In this podcast, Motley Fool analysts Andy Cross and Jason Moser and host Dylan Lewis discuss:
- The epic hype around Nvidia's earnings release, and how AI is playing into the ambitions for other companies in tech like Workday.
- Why "shrink" is the buzzword of the season in retail and how investors should be looking at it.
- How Williams-Sonoma and Ulta bucked tough trends in retail to put up strong numbers.
- The numbers behind updates from Intuit and Autodesk.
- Two stocks to watch: Nike and Chewy.
Olivier Pomel, CEO of Datadog, talks through the company's recent results, the promising signs he's seeing in customer spend, and why he thinks his company still has a 10X opportunity in front of it.
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.
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This video was recorded on August 25, 2023
Dylan Lewis: We've got tales of two earnings buzzwords. Can you guess what they are? Motley Fool Money starts now.
It's the Motley Fool Money radio show. I'm Dylan Lewis. Joining me in studio, Motley Fool senior analysts, Andy Cross and Jason Moser. Great to have you both here, guys. We've got retailers doing well and not so well, a CEO's take on how listening to your customers can help shape your offerings, and of course, stocks on our radar. But we're kicking off today with two buzzwords from the earning season, AI and shrink. We're going to start with AI, and we're going to start with Nvidia. Jason, this is basically the company that could change its name to the AI Supply Company, [laughs] and no one would think twice. Safe to say AI is not going anywhere, and this business continues to benefit from it.
Jason Moser: I think that's a safe assumption, yes. Let's back up a little bit. Forgetting that Nvidia is a great company taking advantage of what is clearly very large market opportunity in the AI, the level of anticipation going into the release, to me, honestly, it's a red flag. This thing is taking on a life of its own. I'm not referring to the fundamentals of this business. Don't get me wrong. I'm referring to the level of enthusiasm, the sentiment, the perspective here that there is Nvidia, and then there's the rest of the market. I would encourage investors, at least, to be careful. Let's keep our heads screwed on straight here. We've had a lot of valuation lessons reiterated to us over the past couple of years. No matter how you slice it, this stock is screaming. Thirty-five times trailing sales, 115 times trailing earnings, the stock is up better than 220% just this year alone, and that's for good reason, and we'll get into that now. Revenue better than doubled from a year ago. Non-GAAP earnings per share up 430%. Yes, 430% from a year ago. I understand the enthusiasm. But you also look and think, this is a business that's come off some recent challenges, one that, long ago, where crypto was supposed to be the big tailwind taking this thing, and all of a sudden, that just disappeared, so I would just encourage investors to keep their heads about them in this case.
Now the AI story is real. That's not something that's going away, and management called this out in the call. I think with Nvidia today, really, the big focus of this business right now, it's the data center opportunity and the world has something along the lines of $100 trillion in data centers, which are ultimately in this process of transitioning into accelerated computing in generative AI. The investment that's going into this data center opportunity on an annual basis, management estimates somewhere in the neighborhood of a quarter of $1 trillion of capital spent each year. Nvidia is going to get their share of that. It also won't last forever, so just keep that in mind. The market, being a forward-looking mechanism, is looking at all of these numbers and looking at what this company has done to date and giving it a lot of credit. You just got to look forward and see how long does this opportunity continue, and what do these growth rates look like a year from now?
Andy Cross: I think, Jason, you hit it on the head with the data center, and that is where the massive growth is right now. I think their data center revenues may have doubled. It was just extensive. The other areas were very nice growth, but much smaller. The data center investment as Nvidia builds out, not just on the graphics processing units, just the chips, but the entire stack support the data with generative AI, with all the computing power required. You look at the clients they continue to reference in their call. You're talking AWS, Google Cloud, Meta, Microsoft, Oracle. Snowflake is a big client. They just partnered with Snowflake for a new deal to help Snowflake make sense of all the data that they are collecting for their clients, to be able to make sense of that as they are looking to analyze all that data. It's just fascinating. I can't remember another company in recent memory that the investment community has been so excited to understand and talk about because of this massive growth opportunity that we're seeing in generative AI.
