In this fun and friendly Election Day special episode of Industry Focus, Emily Flippen chats with Motley Fool analyst Asit Sharma about how this election may affect some companies or industries over the coming years. They discuss both Biden and Trump's policies and their implications for various industries. What happens in case any one of them gets an absolute majority or what happens in a stalemate situation? They also talk about some industries or companies which remain unchanged by the results and much more.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
10 stocks we like better than Walmart
When investing geniuses David and Tom Gardner have an investing tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Walmart wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Stock Advisor returns as of 2/1/20
This video was recorded on Nov. 3, 2020.
Emily Flippen: Welcome to Industry Focus. Today is Tuesday, November 3rd, and it's Election Day here in the United States. I'm your host Emily Flippen, and today I'm joined by The Motley Fool's newest political commentator Asit Sharma, and we're going to talk about some companies or industries in the wake of this election.
Asit, I'm obviously joking here, [laughs] you are not obligated to be our political commentator for the day, but I do appreciate you jumping on with me on Election Day to talk about some companies.
Asit Sharma: Yeah, I am excited to, Emily. And you know what I figure, we could use this as a demo reel; maybe we'll talk politics so well that we could do this in four years again, you know, pitch a political show to The Motley Fool team, see what happens. [laughs]
Flippen: Nothing like a 26-year-old's political opinion, right, to really make an audience angry ... [laughs]
Sharma: Hey, I'm all for it. [laughs]
Flippen: Well, either way, I really appreciate it, and we are going to do our best to talk, we obviously have no idea where this election is headed, and in typical Foolish fashion, we're long-term investors, so I can't say that either of us has really spent a ton of time speculating about this election in our portfolios, but it will be kind of fun to have those conversations today because there are a handful of industries and businesses that could be impacted depending on where this election goes in the United States. And I think it's worthwhile here on Election Day to give it a chat.
And if you're tuning in and you're hoping not to get any election news, which is totally understandable, I will, A. say, don't forget to check out MarketFoolery, one of The Motley Fool's other daily podcast, but also, B., I prerecorded an episode with Brian Feroldi for tomorrow's Wildcard Wednesday. We're going to be talking about a great food company called the Tattooed Chef, that will be a great reprieve from the political news, so definitely tune in tomorrow.
But without any further ado, Asit, let's just jump right into it. I guess to start, let's talk about if Biden were to win this election or Democrats maybe taking over some part of Congress, what companies or industries do you think could benefit from having Biden in the White House?
Sharma: Well, you know, Emily, the first that I want to bat around is cruise lines; and this is something that you actually suggested to me when we were chatting about this episode and doing some planning, you threw that out there and I thought about it, and the idea is really growing on me. And specifically, you mentioned a potential resumption in U.S. to Cuba routes for the major cruise lines.
For those listeners who aren't familiar with this, in 2016, this was the end of President Obama's second term, we normalized our relations somewhat with Cuba, and by doing so we allowed U.S. citizens to travel to Cuba for educational purposes under a now defunct program called People to People. So, as long as you could show some kind of educational purpose, you could travel. And people really took advantage of this. By 2019, the major cruise lines were enjoying booming business in these U.S. to Cuba voyages.
I did a little digging in some news articles [laughs] from that time and through subsequent years, Emily. Between January 1st and April 30th of 2019, 143,000 passengers visited Cuba from the U.S. just using cruise lines. You can compare this to air travel, which only had 115,000 [laughs] passengers, so it was really peaking and getting popular. And then, of course, in June of 2019, on June 5th, without warning the Trump Administration halted nearly all travel to Cuba via sea. And this hit profits immediately for major cruise lines. I went back to some articles I wrote at the time and I saw that the bottom-line effects, while they weren't huge, they were indicative of this sort of growing revenue and earnings stream. So, Carnival got hit about 2% of that company's 2019 earnings per share; and Norwegian's bottom-line was hit by about 8%.
So, if we have a Biden administration come in, they are pretty likely to reinstate a friendlier Cuba policy. Biden has actually signaled this already in some campaign speeches. The thing that is waiting for his posture to open this up again is a lot of capacity in the Caribbean that Royal Caribbean, Carnival Cruise Lines, Norwegian, still have, and they're ready to pile that on. So, I like this idea. And I think, look, we won't see an overnight pop in stock prices; maybe we'll see a little one if, A., Biden Administration announces a change in the Cuba policy, but long term, it definitely is a nice growth earnings driver for all three of the major cruise lines.
