Etsy, Spotify, and Starbucks: What These Investors Were Watching

In this episode of MarketFoolery, Chris Hill and Motley Fool analyst Jason Moser bring you a look at three stocks. They discuss the operations of these companies and what they've been doing right. They talk about what to look for when companies provide guidance and the most important metric for investors to watch when these three present their reports. They also talk about Halloween candies and much more.

This video was recorded on October 27, 2020.

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Chris Hill: It's Tuesday, October 27th. Welcome to MarketFoolery. I'm Chris Hill, with me today, Mr. Jason Moser. Thanks for being here.

Jason Moser: Hey-hey!

Hill: So, for the dozens of listeners, let me just say upfront, we are recording this early because I'm taking Tuesday as a personal day, so hopefully the market is not doing Tuesday morning what it did late in the day on [laughs] Monday. And with so many companies reporting this week, we thought we would do a more detailed preview on three companies that are reporting later this week. And let's start with Etsy (ETSY -2.17%).

Etsy is going to report after the bell on Wednesday, it's their third quarter report. This is a stock that was in the low-30s in March, it's now around $140/share. What should folks be watching when it comes to Etsy?

Moser: Yeah, you know, it's really funny, [laughs] I didn't realize Etsy had been on such a tear. I guess, I just hadn't really been paying that close attention to my portfolio, and then one day I opened it up and I saw, hey, wow! That's a nice little surprise there. [laughs]

Hill: That's the best kind of surprise.

Moser: These guys have been doing OK. So, I will say, first and foremost, when earnings season comes, and you know I tweeted this out earlier, and I think it's just something that I always want to remind myself, because we get very hung up in the expectations game. And for me, it's always more beneficial to pay attention to management, and management hitting the marks that they set, not what the street is expecting, right? I mean, management should, in theory, know the business better than anyone, so I think they're going to provide a little bit more of a realistic outlook, and I think it's going to be a little bit more aligned with the way we invest.

And so, typically, I go through, for the companies that do set guidance and offer guidance, I look for the things that they say. So, with Etsy, you look back to just a quarter ago, the language in the call was one of optimism, yet caution, and they were really taking things one quarter at a time. So, they did offer estimates for some of the metrics that matter this quarter, they had gross merchandise sales, which is the amount of money that's going through that network, in the range of $2.2 billion to $2.5 billion, that would be anywhere from 80% to 110% up from the same quarter a year ago. Looking for revenue, $366 million to $426 million, that would represent a range of growth between 85% and 115%. And so, those are the things I look at, first and foremost, in regard to just the shared numbers.

Now, I think, with Etsy, another metric that really matters -- I mean, this is the nice thing about the network, it's a two-sided network with buyers and sellers and they benefit from both. But if you look back from just a quarter ago, they reported 3.14 million active sellers, 60.3 million active buyers. Now, that represented growth from 2.8 million and 47.7 million, respectively, from the previous quarter. So, you can see, as the quarters go along, this is a business that continues to really benefit from the move toward e-commerce. I mean, e-commerce, it's not just an Amazon world anymore, and certainly Etsy has been proving itself to be not only a great place for people to buy things, but a great place for people to sell things.

And I've always just been really impressed with the metrics the past couple of quarters and what they're selling in masks. I mean, it is just amazing. This is, like, the place to get a mask. [laughs] And you can get all sorts of different kinds and, you know, all sorts of different types of artwork involved with these masks. It was just really interesting to see that this has been such a place for people to go out there and really sell something that clearly everybody needs in some capacity right now. But yeah, I think that those are the first things that I pay attention to when it comes to Etsy. And we'll just, kind of, get an idea of how they see this holiday season shaping up as well.

Hill: You know what, I know we have talked over the past few months with regard to Etsy, the investments that they've been making on the seller side, really trying to boost marketplace operations for the sellers, because they got to make both sides happy, as you said before, customers and sellers. That said, the growth in active buyers is remarkable when you consider, in less than a year, they've basically grown active buyers to the tune of about 50%.

