What's Happening With Zoom and Lemonade?

In this episode of MarketFoolery, host Chris Hill is joined by Motley Fool analyst Jim Gillies to talk about why Zoom Video (ZM -0.61%) and Lemonade (LMND 1.59%) announced secondary stock offerings. Shake Shack (SHAK 0.86%) stock popped on preliminary good news about its quarterly results. Jim analyzes those stories and shares what he's watching in 2021.

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This video was recorded on January 12, 2021.

Chris Hill: It's Tuesday, January 12th. Welcome to MarketFoolery, I'm Chris Hill. Joining me from the great white north, where he needs some audio equipment that Amazon says they're going to deliver, but it's not here yet, Jim Gillies. Good to see you, my friend.

Jim Gillies: Good to be seen, Chris.

Hill: We've got some restaurant news we're going to get to. We've got a preview of 2021 through, let's call it, Gillies' colored glasses, but we're going to start with a pair of secondary stock offerings. Zoom Video is looking to raise $1.5 billion through a secondary stock offering and Lemonade announced a three million share secondary stock offering and yet, shares of both companies are up, so what does that say to you?

Gillies: I'd say there's a lot of money looking for a home, but that's not a particularly unique insight to me. We've been hearing that for a while, there's a lot of money sloshing around looking for a home. People want to be part of the next big thing that go-go grow stories, these have both been multi-bagger stories since they're fairly recent IPOs. I think Lemonade was in July, Zoom was last year, I believe. I think it's a tale of two different companies, mind you. I think Zoom, the $1.5 billion that they're looking to raise, the headlines I'm seeing is they're down +40% from their all-time high, why are you doing it now? I'm like, well, sure, my hindsight glasses work as well as yours do as well. But I'm not sure that's the correct way to look at this.

This is a company that's become a verb. I would argue, it's not only crucial for communication during these pandemic days, but it's wormed its way, and I make it sound pejorative, I don't mean it pejorative, it has found its way into myriad daily uses, not only podcasts like this, Chris. I mean, what is it going to do to the long-term business communications and long-term business travel markets? I will argue that it has changed ways in which people interact business-wise, the way people interact with family wise. For example, my parents are in their late '70s, lovely people, but they used to go to church every weekend, every Sunday. Now, that obviously during the pandemic has been closed down. That's OK. My parents go to church via Zoom now. Flash forward to the post-pandemic era, perhaps. Let's say on some Sunday morning, maybe one or both of them is feeling a little out of sorts, doesn't want to take all the preparations to go to church, they'll still just be able to tune into Zoom. I can't see churches backing away from broadcasting via Zoom because it's cheap. Myself, my kids, don't jump on Zoom to talk to far-flung friends. My one kid is taking extra math classes via Zoom. Here comes along Zoom, it's got itself into myriad daily applications. Sure, it's down 40% from its high, big deal. I think this is a company that can -- yes, it's richly valued, but I think this is one of the companies that will eventually grow its way into that valuation. It's richly valued, sell some stock. Why not, to further your aims and defend yourself? I mean, who is the competition? Slack? I doubt it, I don't like Slack video. I think we've used it, it's not great. Certainly not Skype. So, I think Zoom, you know what? Good for you. The best time to raise money is when you don't need it, and they don't need it.

Hill: One point of correction, they went public in the spring of 2019, and not last year. Although I know we're just less than two weeks into this year, so you're feeling [...]. For people who are still writing checks, they're probably still reflectively writing the year 2020 on the checks. It's a great point in terms of raising money when you don't need to. Certainly, in terms of competition, Microsoft Teams looms out there. I don't own shares of Zoom Video, but one of the things that we like to see as investors, particularly out of leadership, is how do they handle tough times? Tough times come in different shapes and sizes. Certainly, a tough time for Zoom Video was the security issues they faced last spring, when their growth skyrocketed in terms of daily users, and I think Eric Yuan and his team passed that test. I think you have to feel good about that if you're a Zoom Video shareholder. In terms of Lemonade, it's been a public company for less time. What do you think they're going to do with the money? Because this is, certainly in terms of track record for public companies, we don't have as much of a track record. But in the world of insurance, Lemonade seems like, if not the most interesting player, they're on the shortlist.

Gillies: Okay. I'm not sure how we can define interesting.

Hill: Well, let me frame it from this standpoint. You mentioned how Zoom is a verb.

Gillies: A verb, yes.

Hill: Historically, that tends to work out for companies that become ubiquitous and become a verb or a noun. Just ask the people at Google about that. Another way to look at companies is, well, how would their competition feel if all of a sudden they went away? The David Gardner snap test. If all of a sudden Zoom Video went away, that would be tough for a lot of people and a lot of businesses, but they wouldn't be lacking for other options. I don't think Lemonade, from a competitive landscape standpoint, is where Zoom Video is in its industry, but Lemonade strikes me as one of those companies that traditional insurers would love if Lemonade just disappeared.

