In this MarketFoolery podcast, host Chris Hill is back from South by Southwest, and he's got plenty of news to break down with Million Dollar Portfolio's Jason Moser and Stock Advisor Canada's Taylor Muckerman. First on the list is, of course, the Facebook (FB 0.82%) revelations. That a company associated with Steve Bannon snagged Facebook data from 50 million users to craft and target pro-Trump election messages is bad, but really, it's just the beginning of the social media giant's new problems.
Then they move on to the woes of Universal Display (OLED +0.12%), whose shares tumbled on rumors that major customer Apple is taking its screen development in-house. They also consider some odd facts about the recent bankruptcies of the two largest radio broadcast companies in the country, and check in on the shipping wars, where both UPS (UPS +0.28%) and DHL had small but exciting news to share.
A full transcript follows the video.
This video was recorded on March 19, 2018.
Chris Hill: It's Monday, March 19th. Welcome to Market Foolery! We are back from Austin, Texas. I'm Chris Hill. Back in the cozy confines of the Fool HQ fourth floor studio. Joining me in the studio today, from Million Dollar Portfolio, Jason Moser, and from Stock Advisor Canada, Taylor Muckerman. Did you miss me?
Taylor Muckerman: Welcome back! You've got some barbecue on your tooth.
Jason Moser: "We." I mean, some of us are back from Texas. Not all of us had the good fortune to actually go to Texas.
Hill: Let me just say, for people who have been wondering about this, because we've already gotten some email and tweets about the music at the end of last week's episodes. All of the credit for that goes to producer Dan Boyd, who culled through tons of great music from Austin artists to find some fun tunes at the end of last week's shows. So, props to producer Dan Boyd for that.
The news fairy continues to do its job. We're going to get to the shipping wars, we're going to get to Universal Display and the truck that hit Universal Display this morning. But we have to start, though, with Facebook, speaking of being hit by a truck. In this case, it's the headlines. Shares of Facebook down 6% this morning. Pick your headline, guys. I'm going with the one from U.S. News & World Report. "Facebook Data Debacle Spooks Investors." This, of course, refers to the New York Times report that an outfit called Cambridge Analytica got unauthorized access to data from more than 50 million people.
Jason, I'll just start with you. There are times when we come into this studio and we talk about a given news event for a given business, and we all come to the agreement that the headline is worse than the actual issue. "Yes, it's a bad headline for company X, but the underlying issue is not that bad." This actually seems like the reverse. This seems like, the headline is bad, and the underlying issue could potentially be even worse.
Moser: Possibly.
Hill: If they don't handle it right.
Moser: Yeah, and it seems like they're not getting off on the right foot here in handling it. We were talking over the weekend about Snap's (SNAP 5.51%) issues, where just one celebrity comes out and can essentially ruin that business. Facebook is in a bit of a firmer footing, but I do think this is something they obviously need to be laser-focused on, in trying to figure out how to communicate how they plan to respond to this.
I think the biggest challenge Facebook probably faces from this fallout going forward -- because for our purposes here, that's what we care about most, is from the investor's perspective -- going forward, it's the scrutiny of any potential future acquisitions. Up to this point, Facebook's success has really been based on the fact that they're able to bring the most used social platforms under their umbrella, whether it's Facebook proper or breaking out Messenger as a separate app, or acquiring Instagram or acquiring WhatsApp, which, let's be clear, we still don't know exactly how they're going to monetize WhatsApp at this point, so they have a little burden there to bear as well. I think, ultimately, going forward, there's going to be so much scrutiny put on them in regard to any meaningful network acquisition, I honestly would be surprised if they ever were green-lighted ever again to buy a meaningful network because of something like this right here. This really, I think, shows the dangers in a network like this getting too big.
We're at a point now in time where it seems like people care more about the truth as it pertains to their beliefs versus the actual truth. And I guess that's really probably always existed, it's just we used to call it BS, now we call it fake news. But, any which way you cut it, I don't think that's new. I think that technology has just really exacerbated the situation. And that's where we are today.
Hill: And you mentioned Snap. For those who missed it, on Motley Fool Money over the weekend, one of the things we talked about was this ad that they let run on Snapchat that Rihanna, rightfully so in my in most people's opinions, took offense to, and she took to Instagram to blast it -- I think the through line for both Snap and Facebook is that they both had, on their respective watches, they let something slip through. In the case of Snapchat, it's, here's a completely distasteful ad that never should have run on the platform. In the case of Facebook, it is this outside group getting unauthorized access to the data of tens of millions of people.
