On this Market Foolery podcast, host Mac Greer is joined by David Kretzmann of Supernova and Rule Breakers, and Matt Argersinger of Million Dollar Portfolio to discuss some remarkable earnings season results.
Facebook (FB +0.35%) turned in another powerful quarter of growth, but how long can it keep up this pace? PayPal (PYPL 1.34%) outperformed again, making the Fools wonder if a buyout is in the cards. And rural retailer Tractor Supply Company (TSCO 3.90%) continued to demonstrate the benefits of being in an Amazon.com (AMZN +0.37%)-resistant niche. But as for B-Dubs, well, let's just say that if your whole business model is built around the idea that chicken wings are cheap, and then wholesale wing prices take flight, nothing else is going to go easy for you.
A full transcript follows the video.
This video was recorded on July 27, 2017.
Mac Greer: It's Thursday, July 27. Welcome to Market Foolery. I'm Mac Greer, and joining me in studio we have Matt Argersinger from Motley Fool Million Dollar Portfolio and David Kretzmann from Motley Fool Supernova. Gentlemen, welcome! Are you feeling it?
David Kretzmann: Feeling it as always!
Matt Argersinger: Feeling good!
Greer: OK, we have lots of big earnings stories to talk about, and we're going to talk later about PayPal. We're going to talk some Buffalo Wild Wings (BWLD +0.00%) and Tractor Supply. David, I know that's a company that you follow.
Kretzmann: Oh, yes!
Greer: But let's begin with a sleepy little social-networking site called Facebook. Guys, Facebook just keeps going up. The stock up big on Thursday. Matt, stronger than expected mobile ad revenue and now more than two billion monthly active users.
Argersinger: Yeah. I'm trying to get my head around the numbers I'm seeing here.
Greer: That's a large number.
Argersinger: Very large! You mentioned the advertising revenue up 47% to $9.2 billion. Keep in mind that 87% of that is mobile. It really wasn't more than a few years ago that we were wondering if Facebook was ever going to succeed on mobile and do it on a massive scale. Operating profits were also 47% to $4.4 billion, just showing you how profitable this business is. The monthly active users, over 2 billion, you said, Mac. Daily active users are up 17% to 1.3 billion.
Greer: So only 1.3.
Kretzmann: They still have some work to do.
Argersinger: They have some growth to go ahead there. That's really the number. Think about it. Those are the "rabbit users" of the platform. The fact that the number is still at that rate, given Facebook's pedigree at this point, is remarkable. The challenge ahead for Facebook -- these numbers are outstanding -- but I think management has gotten a little out ahead and said, "At some point, we can't grow advertising revenue at the rates we're growing, just because we can't load people's news feeds with more ads." And I think they're pretty much at the saturation point on the Facebook core platform. So the growth is going to have to come from Instagram, and they're having massive success there.
But it's also going to have to come from some of their chat apps, Messenger and WhatsApp, each of which have a billion users alone. There were a lot of questions on the conference call about their ability to do that. It sounds like Mark Zuckerberg wants to go faster. He thinks they could be monetizing those platforms a lot faster. I think it's quite a challenge when you start putting ads in someone's text chats on their phone. I think that's going to be a big challenge for them. That's something to get worried a little bit more about going forward. Otherwise, the numbers were fantastic.
Kretzmann: Yeah, I think that's the biggest question -- what does the monetization of WhatsApp and Messenger look like? I think a lot of us here at HQ thought they might replicate the model that WeChat employed in China, where you actually have a lot of transactions and services within the messaging app, and it becomes almost the new browser. You do everything in there. You hail a cab or a ride, you make payments, you book movie tickets -- you do everything in WeChat in China, just about. But it doesn't look like Facebook is going that way anytime soon with Messenger or WhatsApp. Instead, they've talked about putting display ads in Messenger, which I think sounds clunky and not like the best user experience. So that will be something to watch.
We are getting to the point in the year where Facebook had warned about a year ago that revenue from the core Facebook platform will start to decelerate. Obviously, the numbers are still incredibly strong this quarter. But once that revenue from the core Facebook platform does start to decelerate, we'll want to see where they can make up that growth in other areas.
Greer: Let's talk more about that advertising piece. I think when you read a lot of these reports about Facebook, and today, a lot of people talk about Facebook in reference to Google, like this is a cage match and only one will come out alive. Here's an interesting stat. Facebook ad revenue now growing at twice the rate of Google's ad revenue. So my question as an investor is, "Is there room for both Google and Facebook to be market-beating stocks over the next five and 10 years? Or is Facebook's gain necessarily Google's loss?"