Jason Moser: You said data center. Just to put a bow on that, dataset. I like to see how often things are mentioned, and then for the longest time, it's been AI. Data center itself was mentioned 50 times in this call. We're talking about record revenue of better than $10 billion. That was up, like you said, AC, up 141% sequentially, up 171% from a year ago, so clearly, they're lighting the world on fire here. Just try to figure out how long does this continue because, at some, point it starts to slow down.
Dylan Lewis: Andy, we're going to take the challenge here from Jason and have a conversation about AI that does not include Nvidia. [laughs] We're going to talk about another company. We see these headlines related to Nvidia and AI. Let's actually look at how businesses are implementing AI in their offerings and talking about the positioning there. You dug into the results from Workday. It seems like a good company to profile for that.
Andy Cross: Workday is actually a really interesting company to talk about not just because of what they are serving in the human resource, in the financial area, software provider to help companies make sense of their HR financial operations, but also, like you said, in the AI. Just very quickly, the quarter for Workday is a $60 billion market cap that provides the human resources and financial functions for half the Fortune 500, for example, so very large clients, really solid quarter. Subscription revenues up almost 19%. The revenue backlog was up almost 33%. Real operating margins, so you add in all that stock-based compensation, was at 2%, but that was versus a loss of a year ago, so they are making progress on the profit curve. But what's really interesting, like you said, Dylan, is the focus on AI, and they did talk about this throughout the call, highlighting Workday's investments in AI and machine learning that they've been doing since 2014. Their software touches 65 million users globally. You take their clients and all the people who touch and use that software, 65 million users who have that high personal touch interaction that are so important for a company like Workday, and AI and machine learning are really benefiting from that. The company believes that AI will be central to changing the way that Workday's clients interact with their software. Again, you're talking about HR and financial functions, so a very personal function for an employee base. They process 50 million machine learning inferences a day, and that's up 60% from a year ago. They're collecting all this information, trying to make sense of it, put it into their systems, and build better tools for their clients, and clearly right now, it is starting to work. I'm excited about Workday because it's interesting as it is not just being able to grow revenues but actually be able to grow profits. Finally they talked about the ability for things like generative AI to help improve their operating performance and eventually help with their operating margins down the line.
Dylan Lewis: Over to buzzword Number 2, and this is really the story of shrink. It continues to grow. This week we saw disappointing results from several retailers, Dollar Tree, Foot Locker, Dick's. Jason, one word just kept coming up, shrink.
Jason Moser: It is a real problem, although I think it's also a real excuse in some cases. I think, for some retailers, it's a bit more relevant than others. Looking at something, like Dollar Tree, for example, we were just going through those results earlier. Talking about things that are mentioned in call, the word shrink mentioned 26 times in Dollar Tree's call. I would argue, Dollar Tree, I think that's a business that's going to be difficult to really monitor this stuff because you have these shelves full thousands upon thousands of SKUs, just a lot of stuff in those stores. It's just difficult to keep track of all that stuff. But they did quantify this and that shrink is continuing to restrict their margins, they said, by about 75-80 basis points on a year-over-year basis. Now they're taking what they call the appropriate actions to try to combat that. They didn't really dig into what those actions were, and I think that is a testament to really how tough of a problem this is to solve. But I also think it will be noteworthy to hear this perspective a year from now, because if you think about it, shrink is really a trailing indicator. It's telling us what happened. As we've seen companies like Dollar Tree, they're through about 75% inventory for the year. As they finish that count, and we get a better understanding of how big of a force that is on their margins, a year from now, we'll see if those appropriate actions have actually helped out at all.
Dylan Lewis: Andy, going over to Jason's metric of the day, number of times things are mentioned in earnings call, I looked over at Foot Locker, nine times on the call, shrink came up. Same story there?
