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IPO Dreams and Stocks to Watch

Jason Moser, Dylan Lewis, Nick Sciple, and Shannon Jones, The Motley Fool

Wrapping up the 4th of July week, all the Industry Focus hosts get together one more time to talk stocks, IPOs, and 4th of July traditions. It seems like every week brings us another IPO, but plenty of fantastic private companies have no reason to list. The IF hosts discuss some private companies they wish they could invest in, from tech to restaurants and more in between. Then, the gang shares some stocks to watch, including an incredibly comprehensive bull case for Redfin (NASDAQ: RDFN). And stay tuned to the end for some Independence Day traditions.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on June 27, 2019.

Nick Sciple: Welcome to Industry Focus, the podcast that dives into a different sector in the stock market every day. It's 4th of July week, so we brought all our Industry Focus hosts together for roundtable discussion. This will be part three of our discussion. If you haven't caught the first two parts, please tune into our discussions earlier this week. I'm your host, Nick Sciple, and today I'm joined in studio by Industry Focus hosts Shannon Jones, Dylan Lewis and Jason Moser. How's it going, guys? 

Jason Moser: Howdy!

Shannon Jones: Hey!

Dylan Lewis: Hey!

Sciple: Good to have y'all on here once again! We're going to continue our roundtable discussion. The next topic I want to talk about is our investing wish list. What is the company that is not available on the public markets today, and if you could snap your fingers and invest in it today, that would be the one that you would pick? Jason, I'll let you go first. Switch up the order here.

Moser: Me?

Lewis: You've been getting off easy!

Jones: You have. Very easy, Jason!

Moser: I feel like this one, I may take someone's answer here, so I apologize, but you sent it my way. Sometimes you have to deal with the choices you make. OK, do you want just one? Or a couple?

Sciple: Go nuts!

Moser: Well, I feel like everybody wants Chick-fil-A, but it's just never going to happen. Talk about no competitive advantage. Restaurants don't have them. But that doesn't mean they can't be a good investment. I feel like Chick-fil-A would be a good one. I think, if I saw the data correctly, it's moved up to the third-largest restaurant chain by sales in the United States. And if you live near one, you know what I'm talking about. It's tough to resist. 

But the one that I would really like to see would be Stripe, the payments company.

Lewis: Shocker!

Moser: Yeah, well. [laughs] Touche! I would add that to the "War on Cash" basket, I think. They're doing a lot of things like what Square's doing, and Stripe is a big provider for Shopify. You know we like that business as well. Very Square-like in what they're doing. Pursuing, obviously, a massive global market opportunity. I'd love to see Stripe go public. I don't think it will, though.

Lewis: For me, it's Palantir. I don't know if this on any of your lists. I'm interested in pretty much anything that Peter Thiel is interested in. He has a pretty good track record there. By all reports -- we don't have a good sense of what the business looks like, but they're profitable, they work with government agencies, contract-based, so the contracts are going to be there. Unfortunately, this business is not ready for the big show yet. They are still in the process of bringing a lot of the people on board that will allow them to go public. They need the independent board members; they need a CFO that's ready to do this kind of stuff. I think they'll be pushing out to 2020. But this is a really interesting business to me.

Jones: I'm going to go with Grail. This is the Google company, really driving the fight against cancer. They're using next-generation sequencing to develop blood tests for early detection of cancer in patients who don't yet show signs or have a diagnosis. This is a huge area, huge unmet need still. They recently just brought on Hans Bishop, he was the ex-CEO of Juno Therapeutics, which got sold to Celgene for $9 billion. It's a CAR-T company. Last May, they actually raised $300 million in a Series C round. Estimated valuation right now about $3.2 billion. I like where this company is going. I must say, I'm a little hesitant anytime Silicon Valley tries to address health needs. There's a little bit of skepticism there. But with the deep pockets -- they've got backers like Jeff Bezos; they've got Bill Gates -- I think they're well-funded to at least go after it more so than some of the other smaller players out there.

Lewis: Hopefully they stay away from blood testing. 

Jones: Please. Please!

Moser: I just got done reading that book, Bad Blood

Lewis: I borrowed Shannon's copy.

Moser: So good! So entertaining!

Jones: I read that in a day. Riveting!

Sciple: I think all of us have read that book, then.

Jones: And infuriating!

Moser: And amazing, that people just bought in! Beware of the herd mentality! Just because everybody says it's a great idea doesn't make it a great idea. 

Jones: So true!

