Best Buy (BBY 0.78%), Dick's Sporting Goods (DKS 0.21%), and Zoom Video Communications (ZM 2.13%) all issue third-quarter earnings reports with a similar pattern: better-than-expected results followed by shares falling. Motley Fool analyst Asit Sharma analyzes all three and shares why he believes the short-term pain for shareholders should be buoyed by the strength of each business.

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This video was recorded on Nov. 23, 2021.

Chris Hill: It's Tuesday, Nov. 23. Welcome to MarketFoolery. I'm Chris Hill. With me today our man in North Carolina, Asit Sharma. Good to see you.

Asit Sharma: Chris, good to see you my friend. I am so happy to be here in this great week right before Thanksgiving holiday with you.

Hill: Likewise. Selfishly, I like that earnings season doesn't slow down just because we're less than 48 hours from Thanksgiving. We've got a trio of third-quarter earnings reports. We're going to start with Best Buy. Profits and revenue were higher than expected but shipping costs are on the rise. Shares of Best Buy falling 16% this morning, although this is falling from an all-time high. I get that if you're a Best Buy shareholder, it's never good to see that amount of red. Maybe the fact that a day ago the stock was at an all-time high takes a little bit of the sting out of it.

Sharma: Chris, I am with you there. At the same time, should we invoke the name of Rodney Dangerfield here? I feel that Best Buy just doesn't carry enough respect. This is a company that now after today's fall in the stock price is trading at about 12 times forward earnings. The last time that you and I talked about Best Buy, it might even been last quarter, I was praising the way their business model has adapted. I was praising management's willingness to experiment with different store formats. Here we have a quarter in which they were able to increase their domestic comparable sales by 2% after those sort 22% and change this time last year. They maintained a lot of that COVID momentum, but yes, to be a little more serious here, I think investors do tend to have a shorter-term bias around earnings reports. Just now people are seeing some of the potential risks ahead with this business model, as supply chain issues still are pushing so many companies to the brink of making their commitments in terms of deliveries and in terms of their promises to investors. I can understand this. At the same time, we have a company, one of the few in the retail sector, that has shown it can grow in multiple environments. This, to me, looks like a buying opportunity for those of you out there who are fans of this company and the way it's transformed its model over the past 3-4 years.

Hill: Jason Moser likes to point out with respect to expectations. He is more interested in what are the company's expectations for themselves? When you look at the comments from Corie Barry, the CEO of Best Buy, this very much appears to be a business that is sticking to its plan, both in terms of what they are looking to do for the holiday season, and what they are looking to do for the total-tech membership program that they are making a not-insignificant investment in. I'm not a shareholder. There's nothing I'm seeing right now from Best Buy that makes me think they are in trouble here. Look, I understand the argument that some analysts are making with respect to Best Buy. The argument goes like this: During the pandemic, a lot of people invested in upgrading their technology at home. As we get past the pandemic, people are going to take that money and they're going to instead spend it on travel and live entertainment.

I understand that argument. I just don't happen to completely agree with it to the tune of the drop that we're seeing today. Maybe some of what we're seeing today is profit-taking, but the idea that the amount of money that people are spending on home electronics is going to completely flatten, I don't know, I don't think so. The last thing I'll add, Asit, is one of the reasons Apple (AAPL -0.66%) has been such an amazing business and such an amazing investment over the past 15 years is because Apple has defied expectations with respect to everything we thought previously about the cost of consumer electronics, which is that over time the costs come down. Apple's been able to keep those iPhone prices nice and high. Corie Barry taken a little bit of a page out of that playbook by pushing back on the notion that Best Buy is going to have to do some deep discounting this holiday season. Now, we'll find out three months from now how that actually played out, but if I'm the Best Buy shareholder, I like everything I'm hearing from the CEO.

Sharma: I agree, Chris. Also, we know that Best Buy is less reliant on the holiday season than they were in years past as they fine-tune their operations. I love this comparison to Apple. Apple is the original company that changed our idea of the replenishment cycle in electronics. Before Apple had this solid cadence of introducing new iPhone models, you held onto your phone for four or five years. Now, cheapos like me still try to hold on to their phones for four or five or six or seven years, but the rest of the planet likes to upgrade in more frequent cycles, and look, Best Buy is a beneficiary of this cycle. If we do look only at the next couple of quarters, yeah. Is there some fall-off effect from stimulus and are people itching to travel? 

Maybe they're allocating money toward a plane ticket versus I don't know, a new television set. There's a short-term effect there, but come on, when you have a stock like this that is objectively cheap, you have a great management team that, as you point out, is investing in all types of ancillary revenue that's surface based, not just tied to the buying and selling of product, then you have to think twice about your holding periods. If you're holding period is three years, five years, it really doesn't matter to you if Best Buy gets socked hard during the holiday season due to things like supply chain constraint or some analysts saying that look, folks aren't going to be spending as much in Q3 of FY '23. I don't know. To me, this is one of the few retailers, still, that makes sense that you can invest here and see a handsome return in the coming years.

