After its blockbuster debut on the market last week, we've been inundated with questions about the hair care company Olaplex. Is this the next great investment opportunity or a trend that will die out faster than the mullet?

In this episode, we also discuss: Tesla's record-breaking quarter for car deliveries

The reasons behind the collapse of the Zoom/Five9 deal

And Mike pitches a company that's leading the way in fertility benefits management.

James

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 Michael O'Mahony and Rory Carron from the MyWallSt analyst team. Today we're talking about the implications of Tesla's latest delivery beat; the collapse of Zoom's latest acquisition of Five9; and the things we like and the things we don't about the newly IPO'd hair care company, Olaplex.

James

So, guys, it's kind of hard to set off this podcast without mentioning Facebook. They've had a lot of pretty bad press recently. But just days after a former company product manager turned whistleblower testified in front of Congress, all Facebook services and doing its native app, Instagram and WhatsApp suddenly went down for what was surely its longest outage ever -- I think it lasted about 6 hours in total. The company blamed this issue on a faulty configuration change. But Mike, as our resident conspiracy theorist here at MyWallSt, I'd be interested to hear your take on this story.

Mike

Tin foil hat firmly fastened, but it's a classic bait and switch, James, you know? It was the day of the whistleblower interview on '60 Minutes'?

James

Yeah, yeah. I think it was just after yeah, yeah.

Mike

So they obviously severely limited, like the distribution of that interview. And then when they're back up, that's not even the biggest Facebook story in the news that week. Yeah.

James

Rory, a few episodes ago, we talked about this Facebook strategy of only putting good news stories on Facebook feeds. Is this a case of no news is good news?

Rory

Well, first of all, hold on. When did Emmet lose the title of chief conspiracy theorist in this business?

James

When Mike walked through the door and started, eh-- I actually won't even get into on public records some of the conspiracy theories I've heard out of him.

Rory

Yeah. I mean, they didn't need to shut the Facebook because they can just decide they're not going to show anyone. They give out to the media for only publish and bad new stories about them. And then they're like, yeah, know what we're gonna do? We're only gonna publish good news stories about us, so there, deal with that media

Mike

 I think they should put in Zuckerberg as the new Bond villain.

James

Yeah

Mike

He would fit in so well.

James

By what I've heard of the reviews of the latest Bond, I think he'd be better than Rami Malek, but I won't spoil it for anyone that hasn't seen it. So let's move on then to some more real stories. So there was good news for Tesla this week after the company revealed that it had smashed delivery expectations for the third quarter. The company managed to deliver just over 241,000 cars in the quarter past, beating analyst predictions of close to 221,000. This also marked a 73% increase year on year and a 20% jump quarter on quarter.

James

Anyone that's follow Tesla over the past couple of years will know that historically one of the company's biggest problems has been scaling up its production delivery capabilities. Mike, with such strong delivery numbers reported, can we say that Tesla is finally emerging as an automaker capable of consistent production on delivery?

Mike

Yeah. Well, first of all, are we allowed to talk about Tesla when Emmet's not here because somebody might get fired for talking too much about them. But no, yeah. Look, it was a huge quarter, and it was a record quarter, and it's fifth record quarter in the row as well.

James

Yeah.

Mike

So what makes it all the more impressive, I think, is that it's done this in the face of mounting challenges for the industry with the semiconductor shortage. And like you've seen, GM and Ford have suffered greatly. And Tesla is producing record quarter number five in a row. It's actually kind of funny. I read the press release where it announced its delivery numbers and it said "we would like to thank our customers for their patients as we work through global supply chain and logistics challenges." While everyone else is struggling, we post these numbers and then apologize, you know, it's like an Irish mammy apologizing for the house being messy after she's been cleaning for the last 3 hours. A really humble brag.

James

Yeah, absolutely. But as we've mentioned, Tesla's problem consistently has been in delivery numbers. And I remember a few years ago, the temporary production facilities they set up all of those crazy stories about Elon Musk sleeping in the office and all of this. How important has been the opening of new factories in China and the plan new factories in Texas and Berlin. How important is that to the overall story of Tesla. And maybe the company actually catching up to its share price sometime soon.

