Virgin Galactic's (NYSE:SPCE) successful test flight sends the stock up 15%. Phil Mickelson's historic PGA Championship win gives shares of Callaway Golf (NYSE:ELY) a boost. In this episode of MarketFoolery, Motley Fool analyst Jason Moser analyzes those stories and checks in on Autodesk (NASDAQ:ADSK).
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This video was recorded on May 24, 2021.
Chris Hill: It's Monday, May 24th. Welcome to MarketFoolery. I'm Chris Hill, with me today, Jason Moser. Good to see you.
Jason Moser: Howdy, good to see you.
Hill: We've got the business of sports, we've got an earnings preview, but for the second episode in a row, we're going to talk about Virgin Galactic. That's because shares of Virgin Galactic are up 15% today after the space company's test flight on Saturday went about as well as it could have. This is their first flight in more than two years and I think if you're obviously a shareholder or just someone rooting for advancements when it comes to space, you've got to be pleased with what happened.
Moser: Yeah. I'm definitely one of those people who is rooting for those advancements. I'm not a shareholder, at least not now. Definitely a company like Virgin Galactic piques my interest though. I do like to think about that kind of stuff. For me, it was really neat to follow over the weekend. There was a lot of good content on Twitter. It was really encouraging from a number of angles. But I do feel like if there is ever an idea that embodies the notion that investing is a forward-looking exercise, I think Virgin Galactic has got to be on the shortlist. This is a company that generates no revenue.
It's funny, I was looking through the most recent earnings call and it's very simple in that they are like hey, here are our financial results. We didn't make any money, therefore we lost a lot of money, but here's what we're doing. [laughs] You have to take this one I think with a little bit more of a leap of faith than others and I think it's also trying to figure out what they do beyond just space tourism. Because that's a neat opportunity, but when you put the numbers together, they've, I think, got about 600 reservations today for tickets for future flights. Those were sold at around $225,000 each. If you do the math there, you've got about $135 million in revenue from those sales. Now, that's not really all that attractive. Those are just one-off ticket sales so you want to try to figure out what more this company does? I think that's the fun part when it comes to thinking about a company like Virgin Galactic. In their calls, in their decks they have three markets that they intend to serve with this suborbital space flight system and they are looking to serve private astronauts, microgravity research, and suborbital training for professional astronauts. There are various ways that they're looking to try to utilize this technology. That to me is probably the more exciting part of the longer term implications of businesses like this. It's the stuff that they're going to be able to do with all of this technology and all of this capability. But clearly, very, very early days and excellent news over the weekend for sure.
Hill: When you look at the stock, as you said, it is a pre-revenue company. This is one of my favorite new euphemisms in the world of investing over the last few years. We're pre-revenue.
Hill: It's like pre-owned cars. But you look at the stock, it's up nearly 50% in the past week. I guess my question is, what should someone's expectation be? If they are looking at this and saying, "Hey, I'm rooting for this company." Which is always a great position to be in as an investor. I'm rooting for this endeavor. You can't go back in time and buy at 50% ago, but what should the expectation be for an investor looking at a business like this?
Moser: I think the expectation first and foremost needs to be an expectation of volatility. You have to know going into an investment like this, that it's going to be one that is very headline driven, very emotional for a lot of people. When you don't have revenue to go on, then you start going on other things. You start going on goals, missions, aspirations, optionality perhaps, and I think that's going to be a key for a business like this. Because right now, think in the near-term at least, and by the near term I'm talking about at least over the course of the next decade, space travel is going to be like a Robin Leach Lifestyles of the Rich and Famous luxury. I'm going to space and I don't know why. That's what people are going to be saying. It's just for rich people [laughs]. Maybe a decade out, maybe it starts to come to a larger audience, and that's great. There's the expanding market opportunity from that perspective but then it's really, what are they doing beyond just the actual space? What are they able to do with all of this capability? That's going to be a long way away.
