On this Market Foolery podcast, host Mac Greer is joined by Aaron Bush and David Kretzmann of Motley Fool Supernova and Rule Breakers to discuss three business stories that are rooted in investor and consumer perception as much as in provable facts.
First, they break down what the real revelations were from Apple's (NASDAQ:AAPL) event this week, and the most interesting points don't have much to do with the iPhone's technical specs. Next, they consider JPMorgan Chase (NYSE:JPM) CEO Jamie Dimon's assertion that bitcoin is a dangerous fraud. And finally, they hit up Chipotle Mexican Grill (NYSE:CMG) to ask two key questions: How good is the new queso, and how come the company isn't making way more noise about it?
A full transcript follows the video.
This video was recorded on Sept. 13, 2017.
Mac Greer: It's Wednesday, Sept. 13. Welcome to Market Foolery. I'm Mac Greer. Joining me in studio, we have Aaron Bush and David Kretzmann from Motley Fool Rule Breakers and Supernova. Guys, welcome!
David Kretzmann: Happy Wednesday!
Aaron Bush: Thank you.
Greer: Happy Wednesday! Do we have a show.
Kretzmann: I'm excited.
Greer: Bitcoin and queso.
Bush: What could be better?
Greer: It sounds like a bad high school band.
Kretzmann: We could talk about that every day, I think.
Greer: Bitcoin and queso. But let's begin with Apple. Guys, on Tuesday, Apple unveiling three new iPhones. David, they also introduced some whiz-bang technology, like facial recognition. As an investor, what stood out about Apple's event?
Kretzmann: Those things weren't at the top of my list. I think a lot of those items were expected. Apple, as best as they try, they don't keep a lot of secrets these days. They're so big, they have so many eyes on them, that they don't have many secrets. I think a lot of the technological advances with these new iPhone models was generally what we expected. I don't think there are giant surprises there if you were following the different rumors there that were coming up from different blogs and stuff.
But I'm really impressed with the Apple Watch. As a device that over the past few years since it launched, people always rag on it for some reason. "Oh, it's a flop, it's not as big as the iPhone." Well, it doesn't need to be as big as the iPhone. It still captures over 50% of the smartwatch market, which is pretty incredible for a relatively new device. And Tim Cook announced yesterday, it's actually the best-selling watch in the world, not just for smartwatches, but they're a better seller than Rolex globally. So that's a really impressive feat to me as well, and this new generation of the Apple Watch that now has built-in cellular technology where it doesn't have to be directly tied or tethered to your iPhone, I think that makes the watch all the more compelling for a user.
So Apple continues to really innovate where it needs to innovate with the Apple Watch, each version -- now they're on the third version. I think it's more impressive. I've never owned a smartwatch, but I think if I was wanting a smartwatch, the Apple Watch might be something that draws me into that Apple ecosystem.
Greer: And I notice the new Watch is going to feature a heart-rate app, which will notify you when it detects an elevated heart rate. That can't be good for Fitbit, right?
Kretzmann: Yeah. If I'm Fitbit, I'm really nervous right now. Fitbit just announced within the past month or two their new smartwatch, but I feel like the features, the look, the design of the Apple Watch just blows Fitbit out of the water. The Apple Watch has a lot of compelling health cases as well. That heart-rate monitor, I think they mentioned yesterday that it's actually the most used heart-rate monitor in the world, there's just so many people using this device, and they're capturing that data.
The value proposition of Fitbit, I think, is waning bit by bit. The one thing Fitbit as a company has going for it is, I think 45% of the market cap right now is in net cash. So the company isn't going go bankrupt overnight or disappear overnight, but they need to figure out a way to stop bleeding cash, which they've been doing over the past year or so. And I don't think the smartwatch should be their main strategy, because I just think Apple will continue to be the clear leader here.
Greer: Aaron, what were the highlights for you?
Bush: I feel really bad for the iPhone 9. It's never going to get a chance. [laughs] No love at all. I think it's really interesting. I don't think any of this was surprising. What we're seeing is just iterative of everything we've seen before. I do think it will be good for the business, seeing how they're strategizing with the iPhones, seeing how they have the 8, which still is normal pricing. It's not a cheap version of the phone by any means.
