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A “Rule Breaker” and some “Cloud Disruptors”… A Smorgasbord of “Secret” Fool Picks

Checking in on a new teaser pitch from Tom Gardner's Motley Fool Cloud Disruptors 2020, as well as a "recent IPO" spiel from brother David Gardner's Rule Breakers newsletter.

By Travis Johnson, Stock Gumshoe, April 13, 2020

The Motley Fool put together a new push for Tom Gardner’s “no. 1 technology investment” late last week, including yet another “presentation” with Tom Gardner, Eric Bleeker and Tim Beyers, so we’ve gotten quite a few questions… and I also got a few other questions this week about a David Gardner teaser pitch, so we’re going to double up and cover both of those today, a little more briefly than usual.

The first spiel is all about “Cloud Computing” as the Fool sells their Motley Fool Cloud Disruptors service. I looked through the clues to see if they had added anything since we covered a similar ad five or six weeks ago, and there isn’t a lot to add… but they do throw one or two new ideas out there in the email teasers.

The first wave of Fool “Cloud Computing” promotion was actually selling a different service, IPO Trailblazers, but it was sold with the same kind of “presentation” with the same people, and built around five cloud computing ideas that they called the “FAZER” stocks, since everyone loves a good acronym… the idea being that the cloud will be the next big thing after the FAANG stocks.

Here’s the Quick Take I shared with the Irregulars back on March 2, when I covered that teaser pitch:

Irregulars Quick Take
Newsletter: Motley Fool IPO Trailblazers
Stocks: Fastly (FSLY), Appian (APPN), Zoom Video (ZM), Elastic (ESTC), Roku (ROKU)
Travis’ take: This is a teaser ad for a presentation the Fool is doing tomorrow about “FAZER” stocks that could be the “next FAANG” ideas, small growth stocks to hopefully repeat the success of huge past winners like Netflix. I like Roku and Fastly and now own both (Trade Note: I just bought ROKU for the first time today after researching it again for this article, mostly because of the accelerating sales growth), and I find Elastic appealing but haven’t bitten yet after their “bounce back” quarter… Appian and Zoom I don’t find personally appealing, Appian because I don’t know what the real long-term opportunity is and growth is very weak given their valuation, and Zoom because I don’t understand how they can be meaningfully better than lots of other videoconferencing tools and justify their 50X sales valuation.

So I can’t tell you for sure whether those five IPO Trailblazers ideas are also Cloud Disruptors recommendations, but I’d guess that most of them are (those are two different services in the Fool’s “Discovery” series of products — which generally cost about $2,000 a year, are nonrefundable, and offer somewhat of a “portfolio guidance” service and a model portfolio instead of just monthly recommendations, but the sales pitch for them is so similar, recently, as to be almost identical).

But what I can do is look at the few hints that Eric Bleeker dropped in his email, which gets its “urgency” from the fact that our “work from home” and “social distancing” world has changed dramatically and created a new surge of business for cloud computing stocks.

Here are a few of the details from the email I received last week:

“In January The Motley Fool announced our ‘No. 1 technology investment for the new decade’ …

“…. We believed it had the potential to grow 33X in the coming decade and beyond…..

“Now, I’m writing you today with an important update to our ‘No. 1 technology investment’ because recent events have…. Frankly, caused growth rates to surge to levels that were simply unimaginable mere weeks ago.

“Here’s just a sample of some of the growth we’ve been seeing:

“A recent recommendation from Motley Fool co-founder David Gardner has seen demand soar by an incredible 1,900% since just the start of the year…

“Another Motley Fool recommendation whose shares have gained more than 440% just announced that demand for its product jumped tenfold in just two weeks time.

“Even a massive company like Microsoft has seen usage increase. It recently announced a 775% demand spike in areas where “shelter in place orders have been enforced” ….

“… the bottom-line is that the world will likely never be the same. Many stocks have rapidly fallen by 50% or more, and certain industries will struggle to survive this period.

“Meanwhile, changes like social distancing and workers across the country operating remotely are in many cases rapidly accelerating the growth of certain technologies and industries…

“Sometimes pulling forward what could have been a decade of growth into mere months (or even weeks!) of time.”

