A New Problem for Google, a New Pickup for Tesla

The more things change, the more they stay the same. First, Alphabet's (GOOGL 1.87%) (GOOG 1.85%) in trouble -- again. According to news reports, on Monday, more than half the state attorneys general in the U.S. will be jointly announcing a wide-ranging probe into data collection, privacy, and possible antitrust violations at Alphabet subsidiary Google. That will join a number of similar probes and investigations by regulators here and abroad. Next, Elon Musk may be exaggerating -- again. The auto industry -- and consumers -- are waiting with some anticipation to see whether Tesla's (TSLA -3.76%) much-discussed electric pickup truck (due for a big reveal in the next couple of months) will live up to the CEO's hype. And finally, Apple (AAPL 0.38%) is preparing to offer a new, lower-cost iPhone once more, aimed at winning back some of the market share it has been losing, especially in China.  

In this episode of MarketFoolery, host Mac Greer and analysts Emily Flippen and Jim Mueller put all three of these news items into context for investors.

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 Sept. 4, 2019.

Mac Greer: It's Wednesday, Sept. 4. Welcome to MarketFoolery! I'm Mac Greer and I am joined in studio by Motley Fool analysts Emily Flippen and Jim Mueller. Welcome! How are we doing? 

Emily Flippen: Hey, Mac!

Jim Mueller: We're doing fine, Mac!

Greer: Well, Happy Wednesday! We've got lots to talk about. Tesla trucks. There's some buzz. The buzz is growing that Tesla may be unveiling a pickup truck very, very soon. We'll get to that. We're going to talk cheaper iPhones. Turns out, the more expensive iPhone's not selling quite as well as they once did. 

But let's kick off with Google and reports that more than half of the U.S.' state attorney generals are gearing up for an antitrust investigation into Google's advertising. Now, Emily, we're expecting an announcement, according to these reports, next week. This happens against a context where there are a lot of other Google investigations. We've got a House Judiciary Committee looking into Amazon, Apple, Facebook, and Google. We've got a Justice Department reviewing big tech. And we've got the E.U. Where does it end? And what do you make of the state investigations? 

Flippen: Well, first of all, I love covering rumors on this show. [laughs] Although it seems like these rumors, given all the context you described, might have a little bit more veracity to them. It's no surprise that they're going after Google. Mind you, it could be other companies as well. Google, obviously an advertising, monolithic company, but the other big guy is Facebook as well. I don't think any big advertising company is out of the crosshairs here. But it begs the question of, what are we looking for? What is the outcome from investigations? Is it a breakup of companies like Google? Is it a breakup of companies like Facebook? I tend to think not. That's what some lawmakers may want. But the issue does become partisan at a point. I think that what we're looking at here is probably going to be a stifling of these companies' ability to acquire, to innovate, to expand their market share when it's already so great. When people think about Google, it may not occur to them how big it is, in terms of its advertising business. But Google not only essentially owns search in the United States, but they also own YouTube. All the ad-based videos you see on YouTube are also coming from Google. Google owns AdSense and AdWords, all of these platforms that work with advertising, and external sites as well, and they're advertising their own products on top of it. It really does pose a lot of conflicts of interest. 

Greer: OK, let's get into that. I want to share a quote from Louisiana's attorney general, Jeff Landry. This is about what we think is going to come down with all the state attorney generals next week. Here's what the Louisiana attorney general has to say. He says, quote, "Google gets to pick winners and losers because the system is rigged in their favor. Continuing down this road will kill online publishing, or Google will control who stays and who goes." 

Mueller: It's a pretty bold statement right there.

Flippen: It really is.

Greer: That's why I shared it.

Mueller: But I have to wonder if some of this thinking isn't stuck in the 20th century, even in the 19th century. The breakup of Bell, the breakup of Standard Oil, those are all 20th century stories, and early 20th century for Standard Oil. That's more where the monopoly was built up and imposed upon the customers. Here, with Google and Facebook and others, the monopoly is being chosen by the customers. For Amazon, people are going to Amazon to buy. People are going to Google to search, and Google's search engine is the best, or near the best, if it's not the best, so the advertisers are going where the eyeballs are. The company is not imposing the monopoly --

Greer: So, no harm is being done?

Flippen: Harm is happening.

