In this episode of MarketFoolery, host Chris Hill and Motley Fool contributor Asit Sharma discuss shares of Angi (ANGI 3.95%) popping on encouraging numbers from August. Sharma analyzes those stories as well as Taco Bell's newest promotion: a taco subscription service.
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This video was recorded on Sept. 14, 2021.
Chris Hill: It's Tuesday, September 14th. Welcome to Market Foolery. I'm Chris Hill. With me today, Mr. Asit Sharma. Good to see you.
Asit Sharma: Great to see you, Chris. Thanks for having me.
Chris Hill: We've got the newest subscription service to talk about and we also have some upbeat numbers in the home services industry. We're going to start with the deal of the day. Intuit (INTU -1.96%), the maker of TurboTax is buying digital marketing firm Mailchimp for $12 billion. This is a cash and stock deal and it comes on the heels of the acquisition Intuit made last year when they bought Credit Karma for seven billion. Let me start with the obvious question. Do you like this acquisition?
Asit Sharma: I actually find that I like this acquisition a lot, Chris. I had a chance to listen to the conference call that Intuit held last night. Really got a chance to understand the strategy behind us. I must say, I'm pleasantly surprised that price tag bothered me a little bit. There were reports last month that Mailchimp was shopping around at a $10 billion stock-price. They had $800 million in revenue last year. It's not a cheap multiple but if you look around the software as a service space, as a multiple of price to sales, it's really not as expensive as some of the companies that we happily buy on the publicly traded markets. It's going to be accretive to Intuit in the first year after closing this acquisition, meaning thereby that Mailchimp is going to drop a little bit of coin to Intuit's bottom line, they haven't disclosed the specifics yet. They say that they will do that after the close of the transaction. But what really peaks my interest is that Intuit is looking at this acquisition as almost an entry way into hitting the mid-market which it historically has not played in. Intuit's software suite for small businesses started as a mom and pop tool. They have over the years, gradually move into higher segments of the market. This is a way to hit companies that are slightly bigger than its core base of small businesses using Mailchimp's artificial intelligence. Interestingly, this acquisition isn't about email marketing, [laughs] which I thought was on the surface. Sasan Goodarzi who is the CEO of Intuit, really wants to utilize the marketing savvy that this platform has in order to give a full complement to small business owners. Again, the company's right above that level in the mid-market, slightly larger businesses, so that they can not only do the accounting for their business but they have a better way to market to their customers. With the artificial intelligence that Mailchimp has developed through its evolution from being just that an email marketing company into this more complex organization that is able to help automate marketing. They think that they can really service their customer base and grab new businesses around the world. We should mention here that Mailchimp is a globally diversified business. They get quite a bit of business outside of the US. It makes sense on a lot of fronts as Intuit decides to take its QuickBooks Online offering and make it a more robust animal to hit bigger market and to keep growing because Intuit's no spring chicken anymore. I like that angle as well.
Chris Hill: Like you, when I saw the price tag, I immediately thought that seems like a lot of money to pay [laughs] for Mailchimp. But I think you're right that part of it and the reason that shares our Intuit are up 1.5 percent which is not a lot. But it's on a day when there are about to payout $12 billion and the market is down. Clearly, the community on Wall Street likes this deal. I think you're right in terms of you have to weigh this acquisition, the cost of it against what our multiples like today. I think you also have to look at the company's track record with acquisitions. They've made somewhere in the neighborhood of 30 acquisitions over the past decade. This is a company that in general does a good job with acquisitions and I think their track record and their history is being rewarded today.
Asit Sharma: I agree. Under former CEO, Brad Smith, I think they were a lot more of a bolt-on acquisition company looking for small strategic acquisitions. They did have a few outsized transactions but under Sasan Goodarzi, they're really using the template that Brad Smith opened up which is to find strategic fits that can help grow the business at a faster rate than it's growing today. They are not afraid to deploy more capital. Going back to that price tag before we move on, the closest direct competitor to Mailchimp that we can find this available on the public markets is HubSpot. Slightly different business but both companies are trying to automate marketing for small and medium sized businesses. HubSpot trades at a multiple of 20 times its sales. If you look at this acquisition, Intuit bought Mailchimp between 14 and 15 times annual sales. On that basis alone again, you can see that yeah, it's pricey but it's really not paying too much or overpaying, especially if they're able to utilize that artificial intelligence component that they really like in the business and extrapolate those results going forward with a larger customer base.
