In this podcast, Motley Fool senior analyst Bill Barker and host Mary Long discuss:
- What prompted DoorDash's recent updates.
- Fees, tips, and other ways Airbnb and DoorDash pass on costs to consumers.
- How demand for spicy food is just one positive sign for McCormick.
Motley Fool analyst Sanmeet Deo and host Mary Long break down the main components of Adobe's business and how AI could prove to be a major growth area.
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 29, 2023.
Mary Long: DoorDash goes hourly and McCormick keeps things spicy. Motley Fool money starts now. Welcome Motley Fool Money. I'm Mary Long. I'm here with Motley Fool analyst Bill Barker. Bill, I feel like everyone's getting a second dose of you this week, so that's awesome. How are you today?
Bill Barker: I'm well, thanks for asking.
Mary Long: Well, let's start talking about DoorDash. They are the leader in the restaurant delivery wars. They announced an hourly wage option for Dashers, those are the couriers that do the pickups. Previously, it was on a per-job basis so I think this came because there was some pressure on gig economy workers from local governments. I think this is good news for the Dashers, is it good news for the company?
Bill Barker: I think long-term it's good news for the company because it's going to supplement in particular pickup jobs that weren't very profitable on a per-job basis, but were on an hourly basis or could be at least decent pay at an hourly basis, smaller orders, longer travel. In terms of satisfaction with the ultimate customer, I think DoorDash is going to be supplying more of the deliveries through this choice that the Dashers have. I think it's a recalibration of the business model. If these run fast and break things models, get things out, don't worry too much about where the profits are right away, get a lot of customers and then figure out the profitability over time, both by the company and by the gig economy employees. Over time you see where the holes in the system are and this is filling in one of them.
Mary Long: Yeah, the holes in the system thing is interesting because this is a similar path that I think all of the sharing economy, gig economy companies have had to wrestle with. Uber has had to deal with it, Airbnb. This is just something that these companies, as they evolve, they're becoming more like traditional work in some ways.
Bill Barker: There are regulations that show up in certain locations where some of the gig economy employees or not employees become considered employees or part of the way toward that. I think that over time, you're not going to find the jobs like this pay either too much or too little but in the short term, they will. I think that the people that can game the system the best, do the best and tell people hear oh, if you work the system this way, you can make a ton of money and then you get more supply. Chasing that and that tweaks the model a little bit and ultimately, people get fairly paid is the likeliest outcome.
Mary Long: Yeah, it's true. Around Uber, there's a whole system of people giving advice about which rides to pick up and things like that. Another aspect of all these companies is the tipping. Another update DoorDash made on their app is they're now going allow post checkout tipping for 30 days. It seems like a while to me. But there's been a little bit of a backlash in the world about point-of-service tipping. Everybody feels like they're being asked for tips at any transaction, any moment. With DoorDash, with Uber, it seems like they have to do everything they can to encourage tipping to keep the workers happy. Are they passing on some of the cost of doing business to the customer?
Bill Barker: No. There's no sort of about it.
Mary Long: Okay.
Bill Barker: You're a customer, you've had cost passed on to you. You have been given opportunities to tip that are many times the number of transactions that used to be the case. You have perhaps I'm not accusing you of tipping or not tipping at any point, but you've probably paid more money for the same service in the last couple of years than you did five years ago. Am I right about that?
Mary Long: You are right about that because there's the other aspect of it, especially with Uber or something like that. I'm attached to my rating and that's part of the aspect of this, too. If you don't tip and you plan to use the service again, you're going to be in trouble.
Bill Barker: I have made probably the mistake of not caring about my Uber rating. Really couldn't tell you what it is therefore, maybe I'm not tipping as much as you are in pursuit of a better rating. I'm hard-pressed to think of an occasion where 27 days after a service, I would have been compelled to tip.
Mary Long: Why?
Bill Barker: I can't imagine the circumstances under which that would occur do leaving things open for 30 days for a tip, I guess a signals something to the employees, look, you've still got a chance. I guess if you go back to the same spot, the same customer again and again and deliver a good service, maybe you can get retroactive tipping.
