Earnings season is warming up. In this episode of MarketFoolery, host Chris Hill talks with Motley Fool contributors Jason Moser and Taylor Muckerman about what they're watching out for this quarter.
Kinder Morgan (NYSE:KMI) and Snap (NYSE:SNAP) have had a rough go of it lately, and a nice earnings report sure would offer their investors a little relief. GE's (NYSE:GE) stock has really struggled since CEO John Flannery took the reins, but the company finally seems to be righting its wayward course. Zillow (NASDAQ:ZG) (NASDAQ:Z) recently made the surprising decision to start flipping houses -- but can the company truly pull off utilizing its data stores to rock such a risky undertaking? Plus, the hosts discuss Netflix (NASDAQ:NFLX), PayPal (NASDAQ:PYPL), and others. Tune in to find out more.
A full transcript follows the video.
This video was recorded on April 16, 2018.
Chris Hill: It's Monday, April 16th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, Jason Moser, Taylor Muckerman. Happy Marathon Day!
Jason Moser: Yes. Wait, what?
Taylor Muckerman: Boston Marathon.
Moser: Oh, OK. I thought you meant a marathon episode of MarketFoolery. I was only prepared for so many minutes. [laughs]
Hill: [laughs] Settle in, everybody, we're going to be going for three hours today. No, in Boston, it's just known as Marathon Day. And isn't it great that we're here in a nice, warm, dry studio and not out there? I mean, there are some days where it's beautiful for the Boston Marathon. Today ain't one of those days.
Muckerman: Doesn't appear to be the case.
Hill: No, not the case. Earnings season is starting to kick into gear, and I thought what we could do is put some stocks on our radar, if you will, in terms of the upcoming earnings season. I want to start with this: who needs a hit? Every company wants to put up a good quarter, but some companies need not just a good quarter for the sake of having a good quarter, there are companies out there that need to change the narrative of their business. Taylor, I'll just start with you. When you look across the universe of public companies, who needs a hit?
Muckerman: It's a fairly large company, Kinder Morgan. The stock just continues to languish, even though you've seen oil prices rise, production continue to rise in the United States, along with natural gas, which is a big part of their business as well. But, the stock just isn't reacting the way that some of us here at The Motley Fool would be expecting. Just last week, they announced that they were basically curtailing all plans to continue forward with the Trans Mountain expansion up in Canada. It's a $7.5 billion project, one that they've been working on for five years. But British Columbia just isn't allowing it to reach the Western shores of Canada. Alberta, fully on board. Justin Trudeau, fully on board. But, they need the provincial approval of British Columbia, and it's just not working. I think there's a final deadline of May 31st to get this all sorted out, but as of right now, Kinder Morgan is just hands off, they're done. I think that's kind of been overhanging the shares. So, we'll look to see what management has to say on the call.
And even without this project, my colleague Jim Gillies, who's very well-versed in this company, believes that they're going to have tens of billions of dollars in cash flow over the next decade, even without this project, to buy back shares, reduce leverage. He's still very much bullish on this company, just waiting for the market to come around. So, I want to see what management has to say.
Hill: When I think back to when the price of oil was dropping not just below $100, but it just kept on falling, and one of the things we had talked about was how important having cash on the balance sheet is for particularly these larger companies, how it can get them through the rough times. What is the cash situation at Kinder Morgan like?
Muckerman: Much better than it was. They had to cut their dividend about a year or two ago, and that drove the share price really far down. Since then, it's recovered, curtailed some growth, curtailed spending. The dividend obviously helped with cutting the overall outlay for that. So, in a much better position now. They're funding a little bit of growth. This was going to be that next big project for them, but still, cash flow coming in and deleveraging. So, a much sounder position than they were two years ago.
Hill: Jason, who needs a hit?
Moser: I'm going to go ahead and target Snap here. I feel like this is one where, you remember last quarter when they announced earnings and the stock popped, I think it was something like 50% that day, which was just crazy. If you read through the results, and you didn't look at the actual market reaction, you would have read through the results and thought, "I guess it wasn't that bad of a quarter, it wasn't great but perhaps better than expected." The disparity between the reaction from the market and the actual release was significant. And if you look to today, they've given back just about all of those gains, which I think makes more sense. If you look at the stock itself, there's a decent short interest out there. I don't think we would expect the same kind of short squeeze this go-around that we saw last quarter.
