In today's episode of Market Foolery, host Chris Hill and Motley Foll contributor Charly Travers hit on some of the market's biggest stories. Fitbit (NYSE:FIT) rose by a whopping 26% after earnings. The report was good, but was it 26% good? What's really behind the bump? Is the company's bleary long-term outlook any better today than it was before?
Spotify (NYSE:SPOT), meanwhile, fell 8% on earnings, despite reporting a bundle of promising numbers and trends.
Meanwhile, Reese's -- of peanut-butter cup fame -- stuck it to the competition this Halloween with a bold advertising move. And Charly shares what he'll be watching in Apple's (NASDAQ:AAPL) earnings this quarter. Tune in to hear more.
A full transcript follows the video.
This video was recorded on Nov. 1, 2018.
Chris Hill: It's Thursday, Nov. 1. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, from Motley Fool Asset Management, it's not Bill Barker. I'm glad to say it's Charly Travers in the house. Good to see you, man!
Charly Travers: Good to see you, Chris!
Hill: Thank you for being here. We've got music streaming. We've got a preview of Apple's earnings later today. But we're going to start with the stock of the day. To the surprise of probably everyone, including the company employees and management themselves, the stock of the day is Fitbit. Third-quarter profit and revenue came in higher than expected. Fitbit also raised guidance for the fourth quarter. The stock is up 26% this morning.
Travers: That's a big move.
Hill: That's a heck of a big move. And this is a stock that's been down for so long. We've talked on this show over the past few weeks, we've seen this with other companies in other industries, where they get a big pop, you do the pull-back and you look at the last year or two, three. We saw it early this week with Under Armour. Huge pop, then you look back, and you're like, "Oh. Yeah."
You tell me. How enthusiastic should non-Fitbit shareholders be? I'm not a Fitbit shareholder. Is this a corner that they've turned? I have to believe at least part of this pop is, some investors, maybe on the institutional level, saying, "You know what? I'm going to give them a shot."
Travers: Yeah, the company is certainly in the right place, as far as the intersection of consumer technology and healthcare. I think that's a very real trend that is here. There's a number of big-name consumer electronic companies trying to spin a health and fitness angle. There's also medical-device companies trying to have more consumer-friendly devices as well. Fitbit is certainly one of the major players here. So I think they're in the right space. I think there's a long growth trajectory to these types of products. They seem to be striking the right chord with consumers on the watches side. That's a relatively recent move for this company. They started out with trackers, but now they have watches that have a lot more functionality, and that's half their business at this point. It really went from nothing a little over a year ago to being a big portion of what they're doing.
One of the issues there, though, is that watches are coming with lower profit margins than those trackers did. As that becomes more important to their business, and as that's driving sales growth, the profit margins are coming down. Maybe that's just a temporary phenomenon, and they can work through that over time.
I think one of the bright spots here is overseas sales. That was up 10% for them. It's really nice to see that they're getting global traction. But I think this is probably more of a case of coming off of low expectations driving that big jump in the stock price, rather than anything that they were reporting, necessarily, in the financials or on the product line.
Hill: We've certainly seen the case before where Company X comes out with a really good earnings report, their guidance is a little weaker than Wall Street analysts were expecting, and the stock drops, not on the results but on the guidance. Let's go ahead and assume that what's driving Fitbit's stock today is not just that the quarter was better than expected, but also the raising of guidance for the fourth quarter, which is so important for them. They need to crush this next quarter, don't they?
Travers: As with all consumer electronics companies, you make your year on the Christmas season. The next eight weeks are really going to be key for them and set the tone for 2019.
Hill: Let's move on to Spotify, which, in some ways, is more baffling than Fitbit. Spotify reported a profit for the third quarter, which was not expected. Their revenue came in higher than expected. They're closing in on 200 million monthly active users. Why is this stock down 8%?
Travers: I suspect a lot of that is due to the valuation. There's been a lot of companies this earnings season putting up phenomenal numbers, and the stock is down. Not to the extent that Spotify is today, but it's almost like, if you're not beating and raising and you have a richly priced stock, you're going to get a little bit of a haircut.
Looking at the numbers, I think if you're a Spotify shareholder -- which I'm not -- you have to look at what they're putting up and what's going on in the business and be pretty happy with it. What I was specifically looking for was the Premium subscribers, the people who say, "Spotify gives me enough value that I'm willing to pay a monthly fee for it." They're guiding for that to be up over 30% this year as far as the subscriber count. The revenue is growing. I think they put up 31% in the quarter. And it's not just sales growth, it's profitable growth. Their margins are getting better. As this company is getting bigger, getting more people to pay, they're becoming more profitable. You look at the trailing numbers, and you see a business where things should be, by all appearances, going according to plan.
Hill: You mentioned the valuation. This stock went public at $132 a share. With this drop today, it's basically right back there. It had popped up. Big IPO, all that sort of thing. It's trading in the high $130s right now. Is it still a pricey stock?
Travers: They have a roughly $25 billion valuation right now for a company that I don't believe is making money. I mean, they're getting closer.
Hill: I was going to say, they reported a profit this quarter. No one was expecting that.
Travers: Right. So, yeah, by traditional metrics, you would say it's expensive. But as we've seen with other subscription companies that have big, engaged member bases, those companies can really stay richly priced for a long time and appreciate in value. The old metrics may not apply to a company like this.
Hill: You and I were talking about this earlier today. Your home has a Spotify subscription?
Hill: I've got a Pandora subscription that I got for the missus last Christmas. It really does seem like one of those things ... I'm not going to compare it to Netflix, because they are both in roughly the same business, but Netflix is doing things on a level that Spotify and Pandora are not. But, I think they are similar from the standpoint of, "Here's this entertainment subscription in my home. I like it. If they come out and raise the price a buck or two, I'll probably pay it."
