Happy earnings season! In this week's Motley Fool Money, host Chris Hill, together with Motley Fool analysts Andy Cross, Emily Flippen, and Ron Gross, hit on some of the biggest earnings news.
Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG), at a whopping $800 billion market cap, somehow managed to grow its revenue 19%. Shares of Snap (NYSE:SNAP) shot up 30% after posting an extremely promising report. Shares of Tesla (NASDAQ:TSLA) tanked after some disappointing and alarming news. Starbucks (NASDAQ:SBUX) nailed it in China even as strong competitors like Luckin (NASDAQ:LK) took root.
Also, stay tuned for earnings takeaways from Amazon.com (NASDAQ:AMZN), Facebook (NASDAQ:FB), Align Technology (NASDAQ:ALGN), MarketAxess (NASDAQ:MKTX), Boston Beer (NYSE:SAM), Chipotle Mexican Grill (NYSE:CMG), Hasbro (NASDAQ:HAS), Mattel (NASDAQ:MAT), McDonald's (NYSE:MCD), and more. And, as always, the analysts wrap up with 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 July 26, 2019.
Chris Hill: It's the Motley Fool Money radio show! I'm Chris Hill. Joining me in studio this week, senior analyst Andy Cross, Emily Flippen, and Ron Gross. Good to see you as always! It's Earningspalooza! We've got so many earnings stories, we didn't even schedule a guest this week. But as always, we'll give you an inside look at the stocks on our radar.
We're going to begin with the big macro. The latest GDP numbers came out Friday morning from the Commerce Department. The U.S. economy grew 2.1% in the latest quarter. Andy Cross, let me start with you. Next week we've got the Fed meeting. Everyone's going to be watching it, everyone's saying, what are they going to do with interest rates? How do you think this number impacts the Fed?
Andy Cross: I think it's more evidence, clearly, that the growth is not off-the-charts high. It was a slowdown from the first quarter. A continuous slow down if you look over the year to year trend. But for me, this basically says the Fed is looking at the lower level of rate cuts next week. There were talks about maybe 25 or 50 basis points. I think this is going to be a 25 basis cut. I think it's all baked in that they're definitely going to cut. So it's not a question there. But just, I think this says, pretty much, growth is good. It's not phenomenal. It's a little bit ahead of expectations. No reason to go crazy and go up to the high end of the rate cut.
Emily Flippen: Yeah, it's clear that this is definitely causing a little bit of a stir. We already got a little bit of a threat from President Trump, who after these numbers came out and tweeted that it was not bad considering we have the very heavy weight of the Federal Reserve anchor wrapped around our neck. That's just a testament to the fact that these numbers are pointing toward what the Fed's going to end up doing next week. I agree with Andy that a cut at this point has been baked in, both with estimates and companies and banks. I'd be surprised if we saw a big cut, but I think we would expect at least a small one.
Ron Gross: The non-fake news is that business spending was weak, and that's why the overall number was weak, largely probably -- "largely probably." Can one say that?
Gross: Probably because businesses are a little bit wary of tariffs and trade wars and unwilling to spend as much as they have. So that's probably what's going on. The Fed also likes to balance cuts with inflation. Right now, we're at about 1.8%. The Fed target's 2%. We're still below that. But we are at the highest number since the third quarter of last year. So, just keep an eye on inflation.
Hill: Alright, let's get to the earnings. We're going to start with Alphabet. Second quarter profits and revenue came in higher than expected. Shares of Alphabet up more than 10% on Friday. Andy, that is a huge day for one of the biggest companies in the world.
Cross: [laughs] Yeah, for an almost $800 billion market cap company, it's pretty impressive. Revenue was up 19%, that was an acceleration off the first quarter. Earnings per share, when you adjust for the European Commission fine they had last year, were up about 21%. Operating income up a little bit less, 13% if you bake in the European Commission fine. Overall pretty good. The revenue breakdown just from Google property, which is the main business, was up 19%, up 16% on Google properties. That's an acceleration, again, off the first quarter. So I think investors are looking at Google, such a large company, and they're seeing continued momentum as consumers continue to use Google as their primary search engine. That's having a benefit for the ad business, and showing up clearly in both the top line and the bottom line.
Interesting, Chris, they did announce a $25 billion share buyback --
Gross: At this level. That's interesting!
