No time for guests on this week's Motley Fool Money -- instead, have some earnings, another dash of earnings, and a few more earnings on top of that.
Things continue to worsen for GE (NYSE:GE), but Fitbit (NYSE:FIT) shareholders were treated to a breath of fresh air with good numbers, good guidance, and a huge jump in the stock. Shake Shack (NYSE:SHAK) dropped a whopping 11% on earnings, and things don't look so great from here. Spotify (NYSE:SPOT) reported some positive news, but still fell on some long-term trends. MercadoLibre (NASDAQ:MELI) popped, and the company is becoming so much more than just the so-called Amazon (NASDAQ:AMZN) of Latin America. And, as always, the analysts give you a sneak peek at the stocks on their radar. Tune in to hear more.
A full transcript follows the video.
This video was recorded on Nov. 2, 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!
It's Earningspalooza. We've got so many companies reporting earnings this week, we don't even have a guest. We're going to dip into the Fool mailbag. And, as always, we'll give you an inside look at the stocks on our radar.
We begin this week with the big macro 250,000 jobs added in the month of October. Matty, we've got jobs on the rise. We've got wages on the rise. I'm betting we're going to have interest rates on the rise.
Matt Argersinger: I think you're right there, Chris. The 3.1% rise in hourly wages was the number that stood out to me, the largest since the recession. That's a big gain. We know, as we've been talking about the last few months, wage inflation begets greater inflation in the economy. Generally, that's how it works. I think this slams home another Fed rate increase in December. What I think it also does is rekindle some of the conversations we had trying to explain what happened in October, the stock market sell-off, which is rising interest rates, rising Treasury yields, and what the Fed's going to do. I think those are all back on the table now.
Ron Gross: I actually love to see people returning to the workforce when they see a strong market, that labor force participation rate we sometimes talk about. People come back to the workforce. The unemployment rate actually probably would have dipped if it wasn't for that. Part of that is seasonal, certainly, getting ready for the holiday season. But I think there's something larger here. People say to themselves, "It looks like, if I want to get a job, I can get a job." That brings people back.
Argersinger: Yeah, I agree. We're seeing Treasury yields rises, as we've talked about. It's hurting the relative attractiveness of stocks. Just keep that in mind as we think about, if the stock market is going to rally in the next couple of months. Is it, if this is still overhanging? We have to pay attention to that.
Hill: Let's get to the earnings. Fourth quarter profits for Apple (NASDAQ:AAPL) up 41% compared to a year ago. But, shares of Apple falling 6% on Friday after iPhone sales came in flat year over year. Jason, a lot of grousing among Wall Street analysts about this one.
Jason Moser: Let's everybody just take a step back. Let's keep things in context here. Bears will try to frame this quarter and the information we gleaned from the quarter into some earth-shattering move that shows that Apple's best days are behind it. That's just not the case. The big noise that's being made is that management is going to stop reporting unit sales for iPhones, iPads, Macs. When you want to steer your identity away from being primarily a phone company, this is a logical decision. "Hey, let's not worry about being so granular." And I think management's point on the call is actually right in that today, a unit of sale is less relevant for them than it was in the past. If you look at iPhones alone, there are a lot of different models now. You've got enough models to accommodate a very big market. It's not necessarily indicative of the health of the business because they're also selling iPads and Macs, but even more so the Services side of the business. And there is something to be said for the Wearables side of the business, as well.
They're witnessing some pricing pressures in emerging markets. Not terribly surprising. Average selling prices are not going to go to the moon. They also made the point that they released the most expensive line of phones here first, and the cheaper line of phones is going to be coming out this quarter. It was the opposite last year. That average selling price that was so high this quarter, reasonable to assume it'll probably be a little bit lower next quarter. But at the end of the day, these guys are selling millions and millions of iPhones. I don't think that's going to stop. If anything, maybe we see a little bit of time between replacements now, because phones are better and we're getting more time out of the phones that we buy. But they've still got quite the loyal customer base. I think things are going to be OK.
Gross: I think there were probably a lot of disappointed analysts out there who will no longer get quarterly unit data. We're all paid to opine on a quarterly basis about the health of Apple and all the other companies we follow. But for shareholders, I don't really think it matters. I'd love to see that data released on an annual basis, so we can calm down on a quarterly basis, and just look at things annually. But I'm not actually sure they're even going to do that. I would encourage them to give us data on a yearly basis.
