16:21]
John Quast
Well, I think it's a little bit strong, to put it that way, Travis, that Google gets AI better than the other players. What I do think that Google has that is extremely valid here is that it can execute at a higher level because of how many billions of people are already deeply embedded into the Alphabet Google ecosystem.
- [16:42]
Travis Hoyam
Yeah, I believe it's nine products with over a billion users right now.
- [16:46]
John Quast
That's incredible distribution and scale. And so if you're looking to do personalized AI, and I think that a lot of these players do want to do this, but Google can execute better because it does have more personalized information about you. And so I think this is really Google's advantage here.
- [17:04]
Lou Whiteman
I mean, Chad, I think I agree with you. I mean, look, let's be honest, some of it's A parlor trick. Most people, Travis, you may not know what your license plate is. I don't either. I take a picture of it when I need to pay something later. But I do know what kind of car I have and I can Google and search right now, best tires for a Honda Insight or something like that. So you know, whoop de doo. But like John said, Google is playing to its strength. It has been spying on my email and my photos and everything to suggest products forever. This is just a natural extension. Hopefully AI makes them better. I love the fact that I like one team in English soccer. They think I must want to buy stuff for every team in that league.
- [17:43]
Travis Hoyam
It's like you buy a toilet seat once and Amazon thinks you want toilet seats forever.
- [17:47]
Lou Whiteman
Yeah, but I mean look, they're playing to their strengths. I thought the Claude cowork thing, I thought that was actually pretty ingenious. Whether you need it or not. Bottom line here, what's really going on, Everyone is experimenting, everyone's trying new things, everything's flexing. Google is this consumer focused company so they can do all these things that seem really cool and relatable. I don't know if anyone is better at it, but I think what this does show, I keep coming back to this, is that as all of these companies try to get their AI, AI out to the world, Google's real advantages, they have so many more just natural avenues for monetizing. They are in so many homes, so many phones, so many consumers already. It is just a much more natural thing to see them adding AI as a bolt on versus a cloud or OpenAI or all these trying to basically have to win every customer from scratch.
- [18:44]
John Quast
And I think that the proof of that Lou, is just how quickly for example Gemini is gaining market share right now. I mean this company launched Bard. Does anyone remember Bard? That was a stumbling.
- [18:56]
Travis Hoyam
Even the launch of Gemini was terrible. They had those, those images that were just, you know, completely inaccurate. That was a huge black eye and that was, that was Gemini.
- [19:07]
John Quast
People forget that. Yeah, for sure. And but how quickly Google has been able to recover and take market share because it does have the advantages of distribution, vertical integration. Now OpenAI is making deal to try to better compete, but Google just has such an amazing amount of muscle that it can flex here.
- [19:27]
Lou Whiteman
So this isn't a prediction because I think that, yeah, I already talked about Google's natural advantages but I think that the important thing there is how quickly this can change. I don't think anything is set in stone yet. This is still the wild west and so I think Google looks great right now. Maybe it will two years from now. Or maybe it'll be another even crazier shift.
- [19:47]
Travis Hoyam
When we come back, we're going to talk about stocks that are either values or potentially value traps. You're listening to Motley Fool.
- [19:53]
John Quast
Money.
- [20:05]
Travis Hoyam
Was for Christmas.
- [20:06]
John Quast
What would be my door?
- [20:12]
Dan Boyd
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- [21:29]
Travis Hoyam
Welcome back to Motley Fool Money. One of the things we often talk about as investors is values versus value trading traps. So let's see what Lou and John think about some of the potentially down and out companies that might be great values that we look back on being obvious opportunities. In hindsight, they also may be value traps. Let's start with a really popular one today. That's Adobe. John, I want to start with you. $127 billion market cap. The price earnings multiple on a trailing basis is just 18. This is a company that has grown revenue over the last three years at a 10.5% clip. But shares are down 57% from their high. Is this a value or a value trap right now?