Moser: Yeah, and I mean, you think about the size of that opportunity, I mean this is a business ultimately that is going to be -- I mean, it is already global, but it is going to be like a global business, it's going to be that strong, this isn't something that's just really, kind of, a domestic play here. And to that point, I'm glad you brought that up about the investments they make in the business, particularly on that seller side. A couple of areas that they continue to focus on are in Etsy Ads department and, man, you got to love it when a company brings up their own little brand of payments. You've got Etsy Payments, and that actually is a thing.

Now, in regard to Etsy Ads, an interesting statistic there that Etsy Ads had its first $1 million day in July. My suspicion is that as the year goes on, we're going to see that more frequently, I'd imagine. And they continue to tinker with that offering in order to make it more friendly to their sellers. They are very much a partner-centric business. I mean, they're trying to make this a platform, a network, for their sellers, because if you have a platform where the sellers are happy and taken care of, if there's selling good stuff, the buyers are going to show up. And obviously, the buyers are showing up. So, it seems like they're doing something right there.

And then in regards to payments, I mean, Etsy Payments, that's not like a Square thing or a Stripe thing, Etsy Payments, they depend on third-party providers to run their payment platform, but regardless, it's another way to keep their buyers and sellers in the universe and control that experience a little bit more. But over the last quarter they expanded Etsy Payments to five additional countries. It's now in 43 countries, 19 currencies, and it processes 92% of their gross merchandise sales. So, you figure that one of the upsides of digital payments of mobile payments of just having that payments business, one of the upsides is more data, more information, being able to personalize more, that's something that they're going to continue to be able to do with that payment side of the business. Ultimately, that all results in bringing more sellers in. If the sellers are selling stuff that the buyers want, then more buyers come in. I mean, it is just a phenomenal network effect, just keeps feeding on itself.

So, I feel like, as a shareholder myself, I'm extremely happy, I'm extremely happy that Santa Claus brought these shares to my daughters last year for Christmas. [laughs] And yeah, I think that you got to feel really good about the groundwork they're laying out.

Hill: Let's move on to Spotify (SPOT -7.28%). Spotify is going to report third quarter results Thursday morning. Subscriber growth is the No. 1 metric to watch here. I mean, this is an unprofitable company, so clearly profits are not [laughs] what we're going to be looking to.

Moser: Ah, profit-shmofits, who cares about that, right? Yeah, I think as a Spotify user, I am not a shareholder yet, I mean, I kind of feel like it's one of those stocks that I've always wanted to buy and just never got around to it for one reason or another. Very much like Netflix, I think this is a business that, for right now at least, subscriber numbers are the numbers that matter most. And the nice thing about Spotify, they have two different classifications of subscribers. They have the paid subscribers, and then they have the ad-supported, but if you look back to last quarter, monthly active users just under 300 million, 299 million. Subscribers made up 138 million of that.

Now, right now it is all about users, and the reason why the subscribers are so important, because that's the gist of the business, right? I mean, those advertising-supported listeners are fine, but really the money comes from the subscription, and if they can continue to grow those subscribers, that's going to be really encouraging. If you think about 299 million overall monthly active users and subscribers at 138 million, I mean, you can see the disparity there. There is plenty of opportunity to bring more people into that subscription model. And they continue to build out the content offering in order to do that.

The area that they've made the most investments in, I think, is on the podcast side. And I think the podcast requires that ultimate long-term view. I mean, it is something that they're still learning very much how to monetize it and how to make it really, you know, a stable and reliable and growing and meaningful part of the business, but they're definitely doing that. They now have over 1.5 million shows, 50% of those launched in 2020, this year, where a lot of people have had a little bit of time on their hands. So, I'd imagine that they're giving Spotify a chance and listening to some of those shows.

