In this week's episode of Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP take a closer look at recent fintech IPO Bill.com. Then, Matt talks about real estate investment trusts CoreSite (NYSE:COR) and Innovative Industrial Properties (NYSE:IIPR) as unique plays on some of the latest trends in technology and medical cannabis, while Jason takes a deeper dive into Mitek (NASDAQ:MITK). Plus, we look at some of the latest stocks that our listeners (and we) bought.
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This video was recorded on Dec. 16, 2019.
Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, December 16th. I'm your host, Jason Moser, and joining me in the studio today via the magic of Skype, it's Certified Financial Planner Mr. Matt Frankel. Matt, how's everything going?
Matt Frankel: Pretty good. It's a good week. You know why? Because for the first time ever, my wife listened to an episode of our podcast.
Moser: [laughs] Oh, really?
Moser: Interesting! I hope you didn't say anything to incriminate yourself.
Frankel: I don't think so. It was last week, and it was to show her friends at work. She mentioned I had a podcast, and they all wanted to hear it.
Moser: Hey, now that's good. You get a little bit of word of mouth out there. That's what we need, right?
Frankel: So, a little shout out to the educators at Lexington Medical Center in South Carolina. Thanks for listening!
Moser: Lovely Lexington. Yeah, man, I tell you, I grew up playing in a golf tournament there at Lexington Country Club every year, the South Carolina Junior Amateur Championship. Lovely place. A lot of fond memories there.
You know, I thought you were going to say it was a great week because, if I'm not mistaken, your South Carolina Gamecocks just beat the Clemson Tigers on the basketball court, right?
Frankel: Yeah, we've got to be better at something.
Moser: [laughs] Listen, between that and my Wofford Terriers taking down UNC Chapel Hill yesterday, in Carmichael, no less -- listen, we had a good little one-two punch there on the basketball court this weekend. I'm feeling pretty good about things.
Frankel: I hope we can keep the momentum going. We have to be superior in at least one of the major sports down here.
Moser: It's a long season, that's for sure.
Well, on this week's show, we're going to dig into a couple of listener emails. We've got more of the last stock you bought and why. We're also going to take a look here, first and foremost, though, at, this is a new IPO, Matt. It just started trading here last week. One that seemingly has been welcomed by the market with open arms. We're talking about bill.com, ticker BILL. Like I mentioned, it started trading late last week, I think Thursday, perhaps it was Friday. The stock has been on a tear ever since opening up. They raised their pricing from around $16 to $18 to ultimately around $22. And now, you've got it trading upwards of $40. I think maybe it's having a little bit of a down day today, but nevertheless, it's been a tremendous start, for what is a company that I think is probably not on a lot of people's radars.
Matt, I'm going to just open this up with a reading from the company's S-1 to give our listeners an idea of what this company is about, bill.com. It says, quote, "We are champions of small and midsize businesses," we call those SMBs. "We're a leading provider of cloud-based software that simplifies, digitizes, and automates complex back-office financial operations for SMBs. By transforming how SMBs manage their cash inflows and outflows, we create efficiencies and free our customers to run their businesses."
Now, Matt, I like the way that sounds. I will say, though, on the flip side of that coin, I feel like I've heard that before. But let's just go ahead and kick off the discussion here and get your first feelings here on bill.com as a business, and why the market has been so welcoming to it.
Frankel: Well, as a business, it definitely serves a purpose. The selling point is, there are many other companies that do what bill.com does, but none of them are really purpose-built for small and medium businesses. They're trying to serve an underserved market, which is why they've been so successful so far.
The IPO is really showing me that, one, there's a giant appetite for IPOs still, despite what headlines you might read. And, two, it still appears nobody really cares about valuation if a company is growing. bill.com, just to run down a couple of the numbers, they did $108 million in sales last year. They're trading at a $2.7 billion market cap, so, at about 25X times sales.
Moser: Sounds like a lot.
