Sonos (NASDAQ:SONO) shares popped 10% after an International Trade Commission judge rules Google [Alphabet] (NASDAQ:GOOGL)(NASDAQ:GOOG) infringed on some of the company’s audio technology patents. SoFi (NASDAQ:SOFI) falls 15% after its second-quarter report, but is it a buying opportunity? In this episode of MarketFoolery, Jason Moser, with host Chris Hill, analyzes those stories and offers a preview of Tuesday morning’s earnings report from Home Depot (NYSE:HD).
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This video was recorded on August 16, 2021.
Chris Hill: It’s Monday, August 16th. Welcome to MarketFoolery. I’m Chris Hill, with me today, Mr. Jason Moser. Good to see you.
Jason Moser: Happy Monday. Good to see you.
Hill: Happy Monday, indeed, earnings season rolls on. We’ve got FinTech, we’ve got home improvement. We’re actually going to start with some news from the home entertainment industry. Shares of Sonos were up nearly 10% today. This is a high-end speaker company. This was not an earnings win for Sonos. This was a legal win, they are in a courtroom battle with Google. An International Trade Commission judge ruled that Google has infringed on some of Sonos’ audio technology patents. I guess if you’re a shareholder of Sonos, you don’t care where the wind comes from, but it’s always interesting to me when this type of thing happens where it’s not, the business got better. Although maybe it did, maybe the business did get better if this means that if this paves the way for Google not being able to compete with Sonos to the degree that they would like?
Moser: Yeah. There’s plenty to unpack as far as what this decision actually means. I think the big picture takeaway right now, it’s a very difficult time to be big tech in the sense that you have to figure that any organization with any sway whatsoever is very open to handing out whatever losses, whatever they can. That I think is something that could certainly play out, not only in Sonos’ favor, but other smaller companies out there that are utilizing technology in some capacity to build out their business models. That was something that Sonos quoted here, they’re just listening. They’re trying to level the playing field for competition out there. It’s difficult when you have big tech that is so entrenched and they are now trying to become all things to all people, makes it very difficult for other companies out there to compete.
You look at what Sonos does, this is a company that sells speakers. When you just get right down to it. That is a very competitive industry. You’ve got Amazon out there doing the same thing, you’ve got Alphabet doing the same thing, and plenty of others. I think this is one of those things that, while this is not the final decision, I think it is good at least to see that at least there are some open minds out there to looking at what big tech is doing, where they may be getting some of that technology from. For Sonos, it is a very big deal, they make their money by selling all of this equipment, but really, the proprietary software is what drives that device engine. Then they definitely had a partnership ecosystem in play. They are open to working with big tech, but they want, I think, to make sure that what is theirs is seen as theirs legally speaking and otherwise, and that makes a lot of sense. I ain’t telling you just as a Sonos customer, we have a couple of those Sonos move speakers here in our house, one in our house, and one in other places. Man, they make some good stuff. It looks like there’s a big market opportunity forming for them that maybe didn’t seem like it really existed before.
Hill: So I’m wondering about their pricing power because it seems like the brand equity that Sonos had, like you said, they make great speakers. I don’t think there’s anyone who disputes that unless they are direct competitors. It seems like part of the bulk case for Sonos is, I’m not saying they’re like Apple and they can do with their speakers what Apple has done with the iPhone. But it does seem like they are at least in that direction if this is a business that can tick up prices over time. People who want high-quality audio in their home are going to pay for it.
Moser: Yeah. I think they do have that to an extent. I think part of that is forming from that market opportunity that is developing now that didn’t exist a time ago that I had mentioned earlier. Part of this is due to the pandemic. Part of it is just due to connectivity and being more connected, not only at work but in the home too. Sonos management quotes these three pillars of this opportunity that’s forming. One pillar to this goal, major audio, where we’re just seeing more audio content delivered than ever before. The growth in podcasts and whatnot. There’s just more audio content than ever before. We’ve seen that Spotify and Apple are these two companies that have really benefited from that.
The second pillar is this Hollywood at home concept, where more people are watching these hit movies from home. Disney+ giving you that option now to go ahead and rent the movie, and watch it from the comfort of your own home as opposed to having to go to the theater. There are folks that are focusing more on bringing that theater-like audio experience into their home. That’s absolutely something that Sonos is good at.
Then a third pillar, they quote is the great reshuffling and it’s ultimately people becoming more flexible. We’re not tied necessarily to our workplace anymore. That workplace doesn’t dictate where we live. Now, you see folks who are able to go wherever and do whatever in much like the content that we get, wanting it to be on our terms when we want to listen to it, where we want to listen to it or when we want to watch it, where we want to watch it. That’s something that certainly plays into the product lineup that Sonos is coming up with. That will help them continue to deliver, I think, new products, new ideas, new ways of delivering the audio content that they’re so well-known for.