Cross: Yeah, at this level, exactly. The stock's done very well. At that size, and it's not a huge move, only about 3% of the market cap, but it is a significant amount of their annual free cash flow. So the question I have is, when you think about all the investments Google could make, they decide to plow a bunch of more money into their stock? Just says that maybe the investment at that amount of capital, it's very hard to get a good return on investment in from a company that size.
Gross: I'd actually prefer to see a dividend on the stock at this level than a stock buyback. It'll be really interesting as us Monday morning quarterbacks look back a year or two from now and decide whether that was a smart use of capital or not.
Hill: Well, let's look back three months for a second. You go back to the last quarter, Andy, and one of the stories out of Alphabet's report back then was YouTube. Ruth Porat, the phenomenal CFO at Alphabet, was clearly not happy last quarter with YouTube. Seems like YouTube certainly performed better this quarter.
Cross: I think that's true, Chris. There was also a lot of concerns specifically about Amazon taking on more of the advertising space. Granted, that will happen. But I think Google has been able to show, and Alphabet has been able to show, they continue to be the biggest player in the advertising space, and that's showing up in both the growth rates for impressions as well as revenues and profits, when you adjust for some of the fines they faced over the past year.
Hill: Starbucks hitting an all-time high on Friday after third quarter same-store sales in the U.S. grew 7%. Emily, they haven't put up that kind of number in the U.S. in a few years.
Flippen: It's been an astounding quarter for Starbucks. They opened up 442 net new stores, a third of which were in China. The same-store sales growth in China was still at 6%. What seemed to be dead in the water for a lot of people, especially with the IPO of its competitor, Luckin Coffee, actually it tends to be a good thing for Starbucks. They have great growth, both internationally and in the U.S. I think it really shows the success of a lot of their new initiatives. They're adding new menu items, adding limited-edition drinks. But I think most importantly, they're improving the customer experience. That's revamping the company's mobile experience, and launching delivery through a potential partnership with Uber Eats. These are all things that are going to drive customer growth. Membership in their loyalty app was up 14% quarter over quarter to 7.2 million members. And for a long time, that number looked really small in comparison to a lot of competitors. But that just shows that they're not just driving people to download the app, but use the app, spend more money on the app. It's exciting to see. Their net sales were up over 8%. It's a good quarter for Starbucks. I expect great things, especially when it comes to international sales.
Gross: For many of us, the thesis has hinged for a long time on China growth. I perhaps incorrectly had assumed that we would see them start to pull back on expansion, on growth numbers, in terms of the number of stores. Are they commenting about previous estimates? Are we on track for growth in China? Or should investors be a little wary? I know it was a good quarter, but what does the future look like?
Flippen: Well, anecdotally, I'm working as part of the Rule Breakers team, I recently talked with David Gardner, who got back from a trip in China, and the one takeaway he had for the team after his trip was, Starbucks in China. He was amazed by the lines that were out the door and how quickly they were expanding. Some of their largest stores are now being opened up in China. I think we see other entrants getting into the market -- Luckin Coffee, for instance -- and you look at coffee consumption in China, it's still relatively small given their population. A rising tide lifts all boats in a case like this. We're training people to drink more coffee. I think as the country becomes richer -- and while it's not growing at the same rate as it did historically, it's still growing. People are getting a taste for it. People are getting more money and they want the Starbucks.
Hill: I could see that being a double-edged sword for our friend and colleague David Gardner. As a shareholder, probably happy to see the long lines in China. As someone who enjoys the product, probably didn't enjoy the lines.
Gross: [laughs] Didn't like the wait.
Hill: Amazon's streak of record quarterly profits has come to an end. Second quarter profits looked good Ron, they just came in a little bit lower than expected. Shares down a little bit for Amazon this week.
Gross: I thought revenue was solid. Overall sales up 20%, Web Services up 37%, but slowed sequentially from Q1 when it was 42%. Investors certainly keeping an eye on that. Online retail sales up 14%. Subscription revenues, which includes Prime, obviously, up 37%. These are all really strong moves. Revenue growth got a boost from the company moving Prime to one-day delivery from two. But there were also costs associated with that, namely about $100 million for the transition, which took a bite out of margins, which took a bite out of profitability, net income only up about 4%. But overall, still a good quarter. Guidance, I think, was a little bit weaker than investors had hoped for.