Frankel: That's a lot, especially for a company that's not profitable. In the 2019 fiscal year that just recently ended, they lost $7.3 million on $108 million in revenue. So, this is not a profitable company. The only reason that the market's placing this type of value on it is because those revenues represent 67% year over year growth, and obviously, they think they're going to be able to sustain that and eventually reach profitability. They have 81,000 customers right now. There's about 6 million small and medium businesses in their target market. So it's definitely possible they could sustain this.
I worry that this is a very competitive space. Anything fintech is very competitive. There are a lot of competitors with much deeper pockets than bill.com. I think this is kind of a ... I don't want to say it's a crazy valuation, because if you just look at it from a "how fast is it growing" standpoint, it kind of makes sense. But, for a company that's not profitable yet, has no clear path to profitability, it just seems like a high price to pay.
Moser: I don't disagree with that all. One of the things I wonder, going through the S-1, and looking a little bit more what this business does, and it really is about wringing out the efficiencies, getting rid of that back-end paperwork that can weigh down these small and medium-sized businesses. To an extent, though, that is something that companies like PayPal and/or Square are doing. Maybe not with the focus of something like a bill.com. Maybe bill.com, this is more specifically what they're geared toward. But like you said, it's a very competitive space. There are bigger and better-capitalized businesses out there pursuing at least some of this market, right?
Frankel: Yeah. This is not a new idea, to automate things like invoicing and cash management for businesses. But, like I said, none of the big players have historically focused on these small and medium-sized businesses. It remains to be seen if they'll be able to scale to the point where the efficiencies will put them into the green. If they can do that, will it be enough to justify almost a $3 billion market cap? It's priced that it's going to eventually have profits that are more than its current sales.
Moser: Yeah. I feel like, immediately, you say "SaaS business," and it gets a lot of people's attention. And it's got that subscriber model, and that gets a lot of people's attention. I did notice, those subscribers, it's pretty much open-ended, and they cancel anytime. I do like the opportunity. It kind of reminds me of something like a Shopify in that they're getting after that one particular area of the market and providing a solution for a particular market that is maybe overlooked. So, you don't dismiss that, you don't discount the potential there, but, yeah, again, to your point, this was a very warm reception for a company that has not really shown any results yet. Typically, my standing rule with IPOs -- I rarely break this. Every once in a while I do, and I end up regretting it -- you just don't buy into a company like this without giving at least a couple of quarters for them to report, and understand how this business works, what the metrics that matter are, and understand how management is communicating their vision.
Speaking of management, it is run by founder and René Lacerte. He owns around 13% of the company still today, so he's got plenty of skin in the game. He seems to be very passionate about this company in the interviews I've seen with him. So, yeah, I guess I understand the market's enthusiasm, given the SaaS nature of the business and the fintech nature of the business. But I would not confuse the market's enthusiasm with success just yet, because it seems like we don't have those signs of success, given how small these revenue numbers are today.
Frankel: Right. One other thing I would point out is, a lot of these IPOs, especially on the smaller end, like bill.com, are our takeover targets. I could see that maybe that's where some of its value is coming from as well. I could definitely see what bill.com does being useful to someone like a Square that has a big small and medium business ecosystem but doesn't currently do what bill.com does. Something to that effect. Especially if their growth continues, and they continue to post great numbers but aren't profitable, I could definitely see them becoming a takeover target.
Moser: Yeah. That's going to be one to keep an eye out on in 2020, because it's definitely not going anywhere, it sounds like, anytime soon.
OK, let's take a look at an email we got here from a listener. Chris Brocco writes, "Hey guys, I'm a Stock Advisor and Rule Breaker member and generally a big fan of the Industry Focus podcast, especially the Financials show." Matt, just give yourself a little pat on the back there, buddy. It seems like we're doing something right. Chris says, "I was wondering if you guys could talk about two REITs -- CoreSite, COR, and Innovative Industrial Properties, IIPR? I realize these two are in very different markets, however I'd be interested to hear your thoughts on how well or not well you think they represent the real estate space. In other words, are they good ways to gain real estate exposure? Or do you see them more as tech and cannabis plays respectively? Thanks guys, for all you do and please keep it up."
