In this episode of Industry Focus: Tech, Dylan Lewis is joined by Motley Fool contributor Brian Feroldi to take a deep dive into Zoom Video Communications (NASDAQ:ZM). It has achieved an insane amount of growth and attention in a really short period of time. Is the momentum sustainable? Discover what is attracting people to Zoom and what's keeping them there. The guys also take a listener's question, talk about target date funds, and much more.
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This video was recorded on June 5, 2020.
Dylan Lewis: It's Friday, June 5th, and we're talking about the most absurd earnings beat we've ever seen. I'm your host Dylan Lewis, and I'm joined by Fool.com's high chancellor of below averageness, Brian Feroldi. Brian, you have outdone yourself today. [laughs]
Brian Feroldi: Thank you. I thought you'd appreciate that one. [laughs]
Lewis: [laughs] There's this conjuring up of, both, royalty and self-deprecation with that one; that one 's pretty good. [laughs]
Feroldi: I like to confuse people ... [laughs]
Lewis: Brian, this is a big day for you, isn't it?
Feroldi: Yes, it is a big day. Today was the last day of my kids getting new assignments at school. They are not finished yet, next week is their last week, but it's going to be smooth sailing and fun next week. So, the pain that has been homeschooling is finally starting to be in the rearview mirror. And let me assure you, Dylan, it has been painful.
Lewis: Well, Brian, how does the pain of homeschooling compare to the task of entertaining for the Summer vacation; are those on par with each other?
Feroldi: Oh, this is a weird, weird time, because I normally dread the end of school. Like, it's like, "Oh, God! They are going to be home all the time." Now, because of the homeschooling, I'm like, "God! School, please end." [laughs] So, it's definitely some weird emotions.
Lewis: Yes. I've felt very lucky right now and for the last couple of months, because, you know, we've had the good fortune of working for a business that's able to be remote and we're doing great. And we're able to keep working and be relatively uninterrupted. You and I are still able to get together and do these awesome conversations that we love doing so much. But also, I don't have kids, and so, [laughs] the stay-at-home, the quarantine, it has felt a lot easier than I think it has felt for a lot of my friends who are parents. And you're, kind of, both, parent, entertainer, and doing whatever you normally do during the day, and that's a lot to take on.
Feroldi: Yes. I'm used to having the house to myself, to be able to think and focus, and it hasn't been that way for a couple of months so, that's OK.
Lewis: Yeah. Well, I'm just thrilled that you're able to find some peace and quiet so that we can record this episode [laughs] and that there isn't too much noise over at the house. Big day for you, Brian, but a big week, and maybe this is just like a big quarter, we can put it that way, for Zoom, the video communications stock; perhaps the stock of 2020.
Feroldi: Yeah, I think that that's completely fair. This company was doing fabulous before COVID-19 and then it just caught fire, it caught the media's attention. The company was up over 200% year-to-date prior to this report, so talking about having some big expectations. And then it actually popped after the company reported earnings. So, as you, kind of, prelude at the top of the show, the numbers were stunning.
Lewis: Yeah. I mean, we've talked about this company plenty. And as with any company that goes through an insane amount of growth and attention in a really short period of time, they have not gone without their speed bumps and their hick-ups along the way. A lot of users flooding to this platform, particularly on the free side, and learning how to use it and the company having to adjust to all of that, there were some security concerns.
With all of that going on, though, incredible headline numbers when it comes to their earnings report. Revenue up almost 170% year-over-year to just under $330 million; the guidance, Brian, was just over $200 million, that's bonkers.
Feroldi: "Bonkers" is the word, I think, Dylan, to use there. And, yeah, Wall Street was expecting $202 million. So, Wall Street was above guidance, the actual result, again, $328 million; enormous topside beat. That wasn't all that surprising given how much we know the usage of this company's platform has just exploded.
Some other headline numbers from the quarter that I thought were worth highlighting: gross margin actually fell during the period to 69.4%. In the year ago period, it was about 81%. Zoom CEO and Founder, Eric Yuan, came out and let investors know that. During the middle of the quarter he basically said, the usage on our platform is exploding, we have to invest like crazy to ensure that we can actually meet it, expect gross margin to decline, so it did decline. Still very healthy at almost 70%.
