In today's episode of the MarketFoolery podcast, Chris Hill talks with David Kretzmann from Supernova about today's market news. Tesla (TSLA +0.91%) is getting a chunk of semi truck preorders from the likes of Pepsi (PEP 0.27%) and Anheuser-Busch InBev (BUD +0.72%) while the Model 3 is still experiencing production issues.
In a year of lifeless IPOs, new IPO Stitch Fix (SFIX 3.46%) -- a subscription-based company that uses algorithmic data to send its customers tailor-picked clothes -- is taking off, and RBC Capital (RY +0.66%) is taking note. Google (GOOGL 0.41%) (GOOG 0.20%) has overtaken Facebook (FB +0.22%) once again in the marketing traffic war, but that battle is far from over.
A full transcript follows the video.
This video was recorded on Dec. 12, 2017.
Chris Hill: It's Tuesday, December 12th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today, from Supernova, David Kretzmann. How are you?
David Kretzmann: I'm doing well. It's a good Tuesday. How are you?
Hill: [laughs] It is a good Tuesday. Why are they laughing, you may ask as you're listening to this? Well, it's something that happened right before we started taping, and we're just going to keep that to ourselves, because that's just kind of mood I'm in. We're going to talk upgrades. We're going to talk publishing, because the Google-Facebook war continues. But we're going to start in the automotive business. This is something, David, that we talked about on Motley Fool Money last week. And last week, it was Anheuser-Busch InBev buying 40 semi trucks from Tesla. Today, the news comes out that Pepsi, which does a fair of shipping, they're buying 100 trucks from Tesla. I guess that's good for Tesla, because I assume they're getting that money up front.
Kretzmann: Yeah. They initially set the pre-order price for these semi trucks at $5,000, and that has since gone up to $20,000, so they're bringing in some decent money. Reuters says that Tesla has 267 confirmed public reservations to date, so that's a couple of million bucks that Tesla has now that they didn't have a month ago. So, give Tesla credit. They, especially Elon Musk, are great at building up anticipation, building up excitement around future product launches. I think the ultimate question here continues to be, can they get to the point where they execute and deliver on those expectations relatively on time? At this point, I think there are still a lot of question marks out there. Obviously, they're going through some issues scaling production of the Model 3, their mass-market vehicle, and then adding on anticipation for the semi truck, the Roadster 2, on top of that, coming in the next couple of years, that adds question marks. At some point, they need to not only promise but also deliver. They still have some work to do there.
Hill: So, a couple of interesting things here to me. One, you mentioned, initially, Tesla was looking for $5,000 up front to reserve these trucks. Then, they bumped that up to $20,000.
Kretzmann: Yeah, why not?
Hill: You know, good for them, because if they feel like they have that kind of pricing power, and Pepsi is going to cut that kind of check, good for them. But, and this is something that Tim Hanson and I talked about last week, when you think about how Tesla has done in terms of delivering vehicles to people who have ordered them -- let's put the trucks aside for a second, just individual people. People are excited to get their Model 3, and they're willing to wait for however many months, and sometimes it's more than a few months. We've seen stories of secondary markets popping up on Craigslist where people are selling their $1,000 deposits -- essentially selling their place in line to people who are further back in line -- and they're selling the $1,000 reservation for $3,000-4,000.
Kretzmann: I'm so disappointed I didn't do that. A year ago, I had reserved a Model 3 because I was like, I'm not at a point right now in my life where I need the car, but in a couple of years, if I'm at a point where I need a car and I can afford it, the Model 3 would be a pretty cool initial car. But then, this spring, I was thinking, there's no way I need a car, let alone a $35,000-40,000 car to be my first vehicle here in the D.C. area, so I went through the process of cancelling the reservation. And it took a few months, and Tesla is not very responsive, so I went after them on Twitter and sent them a couple of emails and I finally got the reservation check. Then, probably a month or two after that -- that was in July, when I finally got my reservation check refunded -- that's when I saw the stories of people, like you just mentioned, selling their place in line for $3,000-4,000, and I was like, why did I not think of that. Left a couple of thousand dollars on the table, apparently.
Hill: So, consider your own personal experience. You're a young person, and you think, I don't need this right now, but at some point in the future, this might be nice to have. Which brings us back to the trucks. AB InBev, Pepsi, they need these trucks. They're not going to wait around. Unlike what we've seen anecdotally with people like you and other individuals with their cars, in some ways, am I wrong in thinking that these deadlines are more important to Tesla's reputation than the deadlines for individual car owners?