Andy Cross: Actually, I don't think it is. Shrink definitely is impacting their business, but really, they are facing some very stiff headwinds on the consumer that their revenues were down almost 10%, and that was an improvement from a drop of revenues from the first quarter. This was in the second quarter. In the first quarter, that fell 11.4%, but still same-store sales down more than 9%. That was worse than they saw in the first quarter. Gross margin fell by 460 basis points, that's 4.6%, because of markdowns and occupancies costs. They have a lot of inventory they've been trying to move out the door because their consumers are just not spending as much, and that's the challenge that Foot Locker is facing right now. Their consumers are just not spending. They had to cut their EPS, cut their earnings per share guidance to $1.30 to $1.50 versus prior guidance of $2 to $2.25 just earlier this year. They are looking at their consumer base. They're looking at the challenges that consumers are going to have with not just the macro factors, like, what's going to happen when so many consumers have to start paying back student loans later this fall as we know? While employment numbers and workforces are still very strong, what has happened with the higher interest rates? How are all these factors are impacting a company like Foot Locker? Furthermore, Nike is almost 2/3 of their sales, and as we know, Nike is moving more and more to direct-to-consumer, and that's having an impact, so a lot of challenges for Foot Locker and a very difficult quarter they faced.
Dylan Lewis: Coming up after the break, we've got retailers putting up some better numbers. Stay right here. This is Motley Fool Money.
Welcome back to Motley Fool Money. I'm Dylan Lewis here in studio with Andy Cross and Jason Moser. We're going to stick with the retail conversation and continue the earnings parade with a look at Ulta. Jason, the cosmetics company raised full-year guidance and the top and bottom line for them. What's going on right for them right now?
Jason Moser: It is an encouraging report. I think it's one that shines a bit of a light on on the reasons why we like this cosmetics and beauty market. It's a resilient one. Its sale is two-and-a-half billion dollars. That was up from $2.3 billion a year ago, with comps up 8%, and earnings per share up 5.5%. They did see transactions up 9%, so clearly people are shopping. While they saw the average ticket just fall 1%, so not much really to write home about there. I think they are able to maintain some pricing there. Gross margin fell 110 basis points. Most of that really was just due to, unfortunately, they did mention the word shrink, but not nearly as much, but I think it was more about higher supply chain costs in this case. They did end up raising their outlook for the fiscal year. I think an interesting dynamic with Ulta, you look at their partnership with Target. It's something that probably flies under the radar. But they had that store-within-a-store partnership with Target. Now they opened 62 of those stores for the quarter. They have 421 of those little store-within-a-store now, and that's on top of the Ulta retail locations, which is above 1,300. It's just an interesting opportunity there for them. I think one of the things they are really focused on with that Target opportunity is their loyalty program. I'm not really sure fully of the economics in regard to that actual agreement there, but one thing we do know is it does sign up more Ulta Reward program members, and they now have 41.7 million active members. That was up 9% from a year ago. Just a fascinating point here, I discovered these loyalty members drive 95% of Ulta's revenues, so you can clearly see the value that they present.
Dylan Lewis: Sticking with retail, shares of Williams-Sonoma up 11% after earnings this week, revenue and earnings down year-over-year, but the market seemed to really like the margin picture that the company was putting together, Jason.
Jason Moser: We did talk a little bit earlier in the week about retail and how it can be a difficult space for buy-to-hold style investing as things change so much in this world. I think Williams-Sonoma, this is one that stands out where buy-to-hold can work along with Ulta. Williams-Sonoma is a longtime Stock Advisor recommendation. It's got tremendous return for a number. It's just a company that keeps on keeping on. You look at these results, not the greatest in the world. Comp revenue down about 12%. Gross margins saw some compression there to the tune of about 280 basis points. A lot of that was due to higher shipping and freight costs. While they did ratchet down expectations on the top line for the year, they're able to ratchet up a little bit on the operating margin side, which basically means it's a wash for earnings guidance. Earnings still ought to come in in line. I think that when you present that narrative to the market, that top-line is a little bit of a downer. But if the company is going to be as profitable, or even perhaps more, I think that's the enthusiasm we saw from the market.