Moser: I will say, on the flip side of this, because they are focusing the business more on the Services aspect, they are going to give us a little bit more information in regard to that. We're not only going to get the revenue that the Services segment generates, but also the costs involved with that revenue. We'll be able to see how profitable that is and start looking ahead to see how profitable it can one day become.
Argersinger: Can we also just mention that Apple has more cash on its balance sheet than the size of all but 10 companies on the planet? It's a remarkable number. I know we talk about it every quarter, and it's not surprising, but it's still just remarkable to me.
Moser: The bottom line with this, and what I think investors want to know -- what do I do? Is this a problem? Is this a crisis? Do I need to sell my Apple shares? Absolutely not. This is just as good a business today as it was yesterday before they announced these results. If you're a shareholder in Apple, you need to hang on to those shares, knowing that you're an owner of one of the most important companies in the world.
Hill: The hits just keep on coming for General Electric. Third quarter profit and revenue came in lower than expected. New CEO Larry Culp cut the quarterly dividend to $0.01 per share. Ron, how much worse is this going to get?
Gross: Well, Chris, you know the old saying, it's always darkest before it goes totally black. Things are not good. Add on to that: The Justice Department and the SEC are investigating accounting charges. They're splitting their Power into two divisions to cut costs. They're selling many units to try to raise $20 billion to get that balance sheet out of trouble. At last count, I want to say there was about $115 billion of debt on that balance sheet. It's very hard for them to turn this business when they have those handcuffs of that bad balance sheet. That's very important.
They will save $4 billion from cutting that dividend. That's real money, it's nothing to sneeze at. But they've got a lot of work to do here. The Power business itself tumbled 33% in the latest quarter. They've got actual business problems, not just financial and balance sheet problems.
Argersinger: Yeah. It's sad to see this venerable brand and company go through this now. But I look at the size of the business now, and the fact that it's now a power, aerospace business, I don't know. Berkshire Hathaway? Buffett's always looking for the next elephant. Not to say GE is the perfect fit, but the business itself, and what Berkshire Hathaway does nowadays, at least on a major part of its business, it kind of fits with GE, and the size is about right.
Hill: Matt, think back to earlier in the year, when we talked about General Electric cutting their dividend by 50%. I think you were one of the people who made the point, at that time, saying, "Why don't they just cut this thing all the way and do it in one fell swoop?" And now, they've cut it down to just $0.01. If it feels like we've been talking a lot about the stock falling, it's because it has been falling. And today, it's at its lowest point since the summer of 1995. Steve Broido, our man behind the glass, what else was going on in the summer of 1995?
[Kiss from A Rose -- Seal]
Gross: Classic. Batman.
Argersinger: Bad high school memories.
Hall: That's how it's been going for GE.
Gross: Yeah, not good. There's probably a lot of money to be made on playing the bounce here if they can clean up that balance sheet and turn this business. But I think the risks outweigh those probabilities. I would stay away.
Argersinger: I just realized that Apple could buy three GEs with the cash on its balance sheet. Not to work Apple into every story.
Gross: Shares of Starbucks (NASDAQ:SBUX) up 10% on Friday, hitting an all-time high after reporting its best quarter in over a year. Matt, the fourth quarter comps came in over 4%. That's nice, but I'm a little surprised that the stock is responding the way it is. Not that I'm complaining. But it seems like a little bit of an overreaction to a nice quarter, but not an all-time high kind of quarter.
Argersinger: Right. It seems strange to me, as well. China comps, which is where they're betting a lot of their future on, were only up 1%. Still, you look at the comp growth in the U.S., 4%. This is coming off roughly two years where Starbucks was struggling to break out of that 2-3% range. So, 4% is nice. Better still, on the call, management mentioned that a lot of that was coming from more beverage orders, which are higher margin. A lot of people think, "It's because they have the food offerings, that's why the ticket sizes are getting bigger," but actually, it's people buying more beverages. That's a positive.
The other highlight to me was the 15% growth in the U.S. rewards members to 15.3 million. That's the strongest growth in seven quarters. We've talked on the show about how it's surprising to us that this rewards member number isn't bigger. They drive 40% of the dollars spent at Starbucks. So, it's nice to see a big pickup in that number.
