IPO Watch: DiDi and Krispy Kreme

Shares of DiDi (DIDI 2.33%) fell 15% after the Chinese government stopped new users from downloading the ride-hailing app as it conducts a cybersecurity review. Krispy Kreme (KKD) didn't raise as much money as it hoped with its IPO. In this episode of MarketFoolery, Motley Fool analyst Jason Moser analyzes those stories, discusses the challenge of adding to your winners, and shares why he believes inflation might not be as transitory as once thought.

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This video was recorded on July 6, 2021.

Chris Hill: It's Tuesday, July 6. Welcome to MarketFoolery. I'm Chris Hill, with me on a Tuesday, sorry for the confusion, it's Jason Moser. Thanks for being here.

Jason Moser: You just love to throw everything into chaos because every once in a while, you just got to keep people on their toes, right?

Hill: Absolutely, absolutely. We don't want people getting complacent. We're going to talk about the challenge of adding to your winners, but we're going to begin today with a couple of very recent IPOs. First up is DiDi. The Chinese ride-hailing app went public last week. I would say there was a decent amount of fanfare when DiDi went public. The market capital was somewhere in the neighborhood of $65 billion. That was then, this is now because shares of DiDi are falling 15% this morning because late on Friday, the Chinese government announced that new users would not be able to download the app while the government conducts a cybersecurity review of DiDi. I'll just add that The Wall Street Journal had a report that regulators had advised DiDi to postpone its listing in the U.S. until the cybersecurity review had happened. And here we are with one fell through by the Chinese government and billions of dollars in DiDi's market cap are gone.

Moser: Yeah. It sounds like this is an IPO that perhaps got a little bit ahead of itself. It feels like maybe they could have held off for a little while just in good faith. But like you said, here we are. We've talked about this on this show and Motley Fool Money a number of times through the years. I know this is going to probably sound harsh, and people can take this however they want. But ultimately, this makes me feel very good about my philosophy regarding investing in Chinese companies, which is, I don't, period, full stop, end of story. It doesn't have anything to do with the Chinese people, don't get me wrong, let's not go there. But we have to acknowledge the fact that this is a different country, a different form of government, there is a lack of transparency, there is a lack of full understanding of the culture and how things work. They just simply work differently in different places. 

For me, a lesson I learned early on as an investor was that there are so many opportunities out there that just to me, these don't represent opportunities where I feel like taking that leap. Every investment that you make, there is a leap of faith involved, and some leaps are greater than others. To me, when you invest in a Chinese domicile company, that leap of faith is just greater. Now, for some investors, that's going to be just fine, for others it's not. For me, I just feel like they're so many great opportunities out there. This stuff, just I'm not interested. I follow it, I learn from it, but I move on, I don't get involved. Don't think that I'm saying, "Oh, DiDi is just a bad investment." Because there are a lot of positive qualities to this business. It's clearly a large business, somewhere in the neighborhood of 493 million annual active riders, 41 million average daily transactions. This is a $60 billion company that operates in 14 countries outside of China. So I'm not saying this is a bad investment necessarily, this very well could represent an opportunity for interested investors. But for me, I go back to that old Warren Buffett saw where he said, "The stock market is a no-called-strike game. You don't have to swing in everything, you can wait for your pitch." I like how he wraps this up, he says, "The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum.'" As individual investors, we have the luxury of, hey, listen, unless you're just following Twitter 24/7, you don't have to swing. Everybody is telling you to take a swing, don't worry about it, you think for yourself, you don't necessarily have to take a swing if you don't want to. So for me, these are the reasons why I just don't take these swings because for me, personally, they're just not worth it.

Hill: Let me throw out one other stat about DiDi's business that I think bulls probably find pretty compelling. This is a business with 90% market share.

Moser: Yeah.

