Why Investors Are Loving Netflix

In this episode of Motley Fool Money, host Chris Hill is joined by Motley Fool senior analysts Jason Moser and Ron Gross. They discuss Netflix (NFLX -3.92%) hitting an all-time high on strong subscriber growth. Bank of America (BAC -0.13%), IBM (IBM 1.05%), Intuitive Surgical (ISRG -0.55%), and Procter & Gamble (PG 0.68%) slip on earnings. Intel (INTC 0.64%) stays flat despite surprising PC sales. Lumentum (LITE 0.12%) joins forces with fellow laser maker Coherent (COHR). Also, Google grounds its balloon initiative, and Fiat Chrysler and PSA Group complete their merger and take on a new name: Stellantis (STLA -0.40%). Plus, Professor Erin Meyer talks about her best-selling book, No Rules Rules: Netflix and the Culture of Reinvention.

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.

This video was recorded on January 22, 2021.

Chris Hill: We've got the latest headlines from Wall Street, best-selling author Erin Meyer is our guest. As always, we've got a couple of stocks on our radar, but we begin with another all-time high from Netflix. The streaming video giant added 8.5 million global subscribers in the fourth quarter, that is two million more than Wall Street was expecting. Shares of Netflix up 15% this week, Ron, and hitting a new high.

Ron Gross: Hello, Queen's Gambit, which I loved, by the way, I highly recommend that if you haven't seen it. Definitely exceeded expectations. But interestingly, that 8.5 million subscribers are in line with what we saw in the fourth quarter of 2018 and 2019. Which means things are probably returning more back to normal versus what we saw happen in the early stages of the pandemic where they saw a flood of new subscribers come in, because we all had really nothing to do but stream and watch TV. Management is tempering expectations. They said investors should expect just six million subscriber additions in the first quarter as it continues to adjust to that pull forward of subscribers earlier in 2020. I think I should note, there's nothing wrong with pull forward. Sometimes, when we discuss pull forward, we'd talk about it in terms of a negative. But getting money earlier than you expect to get money can be a wonderful thing, especially if you have a sticky business like Netflix, with high retention rates. Kudos to them for pulling in money quicker than they anticipated, obviously, for a tragic reason. But it did help their business. They passed the 200 million subscriber mark for the first time. This is really what I think investors are reacting to. Management said its free cash flow will be close to breakeven in 2021 and that will allow them to stop relying on debt to fuel its growth. They've got $8.2 billion in cash. They've got an untapped credit line. They will no longer need external financing and they're actually considering stock buybacks. Their investors are applauding that for sure.

Hill: I'm glad you mentioned that last part, because that's the question I have. I think it's great that they don't see the need to raise more capital. I think you're right, that's why the stock reacted the way that it did. They haven't bought back shares since 2011. If you're a shareholder, do you want them buying back shares at this valuation?

Gross: Well, I certainly wouldn't have wanted them to do it for the last nine or 10 years where reinvesting capital into this business to create content was essential as it will be going forward. I'm actually not convinced that they're not going to need external financing ever again. We'll keep an eye on it. Stocks have been lofty, heftily priced for quite some time. If they wanted to do selected buybacks, fine. But I, as a shareholder, would probably not want them to use capital that way. Keep your powder dry, invest in content, keep growing the business. It's really not necessary to institute stock buybacks at this point in time.

Hill: From entertainment to surgical robots, fourth quarter profits and revenue came in higher than expected for Intuitive Surgical. Shares falling just a little bit, Jason. It's not a cheap stock, it almost never has been. I'm assuming at least a little bit of this sell-off we saw had to do with the valuation.

Jason Moser: Well, let's be clear here, man. Surgical robots really sound pretty entertaining. Maybe there's a partnership there, I'm not sure. Intuitive Surgical is a phenomenal business. This is a wonderful business, first mover in its space. It's done really well through this current situation. I think that while it's still primarily a U.S. centric business, we certainly are seeing the benefits of its global reach. The fourth quarter revenue for 2020 was $1.33 billion. That was up 4% from a year ago. Non-GAAP earnings up incrementally. This fits in with that Jamie Dimon fortress principles. They have a fortress balance sheet with just under $7 billion in cash and short-term investments. With Intuitive Surgical, it boils down to getting those da Vinci robots into hospitals and then selling the instruments that go along with it.

