Why Twitter Stock Popped

In this episode of MarketFoolery, Chris Hill chats with Motley Fool interns Ian Gray and Ryan Henderson about the latest earnings reports and news from Wall Street. They go through the Q2 results of Twitter (TWTR). Tech behemoth gets a boost from its cloud platform. And a weird report comes out from a popular restaurant brand. They also share some companies to put on your watchlist and much more.

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This video was recorded on July 23, 2020.

Chris Hill: It's Thursday, July 23. Welcome to MarketFoolery. I'm Chris Hill; with me today: Ian Gray and Ryan Henderson. Guys, thanks for being here.

Ryan Henderson: Thank you.

Ian Gray: Yeah, great to be here, Chris.

Hill: We got earnings season heating up. We have the latest from Chipotle (CMG -0.17%) and Microsoft (MSFT -1.02%), but we're going to start with Twitter. Yes, they lost money in the second quarter. Revenue was lower than expected, but stick with me here on this metric: monetizable daily active users up 34%. And that is what is boosting Twitter's stock today. And, Ryan, let's face it, Twitter needed a win after that hack last week, and they got it.

Henderson: Yeah, they really did. You hit it on the head there. They missed expectations on both the top- and bottom-line, and yet, the stock was up 5%. And that's because, at the end of the day, it's a media platform and people really care about demand aggregation, and that's what they got. Average monetizable daily active users jumped 34%, like you said, to 186 million. I think some of that was attributable to the COVID environment and maybe people looking for news. I know a lot of people get their news through Twitter. But, yeah, revenue was down 19%. That was reflecting a decrease in advertising demand, operating loss of $124 million.

I'm curious, if maybe this decrease in ad demand is more of a microcosm for the whole ad-tech space, I think this might be an indicator for some of the future earnings that we're going to see. But, yeah, I guess investors cared about the daily active users. As a Twitter user, the ads that I get are not great, there's a lot of room to improve, but at the end of the day, it starts by owning the demand and then the monetization levers, the way you choose to make money can come at the end. And I know on the conference call, Dorsey mentioned something about trying out possible subscriptions. I believe they said, there wouldn't be any subscription revenue for the 2020 fiscal year, but they're going to have to try to pull some other levers in terms of how they make money, because it seems like ads just aren't cutting it for that platform.

Hill: Yeah, it's interesting to me how a given business's job site, where they posted the jobs that they're hiring for, can set off, you know, sort of, alarm bells essentially. We saw this a couple of years ago with Netflix, where basically the way we found out Netflix was going to start producing swag, essentially based on their [laughs] intellectual property, because they had posted a job on their site. And as you mentioned, CEO Jack Dorsey, sort of having to address the fact that they posted a job [laughs] having to do with essentially someone who would manage a subscription business. So, I think Dorsey did a good job of, sort of, [laughs] tamping down expectations there.

But you know, among other things, this is a sign of just how -- I don't want to say dependent, because I think that's a little too strong a word, but Twitter misses live events, Twitter misses live sports and concerts and that sort of thing. I mean, that's a big category for them that drives engagement. And you know, you look at the results this quarter, they're missing live events.

Gray: Yeah. And just to add on to that, Chris. That's a huge thing, particularly for the ad revenue. You know, they're showing that their daily active users can be resilient despite that. But the story for Twitter is all about monetization. You know, for this quarter, they only generated about $3/person in ad revenue. When you think about how much time people spend on Twitter versus some of these other things in our lives, like, Netflix, going to dinner, using the gym, listening to music, right? The amount of money that they're generating for the amount of time that people are spending on the platform is really not very much.

So, the story, whether it's through subscriptions, like, they floated or through some other, kind of, more creative profit or cash flow generating streams, they need to figure out ways to generate more revenue.