Flippen: Yeah, I think that's probably something I should have mentioned at the offset, is that, even if there are industries or businesses that can benefit from having a Republican or having a Democrat in control of this country for the next four years in the White House, it doesn't necessarily mean that the stock prices automatically revert to whatever the new expectations are. Can they? Of course, but we've also seen so much volatility and uncertainty in the market that I would not be trying to day trade or speculate [laughs] on any of these things. But I hope that any listeners already took that as a given, if you're a Motley Fool listener, if you're a Motley Fool subscriber, you know our mentality about these things.
But to go back to cruises, it's interesting, because I remember when there was this somewhat normalization of relationship with Cuba, it was all the rage for these cruise lines. I mean, they were talking about how significantly this would impact ridership of cruises. And it did, I mean, the numbers you cited there for ridership of cruises going into Cuba versus people taking airplanes, and it's amazing. At the same time, I feel like the noise I've heard there has just fallen off a cliff, it'll be really interesting to see if Biden wins, if that is a top priority for the administration to normalize. This could be something that takes years to create or not happen at all.
Sharma: So, the last point before we move on, that I wanted to make is, you know, another advantage of a Biden administration for cruise lines, potentially, is a much more proactive approach to tackling COVID-19. The administration that comes in, if it's Democratic Administration, is probably going to be much more willing to follow guidance from the CDC as opposed to the little bit of headbutting that we've seen between the Trump Administration and the CDC. You know, regardless of how, as an investor, you might feel politically about this posture, it could benefit cruise bookings I think, because if a Biden administration comes in, and they are really sticklers for following CDC guidelines, that can engender confidence among potential cruisegoers. So, it could be another, sort of, shorter-term or intermediate-term tailwind for cruise lines. Obviously, the best thing is to [laughs] get a vaccine and get COVID-19 behind us, but that's a near-term effect that a potential Biden administration could have on the cruise industry.
Flippen: Although, alternately, on the other hand, a more proactive approach could potentially mean an extension of no sail orders, right? If we don't have that vaccine, I could see an administration coming in and saying, hey, look, cruises are these Petri dishes, right, nobody is getting on a cruise until we're all vaccinated. And that could mean potentially no cruises for months into 2021, looking at the second half of 2021, that would be incredible.
Sharma: Yeah, a very, very good point. And that also is a possibility. Hopefully, we see declining case counts and the vaccine, but that is a risk.
Flippen: Dare to dream. [laughs] Well, one other industry that I wanted to chat about, and I apologize, I sneakily snuck it into our outline here, Asit, I know it's not an industry that you follow actively, or maybe not even that a lot of our listeners even care about, but it's one that I follow actively. So, I have to mention it, and it's the cannabis industry.
The Trump Administration has not been actively hostile toward the industry, they also haven't made it a priority over the past four years to get any legislation, whether that be decriminalization, legalization or even just loosening of banking regulations for cannabis companies, none of that has made it through the Trump Administration. It's possible that if Trump were to win a second term, that those things do make it through, I'm not going to say it won't, but it does seem more likely under a Biden administration. Biden's official policy has leaned toward decriminalization. And I think it's important in this case not to overstate the impact that decriminalization would have in the United States, it would be amazing from a social perspective for people who have been impacted by the war on drugs, but from an investing perspective, it doesn't do much to change the fundamentals that are driving the cannabis industry right now. And ultimately, we'll be having to look to the states to continue to pass legislations if a Biden administration doesn't make it a priority.
So, it's all to say that cannabis is an industry that is heavily impacted by political decisions, heavily impacted by what choices and regulations administrations put forward. I'm not overly bullish in the case of Biden, I am more bullish in the case of a Biden administration for the cannabis industry than I am for a Trump Administration, but ultimately, I think the onus has been on the states to pass legislation for cannabis.
I expect, over the next four years, that despite tailwinds that come from the Federal government, the onus is still going to be on the states. So, this election you should be looking to Montana, Arizona, states that are voting on some, sort of, medical or recreational legalization, those are going to be the true indicators of success for the expansion of the cannabis industry as opposed to the Trump Administration.
