Why Wall Street Is Getting Over Unicorns

In this episode of MarketFoolery, host Chris Hill talks with Motley Fool analyst Bill Mann about some business news. GameStop's (GME -3.94%) beaten-up stock took a few more punches after reporting Q2 numbers. Michael Burry, of The Big Short fame, thinks there's still hope for the retailer, though. Dave & Buster's (PLAY 1.64%) lowered guidance, and questions loom about its profitability and how well it would fare in a recession. WeWork's IPO-to-be -- unless it isn't -- has gotten scads of bad press, and the market seems to be turning a more critical eye on unicorn IPOs in general. Peloton at least looks like a decent business. Tune in to hear more.

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This video was recorded on Sept. 11, 2019.

Chris Hill: It's Wednesday, Sept. 11. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, the one and only Bill Mann. Thanks for being here!

Bill Mann: How are you, Chris? 

Hill: I'm doing all right. I'm doing all right. And let me just say for anyone who's expecting us to talk about Apple's big event, we're not going to be doing that. We're going to be digging into Apple's big event from yesterday on Motley Fool Money this weekend. We're doing an entire segment on that. 

Mann: Also, pretty sure elsewhere on the internet, there's some coverage.

Hill: [laughs] There's some. We're going to have our own coverage; it's just going to be on Motley Fool Money. We've got some earnings to get to. And we have a couple of pending IPOs that we need to discuss. But let's start with GameStop, which is still a public company. 

Mann: Exists!

Hill: GameStop's second quarter, same-store sales down 12%, they cut guidance. When you talk about coverage, there's coverage out there of GameStop, and the headline on fool.com is Everything Goes Wrong For GameStop.

Mann: [laughs] GameStopped! You might have seen this, how many stores do you think worldwide GameStop has?

Hill: For those unfamiliar, GameStop, a video game retailer that has had stretches where the stock has done well, including -- I was looking back; I think I have this right -- from late 2012 to late 2013, maybe a 14-month period, the stock tripled. But they've closed a bunch of stores. I'm going to say... 500?

Mann: 5,700 stores.

Hill: What?

Mann: Yeah. 5,700 stores.

Hill: That's way too many!

Mann: Maybe. It's worldwide. This is actually a worldwide company. It's a lot. You know, they agree with you, actually. They just announced that they're going to close somewhere close to 200 of them, bringing them down to 5,500 stores. But, you wouldn't believe it, would you?

Hill: No! I'm still having trouble believing it because the market cap of this company is less than $500 million! [laughs] Per store, that's ridiculous!

Mann: GameStop's actually been in the news more often recently than it had been in a long time because Michael Barry, who was made famous in The Big Short, just announced that he's taken a 3% stake in the company. He's got some ideas for how the company could reform what it's doing. He feels like this next year will be a big year because of the PlayStation 5; the Xbox Scarlett is coming out. There are believers in GameStop as an ongoing company. 

Hill: Are you one of them? 

Mann: I believe in Michael Barry. Otherwise... you know, he's made his living coming out with stories that seemed far-fetched at the time. On the balance of, "is the housing market going to collapse?" I don't think that "GameStop is an OK company" is that far-fetched of an investing thesis. And certainly, as you mentioned, you're not paying a huge premium on it.

Hill: I was going to say, the stock is down again today. I don't know. We've talked a lot about retail over the last couple of months. Against the backdrop of more and more locations like this, businesses like this, announcing closings -- I mean, you tell me they're going to cut from 5,700 to 5,500. That feels like they could cut that by another thousand.

Mann: [laughs] Or all of them.

Hill: Well, not all of them. I realize this is going to be a little overly simplistic, but it wouldn't be the craziest thing in the world if GameStop said, "What are the 20% lowest-performing locations we have now? Convince me, management team, that we shouldn't just shut those down."

Mann: That may possibly be part of it. Keep in mind, this is what was announced for the quarter. This was not a massive restructuring that they were announcing. They're just saying, "Look, we didn't have a good quarter. GameStopped. But, we have a plan going forward." And it starts with a couple of stores being closed. And these stores are being closed not out of desperation, but because they are economically not viable. So, you can assume that they're looking at, probably, more stores. 

Hill: All right, we'll keep watching GameStop. Let's move on to Dave & Buster's. Second quarter profits and revenue came in higher than expected. Dave & Buster's did cut guidance, though, and that's what's trumping the results of the second quarter. The stock, down a bit today.

