The Fed Chief Speaks; Wall Avenue Reacts

In this podcast, Motley Fool senior analysts Jason Moser and Emily Flippen discuss:

  • Why long-term investors should not be surprised by Federal Reserve Chairman Jerome Powell’s comments.
  • Snowflake‘s (SNOW -0.96%) strong week.
  • Zoom Video Communications (ZM -0.43%) shares falling to a two-year low.
  • Ulta Beauty‘s strong second quarter sending shares close to an all-time high.
  • Amazon (AMZN -0.24%) making headlines for what it is not planning to do.
  • The latest from Peloton (PTON -8.17%), Electronic Arts (EA -1.84%), Nvidia (NVDA -2.08%), Salesforce (CRM 0.10%), and Intuit (INTU -1.28%).

Plus, Motley Fool senior analyst Maria Gallagher talks with Harvard Business School professor Ranjay Gulati about key insights from his book Deep Purpose: The Heart and Soul of High-Performance Companies.

And to wrap it up, Emily and Jason answer listener questions about QuidelOrtho Corp. (QDEL -1.50%) and Berkshire Hathaway (BRK.A -1.50%) (BRK.B -1.69%), and they share two stocks on their radar: Doximity (DOCS -0.03%) and Autodesk (ADSK -1.61%).

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 Aug. 26, 2022.

Chris Hill: When Jay Powell speaks, for better or for worse, Wall Street listens. Motley Fool Money starts now.

From Fool global headquarters, this is Motley Fool Money. It’s the Motley Fool Money radio show. I’m Chris Hill and joining me in studio, Motley Fool senior analysts Emily Flippen and Jason Moser. Good to see you both.

Jason Moser: Hey.

Emily Flippen: Hey, Chris.

Chris Hill: We’ve got the latest in big tech, software, and more. We’re going to dip into the Fool mailbag and as always, we’ve got a couple of stocks on our radar. But we begin with the Fed chief. On Friday morning, Federal Reserve Chairman Jay Powell warned of pain ahead as the central bank plans to use its tools forcefully to bring down inflation. Jason, the remarks sent the overall market down. I’m assuming there were some people who were thinking the worst of inflation is behind us. Maybe the Fed chief is going to say that. I don’t know, I look at this and I think that’s what I was hoping and that’s what I want to hear out of my Fed chief. We’re going to take care of this.

Jason Moser: I agree with you. It’s always funny to see these reactions. The market immediately fell after the language came out. Then recovered and we thought, “OK, that’s pretty reasonable reaction,” and then the bottom fell out. Yet if you’ve been paying any attention at all to what’s been going on, you shouldn’t be surprised by this language at all. I think that what we’re seeing as far as the market’s reaction, this is essentially short-term profit-taking for what could be construed as potentially dead money, for lack of a better phrase, in the near term. The key is inflation is still with us. The Fed is acknowledging that, they will continue to fight it. We’ll learn more in September when they reconvene as far as what they decide to do with interest rates, but I appreciate the perspective. We need to deal with this. It’s not a straight line up. Decisions have consequences, and we flooded our economy with a ton of relief capital here recently. That has impacts and it needs to be accounted for, and that’s what we’re doing. I mean, obviously, that’s not the only thing at play here, there’s plenty going on around the world that’s impacting the global economy. But yeah, this is not surprising. This doesn’t seem news to me. I just think the market essentially looks at it as, OK, we’re going to sell off and come back when we feel like it’s a little bit more certain.

Emily Flippen: Well, about 10:40 this morning, I was feeling really good about myself because I was ready to come on this commentary and say, “Well, look, the market is not going to sell off news that we already know.” Then, lo and behold, what does the market do? Exactly that. Here’s the thing. This is news we already know. We know that interest rates need to be higher in the face of historic inflation. My speculation is the market just doesn’t like being reminded about it.

Chris Hill: Let’s get to some individual companies there. We’re going to start with Snowflake. Shares of the data cloud business up nearly 30% this week after second-quarter results were better than Wall Street was expecting. You tell me, Emily, was Snowflake that good or were expectations that low?

