Right Trend, Wrong Stock
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it's easier to add an app to infrastructure than infrastructure to an app. Think about your competition or who can replace you might not be a peer. Like what's the entity that has the stuff, can do the stuff that we do and can possibly do it with better scale and everything else because it wasn't really a, hey, some other player in the space outdid them. It was the existing infrastructure was able to come in and say, we appreciate you doing all the product market fit and the R&D and all that and we'll take over now. Thanks a lot.

I'm Mary Long, and that's Patrick Badalotto. He's an associate professor of instruction at the University of Texas at Austin's McCombs School of Business, where he teaches accounting. He's also a returning guest to Motley Fool Money. My colleague, Ricky Mulvey, caught up with Badalotto for a conversation about what we can learn from companies that brought great ideas to life, but struggled to turn those ideas into successful, growing businesses.

They also talk about what went wrong with Blue Apron and Beyond Meat, when to be wary of the Lynchian approach, expanding your definition of competition, and the importance of testing out ideas with other people.

So we had a discussion on the show about a month ago. I was talking to Anthony Chavone specifically about apartments in multifamily REITs in the Sunbelt area where investors got a trend right, but the stock ended up being kind of a loser, which was a lot of people are going to move to the Sunbelt area when you can work from home, things are a little bit sunnier there.

And what's ended up happening is there's been a little bit of a period of overbuilding, remote work, sort of the demand for remote work has evened out, I would say. And now you have a stock like MidAmerica Apartments, which has gone down. Not a total loser, but people who invested money at the peak have lost money. So...

This is not a unique phenomenon, though. There are times where investors will get a trend absolutely right and completely dead on. But as my colleague Jim Gillies would say, the price you pay matters. At a high level, when do investors get a trend absolutely right, but they see their stocks end up being total losers, even though they were right on one account?

yeah i want to add in one thing to the price you pay matters which is i think the company like the horse you're riding really matters too that like the trend can exist but if if you're if you're betting on a company that doesn't actually sort of have a competitive sustainable advantage it might be one that you know has some years of performance and growth and everything else but it just doesn't pan out

We talk about this extensively in class. It's honestly one of my favorite conversations. And I know we're going to get into this in more detail, but some of the examples we've used over the past couple of years, I'll just give two and then we can add to this as needed. One of them is the meal kit trend, but I actually want to broaden it. I would say the trend that happened was consumers demand

for convenience when it comes to food, in addition to better product curation. And so meal kits seem to perfectly fit that. I want more convenience and I want more product curation. A second trend that we've recently discussed the last couple of years is the trend towards non-animal based meat and just the idea of, hey,

People have kind of shifted their food preferences. And so obviously we still have massive amounts of individuals consuming animal-based meat, but there have been more in a trend towards non-animal-based meat, plant-based meats arising. So those are two trends we've talked about. And we can jump in and grab and discuss those companies as you want.

Before that, and Blue Apron's an interesting one. It makes me think of Kara Swisher has this line about how a lot of tech innovation is just assisted living for people in their 20s. And meal kit delivery kind of falls into that. We'll get there in a sec. But one of the quotes you brought up when we were preparing for this was from Charlie Munger. And he says, quote,

Some people collect stamps. I collect insanities and absurdities, and then I avoid them. And it's amazing how well it works because I've gone by the examples of all these people that are more talented than I am. If I had set out to invent more quantum mechanics, I would have been an also-ran. I just set out to avoid the standard stupidities, and I've done a lot better than many people who mastered quantum mechanics. It's a way for mediocre people to get ahead, and it's not much of a secret.

Either just avoid all the standard stupidities. There are so many of them. End quote. Munger and Buffett have this wonderful ability to make incredibly difficult things sound simple and almost easy.

I think this plays into what we're talking about, but what are the standard stupidities that Charlie Munger is referring to? Yeah, I think he's, I mean, classic Charlie Munger is self-deprecating. I don't know that it's a way for mediocre people, but still, what a great way to capture just such a core human idea. And I think the main one or what I try to talk about in class is hype cycles.

where you have just a variety of factors that are going to drive the growth rate of a company pretty high. One, it's new. Two, it's just building off a low base. And so basically almost anybody can achieve like a high growth rate or a compound annual growth rate. And three would be, it is a trend or a fad. So it's like, it is happening.

And then we assume what I believe this phrase is referred to as a straight line instinct. Like we humans, like if you give us two data points, we just keep extrapolating in a linear fashion. It's like we can't help ourselves. So we extrapolate trends when they don't exist. It's not that the growth didn't happen. It's just that just because that growth happened is not an indication. So like be careful with growth rates, be careful with things starting out, be careful with hype cycles and fads and trends, right?

And my advice would be like always try to get at the essence of not what was the growth rate, but what was the driver of that performance and whether or not the specific driver or drivers can continue in the future. So the common stupidity to avoid is like trend extrapolation or, you know, getting overly excited about growth rates when the primary driver is either something that won't continue or just that it started low. And just mathematically, you're going to have a high growth rate.

