In this special episode of Industry Focus, all the hosts get together for one last time (in 2019) for a roundtable chat about the year in review. Among the topics they discuss:
- How will marijuana sales compare to alcohol over the next decade?
- Will iPhone production last as long as Model T production?
- How much will bitcoin be worth in 2030?
- Can the FAANG stocks keep up their breakneck growth rates in the 2020s?
- How many big tech companies are on the antitrust chopping block?
Plus, they share some stock picks and pitches for 2020 from across the market, from healthcare to e-commerce; discuss the fate of the Washington Nationals; and more.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Dec. 18, 2019.
Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's the holiday week here on Industry Focus and we are wrapping up the year with an all-host roundtable. I'm host Dylan Lewis and I've got Shannon Jones, Nick Sciple, Jason Moser, and our new host, Emily Flippen, with me in the studio. What's going on, folks?
Alright, so this is going to be our third installment of the never-ending story. We got our roundtable. We like doing this every year. If you haven't caught the earlier ones we've taped, go back and the construct will make a little bit more sense, and you'll get some background on some of the changes coming to the show in 2020.
With that ominous note, I'm going to pass the mic over to Nick Sciple, who's got a fun little game for us for this segment.
Nick Sciple: Yeah, I thought it'd be fun to do some over/unders on our expectations for some important markets going into the future. The first one, I had a question for you guys, and then we'll go into this first over/under. Debuting in '08, this device was the brainchild of its founder-leader, one of the greatest business leaders of all time. He didn't invent the device, but the introduction of his version sparked a revolution that transformed, first the United States, and then the world into what it is today. It transformed a product that was once accessible only to the ultra-wealthy into something for the everyman, and as a result, it made the world more connected and created an ecosystem that allowed dozens of new businesses and business models to develop and thrive. What device am I talking about?
Jason Moser: When was this again?
Lewis: The iPhone?
Shannon Jones: The iPod?
Sciple: No. Alright, the whole idea was, they were guiding us toward the iPhone. It's the Ford (NYSE:F) Model T. In 1908, the Model T debuted. Obviously, it opened up access to the automobile for people across the world and went nationwide. The iPhone debuted in 2007. Did a very similar thing, opening up access to apps and really connecting folks. The Ford Model T ran from October 1908 to May 1927, a 19-year career for this device, and the second-longest running auto vehicle in history.
The question in my over/under right now is: over/under 19 years, will the iPhone last in production?
Lewis: I'm going to take the under.
Emily Flippen: I'll take the over.
Jones: I'm going to go under.
Sciple: Over. That means, past 2026, you think the iPhone will last. Why do you think the iPhone will last that long?
Moser: We've obviously become very used to it. It's become almost mundane. It's an extension of ourselves. We talk about the cyborgification of people, like we're becoming robots. That's kind of like the first step really, because you're not doing anything without your phone. I think sometimes, we discount how prolific the smartphone has been in the development, in the growth of the human race. It's a lightning-in-a-bottle product. I think that one of the biggest challenges companies have been facing since the smartphone came out is, what's next? And there is no clear answer. I do believe in the future of AR and MR and all that stuff. I think that headsets will be a part of that. I just have a hard time seeing something just fully disrupting the smartphone from our lives.
Lewis: You might have just convinced me that I was wrong. [laughs]
Moser: Well, Dylan, you know ...
Lewis: Well, I was thinking about it quite a bit, and yeah, the form factor for the iPhone, the specs have changed dramatically. What's under the hood has changed dramatically over the last 10 years. It pretty much looks the same. I'm thinking about all of us sitting around the table here with our laptops. Laptops have changed dramatically in terms of what you can do on them. They haven't changed dramatically in terms of what they look like. And they've been around even longer. So, yeah, I could see something that looks a lot like the iPhone continuing to be around for another 15 years.
Moser: I just view the phone as a window that just opens you up to the entire world. And there has not been anything developed since the smartphone that comes even remotely close, nothing at all.
Lewis: I think the fantastical idea that hops into a lot of people's heads is, like, we'll have some form of embedded technology, that will be kind of the next thing.
Moser: Distinctly possible, but still, you have to account for how you're going to consume that -- it's got to be a window that's opening up the rest of the world to you. So then, how are you going to be consuming that? If it's something that's installed in your arm, or if it's a headset that you're wearing -- certainly, there are going to be iterations that come along. I just think that sometimes, we get so used to those phones, we forget about how profound that development has been. We watch these companies try to come up with that next lightning-in-a-bottle device, and nothing even close.
Sciple: That's why I keep thinking about the Model T as the comp for the iPhone. We had smartphones before that period. There was the BlackBerry and those sorts of things. But they were used for business. And when it became the product that every single person used is when you saw these developments, like we talked about, of online dating, or social media, and all those sorts of things, and you really reshape your entire society around that. You think about what the automobile did to the 20th century, right? We all get in a car almost every day to go to work. Everything that gets to market uses that system. So I think it's an interesting comparison to think about.
To your point, the form factor of those original cars back 100-plus years ago, aren't all that different. They're just significantly safer. But there's still four seats, a driver's wheel, and two pedals. Just something to think about going forward.
Another one of those over/unders I wanted to talk about is bitcoin. Bitcoin has been a huge story of the past decade. It was initially released in January 2009 by "Satoshi Nakamoto," who is still to this day unidentified. Fun trivia question before I hit you with over/under. The first bitcoin transaction was in 2010 when Laszlo Hanyecz bought two Papa John's pizzas in 2010. How much in U.S. dollars today did those Papa John's pizzas cost?
Moser: I know it's like $1.3 million or something like that.
Jones: I was going to say $1 million.
Flippen: I was going to say $55,000.
Sciple: He bought two Papa John's pizzas with 10,000 bitcoin --
Flippen: Oh, gosh! [laughs]
Sciple: -- that today would be worth $70,910,000.
