Welcome back everyone. Today on the Joseph Carlson
Show, we're going to be reviewing 6 different companies
that are very important to the market.
These are companies that were once considered compounding
machines, the best of the best, the high growth companies that
every investor wanted to own. But each of them has run into a
series of challenges. They've stumbled and the stock
price has come crashing down. So they are fallen compounding
machines, formerly great companies, but now it's up for
debate. Now the market's trying to
figure out whether or not these companies are still great.
We're talking about Lululemon, which is down 53% year to date.
Investors seemingly have given up on this company, but as it
deserved, we have Celsius, the healthy energy drink company,
down 36% year to date. We have Ulta, the beauty
company, down 34% year to date. Nike, down 30% year to date
after falling down even last year.
Where is the bottom for Nike? We have Airbnb, which reported
its recent quarter. It was disappointing, and the
stock is down 15%. This was a incredibly fast
grower. And then of course, we have
Disney. Disney's not yet recovered to
its 2021 highs. The stock is down 5%.
What does the future look like for Disney?
We'll be looking over each of these 6 fallen compounders,
looking at analysis on the companies and determining
whether or not they're a buy. Now, the first one we're going
to be taking a look at is Lululemon, down 53% year to
date. It's hard to believe Lululemon
seems like such a great company. They can charge so much money
for their clothing. Everyone's addicted to the yoga
pants and the at the leisure type of clothing.
So you think this company would be having a great year as
consumers have been mostly strong with a lot of other
businesses. But it's down over and over
again all throughout the year, trailing down 53% over the past
one year. It's down 34 percent or sorry,
38% over the past five years. It's now only up 34%.
So it's underperformed the S&P 500 for A5 year basis.
What happened to Lululemon to have this type of performance?
Well, according to a BMO senior analyst, Lululemon is simply
becoming not cool. So, so I think that's the
question. I think you and I have talked
about in the past, we've talked about on the show this notion
that brands hit ubiquity levels, brands become not cool at a
certain level. And that level, my team has done
phenomenal work on this. So thank you to them.
But what we have found is $3 billion in North America is that
level. And so companies go above it and
then they come crashing back down.
And so Lulu right now at over 6 billion looks much higher.
Now guys going to come at me and say, well, where's Nike fit on
that? And the answer is there are
exceptions. And so we need to figure out, is
this an exception what you look for is whether the sales are
eroding, the quality of sales are eroding, do they have to
discount to get those revenues last quarter?
They did. So.
According to this analyst, once an apparel company goes from $3
billion to above $3 billion in sales in the US, it goes from
being cool to not cool. It becomes too ubiquitous.
Basically, everyone's getting that thing, so the trending
thing or the cool factor is diminished.
It's reasonable to assume that once something becomes too
popular or ubiquitous, it loses some of its uniqueness or appeal
to some degree. But at the same time, I see many
counter examples to this, not just Nike, which of course he
mentions Nike as an exception, a convenient exception, but Nike
has been a staggering exception. The Nike Air Force One shoes are
the most commonly sold shoes in the US and the world.
They are so common that every teenager has a pair of them.
Every teenager wants them. That shows the exact opposite of
the point he's trying to make. It seems that the more people
have these shoes, the more people want these shoes.
You also have the example of of you than other companies like
Crocs. Crocs hit $4 billion in sales.
That's mostly in the United States.
That didn't seem to stop them from becoming popular.
It seems like more and more people that have the shoes make
more and more people want the shoes.
So I'm not entirely convinced that the reason that Lululemon
is going down so much is because it's becoming too popular.
So that's one theory of why Lululemon is doing poorly, but
he also points to another reason.
It's 3 billion of sales at retail.
So what that means? So these companies report their
revenues, but Ralph is a wholesale business.
And so if you strip out the business and you add that up,
they're actually it's, it looks different.
And so that's really important because I don't really care
about what revenues a business recognizes.
I care about what level of consumer spends.
And so a lot of these businesses, you watch Ralph, you
watch Coach, you watch Michael Kors, you watch these businesses
go higher with wholesale, which helps.
