In this podcast, Motley Fool analyst Jason Moser and host Deidre Woollard discuss:
- If cable companies need to worry about Verizon.
- What CoStar really sees in Matterport.
Motley Fool analyst Sanmeet Deo and host Ricky Mulvey break down On Holding's appeal for shoe lovers and stockholders.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
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This video was recorded on April 22, 2024.
Deidre Woollard: This M&A Monday comes with a big premium. Motley Fool Money starts now. Welcome to Motley Fool Money, I'm Deidre Woollard here with Motley Fool analyst Jason Moser. Jason, good to see you, we missed you last week.
Jason Moser: Hi Deidre, good to see you again. I was out of town last week, but glad to be back.
Deidre Woollard: Glad to have you back and glad to have you back for what should be a very interesting week, so around 30% of the market reports this week, lot of big tech reporting. If we're getting into earnings season a little bit up and down, so what are you looking for?
Jason Moser: It seems just earnings projections and guidance going forward, it's just such a funny time in the market right now. It's reasonable to expect some of these companies to have some trepidation, but then it also feels like some of these companies really they're very encouraged by the economic picture, the economy seems to be hanging in there and employment still on a good place. But the consumer is still just so clearly stretched, credit card debt, student loan debt, inflation obviously is still an issue, so there are just clearly some issues there in regard to the consumer that leave us, I think, with some questions.
We've talked about this a couple of weeks ago when Jamie came out with his letter for JPMorgan. They were a lot of things he said in that letter that just make you feel like OK, maybe things are OK, but we should at least be on guard. He said and I quote, this is really a very profound statement. He said, "We may be entering one of the most treacherous geopolitical era's since World War II."
That's a bold statement, that's something to at least keep in mind, especially coming from someone like that, remains wary of economic prognosticating and they have ongoing concerns in regard to inflation and they're considering a wider range of outcomes as far as how companies are going to perform in regard to interest rate exposure and whatnot, so it seems a very volatile stretch right now and this earning season, I think it's going to be very enlightening.
Deidre Woollard: Absolutely and I think one of the things that makes this week particularly interesting is there's been so much talk of the shrinking of the formerly magnificent seven into following which companies are still members of that. [laughs]
Jason Moser: What do they call them now, the fabulous five or something [laughs] like that now, it's so funny how that changes quarter-to-quarter.
Deidre Woollard: Yeah, we will probably know something entirely different at the end of the week, which is one of the reasons for me, I really want to hear what happens on the Tesla call. I need to hear it from him and I need to hear that reaction. Earnings calls are important for that reason, but I want to get into one earning that we had today, we've got Verizon. This is a Steady Eddy, it's a good dividend player, people like having this one in their portfolios.
You've got decent solid results, a nice increase in cash-flow, but there's a little something happening with smartphones that I've been watching and thought about last week with Taiwan Semi's earnings talking about smartphone revenue. There's a slowdown in usage happening in cellphone usage and getting new phones, they talked about wearables and tablets being down. This seems to have implications for Verizon, but really for tech in general.
Jason Moser: I think you're right. In regard to smartphones, it's no surprise, these things get better every iteration and so then that begs the question, why should you upgrade so frequently? For most of us, the answer is we don't. We don't upgrade as often maybe as we used to, but I think the most obvious company that stands out here in regard these things like phones and wearables and tablets whatnot, let's look at Apple. If you look at last quarter for Apple, the wearables, home and accessories segment of the business, that revenue came in down 11% from the previous year. iPad revenue is down 25% from the previous year. Verizon calling this out, I don't think that's a cop out, they're not looking for an excuse, I think it's something very real. It's absolutely something to keep in mind.
Deidre Woollard: Well, the other thing I'm watching with Verizon and really with all the telecoms, is what they call Cord Cutting 2.0, which is the rise of fixed home Internet is taking some of the juice away from cable. Not a massive trend at this point, but it's interesting, Verizon's up to about 3.4 million subscribers, T-Mobile's got around 5 million, seems like something is starting to happen here. You've probably seen all of those commercials pushing back against, it's not reliable or it gets jammed up, which whenever I see a commercial that's telling me something is bad, I'm like, that means something's happening here, I should pay attention to.
Jason Moser: I think you should pay attention to it. We've gone from where it wasn't reliable to where it was reliable some of the time and now it's certainly becoming more and more reliable as time goes on. I think companies should absolutely keep an eye on this. Again, looking to other companies in the space that are good indicators, look at Comcast, for example, in regard to something like this.