Flippen: 10,000 bitcoin!
Sciple: Phew! [laughs] Yeah, so it's been a crazy [decade] for bitcoin since that transaction in 2010. Obviously rocketed up in 2017, hitting an all-time high of $19,783. Fell 81% from there in 2019. Today, it's trading at $7,091. So, 10 years from now, do you think the price of bitcoin in U.S. dollars will be higher or lower than $7,091?
Lewis: Higher. I'm going to say higher, but as someone who does not own bitcoin and probably will not own bitcoin, I think that the use case is very compelling if you live in a country that does not have a particularly stable currency. I lose sight of that a lot being in the United States, but I think there's something there, and I think there are a lot of people, very similar to the folks who love gold, that are going to continue to buy and hodl bitcoin.
Moser: [laughs] Hodl.
Lewis: I had to sneak it in there. So, I can't speak to its investment worthiness, but I do think it'll probably be worth more. Shannon?
Jones: I think higher. I will say, I'm a little bit more skeptical when I look at it long term, particularly in developing countries, because you have to have the infrastructure to support it. But I think in terms of U.S. dollars, I think it'll be a bit higher. I'm not going to say a lot higher. I don't think we'll get back to where we were.
Flippen: We're all hodling!
Lewis: Wait, J.Mo was a no.
Flippen: Except for J.Mo.
Moser: I said lower.
Lewis: So, what's your rationale?
Moser: I appreciate what you're saying in regard to countries with currencies that are less stable than others. I think for me, I want to ask the question: Why is the currency unstable? That boils down to governments. I think there's a whole 'nother layer of problems to solve before bitcoin just fixes it, you know what I mean? I like the fact that bitcoin is finite. There are only so many bitcoins. By that logic, over time, if it's any kind of a store of value, it should increase. And I think over time, it probably will be, as more and more use cases come to light. I just think it's probably going to take a little bit longer than people think.
Sciple: One question folks have raised, and it made me think about the use case for bitcoin a little bit, you mentioned one of the big positive traits of bitcoin that folks mention, as J.Mo called out, is that supply is limited. That reduces the amount of inflation over time. But the fact that supply is limited, I think, from a currency point of view, is almost a negative. It makes the currency, by definition, deflationary. By definition, things that are bought and sold and that currency will decrease in value over time in terms of that currency. And when the Fed and every central bank's mission worldwide is to maintain steady, predictable inflation over time, when you have a currency that is going to be a global basis that is by its very nature deflationary, that seems that it would create problems to be used as a currency. But we shall see, 10 years in. We'll see where we're at 10 years from now.
Another major trend over the last decade has been the move toward marijuana legalization. We saw Colorado becoming the first state to legalize marijuana for recreational use in 2012. We've seen a bunch of other states follow. The big question I think a lot of folks have is, how big can this industry get now that it's legalized? And I wanted to pick a number that maybe might make sense. Currently in 2019, global alcohol revenue is projected to be about $1.5 trillion. That's beer, wine, spirits, all those sorts of things. By 2030, do you think the global marijuana revenue from all sources will equal about 20% of what alcohol sold last year? That's $300 billion. So, by 2030, do you think global marijuana sales will be $300 billion or higher?
Lewis: I think it will be on the run rate to that, if it isn't over it. It might take a little while as we go through legalization for some of the major economies, but I think once that hits, it's going to become a major consumer product. I think that actually, a lot of alcohol sales may start going the way of marijuana sales. And, yeah, I'd probably take the over or the meet on that.
Flippen: I will easily take the over on that. I will also add the caveat that it depends a lot on regulations. I agree with Dylan's analysis that a lot of alcohol now I think will transition to cannabis use if and when it becomes federally legal, at least here in the U.S., just because of the side effects. That being said, there's a lot of regulations in place that make access, even in states that have laws like Colorado that allow recreational cannabis use, that say, "Hey, you can't consume it like you can consume alcohol. You can't go to a bar and get cannabis and consume it there." I think if we see changes on that level start to take place in the U.S., that could really open up the cannabis market.
Moser: Yeah, I tend to agree. I think that it's not going to be all that far down the road where you're going to see people drinking their weed like we drink our beer today, right? I think you're going to see enough case studies out there that will show, the side effects of marijuana can oftentimes be far less dangerous than alcohol. To me, this is the power of generational thinking. We have a generation that is coming up now that is seeing the world through a completely different set of eyes. And once that happens, then the numbers are in your favor and stuff changes pretty quickly.
Jones: I agree. Yeah, I definitely would say over on that. I think, especially as companies start to innovate with onset and offset in terms of the therapeutic benefit, or even just the recreational benefit you're trying to get high off of -- but anyway, I think as companies innovate with that, I think it is going to open up a very large market. And I agree with Dylan, I think you are going to see people start to move away from alcohol and move into cannabis-based beverages. I could easily see that being over.
Sciple: I set the line, so I think that's about right on the money. One question I do have, and maybe you guys have some thoughts on this, as comparing marijuana to alcohol sales, is about out-of-home sales for alcohol. When you go to the bar, maybe I could drink five or six beers in an afternoon, or in a course of an outing. I don't think I could consume six joints in one outing. That's about half of global revenue from alcohol. So how do y'all think about the role that away-from-home sales will play in the marijuana space going forward, given the consumption patterns of that drug are a little different?
Flippen: Here's what you can't do -- you can't go to a bar and get a pint glass of vodka. So, you shouldn't be able to go to a cannabis bar, theoretically, and get the cannabis equivalent of a pint glass of vodka. I think it comes down to needing regulations to say, what is a dose of THC? Just like alcohol, that can change person to person. One person might have one beer and feel intoxicated. Another person might take five beers to feel intoxicated. That can be true for cannabis too. But it needs to be regulated. You shouldn't have products that are so high in THC that you are completely inebriated after what would be equivalent to one pint of beer. So, I think it comes down to needing regulations. And I think that once they get there, it will take a long time, because it's the government. But once they get there, yeah, there's an opportunity for you to go out and have the equivalent of five pints of cannabis. Wow, this analogy is really going down the toilet.
