In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Jason Moser about the latest headlines and earnings reports from Wall Street. They've got earnings news from the world's biggest electric car manufacturer and discuss its production and balance sheet numbers. A restaurant stock gets a digital sales boost to beat market expectations. And they talk about what went wrong with Quibi and much more.
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This video was recorded on October 22, 2020.
Chris Hill: It's Thursday, October 22nd. Welcome to MarketFoolery. I'm Chris Hill, with me today, Mr. Jason Moser. Good to see you my friend.
Jason Moser: Good to see you.
Hill: We've got -- I said it before, it's my favorite time of year, and it comes four times a year, we got earnings season heating up. We got Chipotle (NYSE:CMG), we got Tesla (NASDAQ:TSLA), we're going to perform an autopsy on Quibi.
Let's start with Tesla, though. Tesla reported a profit in the third quarter that was higher than Wall Street was expecting, and this is the fifth quarter in a row that Tesla has delivered a profit. Stock up about 5% this morning. It was one of those things where the lightbulb went off above my head this morning, Jason. It was like the fifth quarter in a row, profits, earnings... oh, wait! they have a P/E ratio now, I wonder what it is, and it's just shy of 1,100.
Moser: Oh, I mean, I guess the market is just pulling forward some very robust expectations, let's just maybe leave it at that. You know, I don't have a dog in this hunt, so to speak, I don't own Tesla shares, I've not recommended it, I've not short it, I enjoy following this business, learning from it and there's some entertainment value there for sure. The core business here is just really so simple, right? I mean, they make cars and they sell them to people. And yet it's such a sideshow to the distractions and the drama with analysts, they're so dead-set on one position or the other. I mean, you go on Twitter, and it's just this back-and-forth that never ends. And honestly, it's like DC, I mean, nobody is going to budge, right?
But to your point, fifth consecutive quarter of profitability. Yeah, we could sit there and argue about how they got to profitability, and I'll note that regulatory credits, I think, are probably a big question that a lot of folks will continue to harp on, how important are they. I think in regard to Tesla's business, regulatory credits are very important, but that shouldn't be a surprise. That's how you incentivize moving an entire society over to a new technology like this that we're so reliant on in transportation.
And so, this year so far, they've taken advantage of about $1.2 billion in those credits, and that clearly affects profitability, that's good for them. But I don't hold that against them, because they're just playing the hand that they were dealt, they are playing with the rules of the game more or less. If you compare that to last year at this time, they claimed about $460 million in credit. So, clearly a considerable amount more in credits this year than last, and I'm sure that's something that we'll continue to see them take advantage of to the extent they can. But I mean, they produced just over 145,000 vehicles, they delivered almost 140,000.
And I think, while Musk certainly loves to aim high, and I think he should, their 500,000 deliveries for the year remains a target. Now, that is a high goal. That's a lofty goal. They need about 180,000 to go. They need about 180,000 this final quarter. Maybe they get there, maybe they don't, but I think the more time goes on, the more we're seeing the market is willing to give this business time to do its thing. And not every business out there can claim that luxury, but you see companies like Amazon, for the longest time, the market really gave Bezos the leash to run with that business and build it. You see the same thing happening here.
So, I'm for the business, I love what he's trying to do, I think it's funny to listen to just people go back-and-forth on the valuation and whatnot, but here we are and this is clearly a business that's making a big impact in the world.
Hill: Yeah, there are definitely a couple of analysts, I was watching on CNBC this morning, who are bearish on Tesla. And they're getting kind of worked up. [laughs] It was just one of those things where I felt a little bad for them, I don't know, I mean ...
Moser: And like I said, I don't dive into that discussion because it's just so unproductive. So, I'd say the one thing, like, if you look at where they are today in regard to the balance sheet. I mean, they're quarter in, they're cash equivalents jumped from $6 billion to $14.5 billion. Now, remember they had a capital raise here recently; I think they raised around $5 billion. If I had one piece of advice for Elon Musk -- and listen, Chris, I'm a dummy, OK, I know that. I mean, he's not asking me for advice, but if I were to give him one piece of advice. You know, like we've talked before about Tom Gardner's philosophy on your holding period, right? However long you plan to hold a stock, just, boom! Automatically double that, right, double that holding period and you'll benefit from it. I feel like any time he wants to raise money, double it, because it's just clear as day that any lever he wants to pull, he's going to be able to raise that money without too much trouble. And particularly where the stock is today, I mean, if he gets to a point where he needs to raise more capital, and he probably will, I mean, he sees the energy business ultimately being as large as the vehicle business one day, and that's going to require a lot of investment too. Yeah, anytime you're ready to raise some money, just go ahead and double it. I think that would be a nice rule of thumb.
Hill: Third quarter profits and revenue for Chipotle came in higher than expected. Same-store sales were north of 8%, and Chipotle's digital sales tripled year-over-year. And despite all that, shares down more than 5%. What is going on here, did Brian Niccol say something on the call?