Hill: The success that we talked about last week's show with Prime Day and the sales that they got from that, that's not going to show up until the next report, right?
Gross: For sure. But all indications were that it was quite strong.
Hill: Facebook's second quarter profits came in higher than expected this week, but shares of the social network were basically flat. Andy, did anything in particular stand out in this report?
Cross: Average revenue per user is up 18% to now more than $7. Facebook daily active users up 8% to almost 1.6 billion. Monthly active users up about the same, 8%. 2.7 billion of us now use either Facebook, Messenger, WhatsApp, Instagram over the course of a month. Revenue was up 28%. Payments revenue up 36%. Average price per advertisement shown was down a little bit. So, not quite the pricing power. We saw that with Google a little bit as well, too. But clearly, the volume and the impressions continue to show up in Facebook. That's good news.
What was really interesting is, this seemed to get tossed to the side when you read the conference call and all the articles that are written, because so much conversation around the bigger issue around Facebook, which is privacy, regulatory concerns, fines. Like 75% of the conference call seemed to be focused on that, when their business is actually continuing to hum along as they are making these investments. Finally getting some growth and some improvement into their Stories and their services. I think members and users of Facebook and all of their properties are resonating with what's actually there. And clearly, they are sticking around.
Flippen: Facebook is kind of an anomaly to me. The dialogue does depend a lot on privacy, but ultimately, when you look at the company, it shows very little in terms of their financial position. It is so great at monetizing the platform, at least Facebook's home platform, that it's set a standard for a lot of other social media companies in the markets. Facebook's the big guy. Facebook shows that you can monetize social media. But at the same time, you really haven't seen them monetizing other platforms like WhatsApp -- which, in my opinion, holds a lot of potential. So, it'll be interesting for Facebook moving forward to see if they can innovate, I guess. I don't think they're going to be able to acquire their way to the user growth. But it'd be interesting to see if they can innovate to establish new products that will gain users and be able to monetize. I know that they tried to launch a kind of Slack competitor. That really doesn't gain much traction, so it makes me nervous about their ability to continue to grow in the future.
Cross: Mark Zuckerberg talked about Oculus and some of the improvements they're making there, too. Interestingly, their capex is going to be a little bit lower because they're not spending as much on data centers. We heard a little bit of that with Google as well, too. The data center explosion we've seen over the last couple of years is definitely starting to slow.
Hill: Shares of Snap up nearly 30% this week after Snap lost money in the second quarter, just not as much as everyone was expecting. Emily Flippen, you're a Snap user. What do you think of the business?
Flippen: Throwing me under the bus there, Chris!
Gross: Oh, snap!
Hill: I'm just identifying!
Cross: Speaking truth!
Hill: I wasn't assigning any judgment to you being a Snap user!
Flippen: Well, I'm actually apparently in good company. They posted an amazing 13 million quarter over quarter increase in daily active users to 203 million, mainly in the 18 to 24 age bracket. So I'm on the upper edge there, but I'm still in that age bracket. The company associated a lot of that performance, about seven to nine million of those users, they believe they brought in through the launch of its augmented reality lenses, which they have been called as the perfect for the millennial niche glasses. Apparently that's working, at least with some of the audience there. An amazing 48% increase year over year in revenue. It's still losing money, like you mentioned. Like we talked a little bit earlier about Facebook, about their ability to monetize their platform, Snap's really struggled in that regard. Despite the great increase in users, they still haven't quite seen the ability to monetize, at least to the scale that Facebook has. But ultimately, the big news here is that this pushed the stock price above the IPO price for the first time in Snap's history.
Gross: You talk about monetization, and I appreciate that, because it all comes down to profits eventually. Could it be that advertisers aren't impressed with the fact that their target market has no money? Those 18- to 24-year-olds?
Flippen: Well, I take personal offense to that, Ron.
Gross: [laughs] Compared to the average Facebook user, which has gray hair like me.
Flippen: I wonder what will happen as these users do start to age, though, I think the reason why we see such great monetization with Facebook is just because, you're right, older people tend to click through more often. There's a culture that comes with Snapchat that is not based around monetization, at least not the way it is around Facebook or Instagram. So I think it's going to be important for them to cultivate a purchasing culture on the app that isn't there currently.