Henderson: Yeah. And to touch on that, Ian, they've, sort of, built this incredible platform, and it's almost a double-edged sword, because it's gotten so good that ads detract from the experience. It's not like a Pinterest platform, where you go there and you're almost expecting to receive ads and you look forward to them. Like, when I'm scrolling through my timeline and I get an ad, I'm like, this is so irrelevant, I don't need this. It really detracts -- like, it's this great idea-sharing place where everyone goes and you spend so much time on it, but it's become so good that you don't want the ads. And so, Twitter continues to be Twitter's own worst enemy for the time being.

Hill: Well, it will be interesting to see if they can, sort of, carry through over the next couple of quarters with what they did on the increase of the monetizable daily active users.

Let's move on to Microsoft, fourth-quarter revenue came in north of $38 billion. And once again, Ian, Microsoft's cloud business is getting it done.

Gray: Yeah, for sure, Chris. The cloud revenue, for the first time ever, for the fiscal year crossed $50 billion, which is over a third of total revenue for Microsoft. Which, if you told someone that a few years ago, I think it would have blown their minds. The story today, the stock is down a little bit on the quarter, and the story today is really its Azure platform. The revenue growth was 47%, which sounds amazing than it is, but last quarter it was up 59% year over year, and this is the first time that Azure revenue growth year over year has been below 50%. So, I think there's some concern about how much of that trend might continue. Clearly, 47% revenue growth is very high. I think there's just a little bit of concern about the deceleration from that 59%. So, it'll be interesting to see whether that was impacted by just decreasing cloud spend from companies, and trying to kind of conserve some cash during this period or whether that's a trend that will continue as we continue to move through this pandemic and out of the pandemic.

You know, Microsoft is such a big company, has its hand in so many things, some highlights from the quarter is, if you remember, Microsoft owns LinkedIn, which also has this LinkedIn learning platform. And on the call, the CEO said that professionals watched nearly 4 times the amount of LinkedIn learning content than they did a year ago. So, they're seeing a huge explosion in ...

Hill: [laughs] ... Gee! I wonder why?

Gray: [laughs] Yeah, exactly. Professional development, and people have time on their hands, and so they're trying to learn new skills and they really are being able to capitalize on that. They're trying to, kind of, tie that in with their Teams platform and be able to generate some kind of good workflows through some learning environments. And then it also saw record monetization in gaming, which again, it shouldn't be any surprise to anyone given the environment we're in. But, you know, we're just talking about the Twitter revenue streams and how they need to figure out some ways to diversify.

Microsoft has that down, they have their hand in so many things, they're continuing to drive impressive growth across the entire company.

Henderson: Yeah, no, they certainly are. I think Satya Nadella mentioned on their conference call, it was simply a breakthrough quarter for gaming. Revenue from Xbox content and services grew 65% year-over-year. That also carries with it some interesting implications for other gaming businesses as well. What are we going to see from EA? Companies even like Nintendo, Activision Blizzard, I'm curious if we're going to see a boost just on time that's spent playing their games, and then, also maybe in revenue as well.

Hill: You know, Ian, you mentioned Microsoft Teams. It is interesting to see the -- let's just call it an evolution, in the competitive landscape with Slack's recent action in the EU filing, I think, an antitrust, basically accusing Microsoft of anticompetitive practices. Being as old as I am, it sort of was a nice throwback to the late 90s, early 2000s, when Microsoft was fighting a similar type of battle for its operating system. But, you know, this -- I don't know, we were talking earlier today. I sort of feel like that was probably the right move for Slack. It also isn't great in terms of optics. And I say that realizing that there are times in business where you just have to ignore the optics of how something looks and just focus on what it actually is. That said, I'll just speak for myself, my gut reaction when I saw Slack filing that lawsuit was, it was basically about the optics. Like, wow! Maybe that's the right thing to do, but it seems like [laughs] they are inadvertently concerned about the strength of their platform relative to Microsoft Teams.