Andy Cross: The cash flow line too as well, Jason. The inventory and those costs had been really hammering Williams-Sonoma. I think it will start to subside over the next certainly next year or so, and that's going to help on their free cash flow line. It's been a company that pays a nice dividend, buys back stock, makes smart investments. Laura Alber and her team, I think, are really underappreciated managers in the retail space, and Williams-Sonoma continues to impress.
Dylan Lewis: This isn't a company I'm super familiar with, Andy, but just in prepping for the show and getting my research together, I didn't realize the e-commerce presence they had and the push that they are making into college and dorm wares and just what that might mean for this business.
Andy Cross: It's really interesting, Dylan, because over the last, say, five years, they made a broad push to go more and more into e-commerce. They still have a retail footprint, but they're managing that very well. They really build out those brands they have and expanding beyond just the core Williams-Sonoma Pottery Barn into other lines, especially, as you said, into younger consumers, like those who are in college.
Dylan Lewis: Summertime might not be when people are generally thinking about taxes, but Intuit does a lot of other things. I think shareholders probably appreciated seeing a 2% bump after the company reported fiscal Q4 earnings. Andy, what did you see in the results?
Andy Cross: A really solid quarter from Intuit and strength in the business-to-business. That's really on the small business, self-employed QuickBooks Online, online services, that area, a little weakness on the new Credit Karma business they bought maybe two or three years ago. That was actually down 11% versus growth of 21% in the small business and self-employed which, by the way, saw strength there across the online system that they are continuing to add in the features, like payment volume. Payment volume was actually up 22% in that small business area, so strength in the B2B sphere, Dylan, and a little bit weakness on the consumer side. Now they're very excited about the Credit Karma business. I think that can lead to some really strong growth long term. But that was weak this quarter. They're expecting further weakness ahead. Yet still you think about the sales overall, up 12%, operating income, up 45%, adjusted EPS for the quarter, up 50%. They do have two-thirds of their debt maturing over the next 15 months or so, so it'll be interesting to see how they refinance that debt and what it cost them to do so.
Dylan Lewis: You mentioned the Credit Karma asset there. Is the weakness that we're seeing there part of the broader interest rate story, Andy?
Andy Cross: Yeah. It's part of the broader interest rate, so it's weakness in loans and it's strength in credit cards. They are seeing more and more interest in credit cards. Unfortunately as we are starting to see a little bit of weakness in credit card payments and some of the banks starting to set aside some of those reserves to some of those credit cards.
Dylan Lewis: Losing a little bit of talent too, aren't they, Andy, Intuit?
Andy Cross: They are. PayPal assigned their new CEO, who came from Intuit, ran a very nice business with Intuit. While that's an advantage that PayPal, that's a little bit of a loss to Intuit, I think.
Dylan Lewis: We'll round out the earnings talk with a look at Autodesk. Shares, up 5% this week. This is one of those lesser known companies. I know our Fool analysts follow it and really enjoy looking at the company, following it. This is also maybe a name that comes up in AI conversations. Andy?
Andy Cross: Yeah, a little bit. It's a 45 billion-dollar company, so it's not small, and they are the leader in providing software to architectures, engineer, construction firms as a big part of their business. They do AutoCAD. They have lots of different lines. They actually have a little media business too that provides 3D modeling to entertainment companies to help them build out some of their films and movies in television, so really solid business. They're revenue for the quarter was up 9%. They saw strength really pretty much across the board. AutoCAD, up 9%. That architecture, engineering, construction, which is the big part of their business, was up 14%, manufacturing, up 9%. Direct sales was up 18%. That's not going through resellers. That's going directly to their customers. That was up 18%, and now it makes up 3.7% of their sales, so strength really across the board for Autodesk. The backlog of demand, their CEO said, is still very significant as the markets figure out the best way to adopt digital solution to help build out what really is a need for better architecture solutions when it comes to helping to build all things, and Autodesk touches all things. The free cash flow is a little bit lower this quarter up to the rest of this fiscal year, but that will start to trough and start to improve in the next year or two. That's what I'm really excited about when I look at Autodesk, the free cash flow potential of this business.