Kretzmann: $700, that's a chunk of change.
Bush: Yeah, it's still significant. And then you have the premium version, which is going to start at a $1,000, the iPhone X. So I think what we're going to see what that is, it's probably going to push up the average selling price of those phones, which is a really big deal for Apple, because more than anything to Apple, Apple is all about margin and pushing up the prices as much as they can. It's not as much about market share; it's about what they can get out of what they sell. So I think that was really interesting.
And I agree with David on the Apple Watch. I think, if anything, what's most telling about Apple is just how good of a job they do on piecing together the entire ecosystem. You see the phone, which is still the central hub; the Watch, which is offloading some of those features with its own capabilities. And with cellular, that replaces the phone in some ways. Then you have AirPods, which connect. There weren't really big announcements with that, but that still connects. And then, seeing the face recognition, I mean, I don't really care about that too much. I think what's most interesting with that is the underlying camera improvements and the software improvements in the camera, and what that means for augmented reality.
I think we're starting to see the building blocks of this ecosystem coming together in a way in which augmented reality over time becomes a bigger deal and Apple becomes a big leader in that, just as they have with the Watch and the phone.
Greer: And what's amazing to me is, you just casually mentioned a $1,000 phone. If 10 years ago, or even five years ago, we were talking about a $1,000 smartphone, a lot of people would say, "That's crazy." And yet, Apple has the ultimate pricing power now, don't they?
Kretzmann: Yeah. This is a really interesting moment for tech in general, because consumers have generally been used to the average selling price of devices, whether it's computers, TVs, phones, laptops, tablets, to usually go down over time. That's been the expectation. Now I think we're at an interesting turning point where these phones are incredible, what they can do, compared to just three years ago, it blows me away what these phones can do. So it makes sense for the average selling price to go up.
But up to this point, consumers haven't really been used to that. But I think Apple will be able to pull it off, especially because they have this whole ecosystem, like Aaron mentioned. The software and the different devices that all tie together. If you're a diehard Apple user, that $1,000 price point probably isn't going to scare you away, because the phone looks pretty darn cool and technologically advanced, and it just plugs right into that ecosystem that you know and love. I think Apple can pull it off and it'll be really interesting to see how consumers will react.
Bush: My unpopular opinion is, I think the iPhone and these premium smartphones in general are actually one of the greatest values you can get out of any device. I think we see these prices go up, but if you think about the time that we spend using them, from a usage perspective, we're getting so much value out of what we spend on them. So I think it makes sense to me, and if Apple can justify it, that's awesome.
Greer: That's a good segue for my final question here involving Apple. How about the stock? Is the stock a good value? Because a lot of people maybe have been watching Apple for years, and if they did invest, they've just seen the stock go up and up and up. As we know, investing is all about the future. So what do you think of the stock?
Bush: Right now, the market cap of Apple is about $820 billion. This isn't the kind of company that can double overnight. I think they have some things going for it with the dividends and share repurchases. My personal opinion is that you can do a lot worse than investing in Apple. Apple is still going to be throwing out new, great products that make the company bigger, and it's going to return value back to shareholders in those other ways.
In my opinion, I also think you can do better than Apple, too. Just given how much the stock has gone up in the past year, and how big the business is today, that's not entirely a limiting factor, but it still is one.
Greer: That's a bit of a hedge, though. Does it beat the market over the next five years?
Bush: I'm going to say no, actually.
Greer: Ooh, wow, those are fighting words.
Greer: David Kretzmann?
Kretzmann: Before I get to the valuation, just one quick thing on the average selling price. When you go back to the first cell phone that Motorola released in the early 1980s, the selling price was just under $4,000 for that phone, and the thing weighed practically 15 pounds, had a 30-minute battery life. So paying $1,000 for this incredible technological achievement isn't actually that bad in hindsight, and I think to Aaron's point, you might be getting a bargain on that device and how much you use it. I think that's a great point.