So that all sounds like they’re just promoting the same kind of “cloud computing” stocks as they were in January, just using the same stock ideas to tout a new service, but there are also two hints about specific stocks in there. Let’s look at them individually:

“A recent recommendation from Motley Fool co-founder David Gardner has seen demand soar by an incredible 1,900% since just the start of the year.”

That one is Zoom Video Communications (ZM), which was one of those FAZER stocks in January. My thinking about it hasn’t changed, though David Gardner continues to double down on it and extoll the huge opportunity they have to maybe become the foundational video conferencing technology on the back of this coronavirus explosion in demand.

The big risk, recently, is that Zoom’s security flaws have come to the fore during this explosion in use — particularly through “Zoombombing” when people either maliciously or foolishly jump in on other peoples’ conference calls, but also other security flaws that people have been warning about for Zoom since it became a “hot stuff” new IPO last year (one of the more attention-getting notes was that U.S. Senators were advised to stop using Zoom last week). The CEO came out a week or so ago with a “mea culpa” announcement and a promise to refocus on security, but the narrative pretty quickly shifted to, “hmmm, maybe the reason Zoom is the easiest and best service is that they skipped the security work that other videoconferencing companies did.”

I don’t know how it will work out a few years from now, obviously, but Zoom clearly has a huge opportunity thanks to the coronavirus — without spending any extra money on marketing, their usage did indeed surge by 1,900% in the first few months of this year, so even though they gave the service away free to some users (like schools) and the revenue might not surge by that degree immediately, that’s a huge number of consumers who are getting used to the service and generally finding it useful. That has to be balanced by the security backlash, and the company will be monitored closely to see if their security improvements come through as promised, but that kind of new account signups and new visibility is incredibly valuable if they can capitalize on it. Not valuable enough that I can swallow paying 50X revenues for the shares, but maybe you’ll be more inclined to follow David Gardner on this than I am, he certainly has a better record for long-term tech investing than I do.

In case you’re curious to follow up further, David Gardner also featured Zoom as one of his podcast stocks in the free Rule Breaker podcast last week, and my memory is that he indicated on that podcast that he had most recently recommended the stock for Rule Breakers in the $120s, so it’s still close to that neighborhood.

And the other one?

“Another Motley Fool recommendation whose shares have gained more than 440% just announced that demand for its product jumped tenfold in just two weeks time.”

That one is Teladoc (TDOC), another of the “obvious” beneficiaries of the coronavirus because it is dramatically increasing demand for its telemedicine services. The stock has soared, but it’s still fairly small (market cap around $10 billion), and I’d still say that they’re the leader in this space… and also the company that is best-capitalized among the telemedicine players (the other meaningful ones are all private still).

I’ve written about Teladoc a few times this year, starting in January when I bought back into the shares because of management improvements and an appealing new acquisition, and then following up a few times because several newsletters started teasing the stock thanks to its obvious connection to the coronavirus outbreak. Here’s what I noted about a month ago in an updated article about Teladoc:

“I wouldn’t buy just because of this coronavirus scare, but I do think it’s possible that the coronavirus and the possible increase in use of telehealth services will speed up the adoption of telehealth in general and “normalize” that kind of virtual health care interaction for more people, and that would be a good thing for the company as they build their business in the long term. It doesn’t mean they automatically get to hold their early advantage in the market, Teladoc is clearly the leader among “pure play” telehealth companies, but other big tech or healthcare firms could certainly try to develop their own systems, and some already have,

“Amazon, for example, launched Amazon Care in partnership with a local clinic last year, and is pushing it out to more employees during this viral crisis — and it’s entirely possible that if the market decides that Amazon is going to coordinate with its Haven partners (JP Morgan and Berkshire Hathaway) to push Amazon Care out as a national offering for employees, or get more aggressive and release its own telehealth network for anyone to use, then Teladoc might fall 30% that day. People are terrified of competing with Amazon or the other mega-tech stocks, even if the specialized company might end up “winning” anyway (remember Facebook’s plan for dating that was going to crush Tinder and MTCH shares cratered by 20% in moments after Facebook announced that service at its developer conference in May of 2018, and then fell again last last year as Facebook dating prepared to roll out after a test run, but if you had bought MTCH shares on the highs the day before Facebook’s 2018 announcement, with the unluckiest buy date possible, and held through all those big swings, including some wild ups and downs, you would have still beaten the market after six months or a year, and as of today your return (about 45%) would be triple the returns you would have gotten from the broader market.

