In today's episode of Market Foolery, host Chris Hill and Motley Fool contributor Bill Barker hit on a few of the market's biggest stories, and a few other things, too. Zillow's (ZG 2.13%) quarterly report tanked the stock 17% on not one, not two, but three counts that infuriated the market.
Meanwhile, e-commerce crafts site Etsy (ETSY 0.85%) is up about 11% today after a great quarterly report, and shareholders seem perfectly content to be patient on the whole profit thing. ESPN announced that it's going to grace its channels with The Ocho again, swapping out football and soccer for the likes of ping-pong, trampoline dodgeball, and chess boxing (yes, that's a thing). Tune in and find out more.
A full transcript follows the video.
This video was recorded on Aug. 7, 2018.
Chris Hill: It's Tuesday, August 7th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, from Motley Fool Asset Management, Bill Barker. Happy Tuesday!
Bill Barker: Thank you!
Hill: We have some poll results we need to get to today. We have some exciting news from ESPN. But I think it's fair to say that revenue is the theme today with the earnings news, working out in good ways and bad.
We'll start with Zillow. I think with Zillow, you can forget the adjusted profits they reported in the second quarter. No one appears to care about that because Zillow's revenue came in lower than expected, and guidance for the full fiscal year was weak. Shares of the real estate website operator are getting smacked in a big way. Zillow down 17% this morning.
Barker: The revenue guidance was very weak. Complicating matters, Zillow also announced an acquisition which also involves expanding into an additional line of the business. The market reaction is a little hard to parse, as to which part of this the market is most disgusted with. Let's just call it a fair competition between all of that -- missing on the quarter, guiding lower, and adding a new leg to the business, which didn't go over well the last time it was done, either.
Hill: That's the thing. I think the stock would be down regardless of the acquisition, but it really does seem like some analysts are going out of their way to essentially say to Zillow, "For the love of God, stop buying things. Just stop buying new businesses and trying to build out your portfolio. Get your core business right."
Barker: Maybe. The addition here is a mortgage lender from Overland Park, Kansas. Mortgage Lenders of America is the name of the acquisition. It's not that big of a company, about 300 employees. It's complementary toward the home acquisition and refurbishment and resale business that Zillow has started but has not yet translated into actual revenue. It doesn't seem to me this is wandering too far out of what their core competencies should be, but until they prove that they can make a profit on this kind of thing, the market is going to keep reacting negatively.
Hill: When you look at the stock right now, all of the sudden on a bit of a discount, the stock is on sale -- does this interest you at all? Or do you look at this and say, "No, I really want to see at least one or two quarters of revenue going in the right direction?"
Barker: It interests me. I'd want to do more work than I've done looking at this brand-new business, about which there was relatively little disclosed, i.e. the purchase price.
Hill: I was going to say, including the amount of money that they paid for Mortgage Lenders of America.
Barker: Yes, and that's the kind of thing you'd want to know to have the amount of confidence you should have in buying something. The stock price has wandered around, visited a few interesting places, but not really much improved, certainly not over the last year. As I say, I think the business construction of getting into being a buyer and a seller and a mortgagor makes sense, given their data. But it makes the business a lot more asset-heavy. There aren't too many assets heavier than a home.
Hill: True.
Barker: Before, it was a website, which is very asset-lite. It weighs almost nothing.
Hill: [laughs] Almost nothing, yeah.
Barker: Compared to the home, which, I haven't picked up any, but they're pretty heavy, from what I hear.
Hill: Yeah, if you've ever seen them on the highway, one of those trucks that has the sign on the back, "Give us a wide berth because we're hauling a home."
Barker: Wide load, yeah. You never see that on websites, wide load. What would it mean? A bad website. Somebody who doesn't know what the internet does, that's what you would conclude.
Hill: [laughs] Not to get in the weeds here on an actual business point, but why wouldn't Zillow disclose the amount of money that they paid? Given their track record, my assumption is, they didn't disclose what they paid for Mortgage Lenders of America because they were embarrassed by how much they paid.
Barker: I saw the CEO answering this question on CNBC today, and he said they didn't disclose because they were advised that it was not a material amount. That begs the question, why not disclose?
Hill: Right! "We got this thing for a song!"
