In this Market Foolery podcast, host Mac Greer Hill and senior analysts Taylor Muckerman and Jason Moser discuss some of the more interesting news items from the business world over the past few days. First, there's a new U.S. leader in the music-streaming space -- it's Apple (AAPL 1.45%), though Spotify (SPOT 1.19%) still has a solid lead globally. But China's e-commerce giant Tencent now plans to spin off its own streaming service -- and it's tied to Spotify by fairly large mutual stock holdings.
Meanwhile, there was a double shot of news from Starbucks (SBUX 4.76%): It's phasing out disposable plastic straws, and its former CEO made a bold prediction about the growth of its business in China. PayPal (PYPL 3.53%) tells investors that it's still interested in acquisitions, and will be for a while. Finally, Twitter (TWTR +0.00%) goes into housecleaning mode, which is making Wall Street nervous.
A full transcript follows the video.
This video was recorded on July 9, 2018.
Mac Greer: It's Monday July 9th. Welcome to Market Foolery! I'm Mac Greer. Joining me in studio, we have Motley Fool analysts Taylor Muckerman and Jason Moser. Guys, happy Monday!
Jason Moser: Hey-o!
Taylor Muckerman: How are you doing?
Greer: I'm doing good. I'm rested. I was out in Colorado for a little while, I feel good. I should bring my A-game.
Moser: You know, you have a little sun to you. You look healthy.
Greer: Are you just saying that?
Moser: No! You look healthy!
Greer: Normally I don't look healthy?
Muckerman: It's all that fresh air out there. [laughs]
Moser: No, I'm just saying you look healthier.
Greer: [laughs] OK.
Moser: You probably ate a little bit better out there, right?
Greer: I did. I ate too much.
Moser: A lot?
Greer: Yeah. I have to start losing weight again.
Moser: Well, it was a nice place.
Greer: I crossed a significant milestone, that's all I'll say.
Moser: Now, see, you said that, I didn't!
Greer: I know, it's a cry for help. OK, on today's show, guys, let's talk some Starbucks and China, also talk some PayPal. They're in a spending mood, so we're going to talk about that. Twitter cleaning up their act and, at least, if you look at what's happening to the stock today, Wall Street is really not liking the news. But, I don't want to start there. Jason, I know you have a lot to say about that.
Let's start with the music wars. Apple's streaming music service gaining ground on Spotify. According to Digital Music News, Apple Music has surpassed Spotify in U.S. subscribers. Spotify still has a big lead globally. Jason, that's not all. The plot is thickening. Tencent is now announcing it's going to spin off its music service into a U.S. IPO. This is where it gets really confusing -- Spotify owns about 9% of Tencent, while Tencent owns 7.5% of Spotify. What does that mean?
Moser: It's a mouthful. This is really shaking out to be a very interesting space for a number of reasons. I don't think the Apple Music news is any kind of surprise. We saw that trend back at the beginning of the year. Domestically speaking, it makes a lot of sense. Apple holds a big share of the smartphone market here domestically.
When you take that out and look globally, that's where I think this gets really interesting. Android is by far and away the most dominant operating system globally. When it comes to Apple Music, the question for me is, how do they grow beyond the domestic market? The reason why I ask that is, I don't think there's much incentive to use Apple Music if you don't have an Apple device. I mean, I have an Apple device and I don't even use Apple Music. I think there are a lot of options out there, and Spotify certainly has a great reputation worldwide. They've been able to grow their member base at very impressive clip.
I wonder if, at some point, we don't see Apple trying to gain more share by perhaps selling some more low-end or cheaper iPhones to get those devices out into people's hands. I think, if you want to grow Apple Music, you're going to have to get those Apple devices in people's hands.
The nice thing for Apple is, they're not going to depend on Apple Music for their success. That's just one of the many things that they offer. I think that goes to that greater point we talked about earlier today. It's different if you're a pure-play in this business vs. if it's just part of your offering. Apple, Amazon (AMZN 3.89%), Alphabet, they're not just music companies. Spotify, right now, it's a music company. They're going into podcasts and talk shows and stuff like that, but they're very content-driven. It's really interesting to see how this is shaking out.
Muckerman: If you're looking at Spotify, it's very much an international story. You're talking about 70 million paying subscribers globally, I think around 170 million monthly active users, which includes the freemium side of things. This business, still not even in Russia, India, countries like that, but they're talking about moving into those countries. I think there's a lot more growth, when you're looking at music apps in particular, for Spotify.