Hill: Under Amour's (NYSE:UA) (NYSE:UAA) third quarter profits came in higher than expected, sending shares up 25% this week, Jason. When was the last time we said anything approaching that with Under Armour?
Moser: Little by little, it seems like maybe this turnaround starting to take hold. When you look at the quarter, on the whole, there wasn't one thing that really stood out. But it's just progress on all fronts, really. The International business is still strong. U.S. is treading water. I know treading water is not what we really want to hear, we want to hear more about growth. But it's worth noting that they cut back a lot on promotional stuff for the quarter. That affected the U.S. business, affected the direct-to-consumer business, as well. But inventory management is improving by leaps and bounds.
Most importantly, and one of the hurdles we've helped them to here, is that the COO and CFO are still there. Plank hasn't scared them away yet. That's a big plus. And, listen, you've got The Rock pushing your stuff still, that's a win in any capacity. All in all, it's not like they're there yet, but we are seeing signs that this turnaround is starting to take hold. Under Armour is still a very powerful brand. It sounds like they've come to the realization that they need to maintain that premium status in the market as performance gear, instead of trying to go performance and fashion and wherever else they may go. I think that's good. The market opportunity is a little bit smaller, but it's a big market opportunity still, and they have a reputation in the space for high performance gear anyway. All in all, as a shareholder, I'm happy.
Hill: Yeah, all kidding aside, Matt, at the beginning of this year, that's one of the things we talked about. Kevin Plank, for all the things he has done right at that company, has struggled, historically, keeping an executive team around him. And we said, "Let's see if he can get through the entire year with the C suite still in place."
Argersinger: I know. It's funny to joke about that, but it's true. Under Armour is an example of a founder-led business, and we love investing in these kinds of companies at The Fool. Under Armour has been a wonderful company to follow and invest in. But it really got to a point where Kevin Plank had to realize that there were decisions he was making that he needed more council, he needed more advice on. I'm really thrilled to see the CFO and COO staying on. It's really key.
Hill: You know who had a better week than Under Armour shareholders? Fitbit shareholders! Third quarter profit and revenue came in higher than expected, and they raised guidance for the holiday quarter, Ron.
Gross: I've never been a fan. [laughs] I don't understand why it's a stand-alone company.
Hill: Can I interest you in the stock up 33% in one week?
Gross: I'll give it to them. Smartwatch sales grew significantly over the quarter. They sold 3.5 million devices. Average selling price increased 3%. They're now the No. 2 player in the smartwatch space, having had zero share only 14 months ago, according to the company. That's pretty impressive. They've made some nice tuck-in acquisitions in the healthcare market. Healthcare grew 26% for them. It's still a relatively small piece of their revenue, but it's increasing. But hey, competition is pretty steep with Apple, Samsung.
It's interesting to me that they're a stand-alone company. I don't know if they will be forever. But good for them, it's a solid quarter.
Hill: When you look at the track record this company has had -- I'm thinking mainly of the stock and how it has struggled over the past couple of years -- I have to believe, or maybe I'm just hoping, that they are not taking the guidance raise lightly. The holiday quarter is so important for this company. If they can do this again in three months, they might actually have something.
Gross: It's interesting, their guidance was mixed. Their earnings guidance going forward was better than expected, but their revenue guidance was light. They're hopefully being conservative on the top line.
Hill: MercadoLibre reported a loss for the third quarter, but overall sales came in higher than expected. Matt, we've always talked about MercadoLibre as being the Amazon of Latin America. You were saying before the show, you don't think of them that way anymore.
Argersinger: No, I don't, especially after this quarter. If you look at MercadoLibre's press release, the first six bullets of that press release didn't even mention the core e-commerce business. Instead, it talked about Mercado Pago and metrics like payments transactions, transaction volume, off-platform payments, mobile point of sale, mobile wallet, asset management. It's interesting. It reminds me, several years ago, before eBay and PayPal split, if you read eBay's conference calls or press releases, it spent most of the early part gushing about PayPal, not so much about the marketplace business. That's exactly what's happening with MercadoLibre. It points to the fact that payments and financial technology is becoming so crucial to the business.