Lulu doesn't have wholesale to any real extent, but then they
actually did come back down. And so part of what Ralph did so
well is they appreciate this idea that you can sell less and
charge more and make more money. You can raise your price, and we
learned this in Econ 101 price elasticity.
I can make a lot more money by being more exclusive.
We all want to be inclusive. We want to sell to everyone, but
the reality is you don't. So he's also concerned that the
quality of sales from Lululemon is starting to decline as they
discount their products and give more deals.
And I believe this is more concerning thing to point to.
Lululemon is facing greater and greater competition.
If we were to divide this company into three different
phases, we have phase one right here from 2005 to 2010, the
company during phase one faced almost no competition.
The stuff they were making was novel.
These good looking yoga pants that were seamless, that took
very complex sewing machines to even create.
They were very expensive and only a niche consumer even knew
about them. During this second phase of
growth during the 2010 to 2020, the company was not quite as
novel. It was picking up steam, but
there still isn't any big competitor to Lululemon.
There is nobody directly ripping off everything they did.
So this is a time period where they face some competition, but
it still was not intense. Then we enter into the third
phase of this company, 2020 to current day.
Lululemon's competition has increased dramatically over this
time period. Now competitors are competing
fiercely. There are so many brands you can
list off that are almost exact dulicates or better yet, slight
variations that are some ways better or worse.
But regardless, Lululemon is no longer in phase one or two where
they have organic growth without facing dramatic competition.
When you have dramatic competition, a few things
typically happen. The first of which is pricing
power. Dramatic competition leads to
declines in pricing power. So while Lululemon was able to
raise prices during phase one and phase two, I think it's
going to be much more difficult for them to raise prices during
phase three facing all these competitors.
And in fact, Lululemon might find themselves in that circle
of continually lowering prices. There are now some analysts that
believe Lululemon's actually going to have its first down
year in its history. Look, it's both.
It's, it's very simple. The street thinks that
Lululemon's going to grow double digits into perpetuity.
We think that Lululemon's U.S. business is going to turn
negative next year for the first time ever.
And why is that? Well #1 The athletic leisure
category used to grow at a mid to high single digit rate before
COVID, grew to a double digit rate post COVID.
Now after COVID, you have that COVID hangover, if you will, and
that's creating a slowing in the growth rate for the backdrop of
the industry. In addition, you have companies
like as I said earlier, Aloe and Viori, you're seeing it all over
the place in terms of big cities, they're gaining market
share, particularly Aloe in a big fast manner.
So that's creating an additional headwind.
And I think what the street is missing is they're not
projecting U.S. sales to go negative next year.
We are that's why we're, we're massively below, below the
street. And when you look at our
numbers, so the the total growth rate for the company by the
consensus is over 11% growth for 2025.
We just think that doesn't happen.
If Lululemon is priced for 11% growth and it actually turns
negative next year, the stock will be re rated even lower.
And This is why it's important to know that just because a
stock is down in price doesn't necessarily mean that it's a
good buy or a good deal. Lululemon is down 52% and
there's still a lot of risks in this company.
I agree with the analysts that there is a risk of the company
turning negative next year. The growth rate is decelerating.
If we get negative growth in 2025, that could be trouble for
the company. When I look at Lululemon, it's
still a stock that trades at 16 Ford PE ratio.
Given the risks of an apparel brand facing new competitors
with slowing growth, I would need a price tag much lower than
this one. I would want to buy this company
around A10 Ford PE ratio. That seems super cheap, but if
it never gets there, that's OK. This one for me is a pass at
this price point. It's just too risky now.
Next up we have Ulta Beauty. This is another company that was
once a compounding machine. It was a very dependable company
with fast growing free cash flow and at a healthy valuation.
But the stock is now down 34% year to date.
So it's getting crushed this year.
It's one of the worst performers.
And we want to take a look why. Now when we look at the
quarterly trailing 12 months of this company, we can see the
gradual revenue growth over time.
It looks really good, especially because this part right here is
because they had to close their stores during COVID and it
recovered rapidly from that point.
But you're starting to see a similar trend here.
The growth seems to be decelerating like it did with
Lululemon. And I believe that Ulta is
running into very similar problems.