Emily Flippen: I think you can thank Zoom for Snowflake’s strong performance because they reported not too late after Zoom reported, and Zoom had pretty dismal results in terms of its top-line growth. When Snowflake comes out and they say, “Yeah, our product revenue rose 83%, our remaining performance obligations,” that’s Snowflake’s backlog, so future revenue growth, grew an incredible 78%, and their net revenue retention rate continued its impressive trend of above 170%. It was a great reminder to the business that Snowflake is an important partner for its core customers and its move upstream, which is to say its move toward more high-value enterprises, capitalizes based on its usage-based business model. The more enterprise customers they bring in, the more data they have moving onto Snowflake’s platform, the more money Snowflake is getting. All very great. Combination of really strong performance, incredible margins, incredible growth, plus very low expectations put out for them this quarter by the performance of their peers.

Chris Hill: Speaking of Zoom Video, shares fell to a two-year low this week after second-quarter results saw slowing growth and the company also scaled back their guidance, Jason.

Jason Moser: Well, I mean, going back to things we shouldn’t be terribly surprised about. This to me, again, feels like it’s right in line with what you should have been looking for. As management noted in the call here, the majority of revenue is shifted back to the enterprise, but they moved beyond pandemic-buying patterns. We’ve moved beyond really what we’ve been dealing with over these past couple of years in this digital transformation, and we talked about it before. A lot of growth was pulled forward and we saw that with a number of businesses, Zoom no exception. Now we’re seeing the aftereffects of that, a little bit of a hangover, if you will. I think it is something to note. I mean, this is a good business. It doesn’t mean that it’s not going to grow going forward. It will grow going forward, but that growth is going to slow down. It’s going to normalize a bit. I think that’s just the key for investors to keep in mind, this is going to be a bit of a more normalized story than what we’ve been conditioned toward over the past couple of years. But if you look at the numbers, they weren’t all that bad. I mean, it the most impressive in the world, but revenue up 8% from a year ago. You see the number of customers contributing more than $100,000 in trailing-12-month revenue, that was up 37% from a year ago. They now have approximately 204,100 enterprise customers. That’s up 18% from a year ago.

Net dollar expansion rate for enterprise customers of 120%. They anticipate the enterprise customer becoming a greater part of the business as time goes on. It’s already well over half and that’ll continue to grow. All things considered, I mean, Zoom is doing essentially what we expected it to do, seeing tremendous success in things like Zoom Phone, Zoom Contact Center. Those are new investments that they’re making and they continue to grow that enterprise side and retain those customers. It’s just become a more normalized story now. When you look at their guidance for the full year, somewhere in the neighborhood of $3.66 per share in earnings, that value shares now with the sell-off around 22 times full-year estimates, I think we’re looking at a pretty reasonable price for what is a very high-quality business with, I would say, very customer-centric leadership.

Emily Flippen: I wouldn’t say this is normalizing. I would say this is below normal. Now, I realize this is a controversial opinion here, but if you look at their underperformance, it’s largely due to their free users. Individual people who are going onto their online sales, never connecting with the sales representative. Their enterprise business it just getting started. They are just learning how to deepen monetization with these users. I really think, and I could be wrong about this, I should knock on wood, but I think growth from this point accelerates as long as they execute on their enterprise strategy.

Chris Hill: Peloton shareholders had reason for optimism early in the week when the company announced a partnership with Amazon to sell equipment and apparel on the tech giant’s site. The news sent shares of Peloton up more than 20%. But later in the week, the company posted dismal results for the fourth quarter and shares of Peloton fell back to earth, Emily.

Emily Flippen: Where to begin with this story? Let’s just say if they had announced a partnership with Amazon in 2020, the stock would have sold off on that news because it probably would have been degrading to the Peloton brand, losing control or their customers and their supply chain. But at this point, they need to move inventory. That’s what we saw when Peloton reported their results here, is that they had a huge backlog of more than a billion dollars in inventory sitting on their balance sheet right now. Any partnership for them is good for getting those bikes out the door. But the problem is that it’s really not righting the ship quite yet. That was Barry McCarthy’s plan. Right this ship and the problem is revenue fell 28% in the quarter. Inventory actually rose. Margins were incredibly poor. Everybody listening right now, guess in your head what you think the gross margin on a Peloton bike is right now. Some of you may know, I’ll give you a second to think about it, but it is an astounding negative 98%. They are losing an incredible amount of money on these bikes. The silver lining here has always been the subscription business, though. That grew to more than 50% of their revenue with this quarter. Gross margins there around 68%. Subscriptions, great. Bikes, still a troubled business.