Gross: Don't email me. I love the younger generation.
Hill: [laughs] Second quarter profits for MarketAxess Holdings came in lower than expected. Shares down 6% this week. MarketAxess is a platform for bond trading. Not the sexiest thing in the world, Andy, But even with this drop, shares up more than 70% over the last year.
Cross: Bond traders out there, email Chris on that. This was another outstanding quarter for MarketAxess. The stock has done just phenomenally. Revenue was up 17%. Earnings per share up a little bit more. They continue to invest in the platform. They gain market share. Trading volumes are all moving in the right direction. As more and more institutional traders -- they have more than 1,000 clients -- really start to use electronic trading for fixed income, and that's basically the exception. It's not like stocks. Bond traders are really starting to move more toward electronic trading, trying to find quotes out there, find liquidity. MarketAxess is playing into that space. It's done very well. It's more than $12 billion in market cap now. Very profitable. Margins almost near 50%. Return on capital, very high. Continuing to make the right investments. The stock was priced for perfection here, so maybe the guidance and the costs increasing, investors or traders may say, "Time to take some profits, maybe not quite the growth story that I saw before." But overall, really solid quarter from MarketAxess, and the stock's done very well overall.
Hill: Tesla shareholders had another rough week. Tesla's second quarter loss was bigger than expected and shares fell 13%. What do you think, Ron?
Gross: Oh, Chris! [laughs] What to make of this? I think the big deal is that the CTO stepped down. He's long been the No. 2 man at Tesla for quite a while. As far as results go, in a vacuum, you would say, "Wow, this sounds amazing!" Revenue was up 59%, driven primarily by 134% year over year increase in vehicles. They had record deliveries. They had record production. What could be wrong? Well, a few things. One, those numbers were less than analysts were expecting. No. 2, because the Model 3 is a lower price point, you saw automotive gross margins take a hit. They're really only around 19% now. The company continues to target 25% gross margins. That's a lot of bluster, I think, from Musk. Good luck with that! So, the company posted a loss.
On the call, Musk said he expects a breakeven third quarter, then a profitable fourth quarter was likely. They keep kind of kicking the can down the road in terms of profitability, although they have had profitable quarters before. Do they have enough cash to weather the storm? They certainly have enough cash for now. They just raised about $2 billion in debt and equity. They actually were cash flow positive for the quarter. They have about $5 billion on the balance sheet. They're OK for now. But I don't know where the story ends. They're going to have to ramp up deliveries pretty strongly.
Hill: It's a little bit like what Andy was talking about with Facebook, where you look at the narrative around Facebook -- you can look at the business of Tesla, but the narrative of, yet another executive is leaving the company, is definitely not helpful.
Gross: Not helpful. The CFO said he was leaving earlier this year. The CTO says he will be an advisor. He says certainly it has nothing to do with his belief in the company. Well, you know, what are you going to say? So yeah, I think it's troubling.
Hill: Boston Beer got a boost from its non-beer brands. Second quarter sales rose 16% thanks in part to Boston Beer's and new line of hard seltzer. Emily, I'm not a beer drinker, nor do I drink hard seltzer, but apparently plenty of people are doing both.
Flippen: Well, even if you're not a beer drinker or hard seltzer drinker, you might be drinking their alcoholic kombucha or their hard cider.
Flippen: [laughs] Boston Beer still has a lot of product lines that are sticky, even though its namesake brand, Sam Adams, has been declining year over year. They recently merged with Dogfish Head craft brewery for $300 million. And they're going to explore not only beers, but beer alternatives as well. I actually think there's a lot of optionality still in the stock. They have raised guidance. Great revenue growth. Depletions up 17%. It's a pretty significant quarter for Sam Adams and its parent company, Boston Beer, I think that's really going to continue to show year over year.
Hill: Let's go to our man behind the glass real quick. Steve Broido, do any of the beverages Emily mentioned interest you?
Steve Broido: Not really, no.
Hill: Align Technology reported solid numbers for the second quarter, but the medical device company best known for the Invisalign brand issued weak guidance for the third quarter. Shares of Align Technology fell 30% this week. Thirty percent. Andy? How bad was this guidance?