Hill: There are people who are bullish on Uber, and Uber's market share is somewhere in the neighborhood of, I think, it starts with a two, it's somewhere in the 20s. The fact that DiDi is so dominant, I'm not buying shares of DiDi, I'm sure there are some people who are looking at this as a buying opportunity. I think it's going to be fascinating to watch because there's a version of this where this is a momentary hit, this is a hit that DiDi takes for a couple of months while this review goes on, and then it's back to business as usual. As we've both mentioned, business is going pretty well for DiDi. But there's also a version of this where it really hamstrings the company.

Moser: Yeah. I think you're right on the former point. I think this is a temporary thing. I do believe this is something more than likely at the end of the day, the company recovers from this with no trouble. It is the dominant company in its market, in its region. I think with any of these ridesharing businesses really, the story is more about what are they going to be able to do beyond just ridesharing because the economics are pretty difficult and somewhat rely on eventually getting to autonomous driving at an acceptable scale, and we're still a ways away from that. But, yeah. Whenever you see a dominant company like this, you need to take note as an investor, those oftentimes represent just tremendous opportunities. This is just a part of the you've got your bull case in the bear cases here, the Chinese government, they are basically the ones calling the shots, what they say goes. It does seem like they are cracking down a little bit more, particularly on these market-dominating businesses. Again, that doesn't mean it can't be a bad investment, but it's just something you have to keep in mind if you're going to invest in a business like this. This is going to be one of those things you're just going to have to tolerate because I don't think this is the last time we're going to see something like this come up for DiDi and for any of these other China behemoths down the line.

Hill: Five years after being taken private, Krispy Kreme is back in the public markets. The doughnut maker went public last Thursday. Shares were up more than 20% on its IPO, although Krispy Kreme was hoping to go public in the range of $21 to $24 a share. There wasn't that level of interest so they went public at 17. They didn't raise as much money as they were hoping for. But that aside, this seems like a relatively smooth start back into the public markets for a business that is beloved for its product and also infamous for its troubles the first time it was a public company.

Moser: Yeah. Hopefully, this is going to be a better trip around the second time. But I do find it interesting that JAB spun things out given their prowess in the space. JAB owns Panera and Caribou Coffee, and a number of other brands. This is right in their wheelhouse. The one perspective there is it's common you see private equity spin these types of businesses back out and they capitalize on their investments. You typically see these businesses go public with a decent amount of debt, and Krispy Kreme is no exception there, I think they have somewhere in the neighborhood of one and a half billion dollars, and they don't have something on the balance sheet, if I remember correctly. This is a difficult one for me because I'm trying to separate my personal feelings from the actual facts of the matter. I grew up in Mount Pleasant, South Carolina, and Krispy Kreme was where it was at; there was no Dunkin Donuts at the time. You fast-forward to today and I think most of America really does run on Dunkin, for lack of a better phrase. Krispy Kreme still has its strong brand awareness there, strong brand equity, but I don't know that it necessarily possesses that same level of something like a Dunkin. So that could be a problem but the business itself has done pretty well over the past several years. If you look from fiscal 2016 to fiscal 2020, revenue grew at a compounded annual rate of 19%. That's really pretty impressive actually for a doughnut company. 

I was looking through their S-1, you always try to figure out, how do they really define the market opportunity here? There's just some very interesting language The way they look at this in the S1, they talk about the large, stable, and steadily growing global indulgence market. So that's really what Krispy Kreme is pursuing. It's their words, not mine, Chris. It's the indulgence market, and you know how indulgences go, you feel a little bit guilty when you do it but you're also happy when you do it, too.

Hill: Yeah. Indulgences are great.

