Earningspalooza Highlights Q2 2019

Happy earnings season! To celebrate the second quarterly Earningspalooza of 2019, host Chris Hill and Motley Fool analysts Andy Cross, Jason Moser, and Ron Gross hit on a metric ton of companies' earnings on this week's Motley Fool Money. Twilio (TWLO -0.55%) falls on a good earnings report. Spotify (SPOT -1.49%) still somehow bleeds cash, despite reaching 100 million paying subscribers. Alphabet (GOOGL 0.35%) (GOOG 0.37%) and Facebook (META 1.54%) report trends that might hint at a bit of weakness in digital ad-based businesses. Beyond Meat's (BYND -0.47%) IPO was beyond sanity, in terms of pricing. Tune in to hear more about all that, plus Apple (AAPL -0.57%), Shopify (SHOP 0.14%), Arista Networks (ANET -0.80%), Berkshire Hathaway (BRK.A 0.64%) (BRK.B 0.54%), Under Armour (UA 0.95%) (UAA 0.92%), etc. And, as always, the guys share some stocks on their radar this week.

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 May 3, 2019.

Chris Hill: It's the Motley Fool Money radio show! I'm Chris Hill. Joining me in studio this week, senior analysts Jason Moser, Andy Cross, and Ron Gross. Good to see you as always, gentlemen! It is Earningspalooza! We've got so many stories, we don't even have a guest this week. But as always, we will give you an inside look at the stocks on our radar. And for the second week in a row, we begin with a company joining Club Trillion, if only for a short time. Yes, Apple's market cap briefly crossed the $1 trillion mark after its second quarter report showed double-digit growth in the Services division and the Wearables division. And that's good, Andy, because the iPhone division revenue was about $6.5 billion lighter than a year ago. 

Andy Cross: Yeah, moving in the wrong direction there. It's really the Wearables and Services as Apple continues to transition away from the iPhone. The Services now make up 20% of total sales up from 16% last quarter. Gross margins 2X as high as on the product side. So really, the new services, Apple Card coming on, Apple Arcade, which is mobile gaming, the streaming, obviously, we've been talking a lot about, Apple News is actually starting to have a lot more relevance now. The Wearables themselves, just the wearables, Chris, was up 50%. That's things like AirPods and the Apple Watch. As they continue to push and push further away from the iPhone, transition away from the iPhone, which the sales have not been good, I think they had the worst quarter of iPhone sales, the steepest drop of all time. It's really about the Wearables, and that's good for the profit picture. Revenue's not growing. They continue to buy back a load of stock. That drives the stock price up to basically back where it was six months ago, and almost that trillion dollar mark, as you mentioned, Chris.

Chris: I'm glad you mentioned that, because there was sort of, "Oh, by the way, we're also allocating another $75 billion to buy back stock."

Ron Gross: I wouldn't mind a little special dividend again, to juice the wheels a little bit. I'm not buying the stock for Apple Arcade, let me get that straight on the record, right this very moment. But I do believe in the ecosystem, I do believe in the Services business. But you know what? That whole thing does flow from the hardware. We can't just sweep the hardware story under the rug, because the whole thing tumbles if the top of the funnel doesn't work.

Cross: Yeah, but they have it. So it's maybe stable, maybe just not quite growing as fast. And then they're adding the Wearables, adding the software, adding the Services on to that, and that's going to actually juice the profit picture, too. 

Hill: So the Services growth, I looked at, and I thought, well, that's nice, but it wasn't 30%, something like that, that really would catch your eye. It seems like they're moving in the right direction, but they need a few more quarters of Services growth before it starts to become really meaningful.

Cross: Well, I think that's right, Chris. It's 20% of sales. As I mentioned, the gross margins, 64% vs. 31% for the product. So the profit picture is really right there. I agree. This is a transition, that Tim Cook narrative, he's been talking about. They're making progress on there. But you have to kind of see this. But for a company this size that generates this amount of capital, to have this kind of transition, is pretty big, and they are moving along pretty nicely in that.

Hill: Alphabet put up nice profits in the first quarter, but shares fell on Tuesday because ad revenue growth is declining. Ron, this was the worst day shareholders have seen in more than six years.

