It's been an interesting few days for a couple of big companies on Wall Street, and in this MarketFoolery podcast, host Chris Hill and Motley Fool Asset Management's Bill Barker reflect.
First, near midnight on Friday, Tesla (NASDAQ:TSLA) CEO Elon Musk revealed that while he really could get the funding, shareholders want the automaker to stay public, so he's going to drop his plans to take it private. The duo are not impressed with the timing of the announcement, but they talk about where matters go from here.
And IBM (NYSE:IBM) is apparently working on a flying coffee-delivery drone, which (like so many other attempted innovations in tech) could either be genius or ridiculous. They also answer a couple of listener questions about stock splits and investing in the children's entertainment sector.
A full transcript follows the video.
This video was recorded on Aug. 27, 2018.
Chris Hill: It's Monday, August 27th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, from Motley Fool Asset Management, Bill Barker. Happy Monday!
Bill Barker: Thank you!
Hill: Thanks for being here!
Barker: It's good to be back!
Hill: We're going to dip into the Fool mailbag. We're going to talk about the story that we need to talk about, which is, of course, coffee drones, and IBM's attempts -- well, we'll get to that in a second. We have to start with Tesla. We have to start with the story that broke late on Friday night, when Elon Musk, in a blog post on Tesla's website, explained, "Yeah, we're going to stay public. Even though we have the money -- we could go private -- investors want us to stay public."
Hill: [laughs] ... Let me just, as charitably as I can, say that the timing of this doesn't help. It doesn't help the optics. The optics, which already weren't all that great to begin with for Tesla, specifically for Elon Musk, starting on August 7th with the "funding secured" tweet -- from then until close to midnight on Friday, sneaking this out.
Barker: The timing being after the close on Friday.
Hill: It wasn't just after the close on Friday. Berkshire Hathaway puts out their quarterly earnings release after the bell on Fridays. They do it very quietly. They famously don't do a quarterly conference call with shareholders. But Warren Buffett and his team don't say, "Let's put out our earnings release close to midnight on Friday."
If I'm part of Elon Musk's brain trust, and he's saying, "When do you think we should put this out?" I'm saying, "Either put it out immediately after the market closes on Friday or put it out before the market opens on Monday. Don't do it in the middle of the night."
Barker: He likes to do it as soon as it pops into his head. What makes you think that that information was completely available to disseminate right at the close of the market on Friday?
Hill: You're right. I'm probably the only one who thinks it's suspicious that he put this out close to midnight on Friday.
Barker: [laughs] I think that he put it out when it became his feeling that that it was done.
Hill: Let me quote directly from the letter. "It's apparent that most of Tesla's existing shareholders believe we are better off as a public company." Do you think they are?
Barker: Of the existing shareholders? Do they think that, or do I?
Hill: Do you think.
Barker: I think it has a promising future over the next decade.
Hill: As a public company?
Barker: As a public company. Yes. If somebody can help Musk get through his issues with the short sellers. I think those are a distraction which are not helpful to the actual shareholders. I mean, I'm not saying the short sellers are doing anything wrong at all, just that the interaction of them getting under Musk's skin, his allowing that to happen, is unhelpful to the actual shareholders.
I've stunned you into silence. You don't know where to go with this.
Hill: I mean, there are a few different ways we could go. Let's go toward the legality of all of this. Not to question whether or not it is legal, although there are certainly people out there rattling some cages regarding shareholder lawsuits, saying, "Look, this was a way for him to get rid of some short sellers. From the moment the "funding secured" announcement went out, August 7th, Tesla shares closed at $379 a share. Today, they're about 17% lower than that. There's a non-zero number of shareholders who have lost money on this stock because of all of this public drama that Musk has generated. To what extent, if any, would you be betting on the side of any lawsuits that come his way?
Barker: I would prefer to be his defense counsel than on the class action lawsuits. Now, I think there could be some regulatory wrist-slap about the way in which the information was disseminated, but I am accepting of the story that Tesla has put out, which is, there was unofficial, informal funding agreements -- oral, probably with the Saudis -- or certain elements, not all of which are on the same page, regarding this funding; and that that was boosted up to funding secured. Whether it was secured or not, it ultimately, as it played out over the couple of weeks which followed, wasn't going to be used. I think that the manner in which this was disclosed was obviously suboptimal. And I think that there are going to be consequences for that. But I don't think they're going to be major consequences.
