In this segment of the Motley Fool Money podcast, host Chris Hill asks senior Fool analysts Jason Moser, David Kretzmann, and Jeff Fischer to tell us about the companies they have their eyes on this week and why: car parts purveyor and repair shop operator AutoZone (NYSE:AZO), digital payments player Square (NYSE:SQ), and customer service software company Zendesk (NYSE:ZEN).
A full transcript follows the video.
This video was recorded on April 27, 2018.
Chris Hill: Let's get to the stocks on our radar. Our man behind the glass, Steve Broido, is joined by some special guests this week -- Lee Fry, Lisa Novak, and Jack [...] all from Florida, all Stock Advisor members. [all applaud]
Thanks for coming to hang out with us! All right, David Kretzmann, you're up first. What are you looking at this week?
David Kretzmann: I'm going for a flashy company here, AutoZone, ticker AZO. This is a company that's really been down in the doldrums over the past year, but I think there's still something to like here. Revenue growth has accelerated in recent quarters. We're coming off the harshest winter in the U.S. that we've had in several years. So, that should be a good thing for car repairs, which is really how AutoZone makes their money. They're expanding internationally in Mexico and Brazil. They're expanding their commercial business, buying back a ton of stock, as usual. And despite being a clear leader in terms of producing free cash flow and margins, they're trading at a lower valuation compared to O'Reilly Auto Parts and American Auto Parts. So, I think there's something to like here with this stock.
Hill: Steve, question about AutoZone?
Steve Broido: I think of AutoZone as more akin to an auto parts store. What does it look more like Jiffy Lube, where I go and drop my car off, they do everything for me, and I just come back and pick the car up?
Kretzmann: That's a growing segment for them. Their commercial business, or that do it for me business, right now, is about $2 billion in revenue, but that's something they're reinvesting in.
Hill: Jason Moser, what are you looking at his week?
Jason Moser: Taking a look at Square, ticker SQ. An interesting little deal announced this week is, they're acquiring Weebly. As a Weebly user, I can certainly testify to that product and its value. It makes building a website really easy for a dummy like me. An interesting deal. It gives Square exposure to commerce. Small business is obviously a big part of our economy, and I think a lot of people ask the question, how is Square different than PayPal, and I think this is a good example of Square becoming more than just a payments company. I think it's using its tech and its data to integrate complementary offerings into a bigger model.
Hill: Steve, question about Square?
Broido: Is Square bigger than just that little chip reader thing that I see at the Renaissance festival when I go to buy my gear? Is there something bigger going on here?
Moser: There is. There's a Square Capital part of the business, where they're actually making loans to small businesses to help them fund their growth, and I think this acquisition of Weebly is another good example of them diversifying away from just being a payments provider.
Hill: Jeff Fischer, what are you looking at?
Jeff Fischer: Zendesk, ticker is ZEN, customer service software. $400 million in sales, growing quickly. It has about a $4 billion market cap. So, speaking of a smaller enterprise software company, this is one. Maybe you buy ZEN and NOW and then you're all set with both. GAAP profits are a few years off, so this is more speculative, but it should have non-GAAP profits starting this year.
Hill: Steve, question about Zendesk?
Broido: So, it's a subscription model business. I know we use it here. How do they increase it to beyond just subscription revenue?
Fischer: They're adding more products all the time, Steve, which they can then cross-sell to their existing customers. And I don't know that they need to go beyond subscription. But, they'll also have service revenue.
Hill: Zendesk, Square, AutoZone. Do you have one you want to add to your watchlist, Steve?
Broido: I like them all, but I think I'm going ZEN.
Chris Hill owns shares of PayPal Holdings. David Kretzmann owns shares of AutoZone and Square. Jason Moser owns shares of PayPal Holdings and Square. Jeff Fischer owns shares of Square. Steve Broido has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends PayPal Holdings. The Motley Fool owns shares of Square. The Motley Fool recommends Zendesk. The Motley Fool has a disclosure policy.