Gillies: I'm going to suggest you probably know the company better than I do, because I do look at it as a traditional insurer, and I stop there, because you cannot look at this company through a traditional insurance company lens in terms of valuation and assessment analysis, because it falls apart. I said earlier regarding Zoom, the best time to raise money is when you don't need it. This is only a six-month old company, it IPOed in July of last year. On the most recent balance sheet, end of September, there were $22 million roughly in unrestricted cash on their balance sheet. As of that quarter, the first three quarters of the year, they burned through about $65 million or $70 million. At that burn rate, I don't know obviously what they did in Q4, no one does, but at that burn rate, things were going to get a little tight. Now, they could release some of the restricted cash or whatever. But to me, it looks a little tight. To me, it looks like they need this money. The proposed offering, three million, is going to raise about half of $1 billion, $550 million, probably more because there is an underwriter's overallotment option. At the end of this, they'll probably be north of $600 million, $625 million probably. But I look at this and go like, from my understanding, which is incomplete, I fully grant, from my understanding, these guys seem to be selling a variant of renter's insurance, which you can get from any number of other companies. They have some charitable efforts, which I'm a big fan of, but I think it's richly valued, they look like they need the money. The other thing is that, and I'm really not a fan of this, and this might just be a burr under my saddle and I will fully leave it at that, not only is the company selling three million shares, insiders of the company are selling another 1.5 million shares. The stock IPO'd six months ago. It's roughly four-baged off its bottom, low as $44, today it's around $187. The insiders are running off into the sunset. Again, that's not necessarily bad in and of itself. I don't really like to see it.

Hill: I'm sorry to interrupt, that's not unusual.

Gillies: It's not. You're right. That's not unusual, but here's the unusual part. The COO was on Twitter yesterday, the day they announced this aftermarket. He was on Twitter yesterday, basically railing on short sellers. I presume he had knowledge of the company doing an offering. He is not selling into those, I don't believe, I didn't check the filing briefly, but he had knowledge of a secondary. Short sellers, of course, are trying to drive -- or not trying to drive, but they think the share price will go down. The short sellers are diametrically opposed to the needs of the company, of course, want as high prices as possible as they sell their new shares into the market. It's not a good look, frankly, for management to rail on short sellers. All companies have short sellers, most companies ignore them. I would prefer management to ignore short sellers and just say, "You know what? I don't need to [...], we are just going to prove to you why you're wrong and why we deserve our lofty valuation, focus on the business. It's more than short sellers." The COO did retract his rant this morning, but I think that's a bad look and I think his Twitter account should probably be taken away from him.

Hill: Let's move on to the restaurant industry. Shares of Shake Shack up 6% this morning, the burger chain announced preliminary sales results for the fourth quarter at a virtual conference. Shake Shack's overall revenue grew in the fourth quarter, which comes after a few quarters of falling sales. I was surprised to see that over the past year this stock is up 60%, which tells me that Shake Shack, we can put them in the category of restaurant chains that have done a good job of pivoting to pick up and delivery. What do you see when you look at Shake Shack? Do you see an opportunity? Do you see a well-known brand with a valuation that maybe is too high? What do you see at Shake Shack?

Gillies: The latter. A well-known brand, I have been in New York, I had had their food a couple of times. Generally good, no complaints about the quality of the product. I think the valuation's a little rich, but that's not unique to Shake Shack nowadays. But can I say, I was really impressed by this press release, frankly. And the stock, clearly I'm not unique, the stock's up 6%, 7% in reaction. Average weekly sales are up, same store sales showed continued recovery. Sure, the full-year of revenue is down a little bit at 12%, 13%, but given the lockdown and anti-pandemic measures in New York, which is where most of their stores are concentrated, I think that's not unexpected. Their digital channel sales were almost 60% of the total sales for Q4.

You talked about pickup and delivery being run through digital. The company's own digital sales tripled in a year, and even more, they said, hey, we're going to open 35-40 stores this year, and we're going to open 45-50 stores -- I think it was -- next year. This is a company that is looking past the pandemic. They're giving you really specific goals and targets on which to gauge them. At the time, if other companies were just not giving guidance at all, these guys are standing up and going, "Here's what we're going to do, we're taking the future by the horns." Good for them. I really was impressed by what they communicated to the market this morning.

Hill: I'm glad you mentioned that, because that caught my attention too, just how specific they were being with their growth guidance. On the other side of the rich valuation, you mentioned New York City. You look at a map, and we're talking about a burger chain that has about 160, 170 locations in the United States and another 80 internationally. In the United States, the bulk of these are located in New York City. If you want to throw in the Mid-Atlantic region with Philly and DC, you can do that. But you're basically looking at a big chunk of New York City and a smaller chunk, but a sizable chunk in Southern California. You just think about what the pandemic has done to those two regions over the past 10 months, that to me is the flip side of the valuation. It's like, yeah, it's kind of a rich valuation. But when you look at where they've got their locations currently, and you think forward, let's call it six months, we get to summer time, maybe the fall if things start to open back up, if you're a shareholder, maybe you don't want to jinx yourself by getting too excited about what the same-store sales numbers could look like in the fall of 2021.