Argersinger: No, I absolutely think there's room for both to do quite well. I think both can certainly beat the market, even from today's all-time high prices. When I think about Facebook and Google, the one thing that really differentiates both, and it tends to worry me about Facebook a little more than Google, is that for Facebook to make more money and a lot of money, it always has to come at the detriment of the user experience, because it's an ad-driven business. And generally, users are OK with some ads, but as soon as you start throwing tons of ads in my face, display ads everywhere, I'm not exactly a happy user. The power of Google is that, essentially, the search business is a little more consumer-friendly. I'm searching for things, I'm looking for things, I want to see what I'm looking for, I want to see the best products, or I want to see the restaurant that I'm searching for, and Google can prosper that way, too.
I know that Facebook is growing faster than Google. I totally get that. I do believe, though, that Alphabet/Google might be able to grow at a high rate for longer, because they're not going to necessarily get to a saturation point. Users are driven to those ads, as opposed to Facebook, where they're sort of tolerating those ads, and maybe reacting to them, positive or otherwise. But it's coming at a little bit of a detriment to the user experience, and Facebook is going to hit that saturation point a lot sooner on its platforms than Alphabet.
Greer: So you don't buy the idea that more and more people will search within that Facebook ecosystem, in which case they won't need Google?
Argersinger: That's a good point. There's the network effect and the fact that so many people and brands are on Facebook, within the Facebook ecosystem. That does make it a powerful way. So there's a business, an ad-driven search paradigm there, that they can prosper from. I just feel like that's not necessarily how most people are using Facebook right now. They still use Google for most of their search.
Kretzmann: And I think, looking at the two companies today, Google has more levers to pull down the road compared to Facebook. You have YouTube, Google Photos, Google Maps, Android, a lot of highly engaged services that have over a billion users, in the case of Google. I think it's also worth asking the question, "What will be the next dominant computing platform?" Obviously, Mark Zuckerberg a couple of years ago made the bet that virtual reality, over the next five to 10 years, will be the next dominant computing platform by buying Oculus. I think it's still, at this point, there are more questions about are people really going to be wearing these goggles, or these big headsets, for several hours a day? Will that really be the next way that we engage with computers? There are more questions about that, and I think more people are realizing that maybe augmented reality and mixed reality will be the first step, where you essentially have glasses or goggles on; you're still interacting with the physical world but you have this digital world interlaid on top of that. I think if that's the direction, augmented reality and mixed reality, I think Google is in a better position with Google Maps, Google Lens, Google Photos. I don't know if Facebook really has something to push them forward with augmented reality yet.
Argersinger: Yeah, all great points, David. You mentioned YouTube. Alphabet is already having massive success with video, and that's something that Mark Zuckerberg and Facebook is really trying to bet on. I think, in the near term, if Facebook is going to continue generating the revenue growth that they are, they're going to have to make some big strides in video where advertisers are getting a lot more return on investment. I think, again, it's one of those places where Alphabet probably has a leg up, as David says.
Greer: We will keep an eye on it, guys.
Not a good week or a good day for Buffalo Wild Wings. Shares down on Thursday, after the company reported a decline in second-quarter profits. David, CEO Sally Smith pointed to higher wing costs, lower-than-expected same-store sales, and higher operating expenses.
Kretzmann: Check, check, check.
Greer: That doesn't sound great. Now she is leaving the company. What exactly is she leaving?
Kretzmann: Not Buffalo Wild Wings at its best, that's for sure. This quarter just confirmed the downfall of the company over the past year and a half. Going back to early June, we had that big proxy battle with Buffalo Wild Wings and Marcato Capital, the activist investor group. They wanted to replace the leadership -- in this case, Sally Smith. They nominated several people to join the board. Since they won that proxy vote on June 2, shares are down 23%. So chalk one up for the great world of activist investors. Thank you, guys!
As a shareholder, it's been a painful journey for Buffalo Wild Wings over the past couple of years. They've really struggled with this restaurant slowdown. Going back to the start of 2016, almost every quarter, they've missed their guidance, missed their expectations, and lowered their guidance for the coming quarters and the coming year. So they did more of the same this quarter. And a lot of it does have to do with record-high chicken wing prices, which make up about a third of the cost of restaurant sales. So when chicken wing prices are low, their margins are great, investors are happy, you're not going to have activist investors. But when you have high chicken wing costs on top of a restaurant slowdown that's been persisting for a couple of years now, then you really get a recipe for poor results like this.
Greer: You mention that it's been a rough couple of years. But this has been a great long-term performer. When you widen the lens and look at the last five or 10 years, it's been a great stock. How about going forward? Someone looking at Buffalo Wild Wings from this point going forward, does it beat the market?
Kretzmann: I think there's still potential for it to beat the market. I'm a shareholder. I'll be holding my shares. Right now, the board is looking for a new CEO. Sally Smith will be stepping down in the middle of August, so just within a few weeks. I think you want to see who they bring on board as CEO, what vision they have. Marcato Capital has really been pushing Buffalo Wild Wings to franchise the majority of their stores. Right now, it's closer to a 50-50 split. I think if the restaurants are performing well, it makes more sense to keep those in house as company-operated restaurants.
