In this podcast, Motley Fool senior analyst Asit Sharma discusses:
- Poshmark‘s all-cash deal that values the company at less than half of its IPO price.
- Private market valuations coming down.
- National Taco Day and Chipotle Mexican Grill‘s strong business.
Motley Fool host Alison Southwick and Motley Fool personal finance expert Robert Brokamp talk with Motley Fool senior analyst Rich Greifner about the fundamentals of value investing.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on October 4, 2022.
Chris Hill: Another high-profile IPO company gets taken private, and we celebrate National Taco Day with a closer look at Chipotle; Motley Fool Money starts now. I’m Chris Hill, joining me from the great state of North Carolina, Motley Fool Senior Analyst, Asit Sharma, thanks for being here.
Asit Sharma: Chris. Thank you for having me.
Chris Hill: Poshmark, the online clothes retailer, is being acquired by Naver, which is an internet company based in South Korea. This is an all-cash deal that values Poshmark at, let’s call it $1.2 billion, which is less than half of what the company was valued at when it went public of January of last year. When I saw this news, Asit, one of the first thoughts that went through my head was, well, it’s an acquisition and I think we’ve all thought for a while that we’re going to see more acquisitions in the coming months. My second thought was, Naver is getting Poshmark at a deal. They like this business and they like this price.
Asit Sharma: Yeah, it’s a good business at the right price. Maybe it wasn’t the right price for shareholders who bought in last year. That was a little bit harder to see Chris, I think, I mean, I looked at Poshmark’s business model and several of its peers at that time, and it seemed like a market that was open for evolution. You have resale fashion and the idea of a social network merging in Poshmark and several of its competitors have interesting business models as well. You’ve got The RealReal, ThredUp, which is also dealing in resale. You have luxury companies like Farfetch. But one thing they all have in common is negative operating margins since they went public. None of these companies yet seemed to be able to turn a positive dollar, which hasn’t helped public shareholders.
But as you point out, has made it quite a deal for a company like Naver, which has some very interesting AI capabilities. They’re very good at image recognition. They’re very good at sorting. Their expertise might lend itself well to optimizing this platform that Poshmark has. In addition, you combine a really massive Korean network with a big user base here in America, there’s all sorts of things they can do together. The press release listed a number of strategic benefits of the deal. But if you bought this company at the IPO, you could probably chalk this one up to experimentation with the fashion world, which is always a roll of the dice, doesn’t matter how the technology changes, retail fashion is a difficult business.
Chris Hill: It absolutely is and you can look at traditional apparel retailers that are publicly traded. Any one of them can have a good six-month period. If you’re especially gifted at timing the stocks on these and I don’t know anyone who actually is. Yeah, there have been points in time where it was a great eight months to own The Gap, or a great 15 months to own Abercrombie and Fitch. But over the long haul, it’s such a fickle industry. As I’ve said in the past, I love my children, but I would not want to be part owner of a business that is dependent on their ever-changing fashion tastes.
Asit Sharma: Yeah, it becomes so difficult because that top line, as you point out is never absolutely stable. It changes along with consumer preferences. What you end up with, are companies that are consistently trying to improve the bottom-line cut cost somewhere. We saw that with The Gap. We’ve seen fashion store closures for those with brick-and-mortar models, even in this deal, at the bottom of the press release, after talking about a lot of these great strategic synergies, they talk about run-rate cost savings through post-closing rationalization of public company costs. Meaning hey, as a public company, you weren’t able to cut costs in a way that would have satisfied your shareholders. We understand there’s pressure there. We don’t have that private company, so we’re going to slash some costs after we acquire you. As much as this looks like a new version of a model that is iffy is always going to be problematic I think. Now the flip side of this is in the future as companies get a better handle of monetizing young users. Maybe we’ll see something emerge that is able to generate a positive margin growing cash flows. But as yet, that magical formula hasn’t yet appeared, at least in the public markets.
