In this MarketFoolery podcast, host Mac Greer is joined by senior analysts Andy Cross and Jim Mueller to delve into the news du jour, but it was more talk than action.
First, they parse the discussion regarding Tesla (NASDAQ:TSLA), which mostly revolved around CEO Elon Musk's tweet that it had transitioned from "production hell" to "delivery logistics hell." Next, they consider a fresh analyst note asserting that Amazon (NASDAQ:AMZN) could unlock more shareholder value if it separated its e-commerce and Amazon Web Services segments. And finally, they ponder the report -- debunked on Tuesday -- that Coca-Cola (NYSE:KO) was in serious talks with Canadian marijuana major Aurora Cannabis to produce pot-infused beverages.
A full transcript follows the video.
This video was recorded on Sept. 17, 2018.
Mac Greer: It's Monday, September 17th. Welcome to Market Foolery! I'm Mac Greer. Joining me in studio, we have Motley Fool analysts Andy Cross and Jim Mueller. Gentlemen, welcome! How are you feeling?
Andy Cross: Great!
Greer: Are you ready for Monday?
Jim Mueller: Is it Monday already?
Greer: It is Monday already, come on! You've got to bring it. I'm going to bring it. We're going to talk some Amazon. There is one analyst making some noise about maybe Amazon breaking itself up. I want to get into that with you, figure out if y'all think that's a good idea. Then, we've got Coca-Cola getting into potentially a new line of business. Optionality, isn't that what we call it?
Cross: Optionality, that's right.
Greer: This is a different sort of optionality. Let's begin with Tesla. Jim Mueller, a few things going on with this company. We have the news that Saudi Arabia's Sovereign Wealth Fund has invested $1 billion in Tesla rival Lucid Motors. File that away. Now, for what some may consider the slightly better news, we may even term this as progress -- on Sunday, in response to a customer complaint about a delay in delivery, Tesla founder and CEO Elon Musk tweeted that Tesla, "has gone from production hell to delivery logistics hell, but this problem is far more tractable." Jim, sounds like progress.
Mueller: Well, it sounds like a tour through Dante's Nine Circles, doesn't it?
Cross: [laughs] The Tesla story for the last few months.
Mueller: Yeah, right. Production hell, let's start there. Tesla, for a couple of quarters, had Elon Musk saying, "We're going to reach 5,000 Model 3s built each week." They missed it for a couple of quarters. They finally made it at the end of June, just before the second quarter ended. But in August, they said they were going to produce between 50,000-55,000 Model 3s for the third quarter. If you do the math, that's about 4,600 per week. They're not at the full 5,000 for the third quarter. In 2019, they really want to and almost need to produce much more, as many as 10,000 a week, to satisfy all the demand. But they seem to be doing alright there. That's where he says we've been moving on.
The next thing is, OK, you're producing 55,000 cars. How do you get them to the customers? That's the delivery logistics hell that he's talking about. And he's right. That is a more easily solved problem. You get the cars out, it's just a matter of getting the right shipping out and notifying the customers on when to pick up and so on. Musk was responding to this one customer who said he had been told on the 8th and then the 15th and the 20th and 22nd, and now it's delayed, what's going on? He says, basically, "Sorry, but it should not be too much longer."
Then, the third hell that he didn't even mention is, well, what about all the spare parts? I mean, more and more cars out there get into accidents, you have to have repairs. Musk also tweeted over the weekend, I think it was over the weekend, that he wants collision repairs to be done in-house. That means they have to provide somebody, either their own repair group, or your local mechanics, with spare parts. That might be a third hell that has to come through. Musk said that hasn't been a top priority yet.
Greer: Andy, let's put this in perspective, though. Three circles of hell there. But when you look at shares of Tesla, shares of Tesla still up around 78% over the past five years. It's been a rough last year, down around 21%. But this has been an incredible stock.
Cross: Yeah, and driven so much by the vision of Elon Musk. He just embodies all of what he wants to do with Tesla, and he's the largest shareholder. My biggest concern with Tesla just continues to be the funding needs, whether it's repairs in house, continuing to build out new factories, new initiatives, just to be able to get through all of the operational logistics, the funding needed, with the amount of cash the company continues to burn and their balance sheet weakening. Who would want to fund the growth picture for Tesla continues to be a concern of mine, which is why I'm lukewarm on the shares these days.
Mueller: Well, I'm not only lukewarm, I'm actually short just a handful of shares. But that's a short-term investment idea of mine. It's based on the weakening balance sheet, the $2 billion or so they have in cash while they're burning well over $3.5 billion a year. They don't have much more debt that they can pull in from the debt they have available right now. They're going to have to, if they want to keep on spending like they need to grow to 10,000 cars a week, Model 3s, they're going to have to go back to the equity or debt markets. And at that point, I would expect Musk to finally cave in and say, "Yeah, we have to do it."
