In this podcast, Motley Fool analyst Asit Sharma and host Mary Long talk about AI, automation, and the future of casual dining.
Then, Motley Fool contributor Travis Hoium joins host Ricky Mulvey for a closer look at Crocs, the market-beating clog company.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our beginner's guide to investing in stocks. A full transcript follows the video.
This video was recorded on Sept. 18, 2024.
Mary Long: May the Agentforce be with you. You're listening to Motley Fool Money. I'm Mary Long. Joined today by Asit Sharma. Asit, fabulous, as always, to have you here. How you doing?
Asit Sharma: I'm doing well, Mary. Better since we started taping. Can't wait for this conversation.
Mary Long: Isn't that always the case better when we start taping?
Asit Sharma: Always.
Mary Long: I feel like we got to address the elephant in the room before we kick off. Today is Fed Day. We're recording this in the morning Mountain Time, before J. Powell makes any announcements about rate cuts or what have you. We aren't going to be talking about that today, because we don't actually know what's going to happen. We'll save that for tomorrow's show, but did just want to address that. Unless Asit, you've got anything that you want to leave listeners with before we get more news from Powell and friends.
Asit Sharma: Enjoy your ice cream. That's a non sequitur. It shows how not dialed in I am to today's Fed conversation. We can keep moving.
Mary Long: We can keep moving, and we'll move right on to Salesforce because it is holding its Dreamforce conference this week. This thing is a party. If you look at the speaker lineup, it includes Matthew McConaughey, Carrie Washington, Simone Biles, Alona Mare, Kate Hudson, Jane Goodall, Pink is performing tonight. Just looking at that lineup, granted there are other more business he speakers also involved, but with those names alone, I don't know that I would guess that this is a conference for Salesforce. Asit, if you were in charge of next year's lineup, who would you be adding to that guess list?
Asit Sharma: Well, at least Keanu Reeves. Who wouldn't want Keanu at a conference like this? Bring it back to something real. Bring it back to something that's going to almost pull a tear out of your eye. At the end of the lineup for music, I say Jane's addiction. They're having a rough year. They had a reunion tour, Mary. I don't know if you've seen this, but two of the band members got into a fight on stage. They had to cancel the reunion tour. There are, I understand some maybe mental health issues going on there, so they're going to try to work out and I hope they do work it out. Let's hope for a comeback for the fringe band from way back when to make it onstage to Salesforce, Dreamforce, Agentforce, etc force 2025.
Mary Long: I mean, in all seriousness, like, we list off those names and those celebrities. What is the purpose of this conference? First, Salesforce will tell you, the focus of this event is on the company's changing AI strategy. But why do they need all these celebrities to do that?
Asit Sharma: A long time ago in a galaxy so far away, you couldn't trace it with the best of astronomical instruments. There used to be a thing called a developers conference. This is where companies would have a few days to have developers learn the latest releases of the software before things just started getting updated to the Cloud. These were very important get togethers because developers became like internal salespeople for companies. It helped a company like Salesforce be able to predict when it could reup its contracts with various customers. It made for advocacy, I think, in a growing ecosystem between all these hardware and software products that proliferated, going all the way back to the 1990s and you come to today, Mary.
What's happened is that these have become such big events, partly their PR events, but with so many companies throwing conferences now that often seem far removed from the original purpose. You've got to attract eyeballs and you've got to attract budgets because there are many software as a service company businesses that the typical enterprise business or smaller company deals with. How do you get people to come? You turn to celebrities. They still have the core events that I think are useful for customers. They've got lots of training. They do showcase the latest innovations in software or hardware. But these conferences now have become almost events in and of themselves, in which the I don't know the fluff part of it is just as important or the celebrity poll is just as important as the learning that takes place.
Mary Long: Salesforce would argue that their latest innovation is Agentforce. What exactly is that apart from the name of a product that continues with this force wordplay?
Asit Sharma: In a way, Agentforce is an evolution of the chatbot innovation that Salesforce and other companies have been promoting for a long time. It's different because the latest AI models allow agents to do more things that are specific to the user occasion. In the old days, like a chatbot would have a lot of canned answers, you or I would be online waiting for it to type something that wasn't going to help us. Now what agents do and we'll stick in this context of chatbots is they pull from very specific databases of relevant information. They have much more flexibility in how they can answer a query. They have guard rails, so they don't start hallucinating in these interactions. This is one type of agent that is the old chatbot on steroids. Now, there's another universe of agents, which are thought of as autonomous helpers to humans. You probably heard the term Copilot.