All the company's operating costs up big time. R&D was up 66%, sales and marketing up 69%, G&A expenses up 196%. But even with all those ballooning costs, the revenue growth was so huge that the non-GAAP earnings came in at $0.20 per share, that was up 566%. They were guiding for $0.10 and Wall Street was expecting $0.09, so they doubled the bottom-line number too.
Lewis: Yeah. And it's tough to see a gross margin number go down. I think in the case of Zoom though, Zoom has had probably the greatest free advertising campaign of the last three months that any company has perhaps ever seen. And they have just become such a large part of the consciousness. I think you're willing to accept a slightly smaller gross margin in order to enjoy that widespread awareness. And some of that's just, you know, they have free users that are hopping on the platform, they have more usage than they're expecting, they're investing in security, they're doing all these things to improve the product. 70% gross margin is still pretty darn good.
Feroldi: Yeah, not bad, right? How many companies would kill for a 70% gross margin, in general, let alone saying, "Sorry, our gross margin was so terrible this quarter." And they called out the, kind of, "why" on the conference call, they said, when the pandemic started, their own data centers were overwhelmed. They just could not handle the volume to scale fast enough. So, they did outsource a whole bunch of that volume to their partners. Most notably, Amazon Web Services is running some of this. They actually called out Oracle as another company that they outsourced some of it too. They did guide for gross margins to return to normal eventually as they continue to invest in their platform and build it out, but still, very healthy numbers.
Lewis: It would be crazy for them to go through this kind of growth and not have it hit their business in some way. You know, for all the positive numbers that we're going to talk about here, there has to be some sacrifice somewhere, and it happens to be with their gross margin. This is a SaaS business essentially, right? And the number that we always look at for SaaS businesses, Brian, that net expansion rate number, how did it clock in for Zoom this quarter?
Feroldi: So, they didn't call out the specific number, but they did say that net dollar expansion was over 130% for the eighth consecutive quarter in a row. And on the call when they were talking about their revenue growth for the period, they did say that 71% of the top-line expansion was driven by new customers, 29% came from existing ones. But again, a number of 130% shows us that even their existing customers were buying a lot more from Zoom, which is one of the reasons that we absolutely [laughs] love the SaaS business model in general.
Some of the numbers that I thought were pretty exciting. The number of customers that are going to spend $100,000 with this company over the trailing 12 months jumped 90% to 769. They added a 128 of those customers sequentially in just that period. And a nutty number here is the number of minutes that people are using their platform. At the beginning of the year, they were expecting for the year to do about 100 billion total minutes on Zoom; based on April's run-rate, 2 trillion, [total minutes] that's a 20X increase in a matter of months; stunning.
Lewis: Those are just staggering numbers. And I think, to go back to that expansion rate figure we were talking about, from a transparency perspective, I would really like for them to break that out, that's one critique I think I have is, you know like, it would be really good to know what the number is. We like getting, because it's such a vital number, and it's so descriptive of what's going on with the business, the specifics. I'll settle for over 130%, because the number is just so darn gaudy anyways.
But you think about all of the people that are flocking to this platform with what's going on, this number is saying, even without those folks, we'd be enjoying about 30% growth. All of this other stuff that's coming on to the platform is just additional growth that will wind up becoming, probably, you know, some portion of that, loyal recurring growth down the road too.
Feroldi: Yeah. And I'm with you there. Although, I will say another company that I know and follow, Autodesk, they don't give us the exact number either, what they say is we're targeting between 110% and 120%. And whenever they're within that range, they said, yes, we're within that range. The goal there is to focus on the business model that is working, not necessarily to get pinned down on one number and whether it was up sequentially or down sequentially. So, I agree with you, I prefer them to say, we had 142% or 137%, but overall, more than 130%. Fantastic.
Lewis: Yeah. I'm always going to nitpick, though, I want the number, I want the data, Brian. And while we didn't get that, we got plenty of other good numbers. Deferred revenue for this business grew 270% to over $500 million. RPO [Revenue Performance Obligation] -- which is probably a metric that we need to explain, because, frankly, you and I were a little bit confused by it -- also grew pretty dramatically.