Hill: Dick's Sporting Goods is the same story. Third-quarter profits and revenue came in higher than expected. The stock is down nearly 10%. They also raised guidance. This one is a bit more puzzling to me. The only thing I'll add is that like Best Buy, 24 hours ago, Dick's Sporting Goods was at an all-time high. Maybe given the rise of the stock over the past year or two, it has moved its way into that rarefied air of businesses that when they're trading at an all-time high, only the truly amazing quarterly results and significantly raised guidance are going to move the stock higher.

Sharma: Yeah, Chris. This time I'm buying your argument lock, stock, and barrel. I totally agree with you. It's hard for Dick's Sporting Goods. It's been a star during the COVID era. It's continued to rise as COVID becomes more of a rearview-mirror theme. I think even though these numbers look wonderful, for example, comparable sales increased 12% versus last year's 23% increase, so even better than the Best Buy scenarios painting a few moments ago, I think here it's almost that they are due for some profit-taking. There are investors in this space, the retail space that have an itchy trigger finger simply because retail is hard. It makes sense to me to see this stock selling off some. I still think, like Best Buy, Dick's has done an amazing job with its business strategy. In this case, it's been all about what to sell, where to focus on merchandising, where to invest in inventory. 

They moved very quickly during COVID into the outdoor lifestyle elements of their programs. They have been increasing their private label goods for at least seven or eight quarters now and their e-commerce has been a star. Now, I think part of the story today could be a little bit of that e-commerce sales component's slowing down a bit, which has been a leading engine. I did see a quick news item before we started taping that that could be part of this story, but more or less you're on the money here, Chris. This is people that want to take a profit. Maybe again, opens up a little opportunity for those who have been on the sidelines and like this as a solid, diversified retail concept. Again, Chris, I can't help but keep coming back to this theme, with both Best Buy and Dick's, they specialize in large-format stores. Now, of course, note Best Buy has experimented with a lot of different sizes, but your average Dick's store is a huge edifice. I'm continually impressed by their ability to increase their sales per square footage in these huge big-box stores.

Hill: It is impressive and as you mentioned the investments that they're making in their own in-house apparel brands, the partnership with Nike (NKE -0.76%) tied to their e-commerce. They're not sitting still in any part of their business and I think you have to like that if you're a shareholder. Also, in the case of both Dick's and Best Buy, these are not huge companies. These are $11 [billion], $12 billion market cap companies. The management of both is strong. I'm not saying these are necessarily investments that you can put on autopilot. I talked recently about Home Depot (HD 0.55%) and Lowe's (LOW 1.45%), the way that those businesses are being run right now, at least for me as a shareholder. They are ranking unbelievably high on the peace of mind scale. Like I'm not worried about either of those. Again, it's not that I would put Best Buy, Dick's Sporting Goods in the same category but they both in part because they are so much smaller from a market cap standpoint. They both seem like they have a decent runway ahead of them.

Sharma: I agree Chris, and maybe the one element in there that really supports your argument is that they're both highly cash-generative businesses for being companies that sell again product. These aren't software-as-a-service companies. They have their fixed overhead figured out. They price very handsomely in the market. They found a way to attract customers either in the stores or via e-commerce who will pay for these great brands. They've got a solid equation here that works. In the case of Dick's Sporting Goods, they've had sales through the first 39 weeks of this year of about $9 billion and they've generated a cool billion dollars in operating cash flow from that. This is a component to me that is set and forget. They've got it figured out, and why wouldn't you diversify your portfolio with a few good solid retail names, aka Home Depot or a Best Buy or even Dick's Sporting Goods?

Hill: Stop me if you've heard this before. Zoom Video.

Sharma: Stop.

Hill: Quarter profits and revenue [laughs] expected and the stock is down 17%. This is not a retailer.

Sharma: True.

Hill: There are a few different ways we can go with Zoom Video, but just in terms of the results and their guidance, what stands out to you.

