In this podcast, Motley Fool analyst David Meier and host Mary Long discuss:
- The disconnect between the stock market and consumer confidence.
- Stitch Fix's fall.
- Why great consumer products don't always make for great investments.
Then, Motley Fool host Ricky Mulvey and contributor Lou Whiteman take a look at Palantir, a tech company with a lot of promise and a lot of expectations.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our beginner's guide to investing in stocks. A full transcript follows the video.
This video was recorded on Sept. 25, 2024.
Mary Long: Your personal stylist is calling. Motley Fool Money starts now. I'm Mary Long, joined today by David Meier. David, thanks for joining me.
David Meier: Thank you for having me.
Mary Long: Always a pleasure to have you. Today, let's say we're celebrating. The S&P 500 hit a new record high yesterday. This was not the first time that happened since the Feds rate cut. Are you celebrating?
David Meier: Of course, love new highs.
Mary Long: We love new highs. Also yesterday though, we got new data on consumer confidence, and that was a little less rosy. There is a disconnect it seems between that consumer confidence data and these all time highs that we're seeing in the stock market. Because September's consumer confidence index slid by its largest level in three years. When you get conflicting data points like this, how do you square them and make them make sense and tell a story?
David Meier: A very good question. I think the first thing we need to do is to look and see what the consumer confidence data is actually telling us. Yes, it declined month over month, and it declined from about 105 according to the index to about 98, let's say. The situation is far from dire. During the great financial crisis, the index dropped to around 25 at the Nader. That's bad. Consumers are very unhappy at that point. Even if the consumer confidence changed, dropped at a pretty precipitous level, it's still pretty high given that the index is based on comparing it to 1995 confident level being 100. The other thing to remember is that the economy is not the stock market and vice versa. Many other things impact stock prices, such that we can't always make a direct connection between the two. But that said, consumer confidence is considered a leading indicator. What I would take away from this is, we got to continue to pay attention to this data because consumption is a huge part of our economy.
Mary Long: Allow me to dive into the details a little bit and get a bit nerdy here. You mentioned, it was 105 slid to 98. I think someone could be forgiven for thinking 98. That's on a scale of 100. But if it slid from 105, that's certainly not the case. How do we put those numbers in context?
David Meier: The one thing that we have to remember is August number was actually revised up. Once they get the entire data, and they look at data set, and they look at it again, you never know. September's number could be increased as well. This is a little bit flowing, but it could just be about August itself. The transition between August and September itself. Maybe things get better. Maybe consumers feel more confident after the rate data starts to get digested. That doesn't happen immediately. It takes time. There's a lag between when an event happens and when it actually flows through the economy. I still think now with just one data point, essentially going being drawn, we need to wait and see what next month's data says before we tried to draw a line through it. I would say, pay less attention to the individual macro data pieces, and let's focus on the companies.
Mary Long: I'm going to follow exactly what you said and move from the macro to a specific company. Unfortunately though, while the S&P 500 hit all time highs. This stock is not moving in the same direction. The stock I'm talking about is Stitch Fix. It reported earnings yesterday and is down. Last time I checked this morning, about 35% on those numbers. You were on the morning show today, which is a show on our Members only Live Stream, Motley Fool Live, and you were a bit melancholy, you said about this news. You were a believer in the Stitch Fix idea. What was that idea? What about it did you find so compelling?
David Meier: It does make me sad to see this company down so sharply today following its earnings. But let's start from the beginning. The idea around Stitch Fix, at least as I saw it, was that the company wanted to use technology to bring together fashion supply and fashion demand. Fashion demand was, hey here's a quiz that you can take to let us know your fashion preferences, what styles you may like or be willing to try. We have relationships with suppliers. We can say, hey does this fit with what you're looking for. Then, the way that would work was Stitch Fix would overlay the demand data with the supply data. Bring have its suppliers offer the merchandise, and then the customer could then pick and choose what Stitch Fix sent them and decide. Yes, I'll buy this, but no, I'll return this back to you. If you think about it. If it did that well, Stitch Fix could actually get more accurate over time and sending clothing options to its customers.