The Agentforce is Salesforce's answer to the whole Copilot metaphor. But these get really interesting because they take generative AI capabilities, they can be used for training. They can be used for all other tasks than basic chatbot functions. What Salesforce is trying to do is to get ahead of the curve. As AI evolves, naturally, companies are probably going to be using less of human time and productivity to achieve simple task. We're seeing that in real time. So they want to sell the product that companies are going to turn to and that's what Agentforce is all about. It's about promoting these very capable bots and autonomous agents before companies either develop them on their own or buy them from someone else.
Mary Long: Marc Benioff has called this the third wave of AI and I might be concern trolling a little bit here, but it seems really fast to have reached the third wave of AI.
Asit Sharma: I think Marc is a really great salesperson, and I think he's also trying to get ahead of a wave and just name the wave that he thinks will be most important to Salesforce. I think back to the 1980s when computers started first appearing in automobiles. That's what has evolved from that point on. If this is a third wave of AI, we've been in it for a long time. What is different here for Salesforce is that the tools are shifting from hardware capabilities to software capabilities. Inference is shifting onto devices, laptops, mobile devices that salespeople will use. We are leaning more into that other side of LLMs, which is getting the answers we want very quickly and then doing things in real time with LLM. He wants to maybe put a clever phrase on it, but it falls flat with me. I don't really think that's something that a year from now, you and I are going to talk about saying, the third wave of AI. Remember when Marc predicted that, and it's so evident to us. I don't think so.
Mary Long: Remember when that happened? Another thing that they mentioned at this conference was this new partnership with NVIDIA. Again, I could be concern trolling. It seems a little bit like name dropping in NVIDIA is the new name dropping AI. It's like, look at us. We've got this partnership, too. Is this something that investors should be paying attention to? How significant is this partnership with NVIDIA?
Asit Sharma: It's significant just in that Salesforce has to keep ahead of the curve. I think they felt a little bit of envy this time. Last year, when companies like Microsoft and Service now touted some early partnerships with NVIDIA. They all look the same, which is using not just in NVIDIA's GPUs, but also some services, they call the microservices that they have on their platform and some model customization tools that they have to make your solution, your Copilot, or your agent better than you could do so on your own. But it's not a game-changing partnership. Again, you or I will be talking about this time next year. I'm glad they did it good for them, and it's a great partner to have. But at this point, it is just flag waving that, don't forget about us. We're working with NVIDIA too on these tools.
Mary Long: We talk about AI so often, it's the same names that get brought up in NVIDIA B1, but also Microsoft, Apple, etc, where does Salesforce sit in the AI race right now?
Asit Sharma: This is so crazy to contemplate, because on one hand, Salesforce is the type of platform that should be benefiting from AI. I don't mean to imply that it's not benefiting. They are a SaaS provider of tools. They've been in this game forever. For example, if you're a salesperson of any type of ability. If you don't use their tools for customer relationship management, you're using tools that are based on their original innovations in the marketplace. The thing that's been difficult though for Salesforce is differentiating what it brings to the table with AI. I think they found that very hard to do and they're a little bit at s not this past quarter, but the quarter before this last one in May, the stock took a hit because they said, look, our revenue is really flat lining here. A lot of customers are delaying those bigger contracts. We've seen that with other tech companies, but I think companies are evaluating the need for some of the AI tech that's being put in front of them. I'm going to give you an extreme case, which is super interesting to contemplate. There's a company called Klarna. I think most listeners would have heard of this. Is a by now pallor firm. The CEO is obsessed with AI. He has gone so far as to try to develop all the systems he can in-house. Klarna recently announced that they were getting rid of software. They name dropped workday and Salesforce, too huge platforms that you would think a company that size couldn't live without, if Salesforce is the CRM product that you ended up choosing, or at least something like that.
Marc Benioff actually commented on this. He was like, I wonder if they realize what they're getting into. There's not just the functional part of our software, there's compliance, there's data storing, there's connectivity between recent data and older data. He listed off a number of things that maybe Klarna hasn't contemplated yet, but just the fact, Mary, that they could pull out that really important piece from their software stack. Gives you an idea of why other bigger companies might be thinking, do we need all of this Salesforce.com software? Can we get by with some of it? I think they're at a real crossroads. It's a company with a huge balance sheet and obviously, they've got great enterprise contracts. It's not like they're going anywhere, but the growth question is becoming really interesting as time goes on.
Mary Long: We're going to pivot to a very different automation. Chipotle announced earlier this week that it'd be rolling out robot chefs in a couple of its California kitchens. These robot chefs are bots. They're called Autocados, because their sole task is to have skin and core an avocado. This machine can do that in 26 seconds flat. The avocado parts that get smashed up by the Autocados then get turned into Guacamole by actual humans. Chipotle says that guacamole making process typically takes 20 minutes when it's made fully by humans. Asit, what's the return on investment of those save 50 minutes?
