In today's episode of MarketFoolery, host Chris Hill chats with Motley Fool analyst Abi Malin about some business news. Shares of Snap (SNAP 1.53%) popped 16% as the social media company lost less money than analysts were expecting. Abi sheds some light on why the market might be giving a pass here. Meanwhile, the turnaround at Chipotle Mexican Grill (CMG 2.72%) is a bit more concrete -- CEO Brian Niccol's Taco Bell-inspired strategy really seems to be what the company needed. The timing of its newest round of buybacks, though, is a little questionable. Visa (V 1.74%), meanwhile, turned over some great quarterly results, and Wall Street yawned. Is Visa just beyond earnings news volatility? Tune in to learn 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 24, 2019.
Chris Hill: It's Wednesday, July 24. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio in the heat of earnings-palooza is the one and only Abi Malin. Thanks for being here!
Abi Malin: Thanks for having me!
Hill: It's my favorite week of the year, and it comes four times a year. I love it! We've got like 700 companies reporting this week.
Malin: All the things to talk about.
Hill: All the things to talk about. We're not going to talk about all of them, although there are huge companies reporting that we're just not going to be able to get to. We will talk about the latest from Visa and Chipotle. We have to start, though, with Snap. Shares up 16% this morning after Snap lost money in the second quarter, just not as much as everyone was expecting them to lose. What do you think when you look at this company? The stock has been insane this year. It has basically tripled in 2019. We'll get to this quarter in a second. But when you look at that, shares of Snap tripling in basically six months and change, does that get you excited? Or is this one of those things that you look at and you think, "Oh, my God, you can buy that if you want, but I'm not."
Malin: Probably more of the latter, not the former. But I do think a little bit of that is that Snap was punished pretty harshly, I would say, in their market debut. People were taking their hands off of it, it fell significantly. Maybe that was a little bit of an overreaction. But I do think it's interesting, given the environment that we're currently in with large tech, and specifically large social media companies being more scrutinized, you're seeing regulators get involved a little bit more than normal. I do think it's a little bit counterintuitive that Snap would be doing this well.
Hill: We've talked before about advertisers, essentially looking at Google and Facebook as must-haves. Is Snap moving into that category, if only for a certain segment of the consumer base out there? If you have a product that you're selling, and your target market is people 13 to 34 years old, is Snap now an automatic go-to for you?
Malin: It's interesting you ask that. I think this turnaround was Spiegel's idea to stop trying to attract all users and just focus on engaging specifically with that younger demographic base. If you look at Pinterest, it's kind of a similar idea where it's very niche in that it's majority women. I do think focusing rather than fighting that trend is helpful. You saw their average revenue per user increase to $1.91 versus $1.84 expected. Pretty significant growth in that. Maybe a little bit of that is that less advertisers are interested, but the ones who are have to be there.
Hill: You mentioned Evan Spiegel, the CEO. It is interesting to see his tenure as he continues to lead this company. I think you're probably right, when you look at the full one-year chart of this stock, it's tripled in 2019, but over the past 12 months, it's basically up 30%. It really got hit hard at the end of last year. It does seem like at least part of what we're seeing in 2019 is at least some people on Wall Street saying, "You know what, maybe we were a little too harsh on that stock. And by the way, maybe we were a little too harsh on the CEO. Let's see what he can do."
Malin: Definitely. The augmented reality technology that they have is really admirable. I think it's actually very interesting. I think part of that is what makes it appealing to advertisers. It's that new innovative space. You have to give credit where credit is due.
Hill: Speaking of giving credit where credit is due, same-store sales for Chipotle were up 10%. That is the sixth quarter in a row of accelerating comps for Chipotle. This second quarter report was pretty strong.
Malin: It was strong. Within that 10%, 6.5% was an increase in traffic, and 3.5% was an increase in ticket. Digging a little bit deeper into that ticket, it was boosted by higher prices. But then they also said it was mildly offset by deferred loyalty program revenue. All around actually generally very positive metrics for them. More store traffic, more loyalty members. They launched that loyalty program back in March, I believe, and they're already at about five million members. That's phenomenal!
Hill: It really is. You have to assume a couple of things. One, that's something that can continue to drive this business. It'll be interesting to see how they grow that, but it wouldn't surprise me if in, say, a year or two, they were at double-digits in terms of how many millions of people they have in that. Two, and this goes back to giving credit where credit is due, Brian Niccol has done such an amazing job leading this company in the past 18 months. They are a long way away from the days -- the story a few summers ago wasn't a rewards program story, it was essentially a coupon story. They were just trying to do anything they could to get people in the store.
Malin: Right. It's interesting, he came from Taco Bell. Taco Bell, I would say similar space, maybe? I think these companies would like to think that the more health conscious or more aware consumer chooses Chipotle over Taco Bell. But part of his strategy, which he talked about more this quarter, was adding new menu items. Historically, that's been not within Chipotle's warehouse. They've kept their menu very, very short. It controls costs, it makes you really good at the very few things that you do. There's a lot of advantages to that. But now, Niccol is actually adding menu items. You're going to lose a little bit on the efficiency side because more things, more sources, more people to make more things, etc. But the idea is that your existing customers come in more because there's more options, and you maybe attract some new customers that you wouldn't have had before. Kind of interesting to bring that Taco Bell strategy to Chipotle and actually see it work very well.