Mueller: Harm is probably happening. You can argue that they're collecting too much data, but people also freely volunteer that data. They turn on the tracking on their iPhones, or smartphones, so that they can get the advertising for the stores they're walking by and so on. So how much harm is being done. Whether regulations need to come in and force a breakup or something like that, I don't know. It's a sticky issue, for sure. We have to figure out what the best outcome is. But I'm not necessarily convinced a breakup is the solution. 

Greer: OK, I'm a Google or Alphabet shareholder. Should this weigh on my investment thesis at all? Or do you see this as noise?

Flippen: Unfortunately, I think the space is almost naturally monopolistic, in the sense that Google is the best aggregator of eyes, aggregator of search. That's, as a result, where the advertising revenue goes. As a shareholder, it's almost a good thing in the sense that it shows the power that the company has over the consumer. Despite the fact that we have all these issues, you as a consumer are still probably going to be searching with Google. So, while I am concerned about the penalties, we just saw a penalty come through for Google, I think it was, they reached an agreement with the FTC over some advertising issues they had geared toward kids, and the penalty was a $170 million fine. That's less than 1% of their advertising revenue for the quarter. So, as a shareholder, when I see this relatively light slap on the wrist for what could be a big not only privacy issue but advertising issue aimed at kids, it does make me wonder if the penalties, and when the penalties come down, if they're actually going to have a material impact on the business.

Mueller: Slap on the wrist? That's a slap on the pinky.

Greer: Let's move on to Tesla. Let's talk Tesla trucks. Now, a tweet this summer from Tesla founder Elon Musk said that a Tesla pickup truck could be two to three months away. Kind of cryptic. We don't know exactly when, but the anticipation is building, and Musk has already mentioned some details. He said the starting price for a Tesla pickup will be below $50,000, which is actually very affordable for a pickup; and, the truck will have a range of at least 400 to 500 miles. OK, Jim. We should also add that Ford also working on an electric version of the F-150, which happens to be the most popular vehicle sold in the U.S. last year. It is game on. What do you make of a Tesla pickup truck? 

Mueller: I think there are three concerns. Before I get to those, I want to add a couple of more interesting stats here. You mentioned the 400- to 500-mile range. That is with six people, presumably six adults, in the cab, including Andre the Giant. 

Greer: Who was 7'4 or 7'5.

Mueller: Depending on who you ask. I believe Musk was the one who said that Andre the Giant could fit in the driver's seat, which implies a very large cab. I'm 6'3 and I have a hard time fitting into some drivers' seats. Not pickups, but other cars.

Greer: OK, so, roomy interior. 

Mueller: Very roomy interior, enough for six people. This is the one that surprises me -- 300,000 pound towing capacity. For comparison, this year's model of the F-150, the 2019, has a towing capacity with a special configuration of the truck of only 13,200 pounds. To put that into context, as if everyone knows the size of a dinosaur, the T. rex, the Ford can haul about one T. rex down the road.

Greer: Which is a lot.

Mueller: Which is a lot. Tesla is saying that they're going to be able to put 20 T. rexes on your trailer and the truck can haul it down the road.

Greer: Hold on there. You're saying, if I need to haul multiple T. rexes, an F-150 can't get it done?

Mueller: No. Not at all.

Greer: Oh, my gosh! 

Flippen: What are we going to do?! We have to buy a Tesla now!

Mueller: [laughs] To put it in a more familiar context, 300,000 pounds is about the weight of four fully loaded semi-trucks with trailers, with a gross vehicle made of 80,000 pounds apiece.

Greer: But here's the thing. I hear all of that. But the F-150 is so iconic. Ford is so iconic that I am incredibly skeptical -- what's the word beyond "incredibly skeptical"? -- that the Tesla pickup truck will make it, especially in rural America. The moment they announce, the moment they bust out this truck, if I'm Ford, I'm like, "Keep your powder dry, our truck is coming out in a year/four months/two years," and I'm getting very specific.

Mueller: I don't know what the word beyond "totally skeptical" is. Maybe somebody out there with a thesaurus can tell us. My issue with this is, when? The Model Y is not even in production yet. That's not expected until next year. When might the truck actually be delivered? Musk isn't saying that it's going to start production. It's going to be unveiled, which means on a stage, in a prototype, and all that, and, "Look how pretty it is, start placing your orders today, folks." So, when? Two, three years from now, maybe. That gives a lot of time for companies like GM, Ford, and Chevy to put out their own trucks. The price. $50,000. That's about midrange for a pickup truck. 

Greer: That's amazing!

