Meet the Next FAANG

Under Armour's (UA -0.15%) (UAA) restructuring plan bears fruit as third-quarter profits double and full-year guidance is raised. Chegg (CHGG -0.29%) shares fall 46% on a dismal earnings report. Motley Fool senior analyst Bill Mann, with host Chris Hill, analyzes those stories and makes his pitch for a new acronym encompassing the top eight consumer technology stocks in America.

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This video was recorded on Nov. 2, 2021.

Chris Hill: It's Tuesday, November 2nd. Welcome to Market Foolery. I'm Chris Hill with me today the one and only Bill Mann. Thanks for being here.

Bill Mann: A little crazy out there, is it Chris?

Chris Hill: It is a little crazy. We're going to get to the crazy. We've got a new stock index to talk about. We've got three stocks that are on fire and two of them are in the good way of being on fire. [laughs] We'll start with Avis Budget (CAR 0.66%). Third-quarter profits and revenue were both higher-than-expected because the demand for rental cars is up and they are charging higher rates and anyone who has attempted or even just looked into renting a car this calendar year probably he's not surprise that Avis Budget put better-than-expected numbers. Now, having said that, at one point this morning, shares of this stock were up 160 percent. As of this moment, it's now only up 90 percent, so we can start with what is happening with the stock, or we can start with the results. Where do you want us to start?

Bill Mann: I think we need to start with the stock. It is currently, as we speak, $336 a share and it has been as high as $545 a share today, so that means that technically Avis Budget Group is in a bear market.

Chris Hill: From earlier this morning.

Bill Mann: From earlier this morning. I mean, look astounding results from them. I mean, absolutely astounding results, they're generating about $83 per car per day in revenues right now, which should tell you all you need to know about the pain of renting a car. Avis and Hertz, Avis did not go through bankruptcy last year, Hertz did shed a huge amount of cars. They shed a huge amount of assets really in order to stay afloat. You're talking about something right now that is still in a pretty substantial state of imbalance. There aren't enough cars, the chip shortage hasn't helped. But apparently, none of that matters for Avis stock today because I'm hearing a lot and we hear there's a lot about there being short squeezes. I don't know if that's the case. But about 37 percent of the shares were held short prior to the announcement.

Chris Hill: I'm wondering, as I look at this and look at a five-year chart of Avis Budget, which is very much looking like a hockey stick right now.

Bill Mann: Yes.

Chris Hill: Where do you think this goes from here? Because even if they just run a better business, they've run a more efficient business. Does that justify what we're seeing with the stock long-term? I'm having a hard time wrapping my head around it. Even if you think this is going to be a much better run business going forward, it's hard to imagine buying shares at today's price.

Bill Mann: No. Again, we don't know what the price is actually going to be within 50 percent by the time people are listening to this. It could emerge from the bear market, it could go all the way back down. But it's a $22 billion company and it doesn't nearly make that much money and as we know, it has massive amounts of capital expenditures ahead of it. Avis is a much better run company I think than Hertz. They were talking a little bit about the fact that they want to be in the vanguard of providing electric vehicles in the rental market. Chris, there were some real shade that was thrown by the CFO of Avis today at Hertz. The reason you haven't heard from us about this publicly is because we'd like to execute on our strategy before we announce it. [laughs]

Chris Hill: That's some quality shade, right?

Bill Mann: [laughs] I don't think that the stock is buyable in a market like today, you're risking an awful lot because anytime a stock goes up that much and is that volatile, it is on hinged from its value.

Chris Hill: Under Armour's third-quarter profits and revenue came in higher-than-expected. The company also raised guidance for the full fiscal year and shares of Under Armour up 15 percent. CEO Patrik Frisk gave a decent amount of credit to Under Armour's marketing efforts. I have no reason to doubt him on that. I'm still stunned by the fact that profits were double what Wall Street was expecting. I mean, this was a huge beat.

Bill Mann: It was a huge beat. They were double what the market was expecting. Importantly, unlike Avis, which is now at an all-time high, Under Armour shares are still at a small fraction of what they were in 2011 and 2012. This is a company that has had enormous marketing problems, enormous governance problems, enormous issues with inventory control. I think maybe you're seeing the beginnings of a turnaround at Under Armour. I always had basically a rule of thumb for Under Armour that I would be interested in it until it was one-third of the size of Nike from a revenue standpoint and currently it's still only one-seventh the size of its primary competitor, so there is plenty of room for Under Armour to take additional share. I'm more interested in Under Armour than I am at Avis at these prices.

Chris Hill: You think back to the beginning of the pandemic I think it was April of 2020 when Frisk announced a restructuring plan and I think lost it. Again, these are great results, the fact that they raised guidance, I get why the stock is up 15 percent. But almost lost in all of this, is that you go back to that plan that he announced basically 18 months ago and it really looks like Frisk and his team stuck with their plan, executed it. When you say it looks like the start of a turnaround, it seems like the start of the turnaround that they announced 18 months ago is now starting to bear fruit and I think you're right about where it can go from here.

Bill Mann: Yeah. You really have to say that there is evidence that Kevin Plank, who is the largest shareholder, the controlling shareholder and the chairman of the firm who kicked himself upstairs. It seems like he's letting the team that he brought in to do their work. I think he probably had some recognition that the things that were going wrong, were because they were areas that he did not have skills in so he's brought a very professional team. I mean, Under Armour was never an impaired brand, like never, but their sales strategy was off and evidence suggests that it is clicking once again.