Gray: Yeah, I think you're exactly right on that, Chris. For years Slack has tried to say that Microsoft Teams isn't a real competitor, they're not really in the same space, it's not the same type of product, it's not as good of a product. And everyone's kind of just always kind of nodded along and said, OK, you know, [laughs] whatever. What we're seeing is, Slack does actually consider them as a competitor. And this is showing the strength of Teams, right? By rolling it out to all their users, Microsoft has really given people an opportunity to test it out. And a lot of people are finding that Teams works better and integrates with all their existing software better. And Slack has some -- you know, it's going to be a major battle over these next few years to see which one of these two really comes out on top. And there may be space for both of them, but it definitely seems like Teams is on the up-and-up and has a little bit of a -- at least has Slack's attention at the moment.

Henderson: Right. And it's not even just shareholders that are saying, well, you know, Teams isn't really a competitor. I believe CEO and, I think, founder of Slack, on one of the earlier conference calls this year mentioned that he doesn't really see Teams as a competitor. That's OK until you [laughs] file an anticompetitive lawsuit, because you're basically going back on what you said. And so, it's not a good look, and you're right, the optics of it aren't bright for Slack.

Hill: Yeah, right. I mean, let's be clear. And I'm not picking on Slack; I like Slack, I use Slack. But they didn't file an anticompetitive lawsuit against Starbucks, OK, [laughs] they filed it against Microsoft.

Let's move on to Chipotle. And on the surface, a little bit of a weird second quarter report for Chipotle. Let me just throw two numbers out. Digital sales up more than 200%, and yet, same-store sales still down nearly 10%. Ryan, you tell me, what stood out to you in Chipotle's quarter?

Henderson: Yeah, you're right. People have said recently that crises accelerate the inevitable. Well, in Chipotle's case here, I'm going to say that a crisis here surpassed their inevitable. They were, like you said, 60 -- well, digital sales at 216%. And digital sales now make up 61% of overall sales. I imagine that somewhere in the future that comes back down to around 50-50, but over the years leading up to this, they spent tons of money enhancing their digital experience instead of repurchasing shares or just hanging on to cash. And now we're starting to see the benefits of that come to fruition.

But yeah, it's tough, because there's less people coming into the stores, but I think that digital sales, and I think they now have 15 million total rewards members. And keep in mind that was launched 15 months ago. I mean, there's a lot of good benefits coming from the online aspect. Liquidity is not an issue at all.

The other part, and this is more of a macro thing for restaurants as a whole, there was a study done a few months back where it basically studied small businesses and the solvency or the liquidity of each sector. And restaurants had the least amount of cash buffer days; I think it was, like, 16 days. And so I'm curious, if on the backend, coming out of this pandemic -- I know there's obviously been the government lending and what not -- how many of those smaller mom-and-pop restaurants are going to suffer, and we're going to see customer consolidation to these larger franchises that have a lot more capital to survive.

Hill: Yeah, I think you're right. We had David Henkes from Technomic on Motley Fool Money earlier this month. And the updated numbers that he and his team -- I mean, we're talking one of the top restaurant, if not the top restaurant, and food and beverage analyst in the country -- the updated numbers that he and his team are putting together for what things are going to look like in the restaurant industry at the end of 2020 are more bleak than they were three months ago. So, it definitely is an opportunity for the Chipotles of the world. And, you know, the investments that they're making, there are always going to be shareholders out there, both, individual shareholders and institutional shareholders, who will always be pushing for more buybacks, it's really hard to make the argument that Chipotle, in terms of their capital allocation, hasn't been doing the right thing in terms of the investments they make.

Gray: Yeah, there's no doubt about that, they've made some incredible investments. And like Ryan said, really, just set themselves up to really succeed and thrive in this situation. You know, just to give a couple of the comments that Brian Niccol has made, he sees the long-term vision that they can more than double the number of Chipotle restaurants in the U.S., which is really impressive considering the growth they've already seen. And this is a real opportunity with less competition because of, you know, some restaurants going out of business here in the next few months, it sees less competition for high-quality sites as well, that they're going to be able to get some, kind of, more prime real estate and really have great locations. They've recently pledged to hire 10,000 new workers. They're making all the investments previously, and they're making all the investments today to continue to just use this as a leapfrog to kind of the next phase of growth for Chipotle.