But, we think about all the problems that Facebook (NASDAQ:FB) has been having, and Facebook has really been front and center in the headlines here, this is a great time for Snap to get in there and really tell us a good story here, tell us how things are going, and tell us where they really are taking this company. The flip side to that is, if they are not able to lob up strong engagement numbers and a good picture there of revenue growth here in the coming quarters and years, I don't know that the market really cuts this stock any slack whatsoever. Today, even after giving back all of those gains, it's still a crazy valuation, somewhere around 22-23X sales.
And it is essentially a one-trick pony still. Not that that's a bad thing, necessarily. You can be a one-trick pony and do that really well. And I think they do their messaging platform well, obviously, a lot of people use it. But monetizing that is a bit of a different story, and they're having trouble, obviously, doing that. So, I feel like they really have to, as Ron would like to say, fire on all cylinders here. If they don't, it could be a big problem for investors.
Hill: It is interesting, because one of the things we've talked about with Facebook is the opportunity for advertisers. And all of the growth in mobile advertising has been captured by Facebook and Google over the last year plus. And when we think about companies changing the narrative, that can have a potential positive ripple effect for Snap if they have a good quarter. Then, it just makes it a much better story for their ad sales team to go out and say, "No, this is why you should be advertising on us," because if it's the opposite, that's a much tougher story to tell.
Moser: Right. If you think about Snapchat, the platform the company is known for, that's a platform that's essentially based on privacy. That's that one-to-one communication where the messages essentially disappear. Not exactly conducive to strong advertising performance. So, I think it's a big pitch for them to really tell advertisers why they need to be on that platform. And let's not forget, really, they define themselves as a camera company. The problem with that is, now you are actually beholden to making cameras, which seems kind of like a crappy business. It's a race to the bottom there on the hardware side, so they're trying to get that hybrid software-hardware camera company thing going, and it's just not quite working out yet.
Muckerman: This will be the first quarter they release after revamping the app itself, right?
Muckerman: And that wasn't very well-lauded by the fanbase.
Moser: No, that really didn't work out for them. There are petitions out there still trying to get them to change it back to the old way. But, I'm not a Snapchat user --
Moser: -- so it's hard for me to sit there and testify to the merits of the platform there, but perhaps that's part of the problem, is that not a lot of people are actually Snapchat users, and that tells us that it's a limited opportunity.
Hill: Is there a conference call that you're looking forward to? Conference calls can be illuminating in terms of the tone. It's one of those things where, it's great that there are transcripts of conference calls, but to me, every once in a while, you read a transcript of a conference call, and then you think, "I want to go back and listen to this, because I see what management is saying, but I want to hear the tone in their voice." And sometimes, it's really bad. To me, it's always illuminating to hear executives who are on the defensive and unsettled by whatever questions they're being asked. Taylor?
Muckerman: I'm looking over at GE's Flannery. I don't think he's going to be defensive, but they're nine months into a strategic review, and I think they're going to have some serious questions on the call regarding what they plan to do with some of these business units. They have announced that they're targeting about $20 billion worth of asset sales. I expect that to be a for, maybe that goes even higher. But there has been some chatter out there that they could do something along the lines of a hybrid partnership, where instead of selling off some of these underperforming businesses potentially at the trough of a cycle, maybe they'll partner with an existing public company. And so, that way, GE shareholders will still be exposed, because the company will basically gain shares of said public company as they acquire part of that business from GE.
So, the Transportation business is one of those that's up there for discussion. And they just finished their financial statement review and restatement for 2016 and 2017, so, likely to get some questions on that, even though it wasn't as dramatic as maybe people were thinking it was going to be. It took longer than most thought, so some questions there, I'm sure. I'm interested to see how he handles it.
Hill: It has been a brutal first year for this guy, and I'm curious to see -- in a way, General Electric has never been more interesting to watch. And I said this at the time when Flannery became CEO, I think he deserves a chance to implement his plan. But right now, when you look at the fact that the stock when he became CEO was high twenties, $27, around there, and today it's barely above $13 a share --
Muckerman: It's rough. [laughs]
Hill: Yeah. And maybe it's one of those things where he's just going in and cleaning house and selling off assets and trying to get his plan in place. And maybe one or two years from now, we look back and say, "Oh, that was the time to buy General Electric, when it was in the low teens." But, he really has his work cut out for him.