- [22:09]
John Quast
I think it's a value. I'm so glad you brought this to the table, Travis. I don't normally look at Adobe, so I wasn't really familiar with the numbers at the moment. But as you point out, it's down a lot, trading at 13 times its free cash flow. And you look at some of the things going on with Adobe's business, gross margin is at an all time high. That's a strong signal. We also have double digit revenue growth. Granted it's just a hair north of 10%, but that's still double digits at this scale. The share count is down because as I mentioned, the free cash flow and it does have things to reward shareholders. So I think this is a value stock right here today.
- [22:46]
Lou Whiteman
Yeah, the obvious concern is AI is going to eat their lunch. And to some extent I think we've seen this. The bull case for Adobe a few years ago was all of us normals were going to use a cheaper version of their product and that is, yeah.
- [23:00]
Travis Hoyam
The canvas of the world or even like Gemini to make images.
- [23:02]
Lou Whiteman
And yeah, that business has been wiped out. If I am not a professional user, I'm just going with Nana Banana or whatever. But I do think that the professional class that relies on Adobe, Adobe is applying AI to that and I do think that they can stay ahead of the wolves, at least for now. I don't know if this is going to be a home run stock, but I do think the market has overreacted and I do think it can be a long term market beater just on the strength of their products and their ability to serve customers that are really, the free stuff is going to have to get really, really good before professional users abandon Adobe.
- [23:38]
Travis Hoyam
I think that's the thing I struggle with the most with Adobe is I think you're absolutely right. I use canva, I use some of these free tools. I do not use Adobe products. But Dan behind the glass does because he is much more of a professional producer than I am. You know, when I make a video, my question would be can they increase the number of people using their products? Lou, is that a fundamental challenge? And if you can't increase that number, really the only lever you can pull is price increases. And if that's the case, then what do you want to pay for a stock like that? Are we at that territory? Because this isn't 10 times earnings, it's still almost 20 times earnings.
- [24:16]
Lou Whiteman
But as John pulled out is that they are a cash flow generating machine and that they can, I mean, I think you can win that way over time too. Again, I don't see this as being a slam dunk, but I do think that whatever the bogey is, 7% market average year, I do think over time they can outperform the market.
- [24:37]
Travis Hoyam
All right, let's go to another one that has gotten a lot of attention. The trade desk, down 74%. And this is just in a little over a year, just Crazy decline for the company. Price to earnings multiple on a forward basis still over 20. Enterprise value to sales is 6. Lou, is this getting to be a value or is this a value trap where this can still fall?
- [25:00]
Lou Whiteman
So I, I am a longtime holder who has not sold or added to the trade desk. I think it is a market beater from here, but kind of similar to Adobe. I, I don't think we're getting back to where it was before. I think I was wrong. I saw this huge opportunity and I saw them just capitalizing on it and I didn't factor in the fact that yes, Amazon and a lot of other people were going to come into this market opportunity too. I think the trade desk has great products. I think the products are getting better every day. I think they can hold share and slowly grow share. I do think that it is value here, but I just think that it's always going to be. They're going to be elbowing with other deep pocketed competition. So it's not going to be as gaga as easy as just to the moon as we once thought it was.
- [25:48]
John Quast
Yeah, I think that's a really good way to put it. Lou. I would agree, I would lean value here but I'm not screaming value necessarily because of the fact that its revenue growth has slowed down. Its gross margin trend is down a little bit too. So those are a couple of signals that I look at here from the competitive landscape point of view that why isn't it growing as fast as it once was now obviously as it scales up it's going to slow down some, but it seems a little extreme, especially considering that big players such as Amazon are ramping up. And so you look at that and you say is this a long term fundamental risk? I think that there's still a place for the trade desk and in which case, yeah, relatively speaking it's a decent value. But is it necessarily a no brainer? I wouldn't go that far. I wouldn't say that I'm convinced of the trade desk's long term ability to compete right here in a changing landscape.
