Checking In on "Pandemic Stocks"

As we've witnessed repeatedly throughout investing history, some businesses are more sustainable than others.

In this podcast, Motley Fool analyst Tim Beyers discusses:

• Zoom's (ZM -2.25%) continued customer growth and gross margins and CEO Eric Yuan's steady approach to offering guidance.
• Why DocuSign and DoorDash have staying power.
• The CEO change at Domino's Pizza.
• Pizza preferences.

Motley Fool host Alison Southwick and Motley Fool personal finance expert Robert "Bro" Brokamp talk with Motley Fool analyst Matt Argersinger about the ins and outs of being a landlord at a time when real estate is still hot.

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 March 1, 2022.

Chris Hill: Today on Motley Fool Money, a look at pandemic stocks and a surprising CEO change, that and more coming up right now. I'm Chris Hill joined by Motley Fool Senior Analyst Tim Beyers. Thanks for being here.

Tim Beyers: Thanks for having me Chris, caffeinated up and ready to go or maybe I need a little bit more caffeine, can't speak.

Chris Hill: Get some more caffeine. [laughs] We're going to start with Zoom Video because look, it's March first. I know for everyone, the pandemic starts at a different time. Probably as an investor, I think of my timestamp, the start of the pandemic as March of 2020. Zoom video is as big a pandemic stock.

Tim Beyers: Hundred percent.

Chris Hill: As exists out there and we'll get to the group in a second. But I'm curious to get your thoughts on the fiscal year they just wrapped up. It was interesting to me to see that and we've seen this a lot over the last six months or so. They came out with their fourth-quarter earnings report after the closing bell yesterday. The headline is about the guidance and after hours the stock was down somewhere in the neighborhood of eight percent. As of the market open this morning it's up almost one percent as people had more time to digest it. Just in terms of the year, they just wrapped up what stands out to you because there are a lot of numbers to digest. But the one that stood out to me was the customers they have paying $100,000 or more and the growth in that category, it seems pretty impressive.

Tim Beyers: They're up 66 percent. I mean, I think that's pretty good; pretty good, 66 percent. Yeah, agreed Chris. I know we're being a little bit snarky here, but let's just hit some of the numbers overall. Year-end number of customers over $100,000, so big customers, that was up 66 percent year-over-year. Total revenue for the year came in at, it's just about 4.1 billion. We'll call it 4.099 Billion, but that was up 55 percent year-over-year. Overall, the income from operations up 61 percent year-over-year, these are really strong numbers. I think if you wanted to fixate, you could look at the fourth quarter because that's a hard year-over-year comparison. For example, fourth-quarter total revenue up 21 percent. Far different, much slower growth. Non-GAAP income from operations up 16 percent in the fourth quarter. 

There was some fourth-quarter GAAP income from operations that was down two percent year-over-year. There are some things that you could look at and go, I don't know, growth's slowing here, but overall, Chris, what an outstanding year for an outstanding company. I will say this, let's not forget, this is one of the most efficient companies out there in terms of Cloud. This a profitable Cloud company that generates excellent margins, almost 26 percent operating margins. That's a staggering number. If you think about the number of companies, particularly the number of tech companies we talk about on this show, Chris, were unprofitable and we're asking the question, when are they going to be profitable? You don't have to ask that with Zoom, they are profitable now. They generate huge amounts of cash flow and they're still growing at a pretty substantial rate. The stock going from down to up today, I think there's a realization that this is an excellent business that is trading for a pretty reasonable price.

Chris Hill: I think part of what we're seeing right now is also a recognition that and I want to be clear on this; Zoom Video hadn't given any guidance [laughs], the, "disappointing guidance" is a function of the fact that they hadn't given any guidance. When they came out with their guidance for the full-year a group of analysts on Wall Street said, we thought it was going to be higher.

Tim Beyers: Right.

Chris Hill: I've been saying for weeks now. I don't know why any company would come out with guidance for the next 12 months. That is anything other than cautious.

