In this episode of Rule Breaker Investing, Motley Fool co-founder David Gardner is joined by Motley Fool analysts Karl Thiel, Rick Munarriz, and Tim Beyers, to share stories about some interesting stocks and how they became a recommendation. They've got a story of an under-sung hero in biotech and the company he founded, a founder ahead of his time who finally gets the timing right, a company taking a new direction, and much more.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on November 3, 2020.
David Gardner: Lots of people like superhero stories and used to spend about, I don't know, $1 billion at a box office on a given weekend to see a superhero story. These days we still pay, but we stream. Others like sad stories. Of course, we can all think of a favorite bedtime story. It's often said of us, human beings, that we are a storytelling race. The call of the story, the prehistoric campfire where stories were acted out.
Huge industries today have been built up just around celebrity stories or how about sports, the news, the scores, results. The stories we remember from our own athletic exploits; however scanty [laughs] they may be in my case. Stories. Stories. Stories.
Stock stories. Yep, every stock tells a story. As investors, we get to know our company's mission, maybe its marketing tag line, that's a story, we follow the share price, we experience highs-and-lows, sometimes dizzying heights or cavernous losses, sometimes both. Our experience as investors gives us the long view, the Foolish view, it acquaints with great prosperity creating stories. Especially, look across the portfolio. Look up and down your brokerage statement and I bet you see stories.
Well, a few times a year, we focus Rule Breaker Investing on telling stories. We're a stock market podcast, so these are stock stories. Visiting me around the campfire this week are my longest-time analysts, each of whom has a story to tell. And we get to review one 5-Stock Sampler from a year ago. 5 Stocks for Conscious Capitalism. Hmm... What's their story?
Stories are plenty this week, pull up a chair and stay a while, only on this week's Rule Breaker Investing.
Welcome back to Rule Breaker Investing. Happy November 2020! I had a lot of fun on last month's mailbag. I think I said at the time on last week's podcast that those were probably the best 39 pages of submissions I've ever gotten for our mailbag. The quality of the storytelling coming from you, the quality of the questions and the discussion topics were very high, and it hurt me to have to cut out about two-thirds of that, but really enjoyed bringing that podcast to you last week.
I did open it up with my own impression of Yoda, I was fairly proud of that, so I decided I would play it for my wife. She said that was really good, Yoda with maybe a little too much Cookie Monster; brought me down just, just a little bit. [laughs]
All right. This month of November, we've got three 5-Stock Samplers to review. We're going to be doing one this week, one next week, and one the week after. Now, each of the podcast this month is not focused on a sampler, there are no review-a-paloozas, I just decided to make it the last chapter of each of the next three weeks of podcasts. So, as I said at the top, we'll be reviewing one today with my friend Tim Beyers at the end, it'll be 5 Stocks for Conscious Capitalism, and then two more in the following weeks.
Speaking of 5-Stock Samplers, next week will be my next 5-Stock Sampler, I'm not sure right now what the theme will be, I know one thing it probably will be reacting to events of this week. We are recording this podcast the afternoon of Tuesday, November 3rd. It is an historic afternoon, it's an historic day, it's Election Day in the United States of America. So, I and my fellow storytellers have no idea what's going to happen in the electionș that gets determined, we hope, later tonight. So, nothing in this podcast will in any way speak to the moment that you're probably feeling as you listen to us this week. But next week, I will do my best to think about this week and maybe theme my 5-Stock Sampler accordingly.
So, let me see, I have three of my longest-time analysts joining me. I've got one story myself, so that makes four stories this week. And I think we can call the 5 Stocks for Conscious Capitalism reviewed sampler, that's got to be a story too, so five full stories to share on this week's Rule Breaker Investing podcast.
Without further ado, let's get started. And, Rick, it's time to roll out the ambient sounds here. I leave it to my talented producer to bring the ambient theme to this week's Rule Breaker Investing.
All right. Well, without further ado, let's get started. My first guest, my longtime analyst and friend, Karl Thiel. Karl, welcome.
Karl Thiel: Thanks for having me here awash in mysterious ambience.
Gardner: [laughs] You bet. And how about 30 seconds on what you do at The Fool?
Thiel: So, yeah, I have been a Fool all my life, but I've been at The Fool since 2004. I don't always play this up, but I came in with a biotechnology background and I'm bringing that up because it's relevant for my story today. Sort of, a lot of passion around that area and some background in my work prior to The Fool. So, that's a little bit about what I'm going to be talking on.
Gardner: Excellent. Let me just say as well, that Karl has done so much wonderful writing, what a gifted writer he is, he's written up so many of my picks for Stock Advisor and Rule Breakers. Early on, we discovered that Karl very much has a writing voice like mine. And so, for a lot of the write-ups that you see, you're getting the wizardry of Karl Thiel, while, of course, all of the picks have always and are mine, except the ones that aren't mine like Karl's amazing pick of Shopify, and Motley Fool Rule Breakers, which has Shopify in it, is full of great picks from the analysts that you'll be meeting and hearing again from today.
All right. Karl, without further ado, what is the title of story No. 1?
Thiel: Okay. So, my story is called "Patience is easier if you have passion and a backup plan."
Gardner: [laughs] Excellent. I sense there's some kind of biotech going on here. Is there a particular stock that you'll be highlighting in this story?
Thiel: Yeah, that the stock is Alnylam (ALNY -1.07%), the ticker is ALNY. Okay. So, I'm going to try to keep it light on the science and stuff, but I will briefly introduce it to say that Alnylam is a company associated with a technology called RNAi, [RNA interference] it's a gene silencing technique discovered in 1998 by Andrew Fire and Craig Mello. They won the Nobel Prize for this discovery in 2006. There was some more work in the early 2000s about how to make this a reality. And in 2002, Alnylam was founded.
So, biotech, and lots of other things, often follow the, sort of, Gartner hype cycle, you know, I don't want to be too wedded to that, but sometimes it's really true, there's this idea and it kind of climbs the peak of inflated expectations, and then as people run into problems, it crosses down into the trough of disillusionment and then slowly you, sort of, like iron things out and come into some sort of reality of actually using this. Well, in this case for Alnylam, the hype cycle is really driven by the power of the concept, with you know, a little bit of proof that this could actually work.
