Not Panicking Over Nvidia

In this podcast, Motley Fool analyst Jason Moser and host Ricky Mulvey discuss:

• The subpoena that instigated Nvidia‘s sell-off.
• A record amount of share repurchases by corporations.
• Earnings from Dick’s Sporting Goods and Dollar Tree.

Motley Fool contributor Matt Frankel joins Ricky to take a look at real estate brokerages Redfin and Zillow, and discuss what lower interest rates mean for the industry.

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. 04, 2024.

Ricky Mulvey: Were you waiting for a dip? You’re listening to Motley Fool Money. I’m Ricky Mulvey, joined today by Jason Moser. Jason. Are you ready to take a dip? Ready to dive into the dip?

Jason Moser: Ricky I’m always ready, I’m always ready for a good dip.

Ricky Mulvey: Summer is over and you know what? I thought after last week, I thought we were done talking about NVIDIA for a sec until the chip designer reared its head back for the next earnings call but then they decided to go over and lose 9% of its value in a single day because the company received a subpoena from the Justice Department, this is notable because $280 billion is the most amount of money lost by any company in one day. We’ll reflect on that price drop, but first the story, what’s the new big tech antitrust thing going on here?

Jason Moser: Two hundred and eighty billion dollars is a lot of cabbage, for sure and we’ve talked about with NVIDIA, given the run that it’s had. At some point or another, you get to a point you’re like, OK, we have to be aware of the burden of great expectations, we were talking about this on the radio show last week. The company is performing very well, but the market continues to just up the ante there and expect more and at some point that becomes a little bit more unreasonable and then you add to that this news here that they’ve received a subpoena from the Department of Justice, so it’s an antitrust investigation, it hasn’t actually reached the stage of a formal complaint but ultimately, they’re inquiring about whether NVIDIA makes it more difficult to switch to other suppliers of AI chips. I think that’s been the argument for NVIDIA to this point in its performance is that this is the company that has the best technology for this amazing thing called AI that is going to change everything.

Listen, I’m not saying AI is some flash in the pan, I firmly believe it is not, but it is something that’s going to take a lot of time to develop. It’s going to take a lot of time for us to really understand the implications and how it’s going to impact our lives and how it’s going to impact all of these companies that do so much for us. At this point, they have 80% of the market, I think on the data center AI chips, it seems reasonable at least for an inquiry into this. Now, whether it reaches actual investigation, I think that’s the next question.

Ricky Mulvey: I think the interesting thing to me is that this is what you said, it’s an inquiry. It’s not evidence of a cooked balance sheet, it’s not something, it’s the start of an investigation and yet it’s led to the largest drop in value of a company ever. According to Bloomberg, regulators are also inquiring whether NVIDIA gives preferential supply and pricing to customers who use its technology exclusively. Basically, if you buy a lot of our products, we put you to the front of the line, I’m not a legal expert, JMO but that sounds like a fine, that doesn’t sound like the company’s shutting down here.

Jason Moser: I think that’s likely the outcome if this pursuit continues, and that remains to be seen. The good news for NVIDIA and with so many of these big tech companies is typically these fines are just drops in the bucket. It doesn’t really impact the business for a company like NVIDIA that’s very well capitalized and obviously is let’s just call it, one of the most important companies out there right now. I think a fine would be the most likely outcome, if there’s any outcome at all.

Ricky Mulvey: If you start seeing some leather jackets on Poshmark, we’ll know that Jensen Huang is raising money to pay that off. Stocks up more than 120% year to date. I understand the news story here, I understand that it’s real but maybe the market was just looking for an excuse to sell off. What do you think?

Jason Moser: I think there’s probably something to that to me, profit taking that’s part and parcel with the market. Obviously, we take a little bit of a longer term view but the whole point of investing is to make money, so it makes sense to see some profit taking and even after this $280 billion haircut the company still valued at 28 times sales and around 50 times earnings, so that’s not as lofty as before, but it’s still pretty glass half full and for a company that really is in firm control of this market at this point in time. I understand the market opportunity and I understand the enthusiasm behind it. It wouldn’t shock me at all to see this trend downward a little bit here in the near term as some profit taking continues but we’ll wait and see for sure.