Kretzmann: I think there's something to that. The orders that are coming in from Wal-Mart, Sysco, PepsiCo, Anheuser-Busch and some of these other companies, they tend to be a small fraction of the vehicles that these companies have on the road. I think I saw, at PepsiCo, they have at least several thousand semi trucks on the road in North America. So, this is more, they put it in the test run category, like, we'll give this a shot. A lot of companies are trying to reduce their emissions by 2020 or 2030, and certainly, if an electric semi truck is feasible, it also saves money in a lot of other ways, you don't have to spend that much money on diesel, obviously better fuel emissions and a lower carbon footprint, then I think you would see those orders kick up over time. I think most important is getting the product right, delivering on those expectations. If you do have a several-month delay, that's probably not the end of the world, since this is such a new leap forward, as far as technology goes, especially with semi trucks. But, they do need to get it right. I think that's most important. If you do need to delay it a few months to get it right, probably worthwhile. But if you are delaying a year or two, it leaves room for competing solutions to come in, and it certainly damages Tesla's reputation, which at this point, people sort of just assume that any target launch date they have for a product, knock it back a few months and it's more realistic.
Hill: Let's move on to Stitch Fix, which got an upgrade this morning from RBC Capital. Technically not an upgrade, I think RBC just initiated coverage and slapped an outperform label on Stitch Fix. Stitch Fix is an online personalized clothing company, one of those, you have a stylist that's assigned to you, that sort of thing. I have not used it. Our colleague, Kristine Harjes, when I was in the mailroom yesterday, I noticed there was a Stitch Fix box for her there. So, I chatted with her this morning about it, and she seems pretty pleased with it as a consumer. As a business, this is a company that's been public for about an hour and a half.
Kretzmann: They're young.
Hill: This is a young public company. But, unlike some other companies that have gone public in 2017 and have suffered right out of the gate, this is a stock that is up 60% since they went public in late November. When you look at this company, what do you see?
Kretzmann: What's interesting about the IPO is that they actually lower the price for the IPO. And now that the stock is up, like you said, 60% or so, the company is valued at around $2.2 billion, they probably left some money on the table because they went into the IPO roadshow where they were talking to the investment banks and essentially pitching the company, for whatever reason, they felt they had to lower the share price to really entice those institutional investors. But they probably could have stuck with their initial range. This is an impressive company. They started in 2011, founded by Katrina Lake, who still owns 15% of the company even after the IPO. She's still CEO. Through 2011 to today, before the initial public offering, they only raised less than $50 million from venture capital investors, which is impressive. So, they were able to grow to almost a $1 billion revenue business through their own cash flow.
Hill: That is impressive.
Kretzmann: Yeah, you don't really care about that much coming out of Silicon Valley, or really with many young companies today, especially with that rate of growth. They've managed to build a nice, sustainable business without having to rely on outside capital or debt. Even going into the IPO, they have $110 million in cash and no debt, so they weren't going public just to raise cash, they really didn't have a shortage of cash. So, it'll be interesting to see what they do with this extra infusion of cash. I think they ended up just selling less than 10% of the company in this IPO. A lot of interesting things. I think the ultimate question with Stitch Fix is, what will their customer acquisition costs look like, and how will that trend over time? I think part of what you're seeing here is, they've really done a good job of capturing the low-hanging fruit customers who will be early adopters and drift toward a service like this where you're matched up with a stylist, they'll send you a box of five pieces of clothing, keep what you want, send back what you don't and get refunded for that. But, over the past year, they tripled their marketing cost, and revenue only grew 34%. So, as it gets harder to bring new customers on board and that marketing cost goes up, maybe the financial profile of the company doesn't look quite as appealing. That'll be, I'd say, the main thing to watch over the next year or two, just how they manage to bring in and retain new customers. They've done a pretty good job so far, but the fact that marketing costs have gone up so much and revenue has started to decelerate, that's a yellow flag.
Hill: It absolutely is a yellow flag, but it's interesting, because this is one of those services that, in theory, should be able to learn more about you the longer you are a customer. So, presumably, if they do a good job with new customers right out of the gate, then the more items to buy, the more they learn about your personal style, the more they're able to tailor what they're sending to you. So, if they have their algorithms right, it should get better over time.
Kretzmann: It's definitely a data-driven company, kind of like the Netflix of online personalized clothes shopping, that's one way to look at it, the Netflix of fashion. Not only do they learn more about you, but they learn, people with similar tastes to you like this, we'll recommend this to you this month with your box of clothes. So, certainly, as they refine that algorithm, they get more data, they get better at using that data to fine-tune what they send and offer customers, that should help. Ideally, you get to a point where the marketing expenses are growing at a similar rate of revenue, not double or triple what revenue is, because that's unsustainable. But, up to this point, you have to give the company a lot of credit. In an age where it isn't difficult to get funding from the private markets if you're going really quickly, they managed to raise relatively very little capital and fuel that growth on their own. So, they deserve a lot of credit for doing that.
Hill: One more time, the name of the founder CEO?
Kretzmann: Katrina Lake.
Hill: She sounds like someone to watch.
Kretzmann: She's impressive.