Because it would iterate on the data and get to know you even better and make sure that the trends that it's seeing in fashion match with what you were looking for. I thought there would be enough interested parties out there to help build this into a nice, solid niche business. That was the way I was looking at it. Then I found it compelling because, again, it was taking technology and bringing it to another industry fashion in order to try to move the whole industry forward.
Mary Long: Then let's fast forward today and the news that came out yesterday. The good news, if we want to start there in this report, is that the results were actually in line with management's expectations. The bad news is that management had set that expectation bar pretty low. Revenue for the year fell 16%. They lost customers. That's the continuation of a trend. Why isn't this idea sticking? Is this a company problem? Is this an environmental problem, just tied to the macro environment that we were talking about earlier, where did the company go wrong?
David Meier: It's such a good question. I will say, I haven't followed the company as closely as I did a number of years ago. But especially when I was deeper into what it was doing, I think it has to do with customer satisfaction. If you think about it. Based on what Stitch Fix wants to do, if customers were happy with their experiences with Stitch Fix bringing them to the intersection of fashion supply and demand, like I talked about, they'd be staying with the platform. They'd be repurchasing more. Unfortunately, that's not happening. Something is breaking down in the experience. It could be a big mess in terms of fashion or it could be even little things like, hey it's taking too long for me to get a refund or it's difficult for me to get stuff from you or send stuff back from you. But unfortunately, just the experience isn't there, and the Stitch Fix hasn't found a way to fix that yet, pardon the pun, and get the company and the stock moving in the right direction.
Mary Long: Everybody likes to turn around story and there is some other goodish news when it comes to Stitch Fix. They ended the quarter without much debt. They've got about $250 million in cash, positive free cash flow. Is there a path back to broader health for this company? Let's say that you, David Meier, fashion, extraordinaire, are brought in by Stitch Fix to right this ship. What are you doing?
David Meier: Wow, so you're going to have me play armchair CEO. Did Anand put you up to this? [laughs]
Mary Long: No, I've been put up to this I promise.
David Meier: A favorite of his scoreboard techniques. Obviously, I'm kidding. I love that part of our show as well. A phenomenal question, and I think my answer, unfortunately, starts with figuring out how to get this company private. What do I mean by that? It has to get out of the eye of the public markets. Right now it's struggling. It doesn't need the extra scrutiny that public markets put on a company as it tries to engineer a turnaround. The other challenge associated with that is, I just don't see any private equity firm wanting to pay any premium right now.
But that point that you made above where it has a strong balance sheet, there still is some cash flow. The company has been trying to get its cost structure more in line with its revenue intake right now. There may be something there. But let's say I'm the CEO, and I am able to engineer a take private, so I don't have to be in the public eye, so to speak. I think it's about getting the company back to its simplest form, which is probably a lot smaller. Fewer people, fewer things that it does, and it's got to really figure out how to attract and delight customers from there. Again, my read on it is that the experience is lacking. It's got to figure out a way to delight those consumers, such that it gets word of mouth advertising, things like that, more better brand recognition. May be sure to check those net promoter scores. But look, this is not an easy turnaround, and I think it does have to be done as a private company. If they can get it turnaround, spin it back out to the public markets.
Mary Long: Stitch Fix makes clear that it's not a subscription business. You can utilize a subscription recurring option, but you don't have to in order to play with the company. There are other companies rent the Runway being one of them that play in this space where you can do a one-time order. You can do a subscription recurring setup as well. But basically, they're both playing in the same idea of fashion at your doorstep, right?
David Meier: Yes.
Mary Long: As a consumer I'll be honest. I find this appealing. Rent the Runway. I like their products. Every time I go to a wedding, I'm renting a dress from Rent the Runway. I have a wedding to go to this weekend. My mom and my sister are coming into town for it. We have six Rent the Runway packages that are going to be at my doorstep tomorrow. But that company has also not fared very well since its IPO. When it IPOed in 2021, it hit nearly $400, and today its stock trades at under $10, like Stitch Fix. They've been losing customers. From a Lynchian person, we talk a lot about Peter Lynch and his style of investing. About going out into the world and investing in products that like you as a consumer are familiar with that you find compelling that you understand and that you use. But sometimes great consumer products are actually not great investments. How can you tell the difference between something that you might love as a consumer, but that is not a good investment vehicle?