- [26:41]
Travis Hoyam
Let's go to PayPal, which has been on the value investor watch list I'll say since at least 2022. You might remember this is one of the hottest stocks in the market. 2021, 2022 shares fell about 75% by the middle of the year, but guess what, since then shares are down another 5%. This is a $53 billion company, they're kind of a household name. Not growing real strongly. Three year growth rate 6.7%, but they're profitable. Price earnings multiple is just 11. John, there's gotta be value here somewhere. But are we there or is this still a trap like it's been for the last three years?
- [27:21]
John Quast
I would also lean value here with PayPal, but as you, as you point out, what is kind of interesting right now with PayPal is, you know, there are so many players in this space. It kind of feels like the, it is a pioneer, but it kind of feels a little bit stodgy at this point. And so it's like, is PayPal losing its relevance? I mean, it's single digit revenue growth. That said, it still is a free cash flow machine and it is reducing that outstanding share count by a material amount that can move the needle over the long term. So if it can just hold on to what it has and maybe even grow a little bit from here, I think it does work out okay for shareholders.
- [28:05]
Lou Whiteman
Yeah, I think that's it exactly. Share count is down about 20% over the last five years. That's good. PayPal is a mature business in a really, really competitive industry. Everywhere they want to, there's a ton of other options. This is not one that I personally want to lean into because I do think it is what it is, but I don't think that it's a trap as in it's destined to fail. I think that this is a market performer at worst. And look, they have some good assets, they have good products. I just don't know if I can get a wow out of this one. I'm more open to the idea that I, that Adobe and the trade desk can kind of outperform from here than I am PayPal.
- [28:50]
Travis Hoyam
Yeah, that growth rate is always what kind of sticks me. You know, it looks like a great value, but then you. A single digit growth rate. I don't know. We'll, we'll see about that one. Let's, let's get to one that's very high on the volatility list. HIMS and HERS shares are down 54% from their high. That was in early 2025. $7 billion market cap. But enterprise value to sales is just 3.5. And the five year growth rate, Lou, 76%. Is this a value or a value trap?
- [29:24]
Lou Whiteman
How can we even have this conversation with a company that's valued at 65 times forward earnings? This is not a value, period. It may work out as an investment, it may not, but it is not value. You can give me enterprise value to sales all you want, but look this is a company that is still in the point of its life where it's let's try everything and see what sticks. It could work. I compared this company to Icarus before. They are trying to fly but not too close to the sun. It could work out. It could not. But I don't even know how to look at this as a value or a value trap when relative to what the business actually is, the stock just isn't there. The stock is pricing in them. Figuring out a lot of things from here. They may do it. I'm not putting it, I'm not saying they won't but I just have to say neither. I reject your premise, Travis.
- [30:17]
John Quast
That's so good. I think if you look at yeah, Hims and Hers, the business. If you're looking at the stock and saying oh, I want to buy shares because it's so cheap, I don't think that's the right thesis. I think that you have to say do I understand what this business is attempting to do? Do I understand the risks and the hurdles that it's going to have to climb over to get there? I think that needs to be your fundamental approach to Hims and Hers. So I would say that if you're looking at the valuation that that's leaning more towards trap. You really do need to understand this business because it's not a no brainer. It's not a for sure thing to happen.
- [30:53]
Travis Hoyam
Lou doesn't like unprofitable companies being valuable values. So let's talk about an unprofitable company, Six Flags Entertainment. They were hot at least for a week in 2025 when Travis Kelce announced he was taking a stake in the company. Only a $1.6 billion market cap. Enterprise value sales is 2, but like I said, not profitable. Even on a forward basis. The price earnings multiple is 67. John, is there some value here somewhere in shares that are down almost 75% from their peak?
- [31:26]
John Quast
I wish there was. I really do. I like Six Flags as a customer but I think this is a trap. All day long you, you look at the, I mean normally with these companies at least you have a nice dividend, right. That you have and it's, it's low growth and you, it's total returns kind of a thing. You don't even have that with Six Flags right now. So I think that it has a lot of things that it needs to do in order to just kind of execute on the strategy. It combined with Cedar Fair, all the things that it's trying to do. I think it has a lot to figure out. So I'm saying trap here.
