In this podcast, Motley Fool analyst Jason Moser and host Deidre Woollard discuss:
- The wisdom of Amazon's bet on Anthropic.
- Why Amazon is getting into charging for streaming.
- If checkout-free technology is finally reaching its tipping point.
Motley Fool host Ricky Mulvey interviews the CEO of RCI Hospitality, Eric Langan, on his view on consumer spending and capital allocation, and his journey to the CEO seat.
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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 Sept. 25, 2023.
Deidre Woollard: Maybe don't fear your AI overlords, go to a nightclub instead. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard here with Jason Moser. Jason, how are you doing today?
Jason Moser: Hey, doing great. How about you?
Deidre Woollard: Doing great.
Jason Moser: Good.
Deidre Woollard: Well, the big news today was Amazon investing up to four billion in Anthropic. So Anthropic, the OpenAI rival created by former OpenAI employees. This is a deal that includes Anthropic using the AWS cloud, of course, and Amazon's training chips which are things like Trainium. What do you think Amazon is hoping for with this deal?
Jason Moser: Well, they're certainly looking to make inroads in the AI space and establish their own little corner of dominance, so to speak. I think you see them getting in there with their own chip designs. Like you noted, they're going in there and using their own chips in order to be a part of this. I think it's interesting to see OpenAI, all of these are connected. They're all these former executives from OpenAI and they're all going their separate ways. So you see Amazon making its own little bet here in Anthropic. I did a little digging. I was looking at Anthropic because Anthropic is not a publicly traded company, but it's interesting to see the other investors in Anthropic because it's not just Amazon in this case. Google is an investor in Anthropic. Salesforce and Zoom Video Communications as well through their ventures arm. Again, you go back to how these are all connected. I think it's very interesting. I do think that Amazon making this investment with the goal of using their chip designs, the Trainium chip, and I think there's another chip design as well.
Deidre Woollard: Yeah, Inferentia.
Jason Moser: Yeah, Inferentia. That's it. I'll be interested to see how that plays out against NVIDIA. That's their answer to all of this NVIDIA hype. So I think it's going to be interesting to see how that plays out. Just because you have all of the money in the world, companies like Amazon and Apple, designing chips and then implementing those chips to do very specific things is very difficult. We're seeing Apple having a lot of difficulty in designing that modem chip that they want to be able to stick into their phones and ultimately displace their relationship with Qualcomm.
Deidre Woollard: Right.
Jason Moser: I just think that's a little bit easier said than done. But generally speaking, I like the idea. It makes a lot of sense.
Deidre Woollard: Yeah, it's interesting, the interconnectedness that you mentioned, it reminds me a bit of what we saw before the dot-com bubble. It's all happening in San Francisco again. Anthropic is leasing Slack's former HQ. All of this seems very connected and I'm an old PR person. I like to look at the bottom section of the press release where you see the about Amazon and about Anthropic because it tells me not what the company does, but what the company wants us to think they do. They call themselves Anthropic. They call themselves a safety and a research company. They say their AI assistant, their big AI assistant is Claude, and Claude is focused on being helpful, harmless, and honest.
Jason Moser: [laughs]
Deidre Woollard: Right?
Jason Moser: If they say it enough, then maybe it'll be true, right?
Deidre Woollard: Right. This feels like a don't fear your robot overlords line to me. So does AI need spin at this point?
Jason Moser: I think it does, to an extent. It's funny what you said about the bottom of the release. It made me think of like when you interview leadership of any company, their one job is just to tell you how awesome they are. At the bottom of this release, it seems like their one job is really let's assuage any concerns that people may have regarding AI and the potential drawbacks. We're honest, we're safe, we're careful and all that. I don't know that that necessarily is going to cut it. I think it's going to take a little bit more than just that. In time is something I think ultimately that it's going to take. When you look at the general sentiment out there with consumers isn't all that great when it comes to AI right now. If you look at Pew Research, overall, right now 52% of Americans say they feel more concerned than excited about the increased use of artificial intelligence. You have just 10% saying that they are more excited than concerned. But what's interesting here, the share of Americans who are mostly concerned about AI in daily life, it's up 14 percentage points since December 2022, when just 38% expressed that view. So the trend is going in the wrong way. Americans are becoming more and more concerned about the drawbacks and risks of AI as opposed to the opportunities. That's going to be something that's going to be very difficult to balance because as the social media, information moves just at the speed of light, not everybody is fully honest out there. You get all sorts of funny stories and disinformation and misinformation and things that can lead you down rabbit holes and conspiracy theories and whatnot. I think this is going to be a long-term trend that is going to be full of challenges, and it's going to take a lot more than just language at the bottom of release to make people feel better about the potential positive impacts that AI can have on our future.
