Tech company PagerDuty (NYSE: PD) had its IPO on Thursday, and shares quickly rose more than 60% from their opening price. In today's Market Foolery, host Mac Greer and Motley Fool analysts Ron Gross and Andy Cross explain what this company does, why it's so exciting for the long term, and why investors shouldn't judge this book by its cover. Plus, some other market news. Jeff Bezos started a public company executive flame war in his annual letter to shareholders. He shed some light on business plans, too. Hollywood continues to ask, "Can we make it?" rather than "Should we make it?" At least the upcoming Grease prequel can't be worse than Grease 2. Probably. Maybe. We can hope.
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This video was recorded on April 11, 2019.
Mac Greer: It's Thursday, April 11th. Welcome to Market Foolery! I'm Mac Greer. Joining me in studio, we have Motley Fool analysts Andy Cross and Ron Gross. Gentlemen, welcome! How are we doing?
Andy Cross: Hey, Mac! Great!
Ron Gross: How are you, sir?
Cross: Thanks for having us!
Greer: I'm good! Good to have you here! We have lots to talk about. We've got, well, Jeff Bezos out with his annual letter and he is talking some smack.
Gross: [laughs] It's good stuff.
Greer: It is good stuff. We'll get to that. We've got some more Tesla (NASDAQ: TSLA) news involving their big Gigafactory in Nevada.
Gross: Not as big as maybe yesterday. [laughs]
Greer: Not as big as Gigafactory 1. And guys -- I want to give our listeners fair warning -- we're going to talk about an incredibly disturbing story. Of course, we're talking about the prequel to the movie Grease. Yes, they're talking about making a prequel.
Gross: Ah, so many thoughts, so many things to say. I'll save it.
Greer: It's so wrong on so many levels.
Gross: Or so right.
Greer: I don't think so.
Gross: We'll get into it.
Greer: OK. Tell me more. Let's begin, though, with a big IPO. PagerDuty went public on Thursday and shares were up more than 60%. Now, Ron, this is a software company with a really, really bad name.
Gross: [laughs] It truly is!
Greer: Let's just establish that. It's unfortunate. So, what exactly is PagerDuty, and why the excitement here?
Gross: As The Motley Fool's tech expert, I think this is certainly appropriate for me to answer. [laughs] Thank you for coming to me! I appreciate it!
Greer: Ah, sarcasm!
Gross: So, it's a software company that basically absorbs the signals from all the software that your company is throwing out there, whether you use Slack or Okta or whatever, all the different software systems.
Greer: That's a lot of signals.
Gross: It's a lot of signals. They interpret it. They decide if any action is needed, if there's anything going wrong, any glitches, any problems. Then they'll send that information to the appropriate person in the organization so the problem can be resolved. Makes perfect sense. Lots of companies need a software such as this. They are not the only people in the world that do it. Atlassian, Splunk have a presence in the space as well. But they have some great clients. They are growing really quickly. There's a lot of excitement around the company and its growth, and that's why you see the stock really pop on its first day of trading.
Cross: They went public at $24 a share. As we're talking, it's up around $39. A really nice first day for PagerDuty. It's a pretty interesting business. I've been digging through the S-1, which is the public filing when you announce you're going to go public. They specialize in this on-call management, like Ron said. They call it "incidence response." They're really the software layer in there, trying to monitor what's happening from the digital signals that Ron mentioned, then help the companies make sense of it. It's built by developers, founded by developers who used to be at Amazon (NASDAQ: AMZN). The CTO and co-founder, Alex Solomon owns more than 7% of the stock. Its CEO and co-chairwoman, Jennifer Tejada, she owns more than 6% of the stock. Really nice day for them.
It's very heavily venture capital backed, as a lot of these companies are. It does more than $100 million in revenue. Now maybe the market cap is up near $3 billion, around there. A really nice day for a company that's pretty interesting. Like Ron said, competes with Atlassian. Has more than 11,000 clients, including a third of the Fortune 500. It's playing in a really big space with a lot of excitement now.
Gross: Estimated $25 billion potential market that these companies are selling into. The company's not profitable, but it's only -- "only," [laughs] -- only lost around $40 million or so last year. That's not actually a big loss. Probably, with just a little bit of growth, they could turn profitable, which one would hope with a $3 billion valuation.
Cross: Yeah, and they spend a significant amount of dollars on research and development, north of 30%, which is exceptional. It's really a developing platform. They have more than 350,000 paid clients who are tied into their platform, and developers. It's really trying to play and provide solutions in this developer and operations, DevOps, space that allows these companies to collaborate and work closer together. That's a really hot space right now that investors and engineers are looking at.
