What Investors Just Learned About Meta, Shopify, and Comcast

In this podcast, Motley Fool Chief Investment Officer Andy Cross discusses:

• Meta's worrisome R&D spending metric.
• Low expectations helping to fuel Shopify's rise.
• Comcast beating tough quarterly comps, thanks in part to the Minions.

Motley Fool producer Ricky Mulvey talks with Scott Ford, CEO of WestRock, a "brand behind the brands" coffee business serving up 20 million cups a day.

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 October 27, 2022.

Chris Hill: We've got e-commerce, entertainment, and a consumer goods stock you've probably never heard of. Motley Fool Money starts now. I'm Chris Hill, joining me today is the Chief Investment Officer, Andy Cross. Thanks for being here.

Andy Cross: Of course, Chris, happy to be here. Thanks for having me.

Chris Hill: We're going to dig into this more on Friday show, but I did want to get your thoughts on Meta platforms because that company continues to invest heavily in building out the Metaverse. Those investments absolutely affected their third quarter results and shares of Meta are down more than 20 percent today.

Andy Cross: Chris, if you think about the investments that they're making, this has been an ongoing story even though they're talking about rightsizing their employee base. But I was just looking through some of the data, and you guys will talk a lot about this I'm sure on Friday, but with the actual results, the operating margin down to 20 percent from 36 percent a year ago. That's the lowest that I can remember their operating margin being at least for years. Costs and expenses up 19 percent. What really caught my eye, Chris, is the research and development expenses this quarter came in at 33 percent of revenue. That's the highest it's ever been as far as I can remember and can find. It was 30 percent last quarter normally that's much more in like the low 20 percent level. As a percentage of revenues, they are investing heavily into the Metaverse and into their people.

Their operating expenses for the year they think for 2023, Chris, will be somewhere in the 96-101 billion range versus 85-87 billion this year. Now, they expect that to trend down over the year as they right-size the people, their employee base, but still the investments that Zuckerberg is making into the Metaverse and this was a lengthy conversations about the call, the returns on that, what are they going to get from that? When is it going to show up? Are they being distracted from their core business that is also suffering? As we know, the advertising market is under a lot of struggle from what we saw recently from Google and some others, Snap certainly, or Alphabet and Snap. Their core business is suffering, meanwhile, they're making these massive investments and they have not yet seen the payoff and there's a lot of doubt among the investing community.

Altimeter Capital which has been very vocal on trying to get Meta focus again. When you see your revenues dropping for the second consecutive quarter, and their costs exploding and their profits dropping, their free cash flow going to almost nothing compared to nine billion a year ago, it just really sends a signal to the investing community of a lot of concern and doubt about what's going on with Meta. Now, hey, listen, Zuckerberg has run this business forever. He ostensibly knows it better than anybody. There's a lot of those who have confidence that he will eventually get this right but it could be a very costly investment in the near-term.

Chris Hill: After a rough 2022, looks like we got some signs of life from Shopify. Third quarter revenue was higher than expected. Shopify's loss for the quarter was smaller than expected and share is up 18 percent this morning. Was that good or was this a combination of below expectations for Shopify and also the stock has been just hammered this year?

Andy Cross: Chris, yes. Both of those situations. Very low expectations. Last quarter their revenues grew 16 percent, this quarter revenues grew 22 percent, which as you mentioned was above expectations. Lost two points due to the strong dollar. Gross merchandise volume was up 11 percent, that about match where they were last quarter. I think when you look at what was happening with Shopify over the last few months, there was just so much concern and so much doubt that they've lost their mojo. That the shift away from e-commerce that we saw, the explosion of growth from 2020, 2021 during the COVID pandemic has really slowed down, and that has really affected Shopify and their long-term value. I think this quarter, when you look at some of the returning growth, they have to deliver business that they acquired for 1.7 billion net of some cash but they closed and have started to recognize this quarter.

When you start to see some of that growth return I think you start to see a little bit of sparks maybe show up that, hey, listen, Shopify has one of the largest, by some measures, the second-largest e-commerce platform in the world behind Amazon. They have some potential to right this ship. Now as you and I have talked about, and we talked about after the last quarter, they still have a lot to prove. They are still making investments, they are still not making nearly as much money as they should be. They still have a head count issue that they are starting to right-size their costs for the rest of the year will continue to go up. But they expect that to start to trend down through next year as their head count gets resolved a little bit more normalized. They're still making big investments, Chris.