I did get a chuckle this morning, though, I had a conversation with one of our new analysts here at The Fool, Clay, who lives up in Montana, and he, of course, got out and voted this election season. But he said, there's been tons of political demonstrations in the state for and against legalization of recreational cannabis. So, it is so interesting to me how politicized this decision is. I wanted to mention it, because the industry is heavily dependent upon how regulations shape out for better or worse.
Sharma: Yeah there's so many dimensions to the cannabis industry from the investment side, if you don't invest in it, as I do, that you really see and play, you know, including the human element, the decriminalization that you mentioned, I'm interested just from that point to follow this story. But I love that advice, if you're interested in this industry, you have to look to the state level, don't assume that there's going to be a major change in either administration.
Flippen: Yeah, I definitely think that's a big takeaway here. And another one that could be interesting to look at, and it's kind of like cannabis, I don't want to overstate the importance, because I think sometimes we can make it, kind of, binary, but I'm interested to hear your take on how you view the green, you know, evolution; that's a horrible way to say that. Like, infrastructure and clean energy, how do you see focuses on environmental impact changing industry tailwinds if Biden were to win?
Sharma: Yeah. And I think, Emily, you nailed it, because it's not just about green energy or clean energy, and it's not just about infrastructure, it's a little bit of both, or potentially a lot of both. And for this to happen, we'd need to see a Biden win, and also a democratic -- I call it a sweep of Congress; that's not really what I'm talking about, but it's sort of a sweep of open seats or a near-sweep, which gets the Democrats a majority in Congress, so that both the House and the Senate would be controlled by the Democrats. So, you'd have, of course, a democratic presidency in that scenario, democratically controlled Congress. And from there, they pick up legislation that is already sitting at the Senate's doorstep. And that's the House's $1.5 trillion infrastructure bill. It's just been languishing. Or they pick out parts from the Democratic platform, the Democratic Party's platform, which is really big on surface transportation, electric energy, all types of mass transit, very interested in that greener component. So, you could see a combination of these two ideas. It would be a big bill if the Democrats do indeed gain control of Congress, just that one bill I mentioned was $1.5 trillion.
And sure, we've got [laughs] a lot of debt on the books as a country after COVID-19, and we had a lot of debt before. But I think the Democrats see this as a way to stimulate economic growth as much as it is to maybe clean up the environment and repair infrastructure. So, the overriding thought is, if we are more competitive in investing in our infrastructure, we can be competitive with that next generation of countries like China, that are heavily invested in new infrastructure.
So, I just wanted to read a couple of statistics I picked up from these documents that went back to that House bill. They had allocated $500 billion for surface transportation and other road repairs, and repairs of bridges, Emily, and $100 billion for new transit funding, so think mass transit, improved rail transit, freight as well. And that's on the commercial side. $70 billion for clean energy.
And I guess the takeaway here is, something akin to what you just mentioned, that it's really hard to get carried away as an investor and start finding really specific companies that would benefit from, say, an investment in high-speed rail; [laughs] that's hard to do. What you could do, if you're interested, is invest in, sort of, the market leaders in infrastructure. So, I'll just throw out a couple of big names that I think all of our readers have probably heard, companies that would benefit would be like a Deere & Company, symbol DE. They make heavy [laughs] earthmoving equipment. Union Pacific, they are a railroad that's going to benefit from an investment in commercial rail, and also, all the transportation that will be needed to provide your infrastructure; Martin Marietta, symbol MLM. This company invests in materials. So, think quarries, just [laughs] basic pulling stuff out of the ground to build things. And one that I like, called CH Robinson Worldwide, this is symbol CHRW, and this is a logistics company that works with all types of transportation. Air transportation, rail, ocean, logistics, you name it. They would benefit also from this kind of investment.
So, I guess the big takeaway here is, nothing is going to happen overnight, again, but if the Democrats do control Congress and they work with the Biden Administration to pass a big bill, I would look to some of these really large companies as a safe place to ride that momentum.
Flippen: And now, let's talk about what could happen if Trump were to win a second term or potentially, in the case, that Republicans take or remain in control of Congress. So, there's a lot of different scenarios that could play out, but do you think anything really changes for industries or companies or is it more of the same that we've seen over the past four years?
