Google Buys a Way Into China

In this episode of Market Foolery, host Mac Greer and Motley Fool contributors Jason Moser and Taylor Muckerman hit on a few of the biggest stories in the markets today. Disney's (DIS 0.18%) Incredibles 2 broke all kinds of records this weekend, but the company's stock is still down with so much Twenty-First Century Fox (FOX) (FOXA) uncertainty hanging in the air.

Alphabet (GOOGL 0.55%) (GOOG 0.74%) invested some $550 million into Chinese e-commerce giant JD.com (JD 2.61%), which should allow for plenty of long-term tech investment. Apple (AAPL 1.27%) is teaming up with Oprah to produce some exclusive content, but this deal doesn't look half as exciting as Oprah's jaw-dropping spell with Weight Watchers (WW -3.49%). And Perry Ellis (PERY) is ending its career on the public markets as founder George Feldenkreis takes the retailer private. Click Play to find out more.

A full transcript follows the video.

This video was recorded on June 18, 2018.

Mac Greer: It's Monday, June 18th. Welcome to Market Foolery! I'm Mac Greer. Joining me in studio, we have Motley Fool analysts Taylor Muckerman and Jason Moser. Gentlemen, welcome!

Jason Moser: Hey now!

Greer: How are you doing! How are you feeling?

Taylor Muckerman: Pretty good today. How about you?

Greer: I'm good, I'm good.

Moser: Well rested?

Muckerman: Shaved. [laughs]

Greer: I'm well rested, I'm shaved.

Moser: Sort of.

Greer: I'm sort of shaved. This is the three days. You know, the beard, I kind of decided I was living a lie.

Moser: It's tough in the summertime, I've found. I like the beard, it's OK in the winter, but when the summer hits, it's kind of difficult. It gets hot up here, man. I think it took a couple of rounds of golf with a beard in the summer and I was like, "No, this isn't working."

Greer: Yeah. No, it wasn't helping. And I need help, so.

Muckerman: You can save the beard for a couple of extra holes with the mustache.

Moser: That's a very good point.

Greer: There you go. Well, guys, we have lots to talk about. Alphabet, China, Apple, Oprah, and of course, Perry Ellis.

Moser: Oh, tall list.

Greer: Do I have you interested?

Muckerman: Heavy hitters, quite the lead.

Greer: Those are just a few of the things you're going to hear about on today's show, but let's start with Incredibles 2, the Disney Pixar film, bringing in $180 million in its opening weekend this weekend. Saw the movie, loved the movie. No surprise there, Jason, that it's setting all sorts of records. This was the best debut ever for an animated film. What may be a bit surprising is, shares of Disney down a bit at the market open on Monday. What's going on here?

Moser: Definitely, the shares of Disney are not down on The Incredibles performance. Clearly, that was a bright spot on the weekend. Just as concerned as the headlines were with Solo's performance, or lack thereof, The Incredibles come in and save the day. I think this is really just a testament to why we like Disney so much as an investment -- they have the ability to change that conversation so quickly, and they make their money so many different ways. It's media behemoth. I haven't seen The Incredibles yet. I'm looking forward to going and checking it out at some point.

When we look at Studio Entertainment, it's worth remembering, this is not the majority of the business. Over the last 12 months, Studio Entertainment has been responsible for about 15% of revenue, about 17% of operating profit. They don't live and die by any one of these films. But really, at the end of the year, it's the collective, it's looking at their track record of success over one year, five years, ten years. When you look at all of these top-performing films of all time, Disney holds about half of them. I think that's just something you have to remember when we talk about Disney as an investment. We're looking at it from that perspective, as well.

Greer: In terms of the stock, then, how much of this do you think is the uncertainty over the 21st Century Fox courtship?

Moser: I think that's the big concern today, is this Fox courtship. I think you have people who fall on both sides of the coin. Some feel like this is a great opportunity that they don't want to miss, and some people feel like maybe Disney's getting forced to bid this thing up a little bit and it might not be worth it at the end of the day. I don't mind if they pursue this deal. I think, if you can look at it through the longer-term lens, it makes a little bit more sense. This gives them the opportunity to smooth out, perhaps, some of that lumpiness in the content side, the Studio Entertainment side of the business.

If Comcast ends up getting this deal, then all of the sudden, you're looking at a controller of the pipes with a lot more of that content IP. It makes them, certainly, a much more formidable competitor for many years to come. I can see what Disney's pursuing this. They have the means to get it done. I think Iger really wants to get it done.

Greer: Guys, let's move on to Google. Google is investing $550 million in JD.com, China's second largest e-commerce company behind Alibaba. Google and JD.com will join forces to sell goods online across Southeast Asia, the U.S., and Europe, competing with these petite little companies, Amazon (AMZN -1.64%) and Alibaba. Taylor!

Muckerman: Yeah?

Greer: What do you think about the deal?

Muckerman: I think it's an interesting take here, from Google, finally getting some access into China. They've been rebuffed for years, trying to get into that market from the search engine side. A little interesting to see them partner with JD.com, a company that's online retail, but, as opposed to Amazon or Alibaba, they physically hold a lot of the inventory that they sell. So, a little bit of a different story there, but logistics is their bread and butter. They own over 500 warehouses around China. North, south, east, west, they can get a package to pretty much anywhere in the country in a day, they say, as long as you order by 11:00 AM. An impressive feat for a country that big and a company that's still fairly new, a little over a decade old.

