New Google, Less Government Pressure?

Google hears the people and the U.S. powers that be, but that probably won’t be enough to stave off a whirlwind of concerns.

Mac Greer
Mac Greer
(TMFMac)
Jun 21, 2019 at 4:20PM
Other

In this episode of MarketFoolery, host Mac Greer talks with Motley Fool analysts Andy Cross and Ron Gross about some stocks. Slack (NYSE:WORK) emerged on Wall Street today, and investors are excited. That enthusiasm -- a rare sight in 2019 -- doesn't seem based on oversold hype. Meanwhile, a founder letter from Sundar Pichai of Google/Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) fame reveals that the search giant is considering how to make all of the company better for the world. Plus, a good quarter for Darden Restaurants (NYSE:DRI), parent company of such gems as Olive Garden and Cheddar's Scratch Kitchen, as well as some grammatical shake-ups to a MarketFoolery classic. Tune in to find out more!

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 20, 2019.

Mac Greer: It's Thursday, June 20th. Welcome to MarketFoolery! I'm Mac Greer. And joining me in studio, we have Motley Fool analysts Andy Cross and Ron Gross. Gentlemen, welcome!

Andy Cross: Hey, Mac!

Ron Gross: How are you doing, Mac?

Greer: I'm doing good! Slack making its Wall Street debut. We'll talk about that.

Gross: Very exciting!

Greer: We're also going to talk some Olive Garden and Google. But let's begin with the Fed. On Wednesday, the Federal Reserve signaling that interest rate cuts could be coming as early as June. I say could. On Thursday, the market opening up big. Now, Ron, we are company-focused investors here. We're focused on stocks. How should we think of the Fed and interest rate cuts?

Gross: You know, it's interesting, traders are actually now pricing in a 100% chance of a rate cut next month.

Greer: That's seems high!

Gross: That's about as high as you can get without turning it up to 11. But seriously, folks, I don't love the fact that the Fed is seeing weakness in the economy. That's not a good thing. The R word, recession, is a scary thing. Even slowing growth is a scary thing. However, I do like that the Fed is on top of this, and it's going to use certain tools they have in their toolbox to try to combat that. It gets a little scary if those tools don't work, but I like to see them being proactive and doing something about that. That's why you see the stock market rallying. Obviously, lower interest rates are better for companies in general, but you're also seeing the Fed take action or signal that they're going to take action. Rather than being fearful, you can be somewhat optimistic.

Cross: Yeah, thinking about this globally, I think considering that the U.S. economy, even growing at 2%-ish, for a Western economy, is a bright spot. When you think about more than $12.5 trillion in sovereign debt out there that has negative interest rates around the world, Mac, just the interest rate environment is so low, and as Ron said about the economy, it's doing OK but it's not thriving. The Fed is saying -- which is much different, by the way, than what the Fed was thinking a year ago when they were raising rates at their meetings during 2018. Now they're saying, "Hey, we're in different environment, we're recognizing this." The markets have been pricing this in, maybe not 100%, but certainly over the past couple of months, they've been trending to price it out. We still have the very short-term notes selling at higher yields than the 10-year now. Signs that the economy is not humming along, and the Fed just has this in their toolbox. They continue to see that. Maybe now we will see a rate cut sometime in the next couple of months.

Greer: Guys, Slack making its Wall Street debut on Thursday. Now, this is not your traditional IPO. It's a direct listing. We'll talk about that in a minute. The ticker symbol is WORK. Work. Slack, for those unfamiliar, is a cloud-based, instant messaging type of platform for the workplace. We use it here at The Motley Fool. We used it to prep for this show. We're big Slack users. Andy, I want to know about the stock. What about Slack as an investor?

Cross: Well, it's really interesting. I think it'll be a very well received IPO. Now, as a direct listing, it doesn't have the support of these underwriters. It has Morgan Stanley and Goldman Sachs helping to make the company go public. But it's not like they are issuing new shares. Slack is not benefiting at all. They're not getting any money from this. They're not raising any capital from this. They are simply a private company one day and a public company the next, with some help with some of those banks that match up the buyers and sellers.

The company itself is really coming on. Just think about how we are using this at The Motley Fool. They have more than 600,000 total customers. Only about 100,000 of those are actually paying, so they have about 500,000 who use their free solution, that can get you started into Slack. It's a collaborative tool. It's a workplace tool. Stewart Butterfield, who founded the company, who founded also Flickr --

Greer: Great name!

Cross: Yeah, it's a great name! He and CTO at Slack, who was also a tech leader at Flickr before it sold out to Yahoo, they co-founded Slack. They're both very involved and they own a lot of stock. Stewart Butterfield owns probably north of $1 billion worth depending on where the shares trade today. He owns more than 42 million shares. When you think about this push toward collaborative tools, collaborative work environments, the so-called SaaS space, software-driven, cloud-based architecture that's helping companies work better and more efficiently, including The Motley Fool. They have loads and loads of customers. Two-thirds of the Fortune 100 are Slack customers, Mac. This is not just some small company. The valuation was probably around $16 billion. We'll see where the shares trade after today.