Greer: Guys, let's pull the lens back. Probably a good reminder here that the first-day IPO pop, well, that's not how it always plays out. We have Lyft (NASDAQ: LYFT), which went public in late March -- just a few weeks ago. It had a nice first day. Shares hit a high of around $88. Now, they trade around $61 -- a new all-time low, well below the IPO price. Does Lyft and that IPO experience give us any caution? Does it tell us anything about PagerDuty?
Gross: Yes. It tells you a lot about IPOs in general. All stock pricing, in fact, is based on the supply and the demand of the stock. And sometimes, the demand for an IPO gets a little bit out of whack with the realities of the business and the fundamentals of the business. It's a case-by-case basis. I'm not saying that's the case here with PagerDuty. If I was the CEO of a company and I found out that my investor bankers underpriced me by 50%, I might be a little bit angry about that, actually, because I would want to capture more of that cash in the actual IPO price than just in the aftermarket. So, just be careful. Sometimes the demand is a little bit too hyped. IPOs are somewhat hot right now. There's no real rush, especially for long-term investors. Nothing you feel like you're going to have to miss out on. It's fine to just watch a company and learn about it.
Cross: Yeah, they're hot, they're smoking right now. Lyft's performance was a drag, but there's a lot of excitement in the IPO market right now. PagerDuty is one of these cloud-based companies that came -- Ron's right. If you're one of the companies, and saying, "Wow, gosh, there's a little bit of money we left on the table." So it's a fine line in how they price these. Actually, PagerDuty was originally priced somewhere below $20, I think $19 or $20. They ended up going for $24, and the stock's been in the high $30. A fine line in how you think about that.
That's where you have to be a little bit careful when you're investing. Not all your IPOs, when they come out public on day one, are going to go up to 60%.
Greer: OK, guys. We were talking before we came on-air about how bad the name is. As we wrap up here, I've got to ask you, what's the worst part of the name? Is it the Pager? Or is it the Duty? I genuinely don't know. I think they're both so bad. If you could only replace one of those words, what are you replacing?
Gross: I would have to replace Pager, to be honest with you. It's just such an old connotation.
Greer: It's terrible!
Gross: Duty is fine. [laughs] It's doing double-duty. It's working overtime. It's doing what it does. I don't know what Pager is about.
Cross: I would change the second part of the name, Duty.
Greer: Fair enough.
Cross: I'm going to leave it out there. I'm just going to let that float out there.
Gross: Also, by the way, a character in Grease. Doody.
Gross: Full circle.
Greer: Teasing our final story, Ron Gross. Yeah, I'm getting rid of the pager. I'm with you, Ron!
Shares of Tesla down on reports that Tesla and partner Panasonic have suspended their investment in the expansion of the Gigafactory 1. That's Tesla's ginormous factory in Nevada, where they make the lithium ion batteries. Guys, what does this mean for investors?
Cross: Let me get this straight. They decided not to invest any more money, make a capital allocation decision, to be careful with how they're spending money, and investors are all worried and selling the stock down? To me, I'm looking at this saying, I don't know if Elon made this decision or Panasonic was like, "No, we're not going to expand the factory next year," they were hoping to expand the factory by significant dollars next year, and now they're going to slow that down. Whether he made the decision or Panasonic forced the decision upon them, still, they're not going to spend money. They're looking at the market and saying, "Wow, we're going to do 360,000 to 400,000 cars this year. Maybe a little bit slower. We don't need that capacity right now so we're going to pull back on our spending." I think it's a good decision if you're Tesla.
Gross: Here's the thing. You get into an argument with anyone about Tesla's valuation, and say it's ridiculous for an electric car company be valued where it is. And they'll just fire back at you, shaking their head, "It's not a car company. How dare you? It's much bigger than that. It's an energy company. It's going to change the way we think about many different industries." Back in the day, they said the point of the Gigafactory was to make Tesla into something more than an electric vehicle manufacturer. The Gigafactory is crucial to helping realize the company's mission, one that goes way beyond just electric cars. So, if you see the Gigafactory being pulled back on -- maybe it's short-term, maybe it's long-term, I'm not sure, we'll have to see how it plays out -- it has to make you question, what is Tesla? Is it a car company or not? Are they slowing growth in the areas that are not car-related? What does that mean for valuation?
Cross: We saw in the first quarter, the projected first quarter sales numbers are not going to look so good compared to the fourth quarter. Some slowing growth there. Maybe a lot of that has to do with the subsidies that are going to be pulled back this year. I just think, yes, they're looking at their market saying, "We don't need that capacity. Let's not spend until we actually need it." Granted, they are very forward-looking when it comes to trying to build this great business, as Ron said, in lots of different areas, not just in cars, but lots of different electric spaces. So, trying to figure out how to allocate capital when capital allocation and capital need for Tesla is a critical issue that investors focus a lot on. They're not going to spend the money right now.
