In this week's episode of Industry Focus: Financials, Fool.com contributor Matt Frankel, CFP, and host Jason Moser dig into the latest results from Boston Omaha (BOMN 0.43%) and Latch (LTCH +9.52%), two of their favorite small-cap stocks to follow. Plus, Matt gives his take on the merger of top gaming REITs, VICI Properties (VICI +0.63%) and MGM Growth Properties (MGP +0.00%). Finally, you'll hear why Matt is keeping an eye on 23andMe Holding (ME +0.00%) while Jason is looking at fintech disruptor SoFi Technologies (SOFI 0.11%).
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This video was recorded on Aug. 16, 2021.
Jason Moser: It's Monday, Aug. 16. I'm your host, Jason Moser, and on this week's financial show we've got a couple of earnings reports to dig into. We've got a listener question regarding a recent acquisition in the REIT space. We'll have a couple of stocks for you to watch this coming week. Joining me, as always, it's certified financial planner -- I guess, maybe he's back from Orlando, I don't know. Maybe he'll shed a little bit of light on this, but it's Matt Frankel. Matt, how is everything going?
Matt Frankel: Me and the dogs are back in our own house. The one that just heard me say that got up. But hopefully, he will let us have a nice quiet show this week because he's in his own home.
Moser: Well, that's all right. We never hold that against our pups. But it was a good trip to Orlando, the family had a good time?
Frankel: Oh yeah, that was our first time we've been in the house since we bought it a few months ago. Yeah, it was a great time, beautiful weather, good pool days. It was nice.
Moser: Nice, good deal. Good to hear. Well, hopefully you had a chance over the weekend to dig into some of these earnings reports Matt because we have a couple of companies that we want to get to today that are in our universe here. We'll start it off with Boston Omaha. Boston Omaha, obviously a business we talked about on the show before, one that a lot of listeners are interested in. Matt, I love looking down this earnings report because you see billboard rentals, broadband services, insurance commissions. It's a fun answer when someone asks you what this company does. How does the quarter look to you?
Frankel: Well, in a lot of ways. There's a lot of the same issues we have in evaluating Berkshire Hathaway's earnings -- remember, we did that last week -- because they're secretive about a lot of it, just like Berkshire is. They release their earnings at random times, you never know when their earnings are going to come out. We don't know what's in their stock portfolio, which is a lot of their business. They are small enough, unlike Berkshire, that they don't have to tell us at all what's in it. Berkshire has to report every quarter what their holdings are, which we'll actually get later today. But having said that, what we do know looks pretty good. You mentioned billboard revenue was up. Billboard's by far the biggest operating business they have, it's roughly 56% of the total revenue they make. It's important to pay attention to that number because that's a big chunk of it.
Moser: Sure.
Frankel: Broadband service more than tripled year over year. But take that with a grain of salt because it includes an acquisition they closed in December. One of their two major broadband operations wasn't in their company last year at this time. But that's a business they're planning on building out, excellent margins, 85% gross margin in the broadband services. Excellent business to be building out, and I'm curious to see where that goes in the quarters ahead. Bottom-line earnings have doubled year over year. But take that also with a grain of salt because it includes unrealized investment gains like Berkshire's, the fluctuations in the stock portfolio. But book value, which is a measurement that they actually pride themselves on. The CEO's bonus structure is actually based on their ability to grow book value. Book value grew by 28%. Not year over year, but from Dec. 31. In the past six months, the book value per share is up 28%.
Moser: Wow.
Frankel: Pretty impressive growth. This was before they announced Yellowstone's SPAC deal that we talked about. Remember that was announced in early August. That has absolutely nothing to do with these numbers. Great numbers all around, they have a lot of cash to put to work. We saw that they have about $57 million in cash, another $132 million in treasuries that they can use to invest, buy other companies, things like that. Stock portfolio has gone up tremendously. A lot of that's the Dream Finders Homes IPO that took place earlier this year. Cash flow, their operating cash flow is up from $1.3 million a year ago to $5.3 million now. About quadrupled in their cash flow. Pretty impressive quarter all around. I guess there's a lot that we don't know about their business. To be fair, I think the fact that they don't have to disclose their stock holdings at all gives them a nice competitive advantage, but they're a mysterious conglomerate in the same sense as Berkshire Hathaway is, that they really tell us only what they have to. No earnings call like we talked about with Berkshire. No earnings call, no shareholder letter, none of that. Just here's your 10-Q and have a nice day.
