February 26, 2024

Enterprise JM

Do the Business

Consumer Spending, E-Commerce, and the Business of Lodging

In this week’s episode of Motley Fool Money, Motley Fool analyst Olivia Zitkus and Motley Fool contributor Keith Speights, along with host Chris Hill, discuss a new wave of biosimilar drugs and the challenges (and opportunities for investors) that they present. Also, Motley Fool analyst Bill Mann discusses:

  • Retail sales growing nearly 4% in January.
  • Shopify‘s ( SHOP -2.89% ) strong growth in 2021 being followed by an expectation for slightly less growth in 2022.
  • Why shares of Shopify will never look cheap. The company’s new partnership with JD.com ( JD -5.52% ).
  • Airbnb‘s ( ABNB -3.71% ) record revenue last year.
  • Hotel stocks hitting new all-time highs.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Feb. 16, 2022.

Chris Hill: If you’re looking for one more light at the end of the pandemic tunnel, this is the show for you. But before money starts now. I’m Chris Hill, joined by Motley Fool Senior Analyst Bill Mann. Thanks for being here.

Bill Mann: Hey Chris, how’re you today?

Chris Hill: I’m doing all right. I want to get to Shopify, I want to get to Airbnb. But, let’s start with the big macro. Retail sales grew nearly four percent in January. So I guess for all the hand-wringing over inflation, people appear to still be buying stuff.

Bill Mann: Yeah. When you take out cars, which is a big thing to take out, it was a 3.3 percent gain in retail. Those cash registers are really, really wringing. Now, it’s important to keep in mind that this number is not inflation-adjusted. We’re buying maybe less stuff, but we’re spending more for it. Home furnishings were up a lot. Motor vehicles, and parts were up a lot. The only thing that was really down, which makes some sense to me, was food and beverage, like going out to restaurants. I don’t know if you’ve heard, but where I am, Omicron was a big thing in December and January.

Chris Hill: Yes.

Bill Mann: Yes, it was hot here. [LAUGHTER] Not that surprising, but a really surprising overall spending number from fellow retailers.

Chris Hill: You have to assume that the food, and beverage number is going to go up as mandates for masks get lifted in major cities as they’re starting to. Do the home furnishing numbers surprise you? It surprised me only because I feel like there was a lot of spending on home furnishings in the first year of the pandemic. So the fact that we got this popping January, I don’t know. I guess it speaks to maybe more people moving, and more people just saying, I’m ready for a new sofa.

Bill Mann: Yes, I can try and sound smart about the number that I wouldn’t have predicted. But, at least partially that has to do with the fact that there is pent-up demand in the space. I mean, if we recall, we’ve had all sorts of supply chain issues and one area that’s been hit really hard is both the home builders, things like PVC and Truck Ross’s and things like that have been unavailable. But then, also the home furnishing segment as well has seen a huge amount of push-back, and delays. When I saw that number, I thought, of course, that actually makes sense to me. That, that would still be well above what it was a year ago because there is a coiled spring still that comes in the form of the delays, and the supply chain issues that have impacted so many parts of our economy.

Chris Hill: Shopify wrapped up its fiscal year with 57 percent growth, which is impressive. Then Shopify said growth for this year is going to be slower, and investors did not like that at all.

Bill Mann: No, they were not pleased about that. I mean, as evidenced by the pretty rapid drop in the stock, it was down 17 percent when I checked earlier today. Look, it was a good quarter for Shopify. Shopify has a beautiful slide. Shopify now accounts for more than 10 percent of all e-commerce in the United States of America, 10 percent. So it’s going to be really hard for them to keep growing at 50 percent plus, given that they are such a large component of the market. Again, this is a company that is now up about 170 percent over where it was from the depths of the pandemic, from a share price perspective. Shopify is one of these companies that we have to remember. The market is really struggling trying to figure out how much this company is worth. How good is what Shopify is doing in terms of bringing money down the road? It’s still trading at 30 and 40 times sales, which is a historically enormous number. It was a great number for Shopify. It has to keep continue growing. I really don’t think that people should have been surprised that they’re prognostication for 2022 is lower. The thing that I believe to be true about Shopify is that it has a long growth ramp, and that’s going to pay off over time.

Chris Hill: Is this one of those stocks that is absolutely no matter what the price is, never going to look cheap? Because on a valuation basis, it seems like one of those businesses that is just always going to look expensive.