Mike

Yeah well, I think we can speculate that, like, the big advantage Tesla has that in this current constrained supplies chain environment. It's got its plant in Shanghai, and it's the only one to have that, is that the big advantage it has over its competitors. We've discussed already on this pod the issue it was having with regulators and the public over there. But, like, results like these kind of show that it was absolutely a shrewd move by Musk. And it would be interesting to see now when they publish all the full financial results if Chinese demand kind of rebounded because we saw a bit of a lull recently. I remember I think it was overtaken for the first time by local competitors out there. But I think in general, these numbers speak to a global demand for electric vehicles that's out there right now.

James

Yeah. Absolutely. You mentioned there earlier about semiconductors, which is I think it's the buzzword kind of you're talking about the auto industry at the moment. When these numbers for Tesla came out, Cathie Wood of Ark Invest, who's a notorious Tesla bull, made a comparison between Tesla's impressive delivery numbers and GMs, who actually experienced a 33% decline in sales over the same period. She also pointed out that EV cars need three to five times more semiconductors. Now I'm going to take her word for that because I don't know. But do you think that's a fair comparison to make between Tesla's increase in deliveries in sales and GMs decrease?

Mike

Yeah, well, like, come on. She owns 2 billion of Tesla stock. Of course, she's gonna say that.

James

Well fair.

Mike

It is completely fair because of not so much what Tesla's doing, but what GM Ford are doing. You know, they're portraying themselves as these, we're gonna come in and take over the electric vehicle industry. I think GM said recently that they're planning on doubling revenue by 2030 with the transition to basically all-electric vehicles. So when they're saying that, of course, they have to be compared to Tesla because Tesla is the leading name in the space. And when we look at these recent results, you kind of see why Tesla is the leading name in this space you know.

James

But I suppose the point then I think a lot of people leveled against Cathie Wood was that well, Tesla's overall delivery numbers are a fraction of the amount of cars that the likes of GM and Ford produce.

Mike

Yeah, but they are a fraction of the petrol and diesel cars Ford and GM producing. In terms of changing to an electrified production line, Tesla's still miles ahead.

James

Yeah okay. Interesting. And if we talk about the industry wider than we often talk about the power first-mover advantage here at MyWallSt. And as you mentioned, with such a global shift in the past few years towards EVs and many industry joints getting into the games, many governments putting in EV targets. Surely this competitive edge for Tesla will start to fade over time.

Mike

Yes and no. I think when you look at -- so we're talking about Ford and GM -- the money they have dedicated to shifting their focus over the next decades. First-mover advantage is quite obvious there now. Pretty much everyone is playing catch up while Tesla can iterate on it's already proven production model.

James

Yeah.

Mike

This is why Tesla's battery range is streets ahead. It's got its charging network. These are huge advantages to test the drivers rather than if you got a GM electric vehicle.

James

Yeah.

Mike

And then there's the added competition. Of course, the added competition and pricing power is gonna erode Tesla's first-mover advantage, but it won't be just because it won't be able to enjoy the market share that one's had, it's still gonna have a significant piece of a bigger market. I think the key for Tesla moving forward is gonna try to emulate the iPhone. The iPhone was kind of the first-mover advantage in the smartphone era. But then obviously all the new competitors came in. But Apple managed to kind of maintain that advantage with all the ancillary benefits, the App Store, AirPods, iMessage and all that kind of, like, almost status symbol. Tesla can kind of recreate that with Autopilot with its supercharger network. Those are kind of the the way I think it's going to try to craft it strategy going forward, I think, is something along those lines.

James

So, like the Tesla ecosystem?

Mike

Almost, yeah.

James

Rory, what are your thoughts?

Rory

I think sometimes when we talk about first-mover advantage, I remember one of the creative ones was Netflix's great first-mover advantage was just inept competition.

James

Yeah

Rory

It was like everyone could see what they were doing, but just no one bothered to figure out that they should be doing it, too. And in Tesla, I think we kind of had that for a bit. Obviously, those other companies making electric cars but Tesla was really the one that was making the electric car sexy.

