What Peloton's Deal With Amazon Signals

In this podcast, Motley Fool senior analyst Bill Mann discusses:

• The upside potential for Peloton.
• Whether Peloton may become part of Amazon's Prime membership offerings.
• Toll Brothers blaming supply chain and labor shortages for a cut in guidance.
• Nordstrom's challenges with inventory and family ownership.

Motley Fool contributors Jeremy Bowman and Jason Hall engage in a bull vs. bear debate over Beyond Meat.

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 August 24, 2022.

Chris Hill: We've got signs of life from Peloton and a Bull versus Bear debate over Beyond Meat. Motley Fool Money starts now. I'm Chris Hill. Joining me today, Motley Fool Senior Analyst Bill Mann. Thanks for being here.

Bill Mann: Hey, Chris, how are you?

Chris Hill: I'm doing all right. Let's start with Peloton, shall we? Because Peloton has struck a deal to sell its equipment and branded apparel on an e-commerce website called Amazon.com.

Bill Mann: Heard of that.

Chris Hill: Shares up 20 percent. To be a little bit more serious, this is the first partnership that Peloton has struck to sell their stuff on another company's site. I guess my first question is, do you think the movement that we're seeing in the stock reflects reality or the potential for more of these types of partnerships to come?

Bill Mann: I think what you're looking at here is the recognition from Peloton's management that that white glove service isn't necessary, that they are not a premium brand with a premium service with no amount of competition out there. That they need to get as many Peloton bikes and treadmills and their platforms in front of people as quickly as possible. This is yet another move away from what the former CEO John Foley had in mind for the company. But I think it's a very necessary step for them. The market is rewarding them for standing up to reality in some ways.

Chris Hill: I'm hoping at some point in the future we get 2,000-word article on how this deal came about. I'm naturally curious. Did Peloton call Amazon or did Amazon call Peloton first? I am also wondering though, when we think about not just from Peloton side, do they strike more partnerships with more e-commerce sites? From Amazon's standpoint, somewhere down the line, does Peloton become potentially a member benefit for being a prime member?

Bill Mann: A lot of people have really thought or anticipated that ultimately Peloton was a takeover candidate for Amazon specifically because folding that membership into Amazon Prime is just yet another way to make Amazon Prime that much stickier. I think that there's something to that. I'm also interested. If we look back, not that many months ago, about 16 months, Peloton completed a takeover of a company called Precor, and that was essentially as a $420 million cash deal. It was essentially to get more capacity for the demand for Peloton products. Almost immediately from that point, demand has dried up. Unfortunately for Peloton at the same time, in making a cash deal, they got rid of a lot of their cushion, which I don't think that they thought they were going to need given their trajectory at the time that they made that deal. I think you're probably going to see a deepening of the relationship with Amazon rather than spreading out wider to other channels.

Chris Hill: Let's move on to housing then. Toll Brothers, third-quarter profits were better-than-expected, but overall revenue was light. The home builder cut deliveries guidance for the full year. Not surprising that they cited supply chain issues and labor shortages.

Bill Mann: Chris, does that feel to you a little bit like that famous Onion article where the man blames everything except for drinking too much on his hangover? [laughs] Yes, I'm sure supply chains were an issue and I'm sure that labor shortages were an issue. But at the same time, you have switched in so many hot markets from a seller's market to a buyer's market. Due to interest rates, which are absolutely a thing and due to a housing market in which the amount that people could charge to sell houses just seem to have no upward bound. They were pointing to markets that formerly were COVID dream lands like Boise and Austin, Texas, and Phoenix is being real weak spots for them. I'm sure supply chain issues were partially to blame, but you're talking about a market that has fundamentally changed over the last, call it four months.

Chris Hill: Look into your crystal ball and tell me what do you expect to hear from other home-builders when we get earnings reports from them later this year?

