With its share price down more than 50% this year so far, what's going on with the former fintech darling StoneCo?
In this episode, we also discuss:
Hi there and welcome to Stock Club, a podcast brought to you by MyWallSt. I'm James and joining me on today's episode is Anne Marie Kingsland and Michael O'Mahony from the MyWallSt analyst team. Today we're talking about the likelihood of Draftkings buying the British gambling company Entain, how rising labor costs will affect the restaurant and the retail industries, and what's going on with StoneCo, considering its stock has been cut in half this year so far.
So, guys, one of the biggest stories in the past week that I've been reading is that Netflix has bought the rights to the estate of Roald Dahl. So the first question is, Mike, which of these books are you most looking forward to getting the Netflix treatment?
I think I remember the one with the tortoises? Esio Trot? I can't remember what it is, some made on, he has like, 72 tortoises. It's a pretty hard words to pronounce now -- tortoises?
So what we found out so far is that Mike can't say tortoises --
Neither can I, maybe that's an Irish thing.
I was also terrified of The Witches. Do you remember that one?
Yeah The Witches was pretty scary. The movie, the original movie of that was really, really scary. Anne Marie was Roald Dahl as big a thing in the US?
Yeah, because the Matilda movie was so famous. And then I also remember being a kid in a elementary school. We all had to read the BFG. And then we were taken to see the BFG play that was on in Denver. But they used a puppet for the BFG, and it was massive.
And I remember being like, this is the worst thing that ever happened to me, seeing that giant puppet.
You hardly expected it to be small, did you?
But I was just like, it's so lifelike and it's massive. And I was like, seven at the time. I was like, I can't handle this.
There's really a thread of childhood trauma going through this. People have been terrified for the movies. I just can't wait, considering it's Netflix, I can't wait to see if they do like a true crime style documentary about all the kids that went missing in that chocolate factory, they'll probably get five or six episodes out of that anyway.
Or like when Miss Trunchbull picked up that girl by her pigtails and swung her around the school, yeah.
So much potential. Netflix, if you're listening to us, give us a call there we've got lots of ideas for you.
So on to more serious things. And over the last few months in this podcast, we've spoken quite a bit with the troubles that many companies are facing right now, especially in the retail and service industries, in trying to reopen after pandemic. Really, these kind of troubles boil down to getting people to actually work for them. But over the past past few weeks, we've seen a bit of a c-change on this with the likes of Walgreens, CVS, Chipotle Mexican Grill, all raising their minimum starting price to about $15 an hour, even Amazon, a company that's so often a punch back for critics in terms of the way it treats the employees, has increased its average starting wage to more than $18 an hour over the last few weeks.
Anne Marie you're the one who kind of has spoken a lot about this on Stock Club so far. What's your take on these recent changes of kind of companies raising the minimum starting wage?
It's really not surprising to kind of see these changes. I think there's a lot of pressure on businesses right now to find and maintain staff. Some of what you think is the direct result of the pandemic and some of the conditions that caused. But I think more accurately, it's really the result of calling far-reaching frustration that's been within probably the restaurant and retail space for a long time now. And I guess the pandemic is just kind of highlighted and amplified these things that people are unhappy about.
Rebecca Given, who's a professor of labor studies and employment relations at Rutgers. She has this great quote where she said, We're seeing a wider understanding that these were never good jobs and they were never livable jobs. In many cases, the pay is below a living wage, and the hours are inconsistent and insufficient. If anything, the pandemic has made retail jobs even less sustainable than they already were. And it really seems like when the pandemic kicked in and it closed child care facilities and schools and public transport and other essential supports for these people, it meant that these jobs just became completely incompatible with their lives, not to mention probably the strain of working in an essential service during the pandemic, with staff shortages and people kicking off about pandemic restrictions and having to wear masks and stuff like that, it's probably incredibly stressful.
Yeah, I imagine as well, considering the amount of white collar workers that suddenly were able to work from home, not have to worry about child care, commuting or even exposure to the virus. It made the differences, I suppose, between these two classes of jobs much more visible as well if they weren't visible enough as it was.