Chris, thank you so much for listening. Thanks for the kind words. We're going to keep doing this as long as they let us. I'm going to let Matt take this question here because he is our real estate king. I know you've had a chance to dig into these names a little bit, Matt. What do you think about CoreSite and Innovative Industrial Properties?
Frankel: Well, CoreSite is one that I actually know pretty well already. It's a data center real estate investment trust. In full disclosure, I own one of its big brothers, Digital Realty Trust, and have for some time. I love the data center space.
To answer the question, yes, it's both a play on real estate and tech. I've often referred to Digital Realty Trust in articles as a different type of tech company. Data centers, if you're not familiar, these are these giant buildings that are designed to allow clients to securely store and transmit data. If you store a photo the cloud, it's probably housed at one of these data centers. Data centers in general are a great play on increasing cloud and connected device traffic. Cloud spending is expected to rise over 50% by 2022, so, in the next three years. The connected device market is getting huge. Just think of everything that's connected to the internet now that didn't used to be. I mean, within three feet from me, there's a vacuum cleaner, a doorbell ...
Moser: [laughs] That's a good point! You're right, it's that internet of things that we've talked about before. I'm glad that you are referring to it this way, because it does feel like, to me, you're looking at two very big long-term trends at play that work very closely together in data and all of these things that are connected to the internet. Those two work hand in hand, really.
Frankel: Yeah. My Ring doorbell takes video all the time, and it's not stored in the doorbell itself. It's stored in the cloud. I know Jason's a virtual reality and augmented reality type of guy.
Moser: I am!
Frankel: That's a big driver of cloud growth.
Moser: Yeah, you're right. I tell you, as 5G starts to roll out here, it is pretty astounding, the amount of data that's going to be flowing through these networks in the course of the next five years and beyond. It's going to be a lot of fun as a consumer to enjoy that. But the work behind the scenes to be able to handle all of that capacity is really impressive.
Frankel: Yeah, the augmented reality market's supposed to almost grow tenfold in the next five years. I'm sure you've seen all these statistics, being the augmented reality guy.
Moser: It's moving. It's moving, that's for sure.
Frankel: The point is that data centers are popping up all over the country. This is a great way to play this tech trend without actually betting on an individual tech company. These buildings are going to be in very high demand. CoreSite's not that huge of a company. It's just over $4 billion in size, and they have $1.8 billion of development in their pipeline going on right now. Their business model is building properties from the ground up, generally, instead of acquiring. They have 23 data centers right now. These are huge buildings. Just to put that in perspective, 23 buildings, 4.6 million square feet of space. These are really blowing up. Jason actually lives in ground zero for data centers, Northern Virginia is the biggest data center market in the country.
Moser: Yeah, yeah, it's a big one.
Frankel: It's a high-barrier market. There aren't a ton of competitors. Like I said, there's a few bigger players like Digital Realty. Equinix is another big one. But there really aren't a bunch of big players in the space. I like it. It yields over 4%. It's been well-run. It's been around for almost 20 years, so it's a nice, established company.
Moser: Now, we talk about long-term trends. Investing in long-term trends is something we really like to do, because that gives us a long runway to really try to see how these markets shake out. I think the cannabis market is a great example of, there's a big long-term opportunity there, it is still very much dealing with a lot of red tape. Less so in a market like Canada, obviously; more so domestically here. But the people I talk to when it comes to this space, and I encourage you, check out Emily Flippen if you haven't yet, because she's our advisor here in this space and really studies it closely, knows a lot about it. But it is one of those things where, we've seen where this puck is headed. This toothpaste can't go back in the tube. It's really just a matter of getting this red tape sorted out, and this new regulatory environment in place. That's going to take some time. But I do think that cannabis is a big, long-term opportunity for investors, albeit one where you probably have to be a little bit more patient and a little bit pickier.
So, what do you think about a REIT like Innovative Industrial Properties?
Frankel: When you hear that name, you don't really think of cannabis.
Moser: No. Maybe that's a good thing, right?
Frankel: When I first heard that name, I said, "Is that a warehouse company?" I had to dig into this one a little bit.