Hill: Do you think there's any way we get to Tesla's next earnings announcement, which is two months and change away, do you think there's any way we get to that without any further drama here? Because it seems like the best thing that Musk could do for his company, for his shareholders, including himself, is to just focus on vehicle production.
Barker: Yeah, I think there's a chance that lessons will be learned, and he will focus on that, and that those close to him will convince him of why that would be the best thing for him to do. I think that there are going to be distractions from the legal consequences which follow. That's going to be somewhat of a distraction. But he's already easily distracted. I mean, whether it's creating submarines for trap soccer teams, or SpaceX, he's got a lot of things going on in his head.
Hill: But from a legal standpoint, when you see these stories of, this group is putting together a class action lawsuit for shareholders, so is that group over there -- given your past experience as a government lawyer, you're not too concerned about it?
Barker: Given my past experience regarding some class action suits, I would not be too concerned about it. There's always a lot more wailing and gnashing of teeth by the class action bar than ultimately is visited upon the company. I think that the contours of the story are generally what they appear to be, which is, legitimate consideration was given to taking this company private, and that having weighed the pros and cons at the moment, it is now Musk's and the company's considered opinion that that is not in the best interest of shareholders. But there is plenty to look at and say that it's worth considering being private. Companies do that. Certainly, the distractions of a quarterly production schedule are not helpful to the long-term interests of shareholders here. There's nothing to me about that consideration that smacks of dishonesty. I think that the way that it played out, it shows, certainly, that Musk is a little bit flighty on giving his innermost thoughts out to the public in the wrong forum. If, largely, this had been done through SEC disclosures rather than tweets, it would have looked a lot better, obviously.
Hill: Our email address is email@example.com. Drop us a line, would you? Let us know how you listen, where you listen. And, of course, you can ask us stock questions. From Jerry Villani in Cleveland, Ohio. Jerry writes, "I'm looking at my shares of Amazon (NASDAQ:AMZN) at nearly $2,000 a share, and I started thinking about stock splits. I know it doesn't mean anything on paper, but it does seem that a share price of $100 would make the stock more accessible to more investors, thus creating more demand and moving the price up. What goes into the thought process of companies when deciding to split their stock or not?"
Great question. He's talking about Amazon, he could very easily be talking about Priceline, AKA Booking Holdings. Last time I checked, that stock was somewhere in the neighborhood of $2,000 a share. This was an issue with Apple a couple of years back when they decided to, if I'm recalling correctly, split their stock 7:1. It seems like at least part of the calculus there was, "This will get us into an index or two."
Barker: I think that, of course, stock splits are a lot less popular today than they used to be 10, 20 years ago. Stock split announcement back in the late 90s was enough to goose your share price. It was an indication, seemingly, of optimism about the future of the company.
So, what actually goes in. Going back to making it easier for shareholders to buy, I think that was a very common and consistent rationale with reality back in the day. That is, companies knew that brokers tended to recommend that shares be bought in lots of 100. So, they would attempt to keep their price -- depending on the stock and the industry -- at something that was affordable in lots of 100 shares. So, $20-40 was a pretty common stock price. Companies would split to be in that range. I think nowadays, where there's a lot more use of electronic investing -- almost total use of it, and people can just look at their accounts and say, "I need eight shares, or 15 shares," it's easy to do and you get the same price. So, people are more comfortable with buying stocks that have much higher prices. It is true that, for a couple of thousand bucks, you just simply can't buy it if you're just looking to make a $200 purchase or a $1,000 purchase.
I don't think that there's any lack of demand for Amazon. I mean, to use Amazon specifically, there seems to be plenty of demand enough...
Hill: For the stock?
Barker: For the stock. They don't need to split the stock. I also think that the example of Berkshire Hathaway, largely, has given many of these companies -- like Alphabet and Amazon -- a leader to follow, and a demonstration that you do not need to split your stock in order to keep people interested in it.
Hill: They sure are fun, though. I mean, wouldn't it be fun, if you were an Amazon shareholder, to be like, "They're splitting it 10:1." There's just something, on a gut level -- I know, I know how the math works. [laughs] I know it's simply cutting the pizza into 16 slices instead of four, or whatever it is. It doesn't change the size of the pizza. It's just fun!
Barker: I can remember being at a meeting with management of a company that had been recommended in the Hidden Gems newsletter back in the day. I was there with Bill Mann and Tom Gardner. The stock had recently split, or an announcement that it was going to split had recently been made. We asked, "Why'd you do that?" And management said, "One of the reasons was that the employees who are getting options just like to see a bigger number. They'd rather see that they're getting 100 shares this year instead of 50." He said, "I know that sounds dumb, but that's one of the reasons why they did it." I think that gets to the fun. More seems more fun. It's just a psychological thing, I guess, which is true, but not helpful to shareholders.