We look at things like procedures, fourth quarter procedures were up 6% worldwide versus the fourth quarter a year ago. They did place 326 more systems. Now, that was down a little bit from a year ago, but they grew overall the da Vinci System placement to just under 6,000 systems now placed. They are seeing impacts from COVID. It's been very regional. What they noted in the call is that it is not the same everywhere in regard to the system placement going forward and perhaps some of the trepidation in the market today is based on this. They saw a lot of budget exhaustion toward the end of the year, money being spent to exhaust those budgets. But the budget setting for 2021 is a bit more nebulous, the hospitals were just not quite sure exactly how to allocate all that money. There may be a little bit of holding off toward the back half of the year.

Another interesting thing they did note, the average selling price for these robots was down slightly. Part of that was due to a lower mix of systems in places like China and Japan. This is really interesting. They've introduced these extended used instruments, which are really great for customers. It's going to play out on the company's financials a little bit negatively, but ultimately, it is the right thing to do for customers. It is going to make doing business with Intuitive Surgical a little bit easier. It's going to extend those relationships. I think it's good long-term thinking for this business, and we'll remain to really like this company for the long haul. They continue to innovate and do tremendous things in the space.

Gross: It's interesting, it's almost opposite of the pull forward we were talking about with Netflix, where folks not only delayed purchasing the da Vinci system during COVID, but many people delayed elective procedures that the da Vinci would typically take care of. We could actually see a spike, I think, in those delayed or postponed purchases and procedures once we truly get to the other side of the vaccine. It'll be interesting to watch.

Moser: I think that's very fair to say.

Hill: IBM's fourth quarter revenue fell more than Wall Street was expecting. In retaliation, Wall Street sold off the stock, shares of big blue falling 10% on Friday. You tell me, Ron, how bad is it?

Gross: Revenue clearly disappointed. Earnings in and of themselves weren't so bad. But I think people were really disappointed in what they saw. With sales being down 6.5% overall, that's the fourth straight quarter of declines. All main segments were weak. Software, which is their biggest segment, was down 4.5%. But within that segment, the cloud and data platform division grew 9%. That was led by Red Hat, which you recall that they acquired back in 2018 for $34 billion. Red Hat was actually up 19%. There was some interesting growth there. Global Tech was down 5%, Global Services down 3%, their systems business down 8%. Red Hat, the only bright shining spot here. That's exactly the reason that they're spinning off the managed infrastructure services units so they can focus on cloud. But there's a lot of competition in this space. Perhaps you've heard of Microsoft and Amazon, a couple little companies that dominate there. Perhaps they can differentiate themselves. They're using what they call a hybrid model, which is a combination of on-premises storage and cloud storage. I'm not sure that actually gets it done, but we are seeing growth in Red Hat, growth is growth. If they can continue that, then perhaps they can be an unlocking of value as a result of the spin-off.

Hill: Shares of Bank of America falling a bit this week despite fourth quarter profits coming in higher than expected. Jason, we talked recently about JPMorgan Chase led by Jamie Dimon. You and I were talking earlier this week, it sounds like you think that maybe B of A and Brian Moynihan are not quite in that class, but maybe a close second.

Moser: Yeah. Maybe that's just due to time spent. Jamie Dimon has certainly been in his position with JPMorgan a little bit longer than Mr. Moynihan has with Bank of America. But he's in that same class I think. It shows. It's a bit of a trick to really square these results up in the release, because they referred to one of the worst economic environments in modern memory and yet they finished up the year stronger than before the health crisis. I think that's just fascinating to think about. But we've seen similar trends with Bank of America that other banks have reported, deposits were up 23%, loans down 2%. They did grow deposits by $361 billion. Given the stimulus and what they referred to as the velocity of money, or essentially the rate at which money is exchanged here in the economy, they feel very good about the deposits that they have. It puts them in a good position going forward. They're able to continue returning capital for shareholders. Around $4.8 billion slated between buybacks and dividends in the coming quarter. Again, one of the big stories for these banks recently has been reserved releases. They were putting a lot of money aside in case of loans that were written off. They were able to release $828 million in reserves here over the quarter which certainly benefited the bottom line along with expenses declining around $474 million from the previous quarter.