The growth has been impressive. Total payments transactions were up 67%. On-platform payment volume reached almost $5 billion. Something noteworthy was that in September, the last month of the quarter, off-platform transactions exceeded marketplace transactions. In other words, more people are using Mercado Pago outside of MercadoLibre than using it inside MercadoLibre. It's not just the "Amazon of Latin America." I think more and more, it's the PayPal of Latin America.
Moser: They see opportunity in... payments. That's... interesting.
Argersinger: You know something about payments.
Hill: I was just going to say, it sounds like one more for the War on Cash. Shares of Teladoc (NYSE:TDOC) up this week after third quarter revenue came in higher than expected. They're still losing money, Jason, but Teladoc appears to be losing less money.
Moser: They are, and they do have a clear path to profitability. That's one of those things we always like to see these with unprofitable new IPOs. They've been in the market now for a few years. When you look at the business, its market, this is an attractive opportunity. It tackles perhaps the greatest challenge in healthcare, scaling it. It's very difficult to go through their release and the call and not be excited with what they're doing. U.S. paid memberships now stand at 22.6 million people. The visit-fee-only population is about 9.5 million.
There was another interesting point they made there. The Center for Medicare and Medicaid Services just published the rules which will allow Medicare Advantage plans to include telehealth as part of their bids in 2020. What that ultimately means is that Teladoc is going to be able to offer its full suite of services to those 21 million additional enrollees.
We talked about when they changed their name from Teladoc to Teladoc Health. It's really about this comprehensive, holistic solution. The partnership with CVS, that's not something that was just entered into lightly. There was a lot of research done with that from 2014 on. We're seeing that rolled out now in the Minute Clinics, these virtual Minute Clinics. And you'll see, as time goes on, CVS try to leverage that physical presence in those stores. It's going to be less about buying Pringles and more about actually focusing on good health, I think.
Probably easy to look at the share price today and anchor, feel like it's taken off and you missed the boat. I would encourage you to take another look. It's still a very reasonable price for a company that has a big opportunity ahead.
Hill: I'm going to overlook the shot you just took at Pringles.
Gross: Yeah, what's wrong with Pringles? Salty goodness.
Moser: Well, it's less a Pringles thing -- what if we said Combos?
Argersinger: Ooh, I like Combos!
Gross: Not the Pizza-flavored ones.
Hill: Really quick on Teladoc, this is a $5 billion company, and I don't think I could name one of their competitors. I'm sure they have them in this space. To what extent, if any, is management talking about acquisitions? They appear to be big enough now that, if they've got smaller competitors that they can snap up and incorporate, that might be a good move.
Moser: That's a good point you make. Most of the competition in the space is much smaller than they are. They've made a couple of big acquisitions to date so far. The most recent one was Advance Medical, and what that did was give them global exposure. They now have this global service called Global Care, where they can accommodate patients all over the world. Really, it makes a lot of sense, what they've been doing. They've been trying to gain as much market share early on as possible. Yes, that plays out on the financials in the short run, but long-run, I think it's going to be the smartest decision.
Hill: Do you think they could go to Apple and ask to borrow some of that cash they have on the balance sheet?
Moser: [laughs] Hey, it's worth a shot.
Hill: This is normally the part of the show where I say, "Guys, we'll see you a little bit later in the show," and we go to a guest. But, no. It's Earningspalooza. We have no guest this week. Hang in there, Ron!
Gross: [laughs] I'm here for the long haul.
Hill: Let's move on to the Earningspalooza portion of the show, which is all of the show. A bad year for Kraft Heinz (NASDAQ:KHC) just got a little bit worse. Third quarter sales came in lower than expected. Shares of Kraft Heinz falling on Friday, Ron, and hitting a new 52-week low.
Gross: They have really been struggling with the trend toward fresher, healthier, more natural foods. It's showing up in the numbers. They did manage to eke out an overall revenue increase of 1.6%, but they have higher costs -- marketing, hiring, new product costs really are weighing on that income statement. Their adjusted EBITDA was down 16% in the U.S., which is obviously very important to them. Adjusted earnings fell 6%.
They're guiding us to expect some relief from some of these cost pressures. I think we have to wait to see how that plays out. You have top line weakness, you've got pressure on margins. Never leads to goodness on the bottom line. We'll have to take this quarter by quarter, but I don't see this abating anytime soon.