Yes. Growing 100% of your revenue starting at $10 million is a lot easier than growing 100% of your revenue at $1 billion. And that was certainly the case for Blue Apron, which was a meal kit delivery went public in 2017 for about a $2 billion valuation. It was delisted in November of 23. I think it has a private owner now. And before going public,

Blue Apron got some investors excited with exactly what you're talking about. It made about $80 million in 2014 to almost $800 million in revenue in 2016. So investors saw this explosive growth. They saw the trend.

More and more people are going to get these meal kits delivered to their door. And when you look at the S1, you can see promises of great unit economics, scale and growth. And what's going to happen is we're going to spend a lot on marketing up front, give people free meals to their door. They're going to realize how convenient it is and then become long-term customers. That turned out to be kind of right.

The thing they also promised was a hard to replicate value chain because they worked with a lot of suppliers. That one I have some more doubts about. Easy to be right in retrospects.

But why didn't these promises, you think, pan out for Blue Apron's IPO investors? What went wrong? Yeah, great question. And I always try to distill things down to two main concepts. We've actually talked about this before. The drivers of a company are the revenue, their expenses, and then any risk they face. And so I want to kind of break it open in those two pieces. One is we talked about low base. They could drive that revenue growth that you walked us through. They are able to do that because they're starting out. They were able to attract people.

But you also nailed the other part there. That was heavy with promotions. That was heavy with marketing. And I think just the tendency of many of the consumer demographics they were trying to get was, hey, I'll try this. I mean, our household did. We'll give it a shot. We'll try the meal kit. Specifically when it was deeply discounted and there were so many promotions. The challenge, though, to that is not only, hey, it's going to get harder as it gets bigger, but I think the other huge challenge they faced, and I know they got some pushback across time on their conference calls on this, was

was customer retention. I mean, I think it's a company where I want to say like, no, no, really no problem getting people to sign up and certainly no problem when we were giving heavy discounts and promotions, but, but the challenge was to what extent did they retain the customer? Uh, what that, the challenge they had there. And the, the reasons that's hard to do is one, just there was increased competition at the time of others trying to do something similar. I don't know. There was that degree of differentiation. Uh,

But then two, in many ways, the individual who gets the meal kit, I mean, it's kind of funny. I'd argue this is almost existential to what they do, but the individual gets the meal kit.

could always, you know, keep the recipe card and then think about like, Hey, if I really liked this meal, like, thanks so much, Blue Ape. And I appreciate you exposing me to this particular dish, but like, I can keep this and make it myself. Is there incremental convenience of getting it all packaged once we've kind of settled on, you know, the eight or nine meals that a particular household likes, or is it just more of a, Hey, give me some variety, give me exposure. And then unfortunately it's like, did they educate their user to just

do it themselves in different ways so to me that's kind of a variety of challenges to revenue if i can i want to jump into the expenses uh part of it too which is yeah i mean you read this story about the potential for unit economics and we'd all love to hear that but i think at the end of the day it's worth noting that they're still selling commodities i mean literal commodities they're selling food that's not branded that's just ingredients to a meal

And as a result, I think the best kind of way to understand their unit economics is to jump right over to the industry that's been doing that for centuries, decades, the grocery industry. And the grocery industry has done fine.

But with a reality that it's always low margin, always low margin, and they've got to execute on scale. They've got to get huge. And the established grocers, I mean, the Walmarts of the world do a phenomenal job at this, but they do so because of their scale. So they have that same challenges with the supply chain, keep things fresh, everything else. But they're doing it at a scale that's, I mean, I don't know the math, but it's so many times over what Blue Apron's potential is, even if everything went well.

And the second thing I would say there is that Blue Apron introduced major costs that their competition, the grocery stores don't have. And those are really two. One is customer acquisition costs, you know, to get us in and then to keep us there. We go to the grocery store near us because we're

Because it's near us. It's on our commute. It's near our house. So they don't have to spend heavily on customer acquisition. And then the second one is the last mile delivery. The last mile delivery of, you know, of stuff that has to be kept fresh. You know, that's here in Austin, Texas. Like it's not going to work sitting in a truck that's 120 degrees. Like you've got to keep that stuff fresh. So that's expensive. You know, very time sensitive stuff.

condition-sensitive delivery. And those are two things that their competition in the grocery store just doesn't have, but a part of a challenge to the unit economics for the broad business of the meal kits of the Blue Aprons. A couple things there. One is, I agree on the hard-to-replicate supply chain, or the hard-to-replicate value chain that was promised by

in the S1 actually was already replicated. Grocery stores have hundreds of suppliers. And just because you have a bunch of suppliers, that doesn't mean it's necessarily impossible to replicate. Myself, I probably couldn't do it. But in a business, you probably can. And you mentioned Walmart. Yeah, they do have a difficult to replicate value chain because they built out their entire cold chain.

