In this podcast, Motley Fool analyst Jason Moser discusses:
- JetBlue Airways (JBLU +6.44%) going hostile in its pursuit of Spirit Airlines (SAVE +0.00%).
- McDonald's (MCD +1.43%) leaving a major market for the first time in its history.
- The prospect of other major restaurant chains following McDonald's and closing up shop in Russia.
Jason and Motley Fool contributor Matt Frankel take a closer look at how Twilio (TWLO +2.30%) makes money and at one of the company's competitive advantages.
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 May 16, 2022.
Chris Hill: [MUSIC] For the first time in its history, McDonald's is leaving a major market. Motley Fool Money starts now. I am Chris Hill and I am joined by Motley Fool senior analyst Jason Moser. Thanks for being here.
Jason Moser: Hey, happy Monday.
Chris Hill: Happy Monday indeed. We're going to get to McDonald's in a second but I want to start very quickly with the airline industry. JetBlue is ramping up its all-cash bid for Spirit Airlines before it was a friendly takeover and now it is officially hostile. [laughs] Which it shouldn't make me happy but it does. Spirit officially rejected the bid from JetBlue earlier this month they said, "We're going ahead with our plans to merge with Frontier, a fellow low-cost airline." I don't have any investing interest into I don't own shares of any of these companies but I look at this, Jason, and beyond just the popcorn entertainment value of a hostile takeover. Am I wrong to think that JetBlue if they go ahead and they make this happen with Spirit that it makes them more competitive with the larger airlines, the Americans that Deltas of the world? Because if that's the case, I feel like that is potentially a win for people who want to fly from one place to the other and not pay a lot of money.
Jason Moser: I feel like you're definitely on the right path. I too, I have no interest in this. No dog in this race so to speak. It's an interesting situation. There is a lot of drama behind us because when you look at the Spirit and Frontier deal is financially it's inferior to the offer that JetBlue made. Jetblue actually made financially a better offer than the Spirit-Frontier deal would be. I certainly can understand why they feel the need to go hostile. I guess they're going to submit this tender offer and they can win over the favor of shareholders there. In theory, yeah you should see this merger in either which way this merger works out, whether it's Spirit and Frontier or JetBlue, it would ultimately I think result in what the fifth-largest carrier in the country. In theory, yes that would mean they should compete a little bit more with the bigs and that make sense.
Now that the reason why this seems to not be happening, the reason why there seems to be so much drama, Spirit they ultimately said no thanks to JetBlue. They have some unserved with JetBlue and the regulatory environment they are feeling like that ultimately combining with JetBlue might actually result in higher prices. Because they feel they're going to be moving away from that low-cost provider into that other echelon of provider like the bigs. You look at JetBlue has a partnership with American, I believe it is some of a relationship with American in some capacity. Maybe that was part of the concern there is the feeling that ultimately this would eliminate competition and ultimately offerings on that low-cost provider side. That's where all the drama comes from and then there's a whole lot of drama with this. It remains to be seen how it ultimately all shakes out. But it doesn't seem like the story is going to end anytime soon and it really does feel like JetBlue knows what it wants, it's trying to figure out exactly how to get it. If the tender offer is something that works, then we'll see how the regulatory side plays out because that's not a hurdle altogether.
Chris Hill: Let's move on to McDonald's. Earlier this year, McDonald's paused its operations in Russia due to its invasion of Ukraine. Today, the company announced it will sell it's business and exit Russia entirely. They've got more than 800 restaurants. Most of those are company-owned. We'll get to the ripple effects in a second but if you're a shareholder of McDonald's, how should you feel about this? Because they're going to take a charge on this somewhere in the neighborhood of probably north of a billion dollars. You don't like to see that. On the flip side, it does provide some certainty in an area that was up in the air.
