Alphabet Antitrust Worries Abound

On this episode of MarketFoolery, host Chris Hill chats with Motley Fool analyst Emily Flippen about the day's market news.

U.S. government distrust of big tech has been a hot topic for years, but the Department of Justice's potential antitrust probe is a bit more concrete, and it spooked investors in a big way. What could this really mean for Alphabet's (GOOGL 1.42%) (GOOG 1.43%) future?

Meanwhile, in a very different sector, Nestle announced that it's joining the veggie burger fray. What does the future hold for pure plays like Beyond Meat (BYND -3.90%) when giants like Nestle and Tyson (TSN 1.10%) start competing? Plus, Emily shares a sneak peek of her FoolFest panels and talks about two risky but very exciting companies that investors might want to check out.

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 June 3, 2019.

Chris Hill: It's Monday, June 3. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, Emily Flippen in the house. Thanks for being here!

Emily Flippen: Thanks for having me!

Hill: If you're brand new to this podcast because you listened to the bonus episode with Greg Fitzsimmons, this is what we normally do on MarketFoolery. We normally talk about the business news of the day. Today we're going to talk about the latest in the food industry. We're going to give a sneak preview of Fool Fest, which is our big two-day investing event that's happening later this week. 

We're going to start, though, with shares of Alphabet down 6% this morning. The U.S. Department of Justice is reportedly looking into launching an antitrust probe aimed at Google. I'm of two minds of this. On the one hand, I look at this and think, "Yeah, this could be really bad." I remember how much time and energy and money Microsoft spent back in the late 1990s dealing with their own antitrust investigation by the DOJ. On the other hand, I have to say, I'm a little surprised at the reaction of the stock. It's not exactly like it was a secret that this kind of thing was coming. 

Flippen: Exactly, it's not entirely unexpected that they're exploring launching an antitrust case against Google, especially given all the controversies recently around Facebook. If Facebook's an issue, Google's kind of the mother of all antitrust issues. 

Going back to your point about Microsoft, I mean, look how well Microsoft has done post -- I think it was the late 1990s, early 2000s, antitrust case against them. The company has excelled. So when you see a pullback happen like today's for Google, logic will then tell you, this is a short-term market reaction. Precedent says that the DOJ is really not going to do much to break up Google like some people may fear. 

But on the other hand, you can't help but consider the fact that this has been a long-standing issue. The question of technology, and what it means to be a monopoly in the tech space, is something that's a big question mark in the American markets today. Whether or not Google ends up being broken up, I don't think it'll go that far, but I do think it will have a strong impact on Google's ability to acquire in the future. 

Hill: Do you own shares of Alphabet? 

Flippen: I don't, not directly.

Hill: I don't either, so, consider a grain of salt or two with what I'm about to say -- I look at this, and, again, having watched what happened with Microsoft, I think to myself, I think if I were an Alphabet shareholder... I'm not saying Alphabet should just do whatever the Justice Department wants, but at some point, I like to think that the executives at Alphabet are smart enough that they would consider proactively spinning off some part of the business if it made this type of thing go away. First in my mind is YouTube, in part because -- this is not particularly revolutionary thinking on my part, people much smarter than me have made this point -- you could unlock potentially greater value with YouTube if you spun it off and it was its own public company. But, I don't know. I look at this and think, sure, Alphabet can afford the lawyers. They can have whatever conversations they want with DOJ. But at some point, it might be worth just saying, "OK, what do we need to do to make this go away?"

Flippen: It would be a big thing for markets. As we mentioned, neither of us own shares of Google outright. But I index a majority of my retirement savings, for instance. The reason why I don't own shares is because I actually own way too much Google on an index basis. Because it's such a large company, virtually any index fund you'll buy will have some exposure to Google or other large tech giants. A spinoff would mean really big things for the company. 

The reason why I don't think it's maybe as likely as you say is because we saw last quarter a slowdown in Google's core business. I think Google is realizing that they haven't really had organic growth for a while. Internally developed growth has kind of been hard to come by for Google. They're relying on acquisitions, acquisitions like Nest and Waze and even YouTube. These are the things that are really driving growth for them. 

I do think there could be some value unlocked by spinning off different subsidiaries, like YouTube, for instance. But the other flip side is, if they did that, I think it would mean bigger things for Google. They'd have to reinvent what their core business is. If things like YouTube don't play into that core business, how are they going to make that core business grow again?