Muckerman: Yeah, 50 million, they assume. This is a deep rabbit hole, if you really want to start googling Cambridge Analytica and the connections it has and the influence it has had around the world for elections, not just our own. We're just the latest domino to fall, I think, with regards to Cambridge Analytica. But, all these people did was take a survey for a few dollars, and then the research firm that Cambridge Analytica got the data from, then had access to all of those people's friends' data, even if you didn't give them permission, just through terms of agreement, your friend or your acquaintance taking that survey gave your own data up. I remember over a year ago learning about this and stripping my entire profile of everything other than the friends that I have on it because of this reason. I don't get on it anymore. I didn't give anybody permission. Somebody else out there that decided to take a survey for a couple extra dollars gave--
Moser: This all comes back to people. At the end of the day, this just comes back to people. People who want to try to get in there to manipulate data will get in there and manipulate data. People who want to act unethically will act unethically. And it sounds like, based on the time period of when this happened, it sounds like someone sort of bent the rules or just figured out a way around some guidelines that perhaps weren't really as firm on Facebook's side as they are today.
Bottom line, though, is that users of Facebook are the ones inputting all of that information on a daily basis. You have a choice to not go in there and put your life out there on display for everyone to see. I think that's probably something that a lot of people are going to start to reconsider. I think the world is big and a lot of people want to use it. We are far ahead of a lot of people around the world who haven't gotten to that point yet. There is sort of a novelty there still with social media in some parts of the world. But, at the end of the day, people have to take responsibility for the stuff that they put out there and recognize that if you don't want to be a victim of this, you do have a choice. Probably, at the end of the day, people aren't going to quit using it, I think. Unfortunate, but probably the case.
Muckerman: If they do, it's all that Facebook is built up upon, is other people's data. Without that, this company is a non-starter. And then you talk about some ad-based numbers, it looks like Alphabet and Facebook, finally taking a step back in terms of market share for U.S. digital advertising. Maybe this is part of the reason why, especially with them dropping a lot of news outlets, trying to return more toward that friends and family Feed that they were based upon when they first started.
Hill: Last thing before we move on, Facebook's next earnings report is about six weeks away. Do you think Mark Zuckerberg will come out in the intervening six weeks to address this issue in a bigger way? The word you used, Jason, is the one that I keep coming back to, and that is scrutiny. If you are Alphabet or Amazon (AMZN 0.41%), you're breathing a tiny sigh of relief today, because those two companies have been lumped in with Facebook for the last, I would say, year or so, in terms of the question of whether or not these companies are monopolies, and to what extent do they invite scrutiny from Capitol Hill. As of this moment in time, Facebook is far and away the clear leader in that book.
Muckerman: I think he has to. He made it his New Year's resolution to make this company a little bit kinder to its citizens and to the world in terms of the influence it can have. He's done let with learning Mandarin. He learned AI one of his New Year's resolutions. And that's this year's New Year's resolution for him. So, I think to own up to that, he has to get out in front of this personally.
Moser: I was thinking the exact same thing. Had he not made that his New Year's resolution, to "fix Facebook," then we could at least understand if he was going to try to remain quiet to maybe understand the facts as well as possible. But at this point, he has to come out and say something, otherwise he looks like he either doesn't care or is being somewhat lazy or is somewhat scared. And perhaps he's a little combination of all of those three. But, either way, they will need to nip this in the bud.
And again, when you look at Facebook and think about what that whole investment thesis is based on, it's based on people inputting their personal information into a website. So, with Facebook, it seems anecdotal, but speaking with more and more people who are migrating from Facebook to Instagram, I think Facebook is becoming a little bit of a lesser user experience, perhaps riddled with ads, so people are doing more on Instagram nowadays.
Muckerman: It's in the top five -- if you broke it out, it would be a larger digital ad space than Snap, it would be larger than Microsoft, it would be larger than every other competitor other than Facebook and Alphabet.
Moser: Right, and that matters, particularly as we go back to what I was talking about in the beginning, what is Facebook's next big acquisition? They're going to have to come up with something. Messenger is not going to monetize like Facebook or Instagram does. It doesn't, it's a messaging platform. I'm just not sure they're ever going to get there with WhatsApp, either, because of the same premise there. It's a messaging platform. So, they have to be thinking about what comes after Instagram. Not such an easy question to answer. This makes it far more difficult.
Hill: Shares of Universal Display are falling on the news that Apple is reportedly producing their own display screens in "a secret manufacturing facility near Apple's headquarters in California."
Muckerman: They kept a secret?
