Lesser Known E-Commerce Platform Posts Blowout Quarter

In this episode of MarketFoolery, Mac Greer, Emily Flippen, and Jim Mueller talk about Shopify (SHOP 4.90%), CVS Health (CVS -1.62%), Lyft (LYFT 1.14%), and the latest foldable smartphone from Samsung. Shopify and CVS had better-than-expected earnings, CVS makes a push toward affordable healthcare, and Lyft is losing money. 

Finally, Emily and Jim give us their top stock picks.

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 Feb. 12, 2020.

Mac Greer: It's Wednesday, Feb. 12. Welcome to MarketFoolery! I'm Mac Greer, and I am joined in studio by Motley Fool analysts Emily Flippen and Jim Mueller. How are we doing this Wednesday?

Emily Flippen: All right.

Jim Mueller: Doing great, Mac.

Greer: Well, good to have you here. We're going to talk some CVS. We are going to talk some Lyft. And we are going to talk the voodoo magic that is foldable smartphones. Samsung out with another one last year; didn't go too well. So we'll kind of find out about the new-and-improved version, and, more importantly, we'll talk about what it all means for investors.

But we begin with the red-hot stock that is Shopify. Shares up big, around 12% at the time of our taping, on better-than-expected earnings and upbeat guidance. Now, Emily, Shopify may not be a household name for a lot of people. It's an e-commerce platform, kind of a behind-the-scenes business that helps other websites operate and really allowing them to build out their online presence. And it has been a great stock. What do you think of the latest earnings?

Flippen: Well, if it's not on investors' radars, just because you're not familiar with the name, it definitely should be. It's one of the best performing stocks over the past year. And when you open up that read, talking about voodoo magic, my mind immediately went to Shopify's share price. Shopify is a company that has really kind of proven themselves and seems to have no upper limit. They had another blowout quarter this year; that's after the stock is up something, like, 70% since November, before this quarter. So revenue grew nearly 50% year over year, which was supported by both the number of merchants that are selling on Shopify's platform as well as an increase in the merchants that are using what they call Merchant Solutions.

So Shopify isn't just a platform for these merchants. They also provide a lot of ancillary services. That's things like two-day shipping, payment processing, and fulfillment. And makes the whole process really simple for merchants.

Greer: OK. So I hear you on all that, and it sounds interesting, but I look at the stock chart and I go back four years -- it's trading around $20 a share. Today, trading over $500 a share. So if I'm a shareholder, should I start thinking about trimming my position a bit? And if I'm not a shareholder, is it too late?

Flippen: Yeah, I have to admit, this is one that I have struggled with as an investor. I don't like price to keep me out of what I know is a great company that has a really strong future. And in my opinion, Shopify is very clearly that company. At the same point, it's hard to see it sustaining itself at these levels over the short term at least. I think if you're a long-term investor, if you have that time, you shouldn't worry too much about the valuation, but I could see there being some short-term pressure, just because the stock has had an outstanding but somewhat unwarranted run over the past six months.

Greer: And let's move on to CVS. CVS reporting better-than-expected earnings. Jim, what jumps out at you here?

Mueller: What jumps out at me is that, the big numbers, the 32% revenue for the full year, the $257 billion, that's primarily from their acquisition of Aetna back in November of 2018. The basic business, the pharmacy services revenue, that was up 5%; the retail revenue from their stores up 3%. Those are solid numbers, but the majority of the revenue gain was from their acquisition of Aetna.

Cash flow was strong. I liked the fact that they used some of the cash flow, $4.7 billion worth, to start paying down the $45 billion of long-term debt that they acquired or that they brought on to acquire Aetna. So I like that. That's good capital management, in my opinion. I like that they're expanding the MinuteClinics and helping healthcare become more affordable. And Aetna is being integrated pretty well. The former CEO of Aetna, who'd been on the board of CVS, is leaving the board now, now that the integration is well on its way.

But there was a phrase that kind of pricked my annoyance button a little bit -- not in CVS's earnings, but in the coverage of it and how it's referred to. The Wall Street Journal in its coverage called this -- and this is for the insurance part of the business -- "the medical loss ratio."

Greer: OK. The medical loss ratio. OK, I'm with you.

Mueller: And this is basically the upside-down gross margin for insurance companies. Of the premiums they bring in, it's how much they pay out to cover the benefits of the insurance. OK? And the remainder is what they get to keep. And so, that's kind of like the cost of goods sold for a retailer or a manufacturer.