If you need to keep things cold in Austin, Texas, or I'm out here in Colorado where it's actually very difficult to transport ice cream because our altitude. So when you're a mile in the air, things bubble up and it's difficult to maintain that. If you've had a bag of chips in Denver, you know it blows up and that can be difficult. And Walmart's able to do that because they have their own cold chain, which is necessary for produce, frozen goods, all of that kind of thing.

And with the last mile delivery, I wonder if things would have been different if they didn't do it. If they just had stations where what the grocers figured out is that people want to go up to the grocery store. A lot of them actually don't want to shop for their produce. They want to be in and out and done. And you could have had Blue Apron stations, maybe three or four in major metropolitan areas where you go up, you load up your things, and then you can go home to make your meal kits. I mean, I agree. But I think I also almost want to push back a little more on the existential threat, which is

It's really your first point. And if I can synthesize these together, it's like, but isn't your grocery store already that station? And I know that this is an example where first mover was a disadvantage. I just never sat in a meeting, but I'm confident the grocery stores watch the meal kit thing unfold. And then we're like, all right, so what day do we change that aisle of our store to put these in? Because

it already is that, right? And so now here in our HEBs, the private grocery here that's all over Central Texas, like they all change at some point to have right at the front of the store, you know, meal kits, totally prepared meals, you know, the heat up ones. And I would argue in many ways, way more convenient than the Blue Apron, because if your household wants to just pop a meal in the microwave and eat it, like you can do that. If you want the thing you could walk out of the store eating, you can do that. If you want to get the meal kit. So it's like,

I've argued in class that like the HEBs are basically the platform. Like they're more like Apple where they're offering us whatever we need on one platform, true convenience. And even if, like I agree with your point about reducing the last mile, but like isn't that still inconvenient of like, oh, I have to go to this pop-up kiosk for Blue Apron and it's in a popular city like Austin, Texas or Denver, Colorado.

But it's like still, I'm just getting that one thing there where like I could go to my grocery store and I could get any of these things and I can change each week just as suits me or my family's needs. The other bear case I would offer is that when you're doing a meal kit, all of the portions are tightly controlled.

So for many people, you're not getting leftovers. And food is something we like to have a lot of control over. That's why Heinz ketchup has the squeeze bottle. For a lot of kids, that's the first time they get to control their food is when they can squeeze exactly how much ketchup they like. And I think that trend sticks with us

And with a meal kit, you kind of lose that. And I think for a lot of people that tried it but didn't necessarily want to continue with meal kits forever, there's an element of, you know, I was full for a little bit, but it wasn't exactly what I wanted. I didn't get any leftovers, which I'm used to when I'm making dinner at home, making some hamburgers and pasta and vegetables, that kind of thing.

Honestly, I've never thought about that angle. It makes sense. It's like the control, like the ability to choose when you stop is kind of a part of the control the consumer likes. I mean, they initially pitched it as like the reduction of food waste. And so, you know, the benefit of that was that, yeah, it's all packaged and they control it. But but that then the consumer doesn't have to worry about, you know, you're buying that thing of shallots, you're using one stock and you're never touching it again. So but I but I agree there's you know, there's layers to that story, too. We'll see if we can bring this to something that's happening today. Yeah.

which is a commoditized product, a lot of marketing that gets into people that have to use that product, and then low switching costs. And I wonder, I'll bounce this off you, I wonder if there's a tie to these sports gambling companies.

where, you know, you have a huge incentives for people to join these platforms to bet on sports. Right now, there's a lot of excitement about them. Many of them still have a very difficult time making an operating profit because they have to spend so much money on advertising. But the key difference I would say, and I don't know if it's powerful to get them over this hump

is that they are offering a incredibly dopamine-inducing addictive product compared to the meal kit delivery here, even though some of the unit economic stories are kind of the same.

Yeah, that's a fascinating link, Ricky. I agree with your perspective there that the heavy promotions, the massive spend to bring in customers is very similar. But the difference is, yeah, I think in many ways, I'd argue the meal kit thing was like the opposite of an addiction where at one point you're like,

If I'm cooking the food and doing all this, why am I paying extra and I have to do my own dishes anyway? Why don't I just go to a restaurant where your immediate gratification is almost going to drive you away from a blue apron at one point? But in gambling, I think that's fascinating. I'd add one layer to that too. It would be that consumer data. So my guess is that...

The data and the specifics that those companies can collect about what bets and when they're doing it, I wonder if that's another avenue where they can focus better on customer retention because the data they're collecting about the users, the customers, could

Give them the, how do we market? What do we do? What's the right time to offer them that next offer or whatever else? In some ways, that might be bad for society, but I think the business, the use of data and just the human psychology likely gives that company a better chance to sort of, I think, a sustainable business model there is the customer perspective.

consistently gambles you know never so much that they're going bankrupt or losing their job but you know consistently is taking a small part of their paycheck and losing it i believe their revenue is just the when we lose so it's like they they almost want like the person to have a you know like hey every every week i'm going to gamble 20 bucks but just 20 bucks but i'll keep coming back so i think you're right the dopamine hit the the consumer data that stuff gives a little bit of an advantage

