Disney‘s (NYSE:DIS) blowout third quarter is fueled by growth in Disney+ subscribers. Airbnb predicts record revenue on the horizon. Unity Software‘s (NYSE:U) second-quarter report calms shareholder concerns. Boston Beer (NYSE:SAM) and PepsiCo (NASDAQ:PEP) team up to create an alcoholic version of Mountain Dew.
In this episode of Motley Fool Money, Motley Fool analysts Jason Moser and Ron Gross analyze those stories, discuss the latest from eBay (NASDAQ:EBAY), Chegg (NYSE:CHGG), DoorDash (NYSE:DASH), and The Trade Desk (NASDAQ:TTD), and share two stocks on their radar.
Plus, Motley Fool analyst Maria Gallagher talks with Julia Galef about her book, The Scout Mindset: Why Some People See Things Clearly and Others Don’t.
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 August 13, 2021.
Chris Hill: We’ve got the latest headlines from Wall Street, we’ll talk about the Investing Mindset with author Julia Galef, and as always, we’ve got a couple of stocks on our radar. We begin this week in the magic kingdom. Shares of Disney were up on Friday after a blowout third quarter report, profits were much higher than expected, and the Disney+ streaming service now has 116 million subscribers. I will point out, Ron, it was less than two years ago that they launched it and they’re already at 116 million.
Ron Gross: Very, very impressive. They ended the quarter with a total of 174 million streaming subscribers overall, and that’s just 35.5 million short of Netflix‘s subscriber base and Netflix has been at this game for quite some time. Really impressive. Overall, the quarter really beat expectations on the top and the bottom line. Overall revenue was up 45%, and as we noted, streaming is most of the story here, but the theme parks are back despite the rising Delta variant. As you said, Disney subscribers doubled to 116 million. ESPN subscribers increased 75%, Hulu subscribers up 21%. The whole overall direct-to-consumer division, which includes that streaming business, had a 57% increase in revenue. But it’s important to note they did report a loss in that division of about $299 million because they invested in programming, which as we know from all the years of Netflix is expensive, so we have to keep an eye on that. Also very important to keep an eye on average monthly revenue per paid subscriber. For Disney+ that actually decreased to $416 million from $4.62 and that’s due to a higher mix of Disney+ Hotstar, which is the subscription service in India. That metric is going to be really key to profitability for the streaming business and where the growth comes from, whether it’s overseas or domestic, is going to be an important part of the story as well.
Theme Park revenue rose for the first time in five quarters. Great to see that back. Upcoming Theme Park reservations at the two U.S. parks remain strong even as the COVID Delta cases increased. We saw some weakness in their network business due to an increase in production and marketing costs. But overall, adjusted earnings per share for the quarter increased to $0.80 from just $0.08 in the prior year. Now the stock is not cheap, we’ve got Disney selling at 40 times earnings here. Disney is not the highest growth story in the world. The digital business is exciting. Let’s keep an eye on the stock. As I said, not the cheapest it’s ever been.
Hill: Although it’s interesting when you mention the ESPN+ numbers, it’s interesting to see that one of the benefits of the Disney+ streaming service is basically a catalyst to get people into ESPN+ and Hulu the way they bundle that service.
Gross: Absolutely. The fact that sports is back and sports gaming is back and excitement in general, we have the NFL heating up now. All important for ESPN, Hulu Live, a bit pricier than just the Hulu regular. Hulu is good for the average price point as well. Yes, that bundle is very important.
Hill: As good as Airbnb second quarter revenue was, the company said it expects third quarter revenue to be a record. That guidance also came with warnings about the Delta variant and that was enough to keep Airbnb stock flat this week, Jason.
