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Veggie Meat and Marijuana: The Hype (Cycle) Is Real

Chris Hill, The Motley Fool

On this episode of MarketFoolery, host Chris Hill chats with analyst Emily Flippen about three big stories on Wall Street. First, Alibaba's (NYSE: BABA) fantastic quarterly report prompted basically no reaction from the market. That probably has more to do with macro issues than anything Alibaba said or did...which makes for a pretty nice buying opportunity for long-term investors who see this company's crazy potential. Then, an update on the two best-known marijuana companies, Tilray (NASDAQ: TLRY) and Aurora Cannabis (NYSE: ACB). Finally, a discussion on the increasing popularity of plant-based meat substitutes. Flippen shares some big-picture context, and offers some advice to help investors keep the hype in check.

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 May 15, 2019.

Chris Hill: It's Wednesday, May 15th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, the one and only Emily Flippen. Thanks for being here!

Emily Flippen: Thanks for having me!

Hill: It's warm here in the studio. That's because we just had a very heated discussion with producer Dan Boyd about pizza and bagels. That's just going to remain among the three of us. Probably just as well that that doesn't go out to the dozens of listeners. 

We've got some earnings, we've got some marijuana earnings, we've got some e-commerce earnings. Let's start there. Let's start with Alibaba. Fourth-quarter revenue up 51%. I know we like to talk from time to time about the law of large numbers, but this is a $450 billion company and they are putting up surprisingly big numbers when you consider how big a company Alibaba is. Profits were higher than expected. The stock is barely moving positively today. Why is that? You watch this company closer than me. This seems like a solidly good quarter for a big company. 

Flippen: Well, you've made a mistake in bringing me on today. Alibaba is one of the companies that I watch, but there's also a handful of other Chinese companies that have been reporting and will continue to report in the next couple of weeks. The earnings that we've seen, Alibaba included, have been outstanding, and the market has hammered them. In fact, Alibaba not being down today is impressive within itself. Alibaba's kind of trepidatious response by the market I don't think has anything to do with their earnings, their guidance, their business. It's really the macro situation right now. There was nothing within reason that they could have said that would make the market respond very positively. But the fact that this is such a big company growing revenue at 51%, and they're seeing such an amazing growth through Alibaba Cloud, I mean, they really are doing everything. We have the cloud business. Their management now says they're serving 50% of China's A-rated businesses through their cloud business. That's actually much smaller than I think it can be over the long term. So this growth to me is just the beginning. You'll see that 70% of the increase in active users were actually from less developed cities as well, so they continue to expand within the country. And their partnerships are really starting to pay off. Alipay, Taobao, they pushed through 30% of Ele.me's orders. That's Chinese food delivery. So the fact that Alibaba is so spread out, across the country, in terms of business segments, in terms of revenue, just means that this is an amazing company. The market's sad response doesn't mean much to me. 

Hill: [laughs] So, it sounds like you think this is a buying opportunity. 

Flippen: Oh, 100%!

Hill: To widen the lens a little bit, I mean, this is a stock that, I think it's up about 30% maybe over the past year or so. It's had a pretty decent run. But it sounds like you think there's a lot of runway ahead of it.

Flippen: Well, here's a good testament to that runway. Youku, you could call it Chinese YouTube, it's Alibaba's video-streaming website, they're still producing movies and TV shows. And guess who they're selling it to? Netflix. The biggest one in China right now, I forget the name, but it dropped on Netflix today. If you're interested, you can go on Netflix, it's probably going to be one of the first videos that starts playing for you. It's a Chinese drama that they purchased from Alibaba, through Youku. The idea that this company has tapped out on growth is a terrible misunderstanding of all the different levers that Alibaba still has to pull in their business. 

Hill: Let's move on to another of your areas of expertise. That's the marijuana industry, which you cover here at the Fool. A couple of companies reporting today. Tilray reporting first-quarter results. Sales were up, but their costs were also up, so their loss was definitely bigger than expected. Aurora Cannabis seemed like it had a pretty good third quarter. Tilray's stock getting hit a little bit. Aurora Cannabis, last time I checked, was moving slightly positive. Safe to say Aurora is, if not the biggest player in this space, maybe the best known?

Flippen: Yes. Definitely. Tilray and Aurora, two of the best-known players in this space. You'll notice that revenues growth in general is extremely strong in both these companies. Tilray's up almost 200%. But it's only to $23 million. It's just a reminder to people who are interested in this space that these companies, despite their popularity, and despite how well-known they are, they're still extremely small. It's projected that Tilray, being one of the best-known companies, only has about a 5% market share in Canada. And that might sound to somebody like, "Wow, they have so much room to grow!" But that's just a testament to how fragmented the market is. And both of these companies are increasingly unprofitable. They're going to need to raise capital to continue operations. That should not miss out on any investors. Investors should be perfectly aware of the fact that shareholder dilution in these companies is not just a word we like to say about why we don't like them, it's a real threat. It's a real threat to people who are buying these companies. If you're interested in looking into the cannabis space, there's a lot of other companies, a lot of ancillary plays, that you can get into that have a lot less risk and a lot less exposure than companies like Aurora or Tilray. 

That being said, partnerships are really key for both these companies moving forward. They are big players, they are well-known players, so it's going to be important for them to continue to make partnerships. They're both doing a good job of executing on that. 

Hill: Go back 25 years or so, you had a bunch of companies that made desktop computers. They're all competing with one another. Part of the reason Microsoft grew was because they weren't interested in making the computer, they were interested in just being in the software inside the computer. Hearing you talk about the cannabis industry, it makes me think that investors shouldn't be looking at the growers, which are the obvious first place to look; but instead, the picks-and-shovels companies that are looking to service any of these companies that are producing the marijuana. What's one or two companies that you think fit that space of, they're not growing, they're maybe not as well-known as Tilray or Aurora, but these are worth keeping an eye on? 