Greer: Guys, Jeff Bezos, Amazon's CEO, is out with his annual letter to shareholders. He's feeling a bit feisty. This is a quote. "Today, I challenge our top retail competitors -- you know who you are -- to match our employee benefits and our $15 minimum wage. Do it. Better yet, go to $16 and throw the gauntlet back at us. It's the kind of competition that will benefit everyone." That's from Bezos, and it didn't take long for Walmart to respond. This is Walmart's executive VP of corporate affairs, Dan Bartlett. He shot back, "Hey, retail competitors out there -- you know who you are -- how about paying your taxes?"
Andy, what do you think?
Gross: It's on!
Cross: I love that kind of conversation and debate! Obviously, Jeff Bezos is a very aggressive competitor, probably one of the most competitive CEOs out there. And he went out there very publicly in his space -- in a letter, by the way, that had lots of good information in there, not just this. There's a lot of good stuff in there.
Greer: I should clarify that in 2018, Amazon paid $0 in U.S. federal income taxes based on $11 billion in profits. That's because we had the tax cut, we had carry-forward losses, tax credits. So there are multiple reasons. But they did not pay anything in federal income taxes in 2018.
Cross: Yeah, compared to the likes of Walmart, that pays substantial amounts in taxes and has for years and years. I think he's throwing this gauntlet down because he cares so much about how they pay their employees. To come out boldly like that, like, hey, yeah, this is way that Jeff Bezos kind of rolls. And hey, I applaud Walmart for getting out there and throwing it back at him.
Gross: Besides that, my takeaway from the letter was that he wanted to give himself cover that he's going to be trying some big and bold things in the future. They're not going to all work out. Some of them might lead to billion-dollar losses, or hundred-million-dollar losses, like the Amazon Fire phone. He doesn't need to give himself cover. He can do what he wants. But I think he was just warning everyone, "Especially if you're going to own our stock, be prepared! I'm going to be making some big bets and they're not all going to work out."
Greer: To that point, Ron, I love this language. It just shows you what a position of strength Amazon is in. Here was his phrase. He said, "We will occasionally have multibillion-dollar failures."
Gross: Hopefully he'll have more multibillion-dollar successes that will offset that. Otherwise things are going to go badly quickly. But he's just warning, like, we're going to be making some big bets.
Cross: Warren Buffett has talked about this at Berkshire Hathaway, when you get that big and you have that much capital, to move the needle, you can't just go picking around the edges. You have to swing from the fences. And Bezos has. He talked about the success they had by the third-party sellers in his annual letter. So to move that needle forward of Amazon, he's got to make those bets, and they won't all work out, but those that do, his history is pretty good that it creates a lot of value for customers and for shareholders.
Greer: Well, speaking of bets that may not work out. Our final story, a story that we are so excited about, is that fair?
Gross: [laughs] You are so excited -- no, no, we're all excited about it!
Greer: I know we're all Grease fans. Let's lead with the truth, complete transparency. Paramount is working on a prequel to the movie Grease. The prequel will be called Summer Loving. Woof!
Cross: Is it Lovin' or Loving?
Greer: I think Loving.
Greer: No apostrophe?
Greer: Yes. So, for some context. Grease, the original movie comes out in 1978. Earns $190 million in the box office. Adjusted for inflation, that's almost $700 million today. That's a big number. Grease 2 earned only $15 million. Adjusted for inflation... well, it's still really bad. I don't know what it is. So, Ron and Andy, we're all big fans of Grease. Why mess with perfection?
Gross: Alright, so...
Cross: They already did! And they messed it up!
Gross: All you have to know is that Grease 2 was based on bowling. Bowling was a big part of it.
Greer: I never saw Grease 2, and I will not see Grease 2.
Gross: Instead of the big drag race, I think there was a big bowling competition, but I could be off on that. Grease is based on a play of the same name. Back in my younger days, I was a bit of a drummer. I actually played the drums for this show in college. The theater department put on a production, and I was the drummer in the pit band. So I literally know every note of every song, every lyric, of this show. It will always be near and dear to my heart. And the movie, I thought, was absolutely fantastic.
Gross: Especially for the age I was in. It was the age of Happy Days and the leather jacket and Fonzie, and then Zuko shows up with his leather jacket, and Kenickie, it was amazing!
Greer: Kenickie and Rizzo, to the two most underrated characters... I mean, Ron mentioned Doody earlier. I'd forgotten he was even in it.
Gross: He was part of the Thunderbirds.
Greer: I remember him now! Andy?
Cross: Olivia Newton John, Sandy's character, for me, right up there with Farrah Fawcett.
Gross: Tell me about it!
Greer: Tell me about it!
Cross: I was just Hopelessly Devoted to Sarah, err, Sandy there.