Sciple: Yeah. And just because people that you think are really smart and sophisticated investors are in -- like the Walton family and the Murdochs and every Secretary of State since 'Nam, apparently just because all those folks are in there does not mean it's a good investment. Something to keep in mind. Well, y'all sniped me on a couple with Palantir and Chick-fil-A. That's OK. I'll go with Airbnb. Airbnb is one I'm really excited to see. Founder-led, really shaken up the entire global lodging market. I can't remember a vacation I've been on in the past five years where I haven't stayed at an Airbnb. It seems to me that, for personal travel, it's really changed the game. Two-sided network effect, both from a consumer point of view, as well as the folks listing their properties. From common sense, monetized these assets that folks weren't using, vacant homes and things like that. I think it's got a really huge opportunity. There are some concerns you might have on this business. They run a similar playbook to maybe what Uber and Lyft ran in the past, where they've been fast and loose with regulatory issues in the places that they moved into. However, I think they've entrenched themselves enough that they have strong enough network effects and a strong enough presence, they'll continue to grow over time. I think it'll be a great business to invest in.

Moser: We looked at Airbnb when we went to Costa Rica, and we ended up getting a place on Vrbo, which is owned by HomeAway, which is owned by Expedia. Right? I think I connected those dots. But what I found was that the user interface on Vrbo, to my finding, and my wife thought the same thing, was far superior to Airbnb. The user interface on Airbnb just wasn't as good. But I guess the question is, do you feel like with Airbnb and Vrbo, there's that same dynamic with Uber and Lyft in, great services, they've made our lives better, but will they ultimately be good investments? I mean, I just don't know the economics of the business that well.

Jones: As someone who's used both platforms, I really don't care which platform there are, because I'm looking at ultimately price. 

Moser: Yep. 

Jones: So, I don't think there's enough differentiation between the two right now for me to say, "You know what? Airbnb is a better investment than Vrbo." They're filling a niche. I think their valuation, though, has them at like $35 billion. That puts them, just for perspective, more than Expedia, Hilton, and just under where Marriott and booking.com are. That's huge. Not to say that there's not that market out there, because they have created this sharing economy, they've really been able to drive that. But this is a space I just don't see enough differentiation in to make a good call in terms of investment.

Lewis: I think that they don't have to deal with a lot of the other issues that some of the gig economy businesses do. And, yeah, there's some price sensitivity, but what I will see often is a place is listed on Airbnb and Vrbo. I don't know that the price sensitivity matters quite as much. It's not like Lyft and Uber, where you'll pull up the app and see who's giving you a better fare, and it'll be slightly different.

Sciple: We haven't seen the numbers from Airbnb yet, so to really know in depth how the economics are shaking out for them, it's tough. I will say, for me, I use Vrbo if I'm going to the beach or something like that, I'm going to stay in more of a higher-end vacation rental. I tend to think of a Vrbo for those sorts of things. Whereas, Airbnb is the first place that I go. But to your point, I think it's more mindshare than anything that's Airbnb's advantage, scale and mindshare. We'll see when the numbers come out whether what I perceive to be the market opportunity is lined up with what the real financials are going to be. 

All right, the next segment we're going to do -- it's kind of stolen from MarketFoolery as well as, Jason, you do it on your show -- is One to Watch, what's on your radar, stock that you're watching right now. We'll run around the horn. I'll let Jason go first. 

Moser: There's no stealing around here, man! This is the sharing economy! One that I was talking a lot about at Fool Fest, and I think it's plain to hear from my talking there that it's also a recommendation that I put out there for the new augmented reality service, is a company called Autodesk, ADSK. Essentially this is like CAD software, 3D software. It's the engineering space. These buildings that we occupy, the planes that we fly, even some of the movies that you watch with those cool special effects, these engineering companies are helping that cause. Autodesk is one of them. A lot of neat aspects to the business. They recently changed their business model around to more of a subscription-style offering. I think the uncertainty there played out a little bit on the share price. But it seems to be recovering nicely. Still only about a $37 billion company, so in relation to the market opportunity that's out there, I think a lot of room to run, and they have a great demonstrated track record up to this point. 

Lewis: That was also my stock to watch.

Moser: Whoa, no way! Wow!

Lewis: Yeah, because I tape a lot of shows with Brian Feroldi. 

Moser: Brian and I were doing a lot of research into some of these names, and Autodesk, he and I both shared positive thoughts about that one. 

Lewis: That's too funny!

Moser: That is funny! And it's worth noting, you and I did not...this is very matter of fact right here.

Jones: The double rare buy alert! [laughs] 

Moser: Well, why don't we skip over to Shannon, and we'll give Dylan a second to come up with another idea?

Lewis: I love that!

