In this MarketFoolery podcast, host Chris Hill is joined by Motley Fool Chief Investment Officer Andy Cross to discuss some of the bigger news items on Wall Street, starting with the earnings report from the world's biggest public company. Apple (NASDAQ:AAPL) delivered yet another remarkable set of results, with its fourth straight period of double-digit percentage growth and its seventh consecutive quarter of accelerating growth.
Across the Pacific, Baidu (NASDAQ:BIDU) also put out a strong report, but that immediately got lost behind revelations that Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) unit Google has been working on censored search engines and news apps that would allow it to reenter the Chinese market. And speaking of foreign markets, SodaStream (NASDAQ:SODA) managed its best revenue growth in five years, primarily thanks to its platform's popularity in Western Europe. What foundational Foolish investing principle do all these stock stories have in common? Listen all the way to the end of this podcast to find out.
A full transcript follows the video.
This video was recorded on Aug. 1, 2018.
Chris Hill: It's Wednesday, August 1st. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today, chief investment officer, Andy Cross. Thanks for being here!
Andy Cross: Hey, Chris! It's a great day to be here, a great day to talk stocks.
Hill: It is, particularly if you're a shareholder of Apple. We'll talk Baidu. It's also a really good day if you're a SodaStream shareholder.
But, let's start with the fruit company. Apple shares up 5% this morning. Third quarter revenue, $53 billion. Of course, that's a big, impressive number. More impressive to me is, this is the fourth consecutive quarter that they've grown revenue by double digits.
Cross: And it's the seventh consecutive quarter that it's been accelerating. That's a lot of fruit. They're selling a lot of fruit, and they're charging more for that fruit, too. There's been a lot of concerns and thinkings about how many actual units of iPhones, which is really their big revenue driver, they will sell quarter-to-quarter. That was basically flat to down a little bit this quarter. What was interesting is, the average selling price continues to inch up, as they offer the iPhone X, and the average selling price was up 20%. You raise the prices 20% on your biggest revenue driver, and you can see how revenues can get up to the 17% level.
Hill: That's the thing. For a long time, the question about Apple has been, how many more of these things can they sell? To your point, it's like, is the unit growth enormous? No, it's not, but the selling price is.
Cross: The unit growth ... it's not the marginal story, but the really impressive thing with Apple, what they're doing -- and frankly, they've been doing this for the past couple of years -- they're starting to see the benefit of moving more to offer the Services. The Services revenues now account for about 18% of overall sales. Their Wearables business is really starting to take off. I think revenues were up 60% this quarter. That and Services now are at a record high of $9.5 billion of sales.
So, it's really starting to have an impact, this network of how we are tied into our Apple universe. We're getting more and more connected and more and more deep into this, and it's starting to show up on the P&L for Apple.
Hill: All of this is happening in the third quarter, which is historically the weakest quarter for Apple. Whatever has happened with Apple's stock in the past, say, five to six years, this is not the quarter that anyone has ever looked at and said, "Boy, they really need to crush it."
Cross: Yeah. Everyone expects something coming out in the fall. Their new cycle comes out, a new product offering. The iPhone X has been a really nice success for them, especially from the pricing perspective. It's having growth across the world in so many of their markets. But really, the excitement is always in the fall, when they come out with maybe a new offering, or a new device, whatever it may be, something new that consumers and investors can lock onto.
But clearly, their business is rolling in momentum. You look at the size of the organization now, $950 billion, really ticking up against that trillion-dollar mark. Frankly, they probably would have been a trillion-dollar company if they weren't buying back so much stock and paying that little dividend. They pay a dividend of 1.5%, which comes out to about $13 billion a year. They buy back more than $60 billion a year, and they spend about $14 billion in capex.
This is basically exactly what Warren Buffett and his team saw at Berkshire Hathaway two years ago when they started buying the stock below $100 a share. And, they were recognizing this as the largest consumer technology company, but really a branded consumer product that people resonate to as they push more and more into high-margin Service revenues that we're all now using in whatever it might be, and, in their Wearables business. That generates an immense amount of cash flow that they can't invest fast enough, so they have to buy back stock and pay their dividend.