Bill Mann: I think they're going to blame supply chain issues. The thing that is unique about Toll Brothers is that they are a luxury home-builder. The average ticket for their homes is right around a million dollars. They've got a longer lead time than a lot of housing companies do, the companies that build a little bit lower in the value chain. These are generally speaking, housing stock that is a trade-up for their buyers. I think you may see a lot of the same, but it will make even less sense with other companies than it will with Toll Brothers because their turnaround times are much faster.

Chris Hill: Also, I don't know about you, but anytime I've had a conversation, really in the past year and a half, anyone who is looking to build a home, and not necessarily with Toll Brothers, but just in general or by the way, doing some significant home renovation project. It's the classic case of delays only exponentially more so.

Bill Mann: The other thing to keep in mind is that we keep talking about that interest rates are high. Historically, they're really not that high, but it just feels that way. It's something that the fancy people in economics call the tenor of rates. Where were they recently and where are they now? But it absolutely has a chilling effect on people who are in houses now with sub-three percent interest rates that they would even consider going out and trading into a different house. It has become much less of an environment where people are doing it by choice and much more of one where it's being driven by necessity.

Chris Hill: We'll close with Nordstrom's second quarter results, which really just got overshadowed by the high-end retailer taking an absolute machete to their full year guidance. The inventory problems that we've seen at other retailers are absolutely happening at Nordstrom. I guess the silver lining, not for shareholders but for consumers is check your local Nordstrom for serious sales. [laughs] It's not quite an everything must-go situation but holy cow, are they looking to move some stuff at Nordstrom and Nordstrom Rack?

Bill Mann: Yahoo Finances carrying an article today about Nordstrom. It's one of the more brutal headlines that you will ever see. It is this, Nordstrom, shoppers won't even by clearance items right now, which I don't know about you that sounds bad to me.

Chris Hill: It really does. I'm curious. We talk a lot at our company about founder-led businesses and the benefits for finding truly great, revolutionary founder-led businesses for a number of reasons. A key one being, they have skin in the game. I look at a business like Nordstrom, which is largely controlled by the Nordstrom family, as being a pretty glaring exception to that. Because over the last 5-7 years, there have been points where the headline around Nordstrom is not necessarily the latest earnings or what their guidance is, but it's whether or not the family just wants to sell outright. [laughs] I'm sure there are some people looking at Nordstrom. There is a brand with some equity there. The stock is trading 20 percent lower today. Maybe they're thinking, this might be a value. I don't see how you look at this business with a five-year time horizon when members of the family itself don't appear to have a five-year time horizon.

Bill Mann: I think that's a really interesting point regarding the ownership of Nordstrom. It is very much family controlled and that is something that has been a benefit to the company over the last 30 and 40 years as a publicly traded company. They have been able to resist a lot of the institutional imperatives. But I do also get the sense that the next generation of the Nordstrom family is not that excited about running the business. For whatever reason, those reasons maybe they just want to do something else for a living. Maybe they're just rich. I don't really want to speak to that, but there is at some level, a real downside to family controlled businesses where the next generation of the family does not seem to take the same level of interest or enterprising like strategies in terms of pushing the company forward. In retail, when you're talking about a lord of the flies market where people walk into one store one time and it doesn't go well and they swear it off for the rest of their lives, that matters at a place like Nordstrom.

Chris Hill: Bill Mann, always great talking to you. Thanks for being here.

Bill Mann: Thank you, Chris.

Chris Hill: As a business Beyond Meat makes plant-based meat alternatives. As a stock, Beyond Meat is down nearly 80 percent over the past 12 months. Yet it's worth asking, is this stock somehow still overvalued? Ricky Mulvey host Jason Hall and Jeremy Bowman in a Bull versus Bear debate.

Ricky Mulvey: Welcome to Bear versus Bull. We find a company, gets some analysts, flip a coin, and then you hear both cases. Today, the company is Beyond Meat and on the bull side, we have Jeremy Bowman. Thanks for being here.