We talked about investments with Meta, Shopify is still making big investments to compete with Amazon in fulfillment. There's a lot of question marks on that regard whether they will get that right, whether they could have done that in different way. But regardless, they're making those cash outlays. They still have a very attractive balance sheet with almost five billion in cash versus a billion in debt. They have the balance sheet to make these investments. But I still think there's a lot of questions. Will they get this right? Their growth? This is not a 50 percent grower company like it used to be, Chris. We're talking much more in the high teens or 20 level. If they can get there and get the profitability curve going right, paying six times sales, I think shareholders will be OK with Shopify over the next five years. But it could take a little bit more lumps in the short-term.

Chris Hill: This was a nice quarter, maybe a little bit of a surprise to the upside. But it sounds like you're saying, this is great, we'd like to see this a couple of more times. We'd like you to do this for two, three, four quarters in a row.

Andy Cross: I think that's right, Chris. When you look at things, when they talk about this, the merchant solution growth will be two times higher than the subscription solution growth. Subscriptions when you join the platform, you pay a fee for that. Then they have their merchant solutions, things like Shopify payments, Shopify capital, or Shopify logistics, and shipping those things as part of the merchant solution. Those are far lower margin businesses. As those businesses grow faster, they expect their gross profit growth will be, and I quote, "Meaningfully, trailing revenue growth for the foreseeable future."

That means that profitability curve that many of us want to see from Shopify is not going to happen likely anytime in the very near term, but longer-term. Will they be able to continue to grow their customer base and continue to provide them with solutions that allows them to be an independent provider to fend off the likes of Amazon and others, to provide their platform to entrepreneurs to sell their goods, and will that benefit Shopify shareholders? I think there's still some question marks that we need to see from Tobi Lütke and his team that has had some executive level turnover that we expect to see them for us to become really excited. At least me to be really excited to be a buyer of the stock at this price.

Chris Hill: Third quarter profits and revenue for Comcast came in higher than expected and shares of the cable and entertainment company up seven percent this morning. I was a little surprised by this just because there were some things to like in Comcast results. It wasn't an amazing quarter. I guess on the positive side, this was a tough comp when you consider that this quarter last year included the Summer Olympics and how important that was for Comcast business.

Andy Cross: Chris, if you see like the NBC Universal deal which includes so much of the NBC Universal business unit. The revenues and their media department was down 23 percent, but it was actually up four-and-a-half percent if you back out the Olympics revenue they got from the advertising last year. Comcast is a much different story than what you have in either Shopify or Meta. It's a very stable business, doesn't grow tremendously fast. They are losing a lot of their pay TV subscribers down another 560,000 this quarter. They've lost cash more than one-and-a-half million just this year alone. But they make that up by adding more and more broadband users.

I think they saw 14,000 new broadband customers added this quarter to take it to more than 32 million. You see this balanced shaping up. It doesn't lead to a really robust fast-growing company, but very profitable, generates a lot of cash, has a free cash yield of more than five percent, a dividend yield of more than three percent. You're paying about 10 times earnings for this business. They buy back some stock. Part of the NBC Universal business that I found so interesting. The revenue was up more than 30 percent. Jurassic World, Minions rise of Gru, and the movie Nope. I've not seen either any three of those, which doesn't speak anything to Comcast more than me.

But they did see some releases and that helped the lumpy revenues there. But their theme parks, Chris. The theme park revenue was up more than 42 percent. They mentioned attendance and spending increasing. Universal Orlando had the highest cash-flow ever in a quarter. Universal Beijing was starting finally seen some profits this quarter. You're starting to see the theme park business come back a little bit much like we've seen with Disney too. You have the balance of all these businesses relatively low growing fairly stable. Although, they can be lumpy quarter-to-quarter. You're not paying a lot for their business. Their sky business over in Europe is just marching along.

Chris Hill: Yeah, they had a pretty big write-down of the sky business.