As far as the stock going forward, I think, yeah, you can do a lot worse than Apple. The valuation today, the P/E multiple is around 18, which is toward the higher end of the range over the past three years. The dividend yield is about one-half percent, which is the lowest it's been over the past three years. So I think, from a valuation perspective, people are more optimistic about Apple than they were a few years ago, when people were wondering what comes after the iPhone. I think people are now recognizing that Apple doesn't need to replicate the success of the iPhone. They have this incredible ecosystem. They can do more of the iterative innovation and do just fine.
Apple is not a growth stock; it's not a growth company. But I think as a cornerstone of the portfolio, as a core position of the portfolio, it's a good place to start. But at these prices, I'm not as excited as I was when the price to earnings multiple was closer to 10 or 12.
Greer: OK, guys, let's move on to bitcoin, a subject that we all know evokes some very strong opinions for and against. Speaking at an investment conference on Tuesday, JPMorgan Chase CEO Jamie Dimon called bitcoin a "fraud." Dimon said he supported blockchain technology but said that bitcoin was "stupid" and "far too dangerous." So guys, what do you think? Bitcoin, digital currency. Is it a fraud? Is it the next great thing? Or is it somewhere in the middle?
Bush: I think it's definitely not a fraud. And I think even if bitcoin exactly isn't the next great thing, its creation was the start of something great. No, I don't think it was a fraud. And as I think back over what Jamie Dimon says, Buffett at one point called the value of bitcoin a mirage. Howard Marks has been all wishy-washy on it, too. My personal opinion is that they're all wrong. I think there definitely is hype in the market, there definitely is, beyond a doubt. But at the same time, there is true value in what bitcoin has done, creating a decentralized network without a central authority that can shift money around with complete trust. That's a huge breakthrough.
And I think what people are underestimating, and these are people who are good at finance but aren't necessarily great at understanding the computer science -- I think they're understanding what can be built on top of it. As you add Layer 2 functionality -- that's the equivalent of saying, on the internet, we create an HTTP, bitcoin would be similar to something like HTTP, but now think about all the things that we've built on top of HTTP. I think we're going to start to see more use cases and applications be built where we can use bitcoin.
And honestly, people solely talk about it as a currency. And I think that's how it was created. It was created to be a peer-to-peer payment platform. But I think it's evolved to be more than that. So yes, it can be used as a currency, but the reality is, people don't trade things that go up, so they're holding on to it, which has made it a store of value. So I think the best metric for measuring bitcoin isn't transactions of volumes; it's just the number of believers. And whatever these guys say, as long as the number of believers is going up, the value of bitcoin should go up, too.
Kretzmann: Yeah, looking longer-term, I think it's inevitable that this technology will be implemented and utilized in some shape or form, whether it's bitcoin or ethereum or some other concoction that hasn't even been created yet. That's impossible to say. But over the long run, I think it's inevitable that the world goes this direction.
With that said, in the short term, from an investor's lens, it really seems overheated to me right now. I have a lot of friends who, fairly regularly over the last couple of months, will come up to me, and these are people who probably aren't even invested in stocks yet, and they're asking, "What do you think about bitcoin? Is there something there?" And to me, it's reminiscent of the '90s, when everyone was talking about tech stocks -- "you just have to get in on this." So I think a lot of people right now are looking at it through more of a short-term lens. They're trying to buy it and make a quick buck. They're not actually interested in using it as a currency.
Longer-term, I think we'll have some sort of correction or crash where it weeds out some of that, similar to the days of the dot-com bubble, where you had some legitimate businesses and visionaries like Jeff Bezos and Amazon and eBay that got punished hard during crash, but they managed to come through it and ended up really revolutionizing the world. I wouldn't be surprised if there were some similarities there with bitcoin and cryptocurrency and the blockchain and all of those different buzzwords right now. But in the short term, it's very speculative, so I wouldn't put anything in bitcoin that I wouldn't be willing to lose.
Bush: Yeah, I kind of think of the entire cryptocurrency industry in a stage where the internet was in the early '90s or so. The difference is that this industry is moving a lot faster. It's developing a lot faster. It still isn't perfect. There's still a lot of lacking infrastructure out there. The developer experience isn't great yet, and the user experience still is kind of limited to only techies who know how to move around money in this way who can really figure this out. But that will change in time. And added infrastructure will make it more usable.
