Investor Updates on Roku, Peloton, and Fastly

In this podcast, Motley Fool senior analyst Tim Beyers discusses topics including:

• Roku having more cyclicality than investors might expect.
• Whether Peloton can produce lower inventories over the holidays.
• Fastly's CEO declaring a commitment to growth.

Later, Motley Fool producer Ricky Mulvey continues his conversation with Ben Foldy, a Wall Street Journal reporter and host of the podcast Bad Bets, about the current state of Nikola and the rising interest in hydrogen-powered vehicles.

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 Nov. 3, 2022.

Chris Hill: When the CEO of a troubled company says things are turning around, it's a good idea to ask how quickly. Motley Fool Money starts now. I'm Chris Hill, joining me today, our man in Colorado, Tim Beyers. Good to see you.

Tim Beyers: Good to see you too, buddy, fully caffeinated, almost ready to go.

Chris Hill: You're going to need that caffeine because we're going to start with Roku, which is a business and a stock that could use some caffeine of its own. Its third-quarter revenue was higher than expected for Roku, but the guidance for the fourth quarter has the stock down more than 12% this morning. If you're looking for silver linings, Tim, I guess it's that overnight it was worse. Overnight shares of Roku were down close to 20%. We're seeing a little bit of moderation there with the stock today. What do you see when you look at Roku's business right now?

Tim Beyers: Well, they're getting hit by advertising, Chris. The softening in demand for advertising that we've all been expecting is hitting them particularly hard. As they estimated for their holiday quarter, they came in at a number that is much lower than the Street expected. For their upcoming quarter, they guided to $800 million in revenue. The consensus, according to what I see in S&P Capital IQ is almost $895 million. That is way, way short. What Anthony Wood, the founder said, is that advertisers are cutting spending across the board. In other words, not just us, it's everyone and we see softening everywhere. He was talking particularly Chris, I think this is one of the worries is he was talking about consumer goods companies that normally might advertise on Roku coming into the holiday season saying, nope, those budgets need to be cut. That has dual effects.

That has people worried that for a, Roku's business and b, the broader economy because we do depend so much on consumer spending. That really does stink. I can understand why the stock is down so much on the day so far. Having said that, this is still an outstanding business. I'll hit a couple of quick numbers here, Chris, and then we can keep talking about it. Revenue still up 12%, and year-over-year platform revenue up 15%. But here's the thing that, Roku almost always does this, it's not always the case, but almost always. In this case, in the third quarter of 2022, average revenue per user up 10% year over year to $44.25. Active accounts up 16%, streaming hours up 21%. People are still using Roku. This is still a valuable platform. Chris, this sucks for now. It does suck for now, but this is a platform that people like, people are using, they are engaged with and there's no reason to believe they are going to stop engaging with it.

Chris Hill: I think that's important, particularly when you think about what you said regarding advertising. If you want to go back to the commentary we got from Alphabet last week.

Tim Beyers: Sure.

Chris Hill: I think that's important for any business that is making any amount of money from advertising to look at when judging the health of a business right now. It's important to look at, well, what does the environment. If it's an environment where marketing departments are spending money hand over fist, and you're in the business of selling advertising and you can't sell it, well then something's probably wrong with your business. But the overall environment is such that, as you said, we've got this softening from consumer goods companies going into the holiday quarter, which is so important. I'm still thinking about something that we got from Alphabet last week about entire categories that are just going down. One being cryptocurrency. Cryptocurrency advertising has been basically cut to zero. When entire categories just go away, the ripple effect of that is going to be felt.

Tim Beyers: Yes, absolutely. It's absolutely going to be felt. In this particular case it would be different if The Roku Channel usage was down significantly. But The Roku Channel, the core channel where they can sell advertising for the highest margins, total hours streamed were up 90%. That's a huge number. Their bets on original content on their own channel, not just licensed programming are, at least, for now starting to pay off. They still have a lot of cash on the balance sheet. I think one of the key questions for Roku is, how much are they dependent on these cyclical moves? If they are tied to advertising cycles we should know that and we should pay attention to that and maybe factor that in as investors.