Greer: How about the Tencent piece of this, this Tencent IPO in the U.S.? Is this something that excites you? And, what about that Tencent relationship with Spotify, where they each own a part of each other?
Moser: I don't know that I get too worked up over the Tencent side of it, but I do think it's pretty interesting from a Spotify perspective, in that you have two pretty big players in this space teaming up, it seems like, to gain more share. That's going to make it very difficult for something like an Apple Music to really gain meaningful traction.
If Spotify is able to continue to pick up global share, markets especially like China and India and whatnot, those are the big opportunities out there. For me, it's neat to see those two big players in the space teaming up to potentially grow the offering and grow the audience.
What gets lost in here -- I mean, what do you do if you're Pandora at this point?
Greer: Woof.
Moser: I mean, that was the name in this space just four years ago, five years ago.
Greer: So dominant.
Moser: But you go through Capital IQ and look at Pandora's financials, I've said this before, they're some of the worst financials out there. It goes to show, it's not always about being first. It's about, sometimes, being second and learning from the mistakes of your predecessor.
Muckerman: I think they're just resting on their laurels. You look at Spotify partnering up with Hulu in April to offer a joint membership for $13 a month for Spotify and Hulu. They've partnered with Cadillac. I've heard rumors that they might start talking to airlines, to be able to use streaming of Spotify on airlines to expand their brand a little bit. So, I think there's a little bit more innovation there on the customer acquisition side.
Greer: I use Amazon Music Unlimited and I'm just pleased as punch. That's an incredible service.
Muckerman: I haven't gotten into that yet.
Greer: Oh, it's great.
Moser: Do you pay for the subscription?
Greer: Yes, I pay.
Moser: I have Amazon Music that I get with the Prime membership, and even that's OK. Now my music preferences are maybe a little bit different. I pull a lot of the live music I want to hear online anyway. I don't have a Spotify membership or a Pandora membership or anything like that. But I think that just goes toward that greater point. As a pure-play in this business, it's really difficult. The economics of the music business are really hard. If you're something like an Apple or an Amazon or an Alphabet, it's really nice to have that as just one facet of this overall offering, as opposed to relying on that one trick.
Greer: I want to ask you guys about Spotify. When I was on vacation, I was talking to my brother, and he asked me about Spotify the stock. When my brother asks me about stocks -- I've worked at The Motley Fool for almost 20 years, so I've heard a lot. So, he says, "What do you think about Spotify the stock?" I gave him my standard answer. "Uh, I don't know." So, what should I tell my brother about Spotify the stock?
Moser: For me personally, I'm not quite on board with wanting to own the stock. I'll say, I hear from a lot of people in the industry and users themselves, Spotify seems to have a great reputation in this space, from a user interface perspective and from a content perspective and whatnot. To me, the economics of music are so tough, and music is so individual. Everybody likes their own thing. I would rather own a part of a music offering that was part of something greater. That's my cop-out for saying I'll just own Amazon and be done with it.
With that said, I do think, if you're looking for a pure-play winner in this space, I think Spotify is probably the front-runner right now. I'm just not convinced it's actually worth investing in.
Muckerman: Yeah, I'd have to agree. The market, you're looking at streaming, almost 40% of music revenues globally. There's still some room to grow on the streaming side, to be sure. But even though it's a small competitive market, I don't know if I'm going to buy into a pure-play. In an industry that was so recently disrupted by streaming, who knows what's next around the corner?
Moser: You look for things like pricing power and switching costs, obvious competitive advantages. As time goes on, perhaps there's a switching cost to Spotify, in that you don't want to change your entire music life over to some other provider, if that's the way you listen to music. But, I don't see that this company has a whole heck of a lot of pricing power, to be honest.
I do like the fact that they're branching out into other content, so it's not just music. I think that's where they have a really good chance of becoming something more. We've seen over time -- Sirius XM is a good example of a company that, at the very beginning stages of Sirius XM, nobody gave them a chance whatsoever. They had the benefit of Howard Stern really helping spearhead the beginnings of that company. Now, they have a subscriber base of 30 million or more happily paying. The big question out there is, when Stern leaves, how many of those people stay? Certainly, I don't know that I do.
Greer: There's only one Howard Stern.
