In this podcast, Motley Fool senior analyst Jason Moser discusses:
- The relative strength of Planet Fitness.
- How “exercise at home” has been around for decades.
- Amazon testing flying drone deliveries in California and Texas.
Plus, Motley Fool analyst Dylan Lewis and senior analyst Asit Sharma discuss what growth stock investors should be considering this year, as well as one business in particular with tailwinds (despite a tough environment).
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 Jan. 3, 2022.
Chris Hill: Flying delivery drones are finally here. Yes, really. Motley Fool Money starts now. I’m Chris Hill. Joining me today, Motley Fool senior analyst Jason Moser. Happy New Year.
Jason Moser: Happy New Year to you.
Chris Hill: Let’s start the first trading day of 2023 by talking about something that so many people focus on in early January, and that is physical fitness.
Jason Moser: I thought you were going to say taxes or something like that. Just kidding.
Chris Hill: No. I don’t want to start the year on a downer.
Jason Moser: Nobody does.
Chris Hill: Although physical fitness isn’t necessarily all that fun anyway. You know what? People should just stop listening now. No, I did want to get your thoughts on this because Chris Rondeau, who’s the CEO of Planet Fitness, and he’s been the CEO for 10 years. He was on CNBC this morning. Like any responsible CEO, he was talking his own book. He was talking about the strength of the Planet Fitness business and when he got a question about Peloton and at-home fitness, I thought he handled it well because he said, look, there’s always been a push for at-home fitness, even invoking Richard Simmons and Jane Fonda workout videos, something that younger listeners might be scratching their head at, but older people like you and me nod along and say, I remember that.
But it prompted me to look back at the business of Planet Fitness pre-pandemic, and I guess my question for you is, is this a business that you think is worth a look? Again, there’s always enthusiasm for physical fitness at the start of the year. If you can tell me that they’re going to retain a high percentage of the new customers they get, then I think I’m more interested, but what do you see when you look at the books of Planet Fitness?
Jason Moser: I think first I probably would have said just no, full stop. This is not a business I’m really interested in and just moving forward. I’m not anti-fitness, don’t get me wrong. To your point, it is one where it feels like fitness gets a lot of hype. At the beginning of the year, people are making New Year’s resolutions and then it fades and then you hit the reset button and you go back to square one the following year. I think in the case of Planet Fitness, though, it is interesting, I think the story. I think that there’s an opportunity there. They quote in their research there are 80% of consumers without a gym membership today and obviously that’s a lot of people. One of the things I think we learned through the past couple of years, it’s a lesson probably some of us knew, some of us learned, and for some of us, it’s been reiterated, it’s to be careful investing with that absolute mindset.
What I mean by that is it’s saying something like at-home fitness will render gyms obsolete. I think that was a very easy thing to say over the past couple of years but when you take a step back and actually think about it a little bit more deeply, realize that that’s a flawed statement. That’s not really something that’s going to play out. I think we’ve seen that through the numbers that Peloton continues to record and the, I would call it less-than-enthusiastic rollout of Apple‘s fitness products. I’m sure there are plenty of Apple diehards out there that use it, but it’s certainly not making headlines. Over the past couple of years, at-home fitness made a lot of sense, but you made a very good point there early on and I’m glad that he mentioned it too in that interview.
He’s like, you go back to the days when we were kids, we remember the Richard Simmons, Jane Fonda, at-home fitness’s always existed in some shape or form. That’s not really new. I think what’s new is just what technology can do to enhance it and obviously the equipment side of things that makes it a little bit more compelling in certain cases. I was thinking about this from the perspective of some LinkedIn data that we used to tout. Remember when LinkedIn was a publicly traded company and you have LinkedIn and [Meta‘s] Facebook. It was the early days of social media and we had the social network and the professional network and LinkedIn always touted that data that people wanted to maintain separate identities.