Mueller: Ranges run about $30,000 to $70,000. But, can Tesla actually get the same levels of profits that the trucks deliver for Ford? A third of their sales revenue is from these pickup trucks, among the three big Detroit automakers. I'm sure a large amount of their profit is also coming from those trucks. Can Tesla match that profitability? I don't know. 

Flippen: Yeah. And, here's the thing. 20 T. rexes, I'll give it to them. The guy sent a car to space, OK, you can have your 20 T. rexes. Here's what I don't believe: the $50,000 price point. I feel like we've been there. We've done that. We've heard it. It's probably not happening, at least not at that price. 

Greer: You're skeptical? 

Flippen: I will give him the 20 T. rexes. That's being very, very generous. I'm skeptical of the price. 

Greer: What do you think, Emily, of my strategy? Let's say, the moment they unveil this Tesla pickup truck and they start accepting orders, if you're Ford, wouldn't you also announce your version of an electric pickup truck and also start accepting orders? What you want to do is, you want to freeze the game board. You don't want to lose anyone who would be tempted to buy that Tesla truck. You don't have to make the sale right away, but if you say, "Hey, two years from now, we're going to have our own F-150 electric truck. You've heard of the F-150. We'll start accepting orders today."

Mueller: Maybe. Maybe not. A big driver of the sales of those F-150 pickup trucks is to farmers and small business owners who need the hauling capacity, who need the payload capacity, and so forth. They also need the utility, ability to switch between hauling or payload or driving around town or what have you, as well as being easily repaired -- for farmers, easily repaired on-site. So, with Tesla and their repair issues going on today, will they actually appeal to the farmers and small business owners? Or will Ford come out and say, "Yeah, Tesla announced that big pickup truck, but they're not targeting you, our core buyers of our trucks. We're coming out with something. If you want electric, we can give you electric. If you want diesel, we can give you a diesel," and so on. 

Greer: If you're Tesla, and you're hauling 20 T. rexes, you may need some repairs. 

Mueller: [laughs] Right.

Greer: One more bank shot for the Tesla story, quickly. Emily, Tesla owners in China asking for refunds after Tesla got a 10% tax break. What do you make of that? 

Flippen: I would do the same thing, wouldn't you? Pass that savings on to me. But there's no way Tesla's actually going to be doing that. They worked hard for that tax break. I think it'd put them at a 25% tax bracket if they didn't get a cut there, so, all their auto parts. But, no surprise there. I think that consumers want a little bit of that refund.

Greer: Never hurts to ask.

Flippen: Exactly.

Mueller: That was actually a sales tax break that Tesla doesn't have to charge anymore and pay to the Chinese government. They are going to be still subject to December's proposed 25% tariff of importing cars, which is a big reason why Tesla is building that factory in Shanghai. 

Greer: For our final story, let's talk iPhones. Let's talk cheaper iPhones. Apple reportedly will introduce a new low-cost iPhone in 2020. Emily and Jim, you may have heard, iPhone sales slowing a bit recently. That may be playing into this story. I am proudly rocking my iPhone 6s with a battery life that seems to last somewhere between 18 and 20 minutes. I may be in the market for a new lower-cost iPhone. But, what do we think of this news?

Mueller: Apple's done this before. When they launch out a new version of their iPhone, they lower the price of their previous versions. They came out with the iPhone SE back in 2016 at something like $399. The current price of the iPhone 7 is $449 I believe. But the new iPhone X, however you pronounce it, is $1,000 starting price, I understand. Next Tuesday, when they have their announcement of all their new products, they're expected to announce a new phone that has a processor upgrade, more cameras, you can do ultrawide angle shots if you get the right version, better Face ID. Something I think is really cool-sounding is live video editing. As you're filming the video, you can edit it and crop it and resize it or color correct or whatever. I don't know if that is already available on Android devices, but I've noticed that what Apple brings out is often what's already on Android. Certainly it was with my Samsung S8.

Greer: But they make it seem like it's new. That's the brilliance of Apple.

Mueller: They do. Next year, they'll likely come out with a cheaper phone. Possibly, iPhone 8 will drop down to the price point of $449. I think Apple's running into what Dell ran into years ago -- the phones are so good, you don't have to upgrade as often or even at all, as you have not with your 6.

Greer: I just had the battery replaced a couple of years ago. I'm probably due for another battery replacement. I should probably get a new phone.

Flippen: iPhone X -- to Jim's point, I don't even think I know [how to say it] because I was never going to pay $1,000 for it in the first place. I do think this will appeal to consumers. But I also think consumers at this point are just happy that they're not doing what Samsung did, which was come out with a flip phone that --

Mueller: Didn't flip.