Jason Moser: To me, this feels like a pretty easy decision. They can make this decision and it appears, it looks like they can take a stance on something that really pretty much the whole world was on board with. I mean, we all feel what's going on over there in Ukraine right now is unacceptable. They don't have to really worry about repercussions there in taking sides, so to speak. Because really it seems like everybody for the most part around the world is on the same side on this one. But also, I mean, you look at it also it's frankly it's not the greatest line of business for them anyway. You referred to the company-owned dynamic there and I think that's important to note because when you look at McDonald's as a business franchise restaurants represent 93 percent of McDonald's restaurants around the world. But if you look at Russia, franchises operate only 15 percent of the Russian locations. The company owns the rest and that matters because ultimately when you look at McDonald's financials, you see how this all breaks down. In 2021, they did $9.8 billion in company-owned restaurant sales. Not systemwide sales. I'm talking about the revenue. The operating expenses involved there were $8 billion. Now if you look at revenue from franchise restaurants, that was closer to $13 billion, and operating expenses there which are primarily just occupancy expenses. Those were $2.3 billion. It feels like they were looking at this from two different angles thing you know what? Maybe they weren't all that thrilled with this line of the business anyway. It's a lower-margin business. Maybe the juice isn't really worth the squeeze anymore given the geopolitical pival that's going on over the past several months. You put all that together, I mean, I look at this and it seems like it's a pretty easy decision for management to make. It is worth noting they're retaining their trademarks there in Russia. I would look at this and say, you know what, they're making this decision now it's probably not a threat or anything like that, they are saying, look we're going to go ahead and do this.
Jason Moser: Now, if the geopolitical environment years from now looks considerably different, they feel like the risk has diminished somewhat than they think what always have that option to consider opening back up there if they were wanted. But it feels like a pretty easy decision for them to make I definitely would not consider this a thesis-changing event by any stretch. When you consider the global nature of McDonald's, in 2021, they did 112 billion dollars in systemwide sales. When you look at Ukraine and Russia, those markets represent in total about two percent of those systemwide sales. Nothing really that's going to hit them in the pocketbook, so to speak. Yes, they'll take a charge. Yes, they'll present adjusted earnings. It ultimately does look like their guidance, for the most part remains the same and they will continue opening stores around the world, just not in Russia.
Chris Hill: Does the spotlight now shifts to businesses like Burger King, Domino's, Starbucks, and others? It seems like a natural question for shareholders and Wall Street Analysts as well. But here's the worldwide leader. They're leaving Russia. What are you going to do?
Jason Moser: Yeah. It's a fair question and that's really anyone's guess as to how companies will ultimately deal with this. You look at Starbucks, for example, I believe they have halted operations at least in Russia for the time being. I don't know that I've seen anything where they said they were actually shutting down. But again, it's difficult in certain instances for companies to take stances. If it's a debatable issue, it becomes a much riskier proposition. This really isn't that risky of a proposition because it's not really a debatable issue. I think most of the world is on board with the notion that this really is unacceptable and Russia shouldn't be doing what it's doing. There isn't that risk and I think that probably gives these leadership teams and all of these different food and beverage operators, it gives them the opportunity to at least examine those lines of business more closely to see really, if, like I said earlier, is the juice really worth the squeeze?
Because if it's not, you know, then they can go ahead and make that business decision while also getting a chance to really stand for the values that they espouse. I think this really falls in line when you look at McDonald's, their core values are serve, inclusion, integrity, community, family. It feels like this one really falls squarely on the integrity value, which for them is ultimately do the right thing. I feel like they feel like they're doing the right thing. I think most people would side with that. For businesses, considering this, I think they're taking a very close look at how McDonald's deals with this. They're taking a very close look at how the investor community and the rest of the world responds and that will probably help dictate the course of action for some of these others in the next several weeks to months, assuming this continues to drag on.
Chris Hill: Thanks for being here. [MUSIC]
Jason Moser: Thank you.
Chris Hill: [MUSIC] Actually, Jason Moser is sticking around because he and Matt Frankel are taking a closer look at Twilio. Now, you may not know Twilio, but if you've ever ordered an Uber, you've experienced its technology. Twilio helps send the notification saying, your ride is here. Shares are down 60 percent year-to-date and the guys are focusing in on how Twilio makes money, the risks for investors moving forward. One of Twilio's underappreciated competitive advantages. [MUSIC]
Jason Moser: We love to dig into companies here. We love to learn a little bit more about what they do and why they pique our interest in this week, we're digging a little bit more into Twilio. This is a company I'm sure many listeners are familiar with in many likely own. I know I own it. Matt, I feel pretty darn good about that even in this market sell-off we're witnessing. Let's take a few minutes to dig into Twilio. Let's learn a little bit more about the business, what it does, and why it might present an opportunity for investors. Just very high level though, to get starting to your what does Twilio do?
