Motley Fool: Downstream Merger Monday



On today’s episode of MarketFoolery, analysts Jason Moser and Emily Flippen take a look at some market headlines. Two huge defense companies are mergingin a massive deal, but United Technologies (NYSE:UTX) won’t necessarily be as anticompetitive as some current U.S. presidents might tweet. A very different merger is soon to be with Tilray (NASDAQ:TLRY), and the stock is soaring on the news.

Tune in to learn what a downstream merger is, and why Tilray shareholders are so chipper about it. Also, get some updates on Beyond Meat‘s (NASDAQ:BYND) continual climb, and how Zoom‘s (NASDAQ:ZM) performance makes it worth its very rich multiple. Find out more below.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. A full transcript follows the video.




This video was recorded on June 10, 2019.

Mac Greer: It’s Monday, June 10. Welcome to MarketFoolery. I’m Mac Greer. Joining me in studio, Motley Fool analysts Jason Moser and Emily Flippen. Welcome!

Jason Moser: Hey hey!


Emily Flippen: Hey, Mac!

Greer: How we doing?






Flippen: Doing good.

Moser: I’m doing well, I feel like things are all right here. Recovering from a busy week.

Greer: A busy week, a busy Fool Fest, our annual member event. We may talk about that a bit later. But lots to get to. We’ve got Beyond Meat, which just continues to go up and up. We’ve got Zoom, also getting it done. And we’ve got some cannabis news. But we begin with merger Monday. Now on a Sunday. Two big deals. The first one on Sunday. United Technologies and Raytheon announcing plans to merge. Now the new company, Raytheon Technologies, would become the second largest aerospace and defense company in the U.S., right after a little company named Boeing. And another big deal on Monday, y’all. Salesforce planning to buy big data company Tableau Software for $15.3 billion. Emily, let’s start with the United Raytheon deal.

Flippen: It’s an exciting Monday for all these mergers and United Raytheon is no exception. Notably, when they announced the deal, President Trump then virtually immediately responded saying that he was concerned about the anticompetitive behavior that would result for defense contractors once this deal goes through, noting that it’s harder for the U.S. government to get good prices on things like airplanes when there are fewer businesses to choose from. However, the CEOs of both United Technologies and Raytheon then came out and said, there’s really nothing anti-competitive about this merger because they don’t supply the same products. Nonetheless, I think it plays into the trends that we’re seeing in terms of regulatory agencies how they gauge mergers and acquisitions for a lot of these huge companies. I think combined, this will be a $166 billion company. It’s definitely not a small merger by any means.

Greer: Jason, what about the Salesforce news?

Moser: Yeah, Chris and I were talking about Salesforce’s most recent quarter, I think it was last Wednesday’s MarketFoolery. And I mean, it was another very good quarter for the company. I think it’s helpful to remember exactly what Salesforce is. It’s online solutions for customer relationship management. And so ultimately, you’re giving these companies a chance for all of their departments, whether it’s marketing, sales, commerce, service, all of these departments, it gives them a shared view of your customers in one platform. And so Salesforce ultimately runs that platform with all of these different services. And it plays into this idea that we are really operating in what is becoming a very digital economy. Their estimates are that by 2022, more than 60% of global GDP will be actually digitized or functioning as a digital economy. Look around the things that we’re doing today. That seems fairly plausible. So the acquisition of Tableau will give them the opportunity to do more with the data that their platform brings in. And I mean, you remember, it wasn’t that long ago when Marc Benioff, the founder and CEO of Salesforce, was kicking around the idea of buying Twitter, which seemed odd on the surface, but really, that was kind of a data play too, given Twitter’s role in customer relationship management and how people reach out using that platform.

Greer: And let’s look at the market’s reaction to this deal. Not uncommon in a deal like this, shares of Salesforce down around 4% at the time of our taping, Tableau up around 35%. What does that tell you as an investor?