Gross: October 2012 or so. Over $65 billion erased from market cap. Do you realize how big that is, Chris? Companies would kill to be that big. Some countries would kill to be that big. Not an inconsequential day for Alphabet. As you say fear of decelerating growth of Google's advertising revenue. CFO Ruth Porat blamed deceleration of click growth on YouTube for the slow down. Still, you had revenue growth of 16.7% year over year. But that was light compared to expectations, part of that due to currency translations, which obviously they can't control. Paid clicks up 39%. Cost per click declined 19%. Cost per click, once again, is the metric that shows how much Google makes per ad. That's down 19%. You throw in some one-time costs and some fines from Europe for antitrust issues, and you've got operating income down 15%. You strip out some of that, you actually have an increase of 9%. They're still growing, they're still putting up numbers. But deceleration, specifically on the ad business, YouTube, is cause for concern.

Cross: Facebook saw a little decline in their cost per click, or revenue per click as well, too. I don't think that dramatic, but they saw a lot more ad impressions served across their platform. So it's kind of the same narrative on the per unit basis that we're seeing between Facebook and Alphabet. Might lead to some indications that that market is not quite as stable from the pricing perspective as we may have thought.

Hill: You go back a couple of years, when the company reorganized its corporate structure. Once we all got over the fact that they had decided to name the company --

Gross: I'm not over it yet, by the way.

Hill: [laughs] There was a lot of talk of, "Well, this is going to provide more transparency, it's going to give Wall Street and everyday investors more insight into how the business is doing." But you look at a quarter like this, and Ron, you're reminded of the fact that, no, they're still going to be as opaque as they want to be. Ruth Porat and her colleagues didn't really give a lot of color as to why they're seeing the drops that they're seeing.

Gross: Correct. Not a lot of color going back, not a lot of color going forward. Guidance is lacking. There's not a lot here. You're buying it because you believe still in the business and the growth that they can put up. That's why deceleration gets to be so dicey. 24X only. This is not one of these high-flying growth stocks, tech stocks that you think about. 24X is not that expensive. 

Hill: Shares of Shopify up more than 15% this week after first quarter revenue was up 50%. Shopify is not profitable, Jason, but I don't think anyone appears to care. 

Jason Moser: No, it really doesn't look like anybody cares. You can never underestimate the power of mission-driven leadership. I mean, their vision really is to make commerce better for everyone. That's what guides the moves that they make with the business. And clearly, the market loves what they're doing. I think a lot of that has to do with the massive market opportunity they're pursuing, along with the fact that they're never sitting still. I mean, the pace of innovation at Shopify is really impressive. And that's resulting in that top line growth that you mentioned. 

Interesting to see they're getting in the hardware game, kind of like Square. They have Shopify Capital, which is similar to Square Capital. They issued $88 million in loans and cash advances. That was up 45% from a year ago. 

Back to your point, though, I think that you need to keep in mind, it is an unprofitable business. It's going to be that way for a while. We've seen the market give these types of businesses credit as they do their thing. But when you have a share price that's not based on really any fundamentals, I mean, that does open it up for a little bit of higher risk on the downside if we hit some tumultuous times. Really, one of the biggest drivers for Shopify is the consumer. The consumer's feeling pretty good today, between unemployment and wages. We just have to keep an eye on the future there. But I do like where this business is going. 

Cross: I think it'll be really interesting to watch Square and Shopify continue to go after each other's market as Square bought Weebly, they go into the online store commerce side. As you mentioned, Jason, Shopify now having their Shopify Tap and Chip card reader, their retail stand for iPad. So these two massive companies, servant leadership, great innovative cultures, starting to clash against each other.

Moser: Interesting comparison there. You put them side by side, and after this earnings season, the market is valuing these two companies at basically the same, around $28 billion market caps. Square's bringing in 3X the revenue to Shopify is. So clearly, there's a little bit of an expectations thing there. 

Hill: We had talked recently about Amazon and how they continue to invest money and how a lot of investors are looking for them to continue doing that. Shopify, obviously, a smaller and younger company than Amazon. But do you think there's sort of the same mentality for a lot of investors? Yeah, we're not so anxious for you to get profitable, we'd rather see you investing more money?