Moser: Then that comes back to the pricing power. I might stay if they make it worth my while. And by making it worth my while, I mean, cut that subscription in half. The economics make it really difficult.
Greer: Guys, let's move on to Starbucks. A lot of different news here. We have outgoing executive chairman Howard Schultz saying that the recent slowdown in China would be short-lived. Starbucks also announcing that it's getting rid of plastic straws by 2020.
Moser: [claps] I applaud that plastic straws move! Thank you!
Greer: That's great! We were just talking before the show, Jason, you were saying you're not a straw guy, you don't use straws.
Moser: I'm not. I'm not a straw guy. I feel like that's one of the obvious things that you could either just change, or make it out of something compostable. It's just one of those simple little fixes, I don't know why we haven't done it yet. K-Cups, same thing. How hard is it to produce a fully compostable K-Cup? I don't know! That stuff is all magic to me anyway! But I have to believe someone out there can do it, right?
Greer: You have to believe. If we can put a man on the moon ... Taylor, what do you think of the Starbucks news?
Muckerman: I wonder if straws were even big back when we put the first man on the moon. When did the first straw come out? I don't know, McDonald's, probably --
Greer: This is a bit of a digression, but when I was a kid -- there are going to be two or three listeners who will know this reference -- there were these things called Krazy straws.
Moser: Oh, yeah!
Muckerman: Oh, sure.
Greer: That would be the one exception. I would say that they should eliminate all straws but have Krazy straws.
Moser: But here's the difference, the Krazy straw is reusable! You would use it, you'd put it in the dishwasher, you'd clean it, and it's Krazy all over again!
Greer: Oh, my God! It would last a thousand years!
Moser: Exactly! I'm OK with that because you can reuse it. It's that plastic, disposable, it kills me.
Greer: I would go to Starbucks more if they had Krazy straws. Right now, I'm a Dunkin' guy.
Moser: See, Dunkin' kills me because of the Styrofoam cups.
Greer: That's a great point.
Moser: I don't understand, why can't you make that switch?
Greer: You know what Dunkin' does? They take the time to put the cream and sugar in your coffee for you. I like that. I like that extra step. Life's hard enough.
Moser: Or are you lazy?
Greer: Absolutely! That's what I mean by the extra step. I'm lazy, do it for me. Taylor, back to Starbucks. What do you think about this whole China thing, Schultz saying, "Hey, you know the China story? Not too bad, don't worry." Do you buy that?
Muckerman: Just based on the fact that it's still pretty early days for Starbucks, and they are opening stores, it seems like, every 30 minutes in China ... I'm not too sure of the consumer preferences in China. I know tea is probably a big deal over there. I don't know about coffee. But coffee wasn't big and other countries that Starbucks moved into. In Europe, you think espresso is the big deal, but Starbucks is very successful serving their full cups of coffee over there, along with all their sugary beverages. I think there's a good future there.
For me personally, I do wonder, Starbucks might become that dividend stock that you hold on to. I don't know if it's the same growth story, or even close to what we've seen over the last five to ten years, regardless of how China pans out. Even if it hits all the marks. I still think it's not going to be that stock that you see those life-changing gains anymore from.
Moser: Yeah, I tend to agree with that. I think the local risk is in play here, at least domestically. Growing that store base here in the U.S., it seems like we're pretty saturated at this point. It also does seem like mom-and-pop coffee shops are making a little bit of a comeback.
Muckerman: Yeah, it's almost like the craft brew industry here in the U.S., with all these mom-and-pop coffee shops.
Moser: That's not going to have a tremendous impact on their business, but it certainly brings into question the growth domestically. The thesis for the growth story in Starbucks over the past few years has been China. If you look at what Schultz says, I quote, he says, "I will say unequivocally that anyone who is betting against Starbucks in China is dead wrong."
Greer: Fighting words!
Moser: Yeah. He's very certain. I will say this, I don't think there's a CEO out there, at least of an American multinational company, that has done more research into the Chinese market than Howard Schultz has. I think that a lot of people that might get out there and criticize him on that statement don't know anywhere close to what he knows about the China market.
Greer: We should add that Schultz is leaving. Does that concern you?