Jeremy Bowman: Thanks for having me Ricky. I'm looking forward to it.

Ricky Mulvey: Crossing over from the smattering podcast. He is on the bear side. It's Jason Hall, ready to dunk on Beyond Meat.

Jason Hall: This is beyond my understanding why anybody would invest in that company. Just saying.

Ricky Mulvey: Well, let's get it started. Jeremy Bowman, you have the bull side and you have five minutes whenever you're ready.

Jeremy Bowman: I think the best way to think about the bulk case with beyond me is that there are two elements to it. You have the case or the category which is plant based meat protein, and then the bulk case for the brand. I think in order for the brand to be successful, the category has to be successful. I'm going to start off by talking about the bulk case for the category first. I think we're all aware that this is a huge market that beyond meat and its peers are going after. Animal-based meat is a $270 billion annual market in the US and 1.4 trillion globally. I took those numbers from Beyond Meat's S1, which is back in 2019. It's even bigger now. Plant-based protein is only about one percent to two percent of that market. It's a huge opportunity. Huge nut to crack here if they can do it right. Then what we're seeing is there's a ton of innovation going on with plant-based protein. Beyond Meat itself spent 67 million on R&D last year, which is 15 percent of its revenue.

That's more than a lot of tech companies spent, that's more than Apple spent as a percentage of its revenues. In order to think about this industry correctly, you really have to think of it as a tech driven industry. Even though we're talking about really a basic consumer product ultimately. I think with that innovation going on, even what we've seen in the industry in the last five or 10 years with all these companies like Beyond popping up, you have to believe that the products are going to get better. They're going to get more specialized. They're going to become more developed and scale up and the prices will come down making them more competitive with animal-based meat. I think eventually significantly cheaper since they're not subject to the same constraints as raising livestock, which involves feeding and animal for months or even years.

The other environmental inputs there as far as water consumption and that thing. I think we should also step back and remember that the target customer is a flexitarian here. It's not a straight up vegetarian. It's people who eat some meet want to vary their diet and add more plant-based products so they're turning to Beyond Meat sought to believe in the category. I don't think you have to believe that the whole world's going vegetarian. Then the third about the category I wanted to make is that the demands of the world are changing in a way that makes plant-based meat more desirable to animal-based meat less desirable. The global middle-class is expanding, which is increasing demand for meat. But at the same time, climate change and water shortages and these related issues where we're seeing are making it more expensive and harder to raise livestock. There's a limited amount of land in the world of growing demand for meat. That'll drive up prices for animal protein.

I think unrelated level, when you think about what we've seen with electric cars, you can see regulations begin to play a role in plant-based meat consumption over the next 10 or 20 years. We've tax credits now for electric cars for environmental reasons, why shouldn't there be similar benefits to purchasing plant-based meat or products over the animal-based variety? I think there's a good combination there of both the demand and supply bull arguments for plant-based protein. Basically, if the product is going to get better, tastier, more specialized, cheaper, that'll lead to an increase in demand. At the same time, you've factors like climate change and the growing global population that's going to make it harder to keep livestock and animal-based meat at the current price. That'll drive consumption to plant-based category as well.

Throw in the regulatory tailwinds there as a bonus, as I mentioned. Then as far as Beyond Meat specifically, I think if you're bullish on the industry the case for Beyond Meat, it's pretty straightforward. This is a clear industry in the category. I think it's really the only other appear on its levels, impossible foods, Beyond Meat, great brand recognition. I think we'd all agree on that. Prime placement in thousands of grocery stores was in 34,000 stores in the US at the end of last year and 30,000 outside the US and that's shelf space is not easy to get at these big chains and local grocery stores. That's going to give the company a clear long term competitive advantage. Even on a large scale, if you think about the big meat companies, sausages or whatever, there's only a handful of brands that supermarkets really want to put it in. Most categories have a couple that dominate.