You couple that with a very strong wealth management business record, client balances of more than $3.3 trillion, up 10%. They are really doing a lot of great things. Just a couple of quick notes here on the digital front too, they now have 39.3 million active digital banking users, that's up 3%, 30.8 million active mobile banking users, that was up 6% in Zelle. We talk a lot about PayPal and Square, but Zelle, 12.9 million active users sent and received 157 million transfers worth $43 billion. Chris, that was up 65% and 79% respectively. Hey, they're getting it done in all sorts of ways here at Bank of America. Good quarter.

Hill: Intel's fourth-quarter report was helped by stronger sales of personal computers than expected. But shares of Intel flat over the past week, Ron, didn't really boost the stock.

Gross: Yeah, results not great. They did beat relatively low expectations and they did increase guidance and they did increase the dividend by 5%. They're making some moves here to try to appeal to investors. But investors are not impressed. Revenue down 1%, Datacenter Group down 16%. But as you mentioned, the PC-based client computing group was the highlight, up 9%. That's by far the biggest segment of this company. Interestingly, they did put up some growth there, but their operating margins narrowed, their earnings fell, but they were significantly higher than expected. But as we talk about, it's always an expectations game here. So although earnings were down, they did beat. As far as the stock selling off, I think the main thing that's going on here is that incoming CEO Pat Gelsinger just said Intel would focus on regaining the company's lead in chip manufacturing. He said, "I'm confident the majority of our 2023 products will be manufactured internally." Investors did not want to hear that. In fact, some have been calling for that business to be spun off or sold. That was not welcome news for the investor base and I think the stock sells off as a result.

Hill: We've got a deal in the laser industry. Lumentum is buying Coherent in a cash and stock deal worth $5.7 billion. Shares of Coherent rose 35% while shares of Lumentum fell in the wake of this deal. Jason, Wall Street thinks Lumentum paid too much, but I get the sense that you don't.

Moser: Well, I mean, [laughs] they probably paid a little bit more than they had to, but I do think we are seeing a lot of consolidation in the space these days with these lofty valuations that begets those high prices. I'll get to that in a second. But in regard to the actual deal, I mean, as you mentioned, this is about Lumentum getting Coherent's laser business, and Lumentum is the market leader in what we call vertical cavity surface emitting lasers, VCSEL. That's really an important part of the entire 3D sensing market, and as these devices move toward more sensing and whatnot. But they have a small part of their business which is focused on lasers. This is going to give them a much bigger part of their business that focuses on lasers.

Coherent's photonics and laser business focuses on microelectronics, precision manufacturing, aerospace, defense markets. It is a big deal, $5.7 billion in cash and stock. That values Coherent at around 57X EV to EBITDA. Now, that's reflective though of less than normal results given the current state of affairs. For Coherent, this is a business with 75% of sales done outside of the U.S. I think that Lumentum, it's an interesting situation there. They make about 26% of their money from Apple, at least as recorded in 2020. That relationship is going to continue. So, it diversifies away from that relationship a little bit, which is nice. But back to the valuations, when we look at the consolidation in the space here recently, Nvidia acquiring Arm, AMD acquiring Xilinx, Marvell acquiring Inphi, now Lumentum acquiring Coherent. The interesting commonality in all four of those deals, stock and cash deals, these companies are using their stock prices, their lofty prices, as a form of cheap currency. I like that in this case, it expands the balance sheet. It lets them be a little bit more bold on those offers. In the long run, this is a complimentary deal. It should work out well.

Hill: Shares of Procter & Gamble down a bit this week, despite the fact that second-quarter revenue grew 8%. Ron, help me out, P&G makes products for the home, everybody needs them. They do have some pricing power. I'm a little surprised this stock hasn't done better over the past 12 months.