Ricky Mulvey: Let’s zoom out on the market as a whole as we look back on August and something interesting to me is another story in Bloomberg showing that companies authorized $107 billion in new buybacks last month, that’s the most of any August, NVIDIA was certainly a part of that, they authorized, I think 50 billion in new share repurchases. For context, Goldman Sachs, which does corporate repurchase orders, saying that they were more than two times higher than a year ago. The point of all of this is that a lot of companies are buying back a lot more stock, even as the market is scratching all time highs. What’s this signal to you? Anything at all? As you look at the macro picture?

Jason Moser: There are a couple of things here. Let’s do remember that the market, the overall markets performance, it’s been very concentrated. We’ve seen essentially a handful of companies around 10 companies are responsible for a little bit more than really a third of those market returns, so it is something where we’d like to see a little bit more breadth, as they say. We want to see this performance reach beyond just these 10 companies, and most of them, they’re the magnificent seven and a few more. I think up to this point, companies have been playing defense to an extent in this environment, it’s a little bit of an uncertain environment, it’s a higher rate environment, the cost of capital has gone up, so they’re protecting their balance sheets being a little bit more mindful of debt. They’ve had the ability to build up some cash to put to work, and it’s nice to see shares repurchased at attractive prices but you also want to see with that, you want to see the share count come down and so if we look at NVIDIA specifically, NVIDIA repurchases are essentially just offsetting dilution at this point and that’s just going to be the way it is, it’s investors are going to have to weigh that in a case like this, I wouldn’t mind seeing them pull back a little bit on that share based compensation, and to see those repurchases have a little bit of more of an impact there on bringing that share account down. Otherwise, you have the income investors really getting out there and say, hey, listen, where’s my dividend?

Dividends are cash in the pocket, there’s more certainty. Repurchases are theoretical to an extent in that they’re supposed to increase the value of that share because it whittles down the overall share account but in the case of companies like NVIDIA right now where it’s not really whittling down that share account, you have to ask yourself the question, is that the best use of capital at this point.

Ricky Mulvey: Sounds like you’re sub tweeting Matt.

Jason Moser: Well, probably. Matt and I worked very closely together, so he and I think alike on a lot of things.

Ricky Mulvey: Let’s move to Dick’s Sporting Goods. It’s another stock on fire that’s taken a breather. Dick’s Sporting Goods handedly beating earnings estimates, but investors did not like that the company basically maintained its full year sales guidance. Let’s look at some highlights from the quarter. Earnings per share almost $4.40, importantly, that’s up more than 50%, 5, 0 from a year ago. They opening five more locations they’re calling the House of Sport, which are two times larger than a normal Dick’s Sporting goods store and also, the company disclosed that it was the victim of a cyber attack and certain confidential information was breached. JMO, I want to focus on that earnings growth. Where is that coming from the sporting goods retailer?

Jason Moser: Yes, so they noted in the release that the comps growth was driven by growth in average ticket and transactions, those are two metrics we pay attention to a lot with things like retailers and restaurants, because you ultimately want to see more people coming through the store, buying more stuff and so if you see greater traffic, and then you see that traffic spending more, well, that really helps offset that fixed cost base that comes with operating those stores and in Dick’s Sporting goods case, of course, that’s a lot of stores to consider. They definitely realized the benefit there, they realize some gross margin expansion thanks to a higher merchandise margin. They’re able to buy prices as well as the mix of the merchandise that they’re selling, they realize a higher merchandise margin there and then they’re also leveraging their SG&A and pre-opening expenses were considerably lower versus a year ago that they just haven’t opened as many stores. When you put all of that together, that’s what really helped boost those earnings per share of this score.