Asit Sharma: That is such an interesting question. But first, I got to lodge a complaint with Vebu. It is hard enough to pronounce avocado quickly. Then to use these two terms in the same sentence it's like a tongue twister. Autocado is trying to help you reduce the time it takes to process avocados. That 50 minutes is very interesting because it's right now all manual labor. Chipotle who is using Autocado, is paying its employees to carefully process the guacamole, remove the pits, as you said, peel it, whatever and then smash it into guacamole. Now, that is a time consuming process. When we think about it, there are a few processes that are manual that Chipotle has that probably take more time than this. Now, I think the return on investment is going to be coming from a surprising place. Let's work backward. First, we don't know the cost of these machines. I tried to look it up. It's not disclosed yet, but Vebu says that a test case can mean millions in savings for a company and Chipotle is the only test case they have on their website.
What this probably is is a percentage of time of the total make ready for food and I think that's going to improve margins potentially by something really small on the order of a half or 1% of total per restaurant operating margin, where there could be a bigger boost though is not in trying to save money at the bottom line, but Mary, if you or I, let's say we're working beside each other at a Chipotle and neither one of us has to process guacamole in our shift. That freed up a lot of time for you and I to do other things to help with the make components in the other lines, to help mend the register. This is going to affect throughput because throughput is something that becomes very visual. If it takes you more time to bring customers through your line, Oftentimes, you're missing out on more sales because someone is driving by the Chipotle store and seeing there's a longer line. I'm going to go on to Chipotle or some other place or even walking in the door and turning around. We've seen this with Chipotle over the years. They're obsessed with trying to get throughput to its optimal degree because they know if they can't move people through the restaurant, others are going to turn away. I think this will result in some invisible top line momentum. That could be maybe a percent or two on the top line. That starts to become significant.
Mary Long: Just as a heads up to listeners, this Autocado machine that's Autocado, not avocado has been made possible through a partnership with Vebu, which Asit mentioned, that is an investment in Chipotle's venture arm, which is $100 million fund called Cultivate Next. So the Autocado is one piece of that. They've also got partnerships with other start-ups that are making different machines. On also being rolled out in California. Builds bowls and salads underneath the current prep line. So speeds that up, too. So this is not the only automation that we're seeing Chipotle test out and cultivate next that Venture Arm also has a few other non machine related projects that they're working on as well. Asit, you talk about throughput, Chipotle obviously is not the only restaurant that's experimenting with automation.
Last year, we've got a lot of news about Sweetgreen testing out robotics in different kitchens. I stopped at McDonald's in Rollins Wyoming last Thursday on my way up to Jackson and the only way to order was through a self served kiosk. Is this the future of casual dining? Are we going to see this automation in its various forms play out in nearly every casual restaurant that we experience?
Asit Sharma: My guess is as good as yours and everyone else listening today, but I'll give you my personal opinion. I myself was traveling recently, Mary, on the wall of my local airport, RDU, there was this really interesting display. It looked like such a futuristic automat. It's basically a collection of windows with brands that you and I recognize. So you can go to any one of these windows. Download the app pay and pull your food out. This is the extension of the dark kitchens concept where you don't have the restaurant, but you have the output of the restaurant. I think that the only reason someone would use that Automat is because they're familiar with the brands, and they're going there from a previous experiential draw. If we cut down too much on the experience, you start to lose your connection with the brand and brand surprisingly, plays a role in creating our sensations and our understanding of what the food tastes like. That experience can be all important.
You can have a wonderful food experience that's just spoiled by all the sensory deprivations or impositions in your senses of a bad restaurant. Maybe it's not clean, maybe it's loud, whatever it is that ticks you off. I think that pendulum is probably swinging right now toward automation, but there's going to come a point in time where restaurateurs understand that it's not all about improving their margins or making it super convenient for us and then we will see that pendulum swing back to the human touch. But for now, that's the near term trend is more and more of this stuff. But as our friend and your co-host, Ricky Mulvey often points out, there are things that come and go. He was mentioning Flippy, who remembers who Flippy is? The Burger flipping robot? I think they're still under development, but the technology is not 100% yet still under development.
Mary Long: The names of these robots are really something to behold. Chipotle also has Chipotle, which, as the name suggests, is responsible for tortilla chip development, creation. Asit, as always, pleasure talking to you. Thanks so much for the time and all the knowledge that you shared with us today.
Asit Sharma: I appreciate it, Mary. This made me hungry.