Greer: This probably won't shock you; I was a big Olivia Newton John fan. When I was a kid, I collected autographs, and collected primarily baseball and football autographs, but celebrity autographs too. And somehow, my older brother and I had this address list where you could write celebrities. It was usually through their agents or their publicist. I was probably 10 years old. I spent the better part of a day writing Olivia Newton John. I was at our table --
Gross: [laughs] I'm so sorry, Mac!
Greer: -- I was writing, "Dear Olivia," and I had some photos I cut out of magazines that I was going to have her sign. And my mom is a saint. I spent probably two or three hours working on this letter. And I remember my mom finally coming in and basically saying, "That's enough!"
Gross: [laughs] Oh, Mrs. Greer, you're a good woman!
Greer: "I think you need to get outside; you need to let it go." And she was right. And I know that your job as a parent is to worry about your kid and I probably was a little unhealthy in my obsession.
Cross: Very devoted!
Greer: But I will say, I've got autographed photos of Olivia Newton John somewhere.
Cross: The question that people may have is, were you early Elvis or late fat Elvis fan? Were you Sandy early in the movie fan? Or were you Sandy late in the movie fan?
Gross: That's a great question!
Cross: It's a great question! I will tell you, I was Olivia Newton John, Have You Never Been Mellow fan. That predates Grease. I have to say, I'm early Sandy.
Gross: When Frenchie got her and helped leather her out a little bit, used her beauty school background, that was special.
Cross: I'm just glad she didn't give her Frenchie's hair. That's what I was worried about.
Gross: Can we agree that the ending is really bad, when they fly off in the car into the air?
Gross: That's, like, you have to rewrite that. That's ridiculous!
Greer: So here's my idea for a Grease movie, if you're going to do it. It's Grease: The Later Years. Zuko is 60. Olivia Newton John was actually older when they filmed Grease. She's around 70 now. It begins with Danny and Sandy at Home Depot, and they're getting frustrated because they can't get someone to help them. Then maybe you cut to them talking asset allocation. They're nearing retirement. They're having a debate about fixed income vs. equities. Come on!
Gross: [laughs] Does Travolta have hair? Or no hair?
Greer: There's nightlife. They've got a low-speed vehicle or golf cart. There's some socializing.
Gross: A Prius.
Greer: But it's more realistic! They talk about their health maladies!
Gross: No, alright, back to the original! I'm a fan of the idea of a prequel but it's all in the execution. It could be amazing!
Gross: It's likely not going to be.
Greer: It's going to be the summer before they rediscover each other.
Gross: Give it a chance!
Gross: Is there going to be music?
Greer: I don't know, but you're messing with perfection! I don't need that summer scout out for me!
Gross: Our engineer is so bored!
Greer: Yeah, he is. Speaking of, Dan Boyd, you're of a different generation. What do you think of Grease? Then, follow-up question, what do you think about this discussion we just had?
Dan Boyd: Well, Grease is a movie. And I've seen it. It has songs. Some of them are good. Some of them aren't as good. I've heard them. I happen to share a birthday with Olivia Newton John.
Cross: What day is that?
Boyd: September 26th. The Christmas in September, we call it.
Cross: I'm sure Mac knew that.
Gross: So, is the best podcast you've ever heard? Or the greatest podcast you've ever heard?
Boyd: Anybody who knows Mac Greer understands that he is a rabid fan of '70s TV and film.
Boyd: As a person who was born in the decade after the '70s, I have no connection whatsoever to any of it. So this discussion for me has been both interesting and titillating.
Greer: Dan, have you never been mellow?
Boyd: I'm feeling pretty mellow right now. Thanks for asking!
Gross: I think we've done it!
Greer: OK, so, the desert island question. Here you go! As we wrap up. If you're on a desert island for the next five years, you're looking at one of these stocks. What are you going with? We've got PagerDuty -- terrible name. We've got Lyft. We've got Tesla. We've got Amazon. Let's throw in Grease: The Prequel.
Cross: I'm going to say PagerDuty. Here's my prediction. I think within three years, Atlassian will buy PagerDuty.
Gross: Oh, that's interesting!
Greer: And change the name!
Greer: They'll have to!
Gross: I'm sticking with Bezos and Amazon.
Greer: You can always email us at email@example.com with your questions, your comments, your flames. Let us know what you would rather see -- Summer Loving, a prequel to Grease, or Grease: The Later Years. Sunset Loving. Andy, Ron, thanks for joining me!
Cross: Thanks, Mac!
Gross: Thank you, Mac! Always a pleasure!
Greer: As always people, on the show 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 it for this edition of MarketFoolery! The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! Grease is the word!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Andy Cross owns shares of Berkshire Hathaway (B shares) and Home Depot. Mac Greer owns shares of Amazon. Ron Gross owns shares of Amazon and Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Amazon, Atlassian, Berkshire Hathaway (B shares), Okta, Splunk, and Tesla. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.