Mary Long: Maybe we'll see. I want to take a quick pivot to another sharing economy service. Because yesterday on the show you chatted with Ricky about Delta and travel. Summer travel though it's cutting a little dicey with some of the airlines lately but there was a story from a tweet that went viral yesterday about Airbnb. A real estate consultant published some data from this company called AllTheRooms saying, Airbnb revenue is down by 50%, and in markets like Austin and Phoenix, there's competing data from another company, AirDNA, saying the revenue is only down around 3%. Either way, looking at Airbnb, is there a demand problem or is this a prices have gotten too high problem?
Bill Barker: I think that it's more likely that the prices, if not too high, have gotten to be no value compared to hotel rooms, especially on the short stay given what seems to be a very large cleaning service for any Airbnb stay. I think that short-term rentals hotels are going to be if not competitive or if not superior are very competitive, and they're more of them. There are more employees at the hotels today than there were a year ago. There's more people coming in to do seasonal work than there was a year ago, still hard to get into the country a year ago, you had needed to have a negative test just to get into the country. I can't remember what month that changed, but it was sometime after May when I was traveling back into the country so it's just a case. I think the data is very different between these two services as to what the extent of the decline is. As you pointed out, there is a decline year over year but 3% is very different from some markets, 50%, that's also a headline so selecting the hardest hit market, you can find throwing that in your headline, calling it a collapse, there is no collapse here. But there's more hotel rooms being supplied with more staff that can turn around hotel rooms in a timely manner.
Mary Long: Yeah, the collapse thing. Yeah. That was a very overblown headline. You mentioned the cleaning fees, this is a big issue that everyone has complained about. Airbnb, they'd have made some moves to increase the transparency on it. The fees part is one, the other part is the demands that you get when you use in Airbnb, they ask you, like tickets trash, or strip the bed, sometimes it can be more than that. Can Airbnb administer that on the corporate level? It's a little bit different than transparency with fees because it's not at the app level, that's really at the highest level.
Bill Barker: Yeah, ultimately, you get what you pay for. If you are paying a very small amount for a room that seems or a house that seems exceptional then there may be additional fees that supplement that and make the fee less attractive. Or you're getting less service than you would if you were paying more. This is another example like DoorDash where you've got a new business model, you come out, it evolves, you tweak it, broken things get fixed over time. Ultimately the customer, hopefully, I think for Airbnb, the challenge is the customer to have a consistent experience where it is very hard to give a consistent experience due to the nature of independent operators being the ones supplying the rooms and housing. Getting that information out there in a more transparent manner and Airbnb is not the only one who provides a price upfront that then you confront at the end of the transaction wasn't anywhere close to what you thought you were going to get. That's available in many different travel services. But if people are getting upset because of the experience of booking their Airbnb stays, Airbnb will correct that.
Mary Long: Yeah, absolutely. Let's talk about something different, very consistent business actually. We're in the heart of grilling season, which it seems like every food season might be good news for McCormick. Strong quarter for them, sales up percent. The part of the business where they see the growth though, isn't necessarily the hot sauces, the spices that we buy, it's the flavor solutions they sell the businesses. Why is this a growth area for McCormick?
Bill Barker: Well, the headline number seems like more growth than once you dig things away. Flavor solutions sales, and that's the category selling to restaurants, and to the industrial market formulae called the Industrial Segment. Up 12%, but that was all pricing. It was a 14% increase from pricing actions offset by a 1% volume decline and it was pretty much the same in the consumer segment. Much smaller, not able to raise prices as much, only 9% increase from pricing and a 2% volume decline. Quarter-over-quarter, year-over-year by the quarter, people were stocking up less, but they were paying a lot more, especially at the restaurant level, which is also probably something that would come as no surprise to you, or listeners. It seems like restaurant pricing has gotten very generous at the restaurant level.
Mary Long: Yeah. Generous for them a little bit painful for us.