Lewis: [laughs] I want to follow Nick around on that.
Jones: [laughs] I think you're getting to a point where you're seeing companies try to become really smart about that. They want you consuming these beverages just as much as you do the alcohol beverages. So, once that limit is set of what is the appropriate amount of THC, they're going to innovate and find ways to try to spread that out, make sure you actually don't feel that benefit or it goes away in a very short amount of time, so you'll pick up the next one and keep going. I think this is an ever-evolving space, but I think that's what makes it really interesting, too.
Sciple: You can tell the story of, if I'm a restaurant and I'm selling these marijuana-infused beverages, and we've been able to really develop these things, then I'm going to get the strain that has a little bit turned up the munchies for my restaurant there, so maybe I'll sell a little more product.
Moser: Probably fewer bar fights.
Flippen: [laughs] Yeah.
Lewis: Might still need to carry people out. [laughs]
Sciple: They'll just be a lot more happier when they do that.
Alright, the next topic I want to talk about is antitrust. Obviously it's a big concern, big tech really growing in a significant way over the last decade. And so, with the election coming up in 2020, part of several candidates platforms' has been breaking up big tech. So, the over/under I have for you is: Over/under one company over the next 10 years over $1 billion in market cap that will be broken up as a result of antitrust.
Lewis: I'm going to take the over on that. I think that, to go back to our rundown of the largest companies in the S&P 500, we are in an era where tech has dominated and grown very quickly. And so, the five largest companies in the S&P 500 [are] all tech companies. I think that regulation and antitrust regulation in particular tends to lag market dynamics. You have regulators that want to learn and understand what's going on in a market before they hop in. And like we saw with a lot of the oil breakups that happened in the 1900s, I think that's probably going to happen in tech.
I think with a lot of these businesses, as well, it's pretty easy to see how you could spin out certain operations and still have them make sense as individual companies. Amazon (NASDAQ:AMZN) spinning out AWS. It's already a business segment that exists for them. Forcing somebody like Facebook (NASDAQ:FB) to spin out Instagram. That's not insane as an idea. Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) owning Google search. You could make the argument that maybe YouTube could be spun out of that. In a lot of those cases, I think they wouldn't be terrible for shareholders. It would definitely affect how those businesses operate. But after we've had this crazy period where tech companies have really taken over, I think it's only natural that we're going to have the backlash of making sure that we're comfortable with how they're operating in our society.
Flippen: I will also take the over on that, but I do so hesitantly, because I think it's a new problem that the government faces. That's because these monopolies, if you want to call them that, these companies that have the risk of being broken up, they're consumer-based monopolies. Historically, we only see monopolies that are supply-based be spun off, because it's anti-competitive, it hurts the consumer. But the thing about social media and data and tech is that these are monopolies that are direct results of users using platforms. They're natural monopolies. They're monopolies that have evolved from convenience for the consumer. So I think it makes a difficult challenge for the government to figure exactly how do you start spinning off, and what criteria do you use to start spinning off or forcing to break up companies that are monopolies simply based off, their products are so popular and so in-demand.
Moser: Yeah, I think I'd probably go over. And I think part of that might just be from companies almost doing this of their own volition. To me, Amazon is one that stands out. I actually could see Jeff Bezos just spinning out AWS without even being really told to do so by the government. To the point that you made, just because you're being broken up or spinning off a part of the business, that doesn't mean it's a bad thing for shareholders. And oftentimes, it can be very good. It depends on the reason. I look at something like Facebook, for example. This may be a harsh opinion, but I really do actually think Facebook is the most dangerous company in the world right now.
Flippen: [laughs] Casually drop that.
Moser: The government probably has something like Facebook square in its sights. Maybe it doesn't quite look at Amazon or Alphabet the same way. Probably in the same ballpark. I do feel like some of these management teams are thinking about that and wondering, "Would it be worth our time to go ahead and do this on our own? Doing it on our own terms could make it work out really pretty well."
Jones: Yeah, that's exactly how I see it, too. I agree with everybody across the table. I think if you look across history, there's always been periods where you get these big conglomerates, and then whether it's through regulations, or it's through their own volition, they end up getting broken up. I think it's more a matter of time, and when it happens, rather than if.
Sciple: Yeah, I would tend to agree with you guys. The company that I think could bear getting broken up the best, I think y'all are on it, is Amazon, just because AWS by itself could be one of those top five most valuable companies in the world. You have dominant share. We mentioned cloud gaming earlier. Cloud will shape the way computing is done over the next 20, 30 years. When you're pushing 50% market share, growing at double-digit percentages every year, I just can't imagine that business not doing super well. Between those two, I'd be much more excited to own the cloud part of the business than the marketplace. We'll just have to see how things play out.
Also along the sides of big tech, obviously have been super dominant over the last decade, you've created the whole FAANG catchphrase -- Facebook, Amazon, Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), Google. Microsoft (NASDAQ:MSFT)is often thrown in there, and I'm going to throw that in there now. If you look at those companies since 2013, Facebook had its first full year publicly traded, they've returned a 37% CAGR. Today, they're roughly $4.9 trillion. Over/under, by 2030, do you think that the FAANGs, with Microsoft included, will triple to $15 trillion over the next decade? For quoting, that's an 11.75% CAGR over the next 10 years.
