In this podcast, Motley Fool analysts Deidre Woollard and Jason Moser discuss:
- Stocks that could be prime acquisition targets.
- JetBlue‘s (JBLU -2.26%) offer for Spirit Airlines (SAVE 4.23%).
- Venture capital drying up and what that means for technology innovation.
Plus, Motley Fool host Alison Southwick and Motley Fool retirement expert Robert Brokamp continue their series on past market declines with author Morgan Housel, this time covering the dot-com bubble and its lessons for investors.
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 June 28, 2022.
Deidre Woollard: It’s not easy being a public company. A major software company goes private while airlines battle for acquisitions. Plus, Morgan Housel looks back at the dot-com bubble. You’re listening to Motley Fool Money. I’m Deidre Woollard, sitting in for Chris Hill, and I am joined by Motley Fool senior analyst Jason Moser. Hey Jason, great to be with you today.
Jason Moser: Hey Deidre, thanks for having me.
Deidre Woollard: I’m excited to talk to you because you’ve seen cycles in the overall market and we are in this “let’s make a deal” environment right now. [laughs] There are so many acquisitions. There are rumored acquisitions. It’s just all spinning. Some of it is small like eBay buying an NFT platform called Known Origin. But then, last week, you had that larger deal like Zendesk going private for $10.2 billion. We’ve got the Frontier battle, we’ve got rumors coming out like PepsiCo and Celsius fitness drinks and FTX and Robinhood. Well, let’s start with Zendesk for a minute. So we had a flood of IPOs and SPACs in the last year or two, that flood turned to a trickle and some companies are now going private. What does this Zendesk deal signal to you?
Jason Moser: Well, it signals a couple of things. I think, on one hand, it does feel like clearly the market’s appetite for those highfliers has been tempered a bit. That the promise of profits down the line isn’t quite as enticing as maybe as it used to be. We saw not all that long ago. So many of these businesses were just trading at 20-30 and 40 times sales, which it wasn’t normal, but it kept on going on for a really long time, so it became normalized. All of a sudden, we became a little bit more immune, or just numb to that 20 and 30 times sales multiple. It was really out there though until as market conditions have deteriorated, as the cost of capital continues to go up, you see the market’s appetite for those highfliers has been tempered a little bit. So Zendesk going private now around seven times sales, start asking yourself, maybe some of these companies, maybe whether it’s private equity or are these larger acquirers, maybe they see where things are headed.
They believe in this digital economy and that is ultimately where we’re headed as tech guides more and more of our lives, particularly on that back-end. Maybe these acquirers see that long-term opportunities, these valuation start to come down. I’m not saying they’re cheap by any means, 6, 7, 8 times sales is still expensive, I think, conventionally speaking. But it starts to become a little bit more palatable if you can really take that longer view. If you’re looking at this as a decade-plus-long play, then all of a sudden, you start seeing these valuations making a little bit more sense. We saw recently private equity firm Thoma Bravo just acquired Anaplan for essentially double that multiple, just a few months back. It does feel like we’re starting to see some of these highfliers come back to somewhat palatable valuations.
Deidre Woollard: Well, I think it’s interesting because maybe some companies went public, really before they should have in that IPO and SPAC frenzy. I think we saw a lot of younger companies get in the mix before they were really seasoned. Do you think that’s some of why we’re seeing some of the public companies go private now?
Jason Moser: I think you’re absolutely spot on. It’s very difficult. If you’re a company, particularly exiting that start-up mode and really trying to get your feet underneath there and you’re in that type of market that we’ve been witnessing over the last several years. I’m not saying it’s easy money, but you really do want to go public when you have the opportunity to raise as much capital as possible. The enthusiasm has just been there. Enthusiasm bordering [laughs] on speculation in some cases, perhaps yes. But it was an opportunity for a lot of these businesses to raise a lot of capital. I think it’s fair to say that a good percentage of them probably weren’t necessarily ready to live their lives as publicly trading companies, perhaps witnessed the difficulties that come along with that. When you see an exit strategy, they can maybe let the company get back down to doing what they really want to do. Sometimes, that’s a difficult offer to pass.
Deidre Woollard: Yeah. Well, SPAC and spec are just a letter apart. [laughs]
Jason Moser: I like that, it’s true. [laughs]
Deidre Woollard: I’m wondering about other targets. I think the whole market is looking at things. I’m thinking about Peloton. We heard a few months ago, that there was all that speculation about who might get them it out. Oatly, Upstart. There are a couple of ones that are bubbling around as potential acquisition targets, any that you’re thinking about?