Yeah, I think it's pushing these workers that would traditionally be in retail and restaurants to look for kind of similar skilled jobs in other fields. And they're taking advantage of these new hiring waves. And it's interesting to see people who might have traditionally worked at a Walmart end up taking on secretarial jobs in insurance companies, or you're even seeing people being hired like marijuana dispensaries and banks and local governments and taking on these positions, and they're probably getting better pay, and they're probably getting benefits. And according to The Washington Post, 26% of restaurant workers in the United States have permanently left the industry, and 33% of them have yet to return to work.
So now the pressure's really on retailers and restaurants to kind of address the structural problems within their industry and make these jobs more sustainable. I think in some ways we almost need to have a cultural change so that these positions are not just kind of viewed or treated as dead end jobs, or maybe a job you'd have for part time in College or something like that. But if you need it to be, you could in theory make a career out of this if you want it.
And I think that the wage adjustments are kind of the first step to this. But I think we're probably going to see other changes as well. Probably health insurance is going to be added, giving people more flexible schedules, giving people more hours, sometimes even tuition supports, and then career progression opportunities, I think, is going to be kind of the next list of things that we'll see. And I think the pressure is only going to get worse. You're seeing now political pressure with ten states and Washington DC stating that they will incrementally raise the minimum wage to $15 an hour over the next couple of years. So if they don't raise now, it's gonna happen in the future.
Yeah. Well, obviously these wage increases are great news for workers and a lot of these workers who did keep things running, especially over the pandemic. But what our investor hats on, then? Surely higher labor costs equal tighter margins. Other companies will surely struggle to pay workers more, will they?
I think really, it's like a totally stock to stock company to company basis that you really need to look at this. And to me, it seems like maybe an opportunity for management teams to prove themselves and their ability to believe in their company's longevity and their staff. One of the companies that I love to talk about on the podcast, and we've talked about them previously in relation to wages and employee treatment is Costco. And Costco made these changes. In the 90s. They started paying their employees really well. They gave them health insurance, and it's paid off over the years. Their staff stays for nine years. That's unheard of in retail. That's incredible. And so now we're kind of waiting to see what companies are going to follow in Costco's footsteps and then implement these changes and be able to save money in the long run. So, for example, Chipotle and Shake Shack, they both announce they're going to $15 minimum wage. And in order to kind of address the short term issues at this, they have to raise menu prices.
But it's not too bad. Chipotle will be between three and a half and 4% shake Shake between the three and a half percent. On average, they raise their menus 2% a year anyway. So it's not crazy, and it'll basically cancel out any impact this is going to have on their quarterly reports, the broader conversation that both of these players are entering into, which is more interesting is how do we maintain the staff and how do we maximize efficiency in new ways. And so you're seeing places like Chipotle talk about 90% of our restaurant managers are internal promotions.
So it's people coming in as restaurant staff and making the way up the ladder, or they talk about how they've maximized restaurant efficiency to decrease the number of staff that they need. Or they're looking into opening up restaurants that are just pick up and drive through. Only they'll have no internal seating because they've had such success with their digital orders. And if they can open a couple of those, the number of TF that they'll need will be less. So then they save money in that way.
I think for restaurants, we're seeing some innovation. I think we're seeing some key players step up to the plate and make decisions and try and innovate. I think things will be maybe a little bit more difficult for retail. I think retail just the scale it functions on. I think change will just be naturally slower, so they might feel a little bit of a pinch. Walmart CEO Doug McMillon bill in, he said in their most recent quarterly call that about five years ago, Walmart recognized that they were kind of falling behind when it came to wages and ecommerce, and they've been trying to kind of make up for it now.
And he said they feel comfortable with the investment they're making wages and hope that it will keep them competitive. But then at the same time, he was saying, we're putting money into research for automation, and we want to add more self-service checkouts because they acknowledge they just might not be able to get the same amount of workers.
Yeah, on that thread. You mentioned automation there. That's kind of been the boogeyman for the last few years for jobs in this kind of industry, do you think we're going to see an increased drive towards automation across the board? I know Amazon has been testing some fairly realistic type robots and then scary looking thing in Past.
Yeah. I think we're in kind of an interesting space when it comes to automation, because I think sometimes part of the reason that jobs like this get kind of pushed to the side or people maybe kind of look down on them is because they're like, oh, that job will be taken by automation like, that job will be gone tomorrow. That seems to sometimes be the attitude we have. But it'll probably be decades before there is enough kind of automation and little stocking robots like wandering the aisles of Walmart to effectively replace the majority of their staff.