James

Yeah

Rory

And that's still what they're doing today and I mean, there are going to be competitors coming in. And this is where the test for Tesla is going to be is how much is that sexiness worth? And from a stock press perspective it's hard to quantify.

James

Yeah, what the ratio of sexiness per car price?

Rory

What's your sexy to revenue ratio? Yeah. I think that's where the big question lies now, with Tesla going forward is at what point people start kind of value more as a business that's competing with other businesses doing a similar thing and not just as a Wow, this is a very, very sexy product.

James

I can't move away from this Tesla story without asking probably the most important question about Tesla, which has come over the past few weeks. So with Elon Musk and Grimes having broken up in that famous picture of Grimes walking through with Los Angeles with a Karl Marx book. Rory, does this mean that we might actually start getting some good music from Grimes again soon.

Rory

Here's hoping, here's hoping, cross my fingers.

James

Oh, it's hard to like a company like Tesla sometimes. Let's move on then. And so a few weeks ago in this pod, we spoke about Zoom's planned acquisition of the cloud call center company, Five9. Well, last week that deal went caput with Five9 shareholders rejecting the deal because they felt it did not appropriately value the company. Rory I got the feeling that the analyst team here was a little split over this deal when we talked about at first, what's your initial taught on it falling through?

Rory

Yeah. So the deal with Five9, it was one of those deals that made perfect sense. But in a really unexciting way, I think a lot of people wrongly think of Zoom as just what we're doing right now, which is just being on a Zoom call.

James

Yeah

Rory

Zoom has much greater ambitions than that. They are looking to create kind of frictionless communication throughout the world. And the one place that really is an issue is call centers. Now, call centers are not a particularly sexy industry -- god I'm really on the sex thing today. They're not really a sexy industry. I think at least in the zeitgeist, they're kind of always portrayed as quite depressing spaces, this kind of Sisyphean existence. Like I said, like it did make sense. It would have diversified their product line. It would have created cross selling opportunities. It would have created kind of strong switching costs. But shareholders weren't particularly pumped by the idea. Now that the deals falling through, it's kind of like your friend is dating someone that none of the other friend group like and the relation spans. And you sort of have to pretend you feel sorry for about it while kind of secretly being absolutely delighted you're all like, oh, that's terrible. We're looking over each other way and like, great. Finally, that's not your stuff. Yeah. Now, Incidentally, back in September, Zoom and announced, their video engagement center, which is set to launch in 2022, which I don't know for me, sounded very like the start of their own contact center solution. And I think that they may have just saved themselves 15 billion quid and a lot of bother by the deal not coming through.

James

Yeah, well, it's worth pointing out with this deal that the drop in share price that Zoom suffered immediately after the deal was announced obviously affected the value of this deal for Five9 shareholders. Can you explain that a little bit for us?

Rory

Well, it was already at a pretty low premium. I think a lot of the Five9 shareholders were already questioning the deal. I think a lot of the times management kind of looks at all stock deals and maybe just maybe they're thinking about their own interests a little bit ahead of the shareholders. We don't get a premium, but would be part of Zoom and that's one of the most exciting business out there, whereas shareholders are a bit like if I wanted team shares, basically the market rate, I would have bought Zoom shares at the market rate.

James

Yeah

Rory

The drop and Zoom share price certainly didn't help matters. Like I said, it wasn't particularly looking like a very sweet deal. Shave 20% off it again. No one's really going to be jumped for joy at that deal.

James

Yeah. Another thing to point out, sorry, is that prior to the deal being scrapped, there were reports floating around that the deal was actually being investigated by the US government for potential national security reasons. Considering that Five9 has operations in Russia and Zoom has an R&D hub in China, do you think that had anything to do with deal falling through?

