In this podcast, Motley Fool senior analyst Tim Beyers discusses:
- Fourth-quarter revenue coming in higher than expected for Meta.
- That $40 billion share buyback plan.
- How AMD is demonstrating that not all semiconductor chip companies are alike.
How did Planet Fitness get the attention of the Federal Trade Commission? Motley Fool producer Ricky Mulvey and Motley Fool senior analyst Sanmeet Deo discuss whether the low-cost gym deserves a spot on your watch list.
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 February 02, 2023.
Chris Hill: Well, it's Groundhog Day, again. Motley Fool Money starts now. I'm Chris Hill. Joining me today, Motley Fool Senior Analyst Tim Beyers. Thanks for being here.
Tim Beyers: Thanks for having me, fully caffeinated ready to go.
Chris Hill: Likewise. Let's start with the social network. Fourth-quarter revenue was solidly higher than expected for Meta Platforms, and throwing the fact that Mark Zuckerberg, and his team have been methodically cutting costs, and they announced a $40 billion share buyback plan, and you get shares of Meta Platforms up more than 20 percent. Where do you want to start?
Tim Beyers: I think I want to start with Mark can't quit the metaverse. He just can't quit it. Maybe he doesn't need to. He was a bit forceful in his comments about where they're going. He made an argument that Facebook's AI is making better and better decisions about how they place ads and that that will keep going and their investments in AI will just keep progressing. But boy is the investment in Reality Labs just gone bonkers, Chris.
I want to give just a quick update here, so year-over-year, both the revenue for the quarter as well as the operating income for the quarter and the year for Reality Labs were just worse, like the revenue was down, but there's about $3.5 billion for the fiscal year, Chris, and additional operating losses for Reality Labs so that may very well pay off. However, that $40 billion buyback that seems to have the streets giddy, there's probably going to be some debt that Meta/Facebook [laughs] is going to have to take on to fund that buyback. I'm not so sure I love that. They did it last year, and they're probably going to do it again.
Chris Hill: Although, I think part of the counter to that, is we see companies buying back shares. Not every company is good at it, and there are companies that buy back shares, and they don't really reduce the share count. Meta Platforms, for whatever else you think of them, they have done a good job of reducing the share count. But it is one of those things where it's, and I'm not a shareholder, but it's like, I think I feel better about taking on debt if interest rates were backwards when they were 18 months ago.
Tim Beyers: I agree with that, and I would also agree if Facebook, we're actually good at this, like if they were provably good at buybacks. To be fair, this buyback may be amazing, but they are not provably good at this, Chris. I did the math. Over two years, $72.5 billion on buybacks, 33.6 billion of that in Q3 and Q4 of 2021 and your average buyback price, $389.74. That is a lot higher than where the stock is right now, even with the bump. I'm not saying that Facebook is wrong to be thinking about buybacks, especially if you think the stock is cheap right now, it's actually a very good decision.
But let's be clear here, because of that Reality Labs investment that is not going away, Facebook doesn't generate as much cash as it used to, and it is consuming all of it to fund its capital expenditures and those buybacks and then some which is why it needs the debt to do this. I don't have super strong objections, but I think if we were to color this as, wow, this company is killing it right now. I don't know. I don't know that they're killing it, Chris.
Chris Hill: No, I don't think they are, but I do think part of why we're seeing the stock shooting up today, part of it is just how much it's been knocked down.
Tim Beyers: Yes.
Chris Hill: Part of it is the bread and butter of this business is advertising. We saw what happened to Snap recently among other things, and this isn't getting a lot of attention. But among other things, I think this was a quarter that not only was better than expected and better than average for companies that make their money off of digital advertising, it was also a signal that the threat to this business from two years ago of Apple changing their privacy settings. They appear to be moving past that, or, at least, managing their way around it. I mean, they really took hits to their revenue because of Apple's decision to beef up their privacy settings, and you look at the revenue for Meta Platforms, they look to be back on track.
Tim Beyers: They finally are, and he called it revenue neutral for 2023 and possibly into 2024, so it does look like things are turning a little bit. I would agree with that things are more positive than they were. My fear is that because things are more positive than they were, we've suddenly gone from things are better than they were, so now it's all gas, no break. Let's go. I wonder if it's a little too much, a little too soon. If I were an investor right now, I think I'd be a little cautious about going deepened investing a lot in Facebook. In fact, given where the stock has shot up, if you bought this, say like a year ago, and you're sitting on a massive return, I wouldn't be afraid to say, maybe take a little bit and find some other bargains here because this one, I think is still early in the turnaround process, Chris.
Chris Hill: Real quick, I want to get your thoughts on a completely different part of the market, and that's semiconductors. This is one of those industries that at first blush seems to be somewhat uniform. Every company is different obviously, but their results tend to track one another. But last week we got Intel's latest results. This week, we get AMD's results, and they could hardly be more different, Tim.