Mann: Yeah, the stock's down a little bit today. It was down about 7% when I looked earlier -- which means it'll probably end up anywhere else but 7% by the time this comes out. Actually, pretty good quarter. They had good earnings. They had revenues of almost $350 million, up 8%. One of the things that the CEO, Brian Jenkins, mentioned was that the comps were a little bit bad because last year at this time, Dave & Buster's was launching virtual reality simulators in a lot of its stores, and that was a huge thing. I felt like this was a little bit glib, and I really liked the way he put it -- he was like, "Last year's launch of virtual reality was pretty tough to match." [laughs] So, yeah, the company's OK. 

The thing I wonder about with Dave & Buster's, one of their big things that they're talking about is that they want to increase the amount of times customers come into a store per year. Their existing customers tend to come about twice a year. They think that they have pathways to increasing that. For a company that's high fixed costs and low marginal costs, if they can do that, it's a pretty compelling case.

Hill: I was in a Dave & Buster's over the weekend because my son had gone there with some friends of his. It was packed. Granted, this is just one location, but it was packed. I think they've done a pretty good job of combining basically the stuff for kids, so the reasons for kids to go there, and, the, "We're going to compete, on some level, with Buffalo Wild Wings. You want to watch sports and, during halftime, maybe go play a game or whatever? Oh, and by the way, we'll sell you alcohol."

Mann: [laughs] Right. It's like half Chuck E. Cheese's, half Buffalo Wild Wings, and they fit right in the middle and ideally make both customer groups happy. Did you enjoy your time at Dave and Busters? 

Hill: I did not because I was only there to pick him up.

Mann: Oh, OK. Fair enough.

Hill: It was sort of a sensory overload kind of thing. But I sort of felt like, if I were somewhere on a business trip, and there was a Dave & Buster's nearby, and all I wanted to do was get a bite to eat, have a drink, and watch a game, that seems like they've set up for that. 

Mann: Yeah, that's great. One of the things that they were talking about is, they've released something that, I don't know, may possibly enhance your game-watching experience. In Dallas, they've launched something called a WOW wall, which is a giant LED wall. It's in their bar area. Talk about sensory overload -- an entire wall that is essentially a monitor, if you will. 

The thing I wonder about with a company like Dave & Buster's, there's obviously high fixed costs. You hear about things like this, what is the ongoing lift of virtual reality? What is the ongoing lift of a WOW wall? And I think that they do a really good job, but it's an endless amount of capital investments into their existing stores. 

Hill: And when you think about the rise of delivery, when it comes to restaurants, Dave & Buster's is all about, "We need you to leave your home and come here. We're going to make as compelling a case as possible for you to do that." We've talked about this before -- when you think about recession-proof stocks, on the spectrum, [laughs] this is one of those that is a discretionary income stock. "Times are good. I've got some money. Let's go out and have some fun."

Mann: Put that way, you would almost think of Dave & Buster's as competing with maybe being a more economic version of going to the game. They don't tend to be neighborhood restaurants. They tend to be destinations. They're in large malls. They're very rarely in the midst of neighborhoods, except by happenstance. They're meant to be put in places where they have a pretty large geographic circle around them. Times have been pretty great. It's a good brand.

Hill: It is. Last thing on the stock before we move on, the stock is down a little bit today, but that's due to the guidance; it's been up and down a little bit over the past three years, but it's basically where it was three years ago. On a valuation basis, does this seem rich to you? Or, do you think, "No, this is a reasonably priced stock for what it is"?

Mann: Both income and cash flows have grown during that period of time. So, to the extent that you believed it three years ago, I would definitely be a believer of it now.

Hill: One more programming note. I mentioned we'll be hitting Apple on Motley Fool Money on Friday. Thursday, 03:30 PM Eastern, we're doing a live Q&A on YouTube. We're going to be talking about software-as-a-service stocks. Myself, Jason Moser, Joey Solitro. You can find it on The Motley Fool's YouTube channel, which is youtube.com/themotleyfool. You just did one last week.

Mann: I did, on China.

Hill: Yeah, with Emily Flippen. China, I've heard that's a big market. [laughs] 

Mann: I think it's going to be in the news more and more.

Hill: Let's talk about IPOs for a second. I'd been saying that I feel like the WeWork IPO -- if it happens -- is essentially going to be the last big IPO of 2019, or notable one. I'd forgotten about Peloton. Peloton, for those unfamiliar, the exercise bike, and it's not just an exercise bike, they also have a subscription attached to it so you can do different programs. I think it's $35 a month, or whatever it is. They've come out with their filing. I don't know that I necessarily want to buy into the Peloton IPO; I will say, however, they are getting credit -- and good for them -- for being pretty transparent about their numbers, particularly relative to what WeWork has done.

Mann: Yeah, you could hardly do worse. Peloton to me has always been a somewhat oddly named company. Peloton means riding in a group, and you're essentially on a bike by yourself.

