Earlier this month, Tesla (NASDAQ:TSLA) CEO Elon Musk sent his millions of followers a tweet that included an apparently unintentional exaggeration about the company's 2019 prospects, and the SEC -- which had given him a settlement deal that was specifically intended to stop him from doing things like that -- is not pleased. And that's not great news for Tesla shareholders.
But if you're searching for news that was good for a company's shareholders, look no further than Etsy's (NASDAQ:ETSY) quarterly report, which shows the online marketplace continues to grow at a marvelous clip.
In this MarketFoolery podcast, host Chris Hill and Motley Fool Director of Small-Cap Research Bill Mann discuss the problems of Musk and Tesla, and the methods by which Etsy has thrived in an environment dominated by giants. They also talk about the justifications for the U.S.-China trade war, a leading player in the conflict whom you might not have heard of, and what a "victory" in it might cost American consumers and companies.
A full transcript follows the video.
This video was recorded on Feb. 26, 2019.
Chris Hill: It's Tuesday, February 26th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, Bill Mann is in the house!
Bill Mann: Yeah! On my middle child's 17th birthday. Happy birthday, Alli!
Hill: We have an odd way of getting you in the studio on your kids' birthdays. I think this is the third time it's been one of your kids' birthdays.
Mann: That's right. And I didn't ask.
Hill: Do they take offense?
Mann: To being wished happy birthday on the air?
Hill: Just to you in general.
Mann: Oh, yeah. For sure. You have kids. You don't necessarily want to throw all their stuff out there, but, you can wish them happy birthday. That feels OK.
Hill: We've got some earnings to get to. There's some trade stuff we're going to go to.
Mann: We've got to talk about Musk.
Hill: We've got to talk about Musk. And as you pointed out once on Twitter, there's not really a need to say the full name, Elon Musk, because in the business world, how many CEOs are named -- is there another CEO named Musk? Anyway, Elon Musk has a date. The SEC asked a federal judge to hold Musk in contempt of court, saying he violated the settlement that he agreed to last year. Musk then took to the Twitters and wrote, "Something is broken with SEC oversight."
Mann: [laughs] "You want to see some contempt?"
Hill: U.S. District Judge Alison Nathan has come out this morning and said, "You've got until March 11th to explain why you should not be held in contempt of court."
Mann: It was about a tweet. Let's take him at his word, that he wrote, "We're going to produce 500,000 cars in 2019," and then he came back, and he corrected it. As a CEO, he should know that the First Amendment doesn't necessarily apply all the way to him. You have to be careful with what you say. That doesn't seem that bad. But what he's gotten is a Lifetime Achievement Award for the other crazy things that he's said, which, by the way, got the SEC and the court system interested in him and his public offerings in the first place.
Hill: Let's be clear, if Mary Barra, CEO of General Motors, had tweeted something about production in 2019, maybe not she, but certainly --
Mann: The person who's tweeting as Mary Barra? [laughs]
Hill: No, no, the legal department at General Motors. They'd get a phone call from the SEC saying, "Hey, by the way, don't." But, as you said, because of Musk's history, especially because of the settlement agreement last year --
Mann: That's right!
Hill: In some ways, when you're just looking at the stock -- I'm surprised. Maybe I shouldn't be. You tell me if you're surprised. I'm a little surprised that this is a stock that, over the last two years, has traded in a relatively tight range. This is a stock that has basically been in the range of $250 a share to $350 a share. It's visited many places in between those two points.
Mann: Pretty quickly.
Hill: But for the last two years, it's really been in that range.
Mann: It would be amazing to go back to early 2017 Chris and say, "Hey, Chris, by the way, not much is going to happen with Tesla over the next two years."
Hill: The stock.
Mann: The stock. It's amazing that it has not moved that much. Now, it has huge expectations built into the stock price. Maybe those expectations haven't changed that much based on Elon Musk either speaking or not speaking on Twitter. But I can't think of another company that is more dependent upon its CEO, or seemingly more dependent on its CEO, than Tesla is with Elon Musk, particularly since no other executive seems to stay there very long.
Hill: Right. The last time we were talking about Tesla, it was because the chief legal officer had left after just two months. I want to go back to something you said regarding Musk and his importance to this business, and therefore to the stock. I don't think anyone really thinks that the board of directors is going to show him the door. I don't think anyone thinks that's going to happen.
Hill: Now, that being said, do you think in two to three years, he's still the CEO? I don't see the board showing him the door, but I could see him at some point saying, "I don't need this. I have other things I'm interested in. I'm going to go run my space business."
Mann: It's not going to be up to the board. I think you're exactly right. It will either be up to the SEC or it will be up to Elon Musk. I think it's unfortunate to say, but both of those are going to be based on how he chooses to comport himself in the meantime.
Hill: It's going to be one to watch, for sure.
Let's move on to Etsy.
Mann: So much happier!
Hill: Fourth quarter profit and revenue came in higher than expected. Everything is up Etsy. Users are up, sellers are up, stock up 13% this morning. This thing's a monster.
Mann: It is a monster! David Gardner was pointing out that David Kretzmann recommended Etsy back in 2016 at $13 a share. It went down below $10. With today's rise, we're basically getting the same amount as the stock was when David recommended it, which in David Gardner's world is called a spiffy pop.
Hill: 400% ago.
Mann: Yeah! It's a great company! It really is. They've done a really good job putting up their moats. If you're a small business person, a craft person, Etsy is where you go. I didn't love this business when it first came out. It seemed to me like a niche business. But it's grown. It's now an $8 billion market cap. Absolutely wonderful quarter, and well-deserved. They've executed very well.