With that in mind, you have to remember, even when this is beyond pre-revenue, it's not going to be the most attractive revenue model, at least in the near term. It will be headline-driven, like today, it will be emotionally driven. But if you're a space enthusiast, and I consider myself a space enthusiast, I do. This is the type of company where if or when I own shares, you only need to own just a little bit. This is one where you own a small little piece of it and you tuck it away and you check back maybe a decade [laughs] later. Hopefully, it's still there. It should be. I think it will be. It looks like it has very capable leadership and they've made a lot of progress. But it's not one that you want to sit there and monitor. It's one that's going to take a long time to play out, and it's one that is going to be very high up on the risk scale. Just a little bit is all you really need.
Hill: On Motley Fool Money last week, Andy Cross's radar stock was Autodesk. This is the software company that does 3D design engineering. One of the things Andy talked about that he loves about this business is their high recurring revenue. They're going to report on Thursday after the closing bell and I know this is a business that you have on your radar as well. What are a couple of things that you are going to be watching?
Moser: Yeah, this has been a real fun one. Autodesk is a 3D design engineering, entertainment software company. A computer aided design CAD software, they're really well known for, and as you mentioned, a very strong recurring revenue. Subscription revenue now accounts for 91% of total revenue, you just got to love that. They made that transition just recently really. That was where they had to take a little near term pain for some longer term gain. This is a business that I think I can let the cat out of the bag now. I recommended it two years ago in our augmented reality service and I own shares myself as well. That move over to the SaaS business model while it played out in the near-term as a little bit of a headwind, it's really worked out well for the company.
The stock over the course of the last three years has better than doubled and it obviously outperformed the market. I think for me, you continue to watch that subscription revenue, the net revenue retention rate that they report, that's a metric that remains in that 100%-110% range, and that's always something worth watching as well. There are a couple of things that took place on last quarter's call that I'd like to just see some updates here. One, management has been exploring a consumption-based facet to the business model. It reminded me of the conversations we had in regard to Fastly and Cloudflare, for example. I've always held the consumption-based business model against Fastly. Being that in certain cases it wasn't optimal for the business. Cloudflare has a consumption-based offering, but it's a very small chunk of overall revenue. I think something like 5%. They really do well with that subscription-based model and contractual offerings. I think that when you introduce a consumption-based dynamic of the business model, becoming a little bit more for your customers is always a good thing. I'll be interested to see how that's progressing, if it's progressing.
Then they also made an acquisition of a little company called Innovyze recently. That's a water infrastructure software company, so ultimately helping water infrastructure simulation and modeling, which then goes back to that engineering customer demographic for the business, serving a lot of very important customers in that regard. It sounds like management believes that the back half of this year is going to start to really accelerate the enterprise business agreements that were signed in the fourth quarter of this most recent reported quarter, those were equal to the number signed in the entirety of the previous years. They've seen some acceleration business coming back with guidance for the full year. They set last quarter at $4.93 at the midpoint. That puts shares today around 60 times full-year estimates. I mean we're not getting anything this cheap these days. But I will say at least with Autodesk, it's a nicely profitable, well-established, very strong business leader in its space. It's a little bit pricey, but you know the old saying, you get what you pay for. I think in this case we should know you're getting something really good.
Hill: Yeah. I think it's probably a testament to the business model, the management, everything you talked about. We've seen a bunch of software companies really pull back in the first half of this year. Autodesk is basically flat year-to-date. It might be down 2%, 3%, something like that, but it really hasn't been slammed the way some of the others have.
Moser: Yeah. I think it's partly a testament to how established the business is. It's been around for a while. It's really viewed as a high-quality solution by a lot of its customers anecdotally. People even reach out to me on Twitter sometimes just saying, hey, our company is Autodesk and it's just great. There is a switching cost involved there that grows over time, which is nice. Even with a business like this, they are pegging top-line revenue growth. They are pegging the top-line growth for the year at around 14%. The model is so profitable now, thanks to that transition to the SaaS model. I think that's part of the reason why the market's willing to pay up for it. It's a very high-quality business.