Cross: Yeah, and one thing we've talked about internally here and talked publicly on our services is the need for Elon Musk to have a really strong second operator and No. 2 in charge. Tesla has lost a few of their key executives over the last year or so. To really get a person in to work with Elon, to help him through all these operational challenges, is a very important point. If you think that he can do that and is willing to do that, then the future for Tesla, in my mind, becomes much brighter. But until that happens, I'm a little not quite as excited with the shares today.
Mueller: In my mind, as well. I've heard that he has an operator at SpaceX. He doesn't have to be on top of everything there. But he doesn't have a similar person like Steve Jobs had with Tim Cook back in the day. H doesn't have a Tim Cook at Tesla, to run the company day to day. And he really needs that. Frankly, his distractions are hurting the company and hurting shareholders.
Greer: And, when you move back from that, I hear you talking about his need for a No. 2, but when you look at Musk, along with his vision, I think it's fair to say a lot of people would say, "The guy behaves kind of erratically. You never quite know what you're getting." So, at what point, with a founder-led business, do you say, "It's time for the founder to relinquish his or her CEO roles and step back from running the business?" Is there a point that you look at it and say, "Musk is no longer the right guy to run this business?"
Cross: Let's not forget, he's still a very young entrepreneur and a young leader. I think he's less than 50 years old. He still has years and years to be able to continue to drive what he originally thought with Tesla, and not to mention what's happening over at SpaceX. I'm willing to give founders who have success with their vision a lot of room to be able to continue to grow the company and take it where they want to go. I just think that they do need operational help to be able to drive that vision. Clearly, over at Facebook with Sheryl Sandberg helping out Mark Zuckerberg, is a great example. As long as he can find that kind of help, the future for Tesla is far brighter than it is right now.
Mueller: Yeah, he doesn't need to step down as CEO. But, as Andy says, if he has a strong operator, that'll do the day to day stuff, then yeah, the company should do well.
Greer: OK, let's talk about another founder-led business. Amazon, in a note to clients on Monday, Citi Research says Amazon should split itself up to reduce the risk of regulation and increase shareholder value. Citi analyst Mark May says, by separating the retail and Amazon Web Service businesses, Amazon could minimize or avoid the risk of increased regulatory pressure. Andy Cross, what do you think about this idea of Amazon breaking itself up?
Cross: I don't think it's going to happen anytime soon. And it's not new. For the last five years, analysts at various times have called for Amazon Web Service to be spun off.
Greer: But this note is new. Don't throw a wet blanket on this story. [laughs]
Cross: I'm not! The note is new, and the regulatory issues are different than what they were a few years ago. But just for context, Morgan Stanley talked about this in November 2014. They pegged Amazon Web Services worth about $32 billion in enterprise value. That was when Amazon was at $150 billion in enterprise value. Today, that's worth almost a trillion dollars. This is why Amazon Web Services getting spun off by Jeff Bezos and his team is not a story that I will entertain anytime soon. Amazon Web Services is the real growth engine behind the Amazon story. The last quarter, it was up 50%, and accelerated revenue growth for the last three quarters. It is growing so fast, it is so part of the ecosystem of Amazon, helping support all of their e-commerce initiatives, all of the initiatives where Jeff Bezos wants to go into, whether it's video or other initiatives. Prime, for example. It's such a part of the Amazon story that the likelihood to spin it off anytime soon, especially as they've now crossed a trillion dollars in market cap value, I think is not likely.
Greer: Andy, I want to go back to something you just said there. May did estimate, in this note from Citi, he said that the enterprise value for Amazon's retail segment estimated around $400 billion. And for Amazon Web Services, $600 billion. It's amazing to me. I'm an Amazon shareholder. But now, Amazon Web Services, more valuable than Amazon retail?
Cross: The profitability behind Amazon Web Services now is north of 20%, 25%, vs. the North American business, which is less than 3% profit margin. It's more profitable, it's growing faster. It's a real gem inside Amazon. You'd think that the valuation of that business is at least as high as a larger e-commerce business.
Mueller: It's going to be higher, definitely. AWS has provided about 60% of the $5 billion in operating profit the whole company brought in for the first half. That grew 68% year over year and 79% for the second quarter. AWS has operating profit, it's a big driver.
Another nice thing to consider is that CFO Brian Olsavsky points out that Amazon is, if not the biggest customer of AWS, certainly one of the largest. If they are forced to split, then Amazon's going to have to build either pay market prices for AWS's products and services, or build their own infrastructure. Going the other direction on this symbiotic relationship, Amazon is also a great beta tester for everything that AWS wants to bring forth. There's real strong arguments for keeping them together.
Cross: Also, to that point, if they did separate, it would bring a little bit more scrutiny into that link up. I'm not too sure if they really want to go there, from a competitive position. Now, I could see how a lot of retailers who might use AWS would say, "Why are we giving business to one of our biggest competitors?" especially as those other retailers who might be using Amazon Web Services to grow their e-commerce business continue to put more resources toward e-commerce. However, I think the tie-in with AWS and Amazon is so strong as a part of the story that a spin-off anytime soon is unlikely.