Chris Hill: Shares of Angie up seven percent this morning. Angie is the Internet services business that was formed when Angie's List merged with home advisor. The company shared some numbers for the month of August which included a 21 percent rise in revenue which is nice for a Angie, although for anyone who remembers Angie's List in its original form, I'll just say it's been an interesting ride to watch. But at no point have I thought to myself, "Boy, I really need to get shares of this company." The public life of Angie it hasn't been terrible but it also hasn't been great.
Asit Sharma: Yeah. Chris, they're coming up on their one year anniversary. Company IPO-ed in November of last year. In that time, the stock has been volatile but it's basically flat year over year which is different than many of the companies we've watched in this hot IPO market that have done extremely well. Angie's has a lot of the characteristics that you might like in a stock like this which provides a platform for homeowners to basically improve their residences. It's a marketplace business. It's got a curated aspect, now, they're even selling services. But here we go after a year, the company selling at less than four times sales. Maybe these [laughs] numbers indicate that it might be interesting to start poking around. One of the things that setback Angie's is that they had a lot of marketing spend over the past year as they really took all the brands and merge them under one roof. This was two separate businesses before they went public. The Angie's name is the bigger brand name. Of course, that's the one that remains. I think that advertising expense scared off some investors. Chris, they had some outsized losses. But these August metrics indicate that maybe they can get the revenue back on track. I will say that it's going to be a fun business to watch simply because they are marketing to two different sets of constituents here. They're marketing to consumers, homeowners but they are also marketing to pros who are coming in and delivering a lot of the services on the platform. We've seen other businesses survive and thrive with this model. I myself, I'm partial to marketplace business. I don't want to come out today and start touting this stock. But just to say, sometimes, a thesis bear's looking into again, if you see some metric start to rise and there's nothing fundamentally wrong with, say, a young IPO like this. It bears some scrutiny, might be something that's very investable in the next several quarters especially in an environment where so many companies are offering nosebleed multiples and they are so hard to buy just because it seems to expensive.
Chris Hill: True. But we've seen enough from this company that I feel like if you're in similar to when oftentimes will tell people when a company is getting ready to go public you might want to wait a couple of quarters just to see how they fair as a public company. That's not the case with Angie. Instead, with Angie, I feel like they are in that zone where it's like I would like to see a couple of quarters of really great results. I would be willing as an investor to pass up whatever gains come in those first couple of over a six month period just to know that they can deliver. Because to this point, they haven't really done that. They really haven't strong together two or three great quarters.
Asit Sharma: Absolutely. If you listened to management, their story is we had to spend more on marketing to pull all these brands under one roof. We've really got a business that's very complementary. We're selling services now alongside with marketing services as a platform. This bears proving out past the quarters of outside spend which caused the losses. I think you are perfectly advised here. You, me, any other investors who might be watching this one release today with some nice metrics, to just keep it on the radar screen and see if we see sustained momentum going forward on that revenue front and also on the operating front to make sure that the management team can control its cost as it goes forward and that their basic economic formula as this two-sided platform business bears out over more than a quarter or two. I'm with you there in that sense, I think that it bears watching. Only more interesting to me, I think because I've been scratching my head at the valuations that are out there in the market now for great businesses that are capital-light like this one, so one that I'll watch and one that maybe we can return to, Chris, and a couple of quarters and revisit how they're doing.
Chris Hill: Shares of Yum! Brands (YUM 0.38%) are doing slightly better than the overall market today and I have to believe that it's at least partially due to the optimism around one of Yum's divisions. I'm talking of course about Taco Bell. Taco Bell is testing a new subscription service. It is the Taco Lover's Pass. You can get it on the Taco Bell app. It entitles customers to one Taco per day for 30 days straight. The pass costs somewhere in the range of $5-10 a month. They're testing this at 17 locations in Tucson, Arizona. Let me start by saying, if anybody listening is in the Tucson area and is willing to test this out and report back, please drop us a note, [email protected] I'm not going to lie, when I saw this story, I laughed and then the more I read about it, the more I thought, I think this makes good business sense. What do you think?