At the same time, I mean, if it's a crowded space, it seems like an industry that's going to struggle with true competition. But if it can consolidate, you know, can they do things like reduce the promotions and reduce all that, reduce the marketing span and just kind of, you know, will the, will

Will the final leaders in the space, the ones that make it out, will they be okay because the human condition is positive towards their model? So the key lessons as we turn away from the Blue Apron story, I would say is be wary sometimes of the Lynchian approach. You may have seen a lot of advertisements for Blue Apron. Then you see a lot of sales growth. Maybe you try the product and you like it. Then you have to ask deeper questions of what are the actual unit economics? Who are the competitors here? Does this business have a sustainable competitive advantage? Because oftentimes you can end up

like the scooter business? The one thing I would say is with the competitors, I think we're all like, oh, it's Blue Apron and HelloFresh and Marley Spoon. But I mean, back to our earlier conversation, like what I try to instill in the classroom is never think about competitors as like just your literal peers. Like it's really who existing in the space. And this answer, we all know now is grocery stores. But I think when I first covered this class in 2017, I came up with the phrase, I thought that a good job, like it's easier to add an app to infrastructure than infrastructure to an app.

Think about your competition or who can replace you might not be a peer, right? It might be like the other, like what's the entity that has the stuff can do the stuff that we do and can possibly do it with better scale and everything else. Because it wasn't really a, Hey, some other player in the space outdid them. It was the, you know, the existing infrastructure was able to come in and say, we appreciate you doing all the product market fit and the R and D and all that. And we'll take over now. Thanks a lot.

So they participate in the downside risk. They blew apron of like spending and all that and never got to participate in the upside in terms of like benefiting from this secular trend. Back to your kind of the introductory point here, like when the trend is right, we still want convenience. But the company that wasn't the beneficiary of that specific trend.

Being a first mover is not always an advantage. And it reminds me of the, it was a Netflix executive when asked what their competitor, who their competitors were. I think basically it was, it was tick tock and sleep, tick tock, sleep in YouTube because, because at that point they're real competitors or things that take away from your time. Let's go to beyond meat.

This is another example where this stock was on fire for a little bit. Revenue growth was looking good. It was even getting to an operating break-even point. Investors could see revenue rising. The company's getting more efficient as it strikes deals with Walmart, fast food chains, including McDonald's and Burger King's.

So you're seeing the unit economics get better. You're seeing more widespread adoption. And yet the company has been a loser for many of its long-term investors. Why is this one another case of right trend but wrong stock?

Yeah, I want to flesh out a little bit what you said. As an accounting professor, I can't help myself. I love the financial statements. But if you chart them up to 2019, there's two things that you mentioned, Ricky. One, which we commonly see, just the explosive revenue growth. And it's actually increasing at an increasing rate where I think it was over 170%, then 240% up to 2019. So that's good. But in addition to that, you actually see improvement in both their gross and operating margin. And so it's your point, I'm just repeating it, that

hey this is a company that seems to be improving their unit economics and my first take there is that well the unit economics should improve because at the end of the day what's the essence of the beyond meats of the world well they're they're manufacturing and processing food and so their their fundamentals should work like a manufacturer and

You know, in like a managerial accounting lens, we would say that your cost allocations, if your units produced is small, you're going to have high cost per unit and you're not going to look that good in your margins. But as you grow your units produced, which they did, you expect the economies of scale to kick in. And then the cost per unit goes down. Gross margins get a lot better. And even operating margins can move, as you were saying, towards break even. And so they've got a situation where it's revenue growth and growth.

improvement in overall efficiency, which is pretty fascinating. So it looks good, it looks great, but it still gets back at, as we cover in class, like what were the drivers of performance? And I want to go through, I kind of did the expense side there, but I want to talk a little bit about the revenue.

One of those drivers was actually that they were expanding channels. So they were adding like the major supermarkets, the major restaurants. And as you do that, you get a bit, you get like a big hit. And in some ways it's like the perspective I've offered there is it's not really about the consumer's interest whatsoever.

the consumer alone's interest in non-animal based meat, it does still come down to like, ultimately who's your distributor? Like a question I've asked is, you know, who's directly bought products from Beyond Meat or Impossible Food? And a bunch of people raised their hand saying they've tried it. And I was like, I don't, you know, are you the buyer of Kroger or whatever else? I usually interject with a question.

And the answer is, well, no, we've actually bought them through a third-party distributor. And so they did expand their third-party distribution. And I'm mentioning this because I think we have another example that actually fits the same challenge here. But it's worth us looking at, reading in their financial filings that if you're growing through others and the others are the direct access to your customers, that's a risk that

Two things really is that could somebody else come in and undercut you and the distributor may not be as wed to your brand or to...

At some point, you're going to saturate those channels. You're going to add all the Kroger's and the Walmart's and the Albertson's and whatever else, the big grocers. And then you're not going to have that kind of amazing growth. You might have just more slower and steady growth. So the challenge was actually there at the beginning that like, hey, is the revenue growth something that might be hard to sustain?

