What should investors consider when a company they own shares of buys another business?
In this podcast, Motley Fool analyst Jason Moser discusses:
- How Teladoc Health's (TDOC 1.96%) stellar acquisition of BetterHelp is paying off.
- Why the jury is still out on its purchase of Livongo.
- The case for Lowe's (LOW 0.50%) Marvin Ellison being an early front-runner for CEO of the Year.
- How Lowe's is effectively dealing with inflation.
Plus, Motley Fool analyst Deidre Woollard talks with Boston University professor Makarand Mody about the hospitality industry, Airbnb's pricing model, and how the company affects the price of hotel rooms.
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 Feb. 23, 2022.
Chris Hill: With the record acquisitions predicted for the year ahead, it's worth spending a few minutes exploring how they can go well for a company and what it looks like when they don't. Motley Fool Money starts now. I'm Chris Hill, joined by Motley Fool Senior Analyst Jason Moser. Thanks for being here.
Jason Moser: Hey man, thanks for having me.
Chris Hill: Coming up later in the show, Deidre Woollard is going to be talking with Makarand Mody, professor of hospitality and marketing at Boston University. They're going to be talking about Airbnb. But let's you and me start by talking about acquisitions. Teladoc came out with their latest earnings report. You pointed out something on Twitter that was somewhat eye-opening to me because we've talked in the past about their acquisition of Livongo and how much they paid for Livongo. You pointed out that years ago they bought BetterHelp for $4-1/2 million. If you look at what BetterHelp did for their business, looks like the opposite of the Livongo purchase. Looks like a purchase that really worked out well for them.
Jason Moser: Well, yeah. I guess we should say with Livongo, the jury is still out. Let's give them a little time and we can dig into that a little bit later. But to your point regarding BetterHelp, that has turned out to just be a phenomenal investment. To put some numbers around that, Teladoc bought BetterHelp in 2015, they paid $4-1/2 million. BetterHelp this past year, 2021, just generated better than $700 million in revenue for the business. This was honestly one of the things that attracted me to Teladoc in the very beginning, this idea of a new way to distribute mental health services, that's what BetterHelp is. I think they saw early on this idea with telemedicine, with virtual healthcare, it was a nice way for folks to pursue assistance regarding mental health. It saved people, I think, from having to make that decision, maybe of going to the doctor for fear of being seen walking into a psychiatrist's office, for example. Of course, there's no shame in doing that.
But the stigma exists. I think they felt like this was a great opportunity because you can visit your psychiatrist essentially from anywhere, you don't have to leave your home. It makes it maybe a little bit more open-minded to pursuing that and that's really paid off for them clearly. I don't think anyone really foresaw what we would have been going through over these past couple of years. But clearly, these past couple of years have taken a toll on everyone, I would say, some more than others. What that really has done, it's given Teladoc Health a great opportunity to get that BetterHealth product service out there for folks who need it, and clearly, a lot of people are taking them up on that. When you look at acquisitions and Teladoc has really grown via acquisition through the years, that is one that stands out as a wonderful investment.
Chris Hill: I realize that I tend to think of management teams and businesses making acquisitions in a pretty binary way. I tend to just put companies and management teams into one of two buckets. Either they're good with acquisitions or they're not. I'm wondering if I should start thinking about it more like a portfolio where you've got a portfolio of stocks and you've got some winners, you've got some losers. The BetterHelp acquisition turned out to be a masterstroke by the folks at Teladoc. As you said, Livongo is still up. We've talked before about Meta Platforms buying Instagram for $1 billion and that was a genius move. There are activist investors who look at Meta Platforms paying, I think it was $19 billion for WhatsApp and saying, what are you doing? Is it the same group of people? Is that how we should think about acquisitions? Because obviously, we'd love it if companies we own were out there making acquisitions, we'd love it if like, oh, they're great at this. But is the better way to think about it more like stock-picking in that, look, some of these acquisitions, they're just not going to work out, they're going to overpay or it's going to take longer to be accretive.