Moser: [laughs] No, no, no, no. I think there are a couple of things that are probably coming into play here. No. 1, I think it's probably selling a little bit on valuation, in that, the stock is trading for over 120X full-year earnings estimates. I mean, this is still a burrito company basically at the end of the day. So, you know, +120X, that's a pretty expensive burrito, so to speak. So, I think there's probably a little bit of selling on the valuation side of it, but there's also some concern there. And fair concern, I think, in the delivery, and we'll talk about that in a minute. But I do think it's just amazing.
I was thinking about this yesterday, the Chipotle story, it's amazing to watch here over the last several years, because they went from a restaurant that really couldn't stop from getting people sick to now being, like, one of the best operators in the entire space during a pandemic where a lot of people are getting sick. So, just hats off to Brian Niccol, the CEO. I think he's just done such a good job with this business since he took over, and it goes to show you the value in hiring folks with a lot of industry expertise like he has coming over from Taco Bell. So, for what it's worth, I think they made a great call on the CEO side.
But when you start looking at the numbers, I mean, it really does feel like Chipotle is turning into Domino's, it's really interesting to see. They have over 17 million loyalty program members now versus just 7 million a year ago. And that's all thanks, really, to a very strong app. And if you looked [laughs] on the call, as I did, the word "delivery" was mentioned 45 times on yesterday's earnings call. A year ago, it was mentioned six times. And I think that is potentially a source of some market concern as well, because when you look at delivery, the digital sales numbers were really impressive, they grew over 200%. They represented close to 50% of sales. About half of digital was delivery, and the concern there, and they note this. And so, I want to read this exactly as they noted.
But here's the crux of it, they say the amount that we remit to our delivery partner for sale through our app and website is higher than what we collect from customers and is included in other operating costs. So, delivery is something that is, yeah, it's driving the topline maybe a little bit, but it's also something tampering profitability. And they're going to have to figure out a way to square that at some point, but for now, they're doing a really good job in the face of what is a very difficult restaurant space, utilizing that delivery lever, really growing that part of the business. I don't hold that against them, I understand maybe a little bit of the concern in the near-term, but I think that when you look at all of these numbers put together, you still have to be very bullish on this company's future.
Hill: We've talked before about the opportunity they have in terms of expansion, to grow their footprint. Gary Kelly, the CEO of Southwest Airlines, was talking this morning about corporate travel and how he thinks that's going to take 10 years for corporate travel to fully recover for the airline industry. David Chang, the restaurateur and chef was tweeting this morning about how the restaurant industry is tied to corporate business. And you know, putting those two together and, in particular, David Chang's comments, it really does seem like a longer opportunity for that type of investment for Chipotle to grow its footprint.
Moser: Yeah. I absolutely agree. I mean, I think they've done a very good job of not trying to expand too quickly, that can be one of the dangers of franchising is that it gives you the opportunity to grow really quickly, but sometimes that can be a little bit of an anchor on you if times are a little tougher. And so, they opened 44 new restaurants during the quarter, and closed only three. They have just over 2,700 stores today, and most of them are all open.
Since sales really hit their low in March, they've been able to retain, they said, 80% to 85% of the digital sales gains, while recovering about 50% to 55% of their in-store sales. So, again, I think that when you see how they're slowly and methodically growing that footprint and then they're also making sure that they utilize that physical store footprint for more than just the in-store dining experience or even picking up for that matter, again, I go back to Domino's, and really one of the things that Domino's really done so well through the years is utilizing that physical footprint to essentially offer two different businesses, right, it's a pickup and it's a delivery. And I think that Chipotle is really starting to exploit that as well.
And if you do it right, if you do it well, it can be really, really valuable over many years. And Domino's investors, you know what I'm talking about. If you held on that [laughs] stock for the last +10 years, you are just loving life. Now, I'm not saying Chipotle will be Domino's, it's pizza versus burritos, and probably a little bit of a different market opportunity there, but I think that Chipotle is going to continue to be able to focus on the core Mexican food business for some time to come. And at 2,700 stores today, you know, they're going to keep on opening up 100 new stores a year here-and-there for the foreseeable future. And so, for investors, you have to love that, because now we're going to see two different drivers of sales from not only the store itself, but also the delivery model that they'll perfect that, they'll get it down, and it'll become something that's a bit more profitable and meaningful to the bottom-line, it's just going to take a little time.
Hill: Six months after its launch in April, Quibi, the short-video streaming service, is being shut down due to a complete lack of interest. The company was started all the way back in August of 2018 by Jeffrey Katzenberg and Meg Whitman. They raised $1.75 billion and then proceeded to light that money on fire. Where do you want to begin with this guy, because one thought I had, and we were chatting a little bit about this yesterday, is that capitalism works. Like, among other things, this is an example of capitalism working. They built this thing, they spent a lot of money to do it, they put it out there, and everyone collected and said "no."