Hill: It is not helpful. Of course, the flip side of that is the case for penny stocks. As much as anything, that is probably the No. 1 bull case for penny stocks. "Look at how many shares you get!" [laughs] It's not, "Look at this great business!" It's, "This thing's trading at $0.20 a share! For $100, look at how many shares you get!"
Barker: I think that the days of a lot of stock splits seem to be over. I don't know. They could come back in vogue. Things go out of style and come back in. But most of the companies that you most respect, in terms of their market capitalization and recent stock performance, run into the hundreds, and now occasionally thousands, of dollars per share. And they are suffering no ill consequences of that. I think that it has a lot to do with electronic trading and the ability to just buy seven shares of an expensive stock.
Hill: Question from Roy in Tel Aviv. "What are the best stocks to watch for in the entertainment for children segment?" It's a great question. We get variations of investing for children questions. I guess one of the thoughts that pops to mind when I get a question like this is, if you're wondering, "What should I watch when it comes to entertainment for children?" One way to go is, watch, what entertains your children? What are your children using? What is popular among them? That may be at least one way to get ideas. It doesn't mean, necessarily, rush out and buy shares of that thing. But, what becomes popular with your children and their friends is certainly a good place to start.
Barker: Yeah, it helps frame the question. I suppose one of the answers I would look at is -- disclosure here that we have Hasbro in some of our funds -- don't invest in Mattel.
Hill: [laughs] I'm glad you led with the disclosure!
Barker: Well, Mattel has really gone the other way --
Hill: They really have.
Barker: -- from Hasbro. These were roughly equals not that long ago, and they are not today. Mattel is still the maker of many fine and well-known brands that entertain children today, in some ways just as they entertained them 40 years ago. But they are not a well-run company and they have not been making the right steps. They have suffered with the close of Toys R Us. Hasbro has, too, but to a much lesser degree, and is much better-positioned because of the steps they have made -- getting more of their names into mobile gaming and online, and just being a better-run company. Disclosure, there's an invested interest in that, in terms of our fund.
But, those are entertainment stocks for kids. Not in the visual entertainment so much. I think "Don't invest in Mattel" is my first thought about that. People, for many years, would have, in terms of getting their kids interested in a stock, get something they know, something they loved from a young age. They know the Mattel brands and would have done this. And unfortunately, they would not have done as well as if they had invested in Disney. Or, just, "You know what entertains my kid? My iPhone." That's what a lot of parents do to entertain their kids at a very young age now, when they want a few minutes of quiet -- hand over the phone or iPad, or something like that. I think those qualify, as well, as being some of the companies that most are integrated with entertaining kids.
Hill: According to paperwork filed with our neighbors at the U.S. Patent and Trademark Office, IBM has secured a patent for a coffee drone that not only flies around public spaces to deliver coffee; it also predicts when you will need the coffee. What do we think about this? My initial excitement about this story quickly waned, I have to admit, even though I'm someone who drinks a whole heck of a lot of coffee, I just thought, I'm not entirely sure what problem this is solving for me personally. I could see this working. Kudos to the people at IBM for having the foresight on this one. But I don't know that I need a coffee drone. Were you excited by this?
Barker: I was entertained by it more than anything. I think that it is humorous to think of drones flying around, delivering hot coffee to people. What could go wrong with that picture?
Hill: [laughs] Right. Delivering hot coffee and not scalding anyone.
Barker: Yeah. I mean, it needs to be hot. Now, maybe that's part of the patent, the heating technology. Because you don't want coffee coming from someplace too far away and having it cooling down on you. I don't want this coffee delivered if it's room temperature. Why am I going to pay for that?
Hill: And you want it the way you want it. Every one of us who drinks coffee -- and by that, I mean all us healthy people -- we like our coffee a certain way. It has to be the way that we like it. To your point, it has to be hot. It has to be with a really secure lid so it's not spilling on the people in the public spaces.
Barker: Yes, this is why Starbucks did not have this patent. They cannot be trusted to deliver coffee with secure lids.
Hill: [laughs] That is an issue with Starbucks.
Barker: Where was your initial excitement about this? You said it's waned. At peak excitement, where were you?
