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Why Alphabet and Texas Roadhouse Fell Tuesday Despite Rising Sales

By Chris Hill – May 3, 2019 at 10:15AM

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Top-line growth is good, as are higher comps. But the investors need to see the big picture.

Google parent Alphabet (GOOGL -0.58%) (GOOG -0.36%) is one of the biggest tech companies in the world, with its fingers in a whole lot of pies. But at its core, most of its revenue still comes from online ad sales, so news that ad revenue growth in the first quarter had decelerated again got more attention from Wall Street than its otherwise solid earnings.

In this MarketFoolery podcast, host Chris Hill and Motley Fool Asset Management's Bill Barker talk about the situation at Alphabet, as well as the key takeaways from the quarterly reports of General Electric (GE -0.19%), McDonald's (MCD -0.89%), and Texas Roadhouse (TXRH 0.20%).

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on April 30, 2019. 

Chris Hill: It's Tuesday, April 30th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, from MFAM Funds, Bill Barker in the house. Thanks for being here!

Bill Barker: Thanks for having me!

Hill: We got a bunch going on. We've got restaurant stocks that are moving in opposite directions. We've got a surprising day for GE. But we're going to start with Alphabet. 

First-quarter profits for Alphabet were great. That's not the problem. Declining ad revenue. That's the problem, because Alphabet is in the advertising business. Shares are down about 8%. When you're as big as Alphabet is, that somewhere in the neighborhood of $75 billion worth of market cap. 

Barker: Yeah. I would say that the earnings were good, not great. What it comes down to is how the market does and should value growth rates. You've got ad revenue growth of 15% for this quarter. That's a continued deceleration. It was about 20% in the fourth quarter, a little over 20% in the third quarter last year, 24% in the second quarter of last year, and 24% this time last year. There's a little bit of adjustment that you need to make for currency translations, but still, that's a four-in-a-row quarter deceleration of the most important part of their business. It's still growth. That's pretty good growth. Fifteen percent year over year growth, given the size of this company, is not something to dismiss. But if you're into pattern recognition, it's a pattern that is slapping you in the face at the moment. 

Hill: So you don't view the stock drop today as a buying opportunity for someone who's been sitting on the sidelines on Alphabet. 

Barker: If they've been sitting on the sidelines, I think Alphabet's going to continue to be one of the dominant performers and growers in the market. If you've got a longer time horizon, sure. One of the issues here is that Alphabet is not very forthcoming about the details of things. I was reading a Deutsche Bank analyst report. Really, there was a little bit of hostility underneath the words here about the ways in which Alphabet is not as forthcoming as at least this analyst would like them to be with the details of why things are happening the way they are. 

Hill: I didn't see that note, but I did see a report about Ruth Porat, who's the CFO at Alphabet, a tremendous hire, and Alphabet's shareholders have done very well during her time as CFO. She mentioned comments about YouTube that the company didn't really expand upon. It was basically, "Yeah, YouTube's a problem." [laughs] I'm paraphrasing. I'm doing this in a broad stroke. But yeah, that was basically what Ruth Porat said about YouTube. "Yeah, YouTube, that's also a problem." And there wasn't any color beyond that. It's amazing to think that YouTube -- as big as it is, as dominant as it is -- and you look at Ruth Porat's comments, and honestly, any comments related to YouTube coming from within the company, and one common theme that we've heard for years is, "Yeah, we haven't really optimized this yet. We haven't really turned this into the video equivalent of what Google Search is, and that's what we want to do." And it's understandable. But in some ways, it's similar to the way you and I talk about Starbucks, and we're like, "Wow, it's an amazing to think that Starbucks has gotten this far and food is, at varying points in its history, pretty good, to dismal." It's never been, "Wow, they are firing on all cylinders with food the way they are with coffee." It's the same thing with Alphabet and YouTube. It's like, yeah, YouTube is the most dominant video search engine and the second-most-dominant search engine, period, in the United States, but we still haven't worked out the bugs. 

Barker: Yeah. They're not doing the job that some would like, giving granularity toward the understanding the numbers. One of the comments in this Deutsche Bank, which I'm quoting, just because it jumped out at me, this is not usually how things are phrased. It says, "Site revenue growth of 90%, with Google providing its investors, its typically limited assistance understanding the weakness."

This is one individual's recounting. I'm sure Google would beg to differ. But that's part of what's out there today. If the numbers are continuing to come up with a slowing -- though still, I would say, impressive -- revenue growth, you've got the ad revenue, I think I read some data point that Google and Facebook are on track to have 40% of global ad revenue by next year, that may have been online, but, that would be staggering. Do you know? It can't be all ad revenue, can it? [laughs]

Hill: I haven't seen that, but we can put someone on that, our substantial stuff. Let me step back for a second because you raise an interesting point about Alphabet and this one analyst. I'm curious, what is reasonable to expect? Put the analyst aside for a second. Just for shareholders, what is reasonable to expect out of company leadership, in terms of how much insight they're going to give us, particularly when, in the case of Alphabet, things didn't go as well as they would have liked? 