But a couple things that they are doing that I do like -- they rolled out a loyalty program nationwide that has 2 million members. I think that makes a lot of sense for retailers and restaurants to do. If you don't have a loyalty program, there's no good excuse to not have one at this point. They're also testing out moving more toward lower-cost boneless wings. For a while, they've had a half-priced wings Tuesday promotion. When the cost of your main item, chicken wings, is going up, you don't really want to be selling them for half price.
Greer: Not a great business.
Kretzmann: Not a great combination. But boneless wings have a lower cost, so they're trying to shift their promotion more toward those, and it seems like there's some progress there. They're also doing a lot with takeout and delivery, online ordering, things like that. So I think there is reason to be optimistic, if they can bring in the right management change in the coming months.
Greer: Guys, let's talk PayPal. Shares of PayPal up on better-than-expected earnings. Matt, PayPal has now beaten expectations every quarter since it was spun off from eBay back in 2015.
Argersinger: Yeah. Me and Carl Icahn had a great idea a few years ago, when eBay and PayPal broke apart. I don't know if he was really the catalyst, but yeah, as a standalone public company, it's been outstanding. Revenue in the recent quarter up 18% to over $3 billion. But here's the number: They added 6.5 million new customer accounts. That's actually the fastest quarterly gain in over two years. So PayPal is a platform, like a lot of the platforms that we're seeing, that's actually seeing acceleration in adoption and growth. It's impressive. Payment transactions grew to $1.8 billion. That's a 23% gain. Total payment volume, $106 billion. First time it's crossed the $100 billion mark, that's the number of dollars flowing across PayPal's platform. That's incredible. That's up 23% as well. Venmo, the social payments platform, Facebook might have a lot to do with this -- $8 billion and transactions last quarter. That's up over 100% over the prior-year quarter.
This is really, now, PayPal is not just an easy way for anyone to pay someone online, pay a shop or a merchant online with a phone. This is a full-fledged digital payments ecosystem in so many ways. I think the network effect now is so strong, and the partnerships they've made with credit card companies, they actually just did a partnership with Baidu in China for their digital wallet as well. It's really getting everywhere, becoming more and more popular. So I almost think, it's a $70 billion company now -- I don't know if I see it as a standalone company much longer, to be honest with you. I actually think, and I said this over a year ago, I think Facebook should have bought PayPal. But I think this is a company, if you're Facebook or Amazon or Apple, it's not a big price to pay. Even if you're a J.P. Morgan or a MasterCard, this is a company that might want to be in your crosshairs. It wouldn't be too difficult to do an acquisition, even at today's market cap.
Kretzmann: I haven't looked at PayPal as closely as you, Matt. But one thing I've always wondered is, if I have a PayPal account, but the main item I use to make payments is a Visa card, does PayPal actually get a cut of the transaction from Visa? Or are they basically saying, "We'll let Visa roll in here; we just want to be the platform."
Argersinger: It depends. I think there are situations where, yes, they do get a small cut. It just depends on the partnership agreement they specifically have with the credit card company. I don't know exactly. In a lot of cases, it's a matter of just, we want more people using PayPal, because that means they're probably using other services on PayPal, and we're fine with them using MasterCard or Visa. But in a lot of cases, no. If you're going directly through PayPal but you have a credit card stored, both parties are taking a cut of that transaction.
Greer: Guys, let's switch gears and talk Tractor Supply.
Kretzmann: Sexy.
Greer: See what I did there? Shares of Tractor Supply up on better-than-expected earnings. David, this was a stock you talked recently about on our Motley Fool Money show; it was one of the stocks on your radar. I know one of the points you made is, this is one of those retailers that may be Amazon-resistant.
Kretzmann: I think so. Looking at the conference call, though, an interesting sign of the times, the word "online" was mentioned 56 times in this conference call. The same quarter last year, it wasn't mentioned once. So that shows a sign of the times. A lot can change in a year. But they are making progress. They're still continuing to open stores -- about 1,600 Tractor Supply stores. They acquired a small-town pet-store chain called Petsense last year, which has about 160 locations.
So they're continuing to build that brick-and-mortar retail presence, but they are also investing a lot in their online and e-commerce business. They've completed the rollout this quarter of their buy-online, pick up-in-store program. Fifty-five percent of their online orders are now picked up in the store through that program. They've also noticed that the average order value through that program is higher than the average order size of someone who's just walking into the brick-and-mortar store and making a purchase without going online.
So they've also rolled out a loyalty program nationwide that has 4 million members now -- the Neighbors Club. This was certainly an improvement from the first quarter, where poor weather in some of their key markets dented their results. I like that management, this quarter, credited good weather for some of the positive performance. They recognize that it goes both ways when it comes to weather.