- [32:01]
Lou Whiteman
It should work because real estate matters. They have all of these properties, what, 40 something, 50 properties. It should work. I, I again, I don't, I haven't necessarily felt compelled to buy in myself. I don't know when, but I do think that I probably believe they're not going under, it's not a trap, and that they will figure out a way to make this work eventually. I just don't know how long that would take. I will, I guess I'll squint and say value. But yeah, it should work, darn it. And it so far has not.
- [32:38]
Travis Hoyam
This is the hard thing with companies that seem like their values is you have to look at not only revenue growth but also margins. And then what's the catalyst to go from a seemingly low valuation, whether it's price to sales multiple or price to earnings multiple, to a higher valuation. And with some of these stocks, it's, it's not always a clear picture forward. That's why they're potentially values or value traps. When we come back, we're going to talk a little bit about bank earnings and get, get to the stocks on our radar. You're listening to Motley Fuhlman.
- [33:25]
Lou Whiteman
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- [34:01]
Travis Hoyam
As always, people on the program may have interest in the stocks they talk about. And the Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows the Motley Fool's editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show. Notes Big banks were on deck for earnings this week. They always kind of start off the earnings season. Lou, what did we learn from the big banks that we heard from this week?
- [34:33]
Lou Whiteman
So, you know, very cautious. Not terrible, but cautious, I think is what I would say. Yeah, we like the banks because the banks sort of are a barometer for the economy. Let's focus on loan growth Travis, bank of America loans up 8%. JPMorgan Chase, 9% Citi 7%. Glass half full. That's a confident consumer. Glass half empty. That's a desperate consumer putting everything on their credit card because they can't afford to pay their bills. We don't really know the answer there. J.P. morgan made headlines. A huge, huge boost in their provision for credit loss up to 4.6 billion. It was a 3.
- [35:07]
Travis Hoyam
And what does that explain what that means?
- [35:08]
Lou Whiteman
So that's basically you have to. And as a shareholder, you don't necessarily mind this because they are required to set aside funds just in case the loans go bad, so they can still pay their depositors. And it's a kind of based on what they're seeing, a big uptick would normally suggest, you know, something, they're seeing things turning south. They're getting worried. But they are also buying the Apple card. So part of that, and maybe much of it is just, you know, trying to get ready for that. Everything looks okay, but not great, which is, I think, what we kind of knew anyway. The banks had a great year last year. The stocks all sold off after announcements. I think that is almost expectations got ahead of themselves. They're fine, but there's a lot to at least, huh? Let's keep watching this.
- [36:01]
John Quast
Yeah. I don't think that banks necessarily are the best indicator for what the consumer is feeling and what they're about to do. Going back to Lou's Point, just a couple of years ago, we were watching bank balances drop and credit card balances skyrocket at the same time. So that was screaming, hey, consumers are running out of cash. And you would think logically that's going to translate into not as many vacations on cruise ships or not as many premium purchases for these discretionary brands such as Yeti coolers or something like that. And what we saw was the consumer was absolutely fine. The consumer continued to spend money. In fact, they spent more money than what we were expecting. So I think that banks paint a logical picture, but the. The consumer is not always logical. We are emotional people, and that's just how it is.
- [36:49]
Lou Whiteman
I keep coming back to this. We tend to want to look at it as a binary thing. The consumer is healthy or the consumer is not. Really. Each one of us make our financial decisions based on how we are doing. And all you need is a critical mass of people who feel okay enough to keep spending, to keep doing trips. And the consumer is fine. The thing is, you never really know if that critical mass is 65% of consumers or 50.1% of consumers. I think that's what needs to play out over this year is we're going to find out if that number or if the number of people who feel comfortable if that total is eroding. If so, how fast and by how much.