Deidre Woollard: Yeah, and to throw it back to the early aughts, again, we felt the same way about the Internet. There was a lot of concern at the start of the Internet, this is going to be a bad thing. This is going to put people out of jobs, it's going to end the world. We're seeing that with AI certainly. I was reading WIRED's all AI issue this weekend and it was very everything from the world is going to end in eight years to this is going to make a new utopia. So opinions are all across the board.
Jason Moser: The disparity of the outcomes is impressive. Going from a panacea to full-on world destruction, you can't get much more polarizing than that.
Deidre Woollard: Yeah, absolutely. I want to pivot a little bit to talking about another part of Amazon. We may have an end to the writers strike hopefully, fingers crossed. But meanwhile, let's talk about Amazon Prime. Amazon announced on Friday, they kind of snuck this out, they're adding ads to Prime. They say not a lot of ads, just a few. Nothing to worry about here. You can opt out of the ads for about 2.99, about three bucks a month. So it's small, but 200 million Prime users, that does add up. What do you think? Are you paying for the Amazon ad-free tier or you're going to wait?
Jason Moser: I probably won't. I don't know that I use Amazon streaming enough to really justify that. But honestly, I don't know that they want us to pay to opt-out. We've seen from companies like Netflix and Walt Disney here over the last several quarters, they've been talking more and more about these ad-supported options that they've introduced into their models. Ultimately, those ad-supported models can be more profitable for the businesses. They actually like being able to incorporate ads as long as consumers will tolerate them because they can be very profitable and consumers will tolerate them, particularly on a global basis. When you look at the advertising support of video on demand, that is a really fast growing market on a global scale there in connected TV. It really is something I'm a little bit surprised we didn't hear this announcement from Amazon sooner. I like it. It gives consumers a choice and if you're someone that uses the Amazon Prime streaming service a lot, then maybe this is something you'll consider. I'll say, we use a lot in our house, we use the Hulu Live offering and we pay for the ad-free version of that so that anything that we're streaming on Hulu, any on demand stuff, we can just get all that stuff with minimal to zero ads. I think it really just boils down to what platforms you use the most where is the value proposition going to be there. But I think generally speaking, most of these companies, they don't want you to opt out because those ad-supported models can be quite profitable.
Deidre Woollard: Well, I mean, with Amazon especially, advertising is a bigger and bigger and more profitable part of that business already.
Jason Moser: It is, and they distribute content in so many different ways. They've already got a little bit of this going with that freebie offering. That is essentially TV with ads right there. That's an Amazon property. So this is just taking it one step further. Amazon, they distribute content in so many different ways, this is just a natural fit.
Deidre Woollard: Maybe the three dollars is just to bring awareness to the idea that there's going to be ads. Who knows?
Jason Moser: That's a very good point.
Deidre Woollard: One last Amazon question. I noticed on the bottom of the press release, I love to do that, the Just Walk Out technology was on their list of the things that they are talking about. This is the technology where you can basically go into to the store, pick stuff up, and just leave. We surveyed our listeners last week on X, about 78% they said they're willing, they're willing to do it. Amazon has struggled with integrating this tech for a while. They had those ghost stores. They tried this out with Amazon Fresh, that hasn't been going so well for them. Do you think the tipping point on this is coming soon?