Tim Beyers: Or shrug emoji.

Chris Hill: Right.

Tim Beyers: Right? [laughs]

Chris Hill: I don't know, so this is not Zoom Video cut their guidance from three months prior. They came out with guidance for the full fiscal year. What did you think of it because it struck me is imminently reasonable?

Tim Beyers: It was very reasonable. Now, I will say this, like when you look at, it is possible that they are being very conservative and sandbagging here. But again, to the point you just made, Chris. Would you do anything differently knowing what you know that there are so many known unknowns? But let's just be clear about this. When we're looking at the year-over-year revenue growth. So for the full fiscal year looking ahead, this is heading into fiscal 2023 for Zoom, it's between 4.53 billion and 4.55 billion now at the midpoint, that's about 11 percent revenue growth year-over-year. For a company that's been growing as fast as Zoom has been growing, somebody could look at that and say like, wow, that's an immense slowdown. If you actually believe that Zoom is going to slow to that kind of growth, then, OK, I get it, that you don't really want to be on this train anymore. But here's the thing, Zoom is notoriously conservative whenever it gives guidance, it has a history of raising its guidance over time. They want to set a bar they can walkover and then slowly raise it throughout the year. Because again, there are a lot of known unknowns. To me, I look at that guidance Chris, and I say like again, Eric Yuan is showing me that he's pretty smart. He is not going to set expectations that he can't easily exceed.

Chris Hill: You look at the pandemic stocks as a group and the two that immediately get name-checked, are Zoom Video and Peloton. We've seen plenty of businesses in this category. Over the last two years their stocks get run-up, in some cases, doubling over a short amount of time and then coming back to Earth. DocuSign, Teladoc Health, Twilio, Wix; are there ones that you look at and you think they separate themselves because some of them, whether they are profitable today are not seem like sustainable businesses. Peloton, to me, always struck me as a business that was having its moment. I think the new CEO, Barry McCarthy, is as good as anyone that you would want at this point in the company's history to get the books right, to right size the company and get them on a sustainable path to the future. But I look at a business like DocuSign and I just think, yeah, I understand why the stock did what it did. I even understand why it came back down to earth, but I don't see us returning to a world of pen in hand signatures, not when DocuSign is able to make that process so much easy.

Tim Beyers: Come on Chris, you don't want to sit down on your next mortgage and go through 300 pages and have to sign them with a pen. Come on, Chris, what kind of monster are you?

Chris Hill: A very lazy monster. [laughs] But seriously in the "Pandemic stock category", what are the ones that stand out to you as like this thing has legs. This is not just a pandemic business, this is a sustainable business.

Tim Beyers: Certainly DocuSign checks those boxes, but I will give you another one that I don't think we're talking about enough. DoorDash. I think DoorDash has four reasons that are different than some of the other pandemic stocks, has established itself as a business that is going absolutely nowhere. It's tongue and cheek evidence here Chris but I think just the fact that Uber needed to issue arguably the worst of the Super Bowl ads. The Uber eats where we're eating things like toilet paper, it's such a nonsensical ad but just the idea that Uber had to remind you that, hey, over here, we do this too. We do last-mile logistics. It's not just about delivering your order. DoorDash has been so far ahead in the idea of last-mile logistics and delivering things other than food well before anybody else was talking about this. Please remember that DoorDash has been eliminating its competitors slowly, steadily, ruthlessly through things like using their tech, creating a better app. Now, to be fair, you could accuse DoorDash from very unsavory tactics. They've had some pricing that has been very unfavorable to some of their restaurant partners and they've accepted that criticism and they're working on getting better at that. You could definitely hate them for that. 