Hill: But that's the subscription part, right? 

Mann: Yes.

Hill: You join up, and you're racing against other people. I think they do a good job of showing that in the TV commercials. 

Mann: They do. So much so that 400,000 people have bought bikes, which is an extraordinary number, given that it's a $2,500 bike, $3,300 treadmill, and a subscription that comes with it. I question a little bit what the overall size of their market is. Now, Peloton people will tell you that it's the greatest thing that they've ever done. It's like the opposite of the first rule of Fight Club. The first rule of Peloton is to talk an awful lot about Peloton. People love it. But, I do wonder, in the same way, what we were saying about Dave & Buster's, is this a discretionary expense? Is this something that people at a lower income level are going to want to do or access? 

Now, one of the things that Peloton's done, which is smart, is that they now have a subscription service where you can get a video stream, but you don't have to have the bike. You can use your own bike. We'll see how that goes. 

Hill: The WeWork IPO --

Mann: If any.

Hill: -- for those who haven't been following the news, WeWork filed their S-1. They started their roadshow. 

Mann: Maybe.

Hill: This seems like... if there's anyone out there who's super bullish on this -- anyone on Wall Street, I should say -- they're keeping it to themselves. You and I were talking yesterday about how it's pretty astonishing -- like, we were trying to come up with the last time a company was getting ready to go public, and there was this universal stop sign from Wall Street saying, "Not only are we not interested, but please leave."

Mann: [laughs] Yeah. "You're messing up all of our other gigs." I don't tend to read too much into the moves of stock prices on a day-to-day basis, but it is not lost on me, or should it be on anyone, that the same struggles that are happening with the WeWork IPO, and when they said they were coming out at $47 billion, and now they're coming out at $20 billion, which is several billion less, that people are starting to look at some of the other companies that are extremely high priced and saying, "Hey, is this the end of the market's appetite for companies, regardless of their valuation?"

Hill: Again, the reaction -- and I haven't seen anyone say this, so this is my read into it. 

Mann: [laughs] Go ahead and give it to someone!

Hill: My read is, there are Wall Street firms looking at WeWork and basically saying to them, "This is going to hurt our reputation." The way the Uber IPO went down, you could look at that -- or, on the flip side, the Beyond Meat one. That thing went 160% higher on the opening day. And you say, "Well, someone didn't price that correctly." This is one where it's so bad -- and, to go back to Peloton, WeWork is being so opaque in their filings about how they make their money that Wall Street firms are saying, "This is going to hurt our reputation and we don't want any part of it."

Mann: You feel like, in some ways, this IPO or non-IPO is the end of an era. It's the end, to me, of the unicorn era. If you look at the commonalities of the unicorns, a lot of them have opaque management structures, they've got shareholder structures that favor management and entrench management. And in some ways, that's good; in some instances, it's not good. But I think people are looking at WeWork -- I don't get the feeling that most individual investors or even most institutional investors care a whole lot about corporate governance. So, if the corporate governance is a little shady, that's OK. But corporate governance where it hurts potential returns, which is what I think that people are looking at in the case of WeWork with the bizarre structure, and the CEO owning and leasing back the buildings, and all of these different things -- people are not about it anymore.

Hill: Right. And that's the sort of thing where, you can take that route, but you'd better have an amazing business in a growing industry. 

Mann: Yeah, you'd better stick the landing. [laughs] 

Hill: You'd better stick the landing. There are different companies that we own shares of that, as much as anything, the reason we own shares is because of the leadership. 

Mann: Exactly.

Hill: By the way -- we've seen companies over time, in their public life, start to pull back the information they share, and say, "You know what? We're not giving this metric anymore. If you don't want to own shares, that's fine." It's like, "Eh, you've proven your worth, we're going to stick by you on this." But, right out of the gate? No!

Mann: It's amazing; at this point, not even SoftBank, which owns a huge chunk of -- if you really wanted to point to the person who was excited about WeWork, it was Masayoshi Son, the CEO and visionary behind SoftBank. They own a tremendous amount through their company and also through their Vision Fund, which is levered, which means that losing $27 billion in valuation for WeWork hurts them a whole lot. They're even really encouraging WeWork not to do this IPO. The problem is, WeWork is losing truckloads of money. And not losing truckloads of accounting money; they're losing lots of money in cash. 

Hill: Actual money.

Mann: Actual money. There's a bond offering that was coming with this. They needed to raise about $9 billion. That was their plan. That's money that is accounted for in their operations. So I think they're going to go public and it really, really might be a disaster.

Hill: Bill Mann, always good talking to you!

Mann: Great to see you, Chris! Thanks!

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'll do it for this episode of MarketFoolery! The show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!