Jason Moser: It could be. I liken this to self-driving cars in that, to me, it feels like the technology is on a much faster pace here than actually figuring out how to handle the tech as a society. There's infrastructure investments that need to be made. They're educating the consumer. Once you get stuck in your old ways or your habits, those can be difficult to break. I think it's interesting technology. I would certainly try it. It's not like it's something that scares me, but like that old trust, but verify. So I think I'd be going through my receipt to make sure I was getting charged for the right stuff and furthermore, the store owner, in this case, whether it's an Amazon Fresh, whatever, but let's assume this technology gets rolled out to stores and shops everywhere. As a store owner, I have to imagine, you're kind of wondering. You're just going to take this on blind faith that everything is getting charged? That can be a little bit of a leap of faith right there. So that'll take a little bit of time ultimately to play out there. I don't know, I see it playing a role. I'm just not sure how quickly we're going to get there. I think it's going to take probably a little bit longer than maybe people think.
Deidre Woollard: Yeah, the checking out thing is interesting because now if you leave like the Walmart, they at least look at your receipt. Not sure if that would happen if you're using the checkout-free technology.
Jason Moser: Well, that would be the idea. The whole point is convenience and zero friction. Well, if we're going to introduce some friction and say they're, well, checkout-free, but we're still going to check your receipt. Well, that's not really checkout-free then, so it's false advertising. As a consumer, hey, you're checking out, you probably don't really have much to worry about. Maybe you're not getting charged for everything, maybe you are, maybe you care, maybe you don't. But if you're the shop owner, you care. You want to make sure you're getting charged for every single thing that that consumer is walking out with, and whether this technology can really do that consistently I guess remains to be seen.
Deidre Woollard: Yeah, I think that's true. Thanks for your time today, Jason.
Jason Moser: Thank you.
Deidre Woollard: We just talked about Amazon. We think there are a lot of great companies out there that are back at levels not seen in years. That's why our analysts have rounded up five companies that have dipped below 49 bucks a share, and we're giving away that list for free. You can grab your copy of this report Five Stocks Under $49 for free at fool.com/report. That's right, five stock picks, totally free. We'll also put a link in the show notes. Last week, the CEO of RCI Hospitality, Eric Langan, tweeted he was grabbing dinner at the Grange Food Hall in Denver and was happy to meet up. The company operates restaurants, nightclubs, and soon casinos. RCI shareholder Ricky Mulvey took him up on it and brought his recording equipment. Mulvey talked to Langan about consumer spending, capital allocation, and his journey to the CEO seat.
Ricky Mulvey: I know you told this story on X or Twitter, whatever you want to call it. It's got to be an interesting journey to, I think you had maybe one club and then to be the CEO of a publicly traded nightclub, restaurant, gentlemen's club, cabaret business.
Eric Langan: Yeah. I mean, I started out, I was dating an entertainer. I was 19 years old. I got married and divorced at 19. Friends started taking me to club to hang out to try to keep my mind and my ex-wife had ran off with my daughter, so I didn't really know where my daughter was. I was young and crazy, but they tried to take me to clubs. So I started dating one of the entertainers at the club and then didn't really like the way things were going there for her, so I decided we were going to open our own club up and sold my baseball card collection and open up my first club. It was about 1,600 square foot. A little tiny place, just sold beer and wine, no hard liquor, but then we parlayed that into another club and another club. Now we have almost 70, went public in '97, merged with Rick's who did an IPO in '95. Then bought out the founder in '99 and basically been CEO, Chairman of the Board since 1999.
Ricky Mulvey: That's incredible.
Eric Langan: Yeah, we had seven locations, I think, or six locations in 1999. We have 70 locations right now, we have 14 different projects in various phases of construction. Our next one that'll open, it will be in Stafford, Texas such as a Southwest Houston suburb area. That one should open in the next two or three weeks. We're building a flagship location in Rowlett, Texas, which is between Mesquite and Rockwall right on the lake. I have a 3,800 square foot outdoor patio, really fantastic location. Part of a huge 180 acre. I can't remember how big it is. A development with all types of business there. Our neighbor is going to be Margaritaville, to give you an idea. Jimmy Buffett's Margaritaville Hotel and Resort.