They wanted their professional lives to be separate from their personal lives and that’s why LinkedIn didn’t feel as threatened by Facebook at the time. I think that made sense, and I think that’s held up rather well. I think it extends further out, too. Over the past couple of years, we’ve seen the benefits of being able to live a hybrid lifestyle and get things done when we needed to get them as opposed to having this siloed existence of work, home, and wherever else you’re going to go throughout your days, and your weekends and whatnot. We’re seeing this play out of Planet Fitness’s numbers. People want to go to the gym. Maybe not everybody, but people want to go to the gym.
Chris Hill: I think that Rondeau and his team are smart by really pushing moderation. One of the things he talked about was, we don’t want people joining a Planet Fitness gym and coming seven days a week. That’s a recipe for burnout. We want people coming two, three times a week, get a good workout, and that’s really the pathway to a longer relationship which is, look, there’s so many businesses and Planet Fitness is one of them. Part of what they’re dealing with is customer churn. If you’re Rondeau, you’re looking to get new customers in and keep them for as long as possible.
Jason Moser: I think that’s always going to be a challenge for a company like that, for a concept like Planet Fitness. Churn, I think is always just going to be part of the beast there, unfortunately, but when you look at the actual numbers of this business, I was actually pretty impressed. Just looking at it from a numbers perspective, for example, look at their recent 10-K, and you go back to the end of 2021, they recorded 15.2 million members as of the end of 2021 and that compared to 10.6 million at the end of 2017. Now, if you look at the end of this third quarter that they just recently reported, they now stand at 16.6 million members. That membership is growing. When you look at the revenue numbers that they’re recording, they fell off a cliff in 2020 for obvious reasons. They recorded $363 million in revenue.
But then it started coming back around 2021, $534 million, trailing 12 months, $782 million in revenue. This is a company that continues to grow. Going back to that 80% number that I quoted earlier, you’ve got an opportunity there, 80% of consumers without a gym membership. Now, think about this from the perspective of just economics. I mean, at-home fitness is what you make it. But a lot of what it has been made out to be over the past couple of years is buy this killer piece of equipment, subscribe to our service, and you’re set for life. Well, I don’t think that’s going to work because I think people are finding more and more, they actually do want to get out. I think a lot of people are finding they want to maintain separate professional lives, separate personal lives, and separate fitness lives perhaps as well.
But I think just from the perspective of economics, you can right now join a Planet Fitness for one dollar now and $10 a month. Think about the risk that entails versus buying some thousand-plus-dollar piece of equipment. It oftentimes it’s far more than that, even refurbished stuff. The economics just make sense for the gym perspective versus the at-home fitness, and so then the consumer has to weigh. Is it the convenience that I want, am I going to just commit myself to this one piece of equipment, or would I rather save a lot of money and have to maybe suck up driving to the gym a couple of times a week, but I’m going to have this whole wide world of equipment services and whatnot that I can benefit from. To me, it’s not to say that Planet Fitness is just a no-brainer winner, but it certainly presents a very compelling value proposition for folks who are looking to bring more fitness into their lives.
Chris Hill: Let’s move on to a future that’s been delayed a couple of years, but it appears to finally be here and I’m referring to the future of flying drone delivery. Amazon is now delivering small packages by flying drones in California and Texas. This is a part of the business referred to as Amazon Prime Air. This is something that I think it was 2016, 2017 that CEO Jeff Bezos was on 60 Minutes touting this. They got the clearance from the FAA in 2020 but now they’re testing it in these rural areas of California and Texas. I don’t know about you but I’m really curious to see where this goes. Because I can see this not having a huge material effect on the company’s bottom line anytime soon. I can however, see depending on how the next 12 months goes, this could be a nice little ripple effect in terms of cost controls.
Jason Moser: Well, yeah, you said I think the key words anytime soon. I don’t think this is something that’s going to just immediately boom, just change the outlook for a company like Amazon, particularly when you consider how big it is now. But yeah, to your point, it just went from like a seed of an idea in an interview 10 years ago almost to something that’s actually now starting to bear fruit. As often as is often the case with Jeff Bezos, it just takes looking at it from a very long-term perspective. That’s his forte, is long-term thinking and this is no different. For me, I’m excited as a consumer because I think it really does open up a world of possibilities. We are living in an on-demand world and delivery is just such a key part of that. We’re seeing FedEx and UPS deal with those challenges.
