The Consumer Is All Right!

0:01Travis Hoium:Earnings season is in full swing and Motley Fool Hidden Gems Investing starts now.

0:09Travis Hoium:Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoium joined today by Lou Whiteman and Rachel Warren. And guys, we've got earnings on the mind today. We're going to get to four different earnings reports, at least touch on them. Lou, the first one that I wanted to get your thoughts on is one that I'm sure a lot of fools have in their portfolio, or at least their watch list. That is so far. The numbers looked pretty impressive. Total revenue was up 43%. Net income was up 61%. And yet the stock is down almost 10 % today.

0:37Lou Whiteman:Yeah, I think the stock is acting rational. And again, I know I get a lot of hate for this, but, you know. You just don't like growth, Lou. Let's be honest. I like growth. It's just the question of what you're paying for growth. You know, Now, one thing we learned from that short report, and I think it's important that the short report was mostly just nonsense. But one thing that I think it did highlight is SoFi loves to use marks to market and other adjustments to create non-gap earnings. That's fine. They disclose it. Again, the short report was overstated, but it makes apples to apples comparisons to other banks very, very deceptive.

1:18Lou Whiteman:And I think flatters SoFi in a lot of ways. On a gap basis, SoFi is trading at 40 times earnings. The average bank trades at 10 to 15 times earnings. I can find you really good ones right now where the dividend yield is, you know, at 4 % or so, and they're on the lower end of that 10 to 15%. So the question is, yes, SoFi is growing faster than these banks, and I think they can justify a premium valuation based on that growth. But I don't think the market is wrong in saying it ain't 40 times earnings, which, you know, and we can go deeper into it if you want. But I think for all SoFi tries to say it is, SoFi is a bank and it should be judged as a bank.

2:02Lou Whiteman:It's a fast growing bank. So give it a premium. But I do think the valuation is still eye catching.

2:11Travis Hoium:So is that the criticism of the quarter and the stock right now still is that maybe this is a more attractive bank than other banks because it is growing more quickly. I just don't I still don't want to pay this price. And what price do you think it becomes more more intriguing?

2:30Lou Whiteman:Yeah, my criticism is why now, guys? We've known this for a while, so I don't know why. Maybe that there was hope that we were going to see different in the new quarter, but I mean, they are what they are. The fintech business is, it's not nothing, but there are dozens of software vendors that'll give you banking as a service. the real and inevitably these faux banks come and go left and right there isn't really any differentiators so that software business always seemed a little suspect to me if you want a great fintech bank story buy live oak don't buy sofi sofi is a retail bank and you know at some point

3:09Travis Hoium:we should value it like one rachel do you see this quarter similarly or do you look at you know kind of these, not only did they grow members, but they actually grew products faster than members, which tells you that their uptake on those products is, you know, a little bit higher. So getting more people in the ecosystem and getting them to use SoFi more. Yeah, I have a few thoughts on this. And I don't necessarily think you can value SoFi the same way you would legacy banks. But I do think there's a few kind of very practical reasons why we've seen some of the pressure on the stock. I mean, going back to the quarter, you know, they added over a million new members in the quarter alone.

3:43Their base is just shy of of 16 million people on that banking side. Management raised SoFi's full-year revenue outlook, so that kind of core machine seems to be resilient. Now, it was interesting. I think one of the things investors didn't like was, of course, the tech platform segment that dropped 23 % in terms of revenue. And that was largely because we saw a major enterprise client that had left the platform at the end of last year. So we've been seeing the impact since then. Full-year profit and earnings per share guidance remained the same. I think we're in a market where a lot of investors are hoping for not only a beat, but a raise.

4:19The risk that I would be watching here is SoFi is leaning heavily into capital-intensive lending to fuel its growth story. So we saw total loan originations hit a record$14.8 billion. That included about$10.7 billion in personal loans. So their CEO is insisting that the borrowers are remaining resilient, personal loan charge-offs and credit delinquency trends are creeping upward across the industry, however. And the reason this matters is SoFi keeps these high yield loans on its own balance sheet rather than instantly offloading them. So, you know, if we see a macro downturn, which I'm not saying we will, but it's something to, you know, watch for or even a spike in consumer defaults, that will hit the balance sheet.

4:59And we also saw that, you know, tech platform enabled accounts actually dropped about 16 % year over year. So they have seen a bit of an impact from the loss of that major enterprise client. Fundamentally, I think this is a good business. I think it's a solid one. And I don't think there's anything wrong that, you know, is leading to the pressure on the stock. I think a lot of this is just the machinations of the market. I do think that these are elements to watch, though, if you own SoFi or even are thinking about buying shares.

5:27Lou Whiteman:We have a name for companies that make loans and keep them on their balance sheet. You know what that is? I know where you're going with this, Lou. It's a bank. Yeah. Let's talk about the products because I and maybe I'm showing my ignorance here, but I was really surprised by one stat in there that they said the products per member reached one point five four, which is an all time high. Now, I've been involved with banks for 30 years, and most banks don't break down the numbers. But if you hire a bank consultant to what they come in, the first thing they're trying to do is to get that number to two or three per member.