Sharma: Yeah. So, I'm curious about your thoughts on this. I mean, there's two scenarios, right? One is that Trump wins a second term and the Republicans retain hold of the Senate, but the Democrats keep control of the House. So, in my opinion, that's just going to be more of the same, because neither side [laughs] has been able to pass major legislation. They can't agree on anything, they're always at loggerheads. And we just seemed locked in this combat quarter-after-quarter, month-after-month, year-after-year. So, I think more of the same, if we, sort of, keep the status quo.
I'm curious what your thoughts are, would the two sides suddenly wake up and say, hey, let's work together, we've got four new [laughs] fresh years, let's make things happen. What do you think in that first scenario?
Flippen: [laughs] I haven't the first clue; I could not have predicted the past four years; I have no clue what the next four would look like. Maybe it's potentially different, right, heading into what would be than the 2024 election. Maybe both sides would have more priority on getting work done. But if the last four years have anything to say about it, compromise on both sides doesn't seem to be feasible right now. So, I kind of agree with you, I feel like more budding heads, more of the same; I wouldn't expect very much a change.
But let's paint a second scenario there, if President Trump were to win a second term and Republicans maintain the Senate, and they get control of the House. So, essentially, we have a Republican sweep, giving them a lot of opportunity to potentially make regulatory changes, policy changes. Do you think anything fundamentally changes then?
Sharma: I really think some things will change. So, for example, defense stocks would probably prosper in that scenario, because that's always a priority of Republican administration, so there would be more investment in defense. So, you can, sort of, count on that in Republican administrations. But if we get the scenario where, let's say that, and it looks improbable here, but let's say that Republicans can take control of the house -- they have a hill to climb to do that -- yeah, then I think you start to see money flowing to defense stocks.
Bank deregulation would be a big theme. The largest banks probably are going to be the ones that can benefit the most from easing of regulations. So, think JPMorgan, think Bank of America, because the biggest banks have a lot of capital requirements that they've got to adhere to. Just going back to the last financial crisis, coming out of that, banks had to have stricter capital ratios and keep more reserve money on their books, so that the whole system [laughs] wouldn't collapse again. But especially this year, I mean, this has been a priority of the Trump Administration going back to when President Trump took office. And some of this he's done through a little bit of executive order, some working with Congress, and some of this, as I was just mentioning, going back to COVID, the Federal Reserve has also worked with the Administration to loosen restrictions on capital requirements for banks, simply because we're trying to protect the system from another big systematic fail.
Now, there is this one, sort of, pillar that's still standing, Emily, and it's called GSIB. [laughs] What is GSIB? GSIB is the Globally Systematically Important Bank. So, the biggest banks in the U.S. have this extra capital requirement. They got to keep even more money on their books to keep things stable. And bankers like to think of this as like a surcharge on their capital requirements of anywhere from 1% to 3.5% of a big bank's capital base. So, this is going to be a target in a second Trump Administration, and there will be just so much more pressure if the Republicans can take the house and just have a lot of influence in Congress.
This is something that you can expect to see fall, meaning that those big banks, like JPMorgan, will be able to use even more of their capital to trade [laughs] and take on riskier investments, potentially make more money. Some would argue that that might put the whole system at risk again, as it was the days before [laughs] the financial crisis, which is a little bit of the side that I fall into, but that can be expected down the road.
Flippen: It's so funny, I'm in the process of studying for the second level of the CFA exams, and there's an entire unit that we have over financial institutions. I had never heard of GSIB before. Maybe I'm just a terrible studier, [laughs] maybe I missed it, right, I'm going to fail the exam come December, or that just shows the depth of research that you've devoted to the topic, Asit. And it will be really interesting to see what happens with these financial institutions. I think I agree with you that they stand to benefit a lot if President Trump were to win a second term, not just from deregulation, but also just trading. We've really seen -- granted it hasn't been a trend just over the past four years and it's been a longer term trend than that, but we've seen it accelerate over the past four years, just the amount of trading that is happening, whether it be from individual investors or institutions, that's a trend that I would expect to continue.
And keeping trading accessible, for instance, with trading being the volatile source of income for a lot of these big banks, that could potentially lead to great years for a lot of these banks if Trump wins a second term, and we've seen the historical trading pattern over the past four years, continue into the future.
Sharma: For sure. I totally agree with that.