Sharma: Yeah, I think for Zoom, one thing that we probably ought to discuss is there is some left over lingering nervousness about the fact that Zoom had to call off its acquisition of Five9 (FIVN -0.70%), which makes cloud-based customer service software. I think many investors were looking at that as a key piece for Zoom to have a new avenue to revenue. With that, you get this slowdown of revenue that is associated with the pandemic and all us being tied to our computers. However, I want to say that Zoom has a really interesting future as a hybrid work company. I think that with the growth rates we're seeing, I mean, we're talking about third-quarter revenue that was up 35% year over year. We still have an extremely capable company with many ways to continue to grow. Their investment thesis now is focused on that hybrid environment and it's also focused on the enterprise. Increasingly, Zoom wants to migrate away from this idea of itself as a universal tool for all consumers and more of a tool that the largest companies can utilize in their arsenal for providing employees with multiple ways to work. With that in mind, if you look at the stock, which is down significantly today in and off, well off its all-time highs, again, stop me if you've heard this before, but this [laughs] opportunity for those who are on the sidelines and have been looking at Zoom as a solid company with much growth potential ahead.

Hill: I understand the case for selling but it's hard for me to imagine that Zoom Video is not going to be a bigger company a year from now than it is today. When you look at the growth that this company has experienced over the last two years, the way that it is integrated itself into the lives of so many people and so many businesses. I think if you are bearish on Zoom Video, at least one of your arguments has to be, I don't think this company has the ability to raise prices at all. I am not a shareholder, I'm not sure of the stock. I would not want to be in the position of making that argument that Zoom has no pricing power whatsoever.

Sharma: Yeah, and I think they do have pricing power, but it's not in the form of raising prices. I think what we're seeing here is a company that's been able to upsell its offering to lots of different-sized companies. Their trailing-12-month net dollar expansion rates in customers with more than 10 employees was 130% this quarter. That's for the 14th consecutive quarter. Let's break this down over the last trailing-12-months customers on average, if these customers belonged to companies with more than 10 employees, those companies spend 130% more of their average rate over that time period. So how are they doing this? Part of it is the migration to something called the Zoom Phone. Zoom Phone is an all-in-one interface via Zoom that enterprise companies use. It incorporates text messaging, all modes of communication, makes it easy to have Zoom on the go, and it's basically a license that Zoom sells. This is for them, the upsell or the pricing increase. It's not necessarily raising the price of the Zoom product that most of us have used but it's taking its enterprise customers to the next level to that future of hybrid work and remote work. I think that this is a story. If we choose to ignore it, we can but truth what you just said Chris, yes, there's no way that Zoom is your company this time next year. I mean, they have the track record of this incredible expansion that's still continuing. 

If you look at this quarter only, gross profits for this quarter is up almost 50% versus this time last year and year-to-date absolute gross profit dollars have nearly doubled since last year in the first nine months of 2021. That just tells you that this is a business that is compounding its advantages. It's got I think some narrative problems because people don't understand that yes, 35% growth or 20% growth or 25% growth is brilliant. They want to see 50% growth that we had during the pandemic. That's probably not going to happen and yet the advantages here are so strong. I also think again, there's some residual skepticism because it couldn't merge with Five9 and I think here that the best thing if you're a shareholder is to give the company some time. It's going to figure out, again the add-ons to its revenue streams. It's already doing that with Zoom Phone and some other products but I think over time with the leadership, their fortress balance sheet and the growth that you mentioned Chris, this is that call if you're on the sidelines to take a look at Zoom and maybe buy some shares.

Hill: Let me make one distinction in something you just mentioned because I agree with you that they do have a little bit of a narrative problem. But I think their narrative problem is with investors and it's not to dismiss that like anytime you have a good story that you can share with investors, that can be a powerful thing for your business. But I think that the narrative problems they have are probably more with investors than with customers. My hunch is if you're in the business of selling for a videoconferencing business, you'd probably rather be working for Zoom than one of their competitors. That's just a hunch.

Sharma: Yes, Chris, let me condense and rephrase everything I just said after listening to you and say.

Hill: I wasn't trying to correct you. I was just trying to make it.

Sharma: No, but I think this is great because I think you've refined the idea and what we have here is the problem isn't with the storytellers, it's with the listeners.

Hill: Yeah, although it's one of those things where I always pay attention to how companies communicate both with their customers, potential customers, and with Wall Street and I think Zoom has done a good job of walking in that line of just saying like sometimes pushing back on Wall Street analysts without showing that they have a thin skin. Because I never want to see that from any leadership of any company that is such a red flag to me if they feel like they're being attacked personally as opposed to being questioned about the business that they're running.

Sharma: Yeah, I agree. I think management does a really good job of that. I think the customers get it and I think they're telling a good story. All in all, I buy that story and I'm pretty positive on their potential looking ahead over the next few quarters, but it probably will be bumpy. But at the end of the day, you've got a company here that just got a lot of very persuasive advantages so we'll see. We'll see this time next year.

Hill: Asit Sharma, great talking to you. Happy Thanksgiving.

Sharma: Same to you, Chris. Great Fun. Thanks so much.

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 see or it's going to do it for this edition of MarketFoolery. The show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. I'll see you tomorrow.