Ricky Mulvey: One thing I've heard you talk about on earnings calls is you talk about capital allocation more than a lot of publicly traded CEOs. You've drawn inspiration from a book called The Outsiders. Just maybe broadly how that book has affected you as a CEO and also how you just maybe generally think about capital allocation at RCI.
Eric Langan: Well, in 2014, we were supposed to do this big acquisition and I found some accounting irregularities I didn't like. The more I dug in, the more I realized there was some type of fraud going. I didn't know what it was at the time. I found out about 18 months later when the owners were arrested for money laundering. Basically, their sales didn't make any sense versus the inventories. I was watching the inventory. Basically, on the one club, when I finally said, OK, no, we're not doing this deal, they would have had to have been selling beer for about 120 bucks apiece.
Ricky Mulvey: Wow.
Eric Langan: Beers were like 4.50 back then. I was like, how can you have this much beer sales, but you only bought this much? You can't have $100,000 in sales and you only bought enough beer at your 4.50 to make $20,000 in sales. Where's this other $80,000 in beer sales? You're paying the tax. Everything looks normal on the surface. But when I dug into their inventory purchases, the actual purchases of the product, they didn't buy enough product to have that much in retail sales. I've been to the club multiple nights and it was always slow compared to what the revenue numbers they said they were making. So it threw me off, so we walked that deal. When I did, my bankers who were getting ready to do about $14 million raise for us didn't get their 6%. So they started pressuring me hard core. No, just buy it and you can fix it, you know what you're doing. I'm like, no, I'm not paying for something that just doesn't make sense. This is not right. Something's wrong here. I can't do it. We backed out of the deal. We got into a big argument with them. I ended up firing all my financial advisor, fired people that were raising money for us about mid 2014. Then about a month later, a group from California came out to me and said, hey, we've got a proposal for you.
They hand me this book and it's called the do nothing proposal. I'm like I'm good at doing nothing. I like this, and I opened it up and it says you should do nothing other than buy back your stock as long as your free cash flow yield is over 10%, and your free cash flow yield today is 32.6% or something like that, at the time. Because I didn't do the deal, the stock had gotten beat up. I was like hmm. So I started looking, I was like, and then explain to me how the deals we had done in the past with equity had been the most expensive capital that we could use because of the free cash flow yield. We started looking, really got me into it. That's why I started and I was like, so basically within, I don't know, probably a month we had settled everything down. We stopped looking for acquisitions. We closed down anything we were doing. We literally took all of our free cash flow every week and started buying back stock.
If I had $500,000 in extra cash that week, I would call the broker on Monday and say buy me $500,000 of the stock this week. I'll talk to you next Monday. That was my job for the week. Like I said, I was really good at that doing nothing. As we did that, we started buying back lots of stock. If we look at the originally fully diluted basis, we had 10.8 million shares outstanding, and today we have 9.4. We've used half a million on one acquisition, 200,000 on another acquisition. But the 200,000 that we used at $80 a share on this acquisition in March, we bought back at an average price of $65 a share over the period of time after we did the first acquisition. We've been very lucky and timing and following the strategy. It really works. If we set a hurdle rate for ourselves, if we are going to invest money, if our free cash flow yield at 10%, then anything money we invest that's not buying back our own company, we want a 25-33% return on, cash on cash. I don't worry about levered returns, we have bank financing now. Until 2017, we didn't have bank financing.
Everything was cash or seller financing or super high interest, 12%, 14% money from hard money lenders. That's really changed the ball game for us between 2017 and now. If you look at our stock today, we closed at a 52-week low today, which I'm just in shock over because, I mean, I guess not really because we've been weakening and people have misunderstood or misunderstood where we're going because they're looking at our post-COVID numbers and I tell everybody, we got to throw the last three years away. There was no normality to anything, there was no seasonality. In the summer time, when numbers were supposed to get down, we started running record numbers. When the numbers were supposed to go up, our numbers were off. It's like there's no normality to anything because you'd get open and then we'd get close, the COVID closes down. Then there'd be another scare. We got to put your mask back on. You got to do this, you got to do. There was no real normality. Especially like the restaurant side, you look at the restaurant association where they say like 40% of mom and pop restaurants went out of business during that three-year period of COVID. What we've had in the last 12 months is new operators leasing all those buildings or renting all those buildings, opening new stores. We had the big bump because everybody was closed. Then we get this dip because now everybody is reopening different stuff, but it's new.