Flippen: Well, one company that is an active recommendation in the Marijuana Masters service here that I'm a huge fan of is actually EnWave. EnWave is interesting. It's been around for a while. They're a dehydrator.

Hill: I was going to say, I think of it as the oven company, but I have a simple mind. 

Flippen: They're actually pretty well-known in the cannabis space. But people think of them as just that. The oven company. They sell dehydrators. That's kind of a misunderstanding of their business model. Very early on, the company figured out that they're not going to really make a lot of money by just selling this equipment to companies like Tilray and Aurora. What they're going to make money by doing is selling subscriptions, licensing. So they started to license these, giving exclusive rights to use this equipment to companies like Tilray. That provides ongoing, recurring, safer revenue. If you like a company like Tilray, a good investment is actually probably EnWave, which is relatively insulated, because they don't have the risk that Tilray has in terms of having direct exposure to the price of marijuana, which some people argue is a commodity. Instead, they have predictable, stable, growing revenue, while still providing some exposure to the space. 

Hill: Safe to assume that this is one of those industries that investors should think of in terms of the more volatile end of their portfolio? The higher-risk end? And the reason I ask that is because I was just looking at the 52-week range for Tilray. 52-week high of $300 a share, a low of $20 a share. That is one hell of a roller coaster.

Flippen: The hype cycle is real. And we've seen it a million times over in about every industry you can imagine. 3D printing comes to mind. Nobody wants to be buying 3D printing at its very peak. The same can be true for marijuana. The difference is, is that in the marijuana industry, I see strong underlying demand. That's why I feel comfortable investing in a lot of these companies. 

That being said, you have to recognize that the reason they're so hotly valued right now is because the hype is extremely strong. It's not a matter of if we see a marijuana pullback, it's a matter of when we see a marijuana pullback. So if you're investing in companies in the marijuana space, do not just buy pure-play companies. You are setting yourself up for disaster. What you should be doing is taking a basket approach, taking a long-term view, buying companies that maybe are pure plays, but combining them with companies that operate in the marijuana space that will see less of a pullback when the marijuana industry as a whole continues to fall. 

Hill: Restaurant Brands International (NYSE: QSR) is having their investor day today. This is the parent company of Burger King, Tim Hortons, Popeyes. One thing out of the day that caught my attention was, Tim Hortons is going to be adding Beyond Meat options to their menu. That caught my attention for two reasons. One, just that it happened; two, when Tim Hortons was looking for plant-based meat substitutes, they didn't go with Impossible Foods, which Burger King has been doing with the test of the Impossible Whopper. If anyone was wondering, do all of these restaurants under the Restaurant Brands International brand, are they all operating independently? Yeah, they absolutely are. I'm curious where you see this space going. This is also a day or two removed from Impossible Foods announcing they've raised another $300 million in venture financing. I think the total that they've raised now is somewhere in the neighborhood of $750 million. It seems like an obvious growth story. How big are these two going to get? 

Flippen: Well, they're big right now in part thanks to what I already mentioned, the hype cycle. We are straight-up on the non-meat substitute hype cycle. People are really excited by it. But it goes back to what I said about cannabis. It's a matter of if the underlying demand is there. I think with a lot of these companies, Restaurant Brands International included, they're testing whether or not the market demand is there. So we're seeing success with things like the Burger King's Impossible Whopper because people are so excited and interested. What's going to be the testament long-term is that if people continue to choose to buy the Impossible Whopper over the classic Whopper. 

That's where the strong debate comes. A lot of people think that this is just an interesting one-off play -- that when push comes to shove, you're never going to convert an entire society of meat eaters to meat-substitute eaters. But what's interesting about Impossible Foods and Beyond Meat, Impossible Foods being more toward the taste of somebody who wants a meat taste, and Beyond Meat, in my opinion, being closer to somebody who wants a really good veggie burger, is that I think long-term, especially with the younger generations, there are going to be people who choose to have and pursue flexitarian, non-meat diets. So I think the underlying demand is there, I just don't know how big it is yet. So, with companies like this, I love the fact that Restaurant Brands is trying out both Impossible and Beyond Meat, and seeing where the market demand is, although, obviously, Tim Hortons and Burger King, totally different businesses there. But it'll be interesting to see. 

It's important to remember if you are in investing in this space, be clear about what it is. What it is, is ground red meat substitute. That's all they're doing right now. They have stuff that can kind of make it taste like you're eating ground meat. This is not an entire meat substitute. We're still far away from having a Beyond Meat steak, for instance. Keep that in mind when you're looking at the total addressable market for companies like this. 

Hill: It really is going to be one of the more fascinating things. We've been lucky enough as people who work in this industry that we've had several years now of these types of really interesting trends pop up. Marijuana being arguably the most recent one. But I think the plant-based meat substitute space is going to be interesting to watch, because right now, between Beyond Meat and Impossible Foods, this is setting up as Coke and Pepsi. I'm curious to see if we see a third viable entry into this market, or if some enormous company decides to take this upon themselves and just say, "No, we're going to do this, and we already have the distribution channels," in the same way that Coke and Pepsi, part of the strengths of those businesses is the distribution channels that they have. 

Flippen: Well, I'm a Dr. Pepper fan. So part of me thinks that I might be holding out for that third entrant. 

Hill: [laughs] Emily Flippen, thanks for being here!

Flippen: Thanks again for having me!

Hill: As always, people on the program 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 going to do it for this edition of MarketFoolery! The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Chris Hill has no position in any of the stocks mentioned. Emily Flippen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends MSFT and NFLX. The Motley Fool has the following options: short October 2019 $82 calls on Restaurant Brands International. The Motley Fool has a disclosure policy.