Jason Moser: Now they want you to put those bikes together. They’re not getting this stuff professionally put together, you got to do it. It’s like IKEA. I mean, that’s OK if we’re talking about armoire or a bench. I don’t know that I want to be putting those bikes together.

Emily Flippen: I put my bike together. Granted, I have a NordicTrack, but I will say it was not easy. It was not a fun experience.

Chris Hill: What are the odds that two to three years from now, we’re talking about Amazon acquiring Peloton? What are the odds that this really just paves the way for an acquisition?

Emily Flippen: I will say, I’m not sure if it’d be the smartest move on Amazon’s account. Part of that is because I think they’ll probably get regulatory question marks here, but also because, look, at-home fitness, as much as I hate to say it, I want to be a believer, it has a history of lacking engagement. We saw the churn rates for Peloton increase this quarter. I don’t really know if at-home fitness is ever going to be the great high-margin business that people may want it to be, even if Amazon is the company doing the bidding.

Chris Hill: Ulta Beauty posted big profits in the second quarter and raised guidance for the full fiscal year. Shares of Ulta Beauty up 5% this week and close to an all-time high, Jason.

Jason Moser: Yeah. What a nice turnaround for Ulta here over the last several quarters. Obviously, had a tough time during the pandemic, but things have recovered nicely. The stock is actually up year to date. Like you mentioned, they raised guidance to boot. I mean, you look at these numbers, sales up 16.8%. Earnings per share of $5.70, that was up 25% from a year ago. They are seeing price increases across the board with their brand partners, so that’s something to keep in mind. They expect that to continue through the rest of the year. It’s not surprising, but that is playing out on the gross margin on a little bit. Gross margin down 20 basis points for the quarter. But comparable sales performed very well, up 14.4%. That was driven by an 8.3% increase in transactions and a 5.6% in average ticket. Seeing an increase there in traffic and ticket is very encouraging, and they spoke to that. They see store traffic recovering nicely, they expect that to continue. BOPUS. Let me give you a guess to what BOPUS is, Chris — buy online, pick up in store, BOPUS.

Chris Hill: I just assumed it was a face cream.

Jason Moser: I thought it was a makeup line, too, at first. But BOPUS was up 25%. That’s of e-commerce sales. That was 25% of e-commerce sales versus 20% a year ago. A lot of folks ordering online, picking up in store, that’s nice to see; 38.2 million active loyalty members now, that was up 10%. They continue to repurchase shares, that count is down 15.5% over the last five years. It feels like this is a company that’s really got things back on track.

Chris Hill: Amazon made big headlines this week, but it was for the things the company is not planning on doing. We’re going to explain after the break, so stay right here. You’re listening to Motley Fool Money.

Welcome back to Motley Fool Money. Chris Hill here in studio with Emily Flippen and Jason Moser. Three years ago, Amazon launched a telehealth service called Amazon Care. This week, the company announced it is shutting the telehealth service down, prompting questions about where the company wants to go with its healthcare aspirations, Jason.

Jason Moser: Yeah. I mean, I think the knee-jerk reaction to this news was, wow, they’re getting out of telemedicine or healthcare or whatever. I mean, I think the takeaway is clearly not that. It’s not that Amazon is giving up on healthcare or even virtual healthcare for that matter, ultimately, I think what this feels like is they just came to the realization it’s hard to build, and they could probably make more progress by buying as opposed to building and then building off of what they buy. That is what is really behind that One Medical deal, I think, where they are looking into the primary care market that has a physical and a digital presence there, and it accounts for, I think, future endeavors as well as they continue to dabble in the space. I think that, for Amazon, this is something they do a lot. They try things, sometimes it doesn’t work out. They can buy their presence in that market, and they go in more educated about it than ever before. I think they’ve learned a lot just from trying to build Amazon Care. But ultimately, they just found it wasn’t holistic enough. It didn’t provide as much as ultimately their customers wanted. I think the big question for me in regards to Amazon healthcare, and I just don’t know what the answer to this is, but it’s just from a brand perspective. I don’t know if folks want healthcare by Amazon. I mentioned earlier in the week, it sounds like banking by Facebook. I mean, at some point or another, is that the brand you trust for that particular experience? I had some interesting interactions with folks on Twitter that given the Amazon’s customer-centricity and in success and retail, maybe it would be. I think that’s right. I think the question is, will they participate in this healthcare space as it is, or will they be able to get in here and disrupt and change the healthcare space? I think that really speaks to it because if they can disrupt and change things, I think that gives that brand far more credibility in healthcare space than we probably assume today.

