As Clients Spend Much less, Corporations’ Stability Sheets Develop into Extra Necessary

On this podcast, Motley Idiot senior analyst Jason Moser discusses:

• The energy of an organization’s steadiness sheet changing into extra vital.
• Rising information that prospects are beginning to spend much less.
• “Shrinkflation” as a instrument that some (however not all) corporations can make use of.
• Internet enlargement as a key metric to observe.

Motley Idiot analyst Sanmeet Deo joins Jason to speak about potential purposes for digital actuality (VR) within the healthcare business and a mid-cap firm which will have benefits over the tech giants within the area.

To catch full episodes of all The Motley Idiot’s free podcasts, try our podcast middle. To get began investing, try our quick-start information to investing in shares. A full transcript follows the video.

This video was recorded on June 16, 2022. 

Chris Hill: Recently we have been asking about pricing energy. Immediately, it seems to be like we may have to begin asking a brand new query. Motley Idiot Cash begins now. I am Chris Hill and becoming a member of me in the present day for the second time this week, Motley Idiot Senior Analyst Jason Moser. Thanks for being right here!

Jason Moser: Hey, thanks for having me!

Chris Hill: Effectively, yesterday was enjoyable whereas it lasted [laughs] and in the present day the market continues its grim slide. I wished to get your ideas on what seems to be a pattern or if it isn’t a pattern it is actually a rising quantity of knowledge and it has to do with client costs. I believe client costs could even be on the enterprise facet as effectively, however this morning we received two bits of client information. One was that for the primary time this 12 months airfare costs have dropped, so for anybody nonetheless seeking to ebook some air journey that is welcome information. Extra particularly, Kroger got here out and stated that their prospects are beginning to drop dearer identify model merchandise in favor of lower-priced generics, and also you and I’ve talked loads of occasions up to now about pricing energy; what companies have it? What are the boundaries that they will push it? Earlier this 12 months you and I talked particularly almost about Chipotle and their capacity to boost costs, and also you had made that time of like, they’re doing a reasonably good job proper now. I do not understand how rather more they will push it. I am questioning if we’re now shifting into a brand new section the place the query for companies shouldn’t be have they got pricing energy, however as a substitute the query is how robust is their steadiness sheet? Can they stand up to particular person prospects or different companies spending much less?

Jason Moser: I believe that is query. We have hit that section of this cycle the place shoppers are beginning to commerce down. Clearly inflation is hitting us from all sides. You take a look at a number of the information on the market in regard to the shop manufacturers versus nationwide manufacturers, within the first quarter of this 12 months gross sales of store-owned manufacturers rose six-and-a-half %, that compares with 5.2 % enhance in nationwide manufacturers gross sales. We’ve seen that transfer already actually from all the way in which again to the start of the 12 months the place of us have began to commerce down, so to talk just a little bit, and that is sensible. One other attention-grabbing idea and it is a humorous phrase that at all times makes me chuckle once I see it however shrinkflation.

Chris Hill: I am sorry. What? [laughs] I’ve by no means heard that.

Jason Moser: Shrinkflation, it is a phrase. Corporations are very intelligent. These nationwide manufacturers, they’re very intelligent in how they train pricing energy. It would not essentially at all times come within the type of greater costs. It might come within the type of shrinking the precise product measurement in sustaining the identical worth, in order that field of cereal is 14 ounces, perhaps now it is 12. Clients are looking out for that stuff, it does matter. Pricing energy is a really robust high quality to have. We like to see it, but it surely’s at all times value remembering. It would not go to the moon. There’s a cap, there’s a ceiling the place you must cease, but it surely’s actually delicate on the meals facet proper now. I believe inside meals merchandise you see the costs up 11.9 % for meals stuff that we’re consuming at residence versus stuff that we’re consuming at eating places; consuming away from residence, these costs rising simply 7.4 %. It is hitting shoppers in the home, and so while you see the way in which these companies begin attempting to deal with this, completely taking a look at steadiness sheets I believe is a superb solution to get a grip on, on an organization’s monetary stability as a result of if you concentrate on it on this rising rate of interest surroundings, on this inflationary surroundings, after all we as shoppers are getting hit by it. It makes excellent sense that companies would get hit by it too, but it surely’s not each enterprise. For companies that generate free money circulation, for companies which are worthwhile, for companies which have wonderful steadiness sheets, they’re capable of kind of self-fund. They don’t seem to be going to be essentially beholden to the identical inflationary pressures that customers is likely to be feeling. It is an excellent reminder although, to at all times take note of an organization’s fiscal health so to talk as a result of all of them aren’t equal.