Lewis: Boy, you really set some good odds here, Nick. It's interesting, because having done the S&P 500 breakdown in 2010, and then again now, the collective value of those companies back in 2010 was about $2.2 trillion. The collective value of those companies now, that top 10, is about $6.5 trillion. That's a 3X for the basket. Now, the growth rates for those businesses were a lot higher than the growth rates for that basket. And so there's a part of me that says these are inherently very scalable businesses, and it would be very easy for them to maintain pretty aggressive growth rates.
But we haven't seen trillion-dollar companies for that long. And I do start to wonder, between them being bigger than anything we've seen before, and them possibly being broken up and not enjoying all these synergies and cost efficiencies that we've seen them enjoy over the last 10 years, and the free ride that comes with not really being regulated, might that path be a little bit tougher? And so I'm going to say, winners are probably going to keep on winning, but not to the extent where they hit those growth rates.
Flippen: Yeah, everything Dylan just said times two. I will take the hesitant under on that. I think they're going to continue to grow, especially Microsoft. Microsoft's not in there, is it? FAANG -- oh, OK. Just making sure. Yeah, especially Microsoft. An 11.5% CAGR for Microsoft at this point feels pretty achievable to me. But when I look at Facebook, even Amazon, these are really aggressive growth rates over the next decade. So I'm going to take the hesitant under, but I think they'll be bigger.
Moser: I'm going to go under. I think, honestly, it's not about the companies. As they get bigger, they slow down. But I think it's going to be more macro-related. I think there's going to be a big old culling of a lot of value in this market over the course of the next decade at some point or another, whether that's a recession or whatever. I think a lot of these companies have benefited from tremendous multiple expansion that is not necessarily on par -- well, with them, probably close to on par with their earnings growth. But I think that we're just going to see a little bit of a culling at some point which would prevent them from achieving that level of growth. But, again, they're still going to be bigger.
Jones: Just for the sake of being the contrarian, I'm going to say over. And only for the sake of being a contrarian am I going to say over, because I agree with everything -- you all said at this table. But this is my bold prediction, I'm going over.
Sciple: I think I might have to go over, too. As I mentioned, cloud, how big of a tailwind I think it is, and how big of an opportunity it is. You look at a company like Pinterest came public earlier this year. And if you look at their expense bill, the portion of their revenue that is going to AWS off the top is double-digit percentages of their revenue. Not just earnings, their revenue. I think of cloud computing as the rails that everybody's riding on to use this compute power to build their businesses over time. And if you think of the history of the railroads, right, every time you built a new stop, there was a boom town that blew up, that utilized the infrastructure to grow over time. I feel like cloud computing is doing the same thing. I think we'll naturally have three or four major players on a global scale. There's just so much fixed cost investment that you have to put in to build this cloud infrastructure. I do think there's going to be a few big winners there. I think it's going to be the Amazons, the Microsofts, the Googles.
And when you look at how big this opportunity could be over time, and if you can skim, not even 10%, if you can skim off 2% of revenue of an opportunity as big and as massive as this can be, global computing, global software businesses, I just think the opportunity is so big, I think 12% a year. Even if the rest of them drag down a little bit, I think the opportunities for those three big ones could carry them over there.
Lewis: I think you could do far worse than buying the five or six of them as a basket and just holding them for the next 10 years. I think that these are businesses that are in dominant positions, and have realized quite a bit of value already, but will probably continue to do so.
Sciple: Yep. OK, the last one, and this kind of hits on what J.Mo mentioned about the macro environment, is interest rates. The period of the 2010s, [the] major narrative was interest rates have to go up. They were basically zero to start off the decade. And they began ticking up around 2015. We started ticking up interest rates steadily over time. That peaked at the end of last year, when the target rate got up to around 2.5%, and has been tracking down ever since.
The question I have, given the way interest rates have gone, and they've remained low for such a long period of time, interest rates today, you have a Fed target rate of 1.5% to 1.75% for the federal funds rate. Ten years from now, are interest rates higher or lower than they are today?
Moser: Well, I feel like I've been saying they've got to go higher for the past 10 years. So I'm sticking with it. At some point, they've got to go higher, Nick. They've just got to.
Lewis: I think the struggle with this is, they've been so low for so long. And there are still a lot of people in the United States, and there's still a lot of countries across the world, that are really struggling. And you think about the tools that a central bank has at their disposal, and one of them is to lower interest rates. You hear a lot of kerfuffle about, when is the stock market correction going to come. The U.S. market has done quite well. There are other ones that have struggled. I do wonder if we'll hit the point where they need to pull that lever to stimulate growth, even though we're already so low. We were talking about the difficulty of nailing something down from a macroeconomic perspective. I can't venture a guess on this one. I wouldn't be surprised if they were lower at some point than they currently are, and if at some point in the next 10 years, they are dramatically higher than they are right now.
Sciple: Yeah, I think my answer to this is, I don't know. The follow-up question I would have is, even if you did know, how would you change your investment strategy, if at all? There's really not much you can do.
Moser: No, I don't think there's really much you could. You might look at your longer-term plan and try to figure out if you're looking to buy a house or want to refinance. There are certain things where those interest rates aren't really going to dictate what you're doing day-to-day. I mean, we like to talk about them all the time because they have bigger-picture implications. But, yeah, your point is a good one.
Lewis: The investing takeaway, I think, if anything, is it's been a very good time to be in stocks over the last decade. If people continue to get pretty meager interest rates elsewhere, the money is going to stay in stocks.
Moser: We talk about that all the time. With interest rates so low, all of this money is chasing where the biggest yield is going to be. The biggest yield is not interest rate driven instruments. It's in the stock market. And then there will be a point in time where that turns. I feel comfortable saying that. When? Who knows? That'll certainly maybe dictate as a buyer of stocks, you want to be a little bit more cautious about what you're buying. Valuation at some point is going to matter more than it does today.
Jones: But it shouldn't stop you from buying.