Jason Moser: So Peloton is one that got lit. Just wondering what the end game is for them. It feels like Peloton is an acquisition waiting to happen. I feel like it’s a better company than the press is probably giving it credit for right now. It has been raked over the coals a bit, but they make a very good product. I do feel like there probably is the opportunity for them to become part of a bigger family somewhere. I like that you mentioned Oatly. The main reason why I feel like with Oatly, feels like that’s a company that probably has a bit of a tricky time on its own as a public traded company.
But, there are a lot of food-related businesses out there with a lot of brands under their umbrella. Where there’s this move toward plant-based is real and it’s got a lot of legs. I was just thinking the other day, that we saw on the news that Kellogg is going to split off into three different businesses here. While the snacks-related businesses probably what gets most of my attention just because I’m a snack head. They’re also going to have a plant-based company that’s been out from this. Oatly strikes me as a business that could be a perfect complement to something like that. So it’s been a little bit of a tough time for Oatly as a publicly traded company, but I wouldn’t be surprised at all to see some food companies that they are really taking a closer look at this. Because again, I do think the plant-based movement is real, it’s growing. I think it’s difficult to make that journey on your own in that food business.
Deidre Woollard: Yeah. I think that one’s interesting, too, of the three businesses that Kellogg’s is spinning off. The plant-based one is the turkey of the bunch, unfortunately. [laughs] But thinking about fold-in acquisitions and things like that, as an investor, if you’re looking at stocks, does it ever make sense to buy a company just because it might be an acquisition target?
Jason Moser: Well, getting back to speculation, I think if you’re buying shares of a company because you thought, well the crux of your thesis is acquisitions. That’s certainly a bit more speculative. Everybody’s got their own way of doing it. I personally, I would never use acquisition or potential of acquisition as a thesis. But I will say it can be part of the calculus when you’re weighing the risk-reward. That’s something to keep in mind because ultimately when we make investments, you’re really trying to get an idea of what is the risk versus the reward with this investment. Obviously, you want that reward to tilt in your favor as often as possible. So when you see a business where you feel like, this is a good business. If they don’t execute, then the worst case is maybe the business gets acquired. I could see that as playing into the calculus for the risk-reward. I would never make it the crux of my thesis, though.
Deidre Woollard: Yeah, that makes sense. But we got some news that this JetBlue, Spirit, and Frontier deal just keeps happening. JetBlue keeps raising its offer. What does this fierce competition mean for shareholders? Any ideas on how this is all going to play out? It’s been fascinating to watch.
Jason Moser: It is, and it’s not just this market. I think it extends well beyond airlines. Airlines are a bit of a unique market in that the regulatory barriers involved and really the limited, I guess, competition. It is a market where scale really matters. Size really does matter when it comes to building an airline. That’s all fine and well. I do appreciate that perspective. I think it’s always worth keeping in mind that with investors, you see times when these valuations get stretched, you see how bad a company may want another asset, and then you start to see this bidding war. You have to start asking yourselves, what is a fair value? Do we get to the point where maybe they’re paying too much? That could be a big problem. Sometimes, it’s nice to see the company step back and say, hey, you know what? No, we’re good. We wanted this, but we don’t want it at any cost. I think you have to keep that in mind, because for shareholders, overpaying for these acquisitions, No. 1, acquisitions are really hard.
Integrating an acquisition into your business, there are a lot of risks that come with that, business model risk, culture risks, all sorts of financial risks. You see, for shareholders, this can result in bloated balance sheets, lots of goodwill that eventually needs to be written off. You start to question management’s actual judgment, does this make sense? One thing that came to mind when we were going through these questions, talking about this a little bit earlier was a good example that comes to mind recently is Teladoc Health. Teladoc Health is a good example of a business that, for a long time, part of its strategy was to grow through acquisition. Now, it was smaller acquisitions. It wasn’t doing anything crazy. It was just buying little, small bolt-on acquisitions to expand the comprehensive nature of its offering. To a certain point, it had executed very well. You look at BetterHelp, for example, that they acquired, I think for under $10 million and grew that side of the business up to a $750 million-plus revenue generator.
But then they go, and they acquire Livongo Health for $500 billion. Of course, that’s not how much they paid, but that’s how much it feels like they paid because they sure paid, it seems like, way too much for something like that. What we’ve seen since that acquisition is the market just has not been on board. Now, you’re seeing essentially the value of that acquisition has completely been erased from the Teladoc Health side of the business. You start to ask yourself, well, this company, they had a really good track record up to that point. Is that a one-off or is that a sign of poor judgment on management that we may expect to continue? We don’t know the answer to that yet, but it really just goes back to show that you do like to see management maybe draw a line sometimes and say, we want this, but we don’t want it at any cost, because there are real costs to shareholders down the line for companies that do just vote to pay anything for an acquisition.