Jason Moser: Yes. They did a good job walking the line here. Not being too optimistic but yet not being too pessimistic either. I think that it’s clear that people are traveling again and Airbnb is proving to be a prime beneficiary there. It won’t be a straight lineup, at least in the near term but we saw this with Disney’s report, we saw this with Airbnb report, we are seeing signs of least that people are starting to accept and learn more how to live in a world where COVID exists ultimately. That’s a good thing because it’s going to be the case, I think for some time to come. But as far as the numbers are impressive, the revenue for the quarter of $1.3 billion, that was up 300% basically from a year ago, that’s for obvious reasons. Let’s take a look at 2019, shall we say, Chris? It’s still up by 10% from 2019 so it’s very respectable there. Adjusted EBITDA, $217 million, that was up substantially from a year ago and even from 2019, as the company works toward profitability. But the numbers are really impressive, 83.1 million nights and experiences booked that was basically flat with 2019, obviously up considerably from last year, $13.4 billion in gross booking value. That was up 37% from 2019 as demand continues to pick back up. Which is ultimately what leads them to their rosy predictions there for the third quarter, as you mentioned. The persistence of COVID and Delta remains, but they do expect quarter three revenue to be their strongest quarter ever.
As demand starts to pick back up, they are seeing guests from countries with higher vaccination rates, including the U.S. and parts of Europe that’s really driving the travel recovery. They are introducing features to the platform like flexible dates, which is really proving to be quite popular in this environment. Interestingly, the trend of long-term stays. They highlighted this in the first quarter, with stays of 28 days or longer. That remains one of the largest and strongest growing parts of the business. It seems like they’re benefiting from a number of different trends here given their brand awareness in the space, it feels like they’re setting themselves up for a pretty good run here.
Hill: eBay’s second quarter revenue was light, gross merchandise volume fell, and guidance for the third quarter was lower than expected. But despite all that, shares of eBay were up 10% this week. Ron, as a shareholder, I’m not complaining, I’m confused though.
Gross: The quarter was mixed and as you noted, revenue guidance was weak, revenue up 14%, but that GMV, that gross merchandise volume was down 7% as the company faced tough comps to last year’s really strong growth. On the conference call, management noted that they’re seeing positive GMV growth compared to pre-pandemic levels two years ago, which is always smart to compare it to pre-pandemic. The fact that they used the word positive and I didn’t really get into some details to me, I’m thinking that means slightly positive, maybe not that exciting. They did in the quarter with 159 million active buyers, that’s a decline of 2%. Flattish from a year earlier, they had weak operating margins, but they managed to report adjusted EPS, which was flat. eBay, they’re looking to generate more revenue from the advertising in the payments business in order to offset that slowing growth from the online marketplace. During the quarter, they processed 71% of online platform buying through their own managed payments. That’s an important part of their future. Under pressure from activist investors, they’re selling off non-core businesses. I like that a lot. They completed the sale of their classified business for $13 billion, and announced an agreement to sell 80% of eBay Korea for about $3 billion. I like that as well. Now revenue guidance, as you mentioned, was weak as vaccinations continue to roll out as people return to pre-pandemic habits. That’s just the nature of the game. But still understanding all that and looking back compared to two years, the quarter was relatively solid. The stock is not that expensive at 17 times, so there’s room for buyers to come in and cause some strength to the stock.
Hill: Shares of Unity Software up nearly 20% this week, after a second quarter report was highlighted by strong revenue. Jason, there were concerns that Apple‘s new privacy changes were going to hurt Unity Software’s advertising platform, looks like they’re in pretty good shape.
Moser: Yeah. I think that’s just a very near-term headwind that shouldn’t really pose too much of an issue for Unity Software. Mainly that’s if you are a believer that the MedVerse is inevitable, and Chris, I am. I think the MedVerse it’s on the way. I don’t know that I’m going to really participate all that much in it, Chris, but I think it’s common. But do you think we’re headed toward a world of 3D and interactive content more than the norm? It feels like Unity is really a company that you need to own and that really bares out the numbers they’re presenting. Revenue for the quarter was up 48% from a year ago ahead of their guidance. That was the 11th consecutive quarter of 30% or greater revenue growth, which is really impressive, of course. The Create Solutions business, that’s the smaller part of the business revenue growth of 31% there, that’s one that’s based on subscriptions and contracts. The Operate Solutions, that was up 63%. That’s a revenue share and usage-based model, so clearly we’re seeing engagement headed in the right direction. I think 888 customers each generated more than $100,000 of revenue for the company over the past year compared to 716 large customers from a year ago, and the dollar-based net expansion rate of 142% over the same from a year ago. Again, they continue to do very good things to bring people in and keep them there. Making an effort to consolidate the space a little bit there, bringing in some little bolt-on acquisitions as time goes on not only to build out their capability, but it also really helps keep that flow of talent steady, which is really important in this line of work. All things considered, a very strong quarter for the business, one that I own, I’ve recommended it and continue to remain very optimistic about it.