You could also hate them for how they've treated their drivers in the past. They're working on that too. But by and large Chris, DoorDash is so far ahead of everybody else in this space. I don't think they're going anywhere. Let me give you two numbers to illustrate this. As of today, DoorDash has 3.7, let's call it $3.8 billion in cash on its balance sheet. Overall, it has roughly four billion in excess cash that's after all of its leases, everything else that it has to pay, it has no debt, so it has a huge amount of capital available to it right now. In addition to that, this is a cash generator. It's an unprofitable business but it is a cash generator because it's very smart about the way that it manages its expenses. It has a lot of non-cash expenses which show up on its income statement that are actually not cash out the door. They accrue those expenses ahead of time and it allows them to manage that balance sheet very, very well. I think DoorDash is formidable. I think they're the leader in last-mile logistics. I think we came to depend on delivery in a way that we didn't expect during the pandemic and now we're not going back and that creates a real tailwind for a company that probably gets a little bit of disrespect undeservedly I think.

Chris Hill: Real quick before I let you go, Domino's Pizza, their fourth-quarter results took a back seat to the news that CEO Richard Allison is retiring. The stock is down 7 percent this morning and I get that same-store sales in the US were just 1 percent. But you have to assume part of the drop that we're seeing is a reaction of the fact that Allison is leaving the corner office. He's been there less than four years. He had a tough act to follow in Patrick Doyle and I think it's safe to say Rich Allison is now officially a tough act to follow when you look at how that business has grown under his leadership, how the stock has performed. Good luck to Russell Weiner who's the Chief Operating Officer who in April becomes the CEO.

Tim Beyers: Right. It's sad to see him go. I think part of the reason it's down as well Chris is the year-over-year revenue and due to some supply chain issues which are understandable. We know this, we know there were supply chain issues for different fast-casual restaurants. We've seen it before. We've seen it in different areas like chicken and Domino's, they're subject to this as well. Even if Domino's wasn't giving you a lot of growth in the top line in terms of the stock which they are, they have done that but today it's down. But the stock has delivered decent returns just in terms of earnings per share, earnings growth, margin improvements. The stock itself has been solid. On top of that, they're giving you 19 percent average annual dividend growth. If you're holding the stock, it's an outperformer just by virtue of how they're returning capital to shareholders. This is an efficient business, they're going to be fine. They're going to keep paying that dividend. I think this is one to hold for the long term. Domino's is an outstanding business. You're right. Good luck to Russell Weiner here but I think he's got a very good business to run and I expect him to run it well.

Chris Hill: In honor of Fat Tuesday, is pizza your favorite heavy-in-fat food or is there another? Because it's very high on my list.

Tim Beyers: Well, look, yes, but we have to be very specific about this. First, if it is the so-called Hawaiian pizza, if you're going to throw pineapple on my pizza, we're going to have a problem. Fruit does not belong on pizza unless it's a tomato. Yes, pizza is my go-to but it has to be large slice, got to be able to fold it, has to have a little grease underneath so when I pick it up off the paper plate I get a little spot under there because I know I'm getting a real New York pizza. That's a real pizza. Do not give me pineapple on my pizza. Give me a little grease, a little extra cheese, throw some mushrooms or pepperoni on there, now we're talking.

Chris Hill: Our email address is [email protected] [LAUGHTER] and I'm sure we're going to get an email from the pineapple people and the Chicago style people as well. Tim Beyers, thanks for being here.

Tim Beyers: Thanks Chris.

Chris Hill: One of the surprising winners of the pandemic is Airbnb. It went public in December 2020 and while the stock has had some wild swings, Airbnb is currently trading above where it was on opening day. But before you decide to turn your own home into a profitable rental property, it might help to know the ins and outs of being a landlord. For more, here's Robert Brokamp and Allison Southwick.

Alison Southwick: Diversifying your income by investing in residential real estate can sound like a really great idea when you do the envelope math. For starters, over the last 10 years according to the Case-Shiller price index, residential real estate prices in the US have increased an average of 7.6 percent a year, not too shabby. Now, imagine if you invested in a rental property and you're able to get a renter to cover the mortgage payment while you accrue the equity. That sounds like a really sweet deal. Buying rental properties and becoming a landlord can be an effective way to build your wealth, but is it really the path to easy street? Joining us to talk about the pros and cons of being a landlord is Matt Argersinger. He's the lead advisor for The Motley Fool's Mogul and Real Estate Winners Services, which focus on investing in real estate, but perhaps most importantly, why we're having him even here is because he's a landlord himself. Matt, thanks for joining us.

