In this Motley Fool Money podcast, host Chris Hill and senior Motley Fool analysts Jason Moser, Matt Argersinger, and Ron Gross dig into some of the week's more interesting news out of Wall Street, and while they can't help but lead off with the massive milestone passed by Apple (NASDAQ:AAPL), there was plenty more to talk about. Baidu (NASDAQ:BIDU) is being troubled by the worrisome rumor that Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) is heading back to China. TripAdvisor (NASDAQ:TRIP) is paying for the failure of its instant-booking feature to pay off.
Tesla (NASDAQ:TSLA) investors are totally focused on the road ahead, which allowed them to ignore the ugly quarter in the company's rearview mirror. There were upbeat results from Square (NYSE:SQ), Take-Two Interactive (NASDAQ:TTWO) and Activision Blizzard (NASDAQ:ATVI), but unappetizing news from Blue Apron (NYSE:APRN) and Red Robin (NASDAQ:RRGB). And of course, as always, the Fool analysts talk about the stocks on their radar.
A full transcript follows the video.
This video was recorded on Aug. 3, 2018.
Chris Hill: It's the Motley Fool Money radio show! I'm Chris Hill. Joining me in studio this week, senior analysts Jason Moser, Matt Argersinger, and Ron Gross. Good to see you as always, gentlemen! We have the latest headlines from Wall Street, we will dig into the restaurant industry with our guest, Jonathan Maze, and as always, we'll give you an inside look at the stocks on our radar.
But we begin with the first company to hit a market cap of $1 trillion -- shares of Apple up this week after third quarter revenue came in north of $53 billion. Ron, this isn't even their big quarter.
Ron Gross: [laughs] But what's not to like? It's very impressive, with revenue up 17%, even though iPhone volume was flat. They've been able to increase price points, the Service business up 30%. I love that that's becoming a more important part of this business. Repurchased shares, gobs and gobs of shares. $43.5 billion of its own stock during the first six months of this year, $220 billion of stock since it announced the buyback program in March 2012. Still has $243 billion of cash on the balance sheet, and plenty more buybacks to come. The dividend is there. It's only 1.4%. I imagine that will be increased. We'll have a nice shareholder yield company going forward.
Matt Argersinger: That's what's so impressive. By buying back so much stock over the last couple of years, they kept upping the bar on the share price they needed to hit one trillion. It just makes my defeat feel so much worse, because I had been riding Amazon's train for a few years now. I think it's nice, because now we get to talk about the first company to get to $2 trillion, and you can bet who I'm going with.
Jason Moser: I was with Matty along that ride, calling for Amazon. I think we both probably knew, though, the chances favored Apple. It made a lot of sense. It didn't have that far to go. There's a reason why they're there. It's a phenomenal business, a phenomenal company. We've talked a lot through the years and quarters, it's still primarily a phone company. The big question was, how do they address that? Can they make the leap beyond just that?
To Ron's point, iPhone sales, the growth is abating a little bit, but they've really turned it up on the Services side. I think they continue to bring a little bit more value to the table for the people who are in that Apple universe already. It's a very relevant business that should continue to be relevant for many years to come.
Argersinger: I have to say, one thing we talked about in the past with Apple is, with the dependency on the iPhone, what would ultimately happen to its pricing power, with so much competition? But the average selling prices for the phones has kept going up. It's been very impressive.
Moser: They got a lot of that from the iPhone X, or 10, or whatever it is. God, why wouldn't you just name it 10? That's the one black mark on this company! Just put a 10! They bumped that price up considerably. It was $1,000. They're not selling those things like hotcakes, but they're selling enough that it really helps juice that average selling price, along with that iPhone 8.
Gross: By the way, the stock is not expensive. There's no irrational exuberance going on here, even though the trillion-dollar number sounds big. I don't know, 16X forward earnings? Relatively reasonable.
Hill: Remember when the big question around Apple was, "Is this company ever going to pay a dividend?" Then, once they did start paying a dividend, you had some people out there saying, "That's it for the stock. It's going to be 3M and people are only going to buy it for the dividend. There's no growth."
Interesting week for Baidu. Second quarter profits for the Chinese search engine giant came in 45% higher than a year ago but shares of Baidu falling this week on reports that Alphabet is planning to launch a censored version of its own search engine in China. What do you think, Matty?