Emily Flippen: Jason, you said it so nicely. The way I’d put it is they like to throw stuff at the wall and see what sticks. Healthcare started to slide. Here is another back stepping a bit. I will say, when I think about healthcare by Amazon, One Medical has made a name for itself by being very personable and focused. Amazon, not so much. So I’m questioning the synergies there.

Chris Hill: Also Friday morning, shares of Electronic Arts popped 15% on a media report that Amazon was going buy EA. But the report was shot down. [INAUDIBLE] Amazon, Jason.

Jason Moser: Well, it feels like a lot of deals trying to happen at once. I’m glad this was something that didn’t shake out. To me, I feel like even folks who are hoping for this MicrosoftActivision Blizzard deal to go through, this is probably really good news. Because if this news was in fact real, if this was something that was going to happen, I would imagine it would put both Amazon and Microsoft even more so under that microscope of regulators in regard to that deal. So probably just as well that this isn’t happening.

Chris Hill: NVIDIA’s second-quarter profits and revenue were lower than Wall Street was hoping for. The chipmaker also talked about the challenging conditions in the gaming market, and shares of NVIDIA down a little bit this week, Emily.

Emily Flippen: Well, what goes up must come down, or in this case, what goes up in the first quarter must come down in the second quarter because NVIDIA was looking at some extremely tough comps in comparison to how they did earlier this year. Gaming revenue, as you mentioned, fell 44% from last quarter as consumer demand weakened for things like GPUs, which drive a lot of NVIDIA’s results. The good news is that data center and automotive were bright spots in the quarter, both growing significantly year over year. So this is always going to be a very lumpy and cyclical business, depending on chip demand. But NVIDIA remains technologically the leader and very well capitalized. So if you’re a shareholder, try not to worry too much about these bumps.

Chris Hill: Salesforce had some nice results in the second quarter, but guidance for the third quarter and the full fiscal year sent shares of the cloud software company down more than 7% this week, Jason.

Jason Moser: Yeah. I wouldn’t really worry about that too much. The stock has had a nice little run-up. Honestly, when you look at what Salesforce does, when you look at the number of different ways they can play into this customer relationship management space, they just tackle it from all angles, and they’ve made some really astute acquisitions over the course of the last several years that are really starting to pay off. Then that really is showing through the numbers. I mean, revenue was $7.7 billion, that was up 26% and right in line with their own expectations. Operating margin down a little bit, 19.9% for the quarter, that was down 50 basis points from a year ago. But Marc Benioff, he did note that of all of the CEOs and leaders he’s speaking with, everybody is taking a more measured approach. We’re seeing this uncertainty play out in all facets of the economy. So they ratcheted their revenue guidance down very modestly, but maintained their operating margin guidance, however, as they’re committed to maintaining cost discipline. When you look at the actual business itself, sales cloud and service cloud are both $6 billion-plus businesses now. In the quarter, they grew 19% and 18%, respectively.

The data cloud business passed $1 billion in revenue. You put those three together along with the service and commerce cloud sides of the business, now all five of their cloud segments are generating better than $1 billion in revenue each per quarter. I mean, that’s just tremendous growth. A lot of that really plays back into the acquisitions they’ve made over the last several years: MuleSoft, Tableau, Slack. Speaking of Slack, revenue of $381 million. It continues to outperform their own expectations. It continues to grow and gain traction with customers. The number of customers spending greater than $100,000 with Slack grew by more than 40% from a year ago as well. All things considered, the business continues to perform very well. They just introduced their first share repurchase authorization ever, $10 billion share repurchase authorization. That’s noteworthy, I think, because when you look at the share count, it’s up 36% over the last five years, and that is due to dilution, acquisitions and whatnot. So they’re going to start trying to bring that back down, return a little value to shareholders. It’s interesting they see some value in their shares. The guidance for the full year around $4.72, that puts shares around 36 times full-year estimates, which really isn’t out of line for such a high-quality business.