Cross: Their long-term guidance overall when they look out over the year is 20% to 30%. And they said the guidance for this quarter is somewhere in the neighborhood of 16% to 19%, folks. Not a great expectation for the quarter, mostly based on some weakness about both consumer interest and sales in China mostly. When they look out across the U.S. and other parts of the world, doing very well. But China weakness, they just think that's going to impact the quarter. It was a very good quarter they reported, with sales doing very well, up almost 23%. Net income up almost 40%. That led to earnings-per-share growth of more than 40% for the quarter. They continue to innovate into the Invisalign product, offer more and more solutions, drive customer acquisition with orthodontists and clients, both consumers and doctors. But clearly, the China market is weighing on the business. That's impacting the stock price. They do think that will start to normalize after this quarter, maybe after the year. So long-term investors could see this is a buying opportunity. The stock has done very well. It had been up to 60% year to date. So it was priced for a lot of that growth. And when the growth doesn't come, investors and algorithms will slice the stock.
Flippen: I am so tired of the China cop-out. I really am at this point. Look, they were projecting 70% to 80% growth in China for the quarter. They banked in maybe 20% to 30%. That's not just weaker demand. You messed up. You messed up on your projections.
Gross: Go get 'em, Emily!
Flippen: [laughs] Especially when you look at -- you talked about Starbucks -- companies that are actually doing really well in China despite a challenging macro environment. That to me says, whether that be reaching out and getting more awareness, educating people, marketing, you're not doing enough of something in the area. If that decreases your estimates for growth so significantly, I wonder what's going to be different in the next quarter. What's going to cause that to normalize, unless they're correcting the mistakes they've made in the past?
Cross: Yeah, I mean, shipments internationally were up last quarter 37%, including 33% in the Asia Pacific market. They've been able to grow in other markets, but something is clearly going wrong in China.
Hill: Shares of Chipotle hitting a new all-time high this week after same-store sales in the second quarter rose 10%. Emily, Brian Niccol has been CEO at Chipotle for about a year and a half, and he appears to be incapable of doing anything wrong. [laughs]
Flippen: For now. For now! Digital sales grew nearly 100%, which are now accounting for almost 20% of total Chipotle sales. So, to say Niccol is doing something right would be an understatement. The same-store sales growth, as you mentioned, is up 10%. There was a little bit of an increase in costs associated with avocados, something that us millennials get fancy about. We call them [pronouncing it differently] "a-va-cadoos." All the cool kids are calling them that.
Hill: They are?
Gross: They are?
Flippen: No, I'm just messing with you. Chipotle may need to just bite the bullet in terms of paying for their fancy of "a-va-cadoos," because those costs have been increasing. However, sales are up so significantly that it seems marginal at this point. What the real story seems to be is Beyond Meat. Last week, I half-jokingly mentioned that Chipotle should look into getting Beyond Meat if they wanted to see a nice little stock pop of their own. But it's something that they addressed in their earnings call, essentially saying that they're not interested in partnering with Beyond Meat because the processes it takes to create the fake meat burger doesn't fit with Chipotle's food-with-integrity principles. This immediately made Beyond Meat CEO Ethan Brown a little angry. Invited the CEO Niccol out to visit the facilities. Regardless of whether or not that ends up happening, it's clear that Chipotle is doing something right.
Gross: Did they figure out that whole queso debacle?
Flippen: I still like the queso!
Cross: I think they figured it out.
Hill: It is interesting, though, if you widen the lens and look at restaurants and food in general, and the trend of delivery. We talked earlier about Starbucks, you look at Starbucks and Chipotle, they've both done a good job. I would argue Chipotle got to it a little faster than Starbucks, but they've both done a good job of expanding their operations within the store to accommodate for the increasing delivery. You walk into a Chipotle, and they've got people working just on delivery orders. Starbucks is starting to do the same thing as well.
The toy makers had a good week. Hasbro and Mattel both issuing second quarter reports. Hasbro's profit growth getting a boost from Avengers toys while Mattel lost money, although the loss was lower than expected. Ron, obviously that counts as a win for Mattel.
Gross: Right. Good for both stocks, but for different reasons. Hasbro, wow! Year to date, stock up 50%. Shaking off the 2018 cobwebs of the Toys R Us bankruptcy very well. Thank you! Really impressive numbers. Net revenue up 9% even with international business falling 1% due to negative currency exchange. Digital gaming did very well. Has anybody heard of Magic the Gathering?
