Calming Words for Investors in the Most Recent Bear Market

In this podcast, Motley Fool senior analyst Jason Moser discusses:

• The pain investors are feeling.
• Why he recommends putting cash to work slowly.
• DocuSign's (DOCU 0.55%) latest quarter meeting management's expectations.
• The relative attractiveness of DocuSign's stock.
• Coca-Cola's (KO 0.78%) new partnership for Jack Daniel's-and-Coke cocktails in a can.

Plus, shares of Meta Platforms (META -1.12%) have fallen 50% so far this year. Is the stock a value play, or is it in the bargain bin for valid reasons? Motley Fool contributors Jose Najarro and Nick Rossolillo take a bull vs. bear approach to the social network.

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 June 13, 2022. 

Chris Hill: The bear has arrived, but so have reasons for hope. We got that plus a debate over Meta Platforms. Motley Fool Money starts now. I'm Chris Hill, I am joined by Motley Fool senior analyst Jason Moser. Happy Monday.

Jason Moser: Happy Monday, indeed.

Chris Hill: It's not really a happy Monday in the [laughs] stock market.

Jason Moser: We're trying to instill some positive vibes, Chris, positive vibes only, as big cat might say.

Chris Hill: Yeah, that would be great. But we also need to [laughs] recognize what's happening in the market, and what's happening, the headline is appropriate. The headline is hey, the bear market for the S&P 500 is officially here. We've got a couple hours before the close of the market today, so maybe it pulls out of the nosedive. But let's just for the sake of this conversation, let's assume that it doesn't. We're actually officially down more than 20%, where do you want to start? Because I hear the comment of positive vibes only, and yet you and I were talking earlier today in the office, because we're both in the office today, which is good to say.

Jason Moser: Yeah, it feels good.

Chris Hill: But we were talking earlier today about the amount of negativity, just the sentiment, all of the commentary, the analysts' notes coming out, and we'll get to at least one stock that's taken a turn for the worse recently, and the negative views on that one particular stock. But just in general, there is so much pessimism, Jason. It's hard in times like this to feel good as an investor, and it's hard to feel like, OK, now I am going to be proactive. Even though we know historically, this might be a pretty good time to start looking for ways to deploy cash into the market, even if you're just doing it through index ETFs.

Jason Moser: Yeah. It is clearly a painful time. Again, I want to make sure people understand that. I started out by saying positive vibes only, and of course, you want to do everything you can to try to view things from a glass-half-full perspective. It's really difficult though, and it's difficult for us, too. For you, for me, for those of us, that really do this for a living. I'm right there with you, my portfolio has taken a big hit just like everyone else's. Now, it is a portfolio that I have had for a long time. I've had the good fortune to be able to be introduced to Foolish investing many, many years ago, so I've built a diversified portfolio focused on businesses. Taking that business-first mentality and being an owner of those businesses, and so over time, and I've said this before, the longer you hold these well-diversified portfolios, the easier these stretches are, and this isn't the first bear market that you or I have ever witnessed, and it won't be the last. For some out there listening right now, it is, and it's very understandable that you're feeling some sense of doom.

Some sense of, oh, my God, how is this ever going to recover? The fact of the matter is, that history tells us it's recovered every time. I don't know when, we're not really in the business of market timing, but these markets do recover. It just takes time, and so you keep that in mind. Bear markets absolutely can be painful, but there's some interesting Ned Davis research out there that hopefully puts this in the context. If you look at the last 92 years of market history, bear markets have comprised only about 20.6 of those actual years, and so if you put that into percentages, stocks have been on the rise for 78% of the time.

Overwhelmingly, folks who take the longer view, who continue to invest, who stay invested, benefit from that. You're benefiting from the fact that statistics tell us. The numbers tell us that overall, for the majority of the time, stocks are helping us, not hurting us. Now, that doesn't really do much for you right now at this moment, I know it's painful, but I think you made a good point there. This is a point in time where you have to start looking at some of these opportunities out there and thinking, hey, you know what? Maybe this isn't a bad time to consider putting a little cash to work slowly, and I want to reiterate that because that's what I've been doing myself.