Bill Barker: Yes. We're being the ones who are generous and then apparently they are being generous with the amounts that they are paying to McCormick that won't last forever. They're not going to be able to raise prices at that level. People aren't going to put up with inflation of the 12 to 14% range on their meal, or the components of the meals for very long, and of course, inflation has come down recently in the rest of the economy. I don't think that we're going to see numbers like this going forward for McCormick. As you pointed out, it's a very stable business. People aren't going to eat 10% more, or be 10%, more flavorful in their eating.. from one year to the next.
Mary Long: That's true. We've got a CEO change with this point too. You talked about the CEO change yesterday with AutoZone. Another very stable sedate change. You've got Brendan Foley who became president a year ago. He's taking on the CEO job in September. The current CEO, Lawrence Kurzius, he's going to stay on as the Chairman of the Board. Foley's been in leadership for a while. This seems like a nice, easy transition, like the one from yesterday. Is this what you want to see, steady companies steady transition, or do you sometimes want to see an outsider come in?
Bill Barker: Well, steady is part of it. The reason why you would want this to be a steady transition is not just steady. You can have a company that is a subpar performer, but very steady at doing so. McCormick's not that. McCormick has been an exceptional investment, and you don't want to see that equation changed particularly, and then it's a happy event, I think for shareholders to see a continuity of management where you do want to see management changes where you are not enjoying exceptional, or above-average returns and then you're going to see more agitation for it. A change in style, or name, or more than that.
Mary Long: Yeah, we don't need that with McCormick. What's interesting to me about McCormick, and about our tastes, in general, is our capacity for spice. We have fallen in love with hot foods. Brendan Foley is that incoming CEO. He said it's not just the hot sauces, but it's also heat as a component of spices, seasonings, snacks, everything that's a huge growth area for them. They have Frank's RedHot, they have some other hot sauce brands. Do you think they're going to continue to go down the hot sauce road, maybe buying other brands, or how do they keep pace with the other companies that are embracing this hot all the things trend?
Bill Barker: Historically what they've done is to acquire great brands, and to keep them going. Old Bay, regionally is probably the best-known brand. Here we are not too far from Maryland, and Old Bay's very central place in the world of eating crabs is one of the things that defines the experience. But I think that Frank's Reds and some of the other hot sauce acquisitions they've made are indicative of what they do with their access earnings, which is to make targeted acquisitions, and they've been successful, and they're able to put more money behind the marketing of regional success stories, and that has worked out. I think that rather than trying to develop new brands, they're better off buying smaller, regionally successful brands and bringing them both domestically and internationally.
Mary Long:: Yeah, I think that's right and then the hot sauce category, there's plenty to choose from.
Bill Barker: Otherwise, there's plenty of regional success stories out there, and they have the ability to make them national success stories.
Mary Long: Absolutely. Thanks so much for your time today, Bill.
Bill Barker: Thanks for having me.
Mary Long: Adobe's new generative AI product, Firefly has people buzzing. That's not all you need to know about the company. Mary Long and Sanmeet Deo walked through Adobe's different businesses, and where the company could go next.
Today we're putting the spotlight on one company benefiting from the AI gold rush. Here to talk all things Adobe is Motley Fool Senior Analyst, Sanmeet Deo, glad to have you.
Sanmeet Deo: Hey, thanks for having me, Mary.
Mary Long: Many listeners may already be familiar with Adobe for its creative software, but there's more to Adobe than photoshop, right? How does this company actually make money?
Sanmeet Deo: Yeah, that's a great question. One of the first things we ask when we're looking at a company. More than 93% of their revenue comes from subscriptions. There are three main segments, digital media, which is about 73% of revenue, digital experience which is about 25% of revenue, and publishing, and advertising, which makes up a little bit, around 2%. There geographically, very diverse all across with America being 60% of where their revenue comes from. EMEA, 25%, Asia-Pacific of 15%. Their gross margin is at the high of 80%, and their operating margins have been above 30% in the past four years. They have products that you've probably used before, PDF, and Acrobat. There's also a slew of content creation tools that video editors, and photo editors use that I haven't used through, that realm of software, but they have a wide variety of products across the digital landscape. Very good, broad-based company.
