In this episode of MarketFoolery, host Chris Hill and Motley Fool analyst Jason Moser discuss the news regarding Zoom‘s (NASDAQ:ZM) latest planned acquisition and how that resembles Salesforce‘s (NYSE:CRM) acquisition of Slack. Also, they discuss the latest earnings report of AutoNation (NYSE:AN) and how buyouts impact investors and their portfolios.
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This video was recorded on July 19, 2021.
Chris Hill: It’s Monday, July 19th. Welcome to MarketFoolery. I’m Chris Hill, with me today: Mr. Jason Moser. Good to see you my friend.
Jason Moser: Good to see you.
Hill: We’ve got automotive news, we’re going to talk buyouts. But we’re going to start with the Deal of the day. Zoom Video is buying Five9 (NASDAQ:FIVN) for $14.7 billion. Five9 is a cloud-based call center operator. Zoom is financing this deal in stock, and I will just point out that as of this recording, shares of Five9 are up around 5%. Shares of Zoom Video are down around 4%. So that is the short-term grade that Wall Street is giving this deal. What do you think about this deal from a long-term perspective?
Moser: I figured Zoom shares would’ve been hit a little bit more on this, but it’s nice to see. It’s refreshing to see that they have not been hit too terribly hard. I think the market is probably looking at this the right way.
The first thing I thought of when I read about this deal on Zoom’s investor relations site, I got one word for you: Salesforce. That may not make sense to some, but let me explain a little bit because I think it’s fair to say you can view Zoom on the same playing field, Salesforce, with this deal. To me, this shows management’s grander aspirations for this business. If you look at what Five9 does, like you said, they run these virtual call centers. And ultimately these cloud-based virtual call centers, which just transcend physical location, they open up lines of communication in today’s multichannel world. So, customer service agents can respond across all platforms — phones, social media, email, chat, whatever it is. It opens up those lines of communication.
For me, when you look at what Zoom does, this really helps leverage their expertise in communications. A question I think probably a lot of us have had in regard to Zoom here recently is what is it going to, not even once we get back to normal; normal is going to be a little bit different, a little bit evolved. But I think ultimately we’re looking at this hybrid workspace. So, Zoom will play an important role in that. But what does it do beyond this?
To me, I actually went over to the Salesforce’s investor relations site to look a little bit more into a presentation that I had viewed there before just to get a better grip on the market opportunity. Because if you look at the press release from Zoom, they look at the total addressable market here as $86 billion all-in, combined. I’m not disagreeing with that, but I actually look a little bit further out, and I see the Salesforce-like potential here and that really expands the market opportunity.
Right now you’re looking at a market opportunity for Salesforce around $125 billion. That combines sales, service, commerce, marketing, platform, integration, analytics, all that stuff that Salesforce does so well in customer relationship management. This is a market that’s projected to reach $175 billion by 2025. Salesforce is the dominant player in the space. But it’s a very big market opportunity. Even just a little bit of that big market opportunity could work out very well for Zoom. So I understand perhaps some skepticism in the near term on this deal, but frankly I think it’s actually a pretty good one. They’re taking advantage of a relatively well-valued stock price to fund it.
Hill: What I’m about to suggest, I want to preface by saying, I don’t think this is going to happen in the next couple of years. But when I looked at this deal, and you talked about how they are expanding their business, it occurred to me that at some point, Zoom is going to drop the word “video” from their name. In the same way that in 2007, Apple Computer dropped to the word “computer” and just became Apple. This is one of those moves that points to Eric Yuan and his team thinking far beyond video. At some point, I think it’s just going to be Zoom Communications.
Moser: Whether it happens or not, that remains to be seen, but I totally agree with your sentiment. I think it only makes sense. And you don’t need to look any further than Zoom Phone to get a better idea of why that could be the case. Most of us know Zoom, and folks just out of our analysis world here, they just know Zoom as the video app, the video chat pretty much that you can just get work done or school done or whatever it may be.
But it is a lot more than just that. You look at their Zoom Phone offering, which is essentially a cloud-based phone offering meant to replace those legacy office phone systems. They have really witnessed a lot of growth there, here over the past year or so. They just surpassed 1.5 million seats of Zoom Phones sold. That was I think toward the end of 2020, actually. We know that with that Zoom Phone concept, they are diving into the hardware space as well. They’re offering the hardware to go with the software.
You’re right, this is not just a video company, this is a communications company. Ultimately, communications, that’s what opens the door for business to do all sorts of different things. That’s why I think this is a company that really stands to do well in this overall customer relationship management market, because it is connecting everyone in virtually which way they want. We hear about retail a lot. We talk a lot in retail about omnichannel and how that’s just basically meeting your customers wherever they are. It’s not just e-commerce, it’s not just physical, it’s both, and it’s hybrid, it’s all of it. I think that that’s ultimately what you’re looking at with something like Zoom here.
You look at Salesforce recently making that acquisition of Slack. That was kind of the same idea, it’s just that Salesforce had the customer relationship management side of it and wanted to bring more of the communications expertise into it. This is kind of the opposite. Zoom really wants to bring more of that customer relationship management type offering into their communications business.
Frankly, I think Zoom blows Slack away. Slack, to me, remains just underwhelming by virtually every measure. It’ll be interesting to see what Salesforce does with it. I’m not saying they will necessarily succeed or fail, but I definitely see the potential here with Zoom and Five9 more so than I see with Salesforce and Slack. It’s not to say either companies are in any real bind here. Salesforce and Zoom are both companies I’ve recommended in my service to be clear, so I like them both.
Hill: Blowout second-quarter results for AutoNation. Profits and revenue came in higher than expected; used car sales up 37%, new car sales up 42%. And shares of AutoNation are up and close to an all-time high.
