Square Makes a Deal With Jay-Z, and Okta Buys a Rival

In this episode of MarketFoolery, host Chris Hill is joined by Motley Fool analyst Bill Mann to discuss Okta (OKTA 2.20%) buying rival Auth0 for $6.5 billion in stock. Also, Square (SQ 0.71%) buys Tidal for $300 million in cash and stock, and adds Jay-Z to the board of directors. Mann also analyzes those stories and discusses whether American Eagle Outfitters' (AEO -0.38%) recent hot streak is sustainable.

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This video was recorded on March 4, 2021.

Chris Hill: It's Thursday, March 4. Welcome to MarketFoolery. I'm Chris Hill. With me today, wrapping up the week, Mr. Bill Mann. Good to see you.

Bill Mann: How are you, my friend?

Hill: I'm good. We have three stories that we're going to talk about, and any one of them could be our lead story, but I am going to choose to start our conversation with Okta.

Mann: Are you just pulling this one out of the bag? We're randomly going.

Hill: No, it's not random. It's one of those things where, it's like I want to tell the other two stories you were really close. [laughs] You were almost the lead story, as though that actually matters to anyone.

Mann: Exactly. [laughs] It was a really hard decision for me.

Hill: It was a really hard decision.

Mann: For me. [laughs]

Hill: Okta is the cloud software business that lets office workers, including us at The Motley Fool, access all of their apps through a secure online service, and Okta is buying one of its rivals, Auth0, is that how we are pronouncing? It's A-U-T-H and then the number zero.

Mann: I've only read it, and so right as we were getting ready to get on, I was about to look up how they describe themselves. I think it's Authi-zero.

Hill: OK.

Mann: Why don't you say Auth0 for the rest of the time and I'll say Auth zero for the rest of the time and we'll see what happens?

Hill: OK. I'm down with that.

Mann: OK. Good.

Hill: Because certainly deciding to name your company that and say this is how we're pronouncing it, that's a choice they can make.

Mann: You deserve what you get.

Hill: So, Auth0 is one of Okta's rivals, and Okta is buying them for $6.5 billion. This is an all-stock deal. Apparently, nobody outside of Okta's executive suite thinks this is a good deal at a good price because shares of Okta before the market opened were down more than 10%. It is rebounded, it's now down only about 3%. You tell me, is the market getting this one wrong? Is this a good deal for Okta?

Mann: Well, this has come alongside Okta's earnings report. Okta was a little bit light on growth from what was expected. They are growing at 30%. The thing that I would say about Okta is that it has definitely been a web security play, but it's also been very much a stay-at-home name. It is something that allows companies to allow their employees to access the network remotely. There has been a very big deal for Okta over this last year. The stock has traded as low as $88, and as high as $280, which usually tells me that the market really has no idea how to price Okta. Okta came out and they are buying Auth0 for $6.5 billion. Auth0, in July, did a capital raise of $1.9 billion. This is a substantial premium to what professional investors have thought that Auth0 was worth within the time of the coronavirus. It's a pretty big premium, but I would say, in defense of Okta, they are at a minimum taking out a reasonable competitor. It's a good competitor for them. I happen to think that this is a great transaction, a great buy for them.

Hill: Is there any regulatory concern that Okta's shareholders should have, that this might not be allowed to happen?

Mann: I don't think so. I guess it would depend on how you define web security. Web security is a really competitive field. So, the fact that they are maybe the leading -- what you might call -- password locker or internet access point provider, I don't think that they're going to have much in the way of worries from a competent regulator. Now, maybe somebody might be angry about their passwords. I spend an unusual amount of time [...] passwords and double factors and things of that nature. There might be someone who isn't all that happy, but I don't think they'll have a problem.

Hill: For all of the rise of Okta, for all the growth the company has had, and this maybe goes on the side of the ledger that says, "No, this is going to get regulatory approval," it's a $30 billion company. This is not a $250 billion company taking out an up-and-coming rival. Okta, for all the growth the company has experienced, it's not so big that I think this necessarily gets a lot of concern from regulators.

Mann: Keep in mind, for Okta, they're still almost entirely corporate. They have corporate clients. It's not something that's, generally speaking, available to individuals. There's plenty of room for other competitors or for Okta to become much more of a monster than it is now. It is a company that I admire greatly. If you really want to know more about this deal, and they're thinking about it, Todd McKinnon, who's the CEO of Okta, put out a great blog post about it that described exactly their thinking. I think they overpaid, but I think that ultimately, if you have the opportunity to consolidate, and Okta's game is consolidation, it makes some sense.

Hill: Square is getting a new board member, because the digital payments company is buying a majority stake in Tidal, the streaming music company that is owned by Jay-Z. It is a cash and stock deal worth $300 million, and Mr. Carter will be joining Square's board. Shares of Square are down a little bit on this news, although you mentioned the blog post from Todd McKinnon. Let me just read the statement that Jack Dorsey put out on Twitter, because he answered the very obvious question: Why would a digital payments company buy a music streaming company? He wrote, "It comes down to a simple idea, finding new ways for artists to support their work. New ideas are found at the intersections, and we believe there's a compelling one between music and the economy. Making the economy work for artists is similar to what Square has done for sellers."

Mann: Brilliant. I agree. [laughs]

Hill: Here's the thing. I don't know that I agree, but I do think Jack Dorsey, in his leadership of Square, has more than earned the benefit of the doubt to make this deal.

