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Enterprise Software, Video Software, and More

By Chris Hill – Oct 20, 2021 at 1:14AM

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German software giant SAP increases guidance for the third time this fiscal year.

Vimeo (VMEO -2.17%) pops on good results. Motley Fool analyst Emily Flippen analyzes that story along with the latest results from JPMorgan Chase (JPM -0.70%) and other market news.

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This video was recorded on Oct. 13 2021.

Chris Hill: It's Wednesday, October 13th. Welcome to Market Foolery. I'm Chris Hill with me today, Emily Flippen. Good to see you.

Emily Flippen: Hey good to be here Chris. It's been a while.

Chris Hill: It has been a while. We've got enterprise software, we've got video software. But we're going to start today with the biggest of the big banks. Third-quarter profits for JPMorgan Chase were well above expectations, revenue was higher too. Shares of JPMorgan down a little bit, but I don't know, it can't be because of the results. This seems like a pretty strong quarter.

Emily Flippen: It's a pretty strong quarter for JPMorgan, although I will caveat that because the good quarter was supported by largely better than expected loan losses that contributed around one and half billion dollar to their bottom line. When you combine that with a tax credit they actually didn't beat earnings as strongly as the market may suggest, so the earnings of $3.74 were greater than this three dollars expected, but taking out, these should be considered one-time credits. It was actually closer to meeting expectations, which may be explained some of the stock movement today. However, even accounting for that, this was a solid quarter for JPMorgan because at this point I think Jamie Dimon and JPMorgan has become almost bellwethers for how the economy is doing as a whole, so seeing a lot of the bullish sentiment come out of this quarter for what they expect in terms of loan losses was actually pretty great.

Chris Hill: Yeah I mentioned on yesterday show when we were talking about Fastenal that Bryan Hinmon couple of years ago told me Fastenal is one of the top conference calls you always likes to listen to JPMorgan Chase is other ones that he mentioned when we had that conversation. He said that the big banks don't necessarily interest him a whole lot as an investor but he always listens to the JPM call because they're biggest bank, more so than any other bank, they've really got their fingers on the pulse of so much of what makes the US economy go, and as you indicated, most rooms that Jamie Dimon he is the smartest person in the room.

Emily Flippen: He has no shortage of opinion. It's always interesting to see what is going to say when it comes out on these earnings calls; but from an economic standpoint, JPMorgan is the best capitalized bank in the United States, has one of the highest tier one capital ratios of the entire industry, which is all to say that when you look at what they expect in terms of how the American consumer is going to behave. It reflects less about what their credit profile looks like and more about what the world looks like today. For that reason it's sensible to listen and see, all of these smart analysts that JPMorgan is encouraging and paying, what are they thinking about this loan credit profile? Because that itself is going to be really interesting to compare against the economy expectations as a whole.

Chris Hill: Shares of SAP are up four percent today. The German software company posted third quarter results that came with increased guidance, I believe the third time SAP has bumped up their fiscal year guidance. In terms of the results themselves, it seems if you're a shareholder, the business is moving in the direction that you would want, which is to say more customers are moving to the Cloud.

Emily Flippen: It's just a slow transition. When we talk about the Cloud transition for SAP, you may be thinking to yourself. I've been hearing about this for years. Why am I just now seeing it sharpen their results? I think there's an argument to be made that enterprise resource planning, it's a crowded space, SAP is pretty far behind in terms of the Cloud transition. But the backlog that they posted this quarter or just say, preannounced for this quarter was incredible. I'm ensuring that they're really getting traction in shifting those legacy customers into their Cloud-based application. Their backlog was over eight billion euro. That was up nearly 25 percent year over year, and it's really being led by their Cloud version, other enterprise resource planning software. The backlog for that system, which they call HANA that was up 48 percent last quarter. All to say, things are definitely pointing in the right direction, but I will mention it again. Despite the clear acceleration, this is a business that has in the past only move pretty slowly. They're one of the largest software companies in the world today, and they're operating in a pretty crowded space, and more of that pie is being eaten up by competitors, whether they be large businesses like Microsoft or smaller ones like workday or salesforce, so competition, certainly something to keep your eye on.

Chris Hill: Yeah, it's one of those things for as big as they are. It seems like just from a brand equity standpoint, SAP is well respected. This is not a stock that is really rewarded shareholders in a meaningful way over the past five years. It is solidly trailing the market.

Emily Flippen: It's not exciting business, I will say that. But even though they're not exciting, even though they don't grow at the rate of a lot of their competitors, which is probably why you're seeing that reaction from the market. There's still pretty financially sound. They trade at less than 30 times earnings right now, which sounds pretty lofty and I will have made for a slow grower. It is still pretty heightened, but they also pay out a pretty steady dividend, so this is the type of business that if I own, I would feel comfortable holding but if I was investing for growth and I'm looking at the software industry, there are probably other companies out there that are going to grow longer and faster than SAP.

Chris Hill: Just quick programming note, it's short week for us on Market Foolery. We're off again on Thursday, so please checkout if you're not already listening to Industry Focus, Motley Fool Answers, Rule Breaker Investing with David Gardner. Check those out and thank you already to the listeners who have sending emails with suggestions for our upcoming apropos of nothing episode, keep them coming, please. [email protected] The stock of the day is Vimeo. The video software companies said revenue in September was up 33 percent from a year ago. Subscribers are up, shares of Vimeo up more than 12 percent, and that's great but Vimeo went public in May and the stock was close to $60 a share of that and even with the pop today, Emily, it's, 30. I'm not rooting against Vimeo, but they're going to need a few more months like September to keep this thing go up.