“I’d guess that the increasing adoption of telehealth is going to become an unstoppable trend, perhaps accelerated by this particular outbreak but quite likely to keep growing even without coronavirus, and that this underlying trend will benefit Teladoc nicely in the long run even though they’re not going to be the only provider or network.”

Another risk is that the big push for telemedicine and virtual doctor visits has also loosened the regulations for those kinds of visits. Where an insurer or the government might only have approved of a doctor/patient virtual visit on an approved and regulated platform before, like Teladoc’s, now they’re so desperate to keep patients at home that they’re allowing and approving insurance coverage for virtual visits using standard videocalling tools like Skype or FaceTime or, perhaps, even Zoom. I assume that once the crisis passes those rules will tighten back up again, and the purpose-built video platforms like Teladoc will be preferred over generic video calling services like Skype, but that’s not guaranteed. Right now, Teladoc and the other established providers are facing such dramatic demand that they can’t keep up, but once the dust settles it will be interesting to see how the market shakes up. I’d be willing to keep adding to TDOC on dips, and most recently bought in March at about $125, but I don’t feel compelled to “chase” the stock at this point. Certainly David Gardner would disagree, since one of his criteria for Rule Breakers is that he wants to buy stocks that have surged and proven that they’re popular with investors.

(And yes, Teladoc was also another one of the “5 Stocks for the Coronavirus” picks on the Rule Breakers podcast last week — if you’re curious about that and don’t want to sit through the podcast, the other three were Sea Limited (SE), a SE Asian gaming/ecommerce company, and the fairly self-explanatory “stay at home” picks Roku (ROKU) and Peloton (PTON))

So I don’t know whether the “Cloud Disruptors” service currently recommends all of these stocks, but it seems very likely that their initial portfolio would include Teladoc (TDOC) as well as the “FAZER” stocks Fastly (FSLY), Appian (APPN), Zoom Video (ZM), Elastic (ESTC) and Roku (ROKU). I agree that cloud computing will be a clear growth trend for many years and own some of these currently (ROKU, FSLY and TDOC), though the valuations are always challenging so investors should certainly expect a lot of volatility — which means that if you like them, there will probably also be terrible days when it’s easier to justify buying them.

And I also said I’d add another pick to the “smorgasbord” here — this is the teaser pitch I’ve gotten a few questions about in recent days, under the subject line “This Stock Could Be Like Buying Amazon in 1997”:

“You see, I recently stumbled onto a practically unknown (yet publicly traded) company following so closely in Amazon’s footsteps that it has seriously caught the attention of David Gardner — a legendary investor who actually did buy Amazon back in 1997 and racked up over 36,624% gains in the process…

“While you can’t go back in time and invest in Amazon alongside David Gardner, I believe I’m offering you the next best thing…

“The chance to get in early on David’s new recent-IPO stock.

“First, the stock has already shot up like a rocket ship, more than doubling in the past year.

“Second, the company has nearly doubled its paying members over the past four years.

“And it has dominant market share, owning four of the five top brands in its space.

“Even more exciting, management expects double-digit revenue growth going forward.

“That’s the type of growth and market opportunity that gets David Gardner’s heart pumping.”

So this one is a pitch for Rule Breakers, the “growthier” of the relatively low-cost entry-level newsletters from the Fool (the other one is their “flagship”, Stock Advisor, which includes picks selected by both David and Tom Gardner each month).

And it’s pitching this as an “Early Bird Stock Event” because they argue that “early movers have the best chance of success,” so I’m a little disappointed to have to reveal to you that this is an old and oft-touted stock from them, not a brand new idea — what they’re pitching with this “recent IPO” is, in fact, the same “recent IPO” they started touting almost exactly four years ago, Match Group (MTCH).

