In this podcast, Motley Fool analyst Asit Sharma and host Dylan Lewis discuss:
- Target finally finding its footing, and how the company is turning to loyalty programs for more growth.
- CrowdStrike's results showing enterprise spend on cybersecurity isn't slowing down.
- Bitcoin's ETF-fueled rise to all-time highs.
Motley Fool host Deidre Woollard talks with analyst Sanmeet Deo about the highly speculative, highly futuristic world of eVTOLs and personal air travel.
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 March 6, 2024.
Dylan Lewis: Target's back on track and Crowdstrike hit all-time highs. Motley Fool money starts. Now. I'm Dylan Lewis and I'm joined over the airwaves by Motley Fool analyst, Asit Sharma. Asit, thanks for joining me today.
Asit Sharma: Dylan, thanks for having me.
Dylan Lewis: We've got stories of companies soaring today on earnings and in the sky with the future of personal air travel, we're going to start with the earnings results and we're going to start with a look at target asset, an interesting quarterly report for the company. Revenue slid, comps were down, but results were ahead of expectations and we saw a huge market reaction stocks up 15% after reporting.
Asit Sharma: Target has been working on some nice parts of their business, Dylan, I really liked that their cost of sales has been held in check for awhile and it keeps decreasing. That way if you get just these small bumps on the top-line, revenues increased 1.7%. You can leverage that if you're watching your costs, the cost of product, and how you manage those costs before you get to your overhead expenses, which of course climbed a little bit. But look, profitability is up this quarter. Operating income was $1.9 billion. At first is $1.2 billion in the same period last year so investors like an earning story.
Dylan Lewis: Yeah, and I think probably something helping that top line and those margins, inventory, it seems the company has gotten a lot better with managing its inventory. Hasn't had to resort to discount and quite as much. This is something that really plagued this business about a year ago and it seems like that's gotten back on track for them.
Asit Sharma: Yes, management has been talking about all the dislocations that occurred during the pandemic. In fact, in this latest call for this quarter, they said the dislocations are still ongoing. It's not like we still aren't struggling, but matching inventory to demand, that's something that Target has gotten much better with over the last couple of years. Inventories at very similar sales levels. Our down versus this time last year, $13.5 billion was the inventory balance at the end of January 2023. That's down to $11.9 billion as of February 3, 2024.
Dylan Lewis: Look at this quarter as a OK. We're back on track with the core business. We've kinda right-size what we need to be doing with the balance sheet. We seem to have found what we need to be doing when it comes to pricing for target. We also got a glimpse at some of the growth initiatives and some of the next step type things that they want to reengage with our customers on. One of the things that I wanted to draw some attention on and get your take on here is the membership program. They are launching, circle 360. This is a paid membership program and Asit seemingly their answer to Amazon Prime and Walmart Plus.
Asit Sharma: It's something that's been in the works for awhile. Dylan, they acquired a company called shipped SHIPT a few years ago, actually in 2017. Target has been working on optimizing same-day delivery, local deliveries over these past six years since they bought that company. At the same time, they've worked with their store formats. They've opened more stores. They have more points of presence where consumers are. They've opened a lot more distribution centers, logistics centers. Their fulfillment capacity, it's way stronger than it was before the pandemic. The natural progression for them now is to try to get some of this business that Amazon and Walmart have been enjoying.
Both of which companies have great infrastructure themselves and I think we're target may have an edge here, at least initially is this price point. If you don't pay your Amazon Prime subscription a year in advance, Here's shelling out 16 bucks a month for all that convenience. While most of the inventory will be focused on target items for 49 bucks for a year subscription. I think that's something many consumers who would want to try. There are local marketplaces that target promotes through its shipped capabilities. This is very interesting and it's also just a progression as target becomes more amazon.com like they are also now expanding their digital advertising with vendors and [laughs] digital advertising revenue stream. It seems natural. I do think we'll have to see how good they are at this business, but maybe now is the right time to roll it out.