Bill Mann: Yeah, I think that’s the case. I mean, when you’ve got 41 percent on a massive number, 41 percent revenue growth, that’s a company that I think that you could extrapolate out 41 percent growth for a really long period of time, but it will break whatever spreadsheets that you have. It’s hard to put a value on what these top-flight gross companies are. Unfortunately, part of the game of holding a company like Shopify is just being used to the fact that, occasionally, some of the moves in the stock are not going to make sense at all.

Chris Hill: I’m wondering if because it’s never going to look cheap. If you think about investors as being an addressable market, I guess you could say that’s about a lot of different businesses. Like there’s some businesses just because of what they do, there are people who would say, I don’t support gambling, so I’m never going to own a casino, stocks, or something like that. But, I’m wondering if the addressable market for Shopify as a stock is constrained because there are always going to be people who want to see a cheaper stock. There are always going to be financial advisors telling people you don’t want to buy that, it’s such an expensive stock.

Bill Mann: That’s a beautiful Amazon in 2003. I mean, that’s exactly what was being talked about. It’s always a little disingenuous, Chris, to pull Amazon out of your back pocket because Amazon was a special situation, and it will probably never happen exactly like that again. But, that is exactly the conversations that were happening around Amazon about 10,000 percent ago in terms of growth. Shopify has a $100 billion-plus market cap company, does not have the growth ramp in front of it in terms of share price that Amazon had at the time. But, that doesn’t mean that a company that will continue to grow. I mean, 41 percent growth on the base that they had, that’s astounding and they’ve just opened up a deal with JD.com. Shopify now has access to 550 million Chinese consumers.

Chris Hill: You say that like it’s a big number.

Bill Mann: Yeah.

Bill Mann: True. Whenever you talked about China, all those numbers, they sound like cheat codes. You put this in, and just suddenly you’ve got 63 extra lives or whatever. Five-hundred-and-fifty million people I’m told is a lot and it’s a market that they’ve barely tapped until now. There’s plenty of growth for Shopify, but I can just simply guarantee as a stock, that is now down by 60 percent over the last three months, this share price is going to continue to visit a lot of different places over time. It’s just part of the game you’re signing up for when you own a company like Shopify.

Chris Hill: Last thing and then we’ll move on, because I think that there are always going to be people who will lump JD.com, and Shopify in the same big bucket of, “Well, these are e-commerce companies.” What is Shopify do that JD doesn’t do that makes JD.com say we want to partner up with you?

Bill Mann: I think it’s the access. They don’t do that different, but Shopify has a massive stable of merchants that are already on their platform. Now, for JD.com, they could say, should we try and set up our own platform and trying to track them? Or can we just simply take what we have, which is an unbelievable infrastructure in China, and offer to split the rewards with the Shopify? What they don’t have is simply that critical mass, and they’re getting there quick, and it makes perfect sense. I expect huge things from that partnership going forward.

Chris Hill: Airbnb wrapped up the fourth quarter by reporting record revenue for all of 2021 and they said they expect bookings in the first quarter, to exceed pre-pandemic levels for the first time. I get that this is overall a down day in the market so maybe what we’re seeing in terms of Airbnb’s rise in this share price today, be a little bit muted. This wasn’t a perfect quarter, but holy cow, this is a really good quarter.

Bill Mann: It was a holy cow quarter. Exactly. What do you suppose the opposite of pouring one out is? Remember back in March of 2020, we were pouring one out for Airbnb. It was the company that was maybe most impacted by the immediate shutdown at the beginning of the pandemic. Now they’ve had their best Q4 in history in terms of revenues in income and they’ve done so really without the benefit of Asia. Asia is still basically locked tight. It’s the area that still most affected by Omicron, but then also by the policies in place that are much more restrictive than we see here in the US and in Europe. Super low cancellation rates, they had longer stays. I think you’re seeing really for Airbnb, and this is a company that I have wrongly been skeptical of, but the fact that they are now getting much more, 50 percent longer stays than they had a year ago. The way in which these properties are being used is very different than before the pandemic. I think that’s a trend that you have to assume is going to continue.

Chris Hill: When you go even further in terms of their longer stays, stays of four weeks or longer, made up almost a quarter of their bookings in this most recent report. It’s amazing to me. You made the point about where they were in March of 2020. There were a lot of companies, pretty much every company had to figure out on the fly, what are we going to do? In the case of Airbnb, part of what they decided to do involved laying off some staff, really pulling back on their marketing. As they look to grow from here, I do wonder if in particular, the marketing spend is a leverage they’re going to be, not necessarily reluctant to pull. They just put up these results. I guess I would hate to be trying to make the case that, they really need to spend a lot more on marketing. It’s one of those adjustments that the business made because they had to make it. Now that they’ve made it, and seen what they can achieve without spending that money. I bet that they’re going to be, maybe a little rightfully stingy with that in the future.