Chris Hill: Intuit closed out the fiscal year in style, fourth-quarter profits and revenue were higher than expected for the financial software company. They also raised their quarterly dividend and authorized a $3.5 billion share buyback plan, Emily.

Emily Flippen: Yeah. You would never know that they recently had to pay a fine of more than $100 million by looking at this quarter, would you? No, Intuit had a stellar year behind them. Revenue rose 32% for the full year, largely driven by self-employed and small business customers. Management continues to speak super fondly of their core customer, the fact that their software is mission-critical for these businesses. So even as the economy weakens, they think that they’re going to continue to retain and grow customers. I will say I’m a little bit more cautious than management, and given the fact that if their core customers go out of business, the need for any software does go out the window. But for this quarter and this past year, Intuit is certainly looking up.

Chris Hill: Maybe it was originally a $4 billion buyback plan and they had to cut that $500 million check. Emily Flippen, Jason Moser, we’ll see you later in the show. Up next, how companies with purpose perform at a higher level. Stay right here. You’re listening to Motley Fool Money.

Welcome back to Motley Fool Money. I’m Chris Hill. Finding companies with purpose is not easy. For some companies, purpose can be a deep motivator for the organization. For others, it’s a box that gets checked with a one-day volunteer event for employees. How can you tell the difference? Ranjay Gulati is a professor at the Harvard Business School and author of the book Deep Purpose: The Heart and Soul of High-Performance Companies. Maria Gallagher caught up with Gulati a few months ago to discuss his book and the long road that Etsy took to find a more focused purpose.

Maria Gallagher: Can you go into a little bit the different types of purpose? I know that in the book you talk about convenient purpose and then within that, there are some different elements and then you also have deep purpose. Can you give us a couple of definitions for those?

Ranjay Gulati: You have read my book.

Maria Gallagher: I have.

Ranjay Gulati: I can see that. Look, again, I ended up with a taxonomy of convenient purpose because there were so many variations of what I call convenient or shallow purpose. The worst kind, the most egregious of purpose is disguise. That’s the example of the Enron, the Theranos and others where purpose is just a virtue cloak. The second was purpose on the side or purpose as CSR. It’s like, oh, yeah, let’s have a little foundation over here, let’s do a little charity over there. We’ll allow employees to go and volunteer for two days a year, and we’ll call that our corporate purpose initiative. That’s purpose on the side. Then I found another version which was purpose as win-win. Meaning, I’m only going to do things that are good for me and good for society. Meaning, I do them both simultaneously. People have called this a dangerous concept because it became another excuse to hide and say I only do things that are good for me. So I had to contrast that with what I call deep purpose. Because if you’re going to unlock the financial performance advantages and even social impact advantages of purpose, you have to really think deep about it and how do you make it part of the very DNA of your company.

Maria Gallagher: I think something that I really admire about the way you’re talking about purpose is it’s really getting to the nuance and the kind of the gray area in which a lot of purpose lives because we have so much talk about win-win and how in this perfect world, every company is just doing amazing things for the world. But I think when you talk about the kind of contrast between insiders, they want to reform capitalism, but they want their own financial fortunes more than they necessarily want that type of reform. I think that’s a broader question a lot of people are talking about in terms of what the overall system that we’re a part of looks at. This is kind of a long-winded way of asking just how do you think about that kind of push and pull of saying that you can’t just be morally neutral. A lot of companies I know you talk about in the book, with Etsy, that you have to make some sort of choices that may hurt some people. So how do you think about that type of overarching idea of what that push and pull and that nuance looks like?