Argersinger: Google throws the wet blanket. Baidu's results were fantastic. I remember seeing this stock price go up $15 in after-hours trading, only to drop by almost $15 when it opened the next morning because of the Google news. It would be easy for me to dismiss the Google news and say, "Don't worry about it, Baidu has been dominating in China. They haven't had to deal with Google for almost a decade now. They've had this dominance, in terms of search impressions, advertisers." And, does Google really want to launch a search engine where they have to restrict words like "human rights" and "democracy?" It doesn't feel like Google! But, keep this in mind: depending on what report you believe, Android has something like a 70-80% market share on smartphone operating systems in China. So, if this Dragonfly or whatever Google ends up calling it does pass the Chinese censors and becomes able to be sold and serviced in China, an enormous lead right off the bat if they can get it onto the Android system.
Hill: TripAdvisor's stock has been having a good run in 2018. That ended this week when TripAdvisor's second quarter revenue came in just 2% higher than a year ago. You tell me, Jason, is this a legitimate concern? Or is this a speed bump kind of quarter for TripAdvisor?
Moser: I'm not going to be an apologist here. I think we've all been pretty critical with TripAdvisor and the bungle they made with the instant booking platform. But, going through the release, it does feel like this was a pretty harsh reaction to what wasn't really a bad quarter. But, I think any time you have a business like TripAdvisor, that's run into the top line growth headwinds that they've run into, the market is only going to pay up so much for that.
The good thing is, they have a platform that's still very engaged and growing. Users are growing, reviews are growing, and people are doing more with those reviews. It's encouraging to see that they're growing the non-hotel side of the business, as well. A bit of margin pressure there for the quarter. That was also a bit of a comparables thing there.
All in all, it's a healthy platform. I think management really lost a lot of time and money in that instant booking strategy, which just didn't work out. But, it seems like the market is liking the stock a little bit more after that initial sell-off. We'll have to see. I don't know that I'd be terribly concerned right now, but it was a harsh reaction.
Hill: Do you have a sense of what the next move is for TripAdvisor? Obviously, as you said, they put a lot of time and effort into the instant booking. I'm wondering if there's some other monetization strategy that they're working on.
Moser: Primarily, it's Attractions. They're really trying to get to that point where TripAdvisor is a platform that not only you consult whenever you go wherever you go, but then, when you want to book something to do, you're able to do that through TripAdvisor. Hey, listen, when I went to the Bahamas, I told you, everything I found there that we did, we found it on TripAdvisor. Pig island! Do I need to say anything else there? That's worth gold.
As long as they can figure out a way to effectively monetize that going forward on a sustainable basis -- and I think they will -- that's certainly what they're gunning for. And, bringing over a seamless experience to the phone, because those monetization challenges still exist.
Hill: You had me at pig island. Shares of Tesla up more than 15% this week despite a second quarter report that featured Tesla's worst loss ever. Ron, they lost more than $700 million, but the confidence that profits are just around the corner really seems to be there.
Gross: I guess so. Investors were focused on, they hit the 5,000-sedan goal, they say they're going to be able to up it to their 6,000-sedan goal. They said they would not need to raise more cash, which I think was a big deal. Investors calmed down after he said that. He said they would be profitable in the second half of 2018. Get this -- Musk expects Tesla will record a profit in all subsequent quarters. Now, who wouldn't want to be a shareholder of that?
Hill: Didn't we have that recently for, what was it, American Airlines' CEO coming out and saying, "We're going to be profitable from now until the end of time?"
Argersinger: "We will never lose money ever again," was roughly the quote.
Gross: He's obviously full of bluster and makes big promises. Interestingly, the Street also reacted to the fact that he apologized this call for being rather rude to analysts on the last call. I'm a forgiving guy, that's fine. It's kind of weird that he had to apologize because he can't hold his tongue. I'm not a big fan. I think he's too much of a salesman for my taste. I actually finally bit the bullet, pulled the plug and asked for my $1,000 deposit back. I decided not to pursue a purchase of the Model 3. I just got fatigued by the whole thing.
Hill: Real quick, how long were you waiting? From the time that you put down $1,000 to the time that you said, "I'd like my money back." How long?
Gross: It was in the second half of 2017 that I asked, so it hasn't been a full year yet, but it's probably coming up on it.