Andy Cross: Yeah. That's still it's a smallest part of their business but still yet to be seen. I mean, for a dividend yielding company. I own Comcast shares myself. I don't actively buy them. It's not one that I just buy. Just let it sit there and it collects a little dividend for me. I think that can be a fine investment for those investors who are looking for that type of investment to fulfill that part of their portfolio.

Chris Hill: I think it was in the Wall Street Journal a couple of months ago. It may have been another publication, but my memory is that it was the Journal. An article about movie franchises. How they can be valuable? When you think about the classic franchises as James Bond and Star Wars and Harry Potter. That thing. This was an article about the Minions franchise. It laid out a pretty compelling business case for whatever you think of the Minions movies. From a business standpoint, the Minions franchise is a cash machine for Comcast.

Andy Cross: I think Chris, if on Monday night Halloween here in the United States if you are handing out candy to those who come knocking on your door. I know one of my daughter's best friends is going as a minion. I think you will see plenty of minion trick-or-treaters out there and just gets the importance of their Peacock business which showed paid subs up more than 70 percent. Now 15 million people on the Peacock side subscribers access to Peacock. That's a big investment there making to be able to benefit from those franchises that you mentioned tied to their universal business. But that's the studio side or the theme parks. You started to see that flywheel effect that takes lots and lots of investments that Disney has honed over so many years and done so well, and we're starting to see others like Netflix and now obviously Comcast take that same approach and hopefully long-term while it takes a lot of investments that can be fairly profitable going for.

Chris Hill: Andy Cross. Great talking to you. Thanks for being here.

Andy Cross: Yeah. Thanks, Chris.

Ricky Mulvey: Even if you're a coffee drinker, you probably have not heard of WestRock. Even though it's possible you've already consumed a cup at a quick-service restaurant or travel center. WestRock is one of those brand behind the brands companies. It serves 20 million cups of coffee every day. All be it under more established labels. Ricky Mulvey caught up with WestRock CEO Scott Ford to talk about coffee trends, the company's value proposition, and why this former telecom executives started his business out of anger.

Scott Ford: Well, I found myself in Rwanda through a long story that would go into another time. But I was looking around at the economic activity and I realized that coffee was the largest cash crop that was sold for the most part people that live in rural countryside and lived up what they call small holder farmer lives, and it's largely a barter society. People grow extra vegetables and trade and things of that nature. The cash crop was coffee, and it was 40 percent of the hard dollar currency that came into the country. It happened to be purchased by these two individuals that finance the local mills, and they were only two mills. Coincidentally through just a bad stroke of luck, they offered the same price every day. That price was half what all the coffee in that region of the continent sold for where there were multiple competitors. I was angry that two guys were profiteering on the backs of some of the poorest people in the world. I said, let's build a coffee mill and that's how WestRock coffee was born.

Ricky Mulvey: Multiple businesses have been born out of your margin as my opportunity. When I have heard you tell the story, did you ever interact with the coffee buyers that we're setting the prices because I can't imagine that they were delighted to have someone come in and mess with their market.

Scott Ford: Yeah, I remember we'd been up for a couple of weeks. The guys that were running the factory for me, they called and said, "Well, we got the strange phone call. They welcomed us to the market and they reminded us that the price was something other than what we were offering." They said, "What do we do?" I said ignore them and raise the price you offer on the street. Another week went by and this time they were really mad. They said, "What do we do?" I said it's easy, ignore them and raise the price again. Eventually, they'll understand. That we not going to talk about that. Then the third time somebody gotten threatened and it got ugly and then we took the price to 0.90 cents. We'd started at 55 went to 65-75, then we are at 90. Well, six or eight weeks later, they finally matched our price. But only after they were sure that we weren't going anywhere and they weren't going to bully us back out of it just because they didn't like our price.

Ricky Mulvey: Will skip forward a few years. Now you have a company, it's on the market. It's a dual-purpose business. What does it mean to you to be running a dual-purpose business?

Scott Ford: Well, I think any business is going to really survive and thrive has to be a commercial enterprise first. Anything that is dependent upon charity, as I tell people all the time. Charity is great, but it sucks as a business model. The one time that you really need money if you're out and you're asking for people to either pay you a premium, which is a form of charity, or subsidize your losses, which is a form of charity. Then you really aren't running a sustainable business. If you just follow that logic, sustainability equals profitability.

