Will the Next Big AI Stocks Be in Deliveries?

Walmart (WMT -1.75%) teams up with Ford Motor (F 0.47%) to test robotic deliveries in three cities. In this episode of MarketFoolery, host Chris Hill is joined by Motley Fool analyst Alicia Alfiere to examine those stories as well as the surprisingly good retail numbers from August.

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 Sept. 16, 2021.

Chris Hill: It's Thursday, September 16th. Welcome to MarketFoolery. I'm Chris Hill. With me today, Alicia Alfiere. Thanks for being here.

Alicia Alfiere: So glad to be here, Chris.

Hill: We've got the business of deliveries. We're going to start today with The Big Macro. Retail sales in August rose 0.7%, which doesn't seem like much until you consider the fact that economists were expecting retail sales in August to actually fall 0.8%. So outpacing what was expected by 1.5% in a single month. That's pretty encouraging. What was your reaction when you saw this news? Because I've seen reactions in the financial media cutting both ways.

Alfiere: I think that's fair. For me, I found it a positive development. Retail, and food services were expected to decline like you said. That was because of the Delta variant, supply chain issues, and fears that many consumers were more likely to stay home instead of venture out to shops and restaurants as a result of the Delta variant. Those expectations were fair, considering that back in July, retail sales were down about 1.8%. But as you said, we have the preliminary results that are out and it's showing retail sales up 0.7% from August, and their levels are up about 15% year-over-year as well. Out of this group, clothing, and accessories were up the most year-over-year. They were up about 38.8%. I'm wondering if it had to do with some of those back-to-school sales. Just to note here, retail and food services, the sales beat even if it's a small one, it's important since some people have really been downgrading their expectations for the overall economy. JPMorgan, for example, they are expecting GDP to grow about 5% in the 3rd quarter, and this is a downward provision from their forecast of 7% previously. Again, that's due to lower demand, supply chain issues, but these retail numbers, I think at least, they give us some hope. If the economic growth is down, perhaps it can rebound pretty quickly as consumers gain more confidence, and hopefully as some of those supply chain issues start to ease.

Hill: Yeah. It was good to see the beat like this. Anytime there is an expectation of a loss and you get a positive number, that's always a good thing. It makes me all the more eager to fast-forward a month or so and see where we are further into the fall because I think that we're going to get a clearer picture of what we can expect going into the holiday retail season both in terms of sales, but also in terms of the job numbers.

Alfiere: Exactly, I think that you're right. As we get closer, we'll have a better expectation. Hopefully those numbers will only continue to improve.

Hill: Do you have any sense of your own expectations with regard to, obviously, before we can get to holiday retail, we always get the various data points from major retailers about what they're doing in terms of seasonal hiring. I think it was Amazon who came out earlier this week and said they were planning on hiring 125,000 seasonal workers. I may have that wrong, I know it was one of the major retailers. But what is your own expectation on that front? Because it seems like for all of the obvious reasons, it's going to be a little harder for these big retailers to be precise with that number and [...] get it right.

Alfiere: That's right. Because we're living through still a time of uncertainty, we don't know what's really going to happen with the Delta variant or the next one, which is the Mu variant, I think it's going to be difficult to project what exactly is going to happen. We have a potential with some of the booster shots potentially being available. Hopefully, that will help. That will help people feel more confident, more comfortable going out to stores and spending money. We'll really just have to wait and see.

Hill: Let's move onto DoorDash because shares of DoorDash are up more than 5% today after the stock got an upgrade from an analyst team at Bank of America. The upgrade is based on the belief that DoorDash will expand well beyond the restaurant delivery category into things like groceries and alcohol among others. First, are you surprised at this? Because my initial reaction was, ''Really?'' I've always been skeptical of DoorDash as a business for some of the same reasons that I'm skeptical of Uber and Lyft as a business. It's never been a stock that I've wanted to put on my watch list, but that was my initial reaction. What was yours?

Alfiere: I'm glad that you made that connection with Uber. A lot of us know DoorDash from their ability to provide delivery services for our restaurants, but the fact of the matter is that they're looking to expand. I've been looking at the news for them for a long time, and they've created some really interesting and exciting partnerships beyond restaurants, with Bed Bath & Beyond, CVS, Macy's, Bloomingdale's, Petco, and Sam's Club. There is an interesting opportunity as they expand. Plus according to one of their filings, they see their potential pool as about 30 million small businesses within the U.S. that they can support. Right now, they have about 450,000 merchants on their platform, and additionally, they only have about 6% of the U.S. population in terms of users. There is a tremendous ability for them to grow and expand. I'm a big believer in the growing need for delivery services, big believer in the convenience factor that leads to the stickiness of a products, and I think there's definitely going to be a need moving forward for fast and efficient delivery services that are really convenient and DoorDash could potentially fill that need. But...

Hill: There's always a but.

Alfiere: There is always a but. The problem here is getting their business model right and being able to serve this market profitably. They've seen some really impressive revenue growth. In 2019, 204% revenue increase. 2020, 226% year-over-year growth. But revenues have decelerated in the second quarter. Still pretty impressive, 83% but lower than those numbers trim before. Also, there's been some decline in their total orders. They had 210% year-over-year increase in 2020, but now they're at about 69% year-over-year. Still impressive, especially when we see that a lot of that growth was driven by increased average order frequency, new consumer growth, growth and drive orders, so a lot of growth. But again, they need to be profitable, and all of that growth comes out of cost. They noted substantial investments in sales and marketing, and they're not kidding when they say cost, so they increased 154% year-over-year in the 2nd quarter, and this is as they tried to, again, expand, attract consumers. That helped to drive a net loss in the 2nd quarter. Do we have a lot of expectations for them? Is there an opportunity here? Absolutely. But at the same time, have to get that business model right, have to be able to be profitable.