Hill: Yeah. And, Jason, when you look at what the stock is doing, I don't personally feel any pressure to jump in here.
Moser: No. I don't think I'd ever feel any pressure to jump in there. Correct me if I'm wrong, was it Berkshire that made a big investment in Kraft?
Gross: You're correct.
Moser: They're probably sitting there thinking, "I should have listened to those guys from Motley Fool Money and invested in McCormick instead," because McCormick and French's and Frank's Red Hot, those things are just on fire, baby!
Argersinger: Whoa! Yeah, I think the problem with Kraft and others is that the importance that consumers used to place on those brands, and the marketing budgets that companies like Kraft could put behind those brands, it's no longer that important anymore in the FMCG -- fast-moving consumer goods -- category that's in vogue right now. And that's just because with consumers, it's more about efficiency and delivery and things like that. Generic brands and others seem to fit that just fine. They're not really distinguishing between brands anymore.
Gross: Right. The Kraft Heinz merger, I think, made sense. They were able to squeeze out about $1.8 billion of costs there. That made sense. But now, where do you go from here? You have to get on the right trends or you're going to continue to suffer.
Moser: What was that thing I saw the other day, millennials are apparently killing American cheese? Did anybody else see that?
Gross: [laughs] No, I don't even know what that means.
Argersinger: It makes sense!
Moser: Google it, I swear I saw it!
Hill: A slowing economy is taking its toll on China's biggest e-commerce company. Alibaba (NYSE: BABA) did nearly $12.5 billion in sales in the second quarter, Matt, but they are lowering expectations for the full fiscal year.
Argersinger: Right. That's the headline, but I still look at the results of revenue up 54% in the quarter, a 56% increase in the core commerce business. And, even though it's still less than 10% of revenue, 90% increase in cloud services. You can see the twin pillars that have made Amazon what it is also working really well for Alibaba. They also added 32 million mobile monthly active users just in that quarter alone. And, as we've become accustomed to with Alibaba, also generating healthy profits, healthy operating cash flow.
I would just say, Alibaba is a little bit in that tailspin of other big Chinese tech companies. There's the headline risk, the trade war, the tariffs, whatever it is. This is why you have Alibaba's stock trading at near a 52-week low. With this kind of growth rate, though, it starts to look pretty interesting to me.
Hill: Shares of Yum! Brands (NYSE:YUM) got close to an all-time high this week after third quarter profits and revenue came in higher than expected. Once again, Jason, we saw KFC and Taco Bell doing the heavy lifting, making up for weakness at Pizza Hut.
Moser: The old saying goes, two out of three ain't bad. That's essentially Yum!'s quarter in a taco shell. A crunchy taco shell. Yeah, KFC and Taco Bell continue to shine. Taco Bell is about 30% of total operating profit. System sales grew 8%. KFC, which is essentially half of the company's operating profit, was another source of strength with same-store sales growth of 3%. If you also recall, earlier in the year, Yum! Brands made an investment in Grubhub. They bought $200 million worth of stock from Grubhub. That gave Grubhub some much needed capital, also tied the two together to really focus on getting more sales out there, in regard to KFC and Taco Bell. Pizza Hut is the --
Gross: Worst pizza around.
Moser: [laughs] It's not good pizza, I'm not going to lie. They have some work to do, no question. It seems like an opportune time, given Papa John's weakness.
Hill: I was just going to say, given everything that has happened over the past 12 months with Papa John's, how is Pizza Hut not taking advantage of this?
Moser: I think this time next year, we'll have a better idea. That's mainly because they've taken over as the NFL's main sponsor. That has the potential to really help them get this thing going back in the right direction. But we're not going to know for at least a little while. To Ron's point, they could probably focus on improving that product a little bit.
Gross: You don't like ketchup on bread?
Argersinger: [laughs] Oh, gosh, harsh!
Moser: It's not my thing. It's worth noting, they've essentially reached their goal of 98% franchised operations. Management is committed to giving back $6.5-7 billion to shareholders through 2019 via repurchases and dividends. As a quick-service restaurant, the pizza is not the best in the world. I don't ever eat at Taco Bell, and I can't remember the last time I ate at KFC. But apparently, people are going there, because they're chalking up a lot of sales.