Barker: What is reasonable? I think that in Google's case, they're more in the position of making the rules. They don't need anybody's help. The reasonableness is, in some sense, a function of who you need help from, in terms of gathering more money. If you're dependent on Wall Street to fund your next capital raise, whether through shares or secondary or bond offering, or just to prop up your price, because it's nice to have analysts saying nice words and recommending that your stock be bought, you have a different set of needs than Google does. Their needs are more in the world of secrecy and not really giving any information to its competitors about why they may have weakness, or why they may have accounted for something over this quarter in a way that you don't quite understand. I think they are more OK with not everybody understanding the details of their business, particularly as they run a business which is highly dependent on continuing to addict people to the service. When you talk about the flaws in YouTube's monetization, those are not flaws in terms of getting people to be addicted to YouTube and spending more and more time on the site. That is currently a bigger chunk of the game than monetizing those hours spent on YouTube, although they're certainly cramming more and more ads on YouTube, is my experience. 

Hill: Absolutely. So, reading between the lines of what you just said, it sounds like the bigger and more successful the company, the less likely they are to be helpful to analysts and shareholders understanding stumbles? 

Barker: Yes, I would say. Depends on management. There are managements, individuals, who are more willing to be more forthcoming and admit mistakes and say, "This is where we are." That's a category thing. But I think it's largely true, that you're not getting the same level of disclosure from the Godzillas in this market than the needy. 

Hill: Let's move onto General Electric, which is still burning cash, although they burned less of it in the first quarter. 

Barker: That's a victory lap right there. 

Hill: [laughs] That, as much as anything, is probably why shares of GE are up 4%. 

Barker: "You thought we were going to burn all the cash this quarter. We only burned $1.8 billion of it, or $1.2 billion if you squint your eyes and look at it from our adjusted perspective. It's not really the full $1.8." Yeah, and that qualifies as good news. This is a very different story than Google, where the perspective coming into any earnings report is, just how good is this going to be? Google's like, "Well, we grew about 20%." And everybody says, "Oh, my God, what is wrong with you?" This is where a one-day move in stock price is more dependent on what the expectations were than what the delivery was. And GE's up, despite losing a couple of billion. 

Hill: I also think that Larry Culp, the CEO, the guidance that he gave...I use the word "guidance," I could have just as well used the word "reassurance," the reassurance that he gave regarding the rest of the fiscal year. I think, to go back to what you were saying, in terms of, what is the story going into any company's quarter? I think one of the stories, at least with General Electric, is, are we at the bottom? I think there are absolutely analysts on Wall Street who look at the size of General Electric, the history of the company, and say, "OK, look, it's not going to zero, so what do we think the bottom is?" Was the bottom $8 a share, like it was a few months ago? The stock's up 4%. Over the last four months, it's up about 25%. I think that kind of reassurance from the CEO, if it doesn't get investors excited about GE, it at least moves GE out of the critical care unit and into...I don't know the name, the wing of the hospital where put serious patients.

Barker: Yeah. So, is it the bottom? Well, it depends on how you define what the bottom is. 

Hill: Don't we all define the bottom as zero?

Barker: You're talking about the stock price. I'm talking about the cash burn now. The indication is that Q1 is going to be the low point of the year, at least, for cash flow. So the rest of the year will have better cash flow or cash burn. So in one sense, that's the bottom. We're not going to lose money as fast as we are right now, again, for the rest of the year. On the other hand, you might say, the bottom is when you're not losing money; when you stop losing money, I'll call that the bottom. And we haven't quite gotten reassurance on that yet. So it's not going to depart a whole lot, I think, from this level as a stock until there's guidance that says, "Here's how much money we're going to be making doing the business we're doing today." That's what you want to invest in, companies that make money.

Hill: [laughs] Right. 

Barker: Investing 101.

Hill: Or at least have a promise of it at some point in the future. There are certainly plenty of successful stocks -- 

Barker: Currently profitless companies which are very valuable, but that is because there is either a path or a belief that there is a path. Something like Uber will get more and more attention, I think, about whether there is a path or simply a belief that there's a path to profitability there. But it's going to be an incredibly richly valued company when it comes to public. 

Hill: Like all private companies, when they go public, they will absolutely get more attention. As we've learned over time, some of those private companies regret going public because they don't like the scrutiny. 