Chris Hill: I’ve skilled shrinkflation, I simply did not know there was a phrase for it. [laughs] The instance I at all times consider on this case was years in the past speaking with our colleague Charly Travers, and he made a remark about ice cream within the grocery retailer packages of ice cream. He was referring to this taking place, I stated, what are you speaking about? He stated do you ever purchase ice cream on the grocery retailer? I can, after all I do. [laughs] He stated what measurement do you purchase? I stated I purchase the 2 quart measurement. He stated no, it is now not two quarts. It is now [laugh] one-and-a-half quarts. They adjusted the packaging, and that is how they handle it. You are able to do that with a bundle of ice cream, however for those who’re within the enterprise of say software program, that looks as if a troublesome factor to drag off. The 2 tales I discussed, these are consumer-facing costs that we’re speaking about right here. Do you assume we will begin seeing this on the enterprise facet as effectively?

Jason Moser: I believe we are going to to an extent, I believe the message is obvious. We’re seeing companies, increasingly headlines popping out of associated companies are targeted on sustaining a robust maintain on the expense line, the hiring. I believe Uber stated for instance that they may deal with hiring as a privilege. I believe now greater than ever companies are wanting on the prices of doing enterprise and taking a look at ways in which they will simplify, develop into extra environment friendly. Software program such as you, you concentrate on the way in which that the workforce has modified over the previous couple of years, and there are specific issues that corporations now are extra depending on than earlier than. You take a look at your Zooms and your Slacks of the world and the way pivotal they’re to only our day by day work. Most individuals are utilizing some type of these platforms so as to have the ability to get work performed. All of it speaks to effectively, if an organization actually is reliant on it then they do not essentially have that freedom to have the ability to say, you recognize what? We will lower this price, we will lower that like that. They don’t seem to be going to say what we’re simply going to eliminate Slack for instance as a result of then what is the different? Now, curiously, there may be another. Microsoft, I believe, stands out as a shining instance right here, however you take a look at Zoom and Slack each present providers that numerous companies are utilizing. Effectively, Microsoft clearly gives providers that the majority companies use. Moreover, now having developed the Groups platform, which may actually be seen as an alternative choice to Zoom and Slack, and Microsoft having that fortress steadiness sheet, having that measurement, having the monetary assets, they will bundle that in a different way, they may worth that extra successfully, and so it does look like this might be a stretch the place Microsoft may get on the market and say, “Hey, we will assist companies save just a little bit on these bills by providing one thing like Microsoft Groups as a competitor to what you are doing on Slack and Zoom in the present day.” Some corporations perhaps will make the shift and a few will not, it simply actually, I believe, in the end is dependent upon what management of the corporate’s need and reenrolling what the staff desire to make use of. However I do assume it does converse to the worth and having one thing the place substitutes are uncommon. I believe while you’re wanting on the software program that corporations are utilizing, there are most likely one million fee suppliers, there are one million payroll software program suppliers, and I really feel like that is likely to be just a little bit completely different than one thing like a communication instrument. It does matter precisely the aim that the software program serves.

Chris Hill: It is yet another query we are able to ask ourselves as traders after we’re taking a look at any enterprise. It is, after all, associated to the pricing energy query. It is principally, how massive are the switching prices for this enterprise? It is fairly simple for anybody going right into a grocery retailer to only swap to a lower-priced product when confronted with that selection, and as extra individuals are tightening their fiscal belts, I believe we will see extra of that. It is just a little bit tougher when the switching prices for what’s the communications platform that our firm makes use of, and the larger the corporate, arguably the upper the switching price as a result of it is as you indicated, you have to get your workers on board with it.

