In this episode of MarketFoolery, host Chris Hill and Motley Fool senior analyst Jason Moser discuss Etsy‘s (NASDAQ:ETSY) announcement of its plans to acquire Elo7 for $217 million and tackle a listener’s question on trimming a position so that they’re not over-allocated to one particular class or name. Plus, is the movie industry really back after the pandemic?
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This video was recorded on June 28, 2021.
Chris Hill: It’s Monday, June 28th, welcome to the MarketFoolery. I’m Chris Hill. With me, Mr. Jason Moser. Good to see you.
Jason Moser: Good to see you. Let me just say, you look well rested. You look like you’ve been well fed, Chris.
Hill: Anyone who goes to Charleston, South Carolina and is not well fed is doing something wrong.
Moser: I vouch.
Hill: I apologize for the quality of my voice. I somehow picked up a cold over the weekend. We got a few things to get to. We’re going to talk about entertainment news. We’ve got some allocation strategies to discuss. We’re going to begin with the deal of the day. Etsy is buying Elo7, which is often referred to as the Etsy of Brazil. Now, you may say, doesn’t Etsy already operate in Brazil? Yes, they do, and Elo7 is going to remain as its own brand, it’s going to keep the branding. Two hundred and seventeen million dollars — this is a much smaller deal than the one Etsy did recently for Depop in the U.K, but it looks like Wall Street is very happy with this deal because shares of Etsy are up around 6%.
Moser: Yeah. I definitely understand, and I do agree with that. I think it’s a good deal. I think when you look at the business of Elo7, it is a small business but it is growing very quickly. Etsy does have a presence in Brazil, to an extent, but when you look at Etsy’s business overall, 22% of overall revenue comes from outside the U.S. and U.K. markets. Latin America and mainly Brazil, still a small part of the business. I think this makes sense to really gain more share in that space. There’s a good reason why they’re doing that. Look at Latin American e-commerce penetration today — it’s still less than 10%. It’s pegged to hit $29 billion in 2021, and the forecasts are for that to grow 26% annually through 2024. Clearly, a big opportunity there, and it’s very believable. We, of course, have seen the move toward e-commerce and the success that Etsy has had domestically — mainly here today, but really globally. It is something that is starting to pick up on a global level, and I think that for the business for Etsy, $217 million, that’s not chump change, but it’s not a lot in the context of that business. It’s about 25% of the total free cash flow that the company brought in over the last 12 months. They’re going to make this back standing on their heads, really. Then they will be able to use their expertise — that is to help them build out this network in Etsy, and they’re going to be able to work on building out a successful network with Elo7. I think it all really is in the name of this strategy, it’s they’re focus on the strategy of becoming a house of brands. Whether it’s Reverb or whether it’s the Elo7, Depop seems to be the strategy that they’re taking and judging from the numbers that seems to be working.
Hill: I was going to say, because we’ve seen companies go the acquisition route, we’ve seen both sides. We’ve seen the companies that say we’re buying you and you’re now going to be wearing our branding. Then we’ve seen companies go the other routes and say, no, we want to have a network. Everything has its own branding, and it really seems like it just comes down to execution. It doesn’t matter the industry — you can find companies that have done this well in both directions.
Moser: Yeah. I totally agree. I liked the idea that they are bringing Elo7 in, letting them continue to do their own thing. It’s a very Buffett ask. That’s Berkshire Hathaway‘s EMO, which is focused on bringing good businesses into your family and then let us do business as you keep doing their thing. You don’t need to fix something that isn’t broken. It’s too early to say whether Elo7 is ultimately going to be successful or whether it is broken. I don’t think, based on the numbers that we’ve seen, there really would be a reason to say it’s having problems. There are 1.9 million active buyers to go with 56,000 active sellers, and those are two important metrics. Those are metrics that we keep an eye on with Etsy. I think that we’ll continue to follow those same types of metrics with Elo7. It gives you some clarity into the business to understand how that business is doing on its own. They’re going to rely on a lot of expertise from Josh Silverman, CEO of Etsy, and his team as they continue to build out the Etsy payments and the Etsy ad side of the business and really focus on building out this very productive and healthy give-and-take relationship between buyers and sellers.
I think they have such a good perspective on what really matters most for their business. Buyers, obviously, they are crucial. They are the ones that are buying stuff and giving you money. But without sellers, it doesn’t matter at the end of the day, and so Etsy has done a wonderful job through the years of building their business and ensuring seller success. I think that if they can continue with that philosophy and they continue to build those other brands out with that same mindset, this is an exciting business. I’m a shareholder myself. I feel really good about owning these shares, and I just made it. It seems like it’s a really bright future so this will be one more — hopefully a strong brand to add to the portfolio.