I think we've almost gotten ahead of our a little bit in terms of automation where we're like, oh, this job is pointless. It's not going to exist, but we still need someone to stock the shelves, probably for the next 15 years. You know what I mean? So I think when it comes to being like a long term investor, you should be kind of keeping an eye on a management team, have a look at what they're doing. I would be probably looking to invest in companies that are raising their minimum wage, because to me, that tells me that they're thinking about their long term.
They're saying we're going to take a hit on our quarterly report for the next couple quarters, but hopefully we'll be able to maintain staff and hopefully this will pay off next year.
So that's kind of how I'm thinking
it's clearly worked with Costco so far. So that's pretty good thesis looking towards the short term. Then there's been reports already that the supply and even sales for upcoming holiday season will be affected by shortages like this. Is that something investors should be worried about, especially with regards to retail stocks.
I think retail stocks are definitely going to be the ones that are probably going to take a little bit of a hit. I'd say probably earnings per share are going to take a hit, and that always spooks the market. They always probably be a bit of a sell off again. I think it's going to be company to company stock to stock. You need to kind of have a look to see what each company is doing. For example, Walmart and Target are both very famously, quite reliant on in store seasonal employees who just come in and work the Christmas season and then get laid off in January.
And I think they might struggle to find people. But then at the same time, probably e-commerce is increasing. Online orders are increasing. So then you might need to be thinking about, okay, who might have shortages in terms of fulfillment or delivery or in warehouses. And I kind of thought about that. And I thought maybe someone like Target might have a leg up because at the beginning of the pandemic, they began using their stores of fulfillment centers. So they have staff who work in store who all they do is take stuff off the shelves and put it in packages and ship it out to people who live locally.
And so they already have that staff on hand. And Target has already announced that rather than being reliant on seasonal workers, they would rather increase the number of hours that their regular staff can take on an offer to pay holiday bonuses. And so that might give them a bit of a leg up, both in terms of e-commerce and in terms of in-store employees. So I'd say if you're worried about a stock that you hold go and have a look about what the management is talking about, what their game plan is for labor shortages for the season, and maybe prepare yourself or maybe just a little bit of short term pain. But hopefully it'll be okay in the long term.
I think in terms of e-commerce, there's some serious global supply chain issues as well that are going to affect a lot of companies again, only short term. But I think shipping costs are like, the highest they've ever been. There's no Lorry drivers. Everyone in UK is filling plastic bags with peterol.
Read or money me to remember. Remember a few years ago oil prices dropped like crazy. And I remember the most searched question on Google in the US was like, Can I keep oil in my garage?
That was last year, wasn't it, people buying oil futures?
Yeah. Like, please, please don't. So let's move on then. And here's. Speaking of people storing oil in their garage, here's another mad story. So according to reports last week, DraftKings is making an offer to buy the UK sports betting company Entain. Why is this so mad? Well, the bid being put in by DraftKings is reportedly around a $20 billion dollar Mark, which is pretty much the entire value of DraftKings itself. At the minute. Mike, a $20 billion company bidding $20 billion for another company. We're close to $20 billion. Can you make this make sense to me, please?
Yeah. That was a very smooth segway as well.
Yeah, it's always if we plan it.
Oil in the shed to a merger. Yeah so I'll give it a go. It's actually it's a bit of a hot mess. And I don't know if you'd be more confused or less confused after this. All the to summarize it. But so Entain is British bookmaker. It owns brands like Ladbrokes and Coral, two of the bigger name in the UK. Market So DraftKings before $22 billion dollar bid, which is about 50% premium on the value of shares of Entain at the min. But it's made up of cash and stock. Hence why DraftKings can get away with making an acquisition larger than its own market cap.
Just issue more shares. You can magic up money out of thin air James. But I think what makes the potential acquisition really interesting is that Entain is a very important joint venture with MGN. So that's one of DraftKing's largest competitors in the US markers. Yeah, Entain actually owns 50% of BetMGM. So that's BetMGM's online sportsbook and casino. It actually provides the tech stack to run BetMGM as well. So at the minute, BetMGM controls about 21% of the US markets and DraftKings. Actually, that 17%.