Just small increments, you don't have transaction costs to worry about, so you don't have to worry about putting a certain amount of money to work at any given point in time. I think that really helps. You can take this slowly, and so I would encourage folks to consider, just invest slowly, but this is the time where you need to start really considering putting a little bit of that money to work periodically, whether it's just through dollar-cost averaging, whether it's through your retirement plan where you have money that's contributed every paycheck, continue doing that. Because the numbers tell us, over the long haul, this works out. These markets do recover, it does take time, but these are the times when opportunities do present themselves.

Chris Hill: Just one last thing on the pessimism, because I think this is one of those things that's important for us as investors to remember, is that part of the reason there's so much pessimism is because the people that we pay attention to the most, and that is the executives and their teams leading the companies that we are watching, that we are part owners of the business, the Jamie Dimons of the world, are, I don't want to say he's being pessimistic, by his own admission, he's being very conservative. Part of the reason there's so much pessimism is because companies are coming out with their own guidance, and they're saying, hey, look, we're shoring up our balance sheet. We're ratcheting back our expectations, we don't want to get in a position where we're being overly optimistic because this is not a situation where anyone who does that is going to be rewarded.

Jason Moser: Yeah. I agree with the taking the conservative approach. It is always worth remembering, as bad as it feels that can always get worse. If you look at the current status right now, we're looking at year to date. You've got the Nasdaq down about 30%. You've got the S&P, like we noted, entering bear market territory down 20%, that's not to say it can't get worse. Again, going back to that Ned Davis research, stocks lose 36% on average during a bear market. Now, you contrast that with the fact they gain, on average 114% during a bull market, so clearly, you want to be a part of that bull market. But in order to do that, in order to be a part of that bull market, the cost of doing business, so to speak, is to endure times like these.

Honestly, when you look at that average gain of 114%, you can absolutely outperform that by being opportunistic during times like these, during a bear market. So something worth keeping in mind, but I do absolutely agree, taking the conservative approach, shore up your balance sheet. Cash is a great thing to have right now and you want to put it to work slowly. There is no reason to go all-in because there is a lot going on in the world right now, and there's a lot of stuff that's really out of our control. You hear talk of inflation in the White House, in the Fed, and how can they not control it.

There is a lot of stuff going on in the world and there are a lot of things that are just frankly far out of our control. There are just certain things that are just far out of our control and we don't really have any say-so in the matter. You just have to be able to endure times like these in order to reap the benefits. For folks who are feeling like they're losing a little bit of sleep at night or they just don't feel comfortable in a market like this, this is a great time to consider adding some of those diverse types of index funds or ETFs because that really does help smooth out the bumps along the way.

Chris Hill: I wanted to get your thoughts on DocuSign, and we talked about it on Friday's show. There was a big drop in the stock on Friday after their latest earnings report. Emily Flippen. I'll paraphrase what Emily said, I think I asked her if the stock is down 25 percent is the business 25 percent worse? She basically said this report isn't all that bad, although she did talk about the billings as being a point of worry. This is on a day when the S&P 500 is entering bear market territory. It's not like DocuSign's dropped today, it's against the backdrop of a day where everything else is in the green, but the stock's down another 10% today. As I alluded to earlier, this is one of those businesses that holy cow, the pessimism seems to be really high on this business and I'm wondering what you think of it.

Jason Moser: Well, yeah, the pessimism is high. It was high, not all that long ago, too, right and the stock had recovered a decent bid going into this earnings report, the earnings come out and the stock plummets again back to levels not seen since, I think several months ago, and so you keep that on the perspective there. I'm a DocuSign shareholder, and I've recommended the stock. I continue to be optimistic about it. I'm not selling any of my shares. I think when you look at this quarter, management met its targets first and foremost. That's the standard I always look to first and foremost when I go through these earnings reports. Is management doing what they say they're going to do? In this case, yes, management is doing what they say they're going to do.

I think the market's reaction is rightly so in regard to the billings number, there was a little bit of a revised billings guide that's not great, but it's certainly understandable given the state of the economy and something else called out in the call, management noted the employee attrition. That's not a DocuSign-specific problem, you've got a lot of companies out there today, particularly in this tech space. We know that a lot of these companies, use equity, they use stock-based compensation to bring talent and they try to build up that workforce as they continue to grow. A lot of these companies have witnessed just tremendous pullbacks over the last year, plus they're giving back all those stay-at-home stock gains. DocuSign was one of those companies that really benefited from that tailwind. When DocuSign was closing in on something like $300 a share, whatever it was, it just clearly was way ahead of its skis, it just didn't make a lot of sense.