Moser: It’s a good deal for Tableau. I think shareholders ought to feel pretty good about that considering the business. It’s one of those tech companies of this new age where they’re growing their top line OK, but they’re still not profitable. Who knows when they ever will be materially profitable. Now, it’s not going to matter. On Salesforce’s side, it’s an all-stock deal. From that perspective, I actually like that move. Shares are trading at near all-time highs. So essentially, they’re using those shares as a form of cheap currency, as opposed to levering up the balance sheet because it’s a $15 [billion], $16 billion deal all things said so. Smart way on Benioff’s part to manage the deal. The company, if you just look at their track record, they’ve got a very good track record of growing the business and doing smart things. And it does really operate on this idea that customer experience is going to overtake price and the product quality is really the key brand differentiator. I mean customer service now is just such a big deal. Customers are prioritizing that over price and quality in some cases. That’s the idea behind the deal.

Flippen: Tableau isn’t the only one that’s up significantly today. A lot of Tableau’s competitors like Domo and Alteryx, they’re all up. And it’s a sign to the industry that, hey, there’s a lot of competitors in this space, but there’s also a lot of demand from the bigger guys. Maybe this acquisition of a $10 billion company — Tableau already being a huge, well established company, maybe it means even greater things for a lot of these smaller organizations. Actually, Joey, another analyst here at the Fool mentioned to me this morning, reminded me that back in 2016, there were actually those leaked documents from Salesforce, in which Tableau was one of the companies which they were apparently expressing an interest in acquiring. It didn’t happen then. But it’s clear that this has been on their minds for a while. I wouldn’t be surprised if this isn’t the last merger we see.




Moser: Salesforce is coming at this from a position of strength already. When you look at the worldwide customer relationship management application, revenue market share, these estimates come from IDC, but you’re looking at Salesforce with 16.8% of that revenue share. The next closest is Oracle at 5.7%. I mean, Salesforce is the clear leader. And they’ve only separated that over time. They’ve only become more the leader over time. I think this does nothing but that make that gap even larger.




Greer: Okay, so, you’re telling me if I’m a Salesforce shareholder, and my shares are down around 4% on this deal, I should not necessarily go out and just sell all my shares?

Moser: I definitely wouldn’t. I would certainly consider this as potentially an opportunity to add to a position of a leading company in its field. I mean, that’s very much the normal reaction, right? The acquirer, typically the stock gets punished. The acquiree, the stock typically reflects the premium that it’s being bought out at. So there’s nothing odd from that behavior. And really, I mean, again, look at Salesforce’s track record. I mean, if you’ve been a shareholder of this business, you’re very happy.




Greer: Beyond Meat reported better than expected earnings last Thursday, when we were having our annual Fool Fest. The stock shot up on the news. The good times keep coming for the plant-based not meat company. Beyond Meat shares up around 30% today. Over the last five days, shares up around 80%. Now, Emily, I’m not an analyst. Is that a bit frothy? I see 80% in five days, and I don’t know about that.

Flippen: I definitely think it’s a little bit frothy. But the market can stay irrational, if it is irrational, can say irrational for a long time. Investors can sometimes forget that. I’m not entirely surprised to see it up on a beat for earnings. However, when you look at the actual valuation of the company —

Greer: B-E-A-T, not B-E-E-T?

Flippen: [laughs] Right, although they do use beets in their product!




Greer: Is that true?

Flippen: Yes, it is. That’s how they give it the red [color].

Greer: I love it. I used to eat beets from the jar when I was a kid. You ever eat those purple-y beets?

Moser: God, no.

Greer: God, they were so good!

Flippen: How old were you?

Greer: That was when I was seven or eight. I ate beets and deviled ham, pimento cheese …

Moser: I remember in college, I wasn’t in a fraternity, but my freshman year in college, I would see fraternities haze the pledges by forcing them to go to the salad bar and eat a bowl full of beets.