- [37:30]
Travis Hoyam
The other one that I'm keeping an eye on, that I don't know if you guys have thoughts on, is some of these buy now, pay later companies. And it just worries me that, you know, a company like Sezzle is seeing nearly 100% revenue growth year over year, but maybe some of those that spending is going from credit cards to, to buy now, pay later and it's kind of just the same thing, just a different format. But you know, Louis, are those canaries that you're looking at as well or am I overthinking this?
- [37:56]
Lou Whiteman
I, I think, I think we'll only know that in hindsight it can be a better deal, especially if you're putting it on a credit card paying 25% or so. It could be just a shift in preferences or it could of trouble. And also remember 100%, there's a denominator thing there too. These are small companies, so they are growing fast. But yeah, I think it's, I think it's worth noting, but I can't draw a conclusion.
- [38:19]
Travis Hoyam
Let's get to the stocks on our radar. Bring in Dan, Dan Boyd for his thoughts. John, what's on your radar this week?
- [38:26]
John Quast
Yeah, this week I'm looking at toast. This is ticker symbol T O S T. This is a restaurant technology stock and its products are used by over 156,000 restaurant locations. So think of ordering at the table, payment processing, they can schedule employees. The programs integrate with delivery partners such as Uber. And I was really doubtful about this business when it went public initially because it was used by a lot of small restaurants and that seemed like a very inefficient go to market strategy to me. I thought they were going to have to spend a lot on sales and marketing in order to get into one little tiny restaurant here and there. But it's been surprisingly efficient. It gets a lot of word of mouth advertising from its customers and it's so it's growing fast and not spending a ton. What's really cool is this, this gets better. Just like an aging wine. I mean as it goes it the hardware is negative gross margin up front, but the recurring revenue is high margin as over time just past 2 billion in annual recurring revenue growing at 30%. It hopes to get to 10 billion in annual recurring revenue within a decade. So stock down 30% from its all time high, trading at three and a half times sales. I think that's reasonable.
- [39:38]
Travis Hoyam
Dan, what do you think about Toast? I feel like this is a business that's going to go with restaurants. If restaurants are doing well, Toast is doing well. And vice versa. Well, not vice versa. If restaurants aren't doing well, then Toast is probably not doing well. What do you think, John?
- [39:50]
John Quast
Well, I think that it is an enabler of restaurants to do better and so it's going to ride the success of its customers.
- [39:58]
Travis Hoyam
Lou, what's on your radar this week?
- [40:00]
Lou Whiteman
So, Dan, there's been a lot of saber rattling from the White House about the defense industry. And earlier this week there was finally action L3 Harris ticker. LHX announced it's going to spin off its missile solutions business, which is basically the rockets that power missiles as an independent company backed by a $1 billion investment from the Pentagon. The idea here is best of both worlds. L3 will continue to hold a majority of the business, but the government will fund basically an increase in R and D to spark more sales. There are a lot of details to be ironed out, but Dan, I really like this Setup. It allows L3 to focus its resources on other potentially faster growing parts of his business while using the government funding to turn an okay but not amazing part of the business into a new growth engine. I see a lot of upside from here and I'm kind of excited about this.
- [40:49]
Travis Hoyam
Dan, thoughts on rockets? Well, it seems like there's a lot of corporate governance problems with L3. Harris. Lou, are we looking at any changes at the top there or are they going to keep moving on with who they got?
- [41:01]
Lou Whiteman
You know what, I, I really like their CEO. So maybe, I mean, I know he had a checkered past with Lockheed Martin, but he is, I, I like him there. I, I, I, I hope he stays on.
- [41:12]
Travis Hoyam
Dan, what's going on your watch list, Rockets or restaurants? Well, I'm not much of a rocket customer, Travis, so I'm going to go Toast. Toast is one of those companies that I'm always happy to to pay with Toast because you don't have to necessarily hand over your card. So that's all the time we have for Motley fool money. Thanks for listening. We'll see you here tomorrow.