Now with that said, the business continues to perform very well, but when you look at that billings guidance, you've got higher attrition within the workforce. Part of that is attributed to the great resignation that continues to play out as people go looking for other things. But also employees continue to pursue other options when you bring focus on that promise of equity and net equity tax. You start to see people saying, hey, you know what, maybe I'm going to go somewhere where my compensation is a little bit more guaranteed. What that ultimately does, their pipeline slows down, and that's ultimately what billings comes down to, it's a pipeline thing. It's not to say that DocuSign, the business is suffering, when you look at the actual business itself, it grew revenue 25% from a year ago. It's a full-on subscription business that was up 26% from a year ago. If you look at international revenue up 43%, that makes it now 25% of the total business versus 21% just a year ago.

They're maintaining that net dollar retention rate that was 114% for the quarter, well, within that range that they targeted 112%-119%. They continue to bring big customers, and I think what the customers with greater than $300,000 annualized contract value, that grew 32% from a year ago, there are now 886 of those customers. Then top it off with just this expanding partnership with Microsoft, I think that's a partnership I don't think you want to underestimate given Microsoft's position in the enterprise world, well beyond just consumers, but Microsoft's position in the enterprise world is tremendous. We talk about billings with businesses like these. Billings can often be lumpy, they can be timing-related. They can be short-term noise, they create some opportunities.

I would not look at this billings guide as a sign that the business is in trouble. I think management is taking the sensible, more conservative approach, but they have a very good track record really of growing this business and meeting their goals. They remain confident as they say, that they are on the path to becoming a $5 billion revenue company, which would make it better than two times as big as it is today. I continue to hold my shares regardless of this pullback, and it certainly seems like for folks who are interested, and don't own shares of this company yet, this is a very good business and perhaps this is one of those opportunities it's presenting itself.

Chris Hill: One more thing before I let you go. I view this as a positive, just like on the surface, but also underneath the surface. Coca-Cola is teaming up with Brown-Forman, which is the spirits company behind Jack Daniel's. They're going to be making a Jack-and-Coke cocktail in a can, it'll launch later this year in Mexico, and the plan is to roll it out to other markets, presumably either late this year or into 2023. This is the fourth alcoholic drink in Coke's portfolio. I'm tempted to ask why wasn't this the first [laughs] in their portfolio? But all kidding aside, Jason, I think this is a really interesting development both for the Coca-Cola and Pepsis of the world, but also for the spirits companies. I think this might be the next big wave in the way that hard seltzer was maybe two, or three years ago.

Jason Moser: It feels like it could be. Spirits represent a very resilient market, we see the constant jockeying between beer and wine and spirits and there's always a little bit of an ebb and flow there, but spirits, generally speaking, are very resilient. I do like the idea of partnering up with big brands like Coca-Cola to be able, not only to produce a branded drink that most everybody would be able to recognize, but really also you're just opening up this massive market opportunity, being able to get this ready-made beverage into consumer's hands. This is a very popular drink. I think that it's no accident that you look at a company like Coca-Cola and Brown-Forman and see that they had outperformed the market year to date.

This is a good time for businesses like these and what we've seen, particularly with Coca-Cola, they are examining more ways to present the value proposition to consumers, to get that product into people's hands, whether it's smaller cans, or bigger cans, different size packages. In one way, one more step beyond that is partnerships like this, which combine two very powerful brands, and make it very easy for folks who like this drink to get it in their hands, without necessarily having to make that big investment and I say big, of course, it's relative, but if you want Jack and Coke, you got to go to the liquor store, you got to get to the groceries, you got to do all this stuff to make it happen. This certainly simplifies and so I can see where that would be attractive for fans of the beverage.

Chris Hill: Jason Moser, thanks for being here.

Jason Moser: Thank you.

Chris Hill: Next up we have got a bull versus bear on Meta Platforms. Shares of the business formerly known as Facebook are down 50% this year. Has the stock been beaten up too much, or is Meta Platforms in the bargain ben for perfectly valid reasons? With more, here's Ricky Mulvey.