Ricky Mulvey: What will the AI Revolution mean for jobs, for our kids, for our relationships, and daily lives? A new podcast, Pioneers of AI is your trusted guide to this emerging technology. Host Rana el Kaliouby is an AI scientist, entrepreneur, author, and investor, exploring all the opportunities and questions AI brings into our lives. Listen to pioneers of AI with new episodes every Wednesday wherever you tune in.
Mary Long: If you want to beat the market, try wearing some Clogs. Over the past five years, Crocs has been a forbacker for its shareholders. Motley Fool contributor Travis Hoium joins my colleague Ricky Mulvey to walk through this unlikely winner and see why its stock may still be undervalued.
Ricky Mulvey: It's back to school season, and one footwear brand might be on sale, or a stock in this case. We're talking about Crocs. That is the footwear company that also includes the Hey Dude line of shoes, which are lightweight casual sneakers. You probably know Crocs already. Travis, are you a Crocs wearer? Are you a fan?
Travis Hoium: No, I own the stock. I have never owned a pair of Crocs, but as a father, I have purchased many a pair of Crocs.
Ricky Mulvey: So you're a buyer. You're a customer of the company.
Travis Hoium: There are plenty in my house. Yes. They're just not mine.
Ricky Mulvey: Many would have guessed that Crocs would have been a shorter term trend, myself included. In fact, Crocs are prominently featured in the movie Idiocracy. It is the shoe-wear brand that is worn by pretty much everyone in the film. The director Mike Judge, had them included in the film because they were a little short on budget and his costume designer said, let's put these in the movie and someone asked him,, what if they get popular? Mike Judge said these are so stupid looking that they'll never be popular. At the time Crocs was just a small start up. Let's fast forward to today. The company made four billion dollars over the past 12 months. Why do you think Mike Judge was wrong? Why have the shoes stayed so popular?
Travis Hoium: If I knew the answer to that, I would have been invested in Crocs earlier. What I think Crocs has really ended up doing is it's become a meme of itself, if you will. If you go to Crocs website, they have partnerships with basketball teams and colleges and Disney, every single brand you could possibly think of. It's almost ironic the way that they're even designing their shoes. They have a partnership with Salahe Bembery, who I was not familiar with, but apparently a very famous designer, it looks like the shoes have stepped in a bunch of gu and that's what's at the bottom of the shoes. But they sold out in minutes.
So they really leaned into what they are. This simple shoe. I think there's a lot of momentum coming out of the great recession, where maybe we're looking for a little bit lower-cost shoes. Maybe we're being a little bit more casual when we're going out. I'm seeing people wearing these in restaurants. It's just become this popular thing. I think it obviously started with kids and then those kids have grown up and now it's people like me wearing Crocs, maybe not myself, but absolutely my kids that is still a popular brand. It surprised me the durability of the Crocs brand, but it's absolutely real.
Ricky Mulvey: I mentioned Hey Dude earlier. It's a casual shoe brand that, honestly, it has some all birds vibes to it. Important because Crocs purchased this in 2021 for about two billion in cash in 450 million in stock. The Crocs weren't enough. Crocs was worth about nine billion dollars then for contacts for that $2.5 billion acquisition. We get back to 2024. Now sales are declining, about 50% for the quarter year over year for the Hey Dude section of the business. In the meantime, Crocs is also opening more outlet stores for the brand. CEO Andrew Rees is promising to significantly accelerate its marketing investment. Travis, Hey Dude has all birds vibes. That's not been great. When we look back on this, do you think this acquisition has been a good idea or diworsification?
Travis Hoium: As we stand today in 2024, it's been a terrible acquisition. I don't think there's any way to get around that. Over the past two years, the compound annual growth rate of the Crocs brand, just so just Crocs shoes is about 12%, Hey Dude -8% over that period of time. Like you said it's gotten worse just over the last few quarters. The question is, is their strategy of basically reducing the number of distribution partners they're working with? That's something they put in place almost a year ago now and they knew that that was going to have negative impact on their revenue. But does that mean that they're going to have better margins and better growth in the future? So as 2025 look better, 2026 look better? If that's the case, we may look back at this moment right now, as we're recording, it's an inflection point for the Hey Dude brand, but we haven't seen it yet.
This is where you're allowing management to do their job. They have a strategy that they've been implementing, and they've been very successful with the Crocs brand. Can they replicate some of those things from a distribution side, from a branding side? They're doing some more things with the Wendy and Wally brand for Hey Dude. They've got some interesting partnerships. I'm not bullish on Hey Dude at this point. It's like an anchor that you get along with Crocs, which I really like that brand. I like the way it's growing. I like the durability. But from a sock standpoint, Crocs is so cheap that if this anchor becomes a sale, that is what's really going to take the stock to the next level.