Rory

It did. I don't know if it had a direct link to it falling through. I think there was, I mean, there was already a sense that the deal wasn't lighting many fires as we've already discussed. The investigation, I think wasn't probably gonna prevent the deal in the end. It probably would have just delayed matters. But what it did do is it gave all the parties kind of chance to end it and kind of save a bit of face. Now, unfortunately, for Zoom this could end up being an ongoing kind of issue for them. It's one of the kind of rarely talked about bear arguments against Zoom, that it's got this link to China and that it does a huge amount of its R&D in China. And like all companies operating in China, it has to follow Chinese law, one of which is that if the Chinese government wants something, you give it to them and that doesn't really go down quite well when you're talking about communication systems within the US-Chinese government interference. It's not a match made in Heaven, bit of a kind of water and oil thing going on there. So this might be -- Zoom has grown an awful lot since the early days. This might be kind of a time for them to start rethinking that strategy because I can see it going in the way of more deals down a lot.

James

So you think there's going to be more pain for Zoom around this kind of location of their R&D hub?

Rory

I think it could definitely. I mean, we know the Biden administration, first of all, has already come out and said that is going to be much gonna be much more wary of these kind of big multibillion blockbuster deals. So that was already an issue. I don't particularly know how much the security issue was at the heart of this. It might have just been. This is a big deal. We're going to look at it, don't be popping champagne corks just yet. But I do think just because of the space that Zoom operates in, if it wasn't in this communication space, which you've already had, we've already had a history with with Huawei, Ericsson and all this kind of 5G stuff going on. I do think they are going to keep an eye on what is going on with Zoom when it comes to big acquisitions related to communications.

James

Yeah. So what's next on the horizon for Zoom, do you think, it's been a pretty bad year for them so far? The stock's down well over 50% from its all-time highs around this time last year. So what does Zoom need to do next to restore confidence, do you think?

Rory

I don't particularly know if it's something that they need to do? I mean, this particular episode was a rare misstep by management and management that has been executing fantastically since they became a public company, one of the fastest scaling businesses we've ever seen in the public markets during what was a very tumultuous time. They probably aren't the most savvy PR people in the they they haven't really got that whole, you know for a communications company. They should be able to go out --

James

Be better at communications themselves?

Rory

A little better, yeah, communicate a little bit better. But we're already seeing, I think, an awful lot of the drop, first of all, was just a kind of correction from the insane 2020 that have had when shares were up there at $550-560. You are going wow, is this thing ever going to stop going up? But now that they're back down, like you said, 50% of all-time highs. There's this kind of, I think worry, fear that we are going back to the office now. No one needs Zoom anymore. But like I said, that's not really Zoom's long-term plan. They're getting much more into the wiring behind the communications that we need to, even if we are not working remotely, we still need these type of communications. And we've seen with the Zoom phone that just only launched a couple of years ago, is already a huge success. So I think they are still executing very well. I don't think there's one particular thing that they need to do to kind of make this company great again. It's still a brilliant company. It's still doing very well. And I still think it's going to deliver for shareholder in the long-term.

James

Before we finish this I have to ask Rory, how long have you been waiting to drop the word Sysphean on the Stock Club podcast?

Rory

How long have we been doing the Stock Club podcast?

Mike

Never mind that it was in the same sentence as the words like zeitgeist as well.

James

Yeah, it's a bit of a tongue twister! Okay, let's move on before any more big words are dropped. So what's going on in the MyWallSt app at the minute? Well we added our brand new Stock of the Month this week. This is a company that I'm personally a massive fan of. Just one of those businesses that you either you or someone you know, as a customer of. Of course, you can listen in to the exclusive Stock of the Month podcast as well. Here, Rory and I discuss this stock in more detail. We just recorded that earlier today and it's going live on Monday, so make sure to check that out.

James

Rory, what is the sexy ratio of this stock?

Mike

We're on the platform, so it's way up there!

Rory

Sexy to what? Come on, James?

James

To forward revenue!

Rory

Forward revenue?????

James

Okay, we're losing Rory, so I move on. Don't forget as well that Emmet has said to appear on a different podcasts in a few weeks time with our friends over Opto Sessions. On Opto Sessions, co-host Haydn Brain & Ed Gotham interview the top traders and investors from around the world in a bid to uncover the secrets to their successes. Emmet is gonna be chatting about his journey so far as an investor, including the reasons why he set up MyWallSt, the details of his investing philosophy and some of the companies he's looking at at the moment. That episode is going live next Thursday, October 14. So to listen in, you can just search for Opta Sessions on Apple Podcasts, Spotify or wherever you get your podcasts.