Hill: The big story over the weekend in the world of sports is that Phil Mickelson won the PGA Championship, and the reason this is the big story in the world of sports is because Phil Mickelson is old for his sport. I want to make it very clear, he's not old, and I say that because he's younger than I am. But he's 50, he turns 51 next month and for the [...] of golf, that's old. Even someone like me who's not particularly a golf fan, I was keeping tabs on it Saturday and Sunday. The way this ties into investing is he's a Callaway Golf guy and shares of Callaway Golf were up nearly 4% this morning.
Moser: Do you know who else is a Callaway Golf guy, Chris? Listen, I think I said last time we talked about Callaway, I play those Callaway irons as well.
Hill: The difference is Callaway is not paying you to do it, they're paying Phil.
Moser: A lifetime ago, Maxfli did pay for me to play at their club.
Hill: There we go.
Moser: I at least had my moment in the sun, I guess. [laughs] For Phil, another moment in the sun for him. That was a tremendous week. Having grown up in South Carolina, having been down to Kiawah, I'd played so much golf down there. To be able to watch that all play out on TV was really fun. I like Phil. I think he's very good at the game. I've enjoyed following his career and to watch what he did. I always felt like it was just a matter of time for someone that age. Age is but a number and if you take care of yourself then good things certainly can happen even as you get older. But you're right, close to 51, even when you have the physical ability to still knock around the golf course like that, your nerves get afraid a little bit more easily.
There's an emotional dynamic of playing golf that I think a lot of people don't quite fully recognize. It is a very mental game in a lot of ways. It's just really cool to see him be able to handle it like that. With Callaway, I think this is going to be one of those things that will play out very well for them over the coming quarters, perhaps even longer. I think of a few things on the horizon just to think about. First and foremost, the U.S. Open, which is next month at Torrey Pines. Mickelson with this win, he gets automatic exemption in the next five U.S. Opens. He's going into this U.S. Open at Torrey Pines where he grew up, and that's the one major he's missing. He wants this probably worse than anything in the world, and he's going in there feeling really good about things. It'll be neat to watch how the U.S. Open unfolds next month.
There was a tweet I saw earlier from Chris Collinsworth that I thought just really encapsulated it. He said, "Millions of guys over 50 will be on the driving range tomorrow. See you there." I think he is right. I think that what we've seen clearly when we talked about Callaway's earnings results just a few weeks back, the company has done really really well through the phase of this pandemic. People just get outside and play some golf. When you look at Golf Datatech, the U.S. retail sales of golf equipment, hard goods, were up 49% compared to 2019, 72% compared to 2020. You're seeing the trends headed in the right direction. When you have a player like Mickelson, a lot of people love the guy. He just generates a lot of interest in the game and Callaway certainly, I think we'll continue to benefit from this. Then you add to that also the top golf angle. It's going to bring people out there who maybe don't ever want to step foot on a golf course, but they're going to have a good time going out there and hitting golf balls at a top golf course for example. There are a few different ways that Callaway can win now. Having someone like Phil on staff, that's a really big win, not only for Mickelson, but really for Callaway as well.
Hill: It's interesting when you look at the chart for Callaway Golf because shares are up a little bit this morning. They're close to a 52-week high, which would actually make it the high for this century. You go back to the late '90s, this was a really hot stock for a good stretch of time, came crashing back to earth and over the past decade has slowly built the business back up and it's been rewarding for shareholders, particularly over the past decade.
Moser: Yeah. Well, they make good stuff. I think at the end of the day, when it comes to golf, No. 1, we're a fickle group. We know what we like and we tend to stick with it for the most part. Even someone who's playing Callaway irons, and wants to get a new set of irons, they're most likely going to stick with Callaway because that's what they've been doing for so long. The other angle I was thinking about was, and this will be interesting to see just from a gambling perspective given how much we're getting now with the sports betting market. I'm going to be fascinated to see what this does for the odds on Mickelson next month and the amount of money that people actually plant down on this. Beyond Callaway, I think the other platforms that benefit from this are the sports betting platforms because I think this has made next month just a whole heck of a lot more interesting than it was at the beginning of last week.
Hill: Jason Moser, always great talking to you. Thanks for being here.
Moser: Thank you.
Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it with this edition of MarketFoolery. This show is mixed by Dan Boyd. I'm Chris Hill, thanks for listening. We'll see you tomorrow.