Deidre Woollard: Yeah. I think this one is really complicated, too, because you have more overlap with JetBlue and Spirit in terms of flights, and you have maybe more regulatory risk. So I think it’s going to be interesting to watch the next couple of days and see what happens with that one. Because definitely, we’re going to see some more news on that. I want to take it to the other end of the money universe, the private side. There was a report that came out from CB Insights showing that venture capital has just really dropped dramatically, dropped 23% between the first and second quarters of this year. Total funding, down 27%. I’m watching this at the same time that I’m seeing tech layoffs at start-ups and publicly traded companies. I’m wondering, what does this mean as we see this serves a great source of innovation? As this funding starts to dry up, what does that mean for some of those potential unicorns out there?
Jason Moser: Well, you would think in theory this means something slows down, or at least there’s a lull in some of this investment, but to steal a line from Jurassic Park, “Tech finds a way.” [laughs] To steal another line from Arrested Development, “There’s always money in the banana stand,” Deidre. [laughs] There is always a lot of capital out there to put to work. So I think that what we likely see from this is less waste and more focus, doubling down on the things that work and maybe putting some of those moonshots on hold. That’s not to say that we don’t see investment in some of those longer-term moonshot-y ideas, but maybe you put those on hold for a little bit and really focus on the things that are working. But it’s been a material slowdown for sure. For the first quarter of 2022, the global IPO market saw 321 deals that raised just over $54 billion in proceeds. Those numbers are down 37% and 51% year over year, respectively. So it is real that, that inflow of capital has slowed down. That definitely plays a role in these businesses weighing where they need to allocate that capital because it becomes a little bit more difficult to come by.
Deidre Woollard: Yeah, absolutely. In the report from CB Insights, also mentioned that Series D funding rounds are far down. That makes me wonder if more of those companies that are more mature might IPO or maybe even SPAC to try to raise capital instead.
Jason Moser: It’s certainly possible. Going public opens a lot of doors to raising money. That is one of the benefits of being a publicly traded company, you just have a lot of ways that you can raise capital. So I’m sure that’s something they’re thinking long and hard about.
Deidre Woollard: Well, thanks so much for your time today, Jason. This was fantastic.
Jason Moser: Thanks, Deidre.
Deidre Woollard: Next up, Alison Southwick and Robert Brokamp continue their conversation on past market declines with Morgan Housel. In this part of the series, they’re going to talk about what was my first scary experience in investing, the dot-com bubble.
Alison Southwick: So, let’s get into it. So for me, the dot-com bubble, I was around, I was alive, not an investor. So from my outsider perspective, it seems like this perfect storm of exuberance over this new thing, the internet, and not quite understanding it, and these companies coming in. We know it’s big, we don’t know exactly why. But then also, investing in these companies also becomes a lot easier. That’s my quick take, but you’re going to give us the longer take, if I’m right.
Morgan Housel: No. I think that’s exactly it. Those two points coming together at the same time is really what made it crazy, versus other times in history when there was a new industry that was coming along that was going to change the future. One in the 1960s was plastics, which is almost funny to say. In the 1960s, plastic was, this is going to change the world. The companies that were making plastic were the big, innovative companies that had huge growth in front of them. But plastics didn’t change how anyone invested at all. You had a lot of excitement, you had overvaluation. But with the internet, it was, hey, not only is this going to change the world, but now, you can invest way easier, faster, and cheaper, and you’re just bombarded with more information than ever before. So you put those two together, and I think that’s the backbone of what led everything to get out of control so quickly. The other thing about this period is that, when people talk about the dot-com boom, they talk about the late ’90s. This is how they say it, or sometimes they say the 1990s. It was really only a 12 or 18-month period in 1998 and 1999 that it got really out of hand.
It really happened pretty quickly. For most of the ’90s, even when this was going on, there was growth, and the stock market was doing well. But it was mostly rational and made a lot of sense from what was going on. It just blew off top right at the end, where things started getting really crazy. A lot of that craziness was really only captured in a small number of companies in that period at the end, where the stock market in general, or if you take a look at the stock market, most individual companies peaked in 1997,1998. It was the gains that the market experienced in 1999 when things were really getting crazy and the market was going up 30, 40, 50 percent was driven by five companies like AOL, Walmart, GE, just a few big tech companies, Cisco, Microsoft, Yahoo!. That’s where all of the overvaluations were. But a lot of the hype ended way before that. So there’s a lot of nuance in what happened that I think gets missed when we just lump everything into, the ’90s were a big, irrational, crazy time to invest. I think that’s directionally true, but there’s a lot that went on in between that takes the story in different directions.
