Motley Fool analyst Deidre Woollard talks with Motley Fool contributor Jason Hall about why he's so bullish about home builders and the tailwinds driving his thesis.
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10 stocks we like better than Netflix
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They just revealed what they believe are the ten best stocks for investors to buy right now... and Netflix wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Chris Hill: We've got a partnership, a potential acquisition and the bull case for home builders, Motley Fool Money starts now. I'm Chris Hill, joined by Motley Fool Senior Analyst Asit Sharma. Thanks for being here.
Asit Sharma: Chris, thanks for having me.
Chris Hill: We're going to start with one of my favorite mills and that's the rumor mill. Shares of Roku are up more than 10% this morning after a Business Insider report that says Roku employees are discussing inside their headquarters a potential takeover bid from Netflix. Let's just put this in the category of smoke. This is not an insignificant amount of smoke, especially when you consider the stock movement of Roku remains to be seen if this is going to lead to a fire. By that, I mean an actual takeover bid by Netflix. But when you saw this news, what was your reaction?
Asit Sharma: Chris, I wasn't too surprised by this. If you'd asked me this a year ago, I would've said no, Reed Hastings, the CEO of Netflix, has always been about the streaming. He had so many opportunities to get into the device role, just showed zero interest. But look, Netflix is at a crossroads. They've built this amazing content powerhouse, but at the same time, they're struggling with new paid subscribers. I mean, that's come to a screeching halt, of course, there are some factors behind that. They have seen a drop-off in Russia, of course. We've got people who found out they like the outdoors after COVID, so they want to spend a little less time on Netflix. But Netflix does have a longer-term growth problem because the competition has become so fierce between Disney and other platforms.
This is a chance potentially to get into one part of the market that lots of investors have asked them about over the years. Why not get into advertising? They could potentially acquire Roku and be able to study, as they pull that advertising platform. They could study a lot about competitors and where consumers are watching ads. They have instant access to add revenue, but also for the day they introduce it on the Netflix platform itself, they can be smart about it. I'm not terribly surprised now, given where we are. If you look at it from the Roku site, they're struggling too because they are partly device players. They're having all problems with the supply chain. Device sales are falling off, they can't meet demand in some cases and nonetheless, Roku is growing its base.
I mean, they have huge subscriber numbers. They're doing very well in their business with advertisers who spend a million-plus a year, they retain somewhere upwards of 96% of those customers. There are some interesting ways this deal makes sense in a way it didn't make sense a year or two or three years ago.
Chris Hill: I mentioned the stock move that Roku that's this morning. This's bouncing off of a little bit of a bottom here. Even with the movement today shares up more than 10%. Shares of Roku are still down, somewhere in the neighborhood of 70% from their high. It's a $14 billion company. Whenever we talk about Netflix, at some point, we get around to how much they are spending on content every year. This would be a not insignificant chunk of money that Netflix would have to put forward to acquire Roku. Maybe they just do it with stock instead. But I would be remiss if I didn't mention that shares of Netflix are up 3%. I'm wondering if this is Wall Street's way of just encouraging Netflix. If you guys aren't thinking about this maybe you should. This leads me to this question. We know an ad-supported model is coming on Netflix. Does this in one fell swoop, solve that challenge for Netflix?
Asit Sharma: It doesn't solve the problem for Netflix, but it does get them a long way toward having the answer to the problem. If you take a look at Roku's growth, the device portion of their business has been less and less relevant even before the pandemic. It was slowing down relative to their platform growth, which includes all that advertising revenue. They've mastered the art Roku has of understanding when and where to place ads and work very closely with our advertisers. They have a lot of data and metrics behind advertising efficacy. Netflix can really pull that out. It's not going to solve their problems overnight because part of the issue for Netflix isn't going to be solved by going overnight to an ad-supported model.
There's still going to have to figure out what's the right amount to spend on content and where for a while, Netflix didn't care what size checks its road for content development. Now, they're having to manage that business more carefully, we've seen them not renew some titles that we thought would be renewed and also they seem to be a little more stingy. I like this with their dollar in terms of hiring and what they're paying employees. There are a number of problems that Netflix faces, none of them unsolvable, this gets them much of the way there.