Ranjay Gulati: Like what’s happening all around us today, Maria, everything has gotten polarized. Everything is taken to its extreme and each side takes the purest view and says, if you are in violation of this purist idealistic, perfect view, then you are completely bad. What I discovered was that, today, businesses have multiple stakeholders to serve. So their purpose needs to think about employees, customers, suppliers, community, society, planet, and nation-states even now. All this stuff is happening, and so you can’t satisfy everybody all the time. This perfect win-win doesn’t happen all the time. So you’re going to have to make choices, trade-offs, hard decisions. No one’s going to be perfectly happy with you, and I call that walking on the razor’s edge. But having a purpose allows you to clarify to everybody this is what I’m doing and why. I’ll tell you a short story here that came out of my research. One of the companies, as you mentioned, I’d studied was Etsy. Etsy was a wonderful company started by a very idealistic founder who was a carpenter and he wanted to sell his crafts online. So he built this little marketplace for craftspeople like himself to sell their wares. This thing grew beyond what he probably ever imagined. Next thing you know, it’s like selling over a billion dollars of product and the company’s outgrown him. They bring in a CEO to take over who grows the company, but keeps that DNA that we’re really here to serve the sellers and shareholders. We’re not here to make money. We’re kind of a socially oriented marketplace. The employees were told, have yoga classes, enjoy, work as hard as you can, but we are working to this great things. What starts to happen after they go public is their spending is growing, their hiring is growing, their marketing and the spending is growing, and revenue is flat. Now, what does that tell you? That here’s something wrong with this business. Anyway, with shareholder pressure now, the CEO gets fired and they put a member of the board who’s run e-commerce companies, Josh Silverman, as CEO.

The day before he takes the job, he takes his teenage daughter for a walk and he tells her, “In the coming days and weeks, you’re going to hear some horrible things about me in the press, from employees. I just hope you believe that they are not true. I’m doing what I believe is the right thing.” He has to go and they have to lay off people because they’ve hired up too much. They have to curb their marketing spend, their technologies were all over the place, and even their social impact was not measured really and all over the place. But the blowback was huge. The labels used to describe him were harsh. His idea was, “I want to build Etsy back into a profitable and socially impactful company,” which he has. But you see that’s why the razor’s edge, walking on the razor. I looked at other companies, too, that did it the other way. Gotham Greens is a fascinating company. It’s an agrotech company that does urban farming on large rooftops in New York City where you are, Maria. They have a farm on top of Whole Foods. The idea is it reduces spoilage, reduces transportation, and of course allows them to deliver the product fresh. Now, packaging was a huge issue. Customers like us, we want it in a package. We don’t want to have a loose lettuce and loose things like that. So they said, “OK, what packaging?” The only packaging they could use was plastic because plastic is the only thing still today that keeps it fresh longest. Now here you are a green-oriented company and you have to use plastic, and they said, “We had to, but we’re going to keep an eye and look for options.” This idea that purpose means you’re perfect on every dimension is an illusion. I think it’s all about walking on the razor’s edge. As long as you have clarity of what your intent is, you communicate it clear to all stakeholders and say, look, this is what we’re doing, this is why we’re doing it, etc. Etsy says we have three social impact goals.

Not four, not five, three: DEI, environment, and economics of the seller. That’s it. How to navigate a much more complicated world we’re in right now where all of us are being called in different directions. If you just take employees, look at the “great resignation.” Employees expect more of work. We expect more meaning out of work. What are companies doing for that? Customers want more trustworthy companies that they feel they can trust. They don’t want to be duped anymore or deceived or misled, manipulated even. The planet is also becoming an issue now. They’re saying even though the planet may not have a voice, but companies are being expected to deliver on this. Then social issues. What do you believe about what’s happening in Ukraine today? Tell me, what’s your point of view? I think what’s happening is most people are reacting to these things, pressures, and what’s the minimum we need to do. Purpose allows you to be proactive. You’ve built an anchor for yourself. You said that’s who we are, and we’re going to do the best within our purpose statement and our frame of reference. I’m surprised why so few companies still have deep purpose orientation.

Chris Hill: Coming up after the break, Emily Flippen and Jason Moser return with a couple of stocks on their radar. Stay right here. You’re listening to Motley Fool Money. 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. Welcome back to Motley Fool Money, Chris Hill here in studio once again with Emily Flippen and Jason Moser. Final reminder about FoolFest, our annual investing conference, Aug. 29th and 30th. We’re going to talk investing strategies, stock ideas. We have a great lineup of speakers. We’re going to be recording our podcast from the events side in Washington, D.C. FoolFest is free for Motley Fool members, and if you’re not yet a member, you can sign up for our Stock Advisor service. Go to fool.com/foolfest for all the details. You get a complementary digital pass to this two-day event. Again, that’s fool.com/foolfest. Our email address is [email protected] Got a question from Tim in Wisconsin who writes, “In August of last year, one of your analysts, I believe it was Emily Flippen, talked about Quidel Corporation, ticker symbol QDEL. They have since merged with an orthopedic medical company, Ortho Clinical Diagnostics Holdings, and the stock hasn’t done much since then. I’m curious what your thoughts are on the company at this time.” Thanks for the question, Tim. Emily?