So, if you think of DNA as being sort of a storage system, it's where the information about your personal biology has written than RNA is the software that's actually going to act on it. And RNAi is basically used to intercept little bits of faulty code and turn it off. And so, like lots of ideas in biology or elsewhere, the concept is really exciting, but the details are difficult. For one thing if you just introduce synthetic RNA into somebody's blood, your body is just going to chew it up, it's not going to be at all useful. So, a lot of Alnylam's early years were about nailing down how you actually introduce RNA as a useful medicine. And so, there was this kind of the peak of excitement there, maybe 2004 through 2008. Alnylam did its IPO in 2004. They cut a big deal with Roche and with Novartis; Merck bought a rival company called Sirna for $1.1 billion back in 2006 when that was considered just an outrageous sum to pay for a company that was basically in the early research stage. Some other companies got involved.
And without getting too deep into it, things turned south, you know, as they realized that this was going to be trickier than it seemed to be. Merck kicked the plug on Sirna, basically just let it go. Roche backed out, Novartis backed out, Pfizer which had gotten into the field, backed out of the field. And so, you got to the point where basically nobody was doing this anymore just about, but Alnylam. And so, this is where I think, really, if you're going to live through a hype cycle like this, you need just that right combination of vision, of commitment and of enthusiasm, and I think John Maraganore, the Founding CEO of the company is really, kind of, an under-sung hero in this case.
So, he came in right in 2002, he was brought in by VC founder Christopher Westfall, who, by the way, is also responsible for Founding Momenta, another -- I guess at this point -- former Rule Breaker, because it got acquired. And John Maraganore is just a really fascinating figure that I don't think we've talked about that much. He started out as a bench scientist. He worked at Biogen, and Biogen was one of these companies that back in the day would encourage their employees to take 20% of their time to do something innovative, do blue sky projects. Well, he used his to basically single-handedly discover the drug that is now Angiomax. It didn't become a big drug for Biogen but it did become a big drug for the medicines company when it got sold to them. Anyway, that kind of led him into business development, it ultimately led him to joining up and wanting to do the work with Alnylam. But this is a [laughs] real deep, long trough and a slow slope of enlightenment ...
Gardner: It really is, and without meaning to break in here, Karl, I do just want to mention, this is an active Rule Breaker pick today; ticker symbol, by the way, ALNY. I'm sure you're getting to this date, but July 24, 2013, you brought it, it's your pick on Motley Fool Rule Breakers. As one of my teammates, you brought it to Rule Breakers. And I'm thinking about that long trough that you're speaking to, because you're talking about circa 2004, and then we finally pick it for Rule Breakers nine years later; which by the way is seven years ago now.
Thiel: Yeah. So, we picked it, it was July 2013, $44.95/share. I think if we had, you know, cherry picked it at just the right point, we could've gotten it for like $6/share. But as it is ...
Gardner: Yes, it was already well up at $44, you're absolutely right. Had we picked it just a year or two earlier, it would be a big winner.
Thiel: Yeah. Right now, it's about $127, so it's handily outperforming the market, but I would argue not nearly as much as you would think, I would say given the company's achievements. It's been as high as a $167 just earlier this year, and it was underwater for us at one point.
People who have followed this company understand, at this point it is a commercial company. In 2018, they got their first drug approved. And then, I think, underappreciated is the rapid-fire success they have had since then. So, they've gotten a second drug approved, and in the next few months they may have two more approved. They've got a bunch of stuff in Phase III, and so that was always kind of the promise here, was that, if you could make this work, you would have potentially some rapid-fire success just kind of almost digitally plugging the mechanism in, because RNA is in a sense digital, once you do different sequences and if they work, boom! You're silencing genes.
A little thing that I think also perhaps underappreciated right now is the work that Alnylam did that's benefiting us elsewhere right now. So, for instance, the leading coronavirus vaccine candidates from Moderna and from Pfizer-BioNTech are both mRNA drugs. It's a different technology, but it basically uses a lot of the same delivery technology that Alnylam has used, and so there's a lot of piggybacking that I'm hoping everybody gets to benefit from soon.
Gardner: Yeah, that benefits the human race. So, Karl, thinking back on this journey, and for you, you've known the company for a couple of decades just about, what are a couple of takeaways for you from this story?
Thiel: So, one of them is just that [laughs] biotech takes a lot of patience. It takes an extraordinary amount of patience; and that's OK if you're a long-term investor. And I know there are a lot of people who love to do biotech, sort of, swing investing based around these very concrete events, will it get approval, will it get a positive advisory committee meeting, stuff like that. But long-term the industry has been a huge winner. And these are great stocks to tuck away and just be really patient with. I mean, you know, we're talking about decades in this case.
Gardner: It's amazing to me to think that you just mentioned, the first commercial drug from them hits the market in 2018, we picked it in 2013 for Rule Breakers, you've been following a decade before that. Talk about playing the long game Karl Thiel.
Thiel: Absolutely. It's really not a bad idea. If you're going to be investing in some of these development stage biotechs, to have a basket approach, buy several, because when you're talking about time frames these long, sometimes it's hard to tell, you know, 10 years out in advance will the innovator really be the winner, things like that. And so, back people, that would be my final one is, really, look for great people. And I think in John Maraganore you really have a great, great leader of a company that had to see [laughs] itself through some dark times.
Gardner: Wonderful, Karl. Well, thank you very much. Thank you for that story. Thank you for all of the biotech savvy that you have. Your knowledge of the industry and the players that have helped make it such a huge industry today is always appreciated. I look up-and-down the Rule Breakers, in particular, the Rule Breakers scorecard, I see so many medical stocks, a lot of them biotech, some medical devices as well, I'm reminded of the importance of that industry. Of course, we're all thinking about vaccines today, but even thinking forward from today, we're going to keep our money well invested in this industry thanks to people like Karl Thiel and Rule Breakers as we look to, yeah, make our money not just survive but thrive in the years and decades ahead. What a great industry. Karl, thank you for your story.
Thiel: Thank you.
Gardner: All right. Stock story No. 2, and, oh, as the ambient sounds reemerge. It's my friend Rick Munarriz. Rick, welcome.
Rick Munarriz: Thank you. Thank you for having me here, David.
Gardner: It's a delight to have you, and before you give the title of your stock story, Rick, could you briefly remind us who you are?
Munarriz: Yes, I am Rick Munarriz, I've been with The Motley Fool since 1995 and I've been part of the Rule Breakers team since you started it back in 2004. So, I've been pretty much everywhere around The Fool, and right now I'm just glad to be here talking to you, David.