We’re seeing Amazon jumping there to try to capitalize on the opportunity and soak up some of that excess demand as well. I love the fact that this is making progress and I think it has a lot of potential. It makes sense that they’re starting small in areas where it would be relatively easy to manage. Because while they say the drones are autonomous. They’re managed by humans, people are overseeing these deliveries and that makes all the sense in the world. There is going to be a point where you wonder will the AI or the machine learning get good enough to where they can scale this because that’s ultimately the goal. They’ve got to figure out how to scale this. You can’t have 50,000 people monitoring these deliveries 24/7 which is not cost effective. There are dangers involved. I was reading about one incident here. There was a test site in Oregon, the drone fell from the air, 150-plus feet out of the air and started a brush fire that went across 25 acres.
Chris Hill: That’s a problem.
Jason Moser: I mean like that didn’t go well. You’re going to have to contend with all sorts issues, whether it’s other drones, power lines, whatever. But again, we were talking about them, and many people were looking at this 10 years ago thinking there was absolutely no way this is going to work. It’s just no. No, it can’t happen. We’re seeing that it can happen. And I mean, he’s getting the green light from the regulators to at least try to build this out to some capacity, and maybe it’s something that serves more underserved areas than everywhere.
But ultimately, I think this is just another example of Amazon’s philosophy of just taking that uber-long-term view, trying things, knowing that not everything is going to work, but you take lessons away. Again, this is one of those things that really just exists right in their wheelhouse so I suspect it’s something they’ll continue to work very diligently on and I would imagine that we will see this continue to roll out in the coming years. I think consumers, you need to be excited about that and certainly as an Amazon shareholder, you should be excited about as well.
Chris Hill: One more thing to keep our eyes on Jason Moser. Thanks for being here.
Jason Moser: Thank you.
Chris Hill: Over the next three days, we’re going to be taking a closer look at different categories of stocks and what you might want to think about in year ahead if you’re considering making an investment. Today, we’re starting with growth stocks. Dylan Lewis and Asit Sharma discussing new questions they’re asking about growth stocks, and one business that still has tailwinds in a tough environment.
Dylan Lewis: I think when you look back at 2022, there are a lot of takeaways. In general, it’s been really tough year for the market. I think there are perhaps more lessons in the growth stock category than almost anywhere else. When you look back over the past year, what do you think of? What are your meditations on the growth area?
Asit Sharma: Yeah, Dylan, so many big-picture things changed that little pieces of investment theses we were making on growth stocks. Those also have changed as well. I think of this as similar to basketball. You see in basketball you’ve got the three-point shot. You’ve also got free throws which are worth one point. If the team is really great shooting from the outside, you don’t have to worry how good they are at the line when they’re making those free throws for one point, but take that away. Suddenly the little things matter more and with the change that we’ve had in interest rates with inflation being so high. This has an effect on the way investors value growth stocks and there are certain things that you’ve got to pay a little bit more attention to that play out in an investment thesis.
Dylan Lewis: I think that there are probably a lot of listeners that are in a pretty similar position to me Asit where I started investing in 2014. So much of the macro environment that I grew into and really learned how to invest in was one of money being relatively easily available, of companies being rewarded for growing their addressable market and to some extent, figuring out the bottom line later, what would you give as advice for this new chapter for a lot of people that maybe haven’t lived through some of these periods before?
Asit Sharma: Sure Dylan, and same with me. I’ve been investing for quite a long time, but periods like this has low you in some ways, so you forget the lessons that you know are there, you have to pay attention to. Let’s talk through a few of them. One is something you just touched on, which is grabbing market share when interest rates are low and money is flowing, so money is flowing in the capital markets, investors are gladly putting money into growth stocks. People really don’t care at what cost a company grabs its market share. The idea is at some point down the road, those cash flows are going to be really valuable if you were investing in a company that’s got very persuasive products and services in the marketplace so when that picture changes, the present value of money decreases, interest rates go up, your dollars are worth less in the future.