Gross: I do think it will be a successful IPO. I think the demand for the stock will be there. Interestingly, the company is still a small company from a revenue perspective. Maybe $135 million for the last quarter in revenue. Still not profitable. We have a company trading around 34X trailing revenue --

Cross: But sales are doubling.

Gross: The growth is there. That's what you need to see when you see a company trading at that kind of valuation. I think it will do well.

Interestingly, you'll only probably get about half of the shares available for trading. The six top institutional shareholders control about 60% of the stock. If they're not sellers, you're not going to see a lot of float out there. It'll be interesting to see how the supply and demand shake out. That will, of course, affect the stock price and how it trades.

Cross: That's why a direct listing is so fascinating, Mac, because it needs the buyers and sellers. As Ron often says, it takes two to make a trade. Well, you need the buyers and sellers, and it doesn't have the underwriters to help really facilitate that -- sorry, they will help manage it, but since the company's not issuing new shares, they're really at the whims of the buyers and sellers.

Greer: Andy, you mentioned the CEO earlier, Stewart Butterfield. He said in a CNBC interview that companies will phase out email over the next five to seven years. Now, he said that the broader world of email will stick around, will still be around, but that companies will phase out email over the next five to seven years. Is that what has to happen for Slack to succeed?

Cross: No, it doesn't have to happen. I think email will still have some place. Let's just be clear, Slack is focused really on their corporate and the work environment. So they're not really talking about individually usage. The killer app for text messaging is text messaging with our iPhones and Google and all that kind of stuff. This is really focused on the work environment. So email may still be around. The volume of email here at The Motley Fool since we've used Slack, I think, has fallen by more than half, maybe even two-thirds or so. Our volume of email flow has dropped dramatically as we continue to use Slack. I don't think email needs to vanish. In fact, Slack ties into thousands of different apps and API' to be able to coordinate and partner with different applications including email. It doesn't need to happen. But I think he's probably right. The work email flow will dramatically change over the next five years.

Greer: For someone, though, who doesn't know much about Slack, or who may not have it in their workplace, when are you using Slack vs. email? What has Slack replaced in terms of email?

Cross: Well, in our preparation for this radio show, I was using Slack, for example, and you went quiet --

Greer: That's not true! I was using it most of the time!

Cross: Yeah, you were using it most of the time, but then you switched to email and sent me an email, and I was waiting for a Slack response.

Greer: True or false: you may have been late for our taping?

Cross: Well, that is true --

Gross: Only late because there was no official start time. You can't be late if there's no start time!

Greer: Let's not nitpick.

Gross: Slack is at its best, in my opinion, when it's used for short correspondence.

Greer: And projects, right?

Gross: No, not for projects. I think email is better for projects.

Greer: Really? I disagree with you!

Gross: You have ongoing threads, attachments, you have things you want to keep for long periods of time, maybe file into folders. I think Slack is better for short bursts.

Cross: Like all software applications, it's not perfect. But I think it is a dramatic improvement. By the way, there were lots of other companies trying to do this. Yammer, which I think was bought by maybe Microsoft. And there are others who have done this over the years. Slack built a solution -- it's only been around since 2014, I think. They built a solution that is integrated, it is cloud-first, it is really focused on helping to improve the collaboration. I think Ron's right, there are times when it's better and times when it's not, although I see it with a lot of the integrations and other software applications getting better. But I agree with Ron. We've talked a lot about this. It's really good for quick hit, little communications, knowledge sharing, that kind of thing. If you start getting into more robust conversations, at least from my experience, that's where more conversations really need to happen. Slack can help drive that. And by the way, there's now Slack video and you can Slack call. They talk about communications and collaboration when they talk about Slack, and that's really what they're trying to drive.

Greer: For our next story, some better than expected earnings from Darden Restaurants, parent company of the beloved, in some circles, beloved Olive Garden, and other restaurant chains. But Ron, we've got revenues and same-store sales growth coming in a bit lighter than expected. What's the story here?

Gross: Yeah, I'm not sure that "better than expected" is the proper categorization here. I think investors were disappointed with revenue and their comp store sales. I think those missed expectations.

Greer: Agree to disagree.