I'll push back on that because there's a lot of consumer products that rely on other people to distribute them. We'll talk Coca-Cola more later, but you could have made a similar case about Coca-Cola decades ago, which is that, yeah, they have distribution plants, but you're really relying on convenience stores, grocery stores, and restaurants to distribute Coca-Cola. They've managed to do pretty well with that.

And yes, you can have a similar formulation. You can go get a store brand cola, but it doesn't hit quite the same as a fresh tasting Coca-Cola. And maybe that could have been true for Beyond Meat. Yes, you could have a store brand, but they did have a proprietary sort of recipe that maybe vegetarians would love or people who want to eat less meat enjoy significantly more than the store brand product. So I can also see it going the other way.

Yeah, I love your perspective. Really appreciate it, Ricky. But I want to push back, which is that I'm not sure that Beyond Meat is the Coca-Cola here. And I'd argue, I think it was in 2023. But if I got my year wrong, I apologize.

is that I believe the largest manufacturer of plant-based meat is the private, massive, animal-based meat manufacturer, Cargill Foods. And so to me, the Cargills and the Tysons are kind of like this too as a publicly traded one. They're more like the Cokes and the Pepsis here where exactly to your point, they control the distribution channel. So it's like if you're the one, if you're the big one, if you're sending a huge percent of your stuff to Kroger,

But I think that is actually the existential threat to the beyond meats of the world. And my comment is not about the trend, what consumers want, but it's like, if it is this amazingly attractive, you know, wouldn't it be the case that those who have the most to lose and the most to lose are the, like the right, the aisle right next to the, you know, with the, the plant-based ground beef, it's the animal-based ground beef, you know, cow, whatever. It's like, who's right next to them and turn that package over. I bet there's a Cargill or somebody like that with so much to lose. Yeah.

And aren't they going to want to fight back? And don't they have the ability to manufacture something similar? I don't mean immediately. I'd love to spend some money and time to get their food nutritionist and whatever people to kind of get that recipe right. But in the long run, isn't it the distribution? And so Coke is successful because of its distribution, but isn't that going to push more towards a car deal? And I think it was 2013.

And it might still be today, but I believe it is that Cargill is the largest manufacturer of plant-based meats. And in some ways, I'd argue that's predictable only because they were the company who had the most to lose if the consumer is going to start putting in the plant-based meat in their cart and not the animal-based meat. And so...

naturally they're going to fight back, but they're going to use their scale and their distribution. Like they have, they have things kind of similar to the blue apron story with the grocery stores. Like they already have those things ready to go to push, you know, to, to basically watch the beyond meats, the impossible foods do something. And then whenever it's big enough or big enough of a threat, say, all right, thanks very much. We appreciate you did the R and D and the sales and marketing, but, but first mover disadvantage, we're going to take over now.

So I'm going to take a step back for just a second because I don't want you to apologize ever for pushing back. Maybe I did as well, but I think it's something that's fundamentally important for anyone listening to this show, which is that if you're going to be an investor, you have to be willing to test out ideas with other people, with people who might know more than you or have a different perspective than you. And you have to be willing to hear it and not take it personally, even if they disagree with you vigorously. Shout out Bitcoin.

But I wanted to just take a second to do that because for someone listening who might be a newer investor, it's very easy to essentially find your tribe of people who really believe in the same stock as you. And you can almost find a community through that.

I think that can be a good thing. The Motley Fool was built on finding a community of people who are interested in investing, but I think it can also be a damaging thing when it's built around owning one single company and then you view yourself as being in that community and you don't want to hear outside bearish different voices than you.

Anyway, that's my rant on that. I'm going to bring it back to Beyond Meat here because there was the point. We talked to basically 2019 margins are getting better. You're operating break-even. You're expanding your distribution partners. One of them at the time was McDonald's, which started to offer the McPlant Burger. And I know that struck you as odd. What was maybe the flag that the Beyond Meat bulls should have stood?

seen or picked up on when that was going on. I don't know, Ricky, I want to disagree, as we just said we could do. I disagree that it struck me as odd, but so we talked about this in class when the news came out, and the specific reason for it was, I just thought it was such an amazing little microcosm of understanding all these issues. And so, you know, basically, I just went on the website for McDonald's, got the McPlant thing,

And just brought it in the class and talked about it. I was like, think of this like a footnote. Now, usually when I say footnotes, I mean the actual financial statement footnotes. But I was like, no, let's have this conversation with this as if it was a footnote. And in that footnote, they do such an amazing job because you wouldn't know. First, the main thing is it's called the McPlant. And I think that was intentional.

it's not, you know, the impossible burger is sort of looks like it's a pairing of equals, impossible foods and Burger King, but McDonald's gets the benefit of coming later. And I just feel confident that they came later and said, look, we need to do what we need to make sure that we secure the upside so that it's McPlant. And we're acknowledging it's not a traditional thing we sell at McDonald's, but we didn't put anything about beyond meat in the title at all. Now,

they do mention in the footnote that's co-developed with Beyond Meat. So they're not violating anything legally. But then even when they talk about it, they're de-emphasizing the patty and really emphasizing like just, you know, the way that it's cooked and what McDonald's is doing. So everything about that advertisement seems to be showcasing McDonald's and kind of downplaying the role of Beyond Meat. And,