Yeah. And I believe MGM actually tried to buy Entain at one point, maybe last year or earlier this year, was it?
Yeah. That would have made a lot more sense than DraftKings Entain old boss actually left because they turn down that offer push. It seems to have worked because DraftKings had come in. I think MGM's offer was about 11 billion. DraftKings had come in with 22 billion. And this is where I think it gets messy as well, because it's gonna be likely that MGM would have I have to approve any deal that would turn Entain into it's one of its competitors, basically. Or else if the deal does go through DraftKings may have to sell off Entain's US operations, but I think this is me speculating here now. But what is more likely to happen is that this acquisition could evolve into a proposed merger between Draft Kings and BetMGM.
Like this is now pure speculation.
Speculate away Mike!
Yeah, what's happened recently, Caesars bought William Hill. They just wanted the tech and they sold off the UK and international operations. So what I think could happen. And this is also another reason why the 20 billion figure might not be as much. It might sound more than it is is that DraftKings is looking at this, looking at the tech stack, looking at the relationship with BetMGM and will go after that, maybe sell off and its international operations, same way Caesars did. So while $20 billion is the big figure, it might recoup some of this at a later date as well you know.
Okay. Interesting. Like I used to work in a bookie, what odds did you give for this deal going through?
I've no clue. There's so many moving parts in this. It seems mad. I think it will come down to MGM. And if MGM has the power to either stop it or wants to go into kahoots with DraftKings.
Yeah. And I suppose that the wider question then is like this isn't the first acquisition DraftKings have made this year. They've made a couple. It here and you know, I suppose although gambling and sports betting is quite established here in Europe, it's still quite an emerging industry in the U.S. Or in most States in the U.S. Is this kind of is this story? It sells kind of emblematic of the wider land grab we see happening in this, I suppose, what you would call it an emerging industry in the US?
Yeah, absolutely. I think in general, the gaming industry in the UK. And we say the UK a lot because it's probably the most developed arcs. But in the UK and Europe, Australia is a big market as well. It's already an acquisitive one. So whether it's a land grab or either buying product or functionality as well, you know, like what DraftKings are doing there? They're looking at Entain's tech stack and want to implement it. So acquisitions have been really common. I think the best example and probably the largest name in the space is Flutter.
Listeners mightn't be as aware of it as it's listed on the London Stock Exchange, but it's a betting conglomerate with a number of big brands under its belt, most notably Paddy Power and Betfair. So it made some big acquisitions recently acquired Pokerstars to add poker and I-gaming to its belts. FanDuel, in what was like a really perceive move to gain access to U.S. market in the lead up to legalization. And of course, there's like the monster merger between Paddy Power and Betfair as well.
So they were the two largest bookmakers on the market at that time, using like, kind of the UK as a bellweather. I could see this something similar happened in the US market as well, which is still like, as you said, finding its feet. But I think that will be kind of a move towards this big consolidation in the future, more of these big acquisitions or mergers companies that end up looking a lot more like Flutter than maybe Draftking right now with a number of big brands under its belt and like, kind of an oligopoly of sorts that, like three or four big names will control much, if not all of the markers under another number of small brands, you know.
Yeah, absolutely. It's really an interesting space. Anne Marie, as our resident Yank here on the Stock Club podcast, can you shed any light on the cultural shift to gambling in the US? You're from Colorado yourself. Is gambling even legal in Colorado at the moment?
Yeah. Colorado actually was one of the first States to legalize sports gambling, and now my parents complain about it all the time because every ad that you see on TV is for some sports gambling app or website. It's funny to watch the legalization process, because unless it was done at a federal level, you have to kind of wait for each state to legalize. And when me and Rory were doing research on adding DraftKings, I remember going and doing a breakdown of all the legislation to see kind of where each state was, and some of them are funny.
I think it's Minnesota, maybe they have legal sports gambling, but it has to be run by the state itself. So they basically pushed out all the private companies. And in some States, it's only legal on Native American lands, because a lot of Native American lands, they have a lot of casinos there. So it's only legal there. So we're a long way off from having sports gambling being freely allowed on everyone's cell phone in the United States. And so it's definitely something maybe to keep an eye on just so you don't get ahead of yourself, because I think maybe a good one to keep an eye with maybe Louisiana that only just recently legalized, and it wasn't yet determined what you were legally allowed to gamble on yet.