Ricky Mulvey: The retailer are focusing on larger physical retail stores, so we’re looking at more than 100 square feet. If you watch the marketing presentation for it, JMO, it’s a place to call home. It’s not just a place to go buy cleats, it’s a place where they know your name, it’s a third place but. Are you surprised to see Dick’s Sporting Goods here opening much larger physical retail stores?

Jason Moser: Like to see him line up some chips and Kaso, maybe a tap with some cold beer there and get me an NFL season starting. Ricky, that’s the place where we’re going to go watch the game. I don’t know maybe. I’m not terribly surprised to see them opening these larger physical stores and that’s mostly because, as the Internet has disrupted everything in retail is no exception. One word that you hear in retail all the time now, it’s omnichannel. It’s ultimately being able to serve your customer, how they want to be served, whether they want to be in the store, whether they want to order online, whether they want to buy online and pick up a store and so with Dick’s, it’s one thing to think about, well, they’re opening these larger stores and opening more stores, does that make sense? But let’s also remember that with the omnichannel approach there, with the online sales that the company continues to present, these are not only shopping locations but they’re also fulfillment and distribution locations, they do fulfill the overwhelming majority of their e-commerce via their stores and so, building out these stores, particularly these bigger ones, not only are they stores where we can go shop, but they’re also helping the business fulfill those e-commerce aspirations as well.

Ricky Mulvey: I’m going to grab my laptop and a cup of coffee, see how long I can work from Dick’s Sporting Goods there [LAUGHTER] on the show, this is my third place. First slide in bold letters when you look at the earnings presentation. In fact, they put it on two slides in case you missed it the first time. We are a growth company, JMO. This is a retailer that has been around for almost 100 years, I think it’s been around since the early 1900s. Is this really a growth company? I see you grimacing, you’re biting your bottom lip.

Jason Moser: No, I think it’s just all companies like to be able to say that they’re growth companies regardless of their size. I think that when you consider Dick’s Sporting Goods in the market that they’re serving, they’re talking about a $140 billion market opportunity that they’re focused on and they brought in $13 billion in revenue over the last 12 months. I absolutely understand that they want to be one and they’ve grown revenue at just under 10% analyzed over the last five years that’s nothing to sneer at. I don’t know that I would call it a growth company necessarily, there is going to be some growth there for sure, it’s not going to be some SAS business, this isn’t software, this isn’t tech. It’s just straight up retail and pretty easy to understand, so there is going to be some growth there, I think what’s encouraging for investors interested in this business at 1.9% dividend yield, we’re going to go back to that dividend conversation there earlier with NVIDIA, 1.9% dividend yield with this business, I think is really is really interesting, so maybe they really just want the best of both worlds.

Ricky Mulvey: Start writing in dividend above we are growth company. Let’s move on to the other side of the consumer retail story, that’s also a company reporting this morning Dollar Tree down about 20% after cutting its full year outlook. Jason, we’re seeing Walmart get in love from the value conscious shoppers, they’re all going to Walmart but you’re not seeing that at family dollar, Dollar Tree Stores. Why don’t you think they’re getting a similar effect?

Jason Moser: Well, to me, when I think of these two concepts, the Dollar Stores, and then something like a Walmart or a Target, it feels like those are two different types of consumers and that’s evolved over time and so if you look at Walmart. Walmart, over the last several years really, they’ve cited this growing customer base of higher income earners. Folks who are feeling the pinch and maybe trading down, so to speak and looking for more value at something like a Walmart as opposed to other places and in regard to dollar stores, they’re just much more sensitive to the economically sensitive consumer. They are focused on those lower earners and when you add to that the fact that these stores are expanding their pricing strategy, they’re embracing this multi faceted pricing strategy now, where it’s not really a dollar storm. You’re going to there get stuff for $7, I think now up to $7 Dollar Tree Stores, for example, so it does feel to me like they’re two different consumers but then when you add that to the scale that Walmart has and their ability to essentially offer that value pretty much as long as they want to. What do Jeff Tazo say, your margin is my opportunity, these companies have that advantage.