Alison Southwick: When did things start warming up with the internet? It’s, the internet, it’s a thing. When was that?
Morgan Housel: I think you have to take it back to personal computers, which was the ’70s and ’80s. Even then, that’s when Microsoft and IBM really started getting into the game, particularly the mid and early ’80s. But even then, it was still seen as something that tech hobbyist would have in their house and wasn’t really, you had people like Bill Gates who were the visionary saying this is going to be on everyone’s desktop, but very few people outside of Bill Gates and his cohort.
Alison Southwick: Core Radio Shack customer.
Morgan Housel: Exactly those people [laughs] really started believing it until the early ’90s, which is when, Windows as we know it, took off and the interface of personal computers really started making sense for people who had no tech background whatsoever.
Alison Southwick: Oh yeah, the mouse. Clicking on things.
Morgan Housel: Exactly, not just the mouse. They had the mouse for like a decade before that, but previous versions of personal computers like MS-DOS. You really had to know what you were doing to get any usefulness out of it, and it was really the first version of Windows when it made sense. Like oh, you have folders and you click on the folders and you have stuff in there. That was the early ’90s when it really started taking off that average individual people could get something useful out of this. Then in terms of when the internet started, really the first event that gets cited a lot as the birth of the dot-com bubble when people really started opening it up to not just the internet potential, but the investment potential was when Netscape went public. It was I think 1994, and it shares doubled on the first day that it went IPO then went public and that was the first signal, the first example of what was to come. Not just in terms of how this is going to change people’s lives or how it’s going to change how people invest it as well.
Alison Southwick: Yeah, spoiler. Our young kids listening to podcasts have no idea what Netscape even is.
Morgan Housel: No.
Alison Southwick: [laughs] So you’re not the one that started it all.
Morgan Housel: That was a big deal because before that you had the internet, but it was again, it was something that you needed to be at a tech genius to use. The browser was the first one that brought it to average everyday people in a form that they could use.
Alison Southwick: Yeah, I always used Ask Jeeves.
Morgan Housel: I did, too. That was a big one.
Alison Southwick: Ask Jeeves was a good one, too. Then [Alphabet‘s] Google came along and all those other ones too.
Robert Brokamp: I was a teacher actually when internet first started taking off. I got my first email address in 1994 and I still have that same email address.
Alison Southwick: You do not.
Robert Brokamp: I do.
Alison Southwick: Really?
Robert Brokamp: For me, like being a teacher, that just opened up your world, being able to show kids different things, to be able to pull up a video. YouTube wasn’t around at that point, but you could still get videos. It was just mind-blowing. Then from there, I went to the financial services industry and I started becoming a broker in 1997 one of the first jobs you have to do there is cold call people. Every time I would cold call people, they’d say I don’t need you. I’m doing better all on my own. This is not something you could say even in the late ’80s because you needed a broker to buy a stock. But that gets back to how things just changed so much that you didn’t need a financial advisor. They’re also looking back on that, too. People were doing well because they were concentrated in tech stocks. Once the downturn came, they probably didn’t do so well.
Morgan Housel: What so many people did when they could start investing on their own was not investing on their own, but day trading on their own. Guys come at the first iteration of hey, I don’t need a stockbroker, I can do this by myself. I don’t have to ask anyone’s permission. What am I going to do is we do not buy and hold investors. This is the whole concept of day trading was born in the 1990s. When here’s your E*Trade account or TD Ameritrade day tech. That was one of the big ones in the ’90s. Here’s your day tech account. What are you going to do? Are you just going to trade stocks all day and because there was so much momentum in Tech Stocks that was just going up day after day after day, that just made the concept of day trading that much more enticing. They only had the opportunity to day trade. But hey, maybe you could double your money a day or a week. So it just drew in all people who had no idea what they’re doing or no business doing them.
Robert Brokamp: Earlier this year, the Bespoke Investment Group published a table of the composition of the sectors, the S&P 500 over various increments. You look back at 1990, tech stocks made up 6.3% of the S&P 500. By 1995, it was 9.3 so growing. By 1999, it was 29% of the S&P 500, and they have all the sectors going back to 1990 up until 2017 and at no point do you see any other sector making up that much of the S&P 500.
Morgan Housel: Much of the gain in that way back to what we were saying earlier was really just a handful of companies, Yahoo!, Cisco, AOL.
Robert Brokamp: Lucent.
Morgan Housel: Lucent. Those were few companies that were worth hundreds of billions of dollars. They were really driving the bulk of that.