Jones: We know it's only a matter of time before rates do go up. I think it's good to know about it, but I think, again, as long-term investors, it really should not change how you evaluate companies, and really just continuing to invest in stocks for the long term.
Lewis: Yeah, I think one of the best things that you can say to someone who is worried about a correction or worried about some macroeconomic issue is to think precisely how your 401(k) invests, or your 403(b) invests, or whatever your retirement account might be through work if you have one. It doesn't matter what's going on, if you're being paid twice a month, 24 times a year, you're buying into the funds that you've decided to buy for the 401(k). It's going to happen regardless. It's going to happen whether we're at highs or lows. You can't do that 24 times if you're buying individual stocks. It's a little tougher to buy into an individual position that many times in one year. But, keep that mindset. Remember that no individual headlines can move anything permanently. It's important to just keep your cost basis moving and add to your winners over time.
Sciple: Alright, that's all I've got for the over/under. Do we want to do our top stock picks for 2020?
Lewis: Yeah, we'll throw some stocks out there. Before we throw our stocks out there, though, I think we should take another listener recent stock pitch.
Moser: Alright, we've got one more here from Adam Diamond. Adam says, "Hi, all. Longtime listener, subscriber, first-time emailer. First, I want to say how amazing your podcasts are. I faithfully listen to each of them." Thank you, Adam. "I have two stocks that I recently bought on their dips. The first is TD Ameritrade after they announced free trades." That must have been just before that Schwab acquisition, too. "Easy return. Great news to hear the Charles Schwab acquisition. The second is Wells Fargo just after they announced their new CEO. So far, so good. Keep up the good work."
Adam, thanks so much. Appreciate that.
Lewis: I can't speak to Wells Fargo at all because I don't understand how to look at bank stocks.
Moser: Well, I mean, Matt and I talk about this stuff all the time. One of the bold predictions that Matt put out there for 2020 -- and I agree with -- we'll continue to see consolidation in the space as rates stay low. Banks are in a bit of a challenged environment, trying to realize profitability. Net interest margins, there's just a ceiling on them right now, unfortunately. It puts banks like Wells Fargo in a good position if they could just get their house in order.
Wells Fargo has been a cultural nightmare. Thankfully, the CEO they recently just brought in was external. I think we can all agree that was something that was really, really needed, given their presence in the mortgage market and their size. It's hard to imagine Wells Fargo not recovering. And so perhaps he found a good value where there is not much value today.
Lewis: Those corporate culture changes are very tough for a company of that size. It seems like they've been working on it for a long time. My general M.O. with something like that is that I don't like to pay admission to watch someone else figure something out. But I also don't understand banks particularly well. That's a business that's really driven by what the books look like. And so, power to Adam for hopping in there.
Sciple: I felt a little bit about Wells Fargo similar to I felt about Boeing. You have these really old, well-established businesses. It's really hard to see a case for them, from the core business, really getting dislodged. So, just from a pure market opportunity perspective, there's a really strong case there. But you have, for Boeing 737 Max; for Wells Fargo, all these account scandals, that really raise questions of management's ability to play that hand they've been dealt that's so strong for them. It makes it really hard to get excited about going out and buying them despite how big the market opportunity may be.
Moser: I think the biggest mistake Wells Fargo made was replacing their former CEO with an insider when Tim Sloan took over the position there. That was their biggest mistake, was promoting an insider. They should have just immediately brought someone in from the outside. Cultural problems, they suck, but they're fixable, right? There's not something fundamentally wrong with the business model. It's just they weren't being led very well. And those are fixable problems. They just delayed their opportunity to really get that damage repaired.
Jones: I think when it comes to bank stocks in particular, it takes a lot longer to regain that trust when it comes to consumers than I think a lot of others. When it comes to someone's kids and their money, it takes a whole lot of time to rebuild that trust, if you can get it. I think it's just going to be a much longer story for Wells Fargo to play out and to rebuild and regain that stellar reputation that they had before the scandal broke out. For me, that's like the big question mark on that stock.
Lewis: I don't mean to rake his stock pick over the coals. [laughs] I think it's also just great to get feedback on your stocks that you're interested in. So, we're going to pitch some companies that we like for 2020. Of course, we want constructive criticism. If you have any red flags on any of these companies, we would love to hear them, listeners. Please keep that in mind. You don't have to just send us your pitches, you can also send us some thoughts on these pitches that we're going to send your way.
Jason, I'm going to let you go first, because I'm a little worried that I picked the same company as you.
Lewis: So, if I let you go first, we can go around, and then I can come up with my plan B if you already picked the same stock.
Moser: I have a feeling I might surprise you here. I'm going to go with -- I was asked to participate in Investor Place's Best Stock of 2020 contest, so I'm going to go with the stock that I chose for this contest. By the way, I'm in the Investor Place Best Stock of 2019.
Lewis: How you doing?
Moser: So far, second place. You know what the stock is? Teladoc.
Moser: So, this one, I actually had to noodle over for an entire weekend, because I was going to go one of two ways. I ended up going with Wayfair, though. Part of that is probably recency bias, and showing up to my doorstep after work every day for the past month and seeing five Wayfair boxes on the front porch. But honestly, Wayfair to me is a business that I've been following ever since they went public. I've been tracking metrics years before they even went public. It's just amazing, the numbers that they continue to record. In this most recent quarter, revenue of $2.3 billion, up 36% from a year ago. Gross margin of 23.4%, up 40 basis points from a year ago. Active customers now at 19.1 million, up 37% from a year ago. Orders delivered of 9.1 million, up 32% from a year ago. Percentage of orders from repeat customers -- and this is the most important metric of all, because it's expensive to acquire customers, so when they get them, they want to keep them -- 67.3% now, up from 66.3% a year ago. And if you look at these metrics going all the way back to 2013, they are just on the way up.