Hill: It reminds me a little bit of late 1990s eBay. eBay, when it was just in the auction business and getting some traction, we saw Amazon announce their auction business, Yahoo, which was much bigger than eBay at the time, announcing their auction business. And there were some people saying, "OK, eBay had a nice run, but now the big kids are showing up here." But because of that virtuous cycle of, in the auction business, if you're selling something, you want to go where the most buyers are; if you're buying something, you want to go where the most sellers are. It seems like this is playing out with Etsy.
Mann: eBay is such a good call. That's exactly what it is. When eBay came out, in a lot of ways, the coverage about eBay was, "Oh, isn't this cute?" And Etsy was exactly the same. These are big businesses, but they were really treated as, "Oh, isn't this cute?" And I tell you what, $8 billion in market cap is, in fact, pretty cute. [laughs]
Hill: [laughs] Yeah!
Mann: Well done, honestly! Again, as someone who was a skeptic. I always thought the management was great, but a skeptic as to how this business might scale. They've really, really done well. My hat's off to them.
Hill: Etsy is a little deceptive in some ways because it's not like they're a physical location, so part of their quarterly announcement is, "Here's where we're expanding." If you're not shopping on Etsy, if you've never bought anything on there, it's really easy to miss. And, as you said, the one-sentence description of Etsy usually involves the word "craft."
Mann: Crafts! Right! [laughs] Yeah, things that are done in Pawnee, Indiana. Yeah, exactly. "Crafts" just doesn't seem like the kind of thing that scales.
Hill: Or is sexy. No investor is like, "Let me tell you, I have a hot tip for you. It's an online crafts business."
Mann: Are they e-crafts? SaaS crafts? No, they're just Kountry and things like that. But, yeah, 46% growth in revenues is nothing to sneeze at. That is a lot of crafts and some other things that they're selling.
Hill: You and I are going to be hitting the road later this week. We are part of a group of Fools who are going down to Austin, Texas. We're having a member event. I wanted to not necessarily get a sneak preview of coming attractions for the event, but one of the themes around this investing event is global investing. For all the stories that have been written over the last few years -- this is a subject you and I have talked about a bunch of times -- for all the coverage of emerging markets here or there or as a group, the dominant story over the last two years is China. I mean, it's all about China and the trade war with China. As an investor, as an analyst, what do you see when you look at the current state of U.S. trade with China, and either opportunities for or potential perils for investing?
Mann: There are both. First of all, are you calling China the Etsy of emerging markets? Is that what you're saying?
Hill: [laughs] I am not saying that at all.
Mann: [laughs] So, China, obviously, has grown very rapidly. It's with great justification that when you think of emerging markets, you do think China first. It's now the second-largest economy in the world. After Canada, it's our largest trading partner. But it's also a country that has had trade as a state policy now for three decades. The U.S. has had its own policy for trade over the same last three decades which was, "Trade is good! Let's do trade, let's do more trade. Well, we can't sell as many things into China because of rules, but we are pro-trade."
Donald Trump has come into office, and whatever your feelings about Donald Trump, pro or con, he picked out early on something that I think is entirely true, which is that China does not play fair when it comes to trade. He's got a guy in the U.S. Trade Representative by the name of Robert Lighthizer who's his lead negotiator for the tariffs. Robert Lighthizer is willing to go to the mat to make sure that the U.S. comes out ahead. So, that's what's been happening with the trade negotiations.
The deadline for the new tariffs had been set at March 1st.
Hill: I was going to say, Friday.
Mann: Friday. Trump came out a little bit early, nobody really knows why, to say, "Hey, we might extend because the talks have been going so well." I kind of wonder a little bit whether this is the right thing to do, because Lighthizer's been winning. He really has been. He's a guy who agrees with Trump that China has not played fair and doesn't think that we, as a larger economy, need to put up with it.
Very interesting to see. Eventually, it's going to come out. Eventually, the tariffs will go back down. We will have a new trade regime. I hope that it's a good one.
Hill: Does any part of you, in the wake of all this, take certain categories of stocks or industries and say, "These are being moved down my list as a result of this? I've got my watch list of stocks, and because of this level of uncertainty, I'm going to hit the pause button on these for now."
Mann: Not really. Certain companies have come out in their recent earnings reports and said that the tariffs have hit them very badly. A lot of people tend to think that the Chinese government or the Chinese industry pays the tariffs. No, no, no, no. The American companies who are buying the products pay the tariffs. So, what it does is it makes other sources more attractive than buying them from China. So, companies that use a lot of aluminum have been hit pretty hard.
I'm not a huge fan of really capital-intensive businesses to start with, so it hasn't really come into my own investing. But, as in all things, when you put tariffs up, it's an impediment to the free flow of capital. It has impacted every company that accesses capital, which is, last time I checked, basically all of them.
Hill: The idea that gets floated now and then of, "Look, if you don't want exposure to China in your portfolio, focus on," another business that's in the news today, "Home Depot, because they don't really have operations in China. They're not really doing business there. Focus on Bojangles." Maybe not Bojangles.
Mann: There, you might have hit one. Yeah, Bojangles probably has very minimal exposure to China. I mean, Home Depot does. Not even necessarily Home Depot itself, because I don't know they have operations in China. I don't think they do. But they sell a lot of equipment that takes a lot of natural resources --
Hill: There's a ripple effect.
Mann: Yeah, there's a ripple effect. Putting tariffs on China really impacts all of us. And the question becomes, and President Trump and Robert Lighthizer said in the affirmative that in the long term, they think it's worth it.
Hill: Real quick before we wrap up, percentage chance that you and I are going to be eating some Texas barbecue later this week?
Mann: I'm going to put it at 103%. I put it past because we may do it twice. [laughs]
Hill: I think that's right. Bill Mann, thanks for being here!
Mann: Good to see you, Chris! Thanks!
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 MarketFoolery! The show is mixed by Austin Morgan. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!