Feroldi: Yeah, this is basically, think of it as, kind of, their backlog, it's remaining performing obligations. This number is more than $1.1 billion, this was up 184%. And they did say that over the next 12 months they expect to be able to recognize about 72% of that number, so about $772 million will be converted into revenue. So, best to think of that, basically, as a backlog.
And, Dylan, how is this for an impressive figure? Free cash flow, so the amount of cash that was generated at the business after subtracting capital expenditures, was $252 million, up from $15 million in the year ago period. Again, stunning.
Lewis: Yeah. And all these numbers are telling us basically what happened. You know, we have that RPO number, that is kind of a signal of what will come for this business; and the idea of deferred revenue is also a little bit of a forward-looking number. But the most part, we've been looking at quarterly numbers that describe the quarter behind us. What is perhaps even more impressive is what the company offered in terms [laughs] of guidance going forward and what they are looking at for their full-year 2020; just absolutely ridiculous.
Feroldi: Yeah. Again, so everything, kind of, took off in March; that's when, you know, COVID-19 stay-at-home orders really kicked into high gear. April was kind of the peak. And so, then the quarter that we're in right now, it's just going to be another monster run for the company. So, they said to expect revenue in the current quarter to be about $495 million to $500 million, up 241% year-over-year, so that's a sequential acceleration. Again, just amazing. Prior to that, they were calling for $199 million to $201 million. So, again, they're now calling for $495 million, they were previously calling for $200 million. Wall Street was also modeling for about $223 million. So, their midpoint of our guidance is more than double what Wall Street was previously predicting. Amazing.
Lewis: Yeah. And it's worth emphasizing, I mean, this is a business that was already growing quickly. You go back to pre-COVID and the period that they reported ending January 31st -- the three months ended there, which is their Q4 -- they posted $188 million in revenue, up from $105 million the year prior. So, this was already a business that was really moving. And the valuation implied that it was a high growth business. And what we've seen is already insane growth rates getting even more ridiculous.
Feroldi: Yep. And that growth is expected to trickle down to the bottom-line too. They're calling for about $0.45 in earnings per share, up from $0.10 in the prior period, Wall Street was expecting $0.10 previously, they're now expecting about $0.41, but even the numbers that we're seeing now are beating Wall Street's guidance, which was already raised. So, just amazing.
Lewis: [laughs] And the full year picture, I mean, it's more of the same. I think we're going to say "amazing," "ridiculous," "bonkers," 400x during this podcast. But for the full year, the company expects revenue to be in the range of $1.77 billion to $1.8 billion, which would be up approximately 185% to 189% year-over-year; you don't hear numbers like that often.
Feroldi: No. I mean, just obscene, Dylan. Their old guidance was $900 million to $915 million, now almost $1.8 billion. That's a doubling. And the bottom-line is also going to be absurdly good, they're calling for earnings per share of $1.21 to $1.29, more than double what they were previously projecting and more than double what Wall Street was expecting.
Lewis: Yeah. And if we go back to when this company IPO'd, and you and I did this prospectus show, as we love to do when companies go public, where we get a look at the S-1 filing and we can really dig into the business. The narrative with this company was, fast-growing, unicorn, and, oh, by the way, they're profitable. And it was [laughs] one of those rare moments where we saw a company that had really impressive gross margins and the ability to scale, become even more profitable than they currently were, but they were currently profitable. To take something like that and then light it on fire and then throw gasoline on to it and just say "Grow! grow! grow!" based on current conditions, I don't know that anyone could have seen these kinds of numbers coming.
Feroldi: Yep. And as expected, from as amazing as these numbers are, Wall Street was basically forced to upgrade its price targets across the board. I mean, we saw almost a dozen analyst firms come out and up their numbers from, say, the $100s range to the $200 range. My favorite upgrade, though, or price target increase, comes from Goldman, which has the company rated as a "sell," and even though they have raised a sell, they increased their price target from $90 to $150, but all of that forced activity certainly lit some fire underneath the stock. So, understandable, why even when the numbers came out, as impressive as they were, and as high as the expectations were that the stock still popped post earnings.