Argersinger: I think Tesla is a paradox. In a way, short sellers are pounding this stock. Of course, they got obliterated this past week. That tends to happen to companies like this. But, actually, if I'm a Tesla short seller, I'm rooting for this company to be successful, start generating a profit. Something you said, Chris -- when they start generating consistent profits, maybe it'll be valued just like all the other automakers, and it wouldn't get this crazy valuation that it gets in the market!
Gross: You're going to get tweets that say it's not a car company, it can't be valued as a car company.
Argersinger: I get it!
Moser: A bit of an unrelated note here, but sort of related -- I was reading recently where Jeff Bezos is pumping a lot of money and resources into Blue Origin, his space company. Now, after reading that book, The Space Barons, which talks a lot about Bezos and Musk and their race to space, I really do believe that SpaceX is Musk's true love. If he needs to start devoting more time and/ or resources to SpaceX, I just can't help but feel like Tesla is set up to suffer from his absence if there's any kind of a prolonged absence. SpaceX is his baby, his passion. Tesla, maybe not so much.
Hill: Good second quarter results from Square. Shares up despite Square's guidance being a little lower than analysts were hoping for. Jason Moser, the war on cash is alive and well.
Moser: [laughs] The war on cash continues! I'll tell you, I saw a lot of Square equipment in many of the stores I visited in Rhode Island and Connecticut earlier this week. Gross payment volume is really the important metric to watch with a company like this. This tells us precisely the power of the network and how it's growing, because it draws a direct line to the question of that growth to the money that's actually flowing through all of their systems. GPV was up 30% from a year ago to $21.4 billion.
Now, you compare that to a company like PayPal, they just reported gross payment volume for the quarter of $139 billion. My reason for bringing that up, Chris, is simply to show you that not only is PayPal still light years ahead, but it also shows there's a tremendous market opportunity out there. Square is working on trying to capture that. Products like Square Appointments, Square for Retail, Square for Restaurants, they are really going after all sorts of angles there, getting these smaller businesses that need the benefit from these cheaper payments solutions and better technology to help them grow their businesses. Square is doing a great job in building this out.
There is a blueprint out there to be profitable in this line of work. Obviously, PayPal is the poster child for that. So, you can see how powerful the business can be if they keep doing what they're doing, and there's no reason to believe they shouldn't one day get there.
Hill: Video games stocks in the spotlight this week. First quarter profits for Take-Two Interactive were higher than expected thanks to its Grand Theft Auto franchise. Activision Blizzard's second quarter profits got a boost from Call of Duty, but shares falling despite that report. Take that in any order you want, Matty.
Argersinger: I think it's a tale of expectations with these companies. Take-Two's results were just a lot better than expected from investors. Their annual guidance is increased because of that. Activision Blizzard also had a quarter, but just didn't raise their full-year guidance. I think there are some questions from analysts, that maybe they're expecting more of a tepid second half to the year.
But, for both of these companies, there's so much built into the next five or six months. You have Red Dead Redemption 2 coming in October. That's going to be Take-Two's biggest franchise release since the last Grand Theft Auto. For Activision, we have the annual Call of Duty game that's coming out in the fall, but also, a new iteration of World of Warcraft and Hearthstone and some other things. I think these companies are doing better than people thought right now, but it all hinges on how good holiday video game sales are, and they look like they're going to be pretty good.
Hill: I was going to ask about the holiday quarter. Is that the most crucial quarter for these types of companies? We've talked before that video games as a business tends to be very lumpy.
Argersinger: It's very lumpy. This tends to be the slowest period right now. We're in the summer, hopefully most kids aren't at home playing video games, although they're playing Fortnite.
Gross: They are.
Argersinger: Yes, it's really all about that. Video games build their publishing schedule around the holidays.
Hill: Shares of Blue Apron fell more than 30% this week after second quarter results were a disaster. Ron, Blue Apron is not just burning cash, they're losing customers, and that may be the even bigger problem.
Gross: It's a really bad report. Loss of customers, down 24% from last year, down 9% from the end of March. We recall, they had a bit of a snafu with one of their facilities, and that hurt operations. They can't seem to get it right. It continues to spiral down.