Barker: Yeah. Whatever amount of money they spent on it is not material to the size of the business, which is an $8 billion business. Let's say they spent $50 million on it -- I think they probably spent more than that -- but, you could probably go out and figure it out, to within 20%, I think, if you had the right comps.
Hill: Let's move on to Etsy. Etsy's second quarter revenue came in 30% higher than a year ago. The stock is up about 11% today. This clearly is the opposite of Zillow, not just because they're in a different business. When you look at shares of Etsy, not just up today, but over the past year, up 200%, this really seems like we're buying this thing for the growth, profits be damned.
Barker: And the growth is there. That's the good news. Profits are the kind of thing that investors have been trained over the years to be patient in waiting for from high-growth internet companies. I'll give you some insight on what the growth looks like over the last quarter: 20% on the gross merchandise sales; 30% rise in Etsy's cut, the revenue; 55% up on services revenue; 118% increase in adjusted EBITDA. The profitability is small but growing fast.
One of the data points that's particularly helpful is, they've increased their transaction fee to 5%, up from 3.5%, which is easy to see, given the popularity of their site, is going to translate to significantly increased revenue.
Hill: No retailer is completely Amazon -proof, but if you're going Etsy, you're absolutely finding things that you're just not going to find on Amazon.
Barker: Yeah. That's its charm, I guess. I've never been there. I'm not as much into arts and crafts as I'm sure you are. But, I think they've established a good name for themselves in a business which is more difficult for Amazon to pursue and crush than other big businesses.
Hill: When you look at Etsy's market cap, about $5.5 billion right now, do you think someone makes a bid for them? Not that they're necessarily looking to sell their business, but, they've had this great run up, and still, in the grand scheme of things, it's not an enormous company.
Barker: No, there would need to be some synergies there because you're not going to get it cheap. For somebody to be interested in acquiring it, it would have to fit into their portfolio, rather than any sort of private equity type of transaction. The company doesn't need to sell itself. It's awfully strong. The market is reacting very positively today. It's being priced generously based on a very interesting-looking future. I don't see who the acquirer is, unless they see making the future even more interesting by virtue of their being associated with it.
Hill: I don't know. Zillow is in a buying mood, maybe they'll make a bid for them.
Barker: I've just argued that Zillow's acquisitions at least seem to make sense. You are arguing that Zillow should stop making sense.
Hill: I and others are making the case that Zillow needs to take a breath. Zillow needs to calm down, stop buying things. To this point, they're not getting the benefit of the doubt. I should say, they haven't earned the benefit of the doubt at this point.
Barker: I think they've accomplished quite a lot --
Hill: I think they have, too. I'm just saying, in terms of non-core acquisitions, they need to put that aside for a moment.
Barker: I think the asset-lite point is important. The market tends to like asset-lite business more than asset-heavy businesses. Especially when things go wrong, you don't want to have a lot of homes on your inventory and be carrying all that. It's not always the case that going from asset-lite to, in part, heavier on your assets is a mistake, but it's very rare that it's well-received in the short-term. So, I would express more confidence in the path that Zillow is going down than the market seems to today.
That said, the guidance on the revenue going forward was a rather dramatic lowering. That had to do with the revenue recognition on this home-flipping and some of that stuff. It was presented as an accounting-type issue, but I don't know.
Hill: Regarding yesterday's poll question, which company is not in Berkshire's portfolio, and four choices that we put out there on Twitter, that Jason Moser threw out to the room, including myself and Dan Boyd -- which is not in Berkshire's portfolio? Visa, Sirius XM, PayPal, and Costco. Dan Boyd, what was your answer yesterday when Jason threw out those four companies? Visa, Sirius XM, PayPal, Costco. You said?
Dan Boyd: PayPal!
Hill: Dan Boyd was right! Dan Boyd nailed it, and so did some of the dozens of listeners on Twitter who voted, as well. Kudos if you got that right.
Speaking of poll questions, let's get to your poll question, which is the naming of your brand-new puppy. We put that out there on Twitter. Tupper, Cooper, and Party Dog. Those were the three names that we put out there. The people overwhelmingly voted for Party Dog. Party Dog pulling down 52% of the vote in our Twitter poll, Tupper and Cooper splitting the difference at 24% each. Do you have some news?