Greer: Guys, for our final story, I want to talk Coca-Cola and cannabis. Those are two words, two phrases I didn't think I'd be using together on Monday. Bloomberg reporting that Aurora Cannabis, a cannabis producer in Canada, is in talks with Coca-Cola to produce health-focused drinks that will ease inflammation, pain and cramping. Shares of Aurora Cannabis up around 13% at the time of this taping.
Now, guys, I was initially going to scoff at this story. Then I was walking around the office, as I tend to do, and I talked to our colleague David Kretzmann. He has this service, Marijuana Mavericks. He's like, "It's more of a Gatorade sort of thing. It helps you recuperate, and there's this medicinal side." What do we think about this partnership?
Mueller: Do note that this is not going to be the psychoactive part of marijuana. It's just going to be CBD, cannabidiol. It's that that is providing the pain relief and the inflammation relief.
Cross: Doesn't really get you high, apparently.
Cross: Mac, you know what's interesting to me about this is the continuation of Coca-Cola to broaden out where it is spending its resources, into businesses that are going to provide growth that it has been lacking over the last few years. We saw its recent proposed investment of Costa Coffee in the UK. I think it's more than the $5 billion U.S. dollars' worth. That's another spot that they are investing because that's where the growth is. Their core business really has been stagnant at best over the last few years. It's not getting any better. They have to be able to put resources into areas that are going to be much more exciting from the growth line, for investors to be able to support that 3% dividend yield. It's a very profitable business, but they have to find the growth.
Mueller: Yeah. Sugary drinks, as you know, are falling by the wayside. They've gotten into water, they've gotten into orange juice. This is just another way to get more drinks, sell more drinks to more customers.
Greer: It seems like the backlash against bottled water is starting. Is that fair to say? I feel bad about drinking bottled water. You go to the airports and they have the dispensers now.
Mueller: I never use bottled water.
Greer: Is that true?
Mueller: Yeah. I buy a Diet Coke. [laughs]
Cross: We started using now, instead of bottled water, you can buy water in a box, which is far friendlier for the environment.
Greer: Is it really? Water in a box? Is that what we've come to?
Cross: It's good!
Mueller: It's got to be better than lye in a box.
Greer: Why don't you just drink tap water? Just put your mouth under the faucet and let it rip?
Mueller: We have a SodaStream at home, so I don't even buy much Diet Coke anymore.
Greer: Do you make your own soda?
Greer: Are you happy with that?
Mueller: We've used it for five or six years?
Greer: I don't know. I don't get SodaStream. I don't get it. One of the best decisions I made is, I basically quit drinking soda 20 years ago. And I have it every now and then. But I love water. Water is great! Give me a reason not to drink water. Wine or beer? OK, maybe. But beyond that.
Cross: You just want some water just infused with a little bit of CBD.
Mueller: There you go.
Greer: Wow! Health-focused, I like that. Now, we should add that, Coca-Cola's stock, up around 40% over the past five years, including the dividend. That sounds respectable, but it's lost to the market. To your point, Andy, they have to try something.
Cross: It's not just lost, it's lost substantially to the market. The market's up more than 70%, not even including the dividends. Coke has lost relevance, frankly. And this is one of the most relevant company over the last, 20, 30 years. The market's shifting. There's a huge potential going on in the cannabis industry. In October, when Canada becomes the first Group of Seven country to legalize marijuana use, it's just a huge opportunity. A lot of companies are starting to look into that space. Clearly, Coke is, again, starting to make some investments that would hopefully fuel the growth and get that growth a little higher.
Greer: I see what you did there. [laughs]
Mueller: Also, I think Coke is almost being forced to follow what other companies are doing. Molson Coors, for instance, has paired up with HEXO, and Constellation Brands put $4 billion into Canopy Growth. And some people are thinking that Anheuser-Busch is going to do a similar kind of investment. So, if Coca-Cola wants to remain one of the drink giants of the world, then it has to do something here.
Greer: OK, guys, let's close with my desert island question. You should never invest this way at home. This is an incredibly arbitrary question. Let me get all the caveats out. Let me hit you with these companies. If you're on a desert island for the next five years, and you can only buy one of these stocks: Tesla, Amazon, Coca-Cola, or Aurora Cannabis.
Mueller: I'll go Amazon. And if it is split, I'd go AWS.
Cross: Consensus between the two analysts. Yes, I would say Amazon, even at a trillion-dollar market cap, just the growth rates. AWS, clearly, they have a lot of excitement in that business, overall, Amazon's business, but AWS is the fuel behind so much of that.
Greer: But it sounds like you don't think it's going to split anytime soon.
Cross: I don't think so.
Greer: OK, well, there you go. Practical knowledge here. If you're on a desert island, and you have to invest in one of those five companies. Hey, we told you so!
Mueller: Well, if it splits after you get on the desert island, at least you own both parts.
Greer: That's right. There you go. Guys, thanks for joining me!
Cross: Thanks, Mac!
Greer: firstname.lastname@example.org is our email if you have thoughts on our desert island poll, or any questions or comments about anything that you've heard on the show. email@example.com. 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. This show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening and we will see you tomorrow!