Gardner: Well, thank you, Rick; it's a delight to be with you today. And I remember you and I hanging out, I think the first time we ever met, was it --
Munarriz: It was the Rainforest Cafe Planet Hollywood at Disney or what is now Disney Springs.
Gardner: You went to Rainforest -- [laughs]
Munarriz: Yes, the Rainforest Cafe grand opening there, yes.
Gardner: That was amazing.
Munarriz: Yes.
Gardner: Back then you were, kind of, a member, a fellow AOL member. You were also making contributions hosting some chats and a discussion board on the site. Rick, you and I met at the Rainforest Cafe there in Orlando and the rest is history. Well, what is the title of your stock story?
Munarriz: Well, this one is called "Roku (ROKU -4.59%): The wrath of can," and this is C-A-N, not to be confused with 1982 Star Trek II: The Wrath of Khan K-H-A-N. There's no Ricardo Montalban involved in the story at all.
Gardner: Love it. So, Roku, again, another Rule Breakers stock. Ticker symbol ROKU. Rick, you and I were talking offline just before starting the podcast, and you were mentioning, you brought four chapters to this story. So, what's chapter one?
Munarriz: Chapter one is Beam Me Up. So, this story starts in 1995 and that's with Anthony Wood, who basically, like a lot of us tech geeks out there, just loved to watch Star Trek, he was a Trekkie, was getting tired of having to record Star Trek episodes on his VHS tapes. So, you know, he's in California, and every week he'd be getting Fry's ad circular; Fry's is this consumer electronics chain, big in California, big in the valley. And in early 1985, he sees that hard drive prices are starting to come down, and he puts two and two together and he invents, he invents, the PVR, which is the Personal Video Recorder, or as we know it today, the DVR, the Digital Video Recorder.
So, he starts a company called ReplayTV and he rolls out the very first DVR. But the problem here, as we know by now, since you really don't know ReplayTV too well, is that TiVo immediately rolled out a much cheaper DVR ReplayTV fails. Being first isn't always enough.
So, Wood eventually moves on to his next come, which will be Roku. And that is the end of the first chapter. Basically, sometimes the first-mover is not enough.
Gardner: Wow! I did not know that background. That is a shocking first chapter to this story, Rick. I love that he was such an early thinker, clearly a visionary, but not just an ideas guy, he went out there and created it, his timing wasn't great, though, because TiVo really stole the show.
Munarriz: Definitely. Yeah, I mean, again, it was a great idea, great product. At the time when he was actually starting to tell his friends, they were saying, no, I like my VHS tape collection, who wants this on a hard drive in a box? I think the first DVR had just six hours of recording time, so it wasn't even that great, but yeah, it obviously, it eventually took off. TiVo did fairly well for a long time.
Gardner: We turn the page to chapter two.
Munarriz: Chapter two is, Things Are Only Impossible Until They're Not. And if it's not obvious, I'm using Star Trek quotes every single chapter here, but it'll catch on eventually. So, Roku attracts the attention of another fellow California company that we all know far better than ReplayTV, and this is Netflix. So, CEO Reed Hastings brought Roku and Wood into the fold in 2007. And Wood starts working out, basically what would have been the first set-top box that plays the Watch Now streaming service that Netflix was just starting to roll out to its DVD-by-mail members around that time. But then Hastings starts to get cold feet just before -- it was called the Netflix player powered by Roku, and is set to hit the market. He's worried about how this is going to play out with some of its third-party licensing partners. And you may have to think back at the time, but back when the product came out, back when Watch Now came out on Netflix, it was not very popular, it was mostly watched on PCs and laptops. And Netflix struck a deal with Microsoft; Reed Hastings was on the Microsoft Board for a while. And basically, what happened is that they had a one-year exclusivity with Xbox. So, Reed Hastings, whether it was that deal or just a collection of various third-party licensing deals, felt that maybe it wasn't right for them to roll out their own set-top solution. So, Reed Hastings said, all right, we'll spin off Roku, and said, Wood, you can go, take your company and do what you want with it.
And this is the other lesson that, sometimes you can have a superior product, but sometimes it's all about timing. And with Roku it was too early, or possibly too late, Netflix let Roku and Wood just strike out on their own.
Gardner: I remember Watch Now; I think I tried it. I mean, I've tried everything off my Xbox over the years. So, he had the early understanding of where things might be headed, but maybe not the right hardware. Chapter three.
Munarriz: Yes. So, chapter three, To Boldly Go Where No Man Has Gone Before. So, single and ready to mingle, the freshly independent Roku decided, well, hey, I mean, Wood has the technology, and may as well hit the market. So, by 2009, it rolls out its very first set-top device, streaming device, and it learns from the past. The first Roku is not expensive like the original ReplayTV DVR which cost $1,000; one was even $2,000 at the time. It doesn't have the clunky hard drives or DVRs, it's free-to-use for consumers, which is obviously a very attractive draw. It's a gamechanger that schools up any dumb TV into a smart TV. And tech giants start to notice. So, this isn't already right away the happy ending that we think is happening, this is chapter three, we'll get to the happy ending in chapter four.
But tech giants started to notice, so Amazon, Apple, and Google, [Alphabet] they're hungry and they see an opportunity, so they just jump into the space. And Roku may have been the first-mover with an early lead, but now Roku is sharing shelf space at your local Best Buy with household names that have large and established fan bases. So, in 2014, Roku does something that is very important to its success today and special, it begins to team up with smart TV manufacturers, who really are having a hard time getting traction, because their operating systems are pretty clunky. Roku says, hey, go ahead, use our hub, make it your default operating system, you know, you have it.
And unlike Amazon and Google that actually put out their own TVs, Roku is ready to be agnostic and play with everybody. It became the industry standard pretty quickly, because it played nice, it didn't really mind being behind the scenes as a player, unlike Amazon and Google that wanted to get their brands upfront, and it works. Roku goes from being this low-margin hardware company that was competing against tech giants with the means to subsidize their devices, because obviously, Apple, Amazon and Google are loaded, to a player platform, where it's high-margin upside of selling ads and collecting referral fees when people are sitting in their living room watching you. And that is chapter three.