Gillies: I think they'll be good. [laughs] If I were a shareholder here, I'm not, but if I were, I certainly would not be selling this one. I mentioned earlier, I called Zoom a company that I think probably can grow into its valuations. You might have to hold your nose a little bit at the present valuation, but hey, it's 40% cheaper than it was a couple of months ago. Shake Shack is the same for me. I think this is a company that can absolutely grow into its valuation. It is still, as you say, something of a regional play. I think that there is a balance to be struck by continued growth within those regions, but you don't have to go with what I'll call kind of the full Coach, the luxury bag maker. Kind of diluted the value of their brand the same way they went into every discount mall you can find. I think Shake Shack, there's a reasonable little path between growth and expanding from the regional story to maybe a more national story or just a little larger regional story. Lord knows, we can always use more burger restaurants, frankly.

Hill: That was nice of you to include the word "kind of" with reference to Coach diluting their brand. You didn't have to do that, they 100% diluted their brand. Real quick before we wrap up, I am curious, since this is the first time you and I are talking in the new year, as an investor, what are you excited about this year? Whether it's a company or an industry, where do you find yourself, for lack of a better term, rubbing your hands together with glee, but not in an evil way? [laughs]

Gillies: I always rub my hands together but not in an evil way. It's a good question. I'm excited to see what a post pandemic world is. Maybe I'm a voice of one, but I'm over this pandemic, I'm done.

Hill: No, you're not a voice of one.

Gillies: [laughs] I'm eagerly looking forward to getting my shot in the arm, if my doctor's listening, I'll come in today if you want me to. I'm interested in seeing what the world looks like on the other side of pandemic, which I think we will get to this year. Clearly, Zoom is prepping to be a more integral part of our world post pandemic. Shake Shack, as I said, is giving you something to judge them by. I'm interested in seeing what the world looks like for the other restaurant chains, or franchisers, and the guys who have their own bricks-and-mortar, the Chipotles of the world, Chipotle has done OK. What do the airlines and the airline [...] look like? I'm even curious about the cruise ships, but just to see how fast people go back. We've seen during the pandemic the rush to embrace e-commerce, online, everything, moving increasingly, are we still going to be living in a socially distant world, or is that going to maintain itself post pandemic? I'm interested in general in seeing that. If the world is permanently on a higher plateau, we pull things forward for e-commerce and we're on a permanent higher plateau, then what do stocks like The Trade Desk or its smaller Canadian cousin, [...] do? What do they look like in this post-pandemic world? That's where I'm interested in seeing, OK great, I understand why everything is pulled forward during the pandemic, where we're all trapped in our houses, how much of that continues and how much of that can we successfully predict? To throw some names out, I think Square and PayPal are going to do just fine post pandemic. I think Amazon is going to do fine post pandemic. I'm curious what winners that have been pulled forward are going to stay winners. I think that's the big question for us now.

Hill: One last thing to go back to Shake Shack. In thinking about their guidance, do you think -- I'm not saying with the earning season that's about to start this month, but looking ahead three months, looking ahead to April, do you think when we get into April, assuming a steady increase of vaccinations, a steady increase of the world slowly opening backup again, do you think, in terms of corporate guidance, that in the April quarter we're going to start to see companies not just return to offering guidance, but essentially be punished for not offering guidance? Because you think back to last spring, every analyst in the world put up their hand and said, "Yes, of course, we totally understand why you're not offering guidance." I'm wondering if that's going to reverse.

Gillies: That's a good question. I have no good answer. We understand why no one is giving guidance right now, except for Shake Shack, fairly, which is great. You can get down the rabbit hole of should companies give guidance. Warren Buffett says, "Yeah, let's not give guidance, let analysts figure it out, and it will be at least more entertaining whenever they report results," and oh, they missed expectations. Well, they didn't set expectations. I kind of hope a few companies are going to stick with the issuing guidance model. I suspect they won't, because for the reasons that you talked about, they'll be expected to do. But I hope a few will say, "Yeah. We're good. We're just going to focus on our business and what the market does is what the market does." I know I live in a sunshine, rainbows, and unicorns world, I suppose, but that's what I'm hoping for.

Hill: Jim Gillies, always good talking to you. Thanks for being here.

Gillies: 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 some of the stocks discussed, so don't buy or sell based solely on what you hear. That's going to do it for this edition of MarketFoolery, this show is mixed by Dan Boyd. I'm Chris Hill, thanks for listening, we'll see you tomorrow.