Gross: Yeah, strong quarter, they did increase guidance. Now, it's not a high-growth business, so you can't pay up too much for this company. Even when you do see a nice run, it'll tend to pull back if the growth just doesn't present itself, that sales up 8%, that's a good number. It was led by homecare, which is up 12%, and healthcare up 9%. As typically, we're all home stuck still because of the pandemic. The rest of the segments did well too, 5% or 6% growth in each of them. Again, not stellar numbers, not technology numbers, but solid margins. Their core EPS, is what they call their adjusted EPS number, which adjusts for some things, up 15%. So all was good. Earlier this month, interestingly, the FTC put a stop to P&G acquiring a women's razor maker named Billie, and that's for competition purposes. P&G already owns Gillette, Venus Braun, an interesting thing to note there. But they're going to be buying back stock, they're continuing to return lots of money in dividends. Their dividend aristocrats yield is at 2.4%. It's a wonderful company. It's just not a gangbuster growth company.

Hill: Guys, we've talked before about Alphabet's, Other Bets division. This week, Google's parent company cashed in their chips on one of those bets. Loon, the company that provides Internet service via hot air balloons is being shut down. The company said in a statement, "The road to commercial viability has proven much longer and riskier than hoped for." Jason, [laughs] if the folks at Google can't make this work, I don't think anyone else should even try at this point.

Moser: Probably not. I think this is honestly what makes the other bets segment and their moonshot so darn interesting and compelling though. They know that most of these ideas aren't going to work out in their original form. But the lessons gleaned, the ideas that are born from these ideas can be compelling. If you look at the other bets, let's look at the other bets segment, just big picture, in 2019, brought in $659 million in revenue. That was actually up 11% from the previous year, but the operating loss was $4.8 billion. This is not a part of the business geared toward immediate profitability. I guess one could argue, maybe it's not even geared toward long-term profitability, but we'll see. This Loon concept is interesting, they launched it back in 2013, it seems like a lifetime ago and certainly things have changed. But it did open up some iteration. Though in the new project they're working on now called Project Taara, which is trying to bring connectivity to underserved places via optical communications, they are essentially beams of light. They got this optical communications data, these lessons from this Loon project.

Hill: Netflix is becoming known not just for great entertainment, but for great corporate culture as well. Erin Meyer is a Professor of Organizational Behavior at Insead, one of the largest graduate business schools in the world. Last year, she and Reed Hastings, co-authored The New York Times best-selling book, No Rules Rules: Netflix and the Culture of Reinvention. Recently, she talked with Motley Fool tech analyst, Tim Beyers, about several key topics in the book, including feedback. In the workplace, a lot of us don't enjoy giving feedback. It has to do with a section of the brain called the amygdala. Professor Meyer explains.

[...]

Erin Meyer: The amygdala is very focused on making sure that you don't get kicked out of the tribe. Because of course, our humanness makes us look for safety in numbers. When you give someone feedback or if I receive feedback, my natural reaction, like you tell me you don't like, maybe you say, "Oh, my gosh, Erin, your answers were way too long [laughs] on our interview." Then my amygdala starts sending off a siren, saying, "Oh my gosh, Tim is going to kick me out of the group," my response is then either fight or flight, either I defend myself, "It's not true Tim, my answers were very concise." [laughs] or I flee, "I'll never talk to that guy again." [laughs] We all know that, we all know that if we give honest feedback that there's always that fight or flight reaction that may kick in to the person that we're getting feedback to. We also all know that if we give honest feedback, that it ups the performance of those around us. One piece of the study showed that 72% of employees across the U.S. wished they got more feedback and feel that they would do a better job if they got more feedback. The question I think is then, if we're bought into that and we're hoping to create an environment of feedback, what can we do in order to actually make it happen? I saw a couple of very interesting mechanisms at Netflix. The first one is very simple, which is that at Netflix, feedback is often on the agenda. [laughs]. If you have --

Tim Beyers: First thing on the agenda, right?

Meyer: First or the last, either it's first or last.

Beyers: First or last, got it.