In the meantime, I'll tell you what Roku is saying, they believe that as these advertising tiers pop up on other stream channels, that the tools that they have for advertisers, analytics, and other types of tools, they think those tools are going to be in demand for third-party publishers. They look at Netflix. They look at Disney and say, how would you like to do more business with us and our tools because we've been doing this for a while. They think there's an opportunity there. It remains to be seen how big that opportunity is, Chris. But I think that's a net positive. We are starting to see signs that Roku is a more cyclical business than we want to believe. Let's keep watching it. Next quarter will be instructive -- how well they do in the holiday quarter amid this horrible guidance is going to be pretty instructive.

Chris Hill: Let's move on to Peloton. First-quarter results. It was more of the same. The loss was nearly double what Wall Street was expecting. The revenue was light and worst of all, Tim, the guidance for the holiday quarter was weak. CEO Barry McCarthy says the ship is turning. I'm not going --

Tim Beyers: Turning toward a waterfall. What's it turning toward?

Chris Hill: I don't have a stake in this company. I'll take him at his word that the ship is turning. I will simply add the clock is ticking. This is a business that if it doesn't start to show significant turnaround potential, someone is going to come knocking on the door with a check and say, thank you. Peloton is now part of XYZ Corporation.

Tim Beyers: He talked about several things when he talks about the ship is turning. He talked about making improvements in gross margins. They were up significantly year over year from around 25% to close to 36% and they model for the next quarter gross margin to be in the 36% range. They model for free cash flow break-even sometime in fiscal '23, maybe the back half of fiscal 2023. Stemming the losses a little bit, but I'll tell you, Chris, there's something that stands out in the Peloton results. If the ship is turning, I really want to see the inventories being worked down. I'd like to see some more normalization here. When I look at it in June, the inventories were about 1.1 billion and in September, the September quarter, they were 993 million.

That's a little bit of improvement, but it's not a lot of improvement. Here's what I would look for. In the holiday quarter, how good is that? Forget about the free cash flow number. Forget about most everything. Did the gross margins stabilize? Is there a meaningful inventory drawdown? Because in a holiday quarter, if you are a consumer products business, your inventory drawdown should be significant. You're building inventory in the beginning of the year to sell it in that holiday season. Let's see, Chris, show me that inventory drawdown. If I don't see it, I think that's going to be a much bigger warning sign. But right now, I don't know where the ship is turning to other than maybe rocky shores. But it doesn't look good right now. That's for sure.

Chris Hill: We're going to end on a positive note.

Tim Beyers: Let's do it.

Chris Hill: Shares of Fastly are up 10% after third-quarter results. I'll leave it to you to tell me if Fastly has the benefit of low expectations. Remind me, Fastly is one of those companies I don't own shares of. I don't follow closely. Every time it comes up, I think, "Wait a minute. Are they cybersecurity? Are they content? What do they do again?"

Tim Beyers: Yeah, and you could have said all of the above. But really the best way to think about Fastly is they make stuff on the internet faster. That's what they do. They have a network, they have software. Some of the stuff they do is security. Primarily, the business historically has been what's called a content delivery network. In other words, I take somebody's content, I put it on our network, I deliver it faster because it's closer to you. I have a whole bunch of things, a network that exists around the world and I have a way to deliver content to you, Chris Hill, much much faster. That's the Fastly business. Now they've been trying to expand beyond that. They are getting into security. But you asked the question, is this rising because expectations were just so abysmally low? The answer is, yeah, that's exactly what happened. The numbers are OK, Chris. I wouldn't say they're great. They're OK. A couple of things though. The growth rate was nice. It was up 25%. Total revenue up 25% year over year. Gross margin was down.

That's not surprising. I believe that they are getting hit with price wars. I think they are facing competitors who are trying to gouge them a bit. It's nice to see them largely holding up. The new CEO, Todd Nightingale, said, and I think this is something that investors really appreciate and may also contribute to that bump, Chris. He said during the call that every dollar at Fastly has to be put toward growth. There was this conversation in the call about careful capital allocation. In other words, there's no playtime here, we're not giving you anymore more focused vision, hopes, and dreams. Let's get to the real work. Every dollar we bring in, we're going to put it toward growth. We're going to invest heavily in security. I think that gives folks some comfort as we figure out how big the future product called Compute at Edge actually can be. We really don't know that yet. But at least we have a guy who's has the look and feel of an operator, who wants to put cash to work in a beneficial way for shareholders and the company.