Moser: I think so. It's a massive and reliable market. We're talking about commerce and e-commerce. That's always going to be around. And really, when you're seeing companies like Shopify and Square trying to build out more seamless services and ecosystems, I think investors generally are going to give them a little bit of slack. 

Gross: Let's not forget, though, in a sustainable market, investors will give companies the benefit of that doubt. If things turn south, look out below. 

Hill: First quarter results for Arista Networks looked good. But shares of the computer networking company fell more than 15% on Friday after Wall Street did not like Arista's guidance. You tell me, Andy, how bad was this guidance? 

Cross: Yeah, speaking of going south, both the stock price as well as the reason for the stock price drop today, which was, the guidance for the second quarter, Chris, coming forward. Sales growth expectation of just 15% to 17%. That's down from more than 26% in the first quarter. And I think from what I could tell, would be their worst quarter of sales growth performance since they've come public over the last few years. So really, the guidance around how Arista's clients, especially the very large cloud titans, these are the Microsofts of the world, how they are spending, where they are spending, that seemed to slow down pretty dramatically in March based on what we heard from Arista. And that has hurt both the expectations for the top line growth, and really trying to understand for the second quarter, but really, what does it mean for the rest of the year, Chris? Will this be more of a slowdown for Arista that's going to last? And so when you look at the difference between 15% top line growth and 20% top line growth, when you add it all in over a decade, Ron, that's basically about $3 billion worth of profits in today's dollars.

Gross: You did the math?

Cross: I did the math!

Gross: I was told there'd be no math.

Cross: That's basically the market cap drop in Arista today. 

Hill: So, do you think there are enough questions in the near term around Arista, that this drop that we're seeing doesn't necessarily represent a huge buying opportunity? 

Cross: Well, no, I think it does. Now here's the thing, the opportunity for Arista is, they made this acquisition of Mojo, which allows them to push into campus data integration with wifi, and provide bigger, as these companies, not just the cloud titans, but large companies in general, expand their wifi networking capabilities and demand for that. That really plays into this space for Arista. And that's an opportunity they haven't really quite baked into their guidance. So that's an opportunity there. Lots of innovation still going on at Arista. But, Microsoft, I think their cloud business has been growing about 100% a year. Now that's down to maybe 70% a year. Maybe those companies are not quite interested in buying the equipment and the services as much as they used to. 

Hill: They bought a company called Mojo? At any point, did they consider changing the name to Mojo Networks? Because that's a little catchier than Arista.

Cross: Could be!

Hill: This weekend, Berkshire Hathaway holds its annual meeting. But Warren Buffett made some news on Friday when he disclosed the company had bought shares of Amazon. Ron, he was very quick to point out, he was not the one doing the buying. 

Gross: He's so folksy! I love it! He says, one of the fellows in the office. [laughs] One of the fellows being Todd or Ted, who manages $13 billion each. Just, you know, one of the guys. But it is interesting to note that finally Berkshire's getting in here. You may remember, or you may not remember, that back in 2001, 2002, they did actually buy some Amazon bonds that were priced as junk. They made an 84% return, largely as a result of the falling dollar. That helped juice that return. But here they are, back in the stock. I'm glad to see it. I think Warren was anchoring there for a while. He kept saying, "It's a mistake I made. It's a mistake I made. I should have bought it. I always believed in Bezos, but I never did it." So he wasn't doing it. But luckily, one of the fellows in the office are not anchoring, and decided that there's still upside.

Hill: The war on cash hitting a bit of a stumble this week as Square's first quarter report came with some disappointing guidance. Shares of Square falling nearly 10% on Thursday, Jason.

Moser: Yeah. We talk about being business-focused investors. I think Square's a very good example of this. The market selling the stock, in my mind, was a bit short-sighted, because when you go through the report and the call they're clearly hitting all the targets they're aiming for, and there's still a ton of market share to capture. So I think all in all, those are good reasons enough to own the stock for me, at least. When you look at the numbers, adjusted revenue was up 49% from a year ago on an organic basis. The gross payment volume, which was $22.6 billion, was up 27%. I always like to compare that to PayPal, just for some context. PayPal's gross payment volume for the same quarter was $161 billion. So obviously, PayPal is a lot bigger. But that also shows there's a lot of market out there to capture. Cash App volume grew 2.5X from a year ago. And while that's not really something they're monetizing, I see Cash App as more of an engagement tool, something to bring people up into that Square ecosystem. And they made reference to the 65 million-plus unbanked or underbanked Americans. That really is a big opportunity as well. One final note on a global perspective, they are seeing some headwinds in Japan turning into tailwinds as Japan has laid down this ultimatum. They want to grow card-based payments from 20% today to 40% by 2025. Square is starting to lay down roots there in Japan to help them do that, showing that this is a global opportunity. 