Greer: OK. And what's your beef with the medical --

Mueller: ... Just the word "loss" "medical loss ratio." As if we're bringing all this money in and we're losing it, we have to pay out those pesky insurance claims and we're losing it. No. The insurance companies themselves don't use that, but The Wall Street Journal and frankly the federal government uses that term. CVS uses the phrase "medical benefits ratio," which is much more positive. UnitedHealthcare uses "medical care," Humana uses "benefit expense ratio." So I don't know if that's spin, or more accurate, but I like those terms better.

Greer: I think you should take that up as your crusade. [laughs] I think you're just the man. Now, when we think CVS --

Mueller: I'm going to mention it in every podcast from now on. [laughs]

Greer: Now, when we think CVS... I have a CVS and a Walgreens near my house. And I confess that the main reason I go to the Walgreens sometimes is there's never anyone there. And I love that I can just get in and out, because it is right across from the CVS. And I should add that the CVS has been there for ages; the Walgreens is only a few years old. So they don't have the established business. But what is the biggest threat to CVS from a competitive standpoint? Is it a Walgreens, or does CVS increasingly -- I mean, do they have the field to themselves?

Mueller: No, they don't have the field to themselves, but they are -- if not the biggest -- certainly one of the biggest players in the space. Yes, they have a retail store. They famously stopped selling cigarettes a few years ago, which is one reason David Gardner named it a recommendation for Stock Advisor several years ago. They're building out the MinuteClinics; they have the pharmacy inside; now they have health insurance. And so, as a company, they're trying to be more vertically integrated and take care of more people and make healthcare more readily and hopefully less expensive.

Greer: Emily, what do you think?

Flippen: I actually have a completely different opinion. I think their biggest risk is political risk. As we see right now, 2020, heading into the elections, there's a lot of pressure on the healthcare system here in the U.S. And their acquisition of Aetna actually could be argued to be anti-competitive and it keeps prices of medications higher for consumers. So I would say that's probably a big risk for a company like CVS.

Greer: OK. Well, we will keep an eye on it. Let's move on to Lyft. Shares of the ride-sharing service down around 9% on earnings. Now, Emily, Lyft is losing money, but losses were actually smaller than expected. But unlike Uber, Lyft did not move up its timetable for profitability. What do you think?

Flippen: How dare they continue to lose money? I mean, this really shouldn't be a surprise for any major investor, or any investor in Lyft, I should say. These are companies that have continuously been loss leaders in terms of the amount of money that they spend to acquire customers. They want you to be able to use Lyft more cheaply than you use Uber. It's essentially a duopoly right now, and they're all just biding time until they can either get their customer sticky enough that they get a little bit of pricing pressure or pricing power, so they can increase rates, or get some more scale in terms of automation with their self-driving cars. But Wall Street was definitely not friendly to the aspect of continued losses, not moving up profitability despite the fact that they beat on revenue and on their bottom line.

Greer: OK. And I look at the market cap here -- Lyft, around $15 billion or so. Uber, closer to $70 billion. So Uber is more than four times larger than Lyft in terms of market cap. Do you have a favorite between those two as an investor?

Flippen: I like Uber better, simply because they have more exposure to different markets. But in this industry, that also comes with more risk. So they have more regulatory risks in terms of the markets that they're exposed to. But Lyft is purely a U.S.-based play. Uber has a little bit more optionality.

Mueller: Expanding on Emily's use of the word "risk" here, I think both companies face the risk that many of these gig economy companies are facing. That is, are the people driving for them, are they employees or are they contractors and self-employed? And there's a lot to be argued both ways. But if your primary job is driving for a company and they dictate to you what rides you're picking up and what fares you're charging and so forth, then it could be argued that you are an employee and therefore labor costs could go way up for both of these companies. It really depends on how the regulators take a stance.

Greer: The main regulation I'd like to see is banning the air fresheners. [laughs]

Flippen: Oh! Strong opinion, Mac.

Greer: Oh, they're just terrible! Oh, they're terrible, like the pine tree. And it also makes me wonder, like, what are you trying to hide?

Flippen: You would rather just have that dirty car smell.

Greer: I think so.

Mueller: Then get a taxi.

Greer: [laughs] Oh, wow! We apologize to all.

Mueller: [laughs] My email address is...

Greer: And we close with the voodoo magic that is foldable phones. Samsung unveiling its Galaxy Z Flip foldable smartphone with, yes, folding glass, for the low, low price of around $1,380. Now, Jim, Samsung introduced their first foldable phone a year ago. Did not go too well. I know you have a Samsung phone. What do you think about the latest news here?

Mueller: I certainly hope they have fixed the issues that they had last year, that were hinges breaking, the glass breaking after only a few flips.