Moser: No, not really. I think, at the end of the day, he's still going to be there to help, whether it's a formal or an informal way of making sure that Starbucks is doing well. I think a lot of what's going on right now, is unfolding, is stuff that he had already put into work. I think he got that ball rolling, helped get that ball rolling, some time ago. Kevin Johnson understands a lot about the China market as well because of his relationship with Howard Schultz. It's all to say that I don't think Schultz makes or breaks this company, but I do take his opinion seriously when he talks about things like this. A lot of what's going on right now, this strategy was already put into action before he decided to sever ties.
The fact of the matter is, if you're talking about a company like Starbucks partnering up with Alibaba and Jack Ma, Jack Ma's goal with Alibaba is to make China more of an importer, to bring more American goods into China. You could open up a tremendous distribution network there on the tea and coffee side with the Starbucks brand, the Teavana brand. A lot of opportunities there.
It's all to say, great businesses go through tough times. I think Starbucks is going through a tough time. Even if it's not that robust growth story that some were hoping for, I think it's going to be a pretty reliable investment. Certainly, the dividend is going to be there. I think it'll continue to grow. I could think of many reasons to hang on to these shares.
Greer: Guys, let's talk PayPal. PayPal's CEO Dan Schulman saying that PayPal is ready to invest up to $3 billion a year on acquisitions. Taylor, you're a PayPal shareholder. How do you feel about this?
Muckerman: I feel good. If you look at the last couple of months, they've already spent about $3 billion on acquisitions. Certainly not something we haven't seen before. Granted, the bulk of that recent spending was on one company, the largest acquisition to date for the company, for iZettle for $2.2 billion. I've seen it called the Square of Europe. Different integration there. International has been the focus, especially with these last three acquisitions. I expect that to continue to be the case.
Dan Shulman also said that they don't want to just be a button company, they want to be a solutions and platform company. One of the acquisitions there was an AI company that focuses on helping companies market certain products to different visitors online based on preferences that they've established through their online trail that they've left through cookies and whatever. I think you see them branching out not just from the payments side, but distribution of payments and the marketplace style e-commerce system that we've seen growing so rapidly, made famous by Amazon. Almost more of a competition with Amazon, rather than just a partner on the payments side. They certainly have the balance sheet to spend some money.
Moser: Yeah, I think you're absolutely right there on the balance sheet side. There was that Synchrony deal from a number of months ago where they unloaded a receivables portfolio to Synchrony Bank, their banking partner. The basic idea was, they don't need to be in that business. That's something that, you let a business like Synchrony do that, because they do that kind of stuff well. It freed up a considerable amount of cash flow for PayPal. The idea was, they were going to use that free cash flow to reinvest in the business and more of their strengths. I think this is right in line with that strategy.
Muckerman: Yeah, it just accelerated the cash conversion cycle by selling those receivables off, not having to wait on them or even possibly risk not receiving them at all.
Greer: Let's broaden the conversation out a bit, Jason. I know for a while now, you've been talking about the war on cash, and you've been recommending a basket of stocks. Are you still of that mindset? Or, if I'm an investor, should I be thinking more about some of the standouts -- PayPal, one of them; Square has had another great run. Or, do you still think, take a basket approach?
Moser: I like the basket approach simply because I don't think this is a zero-sum game. I think there are going to be plenty of ways to win out there. It just seems like quarter in, quarter out, Chris and I would come in for Market Foolery or Motley Fool Money, and we'd be talking about MasterCard and Visa and PayPal and be like, "Did you end up buying shares last quarter?" "No, did you?" "No." And I'd be like, "Dammit! We have to figure out a solution here!"
The solution was the basket, because I felt like it gives you exposure to not only the stalwarts in the industry, in MasterCard and Visa, but I do believe that PayPal and Square are the two companies that are going to really define this space over the coming decade. What we're seeing unfold is just that. It's like they're tit-for-tatting, almost. Anything you can do, I can do better. They're making multiple acquisitions, they have to keep up with each other. PayPal is becoming a little bit more of a hardware company with iZettle; you see Square trying to get their e-commerce edge with the Weebly deal. It's just a little back and forth. I think that, investors who focus on that basket approach, it gives you a better chance to win. If you ask me to rank my favorites from top to bottom --
Greer: I will in a minute.
Moser: OK.
Greer: No, go ahead, rank them.
Moser: Because I've been asked this before! The war on cash basket that I have, I think I would actually give the edge to PayPal because of its size. Square is a very close second. It's like 1A and 1B.
Greer: Fair enough. I like it.
Muckerman: They're just starting to go international, but PayPal certainly has the advantage there.