James

Let's move on to Mailbag guys. And this week we're going to talk about a company that IPO'd on the NASDAQ last week and we've had so many questions in about it, particularly on TikTok, which I think could be part of the story, Rory. I've never heard of Olaplex before, but a haircare company valued at $15 billion seems a bit it mad to me. What are your first thoughts?

Rory

When I first looked at it last week, I would agree with you evaluation wise. It did look a little outrageous, not because it was valued at $15 billion per se, and there's a lot of money in beauty and hair care in particular. And when I say valuation wise, I'm really talking only on multiples here. It was a quick kind of scan of the business and where they were sitting on a kind of price to earnings price to sales metric. We aren't talking here about it. We're talking about a business that makes physical products.

James

Yeah

Rory

And not some sort of high growth, recurring revenue SaaS business. And it's trading at 35 times sales, which is high.

Mike

It was slightly higher on your first calculation Rory no?

Rory

Yeah, my first calculation earlier I didn't carry the one, don't need to talk about it Mike. However, I have to admit that the more I read about this business, the more interesting it has become to me. Firstly, because it is unlike any beauty business I've ever looked at until, not that actually look at many of them in. So to the industry, I'm not particularly familiar with, but they actually run kind of like a technology company. They have over 100 patents for one, but they are a hair care company. What they make is hair care products, both for use at the salon and use at home. In 2014 they created their own category of hair care hair products, which uses bond multiplying technology. So don't ask me what that is, but apparently it fixes hair and people really like it.

Rory

Okay, let's talk about the good stuff first. Sales are through the roof. It hit 90% net sales growth from 2019 to 2020. In the first six months of this year, sales are up 171%. Now, obviously, there was a bit of kind of COVID disruption tied into that as the retail stores were closed and salons etc, but this is a haircare company that generates very, very healthy margins, 82% adjusted gross margins. Again, a company that makes physical products and 71% adjusted EBITDA margins. If you were to look at other beauty businesses,  they're generating, like, 20% to 25% EBITDA margins.

James

So how are all the Olaplex getting such high margins?

Rory

Well, that's the question, isn't it? They are --

Mike

It's all a fraud, they're putting the sham in shampoo.

Rory

They are the number one brand in their category. They have a 71 NPS, which is the highest NPS score in their category. They're the number one hair care brand at Savora. They've the number one follower count on Instagram, and they are the number two haircare brand on Amazon. On top of that, pretty much every female I've asked to talk about this has kind of talk about, like it's kind of some sort of gift from the hair gods. And it's one of those companies that has a great founder story, a guy called Dean Crystol, whose mother owned a salon. His father worked in the business. He invented this for want of a better word or came up with this bond multiplying system back in 2014. Unfortunately he's not with the business anymore. He sold that business to a private equity company called Advent. They on the positive side, they seem to have installed a wonderful CEO in JuE Wong and female leaders, we always like to see that. She has just buckets of experience in the consumer goods and beauty in particular. She was director of PepsiCo, President of Elizabeth Arden, and she was the CEO of Astro. So, I mean, I've actually never entered her before, but I mean, superstar resume there. But here's something we don't particularly like to see, which is, first of all, that Advent controls all the voting power in the business. So it is a control of the company. And that's something that you can see in other businesses, particulatrly kind of like family-owned businesses, Brown-Forman is a good example where the family collectively owns all the voting shares. But because they've been around for so long you kind of trust them with the business.

James

Yeah. It's an institution.

Rory

Yeah. It's kind of an institution. The New York Times, another business famously owned by the family. And here's another thing that is a bit worrying. 70% of their net revenue is tied to one supplier. So that's another kind of big worry thing, a supply chain and the disruptions that we've had over just even the past couple of months. The CEO was asked that on several interviews that they did while their IPO was happening. She came that they have very good relationships with the supliers. They give very close control over the raw materials, etc etc. The exact kind of thing you'd expected to say. But, yeah, the incredibly interesting business with way, way too many questions to be answered before I'd be happy making an investment, particularly this margin business. It's kind of if it's too good to be true, maybe it is. Maybe it isn't true -- not to accuse them of massive fraud or anything, but I definitely would like to dig in a bit deeper and find out where they're getting that kind of margin. Is it just pricing power? Because if it is, it could be a very interesting business to invest in.