Hill: I sold this stock before Niccol became CEO --
Malin: And you're mad.
Hill: I'm not mad. Obviously I've missed out on a tremendous run that this stock has had. But I was thinking about it this morning. I was trying to go back and think about -- when Niccol was named CEO, ultimately, my decision not to buy shares at that time was because I didn't think Steve Ells was going to let Brian Niccol be Brian Niccol. I really didn't think -- given everything Steve Ells had done when he was running Chipotle, there was nothing that made me think, "Oh, yeah, he'll let this guy have free rein to do what he wants."
Malin: Completely. I think a lot of people laughed at, though. At the time, the announcement came off like, "You were that desperate, that you went to Taco Bell?" I don't know, it came off very odd, almost like if you had put a McDonald's CEO at Whole Foods, right? It's the same because it's food, but it's not the same because it's totally different approaches. So, I feel like a lot of people maybe didn't foresee this coming.
Hill: The only thing in this report that gave me pause -- and this is incredibly minor. This is, I don't think, anything to worry about if you're a Chipotle shareholder. But I did note that the board of directors has approved a share buyback plan of $100 million, which is not a huge amount of money in the grand scheme of share buyback plans, but with this stock approaching $800 a share, it's like, really? Now? I don't think now is the time to buy back stock.
Malin: We've had a lot of discussions within the investing team about share buybacks, whether or not people like them. General consensus is that it's opportunistic when shares are low or undervalued by management's expectations. In other instances, it's just sort of like, that's your best use of capital? It's a little disappointing as a shareholder, because I'm like, I would rather see you invest that and grow. So, I would agree with that.
Hill: Although there are some businesses that have rewarded shareholders year after year because that's been part of their strategy.
Malin: Definitely. In very mature businesses.
Hill: Yeah. You look at a company like AutoZone. If you're buying AutoZone, you're buying into a stable business and a management team that has a great track record of buying back stock. That's one of the major ways they reward shareholders.
Malin: Right. I think there are exceptional times to use it, I'm just not sure that this is necessarily one of them. But like you said, it's incrementally very small for them.
Hill: Visa's third quarter profits and revenue came in higher than expected and Wall Street yawned. Shares of Visa are basically flat. They were down, I don't know, 0.5% when we walked in the studio. This is a stock, however, that has such a great track record. Over the past year, it's up about 28%. Look, when we come into earnings season, there are absolutely companies that we expect to see a pretty big swing one way or the other when the report comes out. It seems like Visa is no longer that company.
Malin: I would agree with that. This was a good quarter for them. Revenues were up 11%. That was driven by a 3% increase in the number of cards. But the really interesting metric was actually the 9% increase in spending using Visa cards. That's in constant currency. Pretty significant moves in terms of spending there.
Hill: I don't own shares of it, much to my detriment. Is this a company that has a history of acquisitions, and doing a good job of incorporating them into the business? Or have they gotten to where they are -- and by the way, where they are is, Visa is closing in on a market cap of $400 billion -- have they gotten to where they are simply by growing their homegrown business?
Malin: I don't know if it's so much necessarily an acquisition story. You have dominant players within this marketplace. You think Visa, you think MasterCard. That's your two dominant, main forces. When you have a brand that's that potent, it's really powerful. It's actually very interesting. I know we were talking about valuation before this, like, how does Visa justify this, and if this isn't moving the top line, what does?
Hill: Yeah, it was a great quarter!
Malin: It was a great quarter. I think the good thing and the bad thing for Visa is that they've become very consistent, very reliant. And it's one of the few companies that's both large and, I would argue, pretty stable, but also still providing these pretty large growth metrics, even at such a high volume. Just moving the needle that much is really significant. There's a predictability, I think, that's maybe... I don't want to say working against them, because it is positive, but it's not driving the surprises on the up or the downside that you would see.
Hill: We were talking before about Snap. A lot of times, when we're looking at individual businesses, it's helpful for investors to understand whatever is the narrative of that business at the time. And part of the narrative with Snap, certainly today, is, "Hey, this thing is bouncing back." You look at the coverage both of Snap and of Evan Spiegel, it's that. To the point you just made, yeah, the narrative with Visa right now is, "Oh, yeah, they're great!" It's just, "Yeah, they're great, they're great!" There's nothing super compelling about their story. But I think a lot of people on the investing team would be -- I'm thinking of folks like Ron Gross -- quick to tell you, there are a lot of boring businesses out there that have done an amazing job of rewarding shareholders.
Malin: Right. Complexity is where you get price discrepancy. So, the less complexity you have with a stock, I would say the more right the value is going to be. So, for Visa, it's probably pretty fairly valued for what it's doing.
Hill: Alright, I have to let you get back to work. You're a working analyst. Thanks for being here!
Malin: Thanks for having me!
Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery! The show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