Hill: We’ll keep watching Sonos, I want to go back to last week for a second, because SoFi came out with second quarter earnings after the closing bell on Thursday. For those who don’t know, SoFi is an online personal finance company. They went public late last year. The stock fell 15% the next day. This seems like one of those reports that’s a Rorschach test. Because if you’re a bear, you can point to the loss they posted. Their guidance wasn’t all that great. If you’re a bull, you can say well look the loss wasn’t as bad as it looks on the surface because there were some accounting quirks at play and they are getting closer to getting a national bank charter. When you look at their report, their guidance, and what happened with the stock, what do you think?
Moser: Generally speaking, I think this was a good quarter. Management exceeded their own expectations. It feels the key to success in this area is bound to really two things, having strong brand equity and then also having that strong mobile/digital presence. Those are two things that SoFi is doing really well at. To me, this is a company that’s really, it’s shaping the financial services industry for an entire new generation. They’re not the only ones doing it, but it’s these types of businesses that are really shaping up this financial services landscape for the future. We’re seeing a couple of things at play here. There’s not nearly the appetite for SPACs out there that did exist a little while back. I think we’re seeing a little bit of an exodus from some of these names. Maybe investors that aren’t willing to be as patient as you would need to be getting into one of these types of investments. These are businesses that are coming public far earlier than they normally would. I think that’s something that you need to keep in mind. It just means that you’re going to have to exercise more patience with these types of businesses. You got to give me a little bit more time to let that business strategy play out. But I mean, when you look at the numbers, I think, generally speaking, it’s a very good quarter.
Numbers were up to 2.6 million people. Now, that’s up 113% from a year ago. It was our eighth consecutive quarter of accelerating growth in that metric. Total products of $3.7 million, that’s up 123%, and they’re seeing tremendous growth across the spectrum there. It’s known for its lending segment. That’s the biggest part of the business and that revenue was up to 47% on an adjusted basis, but they saw 188% growth in personal loan originations. I think that just speaks to this new generation of consumer that’s looking to companies like SoFi as the solution for their financial needs. I think gone are the days, of feeling like you have to go into the banking center to get a loan. You’re seeing more and more options out there than ever before in order to get that problem solved for consumers. Certainly, SoFi is helping lead the way there.
The financial services segment, a smaller part of the business today, but that revenue grew 600%. They’re seeing a lot of positive feedback from their investment business. A lot of people are getting into the market these days taking up investing and then anything about SoFi. I don’t know that many people know this, but it is a neat dynamic of the business. They have ETFs, which I think is just really cool. They have six ETFs now to help folks get invested. They’re just making it easy. They’re reducing a lot of the friction. I think that’s something that plays into what a lot of folks out there, younger generation, particularly, what they’re looking for is they’re looking for a trustworthy name and a way to be a part of something like investing, for example, that keeps an understandable that also takes, I think, just a little bit of a longer view than you might see with some of these platforms that try to promote trading in daily activity. It certainly seems sufficient to be focused very much on the education side of things as well, which should benefit them as time goes on. I think one of the areas where you just have to wonder, crypto is just such a difficult space to fully understand. You do wonder how big of a part of their business that will ultimately be, but their members are asking for more cryptocurrency selection. To that end, they added 16 coins to their crypto offering. I don’t even know what coins are reputable, and what coins aren’t, at this point, Chris. That’s one area where I think you’ve got to be careful. But regardless, it does feel like they’re really building out something that should be long-lasting.
Hill: Well, and to your point, at some point, regardless of the business that you’re in, the more you listen to your customers, the better off you’re going to be in the long run. It doesn’t mean you always give your customers exactly what they are asking for, but in this case, a finance company, people asking about a financial instrument, it makes sense for them to have the offering.
Moser: Yeah. You’re right. Sometimes, customers don’t even necessarily know what they want or what they need, and so I think you’re right there. I think that’s a place where they need to be careful in exactly what they’re delivering. But there’s no doubt, they listen to their customers, and try to deliver what folks feel like they need. Again, sometimes, when it comes to financial services, a lot of times, folks don’t necessarily really know what they need. I think that’s why it’s so important for SoFi to continue focusing on the educational side as well. But again, it makes it so easy. They just had such a tremendous digital presence, tremendous mobile presence. They’re tackling a lot of different problems underneath that one big SoFi umbrella, which I think should serve them well.