Chris Hill: We’ve gotten some consumer-facing data over the last few days around automotive prices, around home prices, both of which are coming down. The common theme being, hey, if you’ve been waiting to pay a little bit less for a car or a house, you’re probably going to be rewarded for your patience in the near future. The Poshmark deal makes me think that it’s the same for companies too, for larger businesses that are looking to acquire, tuck-in acquisitions, they’re getting them at a lower price.
Asit Sharma: Yeah, we’re seeing valuations not just in the public markets, but in the private markets too which they’re interrelated, really collapse over the past nine months and so this is a good time if you’ve got cash on the balance sheet to deploy it. A lot of times, we are very critical of companies when the markets are flush, that seem to acquire their way to growth. But when your competitors are on sale, when you’ve got potential synergies, companies that can make a greater whole than the parts. That’s the time to put capital to work. You can’t blame a company like Naver which wants to grow out of South Korea for putting its cash to work. There are some fire-sale bargains out there, just look for the companies that are bleeding cash. Those may be able to be picked up for a song and that’s where you see four to five years down the road, the most strategic parts of those assets get merged into a bigger company, and they have a net benefit that makes economic sense for the buyers that are offering the deal on the table today.
Chris Hill: Today is National Taco Day so happy National Taco Day to all who celebrate and hopefully everyone does because tacos are amazing. I looked at a five-year chart of Chipotle and maybe I shouldn’t have been surprised, but stock up 400% over a five-year period. That includes the start and the height of the pandemic. I don’t want to just turn this into touting Chipotle, but I don’t know. It’s a business that has done an effective job of taking a popular product and turning it into a profitable business over a sustained period of time.
Asit Sharma: It’s funny how they’re able to consistently generate these nice profit so the opposite side of business models, we have something that’s extremely cash-generative. Cash flows are really stable. I almost feel like, Chris, Chipotle was done a favor when it had those viral outbreaks few years before the pandemic and had to learn to deal with strained circumstances with customers that didn’t want to come in the door, they became much more efficient. They learned how to keep that restaurant margin, which is the margin that each store generates on its own. Forget the big corporate fixed overhead to keep that at a pretty reasonable level. You combine that with just continued relentless store expansion, decent same-store sales growth.
Now, menu innovation with the newish leadership regime. He got a formula there that is going to keep pushing up those returns. I don’t want to turn this into it cheerleading session for Chipotle either. But I will note for skeptics out there, none other than Bill Ackman, who’s got a pretty decent track record at least on consumer-facing investments. I think that’s become his No. 1 choice for a while, it was Starbucks, but he’s really fond of Chipotle now is a company with a lot of pricing power, fear, resilient in a time of inflation. Just an all-round consumer-facing investment. It’s hard not to sing its praises if we have a little bit of leeway here on National Taco Day, although, you know what? You bringing that up reminds me it’s been years, nay, sir. It’s been decades since I bought some canned Old El Paso ingredients, spread those with some hard shell Tacos on a sheet of aluminum foil and pop that in the oven. Maybe that’s what I’ll do for National Taco Day.
Chris Hill: That’s one way to celebrate I suppose. Actually, I’m reminded of the last time I was in your state, in Ashville, North Carolina, there’s a phenomenal local taco joint called Billy Taco. I so enjoyed my meal there. I thought it was probably just as well I don’t live in Ashville because I think I would come here four or five times a week for breakfast, lunch, and dinner, and then absolutely I have a weight problem.
Asit Sharma: Yeah. You and I should meet in Ashville next year on National Taco Day. A foodies’ paradise, and I think they picked up James Beard awards in the last few years. We should do that. There’s always time to work off the weight later.
Chris Hill: I like the way you think. Asit Sharma, thanks so much for being here.
Asit Sharma: Really appreciate it, Chris, this is fun.
Chris Hill: Poshmark being taken private at a much lower price is only the latest example of value investing on the rise. Motley Fool Senior Analyst Rich Greifner joined Robert Brokamp and Alison Southwick to talk about the fundamentals of value investing, as well as stock ideas.
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