Hill: Peak excitement was seeing the story last week and just saying, "Fantastic! We're getting coffee, the healthiest beverage on the planet, we're getting it to more people, more quickly. This is great! I love this!"
Barker: "Finally, drones that are not inflicting war on people. Finally, we're turning them to peace."
Barker: That's where you were.
Hill: This is not the war. This is not the Rise of the Machines. This is, these are the helpful robots who are going to bring everyone coffee. But then I just thought about my own life. I like coffee, a lot, but I also enjoy walking to get coffee. I enjoy the ritual of coffee. I don't need it to be delivered to me.
Barker: What if the coffee were delivered by land vehicle, rather than by drone? If it was one of these robots that rolls around the floor --
Hill: Like they have on the Death Star?
Barker: Yeah. "May I get you some coffee, sir?" And it's right behind you, and you're like, "Oh, yeah." And the drone knows how you like it, too. I mean, I trust the drone or the robot to make the coffee better than the man or woman behind the counter. They have no artificial intelligence. They have actual intelligence.
Hill: And it doesn't always work.
Barker: Yeah. They're like, "Let me just put, you know, half a canister of sugar in there for you, because that's how the last person liked it."
Hill: I think that I'm probably more bullish on that, on a small vehicle that's going to go around and deliver coffee.
Barker: Well, the patent office is right down the street. I see an opportunity for you.
Hill: I don't have the technical spec design capability. I don't have the science behind this. I mean, that's a great idea, but I don't think that's how filing for patents works.
Barker: Just get the IBM patent. It's been filed. Then just replace all the drones with rolling robots.
Hill: Do you see where the propellers are? Flip that, and it's going to be wheels, and it's just going to go around.
Barker: And it's going to be friendlier than the IBM drones. I mean, they're not shooting people, which is a step up for the drones, in terms of branding their friendlier futures.
Hill: You don't think Watson comes off as kind of friendly in those IBM commercials? Kind of friendly!
Barker: I'm just saying, the drone I'm picturing is not that friendly, on the air delivery. The rolling one, I think there's more -- maybe it's in the form of a dog.
Hill: It could be. A dog on wheels.
Barker: Well, like one of those Bugs Bunny St. Bernard dogs. A St. Bernard, and instead of whiskey or whatever it had in the little barrel that was around its collar, it's got coffee.
Hill: Well, you know what we really need to do is have a dog on wheels deliver coffee in the morning, and then at some point in the afternoon -- and by that, I mean like 12:05 -- it flips over to whiskey.
Barker: Well, there are those who say -- scientists, even, they're purported to be -- and they're saying that maybe alcohol is not as good for you as coffee. You've seen those reports, and they've angered you.
Hill: I've seen those reports. I think we're going to tackle that in an upcoming Apropos of Nothing episode. I think that's where that treatment needs to go.
Barker: Yeah, along with the robot St. Bernard's?
Hill: Possibly, yeah. I think we're out of time. You can read more from Bill Barker and his colleagues. Go to foolfunds.com. That's it. Foolfunds.com. You can sign up for Declarations. It's the free monthly newsletter.
Barker: We're getting a new name soon.
Barker: Yeah. I don't want to spoil anything.
Hill: OK. When that's news, can you share that news here?
Barker: Yeah, it'll be shared everywhere. It'll be, everywhere that you get news, you'll be seeing this.
Hill: Fantastic! Can you give a rough timeline for this news?
Hill: Soon? [laughs]
Hill: Before the end of 2018?
Barker: Yes. Before the end of 2018. There will be a new website, new stuff. But in the meantime, don't let that prevent you from going to foolfunds.com.
Hill: And signing up for Declarations.
Barker: Or whatever you might do there.
Hill: Or just click around.
Barker: Just click around.
Hill: Thanks for being here!
Barker: Thank you!
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 Austin Morgan, the Iron Man who is pulling double-duty all week between this podcast and Industry Focus. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
Bill Barker is an employee of Motley Fool Asset Management, a separate, sister company of The Motley Fool, LLC. The views of Bill Barker and Motley Fool Asset Management are not the views of The Motley Fool, LLC and should not be taken as such. 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. Bill Barker owns shares of GOOG, AAPL, and DIS. Chris Hill owns shares of Amazon, SBUX, and DIS. The Motley Fool owns shares of and recommends GOOGL, GOOG, Amazon, AAPL, BKNG, HAS, SBUX, Tesla, and DIS. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool recommends BRK-B. The Motley Fool has a disclosure policy.