Hill: Given all the big numbers we're throwing around -- you mentioned the fact that Apple is bumping right up against that $1 trillion market cap number, which they'll hit at some point, if not later today then possibly later this week or month. Maybe this sounds, on the surface, like a crazy question. Am I right that this is still kind of a cheap stock?
Cross: It's really interesting, I was talking to our friend Mac Greer about this earlier today -- they do more than $250 billion in sales. Like I said before, they generate more than $50 billion in net income. On a $950 billion stock, with $250-260 billion in cash, minus out the $100 million or so in debt, you have a market multiple and the earnings power -- now, granted, a lot of that earnings this quarter was generated by a generous effective tax rate. It dropped from 23% down to 13% on the effective side, the effective tax rate. Still, that net income matters, because the company can use it.
You're talking about a company that sells at a cheaper earnings multiple than the S&P 500. And just from the earnings side -- and really, frankly, from the revenue side -- it's probably growing faster than the market. There are not organizations, historically, that are this size and are able to grow that fast. That's where everyone gets a little concerned. Then, you have slowing unit growth on the iPhone sales. The investor base is like, "I'm not going to pay up for that price. I'm not going to pay more than the market." But, clearly, over the past couple of years, it's been an amazing performer, at that size of a company. Full kudos to Tim Cook and his team for what they've done there over the last couple of years.
Hill: Second quarter profits for Baidu rose 45%. Baidu, also known as the Google of China. Profits were higher than expected, why is the stock down 7% today?
Cross: I think there's probably some overall concerns. There was a story coming out that, perhaps, its U.S. compatriot, as you mentioned, Alphabet, is going to have an offering in China that's going to be slimmed down. That team is out there, talking about -- they're not in China, and they're excluded from China -- maybe having a solution there. I think some investors are a little bit concerned there.
Also, Baidu's growth rate for the next quarter ... I mean, it's still good. They're still in the 25-30% expected top line growth rate, but maybe not quite what investors were expecting. It's not like the stock is collapsing, but it's down a little bit.
Hill: I'll come back to the stock in a minute. This is interesting, this Reuters story that got posted this morning about Google. According to internal documents, Google is planning a censored version of its search engine in China. For those who don't remember, Google did try to make it in China, tried to make a push in, and essentially folded up their tent and said, "We're leaving. It's not working for us from a business standpoint." It will be interesting to see if this happens, if they can make it work, and what that does both for Alphabet and for Baidu.
Cross: One thing we've seen historically, since you and I have been doing this over the last two decades, is the first mover advantage, the leading dog into a market, to be able to have that market penetration rate with their client base. Baidu has that inside China. Not that Alphabet couldn't take some of that. They could. Certainly, it's a huge brand and an amazing company that also has been able to do pretty amazing things over the last couple of years, as they're thinking about new ways to invest in both their technology as well as their services. So, I certainly wouldn't put it past them.
But, Baidu does have that leading edge in China. As they continue to build out more and more app-driven experiences tied to their search, and as they continue to expand their mobile offerings ... Robin Li, the heart and soul of that organization, I certainly would not put anything by Baidu to be able to fend off something like that -- if it even happens. China is a total wild card, as we know, for U.S. companies. We'll have to see how that story plays out.
I'm still excited about what investors are going to be able to get from Baidu as they continue to invest more and more in these new initiatives -- whether it's AI or self-driving cars or new chip technology, which is a really exciting area for Baidu, although it won't directly generate a ton of revenue for any time soon. The AI side, tied to their advertising client base, is huge, and they have that edge there.
Hill: It's interesting, when you look at a chart of Baidu's stock. You're absolutely right, this is an $80 billion company. The stock is down today, it's not collapsing. The underlying health of this business is very strong. And yet, when you look at this stock, it's basically where it was a year ago. Although, in the last 12 months, it has visited all these different places, both high and low.
Cross: It's actually been very volatile. I know different investors here at The Motley Fool in different services have taken advantage of some of that volatility. For a company that, when you look over the next five to ten years, will certainly be a big player in a very large market -- I mean, there are almost 1.5 billion people in China, and more than 700-800 million of those are online. A massive consumer market, obviously. They're going to be a key player in that. But, you're right. The stock, really, when you think about some of the performers, whether it's the Alphabets, Apples, Netflixes, Amazons, all these amazing technology companies and what their stocks have done over the last two years, last year, for example. Baidu hasn't really been able to keep pace. That either tells us that investors are missing the long-term story, or they're just not quite excited about Baidu's prospects. I think I fall more on the side of, I'm pretty excited about Robin Li and what his team can do in China.