Lewis: Right. And I think prior to this, there were some very real concerns about what is this company's valuation really backed by? Because this has been one of the pureplay coronavirus stay-at-home stocks, and it's been so in the news, you worry about the hype getting a little bit too far ahead of the stock and the valuation getting crazy. It's a valuation of about $56 billion for the whole company right now. But, of course, we are up pretty dramatically. I mean, over the past month, even after a little dip after they announced these earnings, shares are still up about 40%. So, there's been crazy appreciation.
I could see why the street and a lot of people, myself included, were a little skeptical of whether the business could live up to its valuation. It seems like, certainly for the next nine months, business is going to be booming for them.
Feroldi: Yeah. And that's exactly what they said on the earnings call, while they did give us some forward guidance for both the Q3 and Q4, one thing that we did hear from them was that basically April was the absolute peak of demand or at least the peak so far. But given that governments have started to ease shelter-in-place orders, it's natural to assume that the company's going to not benefit from that, but they did come out and say that they're projecting that the third quarter and the fourth quarter of the year, are basically going to be consistent with what they saw in the second quarter. So, not only has the floor been raised to a very, very high level, but they're expecting that to persist in the third and fourth quarter. So, that's got to be a bullish sign and better than you would expect if you were someone that believed prior to this, that this is just a one-time thing and it was going to spike up then it was going to spike back down. Management says, essentially, the gains are sustainable.
Lewis: Yeah. And that's the ultimate question and kind of the existential threat to this business is, it is so center stage and so of the moment right now, there are a lot of free users that are hopping into this, there are also a lot of smaller businesses that are starting to use it and maybe some larger enterprise clients that didn't have a video conferencing product available to employees and decided to give Zoom a go.
And the concern is, are those people going to stick around? You know, are these incredible acquisition numbers that we're seeing, going to continue, maybe not, but are they going to be able to service those customers once they have them, and prove their value, wind up building out these long, sticky relationships that we love to see? Some numbers in this report would suggest that that might be happening.
Feroldi: Yeah. I think so. And how often have we heard from so many companies that are basically saying that they're going to be taking jobs that were in-person and they're making them permanently remote. And while we don't expect that to happen with every job, certainly some will. And I've also heard anecdotally that a lot of people are saying, well, I'm still going to go into the office, but I'm going to go in three times a week or four times a week, and they're still going to be doing one or two days remotely.
If that's the case, the need for Zoom is still there. So, I do think that this is a permanent paradigm shift for this company.
Lewis: Yeah. I think that all of this has forced people to really evaluate how they're working and it's forced companies and HR departments to really think about what makes the most sense. And, Brian, to your point, say, you and I work in the same office and you come in three days a week and I come in three days a week. We might only be in the office at the same time one day of those [laughs] five days of the week. And so, we're still going to need to use Zoom.
And you couple more stay-at-home with the reality that more businesses are multinational, you have people in different areas, different offices, different time zones. The need for these products is not going away. This might be just the huge step change in adoption of this technology that gets us to more people hopping in and deciding to pay Zoom some money to use it.
Feroldi: Uh-huh. And I also think it's worth pointing out, one of the questions we constantly get about Zoom or at least I've seen in my Twitter feed is, does this company have a moat? And it is fair, right? We've seen how many companies, Facebook and Google [Alphabet] and Microsoft Teams basically coming out and said, yep, we have a video solution too, you can go on and use it. But I think when we did the S-1 show, we concluded that the reason that Zoom had a moat and the reason that Zoom was taking so much market share in what was already a crowded market from the get-go was that, it was the only one that was built from the ground up with a video-first mentality. And they actually have some special technology that allows videos to happen even when there's significant internet packet loss, so you can still get your message across.
And again, anecdotally, my kids have been doing Google Meets with their classrooms, and I've heard for the teachers numerous times to say, once it gets above a certain number of users, the quality just plummets. So, if you need a video solution that is high-quality, reliable and can support lots of users, to me, Zoom is still the premier name.
Lewis: Yeah. I remember when we did that prospectus show, we were talking about the advantages that this business has. And one of the things that really popped out to me looking at that S-1, and I'm actually going to read directly from it right now, "Our architecture is video-first, cloud-native and optimized to dynamically process and deliver reliable, high-quality video across devices." Boom! That says it. They're competing against a lot of people who have been in this space for a lot longer, haven't necessarily developed cloud-first applications, and that's why their product tends to work a lot better.