Gardner: And thank you for that, Rick. And I'm going to say, I came online with my own Roku somewhere around, I think, 2015, somewhere around there. And at the time I was thinking, well, this is an interesting box, but it seems so generic to me, and especially because I had a PlayStation and an Xbox, both of which could launch Netflix and other streaming services, I was wondering why anybody would get a Roku.
So, that's where I was in chapter three. Now, let's get to chapter four, spoiler alert, Rick Munarriz is going to bring Roku to Motley Fool Rule Breakers, and I'm going to listen to him finally, and I'm sure glad I did. I hope that wasn't too big of a spoiler, Rick.
Munarriz: It was not. So, chapter four is called Live Long and Prosper. And Roku finally goes public at $14 in the Fall of 2017, and it's finally well received by the market; it's initially well received by the market. The stock soars 68% on its first day of trading, and it doubles from that point to the end of the year, it closes out 2017 well above $50. 2018 does not go up as planned, it loses basically about 40% of its value, a lot of weakness, in general, but what was happening with Roku is that its fundamentals were actually starting to improve even as the stock was sinking as 2018 played out.
Revenue, when it came public, rose 25% in 2016, it rose 29% in 2017, 45% in 2018. It would go on to accelerate again to 52% last year in 2019. And all this was happening, because it was becoming more of a platform revenue and less of a hardware revenue, which was a lot slower business for it. Basically, when we recommended it, and we did recommend it, in March of 2019 through Rule Breakers, it was generating about 44% of its revenue from platform. Now, as of the past year, the trailing four quarters through the end of June, it's 68% of its revenue. So, this has become a high margin; not that Roku is profitable, necessarily, but it has become the driver, you no longer have to worry about how many boxes it's selling, because it is in so many of the major smart TVs, it is already installed in so many homes. There are now 43 million active accounts on Roku, and that's up 41% over the past year. 14.6 billion hours were spent streaming on Roku in the second quarter, up 65% over the past year.
And, of course, we can all think back to the months of April, May, and June, a lot of us were stuck at home, we were watching a lot of TV, but this has been the trend, where consumption has grown faster than the audience, which is a really nice thing to see with Roku. And Average Revenue Per User, which is naturally also on the rise, it's a fresh surprise to me and to others, because the online advertising market in general hasn't really recovered with a lot of companies, with Roku it hasn't mattered, because it's been able to make money through online advertising from services that want to get noticed, and obviously, through the referral it gets when people sign up for services through Roku.
So, Roku is Japanese for six, the Japanese word for the number six is "roku." And actually, Wood named it that way, because this was the sixth company, and possibly the final company, that Wood founded. And you put two and two and then two together, and its investors that will ideally "live long and prosper" with this very successful Rule Breakers pick. And that is the happy ending that I promised.
Gardner: Thank you very much, Rick. And I'd love for you to give a couple of takeaways. I'm going to give one just from my perspective, and it's just to remind us that Rick brought me and brought to Rule Breakers Roku before I finally recommended it in March. As is often the case, he sees things early and I was just not willing, at the earlier stage, to believe that this company was defensible and could become what it has in fact become. So, the stock had tripled from its IPO, more than tripled, when we finally recommended it at $61/share in March of 2019. We then rerecommended it four months later at $104. And so, you might think, oh, my gosh! How late to the party could that have been?
And yet, I think my takeaway here is, we weren't late to the party at all, the stock is at $200/share as we're speaking. So, even though we waited till $61 and $104, Rick, members have done wonderfully crushing the market by following this company.
Your takeaways?
Munarriz: Yeah, and I liked your takeaways more than mine, that yeah, I mean, the path from the $14 IPO to $200 where it is now, there were a lot of stops along the way to get on. In retrospect, again, we can't predict the future, whether the stock is at $300, $400, there will be people saying, oh, I got in at $200. I'm the lucky one.
So, yeah, just the fact that it had tripled before -- well, technically quadrupled off the IPO by the time we got in, it did not matter, we got in at a great price, it's been a multi-bagger for us already. Not a 6-bagger yet; I'm going to celebrate the day when that happens, because of Roku in the name, but we'll get there eventually. [laughs]
I think another takeaway is that, just this company, again, it did not hit it right away with the right product, and I think you get to a point where a lot of companies, just as Wood was well ahead of his time with the DVR and well ahead of his time with the set-top device streaming box, it is the kind of thing, sometimes you just have to wait for the market to come around to you. We saw this with Netflix itself, Netflix was a stock that when it went public initially, people didn't want to really rent. DVD-by-mail seemed silly when you had a Blockbuster right by the corner; eventually people come around when a model works and you're seeing this with Roku now, when we want to spend so much time in our room.
And services that don't launch on Roku, as we saw earlier this year with Peacock and HBO Max, they launched and they said, we're not going to pay what Roku wants, we're going to just try to get our own audiences. Peacock eventually made nice. And HBO Max, according to the last AT&T report, AT&T owns HBO Max, is struggling on the HBO Max platform to sign new people. People are perfectly happy with the old HBO app which is still available through Roku. So, Roku is a tastemaker, is an influencer, and it's a very important company, so you do have to play nice by Roku these days.
Gardner: Wonderful, Rick. Well, thank you for that story. It is a reminder that often things sound silly -- boy! Did Netflix sound silly to me when I first heard about it. And Roku, I own the product, but it seemed kind of silly that I would actually recommend the stock, thanks to Rick. Or what about Twitter, the first time I ever heard about Twitter from my friend Greg Robleto at The Motley Fool more than 10 years ago, just seemed crazy. Twitter didn't have a great week in the past week as a stock, but it's over $30 billion as a company for something that, for me, I was like, I'm sorry, you're tweeting that you just ate that, and you need to do it in 140 characters or less? So, it's a reminder, I would think that The Motley Fool sounded awfully foolish to a lot of people when they first heard the name and saw these guys wearing jester caps talking about the stock market. So, maybe we should pay more careful attention to things that seem silly.
Well, Rick Munarriz, thank you for all The Foolishness you've brought for 25 years and counting, and for joining with me this week on Rule Breaker Investing.
Munarriz: Thank you, David.
Gardner: All right. Well Rule Breaker Investing stock story No. 3 is mine this month, and I'll mention after I tell this, Tim Beyers will be joining with me, he'll tell stock story four. And then Tim and I are going to review 5 Stocks for Conscious Capitalism. Well, the title of my story is, "How it came to Stock Advisor." And this story begins with me receiving a rather mysterious email a few years ago. It said, I was being invited to an influencer supper.