Mary Long: Other offerings beyond that like content creation bucket that you mentioned?
Sanmeet Deo: Those are the main ones, but there were in, we're going to get into it a little bit later where they've been adding into their product suite with generative AI, which is meant to enhance some of those products, I know we're going to get into that a little later.
Mary Long: What those offerings that you mentioned, without dipping too much into the generative AI stuff quite yet, who is Adobe's chief competitors? You mentioned PDF, and Acrobat. Is there, DocuSign, their top competitor there?
Sanmeet Deo: Yeah, DocuSign is there, and that's a product, and I forgot to mention is the signatory DocuSign style product that they have, but they also compete with big software guys Microsoft, Salesforce, some of those other companies, but there's also a lot of private companies that they compete with, whether it be, Canva, Figma, various other private companies as well.
Mary Long: Yeah, you mentioned Figma, and that's another thing that will look at in a bit. But before we dive into that, let's think about the leadership of the company and offer an overview there. The CEO, Shantanu Norian, has been at Adobe's helm for about 16 years. How integral is Nouryon's leadership to the Adobe story?
Sanmeet Deo: Nouryon has been a phenomenal CEO. He's been at the helm since 2007. Just to give you a snapshot of what he's done since he began this, Adobe Stock has returned 17.1% versus 9.6% for the S&P 500. Over that period of time, the stock has outperformed based on a lot of the initiatives that he's taken on. He's actually been recently named the Number 2 in the top CEO list on Glassdoor. He's been instrumental in them changing their business from a traditional software company where you would buy the package software to a cloud-based subscription model, which changed their revenue model to a more recurring, steady revenue stream vet rather than the traditional packaged software products. That was a huge transition. It did slowdown the revenue a little bit, but it proved to be much higher margin and a better shift for them in the long run. He's one of the ones has helped establish a global standard for digital documents with Acrobat and PDF, which is something we all use. He led the launches of Creative Cloud in 2013, experienced cloud in 2019. He's guided the company in adapting to the changing digital landscape. The company has been recognized as a top place to work for women and minorities. He's very involved with diversity and inclusion. So he's been a great CDO for them.
Mary Long: Awesome. You gave us an overview earlier of some of the different metrics that have and how they've changed at Adobe over the past few years. Can you walk us through how you're thinking about Adobe's current valuation?
Sanmeet Deo: Currently around based on 2023 estimates, they're trading at about 31 times PE. The free cash flow yields at about 3.5%. One quick metric I like to take a look at that. I do a quick calculation on as if we were to assume a 20 times normalized PE, which is a normalized PE for the market and various stocks over a long-term average. Their current price, which last I checked was 49. I haven't checked the price as of today, so their current price of 49 implies a five-year earnings per share Keger of about 20,12%. That's what the market is pricing in. Consensus expectations is about the same. So they're trading in line with what consensus thinks their earnings will grow out over the next few years. They're fairly valued, I would say, and not significantly overvalued even given the run-up in the stock. Because while the stock has been running up, their earnings and their cash flows have been growing as well at a very high-margin, steady clip, so fairly valued, I would say.
Mary Long: You mentioned the run-up in the stock year-to-date, Adobe Stock is like over 40%, has something in particular driven that surge?
Sanmeet Deo: I think has just been good old fundamentals and strong results over the course of the year. They've been continued to post strong results that beat expectations in a challenging economic environment for Tech stocks and specifically SaaS stocks and that just is a testament to the nature of their products and their software being a core product and utilization for their customers. Also AI has been something that's been a big tailwind for them in terms of the momentum for the stock.
Mary Long: Let's talk about AI, what makes Adobe an AI play?