Altas facing increased competition in the same manner
as Lululemon. Most of that competition seems
to be coming from their largest competitor, Sephora.
The main thing is, as you you said it, that the competition is
really heating up. We've seen Sephora really ramp
up its store count with its partnership with Kohl's and a
much faster rate than Ulta's been ramping up its partnership
with Target. We've also seen the rise of
Amazon and digital players capturing share.
And it's really LED Ulta to pull on a number of traffic drivers
such as heavier promotions and marketing spend to get those
consumers back in the stores. And what we're seeing and what
we're we're fearful of it's, it's going to become a much
bigger margin, margin hit than than we originally.
So Ulta falls into the same challenges as Lululemon, rising
competition, pricing power going down.
They're having to give out discounts and promotions and
deals to get more customers, which of course, in turn causes
their margins to go down. And no investor likes seeing
their businesses margins go down.
And even though this one seems like it's at a deal, even though
it seems like it's a high quality company at a discount,
I'm still not buying this stock. And that is because at the end
of the day, it is a retailer and I don't like investing in
retailers. There's only two companies that
you can consider a retailer that I currently have a position in.
One of them is Amazon, which is obviously quite a bit different
than a normal retailer with a massive AWS business with a
massive advertising business. And then there's also Costco.
Now some of you might say, Joseph, that's hypocritical.
Why do you say you don't invest in retailers like Ulta, but here
you are investing in Costco? Costco is truly unique in
retailers and in fact, it's so unique that I don't consider any
other physical retailer to be anywhere close to Costco.
There's some that are somewhat close, like BJ Wholesale or
Sam's Club, but Costco is by far the most unique retailer.
Not a specifically because of their subscription model.
It's a membership model, that's what they call it, but it's
truly a subscription model, just like a software company, SAS
selling software as a service like Intuit or like Adobe.
Costco has that for retail. Now that's something truly
unique. Not many companies can pull this
off because not many companies have the benefit of the customer
loyalty and offering that Costco has.
So they have this big wide Moat where they can offer something
that no other retailer can offer.
The shopping experience is not comparable to other companies.
And then they wrap that into a membership model that further
supports their business. When I look at this on a
trailing 12 month basis, the membership model has generated
nearly $5 billion of revenue and this is extremely high margin
revenue. It's basically all profit.
They don't have to do any type of promotions to advertise this.
You don't really see commercials on TV.
They went over their customer organically and at the same time
they can raise prices on this just like they announced couple
weeks ago, they're raising prices by 8%.
Now this is a small price raise, but again, this is very high
margin. All of this will basically hit
the bottom line. So Costco's a company that the
reason that I hold it is because it's like a software style
company with a subscription model wrapped into a retailer.
When I look at companies like Ulta, it seems like it's at a
great valuation. It seems like it has good
prospects, but it's also facing increased competition from
Sephora. It doesn't have any type of
subscription model. It has a customer loyalty
program, but that's not the same as a subscription model.
So even though Ulta is trading down, I see more continued
struggles with margins, revenue growth slowing due to
competition, and I think the cash flows may stay flatter for
longer. So even though this one seems
cheap, it's another one that I'm not going to be jumping in at
this point. Now Next up, we have Disney.
This company seems to be making a bit of a comeback, but it's
still struggling this year. When we look at Disney, it's
down 5% year to date. At one point, it was trading at
1:22 and it's traded all the way back to $86 per share.
So we were getting the recovery. It seemed like things are back
on track, but then the most recent quarters, Disney's traded
down. Now I have to say, when I look
at Disney, I've done a lot of analysis on this company and I
continue to believe that overall, Netflix is a better
bet. And that is where I've had my
money. At the start of this year, I
even sold a little bit of Apple to buy more Netflix.
This is a massive position of mine.
It's continued to grow and I think that Netflix will continue
to be the streaming leader. It's a more simple company, more
predictable, and it's up 35% year to date.
But Disney's one that I've never really counted out.
It's not one that I've ever been bearish on.
It's one that I continue to look at because I think there's a lot
of potential here and there's a couple things that are moving in
the right direction for Disney. First of all, the box office
hits. Deadpool and Wolverine crossed
$1 billion at the global box office.
