In this episode of MarketFoolery, host Chris Hill and Bill Mann look over a few of the market's biggest stories.
Alphabet (GOOGL +2.48%) (GOOG +2.41%) took just a smidge of a haircut after releasing its first-quarter report, despite putting up huge ad revenue growth. What gives? 3M (MMM 0.64%) followed a knockout 2017 with a not-so-great start to the new year, but long-term investors shouldn't sweat it too hard. Wells Fargo (WFC +0.94%) held its annual meeting today, and despite its CEO's stated devotion to rebuilding customer trust, things don't look so great for the bank -- and could look even worse in a few weeks after Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) annual meeting. Tune in to find out more.
A full transcript follows the video.
This video was recorded on April 24, 2018.
Chris Hill: It's Tuesday, April 24th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, it's Bill Mann. Thanks for being here!
Bill Mann: Hey! I'm so happy to be here! How're you doing, brother?
Hill: I'm good. I'm not as caffeinated as you.
Mann: I'm highly caffeinated!
Hill: [laughs] I stupidly brought water.
Mann: [laughs] I figured that was your chaser.
Hill: I brought water to a coffee fight. Earningspalooza is heating up, so we're going to get into one big Dow stock, and an annual meeting that's going on today. We'll get to both of those. We've got to start, though, with the proverbial 800-pound gorilla of the advertising world, and that's Alphabet, aka Google. First quarter, ad revenue was up 24% --
Mann: That's amazing!
Hill: -- year over year, and that's only, I don't know, 87% of the core Google business.
Mann: Yeah, $31 billion in quarterly revenue.
Hill: And over $9 billion in profit.
Mann: Yeah. Alphabet had some numbers this quarter.
Hill: And we'll get into a couple of the other numbers, but just in terms of the bread and butter of this business, they crushed it.
Mann: They did. And the market doesn't seem to like it very much. The stock was down pretty sharply this morning, if $40 billion in market cap being evaporated is something that you think is important. It was a good quarter. They've had good quarter after good quarter. I do worry that there's a little bit of an expectations game that's going on, that people are expecting a lot of them. People are also talking about some of their expenses. A little bit higher SG&A, employment side. I don't think people understand quite what Larry Page is doing with the Other Bets part of their business.
Hill: I'm glad you mentioned that, because one of the things that they had done recently, and when they moved from being Google to Alphabet, it was to give more transparency to the overall business, and they set up these divisions, and one of them was Other Bets, and it was essentially their way of saying, "Look, to give more transparency to investors, to shareholders, to Wall Street, we're going to put over, in this one category, things that aren't search." And what they did recently was take one of these things from the Other Bets category, Nest --
Mann: And broke it out.
Hill: -- their move to the smart home, and they basically brought that back over to Google. And one of the things that we saw this quarter was that, because of the amount of money they are sinking into Nest, if you just look at the Other Bets as a category, you see that, now that Nest is no longer in there, the revenue is up, the loss is smaller -- it's still a loss, but it's smaller. So, I think, maybe people were reading a little bit more into that than they should, because again, I get that they're spending a lot of money, and certainly, when we were at South by Southwest, everything Google was doing was screaming smart home. That was their entire presence at South by Southwest.
Mann: Yeah. And they are willing to lose money on that for an extended period of time so that they are there and ready to win when the market is ready for it. You know what it reminds me of? I don't know that people think about this that much anymore. You had AT&T, and AT&T had a massive think tank called Bell Labs. And Bell Labs had its own budget. If it made profits, that was great, but it was also there to get out ahead of whatever the next trend was, get out ahead of whatever the next technology was. And Other Bets from Google is exactly the same thing. Even broader, because Bell Labs was pretty much limited to telecommunications. So, I don't know what more people wanted. I think the stock probably has had a great couple of years, so I wouldn't read anything into the fact that the stock is down a little bit. This is a company that is unlike any other on the planet.
Hill: Is it safe to assume ... I'm not going to say the next two quarters are going to look exactly like this, but it does sort of feel like, when you look at the overall business, when you hear the comments from management, it seems like, at least directionally, the expectations for the next couple of quarters is that they're going to be kind of like this. The profits will be measured in billions. The spending that they're doing around smart home-related things, not just Nest but the speaker --
Mann: Auto-drive cars.
Hill: -- all of that sort of thing, it really does seem like they're going to look and feel a lot like this one.
Mann: Yeah, I think that's true. The biggest wild card for Alphabet and all of the other big social media companies is, is there regulation coming down the pike? But, even that's not a story for the next couple of quarters, that's a few years down the road, I would think.