Sanmeet Deo: The thing I like about Adobe is an AI plays, they've not the first ones you can think of when it comes to AI. If you think of [Alphabet's] Google or OpenAI and ChatGPT. But they've been slowly and steadily been working to integrate their generative AI tools into their core design products like Photoshop, Illustrator, and Premier. They've been working on it for a while and now they're starting to bring those products out to bear. The cool thing about their general AI is it could entice customers to pay more for the solutions they're already using with Adobe as well as solutions that Adobe is creating in conjunction with AI to enhance the usability and the interactions. So one of their core products that they recently came out with they launched a beta version in March of Firefly. Firefly is basically if you've heard of DALLE 2 or Midjourney, it's an AI-mostly photo generation for now app where it's trained on hundreds of millions of Stock photos that Adobe has openly licensed content and copyrighted expired public images that you can basically type in a text, create me this image of so and so be as creative as possible as you want, and it will create an AI generate image for you. What I like about what they're doing with this is too, is they're trying to play as safe and be very mindful of copyright laws to protect artists and their work. They're not in a rush to be the first mover and move fast and break things as is always the case and technology. While some of the other image generation AI apps are at risk of potential copyright infringement, so they're already getting some heat and while regulation is forthcoming, as it always is, Adobe is trying to play the good side of that and be on the side of the artists and the content creators.
Mary Long: I saw something literally today would that was saying Adobe was so confident in their Firefly program that they would support the legal fees of any artists that were faced with copyright infringement lawsuits or something. Because that system is trained on Adobe's wholly owned stock images and openly sourced ones. There shouldn't be any issues there. So that was an interesting play, but speaks exactly to what you're saying.
Sanmeet Deo: Then also just one thing I want to add about Firefly. It's only is three months since Firefly launched, users have created almost half a billion images with its tools. Right now it's free and they're going to at some point charge for it. The other thing I wanted to mention about Adobe and their AI generation is one thing that we look for in our portfolios when it comes to AI investing how close are they or are they monetizing their AI? Like in many companies talk about AI. They said they're going to explore AI, but are they making money from it? Or is it just something to boost up their stock and get people excited about them? Adobes, I would argue is close to that tipping point of actually monetizing AI and especially with the fact that their current tools are going to be enhanced by AI and it could help retention and added usability.
Mary Long: Adobe has been around since 1982. It's not like it's the new kid on the block, but as we've just said, it is stepping into this like cutting-edge technology and as being a real player there. Do you think of this as a stalwart company or is there still a growth story here?
Sanmeet Deo: That's a good entry good question. I think it is a stalwart with the optionality of potential for huge growth opportunity ahead, they have their core businesses that are generating a ton of cash flow and steady operating cash flow. That is there and it's going to continue to do well. But I think what the generative AI that provides an additional boost in terms of growth and the Figma acquisition could add another boost of growth if that were to be approved. I see is one of the stalwarts with a growth component to it.
Mary Long: For sure. Let's step into this Figma conversation too last year Adobe announced its plans to acquire Figma, which is a collaborative design software and a huge competitor to Adobe and the price tag on this was $20 billion. So there was plenty of skepticism around that, like sky-high number, but also around potential antitrust issues. The US and UK regulators are already considering blocking the deal and the EU recently launched an antitrust investigation. How Central is the success or failure of this acquisition to your Adobe investing thesis?
Sanmeet Deo: I don't think is central to the Adobe thesis because like I said, they have such a core business that is strong and doing very well, a very highly diversified with a ton of recurring revenue and cash-flow generation. Regenerate AI I think is going to be very additive to their core business as well as future lines of business. But the deal has some positive attributes which I think could really help them in terms of gaining access to new user base. Complementing their tools with Figma tools which are not completely the same, helps them see competitive in a collaborative design software market. It diversifies their products and revenues even more so, while it's a very high price tag, 50 times for revenue, which I think could possibly be the highest for a software acquisition. It has a lot of positive attributes that could be additive for them in the future. But if the deal doesn't get approved and doesn't fall apart, I would not be hesitant to continue to own the stock and be positive about it.
Mary Long: Sounds like there's a lot of upside with Adobe, no matter how you slice it, whether or not this acquisition goes through, their paving the way, but being patient with AI. Lots of things to watch here and lots of good news all around. Thanks so much, Sanmeet for diving into Adobe with us today. Good to talk to you.
Sanmeet Deo: Thank you, Mary.
Mary Long: As always, people on the program may have an 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 Mary Long. Thanks for listening. We'll see you tomorrow.