This movie is a mega success. It's the most profitable rated R
movie ever. That's really incredible from
Disney. Now.
They've had a bunch of flops leading up to this, but now
they're seeing the hits. You have Inside Out Two and you
have Deadpool and Wolverine and this one's still going.
It's still making money. It'll probably make a couple
$100 million more in the box office.
Then they'll put it on streaming and make even more money and
streaming revenue over time. This is what we want to see from
Disney. Fun movies universally love that
make fun of itself. It's self aware.
They make fun of Fox and Marvel in it.
We see this is a mega success. It seems like the creators are
back on track here now. Another thing that Disney's
planning on doing is further investing in their parks.
In the Anaheim park, they're making a Monsters Incorporated
theme at Disney that seems like a really fun addition to the
park. It'll attract new visitors and
Hollywood Studios, complete with Disney's first suspended roller
coaster. So brand new roller coaster type
that makes them more competitive with the faster, more extreme
roller coasters that you see at Universal.
Disney mostly has more mundane smaller rides for little kids,
but a suspended roller coaster seemingly would be more
exhilarating. So that's another thing they're
adding to make the park more dynamic.
And these are big new investments in their parks, the
scope of which are above 10s of billions of dollars.
And this is what Disney should be doing, investing in things
that they know they're going to get a good ROI.
Investing and expanding their parks is a guaranteed money
maker. Even though there's some short
term cyclicality and demand, there's some seasonality.
The parks are money printers. So I like seeing Disney spend
more money investing in their parks.
The other thing that I like seeing for Disney is the growth
in their streaming subscribers. Now this shows all their
different digital media properties, but if we cross out
Disney Hotstar, which is like the cheaper version of it and
Hulu, you can see Disney domestic and international.
This is growing 12% year over year.
That's a lot of subscriber growth.
So they're still growing their subscribers for their core
streaming service. And then not only that, they're
growing the amount that customers are paying while
growing the number of customers. So you're seeing growth in
subscribers and the average revenue per subscriber, both of
these metrics moving up at the same time speaks really well for
Disney Plus. And they just raised prices
again. They're going to make more money
as I think most people be very reluctant to cancel their Disney
Plus. Now when we look at the revenue
by segment of the company, up until Q2 of 2023, they broke it
down from media and entertainment into parks.
But now we have these three different categories.
Experiences is now the parks. You have sports, which of course
is ESPN and then you have the entertainment, which is all the
streaming services. Now the parks is mostly
flattish, but that's still good. That's high income, a money
generator for the company. You have sports, which is
growing a little bit year over year as they're growing their
ESPN and you have entertainment, which is a portion that I'm the
most excited about. This is their box office, it's
their streaming services. And as this portion grows, the
predictability of Disney's earnings gets better and better.
I like what I see from Disney. Now.
We also see the free cash flow coming back.
On a trailing 12 month basis. They've made seven $96 billion
in free cash flow, so they're now again highly profitable with
their free cash flow, and they're projecting that this
will steadily go up over time as they build their streaming
service. With the stock trading back down
over the past couple of months to $86 per share, I think Disney
has crept back in to a buy. I see positive catalyst as
streaming grows and becomes profitable.
The parks are flat and that's the part where people are
selling the stock. But I believe that's temporary.
Disney will continue to grow the parks experience over time.
There's not going to be other companies that build parks like
Disney. Disney does.
I think at $85 per share, Disney's a buy.
Now moving on, we get to Airbnb, another compounding machine that
has fallen this year. Airbnb is down 15% year today,
especially after their most recent earnings.
They basically said that things are going to slow down a little
bit. We don't know how much, but
they're just going to slow down. That spooked investors, so they
head for the exits. The biggest problem I have with
Airbnb is a couple things. One of them is that the company
is not that diverse. They have one way of making
money and that is by short term rentals.
Now the CEO of the company is moving into different
categories. He's probably going to do long
term rentals, maybe hotels, maybe more of a management
thing, We don't know. But he said that every year
they're going to add more and more different revenue items to
Airbnb. So that's exciting for Airbnb
investors that takes a long time to build out and even longer to
gain customers. And when we're looking at this,
I'm comparing it to booking holdings.