Tim Beyers: I think it's time to stop talking about the chip sector and how the chip sector has been depressed and chip clots and all of this stuff and lumping these companies together because they are moving differently now, things have really changed. I want to give you a couple of quick numbers here, Chris. These are two relatively similar areas, in the area where Intel competes, let's say, supplying big chips to like servers, data centers, the stuff that powers the Cloud, they have two segments that provide this area.
The operating margins in 2021 for the network and Edge segment for Intel and then the data-center segment, were 21.5% and 37.2%. Those are down now to 8.3% and 11.9%, so they're either massively cutting prices or they just can't sell their stuff. It just is not great. AMD in its data-centre business in 2022 was up 63% and the operating margin expanded from 27%-31%. These two are going in just different directions materially, and it does look like what we've all heard that AMD is really getting a lot more of Intel's market share. These numbers seem to bear that out.
Chris Hill: Well, and that's not even touching on the more recent announcements from Intel in terms of what they're doing with staff, what they're doing with pay cuts, freezing bonuses, all that sort of thing. Those are tough decisions. But to your point, we're not seeing that at AMD.
Tim Beyers: We're not, and to be fair to Intel, part of that is because Intel has taken on a project that AMD has not and really cannot. Intel is going to be in the business of reshoring chip manufacturing here in the United States. They're not only competing with AMD, they're competing with Taiwan Semiconductor. That's a big, big ask, and they need a lot of capital to do it but the performance of their data center and network business really doesn't help here. I hate to say this because I'm never one-to-one a discount Intel or count them out because they're just so big.
But the numbers are such that, Chris, roughly those two segments, the server side segments for Intel, that's about three billion dollars in operating profit in 2022. AMD over the same period, about 1.6 billion. Now, same period last year, about a billion dollars for AMD versus on the order of three or four billion-dollar. Things have changed dramatically, so AMD has done a lot of work to catch up, and it looks like they are moving ahead here. I would say this stock, maybe it's not cheaply valued any more because people have started to notice AMD. But the momentum, the big mo, was behind this company, Chris, and I think we're going to keep going on this for quite some time.
Chris Hill: Tim Beyers, great talking to you. Thanks for being here.
Tim Beyers: Thanks, Chris.
Chris Hill: Signing up for a gym membership motley fool is easy, but canceling the gym membership, that's a little bit tougher. Ricky Mulvey talks with analysts Sanmeet Deo about Planet Fitness, getting the attention of the Federal Trade Commission and whether the low-price gym deserves a spot on your watchlist.
Ricky Mulvey: Let's dive into Planet Fitness because there was a short report that got my attention on its from Edward Dorsey, he reads a Substack called the Bear Cave. He alleged that Planet Fitness was essentially in a legal billing operation with gym's on the side looking at a lot of the complaints for members about their billing practices, where it's very easy to join, but essentially you have to send a letter or go to the gym in person. Some members have found that maybe their letters have been lost in the mail or that they've moved away from the gym and now it's basically impossible for them to cancel.
Planet Fitness is OneNote, I'll say too, is that the CFO Dorvin Lively and in 2019 essentially said that attrition is so low that we don't even measure it. That's the Chief Financial Officer. It's not a great look for the company, but it raised some questions of, is that a legitimate claim, that it's an explosive claim and is it legitimate and is Planet Fitness essentially, are there practices worse than their competitors?
Sanmeet Deo: As I was reading through this report, I think it's a little bit of a stretch to say they call it illegal billing operation with a gym in place. Like I mentioned earlier, the cancellation billing issues within the gym industry, the fitness industry is a huge issue. It's actually a problem and it's actually something that's very well-known to happens across gyms. Planet Fitness is a franchisor of nearly 2,000 plus locations. They have 17 million members. The short report, I don't know how many exactly. He had some highlights of some of the complaints and legal actions, but in terms of how many total complaints he came across, I'm not sure if you caught that number, but let's say it was 500-1,000 something?
Ricky Mulvey: No, it was in the thousands. He went to the Federal Trade Commission to get complaints and they said we can't even send you the full number of complaints because there's so many about Planet Fitness that you need to get more specific. Now thousands is a lot, no doubt. But thousand among 17 million members is maybe I don't want to say insignificant, I don't want to call anyone's claims insignificant per se, but it is a very small percentage of their total membership base. Another thing is, as you know, I actually did operate a franchise gym and this is a very, very tough situation as gym owner. You will have people trying to get at contracts, get out of memberships constantly. Some people are very legitimate. They have legitimate reasons. They want to get out.
They're not using it as much, but then some just want to get out of them, they'll try almost anything. The problem here is a push and pull between members and the gym there both. The gym doesn't want to lose members because that's paying customers for them. The members don't want to have it be so difficult to cancel. If you can click to sign up, you should be able to click to cancel. That's actually one thing that the New York, I believe or the Federal Trade Commissioner tweeted out about that was something that we're going to really focus in on for subscriptions.