Hill: One thing before we move on from last week, I wanted to hear your thoughts on the Doximity (NYSE:DOCS) IPO [initial public offering]. Doximity went public at $26 a share; I believe it closed at $53, [laughs] putting days or basically doubled off the IPO price. This is a business that has been called both the LinkedIn for doctors. It’s also been called the Teladoc killer. What do you think of Doximity?
Moser: Well, I don’t think of it as a Teladoc killer, although, I do love it whenever I hear someone say, this is the Teladoc killer, it’s the Netflix killer, it’s the Tesla killer — because that really just to me, it reinforces what those companies that they think are going to be killed are doing. It’s also all to say that when you look at the healthcare market, it’s something like $4 trillion in healthcare is spent just domestically every year. This is a massive market opportunity and it is not a zero-sum game. With that said, I think the reason for the enthusiasm with Doximity, and this is a pretty compelling business from a number of different angles. They were founded in 2010 and have been around for a little while. But I think what has the market really excited about this business to be honest with you — you’re not going to believe this, Chris — but it actually makes money. It’s actually profitable.
Hill: Now, when you say profits —
Moser: I’m not talking about adjusted, I’m not talking about non-GAAP, I’m not talking about some new-fangled metric or terminology that we’re unfamiliar with. This is just a company that is straight up net income positive. Hey, listen… that’s a big deal in today’s day and age. You get a lot of companies that are going public that have not reached that threshold yet and it’s not very clear when they will reach it. It’s not to say that we might not see stretches where docs, somebody goes into the red if they decide to reinvest heavily into business, but it does make money in a few different ways. They have a marketing side of the business, a hiring side of the business. In the telehealth side of the business, it’s a very new part of the business. That’s encouraging that they’re doing it. They see where the puck is going and make those investments. But really, I think, the excitement about the actual economics of the business seems promising. It is focused on a very specific market in physicians and obviously, a big market opportunity with a lot of different ways to ultimately make money. Perhaps that’s the enthusiasm behind Doximity.
Hill: We’ll see how they deal with their first earnings report.
Moser: They have a lot of powerful customers. Their customers are not the physicians that are logging in to Doximity, their customers, really, they’re healthcare organizations, the pharmaceutical manufacturers, medical-recruiting firms. They are the ones purchasing the subscriptions for Doximity services, and so they have very big, powerful customers. We talk about powered networks all the time, and if Doximity does what it does very well in its core market is funding a lot of value there — well, it’s going to be sticky — that probably can lead to some higher switching costs down the road and perhaps some pricing power. It will offer the company the opportunity to build out new avenues of revenue, so to speak, like what they are doing with the telemedicine offering right now. I certainly understand the enthusiasm behind the business.
Hill: F9, The Fast Saga, which is the ninth movie, yes, the ninth movie in The Fast and Furious franchise. It took in $70 million at the box office for the opening weekend here in the U.S. Worldwide, it’s now north of $400 million. You tell me, does this signal movies are back? Because you know me, I’m a movie fan. I’m a fan of going to the movies. This is a great opening. This is the biggest opening weekend since the end of 2019 that we’ve seen. Yet, I feel we’re going to get more data or a better answer to this question in a couple of weeks when Black Widow is out.
Moser: Well, far be it for me to just blatantly disagree with Vin Diesel. He said [laughs] cinema is back. I’m not jumping out in front of that bus and just saying that Vin’s wrong. I think he’s probably right to an extent. I think there is a lot of pent-up demand for people to get out and do all sorts of things. I enjoy the movies as much as the next guy, probably go to the movies, maybe, on average, two or three times a year. I don’t go to the movies that often. I’m not really sure why that is. Maybe it’s just keeping busy. But I feel like a lot of people feel this is going to be something where we’re just going to be doing everything differently from here on out, and that’s just you got to get used to that. I mean, I disagree with that. I think we’re going to be doing some things differently, and don’t get me wrong… I don’t think people are not going to want to go to the movies anymore. I think plenty of people still want to go. I do think that greater market opportunity is probably one that’s shrinking a little bit. I think that, just as the Internet has disrupted so many things in our lives as technology continues to offer new ways of doing things, we have new ways to get things.
Distribution is just completely different today than it was 20 years ago. That certainly plays a role in how people will go to the movies here in the future, and I think that just fewer people really feel the need to go do that. But I do think there are plenty of people that still want to do it, and I think that you have plenty of folks in Hollywood with an interest in making sure that that happens. I think this was a very encouraging step in the right direction. I think we still have a little ways to go before people really do feel totally comfortable with it.