Flippen: It's not just banks you're excited about, right, because I feel like there are so many different -- we saw Trump tax cuts impact the broader market as a whole. So, I know that there has to be more than just banks that are impacted if President Trump wins a second term.
Sharma: We'll look at another industry, healthcare. So, there is going to be a huge onus on a Republican administration working with at least a Republican-controlled Senate, if that's what happens, and a democratically controlled House, to pass a comprehensive plan after 10 years of Republican administration promises. And not just Republican administration, but if we're going back 10 years, these are promises made by Republican politicians, prominent ones. And if you look at the House, the Senate promises to strike down the ACA [Affordable Care Act] and replace it with a better plan. [laughs]
And now we're getting close. The majority of the Supreme Court is conservative again after the appointment of Amy Coney Barrett, and they are going to begin hearing arguments in the long-standing case to basically pull apart the ACA, the Affordable Care Act, better known as Obamacare. And this is happening beginning on November 10th.
Now, anything the Supreme Court does is going to work into next year, but the implications are huge, because if the Republicans, who are bringing this to the Supreme Court, get what they want, now there will have to be a replacement of ACA or at least major important portions of the ACA. So, who's going to benefit? Well, again, this is the theme, Emily. [laughs] Don't get too specific, stick with big pharma. So, think of companies like Merck, like Pfizer. I would avoid personally, and I'll say, I'm no healthcare expert, I'm not a health stock guru, but I will say this: avoid investing in insurance companies just with the thought that, hey, they've got a benefit because there's going to be a replacement plan, that's not necessarily so. Because the amount of heavy-lifting that it's going to do to give people who are looking for healthcare a similar package to what Obamacare offers now, we may end up in the same place. It's really hard to see how fiscally it can be done without getting something very similar to Obamacare; this [laughs] only comes down to recreating aspects of that plan, just under a Republican stamp. So, I would wait and see, I would not be going in buying insurance companies at this point; health insurers.
Flippen: Fair enough. Well, I'll tell you one industry that I've thought about a lot because of how politically charged it's become over the past few years, and that's, kind of, big tech. And my, maybe, ignorant interpretation here of the impact that could happen on big tech if President Trump were to win a second term is that, maybe there's actually less regulation, there's less antitrust concerns, as compared to if Biden wins and we have a democratic administration.
I realize that the Trump administration has not been friendly toward a lot of big tech companies, but at the same time, I have this kind of feeling, this interpretation, based on what we've heard from other major democratic leaders that a democratic administration would almost be more intent on breaking up a lot of big tech companies, maybe even companies like Google [Alphabet] comes to mind given its antitrust lawsuits in the EU. Maybe they'd be more proactive in trying to break up big tech. So, if the Trump Administration wins, while it's not, you know, shining light for big tech companies, we've seen a lot of skepticism from consumers and both parties, maybe there's still more friendly toward these companies than a Democratic administration would be.
Sharma: Yeah, Emily, I think that that's the correct big picture. You know, traditionally, Republican administrations have been more willing to look the other way where antitrust concerns are involved. They are in favor of capitalism, [laughs] companies becoming bigger. Democratic administrations have been much more willing to split apart companies, to look at the labor component in industries to see how workers are being affected. So, it should be positive for big tech if the Trump Administration retains power.
The only issue I have with this, is this almost, sort of, personal animus that President Trump seems to have against certain tech companies, [laughs] Amazon.com is the biggest example, because there's some personal clash between one of the world's richest man on any given day, Jeff Bezos, who also owns The Washington Post, [laughs] which is not very friendly toward President Trump. And so, on any particular tech company, you have this filter, you have to run what is President Trump's opinion of this company.
And I have no idea of the company I'm about to mention, what his opinion is, but we do know that The Justice Department sued Alphabet earlier this month. So, this is a case that, again, is going to go on, it's going to take several months, but at least we are seeing a willingness for the Trump Administration to tackle what traditionally would have been a more Democratic administration's concern. So, it's confusing, I think. [laughs] Yeah, I'm sort of at a loss to see what will happen.
But in general, I think your reasoning is absolutely correct, that Republican administrations will and have allowed big tech to grow in a more free environment than Democratic administrations.