Hill: Just in time for the start of the school year, good second quarter results from Chegg. The online education company’s profits and revenue came in higher than expected. Jason, Chegg also bumped up their full year guidance.
Moser: Really exciting to see the kids getting ready to go back to school. Hopefully this 2021-2022 year shakes out to be far better than the last one. In regards to Chegg though, this has been a fascinating business to follow. It’s really evolved over time to not only remain relevant, but to become more relevant. It seems they went from just a stodgy textbook business, to e-textbooks to now services. It seems like it’s proving itself to be an invaluable resource for educators and students alike. The numbers were very impressive. Net revenue grew 30% from a year ago and 38% growth in the Chegg Services side of the business. That was $174 million of their total, $198 million in revenue, and so 4.9 million Chegg Services subscribers now. That’s up 31% from a year-ago. Both revenue and subscribers have more than doubled in the past two years for this business as they continue to invest in that network, and then all of the information that helps the aid that it provides for students.
The neat thing about this business, acquisition costs are so low because it’s just the brand awareness and word of mouth alone. They just don’t have to invest a lot in actually acquiring those customers, so this results in a modestly raising guidance. They are working on limiting account sharing. I know one of the criticisms there with Chegg is that it can promote perhaps less than ethical behavior for students. They are working on that day, they are investing in a feature of a product called Honors Shield. This is ultimately security to help prevent cheating and protect the integrity of the system. But listen, there is a reason the stock’s up over 1,100% over the last five years. It still feels like it’s got plenty of room to grow with around 20 million total college students in the U.S. today. I like what I’m seeing from Chegg.
Hill: DoorDash posted record revenue in the second quarter, but the actual loss for the quarter was bigger than expected. Ron, DoorDash was down after the bell on Thursday, but on Friday, shares recovered. I’m assuming their guidance for the full year probably helped.
Gross: Yeah, but it was also cautious. The quarter was very strong with sales up 83%, total orders up 69%. That’s driven by increased order frequency as well as new customer growth. International orders grew substantially faster than domestic, but expenses more than doubled as the company increased investments to build out non-meal categories, a very important part of their growth strategy to expand internationally and to boost driver recruitment in a labor market that’s very tight. Management said they intend to increase that level of investment in these categories in the second half of 2021. That speaks to your comment about guidance, which I think was somewhat cautious based on the increased costs that they’re seeing. They’ve added over 5,000 new third-party convenience stores as part of their growth initiative, they launched Albertson in the grocery category, they added PetSmart, moving into many things other than just restaurants. They launched in Japan, that’s their third international market behind Canada and Australia. But they did report a loss of $100 million versus a profit of $23 million during the pandemic when business was gangbusters. Guidance for Q3, again included a seasonal decline. That shouldn’t be surprising to people. But it does also include increased levels of investments for those news categories and those international markets. They’re spending money to grow, which is essential. But that probably will take out by profitability for a while.
Hill: Second quarter revenue for The Trade Desk was double what it was a year ago. Good guidance as well, but when you look at shares of The Trade Desk this week, Jason, it’s almost like investors couldn’t make up their mind. They were down after the report, then it recovered. It’s basically flat for the week.
Moser: Yeah there was a state of upgrades the day after the release. I understand why. To me, this is one I remain a very happy owner of, because it just continues to be one of the most attractive ways to invest in the advertising opportunity. It really all comes down to the connected TV for The Trade Desk. To that point, management noted on the call that MoffettNathanson recently reported that the ad supported video on demand market will grow to $4.4 billion in 2022, around $18 billion as early as 2025. Clearly a lot of opportunity there. Particularly as you see, all of these ad supported platforms, Disney+, Hulu, Peacock, Discovery+. All of these different ads platforms contributed to Trade Desk’s success. Revenue more than doubled from a year ago at over $280 million for the quarter. Non-GAAP earnings per share followed suit. Customer retention remains robust at over 95% during the quarter as it has remained for the last seven years. These guys are consistently doing something very well. They do see that advertising video on demand market that’s going to outpace the growth of the subscription video on demand market over the coming years.
