In this episode of Market Foolery, Mac Greer checks in with Fool analyst Tim Beyers for a mid-year look back at 2019. What's the most overhyped story of 2019? The story that should have been hyped more? The biggest surprise? The biggest disappointment? The biggest trend to watch in the rest of the year? Tune in to find out, and learn why the 2019 IPO market is nothing like 1999's, why Tim thinks Zoom (ZM +0.72%) is an awesome long-term play, why the open-source world is getting a little less open and a bit more hostile, why Netflix (NFLX +0.84%) and Disney+ (DIS 0.65%) can both win, and 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 July 09, 2019.
Mac Greer: For Tuesday, July 9th, welcome to Market Foolery. I'm Mac Greer, and once again, we are coming to you from Boulder, Colorado, from historic Chautauqua Park. Now we're stepping away from the day's news a bit, so if something big goes down on Tuesday, rest assured that Chris Hill will talk about it on Wednesday. But I am very, very pleased to be joining Motley Fool analyst Tim Beyers. Tim, thanks for joining me!
Tim Beyers: Hey, thanks, Mac! It's good to be back.
Greer: Tim, as I mentioned, we're going to step away from the day's news a bit. We're going to do a bit of a mid-year year review. We're a little past the halfway point of 2019, so a good time to take inventory. We're going to talk about some of the big surprises, some of the big disappointments, overhyped stories, overlooked stories, trends to watch. And, as always, of course, we're going to name some names. Let's give the people some stocks.
Beyers: Yes, red meat, red meat!
Greer: Red meat, Tim! Let's begin with your headline for 2019 so far.
Beyers: I'm tired of hearing that the IPO market is hot, it's 1999 all over again. It is not 1999 all over again.
Greer: Why is it not 1999?
Beyers: Because there are no sock-puppet IPOs.
Greer: That's a good thing.
Beyers: That's right. It's a good thing. For those who don't know that reference, that's Pets.com; go look it up on YouTube. There were many companies that came out in 1999 that were born within a year, business models invented out of thin air and then taken public into this ridiculous IPO market. That's not happening right now. The number of quality companies that are coming out is immense. Zoom and Slack (WORK +0.00%) are just two, but there are a lot of them.
Greer: We said we'd name some names. You just named Zoom and Slack, so let's take those in order. Zoom, recent IPO. Just featured Tom Gardner, Motley Fool CEO, Tom Gardner's interview with the CEO of Zoom on our Motley Fool Money radio show. What do you think about Zoom?
Beyers: I love Zoom. I think it's one of the best businesses in this market right now. It's certainly one of the top businesses coming out in 2019. Here's why. This company was founded in 2011. It's based on fundamentally different technology. The way Zoom describes it is video first. Mac, you're an AV guy, so you know that audio data and video data are very different. Zoom is built to handle video data natively. It's not like Skype, which was built to handle audio and then was made to handle video, it was adjusted. That's not the way Zoom was built. And because of that, Zoom delivers an exceptional experience. They have some very big-name clients. They're growing very quickly. I really like this business a lot. I think they have a technical competitive advantage because of focusing on video first.
Greer: You also mentioned Slack. What do you think about Slack, another recent IPO?
Beyers: Slack I like a lot. Slack gets known for trying to replace email. And I think to a degree, it's doing that, certainly doing that for me. Slack is my Raid.
Greer: We use it here at The Motley Fool. We used it to trade notes and thoughts on our show preparation.
Beyers: Yeah, and it's fantastic for that. I am trying to use it to get rid of email. Like I said, it's like my Raid, and email are the roaches. I'm just trying to get rid of it. Slack is very good for that. It also has an ecosystem. There's a lot of different apps that plug into Slack that make it more productive. It's also a stock that came out and didn't take off right away. That's because it's a direct listing. What that means is that they list their shares directly on the New York Stock Exchange. The NYSE did a little due diligence, and it allows them to sell stock directly to you or me, instead of using a banker to buy up a bunch of shares and then resell them and create a lot of artificial demand to prop up the stock price. That didn't happen here. So, the stock is still relatively cheap. It's a business that's moving in the right direction. It's got the wind and its back, and it's one of those businesses that has very few customers like us, who pay for it on a big scale, so there's a lot of runway of turning customers who use this for free into paying customers as they grow.
