On this episode of Market Foolery, host Mac Greer and Motley Fool analysts Emily Flippen and Andy Cross touch on the market's biggest news. Shares of Under Armour (NYSE: UA) (NYSE: UAA) are up after a quarterly earnings report, even though the ever-tricky North American sales number remains a weak spot. Eventbrite (NYSE: EB) took a tumble on its earnings report for reasons that have little to do with its long-term picture. Tesla (NASDAQ: TSLA) is raising money; like most Tesla news, the bulls have plenty of reasons to love it, while bears have plenty of reason to hate it. Plus: the convergence of Shopify (NYSE: SHOP) and Square (NYSE: SQ), a reminder that Fitbit (NYSE: FIT) still exists, the elusive nature of success in the fitness-tracker industry, and more.
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This video was recorded on May 2, 2019.
Mac Greer: It's Thursday, May 2. Welcome to Market Foolery! I'm Mac Greer, and joining me in studio, we have Motley Fool analysts Andy Cross and Emily Flippen. Welcome! How are we doing?
Andy Cross: Good!
Emily Flippen: Doing well!
Greer: Good to have you here! We've got lots to talk about. A rough day for Square. An even rougher day for Eventbrite. Woof!
Greer: We've got Fitbit selling smart watches. Who knew?
Flippen: They're capable of it.
Greer: They are getting it done. And we've got Tesla raising some cash. So we'll get to all of that. But let's begin with Under Armour. Shares up around 4% at the time of our taping. Now, Andy, I look at the news here. Better than expected earnings and sales. International revenue up 12%. Now, that's the good news. North America, not so great, sales down 3%.
Cross: Yeah, that's right, Mac. Sales were up 2% to $1.2 billion. That beat the consensus estimate. Same with the earnings per share, up a little bit, they were expected to be flat, and they were negative last year for the first quarter. Wholesale revenues up 5%. Direct to consumer down 6%, which surprised me. North American sales, Mac, as you said, down 3%. That's 70% of their sales so obviously pretty important. Really international, 12%, great. Inventories down 24%, which helped their cash flows. Costs down. So the cost controls, they cut some salaries last year, that Kevin Plank and his team are implementing here. When you're not really growing very fast, if you want to continue to grow your earnings -- and it's been a rough story here, the stock's down by half over the last three years, as a turnaround for Under Armour continues to go forward, they have to get their costs controlled. I mean, they were doing $400 million of operating profits a year ago on $5 billion in sales. Now they're doing $3 million in sales. They're doing $400 million in operating profits. So trying to get the profit margin picture really right for Under Armour is a story where, you're not growing very fast, you have to get that cost structure in line. And they're making some progress there.
Flippen: I think they're at that point where you're either going to invest a lot and try to drive growth, or you're going to cost cut, exactly like Andy said. So I think there was an attempt to boost awareness, boost that brand name recognition, increase sales. Maybe they're still going through that process. I'm not entirely sure that it's not a success as it stands right now. I think there's still potential there for them to turn this brand around. But I agree that if that doesn't succeed, then your only option is to cost cut.
Cross: I will say, footwear sales up 8%, that's actually a nice bright sign. Apparel sales, up 1% or so. That's the largest part of the business. So they are seeing some nice little growth here. Nike actually had a really nice North American quarter. I think they were up 7%. So the comparison, the competition out there, not going away, certainly. So Under Armour has its work cut out for them, but we're starting to see the light. And obviously the stock has done really well lately, I think this year, the stock's up 25%. So investors are recognizing the work they have to do, but Kevin Plank and his team have to continue to get it right.
Greer: Let's talk about Kevin Plank, the CEO. He's said that Under Armour plans to stay true to its performance gear, despite the fact that athleisure, really gaining momentum in the U.S. And so my question, I don't own the stock, but as a potential shareholder, as someone looking at this company, why wouldn't Under Armour just embrace that athleisure market?
Cross: Well, I think they kind of have.
Greer: He's in denial, is what you're saying?
Cross: Yeah, I think he is. I mean, obviously, Lululemon has really done a great, fantastic job in that regard. And I think Kevin Plank sees Under Armour as a real performance brand. And he doesn't want to try to dilute that by going into the athleisure nomenclature. Pushing the performance especially around footwear and around so many other sponsorships, continuing to drive that perception that they're all about performance, and he doesn't want to give that up.
Greer: On a related note, I just discovered stretchy jeans. Do you do stretchy jeans at all?