If you're not convinced based on just the description, the fact that we're using it right now to be able to do this. I think we can also pull some data. And granted this is data that has been collected recently, and so, it's a little bit of a scramble to get this stuff together. I've seen it from several different outlets, some names that I don't know as well, so I've, kind of, cobbled it from a couple of different places, but no matter who you look at when you are looking at web conferencing, Zoom is No. 1 in market share. After them, there is GoToWebinar, there is Cisco WebEx, and they are, kind of, jockeying for second and third, it'll depend on whatever dataset you're looking at, but those three are the big three, they command the market. I've seen Zoom at 30% market share, I've seen Zoom at 40% market share, either way, they are No. 1 by a healthy margin.
And they are also right there with the other big players, Cisco, Microsoft, LogMeIn in Gartner's magic quadrant. And so, Gartner is this tech consulting firm, they do a lot of market research. And they look at all these different enterprise segments to see who is leading the way, who are the visionaries that are going to shape what all these software markets look like. Those are the four that they put in that magic quadrant of not only leading the market, but ultimately shaping the direction that it's going to go in. And Zoom is very highly ranked; of those four, I think it's maybe second. And so, not only are we seeing that it's a leader in terms of market share, but it is probably someone that's going to position where that web conferencing market ultimately goes.
Feroldi: And it's also worth remembering that the Founder of Zoom was previously working at Cisco and he was embarrassed to go into work and he was in-charge of their video product, he wanted to make it better, which required them to build it from the ground up to be different, and he was told "no." He became so frustrated that he left to found Zoom, because he wanted to build it from the ground up. And if you look at their numbers and their leadership position, it's clear that he was right.
Lewis: Yeah. And I think there are going to be some people who naturally question, you know, OK, that you threw some names out there, and I haven't heard you talk about Microsoft. Well, we talked about this a little bit when we did our show on Slack last week, but there is this tension between the bundled experience that comes with, you know, an enterprise having access to everything Microsoft does under the sun and these pure play software applications that do all of those things individually and possibly do it better. And I think there are certain services that a lot of companies are willing to pay up for because the experience is better, so far, it seems like Slack and Zoom are able to fall into that category.
Feroldi: Yep. I mean, we've seen that exactly at The Fool, right? The Fool was using previous video conferencing solutions when Zoom came out and we tried it, switched over to it. Why? It was better and it worked. We're not the only company that has experienced that.
Lewis: Yep. I have access to Teams and I've never used it. [laughs] I think that that says a lot. And we get the benefit; I mean, selfishly, we get the benefit of being able to kick the tires on a lot of software solutions before we even necessarily look at them as investments. And it's really fun to look and talk with our IT department and see what winds up being adopted. I mean, Zendesk is one of the things, like, we used it at The Fool, and we were it at The Fool before I started following the company as a stock, but knowing and, kind of, getting in there firsthand and seeing what it looks like, seeing how much our customer service folks love it, the ticketing system, it made me a believer in a space that I probably didn't know as well and wouldn't have been as convinced of their market leadership, and Zoom is, kind of, the same thing for me.
Feroldi: Yep, I totally agree. And there is something to be said for a company that is hyper-focused on just one thing versus a company that offers that same thing as a bundle to another product.
Lewis: Yeah. You are a shareholder of Zoom, right, Brian?
Feroldi: I am sadly not, even though I absolutely love the S-1 and Eric Yuan; this is another one that's, being value-conscious, has come back to bite me. So, I am not "yet" a shareholder of Zoom, I guess, I should say.
Lewis: Yes. So, we are both FOMOs [Fear of missing out] [laughs] of Zoom or people that have missed out, I should say, on Zoom. And you know, there are going to be people that say, "At this valuation, is it something that's worth buying?" Man, it's a quality business and they've experienced some incredible growth. I'd love to see them continue to do it; the product seems great. I will give the boilerplate advice that I give with positions in general, you really start small with something that has enjoyed so much share price appreciation in such a short period of time.
Feroldi: But on the flipside, it does show you, one of the metrics that we use to judge this company is the price-to-sales ratio, and boy! Has it been high, and boy! Does it keep getting higher! But when they came out and said, oh, by the way, our sales; yeah, they're double what we thought. That really takes that price-to-sales ratio down in a hurry.