Greer: Tim, let's move on to what you would consider the biggest surprise of 2019 so far.
Beyers: I think it's Microsoft. I know we've talked about this. In fact, not to call out Chris Hill, but I think Chris Hill actually laughed at me when I said Microsoft is cool again, as if Microsoft was ever cool! In fact, look where we are now. This stock has gone to the moon, and I think it's partially because people have faith in Satya Nadella. And I think there's good reason for that. He has made Microsoft into a company that will choose the best technology for developers, no matter who makes it, in order to make a better experience for customers and for developers. That's a huge advantage, and it's very different.
Greer: What strikes me about Nadella is that he doesn't seem like he has a lot of ego. And that is a huge strategic advantage. Tim, if you don't have a lot of ego, and you have that humility, then it tells me that you're going to look at the business and say, "If this isn't working, we're going to stop doing it." You're not invested in it. Your ego is not invested in it. And you're willing to move on, and you're going to double down on what works, but you're not going to stubbornly cling to stuff that's not working. You know who you are.
Beyers: Right. Exactly. Microsoft has done that. There's a technology called Kubernetes, which we won't get into, it's very complicated, it's developer-centric, but basically, this is an open-source technology that Google has backed relentlessly for making development easier on an enterprise scale, things called containers. The bottom line is, there's two things that typically, the Microsoft of the past would say, "There's no way we're using this. First, Google's backing it. Second, it's open source, so we can't control it." But guess what? When Satya Nadella heard from developers that the stuff that they were making, that was like their own version of Kubernetes, was not catching on, he said, "You know what? Scrap our stuff, take Kubernetes, let's put it in Azure. Let's let people use it however they want."
Greer: Let's move on to what you consider the biggest disappointment of 2019 so far.
Beyers: It's got to be Apple (AAPL +0.83%). Has to be. I get that Apple is a megalith of a business, but it is a shadow of its former self.
Greer: But it's a huge shadow.
Beyers: It is a huge shadow.
Greer: Everyone's got their iPhone. Everyone's got those new little things in their ears that go with the iPhone, that drive me nuts. That's a pretty nice shadow, isn't it?
Beyers: It is, but here's the problem. We've always thought of Apple as the company that innovates and leads in design. That doesn't seem to be happening anymore, and I don't think it's going to happen again anytime soon, because Jony Ive, who has been the architect of so much of Apple's greatest wins over the past 15 years -- the iPhone, the iPad, the iMac, all of these great, well designed products -- he's leaving the company. And the only reason for him to leave the company is because he's done, he feels like he's done the things that he was going to do as chief designer at Apple. And that's a scary proposition if you're an investor.
Greer: But they'll still be a client of his.
Beyers: Yes, they will, but that's different. I was a Fool contractor for years, and it's different. I've always loved The Motley Fool, I've been here for a long time, I've been writing forever, but it's a fundamentally different thing to be a contractor where you have a handshake relationship, and an employee where you and I are at Chautauqua Park and going deep into these businesses and having fun. It's a different style. With Ive on the outside, I fear for Apple's innovative capacity.
Greer: So, for Apple to get their mojo back, it's not about the iPhone, and it's not about growing the Services business?
Beyers: It is, but those things will lead to higher dividends, it'll lead to higher cash flows. Apple is a terrific income stock right now, meaning that they've got a lot of cash on the balance sheet, they generate a lot of cash, they've got two really big cash cows in the iPhone and the Mac product line. But what they're trying to do is become more of a content company with TV shows, with music and podcasts and other sorts of things. That's a business where they haven't done a lot of innovation, and they don't lead in those businesses. It's a bit of a stretch, I think.
Greer: Okay, Tim, what is your most overhyped story of 2019 so far?
Beyers: I think that we're giving Elon Musk too much airtime, to be quite frank. If we're surprised at this point that this guy has an ego the size of the state of Montana, we're kidding ourselves, right?
Greer: Yeah.
Beyers: He has a Colorado-sized boulder on his shoulder, not a chip. If we know that already, why are we freaking out over every single tweet?
Greer: Quit making that a story.
Beyers: Quit making that a story. That's not a story anymore. We know that the price of Tesla potentially reinventing the electrical supply chain and the energy supply chain in this country is Elon Musk's ego. We know that, and that's priced in.