Everybody is a little bit different in how we’re coming out of this. I feel great about being able to just get out and do stuff and have no concerns. Other people feel a little bit more trepidation, and that’s understandable. We all have to get past this on our own timeline, and that’ll play into this a little bit. But it’s definitely encouraging to see that people are willing to go back out. I think if you continue to get good quality content out there… listen, you can make the argument that Hollywood has been not producing the most quality content for the cinema here lately. It’s been a golden age for television. I think movies have suffered. They need to get past this reboot mentality, and they need to get some fresh new franchises in there, some fresh new content, some fresh new ideas, and that might reignite that interest even a little bit more.
Hill: But this is one of those movies that if you’re going to go see this movie, it’s going to be better on the big screen, and same for Black Widow in a couple of weeks. These are the movies that are going to save movie theaters.
Moser: Absolutely no question about it.
Hill: Our email address is [email protected] We got an e-mail from David Baker. He writes: “Around 10 years ago, I decided to invest 10% of my IRA in individual stocks and the rest in low-cost index funds. I picked Amazon, Netflix, Facebook, Solar City, which became Tesla, and some less spectacular stocks and a couple of losers, too. Now, because of the growth of the big ones, my portfolio is 40% individual stocks, 20% is almost Amazon alone. Any advice about taking profits, versus letting your winners run?” I love the fact that David didn’t just highlight his winners. Because that’s what investing is. It’s like I bought these stocks and you know what? A couple of them are still underwater 10 years later. Some of them are fine, they are fine. But then I’ve got this small group at holy cow or are they driving the bus?
Moser: Well, and that’s the way it works. I love this question and the way he sets it up. David, to thank you, first and foremost, because the 10 years ago thing I think, really, that it’s key to this. That is the key to everything is having that time to work for you. Then you look back and you say, “Wow, what just happened?” Because you see those companies that have just been able to run and succeed continue to do well, and it sounds like, based on the email in investing in the way he approached it — with the 10% of his IRA in individual stocks and the rest in low-cost funds — it sounds from that, he’s somewhat familiar with himself as an investor, too, the risk tolerance that he’s able to stomach. We’re all different where that comes into play. I like that he went into this knowing this is how I deal with risk and so I’m going to invest accordingly. Hats off to you, David, very well done.
Let me just say, this is a very nice problem to have. Don’t feel badly about it. A portfolio being 40% individual stocks, I don’t find to be too much at all. I mean, mine is a lot more. When you add in real estate, everything else that we have in our lives, individual stocks make up most of my investment portfolio. I don’t think I have as much tied into Amazon as 20%. But I mean, Amazon is many times over bagger for me over the years. I have owned it for probably 10 or 11 years, as well, and so it’s become a bigger part of my portfolio, as have a lot of other companies. I think one of the ways you can combat this and not worry so much about the fact that you have 20% tied to Amazon or 40% tied to individual stocks, introducing more individual stocks into your portfolio can help spread that risk around and make you feel you’re not over-allocated to one particular class or one particular name.
Everybody has his own perspective on what to do with those winners. There is a point when a winner becomes more of your portfolio than you’re comfortable with, and then you have to decide what you want to do. I think for us, generally speaking at The Motley Fool, we like to take that angle of go ahead and pull the weeds and water your flowers. In other words, you have a couple of losers there that you’d noted. Maybe it’s time to just pull those out of the portfolio and get rid of them, and then you can allocate that money toward other ideas. Another way that you can go about it is to methodically — you can take this slowly — is to sell a little bit at a time of companies where you feel you have more exposure in than you’re comfortable with, and you can reallocate that money toward either individual stocks or low-cost index funds. I think all those are all great options. But at the end of the day, I really do feel that the real solution to this dilemma, diversification really does help in so many different ways. I mean, there’s just so many benefits of being well-diversified, and I would rather be overly diversified than not diversified enough. I think the argument for many people is they say, “Well, if you own too many stocks, well, then you’re just mimicking an index.”
In some cases, that may be true, but it doesn’t mean that if you own too many stocks and then you are an index, that doesn’t square. I think that, for you, take it slow. If you feel you need to whittle down some of those winning positions to just take a little bit off the table, it’s totally acceptable to do it. It sounds, with an IRA, you don’t have to worry about any tax implications, and then chances are probable that you don’t have to worry about any transaction costs either because those are in most cases zero. You can do it a little bit at a time, and I think that’s what I would encourage you to do is, no matter what, just feel comfortable taking it slowly because it doesn’t sound like you need to worry too much. I think being overweight in a company like Amazon — Amazon is going to be around for a while. I feel pretty good about holding that position for the time being. But at some point, you may feel comfortable whittling that thing down a little bit in reallocating to other ideas.
Hill: Jason Moser, great talking to you. Thanks for being here.
Moser: Thank you.
Hill: As always, people on the program have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. That’s going to do it for this edition of MarketFoolery. The show is mixed by Austin Morgan. 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.