Matt Argersinger: Hey, Thanks, Allison. Thanks, Bro.

Alison Southwick: Now, Bro, you're going to kick us off here.

Robert Brokamp: Yes I am, so let's just go straight into it. Allison just mentioned potential income, potential price appreciation, but actually there's tons of other benefits to investing in real estate and being a landlord so why should someone consider doing it?

Matt Argersinger: With real estate you have to remember you get leverage in real estate in ways that you can't in the stock market. Leverage in the stock market is a dirty word, but all of us or most homeowners have a mortgage and most of the time you put 20 percent down to buy a house. Well automatically, you're getting 5-1 leverage. That's 7.6 percent appreciation. Imagine taking 5-1 on that, or just imagine your house appreciates three percent a year, you've got essentially a 5-1 leverage with your mortgage, that return is more like 15 percent if you're looking at just your initial equity in your house. But that doesn't even begin to talk about some of the other benefits, like tax benefits, for example. Most of the time, because of depreciation, most small real estate investors, landlords, will either break even or report a loss for tax purposes with their real estate, but they're actually generating positive cash flow because maybe the rents are greater than the expenses like utilities, maintenance, and your mortgage, but the same time you're deducting operating expenses and depreciation so you're actually booking a loss for taxes, even though you're making positive cash flow guys. Depending on your income bracket, you can even deduct some of those losses against your regular salary. Those are really some of the positive investing benefits from being a landlord.

Robert Brokamp: Let's talk about that depreciation because it's crazy when you think about it. Basically, the government is giving you a break, assuming that this thing that you own is losing value because it's getting older, but in truth, [laughs] in many cases, it's actually going up in value.

Matt Argersinger: That's right. It's one of those perplexing, paradoxical things or whatever the right word is with real estate. The government lets you treat it as any other asset as if it's like a owning a car, or owning riding lawnmower. Of course, that's going to depreciate over time, but as we know throughout history, homes, real estate, has generally appreciated. If it's in the right area and it's generally a place where people are moving to, or it's near say, a university, or maybe in your tourist destination, generally over history, that property is going to appreciate in value. That doesn't mean that there won't be maintenance, or renovations, or things, or capital investments you have to make into to maintain that property. That sometimes offsets the depreciation benefit. But yes, in reality, real estate tends to appreciate over time, yet landlords are being able to offset taxes through depreciation. it's just enormous benefit..

Robert Brokamp: I'll just stay on taxes a little bit more. You talk about the expenses. Almost all the expenses are deductible in everything from the mortgage interest, to the repairs that you make, replacing the appliances, even travel expenses to some degree.

Matt Argersinger: It's right.

Robert Brokamp: It's all right. You could write it off. Then there's this whole thing about the 10-31 exchange in which, if you sell the property, even if you have a capital gain, you don't have to pay taxes on that if you roll it over to another property of equal or greater value.

Matt Argersinger: That's right, Bro. Even at the end of your time holding the property, if you deducted all these expenses, you sell the property hopefully for a nice profit, and then you get to take those capital gains, if you choose, roll them through a 10-31, as you said, and defer those capital gains out into the future. That's why the old adage goes. A lot of today's billionaires, a lot of the billionaires out there in the world, are real estate investors because they recognize the idea of investing in real estate, this really stable appreciating asset, than being able to roll it tax-free essentially into new properties and doing that for years and decades even and not paying taxes and building this enormous equity base in real estate.

Robert Brokamp: We've talked about the benefits. Maybe some people are intrigued. Where do they start? How do they start looking for a property to consider to buy and then start renting out?