Hill: Definitely going to be something to watch. The wheels of justice tend to grind slowly, so this is something that will, I'm sure, make headlines again throughout 2019 and beyond. We'll keep our eyes on it. 

Let's move on to the food industry, which really, I think, because of what we saw with the Beyond Meat IPO, has become a much more interesting place to watch. The news today is out of Nestle, which is gearing up to launch its own plant-based burger in the United States, dubbed the Awesome Burger, which is a great name. I'm a little surprised no one locked that one up already. Shares of Nestle are up. I had to go back and look and see, how big is Nestle? It's one of those things where I thought to myself, I know this is a big company, I'm just not sure how big it is. Nestle's a $300 billion dollar company, [laughs] and the stock's hitting a new high. 

Flippen: It's a very international company as well. You'll notice that this launch in the United States comes after launching a soy-based burger in Europe called the Incredible Burger. For those keeping score at home, now we have the Beyond Burger, the Impossible Burger, the Incredible Burger, and the Awesome Burger. How you will choose your meat alternative burgers is really going to be, I guess, based off the title there. It's interesting -- you'll notice that in Europe, they launched soy-based. In the U.S., they're focusing on pea-based burgers. Trying to figure out where the market's going in terms of meat alternatives is really going to be interesting. 

That being said, companies like Beyond Meat have really proven that, at least in an investing perspective, there's great market demand for this. The market demand in terms of actual consumption, whether or not it's a fad, whether or not it's persisting long-term, to be determined. But it's interesting, because companies like Nestle, we saw it with Tyson, these are big players, suddenly making a concerted effort to get into the alternative meat market. When I think about the alternative meat market, sure, we've had veggie burgers on the market for decades, but they haven't grown nearly as fast as they've grown over the past few years. Right now, the meat market in terms of alternative sales of meat, it's about $13 billion. The entire meat market in the United States: $270 billion. So it's only about 5% of the meat market. That might sound like a small amount, but electric vehicles, for instance, are only about 1.2% of the vehicle market, and people see great opportunities there for expansion. If you see a clear path to expansion, the way that many people see with electric vehicles, in alternative meets, then there could be an argument to be made that investing in alternative meats for companies like Nestle, Tyson, Beyond Meat, it's actually a good investment. 

Hill: You think about the distribution network that Nestle has built up as the company has grown, and that was one of the things I was thinking about, reading through these stories this morning. Good for Beyond Meat. They're a small start-up, they had a splashy IPO, left some money on the table with their IPO, but they've got a little bit of a supply and demand challenge that I look at Nestle and say to myself, without really knowing all the details, my hunch is they've got distribution figured out better than Beyond Meat. Probably worth reminding folks that we've seen this in the beverage market for a very long time. Startup beverage companies, sometimes their end business goal is to get acquired, whether it's by Anheuser Busch, or if it's a soft beverage, then they're looking to get acquired by Coca-Cola or Pepsi. Seth Goldman, who we've had here at The Motley Fool, we've interviewed him, he started the Honest Tea Company, which Coca-Cola took a stake in and then ultimately took it over. He's now the executive chairman of Beyond Meat. So, when I look at what Nestle is doing -- yes, they've been working on this for years; as you point out, rightly so, veggie burgers have been on the market for years. But there's this renewed interest, and it makes me wonder if one more reason to buy shares of Beyond Meat, and possibly Impossible Foods when they go public, is they're a likelier takeout candidate than Nestle is. Whatever success Nestle has with the Awesome Burger, they're going to spin that off on its own. They're going to keep that in-house. Whereas Beyond Meat, that it's easy to imagine someone coming along and then just saying, "All right, let's take you over and really expand your distribution."

Flippen: Definitely. Nestle made a point of stating when they announced the expansion of their new alternative meat lines that they seek to remove some of the issues that we see in the alternative meat market in terms of production and sales and meeting demand. Nestle is acutely aware of the fact that they are going to fill a need that is still unmet in terms of supplying more supply to an alternative meat market that has soaring demand. 