Jones: Sounds good! The company on my watch list, very high on my watch list, I would even say probably the top one right now, is a company called RegenxBio, ticker RGNX. It's really supplying a lot of the biotech gene and cell therapy space right now with what are called viral vectors. When you think about gene therapy, you have to have something to deliver all of that genetic payload into the cell. This company is making those viral vectors to do that. This is a company where I feel like they can win on their own, they've got their own development platform, but because they're supplying the industry, even if those drugs don't make it to market, they're still making money, which is what I like. They've got a platform therapy, its proprietary portfolio of over 100 viral vectors that can address potentially over 6,000 diseases caused by genetic mutations. That's a huge opportunity. They did get an important validation of their platform with Novartis, who managed to get an FDA approval on a gene therapy that was approved in May. Now, they've got milestone payments coming in, they've got royalties, I highly expect more partners to come on board and start using the viral vectors. I mentioned they've got their own internal drug development program underway. Right now, market cap is $1.8 billion, so really tiny compared to the addressable market here. Cash looks really good, $444 million. This is before the milestone payments and royalties have started to kick in off of that Novartis deal. So, you've got plenty of cash, minimal debt, platform technology, you've got partners. It checks a lot of the boxes that I like to see for these biopharma players. 

Lewis: All right, I'm ready, I'm back. I've got something. But I'm not going to tread too far from Autodesk, a similar space here. I think Adobe is worth looking at. It's similar in a lot of ways to Autodesk, a lot of the same reasons that we like those companies. Software-as-a-service company. It is the de facto provider of the best software in that space. You can't really disrupt someone who is industry standard. I think for most creative fields, the Adobe Suite is the go-to suite. Their margins are crazy. It's like 86% gross margins. I think Autodesk is like 89% gross margins, so you got me there, Jason. 

Moser: Very scalable business.

Lewis: Nice, scalable businesses, recurring revenue, all the kind of stuff that you want to see. I think it's not something that is going to be putting up crazy, crazy returns. It's a fairly large company at this point. But if you're at all worried about buying something that's high-growth, and then having the market take a dip, I think this is a business that has a pretty high floor on it because so many people need it for their jobs.

Sciple: Yeah, if you're a graphic designer and the market tanks, you can't not buy Photoshop. You just you just have to have it. Mine is Redfin. We talked about this on the show with Tim Beyers maybe a month ago. One of my favorite companies right now. If you're not familiar with it, it's a technologically powered real estate company. Their mission is to redefine real estate in the consumer's favor. Their major disruption is, they're disrupting the real estate brokerage industry. Traditionally, brokers have charged 2.5% to 3% on either side of the transaction for fees. Redfin is using its technology platform to charge lower listing fees, about 1% to 1.5% listing fee. They pay their brokers a salary and benefits, which is a different dynamic than a broker who is in the traditional model, where they're getting paid 100% based on commission with no benefits, and you basically have to pay your healthcare. So, from the consumer side, it makes a lot of sense, you're getting a lower price. Particularly as we see, the entry-level home market is really starting to see a swing up. The median age for first-time homebuyers going back 25, 30 years has been 32 years old. The average millennial is 30 and a half. Millennials have become the largest segment of the population here this year, so there's some demand there on the low end of the housing market. When you look at a company like Redfin, the most price-sensitive folks on the entry level of the market are the folks most willing to do things on their own online. It creates a natural market for Redfin. As well, they're pushing out into other services. They're pushing out Redfin Now. Folks refer to it as a home-flipping service. It'll charge a 7% fee to buy the home outright and then turn around and sell the home. I think on every one of those transactions they've participated in to date, they've been profitable, been very conservative about rolling that out. Moving into other parallel services across the real estate industry -- mortgages, title services. They're able to, as they acquire these customers, have more and more products they can sell them, which gives them opportunity to grow. They're about a $1.5 billion business today. Had $487 million revenue in 2018, vs. overall U.S. real estate commissions of $80 billion. They're a $1.5 billion company today with an $80 billion addressable market. You look at their market share relative to the U.S. real estate brokerage industry, it's about 0.8%. Lots of runway for them to grow. A clear value proposition both on the consumer side, as well as on the broker side. And the management, I think, is really strong. Great culture there. Glenn Kelman has been there for a long period of time and has really focused company around culture. You see a lot of these tech companies say, "Hey, we've got tech, everything will work out." They're focused on, "Hey, we have tech, but we're leveraging the personal relationships that our brokers have with folks to build our business over time." Really big opportunity. Still not profitable yet, but a really big opportunity to grow into a market that seems appealing to them.

Lewis: I think we just got Nick's tight five right there. [laughs] You're a stand-up comedian. I sit next to you, so I've heard about Redfin, I think, for like the last two or three months between you and former Industry Focus host Michael Douglass.

Jones: Michael Douglass, yes!

Lewis: He loves that business! Maybe due for a deep dive.