Meyer: If you and I meet monthly, Tim, that doesn't mean that I'm your boss or you're my boss, maybe we're just colleagues. But if we meet monthly, then likely, we put feedback on the agenda ahead of time, and when we get to that, I know you're going to tell me something that I can do to up my performance, and I'm going to tell you something you could do to up your performance. [laughs] There's also just feedback meetings that are often randomly on the agenda. That's a very important mechanism, because most of us will choose not to give feedback, unless the right moment arises. But when it's on the agenda, suddenly, I'm like, "Okay, well this is that opportunity." The other thing they do, which I have to say I just thought was absolutely crazy, when I first heard it, [laughs] I was like, "Oh my gosh, why would you do that?" [laughs] They do these 360 feedback jitters.

Beyers: It's just amazing. Let's talk about this, because this is bananas. It's completely bananas. I love this. Let's get into this.

Meyer: Let me say, there's no rules and process at Netflix, basically. That doesn't mean that you have to do it. It's not a rule. But most managers, maybe on annual basis or so, set up a 360 feedback dinner, where they go out with their team for several hours, usually in the evening over a meal, and during that meal, like I'm up first, so we go around the table and each person at the table tells me what they feel I should do differently. [laughs] Then we move on to the next person. I guess, when I heard that I thought, "What's the point? Why do you have to drag my weaknesses out in front of everybody?" [laughs]

Beyers: It feels like a firing squad.

Meyer: "Could you tell me in a quiet corner?"[laughs] I actually came to see that this is a very interesting mechanism and I actually started doing it even with my own teams at Insead. Because when one person gives you feedback, you never know, is it about that person or is it about me? But when you're together as a group like that and you all know you've come together with the one goal of helping the others succeed. That's my only goal, to help you to be more successful. Then we go around and we start with you, Tim, and you say, "Well, Erin, I think your answers are way too long, please be more concise." [laughs]. Then we move to the next person, and Sally says, "You know what? I totally disagree with Tim. I love your answers and I wish you'd talk more." [laughs] We learn as we go around, what feedback is just about some individual, and then what is a feedback that everybody on the team thinks I need to be doing differently. I actually found people who said that that was the greatest developmental moment of their lives, having those feedback dinners. It's crazy, but maybe even some of our listeners will try it out.

Beyers: It's really interesting. I just want to double down on what you just said there, that when you have feedback like that in a group, the themes start to emerge and you don't get that unless you have the courage to do something like that. Something else I wanted to highlight, maybe get you to talk about a bit and then we're going to pivot to some other portions of the book here before we have some questions, it has to be that the person at the top has to be courageous enough to accept the feedback. There are plenty of stories that you highlight in the book, where Reed, actually, gets feedback and he's not just accepting of it, he's grateful for it. There's one in particular, I want you to highlight, where he was very dismissive in a meeting and he got called out on it.

Meyer: That's right. This is actually, I think, probably the most important thing for any leader who wants to create a culture of candor. Don't start by focusing on getting your managers to give feedback to their employees. Focus on getting people to get feedback to you and to your managers. Because once the feedback goes up, then the rest is easy. Of course, the upward feedback is the most important. I mean, if a lower level person has a blind spot, it's likely the manager or someone else is going to tell them. But when you get to the top of the organization, there is no one telling that person anymore, about those various blind spots, if they have. So, Reed solicits feedback frequently. When he receives that, he acts gleeful. [laughs] He really celebrates that. I think every time I met with him, he was showing me an email of some courageous individual in the company who dared to tell him something that he should be doing differently. All managers at Netflix, from my perspective, seem to share their 360s openly with their employees, especially what they need to work on, so that employees can see this isn't something to be ashamed of. We all have things that we're working on, and if we are courageous to give that feedback, that'll be really appreciative. The story that you're talking about, there's many stories like that.

Beyers: There are, yeah.

Meyer: But Reed had one employee who was, I think, five levels below him, who felt that he was being dismissive and sarcastic with the head of human resources Patty McCord at the time in a meeting, and she went home that evening. She remembered what you said earlier, Tim, "At Netflix, it's disloyal to not get to have feedback that you could give to somebody that could help them or help the organization and to choose not to give it." She sat down and she wrote an email to this CEO, saying, "Dear Reed, I hope you don't mind, but I had some feedback for you and I know you're really trying to encourage people at lower levels to speak up. But the way you spoke to Patty today, that made me feel like I don't think I want to speak up in future meetings." Then he immediately sent an email back, "Thank you so much for your courage," then talked about it to a lot of people. As managers, we really need to start there.