Hill: It's not a secret anymore, apparently. But, Universal Display shares down about 14% this morning. Wasn't this always the case with Universal Display? Wasn't this always the situation where, we looked at this company and said, "This is great. They're doing great. And No. 1, or certainly in the top two or three in terms of risk factors, is if Apple decides to take their enormous pile of cash and start making their own display screens."
Muckerman: Absolutely. The talk lately has been about them getting into larger screens, televisions and monitors of that size. But, yeah, with their largest customer apparently switching to in-house micro-LED, which supposedly has darker blacks, brighter whites, slimmer and consumes less power, you're hitting on all fronts there. It seems like a no-brainer for them, if it is viable technology, to roll that out. And then, LG announced that its new phone, the LG 7, going LCD instead of OLED. So, getting hit from a few different partners.
Moser: Yeah, it does seem like this is another chapter in the book on the pros and cons of working with Apple. We have a litany of examples out there, whether it's Ambarella or InvenSense or whatever provider, it's great, but you get hit on the backside there either on pricing or perhaps Apple considering taking you in house and getting a little bit more vertical, and that's what it looks like it could be here.
Universal Display makes their money by selling the materials for OLED and licensing their IP. And they have a decent catalog of IP, they've been in business for a while. But the numbers here are kind of concerning. If you look at the trail here, the chain of how this money is made, SDC is the company, they are a key customer of Universal, and SDC is essentially helping to assemble all this stuff for these phone companies. So, if you look at SDC as being a key customer of Universal, Universal, 62% of their consolidated revenue in 2017 came from SDC. Now, SDC is a very big supplier to Apple's move to OLED screens. So, you can put two and two together there and realize that Universal is very dependent on SDC, and if SDC is doing a lot of business with Apple, now we understand why the stock is behaving the way it is, because if Apple is taking this work in house -- and this doesn't mean they are, this means that they're working on that possibility -- then all of the sudden, you realize that Universal has the potential to lose a big chunk of revenue. And, trailing 12-month revenue is $335 million. It's not like it's some big, massive company. The stock is trading at better than 50X 2018 estimates. On the flip side, it has a healthy balance sheet, it's profitable. But, again, we've seen this play out before. They need to have something to go to if that Apple relationship deteriorates.
Hill: Let's say you own shares. Do either of you own shares of this company?
Moser: Of Universal? I don't.
Muckerman: Contemplated it, but never pulled the trigger.
Hill: Let's say you've owned shares of this company for a couple years, you've made a nice gain on it.
Muckerman: Yes, you have.
Hill: Yes, you have. But, as you said, Jason, we've seen this movie before, and here's how the movie goes: the report comes out. It's not confirmed from Apple, but the report comes out. And the stock of InvenSense or whoever else, in the case of InvenSense, it's like, they might not be in the next iteration of the iPhone. The initial report comes out, the stock falls somewhere between 5-15%. And then somewhere down the line, it gets confirmed, and then it really takes a hit.
If you've owned this stock and you've made a nice gain and you're seeing it down 14%, do you pull the plug right now? Or do you say, "I'm going to wait and see," knowing that at some point later in 2018, Apple could absolutely come out and say, "We're cutting the ribbon on our now-no-longer-secret manufacturing facility," and then Universal Display's stock really takes a hit?
Muckerman: Yeah, if this report is wrong, that's a huge blunder. So, I'm more likely to believe the report that this is actually under way, and talking about it being under way since 2016, maybe even earlier. I'm willing to cut some of the shares that I would potentially have in that company, for sure, because it's hard to believe that this isn't true.
Moser: Yeah, the nature of Universal Display as a stock, it's not a stock that I look at as a "buy it and plan on holding it for a long period of time." I think it's one you have to keep tabs on. Like you said, we've seen this play out before. Apple is one where you can buy and set it and forget it. Universal Display, not so. If I did own shares and was sitting on a big win there, I'd be looking at this and taking it very seriously based on the history of examples out there. I'm not telling anybody what to do, but if it were me, I more than likely would be leaning toward cutting bait and moving on.
Hill: Before we get to the shipping wars, I wanted to mention something that came up in the news last week, and it's the bankruptcy of iHeartMedia, which is the largest broadcast radio company in America. And this comes on the heels of about three months ago when Cumulus Media, which is the second largest broadcast radio company in America, declared bankruptcy. We've talked before about trade media and how valuable that can be for us as investors. One of my personal favorites to check out is QSR, which is the trade publication of the quick service restaurant industry. You were just quoted in something there, right?
Moser: I was, yeah. That was an interview regarding Chipotle's new CEO.