So, the first thing I guess it implied is that I'm an influencer, whether or not I'm an influencer, I'm not really sure, but I was being included in something called an influencer supper. And I was told that if I was interested, I was to meet in a city at a certain address one night and that there would be other interesting people there, presumably also themselves influencers.
There were some more ground rules for the supper. We were told we could not say who we were. We could not talk about what we do for work. We were just having social conversations as we made supper together, because this was an influencer supper and we were going to make supper together. Now, we could enjoy a glass of wine as we were making supper, we would socialize, but again, we would not say who we were or what we did for work.
I had a few other notes, what's appropriate attire? Well, the answer to that FAQ question was, dressed as you would like to be known. Could you bring someone? The answer is no, this dinner invitation applies only to you. And what if you knew someone, well, if you recognize someone let's say from the media, you were to not mention that. And during supper, a couple of hours into the event, we would then finally go around the table and each of us would introduce ourselves, reveal who we were and any reflections we had on the evening.
So, this is the email that I get, this is the email exchange I'm having, and my first thought was, fun! Sure! Let's go for this. I don't know who this is coming from, really, but let's amp up the fun, was thought No. 2. While Washington DC is where I live, and was a possibility most of them were in New York or San Francisco. And San Francisco is one of my favorite cities. And so, I decided why not fly all the way across the country and show up for this party that night, for the influencer supper, and make some new friends. I'm always looking to make new friends. And so, on February 22nd, 2019, just off Alamo Square, in the city of San Francisco, I showed up. And there were probably 15 other people in this attractive condominium and we began to talk with each other and make some supper together.
And I will say, first off, I did not physically recognize anybody who was there that night, and I don't think anybody recognized me. Suffice it to say Oprah wasn't there that night, nor was the Catholic Pope, there was no Obama, there was no Trump, but we were all presumably people of some stature and that would become clear as we went around the table later that night. But one person, in particular, I thought was just charming. I enjoyed my anonymous conversation with her, as we poured over the oven. [laughs] And so, when it came time finally to sit down to supper, and we went around the table, I want to say two things about that. The first is, our host revealed a little bit more about what was happening. In so many words, we were informed that we are a part of, kind of, a social experiment. In fact, this was coming out of academia, I won't say which university, and I'm not sure exactly what they were studying about us in this social experiment, but part of me felt maybe just a little bit used, not badly used, but it brought me down a little [laughs] to think that I've been part of an experiment.
But my spirits rose as I began to meet the people around the table. And the woman that I'm thinking of, when it came around for her to reveal herself, turns out she worked for a company whose stock I had so previously disliked, a company for years I had watched it, because it was in an industry that I really love, but I wrote in the intro to Motley Fool Stock Advisor in 2012 explaining why I was skipping this stock, even though it had recently IPO'd. In fact, at that point when I wrote that introduction, the stock was down 47% from its IPO, and I, admittedly, had been bashing it a little bit on our discussion boards at Motley Fool community when I discussed its competitors, which I liked so much more, even if it was at the time considered kind of the new hot thing. And so, that's when I found out that my new friend worked at Zynga (ZNGA). And that is how Zynga came to Motley Fool Stock Advisor. The ticker symbol is ZNGA. This is, of course, the mobile game app company, and it's done pretty well.
So, history will show that that supper occurred on February 22nd, 2019. I thought some more about it, did some more research, realized that my new friend was part of the new management team. So, the people that I wasn't a fan of, who had IPO'd the company years before were all gone, and some new leadership, especially from Electronic Arts, had come in to begin to run Zynga. And so, I first recommended it on April 8th, not two months later, the stock was at $5.44 that day. I reupped it again for Stock Advisor in July just three months later. And so, with the stock trading at right about $9.5 today, it has been a spectacular performer for Motley Fool Stock Advisor members.
Three quick lessons here, I think, we can take away from the story. First of all, I'm really glad I changed my mind. It was having a new experience that taught me that the company that I had previously maligned had changed and, in fact, looked well-positioned from that point forward. And so, this was another example, sometimes we can chart our lives by this, my fellow Fools, of when you changed your mind and went a new direction. And when it works out, it feels really good.
I think takeaway No. 2, people really do tell you a whole lot. I had a very good feeling about this leader of that particular company, today who's still in place. And having a personal experience, I feel as if that plane ticket to San Francisco and back, that one special night where otherwise I don't remember that much of it, but darn it, I made it count by taking that new relationship and that new realization away, and making it pay off for you, our Stock Advisor members.
And finally, No. 3, it's the experiences that we have and that we collect that really make our lives memorable and exciting. And I think about one of my most important dictums. I like to throw this one out from time-to-time, I won't give the full sermon right now, but lead a more interesting life. I'm going to pat myself on the back for that night anyway that I decided to take a risk, try something new, show up in a mysterious situation with people I didn't know. And here I am to tell the tale and share with you the profits that have come from that. So, probably one of my favorite stories in the last couple of years.
It doesn't feel like something we do these days in a COVID world. I don't think you'd meet strangers in some random condo somewhere and make a meal together elbow-to-elbow, so a little bit of history now in February of 2019. But that is how Zynga came to Motley Fool Stock Advisor.
All right. And stock story No. 4, this week comes from Tim Beyers, my long-term friend and Rule Breaker analyst. Tim, great to have you back on Rule Breaker Investing.
Tim Beyers: Great to be back, David; happy to be here.
Gardner: Thank you. And Tim, we're going to be doing two things together. First, your stock story, then the 5-Stock Sampler, 5 Stocks for Conscious Capitalism. Let's keep it in that order.
Tim, before you give the title of your story, briefly remind us what you do at The Fool.
Beyers: Yeah, sure. So, I've been around since December 2003. I started as a freelancer, and then I became a contract writer, and back in 2005, there was this open call to pitch ideas to this little newsletter that David had started called Rule Breakers. And I ended up pitching an idea that made it in, and I've been on the team ever since. And these days, in addition to Rule Breakers, I'm the Lead Advisor for Cloud Disruptors 2020.
Gardner: Awesome, Tim. Thank you so much, and thank you for 17 years and counting. You know, we measure ourselves, I think in a lot of ways, by the years that we spend together. We, of course, love loyalty in all things, whether it's being loyal to stocks that we buy and hold for decades or loyal to employees who stay with us for long periods of time. We always hope it equals great rewards. I certainly think that long-term relationships can be among the greatest rewards of all.