You go back to Comcast, most recent quarter on the call and they tell us about maintaining what they said, a strong trajectory in Xfinity Mobile, they increase their subscriber lines by 24%, they increase total domestic wireless revenue by nearly 20%. While I don't know that Verizon is necessarily a full-on threat to a company like Comcast, it definitely feels like there is a shift going on here and companies like Verizon, they're very well set up to succeed here and as we move more and more to this wireless environment, it seems reasonable to think that a company like Verizon could absolutely disrupt the business of some of those cable providers like Comcast and by the same token, it's good to see that Comcast is finding solutions.
They've got the Xfinity Mobile, they've got the domestic wireless revenue, that's something that you pay attention to. It does feel like Verizon and it's wireless brethren are taking a lead here, but I wouldn't know that they're necessarily being fully disrupted yet.
Deidre Woollard: It's a Monday, so we get to talk some mergers and acquisitions. One today, right up my alley, CoStar a company I follow, you've probably seen their commercials for homes.com and apartments.com recently. They're buying Matterport. Now, if you haven't heard of Matterport, they do those cool 3D tours, you've probably seen them, if you look at real estate listings. The premium here is crazy. They're buying for 1.6 billion and that works out to $5.50 per share.
The shareholders are going to get half of that in cash, half of that in stock over 200 percent premium on the last closing price. Last time I looked, the stock was up about 188% or something crazy like that this morning. Everybody is asking why is CoStar which has commercial data and real estate data, why are they buying a 3D tour company? Everybody has an opinion, I've been talking to people all morning, what do you think?
Jason Moser: I'm not actually very surprised by this. I will go back to something I tweeted way back on January 4th of 2022. As you know, one of the services I run here at the Fool, it's a service based on augmented reality, immersive technology and I tweeted then on January 4th, 2022, the value and digitizing, indexing the built world is going to be huge. Wouldn't shock me at all to see Alphabet acquire Matterport this year, search and ad revenue and expertise, those metaverse tailwinds. It was a reckless prediction, but it seemed like at least at the time, that Matterport fit very much into that Alphabet, Google universe, so to speak.
I'm not terribly surprised to see Matterport ultimately be acquired. But by the same token, if you go back to when I said that, I think the stock price closed that day at around $18.22. Clearly from then until now a lot has happened. Matterport was a SPAC and that I think probably at the end of the day most people when we look at SPACs and think well, that's not been a very good thing for most companies. For Matterport I give them credit at least they've stayed in business they've kept things going. It doesn't surprise me at least to see Matterport be acquired because of that specialty what they do, it's a digital capture and spatial data company.
They digitize and they index information based on this built world and they have a lot of information already gathered. To see them acquired it doesn't really surprise me. What I said back then when I first weighed that in 2022, obviously the share price was a lot higher. It's good to see at least shareholders get some value from this. We'll see. I don't know if it's something where ultimately CoStar just takes this business roles that we never hear anything again from Matterport. But clearly they're acquiring Matterport for the data and for the information that it had already gathered and there was absolutely some value in that.
Deidre Woollard: There's a lot of value in that. I think that's interesting because if Alphabet had bought it that would have been more of a tech play to get more of the cameras and the tools that they have the apps that they've built and things like that. Post our buys it, it's a data plays. There's a part of this that it makes me a little sad about it as someone who's seen what Matterport has done because I think may be it curbs everything that they've been building.
I think it'll stay the way it is and I think they'll keep building the digital twins and things like that. But I don't know if the level of innovation is going to continue. CoStar has been pretty good at keeping companies independent but I'm not sure that's what they want with this. I think they want it for homes.com. I think they want it for Zillow but took as competition but I don't know. It's so hard to know how they're going to use it because they've got these two businesses going in different directions and I don't know which side it ends up on.
Jason Moser: Well, I think what you're saying makes sense and it really does make you wonder and I guess we will never really know the answer to this. But it does make you wonder if Matterport was able to just keep on doing what they were doing. Would they have been able to get around that quarter and start to take this business in a direction that could have produced a lot more value.
Deidre Woollard: Thanks for your time today, Jason.
Jason Moser: Thank you.
Deidre Woollard: We talk about a lot of stocks on the show but it's just a peek at the Motley Fool's investing universe. This year we're rolling out a new offering it's called Epic Bundle. The service includes seven stock recommendations every month, model portfolios and stock rankings, all based on your Investor type. We're offering Epic Bundle to Motley Fool Money listeners at a reduced rate as a thanks for listening to the show. For more information had to fool.com/epic will also have put a link in the show notes for you. If you want some on running shoes you're not getting a discount same goes for the stock. Sanmeet Deo joins Ricky Mulvey to give a breakdown of the fast-growing Athleisure company.