Jason Moser: I believe that is actually the hot button is, in the end workers must be on board with it. It is by no means simply that lower and dry. The longer that you just use these specific platforms, the extra that you just get used to utilizing them and the extra performance they construct in. There’s issues that you just do most likely with out even pondering twice with these platforms now, after which to modify over, you actually do need to weigh that. It’s going to be a short-term versus a long-term perspective there. Is it well worth the monetary financial savings for one thing that might probably be an inferior product or perhaps it is a superior one? I take a look at Microsoft Groups as an attention-grabbing instance as a result of having used Microsoft Groups earlier than, I discovered it actually good. Zoom and Slack are useful too. For me, I do not know, I actually guess I might be kind of detached. However others would most likely really feel very strongly by hook or by crook. Yeah, you must determine that out, it is a balancing act for positive, the larger the corporate, the extra workers. There’s simply extra opinions that you must consider. [laughs]

Chris Hill: It is actually going to be attention-grabbing, the following six months, what we see out of a majority of these companies as a result of, once more, the switching prices are greater. But when some companies, and also you spoke to this, that it is not likely an choice to not have them. So many extra companies take a look at issues like Zoom and Slack and whether or not they’re a hybrid setup or totally distant, like no matter it’s, you bought to have some model of Zoom or Slack to exist as a enterprise. Then the query turns into, all proper, effectively, will we wish to swap? It is going to be actually attention-grabbing to see over the following couple of earnings seasons if we begin seeing a few of these companies lose prospects in consequence, or if they’re much less within the driver’s seat and so they need to principally make some concessions in order that they will preserve their prospects. That is one thing you and different analysts deliver up after we’re speaking about software program corporations, a enterprise like Okta, that form of factor the place it is, hey, they have their buyer base after which they have their, basically the purchasers who spend over $1,000, or over $100,000, or over one million {dollars} per 12 months. It is going to be attention-grabbing to see what these numbers proceed to seem like.

Jason Moser: It does look like a possibility for a few of these suppliers to actually earn just a little goodwill from their prospects. In a attempting time akin to this, you’ll be able to both be the supplier that’s going to attempt to capitalize on that and lift costs, or you may be a supplier that say, “Hey, hear, we’re all in the identical boat right here coping with the troublesome financial surroundings.” I believe you are most likely wanting these Q2 numbers popping out and they’re going to point out that we’re in a recession now, it actually seems like one, it feels just like the longer-term alternative is for a corporation to carry again on pushing that pricing up. Pay attention, we’re not going to attempt to put the screws to you proper now as a result of we all know all people is coping with it from all angles, that goodwill actually can breathe longer-lasting relationships the place you in the end develop the connection with that supplier, you return to these internet enlargement numbers, you are searching for these how are they rising the connection? That is at all times metric to concentrate to. It will be attention-grabbing to see how corporations method this as a result of there are a few completely different views there.

Chris Hill: I admire the time, Jason. Thanks.

Jason Moser: Thanks.

Chris Hill: Once we take into consideration the purposes for digital actuality, we regularly go to gaming for example. However one of many extra promising used instances for VR is in healthcare. Amongst different issues, digital worlds could make one thing like bodily remedy much more partaking. Sanmeet Deo joins Jason Moser to speak concerning the prospects for VR in healthcare, and one midcap firm that has an vital leg up over the tech giants on this area.

Jason Moser: Hey, Sanmeet. It is nice to meet up with you once more. This week we’re speaking about immersive expertise, and immersive expertise, it is throughout us. However you and I are literally each actually enthusiastic about one specific market the place it has important potential, and that’s within the well being and wellness area. This week we will speak just a little bit about a number of the corporations on this area, what they’re doing. Once we discuss immersive expertise, it is the broad time period, it consists of issues like augmented actuality and digital actuality, and now you hear numerous discuss combined actuality. Actual rapidly only for our listeners, let’s remind our listeners the variations between the 2 in augmented actuality and digital actuality. What’s augmented actuality and the way is that completely different from digital actuality?