I think from a global perspective that’s important to remember. That really is the nature, I think, of this advertising video on demand market. That’s where the opportunity is. They’re seeing plenty of big brand spending. They saw the number of brands spending more than $1 million in connected TVs on their platform. It’s already more than doubled from a year ago. The number of advertisers spending over $100,000 has also doubled. They just continue to bring more customers in because they’ve got what they want and you like that market opportunity. I think The Trade Desk is a business you need to keep a close eye on.
Hill: Last month, shares of Boston Beer fell 25% after a disastrous second quarter earnings report. But fear not shareholders. Boston Beer is teaming up with Pepsi to create an alcoholic version of Mountain Dew. Boston Beer will make it, Pepsi will deliver and market the product. Ron. Hard Mountain Dew is expected to hit the shelves early next year. Are you interested?
Gross: The phrase flavored malt beverage makes me gag a little bit to be honest with you. But I’ve never been a big Mountain Dew fan in the first place. The flavor doesn’t sit right with me. I feel this is more a novelty item and something that’s going to storm the category and help Boston Beer’s hard seltzer beverage business. But I could maybe just be a little cynical about this and maybe you guys have a different opinion, but I don’t see this changing the direction of Boston Beer. I know Coke has their hard virgin of their topo Chico sparkling water, this is Pepsi’s entry into the space. I’m not convinced.
Hill: I don’t know, Jason, I get why both these companies are doing it. Particularly Boston Beer.
Moser: I’m with you, it feels like Boston Beer might need to change its name to Boston Beverage given that it is not so much a beer company anymore. I think novelty is probably the right word Ron. It feels to me like KFC Crocs or something. Is this really what the masses want? Probably not, certainly don’t mind them giving it a shot, but I don’t know that we’ll be seeing them breaking these sales results out in any future quarters.
Gross: Do we want it to be green? Is that important to the novelty aspect of this?
Moser: This day and age, everybody is so focused on health and wellness. It takes those colors that make it clear. Maybe that’s a selling point, if you keep it clear.
Hill: Having the right mindset is important for any investor. That’s where our guest comes in. Julia Galef is co-founder of the Center for Applied Rationality and author of the book, The Scout Mindset: Why Some People See Things Clearly And Others Don’t. Recently, my colleague Maria Gallagher talked with Julia about how investors can improve their thinking and the ways in which a scout mindset differs from a soldier mindset.
Julia Galef: These are my framing metaphors for the book. I will start with the soldier mindset. This is my term for the motivation to defend your pre-existing beliefs or to defend the things that you want to believe against any evidence that might threaten those beliefs. I’m sure everyone has encountered this before. I’m not the person to point it out. You might have heard of it under the name rationalizing or wishful thinking or denial. The term that Cognex scientists more often use is motivated reasoning or like full-term is directionally motivated reasoning, reasoning that’s aimed at arriving at a sort of predetermined conclusion. My favorite concise definition of what that looks like comes from a psychologist named Tom Gilovich. He said that when you’re engaged in motivated reasoning and you encounter something you want to believe, you evaluate it through the lens, can I believe this? Sort of looking for any excuse to accept it. Whereas, if you are evaluating something you don’t want to believe, you instead look at it through the lens of, must I believe this, and look for any reason to reject it. So just kind of applying an asymmetric standard of evidence or criteria that you are using when you evaluate evidence. I call that soldier mindset just because of the language that we used to talk about, reasoning is very militaristic. We will talk about shooting down an argument or about poking holes in someone’s logic.
We talked about our beliefs as if they are these fortresses that we have to buttress or support with evidence or strengthen against attack. So I call that soldier mindset. Then scout mindset is this alternative way of thinking and reasoning because the scouts’ role, unlike the soldier, is not to attack or defend, its to go out, try to see what’s really out there, what’s really true and put together as accurate a map as possible of a situation or the landscape. Being in a scout mindset just means reasoning with the goal of actually figuring out what’s true to the best of your ability, being as objective and intellectually honest as you can. That doesn’t mean that you don’t have preferences about what’s true like you might hope that your investment is going to do well, or you might hope that in the metaphor of the scout that there is like a bridge across the river where you need to cross, but above all, you want to know what is actually true. You don’t want to draw a bridge on your map where there isn’t one in reality. That’s the soldier and scout mindset.