And I know in the south, like College sports would sometimes be much bigger than professional sports, especially football. And so if you weren't able to gamble on College football, what impact would that have on the ability for sports gambaling to become popular in the south would maybe be a question you want to answer. So it's definitely interesting. It's definitely emerging. I think it's probably going to emerge slower than you would like Ike other industries, too, simply because of the legal road blocks that are gonna be in its way.
Yeah, it seems extremely fragmented. Still definitely definitely a big opportunity there. But as you said, might be a lot slower than everyone thinks. Let's move on then and just talk about some of the things going on in MyWallSt at the moment. So we have our brand new stock, our data stock with one report and the exclusive Stock of the Month podcasts. All live MyWallSt app at the moment for September, starting a new month next week so you can expect all new content coming into MyWallSt app then.
Then this week, however, we have some more great pieces in MyWallSt app including Anne Marie's Full write up of Noosa Brand, the company that she picked last week, which makes the mindblowing yogurt is a mind blowing or causes everyone to lose her mind Anne Marie.
It's probably both. It's incredibly yogurt. It's just very rich and creamy, and apparently they only use the absolute best milk, according to their website so.
We're still waiting on our samples and your parents coming over again.
They're coming over next week, but my mom called me on the phone literally the day the last podcast came out and she was like, We're not carrying Yogurt, and I was like, okay, fair enough.
Probably a wise move.
Put a bin liner in an extra suitcase.
In addition to that, we also have more perspective on Facebook's current brand crisis, and the first look on the drive through coffee chain Dutch Brothers. Emmet is also set to appear on a different podcast in a few weeks time with our friends over at Opto Sessions on Opto Sessions, co-hosts Haydn Brain & Ed Gotham interview the top traders and investors around the world and a bit to uncover their secrets to success. So it's gonna be chatting to those guys about his journey so far as an investor, including the reasons he set up MyWallSt, the details of his investing philosophy, and some of the companies he's looking at at the moment.
This episode is going live in just under two weeks on Thursday, October 14. So you can listen in by just searching up those sessions on whatever platform you listen to your podcasts on. Okay, guys, let's move on to mailbag this week, and we're going back to a request we got a few weeks ago from listener Dylan Lake, who asked for our thoughts on StoneCo. And why we think the company is struggling so much at the minute. Anne Marie StoneCo has been cut in half this year pretty much. So what's going on there.
It's they're an interesting company, because in many ways, their growth looks great. Like last quarter signed on as many clients in a single quarter they ever had. So they have some really nice good signs of growth, the issue that they have run into StoneCo's often compared to Square. And I think in a lot of ways they've kind of modeled their business kind of expansion on Square. And as part of that, they decided to go into small business loans in lending. And it was they launched that at the beginning of 2020, right before the pandemic, and at the beginning of 2021 on, it looked pretty successful.
It was like 7.7% of the company's existing clients had taken advantage of the service and had taken out some kind of small business loan. But then two things kind of happened, which was number one, the pandemic hit, which obviously took a strain on all businesses, but especially small businesses that are attempting to grow. And then number two was that there were regulatory changes in Brazil in terms of small business loans. And it meant that when StoneCo went and had to look at kind of their expected delinquencies from loans, it was going to end up being much higher than they had initially thought.
And so the company did the responsible thing, which was they took out much more loan coverage on themselves, but that actually took a big chunk out of their revenue. And then it meant that their kind of quarterly reports for the last couple of quarters have just looked quite disappointing. And I think that that left a message disappointed and that's kind of taking a toll on the stock. But I think the foundation of the company still looks really strong. They're still making good moves, and they have temporarily closed the landing facility while they kind of just figure things out and make sure that they're being more responsible in the future.
So just a bit of short term pain, in your opinion.
Yeah. I think it's just them having a bit of growing pains. Really.
I think it's also an example of, like a stock being priced to perfection and anything really going wrong like -- it's in a kind of study of evaluation in terms of if everything goes perfect for the next five years, you deserve this evaluation.
If something doesn't, you come back down to Earth a small bit.