But again, going to what they're looking for, you know, looking what management's guidance is, management set out guidance here for total MAUs [Monthly Active Users] between 312 million and 317 million, and of that, they expect total premium subscribers to be in the 140 million to 144 million range. Again, important to see that growth in subscribers, because that's what really gives them the opportunity to continue to build up the content, it requires money, it requires money to feed this engine right now, but it's kind of like Netflix in that regard. I feel like with music, though, the neat thing about music, I think music, it's a little bit different than video, in that, you're going to listen to the same music over and over again and just it lives a much longer life without getting stale. So, they're not faced with that same hurdle of always having to come up with something new. And if they can get great podcast partners on there, that's ginning up continual fresh content as well, that really will help serve their purpose and bring subscribers in and then keep them.

Hill: After the closing bell on Thursday, we're going to get Starbucks (SBUX 1.00%) wrapping up the fiscal year with the fourth quarter report. Year-to-date shares are flat, which is pretty amazing when you consider the S&P 500 is up only about 3% or 4%, so the fact that Starbucks has bounced back to basically be even for the year, given all the closings they've had and everything going on, what are you going to be watching with Starbucks?

Moser: Well, Chris, I'd tell you, the first thing I'm watching is my portfolio is, that stock isn't flat for me, big guy. I bought this thing [laughs] at the nadir back in March, man! I got this thing for, like, $50, I couldn't believe it, it was like a fire sale, so I've been waiting forever to finally get Starbucks shares. And sometime late-March or something, I just saw the opportunity and had to jump on it, because $50 for this stock seemed like a steal. And I guess the market has done, I guess, it was a pretty good deal, and I think I know why. I mean, I would put Starbucks in that same class as Chipotle as one of the key restaurant operators out there that's continued to prove that not only can it keep the ball rolling in tough times, but it actually can really separate itself even more from its competition.

So, when all of these restaurants -- I mean, you just see it, just all over the country, all over the world, really, so many are having such a difficult time, I mean, Starbucks was really set up to succeed here from a number of angles. And I think one of the primary points of success for them has been that mobile presence. Being able to pivot and rely less on the in-store experience and just being able to have their operations open so they can still serve customers.

Now, if you look at what they're actually looking for, their guidance here in global comparable store sales or comps, they're calling for global comps to fall 12% to 17% for the fourth quarter and for the full-year. And remember, this report that's coming up, this is going to be their fourth quarter. They're calling for U.S. comps, Americas and U.S. comps to fall 12% to 17% for both quarter four and the full year. And they're calling for international comps to fall between 10% and 15% for Q4 and then about 20% to 25% for the full year.

Now, this isn't really a surprise, I mean, this is a company that had a lot of success coming into this year, dealt with a lot of time where their operations were shut down, those aren't sales that you get back, we've talked about that before when it comes to restaurants, you don't get to go make it up by selling me two cups of coffee tomorrow. But they were able to really get through this in pretty quick fashion, stay open, they've got, I think, close to 95% of their stores open now; it might be 96% actually. And I think that that only is going to continue, because they've got this blueprint, they've got it figured out here. So, that even while times are tough, they can still remain open and continue serving people.

Hill: You talked before about management and listening to what management has to say, and that's what I'm going to be focused on with Starbucks, is Kevin Johnson and what he is saying about, in particular, capital allocation, what are they doing with their marketing spend, what, if any, extent are they making on further investing in drive-thru. And I say all that, I don't have any, sort of, preconceived notions of what I think it should be; Kevin Johnson knows so much more [laughs] about this business than I do. But it's just -- that's the thing that I'm -- you know, as you said, the numbers are going to be the numbers, and, you know, they're going to be down; that's to be expected for all the obvious reasons. But I think what he says about their fiscal year 2021, that's what I'm going to be watching.