Greer: You never hear that.
Kretzmann: You don't hear that very often.
Greer: Weather always gets blamed, but never the credit.
Kretzmann: It's true. So it's nice when you see a management team that gives credit to the weather when they recognize that's part of the reason they reported good results.
They did lower their guidance for the rest of the year. It was primarily because their first quarter started off a lot weaker than they anticipated. But the second-quarter results as a whole were pretty strong. You had sales up 9%, same-store sales up 2.2%, EPS up 8%. So they're not lighting the world on fire, but I think the type of demographic they serve in these rural, small-town markets, I don't think that's a demographic that Amazon's going to be going after.
And a lot of the items they sell are a lot heavier. You're probably not going to buy a 50-pound bag of feed through Amazon. That might be the type of thing you buy online and pick up in the store. So I really like that they are finally focusing more on building that internet presence. They have a goal to open up to 2,500 stores in the U.S. So they still have some room to grow there, and I think they can continue to grow that online presence.
Argersinger: Speaking of that online presence -- I'm going to be like Steve Broido for a second -- should Tractor Supply buy farmersonly.com?
Kretzmann: [laughs] That could be a nice --
Greer: What what is farmersonly.com?
Kretzmann: You're not a user, Mac?
Greer: No.
Argersinger: Come on, Mac. No, honestly, I've only seen the commercials, but I think it's a dating site for farmers. And I think, as a way of enriching the ecosystem --
Kretzmann: A lot of synergies there.
Argersinger: You could have meetups at Tractor Supply.
Greer: I think that makes sense.
Kretzmann: They already do some farmers' markets at their stores. So, hey, some dating meetups?
Greer: How do they know? If you're a non-farmer and you go on the site, how do they know?
Kretzmann: Yeah, what's that registration process like?
Greer: Is there any sort of vetting?
Kretzmann: But what non-farmers would go to that site?
Greer: Someone who wanted to meet a farmer. If you want to meet a farmer.
Kretzmann: If you're eager, yeah. And who wouldn't want to meet a farmer? That was a dumb question on my part.
Greer: Farmersonly.com, I see an acquisition happening.
Argersinger: It just seems to make sense to me.
Greer: I could also see Amazon buying them. Amazon is on a spree.
Kretzmann: Buying Tractor Supply or farmersonly.com?
Greer: Farmersonly.com, because then you have Whole Foods, you have farmersonly.com, it all makes sense to me.
Kretzmann: I think so. It blends together.
Greer: In my strange brain. OK, guys, before we wrap up, Matt, we were talking about this fun little story that popped up this morning, speaking of Amazon. Founder and CEO Jeff Bezos is now the richest person in the world, at least at the time of this taping. We're taping this before Amazon reports later. So that could change things. Here's my question for you: Bezos owns our newspaper, a little paper called The Washington Post. But he still has some more money to spend. So what's one thing you would like to see Jeff Bezos buy? I'm not talking Amazon. I'm talking Jeff Bezos.
I'm going to start, because I'm going to give you time to think. I want him -- because Bezos has Texas and Houston connections -- to buy my hometown Houston Rockets, because they're for sale. You get James Harden, you get Chris Paul, you get a franchise with a great history, and you get a franchise that's probably going to lose to Golden State for the next 10 years. How's that for selling?
Kretzmann: You really thought that through, Mac. [laughs]
Argersinger: I would say I think Jeff Bezos should basically buy an island. A big one. Maybe Australia or New Zealand, somewhere nice.
Greer: That's pricey.
Argersinger: Go a little Lex Luthor on us. It would be fantastic to see a place where he could, outside the constraints of our wonderful country of the United States, but actually be able to pursue some serious space exploration. He might have to do that, to launch rockets, somewhere else, off the continent. We'll see.
Kretzmann: Mac, your basketball comment with the Houston Rockets got me thinking about superteams, which we're seeing a lot of in the NBA with the Warriors, the Cavs. All these teams need two or three superstars to have a chance at winning the championship. So I'm thinking, Jeff Bezos ought to buy or at least merge with SpaceX. They have a super team of Bezos and Musk working to dominate space.
Greer: I like it.
Argersinger: We're liking the space angle right now.
Greer: I like it. It's Kevin Durant and ... what's the other guy?
Kretzmann: Kevin Durant and Curry.
Greer: Sorry, I forgot about Curry already.
Kretzmann: It's not fair. It's not great for competition, but man, you're definitely going to win and blow out the competition.
Greer: I like it. Guys, thanks!
Kretzmann: Thank you!
Argersinger: Thanks, Mac!
Greer: Guys, you will continue the conversation with Chris and Jason tomorrow on Motley Fool Money. As always, people on the show may have interests 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 Market Foolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! We'll see you tomorrow!