You start to pay attention, how much is this company really spending to grab that market share? Is it running at a big loss? Because if money is worth less, those future dollars are going to be worth less to me, maybe I don’t want to pay so much for that stock today. Another thing I think we should be more in tune with in the growth stock arena, and I’ll say here, so many growth stocks are technology-oriented, if not tech stocks themselves, is what yield on your R&D spend, your research and development spend, are you getting? When times are flush, most investors just want to see that a company is spending more and more on research and development as it’s increasing its sales.
But in a time like this, we have to see what are you getting for that spend? Are you turning out additional products and services at a regular cadence? Are you increasing your competitive edge? That’s very important. Just a few more that I think will make sense to many investors, what is the clarity of future cash flows? In other words, I know this company is going to generate cash flows in the future and look how it’s growing, it is conquering its market. But if I can’t see the bottom-line return on those revenue dollars, then I should take a pause in an environment like this, I shouldn’t just blindly invest in a company. I should be able to see that they’re going to be able to scale with profit and generate lots of cash flow, generate profits according to generally accepted accounting principles or GAAP, and just a couple of other things.
The quality of the customer base becomes more important when money starts to curb a bit in terms of investment, you don’t want to get as many as customers as possible. If you are in the growth stock arena, fewer hands with deeper pockets makes a lot of sense. You can grow a lot easier that way. Then finally, I’ll say to me, something that’s very important in an environment like this is to not simply be a challenger company, but to have a path where you can be a dominant top 1, 2, or 3 company in your particular niche or industry. Because when you have that, that points to the stability of those cash flows in the future, you’ve already achieved the status where you’re now deflecting competition rather than being a scrappy upstart that is maybe generating losses now to get there. You tilt a little bit more to the companies that are more clearly becoming these dominant type of companies.
Dylan Lewis: Now Asit, I’m sure there are some listeners that are like me staring at their brokerage account, seeing that there are businesses that maybe a year ago they absolutely loved. Now, maybe they like or love a little bit less, are some of those growth names but maybe aren’t profitable. At what point are you willing to accept a business not being profitable? Where does that spend go? You mentioned R&D before. How are you trying to assess a business that maybe doesn’t have cash coming in in the way that investors are currently rewarding, but you’re willing to accept it because it’s checking other boxes.
Asit Sharma: I think for companies that are clearly obtained that market position and maybe have a reason to show big losses on their income statement, it can make sense, and here many of you will already see where I’m headed with this. We’re thinking about stock-based compensation. If you know that a company is having a lot of it’s SBC, in other words, offering a lot of stock-based compensation to software engineers, to very high-level salespeople, they’re building out a direct sales force, for example, that can be acceptable. A company, which is throwing money at their whole equation and being indiscriminate with how they use that stock-based compensation can be a red flag, frankly, because it means that true operating cash flow is never going to be that strong, so it’s, again, a question of quality.
That’s a case where I think I can be a little more comfortable with a company that has losses today. When we think about the macro picture, which is certainly affecting all of this, there’s something else that comes to mind and that is the fact that uncertainty is the defining feature of the macro picture right now. That means that you and I probably are being more careful with what we spend as we see the price of milk going up, but businesses are, too. They’re pulling back on their spend. Where I see a company that has something businesses must purchase, digital transformation services, one that I’m particularly fond of, but cybersecurity is another. You can feel a little more comfortable if a company is reaching that dominant position but still generating losses because people have to have that product or service.
Dylan Lewis: Given everything that’s happened over the last year or so, I think the Vanguard Growth Index is down 30-plus percent over the last year. By comparison, I think their value index is down about 5% over the last year. It would be easy, I think, for people to swear off growth names, especially because some of the individual stocks in that category are seeing much bigger declines from all-time highs. My confidence isn’t shaken in the space. I feel like personally, I’m just refining the approach a little bit. Is that how you and the Stock Advisor team are tending to think about it?
Asit Sharma: For sure. At Stock Advisor, we have two recommendations every month, month in, month out. We’re always looking for great businesses. We’re looking to rerecommend some of our favorite names that have been beaten up. One of the reasons for this is that you dollar-cost average in a down market, into great companies. It’s so hard to see the future. When you’ve gone through a year like 2022, your mind gets in the weeds, your soul gets in the weeds. You look at that brokerage account, it’s all in red. But the ability for us to be able to see past that five years from today, 10 years from today.