David Meier: Did you take your super question pills this morning too, Mary?
Mary Long: Everyday David. [laughs] Daily Regimen.
David Meier: This is actually very important. You should definitely always be paying attention to potential ideas that you see with products that you make or that you buy or that people in your family buy. That's a great way to discover ideas. How do you tell the difference? Well, one thing is you actually have to go beyond what you're seeing directly. Are others seeing it? Are people in your family buying the product as well? Do you see friends? Do you see things on social media? What's the vibe? You got to take your observations and what you want to have happen, let's say, with a grain of salt, and see if the data is actually confirming. Yes, this is actually a big idea that I'm seeing and not just, let's say, a flash in the pan.
Then the other thing you have to do is you have to understand how the business makes money. How will it continue to make more money in the future. Then watch and see if it actually performs. I never invested in Stitch Fix, despite my affinity for the idea and my affinity for the founder. That's because in its time of Hiday growth, it never really seemed to be gaining any of the economies of scale that I expected it would. At that time, it made its valuation multiples not really compelling. Basically, I think the message is. One, take your own observations with a grain of salt and see if there are other ones confirming your idea. Two, get to know the business. Three, make sure it performs by producing the cash flows that you're expecting. There's no substitute for doing the hard work, I guess, is what I'd like to say. [MUSIC]
Mary Long: David Meier, thanks so much for doing the hard work and for joining us today. Always a pleasure to have you on Motley Fool Money.
David Meier: Thank you, Mary.
Mary Long: Up next, Ricky Mulvey and Lou Whiteman take a look at Palantir, an enterprise technology Data Analytics AI defense company with a lot of promise and a lot of expectations.
Ricky Mulvey: Palantir is one of the hottest artificial intelligence stocks on the market. An investors believe we're either looking at the next NVIDIA or Shopify in 2021. Which is a real company, but one where expectations have been completely blown up to what the business can do. It's led by a charismatic CEO and co-founder Alex Karp. Lou, at the heart of this though, we're talking about an enterprise technology company that's broken into three pieces, which is Foundry, Gotham, and Apollo. There's a lot of talk about Palantir. But let's talk about what the business actually does. What do these pieces do?
Lou Whiteman: To sum it up and to oversimplify, but Palantir is a data analytics company. It can take massive amounts of data from various sources and make sense of it. Respond to queries, see things, and make connections much faster than the human eye can. It's founder Peter Thiel, of course, famously the founder of PayPal, and the idea for this came out of PayPal's work to develop fraud detection systems. Which again, massive amounts of incoming data and quickly making sense of it. To break down to three parts. Basically, Gotham is the series of tools for intelligence and military customers, government customers. Foundry is the version sold to big corporate clients and Apollo is their next generation cloud-based scalable platform, offering the same services, but in a different more user friendly way. Apollo is where their focus is today.
Ricky Mulvey: The base of what built the company were those defense applications. Let's dig in to Gotham. What are some military use cases for Palantir?
Lou Whiteman: The most famous example, and this has been confirmed. I don't know if it's officially confirmed, but Palantir is credited with helping to find Osama Bin Laden. That's actually a great way to think about how this is used. The US Intelligent community is constantly taking in massive amounts of data from around the world. The challenge is making sense of it in real time. Volunteers tech was able to recognize patterns that pointed to the location. There's a lot of more mundane but essential applications as well. Not every example of how this is used in on that level, but organizing COVID shot inventories, streamlining government processes. The common thread is that technology has the ability to again, look at very complex moving data sets or multifaceted operations and quickly make sense of it. That is their core string.
Ricky Mulvey: Lot of the bull case, and what I'm about to say is what I have heard, and I don't know if it is true. I want to make that disclaimer. It is what in NVIDIA is to chip designs. What it is for the hardware of artificial intelligence platforms? Palantir is for the software platforms. What the product is able to do, if you're a commercial application is you have all of your softwares running. Palantir is able to interact with those pool data. Then build business specific large language models and allow companies to make, faster decisions based on this business brain that it is introduced into all of its software. What's so special about the artificial intelligence platform that Palantir is selling? Why is there so much excitement about it?