Cross: I do do a little stretchy jeans.
Greer: They've got the stretch in the waist and they're lightweight. It's a game-changer. I've been wearing traditional jeans for years. It feels like you're wearing a burlap sack.
Cross: You get those from Costco?
Greer: No, I've switched to Levi's.
Cross: Oh, nice! Congratulations!
Flippen: Oh, supporting Levi's?
Greer: Shout out to stretchy lightweight jeans. Game-changer! OK. Well, shares of Eventbrite down 30% on a big earnings miss and weak guidance. Now, this is an event ticketing company that's now trading at its lowest level since it IPO-ed last September. Emily, is there good news here?
Flippen: It always sounds so dramatic, when you say something's trading at its lowest level, but this is a recently new IPO. And while the results weren't what the market expected, and the company is increasingly unprofitable -- and that's an understatement.
Greer: Tell me more!
Flippen: There actually was some good stuff in here. I feel like management is taking a long-term approach. There was some growth. Throughout all their segments, actually. They had revenue growth, they had ticketing growth. The issue really is just that profitability. They're noticing that they're losing a lot of customers thanks to issues regarding this acquisition that they made of a company called Ticketfly. Instead of keeping the old Ticketfly platform, they were going to migrate existing customers over to the Eventbrite platform, and they're having issues retaining customers throughout that process. But management really keeps that long-term view. They're saying, "Look, we want to have one central platform. These are short-term issues that we're going to get through. And then in the future, we're really going to be able to drive growth through this platform."
The issue I see with Eventbrite, and the reason why I haven't pulled the trigger -- although today's drop does make it more appealing -- the problem is that they offer a lot of stuff for free. You can list an event for free, you can get payment processing, all of this stuff. Eventbrite just gets a fee per ticket. That's their business model. The issue is, they claim to be profitable with scale. I've heard that before. We've all heard that before. It's a risky thing when you're doing as much in sales as they are, and you're saying, "We just need to do more. We'll get profitable if we just keep doing more." So I think in the future, it's possible that this company will start needing to charge for more things on their website. And when that happens, will they lose customers?
Greer: It's the old joke about, we're losing money, but we'll make it up on volume.
Cross: A reminder here, that in a market of really exciting IPOs, that not all IPOs fly to the moon. Eventbrite, recently public, has had some struggles here. In March, the stock got hit pretty aggressively as well, too, after concerns with the fourth quarter. Now this is the second time in a few months. The shares, since Lyft went public, I will say, are beating Lyft, up until today. They had that bright sign going for them, although the bogie there, not so hard to --
Greer: Bit of a low bar there.
Cross: Bit of a low bar, yes. So, a reminder that when IPOs hit the public markets, investors have certain expectations. If the companies can't deliver on that -- and Eventbrite, it was not a very pretty quarter really, when you look at some of the numbers they are putting up. But that said, the stock had rebounded a little bit over the last few months after that pretty dramatic drop. And investors today, obviously, not very encouraged by what they're hearing.
Greer: I want to broaden the lens a bit and not just talk about Eventbrite. If you have a stock and it falls 30% -- you own a stock, and it falls 30% on earnings or some event -- what questions are you asking? What are you looking at in trying to decide whether you should stay the course, whether you should potentially buy more, or whether you should just cut your losses and sell that stock? How do you think about it?
Flippen: Well, for me, it's really what's driving that fall. You'll notice that the market is really looking, at most, a year out on these investments. So when you see a 30% pullback, like we did with Eventbrite today, that's in response to the year's outlook. We don't see a lot of great growth because they're losing customers, thanks to this poor migration at the Ticketfly platform. However, if what causes the drop does not undermine the full value proposition that you made when you made the investment -- if you're making the investment because you really believe in the idea of a centralized ticketing platform that's going to be the go-to place to be for ticketing, then this is short-term news, right? It's a great buying opportunity, it does nothing to undermine your original value.
Cross: Yeah, I think that's an important point. Any short term-drop, whether it's 5%, 10%, 30%, certainly, there seems to be maybe some operational challenges that investors were not expecting, and now maybe having a little bit of lack of confidence in the team to be able to get that done. But to Emily's point of thinking about continuing to remind yourself that you're investing in this businesses, ideally three, five years, looking at the platforms and the potential for them to be able to grow market share in a growing market is the most important thing for these young technology companies. And if you still have the belief that their products and their team can deliver on that, then obviously, looking at stock drops could be a nice bargain opportunity. But you have to understand that management teams have to be able to deliver on their promises. And if investors don't see that, the stock can be in for some volatile times.