Flippen: It's funny you mention President Trump's personal animosities; I wasn't planning on mentioning this, but it gave me a chuckle. I read an article last week that was essentially arguing that Twitter would likely be a good stock to own if President Trump were to win a second term. And I see you, kind of, looking confused [laughs] when I mentioned that, their argument was despite President Trump's -- "animosity" is a strong word, but Twitter, as a platform, has gone after President Trump in many ways. Putting informational notices on many of his tweets, at some point I believe they even suspended his account. So, it's not the friendliest of relationships; they're kind of stuck in a bad marriage right now.
Well, at the same time, the fact that President Trump is on Twitter, makes it the place that you, as maybe as an American, as somebody who's interested in politics or investing, whatever it may be, you kind of have to be on that platform to be following him. So, it's almost this self-fulfilling prophecy that Twitter does well when President Trump is in power, because he uses the platform so actively. Now, that could change at any moment, but I read the article and it did give me a chuckle. I'm not sure I agree with it 100%; I don't think that's a good reason to own any one company, but I did get a chuckle from it. [laughs]
Sharma: You know, there's some insight there. Really briefly, the company to own, the platform to own all this time has been The New York Times, [laughs] and I've written about this once or twice in these past four years that The New York Times and President Trump are frenemies; they need each other. The New York Times' digital subscriptions went through the roof after the Trump Administration came into power. And President Trump loves to be featured in The New York Times, even though most of the time they are investigating him [laughs] and having, you know, sour opinion columns. He really likes his relationship with those reporters, like Maggie Haberman. Although, I think this last that's deteriorated, but both have prospered. President Trump prospered from the publicity, a great PR person, and The Times, you know, just had a clear benefit. If you watched their stock price over the last four years, that's the place [laughs] we all should have been invested in if we were trying to see what might have been favored from this administration.
Flippen: How's that for counterintuitive? [laughs]
Sharma: Right. [laughs]
Flippen: Well, I do want to take a real Foolish approach to investing this election season, and I want to talk about whatever company or industry that you think the results are unchanged as a result of the election. And I said it before, but I don't think any long-term Fools will try to tell you to play or trade speculation on the election. And I want to throw back to something that happened to me last week. We had Fool-a-palooza, which is our annual company holiday. Obviously, we had it over Zoom this year, but one of our guest speakers was Bert Jacobs, he's the Co-Founder and CEO of Life is Good. And one of the things that Jacob mentions during his talk when somebody asked him how he felt about the election was that he really didn't care about what happens on a Federal level, because he really believes in his company and their future, he thinks that growth is their own.
And I liked that, there was a level of self-determination in the way that he thought about his business that I really appreciated. And I always like to say, just on a personal level, that investors shouldn't spend time worrying about things that they can't control. And with the exception of casting your vote this year for whomever, there's really nothing else that we as individuals can do to control this election, so why worry about it? I like that mindset. I thought Jacob's mindset aligned very well with the way that we view investing here at The Fool.
So, with all of that, that little monologue being said, Asit, what companies or industries do you think have self-determination? Do you think results are completely unchanged regardless of what happens today, tomorrow or this week?
Sharma: Well, first I want to say, Emily, that was such sage advice, my blood pressure just dropped so much while you were just talking. I felt so calm. I said, yeah, [laughs] that makes sense to me. I think I knew that intuitively, but it was so great to hear you say that.
I've got one industry that I think, obviously, it's no surprise to most listeners, the tech industry is going to prosper regardless who is in charge, because it's propelling so much innovation not just in pure tech stocks and software stocks, but in so many industries. Any industry which is embracing technology is getting more efficient, profit margins are rising, new revenue opportunities are opening up. So, I like tech, and I like one idea in the tech industry which is an intersection with something we were talking about earlier, which is, sort of, the construction, the infrastructure, the whole idea of engineering, which will have to, at some point here in the U.S., pickup.
And all over the world, if you look at the developing market, the developing world, there's so much investment going on in infrastructure. So, this company is Autodesk (ADSK 0.46%), ADSK. I really like this company, very excited about it. I'm going to read to you how they describe themselves in my radio announcer voice. "Autodesk makes software for people who make things. If you've ever driven a high-performance car, admired a towering size skyscraper, used a smartphone or watched a great film, chances are you've experienced what millions of Autodesk customers are doing with our software. Autodesk gives you the power to make anything."