Ricky Mulvey: As I’m looking at this stock, certainly unpopular, fell off a cliff this year, but previously, it was a decent performer. I want to be clear that Dollar Tree still makes a profit on an operating and a net income basis. As I was looking this morning, the CEO Rick Dreiling, will tell you a lovely bedtime story of transformation and refocusing the company, stop me if you’ve heard that one before. The stock is below what it was in March of 2020 and I don’t know. I like running toward a dumpster fire, any interest in playing a cyclical game with this one?

Jason Moser: Well, I absolutely could understand why some investors would be interested in this, value investors would probably be looking at this and thinking, hey, you know what? Shares are down over 50% year to date, they’re valued around 12 times full year estimates on that revised earnings guidance and there probably is a compelling value thesis here. Now, it’s not really my cup of tea personally but I certainly understand the interest there, I don’t think this is a company, I don’t think this is a concept that’s going in the way the dodo bird. I think one thing to keep in mind, I appreciate the fact this company, they’re repurchasing shares where they feel like they represent a good value. It’s worth keeping in mind they have three a half billion dollar in long term debt versus only about 600 million or so in cash and equivalents on the balance sheet and it’s not really a cash flow machine, so to speak. Now, on the flip side, the coverage ratio is like 17, I think today, so that’s good, that just ultimately means they’re earning enough and operating income to cover that interest expense many times over, so that’s positive. I absolutely, this strikes me as maybe Jim Gillis. Maybe we need to Gillis about it, let’s reach out to Gillis and see what he thinks about this.

Ricky Mulvey: Let’s put it all together, we’ve talked about Dick’s Sporting Goods, we’ve talked about Dollar Tree, talked a little bit about Walmart but any of these stories as we put these earnings together, signal something to you about how Americans are shopping as we get to the latter half of 2024.

Jason Moser: Well, I think there are two very different markets for sure, I think you look at something like Dick’s Sporting Goods, sports equipment in apparel, it’s very resilient, particularly at this time of year we’re going back to school. Kids are getting all set, get college football season starting. Sporting equipment in apparel is quite resilient and while consumers do want value there, they also want brand, brand really matters in a space like that and that commands a little bit of pricing power and that’s a good thing. When you look at the dollar stores, those are absolutely less about brand and far much more about value, which I think we’re just watching that play out right now. It makes a lot of sense these results, and it’ll be interesting to see how they wrap up the.

Ricky Mulvey: Jason Moser, appreciate you being here. Thanks for your time and your insight.

Jason Moser: Thank you.

Ricky Mulvey: Before we get to our next segment, I wanted to tell those in Denver, we’ve got a live event coming up in a couple of weeks. We’re going to be doing a show with our friends from bigger pockets on Wednesday, September 18th. Starts at 6:00 PM at the Denver Press Club. The show is going to be a look at Airbnb as a stock, and then they’re going to do it from the side, of real estate investors also have some networking, time for Q&A. Tickets are $27 and include your first alcoholic or non-alcoholic drink, I’ll put a link to the registration in the description, hope to see you there.

It’s a slow housing market, but the Fed says that rates are coming down, so what’s all this mean for discount brokerages, including Redfin and Zillow. Motley Fool contributor, Matt Frankel joined me to break it down. Matt, real estate brokerages are in an interesting spot to say the least. The macro story with houses is you have high prices, high mortgage rates and even though mortgage rates have declined a little bit, home sale activity is not going up. Many homeowners really like that 2% mortgage and even housing starts are about where they were in June of 2020 in the middle of the pandemic. It’s a very detailed macro picture, but what does that mean for the real estate brokerages like Redfin and Zillow right now?