The one good thing, and this is not a sustainable way to run your business, is that they were able to cut costs. They did a good job there. Gross margins were actually up, administrative costs down. I'll applaud them for that. But it's the business model here that's really keeping them from succeeding.
One interesting note is, they're trying to sell their kits into Costco right now. I think that's interesting. I'll be curious to see how that goes. But I don't think that's the savior for the business.
Hill: Does this industry work? It seems like we've talked about, whether it's Blue Apron or any of the competitors in the meal kit delivery space, whatever one thinks of the actual product -- Matty, I know we've talked before about HelloFresh. I've tried a couple of different ones. I like them. Not enough to keep it going. It makes me wonder if this works as a stand-alone business, or if the future of meal kit delivery is really as a loss leader for a larger business.
Argersinger: I think there's a future. I just think, right now, there are too many players in the marketplace. You mentioned it, you've tried several of them, I have, too. I think that's the problem. People are trying this one, this one. There almost needs to be some consolidation. There needs to be one big player that can reach 10 million customers and eventually succeed. But it's hard to see right now.
Gross: Completely right.
Hill: This week, Red Robin Gourmet Burgers warned that second quarter profits will be lower than previously thought, and that was all investors needed to hear. Shares of Red Robin down more than 20%, and hitting their lowest point in five years, Jason.
Moser: I mean, you cannot guide down the way they guided down and not expect a total market exodus, and that's what we got. These are cheeseburgers, at the end of the day. It's not rocket science. It's a very competitive industry to begin with. Management actually used the word hyper-competitive in the call, which I found interesting. They made the point that it's very difficult to grow sales in this hyper-competitive environment.
Most everybody else out there is focused on cutting prices, offering discounts and deals and whatnot. Red Robin is trying to take a little bit of a different tack here and maintain pricing, convincing consumers that they are getting something special by going there. Hey, bottomless steak fries, I can get on board with that. I just don't know how many people out there really care about it, at the end of the day.
It's not a small business. They do own most of their stores, so, that's encouraging. But, we also see with companies like Chipotle, that can be a sword that cuts both ways. It's not a bad business, but it's a very difficult market. Restaurants are tough to sustainably do well.
Hill: Restaurants are tough, and it's a competitive environment. We're also in a good economy. I was thinking that when Cheesecake Factory reported this week, similar type of results in terms of the stock. What happens to some of these restaurant chains when the economy invariably hits a recession at some point?
Moser: I think some of them have to disappear. The world just doesn't need some of those concepts out there. We always ask the rhetorical question about JCPenney -- does the world really need JCPenney? No, probably not. I think we'll see some of those restaurants fade away, as well.
Hill: Why do you think Shake Shack gets the benefit of the doubt? They're also in the burger business. I'm not saying that they're running their business exactly the same way. That's a $2 billion company. Red Robin is $500 million. Matty, if I offered you, you could own all of Red Robin or I'll give you a quarter of Shake Shack, which of those two are you taking?
Argersinger: Oh, gosh! I'm going Red Robin all the way. I don't have the right number in front of me, but I think at some point, the average Shack was valued at something like $20 million. I don't know if that still holds true today, but the valuation on Shake Shack just confounds me.
Gross: There's some sort of cult following in both the people who go eat there and the people who buy the stock that doesn't exist with a staider company like Red Robin.
Argersinger: It sounds like Tesla. You could have just said the same thing about Tesla.
Hill: Same question, Ron, I'm giving you all of Red Robin or a quarter of Shake Shack. Which one are you taking?
Gross: I think I'm going Red Robin.
Hill: Really? You're a New York guy!
Gross: We have a Shack being built right around the corner from my home. I've never been in one. I'll visit it and I'll get back to you.
Hill: You know what? You're going to change your tune.
Argersinger: And all the Amazon New HQ people are going to be moving into your neighborhood, and they'll love going there!
Hill: Let's get to the stocks on our radar. Our man behind the glass, Steve Broido, is going to hit you with a question. Ron Gross, you're up first. What are you looking at this week?
Gross: I have Equinix (NASDAQ:EQIX), EQIX. It's a real estate investment trust that's the largest operator of data centers in the world. Strong competitive advantage because of that installed base. Obviously capitalizing on the growth in data consumption and cloud outsourcing. Strong management team. 61 consecutive quarters of revenue growth. Again, it's a real estate investment trust, so you have a nice dividend that I think will grow over time.