Dylan Lewis: Is what we're seeing with the financial picture there, Andy, somewhat a reflection of this business transitioning from the licensed model of software to the as-a-service model of software?
Andy Cross: Absolutely, Dylan. They are moving from upfront payments and much more toward subscription both yearly and over a couple of years. That means the recognized revenue will get recognized over years [MUSIC] as opposed to upfront. That's impacting your near-term cash flows. But that will really start to normalize, not so much this coming quarter or the next quarter, but probably a year out. That's where I think the free cash-flow potential and viability of Autodesk will really start showing.
Dylan Lewis: Andy Cross, Jason Moser, fellows, we'll see you guys a little bit later in the show. Coming up, we've got the CEO of a company. Our analysts love talking through recent results and mistakes companies make when they only listen to their big customers. Welcome back to Motley Fool Money. I'm Dylan Lewis. We're sticking with the earnings theme this week for our interview. Earlier this month, cloud monitoring and security company Datadog reported its second quarter results. When it did, at affirmed the reality that, industrywide, customer spend is still a bit tight. But if you take a step back, that budget tightening looks more like a short-term hiccup than a long term headwind. Last week, Motley Fool analyst Tim Buyers caught up with Olivier Pomel, CEO of Datadog, to talk through the company's recent results, the promising signs he's seeing in customer spend, and why he thinks his company still has a 10x opportunity in front of.
Tim Beyers: The last time we talked about Datadog, there was a lot of innovations that you're introducing. You did more of that again this past quarter, continuing a trend I think we've seen from Datadog over the course of its public life and really throughout its history, but I wonder if we could just take it from the top. If you had to summarize where you are as a business today and maybe just thinking about the quarter because growth may have slowed a little bit. I don't think that surprises anybody, but how do you summarize where you are right now?
Olivier Pomel: We are the leader in observability and definitely around cloud workloads. We are establishing a footprint in security also in [inaudible] in addition to observability, and we're growing along with the broader trends of digital transformation and cloud migrations. As we say, in the recent quarters, cloud migration has slowed a little bit, at least, in the numbers after a few years of very rapid growth, after the pandemic. But we think we're still in the early stages of decades-long migration that's going to keep happening. Our role today, our job, is to keep building the product to cover all of our customers' observability and security needs and keep getting our customers set up with these products, basically, so we're heads down on that.
Tim Beyers: Let's talk about large customers because one of the things you've always tracked, and you've been very good about this over time, is the number of customers that generate high amounts of annual recurring revenue. Using Datadog, you reported at the 100K level, and you also reported at the million-dollar level. It seems to me that the customers that grow into that million-dollars tier, Olivier, are arguably the most important for thinking about the compounded value that Datadog can generate. Am I thinking about that right? If I'm not, can you help me think about, how do you consider what are the things that you have to do in terms of serving customers, generating value that creates real value for shareholders over a long period of time?
Olivier Pomel: I would say it's right in part, and we definitely derive a lot of value from there, and we focus a lot on customers that pay us a million dollar or more. Our largest customers today pay us in the tens of millions of dollars a year. But really where the bulk of our revenue comes from is all customers that are above $100,000 a year, and that represents about 85% of our total revenue. This is what I would say, today and in the few years to come, is really what's going to drive the growth of the company is to growth of these courts and scale of customers and they grow with us as they move further into the cloud. They move more of their architecture or infrastructure from legacy environments and on-prem environments into Cloud. Also they adopt more of our products as we solve more of their problems. Also they go from infrastructure monitoring to all of the observability including logs. I think Mission Providence monitoring, and then they add security and then they add developer workflows and all the other things we can do for them. I would say in the longer-term though, we also have a very broad customer base in general. Unlike most companies in the space, are either focus on the very low end, on the very high end. But nobody really covers the full spectrum like we do. Today the revenue is very concentrated on the higher-end and the bottom half of our customers only represent a couple of percent of our revenue. But as we keep adding more products in solving big problems for customers, the lower-end of our customers becomes more important and more monetizable. The issue you have when you have customers that don't pay you a lot of money because they are small, is that it's really hard to feed go-to-market team to better customer acquisition costs on that, and then to better cost of serving new customers and giving them customer support. But as you solve a bigger problem, as you add products have increased the amounts you can get from the smaller customers, and as a result, you make those more investable and you can make them off which other vector of growth. That's not the focus today, but as definitely something that's in our future as we brought on the platform and we solve bigger problems for all of our customers.