Cross: And with the Olympics and the Rugby World Cup coming up in Japan, I think that's a really good investment for Square to make. I mean, I think Cash App has 15 million monthly active users now or something like that. It's a top 20 app in the iTunes Store. So yes, continuing to build out that ecosystem and trying to tie together not just business and consumer, but consumer to consumer, is a nice move for Square. 

Moser: And I think, just like Shopify, this is another business where the pace of innovation is just so impressive. I think the market sees that and is willing to give it a little bit of slack because again, fairly reliable market, massive market opportunity. There are some constants there.

Gross: The rugby what?

Cross: World Cup.

Gross: You're so global!

Cross: Yes. It's huge, man!

Hill: Shares of MasterCard (MA -1.19%) up a bit this week after first quarter report was... everything looked really good, Andy! Another reminder that I'm an idiot for never buying this stock. Revenue was up, profits were up, the transaction volume was up. 

Cross: Another good example of why MasterCard has been one of the global giants when it comes to not just payments, but just a really steady, high-returns business. The stock's up 15% in the last three months, almost now $250. It was $175 back in December at its 52-week low. Revenues up 9% vs. the 8% that analysts were expecting, 13% if you back out the currency. Obviously, a lot of currency effects for a company like MasterCard. Across all of their areas across the globe, the volumes were good, the payments were good. Like you said, Chris, the switch transaction volumes, I think were up 17%. 7% now more cards available using MasterCard and Maestro. That's two and a half billion cards out there. They continue to generate cash, high earnings, buy back stock, pay a little dividend, give good guidance, and investors have recognized the stock price for that. 

Moser: I mean, I thought you were going to be jumping into that war on cash basket with me like a year and a half ago on MarketFoolery. You didn't do that?

Hill: I've got a little PayPal. 

Moser: Alright, that's better than nothing.

Hill: First quarter profits for Under Armour came in higher than expected, Jason, once again. Strong international growth for Under Armour. Shares basically flat this week. 

Moser: Yeah. Slowly but surely, their turnaround is gaining some traction. I do think if they keep this up, there is a very attractive risk-reward scenario here. You remember Lululemon a while back. That was our whipping post for quite some time. Fast forward to today, Lululemon is more than twice as big as Under Armour now. So it can happen. And based on the results from this quarter, it sounds like they're headed in the right direction. CFO David Bergman and COO Patrik Frisk continue to play a very pivotal role in the business, in the calls. I think Plank has finally given into having that team and relying on that team. Inventory was down 24%. That's good. That means they don't have to resort to fire sales to unload inventory. They are moving more toward that premium price point and further away from the discounting. 

But the challenge, the real challenge, remains in North America. That segment revenue was down 3%. I like to compare that to Nike because you get an idea of what the overall market's looking like. For the same quarter, Nike just reported 7% growth in the North American segment. So clearly, Under Armour has work to do domestically. International is, Ron --

Gross: Firing on all cylinders?

Moser: Firing on all cylinders.

Gross: [laughs] Thank you! TM.

Moser: The balance sheet is getting healthier. They're doing those things that we were looking for them to do to get this business going back in the right direction. I think shareholders ought to be at least somewhat encouraged by that. 

Cross: Yeah, the number I saw that was encouraging to me, Jason, was inventory was down 24%; footwear up 8%. They continue to, as we've talked about over the past couple of months, try to get the operating platform for Under Armour on the right footing. And they've had some success with that this quarter. 

Moser: I mean, you listen to that call, and you really do see how well Bergman and Frisk know this business and how much value they're bringing to Kevin Plank. I suspect he will be keeping them on for the duration. Again, we said if they left, that would be a big red flag. 

Hill: Real quick, what are they doing to prepare for the Olympics next year? It is an opportunity for the Nikes and Under Armours of the world.