Chris Hill: Did he give any a timeline on that? I'm assuming at some point in 2023, shareholders will get an update.

Tim Beyers: Absolutely. I'm still looking forward to the Investor Day that was canceled back in May. I want to hear that again so we can get a little bit more color on when Compute at Edge becomes accretive to the business. We just don't know that yet, Chris, so we don't have a timeline. He mentioned Compute and Compute at Edge 13 times in the conference call. Yes, I counted because I wanted to know. He still talks in very high-level terms, but he also talks about it as an incubation project, and what's really driving the business in addition to the legacy product, which is content delivery, is security. The security product is good. The next-generation firewall, web application firewall, that is a good product. We'll see, I think they beat their expectations. Nobody really expected them to do anything. It's like, hey, not dead. Let's celebrate.

Chris Hill: Good place to end this ending. Tim Beyers, thanks for being here.

Tim Beyers: Thanks, Chris. 

Chris Hill: Before we get to this next segment, I want to tell you about something we have planned for later this month. On Thanksgiving, we were planning to take the day off, but instead, we're going to be doing a different episode that will be familiar to anyone who listened to our MarketFoolery podcast over the past decade. It's something we like to call "Apropos of Nothing." No stock talk, no investing analysis. Just me and a couple of longtime Fools talking about the topics that you're more likely to overhear at a bar or a barbecue. Past Apropos of Nothing episodes have included discussions of important topics like, if there was a Mount Rushmore of greasy food, what would you put on it? Who would win a fight between a shark and a tiger? Why isn't tug of war an Olympic sport? Let me be clear. This episode is not going to be for everyone.

Historically, there are listeners who skip Apropos of Nothing and there are listeners who count these among their favorite episodes ever. Regardless, if you would like to suggest a topic for us to kick around, drop an email to [email protected]. Again, no stock talk, no investing or finance just three good friends talking nonsense for a while. If you're stuck in a Thanksgiving Day nightmare, either because of traffic or possibly the people that you're with, hopefully, we can be a fun distraction for you. We're going to record this in about 10 days. Again, if you have any suggestions, email us [email protected]. Up next, Ricky Mulvey continues his conversation with Ben Foldy, reporter for The Wall Street Journal and host of the podcast Bad Bets. They talk about where Nikola is today and why automakers are investing in hydrogen-powered vehicles. 

Ricky Mulvey: Even to today, Nikola is still operating. You could buy, not that I'm planning on doing it, but you could buy stock in Nikola.

Ben Foldy: You can buy a truck from Nikola now, actually.

Ricky Mulvey: Yeah, in their latest quarter, they delivered 48 trucks. Is there anything they're doing though at this point because one of the things that Trevor did is he was just either counterfeiting things by stenciling onto trucks that this is run by hydrogen, or he was simply bringing in other parts and cobbling it into his own vehicle and calling it technology? Through to today in your reporting, have you seen Nikola building any unique technology within either electric car making or electric vehicle making, or hydrogen-powered vehicles?

Ben Foldy: I think a lot of traditional automakers are facing this, too, of that. The auto industry has never been somebody making everything and making all the core components. I think classically in an internal combustion engine world, GM and Ford, and Toyota, and all these companies, they spent a lot of money on developing engines and transmissions, but in the EV world, there aren't going to be engines and transmissions in electric motors, they are commoditized, as are battery cells and the differentiation is going to come in software and experience and these other things. So I don't think that Nikola, as it related to the semi-trucks, was out of line in being a systems integrator, I think most OEMs are systems integrators where the starry-eyed vision of the future that Trevor sold was really unique, was not just the trucks, but this whole systems model of bringing about a hydrogen economy where Nikola was producing its own hydrogen, pumping its own hydrogen into the trucks. In the podcast, I describe it as both the next Ford Motor Company and the next Standard Oil or ExxonMobil.

Because we can talk about this with hydrogen cars, but hydrogen-powered vehicles aren't new. Like anything, there's issues there getting them to a product from prototype. But if you live in California right now, you can buy a hydrogen-powered car. I think the BMW CEO yesterday said that hydrogen-powered cars are going to be hip. This company, Toyota in particular, I think really thinks that hydrogen is the way of the future. So that's not new, what's lacking is, I know that, I can say that I've never seen a hydrogen station. I've never seen a hydrogen-filling station. I can say most Americans haven't because I think there's about 50 of them and they're all in California. I think there's maybe one in Hawaii. You don't have the neighborhood filling station, you don't have the infrastructure, you don't have the 100 years of petrol-based infrastructure that's been built up.