Matt Argersinger: Sure. Well, I'll go back to my own experience really quickly when my wife and I bought our first rental property, gosh, 12 years ago. Now, it wasn't really a rental property, it was a duplex in Washington DC, and we saw it as a way for us to move into part of the house and rent out the other part. That I think is a really great way for us younger or aspiring landlords to get started. You can essentially buy a primary residence, maybe it's a duplex or maybe it's a house that also has a rental unit attached to it or separate, that you can rent out to offset your mortgage cost. That's a great way to get started. I think if you're looking where to buy real estate, it is a cliché, but location is really such an advantage. I think about our first property that my wife and I bought happened to be near Union Station, a few blocks away from Union Station in DC. Therefore, we always had a lot of travelers or activity going to that area of the city, never had a problem renting it out. I think when landlords, when they're looking to buy a property, think about places where there are growing populations, job centers, although that's less important these days with the work from home trend, or maybe they're tourist destinations, places where there's some natural demand drivers in that market that your house is going to benefit from. It's always going to be occupied because there's always going to be demand and maybe it's where your property is going to appreciate in time because that is an area where people are moving to or where there are jobs to be had.

Robert Brokamp: One of the things that always occur to me, and I know this because my parents rented out a town house on the beach for many years back in the 80s and 90s, is that there's a bit of a hassle factor. How do you handle the day to day of collecting rent, making repairs, finding new renters, things like that?

Matt Argersinger: Nowadays, it's a lot easier just given the websites and applications that are out there for you to manage your property will talk. I know we're going to talk about Airbnb a little bit, but my wife and I, for example, use Zillow, which lets us market our property, also handle some transactions and lets us communicate back and forth with prospective tenants. That makes things easier, got your app. But I also think being a decent accountant is a big benefit, making sure that you're covering, keeping track of all your expenses. Like I said, setting aside that maintenance reserve, being a good landlord and since being responsive landlord, I think is really underrated. I mean, I spoke with a full colleague a few months ago. You mentioned to me that he has been running this house in DC for a couple of years and he hasn't had a working oven in six months. 

When I said wait a second, why are you running this apartment if you're landlord hasn't come fixed to replace driven like, well, it's a great property and I can't my rents decent, I don't want to move. Landlords keeps telling me it's going to get back to you at some point. I'm like, that's crazy to me because if one of my tenant said our oven self-working, I'd be there the next day trying to fix it and if I couldn't fix it, I'd probably look to replace it hopefully within a week. Being responsible, Emily, I think also can really endure your tenants to make them good stewards of the property. Hopefully, encourages them to renew when their lease comes to expire. All those things that you can do to be a good landlord, good communicator, can make you successful.

Chris Hill: You mentioned Airbnb. Of course, the question is to Airbnb or not to Airbnb?

Matt Argersinger: I love the question, bro. Airbnb is the ultimate double-edge sword, I think, if you're landlord. On one side, you've got this enormous network effect. You got a 150 million users, you get incredible exposure, if you're listing, you earn more on a monthly basis by doing short-term rentals, even though the headaches can be a lot greater, and Airbnb handles all the financial transactions with the guest. Early on when my wife and I were doing our first rental property, we actually used Airbnb quite a bit. Again, we're near Union Station. That's a big tourist destinations into Washington DC. We had a lot of success really on rental out to Airbnb, and we did really well doing that. On the other side for Airbnb, the fees are very high for both guests and hosts. I don't know if any of you have traveled using Airbnb, but what you pay on a nightly rate gets blown up by about 35 percent when you factor in the cleaning costs, your guest fees, or any other fees that Airbnb is charging. Airbnb customer service is also not great. That's probably being kind. If you do run into a serious problem with a tenant, which my wife and I have a few times, Airbnb is really not going to be much to resolve the issue. 