Lastly, I'll just say that the whole idea of tokenization is essentially the creation of a new asset class that works differently from equities, bonds. And what we've seen even over the past quarter, there have been a couple ICOs, initial coin offerings, that have raised significant money, like over $200 million each. And even apart from the currency side, just blockchain, all of these big finance businesses and non-finance businesses are coming together under these consortia, and the largest consortium raised, I forget, it was like $100 million or $200 just last quarter. So even if it's hype, the fact that it's hype and there's so much money coming in, and there's so much focus here, it's improving the ecosystem at a really quick rate, and there will be value made from that.
Kretzmann: I think, as investors today, if someone really wants to scratch that itch, I could understand putting 1% or less of your net worth into bitcoin and ethereum, just to get some exposure and follow along, as long as you're in a position where you recognize there's a chance that it could go up 10 times in value over the next year, or it could go to zero potentially. You just have to recognize that it's very speculative at this point.
But it'll also be interesting to follow more established companies like Visa, MasterCard, PayPal, even the exchanges like Nasdaq or CBOE Holdings or Intercontinental Exchange, to see how they find different ways to implement this technology or give people access to these cryptocurrencies that are coming out.
And one quick thing on ICOs, and the reason I think right now it's a little bubbly and speculative for my taste, even Paris Hilton is promoting initial coin offerings right now and cryptocurrencies. So it's me --
Greer: And you don't trust her? You don't see her as credible?
Kretzmann: I mean, maybe with fashion. But when it comes to cryptocurrencies and ICOs and all this stuff, when Paris Hilton is getting in, I wonder if maybe that's a sign of at least a shorter-term peak.
Bush: Yeah, I would say that if you're interested in investing in this space, whether it's bitcoin or something else, it's important to know what you're doing. The skill set is different for investing in cryptocurrencies than it is in stocks. It's a much more interdisciplinary form, I guess, of investing in my opinion, just because you have to add the extra layer of understanding programming and computer science. A lot of these projects are pre-product, essentially, so you really have to get into the code and the white papers to figure out if there's any value there.
Greer: Yeah, and even if you're not interested, I would say sprinkle that acronym, ICO, throughout your conversation, because that sounds credible.
Kretzmann: You'll sound so smart.
Greer: You'll impress your friends at a cocktail party. "Hey, can you believe what these ICOs are doing?"
Kretzmann: And just remember to thank us when you sound super-smart at parties.
Greer: That's right. Someone is going to correct you like, "Don't you mean IPOs?" And you'll be like, "No, I mean initial coin offering. What part of that do you not understand? Come on!"
Bush: "It's 2017!" [laughs]
Kretzmann: "I listen to Market Foolery!" [laughs]
Greer: [laughs] Guys, as advertised, our final story, queso, as in Chipotle now has queso as of Tuesday. David Kretzmann, I know you have tasted the queso.
Kretzmann: Oh, yes.
Greer: What's the review?
Kretzmann: I ordered online and went in to pick up my order. I noticed at least one other customer picking up queso. So the word is getting out. But before I get to the review, I'll say one thing that I'm a little surprised-slash-disappointed with as a Chipotle shareholder and fan. Full disclosure, I probably eat at Chipotle two or three times a week, so I'm a regular. And even throughout all the E. coli stuff, that did not phase me at all. If anything, the shorter lines helped. But the one thing that surprises me here is, Chipotle hasn't done any promotion or publicity about this nationwide queso launch.
Greer: Why is that?
Kretzmann: The main legitimate reason that I could give the company some leeway for is if they just want to do a soft rollout initially, make sure they have everything operating smoothly. But this is a time when Chipotle really needs to get traffic back in the stores. This is, from management's own words, the most requested menu item for Chipotle that they didn't already have on the menu. So when you first need people to come back into the stores, you finally launch a product that people have been asking for, and something that will really help differentiate Chipotle, or at least attract people back into the stores, if nothing else than out of curiosity, to try it out. But there's nothing on Chipotle's Twitter, nothing on their Facebook, they didn't send out any text pushes. Even on their online ordering app, the mobile app, there was nothing about queso on there. So unless you're actually going through and putting your order together piece-by-piece online, there was no way you would know that Chipotle is now offering queso.