Gross: And because KFC's delicious.
Moser: I would push back on that one.
Hill: Do you know what else Taco Bell does a really good job of? They do a really good job with promotional items. One of the things that came out in this quarter was, the nacho fries promotion -- which I did not partake in, and apparently, I was in the minority, because that was involved in more than a quarter of every ticket they had.
Moser: Hey, let's relive that Red Sox victory one more time. Remember when Mookie Betts stole second base? They're giving away a free Doritos taco or whatever it was. So, I have to imagine some people went in there and took advantage of that, as well.
Argersinger: I love the Mookie!
Hill: Shake Shack falling more than 11% on Friday after a weak third quarter report with negative comps, Ron.
Gross: The report wasn't horrible, but those top line numbers certainly scare investors when you have a stock that's priced pretty to perfection. Comp store sales down 0.7%, which is actually an improvement from the 1.6% decline last quarter. Silver lining there. A 4% decrease in guest traffic. I'm no analyst, but I think you probably don't want to see that at a restaurant. They had revenue up 26.5%. That's largely because they keep opening new stores. They did raise full-year revenue outlook, which is interesting based on those metrics that I just went through. That's curious. They'll continue to open new stores. They expect to open 36-40 additional stores in 2019. That will continue to drive revenue. We obviously need to see this filtering down into margins and earnings.
Hill: Let me go back to Taco Bell for a second. You look at Shake Shack, they make a good product. But from a business standpoint, they don't appear anytime soon to be employing any sort of a promotional strategy in the same way that Taco Bell does, whether it's discounting or any sort of one-time items. To your point about them raising guidance, I'm not entirely sure what rabbit they're going to pull out of their hat to make that happen.
Gross: A Shake Shack opened around the corner from my house. I've seen no promotion whatsoever. You drive by, you see it, or you don't. You either go in or you don't. I've seen nothing about it.
Moser: And you know how that ends. Chipotle ran their business very much that way for a long time. Eventually, something slips, and you've got to start promoting.
Argersinger: Even after Friday's big fall in the stock price, the market cap of the company is still about $1.8 billion. That means each of the 180 Shacks is valued at $10 million.
Gross: That's high.
Argersinger: Ron is here throwing out negative comps, and I'm thinking to myself, "How in the world could each Shack be worth $10 million?" That's a little high.
Question from David in Massachusetts. He writes, "What is the definition of an institutional investor? Does the percentage of institutional investors indicate if a stock is under the radar? And how do institutional investors affect the volatility of a stock?" Three really good questions, Matty.
Argersinger: Yes. Well, I don't think there's any hard definition of an institutional investor. We think of it as any investor that's not a retail investor or an individual investor like us, or maybe a small RIA investor that's managing family money. We're talking about hedge funds, investment banks, pension funds, big money managers like Fidelity. That's what an institution is.
To the second point, yes. We especially tend to see it with small-caps, small-caps tend to not have a lot of institutional ownership. That makes them interesting. They tend to be off the radar because large institutions usually can't invest in them anyway. So, maybe you can have a little bit of an informational advantage as an individual investor buying small-caps.
Gross: The institutions that are focused on what we call quant investing or algorithmic investing are often very responsible for a lot of the volatility we see. These are folks that manage billions and billions of dollars and will take their portfolios up or down several percentage points with a check mark on a piece of paper or computer. You'll see big, big swings in both stocks and the market as a whole. The importance of indexes, like the S&P 500 Index, so many dollars flowing into those indexes. You'll see wide, wide swings up and down in what people think of as a proxy for the market.
Moser: One of the things we look for in any of the stocks that we're covering for members or recommending for services, you look at the holdings, the companies or the institutions, who has meaningful ownership in that company? And oftentimes, particularly with new IPOs, you'll see VC interest, venture capital interest. And a lot of times, they can have 5-10% ownership, even more. That's fine, they helped bring that company public and that helps them, in that regard. But it's also worth remembering, whenever you see that heavy VC interest, they have an exit strategy in mind. By exit strategy, I mean they want to be able to sell that and make some money at some point. They want to realize those gains. That is something worth noting when you see these new IPOs. Take into consideration the fact that there may be an exit strategy at some point here that could, in the short run, at least, play its way on the stock price.