Ricky Mulvey: If you want a fast-growing company, you might have to pay up. Let's see what's going on with on holdings which listeners might recognize is expensive running shoes with cushion hollow pods in the midsole or some holes for those not into that vocabulary. The On Cloud is very popular running shoes. Sanmeet, let's start with the product. Why are these shoes so special or catching on so quickly among the consumer attention base?
Sanmeet Deo: Ricky. At the core of what makes them so special is that they have this cloud tech technology which blends comfort and performance that arose out of the founders Olivia Bernhardt who's a Swiss triathlete experimentation with garden hose to create a safer and more comfortable shoe. In addition to that there just fresh, they're unique looking. They have the cloud in the soles. They sport that's famous Swiss design element. They've caught on with a tech scene, influencers and just casual wearers well it's becoming a lifestyle brand.
Ricky Mulvey: Are you an On wearer?
Sanmeet Deo: I'm not actually. I'm curious to try them out. I've always been a Nike guy.
Ricky Mulvey: I'm wondering you the closest competitor would be for this product. It's like a high-end running shoe I would think what HOKA. Is HOKA their closest competitor?
Sanmeet Deo: HOKA is definitely a close competitor. I've found numerous reviews and discussions online just comparing HOKAs with On Clouds and they're both primarily running shoes with different features. The search transaction if you look on Google are neck and neck for both of them over the past few years.
Ricky Mulvey:Lululemon would like to be a competitor especially in this space. We were talking before that you think their shoes are a little boring? I don't know. My opinion on this matter matters very little.
Sanmeet Deo: Well, Lulu is like a powerhouse and athleisure market with premium apparel. I feel their footwear line is a side bet to capture some growth. They've rolled out men's and women's footwear. In my opinion they're bland looking but we'll see how it goes with them.
Ricky Mulvey: The highest profile association for on is Roger Federer. He's also an investor in the company. You want to look at that high-profile athletes, the high-profile figure. How important is that February relationship too on holdings? Is this guy sell on a lot of shoes?
Sanmeet Deo: I think it's pretty important on holdings if you don't know is a Swiss company is based out of Switzerland. As a brand ambassador he has massive appeal in Europe. They know him very well, he's very well loved. He is an investor. He actually assist in designing shoes with On specifically now for their growing tennis shoe category. He's important although I wouldn't put them in the category of Jordan, Nike where if Jordan was gone then Nike would have completely collapse. I don't think that On is necessarily there with Federer but he is important.
Ricky Mulvey: One flag for the company. There's a few flags, one of which I think is the valuation, one of which is a co-CEO situation which perks my interest a little bit Sanmeet, but not in a great way. You've Mark Maurer and Mark Martine Hoffman, both of whom have been with the company since 2013.
Sanmeet Deo: Is this a flag for you? Is this a sales force thing going on? Co-CEO situations rarely seem to go well.
Ricky Mulvey: Yeah. It definitely makes me wonder. But with Weighon and structured, I'm actually a little less concerned because Martin is actually more of this is the CFO. Mark is the Chief Operating officer. So while they're both co-CEOs are still dedicated to their specific roles within their company. I'm not so concerned and also being a Swiss company, I don't really know how the co-CEO dynamic works in international companies versus how it works in the United States, it could be different.
Sanmeet Deo: Fair enough. Let's talk about that valuation. On, which has the ticker symbol on, on trades at a much higher multiple than many of its peers. It almost six times sales in 42 times forward earnings. For context, Lululemon and Deckers, which makes HOKA they're both in the mid-20s for forward earnings. What has to be true about On's future growth for this valuation that make sense?
Ricky Mulvey: On is definitely pricing when you look at just from the valuation multiple, one thing I also like to look at in comparison is, On has leading gross margins that are approaching 60%, whereas Deckers is around 55. Lulu's around 58. The mix of businesses is a little different. On is pure-play shoes right now, little apparel. Deckers is shoes, primarily Lulu is mostly apparel. I also like to look at their growth estimates.
Sales and earnings estimates for On are much higher than Deckers and Lulu. So in order to get those valuation to make it look sense, they do need to grow sales and earnings at a fast clip that's heavily embedded into their, into their business. They need to maintain and those industry-leading margins. They need to take advantage of all those whitespace opportunities within the different shoe categories and also ramping up that apparel portion of their business from what's around 5% to about 10% is what they're looking at for the future.
Sanmeet Deo: There are also opening some retail locations which might help with that growth opportunity. One thing we were talking about before the show that I think is worth bringing up and seen in those margins, On does not really discount it shoes. It seems.