Flippen: And now Beyond Meat is taking beets, and people are paying a lot of money for them. Look how times have changed, right? When I look at Beyond Meat, I look at the industry. It’s a $9 billion company, on $40 million of sales this quarter. It’s obviously a frothy valuation. I think it’s trading around 40X prices sales. To say it’s expensive is not an understatement. But the reason why we’re seeing it trade so much higher is simply because people don’t really know how big the market is. This is a really new industry. It’s not just comparing it to frozen vegetable patties in the freezer section. People say this has been around forever, it’s not changing anything. I mean, the fact that Beyond Meat is building a brand and getting that brand next to actual meat products in the meat section of your grocery store, there’s value in that. It’ll be interesting to see if this is a permanent change to people’s diets. I think if that is the case, this valuation is justified. Personally, I tend to think it’s a little bit frothy. Last week, I actually put, call it a negative conviction here at The Motley Fool. That’s our internal tracking system. I put a negative conviction in for Beyond Meat because I said to myself, there’s no way this company can be higher than it already is. You know what? They proved me wrong. There’s your note not to bet against the market sometimes.

Moser: But, in your defense, a very small time. Very small window there. I mean, speaking of that small window, I had a couple of good questions over this past week at Fool Fest in regard to stocks perhaps having a tough year, not performing as well as maybe the business was performing. It reminded me of a slide that we use occasionally when we’re teaching a Fool School seminar. The point of it is to show that these one-year gaps, these little one year-windows, it doesn’t always quite make sense. The example is 2008. When we look at Google, back then it was Google. In 2008, they grew their revenue a little bit more than 31%. That’s a nice line headed up in the right direction. The stock in 2008 was down over 50%. Why would the stock be down so much when the business seemingly was performing well? I mean, it could be a number of reasons. But the point was that this is a one-year window. When you stretch it out over longer periods of time, those little one-year windows start to look like blips. The market doesn’t always make sense in the short run. It doesn’t always quite make sense. This reminds me a little bit of Tilray. Different business, obviously. But I think the mania is still similar. We saw Tilray early on, it was a $150 company.

Greer: We’re going to talk some Tilray today.

Moser: Now, it’s around $45. So, I have a hard time believing this will last forever. I do believe in the market opportunity and what Beyond Meat is doing, but sometimes you have to look at those growth expectations that the stock price is baking in and take a little bit of a dose of skepticism.

Greer: When you look at the market, when you look at the broader market, is there a company, maybe it’s Beyond Meat, or is there another company that you’re more excited about?

Flippen: I’m not not excited about Beyond Meat.

Greer: “I’m not not excited,” got it. So, that means you are excited? Double negative?

Flippen: Well, I’m not not excited. And just, for the points that Jason made. It’s a good company, has a great vision, has a good product. The non-meat industry, I’m actually more excited to see Impossible Foods. I think they have a little bit more proprietary way of making their “meats.”

Greer: Still private.

Flippen: Still private. I don’t expect them to stay private for much longer, especially given the huge valuations that Beyond Meat has seen. It’s almost better for them, if they are going to IPO, they want to do so when conditions are in their favor. And right now, conditions are definitely in their favor. I don’t know if they have plans to or not, but if I was them, I would definitely be thinking about it.

But here’s the thing about Beyond Meat. It has better distribution. A lot of great agreements, Impossible Foods still mainly in restaurants. Beyond Meat has lots of good agreements, whether fast food or even just in your local grocery store for retail customers. It’s important for me not to downplay Beyond Meat. I actually really do believe in the long-term sustainability of both of those companies.

Greer: Speaking of red hot stocks, shares of Zoom up 8% today, after posting better than expected earnings last week. The stock’s been going up since its earnings report. Now, Zoom is a video conferencing technology company. Went public in April. The IPO priced at $36 a share. Began trading at $65. Today trading around $100. What do we think of Zoom? We use it.

