A Small Company Worth Watching

In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Jason Moser about the latest headlines and earnings reports from Wall Street. They share some vaccine news and talk about how it's impacting a steadily growing global consulting company. They discuss whether Snap (SNAP 6.70%) will win where others have failed with its new feature. They answer a listener question, talk about the value of ETFs in investing, and much more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on November 23, 2020.

Chris Hill: It's Monday, November 23rd. Welcome to MarketFoolery. I'm Chris Hill, with me today, it's Jason Moser. Thanks for being here.

Jason Moser: Thank you for having me.

Hill: We're going to talk about social media stocks, we're going to dip into The Fool Mailbag, but for the third Monday in a row, we get promising news on vaccines. AstraZeneca's trials showing a good range of efficacy, we have Regeneron Pharmaceuticals getting emergency use approval from the FDA, Pfizer's vaccine could get approval in the U.K. this week, here in the States the FDA is scheduled to meet on December 10th to consider approval for Pfizer's vaccine, so more good news.

All of that brings us to Korn Ferry (KFY -0.05%). Shares of the global consulting firm up this morning after second quarter profits and revenue came in higher than expected. This is one of those businesses, Jason, that you look back to late-March, when pretty much every stock or most stocks were falling off a shelf, you could be forgiven for looking at a consulting business like Korn Ferry and thinking, boy! They're in real trouble, this isn't just the broad market sell-off, they're in real trouble. And they have bounced back pretty nicely.

Moser: Yeah, they have. I mean, Korn Ferry is a small company. When you look at the consulting gig, that's what Korn Ferry ultimately is, along with the title sponsor for the Korn Ferry TOUR, the developmental golf tour, a step below the PGA Tours, you probably see their name all the time on TV and don't even really put two and two together. I think that's been a tremendous brand-builder for them, as a golf nerd, but we'll talk about that [laughs] another time.

I do think that consulting is a great gig, it's a great business, you can build a heck of a business around it over time if you're good at it. We've seen companies like Cognizant and Accenture, for example, do wonderful things over the years. And particularly, as we go to a more tech-driven digital world, they really do a good job of harnessing that expertise and being able to sort of deploy that talent, that expertise around the world.

Korn Ferry, at a $2 billion market cap, is still a very small company, but going into this year it was a small company, but it was growing slowly but surely, they were doing a pretty good job. And then the COVID monkey wrench kind of set them back a little bit. But that's really not on them, right, I mean, that's something everybody is dealing with. And so, when you look at the results for this quarter, the topline was down 12% from a year ago, but sequentially, it was actually up 27%, which I think is important; that shows some signs that maybe things are coming back around.

And I think that with Korn Ferry, you know, they have a strong collection of offerings. They basically report or they break their revenue out, their business out, into four different segments: consulting, digital, executive search, and then RPO, which is Recruitment Process Outsourcing and professional search. And so, the neat thing when you look at all four of those segments of the business, they were all down modestly for understandable reasons. Digital saw a little bit of a boost; it was based on a small acquisition they made. But ultimately, they're treading water nicely.

But I think one of the neat data points, when you look across those lines of business for this company, is that 71% of their revenue, and their revenue is essentially fee revenue. I mean, it's fees for their consulting services. 71% of their revenue comes from clients that utilize multiple lines of their business. And that number continues to actually grow, which is obviously a good thing, that says they're doing something right, they're doing something well, and that the customers that are signing up for their services, see value, and they are growing that relationship. And that's really what you want to see.

So, you know, I think that when you look at the market opportunity, when you look at the lines of business in which they execute and you see that their customers generally are happy and expanding their relationships, I mean, it's a difficult time, but I think this is a neat business here that investors ought to keep an eye on.

Hill: It really is remarkable how this entire industry has been able to sustain itself at a time when a lot of businesses are struggling, a lot are putting a freeze on hiring, certainly a lot of layoffs, that sort of thing. But I think, you know -- and you touched on this with, sort of, the multiple lines, where they're able to support different businesses, it speaks to the handholding aspect of what Korn Ferry does, of basically helping to guide a lot of businesses through this.