Hill: Yeah, sure! Of course!
Gross: Am I showing my age?
Gross: I have heard of Dungeons and Dragons. Direct-to-consumer sales are great, including on Amazon. Everything continues to go really well. Some promotional activity, but gross margins were still strong. Adjusted EPS up 71%. That's strong output, for sure.
Hill: Mattel's film division has partnered with Blumhouse Productions on a movie centered around the Magic 8-Ball. I think, like pretty much everyone who hears this story, I was tempted to just roll my eyes. But then I remembered that Blumhouse is one of those small, independent, up-and-coming production studios that actually has a pretty great track record. Blumhouse is the studio behind Get Out and BlacKkKlansman, and they're good with horror movies, which apparently this is going to be. Blumhouse made a horror movie called Truth or Dare that had a budget of $3 million and it grossed almost $100 million worldwide. So, I don't know. I think if you're a Mattel shareholder, you have to be looking forward to that.
Gross: Both Hasbro and Mattel have combined their toy products with entertainment in a very strong way. Hasbro, Transformers, GI Joe, My Little Pony, if you will. Mattel is set to come out with a Game of Thrones line of toy sets soon. They're both doing a good job leveraging their product portfolio. I would imagine that the 8-Ball will be pretty exciting as well.
Hill: Do your kids have a Magic 8-Ball? You've got younger kids, Andy.
Cross: We don't have a Magic 8-Ball, no. I thought you were going to say magic pony. We've got plenty of those, unfortunately. Give me a Magic 8-Ball over a magic pony.
Hill: Final earnings story of the week. Shares of McDonald's up after global same-store sales rose 6.5%. Emily, that's huge when you consider just how big this restaurant is.
Flippen: Huge, especially considering not just 6.5% same-store sales growth globally, but 5.7% same-store sales growth just in the United States alone largely thanks to promotions, games, store upgrades. All of these things are helping change what the McDonald's experience is. They're also looking at expanding their delivery options. They're adding DoorDash as a delivery partner, trying to compete with a lot of the faster casual chains that we have now as options. Listening to the earnings call, it was clear that management saw the most opportunity internationally. They spent a long time talking about underdeveloped markets like Poland, for instance, that were seeing double-digit same-store sales growth over double-digit same-store sales growth. So it's been impressive for their expansion internationally. It is a testament to the fact that while McDonald's may feel a little played out here in the United States, the international opportunities are really undeniable. But I would say, I think the thing that we all want to hear -- what I know you wanted to hear, Chris -- was, are they going to make a premium chicken sandwich?
Hill: It's not just me who wanted to hear it. It's the franchisees who said to the board, "We need this sandwich to compete with Chick-fil-A."
Flippen: Well, me, who spent an hour a half of my morning listening to the call --
Gross: And we thank you for it!
Flippen: -- I also wanted to hear about this premium chicken sandwich. But there was no mention of any sort of chicken sandwich. It's clear that while the franchisees would like them to focus more on menu development, to help them compete with companies like Chick-fil-A, the company was mainly focused on just revamping the stores, recreating the McDonald's experience, as opposed to making a premium chicken sandwich. But let me go on record to say, if they made a premium chicken sandwich, I'd be the first in line.
Gross: Let me be the second to say that Chick-fil-A's sandwich -- the No. 1, for those who are aficionados -- is about as perfect a chicken sandwich as one can ever buy. McDonald's will pale in comparison no matter what they do.
Hill: You go back a couple of years with McDonald's, and we started to hear this story from the company management about the investments they were going to make in the locations, the technology. And there were some people raising an eyebrow, scratching their head at the time. Those investments are paying off. It takes a couple of years for that ripple effect to play out if you do it correctly, but we're seeing the results of that.
Cross: Yeah, and Chris, think of the same-store sales we saw this quarter. Chipotle, Starbucks, McDonald's. These are all very large businesses with lots of assets to deploy and figure out, and they clearly are getting it right. It doesn't happen overnight. For long-term investors like us who really study the businesses, that's a great added benefit for investing in companies that can get this right and have the patience to be able to let them do that work.