Ricky Mulvey: Welcome to bear versus bull, the company today we have is Meta, joining us right now, are Nick Rossolillo and Jose Najarro. Good to see you both.

Nick Rossolillo: Good to see you, Ricky. Thanks for having me on today.

Jose Najarro: I'm pretty excited. Thank you for giving us the opportunity to have this showdown.

Ricky Mulvey: Let's start with the bull case. Jose, take it away.

Jose Najarro: First, I want to say the first bullish case that I see for Facebook right now is just the financial strength that they have. Financially, this is a company that has great numbers even with the strong investment push that it's doing right now. Just a quick look at numbers, for example, cash flow, most recent cash flow from operations was about $14 billion versus a 12.2 billion a year ago, so we see some strong growth there. Obviously, that cash flow doesn't really account for some of those capex that it's doing this most recent quarter, but still free cash flow in the most recent quarter was around 8.5 billion versus 7.8 billion a year ago. We can see strong, healthy cash flow coming in from the business. If we take a closer look at that balance sheet, they have roughly about 14.9 billion in cash and cash equivalents and 29 billion in marketable securities.

To top it all off, they have no long-term debt at the moment. We saw that healthy cash flow, that strong balance sheet, and right now in their most recent quarter, they did see revenue growth of about 7%, even with numerous headwinds this company was experiencing. Some of those headwinds were the iOS changes, the e-commerce slowdown supply chain, and the macroeconomics affecting the overall market right now. Personally, I believe that 7% growth was still pretty impressive. If we take a closer look at the second reason, I think this is the eyes continued to be on its platform, and for this being an advertisement-mainly business that is super important. They did show then their most recent quarter family daily active people was 2.87 billion and that was up 6%. Family monthly active people was 3.6 billion and that was also up 6%.

One thing I do feel we hear a lot is Facebook is pretty much one of those dead social platforms, no one uses Facebook anymore. Facebook monthly active users still saw a growth in United States and Canada, even if it was a small number, it just continues to show the strength of their main platform, which is Facebook. Just to give a quick number, 263 million monthly active users in the United States and Canada. This most recent quarter, that was up about 1 million compared to a quarter ago, and up about 4 million compared to a year ago. We're still seeing that growth in users and in one of their most developed markets at the moment. Not only in United States, but they also saw growth overall in Facebook monthly active users, both year over year and quarter over quarter. The other thing on their platform, they are improving their platforms to fend off competition. We have seen a lot of talks of doing things like Facebook Reels, and Instagram Reels. They are moving more into the short-term video, into the long-term videos as well, and incorporating Stories. One thing I am seeing very frequently on the news right now is they are creating new tools to make those creators using the reels, the short videos, and all those stories better.

Most recently they did announce that they are adding things like audio stickers, where creators can interact with their users or with their fans a little bit more. This is, at the end of the day, going to drive more content to their platform. The final reason is probably my favorite reason, and this is their investments in emerging technologies. This is a company that in the next few years is going to be investing in artificial intelligence, in the data center, augmented reality, and virtual reality. First, I just want to show how does artificial intelligence help. First and more importantly, it helps combat the changes of iOS, this is a company now because of those iOS changes is getting fewer data from its users and it's Apple and due to that, it's providing probably lower metrics on its advertisement. With artificial intelligence it can improve that trend, it can improve the advertisement metrics, and in the end, improve the solutions for its customers. The second thing is, that artificial intelligence can help improve suggestions on what users watch or see. Overall improves the experience for the user, improving retention rate, the more time you are in on their platform, the more ads they're able to hit you in with, and the more money they make.

Next, data centers, how are data centers going to help? Again, this improves the experience by investing in data and networking infrastructure. Who wants to go onto Facebook or Instagram or all the other platforms and watch a slow video? With them investing in networking and data centers is going to make sure that, hey, when you're watching a video on their platform is not going to slow down. Again, when you have this improved experience, you're going to also improve the retention rate, with those retention rates, you're also going to see the growth in the advertisements that are being hit. The final one I mentioned was augmented reality and virtual reality. First, I do want to say this is a new form of advertisement, I'd like to believe this is going to be the future of advertising.