Jason Moser: I like that point of view. That's generally the way I look at it. With companies that grow via acquisitions, some companies don't really rely too much on that, but some companies do. I don't think it's totally reasonable to expect them to bat a thousand. Much like we as investors don't expect to bat a thousand in our own portfolio, some acquisitions, they just don't work out or maybe it takes a little bit longer for them to play out. The Livongo deal to me has been fascinating because I will say, I'm obviously a bull on Teladoc Health, own the shares personally and I still cringe [laughs] when I think about how much they paid for Livongo. Now, there are a couple of things that make it a little bit easier for me to deal with. I think about from the perspective of No. 1, yeah, they paid a ton of money for it, but it was a cash-and-stock deal. Thankfully, they were able to take advantage of a very inflated stock price when they made that deal. They did use some cheap currency there, which was a good thing. The other thing in regard to Livongo, and I know everybody likes to think, well, acquisition, therefore, we want to see results now. I think with Livongo, it probably is going to take more time. I think one of the reasons why they were so attracted to paying up for that business in such an early stage was the nature of what they provide, the focus on chronic care.
We've talked about this before, but you look at over 40% of the adults in the U.S. are living with multiple chronic conditions. You do a little back-of-the-envelope math there, 40% of adults, we got 330 million people in the country, 25% of the round number are kids. You've got something like 250 million adults give or take, 250 million adults, 40% of that is a 100 million people. That's a lot of people. [laughs] They just chalked up 729,000 individuals enrolled in their chronic care program. You can see you 729,000 versus a hundred million, that's a big gap there. I'm not saying that 100 million is the market opportunity, but I am saying that there are plenty of folks out there still who could end up being enrolled in this program, in this suite of services that they offer. The other thing is that with chronic conditions, I've said it before, they require chronic care. I think in regard to this deal, you have to really think longer-term. Because they have the opportunity to develop really lifelong relationships with a lot of patients. You're talking 10, 20, 30, 40-year relationships potentially with these folks who have these multiple chronic conditions. There is the potential for a very long-living stream of revenue from these chronic conditions patients that maybe investors today don't really want to think that far out. But I think it helps make a little bit more sense of the deal and why it could be a good thing for Teladoc. I think the jury is still out as to whether it is going to be ultimately a good deal, but I think we're seeing signs, at least I understand why they were attracted to it. It certainly is a key point of focus for them going forward. Chronic care, the call, it may as well been sponsored by Dr. Dre, the word chronic was mentioned 45 times on the call. These guys are focused on chronic care and that makes a lot of sense.
Chris Hill: Last thing before we move on, we were talking before we started recording about the prospect for more and more acquisitions this year. You look at shares of Teladoc Health down dramatically over the past 12 months, the market cap is around $10 billion. Do you think someone is going to kick the tires and maybe look to buy them in the next year or two or do you feel like they have enough going on where they can start turning the stock price around and therefore an acquisition of Teladoc Health becomes more expensive?
Jason Moser: I absolutely believe there are parties out there that would be interested in owning this company. It's interesting to see where the stock price is today. You've got to go back to like mid-2019. We've essentially round trip from there but it's also worth noting when you go back to 2019, Teladoc was basically a $5 billion company. Well, it's a $10 billion company today, but the share price is the same, so what gives? Well, we were just talking about it, acquisition. They issued a ton of shares to facilitate that Livongo deal. As a shareholder you feel like maybe they've been spinning their wheels a little bit, but it is a much larger company today. The point being that acquisitions do come at a cost and you will feel that in the near term. I have a hard time believing that Teladoc's management would be interested in being acquired. To me, this is a team that really seems dedicated to building this business out in doing all that they can without having to deal with living under someone else's roof, so to speak. I certainly believe that there are folks out there who would be interested but I think in order to make that happen, they would have to pay up. I don't think Teladoc management would just give it away for a song, so to speak.
Chris Hill: I know we're not even at the end of February, but is Marvin Ellison an early front-runner for CEO of the year? Because when I look at Lowe's wrapping up their fiscal year the way they did. Profits and revenue were higher than expected. Same-store sales were up 5% which is not a lot in and of itself but the quarter we're talking about is not particularly a strong, you know this is heading into the spring, which is typically a more consequential quarter for businesses like Lowe's and Home Depot. I feel like Ellison is an early front-runner.