Chris Hill: We'll just keep watching, we'll see if we get more smoke later in the week and possibly later in the month, let's move on to DocuSign. DocuSign reports after the closing bell on Thursday, but shares are moving up a little bit today after the company announced an expanded partnership with Microsoft, basically integrating DocuSign's technology into Microsoft's software applications. I'm sure Microsoft, given the size of the company, got terms that they liked with this deal. But for DocuSign, it's probably good to have a partner of that size.
Asit Sharma: I think it's good news for DocuSign. They have had a partnership with Microsoft that's been leading up to what looks like a more formal relationship now. It's pretty much the second phase. You test the waters with each other. Microsoft likes what it can get out of DocuSign, which makes them more able to compete with platforms like Adobe, which of course has its own e-signature product. What's interesting about this from DocuSign's perspective is that they've always seen their total addressable market as being split down the middle between the e-signature business, which is an easy sell for them, and their Agreement Cloud business.
The Agreement Cloud is a platform that DocuSign built from scratch to try to make something very important. That's the process of signing an agreement then following the terms of that agreement, re-upping if you need to after several years, they want to make that as important as HR or Enterprise Resource Plannings to corporations. This is something the market has been excited about for a while, but in recent quarters, DocuSign just hasn't been able to get the momentum out of selling the Agreement Cloud to corporate customers that many observers and investors thought they would. The stock is suffered.
DocuSign got this huge pull forward during the pandemic. They're one of the stocks that I put in rarefied air. I think they're up like 400% from 2019 levels and then COVID and the pandemic normalized a bit, and then you had this effect where investors were wondering, "Are they really going to be able to grow this Agreement Cloud business the way we thought they were?" This helps a little bit in that direction in this agreement because it gives them a broad reach, it gives them a lot of credibility to other enterprises. Maybe investors who walked away from DocuSign and left at like 70% plus off its all-time highest. Taking another look this morning.
Chris Hill: How pricey is the stock? Because as you said, you can look at this and say we'll look this is a business. I think anyone who's ever used DocuSign, particularly if you've used it more than once, you see the attraction and it seems like one of those businesses that are here to stay. The stock is down more than 60% over the past year, they had that pull-forward early in the pandemic it has come back from that. When you look at the stock right now, heading into earnings, does it seem pricy to you?
Asit Sharma: Well, DocuSign is interesting because it's a company which looks a little light on the income statement, but if you flip over to the cash flow statement, you see that there's a lot of stock-based compensation in there, they're giving a lot of stock to employees. I evaluate them on their cash flow. In their last 12 months, this company had about $440 million worth of free cash flow, so it's a really strong cash flow generator. But on that basis, it is still pricy. This company trades at roughly 40 times its free cash flow. It was not cheap. Even after all this decline, [laughs] it's not a cheap stock.
But at the same time, this reflects the fact that many investors still see the potential for a high rate of growth. If they ever do get traction selling the Agreement Cloud to enterprises, they could sustain that growth at a very fast rate for years to come. There's a lot of potential still embedded in the stock. Just evaluation got crazy last year, a year before. Now it's come back to something that's more of a proposition that is going to be centered around its earnings. Over time, we will see that stock-based compensation decrease a bit. We'll see more earnings at the bottom line, and the cash flow growth. I think this is a company that, even though it looks like it's battered and, it still looks expensive, is worth taking [laughs] a look at. I could see it doing pretty well from these levels. Not to say that it couldn't take another dip, but it's not as dire as the stock chart might indicate.
Chris Hill: Do you think there's any chance that Microsoft is taking a closer look at DocuSign? Do you think that there's any chance this expanded partnership is a prelude to Nadella and his team saying, we like how this is going, we're a company that is not afraid of big acquisitions, and a year or two down the line, Microsoft acquires DocuSign.
Asit Sharma: I think that they would be wise to at least glance at that future. The reason is that the Agreement Cloud gives Microsoft the ability to compete with a number of players in a different field that helps them compete with Adobe. It also helps them have almost a Salesforce.com element in their Microsoft Teams offering. This product is going to be embedded in Microsoft Teams, which is becoming just a nice behemoth competitor for any company, small or large that needs to have employees collaborate.
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