Barker: There's no doubt that the listeners, readers got it right, Party Dog being an outstanding name, but I'm going to have to bequeath it to somebody else to use. It didn't ... [sighs] didn't pass.
Hill: It didn't make the cut in your own family's voting?
Barker: No. Really, Party Cat works better than Party Dog.
Hill: I don't know, Party Dog is pretty strong. [laughs] What did you end up naming the puppy?
Barker: The puppy's named Owen.
Hill: Owen?
Barker: Owen.
Hill: Wow! A late-breaking --
Barker: Yeah, it came out of nowhere. Wesley was almost a done deal for a short period of time.
Hill: From The Princess Bride?
Barker: Yes.
Hill: What is the connection to Owen? Owen Wilson?
Barker: No.
Hill: Prayer for Owen Meany? That's the extent of my Owens.
Barker: No. I don't know where the kids came up with the name Owen, but I grew up on Owen Road, so that's what I associate Owen with. Or, Owen Lars, dead uncle of Luke Skywalker, is also a viable thing he might be named after.
Hill: Uncle Owen. Didn't work out so well for Uncle Owen in that first Star Wars.
Barker: No. I hope ... that might not be what he's named after, come to think of it.
Hill: [laughs] For the second year in a row, ESPN is rebranding the ESPN2 channel for 24 hours starting at midnight tonight, so that on August 8th -- yes, the 8th day of the 8th month -- The Ocho is coming back, of course, inspired by the classic film Dodgeball, for 24 hours. Here are some of the sports we're all going to be able to watch on ESPN starting at midnight tonight -- dodgeball, trampoline dodgeball, the world championship of ping pong, cornhole, Premier League Darts, and my personal favorite, chess boxing. "What is chess boxing?" you may ask. It's exactly what you think it is. It's a hybrid of chess and boxing with alternating rounds of each. As we learned when we did a quick Google search on the rules, you can win by checkmate or by knockout, which makes me really want to see Mike Tyson come out of retirement and enter a chess boxing tournament.
Barker: There's a lot to choose from here. You haven't even mentioned saber combat, which seems to involve lightsabers, or kabaddi, which is a tag game where you are only allowed one breath to tag as many people as possible.
Hill: Team tag.
Barker: Team tag. I mean, this is worth a poll, too, which of these sports people are most excited about. Just looking at the lineup -- not to promote ESPN too much -- this may lead to one of those working from home days.
Hill: [laughs] Tomorrow? I think you're right. I do like this, as a Disney shareholder. Beyond just that this brings a little bit of attention, it shows a level of fun that seems to be ... I don't want to say it's missing from ESPN, because ESPN has a lot of fun, and they have a lot of really creative shows. But, some of the things about ESPN's corporate structure that you hear about, it seems like, in a lot of situations, ESPN is a top-down management style. So, the fact that they embrace The Ocho, and say, "Yes, for 24 hours, we can have a lot of fun and throw some random stuff out there. Let's just enjoy it, because it's sports, after all." Yes, it's a business, but shedding some light on things like lawn mower racing and, well, again, chess boxing. You're working from home tomorrow. There's no way you're coming to the office, is there?
Barker: I don't know. I have to see what the lineup is for tomorrow. But it's awfully enticing. The disappointing thing here is, court tennis didn't make the cut. They went with ping pong. I have to say, that's a significantly more high-profile sport, actually one of the most popular sports in the world. To me, that doesn't quite seem to fit in. Also, darts, which I guess Americans don't realize is one of the most televised sports in the various parts of the world. It's a revelation, I suppose, to some Americans, how big darts is in other parts.
Hill: Let's just hit on this really quick before we move on to our final story. And, yeah, for anyone who's wondering, we're done with the investing part of the show. I mentioned this to you the other day, and I'm dead serious about this. For those unfamiliar, court tennis is a sport that you've played for a long time, it's the original form of tennis. It's the version of tennis that basically dates back to, what, the 14th century or something like that?
Barker: No one knows. It predates any recorded history.
Hill: Doesn't it show up in one of Shakespeare's plays?
Barker: More than one.
Hill: I think, you have a year now, you and your court tennis comrades, to get something together so that next year, when, for the third year in a row, ESPN comes out with The Ocho, I want to see court tennis on this. I think, if you make a direct appeal to them and say, "Look, you want obscure. This is court tennis, for crying out loud." Get something together. Throw up a mini tournament or something like that. You have stuff in the realm, in the basic geographic region, of where ESPN is. Make this happen. 2019, court tennis on The Ocho.