Lewis: Yeah. And businesses that are growing at 80%-ish, like they were before all of this happened, deserve a premium, businesses that are growing at over 100% deserve an even bigger premium, [laughs] so.
Feroldi: High-quality companies, in general, deserve to trade at a premium, and there's no doubt in my mind that Zoom is a very high-quality company.
Lewis: Yeah. We believe that winners win, and I think what we have seen would be, kind of, a five-year period of winning for Zoom collapsed into [laughs] about three months, because the adoption has just accelerated so quickly out of necessity. That is not to say that the story is done for them, if anything, I think we're moving more and more to a world where this type of technology is important. They just need to hold on to all these customers that they brought in.
Feroldi: Completely. And it's not just Zoom, we should point out, that's doing so well, how many Software-as-a-Service companies have we seen just explode year-to-date and just skyrocket? But to your point, we've seen essentially years' worth of SaaS adoption get pulled forward and compressed into weeks or months timeframes. When you factor that in, perhaps the valuations that we're seeing today are not as extreme as they appear if you're just looking at the numbers, because again, so much adoption has been pulled forward.
Lewis: I think that's a good point, Brian, because we have so often been stuck looking at old valuation paradigms and new business approaches and platforms, right? You know, the idea of paying 20X sales for a company, 15 years ago, would be a little ludicrous. The idea of doing it now when you have, you know, some businesses with net expansion rates that are 130, 140, they are able to do gross margins of 85%, 90%, that's a fundamentally different business than what we've seen 15-20 years ago.
Feroldi: Yep, it's the best business model I've ever seen in my entire life. And when you look at the numbers of these companies consistently, it's just like, wow! they're just stunning.
Lewis: Yeah. So, I think we need to do that transition to SaaS show at some point, because you pitched that to me as, I want to do it, but I don't have the [laughs] preparation time to be able to do that today, let's focus on Zoom's earnings. But maybe that something we'll hit in the next couple of weeks. [laughs]
Feroldi: Yeah. Sure. We've seen, just reading through conference calls of many of these great companies, we're seeing again and again executives saying, all this innovation and all this adoption has just been pulled forward. So, it would be fun to summarize that.
Lewis: Alright, Brian, before we wrap up today's show, I wanted to take a quick listener question. And this one comes from Jack who wrote in. And folks, if you want us to hit one of your questions IndustryFocus@Fool.com or you can hit us on Twitter @MFIndustryFocus. Jack says, "I'm a massive fan of the Motley Fool Industry Focus podcast." Thanks, Jack. Listens to it every single day. Oh! enjoys the Friday mailbag show and it sparked a question. We love doing mailbag shows, in particular, so write in for those. "A little bit about me. I'm 20 years old. From Pittsburgh." And he goes on to mention that he's studying finance econ and will be interning in the industry. The question is, what is the optimal asset allocation for a 20-year-old. " ... keep-up with the stock market and follow a lot of companies. I do not know what the best stock bond ETF index fund allocation would be for me right now. I have a good chunk of money to invest and I'm going to invest all-at-once here in the next couple of weeks. If there were any way for you to answer this question on an upcoming show, that would be amazing. Thanks for time."
Love this. I think we need to give the caveat that we cannot give personalized financial advice, Brian. But when I hear 20-year-old, thinking about investing. That's someone who's already way ahead of the game.
Feroldi: Yes. If you are thinking about investing and you are following companies at age 20, and you're asking about asset allocation, boy! are you lightyears ahead of where I was when I was 20. So, congratulations for you for even having the thought to ask that question.
Lewis: Yeah. And that means that you have a lot of time for compounding to work on your side and you have a lot of time to weather economic uncertainty. What we've seen over the last couple of months, we've seen some recovery, that's awesome, but that's the kind of thing that's a lot scarier to someone who is in their late-50s, early 60s and is nearing retirement, nearing the point where they're going to start drawing on that money that they've put away. It's a lot easier, if you're in your 20s to look at that and say, "You know, this might not be money that I need for another five, 10 years." If it's money to buy a house or, you know, decades if it's retirement money.