Emily Flippen: Yeah, it does sound like something I would say. Quidel is a really interesting business. For anybody who is unfamiliar with this company, which I wouldn’t be surprised, they’re relatively small, they’re a diagnostics business. Pre-pandemic, their bread and butter was flu tests. Obviously, that changed when COVID hit and the business dramatically shot up. They’re the makers of the QuickVue COVID test. Now they’re just pushing into more of the diagnostics, and that’s exactly what this acquisition of Ortho does. The company did renamed themselves to QuidelOrtho, which I think they could have come up with something better. But it was a $6 billion deal, and this was the combination of the two companies. Ortho focuses on in vitro diagnostics. So it was accretive to what Quidel’s core business is. It’s growing faster than Quidel’s core business, so also hopefully going to be great for their growth engine in the future. On the Quidel side, things are still looking good, still a big fan of this company. They’re doing a combined flu A/B and COVID tests that even as the pandemic wanes, I think, should retain traction with people when they get sick, going to their Walgreens or CVS to get tested. But the big question mark is still their Savannah molecular diagnostics system, which was probably the reason why I mentioned this company in the first place. They’ve been trying to get that out the door for a while. They have tests going in the European Union right now with expectations of launching in the U.S. in hopefully 2023, but we’ll see.

Chris Hill: You can email your questions to [email protected] or you can call the Motley Fool Money hotline 703-254-1445. Let’s go to our man behind the glass, Dan Boyd. Dan, we’ve got a question on the hotline?

Gail: Hi, this is Gail from Hershey, Pennsylvania. My question is, do you consider Berkshire Hathaway a riskier investment than it was five years ago now that one company, Apple, makes up 40% of its invested holdings? I’d love to hear your thoughts and also how you think Warren Buffett might answer that same question. Thanks.

Chris Hill: Thank you, Gail, for listening and for a great question. It’s really two questions, which I love, Jason, that it’s like, what do you think Buffett would say?

Jason Moser: Got an investing question? Better call Fool. Let’s get to it because I love the spirit of this question. I’ll try to answer this how Buffett might, but as you look at the long-term investments sector of the business, it represents 40% of total assets on the balance sheet. Now, many of those produce very healthy dividend streams, Apple included, and you’re looking at a company, Berkshire Hathaway, though, that also generated $290 billion in revenue over the last 12 months. Dividends are a very, very small part of that revenue. I think that Buffett would look into the shareholder letter and refer us to what he defines or what he calls the big four giants. The first is the collection of insurance companies, which is that represents the lion’s share of that revenue that I just mentioned. The next is Apple. Let’s not dismiss the fact that it does represent about 40% of that overall investment portfolio, and it also accounted for $785 million in dividends for Berkshire Hathaway last year. Remember, every year that goes by that they collect those dividends, that actually just reduces their effective cost basis in that investment. Given that we know they’re going to hang on to those shares for as long as they possibly can, that should really only continue to get better over time. But then you look at the other two parts of that big four giants, you’ve got BNSF, which is the railroad, you’ve got Berkshire Hathaway Energy. So all things together, I think you look at the nature of its other investments, I think it makes the investment portfolio even more attractive because all of these other aspects of the business are so ultimately reliable. Insurance, I mean, that’s what we talk about that business time and time again, it’s so reliable. Energy, rail, I mean, those are really strong competitive advantages in this overall business that affords Berkshire Hathaway the luxury of taking those risks with an investment portfolio like this and concentrating on what they see as the biggest long-term winners. Is there some risk in Apple? Sure. But I think that risk is fairly low when you look at it in the context of other investment ideas out there.

Chris Hill: We were talking earlier in the show about Amazon and whether or not they would brand their healthcare initiative around their core company name. You look at Berkshire Hathaway, they’ve done very little of that. They’ve done very little of spreading around the Berkshire Hathaway name to businesses they have acquired.