6:07Travis Hoium:That's why they get you to open a checking account and a savings account at the same time. Right, right, right.

6:11Lou Whiteman:1.54, maybe it just spreads. I think it speaks to how much of SoFi is just paper-thin marketing. because that implies that a ton of their customers relative to a community bank only have one product, which I don't know if that's the flex it thinks is. One stat we can use, JP Morgan, says that 30 % of their retail customers have two or more products. So that's, you know, and again, but that's not an apples for apples. Like I said, most banks don't list that, and it's kind of a weird thing to list, but I'm surprised they're flexing that number because I think there's community banks that I can walk to from my house that would really laugh at that number.

6:53Travis Hoium:It's funny you mention that because that is one of the metrics that I do watch with SoFi. But I have also opened accounts at all of these things. And if you open, like, for example, we have a Wells Fargo account. They will charge you to have a credit, have a checking account, unless you also have a savings account and you deposit, I think it's$25 a month into that savings account automatically from the checking account that you also created. Yeah.

7:17Lou Whiteman:Yeah, I don't want to be too hard on. They are a good bank, but I do think as investors and maybe that we, you know, a lot of investors don't look at banks and so far has kind of attracted the eye of growth investors just because of the story and where they're based and who runs them. I think there is a lesson here that maybe I am being too hard, but maybe also the market is being too generous. It is really, really hard for a bank to be anything other than a bank. And at some point There is regression to the mean. And I think investors, they can, both things can be true. It can be a very well-run company with growth that exceeds national averages and still overvalued based relative to the opportunity.

7:57Travis Hoium:Well, we will be keeping an eye on SoFi and I'm sure Lou and I will keep arguing about the future of the company. We'll see who's right over the next five or 10 years. So listen on to this show. When we come back, we're going to check in on the health of the consumer. You're listening to Motley Fool, Hidden Gems Investor.

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8:43Travis Hoium:Learn more at schwab.com slash trading. Welcome back to Motley Fool and Gems Investing. Let's turn our attention to direct consumer spending. There's a number of different companies who are giving us an indication of how healthy the consumer is. Rachel, one that caught your eye was Procter & Gamble. Maybe not the most exciting company, but it's at least telling us people are telling us how much people are buying, you know, diapers and the things, the necessities of life. Right. I mean, this is the company that's known for those household products like Tide, Pampers, the list goes on. And so it does kind of provide an interesting insight into how consumers are behaving.

9:20And this is, I will note, not a company that is typically high growth, even in the best of macroeconomic times. The margins are slim, you know, a normal year of growth or a quarter, you might see 2 % year over year gains. But Procter & Gamble actually missed Wall Street's revenue expectations by about 180 million for the quarter. They pulled in about 21 billion in this recent quarter. Volume was flat year over year. Operating margins were actually down. They actually saw profits decline by about 15 percent. And, you know, why does this matter? I mean, their operating margins were compressed because you're seeing companies like this have to spend significantly on marketing to try to protect their share.

9:57And consumer staples operate on very thin incremental margins. So any drop in volume hits profits quickly. But I think, you know, what this tells us about the broader consumer is that a lot of, you know, average households are really reaching their financial limits. You know, we're not seeing a dramatic economic crash where people stop shopping, but we are seeing kind of very tactical retreats and approaches to how consumers are putting their money to work. You know, they're looking at these legacy companies that put these household name brands forward, and they're not willing to absorb the higher costs that companies like Procter & Gamble have implemented over the last few years.

10:30They're stretching out their existing household supplies. They're maybe switching to cheaper store brands. They're buying smaller packages. And when you're a company like Procter & Gamble, they've certainly lasted through their fair share of market ups and downs, but it can really come in hard on the margins. I think if anything, this yields a continued ground to the likes of Walmart and Costco, who not only control the physical store shelves, but also have their own private label brands and really robust e-commerce presence as well.

10:59Lou Whiteman:Yeah, I think Rachel's right. It is the store brands. And I don't know if this says anything about the consumer right now. That's a trend that was going well before this current. Yeah, this is a decade, 15, 20 year. And I think it just speaks to and we've seen this with Kraft Heinz. We've seen this with so many. I don't. It's just a terrible place to be right now. Consumers have realized the store brand. I mean, I remember the 80s or when joked about, well, it's the same product, it's just a different label. And that was kind of novel back then. Now it's table stakes. That vast middle, that big consumer brand with a logo has really suffered.

11:36Lou Whiteman:I am reluctant to read anything into the health of the consumer that I think what the consumer right now has showed us is they will pay up for select things like maybe on shoes or something bad. But for most everyday purchases, the fact that it's Tide and not Costco brand just doesn't matter. And I think that's what we're seeing.

11:57Travis Hoium:We can talk about Visa, too, if you want, because I think, again, I just I wanted to point out the store brand thing, I think, is really interesting because that was one of the things when I started at 3M's biggest manufacturing plant in 2005. The interesting thing there was you would have scotch tape rolling off the line. And then five minutes later, there would be Walmart tape rolling off the line. It was literally the exact same equipment. They make it a little bit worse. So it is not quite the same product. You want to have that other product be a little bit higher quality. So there is a little bit of a premium there.