Hill: This gives me about as good a chance as any to work in that if you have a smart speaker, whether it's from Amazon or Google or Apple, you can get all of The Motley Fool's podcasts on there, as well as our daily Flash Briefing.
Mann: And they're fantastic. You guys do such a great job with those. And every once in a while, I come in and screw one up. [laughs] Another thing that you can get on them, and this is an absolute pitch out of the blue --
Hill: Yes?
Mann: -- I studied German in college and try very hard to keep it up. There's an app out there, and it's called News in Slow German. They do News in Slow French, News in Slow Italian, where they give you the day's news in the language, but very, very slowly, spoken very deliberately. And it's absolutely fantastic. So, once you're done listening to a Motley Fool podcast, a Motley Fool minute, learn a language.
Hill: Does it help?
Mann: Yeah, it absolutely helps. As we know from investing, repetition is everything. Someone who practices 15 minutes a day at something is much better than someone who practices three hours on the weekend, and languages are very, very much the same. It's the same as exercising a muscle. It's just better.
Hill: OK, I'm now officially one step closer to getting a smart speaker in my home.
Mann: It's great!
Hill: Let's move on to the Dow, which has six of the 30 reporting today. We'll focus on Minnesota Mining and Manufacturing --
Mann: Not much mining they do anymore, but I do love that they've maintained the name.
Hill: [laughs] Also known as 3M. Not exactly starting the new fiscal year off in the strongest of ways. First quarter revenue was higher than expected. Their profits were solid. But, they cut guidance for the full fiscal year. Not a ton, but enough.
Mann: Enough. Well, this is also -- again, we just talked about this with Alphabet -- a little bit of an expectations game. 3M had a massive 2017. If you were a shareholder in 3M, you almost could not help but make money. So, guidance, they cut a little bit. They're seeing some weaknesses in some of their divisions. Maybe we need to use a few more Post-it Notes around the office and help them out. But, there's nothing that's going on at 3M that is raising alarm bells with me. But, it's always the case that when a stock has done really, really well like that, bad news, even minor bad news, get amplified. And I think that's what we're seeing here.
Hill: And to your point about the performance of the stock, for a Dow, what we think of traditionally as the safe, solid blue-chip stocks, it really was a great 12 months, until you get to the beginning of February. Since then, it has given up more than 20%. It's basically flat over the last year, because it's given up between 20-25% of gains just over the last few months. One of the things management talked about with respect to this quarter was the organic growth that they saw. They liked what they saw in terms of organic growth across the board. So, I'm wondering, if you look at the stock since it's recently given up some gains, is this a value play type of situation? Because the thing about organic growth is, if that continues to play out over a few quarters, then this is a buying opportunity, because it's down about 7% this morning.
Mann: Yeah, I would think so. And organic growth is the kind of growth that you really want with any company. A lot of companies are really good at acquiring, but acquiring is much higher-risk growth, and usually it's more costly than --
Hill: I was going to say, it involves writing checks.
Mann: Yeah, it involves writing checks as opposed to, "Hey, people are buying more tape than they did a year ago," or, whatever product it is, they're buying more. So, yeah, there's a lot of stuff to like. I think the stock got very much ahead of itself. But, down nearly 20%, probably a good point in time in which to get in. But, at the same time, usually an inflection like this has a tail to it.
Hill: We are just down the block from the U.S. Patent and Trademark Office, which is home to the National Inventors Hall of Fame. And I got a press release from them earlier this month, because apparently, in addition to being Financial Literacy Month, April is also National Inventors Month. It's this press release, and they highlighted some people who are in the Hall of Fame, who have been put in the Hall of Fame over the last 15, 20 years --
Mann: Have you seen the Hall of Fame, by the way? It's right in the atrium there.
Hill: Yeah.
Mann: It's awesome!
Hill: Yeah, it's great. And two of the people that they highlighted were the two guys who came up with Post-it Notes.
Mann: Which, if I understand correctly, was an accident. The adhesive, they were trying to find something that didn't leave a mark, and they found a very light, clean adhesive. They've done very well with that. It wasn't Romy and Michele. Do you remember that from Romy and Michele, the movie, that she was claiming that she invented Post-it Notes, that was her thing. I can tell by your face, you have no idea what I'm talking about. [laughs] Lisa Kudrow --
Hill: If you've seen Romy and Michele's High School Reunion, I mean, classic movie.
Mann: Right. "I invented Post-it Notes" was the big thing, and then suddenly, one of the smarter people at the school said, "No, I thought that was ... " [laughs]
Hill: They actually knew the names of the people who came up with it.
Mann: Tough play.