Lou Whiteman: In some ways, this is semantics, but long before we were talking about AI, Palantir was a leader in machine learning. Which to my simple brain is the same thing before we marketed as such. It's the concept of again, training computers, as you say, to make sense of and organize patterns and what looks like chaos. I think as you say, arguably, Palantir, their advantages, they were AI before AI was cool. That they actually have years and years of experience developing this, and they are just further along than a lot of companies that call themselves AI. All that said, I do think they've done a really good job promoting themselves and selling into the AI revolution, which has fueled the hype. But look, this isn't vaporware. This isn't a parlor trick or getting a computer to write limber. Palantir deserves credit as an example of what advanced technology AI can actually accomplish in real world applications and that is why people are so excited about.
Ricky Mulvey: Are there competitors that offer a similar product?
Lou Whiteman: I think it's really hard to do a like for like comparison. But on the commercial side, the corporate side, companies like Snowflake, Databricks can do a lot of the same things. Increasingly, Microsoft, Alphabet, Amazon, other big Cloud providers have similar tools embedded or trying. On the defense side, there may be a dozen defense IT companies that can stitch together similar products. In a way, that's the bigger competitor for Palantir. These aren't like off the shelf the way the Gotham is. But depending on the application, sometimes a customized in house built from scratch platform is better than the one size fits all and make it adapt. These companies at times are able to better compete against Palantir just because they don't have that off the shelf offering, and you do need to dig down deep, if that makes sense.
Ricky Mulvey: You have to stitch together different solutions. That sounds hard, I don't want to do that. This company is also profitable on an operating and a net income basis. It also trades at 35 times sales, 35. It was in the teens about a year ago, which is still that's high expectations. But why have expectations changed so much for this company, which has been around since the early 2000s in just the past year.
Lou Whiteman: Look, a lot of it is AI Hype, and if we're honest, as I said before. I think Palantir to their credit is better at most than amplifying the hype and that's in part, thanks to the way they operate. In part, they have a very enthusiastic shareholder base. Just this week, I was looking at there was a ton of headlines concerning $100 million military contract awarded to Palantir. Looking quickly on the day it was awarded, I see at least five larger Pentagon contracts awarded that day for various things, but with very little coverage. Part of this is just the feedback loop associated with this company, but the same time, I don't want to be too cynical here because the tech is solid. The interest is real. Similar to NVIDIA, there's a combination of a very solid business with great potential and investor enthusiasm that is fueling things and contributing to the valuation. I'm not going to say there's nothing there with NVIDIA. I'm not going to say there's nothing there with Palantir either. But the valuation is, we'll see.
Ricky Mulvey: It's one of those things where a few years from now, if it turns out to be true, if it turns out that this is the best AI software platform. There's no competitors that are able to catch up at all. Then it's a $50 billion company, and that could be cheap. As a lot of big AI companies are in the trillions of dollars. Let's get to the bear case though. We know about the expectations. What happens if this software isn't rolled out to customers as quickly as its investor base expects?
Lou Whiteman: I mean, the bear case here is, and as you say, it's what if it doesn't go to plan? We started seeing questions asked about the payoff of AI in just this last quarter, a lot of companies. Palantir software inside the Pentagon, at least, had a reputation of being very complicated, very expensive, but it does the job. Our corporate clients who are suddenly getting pushed back on their spending, going to think twice about signing a big deal for very expensive software. I think that's a risk even if the technology is real. It's funny Ricky, you said could they get to be a $50 billion company? They are already an $86 billion company by market cap even with revenue of just $3 billion annually. The bear case simply is the tech is real. There's a real path toward justifying that valuation. But when you're priced to perfection, so to speak, you darn well better be perfect, and life very rarely goes to script and is perfect.