Moser: Now, why is it that they don't need to disclose the stocks that they own? It seems like a company, they're trying to build this out in sort of the Berkshire Hathaway mold. Certainly, it seems like they're off to a good start, but why aren't we able to get that information?
Frankel: Well, I'm blanking on the exact threshold, but it has to do with the size of the company. Boston Omaha is a pretty tiny company.
Moser: Got you.
Frankel: They obviously have to disclose the Dream Finders acquisition because it was such a big deal this past year. But the other 50 million or so of stocks they own, I'm not sure the exact threshold, but when you look for Berkshire or Markel, they have to itemize their stock holdings once a quarter. It's because of the size of the company. As Boston Omaha grows, it will eventually have to disclose them. If it gets to that point, that'll be a good problem to have.
Moser: Yeah, absolutely. Well, it feels like that's almost inevitable, so it's just a matter of when not if, assuming they keep doing what they've been doing because it's obviously working through just a cursory glance of the numbers.
Frankel: For sure. I didn't find anything to be upset about this quarter.
Moser: Well, that's a good kind of quarter. Listen, I go through reports. The first thing I'm looking for is red flags. If we don't find them. Well, that makes it a lot easier to really dig in and find the stuff you're looking for. No red flags here, I'm sure investors love to hear that, and so we'll continue to follow this one and look forward to hopefully a productive and good investment idea here. Latch, another business we've covered here on the show. You've spoken with the CEO of the business, Luke Schoenfelder. We had an interview with Luke here on the show not all of that long ago. Latch earnings also came out recently here, and a little bit of a reaction to the stock. That really seemed to me to be more related to the guidance revision, but I'll let you talk more about that. What stood out to you in this quarter for Latch?
Frankel: It's the guidance revision and the general SPAC pessimism going on right now. Pretty much any company that went public through a SPAC is tanking right now.
Moser: Yeah.
Frankel: Not necessarily because anything is wrong with their business. When you look at the numbers, this is another one where it's tough to find anything other than maybe that guidance revision to be that upset about. Bookings, as we've said, the number that you want to pay attention to, was about 96 million, just over 100% year over year. Annual recurring revenue, which is a big, big part of any subscription driven business, up 122% year over year, the revenue figure itself is only $9 million, which for any company that's trading in the billions sounds very, very low on the surface.
Moser: Yeah.
Frankel: They're not profitable, which no one expected them to be for years. If you're doubling your bookings year over year, no one really cares what you're earning at that point. At some point, people will. Bookings are the number to pay attention to. Because that's, like I said, when they're installing their product in a multi-family building. That takes years to develop, so they book it when it's still in its early stages. A couple of highlights going on, then there is one thing I really wanted to point out about Latch's revenue. First, I want to get your take on this. They got their SPAC money early in June. Remember, their SPAC deal was completed. Toward the end of the quarter they just reported, one of the first things they did, they hired a Chief Marketing Officer for the first time. Tell me what you think of this resume. Former senior vice president of Endeavor, and former global head of content and lifestyle strategy at Apple.
Moser: I've heard of Apple. Up-and-comer. I understand in the tech space. I mean, in all seriousness, that sounds like a pretty rich work history.
Frankel: Right. The half-billion or so they got as part of the stack deal isn't reflected in this quarter's numbers, which is one big thing to keep in mind. I mentioned the revenue was only $9 million. Check this out: 80% of that was from hardware, the locks and stuff like they sell for the smart homes. They made $7.2 million in revenue from hardware. The cost of that revenue was over $8 million. They lost money on hardware.
Moser: They're loss leaders.