When anything is new, it has a honeymoon period. That's why if you look at most restaurants, including Bombshells, we don't include them in same-store sales for 18 months because the first six months are abnormal numbers, because you're boosting, because you're in your honeymoon period. We were going against outrageous comps from a year ago and getting hit by all these new places opening up, they're in their honeymoon periods that didn't take just their business back, but took a little bit of our business as well. We probably could have been a little quicker on raising some prices and doing a few other things. At the same time, we had labor squeezes, so we had lots of overtime, so our labor costs got out of whack. Food costs were fluctuating. We played these games. Right now, Bombshells is running, I think we had a 15% margin, we had 12.9% in the last quarter. I'm not sure what this quarter is going to be. We did raise some prices at the end of June, so it should help and stabilize, I think. But we should be back to our 18-22% margins. But what people were looking at before was 28% margins, 32% margins. You can go back and listen to earnings conference calls. I talked to one of our largest shareholders and he'd say, "We can extrapolate this out over the next three years," I said no, those margins are not doable on a long-term basis.
Ricky Mulvey: Yeah, I think one of the things that often affects stocks is when a Wall Street analyst has to change his or her model. You must be in a tough environment where the denominator isn't going back to 2020 or 2021 levels. Now it's the 2022, the post-pandemic reopening boom. I would say a lot of not long-term investors, but traders are just looking at that one year same-store sales number.
Eric Langan: Well, if you look, it's computers that are selling our stock.
Ricky Mulvey: Yeah.
Eric Langan: I can't remember if it's Dimensional or Renaissance, but they're both computer-ran funds. Computers do all the buying, all the selling, and they were net seller in the last quarter based on their 13F filing of 300,000 shares, which is a huge part of the volume for that quarter. So I look at our shareholders lists and I look at the 13, the humans that own our stock are holding it. The computers are doing a lot of the selling right now. When the computers run out of stock, and they will, their accounts are at all-time lows. At one point, Dimensional owned 985,000 shares of the company, which, because of our buyback at that time, that same quarter we bought back a bunch of stock. So they ended up being a little over 10% of the company. I'm sure they sold immediately after we filed, sold down under 10%. But they also kept right on selling and they've continued to sell. You can look at their 13F, like I said, and see that they are very small portions of our holdings now. As those computers run out of stock, eventually we will turn I think as early as first quarter '24, which is October. We're a fiscal year, so maybe October, November, December. By February, the computers could flip because we started down about mid-October last year, the blue collar customer started getting hit in mid-October. We stabilized that customer by April. Then in May, our high-end customer started planning European vacations, Mediterranean vacations.
This summer, our super high-end customers, in the casino terms, they call them wales, but our big spenders were all gone. They were all out of the country. So we saw our big tickets just shrink, went from 25-plus a week to 5,000-plus to a one a week at one of our top locations in the country. So we started looking as like, "Wow, we're really being affected to tune of a couple million dollar this quarter of top end customers," and that top end customer is VIP room, high dollar champagnes, bottle services that are super high margin for us. Not only do we lose the total revenue, but we lost a much larger share of our bottom line margins through that. But they're coming back, they're back from vacation, kids are back in school, weather is changing. It's getting dark earlier and we'll start seeing that customer. I really think the turning point is this next quarter and for sure January, February, March. Sometime between February and May, all those computers are going to switch their models, the quants as they call them, and the quants are going to go, "Oh, we better start buying the stock again," and I think the stock will rebound pretty nicely, especially as we continue to get out on X and get out and put humans in the stock. We hired Equity Animal out of New York to bring us in, and we went from a little over 6,000 shareholders to a little over 9,000 shareholders now. Sure smaller shareholders, but I always say it's real simple. I need 900,000 people to buy 10 shares, or I need 90,000 people that can buy 100 shares, or 9,000 people that can buy 1,000 shares. So I just started playing as a numbers game.