Tim, thank you very much. What is the title of your story?
Beyers: "Sometimes stocks live up to their names."
Gardner: Excellent. And is there a featured stock that you'll be bringing in the story.
Beyers: It is Fastly (FSLY -4.67%).
Gardner: All right, Fastly. Now, before we get into it. Tim, in a few sentences, what does Fastly, ticker symbol FSLY, do?
Beyers: So, Fastly brings content closer to the people who want to consume it. That can be applications, that can be video, that can be audio. They are in the business of delivering content faster, which is why their name is Fastly. And they do it a little differently than some others, the way that they do it is they've connected with the internet's superhighways, what are called tier one networks, and they directly connect into that. And it serves them very well, it serves their customers very well, they've got some very big ones. I think this is a very well positioned business. I'll just say, here at The Motley Fool, we are customers and active users of Fastly.
Gardner: Thank you for that, Tim. Yes, the way I've often heard it said, when everybody rushes to a certain place on the internet because it was just mentioned in a very important context, like, let's say during the Super Bowl, Fastly is a company that enables you not to be sitting there waiting forever for the beach ball or your scroll-y page to finally load, it loads the pages faster. It's smart.
All right. Tim, let's get started with the story. Go.
Beyers: So, Fastly has been one of those stocks that has moved very, very fast. And when I say very fast, here are a couple of proof points, David. So, this has happened twice. Now, the last time I was on, we talked about a stock MongoDB, that over the course of, say, two years, eight times the stock had moved 20% or more up-or-down, well, in Fastly's case, I can point to two [laughs] instances in 2020 where this stock moved 50%, 50%.
First, let's start with February 20th, 2020. And at that time, Artur Bergman, who's the Co-Founder of Fastly, decided to step aside as CEO and become Chief Architect. Well, the market didn't like that very much, David. In the course of three weeks, from March 16th onward, the stock fell 54.7%, which is breathtaking. It's very rare that we see a good business decline 54.7% in three weeks or is it? [laughs] Because, in October Fastly announced that TikTok hadn't contributed as much revenue as was expected, and remember this is a company, TikTok, the Chinese dance party, video -- I've never used TikTok, David, so I don't even know how to describe it, but ...
Gardner: [laughs] Nor have I, but it's obviously a big thing with the kids.
Beyers: It's a big thing with the kids, and it was 12% of Fastly's revenues. So, when Fastly said, you know what, it's not going to be as big a contributor as we thought it was. Well, the stock dropped 49.5%, again, in three weeks. And so, this stock story, David, is about how moves can happen in not just the course of a couple of months, but sometimes in the course of a week or three weeks.
So, here's another one I want to give you. Let's rewind to July 9th, so from May 6th to July 9th, the stock had gone up a breathtaking 345.6%. Fastly really caught fire. And there's a reason for this I'm going to end my story with. But a week later, from July 9th to July 16th, for no reason whatsoever, the stock was down 23.9%, but then back up again, you know, from July 16th to August 4th.
Gardner: And just for perspective sake, I realize we have a lot of Fastly shareholders who are listening to us right now, but many who don't. So, you should know that this amazing stock was around $20 at the start of 2020, that's a helpful mnemonic. So, to think that, as Tim was describing, it went from $20 to $100 in early July, to $75 in late-July, to $115 at the start of August, back down below $75 by September, back to $135 tops last month. And Tim, right now, after getting whacked, as you referred to earlier, it's trading right around $68, and you're thinking, you know, if you bought the stock at $135 just a few weeks ago, you can't believe you've gotten cut-in-half. If you are in it to win it for the long term, the only term that counts. This is a stock that started the year at $20, and it's at $68 today.
Beyers: Right. And so, the lesson here, of this stock story, is that Wall Street has no idea what the price is right for Fastly. And this is something we see in Rule Breakers all the time, if we're going to put some markers around this, let's just use some rough numbers. $20 at the beginning of the year, almost $130 at a point here in the middle of 2020; that's an astounding range. And what it says is, can we take this stock story and say, you know what, there are always going to be prices that we can buy this at.
And here's another thing, it's a technical reason, but let me just wrap it up with this. One of the reasons this stock is so volatile is there just hasn't been as much inventory of Fastly stock as there might be of some other stocks. When this first came public, David, they only put out about 30% of the available shares. And even today, it's only about 75% of the available shares. So, the demand for Fastly stock goes crazy in a short period of time, and then it falls off a cliff, and that leads to very high volatility here. The movement of the stock price doesn't say very much about the quality of this Rule Breaker, which I think is one of the best Rule Breakers on our scorecard. But of course, David, I'm very biased.
Gardner: Well, you are, and for good reason, because, Tim, you're the one who brought this to Motley Fool Rule Breakers on August 22nd of last year. It was $24.5, so that means if it started this year at $20, it was down a little bit as the year started. And, Tim, we have been riding this bucking bronco for 10 months straight now in 2020. But what I'll remember, and what really counts for me is the cost basis that you brought to Rule Breaker members two Augusts ago, $24.5, that looks awfully good, this has been a great winner. I would take that every year-and-a-half or so for any stock we ever bring, despite the volatility.
Beyers: It's been an amazing business, and I love it. Just like I said, sometimes stocks live up to their names, Fastly lives up to its name.
Gardner: All right. Well, Tim, thank you for that story, and we're going to go to, really, the shadow story, the fifth story, it's the 5-Stock Sampler that we're going to review together. Tim, you graciously offered to look up these stocks, think about what's happened since November 13th, 2019, this is our one-year check-in. It was 5 Stocks for Conscious Capitalism.
The way I like to do this, Tim, we'll just remind people briefly what the theme is and why, then we'll go from worst to first. So, let me briefly restate that conscious capitalism, if you don't know what that phrase is, I would highly encourage you to google that phrase and read a lot more about the way that business can elevate humanity, can add so much value to the world, some of the best stocks that we have in our scorecards are companies from the conscious capitalism movement. The Motley Fool is certainly one of them, but it's a great big world out there, and this movement continues to move.