Ricky Mulvey: No. They're taking the Lululemon approach where they're not discounter. They're premium priced. They're playing in that high-price category, which separates some a little bit from the whole cause and from the other shoes out there. Who knows what will happen in the future? But they're playing in that category, which I think with high demand, they can take advantage of that.
Sanmeet Deo: So of the athleisure group I mentioned there sure are some bears out for the On On shares. Has a pretty high percent of shares outstanding shorted at about 9% versus for Lululemon and Deckers that hovers around 3%. What are the bears saying about this company?
Ricky Mulvey: With the high-growth opportunities that it has, it's definitely much more riskier than the other companies. I'm sure the bears are concerned about just the high embedded growth assumption embedded in its valuation. If it doesn't meet some of those targets, the stocks and getting hard. They're probably worried also about the potential for it to be a fat along the lines of Allbirds. Allbirds was hot for a while and then flamed out. These shoe brand of footwear brands and consumer products come and go, their apparel business, they may not stick, there's a lot of competition there as well, and they also maybe not growing internationally. So those are some of the things that bears are probably concerned about.
Sanmeet Deo: Haver, I know you're a big fan of the athleisure space. This is a little different than Allbirds. You can't really go running in the wool shoes that they were selling and then some of the issues were falling apart. But you have a lot of focus on the athleisure space, even if you're not looking at on holdings as an investor, why is this macro opportunity worth a stock investor's attention?
Ricky Mulvey: I liked athleisure spaces. It's become a much, it's a huge market opportunity. It's growing. From the pandemic, more and more people are wearing athleisure as a lifestyle brand, as a casual, they're wearing casual close to more outings. It's become, your lifestyle, but it's also a place where there's a lot of innovation, a lot of freshness, a lot of new names, and exciting opportunities. It's also something that's in demand and use regularly by consumers. You're always buying new shoes, apparel. It's an industry where consumers are always going to spend money.
Sanmeet Deo: Anything else the investing audience should know about the leadership of this company?
Ricky Mulvey: One important point is that On has heavy insider ownership. The directors and executives owning about 33% of the total economic ownership and 67% of the total voting power. Now, while the voting power can be somewhat of a concern because they control a lot of the business. I do like how well-vested the management team is in the business, so they want to see it succeed.
Sanmeet Deo: Let's finish off with a little bit of a game. There's a few companies in the athletic athleisure space that you can buy. I'm going to call this, let's call it where invest in trash. We have a brand to wear, a brand that is earning our investment dollars, and one that we will recycle. Trashing is not kind to the environment and this is coming out on Earth Day, Sanmeet. So where invest recycle, how about that?
Ricky Mulvey: That sounds great.
Sanmeet Deo: No one can get upset at us now. So the three brands we have On holdings, we have Lululemon. This might be an easier one, Under Armour. Which one are you wearing, which one are you investing in? Which one is going to be recycled in an environmentally friendly way? Happy birthday.
Ricky Mulvey: So in honor of your birthday, I'll take the recycling first, so I'm going to recycle Under Armour. The business has just not been managed very well. They have some pretty good products, but lot of the products are sold discounted. Like we were talking about it earlier. When you see it on lots of kids and you see people wearing Under Armour to the stuff that I bought from Under Armour typically tends to be from outlets and from discounting.
So I'll definitely recycle Under Armour, where I would actually wear Lulu because they have great products that are stylish and look great. I have not always been able to afford them, but I definitely have to wear them and invest. I would invest in On Holdings and I'm actually an investor in On Holdings because I think the growth opportunity is going to be great for that company.
Sanmeet Deo: Good place to end. Sanmeet Deo, thank you for your time and your insights.
Ricky Mulvey: Thanks for you.
Deidre Woollard: 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 yourselves stocks based solely on what you hear. I'm Deidre Woollard. Thanks for listening. We'll see you tomorrow.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Deidre Woollard has positions in Alphabet, Apple, CoStar Group, JPMorgan Chase, Nike, and Zillow Group. Jason Moser has positions in Alphabet, Apple, Nike, and Under Armour. Ricky Mulvey has positions in Lululemon Athletica and Taiwan Semiconductor Manufacturing. Sanmeet Deo has positions in Alphabet, On Holding, and Tesla. The Motley Fool has positions in and recommends Alphabet, Apple, CoStar Group, JPMorgan Chase, Lululemon Athletica, Matterport, Nike, Taiwan Semiconductor Manufacturing, Tesla, Under Armour, and Zillow Group. The Motley Fool recommends Comcast, On Holding, T-Mobile US, and Verizon Communications and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