Let's get to a tale of two restaurants. I'm just going to give you one data point and have you explain what the heck is going on here. McDonald's first quarter, same-store sales in the United States, up 4.5%. Texas Roadhouse. First-quarter comps, up more than 5% in the U.S. Shares of McDonald's up about 1%, shares of Texas Roadhouse down 11%. What in the world? We'll get to McDonald's in a second because it seems like they're doing some things right. What is going wrong with Texas Roadhouse that they're putting up these kind of comps -- comps which, by the way, they have consistently put up for a bunch of quarters, and most restaurants would kill for these kind of comps. 

Barker: It's the bottom line. That's the problem. Labor is the specific problem. At a very high level, you might say, these are nice problems to have from a standpoint of the economy as a whole. People are going to their restaurants, they're opening new restaurants. People are spending more money when they go. Texas Roadhouse provides an experience of value for the service you're getting. They are not really raising prices very much. They just took a 1.5% menu price increase. But their labor costs are going to be up 8% for the year. Part of that is they have more labor working more hours. But part of it is that labor costs more to keep employed. People are willing to leave and they are seeing I think 120% turnover. That is going to cost you. You've got to constantly be training new employees. New employees are finding that their minimum wage is going up in other places. The experience of working for Texas Roadhouse has to be competitive for people to be happy doing those jobs and serving customers well, or else the whole thing crumbles. So, you see they're maintaining a level of service that people are coming back for, but they're not pocketing as much profit. And the biggest chunk of that is labor. 

Hill: In terms of McDonald's, it seems like the investments that McDonald's has been making are starting to pay off. They've been remodeling a bunch of locations. The kiosks that they've installed are starting to pay off. They're doing a good job with delivery. I'd be remiss if I didn't mention the fact that the company also credited both bacon and doughnut sticks in the performance of this latest quarter. 

Barker: They did. Everybody seemed to bite on that one, as, "Look here, this is what explains it." I think that when you talk about where their investments have been, it's remodeling, it's kiosks, this is not investments in labor. They are, I think, doing a better job than Texas Roadhouse today in separating the increase in sales, because they're getting good comp numbers as well, from increased labor costs. You can do that by automating more. They, of course, are not as employee-dependent as a sit-down restaurant is. There's more labor involved in the back of the restaurant for a thing like a steak at Texas Roadhouse than McDonald's. So they're not seeing the same pressures. They are seeing some, but it's showing up in today's numbers. 

Hill: Did they give any color on whatever their version of an Impossible Whopper could be? That's something we've talked about recently. By the way, yesterday, we talked about Restaurant Brands, parent company of Popeyes, Tim Hortons, and Burger King. I neglected to mention yesterday that one of the things that came out of their quarter was, Burger King, the tests they've been doing of the Impossible Whopper in the St. Louis area apparently has been going very well because they're going to roll that out nationwide later this year. 

Barker: I don't know, I didn't get a copy of the transcript yet from the McDonald's call. I would be surprised -- not that surprised, but it would make sense for them to field a question about that, since Burger King's in the news for this right now. Maybe that's the direction that they're going to need to be competitive on. They're certainly not closing their eyes to what Burger King is doing. 

Hill: Yeah, I would be surprised, both if they didn't get asked about it, and I would be even more surprised if they weren't actively working on it. To go back to the doughnut fries, this is not a frivolous thing. I remember when they rolled this out, and there was the initial response, because Dunkin Donuts had come out with these donut sticks. McDonald's got a little prickly like, "Look, we've been testing this," because they were being called copycats for doing it. But the reviews were great. Also, I thought it was incredibly smart of McDonald's to just say, "Yeah, we've been doing breakfast all day. This item right here, this is not going to be all day. This is just going to be in the morning." I think that's the kind of thing that can boost the average ticket price and have a nice ripple effect for them. And it has.

Barker: Yeah. Apparently, that is one of the places where the competition is picking up, is in the breakfast space. I think that between that and, as we mentioned, the bacon event -- which sounds like it should have been successful, and it's getting credit for being successful, where they gave a side order of bacon away with any order for an hour on January 29th. I think we missed that one. 

Hill: I totally missed that one. 

Barker: You could have had free bacon with anything that you were ordering. As long as you were ordering something. "I want a shake." "Would you like some bacon with that, sir?" Why, I hadn't thought about that, but yes, I would." That was, I think, the experience, for one hour.

Hill: The answer is almost always yes. 

Barker: Would you like a free side of bacon with that? I mean, the take rate on that is very high. 

Hill: Very, very, very high. We talked last time about, we have the best listeners. The data backs this up. We're not going to go into the data. But the latest example --

Barker: A little bit like Google on this one. We can't go into where that data comes from. 

Hill: Look, I'm sure the people running Bloomberg's podcast would love us to go into the data on how great our listeners are. We're not going to do it.