Greer: OK, I want to bring it back to Eventbrite. Taking what you just said there, Andy, do you think about IPOs and recent IPOs like Eventbrite, do you think about them differently? Do you keep them on a shorter leash? Because this company just went public last September, September of 2018. So in the case of a recent IPO, if it falls 30%, do you say, "You know what? I'm going to apply a little higher bar or a different level of scrutiny."?
Cross: I don't, frankly, Mac. IPOs get lumped together as a group really. When they come to the public markets, they often are looking at the recent IPOs to see how they can price their stock. But from an analytical perspective, from an investing perspective, I take it case by case and look at the business and the people running that and the opportunity for the stock to perform over the next three to five years.
Greer: Well, a rough day for Square, the financial technology company, or fintech, as we say in the business. Shares of Square down almost 9% after reporting slowing growth and a widening loss. Now, Andy, it still posted better than expected earnings, but investors not impressed.
Cross: I think the guidance was a little weaker. I mean, sales were up 43% and up 39% if you back out their recent acquisition of Weebly and Zesty. Gross payment volumes, which is the volume of transactions going through the Square ecosystem, was up 27%. That was a little lower than some of the estimates and little lower from the estimates for the second consecutive quarter. So I think investors are saying, "Wow, the payments business is slowing." Their transaction revenues, which is almost 70% of their sales, were up 26%. Subscription services revenue through things like the Cash App, the peer-to-peer payments processing transactions application, the subscription revenues was up 126%, Mac. So continuing to see momentum into the ecosystem. Look, Square's a $30 billion company. The stock's done phenomenally well. Jack Dorsey has done a really nice job managing this business. And investors just have pretty high expectations and maybe just seeing, is the growth kind of starting to plateau for Square, it's a very competitive space with other players out there now, Shopify in particular, they are starting to go head-to-head now a little bit more. Investors may be wondering if the growth might be plateauing. It's still very healthy for a company that size. Maybe some of the confidence isn't quite as high as it was a year ago.
Flippen: And fun fact, tying it back to Eventbrite, there's actually been some speculation that Eventbrite contributed to this poor quarter for Square, because Square is the exclusive payments processor for a lot of Eventbrite's business, depending on the country you're in. That's a good thing for Square, having some exclusivity there. It shows you the value of what Square provides. But the flip side is, it's a reminder that Square is not immune from the volatility of its underlying customers. Whether or not Eventbrite really moved the needle for Square, to be seen. But the fact is, if they're not driving payments volume, then it will negatively affect them.
Cross: It did move the needle in a bad way because they took a $14 million loss on the other income line from the investment they have in Eventbrite, and that was before today's drop. So, unless the stock recovers, the accounting rules require Square to take a loss on that from the operating loss, when they look at the stock price, if the stock underperformed. So yes, I think Emily's right, the Eventbrite underlying business, if Square is the exclusive provider in the U.S. of their payments operations for Eventbrite, that's actually pretty attractive if Eventbrite can continue to grow. But yeah, Emily, you're right. You have to look at the underlying customer performance of Square's customers to really understand the growth potential there.
Greer: Andy, you mentioned Shopify earlier. I don't really associate Shopify and Square when I think about the war on cash and that competitive landscape. I'm curious, when you think about the war on cash, do you have a favorite in this space right now? Is it Shopify? Or is there another name that when you think about just that big war on cash that our very own Jason Moser loves to talk --
Cross: I like Shopify, Mac! Square bought Weebly, a website design company, and they are now integrating that into their own online store. That plays a little bit against what Shopify does on their online store. Shopify now has a payments business as well, Shopify Payments, so their customers can use the Shopify Payments platform. And they actually have now an in-store technology and hardware that they use for some of their clients, Shopify does. That competes a little bit more against Square. So these massive companies are starting to bump into each other a little bit. It's a massive space, the payments business is huge, globally, Emily, so there's lots of room for growth. But you are seeing a lot of really great companies and very innovative companies starting to compete more and more head to head.
Flippen: Yeah, I definitely think there's room for two winners. It's so funny, when you look at Square and Shopify and how they ended up competing, starting off on two different playing fields. You have one more payments, one on more platform. And then slowly, they've been migrating, until they reach each other in the middle. And I think we're going to start seeing a bit of a shakeout while they start to compete with each other. But like Andy said, the payments space is big enough that I'm not worried about either of these companies as a result of this increasing competition.
