Enough Unprofitable Growth Stories!

In this episode of MarketFoolery, host Chris Hill chats with MFAM Funds' Bill Barker about the latest business news.

Uber (UBER -2.75%), Shake Shack (SHAK -0.55%), and Peloton (PTON -3.04%) are all down on earnings. Uber wants investors to focus on the top line,and wait just a few more years for an adjusted EBITDA profit. Shake Shack dropped 20% on just barely missing same-store sales expectations, but it still trades around 100 times earnings. Peloton's growth is good, but the market no longer seems to care -- it's hard to compete on growth alone when there are plenty of profitable growth stories to look to instead. Tune in to hear more.

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This video was recorded on Nov. 5, 2019.

Chris Hill: It's Tuesday, Nov. 5. Welcome to MarketFoolery! I'm Chris Hill. With me in studio, from MFAM Funds, it's Bill Barker. Thanks for being here!

Bill Barker: Thanks for having me!

Hill: It's hot IPO day. We've got three companies reporting earnings. All three were companies of intense interest when they went public. Doesn't mean all the IPOs were great, but two of them were from this year alone. We're going to start with Uber. Uber's third quarter report, they lost a billion dollars. There were other numbers, too. But shares of Uber are down more than 8%, and I'm assuming it has something to do with the fact that they lost $1 billion in 90 days.

Barker: Probably has a bit to do with that. They are growing rapidly still. 30% top line growth. They'd like you to look at that number, but the market is looking at the bottom line instead, which ends up not being a fair fight for Uber. It's just going to keep talking about the top line. It is saying, "Well, we can be adjusted EBITDA positive by 2021," which is a lot of adjustments there. 

Hill: I was just going to say, there are a lot of caveats that come with that. 

Barker: Yeah, a couple of years out, if you don't look at EBITDA, which is not looking at net income, but you look at adjusted EBITDA then, and you squint real hard, you'll see that we look like we're not losing money years from now in this world. And the market is looking at the fact that tomorrow, the IPO lockup expires, so you've got a lot of new shares available for sale. I think that maybe some of today's selling has something to do with wanting to get out before more people get out tomorrow. 

Hill: Yeah. I think I've made this point before -- it's a little bit like, in your personal life, saying, "Don't judge me by my looks. Judge me by adjusted handsomeness. On adjusted handsomeness, I'm pretty close to Brad Pitt, if you adjust."

Barker: [laughs] "If you adjust."

Hill: "Just straight up looks? No, nowhere near that. But adjusted handsomeness? Sure!" 

Barker: Adjusted future handsomeness.

Hill: [laughs] In 2021. 

Barker: Look, when we're both dead, we'll look just as good. 

Hill: We're going to come back to this with Peloton -- it does seem like we are absolutely, at this point with the market right now, where there are a lot of investors, and a lot of them are probably institutional investors who are not willing to put up with things that they were willing to put up with six months ago, 12 months ago. So, Uber is saying, "Look, we're growing the top line!" It's like, that's fine, but that's less interesting to us than it was last year. 

Barker: Yeah. You've always got a large chunk of the market which is going to be value investors, and who always care about earnings. And then you've got the growth investors, who are excited about the top line growth, maybe more so than the bottom line. But there are a lot of other companies out there that are growing the top line in a very healthy manner as well. So, Uber's presentation that, "Hey, we can grow the top line at 30%. Let's not look at the bottom line," is up against many companies, largely in the software space, that are growing both the top and bottom line by impressive amounts. So, Uber's growth story is in competition with profit growth stories, and that's not a good fight for it to be having.

Hill: I'm sure there are some growth investors who look at the drop in Uber today and say, "Wow, it's down 8%. I like this even more because I'm willing to hold it for five years." Are you one of those people? 

Barker: Well, I've seen a couple of analyst reports talk about dropping their target price, but still having a target price around double of what the current share price is. They're focusing on, "The 2021 adjusted EBITDA profit, maybe that doesn't sound great to you, but we were thinking it was going to take even longer, until 2023, maybe. We're willing to tilt our head a little bit and squint and look at the numbers in the way that Uber would like us to look at them." Maybe that's because these analysts are looking at Uber's need for financing in the mid to near-term future. Maybe they need to raise more cash, bonds, to cover all these losses. So, they might want to be on Uber's good side. You always have to season your analysis of Wall Street's work with that perspective. But, the growth is impressive. Uber someday could pull back on how many different businesses it's losing money in, and probably come up with a quicker profit growth story than it's presented so far. Maybe that's something to hang your hat on. 

