In this MarketFoolery podcast, host Mac Greer is joined by Motley Fool analysts Andy Cross and Aaron Bush to discuss the interesting financial and business stories of the day, and this time around, it's all about tech. Apple (NASDAQ:AAPL) didn't have quite as good a first quarter as analysts were hoping for on some fronts, but shares popped after it reported, and the guys dig into the numbers.
Snap (NYSE:SNAP), on the other hand, told investors its growth was headed for a big slowdown, and the market snapped back at it. In the digital currency world, an investment bank issued a dire prediction for cryptocurrencies broadly -- and our in-house expert says it has a point. And finally, Facebook (NASDAQ:FB) has decided that since it knows us all so well anyway, it should use that information to help the singles among us find Mr. or Mrs. Right.
A full transcript follows the video.
This video was recorded on May 2, 2018.
Mac Greer: It's Wednesday, May 2nd. Welcome to MarketFoolery! I'm Mac Greer, and joining me in studio, we have Motley Fool analysts Andy Cross and Aaron Bush. Gentlemen, welcome!
Aaron Bush: Good to be here!
Andy Cross: Our first show together, Aaron. This is exciting!
Cross: This is great!
Greer: And what a show we have, guys. We're going to talk Snap, Facebook, and crypto. I mean, come on!
Cross: That's a show in itself, just the intro.
Greer: Just the intro. Let's begin with Apple. Shares of Apple up around 4% at the time of our taping. Apple reporting earnings after the market closed yesterday. Guys, here are some highlights. 52.2 million iPhones sold for the quarter, and that was actually slightly below expectations. Just let that sink in. Slightly disappointing. Apple also announced that it's buying back $100 billion in stock, and they're raising their dividend. Andy, what caught your attention?
Cross: That iPhone number, Mac, it was slightly less than what analysts had been expecting by like, I don't know, 50,000 phones or something. It was almost ridiculous to think about how much they may have missed. The numbers that they put up this quarter are staggering. Sales up 16%, earnings per share up 30%. Their Service revenues were up 31% and now make up 15% of the total, so, $9.2 billion, that's the Services. Wearable revenues were up 50% as well. Even those iPhone sales, the numbers you mentioned, Mac, iPhone sales for the first half of year were $100 billion, and that was up 14%. And their average order, because of the iPhone X, went to $728 from $655.
But, the buyback, what investors are getting. Everyone is getting a little bit in this earnings quarter, but the investors, like you mentioned, another $100 billion, that's on top of a $200 billion buyback they've already made since 2013. There are only 75 companies that, their entire market cap is greater than $100 billion, and Apple is buying back another $100 billion worth of stock.
Bush: Pocket change. I think what made this quarter really stand out was the fact that, they only sold about 3% more iPhones, but through the iPhone X, they were able to significantly raise prices. And I think that's also a reason to continue to be optimistic, because that's something that will continue over time. Right now, Apple is in this period where it's not really about selling devices to more people as much. It's about using the 1.3 billion active devices already out there, and all the people who use that, and to figure out how to sell them more services, sell them the smartwatch or the AirPods and make the sales per active customer, essentially, go up. Right, now, I think it's about $30 if you take out the actual hardware costs. But I have a feeling that's going to go higher from here.
Greer: Do you think they've hit a limit in what they can charge for the iPhone? Because, the average selling price of an iPhone for this last quarter was around $728.
Cross: No, I don't think so. Even in China, the iPhone X was a monster success, and there's tons of competition in China. So, they're seeing success there. There were a lot of doubts going into the quarter that the iPhone, Aaron mentioned, the numbers were only up about 3%, and there were expectations they'd be maybe a little bit higher. So, I think there's some concern that maybe they're topping out that upper market, but I don't think so. Just think about what they're building with the ecosystem that Aaron mentioned. I think there still is room for them to continue to push that level. They also have to recognize that the competition is definitely out there, especially from the competitors coming from China.
Greer: Guys, we talked about the share buyback. We all know that companies notoriously are bad at timing their share buybacks. As an investor, how should I feel about Apple buying back $100 billion in stock?
Bush: I think, for Apple, this is something they do all the time now anyway.
Greer: That's a big number. [laughs]
Bush: It's a huge number. But, I don't know if it's as much a matter of timing and it's just as much like, this is more the Apple status quo. I do think that, at a point, when this is what you're doing with all of your cash, you do have to question whether the company is buying back tons of stock when it doesn't have better things to do. So, maybe, timing-wise, it could be a problem. But I think overall, it's a pretty tremendous move.