12:28Travis Hoium:But it's not like it doesn't hold a piece of paper on the wall. It's not like the diapers are going to be complete garbage. So that is something that we've seen for a very long time, is that those big companies, the Walmarts, the Costcos, the targets of the world, have the power to say, hey, you know what, if you want to be in our store, we want to have our label on it. What do you think about Visa, though?

12:49Lou Whiteman:Yeah, so this is another way to look at the consumer, and it's a much healthier look, which is maybe why I'm not sure how to read PG. But Visa reported 10 % U.S. volume growth in payments. That's the fastest growth rate since fiscal 2019. Transaction counts were up to about, say, 10%. So this isn't just an inflation story or something like that. There's actual transactions happening. Visa also, and Travis, this is something we've talked about a lot, but the K-shaped economy. Visa said spending is not isolated to high earners. This is strength across the board. And just last week, the economists over at Bank of America said they believe the K-shaped trade may be reversing in a good way.

13:31Lou Whiteman:More spending power across the board with kind of the lower end of that K kind of picking up. I mean, I don't think we know that yet, but Visa's results sort of back up that idea. Now, look, there was more. I mean, I think the World Cup factored in here. There's international experiences, which is kind of the upper end of decay. So I'm not saying that it is all just, you know, perfect and fine. But, you know, the quarter was fine. They're forecasting basically status quo for the rest of the year. I continue to think both Visa and MasterCard are undervalued right now because of the disruption potential.

14:06Lou Whiteman:I kind of like MasterCard better, but I think that, look, this is status quo is really good here. And this was at worst a status quo quarter. Yeah.

14:16Travis Hoium:Things seem to be okay for the consumer right now. And maybe that's okay for the market right now. When we come back, we're going to talk about an energy company that just grew revenue 166%. You're listening to Motley Fool, Hidden Gems Investing.

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16:10Travis Hoium:Welcome back to Motley Fool, Hidden Gems Investing. Bloom Energy reported earnings last night. And Rachel, this is one of the more interesting stocks out there right now. This stock has been absolutely on fire over the past year or two because this is one of the few companies that can put energy into a data center at a relatively rapid clip. Revenue is up 166%. What do we need to know about the quarter? Yeah, it was a great quarter for Bloom Energy. I mean, their adjusted earnings per share also were double what Wall Street was guiding for. They raised their revenue outlook as well, looking ahead to the rest of the year.

16:44I mean, obviously, as you noted, the stock's down from its recent peak. I think that this is one of those businesses that is very vulnerable to having volatility based on unrealistic hype cycles. You know, this is a company that's executing well. It's worth noting just about every major AI hyperscaler has now approved their fuel cells to bypass utility grid bottlenecks. But I do think there is a question of when there might be periods where the AI power trade could run out of gas, where we could see the stock vulnerable to sector profit taking. I think that might be something we're seeing right now.

17:16I mean, there's this question of when we're going to see this transition from buying a catchy AI narrative to really looking at the capital heavy reality of physical infrastructure. You know, fuel cells are a physical manufacturing business. Generating energy requires real factories, massive upfront capital, very complex installation timelines. Now, Bloom's profit margins improved this quarter. Scaling up production to meet the demand that they're facing is a very expensive endeavor. It will limit their short-term cash flows. Now, I don't think that we need to worry that Bloom's business is broken just because they're down since their summer highs.

17:50But I do think that we might be coming towards a point where the market could force some of these AI infrastructure companies to justify their valuations with some real-world unit economics. So, that could be some of it.

18:02Travis Hoium:Yeah, Ludo, this does seem to be kind of a theme where a lot of these picks and shovel plays coming back a little bit because investors are starting to go, wait a second, how sustainable are these growth rates and margins that we see today?

18:13Lou Whiteman:Yeah, let's get that in a second, because I think that's exactly right. But yeah, stocks down 50 percent from size to 400 percent over the past year. It's still a double in 2026, even if it is all 50 percent since June. And it still trades at 75 times forward earnings, which for an industrial company is pretty amazing. Cordo is fine. Rachel's right. Given the AI power demand, anything short of fine would have been a real negative well factor. But they held serve. And that's great. Remaining performance obligations. RPO, that was flat. And remember, Wall Street tends to pay for growth from here, not growth that has occurred.

18:53Lou Whiteman:And I think that is the easiest way to explain is coming back to earth, kind of letting somebody out of tires. It's great if they can sustain at this level. And I think they probably can, given the demand. That's a fine company, but it doesn't make you a growth stock. Picks and shovels, I think it's really interesting because picks and shovels, it's so clever. And everyone loves to like look smart with picks and shovels trades, but they are imperfect traits. They are a trade you do because the underlying asset is overvalued. You know, why, if you want to invest in hyperscalers, but the hyperscalers are overvalued, how about investing in their suppliers?