Hill: SodaStream's second quarter profits came in much higher than expected. This is the fourth quarter in a row that SodaStream has beat on earnings. The stock is up 23% this morning. Was it that good a quarter?
Cross: Yeah, it was pretty good. Revenue is up about 31%. There were some currency benefits, but let's just take it for what it is. 31%, that's the highest quarterly growth for SodaStream since 2013.
This company has had a rocky road over the last couple of years. The stock reached as low as around $13-14. Today, as you mentioned, it's a massive performer. Now, I think it's north of $108. It's been a hugely rebounding stock.
As their business continues to grow and take advantage of a world that is revisiting -- even though, here, as I have my coffee this morning at The Motley Fool headquarters, I came across a SodaStream machine next to one of the coffee machines. I don't know if that thing has been touched in god-knows-how-long. But, clearly, there are a lot of people using that, especially in Western Europe, which is their big market. That's SodaStream's big market, it's 60% of their sales. In Western Europe, sales were up 33% this year as they continue to sell more and more of their sparkling water containers and their gas refills. Their gas refills were up to $9.7 million this quarter, and that was up 17%. That's a record high. And those are extremely high-margin businesses for SodaStream.
Hill: This company is a lesson in patience for investors. As you indicated, in less than two years, from the middle of 2013 to early 2016, this stock fell 85%. For people who have held on since then, in just over two years, we've seen a rise of more than 700%.
Cross: This one reason why we're fans of really patiently holding on to your investments, if you can. People need capital for different reasons. But generally, companies that continue to have businesses that they can grow, and stock prices over the short-term -- short-term, really, less than a year. For most of the active investing base, that's long-term. The average mutual fund will turn their entire portfolio over in eight months. For us and for so many great investors we respect, less than a year is still a lot of noise.
You mentioned, it's been a little bit longer than that for SodaStream, but if you follow the story, you can see what they're trying to do. Like I said before, their growth has accelerated every quarter for the past year. They continue to make further and further inroads. The Germany business has seen 26 consecutive quarters of double-digit revenue growth. That's a big market where they have the highest penetration rate.
They had some operational difficulties, but they got through those. And clearly, patient investors were rewarded. So, as much as you can, really think about extending out your time horizon when you're holding your stocks, buying those businesses and aiming to hold them as long as you can.
Hill: I'm glad you provided the context of long-term as a phrase meaning different things to different people. I enjoy watching Jim Cramer on CNBC. I remember a couple of years ago, I don't even remember what the company or the stock was, but he was referring to a company's earnings report. Cramer made his bones as a trader on Wall Street. He was talking about it, and he was saying, "I think XYZ, but if you want to think about this stock long-term, like six to 12 months, then I think ... " And I was like, wow! That's what long-term means for people who are traders! Six to 12 months, as opposed to five to ten to 20 years.
Cross: I heard a term this morning, on some business news show, called "long-term trading." I was like, I don't even know what that means. I'm not quite sure what that means.
Studies show individual investors trade too frequently. We really do feel the pains of those losses twice as much as a pain of an equivalent gain in our stocks. We all want our stocks to go up. Generally, stocks do go up. The market generally really wants to go up. Capitalism works in so many ways, and the stocks want to move higher, and businesses want to grow. That's good for stock prices. However, it doesn't always work out that way.
Having the patience to be able to hold those ... for so many of us, it's hard to do that. You have to overcome a lot of cognitive and financial and behavioral biases to do that. But we really encourage you to do that. When you think about the track record at The Motley Fool, like you just mentioned with SodaStream, but there are many others. Hopefully, we'll see it in Baidu, as well, over this year. We clearly saw it with Apple at different times in their career. It really does pay to hold these businesses as long as you can.
Hill: Andy Cross, thanks for being here!
Cross: Thanks, 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 Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Andy Cross owns shares of Berkshire Hathaway (B shares) and Netflix. Chris Hill owns shares of Amazon. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Baidu, and Netflix. The Motley Fool owns shares of SodaStream and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.