One thing, Facebook gets a lot of, I want to say hate for is they try to copy some of their competitors, copy TikTok. This is one of the first times that they are doing their own thing with augmented reality and virtual reality, and I do believe this is going to be the new form of advertisements for some of the big players. The second one is they are designing their own hardware. They're designing the Oculus virtual reality headsets. This is a great move in my opinion because it's going to prevent other players from withholding data. As we saw, one of the biggest weaknesses for Facebook was the iPhone and how they just reduced the data going to the company. If Facebook owns its hardware and it becomes adopted by the consumers, then now Facebook will also be the owner of that data and will be able to strongly advertise and at the end of the day, increase its overall revenues.

Ricky Mulvey: I'm going to cut you off there because we're at five minutes and 30 seconds. Jose Najarro with the bull case. There are going to be a lot of ads in the metaverse, aren't there?

Jose Najarro: Yep, definitely. I think Facebook is going to be a strong player there.

Ricky Mulvey: Little scary. Now with the bear case, Nick Rossolillo.

Nick Rossolillo: I hear you, Jose, those are good reasons to be a bull on Meta or Facebook, whatever we want to call it these days. Coming from a long-term Facebook/Meta shareholder, I've got some serious doubts about this company at this point. Let me break it down for you. User growth in their most important markets, like you, mentioned Jose, the U.S., Canada, also Europe. They're holding onto most of those users, but growth is pretty much tapped out at this point, even in a slight decline in Europe during the first quarter of 2022. And then growth internationally is slowing down as well. Then also in the first quarter of 2022, average revenue per user actually decreased, which led to only 7% revenue growth in the quarter.

That compares to 20% revenue growth in the fourth quarter of 2021. Went from a highflier to basically a post-pandemic pushover in a pretty quick period of time. It gets worse, though, for the second quarter of this year, Meta thinks revenue is going to be 28 billion to 30 billion, which compares to 29 billion last year. We're looking at a possible decrease in revenue year over year, add to that the fact that expenses are going up $87 [billion]-92 billion in full-year expenses this year, that compares to 71 billion last year, about a 23%  increase, all in a year where revenue may not even go up beyond 5%. Basically, that means lower profitability.

Operating margins are still pretty good at over 30%, but operating margin has been all over the place the last few years, upwards of 40%, even 50% at times, and now that's in retreat? The big question is why? What's up with Meta? Maybe it's macroeconomics, recession, basically, maybe it's a TikTok issue, maybe it's Apple's device activity tracking changes and transparency, or maybe it's just simply the spending on the metaverse, like you mentioned, Jose. But there is a potential issue as well. Meta categorizes this as reality labs, that's the segment that they report their AR and VR business under. It's on approach to about 3 billion this year in revenue, but about 10 billion in annual spending is expected to help foster this segment. We're talking about a business that's going to be, according to Mark Zuckerberg, a decade or so before we can weigh the merits of this business. It's going to be a while before we can call this a worthwhile investment.

We don't even know what the metaverse is going to look like, I'm fine with that experimental spending. But given Meta's lack of diversification, I wonder if there's maybe some lower-hanging fruit somewhere else that the company could go after, with that 10 billion a year in spending. Speaking of diversification, out of all the things stocks minus Netflix, what's replaced that with Nvidia, replaced the N and FAANG with Nvidia. Out of those companies, Meta's the least diversified as far as revenue streams. I think it might be time to decommission Meta from this exclusive group of tech giants until they can rekindle some growth and prove it's a little bit more of a disruptor versus getting disrupted by some of the other tech giants.

One final point, Jose, you mentioned the balance sheet, 44 billion in cash and equivalents, no debt, that's fantastic. But it compares to 64 billion in cash and equivalents last summer. Where did the cash go? Share repurchases, about 20 billion in share repurchases in the last year. Great, that's fantastic. However, the stock cratered in February. Not exactly money well spent. Basically, to sum it up, Meta is cheap. I'll put that in air quotes, but it's cheap for a pretty good reason. At the moment, this is more looking like a traditional media company with pretty flattish growth and rising expenses, it's profitable, but you can't really categorize it with the other tech giants. I'm just not so sure about this being a resilient growth story, like it has been the last decade since Facebook, Meta's IPO.

Ricky Mulvey: Nick Rossolillo, thank you for the bear side. Jose Najarro, thank you for the bull side. You can decide who made the better argument at Motley Fool Money on Twitter, we'll have a poll up there. Thank you.

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 them, 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.