Jason Moser: Yeah. That seems to be really right in line with their mentality. I mean, just as much as when they buy those businesses and bring it into the fold, they want the leaders of those businesses to continue leading those businesses. It’s not all about we want you to be Berkshire Hathaway. They want some autonomy there, and I think that plays into their brand as well.

Chris Hill: Nobody wants Berkshire Hathaway candy. We want See’s Candies, not the Berkshire Hathaway candy. Let’s get to the stocks on our radar this week. Our man behind the glass, Dan Boyd, is going to hit you with a question. Emily Flippen, you’re up first. What are you looking at this week?

Emily Flippen: I’m looking at Doximity. The ticker is DOCS. For investors who are unfamiliar, Doximity runs a platform for doctors. It’s like a social networking platform, but they monetize mainly through ads driven by pharmaceutical companies. You can imagine it as like a digital pharmaceutical rep, if you’re going to go that far, but they’ve expanded their business into things like telehealth and physician scheduling, faxing, connecting. So doing a lot more than just any one thing. I will say, though, this past quarter did not look great for Doximity. Ad revenue significantly fell off as pharmaceutical companies tighten their belts a bit for ad budgets, but the fundamentals for this business are still very strong. They have incredible nearly 50% free cash flow margins. A highly invested founder/CEO in Jeff Tangney, and their engagement has “never been higher.” While I’m still nervous about what the ad revenue could look like over the next few quarters, the fundamentals remain strong.

Chris Hill: Dan, question about Doximity?

Dan Boyd: Sure thing, Chris. Doximity, great name, been on the record talking about that before. Emily, who exactly are the customers for Doximity?

Emily Flippen: The customers are the pharmaceutical companies. I will go to the grave saying this because Doximity themselves say, “We always try to serve the physicians,” and it’s true they do want to serve the physicians, but the person who is writing their check are pharmaceutical companies for the most part. So they need to keep them satisfied first.

Chris Hill: It’s the difference between consumers and customers. Customers are the ones who pay you.

Emily Flippen: Exactly.

Chris Hill: Jason Moser, what are you looking at this week?

Jason Moser: Yeah. Autodesk earnings came out this week, ticker ADSK. Very respectable quarter in what is obviously a very challenging time for all. Remember, Autodesk is in the business of computer-aided design. Total revenue grew 17%. They grew their operating margin 5 percentage points. Total billings up 17% to $1.2 billion. Remember, Autodesk is mostly a subscription business, and subscription plan revenue grew 17% with net retention rate in that 100%-110% range that management targets. Remember that net retention rate, that’s what measures the year-over-year change in recurring revenue for the population of customers that existed one year ago. That’s why they track that metric. But the stock itself right now is valued around 32 times full-year earnings estimates. I don’t think that’s out of the ordinary for this business. Fairly reliable subscription model and a very strong reputation, the computer-aided design market.

Chris Hill: Dan, question about Autodesk?

Dan Boyd: Sure thing, Chris and Jason, I suppose. Here’s a more of a fundamental investing question for you. I bought Autodesk early last year, what do you call the opposite of buying the dip? Because that’s what I did.

Jason Moser: I feel like I can let Chris answer that.

Chris Hill: I was going to say I did that, not with Autodesk, but with a couple of other companies as well.

Jason Moser: Buying the top?

Chris Hill: Yeah, buying the top.

Jason Moser: Buying the peak.

Dan Boyd: Sure, I guess. Let’s hope that there’s a dip between two peaks sometime in the future because, boy, it’s not been an easy ride so far.

Chris Hill: I almost hesitate to ask, Dan, what do you want to add to your watch list this week?

Dan Boyd: Well, I’m always watching Autodesk since I’m a shareholder, so I’m going to go with Doximity. Again, I just love the name. Just rolls right off the tongue.

Chris Hill: A great ticker symbol, too.

Dan Boyd: Absolutely.

Chris Hill: DOCS, great ticker symbol. Emily Flippen, Jason Moser, thanks so much for being here.

Emily Flippen: Thanks, Chris.

Chris Hill: Keep the emails coming to [email protected] and give us a call 703-254-1445, the Motley Fool Money hotline. That’s going to do it for this week’s show. The show is mixed by Dan Boyd. I’m Chris Hill, thanks for listening and we’ll see you next time.

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