Moser: Yeah. And you know, one thing they noted with this release, [laughs] you know, we talk about why I think it's habit for us to say, once things get back to normal, and you know, we say that sort of off the cuff, understanding that normal isn't going to necessarily be normal. We've got kind of a new normal that we're dealing with now. But they really make that point here quarter-in and quarter-out, they say, listen, one of their priorities is ultimately to help guide all of their clients to what normal is, which is this new normal. They're like, we're not going back to a lot of the ways things were done. And that's not a bad thing, it kind of goes back to that Satya Nadella quote that we've talked about so much here over the course of the year, where you saw two years of digital transformation brought forward into two months. And businesses like Korn Ferry are really focused on not only exploiting that, but really helping their clients to adopt that mindset, adopt that mentality and adapt their businesses so that they can benefit from that perception. And I think that's ultimately a good thing, I think that's why these consulting companies stand a chance to do very well in the coming years.

I mean, when you look at Korn Ferry, the stock itself, there's still some trepidation, they feel like, all right, we don't know what is around the corner and they're not offering guidance, they're really not trying to set the table here for us, but there's some optimism in the numbers there. And if you look at the stock, it trades around 70X earnings right now. You can't let that high multiple fool you; their earnings are very depressed for obvious reasons. And this is a company that has proven that it can perform very well in good times.

So, I actually look at this business right now, I mean, they generated better than $200 million in free cash flow over the last 12 months. I mean, I look at businesses like this right now and think, you know, given the pessimism that's out there, if you believe that all of this great vaccine news is indeed going to stick, and I think it does, I think it does stick and I think we're going to continue to see things open back up and people feel a little bit better about things. If we see things start to improve on a macro level, you're going to see businesses like Korn Ferry benefit from that. And I think that even though you see that 70X earnings multiple today. Again, you can't let that fool you, because those earnings are depressed. I mean, there could be a real window of opportunity for folks to get into a neat little small cap play here that's playing in a really big market opportunity.

Hill: Shares of Snap are up 5% today after the social media company announced the launch of Spotlight, a feature on Snapchat that is basically their version of TikTok.

Moser: [laughs] Among other things.

Hill: Among other things, yeah, Instagram, and I'm not on Instagram, but Instagram, I think it's Reels, Instagram Reels is I think Instagram's version of some TikTok, it's short video. What do you think about this? The market is reacting favorably to this. You know, I saw this story, I couldn't help but think of Vine, which was the six-second video platform that Twitter had for a few years before they shut it down. I don't know, everyone is looking at TikTok and saying, we want to do our version of this. And I don't blame them.

Moser: No, I don't either. I mean, that's the old saying, right, imitation is the most sincere form of flattery. And I think social is a fascinating space. It's one that, as time goes on, I become less and less enamored with. I mean, I don't use any of those platforms, I got to get that out of the way here first. You know, I wouldn't consider myself an expert from a user perspective; I just don't use them. They're just not for me. I mean, there's some good anecdotal evidence out there, though, that some of these social platforms are doing a little too much and becoming cluttered and unusable, and you know, they're not really fulfilling or they're not really scratching that itch that they did years ago when they were started.

I think that when you look at social, in general, I mean, I put Facebook, and Instagram, and Twitter, and probably Snap to an extent, it feels like [laughs] -- this is going to come across, well, I don't know, you take it how you want to -- but it feels to me like these are the modern day equivalent of the National Enquirer at this point. I mean, I really do. It's amazing to me, I find myself scrolling through Twitter and spending more time telling them to stop sending me stuff, or I don't like this, or I think this is spammy, as opposed to seeing stuff that I actually like. And that leads me to wonder, you know, is their AI, is their machine learning really doing that great of a job?

Now in Snap's case, I think Snap benefits a little bit from what appears to be at least some level of Facebook, and Instagram, and Twitter exhaustion, because Snap is more one-on-one communication versus like this big, let's get it out in front of the world and have, sort of, that Times Square discussion. Those big platforms can be very dangerous if you don't know what you're doing. And I think with Snap, they're continuing to really focus on what their initial purpose was in the very beginning, becoming more of that one-on-one communication or one with just a small group versus, like, letting the whole world know what you think.