But this is a tough thing in the industry. Two highlights for me, was in Planet Fitness, you can't use a credit card to join. You have to use a debit card or you have to give them direct access to your bank account. I think that's uncommon among gyms and the reason is, is because for credit card you can put a block in place and there have been additional billing complaints. One example was there's a senior in Texas who found that he was being charged $30 a month on top of $25 monthly subscription with these unexplained charges. Maybe the opposite side of that is Planet Fitness has lots of franchisors and some mistakes happen when as you said, you have millions and millions of members although I imagine that many of those mistakes often go in the direction of Planet Fitness.
One other piece that I wanted to bring up from that too is there was the claim that essentially that they were lying about the number of Planet Fitness locations in an investor letter. I think that claim holds a little less water than the billing complaints. Basically, their Planet Fitness put out a slide deck for an Investor Day showing that they could open up more locations where they had locations and where they are planning to open up more. Dorsey found that they were severely over counting the number of locations in places like Wyoming and under counted locations in Michigan, which is a very saturated market. Was that a red flag to you or do you think there might have been a more, let's say, innocent mistake made in a slide deck?
Sanmeet Deo: When I first read that, it was concerning and then when we discuss a little bit you'd mentioned on the slide deck it does say for illustrative purposes only. While it's not great that that's an issue, I'm pretty sure they probably, Planet Fitness, probably just took a map through a whole bunch of dots on there and said, this is what it looks like. They have over 2,000 plus locations. Not ideal. As an investor, I would like to see company be a little more detail oriented with their slide decks and the information that they're providing to investors. It is concerning, but not as much of a red flag as it may seem to sound in the short report.
Ricky Mulvey: I don't want to focus only on the negative though. Planet Fitness has had a lot of growth, I think before the pandemic, it had 50 straight quarters of same-store sales growth and many investors are optimistic. It's quickly growing. It's solidly beaten the market since its IPO. It's still looks in some ways expensive, where it's trading around eight times sales. What's the bull case for Planet Fitness? Where are you at as an investor who looks at the health and fitness industry on this company?
Sanmeet Deo: Well, this has been a name that's been on my radar, on my watchlist for a while. Now. As a business, it has quite a bit of things that are bullish. Like I said, it has currently about over 2,300 stores. It's more than 60 strength greater by store count in the next 17 competitors combined, high-value, low-price competitors, which is a lot of anytime fitness and reasonable brands, you could say. They targeted very broad demographics among genders, income levels, ages. They've actually signed up and started to focus a lot on under 35, 40 percent of their age group is under-35 members.
They particularly focused in new fitness goers, people that are like get off the couch types like just get in there and get into the gym and get started. They don't have all the fancy advanced equipment that a seasoned gym goer would want. A seasoned gym goer would probably not sign up for a Planet Fitness because they want more things that a Planet Fitness really wouldn't have. It operates a franchiser model you, when you invest in the stock as a franchisor. They licensed franchise stores to franchisees. This allows them to grow their store count quickly as they've done.
They have high returns on invested capital. The franchisees have attractive unit economics, which is about 40 percent EBITDA margins, which is great for franchisees. Stock investors invest in the stock or benefit from this capital-light, high-margin cash-flow growing business. They have pretty ambitious three-year financial targets as outlined at our recent Investor Day, they want to target 4,000 plus stores and international, and they've already started going international. They weren't low-to-mid teens revenue growth, high teens EBITDA growth, and low to mid 20 percent EPS growth.
For a three-year targets, those are ambitious and strong and something they could possibly do given the way their model is. I've always been intrigued by the fact that it's only $10 a month and they targets such a broad audience that it's almost part of the turn being low might be because of these cancellation billing issues that we've talked about. But part of the turn is it's only 10 bucks. Just the appeal of not canceling and hoping that you're going to go at some point is huge and prevents many people from canceling as well. There's a lot of bullish things about this story as well.
Ricky Mulvey: Send me anything else on Planet Fitness or cancellations at gyms before we get going?
Sanmeet Deo: One other thing to highlight the fact that these cancellation policies are tough across the industry. I looked at a few other chains and went to the websites and took a look at what their cancellation policies are and most of them are very similar. LA Fitness, which is a very popular chain is funny. They have an online cancellation forum where you can go, but you need to fill it out, print it, and then mail it or delivered to the manager, lifetime fitness written notice in person or certified mail, 25-hour fitness cancellation by phone, email, or through app. Then Equinox fitness, which is a higher-end chain via registers, certified mail, email, or club with managers. Just highlighting the fact that this is very, very common within the industry.
Ricky Mulvey: Always appreciate your time. Always enjoy talking about health and fitness with you.
Sanmeet Deo: Thank you, Ricky.
Chris Hill: That's all for today, but coming out tomorrow, we'll have the latest results from Apple, Amazon, Alphabet, Starbucks, and a lot more.
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.