Tim Beyers Let me see if I'm hearing you correctly. What it sounds like is, one of the ways we should think about growth is that, as Datadog compounds its number of use cases, like I've a library of problems, there's Datadog that I can solve. If I have a very large library of problems I can solve, then I have a long tail of ways that a customer who may be small can come in to the Datadog ecosystem and then grow with Datadog over time. Am I hearing you right?
Olivier Pomel: Exactly.
Tim Beyers Is that the way to think about it?
Olivier Pomel: Exactly. In the short term, you mid term even, we're talking about larger customers, so $100,000 [inaudible] or a million dollar or more. In the longer run, every single customer, even the smaller ones, represent an interesting opportunity for us and eventual future growth. We do have a lot of value actually from having these very broad customer base. Even today, if the majority of our revenue comes from our larger customers, we do take a lot of influence for the smaller customers in terms of keeping their products simple and being deployed in a very wide variety of situations, which gives us a network effect for the product in terms of how it works and device configuration is going to support.
Tim Beyers I would also imagine that you may run into some situations where a use case that popped up at the lower end suddenly makes a lot of sense for a large customer that didn't realize they had that problem.
Olivier Pomel: Totally. A lot of the newer technologies, next-generation technologies, tend to start with the smaller customers and the newer companies and the smaller companies. That's the case, for example today with a lot of the newer AI stuff. A lot of that is starting with brand new companies that are exploring and trying new things. Some of it is being adopted by large enterprises, where it might take more time for that to crystallize and rescale in those larger enterprises, so we definitely see a lot of value from having those two worlds meet in Datadog, the world of the smaller, newer companies and the world of the larger, more traditional, high and larger scale enterprises.
Tim Beyers Let me give you a question around this idea of how you're investing, not just in the go-to-market team but just broadly. Your a company that rewards your employees with a lot of stock-based compensation. I get questions on this all the time from our members. SBC was 23% of revenue. In the last quarter, it's grown a lot. I know that this is something that you're going to use in a way that I tend to think about it. I imagine you're using this as a capital you're investing to recruit things, like very talented engineers. How should we think about the way that you think about stock-based compensation? Does this moderate over time? Where where are you in the genesis of using stock-based compensation as part of your strategy to grow?
Olivier Pomel: That's a great question. The first thing I'd say is that there hasn't been a large change in the ratio of how much we compensate with stock-based comp. One change is optical and accounting-driven because, before we took the company public, we were granting stock options to employees. When we went public, we stopped doing that, and we say granting RSUs instead. The stock options don't enter the GAAP numbers the same way as the RSU. The ramp up you've seen was largely the RSUs ramping up and replacing the stock options. We are, by design, compensating employees with equity. The reason for that is that we see ourselves as still at the very beginning of a long expansion cycle, where internally, we're going after the next 10x in the size of the company in the scope we can have for our customers. As a result, we want everybody to be aligned with the long-term success of the company. We do it in a way where the significance of the equity stake goes up with the seniority of the role in the company. But everyone at Datadog gets equity, and everyone is an owner. I think it's important. Culturally it's very important to us.
Tim Beyers: But I want to key on something you just said there. If I heard you right, this is an opportunity. It's early enough that you see there's a 10x opportunity here, meaning, that you think the addressable market for you is at least 10x over where you are today. Is that right?
Olivier Pomel: Yes.
Tim Beyers Did I hear you right?