Frankel: They're loss leaders. Negative 11% profit margin that works out too. On the software side, they did $1.8 million from software, so not a ton yet. That only cost them $173,000. That's a 90% gross margin. [laughs] Right now, it's a tiny part of the business. But the idea is that the more hardware they sell, the more software subscriptions they'll sell on a recurring basis. I mentioned that annual recurring revenue and that's the real number to watch, is the mix of revenue that's coming from software. Because once software gets to the point where it's more than hardware, that's when you're going to see a real path to profitability from this business.
Moser: Yeah. You're right, that's the inflection point. That's what everybody waits for with these types of businesses particularly with the company like Latch, because it came public so much earlier than it normally would have. You just have to be a little bit more patient with it.
Frankel: Yeah. I won't expect them to be a 10-bagger overnight, but they have potential and like I said that software is a very high margin business. It's a sticky business because it only works with their proprietary hardware.
Moser: Well, yeah, I wanted to get to that for a minute because you see the walled garden versus the non-walled garden approach. It seems like with Latch, what is the big challenge there? What's a big threat to this business? Is it just adoption? Is it not getting people to buy into that hardware, more people out there wanting to go the open route versus the walled garden approach?
Frankel: What's adoption, that's marketing. It's being able to sell on a large scale, which they haven't been able to do. They just launched their direct sales channel this quarter as part of it, there's SPAC proceeds. They couldn't sell to a large apartment developer, for example, for all of their properties, which now they will be able to. There is competition risk. There's another company called SmartRent. It's also going public through SPAC. That's a smart home operating system as well, but they don't use proprietary hardware. Can get with say Ring products or Honeywell thermostats or things like that. They don't have their own hardware, so it's a lot easier for customers to switch. Remember when we had Luke on the show, he mentioned that Latch has never churned a customer. A big reason is because their hardware only works for their software. It makes it really tough to switch. Even if there is a lot of competition, those businesses aren't as sticky. Now, having said that, I could see one of the big tech giants that has hardware operations and smart homes like Google which has Nest or like Amazon which has Ring, buying one of these operating system companies. That could be a big competitive threat. Assuming it's not Latch that they actually buy out. There are competitive threats, but Latch for the time being, at least, is the stickiest business in its space.
Moser: Well, we got a listener question here from @matt_invests on Twitter and Matt asks, "We would love to hear your thoughts on the monster VICI Properties Acquisition of MGM Growth Properties. I like the merger, but VICI stock performance is different." Matt, you've taken a look at this deal. What did you see?
Frankel: Well, first of all, one key concept for investors to know is that when one company acquires another, what happens 9 times out of 10 is that acquisition happens at a premium, which we saw here. They're paying a premium for MGM Growth Properties. The target stock goes up, but the acquirer's stock tends to dip at least at first. There are exceptions like when Square announced it was acquiring Afterpay, Square went up. But generally the acquirer goes down a little bit. Keep that in mind whenever you see an acquisition like this. I love this acquisition from a strategic standpoint. It essentially means that the VICI Properties is going to own the Las Vegas Strip. [laughs] If you're not familiar, MGM Growth Properties spun out of MGM Resorts a few years ago for the purpose of owning a lot of their assets. They own the Mirage, MGM Grand, and Mandalay Bay. They own a lot of their regional assets like the National Harbor that's near you. They own the Borgata in Atlantic City. That's MGM Growth Properties. VICI was spun out of Caesars so it's essentially the same business just coming out of the other gaming leader. They spun out of Caesars in 2018, they own Caesars Palace in Vegas. They own the Harrah's on the Las Vegas Strip and they own a lot of regional assets. They are in the process of buying the Venetian, which was formerly owned by Las Vegas Sands, which is also on the strip. The Las Vegas Strip is essentially made of three company casinos: MGM, Caesars, and Venetian.
Now, VICI Properties is going to own a big portfolio of regional assets, the biggest landowner in history on the Las Vegas Strip. This is going to create the biggest experiential real estate investment trust ever, roughly $45 billion of real estate's involved in this deal. There's scale advantages to be had of controlling that much land in one area. They see financing synergies. VICI has better credit than MGM Growth Properties, and sees an opportunity to refinance its debt at a lower rate, because it's acquiring it for $17.2 billion in about a third of that is debt, that's a big potential catalyst going forward. They're also getting MGM's properties, although they're paying a premium based on the stock price, they're getting the properties for a discount to replacement costs, which is a big benefit if you're in the development space. Just to name one example, MGM Growth Properties acquired MGM Springfield up in Massachusetts earlier this year for $400 million. That property costs almost $550 million to build.