Hill: 61 consecutive quarters?
Gross: You got it!
Hill: [laughs] That's a nice little streak there.
Gross: I probably just jinxed it.
Hill: Steve Broido, question about Equinix?
Steve Broido: Where is real estate going in the next ten years? We look like we have prices that are very high, homes are very expensive. Commercial real estate, going up or down?
Gross: I think it's an interest rate play here. If I had to guess, I would say there'll be some tough times, but the trend over our lifetime, for the next 20, 50, 100 years, will be up. But, there will be some blips as we get some interest rate hurt on the way.
Hill: Jason Moser, what are you looking at this week?
Moser: I feel like I'd be letting Mac down if I didn't bring up Teladoc (NYSE:TDOC), so I'm going to go ahead and bring up Teladoc, actually Teladoc Health now, ticker TDOC. Teladoc released earnings this week and they chalked up another very strong, if not predictable, quarter. One of the nice things about the business is, when you have a membership model like that, it can be fairly predictable.
They are adopting a new corporate brand, as I mentioned, Teladoc Health. It's a subtle difference, but it speaks to their ultimate strategy, the goal of being a comprehensive provider in the telehealth space. It's going to utilize the acquisitions they've made recently like Best Doctors and Advanced Medical, trying to become more than just that one app on your phone that you use if you have a sore throat or something.
Hill: Steve, question about Teladoc Health?
Broido: What's the first field of medicine that Teladoc will displace entirely?
Moser: The first field of medicine. That's a good question. We always hear them talk about flu season and how it's having such a great impact on keeping a lot of sick people out of emergency rooms. If we can keep all of the flu sufferers out of hospitals and send them prescriptions and get them cured that way -- let's disrupt the flu!
Gross: I'm in!
Moser: Why not? They're disrupting the flu!
Hill: Matt Argersinger, what are you looking at this week?
Argersinger: I'm looking at despegar.com (NYSE:DESP), ticker DESP --
Gross: You made that up.
Argersinger: No! I have to give credit to one of our young analysts at The Fool, Emily Flippen. She came up with this idea. It's the leading online travel agency in Latin America. It came public last year. It's down about 40% from its IPO. It's had some changes in the executive ranks, the CFO recently left. But, revenue is growing 20% and Expedia owns a 13% stake with an option to take a majority stake in the company. So, I'm starting to get interested in this one.
Hill: Despegar.com, Steve.
Broido: What are some hot travel spots in Latin America, if you live in Latin America?
Argersinger: If you live in Latin America, oh my gosh.
Broido: Are you making a trip to the U.S.?
Argersinger: No, I think you're staying in the region. There are some beautiful beaches in Mexico and Brazil, and some great hiking you can do in Argentina. I have no idea what I'm talking about.
Gross: Cabo, baby!
Argersinger: Yeah, Cabo. Go to Cabo!
Hill: Three stocks. Steve, do you have one you want to add to your watchlist?
Broido: I recently bought Teladoc, so I therefore will be watching Teladoc.
Moser: Hey, now!
Hill: Alright, guys, thanks for being here.
Argersinger: Thanks, Chris!
Hill: That's going to do it for this week's show. Our engineer is Steve Broido, our producer is Dr. Mac Greer. I'm Chris Hill. Thanks for listening! We'll see you next week!
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. Chris Hill owns shares of AMZN and PYPL. Jason Moser owns shares of Apple, CMG, PYPL, Square, Teladoc, and TripAdvisor. Matthew Argersinger owns shares of Activision Blizzard, Alphabet (C shares), AMZN, Baidu, CMG, Square, Teladoc, and Tesla. Ron Gross owns shares of Activision Blizzard, Alphabet (C shares), AMZN, Apple, Baidu, and COST.
The Motley Fool owns shares of and recommends Activision Blizzard, Alphabet (A shares), Alphabet (C shares), AMZN, Apple, Baidu, CMG, PYPL, Square, Take-Two Interactive, Tesla, and TripAdvisor. The Motley Fool owns shares of Red Robin Gourmet Burgers and has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, short September 2018 $50 calls on Red Robin Gourmet Burgers, and short September 2018 $80 calls on Square. The Motley Fool recommends MMM, COST, Equinix, and Teladoc. The Motley Fool has a disclosure policy.