Matt Frankel: The real estate industry in general needs rates to come down, just let me give you a quick example. if you want to buy a house with a 30 year mortgage and a 20% down payment, and I were to give you the choice of two scenarios. One, your house could be 10% cheaper than it is right now or two, you could have a 5% mortgage rate instead of the 6.5 you can currently get. Which would benefit you more as a buyer?

Ricky Mulvey: I feel because it’s set up this way, it’s the mortgage rate question.

Matt Frankel: It’s by far. It would result in a much bigger reduction to your monthly affordability. Everyone is focusing, I think on the wrong issue, they’re focusing on real estate prices went up another I think like 0.5% last month, and now they’re at a new all time high. That matters a lot less than the cost of financing. Really, we need mortgage rates to come down, it looks like it’s going to happen, which is as we’re going to get into why a lot of these stocks have reacted so favorably but it’s not necessarily the home prices. People would buy million dollar homes if they could finance them at 0% but when you’re at 6, 7, 8%, people in my generation have never had to deal with this.

Ricky Mulvey: I guess that’s what’s happening with the new builds too, even though you have a pandemic going on, you have really low interest rates a little bit easier to build. The other big story going on right now is the NAR settlement, the National Association of Realtors. This is the month that that takes effect and basically, the main thing is that realtor commissions are going to compress and high level outcomes are that sellers agents can’t advertise the buyer’s commission on multiple listing services, so if you’re going out to look for a house, a buyer’s agent would probably direct you to the one where they get a juice your commission. The other thing is that buyers must sign a representation agreement before they start touring homes with an agent, this is the spot where commissions become more negotiable. Now, sellers have an option to not pay the buying agents commission, people in the class action lawsuit saying, wait, I’m selling a home. Why am I paying the counterparties agent commission? High level overview, but what are the effects from this settlement that you’re watching is it takes effect in August and September?

Matt Frankel: A few things. Number 1, sellers are going to still pay the buyers agent Commission in most cases, for now. If you are refusing to pay a buyer’s agent commission that’s like you saying you don’t want to sell your house. Imagine a realtor, I’m going to show you two houses today. This one, the sellers are covering my commission, this one, you’re going to have to pay me 3% of the sales price out of your own pocket. It’s a no brainer for the buyer. A big positive effect that we are seeing is that consumers in general are becoming a lot more fee conscious of what real estate transaction costs. Most home buyers have no idea what their agent makes because the seller pays it, it’s not really publicly disclosed and it really paves the way for fees to gravitate downward over time. You saw in the brokerage industry, how brokerage commissions really gravitated down over time? It wasn’t like an instant effect, but it creates a lot more fee pressure, especially as technology evolves and makes a lot more of the process easier to automate.

Ricky Mulvey: Some of the companies that make a lot of money from those fees are the brokerages, like Redfin and Zillow, what do you think these rules mean on that side of the business?

Matt Frankel: If anything, Redfin is set up to compete better in a more fee conscious environment. Just, for example, they charge a 1.5% commission to sellers instead of the standard 3%, and they’ve been doing this for years but no one was really that fee conscious, so it didn’t really make as much of a growth business as Redfin would have liked but with traditional real estate brokers starting to feel the pressure a little bit from buyers, and Redfin offering a industry best compensation structure that they’re just starting to roll out. It’s an interesting time for Redfin in terms of what the settlement means.

Ricky Mulvey: Let’s take a look at Redfin, it’s a wildly volatile stock. It’s one I own and got my attention because Jerome Powell made some dovish comments, and the stock just took off. What do lower interest rates or even just the specter of lower interest rates mean for Redfin’s business? Why are the investors so excited about it?

Matt Frankel: Well, Redfin agents deal with both the buy and sale side of transactions, you can get a Redfin buyers agent Redfin sellings agent. They basically position themselves as a way to sell your house more cost effectively. Right now, existing home inventories, meaning homes on the market are at a generational low, because like you said, people want to hold onto their 2, 3, 4% mortgage rates and aren’t willing to list their houses. If mortgage rates come down, more inventory floods onto the market, that’s a big deal for a company who their bread and butter is selling real estate sellers agents, so that’s really why you’re seeing Redfin react so positively just on the interest rate front.