Moser: Exactly.
Greer: Guys, let's close with Twitter. Twitter cleaning up their act. The Washington Post reporting Friday evening that Twitter is suspending more than one million fake accounts each day. I hear that, and I think, that's good. That's good news. But, apparently, investors don't feel the same way. At the time of our taping today on Monday here, shares of Twitter down more than 9%. Jason, what gives?
Moser: Let's be clear. There's a lot of hypothesizing going on here. We don't actually know a lot factually, other than they're culling inactive bad accounts. We don't have numbers to put around it.
Greer: Are they fake accounts? Or should I dial that back?
Moser: Well, fake or inactive, whatever you want to call it. Basically, they're taking out the trash. I think Wall Street is trying to put some numbers around this. I think somebody was throwing out one million accounts per day. This is unsubstantiated, but if you do the math, you think, one million accounts per day, over 30 days, that's 30 million accounts, yada yada yada. Who really knows?
My bottom line takeaway is, Twitter the stock has certainly had a wonderful run this year. That's for a number of reasons. I think that management has done a very good job of changing the conversation away from monthly active users and more toward the daily users side, because that's where Twitter is a bit more relevant.
This to me is just Wall Street thinking at its finest. I look at something like this and I think, there's a lot of uncertainty just based on the lack of exact information on what they're doing and how to quantify it. It's still the same platform that it was on Friday. For me, I see this, and I think, OK, I'll be OK. I wouldn't sweat it.
Muckerman: And those aren't revenue-generating users. If they're bots, they're not eyeballs that are going to be clicking on ads, they're not going to be purchasing anything. We do the same thing here at The Motley Fool with our email marketing channels. Every six months, in Canada, at least, we purge our email file of people that aren't active. That doesn't really impact our subscription sales because they weren't going to buy anyways.
When you look at this, it gives a higher revenue per user number for Twitter. Certainly, as a user of Twitter myself, I'm very appreciative of them cleaning up the trash. One other thing they talked about was eliminating some dissemination of untruthful news and material, similar to what Facebook is trying to do. I'm not too worried about this one, either.
Greer: So, this is another case of Wall Street just being short-term focused?
Muckerman: They lose a metric to balance their numbers against.
Moser: Yeah, more than likely. It's fair to say that Twitter, the optimism is a bit up there. It's had a great year; the stock has been on a terrific run. That's for a number of different reasons.
Greer: One of our analysts was recommending it a while back, I forget who.
Moser: [laughs] We'll see if we can't talk about that maybe after taping.
Greer: It was Jason Moser.
Muckerman: Stock of the year!
Moser: To Taylor's point, I think a higher-quality network is better, even if it's a smaller network. A higher-quality network is better than a low-quality network. That low-quality network, whether it's bots or trolls or whatever, that really stifles engagement and growth. This is one of those decisions that's more long-term focused, it's more forest for the trees.
Jack Dorsey and his team are one of the most transparent management teams out there today. All you have to do is scroll through his Twitter feed to see what I mean. For me, I look at this as a long-term decision. We look at Twitter as an investment to hold on to for years to come. One day isn't going to change that.
Muckerman: If you look at this, if they haven't been doing this before -- this is a big number because it's been a backlog of things that they should have done over a rolling period. So, if this continues to be a thing that they do, that unsub number starts to shrink on a daily, monthly basis.
Moser: Yep.
Greer: OK, guys, let's end with my favorite, incredibly unfair, arbitrary question. It's my desert island question. You're on a desert island for the next five years and you have to buy one of these stocks. And yes, I realize no one invests this way, but you know what? It's a fun question. Apple, Spotify, Tencent, Starbucks, PayPal, or Twitter? For the next five years?
Moser: Was Square in there? Or just PayPal?
Greer: I'll throw Square in.
Muckerman: I'll go PayPal, since I own it and I'm a pretty big believer in it. Don't know enough about Tencent personally to say, but quite a buzz around The Fool about Tencent.
Moser: Yeah, I think I'd go PayPal, as well. Money is going to be money ten years from now. It has to get from point A to point B, and PayPal is really making it easy.
Greer: There you go. Money is going to be money. That's deep. OK, guys, thanks for joining me!
Muckerman: [laughs] Thanks!
Moser: Thank you!
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 Dan Boyd. I'm Mac Greer. Money is going to be money. Thanks for listening! We'll see you tomorrow!