Cross: That's a good point. The stock, for Apple, at a $900 billion market cap, the company, there's a lot of value characteristics in this business now, and they have $267 billion of cash on the balance sheet that they will be able to deploy when they start bringing a lot of it back from overseas, plus the dividend. So, I think the expectations are that they will continue to have these monstrous -- I mean, they bought back 25% of the company over the last few years. So, if they can do that, especially at opportune times, which they have done in the past few years, when the stock was at less than $100 a share, I think investors will recognize that. But, investors also have to understand, that's the kind of company that Apple is now.
Greer: OK. Going forward, what's your biggest question, or, what's one thing you're looking at with Apple going forward?
Cross: The Services business, I mean, how big can that be? It's 15% of revenues right now. It was a great quarter for them, up 30-31%. There's really a lot of lock-in recurring revenue with that business, so I want to see how large that can get.
Bush: I'd scope it out slightly larger and say revenue per customer, which could include Services, but also would include other devices. Just, how much can they squeeze out of the people that they already have?
Greer: Guys, a rough, rough day for Snap. Shares down around 18% at the time of our taping after earnings. Snap is the parent company of the video messaging app Snapchat. Snapchat warned investors that revenue growth would "decelerate substantially." That doesn't sound good, Aaron. And you mix in the concerns over Snap's recent redesign, what is an investor to do about Snap?
Bush: Go to Facebook. [laughs] I mean, at this point, Facebook is running laps around Snap. Especially if Snap is going to be significantly decelerating their revenue growth.
Greer: And we should add that Facebook owns Instagram.
Bush: Yes, this is true. If you look at this quarter, Snap did gain a decent amount of users, but once again, and this is pretty crazy, its free cash flow was more negative than its revenue was positive, and that's a really tough spot to be in. So, when I look at Snap, I see two main problems. They have an advertising problem and a money-making problem. Which is just comically sad, because that's the two things they need to get right.
If you look at the advertising problem, the main place Snap could sell ads well is Stories. The redesign hasn't helped. They've proven far more seasonal than they should be for a company growing at this scale. Instagram's Stories is running circles around them. And if you go onto the platform, the ads feel pretty forced. So, I think there's still big questions there. Then, for the money-making problem, Snap is burning so much cash. It's a really big problem, and it'll take time to get out of. The best way to do it is through revenue growth, scaling over your marginal cost. But there are problems there.
And the other part is on the expense side. They laid off 100 people or so a month or so ago. I don't know if they'll do more of that, but they definitely will have to rein in expense control and dilution. They diluted shareholders 7% from this quarter from last quarter. So, that's the kind of trajectory we're on, so things are not looking very great.
Bush: That's a lot different than Apple buying back all its stock.
Greer: So, Aaron, I'm going to call you skeptical about Snap. [laughs]
Bush: Yeah, sure, why not?
Cross: Aaron mentioned the advertising problem. That really comes from the user problem. Daily active users up 15% year over year and 2% sequentially. For a company with high growth expectations, when your revenue is growing 54% this past quarter, that's down from 200% this quarter last year, that's about what Facebook is doing. So, when you're competing against a company that's gigantically so much more impressive right now, especially when they say, "Listen, the rest of the year is not going to be good," and the entire first part of the conference call was really talking about the user experience and all the changes they've been trying to make, and how that has not worked -- investors do not like that, and they'll sell that stock down, as they have aggressively today.
Greer: OK, so, your growth is slowing rapidly. You have, as Aaron says, a money-making problem, and, oh, yeah, you're competing with Facebook. So, here's the question -- at some point, does this become a value play? Is that all baked in, and if they do anything positive, the stock starts going up? Or is this trying to catch a falling knife?
Cross: It's interesting, because Facebook, after its IPO -- it came out at about $38, ran up, and then they started running into all the problems, like, they don't have a mobile platform. The stock fell all the way back down into the low 20s.
Greer: Good time to buy! [laughs]
Cross: There were a lot of questions about, what's going on with Facebook, they missed the monetization opportunity. And that turned out to be a great problem to have. I just don't see that. Evan Spiegel and Robert Murphy are the co-founders, they own 35% of the company, that's a substantial amount of equity into a business. Because of the big competitive pressures that Snap is facing across the board, I'm just not as excited about that as I would have been for Facebook.