Greer: So it wasn't foldable, actually. [laughs]

Mueller: It was, but for not very often. Now, Samsung is claiming that the Z Flip can cycle through greater than 200,000 close and open cycles. Which is actually a lot. That allows about 180 uses per day for three years. So that's pretty robust --

Greer: ...OK. It's a lot of math, but I'm just trying to think about how many times I would open and close? A hundred and eighty. OK. I think that's probably enough.

Mueller: That's probably enough. But they also launched their S20 model of smartphone, their non-foldable type -- or at least, if you fold it, you're buying a new phone. But the financial news is kind of ridiculing Samsung here, because they went straight from the S10 to the S20. Where's the S11, the S12, the S13, all the way ...

Greer: ...Well, maybe it's twice as good?

Mueller: Maybe, maybe not. At least iPhone went from X or 10 up to 11, but maybe iPhone's next iteration is going to be the MM for 2,000 or something.

Flippen: I'm sorry. I'm just caught up with the fact that I have a time limit or an amount that I can apparently flip the flip phone? I am not sure if I want a phone that will eventually just die on me depending on how often I flip it.

Greer: So you're skeptical, because you were shaking your head --

Flippen: ...I don't like arbitrary limits to my phone's usabilities.

Greer: So, you're a greater-than-200,000-times user, right?

Flippen: There's a real possibility that I would flip my phone 200,000 times in a year. [laughs]

Greer: Wow! OK. [laughs]

Mueller: So anyway, getting back to your question about twice as better, Mac. The specs are pretty impressive. They have four cameras on the back that can do a wide variety of things, depending on which version you get. They have a pretty good zoom on the Ultra. The zoom is 10X optical and a 100X digital. But as one author in The Wall Street Journal wrote -- I think it was Wall Street Journal wrote -- that's kind of scary, because you can just hold it up and zoom in and read the text on a piece of paper several feet away. So think about that if you're the target.

One thing I do like is, Google's videoconferencing is built into their phone system, so you have the choice of either voice talk or video talk, which is pretty cool. And all phones have some 5G connectivity, though that is still being rolled out by the carriers and is spotty at best. The high-speed stuff, what they call "millimeter wave," doesn't penetrate into buildings. And so it's not very useful yet. That's a tech problem that's going to have to be solved. But the slower speed is not going to be much noticeable unless you're really using it, so.

Greer: OK. So if I had to characterize your overall mood, is it cautiously optimistic, pessimistic? Where are we?

Mueller: I'm wondering where the industry is going as a whole. I think they're going to -- they're starting to repeat, or have already started to repeat, what the computer manufacturers went through a couple of decades ago, in that the hardware got so good, it was good enough and there was little reason to upgrade. That we've had three years in a row of declining annual sales of smartphones around the world, which indicates that the tech is really good enough and people are not upgrading every year or every two years. I've had my own phone for three years. You've had your, what, iPhone 2 or something?

Greer: Yeah. No, I had -- it was actually a coconut. No, I finally upgraded. But yeah, to that point, I guess the question is, does the foldability really solve a problem?

Mueller: No, I don't think so, because the glass on the regular phone is already Gorilla Glass from Corning or an equivalent, in that it's very scratchproof and hard to break unless you drop the phone, and that's going to affect the foldable phone, too.

Flippen: I mean, I grew up with Motorola RAZRs, right, and I like this as an opportunity for me to relive those glory days.

Mueller: The clamshells -- [laughs]

Flippen: Yeah. [laughs]

Greer: It's all coming back. Well, let's close with our "desert island" question. You're on a desert island, and for the next five years, you can only own one of these stocks: Shopify, CVS, Lyft, or Samsung?

Flippen: That's not even a discussion. I would go with Shopify.

Greer: Wow! Even at its rich valuation, it's had an incredible run-up, but you're still there for Shopify.

Flippen: For what it's worth, you can argue that all of those companies that you just mentioned, maybe with the exception of CVS, have rich valuations. And I think Shopify has the greatest potential out of all of them.

Greer: OK. I was just playing devil's advocate for the fun of it.

Mueller: I'm tempted by Shopify, but the valuation, or the price, I should say, I think is overpriced for what it's doing at current prices, so I'll go CVS.

Greer: OK. You're going to go with CVS even though you're very much bothered by the term "medical loss ratio."

Mueller: But CVS itself doesn't use that phrase. At least not in the current reports.

Greer: OK. Fair point. Well, Jim and Emily, thanks for joining me.

Flippen: Thanks for having us.

Mueller: Thanks, Mac.

Greer: As always, people on the show 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 it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening, and we will see you tomorrow.