Alison Southwick: So, the internet. It’s going to be the next big thing. Everyone’s investing in it. At the same time, The Motley Fool is getting swept up in this.
Robert Brokamp: We’re going through right along with everyone else. We’ve talked about this on previous episodes. I joined in ’99 the Motley Fool when we were at 150 employees. At one point, we were over 400. Then things changed. By the time at the bottom where we were like 70 people or so, something like that and I’ll say living through that one thing that is a part of this in terms of the stock market and how bad it got, part of it was the September 11th attacks happened in 2001. You could look at some things. For example, 2001, small cap-stocks actually did pretty well. It was the tech stocks that were suffering, but you could look elsewhere in the stock market and find good returns. But then September 11th came and I think that changed a lot. I remember being in the company and David Gardner saying, “There’s some things you can’t predict when you’re running a business and one of them is terrorist attacks.”
Alison Southwick: By law, we also required to talk about the AOL-Time Warner deal.
Robert Brokamp: As we sit here in the Time Life building?
Alison Southwick: Yes. We are in the Time Life building which is crazy.
Morgan Housel: That is true.
Alison Southwick: That feels like such an iconic moment of the dot-com bubble, too.
Robert Brokamp: In 1999, AOL was the 10th-biggest publicly traded company in the country.
Alison Southwick: Again, we all had their floppy disks and CD-ROMs.
Morgan Housel: You’ve Got Mail.
Alison Southwick: You’ve Got Mail. It was a movie starring Tom Hanks and Meg Ryan. I mean, come on [laughs]. They peaked. [laughs] They peaked right there, quite literally. What made the bubble burst, in addition to September 11?
Morgan Housel: That’s one of the big things you were talking about the crash of ’87 and even the crash of 1929 where there’s not one specific event that you can pinpoint in the newspaper on the day the stock market peaked and said this is what caused it. It’s just things get out of control. I think when enough people start to question what they’re doing and enough people start whispering to their coworkers and their cousins and their neighbors like, hey, this is starting to get pretty crazy. I think those moods can shift pretty quickly. Then it just snowballs just as fast and reverse as it did on the way up. You don’t need that much momentum on the way down before enough people throw in the towel. Then just as momentum, just as buying begets more buying on the way up, selling does the same thing on the way down.
So stocks peaked in March of 2000 and a lot of you have gone back and said why March 2000? What happened at this time? There’s really not any specific event that really triggered it beyond just people’s moods and attitudes changing and it was until 18 or some odd months later that 9/11 hit. That’s a specific event obviously that took the economy and the stock market down a whole another level. But before that it was really just a big change in moods. There were some events of companies that we’re going to go public and their IPO was canceled because there wasn’t enough demand. But that in itself is triggered by the same change in investor moods. Just people start giving up at some point.
Alison Southwick: What did we learn from the dot-com bubble?
Morgan Housel: I think a lot. If you look at other new industries that really change the world. One I think of is the birth of the car industry in the early 1900s. There were hundreds, if not, a thousand car makers, and car manufacturers in the early 1900s and three of them survived: Ford, Chrysler, and GM. I think the same thing happened with the internet where you had thousands of people try their hand at this new technology that clearly was going to change the world and a very small handful of them survived. You talked about Ask Jeeves earlier, that was one of the big search engines. Then there was AltaVista and all these other new search engines, dozens of people that could see the opportunity and said, I’m going to try my hand at it. But in end, there was pretty much Google that you have one company that want it in the end. There’s always that big, just like a culling of the herd that happens whenever you have a new industry, thousands of people trying and only a few will make it.
Because of that, in hindsight, you’re going to have all these horror stories from the 99.9% of companies that didn’t make it. Then you have investors that had, lost a ton of money on those. That scars them for a whole another generation. But the car industry itself changed the world, changed how we live and the internet did the same thing, even if along the way it burned not just a few people, but most if not almost everyone who partook in it. So that’s the risk of new industries. Even when you can identify that this industry is going to change how we live, identifying the specific company, I don’t want to say needle in a haystack, but close to it, that’s going to be the survivor is incredibly difficult to do.
If you are going to play that game, I think preparing yourself that the success rate of these companies that are going to not only survive but thrive for decades after it is in the single-digit percentage. In terms of successors, David Gardner is one who is not only good at identifying companies or even doing well, but more importantly, I think he has the disposition to deal with the loss rate that comes along with identifying new industries and he would be, it’s not that he’s happy about it, but I think he has the disposition to be OK if half the companies in this portfolio do extremely poorly, knowing that one or two are going to do really well and drive that portion of this portfolio.
Deidre Woolard: 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 them. So don’t buy or sell stocks based solely on what you hear.