Now you get to the question of what do you do with your profits? That's the great part of the free-trade system is you as the generator or the profit get to decide what you want to do. We reinvest ours back in farmers, farmer education, agronomy training, expanding the footprint we started in Rwanda. We're in 35 countries now. We underwrite the daily price for millions of farmers in 35 different countries from the work that we do on the ground. But the way we do that is we sell a commercial product. Better product, better price, better service, and we win so that we are assured of making a profit so that we're sure to being on the ground again tomorrow with fresh money, to buy tomorrow's crop.

Ricky Mulvey: You've chosen to be the brand behind the brands. Very often if you're drinking a couple of WestRock coffee, you probably don't know it if you were to quick-service restaurant or at a convention center or a gas station. When you saw the market opportunity. What was the advantage in not really building your own brand as WestRock but rather supplying others?

Scott Ford: Yeah. That's a great question, Ricky. In all honesty, we were just fumbling our way forward through it. But what we learned that cemented this was the right path for us was really two things. Our business model is built around creating volume of what we call the vacuum to pull coffee up into the supply chain. The bigger the demand we have, the bigger the demand pull, the more lives we can impact with a fair price on the ground in more and more countries. That's the reason for the business. That's what we chose to do with the profits that we made from the sale of that's what we chose to do with the profits that we generate in WestRock coffee. That's the mission.

Well, then so happens and I wouldn't really have forecast this, it happens that other people like buying from major brands, like buying from someone that's not in the brand competition business with them. The major restaurants appreciate the fact that they don't care if we sell to other restaurants, they actually know that we get scale that helps them have a better price point, we develop new products that helps them expand their menu but they don't want us on the store in the shelves competing with them and that ripples through the retailers, the private label business we do. We did it for the reasons of creating the broadest demand pool we could and it just happened to have been reinforced by the fact that people like trading them like they're the customer and not just somebody you take care of if you've got excess volumes.

Ricky Mulvey: Let's talk about the fully digitally traceable supply chain because that's one of your key differentiators at WestRock. Why is this important to you as a brand, because very often if a customer is drinking WestRock coffee, they don't know that it necessarily came from you. Why is it so important to you in having these digitally traceable supply chains and what's the customer uptake on that?

Scott Ford: It goes back again Rick to what's the reason for the business? Well, the reason of the business is we want to make an impact in the cash income and therefore livelihoods, of literally tens of millions of small holder farmers around the world, that's the purpose of the business. But I'd hate to spend back half of my career and not know whether I was having that impact or not. We created traceability not just so that we could see who owned it, but we wanted to know did we make a difference in our income? We did a bunch of studies on, but what did they make before we got here, and then what happened to the quality of their crop, the quantity their crop, the price that we were able to get for? Then of course, we started originally balancing our books, if you will when we were looking at the volumes whereby we started with a text message literally out on the border of Congo and Rwanda.

The guy would go around and buy coffee in the morning and get to a hotspot and text message back into Kigali, who would then send me an email and then we would take a counter position in the futures market, that's literally where our digital traceability start. Today, I'm one of the largest retailers in the world has been collecting this data for years. They put a bag of coffee up, you can scan it with a QR code and I can tell you the farmers who's coffees and their name, the price that we pay them, the quality that they brought in, the quantity whether they brought in a better or worst crop last year, whether they'd been through agronomy training, whether the farmer has been inspected that year or not. There are big customers that had been collecting that data from us.

Now you go back again to the same thing. I don't care if we get credit for it, I want the volume. If I have a better product, a better price, and a better service and then I give them that digital traceability, I have armed the largest retailers and restaurants in the world with the right to demand of everyone else in the coffee supply chain to see their digital record all the way back to the farm, because if we can do it they can all do it. It took us six years and we took a team and we moved them two years in the US, two years in Africa, two years in the UK and then back. But if we can do it they can do it and that's why we do it, and the fact that no one knows it's us, I don't care. My customers know it's us and that helps us pull volume up in the supply chain.

Ricky Mulvey: I'll switch gears a little bit then because you're in the commodity business, I'm sure there's other people selling coffee out there. Let's say I'm a quick service restaurant with 300 locations across the United States. What's the value proposition? Is it the traceable supply chain, is it consistent pricing and who are your competitors for this deal?