Moser: It should be no surprise that the stock is performing very well year to date, up better than 50% and outpacing the market handily.
This is an interesting business because on the surface, you think this is a car dealership basically. They sell cars. New and used cars make up 80% of revenue. But those new and used car sales only make up about 30% of gross profit. It has a really robust parts and services business that’s responsible for about 40% of gross profit. It is an interesting business from that angle. It’s not just about selling cars.
But to your point, the numbers are really impressive. Earnings per share up 52%. No surprise, I think inventory is down 28% from a year ago and management had noted that a quarter ago, supply chain issues, demand would continue to outpace supply. But they also noted that it wasn’t nearly as bad as it was a year ago when there were legitimate just supply chain halts. Now, we’re in a little bit of a crunch. It’s a little bit of a different story now.
But they continue to build out their presence, they plan to build over 100 AutoNation preowned vehicle stores here, plan to have 50 of them completed by the end of 2025. Maybe a little bit of a shot at CarMax there. The aim is to have 130 AutoNation U.S.A. stores by the end of 2026. They’re investing a lot in growth, they are building out their footprint.
And they’re also buying back a lot of stock. During the quarter, they repurchased 7.5 million shares. Now you look at the share count overall since 2016, they brought that share count down 20%.
I don’t know that this is a business that I necessarily put at the top of my list as one that I’m interested in, but it’s definitely one that is benefiting from some short-term catalysts, and that seems to be set to play out here for the rest of the year.
Hill: Now, I think unlike you, it’s not on my watch list. I think if you’re a shareholder, you’re holding onto these shares through the end of this year at least. Because everything we are reading and hearing about, whether it’s semiconductor chips, general supply chain issues, just talk to anyone who has attempted to rent a car or buy a used car. This is going to be like this for the rest of this year.
Moser: Yeah, and I agree. They do have a big presence in some big states. Then 65% of the revenue is generated in three key states: in Florida, Texas, and California. They have a strong presence in some states that really matter, and that won’t change. It does sound like they will continue to build out that physical footprint as time goes on.
The automobile space is really interesting to follow right now. It’s developing, it’s evolving, the cars are changing. Obviously, rideshare services exist now that didn’t exist before. We talk more and more about self-driving cars. Well, I think that’s still much further away than people probably would like to think. It’s a fascinating space. It’s been the same space for so long, and now we’re really seeing things changing. It sounds like AutoNation is trying to make the investments to be able to keep up with that.
Hill: Our email address is email@example.com. We got a note from Sarah Prints, who writes, “In 2019, I spent my leftover scholarship money on 20 shares of Stamps.com (NASDAQ:STMP) at $55, when the market overreacted to the news they were ending an exclusive partnership with the U.S. postal service. Now Stamps.com is being bought for $330 a share. Can you explain in more layman terms exactly what is happening when a company gets bought and how long it will take before I see that $330 a share in cash? Love the podcast.”
I think you and I talked about this on MarketFoolery a couple of weeks ago. Thoma Bravo, a private equity firm, bought Stamps.com for somewhere in the neighborhood of $7 billion. It was a markup of something like 64% over the previous day’s close. Good for people like Sarah Prints who held on. By the way, all kidding aside, Sarah gets it, clearly she’s got a watch list, little cash on the sidelines. That’s the way to do it.
Moser: That really is. Remember we talked about this back when that drop came, when that postal service headline hit. I think shares got hit better than 50% that day.
Hill: That was massive.
Moser: Yes, it was just amazing. You could look at that and say, you know what, Stamps.com is a fundamentally challenged business. It was a business that had some challenges. But that seems like an overreaction. I feel like we talked about it that week on Motley Fool Money even. It was just one of those things where we had some criticisms of the business, but it really seemed like that was a massive overreaction. Good for you, Sarah, for having the intestinal fortitude, I like to say, in being able to click that buy button because I don’t know that everybody would necessarily be able to do that. It sounds like you are going to reap the benefits.
In regard to your question, typically, I think the easiest thing to do is go to the investor relations site for the business and just look at the press release when the deal was announced. Typically, you’re going to see a transaction details area where it goes more into the nuts and bolts of exactly what’s going to happen. You look at a couple of things here. Stamps.com’s board has unanimously approved this. They recommended that stockholders vote in favor of it. Typically, that’s going to happen anyway. It’s not something that’s based on generally retail investors voting, it’s big holders making the call and I think they’ll all approve this.
This deal includes a 40-day go-shop period. That basically allows the board to solicit other proposals. Sometimes that happens, sometimes it doesn’t. I think in this case, it seems like a pretty good deal and I don’t know necessarily that the board would be shopping, but it gives them a little wiggle room in case there’s another interested buyer. But that go-shop period expires on August 18th of 2021.
With that in mind, the transaction is expected to close in the third quarter of 2021. If we assume that nobody else comes in with the competing bid, this deal should close at some point in the third quarter of this year. When it does close, that’s when that transaction will go through so that’ll give you a basic timeline as to what’s to happen.
The only thing I would say, just keep in mind that that go-shop period exists. There is absolutely the possibility of a competing bid. I don’t know that I would expect it, but it’s certainly something that could happen.
Hill: Then the cash shows up in your account and time to go back to your watch list.
Hill: See if you can find another six-bagger over a two-year period.
Moser: Yes. Hey, Sarah, by the way, when you find it, could you give me a ring? I’d like to talk.
Hill: Yeah. Just drop an email to firstname.lastname@example.org with maybe just three or four stocks in your watch list, and we’ll take that under advisement.
Moser: How does the byline on our next recommendation sound, Sarah?
Hill: Jason Moser, great talking to you. Thanks for being here.
Moser: Yes, sir. 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. We’ll 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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