Ricky Mulvey: If you're playing armchair CEO, wouldn't you just rather see Crocs invest in the Crocs, the original recipe?
Travis Hoium: As we are today, I think they're too deep in Hey Dude. They've spent so much money on it. They've got debt on the balance sheet from that. I don't know what you do with it because it doesn't have any value if you spin it out or try to sell it to somebody else. So you got to try to make it work. The mistake happened two or three years ago when they made the acquisition. Things maybe a little bit, but that is one of the reasons that the stock is as low as it is today is because there's a good brand and a bad brand within Crocs in one stock.
Ricky Mulvey: I threw a bit of mud at CEO Andrew Rees, but what else should investors know about him?
Travis Hoium: He's really engineered the turnaround of Crocs and I think allowing this company to be relevant, like you mentioned earlier on, I think a lot of us would have thought 10 years ago, that Crocs would be an irrelevant brand by now. It's a fad. It's not something that kids are going to still be wearing today in 2024, but they absolutely are and it's partly because of his leadership and vision. When you look at the steady growth, you just look at a chart of the Crocs brand growth. It's like a machine growing quarter after quarter after quarter. They have a great foundation in the US. They're expanding into Asia. That's where they're having tremendous success right now. I think that is something that needs to go to leadership. That said, it hasn't all been Rose's for this leadership team.
Ricky Mulvey: A lot of the growth story is international. Crocs had 70% year over year revenue growth in China, 22% revenue growth overall internationally. That's the growth story. You see that as a risk or an opportunity here with this company?
Travis Hoium: I think a few years ago, I would have seen this as a risk because there's not a lot of differentiation with Crocs, pretty easy to copy with the growth of brands like Temu and those retail outlets. You would think that there would be a lot of Crocs competition out there, but it hasn't really materialized. I think the brand has much more staying power than I maybe would have thought of a few years ago. This is one of the reasons that I've been bullish on the stock is that if the company isn't going to be disrupted over the last three or four years, what's going to change over the next few years? I think they're sitting in a pretty good position in these international markets. Look, they still have a really low cost product. I think that's something that we can't forget. This is not Crocs going in with $150 shoe and that just not resonating with buyers who maybe aren't quite as affluent as some buyers are here in the US. You're coming in with a relatively low cost product, 30, 40, $50 is a normal price point for a Crocs shoe. That's going to be still pretty accessible, no matter where you are on the income scale.
Ricky Mulvey: I was thinking about it with Lululemon, where Lululemon has a similar growth trajectory, internationally, huge growth in China. Consumers get a little tighter in China. That's a problem for Lululemon, so I appreciate the differentiation. You came on the show two years ago. I'll throw you some flowers because you helped convince me to buy some Spotify stock. Turned out to be a good idea. Spotify at the time was undervalued. Right now, Crocs is in a spot where it's trading at about eight times free cash flow, 10 times forward earnings. The earnings number isn't out of whack historically and it's always traded at a discount to Adidas and Nike. Adidas is about forward earnings multiple of 30. Nike is about 24 times forward earnings for the hits that specifically Nike has taken. There's the setup. There are the comps. What do you think about Croc's current valuation?
Travis Hoium: It's a good risk-reward profile for Crocs right now. The way that I think about it is you have the Crocs brand, that's the foundation. Still growing. So this is still a business whose revenues is going to grow. Profits are going to grow for the Crocs brand. But like I said, we've got the Hey Dude anchor around the business right now. So you combine those two and the growth cancels each other out and you get a stock that isn't growing much at all. That's why the market is saying, a 9-10 price-earnings multiple is appropriate here. If the Hey Dude brand turns around, if we go from negative comps to, what if they're growing high single digits or maybe even double digits, you get some operating leverage in the business. Now you're starting to grow instead of low single digits, you're growing the business overall, high single digits, maybe even double digits.
Now you earn a better multiple, so you have better operations and you get maybe a better multiple that is more like 15, 20 times earnings. I think that's the bull case here is that if the Hey Dude brand becomes something of a help to the business and it doesn't even have to be a lot of a help, just a little bit of help. That's where I think the stock can really go to the next level. But it's really going to come down to Hey Dude because I think Crocs is really just a foundational company, and it's not going to earn a big multiple, but that's OK. You can have a phenomenal business just selling rubber shoes around the world.
Ricky Mulvey: It's a great place to send it. Travis, I appreciate your time and your insight on this.
Travis Hoium: Thanks for having me.
Mary Long: 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 stone buyer cell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow.