I'll just add, there's lots of great international plays when you look at the payments space. The payments space in the U.S. arguably is growing a little bit slower. We've been a little bit more reluctant to move away from cash than other countries. It's a fun place to look at. It's a fun industry to examine. I like both these companies.
Cross: I'll note that Square also issued more than $500 million in small business loans across 70,000 loans this quarter. They now have done 4.5 billion loans to date. So they are kind of getting into that loan business as well, too. So another way to expand their reach into the new clients.
Greer: Shares of Tesla up on news that Tesla is raising more money. Tesla plans to raise up to $2 billion, $1.35 billion of that coming from convertible notes, another $650 million coming from new stock, new equity. Emily, what does that mean for investors? Why are shares up just on news that Tesla is raising some more money?
Flippen: Well, $2 billion is nothing to scoff at when you're Tesla and you burn through money very quickly, especially when you had quarter there where you were not generating any cash to keep yourself going. I think if the market responded positively, because we had seen a company that was so depressed, because people were very genuinely afraid about the long-term viability, this $2 billion buys Tesla some room to run. We see a lot of other initiatives -- it was also announced today that Tesla really is moving forward with their plans to get into the insurance business, for instance. And what they're going to need for that is cash. They need capital to keep going. So while this dilutes shareholders, undoubtedly, it's a convertible note, there is some equity, Musk himself is buying $2 million of it. I guess that's your silver lining. It also means, hey, if you believe in what Tesla is going to do, if they actually are going to revolutionize this space, especially as it applies to self-driving technology, clearly, they're not there yet. But if they get enough capital to allow themselves to sustain until they've reached the point where they're able to scale self-driving, then hey, maybe there's a value there.
Cross: I think there's been lots of conversations with Tesla on the capital position of the company. Lots of thinking through how they can continue to support their business if they are burning through some cash, not profitable, though they have had profitable quarters. But Elon mentioned that, hey, you know, the last quarter could be a time to raise some capital and beef up the balance sheet a little bit. And they've done that. I think investors are reacting very positively because it's another piece of information they have that is now clear. And they don't have to think about it and wonder if it is out there, how much they're going to do. Now they know that information. Having that piece of information puts that uncertainty to the side, and they can now focus more on what is Tesla going to do and Elon Musk going to do to actually become a profitable car-making company.
Flippen: And for a lot of people, you were already a Tesla bear, this probably just makes you feel more bearish. You're like, oh, this is further shareholder dilution. It's another lie. They said they didn't need capital, they clearly need capital. And if you're a bull, then that's exactly it, you're sitting here thinking, this is amazing. This gives them so much more capital to work with, so much more room to run. If you believe in the leadership, if you believe in the vision, this means a lot. Either way, I think the point that you made about this taking away an unknown is the most valuable piece.
Greer: Let's close with a little Fitbit. When we were first talking about this story, shares were up on earnings. Fitbit really getting it done with their smartwatches and fitness trackers doing OK. Now at the time of our taping, shares down a bit. But Emily, what's the story here with Fitbit? Are they taking it to Apple? [laughs]
Flippen: [laughs] I can't help but think that there's a reminder here --
Greer: I'm kidding!
Flippen: Every single time Fitbit reports, it's usually good news. We've seen over the past two quarters good news from Fitbit. In fact, smartwatch sales this quarter were up 117% year over year. It was a low base to start with, but still very notable. There's still great performance in terms of tracker sales, those are up 17% in terms of revenue and 36% in terms of devices. But I think the market then responds because you're like, oh, wait, Fitbit's still here. They report, and it's a reminder that, oh, gosh, this company. It's fallen from the great potential that initially was seen when it IPO-ed and there was this hope for what Fitbit could be medically based on devices, all this stuff. It's clear that Fitbit then lost out to Apple.
Here's what I think is really interesting. I will admit, I am a Fitbit shareholder. I bought in when it was way too high, [laughs] so I would not call myself a Fitbit bull at this point. But I am holding on. And this is because we're seeing demand from the low end of the market. If you're wearing an Apple Watch, that's not a purchase that you want to make regularly. That's a piece of hardware that you'd prefer to keep running as long as possible. But I do think that there's pretty probably a lower-tier market of Fitbit customers who probably replace these devices once a year. And if they're cheap enough, then it gets the job done. They're willing to upgrade to wherever the newest device is. We see Fitbit having great success selling these devices for a little bit cheaper, undercutting Apple.