Sanmeet Deo: Jason, and thanks for having me, I am excited to speak about this. Simply to put the groundwork right here, augmented realities enhances your environment by including digital components to a dwell view or a real-world setting, and it is often performed by way of your digicam in your smartphone or augmented actuality gadget. Assume Iron Man’s glasses, how he put these glasses on after which he sees the true world, however then he sees digital, both pictures or data laid on prime of the real-world setting, will get data that he wants. Digital actuality is a very immersive expertise, so principally replaces the real-life surroundings with a simulated or digital one. Consider the Holodeck on Star Trek once they stroll onto the Holodeck, and you may simulate a complete completely different surroundings from what you are in already. That is how I consider the distinction between augmented and digital actuality.

Jason Moser: I believe that is spot on there. I believe for our dialogue in the present day, we’re actually speaking a bit extra about digital actuality and the impression that it is having within the well being and wellness area. There are some apparent suspects which are doing numerous work on this area, after which there are some smaller corporations which may be of us won’t be as aware of. Let’s simply begin from the highest right here and discuss a few of these corporations which are making waves on this market, the businesses that individuals are most likely extra aware of, and there are, I believe, 4 particularly that you have saved your eye on.

Sanmeet Deo: Yeah. One of many largest ones that you just consider is Meta. Meta has their Oculus Quest, the place now I consider it is known as the Meta Quest 2. It is the massive goggles that you just placed on, after which they’ve a complete bunch of apps associated to gaming and well being and health, and all these issues. The Meta Quest 2 is like your digital actuality platform the place you placed on the glasses and a number of the apps that they’ve which are nice, particularly for health are issues just like the FitXR, which is entitled essentially the most intense exercise amongst VR apps. There’s an app known as Supernatural, which received the very best VR exercise app general, so you’ve exercises like boxing, meditation, hit, stretching. It might gamify health with leaderboards and creating targets for your self and interacting with coaches. It is an excellent gadget, I’ve by no means used it myself, I’ve positively been wanting to make use of that. Meta has that, which is their important gadget, which is a giant client gadget that we consider primarily. Microsoft has the HoloLens, which is what they name a combined actuality headset, which may work augmented and digital actuality to love what we talked about earlier. Permits the particular person to placed on these glasses, work hands-free, collaborate with distant colleagues in real-time.

A few of the use instances for these are after all, healthcare, seeing a affected person, like as you are working with the affected person, you may see their affected person data, they’re charged their information, like in a picture proper subsequent to you as you are working with the sufferers, so it makes it lots simpler than fumbling round with a chart or information or pulling up any data you want as you are working with the sufferers. That is an thrilling gadget. Even Intuitive Surgical is an organization that has a sim now simulation system the place it guides surgeons by way of life like workouts and grasp advanced procedures. Consider medical coaching and training for docs and nurses and medical professionals with the ability to carry out procedures and surgical procedures and all of the work that they do on a digital physique versus a bodily physique in order that approach they do not mess it up on somebody [laughs] in actual life which I for one can be completely for. Additionally they acquired an FDA approval for his or her IRIS augmented actuality system which shows 3D renderings of affected person’s anatomy for physicians on their iPads and iPhones, they will view, manipulate the 3D mannequin as a part of their pre-op surgical planning and referencing and doing operations. Within the healthcare area, numerous the use instances are digital pointing, which is simulating the affected person for the physician to look at and observe on or work on, telemedicine the place you are remotely treating sufferers by way of an ARV or your headset or your smartphone and medical coaching training like we talked about just a little bit with coaching the docs and nurses on a digital affected person versus precise sufferers so once they get to the precise affected person, they will truly carry out very effectively.