When I've talked about it in class, I'm argued like, look, McDonald's knows how to market food. And you may disagree and not shop there or whatever else. But man, this company has done such an amazing job for so many decades. And I was just like, shouldn't we all just step back and think about if they're doing it this way, what does that tell the rest of us about the investment thesis for Beyond Meat? And specifically, what was really interesting is when we talked about it, it seems really like McDonald's set itself up. Back to our Blue Apron conversation, too.

to participate fully in the upside. If things went well, I think McPlant was intentional so that what? They could finish the agreement and make sure everything's legally okay, but then what? Just do it themselves. And if things went poorly, it's like, well, we did a partnership and it didn't work out. So it's interesting to think about upside. Who participates in the upside?

If this was a massive phenomenon for their target market, I think they still participated fully in the upside. And they get to reduce or at least mitigate some of the downside risk by co-developing. Don't spend all the time trying to figure out the exact ingredients, whatever else, but still give yourself the chance to be the one who bears the upside if the –

if the project was massively successful. And you put that in contrast a year ago when McDonald's, and I pulled this up during our conversation, McDonald's announced a partnership with Krispy Kreme to distribute donuts. And whereas you had the footnote for Beyond Meat,

the mcplant when you look at the press release for mcdonald's and krispy kreme it is mcdonald's trademark and krispy kreme trademark are partnering to bring you donuts in part because people have that i think brand affinity for krispy kreme donuts and it's also much more difficult to set up a donut manufacturing plant in all of your mcdonald's locations versus you know we can ship out these frozen patties that go on the same grill as the rest of your big macs

Yeah, my thought there is like McDonald's has been for decades. Like in some ways I've made the comment, like I'm not sure that the Impossible Foods and Beyond Meats were really, were even first movers. Aren't they kind of late movers into the world of processed food where we've, you know, all of those fast food companies have been putting filler. And I'm not a food scientist, but my guess is that filler is plant-based. I bet anything it's plant-based. And so isn't it just recipe tweaks? Like haven't fast food companies been creating, you know,

highly plant-based, not 100% plant-based patties and other pieces of meat, and then marketing them really well. So in some ways, the comment I make is, are the Beyond Meats and the Impossible Foods really truly creating innovation? Or aren't they just tweaking a recipe from fast food, and then can't fast food come in and tweak it back? And don't they sort of maintain the upper hand the whole time? So I think it's easy to sort of dunk on this story. It's always easy to be right in retrospect. And one of the things we...

We emphasize at The Fool is that rule breaker type investing can work for a lot of people. And when you're doing that, you're going for a slugging percentage. You're looking for home runs. And that can mean you have nine stocks that are losers and one stock that's a big winner that makes up for your losses. It's a venture capitalist style approach to stock investing that works for many of our members and many people.

I look back on this and I think, yes, McDonald's could have had, they have the upper hand. Yes, they're the big distributor. And same with the Impossible Whopper at Burger King. But what if it did become popular? What if this did expand to all of the fast food locations? It became immensely popular. Wouldn't have that made Beyond Meat a winner and Impossible Foods a winner if it actually did take off like there was a chance to?

We'll never know. But my guess, and I want to give some substance behind it, is no, because McDonald's did, I think, eight locations. Then they rolled it out to 600. But then they closed it down. I don't remember the exact timeline. So I think they gave it a legitimate shot. And whatever their criteria was, I don't know. But I don't think it was good enough because they pulled it. They don't have it anymore. And my reason, though, I think it still wouldn't have been a situation where Beyond Meat fully participates in the upside because on –

During that time, the last couple of years, when the secular trend is a movement away from just expanding what we define as meat, right? That's the secular trend. That happened. And in many ways, though, but if it was there and if it was amazing, Chipotle came out with their version with chorizo. Chick-fil-A had a version of this. I don't want to miss these, but it seemed like all of the major successful fast food companies were basically introducing their own. Now, in

The Burger King one was different. But after that, it seemed like and McDonald's was co-developed. It seemed like they were all just basically saying, hey, we can do a version of this, too, so that I'll never know. We'll never know. But I would bet that I think this was successful. And if for some reason this McPlant resonated with McDonald's customers, the way that it was initially disclosed and marketed, you know, in contrast to your excellent Krispy Kreme example.

example, I think this would have been one where McDonald's would have just finished that contract, you know, paid beyond me what they need to, and then moved on fully participating in this as if it was a Big Mac, you know, as if it was all the others, you know, all the other stuff that they sell.

because we don't know who the provider of their ground beef and their chicken and everything. And I think it just would have been, hey, we already have access to commodities and ingredients and we already have food scientists and we already do this stuff. We're just going to bring this in-house at some point. So I think the lesson for investors listening is...

you really need to think about sustainable competitive advantages, especially when there's a crowded marketplace. And also anytime you see a partnership that you're excited about, you want to think about, is this a true partnership who has the upper hand and can the person or the company with the upper hand walk away whenever they want to?