Maria Gallagher: That’s awesome. I hadn’t really thought about these types of militarism, how strong the language is around defending our beliefs until I read your book. Once you start seeing it, I was having a conversation with a friend the other day and I realized I was getting so defensive about it, a belief I held and I realized I was using this quite intense language, and so I think that’s really fascinating. As investors, we’ve talked a lot about things like confirmation bias, which is seeking out information that confirms your opinions or even survivorship bias. You remember the stories of the Amazon that survived the 2001 Internet bubble but you don’t think as much about the many companies that didn’t and so how would you kind of compare and contrast the ideas of motivated reasoning with those ideas of confirmation bias as well?
Galef: That’s a great question because the terms are often used loosely or interchangeably and there is a lot of overlap between confirmation bias and soldier mindset or motivated reasoning. On the other hand, they’re not quite the same thing. Confirmation bias officially is reasoning or processing evidence in such a way that confirms what you expect is true, whereas motivated reasoning is processing evidence in the way that confirms what you want to be true. So it’s expect versus want. Again, that can often overlap. An example where they wouldn’t overlap might be, suppose for whatever reason you suspect that your friend is depressed and there’s a party and your friend doesn’t show up for the party and so you think to yourself, it must be because my friends is depressed, she didn’t feel like coming to the party and maybe, but there’s lots of reasons why someone might not come to a party and the fact that someone didn’t show up isn’t that strong evidence of depression, but because that’s when you expect to see, that’s how you interpret the new evidence but it’s not that you want your friends to be depressed. It’s just interpreting evidence in a manner that’s consistent with your expectations. That would be confirmation bias but not motivated reasoning.
Gallagher: Something that’s interesting too when you talk about in your book, you talk about some business leaders. You talk about Elon Musk starting Tesla, that he thought it would probably fail. Jeff Bezos started Amazon, he gave himself about a 30% chance of success and he shared with investors.
Galef: On the media.
Gallagher: We think of them as confident leaders. How do you kind of think about leadership as it comes to these types of mindsets and then how they talk to the public and they talk to their companies and the media?
Galef: I find the stories of the early days of Tesla and SpaceX and Amazon fascinating because they undermined this common wisdom that people have. Which is that leaders, in order to be a successful leader, in order to be influential and to inspire people to work for you and fund you and just like cover you in the media, you need to just be certain in all of your opinions, you need to express certainty that your plans will succeed. That’s what confidence is. The fact that these two extremely successful entrepreneurs and very influential people of Jeff Bezos and Elon Musk actively went against that advice and expressed low confidence in the success of their companies. Elon Musk, I think, gave both Tesla and SpaceX a 10% chance of success. He was very open about that and Jeff Bezos gave Amazon a 30% chance of success, which is still relatively high compared to the base rate of start-up success, but like well below what a typical entrepreneur says about his company starting out. I think it’s very interesting that they are counterexamples to that common wisdom. So the question is why? How are they so successful and influential despite expressing low confidence?
The answer is that there are two different things that we’re conflating when we talk about confidence. One type of confidence is what I call epistemic confidence, and that’s about how much certainty you express in your beliefs or in your predictions about whether your company will succeed. Bezos and Musk both expressed low epistemic confidence in their project success where their company is. Then another type of confidence is just social confidence. Are you self-assured? Are you charismatic? Do you seem comfortable taking charge and making things happen and speaking in front of groups? Things like that. People conflate those two but actually if you look at the evidence, both anecdotal and the studies that we have, the thing that matters to whether people see you as an influential leader is social confidence, and both Musk and Bezos have lots of social confidence. It’s one of the things people tend to remark on about them when they first meet them, and so that’s all you need, which is great. That’s the great news because people all along have been thinking, in order to be influential, I have to convince myself that I’m certain about everything even when there isn’t actually good evidence, even when I can’t justifiably be 100% certain. Being a good scout means you’re going to be uncertain about a lot of things because you can’t actually justify 100% confidence in a lot of things, especially in messy unknowable things like whether your company will succeed. So it’s good news. You don’t actually have to express 100% certainty in order to be a confident leader, you just need to cultivate social confidence.
Gallagher: While you were doing research for your book, was there anything that really surprised you and shocked you a little bit as you were researching these mindsets?