The Business Roundtable and others have spoken of the importance of businesses managing for the success of all stakeholders, that's at the heart of conscious capitalism. So, as I looked up-and-down the scorecard for Motley Fool Stock Advisor, and Motley Fool Rule Breakers, Tim, I picked five stocks that, for me, in different ways, are exemplars of conscious capitalism. So, it was one year ago, and I should mention the stock market is up 9.1%. These are live numbers as we record on Tuesday afternoon, so we'll just round that to 9%; that's what we're trying to beat.
Tim, let's start with the worst, the ticker symbol, ECL, the company is Ecolab (ECL -2.07%). It was at $190 a year ago, it's at $193 today. That's up 2%. That would be behind the market's 9%. Tim, what's happening with Ecolab?
Beyers: So, I took a look at the last four quarters here. And very often, stocks move based on the expectations that the market has for these businesses. And in the last four quarters, the earnings per share came in under estimates twice, $1.66/share versus $1.70/share in Q4 of last year, and then $0.65/share versus $0.75/share estimated in Q2 of 2020. That's usually not a great thing.
And margins have been relatively stable for this business, David. And I like that this is, you know, they have a recurring revenue business, they're cleaning up the world, it's really interesting, but it has been trending lower. When gross margin is trending lower and you see this consistently, it's not a good sign. And revenue did grow marginally in Q4 of last year, and the same thing in Q1, but the two quarters after that saw some pretty sharp declines, including a 15% revenue decline in Q2 of this year; and again, not a great sign.
So, I think it's telling that when the analysts got on the call and they were asking management about this, the first question they asked. And you just know you don't want this to be the first question, but this is what it was, they said, hey, you know what, guys, when is the earnings per share going to be back above 2019 levels? You're like oh, Geesh! Is it really that bad? [laughs]
Gardner: Well, one of the things with this company, Tim, and then we'll move on to company No. 2, is you know, with the whole business world slowing down as a result of COVID, turns out the amount of trash and waste we're generating [laughs] is also down, which ironically hurts this company. I'm looking forward, in the next few years, and we'll keep tracking this sampler each year, to the world economy restoring itself and coming back, bad news there is, we'll be generating more trash in ways, good news, Ecolab is the company that will help clean up the world. So, quick takeaway there. You're right, Tim, the number is very disappointing these past couple of quarters.
Well, things get a little bit better when we go to the next stock, and the next stock on this list is NextEra Energy (NEE -4.64%), the ticker symbol is NEE. The market up 9%; NextEra Energy up 34%. This is the fourth best performer from this 5-Stock Sampler. Spoiler alert, things are going well for 5 Stocks for Conscious Capitalism. Tim, what is going well for NextEra Energy?
Beyers: You know, I really love this business. And primarily, I love it for the same reason you do, David, which is because of its energy resources unit. And that energy resources unit is really killing it here. Now, overall, remember that NextEra Energy is a utility, it also happens to be the largest clean energy supplier in the world, which is amazing. Revenue was down, it has been down in each of the last two quarters, but the clean energy side of this business is doing really well, and in fact, they said in the most recent quarter here, David, their backlog, essentially their renewable energy backlog -- and they've been building this up for 20 years now -- it is a larger, their entire existing renewables portfolio, which took 20 years to compete, it is now larger than it's ever been. And that is very impressive. And they believe that they are on track to meet their 2020 targets or better.
You know, they have been, sort of, missing targets here-and-there on the earnings and revenue lines. But you know what, here's the thing, and I think this is another thing that we don't give enough credit to some times as investors. But this has really been going right. NextEra Energy, in each of the last seven quarters has been raising its dividend per share by at least 12% year-over-year just like clockwork. And when you can do that in any environment, you've got something special. So, I think the market is looking at this as a company that is poised to outperform for a really long period of time, and I think they're right.
Gardner: Well, thank you for that, Tim. So, NextEra Energy. Again, 34% up, that's versus 9%, that's a +25 in the win column. We had a -7 earlier, so we're at +18 net points of alpha. Let's move to company No. 3, one you know very well, because you're the one who brought it to Motley Fool Rule Breakers. This consciously capitalistic company's ticker symbol is CRM, and it is Salesforce.com (CRM -2.77%). I will mention, Salesforce is up 46% over the last 12 months versus the market's 9%, that's a +37, that puts us to a +55, for those keeping score at home.
Tim, in brief, what's going right for Salesforce?
Beyers: You know, the Tableau acquisition closed, so that's the analytics business, they're doing a lot of business intelligence. And I think the market didn't properly account for the fact that Salesforce does acquisitions really, really well. So, in the latest quarter, they absolutely blew the doors off of revenue and earnings, revenue they beat by 5%, they absolutely crushed the average earnings per share estimate. And here's the other thing, David, their guidance for the year ahead was well ahead of what estimates had called for, and they have a $30 billion backlog. So, Salesforce is the quintessential cloud computing company and they're putting up the numbers to prove it.
It surprises me that there's still skepticism about Salesforce and acquisitions, when they've been doing this for 20 years and doing it well, but that seems to be what happened here. There was some skepticism that Tableau would go great, and it did.
Gardner: That's so great to hear, Tim. And, you know, this is a company, I've mentioned this before, I've always been impressed by Founder Marc Benioff, at the outset of his company, he decided we're going to be a 1-1-1 company, 1% of revenues are going to go to charity, 1% of our product is going to go to people who couldn't afford it otherwise, and 1% of our employees' time they may give away in volunteer time with whatever organization they want to, paid volunteer time on our side. So, what an impressive 1-1-1 model. A great company. Tim, thank you again for bringing it to so many Rule Breakers worldwide. What a spectacular winner it's been.
I mean, 46% in one year, I'll take that every time, but we have a very, very low cost basis, $6.89 since Tim picked it on Jan. 21, 2009; we're coming up on the 12-year anniversary. So, yeah, a stock that was at $7, today at $235, we'll take that all day long. Tim, thank you very much.
Let's go to stock No. 4, the second-best performer in this 5-Stock Sampler is Old Dominion Freight Line, the ticker symbol is ODFL, the stock was at $129.70. This was post-split numbers; this stock has split within the last year. We now count it as a $129.70 cost basis. It's done well, 2020 has been good for this less than truckload logistics company, it's gone from $129 to $198; that's up 53%. That's another
+44 in the win column, bringing us to +99 points of alpha before our final stock. Tim, what's happening with Old Dominion Freight Line?