Yeah. What's the true nature of that partnership? Let's get to this Seth Klarman quote, because I think it's an interesting discussion to have in 2025, because he thought about this long before I did, which is this idea that people overrate investment trends. And he was talking about the home shopping network and home shopping becoming very popular for people to watch QVC and then buy things at home. And he wrote in Margin of Safety, quote,

The value of a company selling a trendy product, such as television shopping, depends on the profitability of the products, the product's life cycle, competitive barriers, and the ability of the company to replicate its current success. Investors are often overly optimistic about the sustainability of a trend, the ultimate degree of market penetration, and the size of profit margins.

As a result, the stock market frequently attributes a Coca-Cola multiple to a cabbage patch concept." I think that is a good summary of what we've been talking about so far. It's also, to me, Patrick, interesting to revisit right now because Klarman is describing a Coca-Cola multiple as something that is completely sustainable and durable. Coca-Cola will be here forever.

And in some ways, I think it will be. I think people will always drink soda. But right now, there are tremendous competitive pressures on Coca-Cola when you think about, I would say, a broad scale shift to healthier eating and drinking. Even Coca-Cola itself is saying, hey, look at our new growth driver over here. It's not Coke Zero. It's not Diet Coke. It's this Fair Life protein milk, which I've actually been seeing all over the place. And it's crossed a billion dollars of sales.

At the same time, there's another competitive pressure, which I think the market's underrating, which is that a large subsidy is being removed potentially of Robert F. Kennedy at Health and Human Services. And one of the things that he has said is that he wants to take candy and soda off SNAP benefits. And basically, SNAP households spend about 10% of their food dollars on sugary drinks, including Coca-Cola. That was back in 2018.

So when I look back on this quote, I think Klarman is fundamentally right. And it's interesting to see too, as we update, even the companies that we take for granted as having sustainable, durable, competitive advantages might have different and intense competitive pressures in the future.

Yeah, I want to first defend Klarman a little bit, not that he probably needs it, but like he was writing that about, you know, 87, I think written in 91. So, yeah, does anything last forever? No. But, you know, Koch still had a good run in front of it for decades. But I think your broader point is just is spot on that, like, you know, the world is constantly changing. And, you know, the point of that was to express like extreme durability. But even extreme durability, you know, decades later can can change forever.

But I also want to kind of commend Coke here, where their flagship products are nothing like they were in the past. You know, the health trends, independent of the Snap comment, you know, everything else, like the trends have been away from Coke Classic. But I think to their credit is, and I'm not saying there's an easy way to do this or they've perfected it, like they've focused, they've shifted out of like, so their sustainable competitive advantage they initially had, I think would be like strong brand, brand loyalty, you know, to the Coke Classic products that

everything else. But then what, as that's going down, they're shifting towards distribution, the network, the ability to just, and then that has been, it's a situation where like the right acquisitions can keep the company, you know, afloat, doing fine. As long as they're willing to do what, in some ways have the humility to say that it's not about our core flagship product, even though that drove us for, you know,

decades and decades. It's about finding the, like the next move that's outside of us. And obviously not just doing acquisitions, but like arguably really trying to perfect which brands, which companies do we need to bring in house? So as our brand deteriorates, we can still do what? We can still operate this amazing distribution channel.

with convenience stores and gas stations and groceries and restaurants and everything else, but constantly be willing to do what? To not get complacent, but to think about

What changes are we needed? And I think your point about potential change to the snap benefits is another layer to that. Like, okay, how do they deal with, you know, an external shock that could be bad for them? What are the changes they can make with their product mix? Clearly it can't be to continue to expect that the Coke classic kind of stuff is going to resonate. But, you know, they've done a bunch of those acquisitions already.

Could some of them be failures? Possibly. But at the same time, it's a step of like, it's not us. It's how do we diversify to better utilize what we have, the distribution network, and better meet changing consumer preferences.

So let's apply this metaphor to current companies right now, because Coke's forward earnings multiple is 24, which is, I think, a little bit under the market. But you can find some companies that are pretty close to that. Two of them, I think, are interesting. One is NVIDIA, which for as much as the stock's been on a run long term over the past three to five years, its forward earnings multiple is about 26. That's Coca-Cola land. And for many investors, you might think, wow, that seems cheap.

The second one, and I'll let you pick which one you want to do, is Celsius, the energy drink manufacturer. I've talked about it on the show. I unfortunately own stock in Celsius. I don't own stock in NVIDIA. Probably should have swapped those. And that's now at a 28 forward earnings multiple.

There's a case for either of these, I think, that they could deserve a multiple much higher or much lower than Coca-Cola. That's your menu. Do you want an energy drink or do you want a chip designer? I don't know. NVIDIA is awesome, but I think we should keep the conversation consistent and go with Celsius and elaborate in that direction because I think it's just a more natural extension of all the stuff we've been chatting about. NVIDIA is awesome in different ways, but kind of outside of all that. So let's see. Is it a Cabbage Patch product? Yeah.