Airbnb currently trades at a 27 Ford PE ratio while Booking the
company I do invest in trades at a 19, so bookings at a much
cheaper valuation even though they're growing around the same
rate. Booking grew at 7% revenue last
quarter and Airbnb grew around 10%.
And This is why I didn't buy Airbnb at this point.
So even after this 15% decline year to date, I'm still not
buying Airbnb to buy this company.
I'd be looking at a price point around a 24 PE ratio, so it
would still have to come down in price quite a bit now Next up we
have another fast growing company.
Very exciting one that was supposed to be monster two point
O that is Celsius, the healthy energy drink company.
Now we look at this company and it's traded down 35% year to
date. Over the past five years, it's
up to 1600%. Celsius growth and dominance has
been incredible over the past couple of years, but I'm fearful
that the investors buying in now have missed the window of this
incredible growth. It's true that the revenue has
grown dramatically since 2020, but remember, when you're buying
a stock, you're not buying the previous revenue, you're buying
the future revenue. And the revenue is slowing.
It's decelerating. My issue with Celsius is I still
believe it's victim to the caffeine bubble.
This is a call I made early this year where I said there's so
many companies like McDonald's and Starbucks and Dutch Bros and
you name it, getting into highly caffeinated beverages, making
energy drinks. You have Monster Energy and
Celsius and you have a bunch of other brands doing the same
thing and eventually that level of competition is going to catch
up. So you see the common theme
here, Competition catching up to these fast growing companies
lowers their pricing power. When pricing power is lowered
and they don't have that organic growth, eventually the growth
slows down and if the company is not priced for slowing growth,
the stock price will plummet. So with Celsius, even though the
company's down 3540% year to date, I would not be buying this
company. I still think it's incredibly
risky. It's still trading at a 43 Ford
PE ratio. This company has a long ways to
drop even from here if the growth continues to slow, which
I think there's a good chance it will now finally we get to the
last one, Nike, which is currently down 30% year to date
and Nike's had a very difficult time.
If we look at the stock over the past five years, it's literally
gone nowhere. It's down 11% on A5 year basis.
I believe the problem with Nike is simply that the company is
too expensive, and it has been way too expensive for a very
long time. Investors got used to seeing
this company at a 40 or 50 PE ratio, and they assumed since
the company traded at a 40 or 50 PE ratio last year, it'll do the
same this year. But that doesn't always hold,
and we shouldn't use previous PE ratios to justify current PE
ratios. Nike now trades at a 24 PE
ratio, even after dropping 30%. Even after going nowhere for
five years, I still think the company's very expensive.
It should trade much lower, 15 to 17 four PE, given the level
of competition the company faces now.
It's also new with on Brand and Hoka and Lululemon and you name
it, competing with different aspects of this company.
Nike now faces more competition than ever.
The growth for the company is more difficult than ever and
trying to justify this one by how much it's dropped or what PE
ratio it used to trade at is not the way to look at this company.
So Nike's another one that for me is a pass.
And you see some common themes here.
When I'm looking at compounding machines, the most difficult
thing for these companies is to fend off competition.
Competition is always the most difficult part of investing in
stocks. And that's why when I look at
compounding machines, the very first, the very top attractive
attribute I look at is monopolies.
Companies that have a huge market share, dominant moats,
they own the industry. This is why I put the majority
of my money in companies like S&P Global and Moody's.
There's no up and coming competitors to S&P Global and
Moody's. There's no companies that can
take their market share of credit ratings.
MasterCard and Visa. There's always talks of new
payment methods, but MasterCard and Visa continue to own the
dominant market share. You look at companies like
Intuit, which have over 80% market share of things like
TurboTax and QuickBooks. These are the ones that I
typically go into because I think they make the most
attractive investments. So with My Portfolio, I'll
continue to focus on companies that have dominant market share,
brand value and pricing power. And you can measure that by
whether or not they're raising or lowering prices.
Companies lowering prices is a clear indicator that they're
lacking in pricing power. Now that's a review of these
companies. I hope you enjoyed it.
That's all for now. See you in the next one.