Moser: Yeah, I think you're right and I'm glad you mentioned it. You know, drive-thru is one part of that equation. If you look at the investments, the focus that they've had or the investments they've been making, part of it is mobile, part of it is drive-thru, but if you look at some of these numbers last quarter. Customer usage of mobile ordering increased to 22% of total transactions, that was up 6% from a year ago, which, you know, that honestly feels like it could be more, right? But then you look at the sales volumes for the third quarter that flowed through the combination of drive-thru and mobile order and pay, that basically accounted for 90% of sales volumes. And so, it's a business that certainly has been able to turn its focus really specifically on the areas that are going to matter the most in what we're dealing with now in this pandemic economy, in mobile order, in drive-thru, and they're clearly continuing to get it done there.

And I mean, they're faced with the one hurdle, the one, sort of, roadblock there is that a lot of their stores you can't really have a drive-thru. I mean, it's not like you can just go build a drive-thru in a lot of their stores, but some of them you can. And in future stores, they are going to most certainly take that in consideration.

The one thing that I continued -- we talk about this, I feel like, every quarter. I feel like this is an area where they could do so much more is in their loyalty program. And they basically look at this 90-day active members, it's not just looking at members, they're really looking at 90-day active members, because Starbucks, it's something that you should be utilizing on a semi-daily basis, whether it's every one or two days or whatever, most people are using it pretty frequently. But given everything that's gone on, their rewards loyalty program, the 90-day active members in the U.S. last quarter fell to 16.3 million people. That was actually down 5%. Now, a lot of that was due to the store closures and just general headwinds from what we're going through.

Still, to me, it's 16.3 million, I mean, remember just last week, we were talking about Chipotle now having 17 million, [laughs] and, you know, I think coffee is more addictive than burritos, and certainly it's -- well, I don't know if it's better for you, but burritos, if you eat as many burritos as coffee that you drink, I mean, you're going to get big fast, right? So, coffee, in theory, should be better for you. It all just goes to say they should have more members in that loyalty program that they do. I don't know why they don't, I feel like they need to work on that, because I feel like that's a big opportunity. But regardless, it is a strong business with a very strong brand and a tremendous global presence. You know, just a lot of things to really like about it.

And I think that Kevin Johnson has really taken the reins from Howard Schultz and continued with that success. You know, he really was given a pretty good situation, he didn't try to turn this thing around to do something different, man! He just saw the success that got them to where they are, he's kept that ball rolling, similar to kind of what we're seeing with Chapek taking over from Bob Iger at Disney; I mean, you want to see a new CEO get in there and keep that ball rolling, and it certainly feels like Kevin Johnson has done just that.

Hill: Really quick, before I let you go. I meant to mention this the other day with Jim Gillies, Halloween candy, as we do every year. Give me your underrated, give me your overrated.

Moser: Wow! You know, so we have a couple of bags of candy in the pantry now. We tend to subscribe to the notion that you should have Halloween candy in your house all the month of October, so we do. Underrated? You know what, man! I got a bag the other day with those little 100 Grand bars. [laughs] Those, I feel like, don't get nearly enough attention. That was a revolutionary candy bar when we were growing up, and doesn't get enough attention today though, I think, Chris. I think it's a little underrated that 100 Grand; I like them.

Overrated? Hmm. I like all candy, but you know, I feel like your plain-old Hershey Bar. I don't know, man! If you're giving those out, you have to get a little bit more creative, right? I mean, that feels like I'm not anti-chocolate, but if you're giving people just plain-old Hershey Bars, it's like you're not putting enough thought behind it.

Hill: Well, that, to me, is the -- I agree with that, but that to me is why it's so crucial when they do the miniature bags, it's a mix, it's not just the straight-up Hershey Bar, they got the Dark Chocolate in there, they got the Krackle, they got the Mr. Goodbar, it's like, you know, it's almost like a palate cleanser for the others.

Moser: [laughs] Yeah, I agree.

Hill: All right. Jason Moser, thanks for being here.

Moser: 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 tomorrow.