Chris Hill: I've said for a long time that the baffling thing to me as an Under Armour shareholder is they make good stuff. Which seems like it should be the most difficult part of this, making a quality product that is differentiated, that is better than the average products out there. They executed that. It was pretty much everything else that they screwed up.

Bill Mann: Right. Well, I would say that they have a pretty ironclad brand, their brand and I think that in footwear, in particular, that's really, really important. They've done an OK job and an improving job with their celebrity tie-ins, their celebrity endorsements. I think probably having Jordan Spieth find his range once again and become an exciting golfer again, has absolutely helped because they paid him an absurd amount of money for him to fall off the map for a while, which is unlucky. That's not really on them. Yeah, so it was a great quarter and to me, it's a harbinger of bigger and better things for Under Armour.

Chris Hill: Shares of Chegg are falling 46 percent at the moment.

Bill Mann: A lot.

Chris Hill: Third-quarter revenue lower-than-expected. The online education company said that enrollment did not increase like they had expected. This is in some ways the inverse of what we're seeing with Avis budget. Let me ask a similar question, is what we're seeing with the stock for lack of a better word, fair? Is this a company that really is essentially should be worth half the value it was yesterday, was it that bad?

Bill Mann: It was that bad.

Chris Hill: Okay.

Bill Mann: I think there's so many companies and Chegg was down what really one that I was paying attention to this as being a potential for. Chegg is essentially a notes and textbook rental subscription company. If you've got a child in college or even in high school, instead of having lugging textbooks around, they will essentially rent the rights to those textbooks and whatever additional materials from Chegg. It's a pretty neat, should be a pretty low capital business. But they're saying that their business was artificially impacted, it benefited last year from COVID-19 as everyone came online. Now that people are going back to studying in-person, they've seen some softness in some of their revenue areas. I think probably the market was over crediting Chegg for the change from COVID-19. But I think from now you're going to begin to see a steady improvement from Chegg going forward. I think probably the stock is pretty undervalued here. I don't know what the catalyst would be, but I think we need to remember that in 2021 with almost every company we're going to be forgetting some lessons from 2020.

Chris Hill: You don't look at what's happening with Chegg and think that this is an impaired business and a much more possible outcome for them is now that the market cap is $8.5 billion instead of $16 billion, they become a likely target for acquisition.

Bill Mann: I don't. They also announced that they are increasing their own buyback provision up to a billion so that 16 percent of shares outstanding it current prices. You would suggest that if they were making a feudal gesture, that they're doing it with a huge part of their balance sheet. I don't think that's futile at all. I think they recognize that there is an opportunity to shrink the amount of shares outstanding to increase the amount of earnings that each remaining share has. It's a profitable company. I think for shares were ahead of themselves, but I understand because again, because of COVID-19 and we don't really know how we're going to come out of this. We're learning as we go. For people who are shareholders of Chegg, don't beat yourself up over what's happening with the shares today and don't feel stupid because nobody really knows. It is important to remember that we're going through an unprecedented event in terms of the pandemic shutdown and now the reopening.

Chris Hill: Last week we got the announcement that Facebook is changing its corporate name to Meta platforms. One of the immediate reactions in the investing world was, what about FANG?

Bill Mann: What about FAANG?

Chris Hill: what about FAANG, Facebook, Apple, Amazon, Netflix, Google? What about that shorthand?

Bill Mann: You like to help.

Bill Mann: I'm a helper?

Chris Hill: You came to the table with a solution, an acronym for a collection of big tech companies including Meta, Apple, Netflix, Amazon, Microsoft, Alphabet, NVIDIA, and Adobe.

Bill Mann: Big consumer tech brand names.

Chris Hill: MANAMANA.

Bill Mann: MANAMANA. [laughs], look, I'm just waiting for the Under Armour marketing people to give me a call because this is genius. You don't even have to sue all the companies end. These are very important consumer brand names. FANG was dumb the moment it came out because they forgot Microsoft. It got silly when Google changed its name. We internally, we're calling it FANAMA, which I dare you to try and say without hearing David Lever, awesome voice singing in the back of your head. These are the eight bellwether American consumer tech companies, I think that we consider ourselves to be tastemakers. I'm I right? [laughs] It goes of the tongue? Doesn't it? MANAMANA who's stopping that?

Chris Hill: Here's the thing. I'm going to overlook the fact that you referred to your idea as genius. Because here's is the thing. You're right about this. I looked at this and after the initial chuckle I had, I looked at it, and because you had posted this on Twitter and I thought, I think he's right about this in part because as you said, Microsoft was left out of the equation and now Microsoft is the largest market cap companies out there, but also because NVIDIA and Adobe, increasingly, by virtue of how they have grown the products that they create, the solutions they create, they have forced themselves into this conversation and should be getting more attention.

Bill Mann: Absolutely. Adobe larger and market cap than Netflix. We don't talk about Adobe enough. It has been a long-term monster winner, and probably the company that first invented software-as-a-service. They shifted and became, I'm going to say this declaratively as opposed as opposed to maybe they were the ones who invented SaaS. An incredibly important company. It has been a long-term winner. I think as a bellwether, MANAMANA makes perfect sense. Jump on board. Chris.

Chris Hill: I am onboard Bill Mann, thanks so much for being here.

Bill Mann: Thanks Chris.

Chris 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. 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 and see you tomorrow.