Scott Ford: First of all, you're in business to make money, so the first thing we're going to come up to you to say, how do we help you make more money? You've got to make more money by selling more volume, or you got to be able to sell it at a higher price or you got to buy it cheaper, that's it. What you're going to want to explore quickly is we can all make cheap coffee, hot black coffee and sell it too cheap, there's no margin in that business. Then the question becomes, well what else are you going to sell up and down the counter? There are people who go and say, we're going to give you the equipment to sell all sugary syrupy drinks, etc, or you'll run into people like us who say, you know what we're going to do. We want to expand your portfolio, Mr. restaurant chain, not only for hot black coffee or ice tea, we're the largest provider of ice tea, but we'll also do extract drinks.

You want to make a milk shake, a coffee shake, you want to do an espresso based drink? You can do cold brew coffee or iced coffee with cream in it out of a pump bottle, so this whole concept of taking coffee and basically distilling it to a syrup that you can then rehydrate in any form factor makes it easy for you because you don't have to have employees making it, it's in a pump bottle, you hit the pump twice, you put the ice cream in it or you put the cream in it and the drink is ready to go out the door and the margins for you as an operator on that beverage are some of the highest margins you're going to make, so we've got an entire team of product development and marketing insight people who are available free of charge to you, 24, 365. Let's help you develop a product set that will help you win against your competitors down the street, and when we develop one of those products, we make more money on one of those products than we do all the hot black coffee ground business. Because there's no margin and it's just a commodity processing exercise that you go through.

Ricky Mulvey: It's working as a market research group in some ways. In one key area I've heard your company is capitalizing on is ready to serve cold brew drinks. In late 2021, WestRock purchased it was more than half a million square foot plant in Conway, Arkansas. I believe you're also expanding in Malaysia. What are these expansions going to allow your company to do and how are they going to help you better serve your customers, particularly in that quick service space?

Scott Ford: It's the quick serve restaurants, the C-stores and frankly, this is one of the things that people don't really appreciate. We make a lot of coffee and coffee based drinks for other coffee brands. Not only restaurants that you might drive through, but coffee brands that you go to, Walmart, Kroger, Safeway and buy off the shelf or out of the cold section aisle of the grocery store. What we're going to do in Conway is we're going to build the world's largest roast to ready to drink facility, so we will bring it in green, clean it, roast it, grind it, extract it, concentrate it, add milk, sugar, flavors, etc. Put it in a can, eight ounce, 11 ounce, 15 ounce can, regular size, slim size, put it in a multi serve bottle, put it in a glass line, etc and ship it out the back door to your distribution center. 

Restaurants as they've moved from everybody comes and eats in to they drive through or they order it delivered? They can't sell a drink with their meal anymore, that's the highest margin part of their ticket. Because you can reheat your sandwich, but you can't unmelt your drink, so all of a sudden customers are saying I love your ice tea or I love your mocha cappuccino, but not in that Styrofoam cup and so restaurants are talking to us about putting their products in cans that they can push through the drive through or the delivery system. But most of that is our consumer products group customers, other coffee brands that are gearing up to sell through retailers and C-stores.

Ricky Mulvey: Makes a lot of sense. We got a lot of investors in the audience watching right now who are looking at the financials and WestRock is profitable on an operating income basis that's not something that a lot of your coffee competitors can say, but WestRock is not profitable on a free cash flow basis. A common drumbeat for investors right now is I'm not investing in unprofitable companies. What do you say to those investors watching right now?

Scott Ford: Well, by the time you figure out that we're free cash flow positive because we've built the facilities that were build in around the world and we've filled them, it will be too late. Because you can buy us right now at $10 a share if you run through the math that we've shared with people about, if we build these facilities and we've already over subscribed fill them, so if we build them and we execute against the model by the time we do that, we will pay all our debt off in two years and the stock will have long since eclipsed anything that people today would have looked around and said. Hey, I should have bought it when, but you know what? That's normal. When I was on a hotel everybody hated on us because we were a sub regional and we killed them in stock price appreciation while being fool slap the whole time because we were smaller or because we were investing in a network in a more aggressive level than some of our competitors. But that's the nature of the game and that's OK.

Chris 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. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.