Moser: Yes, the product is awesome. And I think it’s got all the potential in the world. I mean, if you look at the quarter itself, I mean, they now have 58,500 customers with more than 10 employees, 405 customers that are bringing in more than $100,000 in revenue for the company. I think that CEO and founder Eric Yuan has figured out that there’s a space here in video conferencing where you’ve got these big, formidable competitors, things like Google Chat, and Microsoft owns Skype. But it just appears that they’re not investing in those businesses, those platforms, at all.

Greer: And Zoom is profitable.

Moser: Zoom is profitable.

Greer: Didn’t they get the memo? They’re a new IPO! What’s going on with that?

Moser: From what I could see in the guidance there in the release, from a GAAP perspective, they’re not going to be profitable for the full year. But to your point, they have recorded profitability and they are growing their top line in an impressive fashion. I mean, they’re taking this perspective that, listen, this market has been neglected. This is a service that the long-term tailwinds there are there. Why companies like Google and Microsoft are not investing in those platforms, who knows. So Yuan decided to do something about that. And clearly, the numbers say that he’s doing a good job. I think the only real question I have with a company like this — besides valuation. The valuation is …

Greer: Rich?

Moser: Yeah, that’s one way to put it. But, he’s very serious about customer happiness. I mean, that is sort of their North Star, so to speak. They want to just make sure they are taking care of their customers and customers are happy. Typically, customers are happy because they get great service, and they’re not paying a lot for that service. So then you have to ask yourself, alright, so what does that do for a business like this over the long run? How much perhaps can they raise prices as time goes on? I don’t know. I’m not saying they can’t. I’m saying that’s a question to deliberate.

I’m bullish on the service. I’m bullish on the stock. The valuation’s up there. But I don’t know. What do you think, Emily?

Flippen: I don’t get bothered by the valuation as much here. Granted, I think it’s lofty. But the reason why it’s lofty is because Zoom is such a great, well-run company. They have record customer growth. I think 6% average revenue per user growth last quarter, which is insane. They’re profitable. A net dollar expansion rate of 140%. A net promoter score of 70. International exposure, steady, recurring revenue, pretty inept competition, at least from my perspective. And I mean, virtually any metric you look at this company, it’s good. It costs them less to get customers, and it costs cost them less to retain and expand relationship with those customers. And it’s still a small company. We’ll see how this evolves over time. But I think the reason why the market’s responded so positively to the company becoming public is just because it’s a strong, good company. I don’t like to discount companies that have great leadership, a great business model. Well-run company, received well by their customers. I don’t want to discount it just because I think the valuation is too frothy. Honestly at no point is a company this well run cheap.

Moser: We talk a lot about stocks and valuation, should you buy the stock even if it’s rich, or whatever. I’ve said it before, I mean, when I find a business like Zoom, it checks all the boxes for me there. I mean, I like it from virtually every regard, except for the valuation. When that’s the case, typically, I’ll look at this as the perfect opportunity to buy a company in thirds. Take the total amount of money that you want to invest in this business. Say it’s $3,000, for simplicity’s sake. Split that into three parts, $1,000 each. Buy $1,000 of shares today. Even if you feel like the stock may be overpriced, who knows? Maybe it never comes back down. We can’t make any guarantees. But you buy opportunistically. If you have to keep buying on the way up, so be it. That’s OK, too. But you buy that first allotment of shares, hoping that maybe you get a chance to buy some more on a dip, if there’s a correction, or if the company runs into some problems. But I think that’s one way to deal with stocks, if you have a concern about the valuation but really like the business.

Greer: And I love that point, Jason. I think it’s so easy as investors to think in very binary, “I either have to buy all of it right now or I can never buy it.” In fact, that’s not the choice at all. You can buy it over time, you can dollar-cost average, you can find different entry points. And then the pressure doesn’t feel quite as great if you’re not committing as much capital all at one moment.

Moser: I don’t think I have any stock in my portfolio where I’ve only bought one lot of shares. I mean, it seems like, if it’s a company that I like and it continues to perform well, I’m not afraid to add to it.