You know, some of us just look for perfection Mike high standards around here. Thanks for that, though. Then. That's great. So I hope that answer your question, Dylan. So guys, let's move on to the elevator pitch and to finish at today's show. So we're going to get another classic elevator pitch this week in 30 seconds. I want you guys to just pitch me a company, any company you're looking at at the moment. Anne Marie, go to you first. Any more mindblowing yogurts on your radar?
No, I don't have yogurts this week, but I do have lovesac, which we have maybe discussed previously on the podcast. They're kind of a funny little company. They got famous for making beanbag chairs back in the
Bean bags full of yogurt.
That's how my parents are going to bring the yogurt over in the United States. No, but they now make couches, which seems ridiculous to be so interested in a couch company, but they're like, maybe one of the most sustainable companies I have ever seen. They work so hard to make sure that you buy one couch your entire life and you never throw it out.
I think it's such an interesting company in terms of as millennials begin to buy homes and have to furnish them. I think they have such a leg up because they have this incredibly strong brand dedicated to sustainability and their growth during the pandemic, while all of their showrooms were closed was astronomical. And so it's just a company I have an eye on. I'm very excited about it. I mean, my parents go to the showroom to try out the couches. I can find out how good they are they were very impressed.
So just give us a little bit more context. I know this is only supposed to be attorney second pitch, but we're gone over it. Anyway. You mentioned that they've done really, really well over to Pandemic when all their show rooms were closed. I assume they have an incredible e-commerce arm.
Yeah. So the way that their couches kind of work is their showrooms are tiny. You go in and they'll have a big wall of all their different fabrics. They have hundreds of fabrics. Their fabrics are made from recycled plastic bottles. They're the largest repurpose plastic bottles in the United States, and it's kind of similar to, like, Tesla has stores in the mall that look kind of similar where they have one car and the whole place and then just all the options on the walls. And you kind of build your own car, and then they're like, Cool, drop this off at your house in a month or whatever.
And Love Sack is the same. Like you kind of build your own couch. You get to pick how big it you want it to be, how small you want it to be, what color you want, you want a foot rest, you want under couch storage, all these type of things, and then they're like, cool. We'll drop this off at your house in two weeks. And something that my parents found very interesting was so couches sometimes between men and women can be a bit of a controversy because often the seat of a couch can be very, very wide.
And it means that women then can't lean up against the back of the couch because where their knees bend, it's like not where it doesn't line up with where the edge of the cushion is.
Sometimes sitting on a giant couch can be uncomfortable at the LoveSac showroom. They show my parents that the base of all their couches can be flipped over and one side is designed for women, and one side is designed for men. So, yeah, you can make one half of your couch for women and one half of your couch for men.
So that, like, short, people are comfortable on one side until people are comfortable on the other.
That is amazing.
This is the kind of on the ground research you don't get on a podcast.
You show me another podcast that talks about couches that can do stuff like that, and I don't know what I started that sentence, but I didn't know where I was finishing this pie. Let's go over to you. Beat that.
No, I'm definitely not going to be. So I'm pitching a company called Riskified -- it operates a machine learning AI e-commerce platform that analyzes past transactions to protect its merchants from fraud, it's kind of unique. Selling point is that if it approves the track transaction and it turns out to be fraudulent, then it will pay the cost back to the merchant, and then it collects a percentage of each transaction approved. So it kind of allows merchants to outsource their entire fraud operations. Some impressive numbers, like a survey of ten of its largest merchants, which I assume or cherry pick to make them look good, but found that on average, risk if I reduce costs by 39% and increase sales by 8%.
So there's the obvious savings from avoiding dodgy customers and all the rest. But it's also reducing a lot of friction at the checkout
which is one of the key obstacles to ecommerce sales. So it seems like a really interesting business.
Yeah, as any of our listeners in Ireland might know, there's like a string of spam phone calls going around Ireland a minute. And considering I've just had three today already, any company that's tackling fraud or spam is good in my books, so that's it for today's show. Remember, if you have any questions you'd like us to answer or elevator pitches you'd like us to tackle, make sure to get in touch. You can find us on Twitter. That's @MyWallStHQ on TikTok, that's @MyWallSt. Or simply just email us at Pod@MyWallSt.Com. If you're enjoying the show, make sure to tell your friends about it. Don't forget to leave a review on whatever platform you listen to us on. Thanks for joining us today, and we'll talk to you next week. Happy investing.
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