Dylan Lewis: I do wonder as we see all of the kind of traditional retailers and retailers that have kind of gotten into e-commerce a little bit faster, focus on these membership programs. I mean, Costco is their first right there, the OG in this space. But we've seen Amazon do it so well. We've seen Walmart do it so well and target now trying to focus more on it. If we're going to see consumers really focus more of their purchasing at a single retailer and have a little bit less of the average spend splitting out across multiple retailers. That would be the loyalty program for a lot of these businesses working the way they intend for them too.
Asit Sharma: I think so, but the US consumer is so crazily agile. In fact, target pointed out on their conference call, look, you might not know this, but two-thirds of business still occurs in store, that consumers still likes to shop in store. We seem to have a lot of capacity for having multiple subscription and loyalty programs going on at one time, we shift our preferences, we'll shop more in store, then suddenly get on a wave of ordering things online. The customers nimble, I think what Target has figured out is they probably isn't going to be a winner. They're not going to be a sole winner in this space. The Costco's, Amazon's, Walmart's are going to be around.
New entrants will come. People still love small businesses, craft businesses but where Target wants to be is in that muscle category. They've poured a lot of their billions in free cash flow into great ideas. In subsequent years. Those great ideas happen be store openings and fulfillment. They take cash that's left over after investing in physical capacity and invest it in the next year is I think that's something that's going to help them out. They'll be one of the last one standing if it ever does become like that, Dylan, if we ever narrow our focus and just shop from a few vendors, they'll I think they're going to be there.
Dylan Lewis: While we're checking in on the consumer asset. I think we saw a lot of the same signs that we've been seeing in targets results. Not as much focus on some of the bigger, more expensive items in the stores. A lot of focus on affordability with consumers. I think one initiative that really caught my eye with respect to that is deal worthy, which is one of their new low-priced private brands, looking to bring a lot of products in under $10. As we look at a retailer Target as a barometer for what's going on with the consumer. What are you seeing?
Asit Sharma: Consumers have a lot of propensity to bite on offers like this. When you see out in the marketplace that there's a part of the store where you can go in and I think $7 is another price point they mentioned. It draws you into that place. Now, Dollar stores have been doing this for a long time, but our needs to go beyond that. Target, you've got price points that may get you in the door at seven bucks or 10 bucks or to order online from.
But they also extends all the way up into fairly high-priced consumer electronics, and that's where they've always excelled. Target environments are meant to be a mix of different brands. In fact they've talked about this, their own brand portfolio. They're private brand portfolio. They say would be a Fortune 100 company with $30 billion of sales annually. That's one-third of their gross margin. They understand that you've got to have so many different price points and they do it through a mix of their own brands.
Asit Sharma: Brands that the public loves, they have the partnership with Ulta Beauty, and then also bringing in what they call the celebrity brands like Disney, and in partnering with Starbucks and stores. They really want to lure you in with those price points, but think it's a good strategy. They have a little bit of an edge over the consumers who are exhausted financially and are stuck going to the dollar stores and discount stores. They're attracting some of those, but also people with a little bit more to spend who still want a bargain to come in.
Dylan Lewis: We also saw a great market reaction from CrowdStrike results shares up 20% following earnings that beat on the top and bottom lines, plus the company issued stronger-than-expected guidance for the upcoming quarter and full year. Asit, so much of the narrative in the enterprise space has been slowing customer spend. Maybe a little bit of a hard focus on the contracts that exist. Doesn't seem like that's affecting CrowdStrike to negatively.
Asit Sharma: It's funny we've heard so many CEOs of cybersecurity companies talk about this exhaustion in IT departments. They are pulling back their budgets. Even on the last thing you'd expect you have to protect your enterprise. But CrowdStrike isn't seeing any of that. I think this is tied into an argument they've been making for a long time, which is, there are too many products you have to buy to protect your organization. I think on their website they say that IT folks have to juggle like 42 products on average just to protect the organization.