Emily Flippen: No kidding if you're a shareholder in Vimeo today is a very little reconciliation for the pain that she felt over the course of the year. While we have yet to report earnings, this is their monthly metric that they continue to publish. Month over month that is providing this pop today, and as you mentioned, revenue up 33 percent in the month is pretty impressive and I will say, if you compare to the numbers that they were posting in 2020 which is their comparable quarter, it may look less impressive. In fact, revenue subscribers and average revenue per user have all slowly trended down over that period. But there's still higher than where they were pre-pandemic, and Vimeo hasn't issued guidance here, so there is very little in the way of expectations heading into this quarter. Also worth noting that this is the third quarter, which is typically a bit softer than the fourth quarter when you see a lot of pull forward in terms of spending from corporations on things like video software. Ultimately, it's an interesting business, I struggle with the niche that Vimeo was carving out. These numbers themselves don't get me super excited, so seeing the pop today, I think to myself maybe this wasn't oversold business headed into this report, but doesn't quite make me bullish on the long-term impact of Vimeo, especially when you think about the competition in the video, software, and collaboration space.

Chris Hill: The market cap of Vimeo was about four and half billion dollars. If you assume that someone is looking at them and thinking they do good work, we can do more for them if they are part of our larger business than maybe they get bought out for five or six billion. That's still a whole lot more than Google paid for YouTube back in 2006 and at the time, that was seen as paying a lot for YouTube. All of which to say, do you think Vimeo is a stand-alone company in three years? It seems like a good products. The stuff I've read about them points in that direction. It also seems like for as good a product as they have, it seems like six billion would still be overpaying.

Emily Flippen: I tend to think the same as you Chris, which is that this is probably going to be a business that if it is acquired, is acquired at not to hefty premium that investors may be accustomed to, and the reason is, is because Vimeo, as so many investors are aware, tried to upsurp YouTube. They tried to change the landscape of the video streaming game and failed time and time again. When Vimeo went public, which is a spinoff from IAC earlier this year. It was interesting to see how they pivoted their business model, which is going to corporations and essentially providing a subscription based tool for collaboration and video storage. While that's appealing to many businesses, in fact, 60 percent of the Fortune 500 had at least one paying seats with Vimeo. When the company went public, it's still really hard to highly monetize. Only one percent of their total subscriber base was paying more than $10,000 a year on the platform. There was a need for this, but it was just not the need that's you see, where this business has a ton of pricing power. The idea of snapping it up for 6, 7, 8 billion dollars, I think sounds pretty challenging unless we see an uptick in our monetization potential. With ARPU, average revenue per user actually declining over time or the growth of which declining over time. That makes me a bit worried.

Chris Hill: Yeah. I get the enthusiasm when they went public. Just if you go at the historical track record of IAC spinning out businesses, on balance those tend to do well. But as you indicated in addition to going public, which is tougher than being part of a larger entity, there were also shifting their business model. Again, I'm not routing against them, but it's just one of those that are look at and go. I don't know, there's not enough goodness there to put this stock on my watch list, even though it's trading at basically half of what it did a few months ago. Last thing, and then I'll let you go. Where does this idea of this is a business that might get bought by someone else. Does that ever fall into your top five list when you're putting together your pros and cons of a business that you're thinking about buying shares off? Or is that just, if it ends up in your top five than it's actually an indicator that you need to walk away.

Emily Flippen: Not, typically. I don't tend to think about acquisition as a very real investment thesis because in reality I think most acquisitions we see end up being something that at the end result is a bloated business. The companies typically end up better alone, and they did as part of a larger organization. Now, that's not always true. When I think about the types of companies that I want to invest in, my mindset is, oh, I don't want somebody to come in and snap up this business, I want that business to operate independently for as long as possible. I think about Red Hat, for instance, when they got acquired by IBM, and anger is a wrong word biggest disappointment that people felt when that acquisition went through because Red Hat was such an amazing business, with a really unique team, cultural aspects that were unrivaled in the industry. I want to feel that way, about a business before I buy in. That to me ends up being a thesis that's much larger than just thinking, oh, maybe IBM will swoop in one day and buy these companies.

Chris Hill: Yeah when PayPal bought Xoom, not Zoom video but X-O-O-M, Xoom the remittance company. I think anger is the appropriate word to describe Jason Moser's reaction when that happened [laughs] and I think he is still angry about it today or at the very least bidder. That's probably a better mindset, like you want to go in thinking, oh, I still believe in the future of this company that I really hope nobody else snaps them up.

Emily Flippen: Yeah. To clarify, it's because you think the company is going to do so much better over the long term. While that 15, 20 percent premium that you're getting on that single day when the acquisition announced, seems like a great deal oftentimes the investors investment thesis is so long term that you're giving up what could be hundreds of percentage points in gain for a very short term bump. I don't like seeing those little premiums, I think if you're an investor in Vimeo, you're buying into the idea that they have a platform that can be expanded into things like live events, like creating a powered by Vimeo platform. That's going to be bigger, they're able to execute on that idea then again, $68 billion in acquisition cash.

Chris Hill: Emily Flippen, always great talking to you. Thanks so much for being here.

Emily Flippen: Thanks Chris for having me.

Chris Hill: As always, people on the program may have interest in the stocks they talked about on 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 Market Foolery, the show is mixed by Dan Boyd. I'm Chris Hill, thanks for listening we'll see you on Monday.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Emily Flippen owns shares of PayPal Holdings. The Motley Fool owns shares of and recommends PayPal Holdings and Zoom Video Communications. The Motley Fool recommends SAP SE and recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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