Hill: Nice. It's great information, but I was reminded looking at the trade coverage of these two stories in the radio industry that trade media can be really helpful for deeper dives and more granular information. What you shouldn't look to, necessarily, is critical commentary out of trade media. Because, again, it's the two largest companies in a given industry. You would think that there might be some critical commentary. And I couldn't help but notice that, in reading stories on Radio Ink and Inside Radio -- again, iHeartMedia, largest company in the industry, went bankrupt, and the following words did not appear in any of the coverage: Pandora, Spotify, Apple Music, Amazon Music, or podcasting. None of those words showed up in the coverage.
Moser: You don't see very often in any of those forms the, sort of, "Yeah, we suck. These are big problems and we don't know--"
Hill: "Maybe the landscape is completely changing."
Muckerman: "We're being assailed on all fronts."
Moser: "We don't know what we were doing," or, "We were asleep at the wheel and this company just passed us by." In regard to iHeart and Cumulus, one could argue that they were asleep at the wheel and the world completely passed them right by. Between what Sirius XM has done and really the podcast movement, and what we've seen there, it happened with video, it's an on-demand world now, and I think more and more people are recognizing that. And you're seeing companies like Apple, Amazon, Alphabet, building those offerings that are complementary to their business models. Being a pure play in a business like this is very difficult.
Hill: Our man behind the glass, Dan Boyd, is back from Austin. Also on the other side of the glass today, special guests visiting. [applause] Patrick Dunn, Dan Connors, and longtime listener Billy [...], thanks for coming to hang out with us. Thanks for coming to hang out with us.
Moser: [applause] Hey, thank you for coming in.
Muckerman: [applause] I think we just messed up Dan's levels.
Hill: You know what? He's a professional, he's going to make it work. Interesting things going on in the world of shipping. Taylor, I'll let you decide which one is more interesting. We have DHL, which is expanding its delivery in the United States, kind of a shot across the bow at FedEx (FDX +0.65%) and UPS. UPS also came out and announced that they are going electric in London. Of the two, which is the more interesting to you?
Muckerman: I think the electric vehicles, maybe a long time coming, and it's the wave of the future. Maybe DHL, because they announced it on the same day. Small footprint, though. They're only going to be doing the same day and next day, last mile kind of stuff. But, interesting to note that their headquarters in the U.S. is in Cincinnati, and Amazon is planning a new air facility there, in Cincinnati, as well.
So, maybe some potential backdoor dealings there. Who knows if Amazon gets more in the loop with DHL, because we've heard rumors for years that they're trying to get into the delivery game themselves. So, maybe the partnership somewhere down the line. But I don't view it as too big of a threat to UPS or FedEx, just given the potential growth of e-commerce and those short distance deliveries.
Hill: I think it's a smart move by DHL, mainly because of what you said, in terms of, it's a smaller bet. But I think it's informed by the last time DHL really tried to make a go of it in a big way in the U.S., and that did not work out at all.
Muckerman: No, it did not. They're talking about maybe delivering 500 million packages on an annual basis. You're looking at UPS and FedEx doing that and more in a busy holiday season. So, certainly a smaller attempt here than what they previously failed at.
Hill: I think, if you're Amazon, and obviously you have that shipping facility in Cincinnati that you're planning, that's a nice tie in, but Jason, it also seems like this is a small win for any big retailer that's doing significant amounts of shipping. It gives you just ever so slightly more bargaining power with FedEx and UPS.
Moser: Sure. We were talking over the weekend on Motley Fool Money about the bankruptcy at Toys R Us, the impending doom that Sears seems to be subject to, and what is going to happen with all of that real estate. It's not really so easy to tell. That's a lot of real estate. Real estate is priced on the demand, so to speak. And you wonder if Amazon or Target or Walmart or some combination thereof wouldn't be looking at some of those areas as ways to shorten that distance between point A and point B. Which certainly, it benefits these delivery companies, these shipping companies, whether it's UPS, FedEx, DHL or whoever else gets in there. Shortening up that distance from point A to point B is a key variable in the equation for bringing those prices down and making these businesses as profitable as they can be. So, it's going to be a very interesting few years, watching this all shake out.
Muckerman: Yeah. And as for the electrification in London, it's just, new technology is allowing them to hook up multiple trucks to the same outlet, and then the computer model adjusts which truck is receiving how much energy. So, it's a little bit of a smarter grid. They're not relying on one power source for one truck, because that's kind of limiting in their ability to scale here. So, the infrastructure there is just getting smarter. They're looking to go from around 50 all-electric trucks to all 170 in the next couple years. Already, I think, new cabs in Central London have to be electric, so that whole city is kind of moving in that direction.
Hill: Alright. Taylor Muckerman, Jason Moser, thanks for being here, guys! As always, people on the program 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 going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow.