When you look at this company, margins are very thin. But with investment from a company like Google, you could see AI and technology taking a much bigger place here with this company, even though they have a warehouse, that they tout, they just built, that can supply about 200,000 orders a day with only four employees, because there are so many robots operating within. So, I think the technological advances that Google can bring could really drive this company over the top.

Greer: When you look at this deal, as a potential investor, are you more excited about the potential in China for Google and JD, or are you more excited about the potential in the rest of the world and for Google and JD.com to take it to Amazon here in the U.S.?

Muckerman: I don't know if it's really going to be able to take it to Amazon in the U.S. Maybe they get a head start in Europe. Amazon does have a presence there, not nearly as robust as it is in the United States. Maybe there's a playground that JD can mix it up with Google and Amazon. But I think China and Southeast Asia writ large is the big story here. Just, such huge population centers. When you talk about China and neighboring countries, and maybe if they can get involved in India at all there. I really think that that's the story here for Google and JD.com, as well.

Moser: Yeah, I think this really does address, probably, what is JD.com's biggest challenge right now in just the costs involved with growing this business out. It's a point worth noting that Google's investment here, this results, actually, in JD.com getting this money. It's not like Google is going on the open market and investing in the company, buying shares of JD.com. JD.com is issuing new shares. They're getting this money from Google. It's going to be that partnership there.

Then, when you think about the other partnerships that JD.com has forged to this point, whether it be with Tencent or another little player in the space we know, Walmart, it's becoming very clear that that's the strategy to take on something like an Amazon that has made so much of that investment up front, early on in the game. All of this stuff that Jeff Bezos did years ago, now it's starting to make a lot of sense. I think that's why the stock has done so well, is because it's becoming very clear, the direction and the opportunity that e-commerce presents.

For JD.com, this is yet another opportunity for them to be able to grow that business out at a reasonable cost. Partnering with a company there in Google that can really help on that distribution side, the advertising. There's a lot of tech prowess here that I think JD.com will benefit from.

Greer: Guys, speaking of partnering, Apple and Oprah getting hitched. That's a high-power partnership. Oprah Winfrey is signing a multi-year content partnership deal with Apple. Now, guys, we don't know a lot about the details. We do know that Oprah Winfrey will be creating original programming for Apple. She has a pretty good track record.

Moser: Decent. No, she has a good track record. I think the Oprah Winfrey Network at this point is still kind of, eh, it has some good and some bad, I guess. I think this is a neat headline for right now. I think that's probably about it. There's no real downside for Apple doing something like this. Certainly no downside for Oprah, I don't think, you're affiliating yourself with a brand like Apple.

Muckerman: Yeah, and it's not exclusive.

Moser: I think it's sensible, from that perspective, to give it a try. I'm not convinced on how much upside actually exists here. I feel like Apple video streaming is playing out about like Siri at this point. What I mean by that is, I know they're doing it, I know they're trying it, but I'm not convinced that they're fully bought in.

Greer: So you're not a Siri fan, is that what you're saying?

Moser: I'm not a Siri fan at all. A lot of people are not Siri fans. And when you see what Google and what Amazon have done with their voice assistants, they flew right past Apple and have not looked back. To me, there's still plenty for Apple to prove on that content side. They have a billion dollars that they're spending freely on this stuff, and that sounds like a lot until you compare it to what Amazon and Netflix spend on an annual basis.

Muckerman: Or the cash that Apple has on its balance sheet.

Moser: Yeah, exactly. Amazon is spending somewhere in the neighborhood of $5 billion this year. Netflix, it's going to be like $7-8 billion. It just takes a lot to build that out. I appreciate that Apple is giving it a shot, but I don't know what the endgame is here, though. I don't know what the purpose is. How are people going to get it? Is this stuff that I'm just going to be streaming on my iPhone for free because I have an iPhone, or do I have to pay for it? Let me tell you, I'm not going to pay for Oprah Winfrey content.

With that said, I do want to let you know that, back in the day -- you know, I used to live in Egypt, for three years. We were over there in the early 2000s. Oprah has a pretty phenomenal global brand. My eyes were opened to this when we were in Egypt. Particularly among the male population there. I was just really surprised to see how popular she was, and is, with men and women over there. It's not to be dismissed. I think she has a very powerful global brand. Again, I don't think there's any downside for Apple doing this. I'm just not convinced at the real upside.

Muckerman: It's not going to be a Weight Watchers 2.0.

Moser: Right, it's not a needle mover, I don't think.

Greer: And, explain that reference. When Oprah made an investment in Weight Watchers --

Muckerman: It was October of 2015.

Greer: And how'd the stock do after that?

Muckerman: It's up 13X, maybe closer to 14X.

Moser: You know, this is probably a great opportunity for them to sell a bunch of Apple Watches.

Muckerman: Sure, yeah.

Greer: Oh, that's interesting.