And all who are listening ever just want to have some fun and amusement. Listened to CEO George Kurtz diss the competition on a conference call. He doesn't hold back and he loves to talk about how complex it is to ensure that your organization will be protected from strikes, and how inadequate the different types of piecemeal offerings are. From the ground up, they've always made this argument Dylan. We designed Falcon. Our security platform is Cloud native. It's one agent, and it's lightweight. You turn it on, you can add modules. This is a really seductive argument for companies that are paying so many different vendors and then spending time, money, resources to try to stitch them altogether. The argument of a platform like Falcon is that you don't have all that stitching.
So while other folks may price at a lower price point, our return on investment is much higher over time, and you're starting to see that prove out in the numbers of free cash flow margin of 31%, they're projecting that revenues can increase another billion this year from 2.7 billion, or up to $3.9 billion in a year. All of their metrics hitting that 30%, if you're talking about annualized recurring revenue growth. I think they're really enjoying a moment just because the simplicity argument is bearing out in the marketplace.
Dylan Lewis: You mentioned the recurring revenue as a focus there. In the results pod beer, the CFO reiterated the company's long-term guidance of hitting 10 billion in annual recurring revenue by 2030, that currently hits 3.4 billion. They've a bit of ways to go from there, but it sounds like you're fairly confident in that mission.
Asit Sharma: Because I think management has a pretty good roadmap to get there. What they've done is to look at the parts of the cybersecurity industry where they can add value even if they're competing against really worthy competitor. So they have an identity management system that competes against Okta. They've got observability platform that competes against the likes of Splunk, but where they see they can offer that return, they go there, they take years to build out those products and they add them to the platform and there's an uptake by customers. The other thing I like about it is big round numbers really inspire a lot of confidence among employees. ServiceNow, which I talk about a lot. They've been graded doing this.
I think they don't even get the next number out of their mouth and they change it. They up it. We want to be a $10 billion company. That's actually a rallying cry that ServiceNow was issuing just a few years ago, but I think this inspires confidence among vendor partners, it gives employees something to work toward, it really galvanize the sales team and it makes the product team understand that we've got to execute on the roadmap. If we do the simple math of working backward, what is it going to take for us to reach this number? By 2030, it means we've got to add another four pieces to the platform. I'm making this up, but you get the [laughs] , by 2027. And I think running a business that way, if you've got the product which is superior in the marketplace, why not? Go for it.
Dylan Lewis: CrowdStrike at all-time highs after reporting earnings and stepping outside of stocks. Bitcoin at all-time highs. The cryptocurrency hit near $69,000 this week and Asit, this has been a strong 2024 so far for the cryptocurrency, I think in large part because of the spot ETFs that were approved back in January.
Asit Sharma: I agree with you, Dylan. There was so much demand that was being built up late last year as investors were waiting for this to happen. And just the publicity around that, I think tripled down into the consciousness of so many types of investors. The investor who looked at Bitcoin a few years ago and was like, "I'm not going to try to custody these assets, how to even do that. Or, I don't want a Coinbase account. They keep asked me to verify my identity every six minutes." I think that this was pent-up demand now has an outlet, but there's another investor as well that I'm interested in. That's the institutional investor, who's looking at a period of prolonged high-interest rates, and not a lot of great options to generate Alpha, that is return on a risk-adjusted basis outside of US stocks.
Again, this happen, s we have long periods where the US stock market is the only game in town for a lot of institutions that have billions that they have to invest. So I think there's some of that money flowing into its non-qualitative assets, so it doesn't move in tandem with the market. It's even proven to be non-qualitative to risk assets like gold, which this is an argument I heard [laughs]. Early days like gold. But you are saying something that's very interesting before we started taping Dylan, that, outside of the store value argument, there is a financial like argument. This is like a financial instrument.