Hill: I'm getting to the thing in the upgrade that intrigues me the most. Part of that marketing spend in the future will have to be convincing people that DoorDash is more than just a place you go to get restaurant food delivered to your home. I'm not suggesting they need like a major rebranding or anything like that, but there is some consumer education that will need to take place to make sure that if they are going to expand like this into these other categories in a significant way, as this upgrade seems to indicate they can, then that's part of what they're going to have to do, is convince people like, "Now, we can also get things from the drugstore, we can get groceries, we can get alcohol." Here's the data point or rather a prediction in the upgrade that I found to be the most interesting thing, that by 2026, the majority of gross merchandise value is going to be non-food. If they can pull that off and continue to grow the restaurant category, then that's phenomenal. I get that alcohol is typically a high-margin business, but is that a reasonable goal that in five years non-food is going to be the dominant driver of revenue?

Alfiere: I think it depends on how they grow their platform, what businesses they target in their partnerships. As they talked about, a lot of those bigger partnerships that they've announced are not food-related. As they continue to expand there, they really can grow. Again, 30 million small businesses that they could potentially partner with. But again, it's a long road between here and five years from now and they've got a lot of growth to do. As you said, educating consumers to want to use their platform. When we interact with some of those other business partners, how does that work? Do we get to pick what delivery service we're choosing? Are there multiple options to choose from? What is the benefit to me as a consumer to pick DoorDash versus potentially another group that a company has partnered with, especially for those larger groups like CVS, like Bed Bath & Beyond.

Hill: Our final story combines delivery with AI, speaking of which Karen Hao, Senior Editor at MIT Technology Review, is going to be our guest on Motley Fool Money this week talking AI, machine learning, and a lot more. Ford Motor and Walmart are teaming up to test robot delivery services in three cities. The autonomous vehicles are going to be equipped with sensors and software development by Argo AI, and this is being tested in Miami, Boston, Texas, and right here in Washington DC. I love to see the testing. I said this the other day, talked about I love seeing businesses testing additional services. If you're a Walmart shareholder, because I get that there are multiple partners involved here, but if you're a Walmart shareholder, what is a reasonable expectation to have with these tests?

Alfiere: Well, it's important to take into account that they are just test. A lot of times, when they look at these target cities, what happens is they're looking at a small area within those cities and they'll gradually increase the area that they're serving. They mentioned in some of the press releases and news reports that for this part of the tests, there are going to be some human monitors. Whether they are in the cars or in remote command centers, and this is going to be key while they work out any bugs related to the test. But to give some of the background here, Argo's cloud-based infrastructure is going to be integrated with Walmart's ordering platform as well as with the Ford vehicles. So consumers could hop onto Walmart, order products, and then Argo's infrastructure is going to route those orders and schedule that package delivery. Another interesting point here is this is also part of Ford's plan to launch a commercial service to transport potentially people and packages with autonomous vehicles. This is the interesting part here; this isn't the only delivery service in town. Walmart is also working with GM's Cruise in Arizona. They are working with Nuro and Waymo as well. It's more than just Walmart in terms of companies that are testing this going forward. Domino's partnered with the self-driving company Nuro as well for the launch of autonomous pizza delivery, and it's testing that in Houston. Chipotle is reportedly interested in Nuro. Also, there are different ways that companies are testing these robotic and autonomous delivery options. Wing, Alphabet's drone delivery company, has partnered with over 30 businesses, including Walgreens. Last year, they delivered, I love these statistics,10,000 cups of coffee, 1,700 snack packs, and 1,200 roasted chickens in Logan, Australia. It's just incredible. I don't think this is a hot take, but I'm just fascinated with robots and AI. I think right now, we're living in a bit of a golden age for advances in robots, autonomous technology, and AI technology, and I think we're going to continue to see a lot more companies really experiment with all of the things that they could do with this technology.

Hill: It'll be a golden age right up until the point of the ultimate rise of the machines [LAUGHTER] as movies have taught us. It is going to be interesting. When you think about this story overlaid with the backdrop of what we're talking about with DoorDash, this does seem like an area, and I'm talking just about delivery in general. We can be talking about human beings, including Uber and Lyft. We can be talking about food, alcohol, groceries, whatever. It's pretty amazing to see the amount of money that's pouring into this, and businesses saying, "No, we want to be involved in this as opposed to just outsourcing it." I'm not saying it's a zero-sum game, but some of these companies are not going to win and others are just going to give up. There are absolutely going to be businesses that try this and say, "You know what? It's just easier for us to partner with DoorDash." Or others are going to say, "No, we're going to have in our own area." Like if you're Walmart, it wouldn't surprise me if three years from now, Walmart says, "No, we've got our areas. It's not all over the country, but in these certain areas, we've got our autonomous vehicles and we're fine, thanks."

Alfiere: Yes, absolutely. I think there's going to be a lot of acquisition activity that happens here. Like you said, a lot of people dropping out of the market, a lot of testing, and potentially some failures too. There is a big logistics component to a lot of these delivery services, whether it's DoorDash or for real size of a cooler delivery bot that needs to be explored in terms of robots. I think we have the issue of interaction with traffic, interaction with people, and potentially making sure your products get to the destination. A little bit of liability that something like DoorDash doesn't have. At the same time, since DoorDash is into delivery services, maybe we'll see them look toward autonomous delivery as well.

Hill: Fascinating stuff. Alicia Alfiere, great talking to you as always. Thanks for being here.

Alfiere: Thanks for having me.

Hill: As always, people on the program may have interest in the stocks they talked about, and the Motley Fool may have formal recommendations for or against, so don't buy yourself stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. This show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you on Monday.