Olivier Pomel: Yes. I think there's a 5X or 10x on the cloud migration alone because we're far from being done with it, and that trend is going to keep going on. We think AI is only going to accelerate that trend. If you want to add up AI, you need to be digital. That's given. Then you probably need to be in the cloud because all of you are going to it anyway, so I think it's going to accelerate all that. Then there is more of an opportunity if we can broaden to other categories and if we can fully establish ourselves as the leader in security in relation to observability. Then there's a few more potential, longer-term opportunities around ITSM, IT automation, and developer workflow is getting closer to the developers. There's a number of things we can do there to get to the 10X, and that's what we're looking for internally and that's also why we want employees to align on that in the long run.
Tim Beyers That makes sense. This is really interesting. This is a very short-term question, and you addressed this during the earnings call, but I thought I'd just see if there is anything I missed here. What I thought I heard you say during the earnings call is there are some optimizations still happening. There are some headwinds that every cloud company has faced here. What is it that gets you out of those headwinds, and do you see that happening, 18 months, 24 months? Is there a reacceleration that you think you can see? What are you doing to get beyond some of these optimizations that may be crimping the growth rate in the short term?
Olivier Pomel: Here's the thing. We don't really control it because this is driven by a lot of the macro background, things that we don't control. It's driven also by a change in posture from a lot of investors to a lot of newer companies. If you look at our consumer base, the companies that have been optimizing the earliest and the most were the digital native companies. We [inaudible] more recent company, more tech-forward companies that were completely into the cloud, so substantially all of their IT spend is cloud spend for whom IT spend is a big part of their revenue. For a large fraction of them, they were actually unprofitable or not very profitable companies. As you well know, these companies were not viewed as favorable by investors over the past year, so they had to reorganize pretty drastically their finances, and one of the big opportunities for savings was the cloud. Even before us, before observability was their cloud provider, you have to remember that if a customer pays us a million dollar a year, they pay 10 million or $20 million a year to their cloud provider, but we are attached to that cloud consumption. So we don't really control it. That being said, when we look at those cohort of customers who started optimizing and who are at risk, we feel good now that they're in a much better place. We know that because we see those customers now commit with us for longer periods of time in the future and at a level of commitment days above their current consumption, meaning that instead of projecting themselves toward further optimization, they project themselves toward growth in cloud environments again. So we feel good about those. Now this is not the only cohort. There's still a number of pieces in the macro environment. It's just like, every other day, there's a new piece of economic data that falls and reshuffles the markets a little bit. So it's impossible for us to say whether we see all of that come to an end quarter-to-quarter, three-quarters, we can't tell, and if you look at the comments or the commentary in the earnings calls from the cloud providers, whether that's Microsoft or Amazon or Google, they also don't really know. They think also the market is reaching a trough right now, but they can't know for sure. What we know is that, while our earliest customers optimize, the slowing of cloud migration is a bit of a headwind for us. But we also know that, as that optimization subsides, the cloud migration and digital transformation are going to become a tailwind again, which has been true through 95% of the history of our business.
Dylan Lewis: If you're sweating what to cut is you optimize spend, one thing that might ease your mind is knowing that Motley Fool Money is available for free daily as a podcast and weekly here on the Radio. You can get our full archive at podcast.fool.com or wherever you listen to podcasts. Coming up after the break, Jason Moser and Andy Cross return with a couple of stocks on their radar. Stay right here. You're listening to Motley Fool Money. [MUSIC] As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't just buy or sell anything based solely on what you hear. I'm Dylan Lewis joined again by Andy Cross and Jason Moser. We've got stocks on our radar. But first, a story to round out the show, Subway is going to be taken private by Roark Capital in an estimated $10 billion deal, ending the company's long run as a family owned business. Jason, if I give you 10 billion bucks, which company are you taking private in the restaurant industry?
Jason Moser: Dylan, I'm not going to lie. I've got a Joey Tribbiani-esque love for sandwiches. I love them. One that flies under the radar for a lot of folks, AC, I know you know what I'm talking about. Dylan, you may not. I grew up with a Schlotzsky's back down in Charleston, South Carolina. There's only 340 locations nationwide from what I can see, man. I would buy that thing, I would rejuvenate it. I would spread that thing far and wide because that is a delicious sandwich. Just the bread they use for them, it's one I just don't think gets enough credit in today's sandwich-driven world.