So, I really love [laughs] this description, because it explains what the company does. If you didn't know anything about it, they make software that some people refer to as design build, some people refer to as computer-assisted design. But it enables someone to build anything small or something very, very complex, like the skyscraper. And I think it's going to benefit from growth in construction, engineering, architecture regardless which administration we see in just a few weeks now.
So, just to give you a little bit of information about it. As I said, it had its roots in CAD, Computer-Assisted Design software, but increasingly, it's working on total lifecycle planning and project management in industries like construction. They are really killing it in this sphere, they've decided to concentrate more on the construction industry, because that's a huge growth opportunity for them. They've transitioned to a subscription-based model. This has happened over the last several quarters. And their annual free cash flow, which is already pretty decent for their size, is projected to grow by about 70% over the next two years, and that will equal $2.4 billion in free cash flow annually. They're going to reach that from a pace of about $1.4 billion projected for this current year.
It's a little pricey. So, this company trades at 40X its forward price-to-earnings ratio ...
Flippen: It's basically cheap in comparison to everything else on the market. [laughs]
Sharma: Yeah, exactly. You know, it's almost par for the course this year after this post-COVID boom in Software-as-a-Service stocks. And you know, I like that because it's actually not 80X earnings. [laughs] You're right, Emily, stock is up 36% year-to-date, so that's part of it, but it's worth the premium in my opinion. It's got double-digit annual revenue growth, which is solid for a mature tech company. This company went public in 1985, and it's still averaging, for example, its most recent quarter hit 15% year-over-year growth.
Last couple of things about it that I really like, it's got really sweet gross margins, even for a Software-as-a-Service company, they sit around 91%. So that, even in an industry which has high gross margins to begin with, that's admirable. And again, this emphasis on the construction industry gives them a global field to play in for years to come. I think they're going to be a long-term beneficiary of global gross domestic product growth. So, yeah that is my idea; Autodesk, again, symbol ADSK.
Flippen: Well, Asit, it's such a pleasure to have you on to talk about Autodesk for this election-focused episode, because normally when I talk on Industry Focus, we're always talking about consumer goods companies. And it's great, I love talking about consumer goods, and I look forward to talking consumer goods with you for many Tuesdays to come in the future, but it's also great to hear you analyze a company that you wouldn't have otherwise had the opportunity to talk about on a Tuesday show. I, admittedly, don't know very much about Autodesk, but it's one that I do feel like I need to dig into deeper. What it reminds me of is actually a company called Procore, it's a recent IPO; I'm not sure, I have not looked at it for a number of months. But one of The Motley Fool interns we had this past Summer, virtual of course, looked at Procore as an IPO, and they were a competitor Autodesk, solely focused on the construction side of things, but it does seem like the platforms that are focusing on easing up an industry that is really built on a lot of legacy a pen-and-paper work is truly a great opportunity that, I agree with you, will likely do very well regardless of who's in the White House.
Sharma: Yeah. And I'm eager to learn more about Procore. I heard about it, and never really got the time to delve into its prospectus, but you're right, I think this industry itself has a pretty bright future, because things are going to grow. [laughs] Sometimes the world can seem so dour, but the economy keeps growing, companies keep innovating, and that's an opportunity for us as investors.
Flippen: Well, I just want to, Asit, say thank you for joining me today. And I also want to say thank you to our members for listening to this episode; it's a little bit of a weird one, it's hard to make a podcast on an Election Day talking about investing, while also not making it too political. I know that if you're tuning in, you are not here for, you know, Asit and Emily's hot takes on the political spectrum right now. And I hope that we have managed to address the very real issues that are posed to investors, based on this election while also keeping it fun, Foolish, and friendly.
But with that being said, Asit, thank you again.
Sharma: Thanks. This was a blast, Emily.
Flippen: Yeah, it was a blast, and I look forward to listening to you, you know, talk next week about whatever consumer goods topic we pull up then. [laughs] Hopefully nothing crazy happens.
Sharma: We'll see.
Flippen: Listeners, that does it for this episode of Industry Focus. If you have any questions, you can always reach out and shoot us an email at [email protected] or tweet at us @MFIndustryFocus.
As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear.
Thanks to Tim Sparks for his work behind the screen today. For Asit Sharma, I'm Emily Flippen, thanks for listening and Fool on!