Bush: Yeah, I think right now, it's a falling knife. Maybe at some point it becomes a value play. I think what Snap has in its large user base, in its dedicated user base, the average user still spends about 30 minutes a day on Snap. That's still really impressive. Maybe one trick they might have up their sleeve is Tencent, which now owns, I forget the exact percentage, but they've been buying more of the company. And Tencent is the master of all social media companies, with WeChat, and figuring out how to get people engaged through different means. Maybe they could share some of their magic with Snap. But, I think that still might be a far-fetched hope.
Greer: OK, guys, let's move on and talk some crypto. Investment bank GP Bullhound -- what a great name! GP Bullhound. I'm not making that up. It's a boutique investment firm. They're warning that crypto is headed for a 90% correction, leading to a "mass-market wipe out." OK, Aaron, you are our resident crypto expert. Is crypto headed for a 90% correction?
Bush: Possibly. Just to frame up where the market is right now, it's worth about $420 billion. That's up significantly over the past couple of years, but it's actually down about 50% or so from the crazy highs of December, January. Still, $420 billion, to me, that seems far larger than the value that's actually been created so far. From that perspective, things still seem pretty hyped. When I look out at the market, I see a small handful of promising ideas, a giant sea of garbage, and a lot of infrastructural problems that still need to be solved. And that takes time.
Cross: I was going to say the same thing, Aaron. That's exactly right. There are hundreds of different tokens out there created. The market opportunity for the business seems to be just vast. But, you can't deal with a few transactions per second and operate in the space that you want to for a currency and for a transaction business. They have operational challenges the crypto world has to get over first.
Greer: I want to go back to something that you just said, Aaron, about this giant sea of garbage and this small handful of companies that could be successful. How do I invest? If I'm interested in this space, how should I invest in crypto?
Bush: First of all, I think it's important to understand that there still are a few very powerful crypto-native ideas. So, the very first thing I would do is look for a big idea. Don't look for things that just plug in somewhere or already exist and can just be made with a token, for example. Think of things that are native to crypto that could actually become multi-billion, if not trillion, dollar markets. So, I think that's a good place to start. There are very few markets like that.
When it comes to investing tenets that I think are useful in narrowing down what's garbage and what might have value, first, don't invest in white papers. Invest in teams who quickly ship code for tech that people actually want and use. Which sounds so obvious, invest in things people use and that actually exist to some degree, but actually, a ton of white papers where nothing fully exists that works yet are being traded at billion-dollar valuations, which is crazy, and I don't think that's sustainable. So, I would just say, raise the bar for what you look for in terms of the technical merit of things.
Second, I would look for passionate communities. Even if prices fall, passionate, open-sourced teams don't. Market weakness in an open-source world counter-intuitively pushes these teams to work harder, and that's really important. These are open-sourced projects. Then, third, I would just say, controversy is actually interesting when those first two points are met, because that shows that there's something worth fighting for, and there's inherently value in that.
Greer: Guys, speaking of passionate communities and controversy, let's talk Facebook. Facebook is getting into the online dating business. Facebook CEO Mark Zuckerberg says the new service is meant to help people find "long-term relationships rather than hookups." The opt-in feature will match users with people they're not already connected to on the site. Let's talk about the response from Match (NASDAQ:MTCH), which owns dating sites Tinder, match.com, OkCupid and PlentyOfFish -- I'm not even sure what that is, PlentyOfFish. Shares of Match falling more than 20% on this Facebook news. Andy, what do you think?
Cross: That's not surprising. Match is a $10 billion company, so when the biggest, baddest social network in the world comes knocking on your door, investors are going to get a little bit worried and say, "Hey, what's going on with the prospects of Match now?"
There are hundreds of millions of single people on Facebook. It's the most connected network out there. This is not a surprise. This is just an opportunity that Mark Zuckerberg is looking at. The timing is a little interesting, considering all of Facebook's privacy with connections has stirred up in the past few months. I mean, there's nothing more personal, really, than your romantic life. So, how Facebook users react to this from the trust perspective still remains to be seen.
But there's a huge opportunity for Facebook to make those connections. That's what they exist for. And certainly, Match is probably looking at this and saying, "Oh, that's interesting!" The Match CEO had some very interesting comments she mentioned on Twitter when she said, "We're flattered that Facebook is coming into our space and sees the global opportunity that we do as Tinder continues to skyrocket. We're surprised at the timing, given the amount of personal and sensitive data that comes with this territory."
Greer: Throwing shade.
Cross: Yeah, as you said, Mac. And that piece that you read from Zuckerberg, Mac, he does mention the whole concept of a hookup, which, Match may have looked at that and said, "We're not just a hookup site at Tinder."