Barker: They'd like to find the best listeners in the world. How are they going to do that if you don't set out the breadcrumbs for them to follow? 

Hill: Yeah. Not going to happen. The latest iteration of this is, the last time you were on, we mentioned how, in a couple of weeks, you're going to Singapore. The emails just poured in. So many helpful listeners offering up tips, places to go, things to do, restaurants and bars to hit. 

Barker: I'm not going to have time to do everything that's been suggested. 

Hill: I was going to say, enough email and enough suggestions came in that I thought, "Boy, this is like a week's worth of stuff, at least."

Barker: Maybe if I blow off the entire conference, I can cover all that stuff. Probably be a bad idea. But that's what your listeners are demanding, seemingly. 

Hill: Look, where do your allegiances lie? To the people who employ you at MFAM Funds, or to the listeners? I'll let you decide. 

By the way, we have got a couple of questions over the last few months about this. We will have another Apropos of Nothing episode coming in the month of May. Don't know exactly when in the month of May, but it will be coming. 

Barker: What kinds of questions? So they can avoid it? Or what? People who wanted another one, you're claiming?

Hill: Yeah. There were a few people who were like, "Hey, really enjoyed the last one. When are you going to do another?"

Barker: These things take months to prepare!

Hill: [laughs] Now, the people who hate the Apropos of Nothing, as far as I can tell, they largely keep to themselves. They keep those comments to themselves. Every once in a while, it's like, "Just so you know, I skip those." Which is fine. They're an apropos of nothing. They're not the usual episode. That's why we put them out over the weekend. But they keep their vitriol to themselves. 

Barker: So you're looking for topics. 

Hill: We're always looking for topics. If you have topics, you can email us, [email protected] for the next Apropos of Nothing podcast. We're maybe taping that next week because you're hitting the road pretty soon. 

Barker: You've got a topic in mind. You're going to tease that? 

Hill: Let me preface this by saying no spoilers. There are no spoilers for the biggest movie in history, or certainly the biggest opening weekend in history, with Avengers: Endgame. But for anyone who saw the first Iron Man, one of the small nuggets that was established in the very first Iron Man movie is that Stark Industries is a publicly traded company. 

Barker: You have a topic.

Hill: That is one topic that will come up on Apropos of Nothing, the next one. 

Barker: So the spoiler is not what are going to be the quarterly numbers from Stark Industries. You may or may not know that insider information.

Hill: You just have to tune in and find out. Or, like a lot of people, just skip it. 

Barker: I have a topic I might do. It depends who the third individual is, whether I do this one. The anniversary is coming up of a thing I did about 20 years ago on the site, which was to tape an entire day of CNBC.

Hill: Oh, I remember that!

Barker: Yeah, and then write about it. And the 20th anniversary is coming up. A lot of people out there are wondering... [laughs]

Hill: [laughs] Absolutely nobody is wondering.

Barker: "What's the anniversary celebration going to be of that?" 

Hill: It's going to be a 24-hour episode of nothing.

Barker: Because I only covered the first four hours and a half of the day.

Hill: I can go back and probably find the article on --

Barker: No, you can't. You have to find it on the Wayback Machine. We've erased that part of The Fool archives. 

Hill: Thank, God! What is one thing you remember about that experience? 

Barker: From that experience, I got an email from the editor in chief of about it. He liked it, and just wrote me a nice little note. So that's one thing I remember. We might do a little drive by on that as well in some form. 

Hill: We might. Bill Barker from MFAM Funds, thanks for being here!

Barker: Thanks for having me!

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 Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow! 

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Bill Barker is an employee of Motley Fool Asset Management, a separate, sister company of The Motley Fool, LLC. The views of Bill Barker and Motley Fool Asset Management are not the views of The Motley Fool, LLC and should not be taken as such. Bill Barker owns shares of Alphabet (C shares). Chris Hill owns shares of SBUX. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), FB, SBUX, and Texas Roadhouse. The Motley Fool has the following options: short October 2019 $82 calls on QSR. The Motley Fool recommends DNKN. The Motley Fool has a disclosure policy.

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Stocks Mentioned

General Electric Company Stock Quote
General Electric Company
$64.35 (-0.19%) $0.12
Alphabet Inc. Stock Quote
Alphabet Inc.
$98.17 (-0.58%) $0.57
McDonald's Corporation Stock Quote
McDonald's Corporation
$243.76 (-0.89%) $-2.19
Texas Roadhouse, Inc. Stock Quote
Texas Roadhouse, Inc.
$84.55 (0.20%) $0.17
Alphabet Inc. Stock Quote
Alphabet Inc.
$98.81 (-0.36%) $0.36

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