They are offering some interesting incentives to get people out there to create content. And I think from an advertiser's perspective, it's a bit of a catch-22, because even if you don't really like that environment so to speak, even if you don't really want to be such a big part of it, you don't really have a choice, they must be on them, it's not optional, because that's where so many people spend their time, for better and for worse. And so, I think that for me, with Snap, this isn't something that generates probably a whole lot in the way of new users, it may be as incremental at best, but I think it does help create engagement, which is ultimately what these platforms are focused on, creating engagement. And it's just a very delicate balance there of creating engagement without going too far.

And by "going too far," I mean, I'll just use one little bit of anecdotal evidence. My wife was telling me over the weekend, she is an Instagram user and becoming less and less enthused by it because of their push into commerce and it's ruining the user experience. And I've seen a lot of people on Twitter say the same thing. Now, again, I don't use it, I can't really speak to it, but it makes sense. I mean, when these social platforms try to do too much and, sort of, step out of their lane, so to speak, it doesn't seem like this steps out of Snap's lane, it seems like it's very much in line with what they've been doing. Whether they can really monetize effectively, I guess is the difference there. We'll have to see if that's something that actually comes to fruition. But the early signs show that they're willing to pay up to try to grow that monetization. So, it probably will be awhile until we actually see it.

Hill: I think it probably will help with the stickiness factor; it will help with engagement. Going back to what you said about Korn Ferry and their ability to essentially sell multiple lines of services to the same client, this is a similar vein with Snap, where they basically go to advertisers who are happy with whatever is their current spend, and basically say, hey, we've got this new thing Spotlight, if you want to take this out for a spin. So, it will be interesting to see the extent to which, probably not in the next quarter, unless it's a blowout for them, but a couple of quarters down the line, the extent to which they start giving some color on how effective Spotlight is.

And on the flip side, in terms of here's this new thing we're rolling out that we're hoping is going to help with engagement. I don't think you and I have talked about this on MarketFoolery, but we have talked just one-on-one about [laughs] Twitter's new, is it Fleets, is that what they're calling it? It's basically their short video that you can put together that disappears in 24 hours that not only am I not interested in, as someone who uses Twitter every day for work, I find myself accidentally on my phone, accidentally hitting the button at the top that activates someone else's Fleet, and I'm like, ah, I don't want to see this. And it's people I'm following, that I like, I'm like, I don't care about this. [laughs]

Moser: Well, and that's it. I mean, coming up with something new, you have to make sure it offers something that doesn't already exist. And you know, my first impression with Fleets, I don't understand what it's for. I mean, I understand what it does, it's these little 24-hour stories, it's like their version of Instagram Stories, I guess. But having clicked through a couple of those Fleets, and I'm like, oh, it's a tweet, you know, [laughs] it's the same thing as what I would just see on my Twitter feed, except now it disappears. Well, I couldn't care less about that.

And so then I think, all right, well, from an advertiser's perspective, how attractive is that? Because that really seems like just the same thing repackaged. And that's where you have to be very careful, I mean, I'm trying not to be too hard on Twitter, I'm not saying what they're doing is easy, but man! It's been a long time since they've really done anything special. I don't consider Fleets special. I think Fleets eventually probably go the way of Twitter Moments; I don't see how they're really monetizable in any other way than tweets are monetized today. And that's, yeah, when you create something new, it has to be something that fills a demand. And, yeah, it's clever that they did it, but as a user myself, I would love to be able to opt out of those Fleets, because I find them utterly annoying and utterly useless.

I'd be interested to see with Snap, I mean, that I think is really going to be the question with Snap, and this new feature is, how do users feel about it? And that'll take some time to roll out, and you know, maybe listen, maybe you and I are the outliers here, maybe we're the ones that don't like Fleets or don't really care about them, but maybe the rest of the world out there does, we'll find out, because it's still a very new product as well. I don't know that that's the case, I think as time goes on, we probably see that the interest in Fleets is fleeting, [laughs] I suppose, I don't know. But yeah, that's ultimately, when you're creating something new, it needs to fill a demand and do something that you weren't doing before. And if it doesn't qualify, if it doesn't fit those qualifiers, then it's going to be a very difficult road to monetization.