Jason Moser: I mean, it certainly feels like he's done a tremendous job and if you look at Lowe's shares, the stock has returned 210% over the last five years. I mean, that's outpacing the market, and handily, it's outpacing Home Depot which to me that's significant. Home Depot, for the longest time really been the leader of the pack there but Mr. Ellison has just done a tremendous job in turning Lowe's around and really getting the most out of this business and he's also benefiting I think from a very wonderful time to be a company named Lowe's or Home Depot. The housing market is tight and as a reminder, we talk about this often when we talk about these companies, but 50% of the homes in the U.S. are 40 years old and older.
That means that they require investments and upkeep and when you look at Lowe's sales, two-thirds of their annual sales are generated from repair and maintenance activities so it's a market where they hold an important position. They know a lot about this space that helps them manage their inventory levels appropriately. In the quarter itself, another strong one sales $21.3 billion up modestly from a year ago, they grew earnings per share 34%, pro customer sales are up 23%. They continue to reward patient shareholders. This is a Dividend Aristocrat. They continue to reward patient shareholders not only through the dividend, but the share repurchases as well as share count's down 22% since 2017. That's helped fuel that 210% return that I mentioned earlier and when you put it all together it's just been a tremendous performance from Mr. Ellison and from Lowe's over these past several years and I suspect it sounds like they are planning for more of the same here in 2022.
Chris Hill: Well, and you think about the state of homebuilding in America, Matt Argersinger has made this point before, there's only so quickly homebuilders can move in aggregate and when you start doing the math on how many homes per year were being built in the wake of the Great Recession and where we are right now, it really does point to, among other things, more home improvement and therefore more business for companies like Lowe's and Home Depot. I know people always put them up against each other in the same way that people put Coke and Pepsi up against one another and they are competing with one another but as investors, we can own both [laughs]. That's the thing I love about this business, we can own both.
Jason Moser: Yes we can and honestly, I think it's more than reasonable to own both. When you're looking at an important market, one that I think is very resilient, they're able to deal with inflationary times pretty well. Also, they mentioned this on the call, these are costs. These inflationary costs that come in, lumber for example is through the roof now, they're able to pass these costs along the customers because there's not really a choice. But they're able to also keep prices competitive and we've seen them handle inflationary times while gross margin for the quarter expanded 115 basis points from here talking about gross margins in a period of time where inflation starting to rear its ugly head. That's a big deal.
We're seeing companies like Lowe's and Home Depot manage the time very well just because of the nature of the market that they serve and to me, I look at it like Mastercard and Visa, I own both Mastercard and Visa because you don't have to pick one over the other. You can own both and I think in this case with Lowe's and Home Depot, yeah Lowe's has outperformed Home Depot over the last five years but you know what? Home Depot is also outperformed the market over the last five years, they've both been wonderful holdings. Home Depot, I think was a little bit more of an obvious pick because Lowe's was in a little bit of a turnaround situation and there were questions as to whether Mr. Ellison would really be able to pull this off. Well, he's answered I think those questions fully and going forward these both seem like really good opportunities, particularly as we are now entering into the correction territory.
Chris Hill: Jason Moser, thanks for being here.
Jason Moser: Thank you.
Chris Hill: One more driver for the home improvement industry is the growing number of people who are sprucing up their places so they can rent them out on Airbnb. Makarand Mody is a professor of hospitality marketing at Boston University. He's been studying Airbnb's business model and how the company effects hotel prices. For more, here's Deidre Woollard.
Deidre Woollard: I'm here today with Dr. Makarand Mody to discuss Airbnb and the hospitality industry. He's an associate professor of hospitality marketing at Boston University School of Hospitality Administration and he serves as a chair of undergraduate programs and as the school's first ever director of research. He's done some fascinating research on the impact of Airbnb on the travel industry. Welcome.
Dr. Makarand Mody: Thank you, Deidre, for having me. It's a pleasure.
Deidre Woollard: We've been watching the growth in Airbnb now that people are starting to travel again, which is pretty exciting. Why does Airbnb have the advantage in a post-pandemic world?