I will say that, while their services revenue was up 70% actually, so really significant service revenue. That's essentially the subscription-style services that you'll get -- fitness coaching, fitness health. Some red flags I saw from Apple was Apple almost giving us the same party line that Fitbit gave us when they IPO-ed about the health potential of these trackers. I was almost having bad flashbacks there. I'm sitting here thinking, wow, is there actually any value in the technology? If Apple can find value, and if what they say is true, that they find value in the health technology that they provide, maybe there still is something there for Fitbit. Or maybe, they're just both wrong.
Cross: I think it's very hard to be a low-cost producer, as a $1.3 billion company, of hardware when you're competing against the likes of all the other technology companies. Emily, you're right, the services business, just like we saw with Square, tends to be the bigger growing opportunity for these companies. But the ecosystem that Fitbit once prided itself on in having, I just don't think that's enough to really sustain the business long-term. Again, when you think out, say, five years, where is Fitbit going to be? I think the challenge of moving down the price point for these kind of fitness watches or fitness trackers is going to be very difficult for them to compete against the likes of Apple, who's clearly aggressively going into that market.
Flippen: And as a reminder to our listeners, Fitbit is unprofitable. It's not like they can just keep going, doing what they're doing forever.
Cross: Right. There's a reason why Nike decided to get out of that market for the most part.
Greer: OK, let's throw Fitbit a bone here. If you're going to design a smartwatch or fitness tracker, what do you want? What do you need in this smartwatch or fitness tracker that you're designing?
Flippen: Like I said, I own a Fitbit. I've owned a Fitbit for a while. It was for two reasons. It was cheap. It was cheaper than buying myself an Apple Watch. And at the time where I bought it, it really the only watch on the market that would track my run. I like to run outside. It would give me my mile times, give me my pacing. Now that there are clearly other competitors, whether that be Garmin or Apple, in the market, I'm not sure what would compel me to buy a Fitbit over an alternative product.
Greer: Andy, what do you need?
Cross: A device that lies to me, just tells me I'm doing great, makes me feel good. "Yeah, you're doing great!" while I'm sitting on my couch watching Game of Thrones.
Greer: That's great! I have a variation of that. I want something that basically takes my current activity level and shows me what I'll look like 10 years from now. And it's an artist's rendering of my photo. That would be motivational!
Flippen: Maybe Fitbit's going to steal that idea.
Greer: Maybe I'll take the stairs today. Maybe I'll skip the mac and cheese.
Cross: Yeah, exactly! Elvis needed that back in the day.
Greer: He could still be with us.
Cross: No more peanut butter and bacon sandwiches.
Greer: Hold off on the bacon! OK, so the desert island question. You're on a desert island. You don't have anything to do, but somehow, you're able to invest in stocks. Just go with it. You got some snappy app. Under Armour, Square, Tesla, Eventbrite, or Fitbit? You have to own one of those for the next five years. Where are you going?
Flippen: Oh, this is so easy. This is so easy! It's Square hands down for me!
Cross: Yeah, I was going to say the same thing.
Flippen: Out of the companies here, it's not to say that the other ones can't be great investments, but there's a lot more unknown there. Square is just such a well-run company, operating in such an important and growing space. We have faith in the management. I just feel like that's a company that is going to be around for the long term. The rest of them... [laughs]
Cross: Totally agree, Emily! It's a $31 billion company, growing. Even though the numbers may be slowing a little bit from maybe expectations, you're still growing your processing volumes 28%. That's pretty impressive!
Greer: No hesitation.
Cross: No hesitation.
Greer: What if I told you Eventbrite was 30% off?
Greer: OK. Well, you can always email us at email@example.com. Andy, Emily, thanks for joining me!
Cross: Thanks, Mac!
Greer: As always, people on the show may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's it for this edition of MarketFoolery! The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! And we will see you tomorrow!
Andy Cross owns shares of Under Armour (A Shares) and Under Armour (C Shares). Emily Flippen owns shares of Fitbit and Shopify. Mac Greer owns shares of Apple, Costco Wholesale, and Square. The Motley Fool owns shares of and recommends Apple, Fitbit, Lululemon Athletica, Nike, Shopify, Square, Tesla, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.