Hill: Our email address is [email protected]. We got an email from Carlos Argueta. He writes, "I'm 19 years old, just started investing, and I follow the Foolish philosophy of stock picking. My question is, whether using ETFs, like the SPY [SPDR S&P 500 ETF Trust] or the QQQ, [Invesco QQQ Trust Series 1] is a great tool to use as a heavy-lifter in one's portfolio and let individual stocks drive growth, or should I look at ETFs differently in terms of an investment tool? Thanks. I'm a big fan of the show."

Thank you, Carlos. We're big fans of anyone who starts investing as early in life as you, so kudos for that.

I don't have any ETFs in my portfolio, but it is something that I think I should probably -- it is a tool that -- and I love the way he put it in terms of an investment tool -- it is a tool I probably should use. I know our friend and colleague Ron Gross does that. What do you think of Carlos' question?

Moser: Well, I mean, to your point, congratulations, Carlos. You know, being 19 and doing what you're doing is special, so keep that going, because I guarantee you, 10 years from now, you'll look back and think, wow! Thank God I did that.

I think a lot of this just depends on your stomach and how you can handle risk, so to speak. I think that's the general -- that's one of the benefits of funds, you can invest in a lot of different holdings at once. And so with index funds, whether it's the VOO [Vanguard 500 Index Fund ETF] or the SPY. I mean, look at the VOO, for example, Vanguard's version that tracks the S&P, you look over the last five years, the VOO is up 71%, over the last 10 years, it's up 200%. I mean, any which way you cut it, I think those are acceptable returns for not a lot of risk as long as you're just willing to simply be patient and just, sort of, wait it out.

I personally own shares of an S&P index fund in my work 401(k), more of my money is diverted over toward the self-directed brokerage, because the lure of individual stocks is just too great for me to pass up, I just love investing in individual businesses and that's just one of the most fun things I can do on a daily basis is just follow that stuff. But even I know that, you know, I need to protect myself from myself, and I think that's what funds can do for you.

So, I think if you're looking at a broader market fund, that's an excellent tool. You know, when you start getting into more specific markets, that's where you need to be a little bit more selective, because there are ETFs out there that focus on just specific industries. So, an ETF that's focused on gaming, that won't necessarily be the same as an ETF focused on cybersecurity or e-commerce. And I think there are probably some markets where investing in a fund is more than likely the better way to go. I mean, for me personally, if I really felt the need to have meaningful exposure to cybersecurity, for example, I would more than likely do that through an ETF. It's just it's not a market that I fully understand, it seems like it's constantly changing, and so that's one where it just seems like, you know, diversification would be paramount as far as what you're looking for.

But I think they work very well together. And I think I would personally look at it, if there's one fund that you have, it would be a fund that covers the broader S&P index. And then if you really do like investing in individual companies, you know, have some of that portfolio exposed to that fund, to that S&P fund. And then, listen, at 19, you've got a lot of time in front of you, and so that means you can take, you know, you can take a few more chances, which means I think you should be looking at this opportunity for individual stocks a little bit differently than maybe someone who's 60 years old.

But I think that, yeah, viewing those funds as a tool, as a nice sort of foundation for a portfolio, it's an excellent perspective and I'll encourage it.

Hill: Real quick before we go, it is Thanksgiving week, which means it is a short week for us on MarketFoolery. But you can look forward to Motley Fool Money, a tradition unlike any other, our Thanksgiving Special coming later this week on Motley Fool Money.

Moser: Oh, yeah. This is where I like the tradition unlike any other, and this is like, this is the episode where you close it out with that little somber masters' piano guitar music, right, ding-ding-ding. [laughs] Because that along with the masters, our Thanksgiving show and the masters, I mean, those are the two traditions, yeah, they are unlike any other.

Hill: Jason Moser, thanks for being here.

Moser: Thank you.

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd, I'm Chris Hill, thanks for listening, we'll see you tomorrow.