Hill: Today is the day that Wells Fargo is having its annual meeting in Des Moines, Iowa.
Mann: I wonder why they chose Iowa.
Hill: I don't know. Are they not based there? I just assumed they were based there.
Mann: No. They're based in ... Chicago?
Hill: You go ahead and look that up.
Mann: I'm going to look that up. They're not based in Iowa.
Hill: I hear Iowa is lovely this time of year, though.
Mann: Iowa is also not on the way for a lot of people. I mean, for a company that's had the news cycle that Wells Fargo has had over the last year, I would think it would be of benefit to them to put their meeting someplace where people aren't that excited to go. And I mean nothing bad about Des Moines, Iowa, it's just not on the way. Alright, I'm looking now.
Hill: Iowa residents, go ahead and send your angry emails to [email protected].
Mann: No! Gosh!
Hill: So, Tim Sloan, the CEO, told shareholders in his annual letter that the No. 1 priority for Wells Fargo is rebuilding trust after their recent scandals.
Mann: [laughs] I have a super great idea there. How about making sure there's no further scandals? Right? Because usually, when you have multiple scandals like that, to my mind, that means that there's something rotten throughout the company. Right?
Hill: And we're not talking about the same scandal over and over. At first -- and we talked about this earlier -- when the first scandal broke about the fake accounts that they were creating, which, that's just sort of a skeezy thing to do, but it didn't necessarily harm people -- there was anywhere from surprise to genuine shock that this was going on because of Wells Fargo's sterling reputation.
Mann: It's a Buffett company and deserved the halo.
Hill: Absolutely. And now, this latest one, with the billion-dollar fine --
Mann: A billion dollars! Which is such a weird number. Like, I don't get the feeling that Mulvaney at the CFPB went through and really thought of, "What are the true damages to people?" Basically, what was happening, people who were getting car loans through Wells Fargo were also being forced to get car insurance from Wells Fargo, regardless of whether they already had car insurance. So, unlike the cute fake accounts -- which is such a good branding for a fraud, like, what a great fraud branding fake accounts is. But, forced insurance is not so great, but it's actually one that's much more expensive to people. So, there were actual losses and actual damages, and they're being hit very hard for it. A billion dollars, I am told, is quite a bit of money.
Hill: It is, and they'll have no trouble paying it.
Mann: No.
Hill: But I think the signal that it sends is, maybe, stronger than the actual impact of the fine itself. But, this is not a shock, this is just, "Oh, there they go again." And I'm wondering, with the Berkshire Hathaway meeting coming up in a couple of weeks here, how much do you think Buffett is going to be asked about this? A few months ago, he was asked about it, and he expressed his full faith in Tim Sloan. Tim Sloan, who, by the way, was in the executive ranks the whole time that the first scandal was going on.
Mann: Right, he's not Mr. Clean Up Man.
Hill: Yeah. He's not from the outside.
Mann: No. I would hope, and, as someone who studied Buffett for a long time, he has a very light hand with his managers, he doesn't come in and berate them. But, there's also a video of him testifying before Congress after the Salomon scandal in the 1990s, and he said, "If you lose reputation for the firm, I will be merciless." Well, there are people at Wells Fargo -- and I don't mean the rank-and-file, I mean people in the C-Suite -- who have lost reputation for Wells Fargo, and for Buffett, if he doesn't stand up and do or say something about it. So, it'll be really interesting to see what he is asked and how he answers. And he absolutely should be asked.
Hill: You've been to the Berkshire Hathaway annual meeting before.
Mann: I have, yeah.
Hill: What stands out to you, whether it's in terms of visiting the city of Omaha, Nebraska, or just the event itself?
Mann: I should talk about how close it is to Iowa, which I truly love. [laughs] It's amazing. We feel it here at The Motley Fool sometimes because we interact with investors a lot, but, when you go into a room and there are 20,000 shareholders, and then there's an overflow room ... it's an amazing, amazing event. And I've met people who started going to the Berkshire Hathaway meeting even in the mid-80s, and it was in the lunchroom at Kiewit Plaza, and just to think that they had the access where, like, "Does anybody have any questions? No?" [laughs] You know, as opposed to now, where the moment in which they ask for questions, it's this mad dash for the microphones.
It's an incredible event. I don't know how many more they're going to do. I think Charlie Munger is 92, maybe. But, they have a lot of energy when they're up there on stage. And the most amazing thing to me is and has always been -- as I stumble through this -- when they get asked questions, they generally answer in complete sentences with syntax, in paragraphs. It is amazing how their minds work.
Hill: Bill Mann. Thanks for being here, man!
Mann: Good to be with you, Chris!
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!