James

Yeah.

Mike

I think you can never underestimate these kind of like cult following companies like Peloton. People laughed at Peloton. They thought It was an expensive stationary bike. And now look at it like, you know?

James

Look at us now!

Rory

A stationary bike with an iPad attached. That's what someone said to me.

James

Well, yeah. Speaking of that cul thing, apparently, Olaplex is very, very popular on the TikTok kind of subsection of hair Tok, Mike, which I know you're a big fan of Mike, with your luscious locks. So let's move on from Olaplex then and go to the elevator pitches. So that might have seemed like an elevator pitch, but I want two more elevator pitches from you guys today. Mike I'll let you go first seeing as Rory's been talking for so long. What stock are you pitching me?

Mike

All right. I'm going to frame this first with two stats. So the first one is that infertility affects one in eight couples making it a more prevalent condition than diabetes, asthma or depression. And 68% of the workforce is willing to change jobs for fertility coverage. Of those already facing challenges, 90% are willing to change jobs for fertility coverage. So maybe that's three stats, two and a half. So the company I'm pitching is called Progeny. It's a benefits manager. It focuses on on fertility services and partners with organizations to design benefits plans, member support, and kind of manage all their networks attached to benefits, basically.

James

Yeah.

Mike

So a common issue with the current fertility benefit scheme is that plans, like, have an upper limit, so you would go through maybe multiple rounds of IVF, and then the plan can max out, meaning that you have to pay for the rest of it out of your own pocket. Progeny differentiates itself by offering bundles or what it calls smartcycles as an alternative. So they're custom-tailored and fully covered by Progeny preventing exhaustion of upper coverage limits. Customer base is made up of a list of some of the biggest companies the world, including Microsoft, Google and PayPal. And yeah, I think like, it's going to be a big factor in the coming years over recruitment and retention. So I could see a lot of the big companies following suit.

James

Yeah, that's a fascinating company. I actually didn't expect you to pull out a good one, Mike. Well done.

Mike

Thanks for the faith.

Rory

That is such a jibe.

James

This podcast is a bit loose I feel. Rory give me your elevator pitch before I have to shut us down.

Rory

Yeah. So the background of this is there's just been an awful lot of IPOs recently, particularly a lot of consumer-facing IPOs. Just talked about the Olaplex, Warby Parker, AllBirds. There's a couple of others that I can't even remember, but one that has been exciting me and I'm taking a deep look into is Weber. Weber is the market leader in outdoor grilling appliances. Their range of products includes charcoal, gas, pelate, electric grills, etc etc, and accessories, little flipping things, spatulas and all that kind of stuff. What I like is that the company was founded over 70 years ago. And so companies like that, you just get to see some very nice historical revenue. And it's just been growing, growing, growing, growing, growing pretty steadily for the last 70 years. The one thing I do like about Weber as compared to their biggest competitor, which is Traeger., which also went public pretty much on the same week is if you type in Best Barbecue onto Google, check any review site. You can check all of them if you want, 99.999% of the time it will be a Weber in pretty much every category. I think there's one category where they're a little bit weak. It thinks the palate barbecues, but yeah, really kind of steady growing business. Loyal customers, 50 million installed around the world and great net promoter score and seems to be a good leadership team.

James

I'm interested Rory what's the thesis around pitching a barbecue company as we go into winter?

Rory

It's a long time. It's also not winter on the south side.

Mike

South side of the planet

James

Also known as the Southern Hemisphere for anyone who might not get this outside of the planet comment.

Rory

Where I used to live. Australia, they barbecue a lot there.

Mike

if anyone needs any justification of Rory being from Dublin, he says the south side of the planet.

James

Does the Green Luas go there? All right, let's move on. So that's it for today's Stock Club. 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 a pod@MyWallSt.Com.

James

If you're enjoying the show, make sure to tell your friends about us and don't forget to leave a review or a rating for us on whatever platform you listen to us on. Thanks for joining us today and we'll talk to you next week.

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