If we could jump to those points today, we wish in hindsight that we had taken advantage of the opportunity to buy some of these businesses at a really great point to average out our cost basis, and that leads to those future returns. It’s more about tweaking the approach being a little bit more rational. Looking at some of the things I talked about earlier. Still buying great businesses, being a steady buyer in the market is extremely important. It’s not about shying away from growth stocks. One thing history shows is that growth stocks drag the market down, but they’re also the most resilient on the way back up, and those are times where many investors wish they hadn’t stopped buying those quality high-growth companies.
Dylan Lewis: If Asit’s impassioned plea right there got you hooked and you are not swearing off growth stocks, don’t worry, we have a growth stock idea for you and we’re going to talk about a business that you feel like checks a lot of the boxes for a quality growth company, even in this tougher macro environment that we’re in, and that’s CrowdStrike. Why was this a business that you wanted to surface as a best-in-class growth company?
Asit Sharma: CrowdStrike, No. 1, Dylan, it plays in the cybersecurity arena. I’ve mentioned that when companies are pulling back on spend, it’s a very strong idea to buy those companies that people can’t ignore. You really can’t ignore the need to have endpoint security within your organization, to protect your network. There’s so many different facets to cybersecurity that you have to pay attention to as a business in this networked world. I think it’s fun that CrowdStrike itself has a yield on its R&D, which is easy to see. The company has no less than seven different services within this Falcon platform, which is a crowdsourced platform that serves billions of data points every day, and everyone who is a member of CrowdStrike services, everyone who subscribes to their services gets the benefit of this data collection and identification of new threats.
We see that yield on the R&D spend. In addition, CrowdStrike’s products are extremely sticky. If you look at their most recent quarterly report, Dylan, they say that subscription customers that have adopted five or more, or six or more, or even seven or more of their modules, equals 60%, 36%, and 21% of their customer base, respectively. As time goes on, they’re selling within their platform without much efforts, every upsell you can do to a current customer, obviously is a more efficient spend versus going out and getting a new customer, and this goes back to those favorable unit economics I was talking about at the very beginning of our conversation, you want to grab market share at a reasonable cost. The other things that we like about it in Stock Advisor just the growth rate, the fact that this company is growing its revenue, it’s gross profit at 50%-plus year-over-year cadence, it’s obviously becoming dominant in its industry.
Lastly, I will say, what’s so important in this day and age in this high-inflation, high-interest rate environment is that they’ve got extremely vigorous cash flow. They do have GAAP net losses. But when you look at actual free cash flow, you take away some of the non-cash expenses like that stock-based compensation, the cash flow yield on this company is really attractive. In this most recent quarter, their cash flow is extremely impressive. In this most recent quarter, the company generated 30% free cash flow yield in comparison to revenues. For every revenue dollar, 30% of that became free cash flow.
Dylan Lewis: To summarize Asit, strong relationship with their customers, decent cash flow and improving business economics, and they are at a crucial crossroads. For most businesses right now it’s spend that will not be going away anytime soon.
Asit Sharma: Very well stated Dylan, I wish I could have said that so simpler.
Dylan Lewis: Well, I got to summarize it. I got the easier job here. CrowdStrike is not only a best-in-class growth company from the Stock Advisor team, it’s also one of the businesses that Stock Advisor team put together as part of a report for 15 stocks to kick off 2023. That report and a member event that will be tomorrow hits growth, dividend, value, energy and multibagger categories of stocks. If you want more stock ideas and you’re not a member, don’t worry. We’re going to be doing a stock idea every single day this week, checking different boxes. You’ll be hearing about dividend and value opportunities later in the week. If you want the full rundown on companies from the Stock Advisor team, just become a Stock Advisor member. You can check things out. The member event will be available for replay. Asit, thank you so much for bringing this company to our listeners and thank you for your view.
Asit Sharma: Thanks a lot, Dylan. This was a great conversation.
Chris Hill: 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 Chris Hill. Thanks for listening. We’ll see you tomorrow.