Dylan Lewis: It sounds like Jason's going passion project. Where are you going with 10 billion points?
Andy Cross: I like the Dog Haus Hot Dog Cheese. There's one downtown Silver Spring where I live, and you can go there and get all different kinds of hot dogs. They have beers on tap, and they have televisions. I like the Dog Haus. I don't know who even owns it, but when I just want to get a hot dog, that's the place I go.
Dylan Lewis: It's a good local shout-out. We appreciate it. Over to stocks on our radar, our man behind the glass, Dan Boyd, is going to hit you with a question. Andy, you're up first. What are you looking at this week.
Andy Cross: Dan, I'm going with Nike. The stocks at 98 is down 18% year-to-date, $150 billion in market cap. It has a lovely balance sheet, almost $11 billion in cash versus about nine billion in debt. The stock really is a struggle as you're thinking about all the challenges that consumers are having. We talked about the retail challenges. The stock has fallen almost everyday for the past two weeks, a trend I don't think it's seen in a long time. Concerns over slowing consumer growth. The direct-to-consumer strategy that they really want to push toward more than 60% of sales versus about 44 now, maybe that's not having as much success as they originally thought. China's about 14% of sales. Their gross and their operating margins have fallen by more than 200 basis points, so a lot of challenges that Nike is facing. But when you think about leading brands, you think about very solid business, you think about global opportunities. Digital sales now make up more than a quarter of total sales. Nike Direct, I mentioned how important that is for them as they are bypassing some retailers. Price to earnings about 30 times trailing, less than 25 times forward sales. Really one of the best companies in the retail space, one of the best brands, and I think Nike could be a buying opportunity here.
Dylan Lewis: Dan, a question about the Greek goddess of Victory.
Dan Boyd: Nike, a little-known company, Nike, of course. Would you say that it's in its value play era right now?
Andy Cross: It's moving in that direction with the price. I wouldn't say it's quite there yet, but definitely one of those growth at a reasonable price levels because, Dan, the year is not going to be great for Nike, but I think over the next 2-3 years you're going to see it rebound.
Dylan Lewis: Jason, what's on your radar this week?
Jason Moser: Woof, woof. Chewy earnings are out on Wednesday, ticker CHWY. Just to look back at last quarter, this is a business they benefited clearly over the last several years for obvious reasons. Revenue last quarter, $2.8 billion, was up almost 15% with net sales per active customer, up 14.8% as well. Margins maintaining their composure there. I think a lot of that just has to do with the fact that this is such a digital-centric business. It is something that, as they grow, they should continue to be able to scale that. One of the more attractive parts of business is the Autoship. You just set it and forget it. As a guy with three dogs and a cat at home, that Autoship is a lifesaver because that stuff just shows up on my front porch as if out of nowhere every couple of weeks. Autoship sales grew 18.6% representing 75% of sales for the quarter, so I think that's something they'll continue to benefit from. They ended the quarter with 20.4 million active customers, and that was actually down incrementally from a year ago. I think that really is something to keep an eye on with this business. The growth in active customers, it's worth remembering they ended 2019 with 13-1/2 million actives, so they really brought a lot in over the last several years. I'm not understanding why. I wonder how far that can go past this 20.4 that they reported last quarter? Dan, you're a cat man Any question about Chewy.
Dan Boyd: Jason, you only have three dogs? Because when you recorded at home, it sounds like you've got about 100.
Jason Moser: They're very loud dogs. They're just three, but they are very loud.
Dylan Lewis: Dan, which company is going on your watch list?
Dan Boyd: I'd like a big brand with tempting valuation, so I'm going to go with Nike.
Dylan Lewis: Put that on the board. Andy Cross, Jason Moser, guys, thanks for being here.
Andy Cross: Thanks, Dylan.
Dylan Lewis: That's going to do it for this week's Motley Fool Money Radio Show. The show is mixed by Dan Boyd. I'm Dylan Lewis. Thanks for listening. We'll see you next time.