Bill Mann: Perhaps one of the things that I’m not sure that many people have really talked about that much was that one of the things that has grown really quickly for them, which is their nights and experiences segment. They basically took the fact that they have the knowledge of where people were going, and they knew from the types of establishments that they were staying in, what types of experiences that they could serve them and in so doing, they have crushed Tripadvisor, for example. Without even thinking about it, they’ve taken the data that they had in place, where you going, what type of property you are you staying in? How long are you going to stay there? They’re matching that up with experiences. That’s not even marketing. That’s basic processing of artificial intelligence, of being able to make guesses based on really unbelievably deep set of features of data, that they already have.

Chris Hill: It’s concierge service, as we used to think about it back in the day. But as you said, it’s powered by AI and it’s probably one of the more underrated parts of their business. Do you make anything of the fact that Marriott, Hilton, and Hyatt shares of all three are hitting all-time heights today. I don’t own shares of any of those companies, but I look at that, I look at what Airbnb is doing. It seems like every day we’re getting another announcement of an opening up. Disney coming out and saying, I think it’s in their Orlando property, that masks are going to be optional now.

Bill Mann: As we stay down south, “Y’all come” [laughs].

Chris Hill: Again, I don’t own shares of those three. But, I look at that and I feel more optimistic about how the world can be opening up again.

Bill Mann: Okay. Chris, if you had to guess, and you’d probably guessed the answer based on the premise of the question. Which stock has outperformed from March first 2020 Marriott or Zoom?

Chris Hill: Marriott?

Bill Mann: Marriott has outperformed.

Chris Hill: I remember talking with Ron Gross at some point in March of 2020. Marriott was one of the companies that we talked about. I can’t remember if Ron said this on the show or if this was just in our discussion afterwards. But basically he said, “This company, when I look at it from top to bottom, when I think about the strength of the brand, their rewards for all that sort of thing. This seems like an unbelievable screaming value, at where it is trading right now, and because I’m an idiot, I did not buy shares”.

Bill Mann: [laughs] All goes to show that, when Ron Gross speaks, you should definitely pay attention.

Chris Hill: Bill Mann, great talking to you. Thanks for bringing me here.

Bill Mann: Thanks Chris.

Chris Hill: Competition comes in different forms. A business like Airbnb has competitors like hotel chains. But for a pharmaceutical business, competition isn’t just other pharmaceutical companies, it’s also generic drug makers who are ready to move once a drug’s patent protection ends. For more on a new wave of biosimilar drugs entering the market. Here’s Olivia Zitkus.

Olivia Zitkus: Hi, Fools. I’m on with Keith Speights, the healthcare analyst here at the Motley Fool. Keith, thanks for coming on with me.

Keith Speights: Great to meet with you again, Olivia.

Olivia Zitkus: Today I want to talk about an important, and another radar component of the competitive landscape in pharma and biotech, biosimilars. The easiest way to start exploring the current pertinence of biosimes, as they’re known, is with the story of an impending patent cliff. AbbVie‘s biologic Humira, a medicine approved to treat symptoms of various inflammatory conditions is the top drug in the industry by sales. Its 2021 revenue reached $20.7 billion. In 2023, the drug faces an important patent cliff in the United States, where the vast majority of its sales come from. Now under a patent settlement, pharma company Amgen must wait until January 31st, 2023 to launch its biosimilar AMDVITA in the US. It’s already been released abroad. Now Pfizer‘s definition of a biosimilar product is a biologic product that is approved based on demonstrating that it is highly similar to an already FDA approved biologic known as a reference product. Biosimilars have no clinically meaningful differences in terms of safety and effectiveness from the reference product. They have different regulatory pathways than normal drugs that we talked about. In addition to its agreement with Amgen, AbbVie has at least eight other Humira biosimilar settlements with companies like Boehringer Ingelheim, Viatris, Samsung Bioepis, Mylan, and Novartis. Now, Keith, if I am an AbbVie investor, I am panicking, the best-selling drug in the world is about to lose its patent protection and other biosimilars are coming onto the market in less than a year. Is Humira going to be completely swallowed up by these competitors, and how much does the on-slot of these biosimes really matter to AbbVie?