Ricky Mulvey: I don't know why I said $50 billion. We're leaving it in. That's how quickly this company is moving, but I think it was before it's bull run. It was around 50 billion, and then you're right, it moved to $83 billion in market cap company. I know this is something that you're approaching that I'm also approaching with some amount of skepticism. Because I'm not confident that the bull case or the bear case is true. But I know you've looked at a lot of companies that had those large defense contracts. You've looked at a not on the AI side necessarily, but aerospace companies. Is there some history here? A there other stories that have led you to be more cautious and skeptical about what's going on with Palantir right now.
Lou Whiteman: There is a long history going all the way back to post-World War II of basically failure when defense companies try to sell to the commercial world or when commercial tries to sell to defense. One really underappreciated thing about the defense sector is dealing with that government customer with all of the arcane procurement processes, the budget cycles, all of that, dealing with that is a core competency. The big defense companies succeed in part because they understand that customer and they can deal with it. Unfortunately, that skill set doesn't help you as much if you're pitching to say general motors. Now, Palantir could be different. They have a much different founding story than most companies in defense. But if nothing else, it should be a word of caution that these transitions from selling to the government to selling to corporate world. They always seem to fall apart or run into a lot more trouble than they thought. Just a few years ago, Raytheon was going to sell its defense IT cybersecurity products to corporate customers. If you think about it, who wouldn't want Pentagon grade firewalls. I mean, that sounds a compelling sales case. But the whole effort flopped, and Raytheon is now part of a bigger company in part because it flopped. Palantir can pull this off, but if they do, it's important to note they will be the exception, not the rule and I think that is reason for caution as they go toward corporate.
Ricky Mulvey: The company is led by what I would describe as a wild mind and if you want a lot of market beating tech company, you need a wild mind. A lot of them have led that before. In this case, it's Alex Karp. For those who are unfamiliar with Alex Karp. What should these potential investors who are just starting to look at the company know about them?
Lou Whiteman: I like that wild mind. Again, Elon Musk can be described the same way, and they both loved to rail on short sellers. I think Karp is called short sellers compared them to cocaine addicts. But that doesn't necessarily mean that they aren't also brilliant and capable of building amazing companies. With Karp, he isn't Musk, but he is one of a kind and for anyone investing and considering this is defense and espionage and all of these dark areas. You should know this CEO and this company is unapologetic about who they are. In 2020, when the company registered to go public in the S1, Karp famously trashed Silicon Valley in the reluctance of the Googles and the Amazons of the world to do business in the Pentagon, saying, we have chosen sides, and we stand by our partners when it's convenient and when it's not. That's not for everyone. It's either commendable, not commendable? That's for an invert to decide, but it's something you should be aware about. This is a guy who believes what he believes and he's not afraid to say it, and take that for the good and the bad.
Ricky Mulvey: As we wrap up, this is a company with a very engaged following, much more engaged than any other big tech companies, I would say, it's an active subread. There's a lot of conversation about it on X. If you're not already in the group and you're seeing this level of fanaticism for a company like this, what should investors consider before jumping into a company with a cult of personality?
Lou Whiteman: I struggle with this because we talked about this before we started recording. I love the technology here. I see the potential, and so I want to believe. But then you see the valuation, you see some of the hype around it, and I can't figure out what to make of it. Whether it's Palantir or other companies that have this cult around it, I try to find comparisons to filter the hype. It's tough here because there isn't a light for light. There aren't two Palantirs out there. There's not a GM and a Ford. But you take a booze Alan Hamilton, a really good defense IT company with massive ties to the intelligence community. It's trading at two time sales. As you said, Palantir is trading at 35. Definitely, Palantir can do things to Booze Allen can't and so maybe I can argue they deserve a much higher valuation. But is it that big of a gap? I don't know. No matter how you come down on that answer. I think you should at least ask the question and use comparisons to other companies to try to filter through some of the excitement that is built into a price on a company like this.
Ricky Mulvey: I'd also say it's OK to not be all in or all out on an idea and have both excitement and skepticism. Lou Whiteman, thanks for joining me. Appreciate you breaking it down.
Lou Whiteman: Always a pleasure.
Mary Long: As always, people on the program may have interest in the stocks we talk about, and the Motley Fool may have formal recommendations for or against. You don't buy or sell stocks based solely on what you hear. I'm Mary Long, thanks for listening. We'll see you tomorrow.