Barker: Do we have any contacts at ESPN?
Hill: We might have one or two.
Barker: We might have one.
Hill: Let's see what we can do there. But, look, let's not rely on any contacts that we have at ESPN to make the case. The court tennis people, the executives, the cabal that runs your sport, they're the ones who need to make the case.
Barker: It's interesting, trying to figure out how these sports got on there. I'd love to know what the mechanism has been for choosing these things.
Hill: You know what? You have a year to make this conversation happen.
We close with a shout-out to Bo Underwood, a longtime listener who emailed [email protected] with a heartwarming business story that just happens to involve one of our favorite businesses -- well, one of yours, anyway -- Wawa.
A New Jersey woman had made a resolution to help people out at her local Wawa that she goes to, if they were short a couple of bucks, here or there. This is in Medford, New Jersey. There was a guy in line in front of her who seemed like he was a little down and out. He was a couple of bucks short, so she jumped up and said, "Let me help you pay for that." It turned out to be country music star Keith Urban. Which is just fabulous.
Barker: Is there anything Wawa can't do?
Hill: I mean, bringing people together, heartwarming stories involving country music stars and good-hearted citizens of the United States of America. Apparently not.
Barker: No. If there's one place in America you would have expected this exact story to take place, it would have to be Wawa.
Hill: Possibly. [laughs] I can't remember if I mentioned this, Dan, before or not -- we did get an email from a listener, Rich Smith. He sent some photographs of a Bubba's 33, which is the sports bar concept that Texas Roadhouse has started. He sent a very glowing review of his experience there, and some photographs of what looked like pretty delicious food.
The best information that Rich shared, because I mentioned that the closest Bubba's 33 to where we sit in this studio is in Fayetteville, North Carolina. He said, "Check their website," because later this fall, a Bubba's 33 is going up in Glen Burnie, Maryland. Dan, that's about an hour away, right?
Boyd: Yeah, it's on the way to Baltimore.
Hill: On the way to Baltimore. Dan, fair to say we can make a road trip this fall?
Boyd: I will. If you'd like to come, you're more than welcome to.
Hill: I'll drive, you bring the equipment. Market Foolery at Bubba's 33, at a date to be determined, some time later this year.
Boyd: Let's put it on the TBD calendar.
Hill: OK. We have a TBD calendar?
Boyd: Everything is a TBD calendar for this show.
Hill: [laughs] Including whether or not we last another week.
Barker: It feels like this show has been ad-heavy.
Hill: Ad-heavy?
Barker: Yeah. I mean, we pretty much advertised for ESPN, for Wawa, for Texas Roadhouse/ Bubba's.
Boyd: Well, if you'd like to add anything ...
Barker: [laughs] We've just been raving. Shouldn't we complain about some businesses while we're at it, just to balance the scales?
Hill: Did you hear the first five minutes of the show?
Boyd: I have some words on Wawa, if we want to go there.
Hill: Let's go there after the closing credits. You can read more from Bill Barker and his colleagues at Motley Fool Asset Management. Go to foolfunds.com. They have a free monthly newsletter called Declarations. It's once a month. It's great investing content. Go to foolfunds.com if you want to sign up for that. Thanks for being here!
Barker: ... Am I being thanked? Sorry, [laughs] I was -- [laughs] I thought you were thanking the listeners.
Hill: No. We're really done.
Barker: Do you ever bother to thank them?
Hill: Every once in a while, yeah.
Barker: Maybe do it more often. Here's the question, why would you thank me?
Hill: I appreciate you being up here. Even if some of our listeners go out of their way to say, "When Bill Barker's on the show, that's the one I don't listen to."
Barker: Well, I'd like to thank the listeners for putting up with me again.
Hill: Absolutely. I thanked them when I was up in Philadelphia and did the solo show. I never take for granted that people listen to the show, are you kidding me? [laughs]
Barker: Did anybody take a swing at you?
Hill: In Philadelphia?
Barker: Yeah.
Hill: No! It's the City of Brotherly Love!
Barker: [laughs] I know.
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!