It's really on you. Then I think the bigger long-term problem with being an Airbnb landlord is that you do have a lot of cities that are really starting to crack down on short-term rentals, so making it very costly to continue doing them. In Washington DC, for example, you don't have to register your short-term rental unit with the city. You can only do short-term rentals out of your primary residence. You can't have three or four properties and doing Airbnb in all them. It can only one place and it has to be your primary residence. You can't rent out for more than a 180 days. On top of that, DC also charges of 14.9 percent occupancy tax to guest, for stays shorter than the 90 days. There are other cities that are even more strict. I know in New York City and San Francisco and others have also recently passed new regulations against short-term rentals. That's taken away a lot of the advantages over simply renting your home or apartment long term, and that's why my wife and I, a couple of years ago, decided to go ahead and just move to longer-term rentals. It's just cleaner, safer, less costly. You give up a little bit on the gross rent side, but she end up saving a lot of hustle headaches and expense.

Chris Hill: You talked about having trouble with renters and that was an issue my parents had. They had a some folks that wouldn't leave. So they had to evict them, and then when they eventually had them evicted, of course, the place was trashed. What could be your personal experience or just your knowledge, like how common is that and how you factor that into the economics of doing this?

Matt Argersinger: Not quite that bad, bro, for us, but we did have a couple of situations where guest booked the place, we had one guest who just moved in, didn't pay, and we had to amicably find a way for them to get out without Airbnb's help. That was a trick. Then we did have a situation where guest rented one of the house, they had a massive party. The neighbors called the police and it was trashed.

Chris Hill: Oh, my God. [LAUGHTER]

Matt Argersinger: Of course, that was a pretty big disaster for us. We had to spend money to clean, fix some things, and Airbnb, again, wasn't really too much of a help. I think Airbnb is a fascinating marketing tool. It's fascinating for transactions and meeting guest and getting your listing out there. It can be tough when you run these challenges, and most of the time, you just have to really be ready for them. You have to set some money aside for the inevitable disaster and just be ready, come up with a plan, to take action on your own. It's not a good situation, and a lot of cities, of course, because it's a short-term rental because you really don't have a lease with these tenants, evicting them or moving them can be very difficult.

Chris Hill: What has been your biggest surprise on the upside or the downside, now that you've had experienced doing it?

Matt Argersinger: I think it's mostly been surprising on the upside. Real estate has been a great market for the last 10 years, beyond what I think anyone expected to do coming out of the great financial crisis of the previous decade. I think the biggest surprise has just been the way the rents have grown in a lot of big cities. Especially the last couple of years, it's been tremendous. As a landlord, you go in expecting a certain amount of return on your investment. Like I mentioned, a good return on cost is five percent. But in reality, real estate, because of its so many benefits and because you've had this huge tailwind for real estate and rentals and a lot of markets, the returns have just been out of this world. I'm not saying that that can continue. The surprise for me was really working at The Motley Fool for so long and knowing the benefits of investing in the stock market. It convinced me that real estate is a very viable asset class. It has so many advantages and benefits, as we talked about. The surprise, for me, is like I wish I'd made real estate a bigger part of my own portfolio years ago.

Chris Hill: Final question for the folks who really become interested now and doing this, where should they go to learn more?

Matt Argersinger: Sure. Well, I'd be remiss if I didn't point listeners to, of course, our own website, The Motley Fool. If you go to realestateinvesting.fool.com, great content there on how to get started as a real estate investor, it also has a fee that's always updated with our most recent real estate investing articles. So realestateinvesting.fool.com is a great place to start.

Alison Southwick: As you said, Matt, real estate is done really well for investors lately, but it's a pretty competitive market right now and not everyone has 20 percent to put down, and also some people don't want to do plumbing. Maybe we can convince you to come back in the future, so we can talk about other options for investing in real estate.

Matt Argersinger: Of course, we would love come back. Thanks, Allison.

Chris Hill: That's all for today, be coming up tomorrow. Jason Moser and Matt Frankel will be here with some thoughts on risk management portfolio allocation. 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 yourself stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.