Gross: I think investors were also somewhat disappointed with the guidance for fiscal 2020 going forward. But all in all, it still was a strong report. I mean, you saw sales up 4.5%, driven by 39 new restaurants, 1.6% blended increase in same restaurant sales. Strength in Olive Garden, Longhorn Steakhouse, Capital Grille. Weakness in Cheddar's Scratch Kitchen, Yard House, Seasons 52, Bahama Breeze. Shake those all together, you get a 1.6% same restaurant blended sales increase, which is not terrible. I think investors wanted to see more there. But it all worked together to increase earnings per share almost 27%. That's a strong number. They repurchased 42 million shares of stock. Guidance is fine. They're looking for $6.30 on the low end for fiscal 2020. That puts the stock at about 18X earnings. Not really that expensive when you look at other restaurants out there that trade more in the low to mid 20X earnings. They just raised their dividend 17%. You've got a 3.1% yield at the current price. I think the company is doing well.

Cross: I have a soft spot in my heart for Olive Garden. I haven't been to one in years. But when I was at the University of Michigan, my brother was there as well --

Gross: Go blue.

Cross: -- he took me to an Olive Garden my first week, and I just felt like it was just the greatest experience ever, when your older brother takes you to Olive Garden. I just loaded up on breadsticks and salad. It was great! But I haven't been back in forever.

Greer: Breadsticks are so good!

Cross: I mean, they're great!

Gross: Obviously, Steve Broido, or our beloved man behind the glass for our radio show, is the biggest fan at The Motley Fool of Olive Garden and continues to be.

Greer: Loves it, absolutely loves it! Ron, you mentioned the stock. When I was doing my research before the show, trying to find Andy, it was really interesting. Darden has just absolutely crushed the market over the last five years. It's up over 3X in value. Olive Garden's parent company, Darden, doing really well and really outperforming competitors like Brinker and Yum!.

Gross: They've done a great job. Perhaps we should give some kudos to activist investors Starboard Value who are partly responsible for improving some operations there.

Greer: And who said, what? That Olive Garden was giving out too many breadsticks.

Gross: And they should not salt the water because it lowers the lifetime of the pots and pans they use. Little tidbits like that. But yeah, even this year, the stock's up 15%, which is about even with the market, but still very strong.

Cross: It's a $15 billion company. It's not small.

Greer: Well, in his annual founder's letter for parent company Alphabet, Google CEO Sundar Pichai said the company had moved on from its original goal of "organizing the world's information," and is now focused on building "an even more helpful Google for everyone." Now, this comes as Google and Alphabet is facing increased scrutiny, including reports that the Justice Department may be gearing up for some antitrust investigations. Andy, what do you think of Google 2.0, now more helpful?

Cross: Just to be sure, Sundar wrote this letter, and he is the president of Google, which is a subsidiary of now Alphabet, which also has lots of other businesses tied into it. They made this decision a few years ago to do this. He and Sergey Brin and Larry Page, who are the original founders of Alphabet, created the Alphabet structure. He's written two of these letters, and they've written a couple of other ones, during this time.

I think he had to, obviously. Alphabet's a $750 billion company, one of the largest in the world. It touches so many parts of our lives in what we do, and now it's under scrutiny from lots of different parts, including internal employees, shareholder bases. Lots of concerns around the tech privacy and how our data is being used and what we're seeing on YouTube, search of antitrust concerns.

But just looking at the sub heads of his letter, Mac, I think they're telling. The sub heads of the letter. The first one: Building A More Helpful Google. Finding Trusted, Accurate Information. Building For Everyone. Keeping Users and Their Data Safe and Secure. Investing in Our Communities. They've talked about investing more than $1 billion in Home.

Greer: I like that!

Cross: Right? Taking the Longer Term View, I don't think anyone ever thought Google took the short-term view. From the very beginning, when they went public, they always talked about longer term. And then finally, wrapping it back up with A More Helpful Google for the Future. I think he laid out the case, considering where they are now, what they want to be over the next 10, 20 years. It's not as much about the organization of the information like it used to be, which is so tied to search. It's really about being more useful to all of us. Just think about what we do on YouTube. We watch videos to figure out whatever it might be, how to fix a toilet. I mean, I don't do that, per se, but some people do. How to tie a bow tie, I've used it for that. All kinds of stuff. I think that's really what the focus is going to be in the future when it comes to the Google property of Alphabet.

Gross: I agree. I think letters like this, or communications from Facebook, it's a sign of the times, it's a sign of the political climate we're in right now. Which I think is fine, especially if it's to the benefit of shareholders and consumers. I don't like to see companies moving to the whims of the political climate, however, so I would be careful there. But if they are truly taking a look at their business, and making improvements, and really introspection that will accrue to the benefit of all shareholders, then I think that's great.

Cross: Well, they can't not do that. If people are talking about regulating them as monopolies, because we use them so much every day, I think being able to articulate -- you're seeing the same struggle with Facebook and Mark Zuckerberg and his team, trying to articulate to politicians and users and consumers and watchdogs out there, especially over in Europe, where Google has faced a lot of trouble over the years, and fined a lot of money, I think he has to strike a message that is a little bit more like this than what it may have used to be.