And to me, that's a problem. I think this is a great opportunity. I would hope, within the next week or so, they do start making a bigger push. It just seems like a no-brainer.
Greer: That makes no sense to me. If we as Americans can agree on any one thing, I'd like to think it's probably queso, right?
Kretzmann: I mean, yeah.
Kretzmann: At least people would be curious to try it out. And Chipotle desperately needs people just to get back into the stores. And that's one of the reasons I thought this could be something that Wall Street is underestimating, because Chipotle had hinted that they would do this national rollout in September. And as far as something to get people back into the stores, forget about the E. coli stuff, forget about the rats in Dallas, and forget about the norovirus --
Greer: Already forgotten. [laughs]
Kretzmann: Queso! Queso is the dominating story here.
Greer: OK, let's get to the queso. You're in Chipotle now, and you've got the queso. Take me through it. I need to know about the chips and the queso and your first reaction.
Kretzmann: Yeah. I took it to go, brought it back home, and first thing I did was dip the chip into the queso. And I really liked it. It stays true to Chipotle's mission of using simple, whole ingredients. When you compare the ingredients of Qdoba's queso to Chipotle's queso, it's not even close. Chipotle's ingredients are very simple. You can pronounce all the ingredients. As a consumer, I like that. And if Chipotle can pull it off, that's impressive, and still have a great-tasting queso. It's on the spicier side of the equation. But I like the taste.
The reviews have been mixed up to this point. But from an investor's perspective, I think this is something that a lot of people will at least want to try out, and it won't be for everyone, just like no ingredient at Chipotle or any restaurant is. But I think it'll get people back into Chipotle, maybe switch that habit back to go to Chipotle. That's the hope.
Greer: For me, part of the challenge there is, they have to replace District Taco. I love District Taco. And District Taco has queso. It's a local place around here. So unless they have better queso than District Taco, I'm not going there.
Kretzmann: What do you look for in the perfect queso?
Greer: There's a consistency issue, and I'm a contrarian here, but I actually want to run out of chips before I run out of queso.
Kretzmann: That could be a problem with Chipotle's.
Greer: [groans] See, I hate that. I hate when they don't give you enough queso. And I know, this is a first-world problem. OK?
Kretzmann: Totally first-world problem, yeah.
Greer: It's beyond, it's like, what comes before a first-world problem? It's a Paris Hilton problem. It's a Paris Hilton problem. But you cannot run out of queso before you run out of chips.
Kretzmann: Well, what Chipotle has now, and I think this might be a relatively recent switch they've made, but you can buy a small bag of chips or a large bag of chips, and now they also have a small or a large size of queso. So I think, Mac, to scratch that itch, what you're looking for, get a small bag of chips and a large thing of queso, and you'll be good to go.
Greer: I'm probably not the best judge, because I would drink queso if I could.
Kretzmann: [laughs] Well, you need to try it out. We'll have to do a follow-up and see what you think.
Bush: Is the queso only for chips? Or can you get it in burritos and bowls?
Kretzmann: No, you can get it for anything. Just like guacamole is typically an add-on, you can get queso on there. Some of the reviews I've seen, they didn't really like the consistency of the queso, and ironically enough, it's because Chipotle doesn't have all the preservatives in there. There's lumps of cheese and other stuff in there. We're used to that artificial, silky-smooth queso. But I think that consistency issue goes away if you were putting it in a burrito or burrito bowl or a taco. So I think once people try it out, and hopefully they try it out in different ways, they'll probably find something that satisfies them.
But I really hope Chipotle does more to promote this, because otherwise, gosh, what a wasted opportunity when they really need people to get back into the stores.
Greer: OK, guys, we'll keep an eye on it. Before we go, I want to give a shout out for the third addition of The Motley Fool Investment Guide. It's brand spanking new, just released, just published last week. Tom and David Gardner published the first edition back in 1996. Guys, as you know, that became an investing classic. The new edition has been updated, so it has all that timeless investing advice, and yet it's updated and revised. You can find more at book.fool.com. Guys, thanks for joining me today!
Kretzmann: Thanks, Mac!
Bush: Thank you!
Greer: 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. This show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! And we'll see you tomorrow!