Greer: Before we get to our final story, I want to say thanks to LinkedIn. Now, Jason, I know you’ve been involved in some of our hiring here at The Motley Fool. A lot of that hiring comes from LinkedIn. After all, you want to find the best person for the job. And odds are that person is on LinkedIn.

Moser: It was an invaluable resource for us, Mac.

Greer: In our final story, shares of Canadian cannabis producer Tilray up big on Monday on news that its majority shareholder will gradually sell off its stake over the next two years. Emily, what a stake that is. Privateer Holdings owns 75 million shares of Tilray. That’s 77% of Tilray’s outstanding shares. They could have really wreaked havoc had they wanted to. Instead, over the next two years, they’re going to gradually sell off that stake. What does it mean for investors?

Flippen: It’s a process called a downstream merger. This is where a partially owned company, Tilray in this example, takes over a parent company, which is Privateer. So it’s actually a really good sign for investors. It means that Privateer is so confident about Tilray’s underlying business that that’s what they want their business to be in the future. Privateer actually formed Tilray and opened it up to outside investments in July 2018. When the lockup period for Tilray, which I believe ended in January, when that period came and went and Privateer essentially did nothing, a lot of investors got scared, because they’re like, “Why is Privateer not doing anything with this company that they say is such an important and major producer for the Canadian market?” The fact that it’s taken a little while, yeah, it’s a little bit concerning. But this downstream merger is actually really good for Tilray’s core business, because it now means that all of that stake is fully invested in Tilray.

Greer: A downstream merger. If you want to impress your friends, if there’s a lull in the conversation tonight — I don’t think I’ve ever heard that phrase.

Flippen: It’s very rare.

Greer: I like it. It’s downstream merger Monday. It’s not just merger Monday, it’s downstream merger Monday.

Flippen: It’s very rare that you see a smaller subsidiary taking over a big parent company. In this case, this is just a Canadian private equity firm that exclusively invests in cannabis, and Tilray is clearly their shooting star here. So I’m not terribly surprised, although the market does seem to be responding well to it.

Greer: Now that we’re on the topic of cannabis, one of our analysts — we’ll call her Emily Flippen at our most recent annual event, Fool Fest, did a breakout on cannabis. For those who were unable to attend, and you talked about cannabis on the main stage, what’s a big takeaway? We hear so much about this industry. How about one thing I should know about investing in the cannabis industry?

Flippen: I think the big thing is, and it doesn’t get said enough in the cannabis space, is you can choose how to invest in cannabis. People either tend to think, I want to go all in, and I’m excited about the industry, or people think, this is horribly unethical, and it’s investing in something that’s making the world worse, why would I do that? Well, depending on where you draw your line, you can invest in different places. Part of what Shannon and I talked about during our breakout is the difference between cannabis, hemp, CBD, and THC. Hemp is the plant itself that can be used for things like rope and clothing. It’s actually more sustainable, more economical, than cotton. If you’re interested in this space, if you’re worried about the ethics, draw your line there. Invest in companies that are producing hemp. That was legalized late last year.

Or, you can invest, if you want to take it one step further, into CBD, which is the non-hallucinogenic part of the cannabis plant that many people believe has medicinal benefits. The FDA actually approved a drug that uses CBD to treat things like epilepsy. So there’s opportunities to invest just in CBD, which is, depending on what form it’s in, also legal.

Or, if you want to get one step further, you can invest in THC, which is the hallucinogenic part of the marijuana plant that many people associate with smoking it, putting it in edibles. And if you have no problem with it, and you believe that all these things make the world better, you can invest in companies that work in recreational marijuana.

There’s many, many different ways to get involved in the marijuana space. You don’t have to immediately jump into companies like Tilray. In fact, Tilray is on our list of companies not to invest in. But you can look to other industries around it. You can look into parts within the cannabis plants and decide where you draw your line for investing.

Greer: As we wrap up, you mentioned that Tilray is on our “do not invest in” list. What’s the headline there? Why do we say stay away?