Greer: Andy, I want to circle back to what you were saying about YouTube. The front page of today's Washington Post, one of the headlines, YouTube Under Investigation Over Child Privacy Complaints. And then our very own Chris Hill sent me an article earlier today that talked about how YouTube is considering moving all of its children's content into a separate product, the already existing stand-alone YouTube Kids app. The whole idea there is to better protect young viewers. I can't decide. I'm a very happy Alphabet/ Google shareholder. I love YouTube, but I also have kids, and YouTube is the Wild Wild West. You can have parental controls, you can have filters. But at the end of the day, people are uploading so much content to YouTube that you just get the sense that the algorithms and the company can't keep up.

Cross: I get the sense that that might be true. Sundar mentioned in his letter that 1% of all the YouTube content is terrible content, and 99% people find valuable in different ways.

Greer: But they find the 1%.

Cross: Well, they find the 1%, and the 1% is what drives so much of the concerns in the headlines, just like it does with anything else, when the minority of volume of stuff drives most of the conversation. I think Google and Alphabet, trying to figure out how best to structure their properties and their software and develop solutions -- I mean, Alphabet has spent $22 billion on R&D, research and development, over the past year. That's double what you saw from Facebook, and more than both Microsoft and Apple. Less than Amazon, but more than Microsoft and Apple. They are spending a lot of effort and resources, mostly around technology, AI, machine learning, to try to figure out so much of this to get it right because it is so important to consumers. Not just the watchdogs, important there too, but consumers, especially in today's world where switching costs are low. We are so in tune with how our technology is being used, how our data and privacy is being used or being abused. So they have to get this right. This letter, to me, started to outline more of the thinking around what Alphabet and Google, which is their largest property, has to become for the future because of the concerns, like you mentioned with YouTube, Mac.

Greer: OK, well, now it is time for our desert island question. Before I hit you with the three stocks we've talked about -- Slack, Darden and Alphabet, a.k.a. Google, I want to let you know that one of our longtime colleagues, he talked to me about this last week. He passed me in the hall and said, "Oh, by the way, I've been listening. I've been thinking about this for two years. When you ask your desert island question, I don't think that's what you mean. I think you mean deserted island." I want to leave it out there for listeners. marketfoolery@fool.com. Is this the desert island question? Or is it the deserted island question? I went down a rabbit hole on Google after he said that, and I do want to say that I think a desert island, by definition, is deserted.

Cross: I just want the dessert island.

Greer: Do you have strong opinions on desert vs. deserted island?

Gross: When you think of Gilligan's Island, that was a deserted island, which I think is actually what you mean when you ask this question.

Greer: Well, you know what's interesting? I'm glad you brought that up. In my notes, I have the lyric from Gilligan's Island, because I know you will. Here's the lyric. You ready?

Gross: Yeah.

Greer: "The ship set ground on the shore of this uncharted desert isle." Drop the mic.

Cross: Desert, we think about sand.

Gross: But it was lush, there were palm trees all over the place. It wasn't a desert.

Greer: I think of the New Yorker cartoon, sand with one palm tree. But I think a desert island doesn't necessarily have to have sand. I think desert by definition is deserted. I think they are one and the same and I think desert packs more of a punch.

Gross: Let's see what the listeners say.

Cross: I'll take my cue from the listeners. Please let us know.

Greer: OK, so the two questions for listeners. I'm going to add a second. Is it my desert island question or my deserted island question? And then a follow-up if you really want to weigh in: If someone is on the island, is it really deserted?

Gross: If a tree falls in a forest...

Cross: Do we have two answers to that question? Can they be the same answer?

Greer: marketfoolery@fool.com. These are the things we worry about. In today's world, this is what I worry about. OK, the next five years, you're on an island. It was previously deserted, uninhabited. It may have sand. It may have tropical landscape. I don't know. It's a dumb question.

Gross: Mr. and Mrs. Howell might be there.

Greer: All I know is that you're looking at these three stocks and you have to buy one for the next five years: Slack, Darden, or Alphabet?

Gross: Uncharacteristically, Mac, I'm going to go with Slack. I would like to be a shareholder and own it for quite some time.

Cross: I do see that stock trading now. It's up north of $40. List price was $26, it's above $40. It's up almost 60%. I still like Slack long term, thinking out five years at least, compared to at least those two companies, although Darden, very impressive track record. That's a good call, Mac!

Gross: But yet, still a restaurant.

Cross: Still a restaurant, so I'm going with Slack.

Greer: Both on the desert and deserted island?

Cross: Both on the desert and the deserted island.

Greer: OK. As always, people on the show 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. Ron, Andy, thanks for joining me! That's it for this edition of MarketFoolery! The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! And we will see you tomorrow!