I think Beyond Meat, it's going to retain that leadership position there just based on that those partnerships. Restaurant channels, the results have been more mixed but again, it's partnered with Yum Brands, KFC, Taco Bell Pizza, Subway Dunking, those companies alone that gives it access to 100,000 restaurants around the world so a lot of opportunity there. I think the spending on R&D that I mentioned above is also a bullish sign because that's going to give them better quality products, more new products, and lower prices once again. I think basically the food industry, I think, has always been highly fragmented and I think plant-based protein will also be fragmented even at scale. But you look at Beyond Meat's market position today, it's brand relationship with supermarket chains and restaurants, and I think it will retain that leadership position as the category grows.

Ricky Mulvey: Jeremy Bowman, thank you for the bull case flexitarian, I guess that's the new word for omnivore.

Jeremy Bowman: [laughs] I don't know if that's what the industry prefers or what, but yeah I shouldn't define that, but yeah, that's people.

Ricky Mulvey: That's alright. It was the first time I heard it. Let's let's go to the bear side and for that, we have Jason Hall.

Jason Hall: Ricky, I was once told by a person much wiser than me when somebody shows you who they are, you believe them. Beyond Meat's revenue has roughly been flat over the past year. The company has never done more than $500 million in revenue. It's been a publicly traded company for multiple years at this point. We've also seen at the peak of its high rate of revenue growth, that's also when two really important metrics peaked, gross margin and operating margin. We've seen those numbers consistently shrink and compress since 2020, even as the company's revenue has continued to grow. The bottom line is that if you are in the food business, if you're in some consumer goods packaged foods business if you want to be a great investment, you can have a great product. You can be a great company. But to be a great investment, you have to have real moats. That means for these companies, you need to have either a cost advantage, pricing power, or both.

So far Beyond Meat has not demonstrated that they have either of those things. They are still continuing to compete and price is the thing that they continue to lose on. That's why their margins have continued to be compressed and continued to be squeezed. Because those flexitarians, omnivores, whatever words you want to throw out there. I think what they're telling us, again, this is what the company is showing us. What they're telling us is that this massive addressable market of protein, and then plant-based protein, which is a smaller cohort that's still very large. Guess what, Beyond Meat, there's just not a lot of people that are really interested in taking up that product, certainly not paying the price is the premium prices versus actual protein, animal protein or versus some of the other products that we're seeing from some of the large scaled food producers that have a legacy of really good operations, driving out excess costs and using their scale and their relationships with suppliers to get really good cost advantages. When a product like this where right now there is no pricing power advantage, they find the cost advantages.

If Beyond Meat is going to be a good investment, they're going to have to do that. They're going to have to figure out how to get to that scale and have cost advantages and they don't, and they haven't proven it. They've shown us who they are so far. I think even with the stock down as much as it is, it's down close to 90 percent from its all-time high. I'm pretty sure it's still below the IPO price at this point. It is a classic value trap. This is not an assets trading for a discount to their value. This is an interesting products and an OK business that I don't think it's ever going to make a great investment. I think the best-case scenario for Beyond Meat and its shareholders is at some point for a big company to take advantage of the opportunity to buy this brand, package it with its larger business and then get some operating leverage out of that. As a stand-alone business, I am not interested.

Ricky Mulvey: Jason Hall, thank you for the bear-case and you can decide who made the better case. Again, we had Jeremy Bowman on the bull side, Jason Hall on the bear side. Because today's winner will receive. A coveted prize package from Scott clams canned ham. Scott clam has generously donated a pallet of his whole ham cans. That's right. Just one can has one whole ham resting in a salty broth. Scott plan is in cutting any corners, unlike those other honey baked brands. Looking for more variety, try a combo can. Enjoy Scott clams canned ham on a bed of sweet corn, slice potato or mystery mash. Simply open at room temperature and serve for a delicious weeknight dinner. You'll have your friends and family shouting, I got to get my hands on Scott clams canned ham.

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.