Greer: But to what extent do you think his ego gets in the way of that? Or do you have to take the ego with the visionary part of Elon Musk as well? For Tesla shareholders, should I be concerned that his ego, at times, seems to be a bit out of whack?
Beyers: You should be concerned. I think that's a fair concern. But I also think that you go into owning Tesla shares knowing that. If you're going in knowing that, the thing you do as an investor to minimize your portfolio risk is say, "Look, I know that Elon Musk could blow this up, so I'm not going to over-allocate capital to Tesla knowing that Elon Musk's ego could blow this thing apart." But the potential upside is enormous.
Greer: Okay. Let's move on to the overlooked story of 2019. What do you think?
Beyers: I think the overlooked story of 2019 is Amazon (AMZN +1.71%) buying up the subscription box businesses. There's a lot of subscription box businesses. This was the knock on Stitch Fix. I'm talking about Stitch Fix here because one of the reasons Stitch Fix's stock has taken a beating over the past year -- now it's recovering a bit --
Greer: And Stitch Fix, just to clarify, they deliver clothes, and you get to pick the ones you like and send back the ones you don't.
Beyers: Yes. That's a subscription box business. A lot of subscription box businesses have done very poorly. In order to disrupt this, what Amazon has started doing is picking up some of these businesses and offering them a lifeline, saying, "Look, give us your customer list, let us sell on our platform, but we're going to control the customer, we're going to control the relationships, you're going to fulfill the orders." That puts them in control. It's a way for Amazon to profit from other people's work, which they're really good at. You would think that would be a real problem for Stitch Fix, because the rest of these box companies are having trouble. And yet they're not. Stitch Fix is growing meaningfully. Average revenue per active customer was up about 8% in the latest quarter. It's the fourth quarter in a row it's been up. They seem to be retaining both their men's and women's customers at a very high rate, particularly their most premium customers, the customers who pay for what's called the Style Pass, which is essentially Stitch Fix's version of Amazon Prime. There are a lot of people that play this game that's called Style Shuffle on your iPhone. It's basically Tinder for clothes. You decide what you like, and Stitch Fix uses that data to give you better information about the kinds of styles you might like. And it's working. This is a company that I have argued in the past is a data company that is valued as a clothing company, and I think the stats are starting to bear that out.
Greer: You mentioned Tinder for clothes. I play my own version of that. I go to Costco,and I just pick out what I like.
Beyers: Yeah. Union Bay for Mac Greer.
Greer: Union Bay. Cargo shorts are coming back in. Okay, how about a trend you're watching here around the halfway point in 2019?
Beyers: I think open source is changing a little bit. I think the companies that are doing the most in open source, like MongoDB (MDB 4.51%), are protecting their IP a little bit more. I expect them to be a little more assertive about this. Here's the best example. Earlier this year, Amazon came out with a product called DocumentDB. DocumentDB was essentially...it's not quite this simple, but to simplify it, basically a MongoDB clone. They took the open-source version of MongoDB -- basically, if you think of a database as a car, the cockpit is like the front of the API. So, I've got this steering, these brakes. The API's that cockpit, it's very familiar. So, basically, Amazon took that and then made their own suspension underneath and did all this stuff. MongoDB saw this coming. They knew they were going to be copied. And they modified their open-source license so that anything that Amazon invented that was new, using their newest, fanciest cockpit, would have to be shared with the entire open-source community. So, Amazon, because they're smart, went with the older version of MongoDB that wasn't subject to that license and then built DocumentDB around that.
The point is that in order to protect their IP from Amazon and others coming in and stealing their proprietary work and then reselling it as their own, they've taken some more aggressive steps. I think we're going to see a lot more of that.
Greer: Is it fair to assume that you're bullish on MongoDB?
Beyers: Very much so. I think that was a step that they needed to take to separate themselves from Amazon and others. They're still very popular with developers. I love MongoDB.
Greer: Tim, as we wrap up here, final question -- how about one big company that you still like here in 2019?