Moser: They are great, but sometimes people think, "Well, maybe I shouldn't be doing this all the time?" Really to capitalize on that global indulgence market, they also own Insomnia Cookies, which is another interesting dynamic to the business. Cookies, brownies, cookie cakes, ice cream cookie-witches, this is a legitimate business, there's no question. It's another brand to go under that umbrella. But I tell you, what's really weird is to see that they were able to grow their revenue at that close to 20% compounded annual rate over the last five years or so, yet they have reported net losses for the last three fiscal years because they continue to reinvest back in the business. A lot of that has to do with the fact they have gone from being a franchise model really more toward being a company-owned model. I think 85% of the stores now are company-owned. That made me think back to, remember years back when we had the founder of Five Guys at Fool HQ, Jerry Murrell.

Hill: Yes.

Moser: He said something that just stuck out to me. We were asking him if he could do something different and he said, "Man, I would go back and buy back every single one of those Five Guys." That's a franchise model. He felt like owning those stores outright was just far more profitable in the long run, which gave him more control. That could be actually a really good thing for Krispy Kreme. I wonder if they're not lacking a little focus: the use of proceeds, they don't really define anything that they are going after right now, it's just they haven't identified what they call a large single-use case for those proceeds. They're going to just keep it on the balance sheet for now and try to figure out exactly what to do. I think the Insomnia Cookies are a clue as to what the Krispy Kreme of the future is going to look like, and I think it's going to be an umbrella where we see more brands consolidate under that umbrella over time. I don't disagree with the appealing nature of the indulgence market. I think the idea is just you need to have as many of those indulgences under one umbrella as you possibly can. 

Hill: Well, the store strategy for Insomnia Cookies has always struck me as being particularly brilliant because they make good cookies, and they basically look to locate near colleges. They're just targeting the college market. Who is going to treat themselves late at night, to some warm, freshly baked cookies? college students.

Moser: Yeah. Marijuana laws around the country have become more relaxed. I can't help but feel like maybe that's by design, I'm just throwing it out there; maybe I'm wrong. But I think you're right there, and I also think it's really noteworthy that Insomnia has been such a strong digital brand as well. So many of those sales are actually digital in nature, I think it's better than 50%, they quoted as far as the sales of those Insomnia products. I think we're seeing the beginning stages of ultimately what the Krispy Kreme of the user is going to be, I would not be surprised at all here over the course of the next six months, the back half of the year, it wouldn't shock me at all to see them make another little acquisition with some of that money from the IPO, because it really does seem like they are trying to diversify away from just being the Krispy Kreme doughnut company, into really focusing on that greater, as I said, indulgence market, and it could certainly be a lot of opportunity either for that.

Hill: Our email address is [email protected]. You can also hit us up with a question on Twitter, the handle is simply @MarketFoolery. I got a question from Colin Roy on Twitter. He asked: "How do I add to a good winner without it feeling bad? I bought Cloudflare in March for $66 a share, it's now at $108. The business hasn't changed, but it's up 60%, and the price to sales was not low at $66 a share. How do I stomach buying more, at this much of an increase. it's a problem I'm lucky to have. Always love to see the recognition." And in this case, it's Colin saying yeah, this is a good problem.

Moser: Yeah.

Hill: It's still a challenge, it's still something to wrestle with, but as investing problems go, this is one of the better ones.

Moser: It really is. I wish there were an easy way to get around this, I will say, I think it's one of those things where put simply, the more you do it, the easier it gets. It really is true, the more you do this, the easier it gets. I'm speaking from personal experience here. When you first start buying stocks for more than you initially bought them, you feel like it's defeating the purpose. But I think when you start looking at it from our perspective of that time in the market versus timing the market, then it starts to become a little bit more apparent. There's a peace of mind to building positions in winners, it actually mitigates risk to your portfolio, in that you're adding to something with a track record. It is a stronger business in theory now versus when you bought it, however long ago you bought it. So you are adding to something that's even stronger than before. It's answered or it's in the process of answering some of those important questions that you may have in regard to it as an investment. I try to look at it from that perspective, and then I think understanding that just the more you do it, the easier it gets because you start looking back through time, and if you can see positions that you've held for five years, six, seven years, and you can start to see how great those gains can be for those winners over time, as that wealth continues to compound, it just becomes a lot more apparent in hindsight, particularly the longer the time has been. 