Muckerman: It's in our Neverlasting Portfolio in Motley Fool ONE as a short idea, so it's kind of interesting to see that.
Moser: Yeah, it's a real shame. It's not really like this is his fault, right?
Hill: Oh, no.
Moser: He just got thrown under the bus. If you look back at how horribly run -- this is Immelt's fault really, isn't it? At the end of the day, he's the one heading the ship, so to speak. And this has been a horribly run company for a number of years, and it was just kind of slipped under the radar more or less, I guess, because of its status for so long, as such a bellwether of the economy and of the markets it pursued. But, man, I'll tell you, tough job ahead.
Hill: What about you, Jason? Anything you want to listen to this month?
Moser: Yeah, the recent news with Zillow, I don't know if we've talked much about this yet, but Zillow is going to get into the business of flipping houses. Hey, that can't go wrong, can it? So, I'm a little bit conflicted here, because I've always been a bit of a critic on Zillow in that I felt like the market opportunity was somewhat limited. I think Zillow runs by far and away the best experience out there in home shopping. If you're going to go looking at houses, Zillow is the best app out there for it. But, I feel like, it's an advertising play, to a degree. And essentially, they've tapped out the market that, I think, is there.
So, they're getting into the business of actually selling homes. And this is an initiative they have where, beginning in the spring, I think it's going to be a program that's expanded to Phoenix and Las Vegas specifically, I think it's called Instant Offers. And essentially, they're going to take on the business of actually selling homes. They feel like, based on the data they have and the testing they've done, there are opportunities out there with sellers who perhaps prioritize the convenience and time more so than actually getting that bottom line number, what they're trying to sell the home for.
So, obviously, the real estate market is a very big market, so if this is an opportunity where Zillow can step in and take part in that transaction, it's going to be something where they take on a pretty big balance sheet risk here. I mean, they're going to be funding this through collateralized debt. Which, that's fine for now, but if they run into a big-picture macro concern that's well beyond their control, it could be problematic. It certainly makes the business a little bit more difficult to understand.
And again, Zillow has been public for quite a while now, it's still not materially profitable. It's a company that's been making its living off of that adjusted EBITDA number for as long as we've known it. So, a lot of risk here in taking this step. I think, though, it's probably the sensible thing for them to do, if they're looking to become a bigger player in the housing market.
Hill: And presumably, with all of the data that they have access to on their platform, presumably they are being very intentional with the markets they've chosen. They're not doing this in San Francisco. They're doing this in Las Vegas, which is a much more attractive market for this type of business.
Moser: Sure thing. I think they're going to be looking at markets where liquidity is high, markets where homes are selling, even in good times and bad, the volume is still up there. To your point, the data, that's one of the things that I think a company like this needs to be able to fall back on. It's one thing to say you have the data, it's another to actually be able to do something with it. And this is essentially a tech company. They've been founded on this app that they have out there now, so I would assume that they're pretty good at using this data to make good decisions.
Hill: Alright, this is one of those things -- and, we were on Slack before, trading ideas for today's show, and I used a word that's probably not correct. I used the word "secretly" in reference to, "Hey, I think we should talk about companies that we secretly wish have a terrible quarter, so their stock drops and we can buy more shares." But, of course, it's not actually a secret. But this is one of those things that comes up now and then, where we'll be talking during earnings season about, "This company crushed it," and I've noticed it with you, Jason, and I've noticed it with Matt Argersinger, when you're talking about company X having a great quarter, and the look on your face is one of mild disappointment. Like, "Really, in my heart of hearts, I was hoping they were going to tank because I was going to back up the truck."
Moser: It does happen.
Hill: Come on, who do you want --
Muckerman: You can keep it a secret and end the show right now.
Hill: Here's the thing -- we're long-term investors. There are a lot of people out there with a very short-term mindset, and they will react. They won't look at the underlying business or the track record of management. They will see, company X had a bad quarter, and they'll be like, "Pff, sell this thing, short this thing, get me out of this." And that's an opportunity.
Moser: It is. I think that's the best part about our style of investing, is being able to look at the underlying business and say, "Stock price be damned, it's a good business any which way you cut it." This quarter, I'm looking at PayPal. I feel like this is a business that has done nothing but get better and better since it spun off on its own.