Ricky Mulvey: Glenn Kelman, always colorful in his earnings calls when asked, what happens if rates don’t come down? This is what he said. I’m quoting. “Plan B is to drink our own urine or our competitors’ blood, stay in the foxhole. I don’t know if you remember, but the last earnings call ended with me singing a line from a Ho song, won’t get fooled again. I said, we’re not banking on low rates when other people thought they might come down”. This is also a company that doesn’t really make an operating profit, it’s got some balance sheet issues. Is Kelman right here, is this company good, no matter which interest rate cycle it’s in?

Matt Frankel: Well, the short answer is maybe, because they’re doing a great job. That was all a really colorful way of saying that they’re doing the best they can in a bad environment. Basically, they need interest rates to come down to be profitable, but their losses are narrowing very, very rapidly as the company’s really doubling down on efficiency and figuring out how to run a business that doesn’t rely on a strong real estate market to be profitable, so it’s inching toward profitability, there will break even on and adjust the EBITDA basis in the second quarter by the way, which is impressive in a terrible market. They don’t necessarily need interest rates to come down, they’re hoping they will, but they’re planning for the worst.

Ricky Mulvey: Then when we look at its competitors Zillow. Home buying activity with lower interest rates should rise, but the stock hasn’t gotten a similar boost as Redfin has, so why do you think it’s only happening with one but not the other?

Matt Frankel: Well, it’s gotten a boost. Zillow is up 33% in just a few weeks, not quite what we’ve seen with Redfin but it has gotten a boost. It gets less of a direct benefit from interest rate activity and more of a potential impact from the NAR settlement. Zillow makes almost half of its money from fees it charges to buyers agents not selling agents, but buyers agents which as you mentioned, is the core group that is potentially affected by the settlement. Buyers’ agent commissions are in flux right now but at the same time rising tide lifts ships. If home selling activity doubles in the next couple of years, which is entirely possible from a low floor, Zillows they make their money from agents, agents will give Zillow more fees and they win, so it’s definitely a benefit but not nearly as much as we were seeing with Redfin.

Ricky Mulvey: Then as we look at these two companies, Redfin or Zillow, maybe there’s another company you want to bring into the mix. Do you think either of these brokerages are worthier of an investor’s attention?

Matt Frankel: I own Redfin, I sold Zillow shortly before the NAR settlement went into effect, I’m just not that inclined to be in a company that relies so much on buyers’ agents right now. Redfin’s balance sheet issues are not as concerning as they sound, you correctly pointed out, they have a lot of debt, about $1 billion worth of debt. About 700 million of those are convertible notes that pay almost no interest for right now, this was during the 2020-2021 free money period. They have 2027 convertible notes that pay 0.5% interest, so it’s not like a giant interest expense, it is sitting on their balance sheet, but this isn’t debt at like 10% interest for the most part.

Ricky Mulvey: It’s also eating a lot of cash though. Redfin’s cash and equivalents went from 1.2 billion at the height of the pandemic down to about 200 million today. It’s burning cash, even though we’re adjusted EBITDA to break even.

Matt Frankel: They burned a lot of cash, and they made some acquisitions that they clearly overpaid for bay equity home loans and rent.com. They clearly overpaid for those and that’s where a lot of their cash went but they do still have over $200 million in cash. They have debt that is at a pandemic era interest rate, thankfully. I think Redfin stand has a lot of different ways it can benefit in the next couple of years and that’s the one that I own in my portfolio.

Ricky Mulvey: I’m keeping it as a speculation. Matt Frankel, appreciate you breaking it down with me. Thank you for your time and your insight.

Matt Frankel: Always good to be here.

Ricky Mulvey: As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don’t buyer or sell anything based solely on what you hear. I’m Ricky Mulvey. Thanks for listening, we’ll be back tomorrow.