Mann: When it comes right down to it, Jack Dorsey is near the top of the list of CEOs who really don't give a crap what you think. He really is a differentiated, iconoclastic thinker. One of the things that makes no sense to me, but is in fact true, is that one of the Square properties, the Cash App, has a massive audience in the African-American community. It's almost as if the African-American community has centered around Cash App, where a lot of other people use Venmo. The fact that they are bringing in an icon of Jay-Z's, really how important he is, I think this is really meaningful for a lot of ways where Square is, in some ways, doubling down on natural advantages that it has within its client base, and then also, to Jack's point, how they are thinking about using these things to compensate artists.

Hill: I was thinking this morning of a lot of great Jay-Z lyrics, but certainly, the most appropriate one for this deal is, "I'm not a businessman, I'm a business, man."

Mann: Yeah. [laughs]

Hill: We're pointing out he bought Tidal for $56 million and he is selling a majority stake for $300 million.

Mann: For more. [laughs]

Hill: For a lot more.

Mann: He is holding onto some of it. Yeah.

Hill: Right. I'm not a Square shareholder. I think I'd be more excited about the potential for him on the board of directors and his helping Jack Dorsey with the next decade of stewardship of this business than I am about this. Because unlike Okta, Square actually is at the point where it's a $100 billion company. Look, a $300 million deal, obviously they want it to work. If it doesn't, and they have to write it down, they're big enough that they can do that without really breaking a sweat. Again, Dorsey, just look at the last five years of what this company has done under him. You know what? If this is a total miss, he's more than earned that right.

Mann: I agree, and Square and Tidal and Cash App, all have an emotional resonance with people. They all have an emotional resonance. So, the thought of bringing in something else where you want to identify with one of their brands and have that brand help stand up other parts of their business, I think it's a good deal. I really do.

Hill: Shares of American Eagle Outfitters are hitting a two-year high this morning after fourth-quarter profits in revenue came in a little bit higher than expectations. They didn't really blow the doors off anyone, but they were higher than expected. Online sales helped to make up for what was happening, or rather what was not happening, in the stores. I was saying this to you earlier this morning, in the past 10 years, we've seen every publicly traded apparel stock go on a hot streak for three or four quarters or nine to maybe 15 month periods where you can look at any one of them.

Mann: List them out.

Hill: Including Abercrombie & Fitch. You can look at any one of them and say, "Boy, that would've been a good short-term time to own that stock." That's what I thought of when I looked at this. This stock has now doubled over the past year. Is American Eagle actually turning their business around or is this, unfortunately, just another short-term hot streak?

Mann: It remains to be seen, and I think you could say that about anything in the market. But if you think about it, Abercrombie & Fitch is no longer particularly relevant. Aeropostale doesn't exist anymore. The Gap is trundling along. They really have survived in a market in which their competitors have rendered themselves obsolete in some ways. I am the worst person to ask about fashion risk. It is so easy within that industry to zig at a time in which tastes go the other direction. But it really is fascinating that what has generally been a mall-based retailer, as American Eagle is, has done as well as they have. I think, actually, they finally have probably gotten smart about getting closer to the American University Eagles. That big brand, The U, and making that much more of a close tie-in. I'm kidding, they haven't done that. They should do that. Don't you think?

Hill: Absolutely, they should. [laughs] But we've seen this in athletic apparel, we've certainly seen this in straight up apparel where some businesses are doing a better job of walking that tightrope of up until this point or certainly up until maybe five years ago, 10 years ago. We were all about the malls. Then, do we create our own stores? How much do we invest in online at the risk of upsetting the malls based locations that we're depending on right now? Again, over the last 12 months, American Eagle has done a really good job of this. I'm not routing against them, but I'm not seeing anything just yet that makes me say, "They've figured it out."

Mann: Well, I went back and looked. Their revenues over the last 12 months is about $3.7 billion. Their revenues in 2006 were about $3.3 billion, so they haven't grown. They have not grown over an extensive period of time. That doesn't necessarily mean that they haven't figured things out. It is a very different environment and it will very much be a different environment as we begin to come out from the Groundhog Day of the pandemic and the shutdown. I suspect this is a company that's going to continue bumping along. It's not a stock that I'm particularly interested in, at least partially, because as I've said before, I tend to be wrong about fashion companies, which is something that every investor should know about yourself, the types of things that you tend to be right about, that you tend to be wrong about. But this very much is a bucket of wrong for me, but I'm glad to see that they are doing well.

Hill: Today is National Bill Day, because it is Bill Barker's birthday. It is your birthday.

Mann: All day.

Hill: All day.

Mann: Thank you for that. I want to give a shout out to everyone who has March birthdays, because a lot of you 11-monthers might not think about this. But March 2020 to have a birthday day was terrible because everybody was terrified and everybody was paying attention to their own stuff and nobody thought about our birthdays. Not that birthdays later in the year were better, but people were thinking about it. So, if you've got a March person in your life, really give them some thoughts this year. I'll my email address in case you want to think about me. [laughs] I'm just kidding. But yes. Thank you for that, Chris. It's a great day to have a birthday, just prior the big basketball tournament, things are starting to warm up here in this part of the United States of America. I do love it. So, thanks so much and happy birthday to Bill Barker.

Hill: Indeed. Everybody should celebrate by drinking multiple cups of coffee [laughs] and going on some tangents.

Mann: Not that this is great radio, but I'm currently holding up my two cups of coffee. I'm double-fisting coffee as we speak.

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 addition to MarketFoolery. The show was mixed by Dan Boyd. I'm Chris Hill. Thanks for listening, we'll see you on Monday.