Just to answer the first question. I said CoreSite was both a tech play and a real estate play. I'd actually put this more in the category of just a real estate play, and not a cannabis play per se. Reason being, they invest in the buildings that house medical marijuana facilities. They're not in the recreational market at all. They're in the medical facility. And their business model is what's known as the sale and lease back. So, a company that builds a medical marijuana facility will sell the building to this REIT and lease it back from them, start paying them rent on the building. So, they sign long-term triple net leases. The average lease length is over 15 years. That's just consistent income. The states that have already legalized medical marijuana aren't going to go backwards, as you said. So, there's not a whole lot of regulatory risk here. And like I said, they're not relying on the growth of the recreational market. I think it's pretty fair to say that the trend is toward medical marijuana being legal pretty much everywhere in America. It's already legal 33 states, I believe.
Moser: Yeah, I think that's fair.
Frankel: So, that's a pretty clear trend. I don't know if it's ever going to be legal in South Carolina or any of the Southeast where I am.
Frankel: That's another matter.
Moser: It may take a little bit more time, but it'll happen.
Frankel: They legalized it in Florida, which is a borderline red state. I was down in the Keys last summer, and the first medical dispensary opened right on the main street.
Anyway, this is the type of properties they own. They have a very conservative balance sheet. I was actually really impressed when I was digging through the statistics. Their debt to asset ratio is just 23%. That's like if you had a mortgage and put almost 80% down. Very low leverage. Their properties are making a good bit of money. They're comfortably paying about a 5.5% dividend yield. They're a relatively young company. Their IPO was almost exactly three years ago. I'm impressed by what I've been able to uncover. They're doing a great job of turning investors' money into profits. 13.6%. average yield on invested capital is a pretty impressive figure. So, I'm optimistic for the future. It's definitely a nice play on the continual growth of this industry, but I wouldn't call it necessarily a marijuana stock. It's very different investment dynamics.
Moser: Yeah. Well, Chris, I hope you found that helpful. Matt, thanks so much for digging into those. Definitely a couple of companies we will want to follow along and keep tabs on this show going forward.
Matt, we have another email from a listener, Joseph, who writes, "Hey Jamo and Matt. You guys were just mentioning mobile deposits, taking a picture of a check and bingo it's in. I remember so well when I was a kid going to the bank drive through with my dad. He would sign a check, make it out to cash, and put it in one of those suction tubes just like the back-and-forth messaging in the movie Brazil. I can't imagine banks still do this today," and yet they do, Joseph, yet they do. "I was wondering what you think about one of the players in that space, Mitek Systems, MITK. It does two things -- mobile check deposits and mobile ID tech. It almost got bought out this year, but the board said the price was too low. What do you think about this small-cap? Many thanks."
Thank you, Joseph, for the email. This was one that I had not really looked at before, Mitek Systems. It was a fun one to dig into. I think you're talking about this offer from ASG that they rebuffed in late 2018. ASG made an offer for the company around $435 million. In other words, they offered to acquire Mitek for $435 million. That was after a little back-and-forth, and management at Mitek still felt like that was undercutting them for the growth opportunity they had, though I don't know that I necessarily agree with that. It does seem like fewer people are using paper checks. That's just a trend that is happening. You're seeing less and less paper, so you're seeing less and less need for depositing those checks via your phone. Now, with that said, I probably have about three paper checks per year that I need to deposit, and it's very nice to be able to deposit them just by taking a picture on my phone. I don't know that's the biggest growth opportunity going forward for this company. Now, the ID tech, I think, is something that is going to become more important as time goes on. My only reservation here with Mitek is, I'm not sure this is the way to play it. A lot of this just boils down to the fact that Mitek is a really small company. It is a small-cap, but it is one of those that would probably classify as ... maybe not a micro-cap, but pretty darn close. If you go back to the days of our small-cap service Hidden Gems, this would probably be one of those tiny gems that we would feature as one with potential. And that's what gives me more hesitation on this one going forward. You look at the growth for the company, it's just not anything terribly astounding. They grew revenue at a 33% rate last fiscal year. That's not bad. But given the company's size, it's not lighting the world on fire compared to some of these other businesses that are bigger and better-capitalized.