Gross: And finally, I'll add that, it's a combination of the institutional analysts, sometimes what we call the sell-side analysts, giving guidance to the institutional investors that will cause stocks to jump or decline in relatively large swings. Most retail investors like us are not focused on these sell-side analysts and the buy-sell-and-hold. But the institutional investors clearly get their guidance from them.
Hill: For individual investors like us, when we're buying a stock, we're going to make a phone call or click a button and it all happens in one fell swoop. I'm curious, Ron, back in your hedge fund days, when you were buying shares of a company, I'm assuming you had to do it on a piecemeal basis. You couldn't just go in all at once and buy all the shares you wanted.
Gross: Correct. We would work with traders. We would say, "Let's work a 10,000-share order with a top price of $7 per share," and they would go to work for us. Or, if we had smaller orders, we could do them by ourselves through our own systems. But yeah, especially if you're dealing small-caps and micro-caps like I did, you've got to work those orders over days, if not weeks.
Hill: One more earnings story before we get to the stocks on our radar. That's Spotify, which surprised Wall Street by reporting a profit in the third quarter. The stock was still down this week, though, Ron.
Gross: Yeah, because they don't really make money. [laughs] The only reason they were profitable is because of their investment in Tencent Music Entertainment. They got to goose up the value of that, which led to a paper profit. But they're not profitable because of what they actually do. In fact, they reported net losses every year since they launched in 2008. What do you do with that? At some point, they've got to make money. Listeners will recall, they went public back in April in a new way. They went a direct listing approach, rather than using underwriters, which people thought "Maybe this is the new wave of going public." I don't think, necessarily, we've seen that yet. But this was a way for investors in the company to get liquidity. As a result, now it's a public company.
They've got good subscriber growth, but they did have to pare back on guidance with respect to that. They pared back on guidance with respect to gross margins. They just can't seem to flow money to the bottom line.
Hill: They have nearly 200 million monthly active users. What is wrong with this business, that they can't make money, Jason?
Moser: Because they have a pretty compelling free offering, actually. I use Spotify, but I never pay for it. With Spotify, we learned some lessons going into that IPO. I think Snap is another good example of learning some lessons going into that IPO. We paid attention to Facebook and Twitter, and I think we learned a lot from that to get an idea of what might happen with Snap. With Spotify, we could look back to Pandora at least to get some idea as to the economics of that business, and what they would have to do to make any really meaningful money over the long haul. The economics of the music business are just really bad. They could probably have a user base of 300 million, but I'm not necessarily sure that makes for such an attractive investment. It just goes to show that there are cases where it can be a great product or service for consumers that doesn't necessarily translate its way into good investment for investors.
Hill: We're going to get to the stocks on our radar. Our man behind the glass, Steve Broido, is going to hit you with a question. But also with Steve Broido on the other side of the glass, visiting this week all the way from New Zealand, Denver Steele, one of our listeners and members down at Motley Fool Australia.
Ron Gross, you're up first. Steve's going to hit you with a question. What are you looking at this week?
Gross: I've got a recent Total Income recommendation, Carter's (NYSE:CRI), CRI. Dominant children's apparel retailer in the U.S. with 18% market share. They've had really strong financial performance across multiple market cycles. But let's be clear, they did have some weakness relatively recently. Toys R Us and the Bon-Ton bankruptcies played around with them a little bit. Some weather hurt them, as well. So, you have an opportunity to get in at a good price. The stock is trading at only 16X earnings. Steadily growing dividend, currently at a 1.8% yield. They buy stock back. They continually raise that dividend. I think you'll do well.
Hill: Steve, you've got children. Question for Ron about Carter's?
Steve Broido: How important is the process of sales? Like, "There's a big sale going on at Carter's." It seems like with clothing retailers, everything is about everything being on sale all the time.
Gross: Yeah, the promotional is very difficult for them. They use it to clear out inventory often. If you're in the wrong place with inventory, that ends up being trouble for your margins. You want to be able to sell as much full-priced apparel as you possibly can. But often, it's not the case, and they need to clear it out.
Hill: Jason Moser, what are you looking at this week?