Gross: And the Rugby World Cup, for that matter. 

Moser: They continue to bring out new product, they are focused on getting their athlete partners to help give them some input. They also just laid down roots in India, with their first Under Armour brand store there. That's another big massive opportunity there. 

Cross: And you joke, but they are a sponsor of rugby teams.

Gross: Of course they are!

Hill: On Thursday, Beyond Meat went public at $25 a share. While Wall Street has plenty of carnivores, it clearly has an appetite for the producer of plant-based meat substitutes because at the closing bell on Thursday, shares of Beyond Meat closed at more than $68 a share. Jason, what is this? This looks like madness!

Moser: I was going to say mania. There is a mania going on right now with these IPOs. This was even a bit more than I think any of us expected. I'm certain that the underwriters of this IPO didn't expect this kind of a pop either, because in theory, you're looking at that thing, and they left a lot of money on the table. I mean, Beyond Meat is an interesting business. We took a look through the S-1 on Industry Focus a few months back. It is a massive market opportunity. They're not targeting vegetarians or vegans, they're actually targeting the $1.5 trillion global meat industry, thinking folks that eat meat maybe will look at Beyond Meat as something they could add to their menu if they're looking to cut back on the meat that they're eating. 

One of the bigger risks with this business today, though, and we're not going to know as much about this until we see them report at least one or two quarters, is there's a very concentrated supply chain right now. The key ingredient for what they make is pea protein. They have a core supplier for that. The idea with the IPO was to be able to build out that supply chain. That's going to have to happen in order for them to sell more stuff. And they're going to have to sell a whole heck of a lot more stuff to value selling at 40X sales today. 

Hill: Same-store sales for Shake Shack (SHAK 0.34%) came in much higher than expected in the first quarter. Help me understand what happened here, Ron, because the report came out Thursday evening and the stock popped nearly 10%. And then Friday morning, it gave all that back and a little bit more. 

Gross: Well, this ain't pea protein, Chris! This is protein protein. I think what happened is, the top line number was really strong. But once you delve in, you see that the margins are actually weak, which could be trouble for a stock that's priced 94X earnings. Revenue up 34%. 34 new store openings. "Same-shack sales" -- [groans] God, I hate it so much!

"Same-shack sales" up 3.6%. Those are good numbers. Shack-level operating profit up 12. 5%, but shack-level operating profit -- by the way, I think this is what we used to call four-wall contribution, what happens within the four walls of each store -- those operating margins fell. Increased promotional costs, higher commodity costs, higher labor costs. I think that's what we really have to be careful to keep an eye on here. If those continue to fall, then there's no way 94X earnings can be sustainable. 

Hill: Where do we think this whole industry is going? Also this week, we saw Restaurant Brands, the parent company of Burger King, they reported. One of the things they said was the test that Burger King has been doing in St. Louis for the Impossible Whopper, which is their meatless burger, they're going to roll that out nationally. That's gone well. McDonald's reported this week. They were asked about this and they said, "We're absolutely looking into this." I'm wondering if this is now table stakes, no pun intended, for investors looking at the burger industry, in the same way that we look at restaurants and we ask, as investors, what is your delivery strategy, because it's 2019 and you need to have one? Is this now a must-have for these types of businesses? "What is your meatless strategy?"

Cross: I don't know, but I'm getting hungry, first of all; second of all, I heard also that IKEA is thinking about trying to find a meatless substitute for their Swedish meatballs at their stores.

Gross: Say it isn't so!

Cross: As consumer trends are evolving and growing more toward healthier options, the restaurant companies have to compete. 

Moser: I do think the restaurants that offer these types of options, you can think about celiac, for example, where you need to go somewhere where there's no gluten involved. There are some restaurants that really cater to that audience. I think if you're a restaurant and you're catering to all of those audiences, that definitely gives you a leg up because you're expanding yourself to really the biggest customer base. Also, the customers, they'll give you that loyalty. There's a trust that's established there that I don't think customers will dismiss so quickly. 

Gross: This has to be the future, whether it's pea protein or actually genetically creating animal-like products in a laboratory. It's got to be the future, I think, of how humans eat. I can't imagine, certainly 100 years from now, that we're still in the business of raising animals, slaughtering animals, and eating animals in the same way that we are now. 