I used to be in door-to-door sales as a kid, and I started to say we just got to knock the door. So let's just keep knocking doors, knocking doors, and it's working. We're seeing those shareholders come and they're holding. They're buying, they're holding. Yes, the stock was 90 something in January. It's back down to 60. The market is up 15 points, we're down 30%. But we were also at an all-time high in January. I mean, not just a 52-week high. I mean all-time. We've never traded at that valuation before. So I always thought it would return to the mean. I thought the stock would stay between 70 and 80. When it dipped below 70, I was surprised. We held 68 for a long, long time. We finally broke through that 68 support recently, which according to quant charts puts us at 64. We've now broke through that. So next support level I think is 58. We'll see if we can hold 58 here. I mean, like I said, the humans that I talked to and the people that I've known me for a long time, they're all calling me and saying, "Hey, is your stock a buy?" I said, look, based on our cap allocation strategy, you can do the math. We're buying, and I've put it out there pretty publicly that basically, we buy about $100,000 worth of stock a day as part of our deal. We don't buy every day, and sometimes we do. It really depends on our total cash. If we have places to put that cash, if it's a 10% or 12% yield, but we have a place to put it that we think we can earn 30% plus, it makes more sense to invest it at a 30% plus ratio. But we get a certain amount of cash on our books, which typically right now that number is about 25 million. If we're over 25 million in cash on the books, we will buy every day. If we get between 20 and 25, we may skip a day here or there trying to let it catch back up.
Ricky Mulvey: For the humans invested in RCI Hospitality, how do you want them to judge the health and growth of your company?
Eric Langan: Well, I think you have to look at 2023 as a growth year for us because we didn't do any acquisition. We did acquisition, but we didn't do any new builds. We didn't build more Bombshells. We found these casino properties. We're building three nightclubs right now, Fort Worth and Lubbock, Texas. So we have some clubs under construction as well. With all these projects, there's a lot of, I call them anchors or some drag. There's drag on stuff. Our margins, we shoot for 30% even margins, 20% free cash flow margin on total gross revenues. We were hit 19 in change and we hit 29 in change in this past quarter, but there's a lot of drag on with all these projects that we're doing. Architects being paid and attorneys and carrying costs for whether it's property taxes or utilities. There's a lot of little things out there that we're spending money on, travel to go to these sites and meet with people and get construction started, and get the GCs working. All that is going now, and it was really because of COVID we stopped. We got closed down. We didn't really know what was going to go on. We finally got some stuff open in May. We struggled for that 6-8 months. Then we finally got open and we started doing so good. We were so busy that we didn't really have the time to go hunt new projects. But then last year, we started hunting the projects.
From the time we start till the time we open is typically 12-14 months. So the first one will open in October of these 14 that are in line right now. We'll probably open six or seven of them this year and six or seven of them in fiscal '25. I don't have to look for anything right now until the end of calendar '24. After December 2024, early '25, I'll start looking for stuff that's going to open in '26. We're in pretty good shape there and I think these things come online. The drag goes away, and they start income-producing. We're going to get back in. If you look at our five-year CAGR rate through June 30th, we're at 20% free cash flow per share growth in the previous five years. That's through COVID. I think overall our growth has been solid from when we started the capital allocation strategy eight years ago. We're doing 15 million in free cash flow. I project that 2024 we're going to come in over 70 million in free cash flow. So that's not bad growth for an eight-year period, in my opinion. I take it.
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 or sell stocks based solely on what you hear. I'm Deidre Woollard, thanks for listening. We'll see you tomorrow.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Deidre Woollard has positions in Alphabet, Amazon.com, Apple, Nvidia, and Walt Disney. Jason Moser has positions in Alphabet, Amazon.com, Apple, and Walt Disney. Ricky Mulvey has positions in Netflix and Walt Disney. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Apple, Netflix, Nvidia, Qualcomm, Salesforce, Walt Disney, and Zoom Video Communications. The Motley Fool has a disclosure policy.