Beyers: Man! They have just been absolutely killing it. I love this business, by the way, David, because Old Dominion Freight Line is one of those businesses that uses technology well. And folks who know my role on the Rule Breakers' team know that I'm just a tech nerd and I love bringing deep tech ideas to you, David, and I love that Old Dominion masters logistics, like route planning, through technology.
And so, when it came time, during the COVID times when you had a lot of less than truckload logistical work to do to move things around the country, Old Dominion Freight Line just absolutely destroyed. In the last two quarters they have grown incredibly well, but here's the thing, what they've done is grown really efficiently, their margins have expanded. Last quarter, about four points year-over-year, the quarter before, about two points year-over-year. When gross profit expands like that and you get a more efficient business, you are doing really well irrespective of the environment. So, I love that this has always been an efficient business, and I love that it's getting more efficient. And I think the market is right to recognize that.
Well, thank you for that, Tim. Yeah, and part of the reason this is a consciously capitalistic company. I mean, it's such a long-term player, this is a multigenerational family company located, it's headquarter is in the South side of the state of Virginia. But this is a company where none of their truckers have unionized, because nobody ever wanted to or felt they needed to, because they were treated so well by the Congdon family. That's a real advantage for ODFL. And what a wonderful winner. It's been up 53% during a really tough year for so many businesses, what a winner.
But let's close it out, Tim, with the No. 1 performer in this 5-Stock Sampler, Etsy (ETSY -1.59%), ticker symbol same as the company name, ETSY. The stock a year ago was at $40.68, today as we tape, $130.59; that is up an even 221%, against the markets 9%. Man! I'm going to have to do some extra math here, Tim, but I think I got it right. That's 212% of outperformance, when you add that to 99%, we're now at 311% points of outperformance. I'll give the final averages in a sec, but Tim, what has been going on for Etsy?
Beyers: I need to give you some credit here, David. So, a little bit of a hat tip, because you said, you know, when we go back, if we rewind the tape, you said that Etsy was down, it was down roughly 40%. When you put this on the scorecard for the five stocks ...
Gardner: Wow! I totally forgot that.
Beyers: Oh, you totally did. And it was the, you know, in the 5 Stocks for Conscious Capitalism, you said, I'm paraphrasing you here but you said, this is a really interesting time to buy, and you also said, one of the best, most-protected e-commerce businesses that I can think of operating in its own niche, pretty much Amazon-proof in my mind. And I would never say that about any business that is Amazon-proof, but you did, and how right were you.
So, here's the thing that happened, it really was an amazing time to be a buyer, but the COVID tailwinds really blew, I mean, just incredibly brisk for this company, and especially so in the final two quarters. Triple-digit growth, 136.7% in Q2 of 2020; 128.1% year-over-year revenue growth in Q3. That is bananas. There's just so much craft-ware that's being sold to those of us who are stuck at home.
And I think here's the other thing you pointed out in talking about this last year, David, that there's just a huge market of active buyers. Well, that market of active buyers was up 56% year-over-year to 69 million active buyers. So, there's a compounding effect here. Not only are the sellers getting more, but they're finding a bigger market, because those buyers are coming in and they're coming in in droves. Etsy is just proving itself to be a phenomenal business.
Gardner: Well, thank you for that, Tim, thank you for some of the reminders. I certainly could never have expected the kind of acceleration that is, admittedly, COVID-fueled, in part; we couldn't have known that a year ago. But when you find great companies and you buy them, you actually buy them, and then you sometimes add to them, typically the ones that are rising, for me, not the ones that are falling, you end up with this kind of performance. Really happy. This is just one year, not even quite one year, for this 5-Stock Sampler, 5 Stocks for Conscious Capitalism, and what a wonderful brand torchbearer these companies are for conscious capitalism. They average a 71.1% return against the market's 9.1%, that is exactly 62% of outperformance per stock for this 5-Stock Sampler. So, really happy.
And thank you again, Tim Beyers, for helping us review and understand. And a reminder, these were picked for three years at a minimum, so this has just been one year. Now, I doubt the market will be as strong next year or the year after, as we've seen this year, but I sure do think we've beaten the market soundly with the principles of conscious capitalism and with a bunch of Stock Advisor and Rule Breaker stocks.
Tim, thank you.
Beyers: Thanks, David.
Gardner: All right. Well, another Rule Breaker Investing podcast in the books. Thank you, again, to Tim for his extra work reviewing that 5-Stock Sampler. I was really glad he went back and listened to the show a year ago, and you can do that too, in fact, I think it's really helpful to go back and hear what was originally said. We didn't know what was going to happen next. And especially for newer investors, it can be emboldening to hear me back in that moment a year or two, three ago, talking about whatever these stocks are and saying, these are the next picks, and then to think about what has happened since. It's fun to do the reviews, but it can be really useful to listen to the original content.
And indeed, my talented Producer, Rick Engdahl, responsible, among so many other things this week, lots of edits, for the post-produced amazing ambient sound effects. Rick has graciously consented to put a link to 5 Stocks for Conscious Capitalism, a year ago podcast, in the show notes for this podcast. So, listen and learn.
Next week, yep, we're going to review another set of five stocks, it's 5 Stocks That Got Trouble. Now, two spoiler alerts about that. The first is, that was a reference to the musical, The Music Man, and the 5 Stocks That Got Trouble all start with a capital "T" that's the theme that unites them. That's spoiler No. 1. Yeah, rather silly.
Spoiler No. 2, could they have done even better than 5 Stocks for Conscious Capitalism?
And, in closing, I realize there is a lot of anxiety this week around the United States about elections and possible unrest. This entire podcast was done without any knowledge of what's happening in the U.S. elections or the days since, but I do want to say in advance of it all, this too shall pass. I believe much of the most important work done every day in the world is being done by businesses, the businesses that you and I can invest in. They're the largest employers in the United States by far, the private sector adding value every day of the week election days, election weeks or otherwise. So, I will continue to believe that a lot of this anxiety will pass. I'm invested for the long term.
I think there may be a little bit more alarmism than is justified; at least to my taste, we'll see. But that's why I'm thinking, my rough draft name of next week's 5-Stock Sampler, I alluded to last week, is 5 Stocks Should the World End. I'm having a little fun with that. But more seriously, if something important does happen, I'll be reacting to that, I'll be discussing it next week. And the 5-Stock Sampler will take on that theme.
In the meantime, have a great week. Fool on!