Beyers: Modeling that behavior is really important. Let's pivot quickly to transparency, because one of the other values you talked about in the book is essentially opening the books, and being really transparent with people. The themes are -- we're pulling this together here. So you have talent density, really amazing people. To keep them amazing, you have to have a culture of candor. You have to demonstrate, it seems to me, as we're talking about opening the books, there's this feeling that from Reed on down, you have to demonstrate trust with employees consistently. Is that fair to say? Talk a little bit about the principle of opening the books at Netflix.

Meyer: I love this. This is actually, I think, my favorite learning from all of the research that I've done, because I've never met a manager who didn't say that he believed in organizational transparency. [laughs] I mean, everyone thinks that's a no-brainer, but I couldn't tell you if you really mean it, it's not a no-brainer. A lot of things that Reed is doing at his organization just speak volumes to that. For example, Netflix is the only company that I'm aware of that is publicly traded on the stock exchange where they tell their employees before the financial data is released what their financial data is.

Hill: What their earnings are going to be. Right.

Meyer: That's considered, of course, reckless, most companies to do something like that. But Reed feels that anyone who works at the company should feel like, "That's my company, so I know before others know." He did all sorts of crazy things. I told that story in the book about how [laughs] early on, Reed and I were working on a chapter and I wrote like, a draft, I sent it to him for feedback and then next week, I was in Amsterdam interviewing one of the Netflix employees and he said, "Oh, that point you made in that chapter." I was like, "What?" He sounded puzzled and he said, "Oh yeah, Reed sent that chapter out to all [laughs] of us."

Hill: Yeah, all 700 managers. [laughs]

Meyer: I said, "To all employees?" He said, "No, no, just to the top 700 managers." [laughs] But that's the kind of thing that he does, he just makes these like knee-jerk symbols of, "I'm an open book. I just open up and I show you everything that we have going on here," and then employees feel flooded with these feelings of, "Wow, my manager, my boss, my company, they trust me. That leads me to really try to behave as responsibly as possible." So, that's transparency leading to responsibility.

[...]

Hill: Guys, last year, Fiat Chrysler announced it was merging with PSA Group, the parent company of Peugeot. This week, the combined automaker got a new ticker symbol to go with the new company name, Stellantis. [laughs] The company says the word Stellantis is derived from the Latin term meaning "to brighten with stars." It started trading this week under the ticker symbol as STLA. Jason Moser, ask your doctor if Stellantis is [laughs] right for you. This is a business that has iconic brands under the umbrella of the parent company, Fiat, Maserati, Alfa Romeo, Jeep. Why are they going with something like [laughs] Stellantis?

Moser: Latin is a root for so many beautiful languages. Sometimes, you really just got to [laughs] know when to pivot and go the other direction.

Gross: I just want to be one time in the room where the advertising company is pitching the names and they're like, "We got three choices [laughs] for you guys. [laughs] I just want to see how that meeting goes.

Hill: Again, they should have just stuck with some version of Fiat Chrysler, PSA. [laughs] But anyway, our email address is [email protected]. Got a question from Ronald in Arizona. He writes, "I'm 40 years old with probably 30+ years until retirement. I'm in the growth part of my investing life, but with millions of other people retiring or planning to retire soon, would using part of my portfolio to invest in strong dividend-paying companies be smart? I assume that as the retired and soon to be retired people start moving their money into these safer investments, that would cause more demand for the stocks. Am I thinking too much or not enough?" [laughs] I love the way [laughs] he framed it at the end there, Ron.

Gross: I wouldn't buy these companies based on the thesis that future retirees are going to bid these stock prices up, which actually may occur, but I don't like to think about that. Again, I like to think of individual companies that you're happy to own for the long term. For a 30 year time horizon, investors owning some dividend stocks and growth stocks, the combination of both is fine. Don't just focus on the yield, though. Remember, it's always about total return. How much in appreciation plus yield is a company going to give you? I think a bias toward growth for a 30-year time horizon probably makes sense, as long as you can handle the relative risk associated with growth. Too many dividend stocks might be a little conservative for someone with that time horizon.