Moser: Over the past three weeks, I got two postcards from our veterinarian as reminders that it's time for me to bring in two of our three dogs for their annual checkups, shots, tests, yada yada yada. Now, Chris, this reminded me that I spend a lot of money on those animals every year. Now, I'm not complaining about it. I love them very much!
Hill: [laughs] Really? Because it sounds a little bit like you're complaining.
Moser: Let's go ahead and profit from the money that I'm spending, right? My radar stock is Zoetis (NYSE:ZTS), ZTS. If you remember, they were spun out of the Pfizer Company (NYSE:PFE) a few years back. Zoetis develops veterinary vaccines and medicines for food animals as well as companion animals. The space itself is a massive market opportunity, globally estimated in the neighborhood of $30 billion or more. Zoetis' scale and reputation in the field for excellence gives them a very loyal customer base. Also, they do plow a lot of money in annually in research and development to help develop new vaccines and medications for animals. All in all, I love what they're doing. They just reported a great quarter. I own shares personally, I probably will add to that position at some point.
Hill: Steve, question about Zoetis?
Broido: We have two cats. How many cats is too many cats?
Hill: Matt Argersinger, what are you looking at this week?
Argersinger: A company I've discussed before, iQiyi (NASDAQ:IQ), IQ. This is the leading streaming company in China. This stock has round tripped from an $18 IPO price in the spring all the way to $46, and now back to about $20 today. I think it looks pretty good to me. The company reported results this week. Paying members hit almost 90 million last quarter. That's up 89% year over year. Let me repeat that. Up 89% year over year. That's great, because membership revenue, which is the key part of the business now, up 78%, growing much faster than the growth in content costs. As long as those trends continue, this is going to be a much larger and much more profitable company in the future.
Hill: Steve, question about iQiyi?
Broido: Does the current political environment worry you with this company? We hear a lot about China from our president.
Argersinger: Yes, we do. I think the headline risks about the trade war and the tariffs, iQiyi, like lot of these companies, is really 95% domestic China. It has nothing to do or offer in terms of trade or transactions between the U.S. and China. The headlines created all this tension and caused these companies' valuations to drop. They look pretty good to me.
Hill: Three stocks. Do you have one you want to add to your radar?
Broido: I think I'm going to Jason Moser on this one.
Hill: You're not put off by his anti-cat comment at all?
Moser: Listen, I was just going to say, lest I reel in emails from our listeners calling me a cat hater, I am nothing, nothing of a cat hater --
Gross: What was the phrase you used? "Food animals?"
Moser: Would you prefer I say "livestock," Ron? I like cats just fine, we just don't have any in our house, that's all.
Hill: firstname.lastname@example.org, keep those emails coming. Jason Moser, Ron Gross, Matt Argersinger, guys, thanks for being here! That's going to do it for this week's show. Our engineer is Steve Broido. Our producer is 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. Chris Hill owns shares of Amazon, eBay, PayPal Holdings, Starbucks, Under Armour (A Shares), and Under Armour (C Shares). Jason Moser owns shares of Apple, Chipotle Mexican Grill, McCormick, PayPal Holdings, Starbucks, Teladoc, Twitter, Under Armour (A Shares), Under Armour (C Shares), and Zoetis. Matthew Argersinger owns shares of Amazon, Chipotle Mexican Grill, iQiyi, MercadoLibre, Pandora Media, Starbucks, Teladoc, Twitter, and Under Armour (C Shares) and has the following options: long January 2020 $45 calls on Starbucks and long January 2019 $15 calls on Twitter. Ron Gross owns shares of Amazon, Apple, Berkshire Hathaway (B shares), Facebook, and Starbucks. The Motley Fool owns shares of and recommends Amazon, Apple, Carter's, Chipotle Mexican Grill, Facebook, Fitbit, MercadoLibre, Pandora Media, PayPal Holdings, Starbucks, Twitter, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool is short shares of Papa John's International and has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, short November 2018 $155 calls on Facebook, long November 2018 $135 puts on Facebook, short January 2019 $82 calls on PayPal Holdings, and long November 2018 $55 calls on Papa John's International. The Motley Fool recommends Berkshire Hathaway (B shares), CVS Health, eBay, iQiyi, McCormick, and Teladoc. The Motley Fool has a disclosure policy.