Dylan Lewis: I don't have a horse in the race when it comes to crypto. I don't own any cryptocurrencies, but I think it's instructive to look at this and the way that markets work and financial products work. We have long wondered what exactly the utility might be for Crypto, and with spot ETFs opening up, we are seeing a source of demand and another use case for this, and look no further than the fund inflows and the money, you mentioned that there's probably some institutional investors there. Over $50 billion have gone into the spot ETF funds since January. That's not all retail money. And that's immediately creating demand and purchase for something that's going to drive up the value. And I think regardless of whether you see the utility in this, it's useful to look at it and just understand the way that expanding access to something drives demand long term.
Asit Sharma: I think that's spot on. Not to make upon on spot ETS [laughs], but there you go. Utility is the ability to diversify or to invest or take a little bit of risk in a low cost manner, which is what ETFs are designed to do.
Dylan Lewis: Asit, thanks for joining me today.
Asit Sharma: Always fun, Dylan, thanks so much.
Dylan Lewis: Coming up our travel theme week continues with a look at the not-so-distant future of flying jets and mobiles. Motley Fool Money is Deidre Woollard talks with analyst Sanmeet Deo about the highly speculative, highly futuristic world of eVTOLs and personal air travel.
Deidre Woollard: When we talk flying cars, we're not really talking flying cars that we're talking about eVTOLs. Well, what is it eVTOLs? Electric vertical takeoff and landing. It usually means it's a small vehicle. It's like a helicopter meets a giant drone, takes off like a helicopter mostly flies like a plane, usually short range, generally, maybe for passengers, Sanmeet you've taken a look at some of the videos that pretty are they?
Sanmeet Deo: A lot of them are not that pretty. They looked like those you see those concept cars? Some of them look like these concept vehicles. I even saw a single-passenger eVTOL toll that was really odd looking, had all these multiple pillars. Although I will say maybe I'm biased, but there is one that's being made by Archer Aviation, which we'll talk about later, called their midnight. That one is actually pretty sleek-looking.
Deidre Woollard: Well, they did give it a cool name.
Sanmeet Deo: Yes. I showed it to my wife and she said, This looks very Batman-like my cab. Now not all of them are going to look as dark and mysterious and cool and they're going to have paint and they're going to have logos and stuff. But still, we're getting closer to some nicer-looking ones.
Deidre Woollard: It does appeal to our superhero fantasies, I think but I wanted to talk a little bit about the use cases because it seems fantastical. The things that we saw in science fiction more like air freeways. This is not quite where we're going. They're pricier they around five million. No, they're not really for sale yet. But most obvious use case seems to be the some of the way we're using helicopters, which is air taxis in urban areas but I think as they get cheaper, there might be other applications. What else could we use these for?
Sanmeet Deo: The other thing I forget to that one thing to keep in mind is for our listeners that this isn't something that would be something each of us, obviously you named the price so it's quite alive. None of us have really $5 million just laying around to buy one of these, but flying cars gets a little confusing because it's not something that you're going to have one I'm going to have one or family is going to have one. We're all going to be flying around like the Jetsons in flying cars. These are more commercial mass transit type vehicles or even Uber-like ridesharing or flight-sharing type vehicles. But I can imagine, it being used for cargo delivery, short-haul cargo delivery, transport around the cities. I could see it as being very useful for. But I think the sky is the limit there. There's a pun there, [laughs] but I think the sky's the limit for this.
Deidre Woollard: I've even heard of recreational leagues eventually happening or sporting events. I know they had but they had Joan flying links, so you never know. But before we can get to that place, we got to bring in the big guns, the Federal Aviation Administration, the FAA. They don't just call them eVTOLs, they call them advanced air mobility vehicles. Maybe a little catch here maybe not. It's interesting they tried to create rules for, of course, the flights for who can drive them for takeoff locations, Virta ports, that's a cool name. It's important to watch if you're following this industry because it is going to be heavily regulated. But this isn't pie in the sky. The FAA believes it will have multiple operators flying between multiple origins and destinations by 2028. But 2025 seems to be the date that companies that we're going to talk about are really looking for the initial certification. We've seen some test flights. They're getting pretty close here
Sanmeet Deo: A couple of companies I've seen are looking to even go live in 2025 and beyond. There's running test flights. They're getting approvals from FAA, they're getting some other certifications, are getting some of those initial stage certifications. Then they're working from there. There'll be up there sooner than we know.