Flippen: You see with the marijuana industry a lot of hype within a few companies. Nothing against Tilray’s core business. Actually, it’s a pretty strong core business. But because the hype has pushed up Tilray’s stock to such extreme highs, it’s extremely volatile. We don’t think it’s the best opportunity for investors to make money investing in the space.

Greer: I mentioned Fool Fest. Jason, we were both there. We had an opportunity to talk to a lot of great members. I know you did a breakout on the future of entertainment and got to talk to a lot of listeners. A lot of people came up and mentioned listening to the podcast. I’ve said this before, but it is an absolute privilege to do this show. And it’s just wonderful to hear that there are actually people listening, doing real things as they’re listening.

Moser: Yeah. The only real crime of an event like that is, you want to talk to everyone. You want to give everybody a chance. You obviously can’t do that. You don’t have a chance to speak maybe with everyone you hope to or everyone that was hoping to speak with you. But everyone that I did speak with, everybody’s so nice, had so many nice things to say about the podcast, the radio show, everything that we’re doing on this front. I mean, in my breakout, part of the entertainment industry, part of the entertainment economy, is the growing podcast segment. It was just neat to see how many people are already enjoying that podcast segment, neat to see people encouraging us to keep doing what we’re doing and do more of it. It’s always just nice to see that what we’re doing at the end of the day is helping people because that’s why we’re here.

Greer: Amen. I want to give a shout out to Richard and Joanie Morgan, two of our longtime members, listeners. Absolutely always love seeing Richard and Joanie. And George. You know who you are, all of our great members, all of our great listeners. You said how nice they are. That’s true. Do you think our members, specifically our listeners, are they nicer than we are? You’re a nice guy, and I’m a nice guy, but I get a little grumpy sometimes.

Moser: Yeah, but we’re old.

Greer: [laughs] I was recently called a curmudgeon by one of our colleagues, and then she backtracked. But that that hurt me a little.

Moser: See, take that and work with it, Mac.

Greer: I don’t want to be a curmudgeon. I want to be irreverent and excitable and sometimes cantankerous. But I don’t want to be a curmudgeon. Curmudgeon’s not fun.

Moser: Just be a good person, be a nice guy. If you do that, it all works out.

Greer: Let’s go to the desert island. You’re on the desert island. You’ve got five years and you’re looking at these stocks and you can only buy one. We’ve got the soon to be Raytheon Technologies, which is the combined companies. We’ve got Salesforce, we’ve got Beyond Meat, we have Zoom, and we have Tilray. What do you think for the next five years?

Flippen: I’m a big Salesforce fan so I feel like I need to go Salesforce here. They focus on acquisitions a lot. I think there’s a lot of huge opportunities for acquisitions for them. They haven’t fallen under regulatory pressure yet. It’s a good company doing an important thing. I think they can grow to be a lot bigger in the future. I’m a big fan of Salesforce. But I do want to give Zoom its fair shake. I mean, it’s a close call there.

Greer: Okay. Jason?

Moser: I’m a big fan of Salesforce, too. But I’m buying my first third of Zoom. I feel like that’s going to be something that can solve a lot of problems in a lot of different verticals. It’s astounding to me that all of these companies out there that have these big video communications platforms have virtually just completely neglected them. And Zoom just says, “Hey, you know what? We’re not going to neglect you. We love you, video conferencing. We’re going to make you better, we’re going to make people like you a lot.” And that’s what’s happening.

Greer: You know, you’re getting a somewhat Teladoc type excitement in your voice when you talk about Zoom. It that fair?

Moser: Mac, I can neither confirm nor deny that I have an augmented reality service coming out. I can neither confirm nor deny that Zoom may be an idea that was on my shortlist of considerations. I’ll just leave it at that.

Greer: There you go. As always, people on the show 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. Emily, Jason, thanks for joining me!

Moser: Thank you!

Greer: That’s it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I’m Mac Greer. Thanks for listening and we will see you tomorrow.

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Source: fool.com

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