Galef: In this main, something that surprised me, but I don’t think ends up including the book actually is a different bit of common wisdom that I would often hear is that the public doesn’t want to hear uncertainty from scientific experts, like public health experts speaking about COVID or scientist speaking about climate change. Public hates them, in fact they just want definitive answers from scientists. I’ve had that a million times. When I actually looked into the evidence, that’s not true. I read a bunch of studies that measured people’s reaction to uncertainty from scientific experts. In the vast majority of them, the result was actually bimodal. In all these studies, a significant minority of people like 30 or 40% who don’t like uncertainty, and if they hear and uncertain statements from scientists, they will report having lowered their trust in the scientist or lower their confidence in science. But then there’s also another often bigger group of people like 40 or 50% who like hearing uncertainty from scientists and find that that increases their trust in scientists and the scientific process. When interviewed, people in the second group will often say, you can’t actually be 100% certain. If a scientist says yes and I don’t trust them. It’s actually a more nuanced situation than people made it sound, and I’ve started to wonder if maybe scientists haven’t been on wisely optimizing just for the first group of the uncertainty averse people when actually there’s often bigger group of people who would be happy to hear uncertainties if it’s warranted. That was surprising and interesting to me.
Gallagher: That is very surprising. I would assume that they would be the exception to the rule and that most people would not want scientists to show any doubt. But that’s really fascinating.
Galef: I don’t think that’s what I had heard when I assumed.
Gallagher: I wonder what group I would fall into. I feel like I don’t want doctors to be uncertain, but maybe I would feel like I was refreshed with their honesty if they were.
Galef: It depends on the uncertainty. There’s a certain uncertainty, the results of ignorance like if a doctor says, I’ve never seen anything like this. I don’t know what it could be. Then you’re like, maybe there’s a better doctor out there that [laughs] I’m going to find. Then there’s a different uncertainty, again, in studies people react well to, which is like, OK, here is what is known about your condition. The diagnosis is hard to predict as of now, but I can tell you the factors that tend to make it more or less likely that you’ll have a good outcome, but it’s not guaranteed. When a doctor explains the uncertainty in detail like that, what they’re doing is they’re demonstrating that the uncertainty is not the fault of their own ignorance. It’s just the world is messy and things are often unknowable and they’re showing you that they understand the uncertainty and they can map it out for you. That tends to make someone looks like more of an expert, not less. That’ll be my prediction about how you would react if a doctor expressed uncertainty to you.
Gallagher: Yeah, that’s really fascinating. I know we only have a couple of minutes left, so I was just wondering to finish off of what’s one thing that investors and people should start to implement and their daily life to work on, to start having more that scout mindset to looking for the truth no matter what your initial opinions are going to be?
Galef: Yes, I’d say one category of technique called Bates’ Scout Mindset is the thought experiments, which I mentioned earlier. That could look like the outsider tests. Another one is the status quo bias tests where you flip around the status quo to see if you were motivated to stick to whatever the status quo was, even if it’s not actually best. You might ask yourselves like, maybe I don’t think it’s wise to sell, but if I imagine I didn’t actually already own the stock, what I want to buy it, that can often flip things around an interesting way. Another category of technique is just finding ways of making ourselves more open or receptive to the truth. Even if it’s not what you wish, it was.
The way that I usually do that is before I ask myself if something is true, I’ll instead imagine, suppose it is true. How bad would that be, or what would I do about it? If I’m in an argument online and I start to think, oh, I wonder if I’m wrong, the temptation is to push that thought out of my mind and just focus on ways to defend my position. But instead, I’ll also stop and ask myself, OK, suppose I was wrong. How bad would that be or how would I say it? Often in just a couple of seconds I can come up with a draft freezing, but I could say that I would be happy with and I’m like, I don’t think our views about than wrong with four people didn’t turn my head off. That just a couple of seconds and then I just feel much more willing to consider the possibility that I am wrong because I feel like it would be fine, I can handle it. Same thing for if you start to worry that maybe you made the wrong call at work or maybe you shouldn’t have bought that stock or something. Before you try to think about whether that’s true, first ask yourself, suppose were true, what would I do, and try to get into a state where you feel like, OK I could handle that if that were true, and only then will you have the freedom to think honestly about whether or not it is true. I found that really helpful as well.