Hill: Mixed first quarter for CBS (PARA 1.48%). Profits were a little higher than expected, revenue was a little bit lower. Andy, I don't know if CBS is struggling, but they are definitely treading water. 

Cross: Well, they are in some regards, Chris. The excitement, though, comes down to the Super Bowl they had this quarter contributed really nicely to the ad sales. But it's really all about streaming. They featured their chief digital officer on the call, talked a lot about the direct-to-consumer business that they're selling to Hulu and Amazon and Roku. They're spending $8 billion in programming this year. So while it is an old-fashioned kind of media brand, they are trying to evolve and trying to grow. They want to have 25 million subscribers between Showtime and CBS All Access by 2022. They have five million now or something like that. So when you think about how CBS is going to evolve, I think shareholders are starting to say, "Hey, maybe there's something here," and the stock has come off nicely from its lows in December. They had the Masters this year, as we saw. That helped the ad business. The PGA Championship, Jason, is in May.

Moser: Couple of weeks, yeah.

Cross: That will come into next quarter. I think there's some excitement going on from the ad business, but it's really on the streaming side that has investors, if they're excited at all, it's excitement with the streaming side.

Moser: I think the streaming side for these legacy networks -- NBC, CBS, ABC -- the streaming side lies in Hulu's ecosystem. I think that Hulu is where the legacy providers are going to get the most bang for their buck. Trying to sell their offering on their own, I think, is going to be not very fruitful. 

Hill: But CBS at least owns most of its own content. They have that going for them,

Cross: Yeah, that's actually a nice strength for them, too.

Hill: Shares of Spotify down this week after a first quarter report that included both a loss and the fact that Spotify now has 100 million paying subscribers. How expensive is this business to run, Jason? They have 100 million people paying them, and they're not profitable? 

Moser: Well, I mean, we've said it before, the economics of the music business suck. The question I keep asking myself with this company is, is there a competitive advantage with the business? Some switching cost or pricing power? I'm not convinced there is. 

But with that said, the platform continues to bring in users. And that's the most crucial part of the equation today. Monthly actives up to 217 million for the quarter. They're tapping into India as well. Two million users there. On the premium side, users grew to 100 million. That was up 32% from a year ago. There's a Samsung partnership, where new Samsung devices are going to come out pre-loaded with Spotify. That ought to help the cause. But really, I think podcasting has probably been the word of the quarter as they made big investments in a couple of acquisitions with Gimlet Media and Anchor. They now have 250,000 podcast titles. I was astounded to see that number. Not shows, but separate, individual titles. 250,000. So they are really looking to tap into that to generate users. 

I have to say, the one thing that really drives me nuts with this business is the share repurchase programs. They keep on buying back these shares. They spent $225.5 million over the past several quarters to buy back 1.7 million shares. This is a business that needs every bit of cash it can get to invest, pay royalties, yada, yada, yada. For what it's worth, I'm not invested in the company. 

Hill: I'll just add that, a few of those podcasts you can listen to on Spotify are Motley Fool podcasts.

Moser: That's right!

Hill: First quarter profits in revenue came in higher than expected for Twilio. This is the cloud communications platform company. Shares of Twilio down a bit this week, Andy. I'm assuming that because of the run that this stock has had over the past year, this was one of those quarters where if they didn't absolutely crush every aspect of it, the stock wasn't going to go off.

Cross: That's right, Chris! When you sell at 25X sales, you just have to deliver above-expectation outstanding guidance and results. It was a really nice quarter. They now have 155,000 active accounts when you add in SendGrid, which was their email application they bought for about $3 billion. When you think about the pairing of those two, what they're doing with Twilio Flex, and they featured Shopify as a really great client when it comes to unifying all of their customer service applications for clients. I mean, Jeff Lawson building this business, looking to the future, growing revenue, adding SendGrid, building in some gross margin improvements with that SendGrid acquisition. They are really doing quite well. But the revenue growth and guidance just might not have lived up those super high expectations investors. Investors went, "Eh."

Hill: The stock has tripled in the last year. Do you wait for a pullback? Do you hope and pray for a terrible quarter so you can jump in on this stock? Or do you just think, this is one of those companies, like we talk about from time to time, that's never really going to look cheap? 