Hill: Would it be a bad idea to start with a list of dividend aristocrats and go from there?

Gross: It would not. Those are typically wonderful companies with 25-year track records of increasing dividends and it's a great pond to fish in.

Hill: Let's get to the stocks on our radar, our man behind the glass, Dan Boyd, is going to hit you with a question. Jason Moser, you're up first. What are you looking at this week?

Moser: Well, Chris, you know I spend much of my time on the road toward Flavortown. [laughs] Shout out, Guy Fieri, Triple D Nation. Listen, next week, McCormick earnings will be -- ticker MKC. I really just want to get an update on what they see coming up here for 2021 and we look back to the last quarter, they reported third-quarter. There's a passage on call that really summed it up, the significant shift to consumers eating more at home. They feel that shift is persisting long enough that it's become a habit, that's great from McCormick shareholders. There have been some slight weakness and flavor solutions to be expected with restaurants in their current state. They are making some investments and capacity. This year, we should see margins in the fourth quarter a little bit crimped because of that. But I also want to make note that that quarter ago, they said they were open for business in the acquisition department. Lo and behold, they have acquired Cholula, Chris, one of our favorite hot sauces out there, $800 million all-cash deal valued the company around 25 times adjusted EBITDA. I'll be interested to see how enthusiastic they are for bringing that brand into their portfolio.

Hill: Dan Boyd, question about McCormick?

Dan Boyd: Not this time, Chris, more of a comment. [laughs] It's the least spicy take in The Motley Fool universe when Jason Moser is getting hyped about McCormick stock.

Hill: But you're someone who likes his food spicy, aren't you, Dan?

Boyd: Absolutely. Listen, I'm all for flavor in spice. I just wish Jason would pick a new favorite stock. [laughs]

Hill: Ron Gross, what are you looking at this week?

Gross: How about Schrodinger, SDGR, or Schrodinger? I actually have never heard of this company until recently, until I started to dig in a bit. They developed a software that speeds up the drug discovery process. They collaborate with other pharmaceutical companies to bring new drugs to market, they've got five compounds in development right now. They went public back in early 2020 at $17 per share, stock now is at $94, so they've had a nice little run so far. Growing fast, great margins, not profitable yet but they're getting close. I want to understand that a little more. Co-founders are still involved, big shareholders, Bill and Melinda Gates Foundation, DE Shaw, a company called Deerfield Management. It seems really, really interesting to me, so I've got to do much more work on this, but I'm going to dig in.

Hill: Dan, question about Schrodinger?

Boyd: Absolutely, Chris. Ron, if you don't get a quote for Schrodinger's stock price, does it go up or down? [laughs]

Gross: I'm not even sure I understand the question. Is that like a tree falls in a forest, do you hear it or not?

Boyd: You know, I was worried that a Schrodinger joke might be [laughs] a little too high ref for you. I guess I was right.

Gross: I'm sorry, your Schrodinger's cat is what you're referring to, [laughs] the fun experiment. Yes. Named after the Austrian physicist who was born in the 1800s. Perhaps, that's what you're talking about.

Boyd: [laughs] Somebody's got the Wikipedia article open [laughs] right now.

Hill: Dan, two very different businesses. What would you like to add to your watch list?

Boyd: I'm going to go with McCormick here. I know I'm giving Jason some flack for it being his favorite stock, but it is a very good company with great products.

Moser: Love it.

Hill: I just want to remind the dozens of listeners that we call these stocks on our radar for a reason and I think Ron [laughs] illuminated that wonderfully when he led with, [MUSIC] "I never heard of this company until two weeks ago." Again, these are radar stocks.

Gross: Two weeks would be generous.

Hill: Jason Moser, Ron Gross, guys, thanks for being here.

Gross: Thanks, Chris.

Moser: Thank you.

Hill: That's going to do it for this week's edition of Motley Fool Money. The show is mixed by Dan Boyd. Our Producer is Mac Greer. I'm Chris Hill. Thanks for listening, we'll see you next week.