Matt Frankel: Yes. This is a stock that's been on my watchlist for a long time now. I don't own it yet, but especially at the current prices, I'm pretty sure I'm going to be a Twilio shareholder before too long. They are a software-as-a-service company. Their mission is to bring the way companies communicate with their customers into the 21st century.
Jason Moser: Yeah.
Matt Frankel: Just to give you a few examples, most people listening have been a user of Twilio's software without even knowing it.
Jason Moser: Right.
Matt Frankel: If you've booked an Uber and you get a little push notification that your driver is arriving, that's something that Twilio has provided them. If you make a restaurant reservation through Yelp, that's something that Twilio does. If you get an automated message from Airbnb confirming your booking, that's a Twilio product. They built out these communications tools designed to help businesses interact with their customers better because quite honestly, people expect more from the companies that they do business with than they ever have before. Nobody wants to pick up the phone and call it Healthline these days. Nobody wants to have to go to a website to see if their pizza is on the way. Nobody wants to have. They want a quick notification on their smartphone. They want, they want something that's automated fast, tells the story, and that they don't have to go out of their way to do and Twilio helps companies fulfill this essential need of their business.
Jason Moser: Yeah. I'm glad you made, I think, a great point there in that a lot of people, most of us, probably all of us, to an extent, are probably using Twilio technology, are benefiting from Twilio technology and never even realizing that's the case. To me those oftentimes are really some of the most compelling investments because we see the convenience at our fingertips yet we don't really understand the infrastructure and the work that's going on behind the scenes. That really is what Twilio is doing. They do this through these APIs these application program interfaces that just enable them to ultimately build out the communications infrastructure for this digital economy that we're really evolving into.
To me, it's always struck me as a necessity at this point. I mean, businesses need to be able to incorporate this technology into their models or they'll fall by the wayside. Then you have the opportunity or the option. You can either try to build that functionality and capability yourself or you can go to expert providers. It feels like Twilio is certainly building up that reputation as an expert provider. We'll talk a little bit more about some of the customers in its universe there. We always like to look at how these businesses make money. I think it's very important to understand how a business makes its money because that can really paint a picture as to what the future may hold. When we look at Twilio, obviously, a lot of customers, a lot of big customers, but how does Twilio make its money?
Matt Frankel: It's a subscription model and the companies that use it pay Twilio for integrating their product into their platform. It's a recurring revenue model, which is like most Software-as-a-Service companies run. Like most Software-as-a-service companies, it's a high-margin revenue stream.
Jason Moser: Yeah.
Matt Frankel: Twilio's gross margin is well over 50 percent and it should get even better as it scales. It's a fee modeling and its fee income that grows with the customers. As customers are growing and are using Twilio more to communicate with our customers, they're actually spending more on Twilio's products and services over time. The average customer that's been with Twilio for a year is spending 30 percent more than they were a year ago on Twilio.
Jason Moser: Yeah.
Matt Frankel: It's a nice not only recurring revenue, but it's a very expandable relationship.
Jason Moser: Well, I think you make an astute observation there and you've got to a dual threat there. There's a subscription side of the business, but there's also that usage-based model. As its relationship grows with its consumers, that usage-based model really comes into play and I think actually the majority of its revenue does come from the usage-based side which to me is encouraging given direction we're headed in this digital economy and communications becoming paramount for so many of these businesses and so the more they're using Twilio's products and services, while the more they're benefiting, and of course the more Twilio is benefiting as well. When we talk about some of these clients, some of these customers that Twilio works with, there's a litany of them. They're over 250,000, I think over 260,000 active customer accounts today now. But some of these clients are massive, Airbnb, Stripes, Salesforce, just to name a few. When companies of that stature start incorporating technology like Twilio's into their models, into their infrastructure, it feels to me like as time goes on, there's a stickiness that develops there where it just becomes less and less likely the companies are going to want to switch over to a different provider, particularly if the services that they're getting from Twilio are delivering and it feels like at this point those services are delivering, so maybe as time goes on that we start to see some switching costs developed there.