Asit Sharma: I had the same reaction. My first thought was, "Taco as a service?" [laughs] Are we going to see in earnings reports a year from now, our annualized recurring revenue was X. Our dollar-based net retention rate was X. For those of you who are wondering what I'm talking about, these are software as a service metrics that [...] software services routinely drop in their earnings reports in conference calls, but then you look at this and you can see that it's another evolution in Taco Bell's experimentation within young brands, big portfolio of brands. I like it because it's going to drive incremental purchases. Anyone who thinks they're just going there, they're going to take a drive to a Taco Bell to have a taco today to get their money's worth over the month, I think you're probably mistaken. If you are anything like me, what's going to happen is you're going to add on some soft drink most likely, you might get two tacos or add-on any other type of burrito, Chalupa, etc. You could see how long it's been since I've been to a Taco Bell, do they still have Chalupas on the menu?
Chris Hill: They do.
Asit Sharma: Oh, great. Well, maybe they test market this in my neck of the woods, I will try that for market research, of course, but what is really appealing to me is that Taco Bell is solving slowly but surely the throughput problems that it's had in the past. It wants to get customers through its stores quicker, and it wants to drive those customers to the stores. Just last month, we heard about a concept called the Taco Bell Defy, which is a 3,000 square foot multi-storey building with four drive-through lanes, two which go right under the building. They deliver the food via a lift service. It's completely contactless. In some ways, it's the prototype of the future, but this is really about getting customer traffic through so that no one ever drives away from the drive-through if they see a line. Now, they're experimenting on the incentivization size, to incentivize people to come in. I think it's brilliant and I think if it hadn't been for COVID, we would be talking more about subscription-based models and this was something very much in the air before COVID hit. Think about Stitch Fix, think about the Dollar Shave Club, this is just another iteration of that. I'm behind this Chris, what about you?
Chris Hill: I am because you look at the way they price this and I know the obvious move is to think, who wants a Taco Bell, taco every day for 30 straight days? The way they've priced this, this basically pays for itself. If you go 1.5 times a week, five, six times a month, this will pay for itself. In a sense, it's really no different than what we saw from Panera a couple of years ago with their free coffee subscription, or I guess it was like nine dollars a month, same sort of thing, like a coffee a day, it's free, but it's nine dollars a month. I'll be interested to see again, they're testing this in Tucson starting now through basically Thanksgiving. I'm curious to see where they go next with this. If they just say, OK, we're going to roll this out nationwide, or maybe they're going to pick some more places, it is not lost on me that they picked a city which is home to a large university, which is smart, but it also may skew the results a little bit if overwhelmingly, it's University of Arizona students who are driving this and it's like, OK, we're not going to roll this out nationally, we're going to pick some other large places that have a lot of college students, wouldn't shock me if Boston was somewhere on the list next, but again, I laughed when I saw it and then the more I dug into it, I thought, this is smart.
Asit Sharma: Chris, this analysis is astute and that's why they pay you the big bucks. I'm remembering now that you mentioned this, when McDonald's first dabbled in delivery service, now, it's ubiquitous, but this was just a few years ago. McDonald's was very gingerly getting into the delivery game and they looked at their data and saw that they had this incredible surge of orders late at night in college cities across the US and in fact, they then shifted their roll-out to make sure they were hitting college towns with other major metropolitan areas. I think you're onto something here and maybe you have alighted on some of the reasoning behind this and I'll be interested as well to see going forward, is this just something that comes back every now and again as an LTO, limited time offering, or is it here to stay and we actually do get taco as-a-service at Taco Bell and some other companies in the quick-service restaurants industry will follow suit. Another fun one to watch this fall.
Chris Hill: Asit Sharma, great talking to you. Thanks for being here.
Asit Sharma: Same here, thanks a lot, Chris.
Chris Hill: As always, people on the program may have interest in the stocks they talk about on 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 for this edition of Market Foolery. The show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.