That's what hydrogen would need to catch on. Battery electric vehicles don't need that because we have the grid, we have the infrastructure for the fuel is out there and you can say that there's not enough charging infrastructure and you'd be right. But it's not like you need to invent the grid, whereas with hydrogen you need to invent that infrastructure. That's what Trevor was going to do. I think there was some real original systems-level thinking and Nikola of, we're going to have solar, we're going to have cheap electric will allow us to make green hydrogen, will allow us to build out this hydrogen economy and to tailor it to heavy trucking. Which I think makes sense because your average American driver drives their car something like 20 miles a day. Your average trucker drives much further than that and it can't have a heavy battery cutting in the weight they can haul. Hydrogen makes more sense as this transportation fuel than it does for this everyday American driver of fuel.

Ricky Mulvey: Is that the advantage over electric, is that if you're building a hydrogen battery for a vehicle, you just have a lot more storage capacity than an electric battery that would run on something like a Tesla?

Ben Foldy: Fuel-cell electric vehicles also have a battery because they still have electric motors. But what it does is -- it's best to almost think as a range extender, where you have a battery, but then you have a fuel cell that rather than stopping to recharge the battery, the fuel cell is generating electricity for the battery to power the electric motors. Not dissimilar to a locomotive where diesel locomotive or a diesel generator runs into an alternator, into the electric motors. It's almost like thinking of it as an onboard power plant. The other upside is there's no emissions. You still have that BEV with no emissions, but you don't have the heavy batteries and I think I didn't answer that part of your question. But yeah, lithium-ion batteries are incredibly heavy.

In a Tesla, for example, they're basically the whole bottom of the car and they're very heavy. It's not a huge problem for a car. If you've seen a Tesla, they're relatively sleek silhouettes. They're made with lightweight materials, but if you're pulling 80,000 pounds and you're 13 feet tall, you're going to lose that aerodynamic advantage. You're not going to be lightweight and so you're going to need more batteries to pull all that weight. There's a diminishing return, because of more batteries you add, the heavier it's going to be. Hydrogen is potentially the answer to that in that you can have smaller batteries constantly generating electricity, you can do all that. But again, the drawback then is, if I tried to drive a hydrogen truck right now from New York to Chicago, I'm almost certain that there's nowhere for me to put any fuel in that truck.

Ricky Mulvey: Yes. Even if you're driving it around California, it does seem that delivering the compressed hydrogen is both expensive and difficult to do, at least where this stage of the technology is.

Ben Foldy: Yeah, for sure, the economies of scale that have come with other clean utilities and gas and everything else, they just don't exist in hydrogen. Again, I think that's where Trevor's idea kind of shone was that as this integrated model where either cheap solar electric could be used to make green hydrogen onsite and pump into the trucks. And they've had to move away from that, I believe, but that was the vision was this integrated model. I think Trevor often called it the chicken and the egg. Solving the chicken and the egg or it's not like you've induced the demand by selling your trucks and then you fulfill the demand by selling the stations.

Ricky Mulvey: Trevor Milton and his PR team haven't been too keen on talking to you. He's just been convicted of securities fraud on a few counts. Let's do a hypothetical. Let's say Trevor Milton says, "You get to ask me one question, Ben Foldy, for your podcast. I'll answer it honestly, I'll even throw that in." What would you like to ask Trevor Milton?

Ben Foldy: I've spoken to some jurors and we wrote a story a couple of days ago that has some of those conversations. The trial really boiled down to these questions about his state of mind and intent. So I think my question would just be, I don't know how you ask someone about self-awareness, but it would be, "How self-aware are you? What was your intent? What is your intent? Were there moments that you considered that this might be securities fraud?" The state of mind issue. Because it's a really interesting case because it's not like he hid; the evidence of making material misstatements is all over the place. These were public statements. These were public comments. They were broadcast all over the world. That's not at question. What's at question is the state of mind and the intent? That's the mystery that I think remains a little bit uncertain. 

Chris Hill: As always, people on the program may have interest in the stocks they talk about. 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.