Henderson: Yeah. And I'm not a shareholder of Chipotle, but if I was, I would like to see them spending money and, sort of, trying to grow aggressively now. Like, I know, you know, you're going to see a lot of restaurants that struggle on the backend of this, this is a time to gain a lot of market share, try to increase that store count, work on the Chipotlanes, stuff like that. The operating margin expands as more goes digital. There's a lot of good things that could come out of this for Chipotle.

Hill: And just allocate just a tiny bit more into making the queso better, because the queso it's just, it's not where it needs to be, people; it's just not.

And I'll just wrap up, in terms of the last two companies we've talked about; Microsoft, Chipotle, both stocks down a little bit today. [laughs] Microsoft shares up nearly 30% year to date; Chipotle up 35% year to date. I mean, for anyone who doesn't own these companies and is thinking, ah! It would be nice to get them at a slightly cheaper price, today is your day for that.

Before we wrap up -- and, Ryan, I'll just go to you first. Every week on Motley Fool Money we do stocks on our radar. Let's end there. Give me a stock that is on your radar that I should know about.

Henderson: Yeah, a company I've been looking at, they are not public yet, but they did file their S-1. It's called Procore. They provide workflow software for the construction industry. And if you know anything about construction management, it's highly fragmented. And so, there's a lot of different stakeholders on every project, each stakeholder has a bunch of different projects going on at once. And so, somehow, they've all got to stay connected, and that's where Procore comes in.

And it's such a unique landscape, you can't just add some typical workflow software, so you have to be very specialized, Procore does that. They aren't profitable, but they had $289 million in full-year revenue for 2019. And they're growing at about 55% year over year with 82% gross margins.

Hill: Any sense of when in 2020 they are aiming to go public, is it later this quarter or is it more like Q4?

Henderson: They said before the end of the year, but they recently took another private round of $150 million-I think, a $5 billion valuation -- so, they recently delayed it, but they did say, still end of the year. That's kind of their target.

Hill: They have filed their S-1?

Henderson: Yes, correct.

Hill: Great. Ian, what about you?

Gray: Yeah. So, BlackLine (BL -0.46%), ticker symbol BL, is the stock that I've been looking at recently. It's the market leader in automating accounting practices. So, basically it will go on top of your existing accounting software and create workflows, automatically match transactions for bank reconciliation, and help speed up the financial close each month. They say that it can be up to 70% faster than a traditional close. So, it just saves accountants and finance departments a lot of time in closing the books each month. It really has a goal of eliminating the ad-hoc spreadsheets that are used to close the month, and save accounting teams time and headaches running around the office trying to find receipts and check in on people.

It has many other qualities that we love at The Motley Fool. It generates free cash flow; it's a subscription-based platform with high gross margins, about 80%; it has high revenue growth, about 28% for the last 12 months; and it's founder-led, its founder is actually a really interesting person, her name is Therese Tucker. She is somewhat known for her pink hair. I would really recommend, kind of, looking her up and watching some interviews of her. She's a really interesting leader.

It has a market cap of about $5 billion, but the CEO makes comments from time to time that every company in the world should have its software. And it really targets companies that have $50 million and up in revenue, which makes sense, because lower than that, it's hard to justify the software. But at that point, it really does seem like they have a great value proposition. It speeds up the accounting processes and just really generates more time for the accounting departments and generates ROI and saves time for everybody involved.

Hill: All right. Ian Gray, Ryan Henderson, guys, thanks for being here.

Henderson: Thanks, Chris.

Gray: Thanks for having us, Chris.

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this episode of MarketFoolery. The show is mixed by Dan Boyd, I'm Chris Hill, thanks for listening, we'll see you next week.