Matt Frankel: You made a good point. The counterpoint to that is it makes Twilio's revenue top-heavy. It's like the problem that the S&P index funds rely on Amazon, Microsoft, Apple for a lot of their market cap. Twilio relies on its big customers for an outsized portion of its revenue. Doordash is another one that uses Twilio for customer notifications. The top 10 customers in Twilio's out of those 256,000 account for 12 percent of the revenue. That's a pretty concentrated top 10 out of 256,000. Hopefully some of those other 255,990 [laughs] will become some of these big customers one day. For now, it's a top-heavy business model that creates a little bit of risk.
Jason Moser: Certainly, top-heavy usage-based, it's great when times are good, but it's also worth remembering when times do get tough, if that usage goes down, that definitely it's going to impact Twilio's financials. That's going to impact business performance. I think one of the nice things about that usage-based approach, there is a very low cost of entry for new customers. New customers can try Twilio out without really having to invest much of anything to give it a shot. There is a little time and a lot of work and incorporating it, but ultimately it's a pretty easy entry for new customers. They don't have to commit a lot upfront. Then if they discover that the relationship is working, that they're gaining value from that relationship, then they expand that relationship. They add on services and functionalities and that certainly can grow the relationship there. How do we feel about the leadership here? This is a founder-led business in Twilio. Any things stand out to you in regard to leadership here?
Matt Frankel: Their founders are pretty impressive guy, Jeff Lawson. If you just look at a little bit of his resume, he was a founding executive of StubHub. He was one of the original project managers when Amazon launched AWS. Really high percentage of success in this is high-growth start-up businesses. I just used StubHub yesterday. It's the biggest ticket platform in the world, outside the Ticketmasters. AWS speaks for itself when he was the original product manager on it. He is a highly invested CEO, he owns about 4 percent of the company and his employees like him. One thing that really stands out, people really underestimate. I always get a lot of questions about why do I always mention Glassdoor reviews, when I do, the employee satisfaction reviews.
Especially in the highly competitive tech industry, that's such an underappreciated competitive advantage because, being able to attract and retain top talent is everything. It's not just about pay. Today's tech workers will not put up with a crappy work environment [laughs] in exchange for a great salary. They just won't. Everyone's offering a great salary in tech. There is a 93 percent approval rating among his employees. Many reviews specifically call out the great corporate culture and great benefits and things like that. That's a really overlook competitive advantage that Twilio has going for it. Great leadership team, great board of directors, former Amazon and Oracle executives are on there. Some ex-politicians are on there, really interesting group of people to make decisions behind the scenes.
Jason Moser: Ultimately, it looks like a business with a lot of potential, clearly, the stock has just taken a beating here over the last several weeks as has everything. To me, I don't know, that's not a signal that this is a bad or failing business. Everything is really taking a beating, of course. But when you look at the market opportunity for business like Twilio today, management sees as total addressable market reaching $87 billion by 2023 just next year and business that's chopped up here, I think just a little over $3 billion in revenue over the last 12 months. It's also a team has seized growing organic revenue at 30 percent or better annually here over the next three years. You've got a business with a lot going forward, a tremendous market opportunity, feels like leadership that is committed to building products and services that customers want. I think you know where I stand on this one as an owner of this year has already Matt, it sounds I feel like into the answer, it sounds like you feel pretty good about this one too. Your bottom-line takeaway on this, when you feel bullish, you feel bearish on Twilio, you're still on the fence.
Matt Frankel: All the things you just said, plus the fact that the stock is down about 75 percent from the highs, doesn't hurt [laughs] No, it's toward the top of my watch list. I will probably become a Twilio shareholder once I have some free capital to do so in the next few weeks. I'm a fan of the business and I think we're still in the early stages of the digital transformation and Twilio has a lot to gain from it. [MUSIC]
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, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow. [MUSIC]