Hill: Still trading below the IPO price. 

Let's move on to Shake Shack. Yesterday, there was a headline I saw, and the headline was, "Will Shake Shack's Spectacular 2019 Continue With Its Third Quarter Report?" And the answer appears to be a resounding no. Shake Shack, down 20% today. Same-store sales in the third quarter came in at 2%. That's only 0.5% lower than what was expected. But I think, to go back to the headline, it actually has been a very good year for this stock. Shake Shack has moved into this category as a business, maybe we're not expecting perfect results for them, but in this environment, if they're going to miss, then we're taking some money off the table. 

Barker: Yeah, a lot of things to say about this one. One, to focus on that headline, as to what was spectacular? Was it Shake Shack's business year or the stock year? The stock year had been spectacular. One wonders why, to that degree. If you look at a chart of Shake Shack, it's one of the companies that I like to refer to as a stock having visited lots of different interesting places. It skyrocketed after its IPO. Got up to, I don't know --

Hill: $90. It was north of $90.

Barker: Came down to $30. After that, back up to close to $90 again. Now it's at $60-some. And if you look at the actual operations, it's a fairly smooth growth story, which just doesn't have quite the highs and lows that the chart would suggest. It's trading at 100 times earnings. Same-store sales are 2%. Yes, it can open a bunch of stores, but why are people paying 100 times earnings for this company? I think they're asking themselves that, based on the 20% drop in the stock today.

Hill: Even with the drop that we're seeing today, the stock is still up around 50% year to date. It is interesting, though, because you're right, this is not a business that has been what I consider to be overly aggressive with their expansion plans. They've been pretty steady with it. I'm not really sure why they are afforded the multiple they're afforded. I assume at least part of it has to do with a decent concentration of its locations in New York City.

Barker: Possibly that, possibly having captured because of that some of the financial media's attention. The amount of mentions that Shake Shack gets on something like CNBC in proportion to the size of its business is fairly odd. But it's a good growth story. It is actually profitable, as it should be, given its size and the business that it's in.

One of the problems with this report was, it referenced that it is moving from using a number of different delivery services to only using Grubhub. That is going to impact sales to the downside, which makes one wonder just how much is Grubhub offering Shake Shack to be the sole provider of delivery services for Shake Shack? How much is that worth it to Shake Shack, to sacrifice some additional sales? They must be getting a pretty sweet deal from Grubhub. If you look at Grubhub's stock price, you'll see that it must have gotten into a lot of bad deals, because it's going nowhere.

Hill: Yeah, I think this is something to keep an eye on just from the standpoint of whether it's 2020 or thereafter, be on the lookout for one of these two companies being quick to announce, "We're no longer part of this deal."

Barker: You've got to wonder what is in it for Shake Shack. They are highlighting that as something which is certain to create uncertainty about the rest of the years' same-store sales.

Hill: Which, by the way, they lowered guidance for that for the full fiscal year as well.

Barker: Right, in part because they're just going to be delivering and selling less because they're in a number of markets -- I think Grubhub is very dominant in New York, but not so much in many other markets where Shake Shack needs to have its food delivered. And if people can't get it delivered through their preferred vendor, then they may just not be getting anything from Shake Shack. It's bringing same-store sales down 1.5% or something, is the guidance. There are fairly small increments that this is moving around by. But, it is moving, as it always has ,the stock much more than the business itself.

Hill: Peloton Interactive issued its first report as a public company. Peloton reported a loss, which I can't imagine is surprising to anyone. Their revenue, however, more than doubled year over year. Similar to Uber, that's the thing they'd like you to focus on.

Barker: They would. It's, I think, an easier story to buy in terms of, "Just look at how fast we are growing right now, and look at how many things we could pull back on to create profit if that was what was most interesting to us and our board." The CEO stated and tried to sell that profitability is not something that they are focused on, as they are exploring and growing in international markets, and putting more money into R&D. If you have a subscription model like they do, you can have some reasonably reliable future revenues. It's not taking the same kind of hit some of these other things are. 

But, to go back to, I think the overall point, hey, growth is good. What about profitable growth? If you can't deliver that, plenty of investors are willing to look at profitable growth stories.