Deidre Woollard: I want to talk a little bit about the companies because you and I have both been following this space for a little while. I've taken a speculative position in one. I think you've taken a speculative position in the other one that we're going to talk about.
Sanmeet Deo: I have.
Deidre Woollard: These are pure play. They're not making the profits and they're interesting because they're taking different approaches. I'm going to talk first about Joby Aviation. They've been public since November 2020, we put a four billion market cap. Their aim is to have commercial passengers next year if they get through that FAA process. One of the things I found particularly fascinating is they recently announced they've got a six-year exclusivity deal in Dubai for air taxes, which means they would be able to run them and they're also getting some support from the Emirates on that. Really interesting there with both of these companies, we're looking at partnerships and one of the reasons the stock for both Archer and Joby has gone up and continues to go up is the strength of partnerships.
With Joby, you've got a very close partnership with Delta. You've got a partnership with Toyota. You've got interests from the Department of Defense. Speaking about Delta, they're planning with Delta for infrastructure at three airports, JFK, LaGuardia, and LAX. They're building out production, which is interesting, it's going to be a slow process. Their next milestone is to ramp up production. Looking at the cash, of course, these companies are spending a lot of money. At the end of last year, Joby had about a billion in cash. They spent 344 million during the year. For this year rather, they're going to spend between 440 and 470 million. Part of that is just the nature of trying to ramp up production.
This is all expensive. One of the things that's interesting is it's a new thing, but they're also using existing technology. Another thing you should know about Joby is major investors. I mentioned Delta, they've got about 1.6%. Entails got about 4.5%. You've got a lot of interest from other investors like BlackRock taking a look at this company, it's gotten farther faster than I would have expected. I bought in, I think about two years ago just after it went public and the company has really grown dramatically since then.
Sanmeet Deo: GOB is a very interesting one as well. The other one that I've taken a speculative position in as well, and for listeners, keep in mind, these are pre-revenue, not even pre-process, they're pre-revenue, they don't they haven't sold anything yet, really do have some orders, but those can backfire or those could not happen, so they're just orders. Archer Aviation tickers, ACHR, so it's about $1.4 billion market cap company, so a little smaller than the GOB, and they've also been public since December of 2020. They came public actually as a SPAC. They have some pretty impressive investors, largest investors Stellantis, which you might know as the auto company, so you'd be wondering why is an auto company taking an interests investment of them, they also have a partnership with Stellantis. Really, I'll get to that part later. But Mark Lore founder of diapers.com and jet.com, also was previously, I believe it was the president of e-commerce at Walmart he owns about 9%.
Stellantis owns about 13%, and then United Airlines owns about 4% so they're a major investor and partner. Archer has a goal of being first-to-market and they're looking to go live in 2025. One of the things that I found very interesting about Archer was that since they started they have been focused on a quick path to certification. They're really focused on producing these things and getting them certified in, up in the air. Eighty percent of their subsystems and components are derived from certification heritage, which means these are parts and systems have already been certified and other aircraft or certified designs in other aircrafts so they can assemble all these different parts that are already certified, put it together, and then the certification process becomes a little quicker.
That's pretty cool. They're building huge manufacturing facility in Georgia and that they're hoping to eventually produce 650 aircraft annually once they start getting up and going and they're looking at their businesses is really with two revenue streams. Both estimated to be about 50% of their mix. One is just selling their crafts, selling them to the major airlines selling them to whoever else, but also aerial ride-sharing. Think of Uber for the air, for Uber ride sharing. But in flight, and actually one of the executives on their team started the Uber Air flight ride sharing program.