Moser: Yeah, I mean, you're absolutely right. This is a great example of capitalism working. And there are a lot of different ways to go with this. And I don't want to make light of the fact that people are losing their jobs from this, though, I will say that even for the most glass half full person, jumping on board with this entity, you had to probably feel like the chances of success were going to be lower than 50%, I would have assumed, but it seemed like it was a little bit obvious all of us in the analyst community. But it was amazing to me, I read in one of the articles that during a video call with employees, Katzenberg actually suggested that staffers listen to the song Get Back Up Again from the Trolls film to buoy their spirits. I mean, it's like he's still talking to his own booking, [laughs] he's getting ready to lay a bunch of people off is what it sounded like. But it was very odd, like, I don't know, I feel like, it just didn't seem to me to be as sympathetic as probably it could have been.
But we talked about this a few shows ago, right, a few weeks back, where I don't think anyone, including Jeffrey Katzenberg, really knew what Quibi was supposed to be. I mean, is it social, is it streaming, is it social streaming? I mean, there were already all sorts of competitors out there in that space to some extent. And so, sometimes, in investing, like we say, sometimes investing, you just have to be able to call the mistake, admit it, move on, as opposed to just keeping on burning money. And it sounds like in this case, I mean, they burned through their capital, and that was basically that. And I think the writing is on the wall. It sounded like a lot of Hollywood was doubtful to begin with, interestingly enough, they didn't have a problem selling [laughs] content, they're like, hey, sure, we'll sell it to you, but we don't think you're going to succeed.
So, listen, when you jump into a crowded space like this, and video streaming is a crowded space, obviously, you need to differentiate yourself, you need to innovate, do something different, and it just didn't seem like they did that, like, at all. And you know, speaking of Seinfeld, it reminded me of that reservation's episode of Seinfeld, it all comes back to Seinfeld, Chris. But it's like, you say you know how to get in there, differentiate or innovate, but you don't actually know how to do it. Saying it doesn't mean that you're doing it. And it didn't feel like they really had come to that realization until it was just way too late.
Hill: So, one of the thoughts I've had about all this is, I feel like we need to come up with a new word to replace the word "unicorn" as it is used in the world of investing. And for those unfamiliar, a unicorn is a private company that reaches a private market valuation of $1 billion. And I was thinking about something Emily Flippen said on the show a few weeks back where she made the comment like, the world is only getting bigger, we're only going to have more companies with $1 trillion market caps in the future, not fewer. And so, as things continue, I think we need to come up with a different -- because, you know, that was part of it, that's like, oh! look at this company, they've raised nearly $2 billion, you know? What would this be worth in the open market? That's like, well, it turns out zero. So, yeah ...
Moser: Yeah, I look at some of these capital raises with some of these businesses, and it's astounding the money that some of these businesses raise. And it's just astounding, I mean, it's breathtaking, [laughs] like you said. Look at Robinhood, for example. With all of the trouble and issues that they continue to have, I don't know why anybody who's getting started investing today, why would you use Robinhood, because every other platform could basically match what they're doing for the most part and it's going to be a more robust and, frankly, trustworthy platform. And yet, this business continues to raise billions and billions of dollars, and it's garnered something like +$10 billion market valuation. Now, that to me seems really absurd, but it just goes to show, man, there are some very deep pockets when it comes to these VC interests and investors who aren't necessarily participating in the public markets. And I think the thing is, in most cases it's really all about hitting a couple of homeruns as opposed to trying to get, like, 60% of your picks right. I think most people know that they're not going to be getting 60% of those picks right, it's really just about finding a couple of grand slams that can make a big impact.
Hill: Yeah. I mean, the unicorn is an incredibly rare creature, and private market valuations of $1 billion are becoming increasingly less rare. I'll tell you what is really a unicorn, it's something like Quibi, something that from day one, we all sort of looked at and we're like, I don't think that's going to work, and then every step along the way, like, yeah, no, it's still not working. The launch isn't going well, they're burning cash, like, oh, my God! They're exploring strategic alternatives. Oh, they're dead.
Like, I can't think of another time when, you know, there was a business -- you know, maybe Pets.com back in the day, but ...
Moser: [laughs] It feels like there are always going to be those examples. That's why this job is so fun, because we get to see this stuff every day. I mean, the market, at the end of the day, we said it, it's just like a really big disagreement. And both parties think they're right for whatever reasons, and you have to figure out a way to reconcile that and choose a side. I think we chose ours on this one very early on.
Hill: Yeah, if only we had a chance to short it. All right. We'll wrap up there. Jason, always great talking to you. Thanks for being here.
Moser: Yep, thank you.
Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.
That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd, I'm Chris Hill, thanks for listening, we'll see you on Monday.