Flippen: Well, it seems great this quarter. But I will say, something management touched on a couple of times in the call is actually the delay of the improvements that they're rolling out. This is called the expansion of the future, where essentially, they're making their franchisees update their locations. And they're actually having pretty significant pushback from their franchisees, whether that just be because they don't want to deploy the capital, or, more likely, that the franchisees are seeing the capital deployed and thinking, "This would be better spent elsewhere." It's interesting to see the pushback that they're getting from their franchisees in updating the stories. But I will say I agree, just by looking based off the numbers that they reported this quarter and over this past year, it seems like it's working.
Hill: Before we dip into the Fool mailbag, I want to go back to something that's come up a couple of times on this show. It's stock buybacks. Andy, you talked about it with Alphabet and their $25 billion plan. Chipotle, part of their announcement was the board approving a $100 million share buyback plan. Obviously, that's a tiny fraction compared to Alphabet. And yet that actually struck me as being crazier. Alphabet has the money. And when I look at Chipotle and all the great things they've done over the past year and a half with their stock being as high as it is, I just looked at it and I thought, "Why would you think about spending?" Clearly, they don't have to allocate that hundred million. But just the idea that they're entertaining that when they can invest in in something else, I'm just wondering if we're now entering a point where the market is doing so well, so many stocks are hitting new highs, that a share buyback plan is a little bit of a red flag now?
Cross: It's interesting. To full circle back to how we started the show with the GDP numbers and the interest rates, this is why I think aggressive cuts at the Fed rate is not necessarily going to have a huge impact. It's not like companies don't have the capital to spend. They have the capital to spend and they're choosing to spend it not necessarily investing back into their business. They've been buying back tons and tons of stock. Pretty much, they see a higher return there. But also, it clearly helps the earnings per share line as well.
Gross: And the recent buybacks are largely, I think, a result of the Trump tax cuts, where companies saw this influx of cash and didn't really know how to put it to work. So, why not buy back your stock? I'd rather see Chipotle do that than open up a series of burger chains like they announced a few years back. Thank goodness management came to their senses and pulled back on that. But, as we've notoriously said on this show, buybacks are often not the best use of capital. Again, Monday morning quarterbacks, we'll see how it looks in a couple of years.
Flippen: I agree. It does give me early 2000s flashbacks, looking at how many companies are buying back their shares. That being said, as someone who spends a lot of her time looking at cannabis companies, I think a few of those companies could maybe invest in buying back some of their millions of shares.
Hill: Our email address is email@example.com. Question from Dr. Ted McElroy in Tifton, Georgia. He writes, "I'm a member of your Stock Advisor service and a longtime listener of all of The Motley Fool's podcasts. I was going through my industry news, as an eye doctor should, and I came across an article I think thought you should discuss." And he sent along a link. It brings the news that -- and again, this is industry news for eye doctors -- Taco Bell is launching a collection of branded eyeglasses. They are doing this in partnership with a company called the DIFF Charitable Eyewear. The collection, and I'm quoting here, "takes inspiration from many signature elements from Taco Bell, including its logo and its packets of hot sauce," which I would just add parenthetically, I don't want hot sauce anywhere near my eyes. The prices of the eyewear, Ron, you might be surprised to learn, range from $85 to $95. You can buy them online, or next month at the Taco Bell hotel and resort in Palm Springs, California.
Gross: [laughs] I don't want to sound like a curmudgeon. I'm a fun guy. But this just sounds ridiculous! The only redeeming thing here is that there's a charitable component to it, so I'm actually fine with it.
Hill: Emily, can I interest you in these?
Flippen: Of course! And honestly, $95, Chris? That's a steal. You have to understand, Taco Bell is not just another Yum! Brands fast food restaurant. No. Taco Bell is a lifestyle choice. Heck, if I'm a Taco Bell aficionado, I'm going to be wearing those sunglasses at the resort all day long.
Hill: What I like about this is that I know in my heart that there are executives at other consumer brand companies that have nothing to do with fashion that are saying to their bosses right now, "You see what they're doing at Taco Bell?" I don't know if someone at Chipotle is going up to Brian Niccol and saying, "Look, if Taco Bell can do this, and you used to run Taco Bell, shouldn't we be doing Chipotle-branded eyewear?"
Cross: Listen, if Lululemon can open up a restaurant, why can't Taco Bell start offering a little bit of sunglasses?