Cross: Well, yeah, I don't think it will ever look really cheap on traditional metrics. I certainly feel, if you want to buy a little bit now, go ahead, but save some for a pullback.

Gross: You will get pullback. December was a time where you could have bought a lot of these companies -- still didn't look cheap, by the way. But you did get your pullback. 

Hill: Let's move on to Wayfair (W -0.02%), the online home furnishings company. First quarter revenue was up nearly 40%. They're getting more customers, Jason, but they are losing a lot more money.

Moser: They are. I tell you, I'm really impressed with what management has done with this business to this point. But there are some areas that investors want to keep a close eye on in the coming quarters. The numbers generally are all headed in the right direction. Revenue was up 39% to $1.9 billion. As you mentioned, 16.4 million active customers now, that was up 39% from a year ago. Even total orders delivered were up 39% from a year ago. Repeat customers placed 66% of the orders in the quarter vs. 64.3% a year ago. We've always talked about the repeat customer being a key metric because that makes customer acquisition costs less going forward. 

I do want to mention, though, that on a sequential basis, when you start looking a few quarters back, it does look like they're hitting a ceiling there with that number. So if that does stick there around 66 or 67, we may see some costs going up. I think that was really the concern with the quarter. While gross margin was up 100 basis points, they are still spending a lot. Operating expenses as a percentage of revenue grew to 34.1% vs. 13.4% a year ago. It's just costing them a lot of money to run this business. We've talked about the market giving some of these companies credit. They've given Wayfair credit to this point. I don't know how much longer they will. Obviously, the consumer drives this business. But they're doing things the right way; that's what you have to do to build out this business. I just don't know how long the market's going to keep giving it credit. 

Hill: It's a $13 billion company. Do you think three years from now, Wayfair is still a stand-alone public company? Or does someone come in and make them a big offer? 

Moser: I mean, I would not be surprised to see one of the bigger retailers like Walmart or Target make them an offer because that would be an easy entry into the e-commerce market for a very reliable market in home furnishings and goods. But man, they could have gotten it a lot cheaper earlier. 

Hill: Our email address is [email protected]. Question from Misha in Canada, who writes, "I heard many people on the show talk about keeping a percentage of your portfolio in cash. Why not just keep it in a bond fund instead, given that bonds yield much more than cash? Doesn't it make sense for most investors to hold this, especially if it represents a significant part of your portfolio, say 20% or more? I'd love your thoughts on what I might be missing. Love the show. Love all that you guys do." We love you, Misha!

Gross: For sure.

Hill: Thank you for the question! Ron, what do you think? 

Gross: I think that's a very fair comment. Historically, bonds outperform cash by about 2%. They do outperform, but it's not some huge number. Right now, that number is down to about 1%. Lots of folks don't think it's worth the risk of owning bonds or bond funds, which can decrease in value, just for the extra 1%. However, having said that, I think it's perfectly reasonable to own a combination, some cash in an interest-bearing account. When we say cash, we don't mean just under the mattress. Some cash in an interest-bearing account and some bond funds, that you perhaps can take some risk because interest rates will affect prices of bonds and prices of bond funds. 

Hill: So we've talked before about, when we think about having cash in our portfolio, part of the reason we do that, Andy, is because we want to be able to take advantage of drops, that sort of thing. If you have a bond fund, that's not necessarily the most liquid thing in the world. Is there essentially the ETF version of that, that you could like, oh, I could sell that a little more quickly and allocate it toward a stock that drops, say, Arista Networks?

Cross: Yes, there are lots of ETFs out there that mimic that, but it's still holding that can lose value. When you want to be able to put that money to use, you want to have that money available for you to use very quickly. So I think preferred is to really set it aside in really a really liquid cash option inside your brokerage account. 

Hill: Alright, let's get to the stocks on our radar. Our man behind the glass, Steve Broido, is going to hit you with a question. And we have a little bit of time, if you want to hit him with one back. Ron, what are you looking at?

Gross: I have Vail Resorts, MTN. Been expanding really nicely through strategic acquisitions, expanding its properties. They've got great operating leverage. Solid cash flow generation, disciplined capital allocation. I like these acquisitions that they've been making. They've increased their dividend for the last eight years in a row. That dividend now stands at 3.1% which is not too shabby. So I think you have a nice a total return opportunity here to buy the stock and you'll get appreciation in the stock as well as a nice dividend yield. 