Keith Speights: Well, first, I can understand the temptation to panic, but I’ll say that I’m personally an AbbVie shareholder and I’m not panicking at all. I don’t think other investors need to either. But for one thing, AbbVie’s valuation already reflects the coming sales decline for Humira and sales for Humira will decline for sure. The stock currently trades at around 10 times expected earnings. That’s cheaper than most other pharma stocks. It looks like an absolute bargain compared to the S&P 500 which trades at a forward earnings multiple of over 20 right now. The other thing, Olivia, is that AbbVie has been preparing for this for years even before its spinoff from Abbott Labs back in 2013, Abbott and AbbVie knew that the day would come when Humira would face biosimilar competition, the company has been getting ready for this day. 

It’s made strategic acquisitions along the way, notably, including the buyout of Allergan in 2020, and that help make it less dependent on Humira. Also the company has built up a really strong pipeline. Abbvie successors to Humira are two drugs, Rinvoq and Skyrizi. These two drugs are expected to together make $15 billion in sales in 2025. That will go a long way toward offsetting the declining sales for Humira. Also, don’t expect Humira sales to just evaporate overnight. For example, the drug made $6.3 billion in international sales in 2018, and it began to face biosimilars in Europe at the end of that year. But in 2021, Humira’s international sales totaled $3.4 billion. That’s still a lot of money. Sure, sales fell nearly 50 percent, but if Humira experiences a similar result in the US, they can still make more than $8 billion per year in the US market. That’s a lot of money. The bottom line is that AbbVie will definitely feel some pain from biosimilar competition in the US market for Humira, but the company should be in good shape to weather this storm.

Olivia Zitkus: If you’re an investor, that might call me for a brief moment before thinking to yourself, biosimilars clearly post some risk to drugs already on the market. Should I also be worried about generics? Let’s take a step back, Keith. Can you briefly explain the difference between generics and biosimilars and talk about the problems that generics might create for our reference product?

Keith Speights: Sure. Biosimilars and generics are alike. They’re intended to offer less expensive versions, I’ll put versions in quotes, of brand drugs. Biosimilars are similar to biologic drugs or those drugs that are made from living organisms, for example, antibodies. Generics are chemically identical to their original reference products. Biosimilars and generics can only enter the market when the patents for their reference products expire or the makers of the original products reach an agreement with makers of biosimilars or generics for an alternative launch day. But now to your question about whether investors shouldn’t worry about generics, the answer is a definite maybe. Generic competition can present a big problem for a company that hasn’t adequately prepared for steep loss in revenue. In the past, we’ve seen companies such as Pfizer go through what are called patent cliffs where multiple blockbuster drugs lose patent exclusivity over a short period of time. When drug makers don’t have other new products in position to offset the revenue declines from these losses of exclusivity, their stocks can fall quite a bit.

Olivia Zitkus: It sounds like pipeline preparation is definitely key to surviving the loss of a patent or a patent cliff. Now, Amgen, Boehringer Ingelheim, Viatris, et cetera, are all coming for AbbVie in 2023 with their biosimilars to Humira. It seems to me like producing biosimilars could be a really lucrative business. Are there any companies focusing closely on biosimilars that you think could be worthwhile Foolish investments?

Keith Speights: Yeah, Olivia, I think that one of the companies you mentioned is worthy of consideration by Foolish investors and that company is Viatris. Viatris was formed in 2020 by the merger of Pfizer’s Upjohn unit with Mylan. The company focuses on marketing biosimilars, generics, and also older brand drugs such as Lipitor, Lyrica, and Viagra. I recently wrote that Viatris is my favorite value stock right now. I wrote that for several reasons. This stock trades at only four times expected earnings and one times trailing 12-months sales. That is dirt cheap. But Viatris has performed well so far this year, even as the overall market has declined. The company called 2021 a trough year, but it expects to deliver stronger growth going forward. As you mentioned, the launch of its biosimilar to Humira in 2023 is on the way. That should help quite a bit. Viatris also expects to soon launch a biosimilar to another blockbuster drug, an eye disease drug called Eylea pending regulatory approval and that should help boost its sales as well. Then finally, income investors should really like Viatris. The company has a dividend yield of around 3.1 percent. This is a combination of value and dividend that I think a lot of Foolish investors would like.

Keith Speights: I think that’s a great pick as well, Keith. Thanks so much for talking Humira, generics, biosimes with me and sorting all of that out for our Fools. This has been a lot of fun.

Chris Hill: That’s all for today, we’ll be coming up tomorrow. Jason Moser and Matt Frankel have a deep dive on one of the most disruptive financial companies of this century. 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 yourself stocks based solely on what you hear. 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.