Moser: Wow.
Frankel: They've got a big discount to that. VICI estimates that on the aggregate, they're getting a 30-40% discount to replacement cost for all MGM Growth Properties assets. There's a lot of strategic benefits to this deal. I'm a fan of both companies. Like I said, they're essentially the same businesses. One came from MGM and one came from Caesars. It makes sense. I can't name an acquisition that would have made more sense for either company.
Moser: Well. Let's hope that answers Matt's question, because it certainly feels like any questions I had regarding the deal you certainly answered so thanks for taking that into account. Matt before we take off, let's give our listeners a couple of stocks to watch. What's the stock you've got your eyes on this week?
Frankel: I'm going to go healthcare, and watch 23andMe, which is a recent SPAC IPO. Remember that went public through Richard Branson's SPAC Virgin Acquisition Corp. The acquisition was recently completed, so 23andMe has $770 million of cash on its balance sheet right now. It just announced its earnings. They were underwhelming, to be honest, but didn't include any of the growth that can be fueled by the SPAC money, 23% revenue growth year-over-year, which remember, they sell a consumer product primarily they sell the genetic testing kits and so their business is rebounding nicely over the pandemic. The real potential in this business going forward is its proprietary genetic information, which now has 11.6 million genotyped individuals in its database. It's got a partnership with GlaxoSmithKline where it splits any revenue from treatments developed from its information 50-50. One therapeutic is in phase 1 clinical trials right now. One is in pre-clinical trials. There's no telling how many possibilities are coming down the pipeline in the future. If any healthcare investor can tell you, I wish I had Brian Orelli to weigh in on this. But any healthcare investor could tell you that one successful drug could be worth more than 23andMe's entire market cap right now, which is in the $3 billion-dollar range. A lot of potential here, it is still at an early stage, like we mentioned with Latch, went public probably earlier than they otherwise would have if the whole SPAC boom hadn't happened.
Moser: Yeah.
Frankel: But it's trading at a big discount to their earnings. That's mine, 23andMe.
Moser: Well, I'm going to be digging a little bit more in the SoFi (SOFI 0.11%), another company we talked about on the show here before earnings for SoFi came out recently and were good results management exceeded their own expectations, members up to 2.6 million. That was up 113% from a year ago. It also represented the eighth consecutive quarter of accelerating growth. That's important because I think this is just shaping financial services for an entire new generation. These companies like SoFi, bringing everything under that one umbrella, so to speak, you can do so much for businesses that have really just started out on the lending side. The lending segment revenue was up 47%, financial services segment revenue grew 600%. Lending is the primary part of the business today. But you can see with the strength there and the products and the members and the cross-selling that comes from that, the acquisition costs just go down considerably the longer these relationships last.
To me, there's a lot of potential for a business like this. One that is built on a digital backbone, so to speak, and may do a lot of good things with the data that they get. That data we talked about with Square, for example, Square being able to make smart loans to their customers based on all of the data they get from their customers using that hardware and software. SoFi is doing a similar thing, they're taking that data using artificial intelligence, machine learning and really using that data to make the best lending decisions possible. It seems like it's working out for them. Another one that came public probably way earlier than it normally would have thanks to the SPAC group. You probably see some bumps along the way here for this one. But one that I think you and I both agree has a very promising future. I'll be digging more into SoFi this coming week, just to learn a little more about that business. But Matt, I think that's going to do it for us this week. As always, thank you so much for jumping on the show here and glad you got back from Orlando safely.
Frankel: Glad to be back, and I will see you next week. Same time, same place.
Moser: Sounds good. Remember, folks, you can always reach out to us on Twitter @MFIndustryFocus or you can drop us an email at [email protected]. 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 socks based solely on what you hear. Thanks as always to Tim Sparks for putting the show together for us, for Matt Frankel, I'm Jason Moser. Thanks for listening and we'll see you next week.