Hill: Steve, question about Vail Resorts?

Steve Broido: Innovations in the skiing world. We had snowboarding like 25 years ago, and nothing. What's new here? What am I missing? What's going on? Going downhill on two skis, I got it!

Gross: [laughs] Yeah, that remains, pretty much the status quo. I will say, a 2011 law allows Vail to use their resorts for more than just winter activities, for summer. It makes it a less cyclical business. They're able to generate some revenue all year round. That's the bigger trend in this industry. But for the most part, going down the hill on some sort of ski-like product remains. Steve, I am not a skier. It's actually one of my big regrets. Are you a skier? 

Broido: No. A little bit. But, yeah, people fall and hurt themselves. 

Cross: Sounds like it's not a regret!

Hill: Jason Moser, what are you looking at? 

Hill: I'm dedicating this week's radar stock to Mac Greer. So we're going with Teladoc Health, ticker TDOC. It was a good quarter they reported. No real surprises. That's the beauty of this model. It's very predictable. U.S. paid members now staying at 26.7 million. Visit fee members of 10.2 million. This was the first quarter that they actually broke through one million visits for the quarter. Clearly, people are using the service. That's great! Management reiterated that the company will be cash flow positive for 2019. There was also an interesting conversation on the call regarding UnitedHealth. Teladoc does supply services to UnitedHealth and some of their partners. There will be an announcement coming out soon from UnitedHealth on an expansion of that partnership. That could be something. Maybe the guidance they're giving is a little bit conservative. I don't know. But it does seem like this company is doing all the right things. 

Hill: Steve, question about Teladoc Health?

Broido: I'm a shareholder as well. This company is not doing well in my portfolio. I think it's not doing well in a lot of others. What am I missing here? 

Moser: Well, when did you buy it, Steve? I have it and it's doing really well for me.

Gross: Timing is everything!

Moser: I mean, it is a volatile stock. It did run up high earlier in 2018. Right now, the price is a little bit back down to reality. Steve, do you like movies about gladiators? 

Broido: Sure do, Jason!

Hill: Andy Cross, what are you looking at?

Cross: Q2 Holdings reports next week their first quarter sales. They're coming off a really good fourth quarter. This is a business that provides small and medium-sized banks with banking software, helps those clients provide banking software, security software, user interface software for their customers. Coming off a really nice quarter of 30% revenue growth, guided for a little bit less this quarter, 27% to 28%. I really want to understand and get more insights from Matt Flake, who I've interviewed and talked to about the ability to go up the chain and add larger and larger clients to their platform. 

Hill: Steve, question about Q2 Holdings?

Broido: This feels like a commodity business. What makes them stand out from the competition? 

Cross: Well, it's a competitive business, Steve, obviously, with lots of players in there, but they have very high revenue retention rates north of 120%. The ability to continue to provide those services that really match up with that smaller client base is the real strength. 

Hill: Do you have a question for Steve?

Cross: Steve, which bank do you use?

Broido: PNC.

Cross: A very large bank, not the kind of bank the Q2 goes after.

Hill: Q2 Holdings, Vail Resorts, or would you like to double down on Teladoc Health, Steve?

Broido: I think that Q2 Holdings sounds pretty interesting!

Hill: Alright, Ron gross, Jason Moser, Andy Cross, guys, thanks for being here for us for Earningspalooza!

Cross: Thanks, Chris!

Gross: Appreciate it!

Hill: Maybe we'll do this again in another quarter. 

Gross: Maybe a year. Give me a year to prepare!

Hill: Or, based on Ron's reaction when I told him, "Hey, we're going to take the entire show," eh, maybe not. We'll sub someone in. You can always drop us an email, [email protected] is our email address. And if you're looking to pick up a little bit of Fool swag to show off the fact that you actually are one of the dozens of listeners, you can go to shop.fool.com. Get a hoodie, get a ball cap, get a coffee mug, because coffee is the most amazing beverage in the world. That's going to do it for this week's edition of Motley Fool Money. Our engineer is Steve Broido. Our producer is Mac Greer. I'm Chris Hill. Thanks for listening! We'll see you next week!