Dr. Makarand Mody: I think it really comes down to three factors that we've looked at in our research and just generally otherwise as well. I think the first aspect really is the privacy and the safety that staying at an Airbnb affords even say relative to a hotel. In most cases, you have a place completely to yourself, there's no human interaction really for most part and I think that's giving a lot of people a sense of safety and allowing them to venture out again. I think the second factor that really helps Airbnb is space, so a lot of Airbnbs that you would typically end up getting are significantly larger than your average hotel room so surely allows smaller groups even to travel much more comfortably. I think third aspect is really the changing nature of work and travel as a result of COVID-19. We've just looked at the statistics and there's a large number of people now more so than in the past that are working remotely and have significantly more flexible working arrangements and this allows people to work from anywhere really and I think Airbnb really has capitalized on that and benefited from some that work from home as well.
Deidre Woollard: Yeah, I think that's just a fascinating shift for Airbnb, but also for the whole hotel and travel industry. Your research found that Airbnb, the impact of it doesn't necessarily change hotel demand but it may impact pricing, so what does that mean for the ways that Airbnb and the hotel industry intersect.
Dr. Makarand Mody: What's interesting is, when we weren't necessarily expecting that in our research as well, because people are now staying with Airbnb as opposed to staying in a hotel room, it will take away some demand from hotel rooms. But I think what the results of our research now shows that over time, and this is really 2008 post the recession. The size of the travel buy seems to have gotten bigger. We saw about 12 years of really explosive economic growth, and that was accompanied by an increase in travel, as it tends to happen when people's disposable incomes go up. The size of the buy actually increased, which meant that there were more people traveling, and even if hotels were getting a slightly smaller basis of that by proportionately, it still remains the same.
What our research didn't show is that hotel lost a little bit of that pricing power because was now a significant force in the market. So, if hotels were able to charge significantly higher rates before Airbnb was a big factor, now that consumers have this alternative accommodation options, hotels realized that they also have to track and really index their prices against what competitive Airbnbs in the geographical area are charging as well. That's really been an interesting component of this tussle between hotel combination and Airbnb, so much so that most of the trucking companies that offer data like Smith Travel Research now even offer hotels the ability to attract the prices that Airbnb in their vicinity are charging. I think that has been a really fascinating development over the last few years.
Deidre Woollard: Interesting, I think it's fascinating the way that Airbnb has evolved from starting as an air mattress on a floor in one room to now being this global travel brand, and now it's a publicly traded company of course. As it grows up, it had its problems with different cities all around the world. It's maturing as a brand. There's been a lot of talk about Airbnb being a negative for long-term residents. Your research shows that might not be the case. What did you find?
Dr. Makarand Mody: We really didn't approach our research from that perspective, there has been researching entities like LA that has shown that Airbnb do take away from the long-term rental market, and this causes an increase in rent for whatever the remaining suppliers in the market. There has been some research done in cities, but we didn't necessarily approach it from perspective, our research was to really look at residents' sentiment and to get a sense of how people feel about Airbnb as a brand, and do they perceive these negative impacts like increases in rent happening, do a significant enough extent where it impacts their quality of life and they're living on a day-to-day basis. Interestingly, we actually found that for the average resident, so we do find an average resident as somebody who is not renting on Airbnb themselves, but is aware of Airbnb happening in their neighborhoods and perhaps even in their buildings that they live in.
That's how we define the average resident. We found that for most average residents, they actually saw the benefits of having Airbnb in their neighborhoods to outweigh the cost. For most part, they were either agnostic to Airbnb or actually perceived it favorably. What was interesting was, if you were someone who's used Airbnb as a traveler yourself in the past, there was more positive sentiment toward the brand as opposed to if you haven't used it. So in Airbnbs in a sense they're addressing residents is pretty simple. If you can give them to stay with your brand, they won't mind having other Airbnb host and their vicinity as much either.
Deidre Woollard: Interesting, so as Airbnb gets more popular, do you see it fundamentally still as part of the sharing economy as travel platform? What do you think that it is right now?