He came over and they're estimating that ride-sharing or flight sharing, I should say. I don't know what they're going to call it now, but is estimate to be about $3 per seat miles. That's in line with pricing with Uber. Very close. That should be very interesting to see how they ramp and work on that. As a company. They have no debt. They have a 460 million in cash. They have an order book of 700 aircrafts worth potentially $3.5 billion. Again, that is potential revenue. That's not stuff they've had come in lot can go wrong before they actually get that money.
But another interesting thing is that their partnership was Stellantis is also an investor is. As Stellantis if you don't know, is like the third largest auto manufacturer. They make Jeeps and various other brands. They're actually using them as almost like a contract manufacturer. You think of cars and they have the, the assembly line in the process to create, high-quality vehicles at mass scale very efficiently, and so by partnering with scientists, they're hoping to do the same for their aircraft and it helps reduce the capital requirements that Archer will have and increase their cash-flow when it comes to manufacturing aircrafts. I thought that was very unique. I don't know if that's what other companies are doing or not, but I thought that was quite interesting.
Deidre Woollard: As we wrap up wondering what investors should think about as they look at this industry. For me, as I mentioned, small speculative stake and GOB. Looking, I've liked what I've seen so far, may consider adding more if it meets its targets. Things I'm asking myself is, what is the total addressable market like who is the customer? To me, it's not like EVs as we talked about. It's not an individual flying car at this point. Could it be at some point? Possibly. Is this more like the early days of helicopters where you see gradual increased usage. That seems more likely to me. Looking at the market opportunity, wondering what I need to see to add more and also what could go wrong. We haven't had a big disaster, but that will happen the same way it's happened for other things. What are you looking at here?
Sanmeet Deo: The market opportunity, is this could be pie-in-the-sky numbers because this is so early stage, but Morgan Stanley predicts that it can be 29 billion by 2030 and possibly over a trillion by 2040. That has obviously wiggle-room, we don't know for sure, but regardless, it's a huge market. If you assume that this will work, that they can get the certifications, that thing get these in the air, that it will happen. It's going to be a big market and it definitely will have room for multiple players in multiple ways of approaching the problem. What's exciting to me about the industry too is I think it is a little bit of the early days of helicopters and they've referenced that and some of their calls of this is the new age helicopter.
The reason helicopters more successful for the same purpose was very high noise in an urban area like in New York City, San Francisco, big cities. The last thing people are going to want isn't all that noise flying around above you and then having to hear it also they were an electric. Having the all electric purpose gives it more of the cleanliness and the environmental friendliness that we're trending toward. Getting away from the pollution from helicopters or cars or reducing that congestion. To me it's like many of the signals is I'll be looking for certification.
How's that going? Because that's going to play a huge part, and if these things even get up off the ground. One interesting thing that I was listening to a video with the CEO of Archer that he said was the United States has an opportunity to continue to have the lead on aircraft and mobility. It really will be up to, he said if the one thing he could really have to push this industry forward would be for the FAA and regulation to really be accommodating and really help drive it forward to maintain or control lead in this space or because other countries are going to do it, they are already doing it.
Really regulation and how the certification stuff goes is key and then also just safety. Like you said, I think some of these tests flights have had crashes and that's inevitable. You're seeing even with autonomous vehicles on the road, the crashes are going to happen as they prove this out. That's why the certification is very important. The trust in customers saying, am I going to get in one of these things and be safe and feel safe. Helicopters have a little bit of a sense from people on safety, so trust and safety will definitely be huge part and that's going to happen from as they start flying these things.
Deidre Woollard: Absolutely. If the CEO of barter calls you up tomorrow, are you taking to test flight?
Sanmeet Deo: Oh, that's tough question. No, because I'm usually a first-mover on a lot of products. Like if you were to use Apple VisionPro, there's not much risk to my life. There is a much higher risks to that.I don't want to be the first one. But if I see evidence of lots of flights being successful then maybe I would. Could you?
Deidre Woollard: I would. If the CEO of GOB wants to call me up and take a flight. I'm down.
Sanmeet Deo: As always, people on the program may own stocks mentioned in the Motley Fool may have formal recommendations for or against, don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.