Bush: Just, as a thought experiment, apart from digital advertising and the effect that had on media, has Facebook created any new product that fundamentally changed an industry? I can't really think of much. Maybe Marketplace, internationally, in some emerging markets. But apart from that, I don't think Facebook has had much success branching out of its advertising business and getting away from Stories and News Feeds. So, I'm a little bit skeptical.
I think they definitely have large numbers on their side, but how they frame it up is probably just going to be, this is the one way that Facebook will handle dating. When, if you look at something like Match, they have tons of brands, because different people search for different things in their dating sites. So, I don't know. I'm a little skeptical, but it's a big opportunity.
Cross: I also wonder if everyone will want to have all of that much data in their lives that tied into one platform. We tie a lot into Facebook, but this does seem to go that one extra little step.
Greer: Yeah, but this does seem like a more logical offshoot of what they're doing already. They're great at connecting people, so this seems like, this kind of makes sense, especially if they can find a way to do it. And it sounds like they're going to do it in a very different way than Match and Tinder.
On the other hand, we were talking before the show, I was asking colleagues, on a scale of one to 10, 10 being a positive force for good and one being the worst thing ever, where do you think Facebook nets out for established relationships, marriages, partnerships? And both of these people said three, more of a negative force. One said, it allows people to reconnect with old flames, and that leads to higher divorce, which, Facebook is cited in a lot of divorce filings. And the other person was talking about how it's a big distraction. If you're married and one person is really into Facebook and one's not, then it just consumes all your time. So, what do you think? Facebook as a force for relationship, good or evil?
Cross: I'll take the higher end of that. I'll say a six. I think it allows people to be connected more to their families in general, and that's probably a good thing. And the whole idea that Facebook is cited in different cases, there's, what, one and a half billion people who use Facebook, two billion people who use Facebook? That's a huge network, so --
Greer: You're questioning my stats. [laughs]
Cross: Yeah. Just, the law of averages will have people citing Facebook.
Greer: Fair point.
Bush: I don't know. I might go four. Three or four. Just because, I think people are sometimes over-reactive to seeing people communicate with others on Facebook, especially if you look at messages and stuff where it gets more personal. I don't know. It's definitely a mix.
Greer: I think I'm going to go four. I also think there's a lot of Facebook envy. I think we probably all know people who, they have to post a picture of their perfect meal and their perfect dog and their perfect picture, and that's just nauseating. Let's bring it down a notch, let's show life as it really happens -- me chasing after our rescue beagle who's doing awful things in the backyard, that's what I want to see on Facebook.
Cross: [laughs] That was me last night, chasing my Golden all around the neighborhood.
Greer: That's good! Put that on Facebook!
Cross: On Facebook, nobody wants to see that. Even on Facebook, no one cares.
Greer: OK, it's just a thought. So, I want to wrap up with my incredibly arbitrary desert island question. I know it's unfair. But, I want to say, over the next five years, if you had to pick one of the investments we had talked about and you had to hold it on this desert island -- Apple, Snap, Facebook, or, I'm going to give you a crypto basket. What do you think? What are you going with over the next five years?
Cross: How big is the basket?
Greer: Aaron, how big is it?
Bush: How big is it?
Greer: I don't know, 10 stocks?
Bush: Market-weighted, all of them, index?
Greer: Yes, that.
Cross: I'll take the crypto!
Bush: Really? I'm not taking crypto, actually. I'm probably going to choose Facebook.
Greer: OK. Crypto and Facebook.
Cross: I think, Facebook is an awfully large company. So is Apple, too.
Greer: I'm going Facebook. I think the Facebook dating thing is going to be a home run, I predict.
Cross: Alright, there you go. There you have it.
Greer: We'll see. OK, guys, Andy, Aaron, thanks for joining me! ... This is where you say, "You're welcome!"
Bush: Thanks, Mac!
Cross: Thanks, Mac!
Greer: God, what happened to civility and decency? Oh, my gosh!
Cross: Facebook killed it.
Greer: OK, let's try that one more time, and we're going to leave all this in. Andy, Aaron, thanks for joining me!
Cross: Thanks, Mac!
Bush: Thanks, Mac!
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 MarketFoolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! We'll see you tomorrow!
Aaron Bush owns shares of Apple, Facebook, Match Group, and Twitter. Andy Cross has no position in any of the stocks mentioned. Mac Greer owns shares of Apple and Facebook. The Motley Fool owns shares of and recommends Apple, Facebook, and Twitter. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Match Group. The Motley Fool has a disclosure policy.