For me, it is a bit of a sometimes you got to hold your nose and click the button. And I think it's also worth noting that it never is fully something that you overcome. I'll just use this as a personal experience real quick. Last year when we hit that bear market, Starbucks was one of the many really high-quality businesses out there that just got shellacked. I finally was able to go ahead and open a position in Starbucks in my IRA because I felt like it's a company that I want to own for the next 20 years, I thought, That made sense to me. I thought but you know what, $55 a share, it was a great opportunity, but the way things were going at the time I thought, I bet we're going to see this price go down even further. So I'm just going to buy a small starter position and then I'll just continue to add to it. Then of course, fast-forward to today the stock has doubled and I'm soon looking back thinking, why didn't I just back up the truck? Now, I've got to go through and convince myself to add to this winner. But I'll tell you it's not very hard for me to make that case because I have other examples in my portfolio that show that it has worked very well. It is one of those things that the more you do it, the easier it gets.

Hill: Real quick before I let you go. I know on Motley Fool Money last week, you and Emily Flippen, and I did a little bit of looking back at the first half of 2021, looking ahead to the second half, you did a TV hit this morning on the local Fox affiliates. Anything you can share from that in terms of, because some of the dozens of listeners live in the DMV, but most of them don't. Let's just assume that most people didn't see your TV appearance this morning. What else can you share from that in terms of just how you're thinking about the second half of this year?

Moser: Yeah. Well, it was seven o'clock when I did that, so I'm not even sure I saw it, Chris, to be honest with you. But it was basically just a discussion about what to expect for the back half of the year. You're right, we've completed the first half of the year, and then we always love to look at quarters, and halves, and round numbers and what-not. It was a tremendous first half of the year, with the market up close to 15%, and given where we were, that to me is just an unmitigated success. Then you look at this back half of the year and what it may hold, there are a lot of potential tailwinds for investors. One of the things I noticed, and we've seen this data all over, but I saw a Wayfair investor conference here just a week ago or so, and CEO Niraj Shah mentioned some really fascinating data. You look at savings account balances here domestically, we've gone from $800 billion or so pre-pandemic to over $3 trillion now, post-pandemic essentially, and that represents basically like four years of savings growth in less than a year. 

In simple terms, the consumer is locked and loaded, there are a lot of opportunities if you're a consumer out there right now. Given that we are not really that far away from going back to school already, it sounds like it is shaping up to be a very positive back-to-school season. I think we're poised to have potentially a very exciting holiday season. If you couple that with the spending power that consumers in theory should have now between the account balances, they've been able to pay down some of that credit card debt, we see the employment picture starting to look better, there are plenty of reasons why we should see continued positive news here for the back half of the year. Now I will say the one thing that really matters to me, the question that we need to follow is that I word. The inflation headline that we've been talking about so much, and that's just simply something that is becoming more and more apparent. We're seeing oil prices at record highs, over the past several years at least. We're seeing companies more and more price increases coming out. We saw Chipotle and all that long ago talk about a 4% price increase. I don't know if you saw the General Mills headline here, they're talking about 7% price increases across the board here over the next year. 

I think we're just starting to see more and more signs that maybe inflation might not necessarily be as transitory. And seeing Jamie Dimon with JPMorgan, he's been hoarding a little cash as well. Under that same assumption, that could be something just to keep an eye on. Obviously the semiconductor shortage continues to be a headline, and I think that might drag on a little bit longer than we all hoped. That impacts consumer behavior because it limits the supply. You're seeing everywhere from automakers to game console makers and everything in between, they're all having some supply chain issues. I see plenty of reasons to be optimistic for the back half of the year, clearly there are things to keep an eye on. But, yeah, to me it looks like we have the potential for another strong back half of the year.

Hill: Jason Moser, thanks so much 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.