Sciple: It's been hot! I think when we had Tim Beyers on, we talked about Redfin, that's probably the most bullish I've been on a show. 

Jones: It takes a lot to make Nick overwhelmed by something, or just to be bullish, or just like something. So, consider that your double rare buy alert right there.

Sciple: Double secret buy alert. They can't all be winners, folks. They can't all be winners. 

All right, last thing we'll do for fun again, because it's 4th of July week and we want to do something a little bit non-investing-related, I've done this a few times on my podcast -- also super program for being July 4th week -- do your Mount Rushmore, your top four. For this one, we're going to do our top four July 4th activities. We'll go snake draft, so let JMo pick, then we'll come back around, I'll pick twice, and we'll go back around like so. So, Mount Rushmore, July 4th activities, go!

Moser: Boy, if I'd been given my druthers, I'd be out on the golf course first and foremost. 

Lewis: [laughs] You think so?

Moser: Sure! But I can't, I've got a family and stuff at home. Golf comes for when I'm older and the kids are out of the house. 

Lewis: I see. Even on the holiday?

Moser: Why not? I mean, you go play early in the morning, and then you come home, and you do those other activities.

Lewis: That's what I've heard from every parent ever about golf. 

Moser: What?

Lewis: It's the time to get away from the family.

Moser: Well, OK, let me be really --

Sciple: Hey, his family listens now, guys!

Moser: I've been playing golf way longer than --

Jones: Turn it off, Robin!

Moser: I love golf, but I'm never trying to actually get away from my family. It's just trying to diversify my day. 

Lewis: That was very artful.

Jones: Very artful!

Sciple: Welcome to the spin zone!

Lewis: I think my Mount Rushmore activity is buying a Bud-heavy patriotic can. I think that has to be on the list. It's the only time of the year that I will drink Budweiser, but I feel like it is perhaps the most patriotic thing you could do on July 4th.

Jones: I can't even picture you drinking a Budweiser. That's just fascinating to me!

Lewis: Whoever designed that flag can, they deserve some big bucks.

Jones: For me, beach bumming it up. I have to be on the beach. I want to sleep on the beach. I want not to be bothered on the beach. I'm all about the beach.

Sciple: I guess I have two since we're going to snake it. For my first pick, it's just wearing obnoxious American flag apparel. I think everybody has that, particularly if you're a '90s kid, your parents always got you the Old Navy American flag T-shirt. 

Jones: There you go!

Sciple: I've graduated from that with more obnoxious clothes. I think you've got to show your patriotism, and you have to be a true American, so be very aggressive with showing your patriotism. That's No. 1. I think No. 2, along those same lines, you have to play obnoxiously patriotic music. I'm talking about Toby Keith. I'm talking about Team America World Police. I'm talking about "Proud to Be an American." You've got to play that as loud as you can, in public, without shame, while drinking your Budweiser American flag beer can. Those are my two picks. Shannon, what's your No. 2?

Jones: Has to be illegal fireworks. If you are not shooting off fireworks somewhere illegally, you are not doing the 4th of July right. I'm from North Carolina. We always ran from the police. That's what we do.

Lewis: I can't believe that grilling made it back around to me in the second round. I hope I didn't steal that one from you, JMo. I love to grill, period. I really love to do it outdoors on July 4th, just having an awesome time with friends.

Moser: Agreed! And as I said, this is a sharing economy, so I, too, am going to go with grilling. And you know you can be grilling if you're not sidled up to that grill with a nice, cold beer in your hand. Grilling, drinking beer. And I'll go and throw my fourth out there, because I love the illegal fireworks. Illegal just makes it that much more fun. 

Jones: [laughs] It's much more fun!

Lewis: All right, I think we're getting kicked out of the studio.

Sciple: I'll give you my last one just because I want to: being on a boat. Just being present on a boat while other human beings aren't on a boat, particularly if you can do it on the most patriotic 4th of July holiday, while wearing your obnoxious American flag clothes, playing obnoxious music, and drinking your Budweiser Ameri-Can, what better way to do it?

Moser: Love it!

Sciple: Happy 4th, folks! Thanks for listening!

As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for his work behind the glass! For the whole Industry Focus crew, I'm Nick Sciple. Thanks for listening and Fool on!

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Dylan Lewis owns shares of GOOGL, SHOP, and SQ. Jason Moser owns shares of GOOG, BKNG, and SQ. Nick Sciple owns shares of GOOG, Redfin, SHOP, and SQ. Shannon Jones owns shares of SQ. The Motley Fool owns shares of and recommends GOOGL, GOOG, BKNG, CELG, SHOP, and SQ. The Motley Fool recommends ADBE, ADSK, MAR, Redfin, and UBER. The Motley Fool has a disclosure policy.