Gallagher: That is really helpful, I think, especially as investors, when you look at your overall portfolio, a winning portfolio is only right about 60% of the time. There is no way that I’m going to exclusively pick companies that are always going to win. I think having that mindset means, OK, my thesis is wrong, what does that mean? My thesis has been wrong before and it’s looking at it as a learning opportunity and think, what does that mean for the next time I look at a biotech company, what are these red flags I’m going to make sure I pay attention to next time, and having that growth mindset of always trying to learn and grow. You’re wrong about things as we all are, as the world is a messy and confusing place to be an investor and to be a person.
Galef: Right. I could pick one takeaway, it would be that shift in your thinking about what it even means to be wrong because we tend to just implicitly think, but if I’m wrong, it means I did something wrong. I screwed up somehow. Sometimes you’re wrong because you screwed up. Like maybe you were really negligent and you didn’t do enough due diligence for you about the stock and go, hey, is part of the mistake, I should’ve known better. But a lot of the time you made the best call you could have given the information you had at the time and you shouldn’t feel bad about that. The metaphor of the scout, we all have these imperfect incomplete maps. They’re wrong necessarily because we’re not on mission. Over time our goal is to get more information and revise them up and make it less wrong, and that’s the best we can do as humans.
Hill: The book is The Scout Mindset: Why Some People See Things Clearly And Others Don’t.
It’s time to get to the stocks on our radar. Our man behind the glass, Dan Boyd, is going to hit you with a question. Jason Moser, you’re up first, what are you looking at this week?
Moser: Yeah. Just taken a look at Outset Medical, the ticker is OM. They are responsible for the tableau hemodialysis system. I know it’s helpful. It allows for dialysis, believe it or not, to be delivered anytime, anywhere and by anyone, and in fact, it’s the only hemodialysis system on the market with FDA clearance for two-way wireless data transmission. But it’s got a lovely razor and blade model where recently console revenue grew by 106% from a year ago, consumable revenue was up 150% from a year ago. They did report for the second quarter $25.2 million in total revenue. That was revenue growth of 115% from a year ago as well. Secured sales agreements with seven of the eight largest national health systems. Raising guidance modestly could be looking to cross that $100 million in revenue mark this year. This is a very young business. It is just getting started. Clearly, valuation is going to be one of the bigger risks in the near term. But it’s a tremendous market opportunity; it really doesn’t look like they’re proving their case. It’s one I own myself. I remain very excited about its potential.
Hill: Dan, question about Outset Medical?
Dan Boyd: Certainly, Chris. Jason, since inception, the stock has been flat to a little bit down. Is the time to strike now for Outset Medical?
Moser: I think so, Dan. Like I said, valuation being one of the bigger risks, but they are pursuing a very big market opportunity, one that is not going to go away. As we see more moves toward that hospital in the home and telemedicine. This is a business playing in the basic Sandbox, so to speak.
Hill: Ron Gross, what are you looking at this week?
Gross: I’ve got bluebird bio, ticker symbol BLUE. One of the stocks in my personal biotech basket, but I need to keep a close eye on this one. It got crushed on Monday, down about 25% in one day. The FDA paused one of its gene therapy studies due to concerns that one of its therapies contributed to a patient getting cancer, obviously very serious, that needs to be investigated. The company also confirmed its plans to separate into two separate companies, one to focus on gene therapy, one to focus on oncology. May also plans to pull out of direct selling in Europe, so a lot of news on that one day. I’m still hanging onto this one for now. But this stresses the importance of buying companies like this in a basket. This is one of nine companies I own in the space, and even though the stock got crushed, that basket as a whole was actually up on the day.
Hill: Dan, question about bluebird bio?
Boyd: This is one of those stocks that Ron brings every now and then, where I think he’s bringing it to show us how bad things can get when a company has a ton going forward and then loses 25% in one day.
Hill: What do you want to add to your watch list?
Gross: Here’s that basket approach, Danny.
Boyd: Well, it’s certainly not bluebird bio, I am going to go with Outset Medical here.
Hill: Ron Gross, Jason Moser, guys, thanks for being in here.
Moser: Thank you, Chris.
Hill: That’s going to do it for this week’s show, we’re out of time. We’ll see you next week.
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