Dr. Makarand Mody: Right now, I think COVID has changed the dynamics a little bit. We did our research, just before the COVID-19 pandemic, and our research actually showed that the majority of units that were being listed on Airbnb, and this is particularly in the United States, now, about two-thirds of the units were actually rented by multi-unit host, or more to be called professional host. These are people who are listing more than one property on Airbnb. Now, this is a pretty large number, two-thirds and it went against Airbnb is brand Meredith, which is just saying, hey, we're giving you this local authentic experience and an authentic connection with the host, when in most cases, the properties are actually being managed by professional property managers, and as a guest, you have very little to absolutely no interaction with a host or a local whatsoever. It was interesting because it seemed like the professionalization of Airbnb was going against the brand narrative, but it did work for Airbnb really well because it allows them to scale their supply quite exponentially through these professional property managers. We haven't had an opportunity to look through the data now, but at least what Airbnb condenses because of the COVID-19 pandemic, It seems like some of those professional host have reduced, maybe because they see vendor economic opportunity on the long-term rental market because travel demand is lower. But to the extent that, that is true, we haven't had the opportunity to look at this supply date again.
Deidre Woollard: That makes sense. Yeah, that is absolutely something that Airbnb has talked about recently. Another aspect of Airbnb as far as that host experience has been the experiences aspect of it now, where there's something like wine tasting or pasta making classes or things like that. Do you see that as something that will continue to be part of Airbnb? It's something that you see the hotel industry taking a look at as well.
Dr. Makarand Mody: It's interesting, I think hotels have always had these kind of experiences, but typically they have been extensions in the foremost, their loyalty programs. In our experiences outside the hotel, have been ways that hotel companies have tried to get people to spend their loyalty points. It's almost like two distinct programs offering, one is the hotel offering and then this is the experience it's offering. I don't think it's been integrated as well as Airbnb has. I think what Airbnb really did was, they realized that when a traveler actually goes to a destination, sure they want a really nice a combination at which they're going to stay, but really the purpose of travel is to experience the destination as a whole, and that's where they are experiences product, and now because of COVID, their online experience as product really took center stage. I think the way Airbnb has integrated these experiences is better than what hotels have done. Even though hotels have had an experience product for way before Airbnb did.
Deidre Woollard: You teach hospitality marketing, so obviously you study hotel brands, Airbnb. Are you seeing merging between these two platforms, are they each learning from each other as travel evolves?
Dr. Makarand Mody: Yeah, absolutely. I think just as there's a lot for hotels to learn from Airbnb from an experience creations standpoint, Airbnb has a lot to learn from the hotels as well. So, I think one of the common things interestingly that is emerging from both of these, both Airbnb and hotels have realized that they are in the business of space, so if you see yourself as being in the business of space, and in the business of an experience, you start thinking about your business model and you start thinking about product very differently. Airbnb for the longest time was just a home-sharing platform. But now if you go onto the platform, you can actually book independent and boutique hotel rooms across a variety of cities on Airbnb as well. Similarly, if you think about hotels, all they have done for a long time to sell a hotel room or a hotel product. But now, if you take a look at an example of Marriott with their homes and Miller's brand, that's actually a home sharing product that is being sold under the Marriott umbrella. They're learning from each other, but they're also realizing that a traveler has a need, and their job is to really cater to that need and not really get caught up on whether we're hotel brand or home-sharing brand. Really, I think they are starting to rethink themselves and holistic travel brands.
Deidre Woollard: Last question for you. Is there an advantage that hotel brands might have over Airbnb at this point?
Dr. Makarand Mody: Yes, some of our research has alluded to this as well, and I think what hotels have and Airbnb has found very difficult to replicate and will probably continue to do so is that service and that hospitableness aspect. As much as Airbnb would like to suggest that they do provide these authentic local experiences, most of them aren't necessarily engineered and they tend to happen through serendipity. But I think that's where hotels are different. There's a purposeful service element built into the hotel experience. There's an element of hospitality that you're going to get through hotel staff that Airbnb just want to find difficult to replicate.
Deidre Woollard: Wonderful. Thank you so much for your time today.
Dr. Makarand Mody: Thank you Deidre, it's my pleasure, thanks for having me.
Chris Hill: That's all for today and upcoming up tomorrow, we're going to talk about inflation and share three stocks to put on your watch list for inflationary times. 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. So don't buy or sell stocks based solely on what you see here. I'm Chris Hill, thanks for listening. We'll see you tomorrow.