Hill: That's really smart. Google is back in the No. 1 spot when it comes to referring traffic to web publishers. This is according to an article on Recode. Facebook had overtaken Google in terms of referring traffic for web publishers, and they have dropped while Google has gone back up pretty significantly. And I'm assuming, if you're a web publisher, you're paying very close attention to this kind of data.
Kretzmann: Yeah, it's interesting. Off the top of my head, I'm not immediately sure what would be causing the rise in Google and the fall in Facebook, although obviously those are related, because between the two of them, they dominate 80% or so of the traffic that's referred to these publishers. That's where a lot of the eyeballs are, on Google and Facebook. Yeah, Google is now close to 45% of the traffic referred to publishers, and Facebook has dropped closer to 25%. I think part of this is, both companies are always tweaking their algorithm. In the case of Facebook, over the last year or two, they've had different tests where they tweak the algorithm to prioritize you seeing posts from your family and friends rather than seeing a post from The Wall Street Journal or Huffington Post or some other publisher. And I think part of this could be a tweak in the algorithm, perhaps since the election, where obviously Facebook especially has seen a lot of controversy around the fake news arguments, and Russians buying ads around the election, political ads and things like that. So, perhaps they tweaked their algorithm a bit, especially in light of the blowback they were getting, and their poor management that whole situation. I think that perhaps could be the reason they're seeing a little bit less traffic being sent to the publishers. Personally, though, I don't go to Facebook to read the news. If there's a scandal or some controversy going on, I'll probably Google it or go to Twitter. Facebook is not where I go to get insightful news content. Obviously, both companies have different tests in this department. It's important to take a step back and realize that both companies are still doing very well. I think Facebook will often get a lot of credit as the cool kid on the block, you can forget about Google or Alphabet, but Alphabet continues to put up really impressive growth given their size. And Facebook also continues to put up really nice numbers. So, I wouldn't look at something like this as anything other than an interesting story. I wouldn't look at it as something to change an investing thesis.
Hill: And it's a nice reminder that, for as huge as Alphabet and Facebook are, within those two companies, there are very nimble operations going on. We talked on Motley Fool Money the other day about YouTube taking one more crack at music streaming, and I don't know if it was Ron Gross or Jeff Fischer, someone made the point that it's nice to see that Alphabet isn't great at everything, that their first two attempts at a music sharing service didn't really work at all, hence they're making a third run at it. And that's always comforting to me, for any large company, to see, not that I'm rooting for them necessarily me to struggle and fail, but it's just nice to see -- just like in human beings, no one wants to see a human being who's great at everything. [laughs] But, it is impressive, because we have seen the reverse of that, where particularly tech companies can get to be so large that they become bureaucratic, and it becomes very difficult for them to act quickly.
Kretzmann: Facebook especially, they've gotten a lot of attention for their culture to move fast, break things, test things, and go quickly with all of it. I think they're less in the breaking things phase of it, but they're still very much a testing oriented culture where really any of their engineers can pull 100 users or several thousand users and test whatever it might be. A slightly different algorithm, a different color, a new feature. An engineer at Facebook can really do that within 15 or 20 minutes. It's not some bureaucratic process where you have to go through all these different levels of management. If you're an engineer with an idea -- obviously, within reason -- you can push that idea out and see how it performs with that very, very small subset of users. And if the test works, I think it's rolled out. Google, they try to do different things like that. I forgot what they call it, but it's the 20% rule, where if you're an engineer at Google or an employee at Google, you can take 20% of your time and devot it on something not related to your day job. So, if there's a test that you want to try out, I think that's how Gmail was created --
Hill: How'd that work out? [laughs]
Kretzmann: I think that one worked out pretty well. I think they'd like some hits like that. So, yeah, both of these companies, as they become $500 billion in market cap, they need to continue to find ways to stay nimble and fight that urge to become more complacent and bureaucratic. And so far, I think both companies have done a nice job, and they continue to put up really impressive growth numbers.
Hill: Our man, Dan Boyd, is not behind the glass. Austin Morgan pulling double duty this week, or, certainly today and tomorrow. He produces Industry Focus, and he's helping us out today on Market Foolery. Also on the other side of the glass, I want to give a shout out to long time listener Brian Wendt, who's visiting us. Thanks, Brian, for coming to hang out! Tonight is the first night of Chanukah, so happy Chanukah to all those who celebrate. We do holiday music on Market Foolery all month long, and I've been asked on Twitter and on email, "Can you tell us the name of the group? Can you tell us the name of the song?" No, I can't always do that, because a lot of times, we figure that out after we're done taping the show. But, this time, I can tell you. To help us kick off the first night of Chanukah, we have an acapella group called Six13 helping us out. David Kretzmann from Supernova, thanks for being here!
Kretzmann: Thanks, Chris!
Hill: As always, people on the program may have interests 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. That's going to do it for this edition of Market Foolery. The show is mixed by Austin Morgan. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
[Six13 -- Chanukah (Shake It Off)]