Yes, Match can still be called a “recent” IPO, though that’s only because “recent” does not have a legal definition. And yes, it has been a great pick for David Gardner… even with the recent dip, it’s up about 500% from April of 2016.

And this one, we’d imagine, could be a stock that really suffers during the coronavirus “Great Cessation” — Match Group owns that eponymous service as well as the much more important Tinder app and a few other brands in the dating space, and dating platforms are one of the purest and most dramatic examples of the power of the “network effect,” so they should do very well in general as they grow (everyone wants to be on the dating service that has the most possible matches)… but nobody is going out on dates right now, so it would not be surprising if membership and usage of their services tails off for a few months until we’re all able to be out smooching strangers again. They are, of course, responding to coronavirus with video chat options and other ways to meet up, and their membership might be stable if folks decide to keep their dating profile active even if they don’t use it for a few months, but it’s unlikely to be a particularly strong period of time for the company.

Which, of course, is why the stock dipped almost 50% from peak to trough during the first wave of the coronavirus panic. The price bounced back pretty quickly to reclaim some of those gains, but the shares are still below where they spent most of 2019. They are also in the process of fully separating from their owner IAC/Interactive (IAC), a process that might be delayed a bit but is still expected to finish up in the first quarter, so there may be volatility as that spinoff gets completed — though my guess would be that Match will be more stable than its former parent, since I’d say IAC’s other businesses are lower-quality and more challenged than MTCH and they’re looking for new investments.

Match did preannounce that their earnings will be at the low end of the range they had expected in the first quarter, but not disastrous, so I’m sure everyone will be watching closely to see what they say about the second quarter when they report (the next earnings release date for them should be May 8, so you’ve got a few weeks to wait for more news). They did note that the coronavirus tail-off in usage and new signups was most evident among their customers over age 30, which makes sense given the widely-angsted stories about younger people being slower to accept social distancing rules, but that could certainly change as the COVID-19 impact drags on.

I expect Match to own the dominant dating platforms for a long time, it’s hard to imagine anyone really taking market share and they’ve continued to buy up smaller startups, so it’s possible that this is a bargain buying opportunity… but I haven’t ever owned the shares or tried their services, so you can take that sentiment with a grain of salt.

At $67 or so, they’re trading at about 32X trailing earnings, which is clearly a steep valuation for a company whose earnings will probably be pretty close to flat, at best, in 2020… but analysts do see earnings growing pretty rapidly again starting next year, with the 2022 forecasts implying an earnings growth rate of about 15% a year from 2019-2022, so somewhere in the $65-70 neighborhood is probably roughly the most I could stomach spending on an established growth stock like Match (that would be a Price/Earnings/Growth ratio of about 2). It’s not an easy buy, but you can certainly make the case given their market-leading position and the high margins enjoyed by a software company with a strong network effect.

That’s just my thinking on a few recent Motley Fool teaser pitches, though, and when it comes to your money it’s obviously your thinking that really matters — so whaddya think? Have any favorites among those “FAZERT” cloud stocks from the Fool, other stocks in the space that you like, or an opinion about the “recent” Match IPO and its potential? Let us know with a comment below.

Disclosure: of the companies mentioned above, I own shares of and/or call options on Amazon, Berkshire Hathaway, Roku, Teladoc, and Fastly. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.

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2 years ago

had hidden gems and enjoyed it. also have stock advisor. usually a couple of buys there that have been good for me and worth the price. however, lately i haven’t purchased a newsletter over $150 these days. Among my favorites (that I own) “FAZER” is Fastly – doing real well on that. Appian – purchased long ago before FAZER came out. TDOC, Elastic, then Roku in last place. Travis service is my ‘myth buster’ service and a great source of truth. I have been enjoying his service.

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2 years ago

I realy like fastly , elastic and teledoc, they have doen very well for me.
Does anyone know what the brand new trade recommendation in cloud distruptors is (pitched a few days ago)?
Thanks in advannce.

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