Moser: I was thinking, given her identification on the Weight Watchers side of things, and perhaps the fitness side of things, and pushing her audience to be focused on that type of thing, there probably is a great opportunity to either sell a bunch of Apple Watches, or, if Apple is pursuing some other kind of fitness device for a lower price point there. There certainly is an affiliation there that I think could work.

Greer: Guys, let's talk about Perry Ellis. That's a sentence I never thought I would utter.

Moser: [laughs] Is it just me, or, when you say Perry Ellis, the immediate image that comes to mind is Perry the Platypus, of course, from Phineas and Ferb. I cannot hear Perry without Perry the Platypus.

Greer: There you go. I love Perry the Platypus.

Muckerman: There's the new logo design.

Moser: For better or for worse. [laughs]

Greer: I think I may have had a Perry Ellis tie at one point. I'm not sure. They made ties, right?

Muckerman: Probably.

Moser: Chances are good. I think they make a little bit of everything.

Greer: That was back when I didn't get everything at Costco. [laughs] Well, the reason we're mentioning Perry Ellis is, Perry Ellis is going private in a $437 million deal with its founder. Founder George Feldenkreis has been pushing for the company to be sold. Now, Jason, he's going to take the company private. Shares of Perry Ellis down today on the news.

Moser: Well, I think they're just down to where the deal is essentially going to be consummated, hopefully. I think this is the opportunity for the founder of the company to pull the old George Costanza and just leave on a high note. I think that's really what this all boils down to. It was, I think, noteworthy to see some of his comments regarding the board of directors. He appears to have no confidence in the board and the direction that they're trying to take the company. His son is the actual CEO of the business today. Both father and son sit on the board, so I'm assuming that the other folks on the board are where they're lacking in the confidence there.

I do think it's a business that's in a bit of a tough stretch. We know about retail in general, the challenges. Perry Ellis has a lot of different brands underneath their umbrella there, some golf-related. I think there's a market there for them, but it's not ever going to be a company that really lights the world on fire. When you're a retailer like this, I think it's a lot easier to go ahead and operate under the private lens vs. the public. Chances are, you're going to see them probably load it up with a lot of debt and then try to spin it back off public at some point down the road, perhaps when the founder is not as central to the business as he is today. Probably the best outcome for shareholders right now.

Greer: Perry Ellis aside, how about one public company that each of you would like to see go private, or you think, you know, maybe they need to consider going private.

Muckerman: Well, Nordstrom has tried to go private. The family tried to buy the remaining shares earlier this year, I think around February. Not successful. They couldn't raise the financing. But, a luxury retail brand that has been struggling, right along with most retailers. I think that a brand like that could do well private, just because it does have much higher cachet than pretty much every other retailer out there. It's not unsuccessful. I think it just got caught up in the broad sell-off in retail stores. Maybe they can concentrate on things that the market doesn't appreciate. Jason?

Moser: This may rub some listeners the wrong way. I'd really like to see Tesla go private.

Greer: [whistles] Wow! I think we buried our lede here.

Moser: I think I've been very clear all throughout this show, I'm very much a big fan of what Elon Musk is doing. I believe in electric vehicles, I believe in alternative energy. I like everything that he's doing. The problem with it is, it requires a lot of money. For what he wants to do, those aspirations just require a lot of capital. So, he is somewhat beholden to the public markets to do that, and he has to constantly spin this positive message. He always has to be pushing the company and the things that he's doing. Whenever there's a negative press cycle coming out, he has to figure out a way to counter that.

Greer: Attacking the shorts.

Moser: Yeah. And I'd love to be able to see him have the opportunity to operate without that issue overhanging him. I think that's a burden he has to deal with. I'd love to see what he could do without having to deal with that burden. It's not because I think it's a bad public company or anything, I just think he could do a lot more, probably, without having that public scrutiny, necessarily, all day long, every day.

With that said, perhaps that makes his Twitter feed a less entertaining one to follow. I don't know. I do enjoy a good Musk tweet every now and then.

Muckerman: So does all of the mainstream media.

Moser: [laughs] Yeah.

Muckerman: They'll latch onto anything they can with that company.

Greer: OK, guys, let's wrap up with my favorite, incredibly arbitrary, ridiculous, I-would-never-invest-this-way question. You're on a desert island, and you have to hold one of these stocks for the next five years: Disney, Alphabet, JD.com, or Apple. We're going to leave Perry Ellis out of this because they're going to be private.

Moser: I'd go JD.com. I think there's a lot of exciting upside there. I think that the partnerships that they've forged to this point more or less validate the business itself, and I think the opportunity, from a global perspective, is just too attractive to pass up.

Muckerman: I would have to narrow it down to Alphabet or JD. I recently bought shares of JD, about two or three months ago, so I guess I'll go with that one.

Greer: Wow, there you go! A bit of an upset!

Moser: Putting your money where your mouth is. See, I don't own shares of JD. Maybe I should.

Greer: Taylor, Jason, thanks for joining me!

Moser: Thank you!

Muckerman: Cheers!

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. The show is mixed by Austin Morgan. I'm Mac Greer. Thanks for listening! We'll see you tomorrow!