Flippen: It didn't flip, and it broke instead. As long as the phone doesn't flip if it's not intended to flip, and doesn't break, then consumers will probably be happy. 

Mueller: But Apple does need to do something. They are certainly losing market share. According to Gartner, they had a 10.5% market share after the end of the June quarter. Shipments had fallen 13.8% year over year over that. Meanwhile, Samsung was growing shipments 3.8% and has a little over 20% market share. And Huawei, the company that the federal government hates the most, apparently, its share is No. 2 at 15.8%. It's pulled ahead of Apple. They had 16.5% growth, including 31% growth in China alone. I'm wondering if that's not possibly a reaction to Huawei being hated upon by the U.S. government and the Chinese consumers saying, "Yeah, we'll buy it anyway."

Flippen: Huawei also has a very, very strong international presence around other parts of Asia. I actually just got back from a trip to Tajikistan, Kurdistan, Uzbekistan. Huawei stores in all of those places. Didn't see one McDonald's, by the way. But, saw lots of Huawei stores. If that tells you anything, it's that Huawei has penetrated a lot of developing countries much better than Apple has. 

Greer: Let's wrap up with the desert island question. You're on a desert island. There's not a lot going on. You're going to buy a stock and you're going to hold that stock for the next five years. Your choices are: Alphabet, the parent company of Google, Tesla, or Apple.

Mueller: I'm going to go with Alphabet. I think the company's market share and leadership position in the advertising space is so big, and there's not a compelling reason for the consumer for Alphabet to be broken up. So, I'm going to go with Alphabet.

Flippen: You're not going to go with Tesla, Jim?

Mueller: Nah.

Flippen: [laughs] I will also have to agree with Jim. I think I'd be buying Google at this point. I just think about how important they are to everyday life. To Jim's point, this is a consumer-facing company and consumers love the product. I think it would do great detriment to the consumer experience if something like Google were to be broken up. 

Greer: Do you think, in terms of stocks we talk about, is Tesla the single most polarizing stock? It feels that way.

Mueller: Definitely. 

Greer: It feels like you've got people on both sides. Someone is going to be fabulously right. Someone else is going to be fabulously wrong. Or, maybe not fabulously, maybe it'll just --

Flippen: What if it's just a middle-of-the-road performer? What if Tesla, 10 years now, it's not the car maker, but it's also not bankrupt?

Greer: It doesn't feel like that's even an option. I feel like he's like "go big or go home."

Flippen: [laughs] That's true.

Greer: So, it's either going to succeed beyond everyone's wildest expectations --

Flippen: 20 T. rexes or no T. rexes. There's no two T. rexes for them.

Greer: Exactly.

Mueller: I'm going to push back on your framing. Right or wrong is not the way to look at it. You should be looking at it as, how can I make money investing in this company? 

Greer: That's true. 

Mueller: Do I invest on the short side? Or do I invest long?

Greer: That's what I meant by right and wrong.

Mueller: Judging it as right or wrong gets your emotions involved, and that just clouds everything. 

Greer: You're right. That's shorthand -- when I say someone's going to be right, they'll either make a lot of money or potentially lose a lot of money.

Mueller: Well, for a lot of Tesla shareholders, that's exactly how they view it. "I'm right because I own the shares."

Greer: So, you think the emotions get in the way?

Mueller: I think they do, unfortunately. 

Greer: Well, I think you need to hear more things like "20 T. rex towing capacity." Then I'm like, you know what? That gets me interested. Then I'm looking at my F-150 -- I don't have one, but if I had an F-150 -- it's going to take a whole lot for me to get rid of my F-150 for a Tesla pickup truck.

Flippen: Like 19 T. rexes, maybe? 

Greer: I don't know. How many T. rexes, at the end of the day --

Flippen: How many is your breaking point?

Mueller: Here's another one -- instead of 20 T. rexes, what if you went two space shuttles?

Flippen: More compelling.

Mueller: Bring in the modern thing and, hey, SpaceX might be interested. 

Greer: I guess it depends, when is the all-electric F-150 coming out? I'm curious.

Mueller: I don't know, but I know they're working on it.

Greer: It's game on! It'll be fun to watch. Jim and Emily, thanks for joining me!

Flippen: Thanks for having us!

Greer: 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 MarketFoolery! The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! And we will see you tomorrow!