You would have some folks, myself, saying the bull case. No, this is a large-scale shift to healthier-for-you energy drinks. This is one that now has bought up Alani New. This will be a good acquisition because you have some of the most popular sugar-free energy drinks for people who are interested in fitness, working out, and it's a completely different subset of customers than your Red Bulls and your Monster Energy drinks. When we get into energy drink land, it's all kind of marketing anyway.

So I would personally say no. I think Celsius has potential to grow even more. They're making savvy acquisitions and maybe it deserves something higher than a Coca-Cola multiple.

I think it's worth getting in the layers here one of them is that the involvement of Pepsi is massively important to Celsius so they sign an agreement 2022 I think where Pepsi is effectively the main distributor and also as a result of this really the main consumer so they make up a large percent of the revenue Pepsi does and that actually obviously helped them you know boost sales massively when that was signed or when it went into effect not when it was signed I'm sorry

But then what? In last year, they had, you know, roughly revenues been roughly flat. And one of the factors they faced towards the end of last year, which you guys have talked about in The Motley Fool, is that, you know, that Pepsi's inventory issues and Pepsi's inventory backlog was this goes back to our conversation about the, you know, the.

There's a channel that controls your direct access to customers and a constraint. I don't think this in any way says, oh, therefore Celsius is a bad business model, but just a risk and a constraint to their growth is they are still dependent on what happens at Pepsi in order to continue to achieve that growth. And so that, you know, you have a major, extremely powerful customer, Pepsi,

who's not going to crush you or send you to bankrupt or whatever else. They have mutually aligned incentives, but I would say, but actually may just be a headwind, a little bit of a pressure on

why and how Celsius may not be able to continue to grow at any explosive rate. Again, not to crush them, destroy them or anything like that, but just a meaningful constraint to be aware of is that, like I would say, what would I recommend if you're thinking about investing in Celsius? Just go get their latest filing, control F the word Pepsi. Why does it appear so much? And then read the, like it's in there, like read the agreement. Think about what that means.

I'll also add reasons I could be completely wrong on it. One is that many other energy drink makers have brought in sugar-free energy drinks. That space is becoming increasingly competitive. Celsius is also trying to, you know, maybe it made an expensive acquisition with Alani New. We don't know. Time will tell. And then the other thing with it is there may be some brand confusions.

Right now, Celsius is trying to pivot into hydration powders labeled as Celsius, but those don't have caffeine. And that struck me as something that might be a little tricky to some of its consumers if you're selling a Celsius hydration powder, but it doesn't give you the kickstart jolt that the can of energy drink does, despite it looking a little bit similar. So those are a few of my concerns. I could be totally wrong. If I'm totally wrong, it won't totally wreck my retirement, but it's something that I have

some confidence that things could go right. Yeah, I want to give you, I actually want to push back a little on the comment I was making before with the success case. Are you pushing back on yourself or you're pushing back on me? I'm pushing back on myself because you're selling your future back. This is the ultimate meta is you're pushing back on yourself on a podcast. Let's go. That's right. There's a, you know, as a classic case we've covered in our classes with Yeti where they face the big challenge where the third party distributors basically, you know, the Cabela's and the Dick's Sporting Goods and all had bought enough.

It's obviously a non-perishable product, truly in this case. So they just cut back on their spending in 2017 and Yeti saw year over year decline in revenue. But then what did they do? They went and expanded their direct-to-consumer channel, were able to survive that. Their growth rate's not going to be in the 40s percent anymore, but they survived that and were able to keep the thing going and moving forward.

I think that Pepsi is a constraint, but I don't think in any way it's damning because, again, I think the benefit to Celsius is actually the Pepsi contract because you want one of those big players to be like, we're on your team. And even if we're on your team means that we do control and call the shots, but we want you. I think that the best reason is that

But it's still in Pepsi's interest for Celsius to continue to grow, to develop, to do things. And so I think, hey, Pepsi's on our team is a positive thing that timing is impossible to figure out. But Pepsi has a vested interest in Celsius continuing to grow.

In some ways, I argue that's a part of the portfolio diversification of Pepsi. I know it's not, you know, they haven't literally acquired them. It's different structure. But I think, you know, it's like, is the other side of this that like, yeah, you know, the contract with Pepsi caused some negative effects in 2024. But ultimately, is it long run advantageous to have a player with that kind of distribution pull, you know, effectively rooting for your success? Yeah. And unlike the consumer products we mentioned earlier,

Celsius does make a profit and that's a good thing. You know, in four Celsius, even if you're a sugar-free drink, not bad to have a sugar daddy. Patrick Badalata, appreciate you being here. Thank you for your time and your insight. Thank you, Ricky. Appreciate it.

As always, people on the program may have interests 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. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. The Motley Fool only picks products that it would personally recommend to friends like you. For The Motley Fool Money Team, I'm Mary Long. Thanks for listening. We'll see you on Monday.