Hill: Well, for anyone who had SoFi on their watch list, good news. It’s now 15% cheaper than it was last week. On Tuesday morning, Home Depot is going to come out with second quarter results. I don’t want to get anyone’s hopes up, but the last four quarters, Home Depot has posted profits by an average of more than 10% higher than Wall Street was expecting. The reason you shouldn’t get your hopes up is, despite that, the stock isn’t really lighting the world on fire. It’s up about 16% over the past year. That’s good. That’s nothing to sneeze at, but this seems like one of those businesses. Maybe it’s a function of how big they are, $350 billion market cap, that set your expectations accordingly if you’re a shareholder.
Moser: Yeah. I think this is just one where slow and steady wins the race. Home Depot, it’s not a stock for someone who’s looking for an idea that it’s going to double over the course of the next five years. That’s not the likely outcome with Home Depot, but it wasn’t. They’re paying you $6.60 a year just to hang on to the stock. To me, the dividend yield alone makes this thing worth a look, but I think also just given its position in the industry. It’s clearly one of the stalwarts. If you look at the results from last quarter, they are fairing very well in the good times and the bad. I think last quarter, the comp average ticket grew 10.3%, and transactions were up 19.1%. Even more encouragingly are big ticket comp transactions, those tickets over $1,000, that was up 50% from the first quarter of a year ago. To me, you’re in a position where you’ve got a consumer with a lot of money, people are in a pretty good position right now. You are seeing a situation where there are some signs of inflation, I think that’s something to keep in mind.
Typically, Home Depot, they can pass through some of that because of the nature of what they’re selling. But we’ve seen before, lumber, for example, was something we really focused on over the past several quarters with them. Because they do feel that on the margin side, in some cases. It’s always worth noting where inflation stands. You keep an eye out for that language on the call. But generally speaking, they don’t have to resort to fire sales right now. It’s a pretty good time to be a retailer. Then I think based on the language from the last call, they certainly see a lot of demand out there. They feel the housing market is in a good place. With folks now starting to feel a little bit more comfortable getting out there and doing things, Home Depot should continue to benefit. We’ll continue to focus on that ticket and the transactions. That big ticket comps transactions, I think, is another good one to keep an eye on. I always am just really interested in their rental business. I’m a DIYer. I think it’s hard, I don’t like doing that stuff. Mac likes to make fun of the fact that I go rent a tile machine, a tile cutter from Home Depot, and come through a backslash up in our kitchen. But that’s a really neat dynamic of their business. Frankly, it’s one that you’re seeing now Lowe’s trying to replicate because they see how big of a benefit it is. You go in there, and you rent those tools. Then you buy all the stuff that needs to go with that project you’re doing, you’re likely going to go rent that next tool from Home Depot again. It just results in a lot of incremental sales and longer lasting customer relationships that I think benefit this company greatly.
Hill: Well, in both those businesses, I would say Home Depot, certainly over the past decade, and Lowe’s, let’s just call it over the last four or five years or so. We talked a lot during the pandemic about how these were two of the big retailers that were investing in their employees for all the right reasons. But it seems absent in the pandemic, both Home Depot and Lowe’s have done a great job of investing in getting smart personnel in the store to help DIYers. To help people to be like, “What’s your project? You can rent this, you’re going to need this.” Doing it in a way where you don’t feel like you’re being screwed over.
Moser: Yeah. I tend to frequent Home Depot, I think, more often than Lowe’s. I don’t know that I would consider myself loyal to one over the other. I think, typically, just boils down to geography in where I am on whatever given day. But I do feel like, in either case, I’m always very happy with the service I receive at those stores. I feel like there’s always someone nearby, someone who’s relatively well-schooled in the questions I’m asking. To your point, they’re anniversarying all of these big investments they made in the workplace when COVID hit, and things had changed so quickly, they’re starting to see this expense structure normalized now. I think that’s going to be encouraging in the coming quarters and years because I don’t think we’re going to be going back to doing certain things the way they were done before. I think there’s going to be a certain safety protocol and what not that has been implemented over the last year. Some of the stuff is going to stick, some of it is going to stay for good reasons. I think companies that made these investments so early on and committed to it, you’re definitely starting to see them benefit from it now. I think that as time goes on, we said it before, typically, the strong companies come out of periods of time like this even stronger. In my eyes, Home Depot was absolutely in that conversation. It feels like they’re coming out of this even stronger than they were before. That’s really seeing something, going back to the size of the company like you were talking about earlier. That dividend, I don’t think is going anywhere. I think that this is one of those companies, the longer you own the shares, the more it makes sense.
Hill: Jason Moser, great talking. Thanks for being here.
Moser: Thank you.
Hill: As always, people on the program 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. That’s going to do it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I’m Chris Hill. Thanks for listening. See you tomorrow.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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