Now, with that said, they definitely have some interesting identity verification customers they just signed here recently. TD Ameritrade being one. DocuSign, Adobe. So, they do have some technology that is being seen as helpful.
The other thing I dug up, though, was an interesting back-and-forth that they've been having with USAA. You go all the way back to 2012, the two companies pursued litigation against each other over the deposit capture patents. They settled in 2014. In 2017, USAA sends warning letters to the users of Mitek's tech -- and Wells Fargo is one of those. In June 2018, USAA sued Wells Fargo over the use of that Mitek tech. In November 2019, the jury said that Wells Fargo must pay $200 million to USAA. This all leads me back to, I'm not certain how well-protected Mitek's tech really is.
And when I take all of these questions, along with a company that's this size ... I'm not saying this is a bad investment, I'm saying one that certainly merits more digging into for me to really feel comfortable with it.
Nevertheless, it was a good question. It was a company I got to learn a little bit more about. Matt, did you have a chance to dig into this one at all?
Frankel: Yeah, I looked at it a little bit. Honestly, not that impressed with their performance over time. I'm looking at their chart right now, and they trade at essentially the same price they did in 2011. They really haven't done a great job of producing returns for shareholders. Some of this new identification technology is just starting to evolve, and that's only happened in the past few years. There's no telling how far that could go. You mentioned some pretty impressive customers there. But, like you said, I'm not convinced it's the best way to play the space.
Moser: Alright, well, hopefully, Joseph, that was helpful for you. Again, thank you for the email. We always enjoy being able to dig into these new companies and learn a little bit more in the process.
Alright, Matt, we're going to wrap up this week here with another one of our favorite segments. As always, it's that last stock you bought and why. Listeners know we love hearing about the stocks you're buying. Make sure to email us at email@example.com, or get us on Twitter @MFIndustryFocus. Let us know the last stock you bought and why.
First up this week, we've got Conrad's Concessions @consconcessions. He says, "My last one to buy was 3M. It's a powerhouse company that's been beaten up badly, especially with their earplug lawsuit. Their 52-week spread is pretty wide and it's way off its 100 DMA." Conrad, I hope that works out for you, buddy. Thank you!
Dustin B, @DustinBriggs. He lets us know, "I just happened to pick up a couple of shares of Schwab earlier this week before the news broke. I use them as my broker and I'm pretty happy with their service and products, and feel like they have a competitive advantage. Love the show." Dustin, thank you so much! We love that you tweeted in with the last stock you bought and why.
We're going to wrap this week up with our very own Matt Frankel and his last stock he bought and why. Matt, take it away.
Frankel: Well, I added to my position in Boston Omaha, a stock that we love. I think we've interviewed about it on the show. One of our analysts, I think you interviewed about it.
Moser: Yeah, Buck Hartzell.
Frankel: It's one of my favorite companies. It's a tiny company right now. They specialize in two things. They buy insurance companies, and they have a billboard business. Those might not sound like two very exciting things, but over the long term, we've seen that businesses that are based on insurance and use the proceeds to acquire other money-producing assets tend to do well. Think Berkshire Hathaway. This is like a Berkshire Hathaway, just about one-one-thousandth of the size. I'm buying this one because I think it could be worth a lot when I'm in my 60s, not because it's going to be worth a lot in a few years. This is an ultimate long-term compounding play.
Moser: I love that idea. I know our listeners out there, a lot of them are familiar with that company. I'm sure they are appreciative of the fact that you have given them the green light. Because if it's good enough for you, Matt, well darn it, it's good enough for them, too, right?
Frankel: That's right.
Moser: Alright, man, I think that's going to wrap it up for us this week. As the holiday season starts up here, we are going to be on a little bit of a hectic work schedule here. I think next week, Matt, you are going to have the week off. We'll have some year-end roundtables for Industry Focus going on for a few days next week. Enjoy your holiday season. We will pick it up right where we left off the following week, alright?
Frankel: Alright. Happy holidays to everybody listening.
Moser: 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. Today's show was produced by Austin Morgan. For Matt Frankel, I'm Jason Moser. Thanks for listening and we'll see you next week.