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In this segment of the Motley Fool Money podcast, host Chris Hill and senior analysts Aaron Bush, Ron Gross and Matt Argersinger cover two interesting companies focused on the Web. They first reflect on the latest news from the world of streaming music, where national users will be more familiar with Spotify (NYSE: SPOT). But head to China, and it's a completely different song.
Tencent Music Entertainment has asked to be open to the public and its 800 million monthly active users have shamed the major US players. Fools consider the business model, which is not quite the same as the streamers we know best, and speculate on the strength of the company's performance.
Then it's over Stitch Fix (NASDAQ: SFIX), an online fitness service whose customers can set up recurring shipments or choose an "on demand" option. It looks like a lot of people are buying their clothes – quarterly earnings have increased 23% over the previous year. But Wall Street wanted a lot more, and the actions were bludgeoned.
Fools attempt to separate the underlying business from the hype cycle and examine the changes that the business has undergone as it matures.
A full transcript follows the video.
This video was recorded on October 5, 2018.
Chris Hill: Spotify has 180 million active users per month. If you think this is impressive, you will be interested in the upcoming IPO of Tencent Music Entertainment. The company has applied to be listed on the US stock exchange with one of the key data points, Aaron, being that Tencent Music has 800 million monthly active users in China.
Aaron Bush: Not bad at all. Tencent Music is essentially a holding company for four of the largest music services of various types in China. Yeah, 800 million active users a month, it's crazy, and it continues to grow pretty quickly. It is anyway in China and in the greater Asian region. So, yes, this should be a pretty massive IPO.
What's interesting about society for me, besides its obvious dominance and the fact that it's growing rapidly, is its profitability. Rather than relying solely on subscriptions and advertisements such as Spotify, Tencent Music derives most of its money from virtual gifts sent via live streaming. Live streaming has been a big trend in China lately. It seems that Tencent Music is also in the game. In addition, online karaoke is an important source of revenue and song sales. So it's a type of music company that's very different from the one we're seeing here in this country.
They are also more profitable. The gross margin is also higher than what we would see in a Spotify. It will be really interesting to see how this company will behave once it's public.
Hill: Difficult week for Stitch Fix. Fourth quarter apparel online revenue was 23% higher than a year ago, but Wall Street was looking for more. Shares if Stitch Fix drops 40% this week. Matty, is it an overreaction? Because on the surface, it looks like one.
Matt Argersinger: It sounds like an overreaction to me. But you have to go back to the previous quarter, where revenues were up 29% and active customers up 30%. This excited the investors. The stock was up 40% from this quarterly announcement. So, to move on to this one, and as you said, revenues grew by 23% and active customers by 25%. It's a pretty strong deceleration. I think a company like Stitch Fix, which, like a lot of growing companies, has received quite a high valuation.
At the same time, I am looking at the stock now, after the blight that has occurred this week, and your business is still growing by about 20% or even 20-25%, for just over 2 times sales. And it's profitable. I know David Gardner is very excited about this company, and Tom is also excited about it. It is an interesting disrupter in the apparel sector. This is an aspect that interests me now that, of course, it is down 30% from its peak.
Aaron Bush: I think the concept of what they do is fascinating. It is essentially an IT company that sells and distributes clothing. But I think they find that it is not so easy to continue on this momentum. For years, Stitch Fix has relied heavily on word of mouth marketing to build its brand and revenue. Now, even if it's the best dog, there is more competition than ever. They have to shell out more for customer acquisition than ever before. I think we're starting to see some of these issues appear in the financial statements. Retention is not great either. They have problems with which to work, even if it remains a very interesting idea.
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