It's a difficult business to value because they're still not making any money, right? They're building out this network. It's basically a global furniture fulfillment network, and they're investing a lot of money in the business. But we've seen this play out before with other businesses. The market is affording them a little bit of time to do it. I think one of the biggest question marks for them has been that China trade ... I'm going to use your word, kerfuffle. It's so good. I do think we will see that will be concluded at some point or another. I think that is something that will be a catalyst that helps get this business going back in a little bit of a better direction. That earnings call really shaved a lot off that stock price in the matter of a day.
I like that leadership is so bought into the business. They own an awful lot of it. And, I've used it an awful lot. And all of the numbers just continue to tell us that the investments that they're making are paying off. It's just going to be a matter of time.
Lewis: Now, Shannon, you are leaving the show for 2020, but we're not going to let you off the hook. You still have to pitch a stock. We might ask you to come back to the roundtable as a little recap next year. What's one that you really like for the upcoming year?
Jones: Since I am on my way out, I'll give one and a half. My half, though, is actually coming from the stock that I mentioned last year. I'm going to rerec it here. It's Vertex Pharmaceuticals. Stock is up about 32% this year. I encourage you to go back and listen to the roundtable. I won't get into it for the sake of time. But if you're looking for an opportunity to play in the gene editing space, they are a partner with gene editing giant CRISPR Therapeutics. They just released some really, really promising data. It was a very small patient population. But I like where this company is going. They've got a stellar management team. They have a drug development platform. This is not a one-and-done type of biopharma company. They have literally a platform where they're going after really high unmet need targets. They're known for cystic fibrosis. This this is a company I'm really watching even more so in 2020 and into the next decade.
But the other company that I really like heading into 2020 is a company called Guardant Health. For those who aren't familiar, it's a leading provider of liquid biopsies, which is basically blood draws instead of a very invasive biopsy that you typically will see for cancer patients. It's, of course, less invasive, less costly, and this is not of the Theranos kind. [laughs] This is the real deal. Basically, this is a company that has shown that it has what it takes to analyze, on a genetic level, the tumor DNA that's circulating in the blood. Year to date, stock is up 93%. Revenue is exploding. Most recent quarter, revenue was up to $61 million. Nearly tripled from the year prior. Their tests that they're completing have just about doubled. Gross margin's up about 1,400 basis points to 70%. Still losing money, but much less than expected. And this is all on top of their Guardant 360 test, which isn't even yet FDA approved, but it's very much expected across multiple cancer types. This is a huge opportunity. When you're just looking at the cancer space in general, you're talking about cancer being the second-leading cause of death globally. And by 2030, researchers are expecting 21 million new cases every single year. This is a company that's carved out its niche in cancer diagnostics. This is the space you want to invest in.
Right now, they're focused really on advanced-stage cancer, but the bigger opportunity, and really the $18 billion opportunity, is doing it before someone has the symptoms, before you get diagnosed. These are the tests that are coming later that are also highly expected to get approved. And so, this is a company, if you're looking to play in the gene space, a company that's really carved out its niche. Guardant Health is the one to go to.
Lewis: I think that pitch right there fully wraps why you will be so missed on Industry Focus.
Jones: [laughs] I won't be far; I will not be far.
Lewis: So excellent, and also so accessible, as someone who doesn't really follow the healthcare space as much.
Nick, what is on your watch list for 2020?
Sciple: A lot of people will be familiar with this company: Microsoft. Huge performer this year, up 46% on the year. I mentioned cloud earlier, how big of an opportunity I think that is. Azure, their cloud offering, No. 2 behind AWS. Microsoft is that rare big tech that doesn't seem to be on the antitrust radar at all.
Lewis: They were already on the antitrust radar.
Sciple: They were on round one, 20 years ago, right. Just, up and down, obviously, Windows, Office 365, essentially the biggest SaaS product in the world. $126 billion in revenue, up 14%, most recent quarter. Cloud and commercial revenue is growing 36%. When a market opportunity is as huge as cloud is and you're growing at that kind of rate, I just don't see an end in sight for them. They have the gaming exposure will see the new round of console upgrades the next year. You mentioned how important cloud will be for gaming going forward. The infrastructure they have through Azure really gives them an opportunity to do well going forward. So, all steam ahead, I guess.
Lewis: I think that Microsoft may be one of the best "I'm going to start investing" stocks that you can possibly buy. They've built up such a must-have suite of software, and they've built all these other really sticky businesses into their offerings. If you're just putting a portfolio together in 2020, I think that's got to be at the top of your list.
Sciple: Yeah. Think of the big tech CEOs. If you except Jeff Bezos, is there any other person you would want running your tech company today other than Satya Nadella?
Lewis: No. I mean, the story with him has been incredible, absolutely incredible.
Alright, Emily? First time on the stocks to watch for Industry Focus?
Flippen: I feel like I always have to go after these really amazing, revolutionary companies.
Lewis: Did you want to go after me?
Flippen: I'll lob you a softball here, so you can take it and run with it. I talked yesterday about pet humanization. The stock that's on my radar is Chewy, which is the largest e-commerce pet retailer in the U.S. I talk a lot about it. I think it's one of those companies, almost aligned with Wayfair, Jason, that is really under-appreciated in the market. It went public this year. It's unprofitable and it got caught up in that entire sweep of unprofitable IPOs, of these companies with ridiculous valuations. But that's simply not Chewy. Chewy is operating in the $70 billion pet market, and they're on track to do, I believe, $5 billion worth of revenue this year alone. Only 14% of all purchases for pet care products happens online. That implies that Chewy has virtually all of the online market for pet spend. If you assume that people are going to be moving their purchases online for pet spend -- and I think that trend is going to continue to happen -- there's no reason why Chewy shouldn't be much bigger, not only in 2020, but over the next decade. I would challenge anybody who has access to a phone or computer right now -- which really should be everyone -- google pet stuff or dog food. Google something like that. I dare you to find an Amazon link. They're all Chewy. Chewy has done an amazing job establishing its online SEO presence. And it's unprofitable, but it's unprofitable by choice, in a similar way that Wayfair is. If you look at their cohorts of consumers, they track it really well. If you go into their S-1, it's an amazing S-1 to read. They literally track how much money they spend to acquire their customers, and the lifetime value of that customer. They're essentially saying, "Yeah, the reason we're profitable is because we're spending so much on advertising. But the reason why we're spending so much on advertising is because the value of the customer that we're acquiring is so great over their life that if we were to scale back our advertising spend to become profitable, we'd be giving up a significant amount of future revenue."