Jason Moser: Yeah, it feels to me like one of many issues that expertise is doing within the healthcare area. In a specific immersive expertise, digital actuality, issues like that, it is serving to scale healthcare. It is giving us the power to get extra healthcare on the market to the oldsters that want it most. It feels we’re on this surroundings the place we’ve a rising variety of sufferers, the inhabitants continues to develop, and but for those who take a look at the precise information, we’ve a shrinking variety of physicians. The precise professionals, the suppliers within the healthcare area, the obstacles to entry there are excessive. It is some huge cash, numerous training, and you actually must be dedicated and keen about doing that. It’s a restricted provide of suppliers and a rising base of actual demand there. In digital actuality immersive expertise generally, helps us scale healthcare, which I believe is without doubt one of the greater challenges that we have been attempting to unravel for, so it is actually encouraging to see this taking place. It’s slowly however absolutely, however you actually see numerous these corporations making numerous investments, they’re making nice strides in doing this. Now, we speak concerning the massive corporations like your Googles, and Metas, and Microsofts of the world which are doing all neat issues on the subject of immersive expertise, however they are not restricted to healthcare area. They’re doing all issues, gaming, healthcare, leisure, all of that wants stuff. There are some smaller corporations on the market, maybe just a little bit lesser identified to some traders, however they’re making nice strides and focus particularly on healthcare. Penumbra is an organization that stands out to me and also you and I’ve talked about Penumbra just a little bit. I do know that you just lately had an interview with Penumbra management. Let’s speak just a little bit about Penumbra, what the corporate does and the way Penumbra is utilizing digital actuality to advance the healthcare area.

Sanmeet Deo: Penumbra truly purchased an organization that they had been capable of incorporate and create what they’re calling the true Immersive System, which is a sophisticated rehab expertise that makes use of digital actuality for therapeutic actions, developed with enter from rehab consultants. It is principally they’ve a tool much like Meta, the place is massive goggles and it is truly acquired preliminary FDA clearance in 2019 so utilizing the gadget together with a bodily therapist or bodily therapist professionals or docs, they will help sufferers get better from issues akin to continual back-and-neck ache or stroke rehab or Parkinson’s. They’ll assist the rehab of the higher physique with give attention to strengthening vary of movement and postural management. It might even do issues like addressing cognitive capabilities like visible spatial consciousness and command response. Mainly, I discover this attention-grabbing my spouse is a bodily medication rehab physician and she or he works with bodily therapist and sufferers who’re experiencing numerous this stuff, principally like we are able to fear, so fitness-related stuff, however with the ability to use a digital actuality gadget and to boost the rehab course of, particularly for issues like stroke rehab or sufferers that basically cannot really feel or use their arms or legs or no matter they’re dealing with their challenges in, utilizing a digital actuality gadget, truly, it is virtually like tricking the thoughts to have the ability to do what they thought they could not do. It truly enhances the method of rehab, and so it is a very thrilling subject. The interview I did with the CEO was nice, I positively suggest listeners to verify that out. However it’s very younger, it is very new, but it surely’s numerous sensible, nice use case that I really feel may actually assist these sufferers get to a different degree on the rehab faster due to digital actuality in order that’s positively an thrilling firm performing some thrilling issues.

Jason Moser: Penumbra’s small-cap by I believe just about each definition. How vital do you’re feeling like it’s for a corporation like Penumbra going up towards the behemoths in tech, like Apple, Google, Microsoft. These are formidable corporations with huge digital limitless assets. How vital do you assume FDA clearance is for one thing like that? Having that FDA clearance, is that one thing that basically separates them from the comp?

Sanmeet Deo: Oh, completely. As a result of whereas the gadget could seem like a daily client gadget, there’s changing into a divide between the buyer gadgets and the extra medical oriented gadgets the place you want a medical skilled that can assist you use that gadget to realize the targets that you just’re attempting to realize on the subject of your rehab or your well being or medical targets. Whereas any person seeking to assist themselves with crank back-and-neck ache can decide up the gadget and simply begin doing stuff, chances are you’ll not essentially know the way to use it within the correct solution to get the good points and the targets that you’ve got. I believe it is an actual aggressive benefit and one thing they will use to their profit.

Jason Moser: All proper. We’ll go away it there. Sanmeet, it has been nice catching up with you. Thanks a lot for taking the time to return on the present in the present day.

Sanmeet Deo: Thanks, Jason.

Chris Hill: As at all times, folks on this system could have curiosity within the shares they discuss, and The Motley Idiot could have formal suggestions for or towards, so do not buy or promote shares based mostly solely on what you hear. I am Chris Hill, thanks for listening. We’ll see you tomorrow.