And so, for someone in this position, I think the key is, think a little bit about what you want that money to go toward. If it's money that you're saying, ah, like, 10 years from now, I might want to be able to buy a house or plan on having kids and I'd like to be able to have it grow a little bit and then put some of that into education funds. You put it somewhere different than you would saying this is retirement money.
So, make that decision. And then, I'm a big fan of the indexes, especially, early on, if you don't have a lot of other money invested, certainly as a base. It's hard to go wrong putting your money into a broad-based index like the S&P 500 or a total stock market index. You can put that there and then start to make small decisions with individual stocks. I will say, Brian, for me, it's a lot easier for someone that's younger to focus more on stocks and not worry as much about the bond, fixed income side of the market.
Feroldi: Yes, that's exactly right. If you have decades ahead of you that you'll be working, it makes a lot more sense to have a much higher allocation to stocks. And again, we can't give individual advice, but one of the things that I recently did was, I sketched out my asset allocation strategy for the rest of my life, and I just did it as an exercise that got me thinking.
Now, in this viewer's case, we don't know so much, we don't know, do you have any debt, are you going to be buying a house soon, are you going to be moving soon, do you have an emergency fund? We don't know any of that. So, you have to keep those things in mind, those things are important when you're talking about, should I invest, in general, or should I use my money for those kinds of things?
But for myself, I have basically set it up so that I am going to be 90% to 99% stocks basically from now until I'm within "10 years" of retiring, and I put that in quotes because I have no idea what that even means, I can't ever see myself not working, but you know that's my plan as of right now. And once I'm within 10 years of needing the money, then I'm going to start to layer-in bonds and other fixed income things on top of that. And then once I get to a retirement date, my goal is to basically have 10 years' worth of expenses either in cash or bonds and everything else outside of that number still devoted to stocks. That's something that I'm comfortable with and that fits my situation, but this decision about your asset allocation, it's different for everybody depending on a huge number of factors, including your risk tolerance. But in general, the longer you have, the longer you can put money away for, the higher exposure you want to equities.
Lewis: Yeah. And one of the easy ways to get something that maps out that allocation switch over time is to look at some target date funds. These are things that will look roughly when you're thinking about retiring and then over time will say, "Alright, we're looking at a retirement date of 2050, 2060, we're going to be more in stocks for this." And as you get closer and closer, say, year 2045, that fund is going to have a lot more bonds in it over time.
What I will say of target day funds. I'm a fan, I own some target date funds. They tend to go into bonds a little bit earlier than I think Brian would have sketched out with his personal allocation. Just pulling up one now. The 2030 fund is about 30% bonds, that's it, that's a Vanguard target date fund. And even some of the ones that are further out, I think, probably have a higher chunk in bonds than most people realize. So, you got to look at the allocations and make sure that's something you are comfortable with. But those are an attractive option, if you want to be able to go a little bit more conservative as you get older and not have to manage it quite as much.
Feroldi: Yeah. If you think that that is too conservative or too aggressive, you can always change the date by five years, right? So, if you want to be more aggressive, just pretend you're retiring five years later, and if you want to be more conservative, just pretend you're retiring five years sooner. So, in general, target date retirement funds that do all that asset allocation work for you, are a fantastic innovation.
Lewis: I think it's one of the places where it's OK to lie about your age, you know. [laughs] You can decide to push things out and be young at heart a little bit longer if that's what you want with a target date fund, Brian; you just gotta make sure you know what you're doing.
Feroldi: That's right, I love that.
Lewis: Well, Brian, thanks so much for hopping on today's show talking Zoom with me.
Feroldi: Thanks for inviting me back, Dylan, two weeks in a row, this is incredible, or three weeks in a row.
Lewis: Oh, I think, this is just becoming the thing, I mean, I'm having too much fun with you. [laughs]
Listeners, that's going to do it for this episode of Industry Focus. If you have any questions or you want to reach out and say "Hey!" shoot us an email over IndustryFocus@Fool.com or you can tweet us @MFIndustryFocus. If you want more stuff, subscribe on iTunes or wherever you get your podcasts.
As always, people on the program may own companies discussed on the show. 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 for all his work behind the glass today. For Brian Feroldi, I'm Dylan Lewis, thanks for listening and Fool on!