Beyers: Disney. I think Disney+ is getting a lot of traction. Even though it hasn't launched yet, the enthusiasm for this is palpable, and you can see it. There's been a few studies around this. One from Morgan Stanley, they did some work on this and found that the likely membership base for Disney+ in 2024 is 130 million. I know, that's a huge number. That's a huge number. They also predicted at the same time that Netflix at that time gets to 280 million. So, it's not a zero-sum game, but if you take those two and then you add in maybe a player like Roku that's doing over-the-top advertising-driven, but also on-demand TV...cord-cutting has been real for years, but this may be the year that we're seeing, I get to choose what I get to watch, and nobody puts baby in a corner, nobody gets to tell me what I have to watch and what commercials I am going to see. That's a meaningful shift. I think it's really good for Disney.
Greer: Okay, Tim, I'm conflicted here, though, because I'm a Netflix shareholder. And I'm a Disney shareholder. I watched the first episode of Stranger Things season three last night. Loved it, of course. But if Disney+ is a huge runaway hit, as you suggest, let's say it wildly surpasses expectations over the next five years, is there room for both Disney and Netflix to be market-beating stocks? I'm not talking about the service. I probably well may have both services still. I'm talking about the stocks. If I'm a shareholder, does one company's success come at the expense of another company's?
Beyers: I don't think so. If you look at the way the entertainment industry is designed right now, it's not worldwide, it's still very provincial. I think that's changing. Netflix is changing that by being in 190 countries. Disney+ is potentially going to be in 150 countries. Because of that, you're going to have direct relationships with these consumers that they've never had direct relationships with before. I think that offers a lot of avenue for growth. Now, Disney's about a $250 billion company. To double, it has to get to $500 billion. But I think when you look at the market as not the United States, but you look at it as the world, then yes, both these companies have a lot of room to grow.
Greer: Tim, time for the desert island question. You're on a desert island. And for some reason, you're picking stocks. I don't know, just go with it. For the next five years, if you can only own one of these stocks, what are you going with? Zoom, Slack, Microsoft, Amazon, MongoDB, Apple, or Disney?
Beyers: I'm going to go with Zoom because I love the economics of Zoom and I love the founder, Eric Yuan. It's usually a really great sign -- by the way, I feel this way about MongoDB, too -- when a founder solves their own problem with a company that they create and a technology they create, it's a really good sign. Eric Yuan did that. He used to go 10 hours on a train across China to visit his girlfriend who became his wife. And part of this was, there was no telecommuting technology where he could see his girlfriend at the time. So, it became very personal for him to build something. And he did build it at WebEx, which got sold to Cisco. And he knew there was a better way. He tried to sell that to Cisco. Cisco said no. And he went for it and built Zoom. So, it's personal. It's better. It's engaging to customers, and there's much room left to grow that I think Zoom is the one you go with.
Greer: Tim Beyers from historic Chautauqua Park at the foot of the Flatirons in Boulder, Colorado -- if this isn't the greatest place on Earth, then it's top three in my very, very humble, non-Elon Musk opinion.
Beyers: It ranks higher than Costco?
Greer: Don't make me make that choice. That is so unfair. Tim, thanks for joining me!
Beyers: Thanks, Mac!
Greer: Now, before we go, I want to share a listener email we got in reference to Monday's discussion about the U.S. Women's soccer team, equal pay, and World Cup earnings. Johnny G from Charlotte, North Carolina, writes, "The Women's U.S. Soccer Team is obviously much better than the men's team, and I can definitely get behind an argument for their in the U.S. being more than the men's due to how much better they are. Having said that, I can't buy into the argument that was made on the show yesterday about the FIFA pool of money. Tim actually made the comment that it was, 'utter nonsense' that the pool of money was more than 10 times higher in FIFA for the men than the women. All other things equal, that does sound ridiculous. What was not mentioned on the show was the fact that the men's tournament brings in more than 40X the revenue of the women's tournament. That has to be taken into consideration, and it was completely ignored on the podcast. Considering that, the women's pool of money is actually a larger percentage of the revenue it brings in than the men's. I'm unclear as to why that's utter nonsense." Then Johnny goes on to write, "Love the show. I've been a listener from the very beginning. Very rarely is something said that bothers me, but it frustrates me to no end when someone completely ignores such a huge part of the story that would counter their argument."
Johnny, first of all, thanks for listening, and thanks for writing. That is a great, great point. We should have mentioned the disparity in World Cup revenue when talking about the disparity in earnings. Context is a beautiful thing. We should have provided more.
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. That's it for this edition of Market Foolery. The show is mixed by Austin Morgan. I'm Mac Greer. Thanks for listening, and we will see you tomorrow!