Earnings are coming up on April 25th, and I think with PayPal, everybody knows it's essentially the app that you can use to transfer money and pay for stuff, and that's essentially what it is. So, for a company like this, what constitutes a terrible quarter? They're going to be tied to things like active users and payment volume and stuff like that. The nice part about that is, money is just moving around the world all the time.
So, they have this huge market opportunity, and I think there's a really big market opportunity beyond the United States where businesses around the world, perhaps, are looking for ways to bring on new payment options so you don't necessarily have to have all of those merchant services, all of that equipment to be able to swipe credit cards and whatnot, you simply open up a PayPal account, everybody has a phone, and boom, your problems are solved. And we definitely saw a lot of that behavior recently when -- Chris, did I tell you I was in the Bahamas recently? I feel like I might have mentioned that.
Hill: [laughs] Yeah, you mentioned that.
Moser: To me, that was exciting. Of course, I couldn't take the investor hat off, even when I was there, and I just noticed how many people were using that as an option. And they have 227 million active accounts as of the most recently reported quarter. Active accounts continue to grow. Engagement, the number of times people are using it continues to grow.
And I think beyond the reputation for trust that the PayPal brand has earned, now we're seeing that they're looking for other potential market opportunities. We were talking a few episodes back about this unbanked opportunity where they're partnering with smaller banks to offer banking-style services for those individuals who perhaps aren't looking for a banking relationship but need that convenience to a degree. So, they want to become a little bit more like a bank without actually having become a bank, and I like that way of thinking. So, I wouldn't be disappointed at all if, for some reason, they missed expectations and the stock sold off 10%, because I'd certainly shut my mouth about it so I could buy some more shares.
Muckerman: [laughs] Did you back-channel your way into that Georgia bank yet?
Moser: Let me tell you, I have not been able to find out yet, but I'm heading down there in May, I'm going to talk to those guys at Ameris Bancorp.
Hill: Taylor, what about you?
Muckerman: For me, it's Netflix. Not a shareholder, want to be, have wanted to be, and now it's been the second-best performing stock in the S&P 500 this year after a record quarter of subscriber additions in January. So, I'm looking to see, hopefully, the fact that they released 18 new original series and 11 new series for current options out there in the last quarter, hopefully that didn't help them as much as the market is expecting, because they're expecting 32% growth over last year.
Hill: It really is incredible, what Netflix has turned into. The story out this morning that Comcast is now partnering up with Netflix to include it in this new bundle. It's also interesting for me to see how networks, not just broadcast networks but cable networks as well, are going after Netflix. That's probably too strong a word. But, they are looking at Netflix and they are realizing that one of the quote-unquote advantages that they have over Netflix is, they have less original content. So, because of that, they can give more promotional considerations to the original content that they have. We'll see if that ultimately becomes something that starts the flow of talent away from Netflix and more toward content providers who are not putting out -- I don't know, what is it, it's more than once a day, isn't it? In terms of Netflix, when you look at series and movies, comedy specials. Maybe it's only once a day, but the number of things that Netflix is putting out is just dizzying at times.
Muckerman: It is. That number, 18 original series in the last quarter alone, that's mind blowing to me.
Moser: It really is. We have Netflix and we have Amazon Prime and we have the Hulu cable live TV bundle, which, all three of those put together, there's not enough time in the day at all. That's the one thing I noticed with Netflix -- it's becoming almost impossible to find what to watch, because there's so much stuff out there and you don't know what's good. Most of the time, anything I watch on Netflix is based on word of mouth, a friend who has told me that something out there is great and I need to catch that. But yeah, wow, there's not enough time in the day.
Hill: You know how you're on Netflix and you finish watching something and then, one of the ways they push you new content or other content is say, "Hey, if you liked that, you might like this." I heard an interview recently with Judd Apatow, because he had done this documentary on Garry Shandling for HBO, and he was talking about the stand-up special that he had done on Netflix, and he joked, "Yeah, I thought about naming my special, If You Liked Mike Birbiglia's Stand-Up, You Might Like Judd Apatow As Well." Alright, Jason Moser, Taylor Muckerman. Thanks for being here, guys!
Moser: Thank you!
Hill: 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 MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!