What I think is really interesting is that when you look something like Beyond Meat, Tyson had a stake in it. Tyson could have potentially acquired that company, but instead, actually sold out their stake and started to produce their own burgers. Whether or not Beyond Meat gets acquired I think depends a lot more on the quality of their product. They need to prove that there is value and having a Beyond Meat burger vs. a Tyson burger vs. a Nestle burger vs. an Impossible Burger. They need to prove that, "Hey, we have something of value. People seek out our burgers over other burgers, therefore you must acquire us to get that knowledge, to get that technology and that food, as opposed to making your own." We haven't really seen that yet. I think that's largely because the market is still developing for alternative meats. Give it a year or two, I think we're going to start seeing whether or not people actually seek out a Beyond Meat burger, or if they'll take any alternative burger given to them. 

Hill: As I mentioned at the top, FoolFest, which is our two-day investing conference, is happening later this week, so it's going to be the proverbial short week for us here on MarketFoolery. We'll be here through Wednesday. We're taking Thursday off because it's going to be a really, really busy day for yours truly. 

It's also going to be a busy day for you, Emily, a busy couple of days. In addition to a main stage panel that I know you're going to be a part of, you're also doing a couple of different breakouts. I'm curious if you could just share a little bit about the breakout sessions that you're going to be leading, and one or two stocks maybe from each that you're going to be highlighting.

Flippen: Sure thing. The first breakout is going to be over China, actually, which I know is a topic of interest for a lot of investors, given the tensions recently between the U.S. and China and trade. I'm teaming up with Ben Ra here on the investing team. He gives a quick overview of what it means to look at China from a historical context; playing the history of China off of investing in it today, how we get a mindset for how we find ourselves investing in companies. I take some of the lessons that we can learn by looking at the history of China and rolling it into, "Hey, here's some companies in China that we like, even with all these issues."

I think it's no surprise, if you've been listening to me on this podcast, or are familiar with me on Rule Breakers, one of those companies is my favorite, Baozun. They call it the Shopify of China. What I really like about this play is that it's been completely hammered by the trade war, and actually with good reason, because they do have some direct exposure, the trade tensions between the U.S. and China. Which makes a lot of investors think, "Wait, why would I invest in this company?" The reason is, they've been largely unaffected by it. The demand for their product has been so strong that they actually reported earnings last week, and expectations were very much that the trade war would prevent international companies from coming over and using Baozun's services; but, on the contrary, they had the fastest growth of customers that they've ever seen since being a public company. That, to me, says a lot about the strength of their business model. So, that's one company from that breakout that I'll dive further into in that session. I'm a really big fan of it. 

In addition, I'm teaming up with Shannon Jones, and we're going to do a breakout over marijuana investing. That one's going to be really exciting. I think a lot of investors either are overexposed to marijuana in a bad way, or completely avoid the industry, also in a bad way. We're going to address what it means to invest in marijuana, how you can do so ethically, how you can do so safely, keeping that exposure to a minimum while still giving yourself some growth upside. One company that I'm a big fan of -- Shannon a little bit less of, so, that makes for interesting fodder -- is a company called Charlotte's Web, CWEB. It's originally a company run by seven brothers, so really interesting structure there. They essentially created a strand of CBD, which is the non-toxic part of the marijuana plant, that cured a little girl named Charlotte's seizures, or, essentially made them a nominal amount of seizures. So they renamed the company Charlotte's Web. Now they sell CBD online through their store. It's a really inspirational company. Management obviously takes a really long-term approach to what CBD means for Americans, what it means for our health. It's a good way to get exposure to the marijuana market while still feeling good about what you're investing in. 

Hill: You're saying the estate of the late great novelist E.B. White was totally OK with, "Yeah, Charlotte's Web, go for it"?

Flippen: I'm not sure --

Hill: That's a beloved children's book!

Flippen: [laughs] Well, for what it's worth, the company, I think, almost makes good on that name, based on its mission. I mean, they saved a little girl's life, right? What matches with Charlotte's Web better than that? But, I agree. Maybe the company just hasn't been big enough to run into any legal troubles with that name. 

Hill: Speaking of marijuana, we're going to be doing a YouTube Live Q&A today, Monday, 3:30 p.m. Eastern. Myself, Emily, Shannon Jones. We're going to be taking your questions. In fact, by the time you're listening to this, we may have already completed it. But, hey, check out The Motley Fool's YouTube channel, which is just youtube.com/themotleyfool. You can subscribe to our channel for free. You can check out the whole Q&A we're going to be going at least 20, maybe 30 minutes on this. I expect to get a lot of questions from the audience. And it's free. Check it out!

Emily Flippen, always good talking yo you!

Flippen: Thanks again 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 the Iron Man, Austin Morgan. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!