Travers: That is what history says. The value is so compelling. It's the equivalent of two or three cups of coffee a month, and people listen to this for many, many hours.
Hill: Or, in my case, two or three cups of coffee a day.
You're working on something new at Motley Fool Asset Management.
Travers: Yeah! It was a pretty exciting week for us on our team. We launched the Motley Fool Small Cap Growth ETF earlier this week.
Hill: This is the second ETF from Motley Fool Asset Management. The first one was the Fool 100. How is this different from the Fool 100?
Travers: The Fool 100 is a passively managed product, just like you would have for an S&P 500 index tracker. The Fool 100 is tracking an index of Motley Fool newsletter recommendations and high-conviction ideas from the analyst team that goes into Fool IQ. It's a market cap-weighted index. Our Small Cap Growth ETF is an actively managed product. I'm the lead portfolio manager. What our team does is just old-fashioned stock research, finding Motley Fool-type companies, where we love the management team, love the growth trajectory. We're long-term buy-and-hold investors, so, much more of a classic stock-picker kind of product.
Hill: I'm assuming, given the market volatility of the past few weeks, you're finding more small-cap options than you were maybe two or three months ago.
Travers: There's always companies I like in all environments well.
Hill: And that's the thing -- we've talked about this before. For people who are value investors, and are sticking to a very specific set of metrics -- and there's nothing wrong with that -- what happens sometimes is, you can be caught up in a situation where a market gets frothy, and if you're sticking to your value metrics, you're looking around like, "I've got nothing. I have no moves here because there are no 'value' stocks." Whereas, if you're working with a different set of parameters, you find more opportunities.
Travers: My counterpoint to that situation would be, all companies are reporting horrible numbers. You're in a recession, sales are down, profits are getting crushed. And you're like, "There's nothing that looks good."
Hill: Well, great. Congrats on the launch!
Travers: Thank you!
Hill: One thing before we get to Apple. Thanks to Joe Walsh, longtime listener, who sent this fantastic story. Since we are just hours removed from Halloween -- some of the listeners may have seen this story -- Reese's, known for their peanut-butter cups, upped their game this Halloween with a machine that they placed in Tarrytown, N.Y., that they called the Reese's Halloween Candy Converter Machine. Producer Dan Boyd pointed this out -- it's a little bit of trolling the other candy companies. But it's a smart move by Reese's. They basically said, "Kids love to trade candy." In some ways, if it's not the best part of Halloween, it's the second-best part. You get together with your friends after your trick or treating, you're like, "I like these. You like those. Let's see, let's do some trading here." Reese's said, "You know what people love? Our candy. You know what they don't love? Other companies' candies." So they set up this machine, Dan, where you can take your candy and trade it in for Reese's Peanut Butter Cups.
Dan Boyd: It's a fantastic idea. It's basically being like, "Hey, everyone, we're the best candy, all y'all know it, so come and get our candy and give us your terrible candy that sucks."
Hill: [laughs] Remember at the beginning of the football season, we were talking about how Budweiser placed those locked refrigerators all around the city of Cleveland, I think it was with Bud Light in them. The whole thing was, "If the Cleveland Browns actually win a football game, we'll unlock the fridges, and it's free beer for everybody who's at these bars." And we talked about, "Hey, that's a smart branding move by them." It doesn't really cost them a ton of money, when you think about how much money a company of that size is spending. It's just a smart move. I feel like, to your point, Dan, this is one level above that. At least in the case of Budweiser and the Bud Light fridges in Cleveland, they weren't going around and trolling other beer companies. They were just being like, "Hey! We're giving away free Bud Light!" Reese's is kind of going to another level.
Boyd: There's one difference between the Bud Light promotion and the Reese's thing. Reese's --
Hill: Which is owned by Hershey.
Boyd: -- has cornered the peanut butter and chocolate market, 100%. If you want something that has both peanut butter and chocolate, you're buying a Reese's Cup or you're making it yourself with whatever ingredients you have on hand. And it's not like peanut butter and chocolate are hard to come by. And, I mean, come on. It's peanut butter and chocolate. Who doesn't want it? And where else are you going to get that on the planet?
Hill: Smart move by Hershey.
Travers: Totally agree.
Hill: I like what they're doing. Apple is reporting earnings after the bell today. I mentioned earlier in the week, on Motley Fool Money this weekend, it's an all-earnings-palooza show. We will be talking about that on Motley Fool Money this weekend. You tell me, Charly. What's one thing investors should be keeping an eye on when it comes to Apple's report?
Travers: Rather than focusing on phone units or those ungodly prices they're apparently getting people to happily pay. I just can't believe what a phone costs these days. I'm kind of interested in the services side of what Apple is doing. I think that is stealthily a very good business that is maybe underappreciated in the way that Amazon Web Services is for Amazon. So if you look at Apple, with the App Store, the music, and a burgeoning health monitoring business under there -- they are working with a company called BioTelemetry on cardiac monitoring. That's the part of Apple that I think is maybe underappreciated and could be a growth engine for them going forward. So I want to see what they say about that.
Hill: Charly Travers from Motley Fool Asset Management. You can read more from him at foolfunds.com. Learn about everything that Charly and his team are up to. Thanks for being here!
Travers: Thank you, Chris! This was fun.
Hill: As always, people on the program may have interest 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 on Monday!
Charly Travers owns shares of Apple. Chris Hill owns shares of Under Armour (A Shares) and Under Armour (C Shares). The Motley Fool owns shares of and recommends Apple, Fitbit, Netflix, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.