Over the past year, Chewy has seen a 120% increase in sales from existing customers, with 66% of all of those sales happening through their auto-ship program. That's people automatically getting boxes shipped to them every month, every two months, every three months. It's an amazing platform that has done an amazing job of catering to an underserved market. I really think it's underrated, but I know it's a controversial stock because of the previous pets.com bust back in the early 2000s.
Lewis: It was hard for them to escape that when they were going public. When we look at retailers or e-tailers, we think of, are they Amazon-proof? With TJ Maxx and those types of stores, they have the bargain hunting. With Home Depot, this is specialty equipment, it might not ship particularly well, you might need it immediately, and that that gives it that Amazon-proof-ness. Is the SEO strength of Chewy what makes it Amazon-proof to you?
Flippen: No. I mean, that obviously helps. But I think it's their customer retention practices, which include stuff like sending handwritten notes for pet owners on their pets' birthdays. If a pet passes away, they'll send flowers. They've even been known to have customer service people paint portraits of your animals and send them to you. They really improve the overall customer experience. People who purchase on Chewy's platform once usually continue to do so. I'm a loyal Chewy member, and they do, for the most part, match Amazon's prices. I think you can probably find products that are cheaper on Amazon, the same way you can probably find products that are cheaper on Chewy.
The big risk with them is -- I should have mentioned this at the offset, I played it off to be so great -- they are a controlled company. PetSmart purchased them. They are controlled by PetSmart. And PetSmart is not necessarily out there looking for the best shareholder returns for the average retail investor. They're probably going to leverage Chewy to do what they can to retain their strength. But, granted, while it's annoying, I also think that there's a certain level of strength that comes with the distribution networks that have been set up through PetSmart, through that acquisition. So, that's the biggest risk for them.
Lewis: You didn't throw me a softball, that was a great pitch.
Flippen: [laughs] Well, pet humanization. Chewy is not exactly Microsoft.
Lewis: I was relieved that Jason did not take my stock, but I do have another one that I'll throw out there, too. My pitch here is DocuSign (NASDAQ:DOCU). I think anyone that listens to me or to Jason probably knows this one. They e-document everything. They are trying to make document management as easy as possible for all the forms that you need to fill out. And the reality is, there are a lot of forms that you need to fill out, particularly in the healthcare and financial space. This is a company that makes that super easy, and they are embedded with some of the big names already.
It's been an incredible performer so far in 2019, I think up 80% year to date. Now, I don't expect that to continue. This is a stock that I own and have bought a couple times. Growing revenue at 40%. They were actually able to accelerate their revenue growth. They have dollar net retention rate, which is that number we love to see for SaaS providers, at 113%. It's not lighting the world on fire, but I think that's a good, sustainable number. Basically means, for customers that were there a year ago that they got a dollar from, they are now getting $1.13. You couple that with the fact that they have enterprise customer growth of 30% they've got a lot of really good things going for them, and I think it's a company that capitalizes on some really great trends.
Jason, you talk about them all the time. Anything I missed there?
Moser: I love it. I own it myself. Every time I get to use it, I'm just astounded by just how easy it is. And I just wished I'd had it all my life, given you can buy and sell houses or go to the DMV or get married, there's always something you have to sign. The only thing I'll add in there, I think that they have formidable competition in the form of Adobe. Going through Adobe's most recent quarter with their document cloud segment of the business, somewhat comparable to DocuSign's business at this point. I will say, I made my bold prediction on Motley Fool Money last week, I wouldn't be surprised to see Adobe actually try to buy DocuSign. I think the main reason is because DocuSign gets ahold of so many small and medium-sized businesses that Adobe would just love to have.
Lewis: I think if you wanted to play that trend, you could buy both of them and own two stellar businesses.
Moser: Yeah, Adobe's phenomenal.
Lewis: In addition to all the document management stuff that Adobe is doing, they also own so many tentpole software franchises that are must-haves in the creative space. That's another one you can throw on your list. I think that's been a killer performer over the last five years.
The other one I was going to mention is Axon. This is a company that people might know based on what they used to be called, and that is Taser. This a business that made stun guns, and they still make stun guns, that were used by law enforcement. The reason that I am interested in them and have owned them for the last four or five years is, they make the body cameras that you will see on most cops, and they have a cloud business built around maintaining those video records, Evidence.com. You put that together, the body cam/Evidence.com business is almost half of revenue, growing over 40% year over year, and about two-thirds of that revenue is cloud-related with 70% margins.
They are the major player in that space. Very little competition and a lot of medium- and long-term contracts with their customers. And for me, this is a business that's just very easy to get behind. I think that having a better insight into what's going on with traffic stops and how law enforcement is acting is generally better for everyone. It leads to more accountability and it reduces the liability for a lot of local law enforcement groups. I think it's an easy stock to root for, and one that has also done quite well over the last couple years. I think they're up 60% year to date. So, that's another one for your lists.
Anything else on the stock front?