Hill: Steve, Broido, our man behind the glass, you're a fashionable guy. I know that reservations at the Taco Bell hotel and resort sold out literally in two minutes, so you're not going to be going to Palm Springs next month. But can we interest you in some eyewear?
Broido: I don't think so. But it's an interesting choice! It's kind of a cool idea! Let's go completely outside of our lane and give it a shot!
Hill: Let's get to the stocks on our radar. Our man, Steve Broido, will hit you with a question. Ron Gross, you're up first. What are you looking at this week?
Gross: I've got Editas Medicine, EDIT, a clinical-stage gene editing company focused on the CRISPR-Cas9 technology. Currently developing EDIT-101 to treat a rare eye disease -- back to eyes here. In partnership with Allergan, the first in vivo study of a CRISPR-based genome editing medicine, which means it's editing that's taking place inside the human body. First time ever, about to happen. Really incredibly exciting. If you like the sector but you don't want to place just one bet, you can also look at CRISPR Therapeutics and Intellia Therapeutics to diversify the bet.
Hill: Ooh, a little bit of a basket there.
Gross: A little bit!
Hill: Steve, question about Editas Medicine?
Broido: I've heard a bit about the CRISPR stuff. What is the chance that just doesn't work out, that it goes down to zero?
Gross: Wow! It's all about the side effects, and are you fixing genes, but there's other consequences in the human body? If that were to be the case, then certainly, we'd be in trouble here and we'd have to look -- there are other gene editing techniques out there, too, that are competing with CRISPR. We'll have to see which is the best one in the end.
Hill: Emily Flippen, what are you looking at this week?
Flippen: My hot stock should not be a surprise to anybody who's been listening to me speak and that's because it's Beyond Meat, BYND. Beyond Meat is scheduled to report I believe next Tuesday. It's going to be interesting to watch. I've personally had a negative conviction on the company for a while now, not because I don't like what they're doing, but because that valuation is insane. Bringing it back to cannabis for a second, their valuation is the same size as the worldwide cannabis market right now. So, if that tells you anything about what's baked in for this company... regardless, this biopharmaceutical company -- because that's the only way I can get it to the valuation were in needs to be. So, it's kind of like Editas in a sense, Ron. They're innovating in their alternative meats category. And they've made a lot of partnerships. It's an interesting company. I really want them to succeed because I think what they're doing is important, but at the same time, oh, it's ridiculous to watch! I'm definitely looking forward to their report!
Hill: And the ticker symbol?
Hill: Steve, question about Beyond Meat.
Broido: I've heard a lot about Beyond Meat. Where do I get a Beyond Meat burger? Is it the freezer at the grocery store? Is that a restaurant? Where do I buy these things?
Flippen: Get out of the freezer section! Everybody who can't find it thinks that it's in the freezer section! You have to go to the meat section of your grocery store. It sits there next to the ground meat. But you can also buy it at retail stores.
Hill: Andy Cross, what are you looking at this week?
Cross: I like Twilio, TWLO. I've talked about this before. Steve, I think you know this one. It's a cloud communications platform with clients like Amazon, Netflix, Uber, Yelp, WhatsApp, salesforce.com. Founded by University of Michigan graduate, go blue! $20 billion market cap. Reports earning next Wednesday. Stock's done so well. They recently more than doubled this year. They have 155,000 customers. They acquired a company called SendGrid for $3 billion that does email communications, which was not in the Twilio suite of portfolios. So, now it adds that. Growth rates exceptionally high. Want to see those continuing to expand with SendGrid now into the Twilio family.
Hill: And the ticker symbol?
Hill: Steve, question about Twilio?
Broido: What's the biggest threat to their business?
Cross: Oh, gosh! Uber was their largest client, and when Uber started pulling back a little bit, that really hurt the stock and hurt the business. Now they've managed through that. So I would say generally, overall, if clients start using their own applications for communication, that's bad news for Twilio.
Hill: What do you want to add your watch list, Steve?
Broido: Let's go beyond Beyond Meat.
Hill: Alright, Ron Gross, Emily Flippen, Andy Cross, thanks for being here! That'll do it for this week's show! Our engineer is Steve Broido. Our producer Mac Greer is off this week, so we'll try and do better next week. I'm Chris Hill. Thanks for listening! We'll see you next week!