Hill: I find it interesting that Peloton is investing in the ways that you mentioned, and yet, John Foley, the CEO on CNBC this morning, said that they were contemplating doing a Super Bowl ad and they decided not to do it. I'm paraphrasing, but he said something to the effect of, "We didn't think that would go over so well in the current climate." And I thought, you know what? You're absolutely right. That's not necessarily the kind of investment I think is really going to meaningfully drive Peloton. Much better that they're making the investments that they're making.

Barker: Another thing that he said in the conference call, I think, or sometime around then, Foley described the market reaction after the IPO as, quote, "a perfect storm of being lopped into all kinds of buckets that were unfortunate and wrong." My response to that is, this is yet another misuse of "the perfect storm," [laughs] which should be thought of as kind of a one-in-100-years type of thing, rather than, "Our stock is down 20% after the IPO because we have no profits." Like, "That's just because you're comparing us to wrong things, like other unprofitable companies!" I think, if they deliver profits, they'll find the market is very receptive to their story.

Hill: I don't know John Foley, but, yeah, that's a little whiny. And to your point, a complete misuse of the phrase "perfect storm."

Barker: I used to write an article about the misuse of "perfect storm." You can google perfect storm any day of the year and come up with four or five things which were apparently perfect storms, and they would involve whatever happened in politics that day to some stock to an individual baseball game.

Hill: [laughs] Have you read that book, The Perfect Storm?

Barker: Yes. Great book!

Hill: Such a great book!

Barker: Such a great book!

Hill: And one of those books that, whether people are posting on Facebook or on Twitter or just in conversation, they're like, "I'm looking for a new book," that is a book that I will throw out there as, "Have you read this book? Because if you haven't read The Perfect Storm, you absolutely should." It is brilliantly written. If you've seen the movie with George Clooney and Mark Wahlberg, that's fine.

Barker: I had no interest in seeing that. I like all the actors in it, but I didn't expect it to live up to the book.

Hill: Does any movie live up to the book?

Barker: Sure. Many!

Hill: Like what?

Barker: We don't have time. 

Hill: [laughs] OK. Well, that's not one of them. 

Barker: The Godfather. Not a great book. 

Hill: All right, we're not going to get into this now. 

Barker: Godfather II. [laughs] 

Hill: [laughs] I'll just say, if you haven't read The Perfect Storm, you absolutely should.

Barker: Your favorite, Godfather III.

Hill: Godfather III. It has some merits. I'm just saying it has some merits. 

Barker: Merits what you've discussed on Apropos of Nothings.

Hill: Yes. We've gotten a couple of questions lately through email and on Twitter. I think we mentioned this a month or so ago. For those who are relatively new to the show, once or twice a year, we'll do a special episode of MarketFoolery, "special" in air quotes, called Apropos of Nothing, and it has nothing to do with investing or business, and it's myself and Bill and a third person. We've got one coming up. It will absolutely happen. I would say... what's today, Nov. 5?

Barker: We're absolutely recording it Monday, aren't we?

Hill: Yeah, we're just not sure when it's going to go up.

Barker: Well, it goes through months of editing. 

Hill: There's editing; there's legal.

Barker: There's the production values, there's the soundtrack.

Hill: Yeah, there's all sorts of things that go into it.

Barker: So, Tuesday or Wednesday.

Hill: Yeah, something like that. I would say in the next month.

Barker: Thursday, maybe. Are you going to do an episode next Thursday?

Hill: Yes. Next week is The Motley Fool's annual meeting, Foolapalooza, as we call it here at The Motley Fool. We've got 24 of our colleagues coming in from global offices here to Fool HQ. We'll be out of the office Thursday and Friday of next week. But we will be recording. I will be recording an episode of MarketFoolery to go up next Thursday.

Barker: So, if you've got questions, this'll be one of those mailbag ones. Are you going to pretend it's being recorded on the day of?

Hill: No, I've just told people we're recording it ahead of time.

Barker: [laughs] So, if you've got questions, you're looking for something to fill up that episode... 

Hill: I mean, I had a couple of ideas, but we always love questions from the dozens of listeners.

Barker: You're looking for better questions. 

Hill: [email protected] is our email address. Drop us an email. We're lonely, for crying out loud. Just drop us an email. Bill Barker, thanks for being here!

Barker: Thanks for having me!

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. That's going to do it for this edition of MarketFoolery! This show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!