Sciple: On the Axon thing, it sure helps when laws are passed that require people to buy your products, right? It really tends to be a great tailwind to have as a company, and Axon is benefiting from that in a significant way.
Lewis: So nice of you to mention that! Thank you! [laughs] Well, I appreciate all the stock pitches. And I appreciate all you guys taking your time to hop into the studio to do this year-end wrap up. I think we've got one more stock pitch from one of our listeners, Jason?
Moser: Yeah. I think this is wrapping up with this one right here from Joey Hayes on Twitter, @DJJoeyHayes. He says, "I just bought more Disney, because, well, baby Yoda." Dropping the mic.
Lewis: I love that. And you know what? It's been a great year for Disney. This was a stock that kind of struggled for quite some time and been more or less flat. Depending on your holding period over the last couple years, you actually might be down on Disney stock. I think Disney+ and the entrance into the streaming space has got a lot of people excited. I think they're doing over $10 billion in box office this year, which is just incredible. That's another one, I'd put it in the same category as Microsoft, where you really can't go wrong buying that one and just leaving it alone for five or 10 years.
Sciple: Here's a trend for you. 10 years from now, are we still watching Marvel movies?
Jones: Absolutely. I think they'll be like Star Wars.
Sciple: Star Wars was going to be my next one -- 10 years from now, are they still releasing another Star Wars trilogy?
Jones: Of course.
Moser: I'm not sure about the movies, but I think they have so many different stories they can tell with that universe of characters. I think that's one of their specialties, is taking that universe of characters and making new stories with them.
Lewis: That touches on another trend from the last 10 years that I think will stay, but I wish would go away, and that is the shameless reboots and extensions that we're seeing in entertainment.
I love Netflix for a lot of reasons, but, Fuller House, the extended seasons of Arrested Development, I think you have all these big, entertainment brands, as they're spending more and more money on their content, because all these creators are being bid up, they're saying, "Well, we want something that's bankable. We want something that we know is going to draw an audience and has a cult following." It's indulging the fans to some extent, but I think it's because they know it's a moneymaker. I hope at some point, the fans push back on it a little bit, because it feels shameless.
Moser: I tell you; I saw those reboots -- Arrested Development is one of my favorite shows ever. Those first three seasons were just amazing. I couldn't get through the first episode of that reboot, and I almost canceled Netflix because of it. And then to see them do it again, it was just like, guys, come on.
Lewis: Yeah, but they knew people were going to watch.
Moser: I guess.
Lewis: And you know what? I was one of those people, because I also love Arrested Development. So, we'll see.
I want to wrap up with one more over/under, and this is for our man behind the glass, Austin Morgan. The past decade, we saw one Washington Nationals championship. Over/under 1.5 championships in the next decade?
Austin Morgan: We actually saw two this decade.
Lewis: Washington Nationals?
Morgan: Oh, sorry, I thought you said Washington teams.
Lewis: We got the Caps and the Mystics. That's three.
Moser: That's right, the Mystics.
Morgan: Well, in the four major sports, we've got two.
Lewis: So, talking specifically about baseball, we have we have one championship in the past decade. I'm going to set the over/under at 1.5. How do you feel about that?
Morgan: I'm going to say under 1.5.
Lewis: Do you think they'll get another one?
Morgan: Yes, but I'm skeptical to say it'll be the next decade.
Jones: Wow, Austin!
Morgan: I mean, I would love to see it again, but the teams that dominate year in, year out, are always going to dominate because they make so much money. The way the Nationals owners spend money, I don't think they're willing to pay what big guys -- a lot of guys don't want the deferred money, and that's all the Nationals want to give. Geniuses. They built a championship team. It worked. But it worked because they got hot at the right time, which is not repeatable.
Lewis: It sounds like you've got the right mindset coming into the championship offseason.
Morgan: That's the best they're going to get. He's not replaceable. We'll see.
Lewis: Yeah, that's the telltale sign of a fan who isn't used to winning and knows that it probably shouldn't happen that often. That's how I felt when the Jets were good.
Morgan: The Caps are making it common for D.C. sports teams to repeat greatness. They won the President's trophy for two years in a row before they won the Stanley Cup. They were untouchable during the regular season. They just couldn't win the playoffs. Now, again, they're at the top of the standings. We'll see.
Lewis: We'll see. I mean, I would love to have another parade in Washington, D.C.
Moser: Who wouldn't?
Lewis: I didn't go to it, but I just like the idea of parades. I think it's good for morale in the city. We'll check back in on all this stuff ... I don't know about 10 years. Hopefully we're all still here. J.Mo, that will be 20 for you. But hopefully, we're all still here in January 2030.
Moser: That'd be great -- 20 for me with the company, I don't age faster.
Lewis: [laughs] I'm not saying that there are Dylan years and J.Mo years, like humans and dogs. [laughs] In any event, I think we'll wrap things up there.
Listeners, I hope you enjoyed this special holiday week roundtable with all of our hosts. We certainly enjoyed making it, in case you couldn't tell. That'll do it for this episode, and for episodes for 2019. We'll be back in 2020 with some more stuff for you. And like I mentioned, that updated format, and a couple changes with the voices that you'll be hearing each week.
If you want to reach out to us with a stock pitch or with some feedback on anything that we talked about, hit us over at firstname.lastname@example.org, or you can tweet us @MFIndustryFocus. And, if you want more stuff, go over to iTunes or check out videos from the podcast on YouTube.
As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan and all of the folks here joining me for their work on today's show. Thanks for listening and Fool on!
Hey folks, I know I already outro-ed the show, but we've got a little fun nugget for you for all the folks that stuck around and listened to the end of the credits. This is a song from Burke Ingraffia. He's a Fool, and it's nicely tied into what we do over here at Industry Focus. Who knows, maybe in 2020, we'll start working it into our credits. Hope you enjoy.