In this episode of MarketFoolery, host Chris Hill talks with analyst Seth Jayson about some recent market news. Shares of Microsoft (MSFT 0.68%) did basically nothing, despite the gargantuan company reporting some massive growth figures. Virgin Galactic will make history next week as the first space tourism stock on the market, but investors should probably steer clear. Twitter (TWTR +0.00%) shares tanked after the company reported several disappointing trends. Shares of iRobot (IRBT +0.00%) have certainly seen better days, but maybe it's time for a turnaround. Plus, some tips on marathon running in cold, wet, miserable weather. Tune in to find out more!
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This video was recorded on Oct. 24, 2019.
Chris Hill: It's Thursday, October 24th. Welcome to MarketFoolery! I'm Chris Hill. With me in studio, Seth Jayson. Thanks for being here! We've got earnings. Holy cow, do we have earning! So much so that Motley Fool Money this weekend is going to be all earnings.
Seth Jayson: That sounds like fun!
Hill: Oh, it is! It is. We're going to preview a brand-new category of stock that's going to be trading next week. Hold on, we'll get to that.
Jayson: Wait, am I doing that now?
Hill: No. Right now, we're going to talk about Microsoft. First quarter profits and revenue for Microsoft came in higher than expected. The stock is up 1%, 1.5%.
Jayson: Earlier it was down a little bit, but nobody seems to care.
Hill: Let me tell you why it's only up a little bit. It's because their cloud business only grew 59%.
Jayson: I know. That's horrible. Only 59%. Azure is what they're talking about, the Azure growth rate. It was some 60%. Some people said, "We had it at 62%, for crying out loud!" I imagine these guys as old people on a porch. "And it came through at 59%?! Hell in a handbasket!"
But this is a $10 billion division of Microsoft. And if its primary mover is growing still at that kind of a pace, that is the kind of thing you should dream of. And Microsoft is a trillion-dollar company. For them to have a big business line growing at 59% still is pretty incredible. You're talking about $33 billion in revenue for the quarter. That's pretty amazing. Sure, not everything's growing that quickly. But even Office 365 commercial, this is a big contributor to one of their other $10 billion segments, growing at 28%. That's Office. That's the Office software we use. Which, by the way, I love and I continue to use it. That's a pretty healthy growth rate for a product that basically has been around for a couple of decades.
Hill: Yeah, it really is. Earlier in the week, we were talking about all the different CEO announcements. I think that, among other things, you look at the job Satya Nadella has done at Microsoft, and I think now, it's at the point where anytime, any company, no matter what the industry is, if they get a new CEO, if you're paying attention to the universe of public companies, part of you is thinking, "Gosh, if only this new guy at Under Armour can do for Under Armour what Nadella has done for Microsoft, that'd be great."
Jayson: Yeah. Now, a lot of the groundwork was laid before he got there, too. You have to say, really solid execution from thousands and thousands of people working at Microsoft. But yeah, keeping this vision, moving into the cloud so strongly, and tying all this together. They've got great AI. They're a leader there. They have really good gaming. They're even doing their little search business that everybody makes fun of. Doing OK. The computers that everybody made fun of, the service business, does OK. Actually getting good reviews. The Motley Fool has switched to those from what we were using because it's really solid hardware. Gaming business, lumpy. That's how the gaming business is. But, they have irons in a lot of fires. And they do well in a lot of these places.
Hill: Yeah. For anyone who looks at the gaming being down year over year, a year ago, they were putting up insane -- talk about tough comps, Microsoft's gaming division this quarter and the previous quarter, really tough comps.
Jayson: 44% growth last quarter.
Hill: Yeah. So, even if you're looking to ding Microsoft, I don't think you want to ding them too hard for their gaming quarter.
Jayson: Even Windows OEM install, still 9%. That's stronger than I would have guessed. If you had asked me, "What do you think the growth in Windows operating system installs was for OEM computers?" I would have said, who's buying a computer anymore? I don't know, down 2%? Nope, up 9%. OK, cash cow.
Hill: Yeah. Let's move on to, well... [laughs] now that we've gotten the amazing execution story out of the way, let's move onto Twitter.
Jayson: Ah, the Tweeter.
Hill: Shares of Twitter down nearly 20% today. Third quarter results were solidly worse than expected. You've got the management at Twitter talking about a number of headwinds. If you want to give them credit for being transparent, you can. But they're saying, "Not only are we battling a number of headwinds, they're not going to get better in this year, and there's a good chance these problems that we're dealing with are going to bleed over into 2020."
Jayson: To me, it almost reads like, not a bunch of headwinds, but more like a single headwind, which is, "We screwed up a bunch of stuff." So they're fixing what they call bugs in some of their systems, which is changing the amount of information advertisers can get and so forth. And since they run on an auction system, advertisers have responded in different ways, all of which have added up to not doing so much advertising as you would hope. That's really bad when your business is a one trick pony. Well, that's called a two trick pony. You've got hacking elections [laughs] and selling ads, right? So, this is a business that depends on advertising. I'm actually honestly surprised that they can do so well as they have selling advertising. How much internet advertising can we look at? If you run through your Twitter app, according to Twitter, the answer is apparently, I don't know, every third or fourth tweet, here's an ad for you to look at and be really angry about if you wanted to see tweets instead of ads.
Hopefully they fix this. The response from the market today seems to be, "Uh-oh, maybe they don't fix it. Maybe this doesn't get fixed for longer." This company turns out a decent amount of cash. At the right price, presuming things don't go off the cliff, it's actually worthwhile. I'm not sure I'm a buyer at the free cash flow yield that you get right now. But at some point, probably worth it, provided things aren't going too badly. Selling cheaper than it has for a while.
Hill: It absolutely is. In the same way that we just talked about Microsoft's gaming division having really tough year over year comps, potentially this sets Twitter up for a solid 2020 with easier comps. For Twitter, Facebook, Google, Amazon's growing ad business -- and, for that matter, TV networks and radio networks -- 2020, we've got a presidential election, we have the Olympics. 2020 is setting up as, if you're doing your job well, you're making money in the advertising business, and you're making more money in 2020 than you did in 2019.
Jayson: Yeah, and hopefully, web enabled apps that know a lot about us can help these companies do even better with better targeting. That has been some of the worry of what's going on at Twitter today. They had to change things so that advertisers didn't have as much information maybe about users. So, they either stopped bidding on those users or decided, "Alright, we're going to target different users." When you read this, it all makes some business sense. But if you step back and take off your analyst hat, it also sounds really creepy, including the term -- what do they call us? Monetizable daily users? "Hello, fellow monetizable daily user! Welcome to the dystopia!" Please change that! Change that, you guys!
Hill: [laughs] Yeah, that was not a great bit of wordsmithing. That's the sort of thing, the old adage in sports is that winning cures everything. Hey, if Twitter came out and crushed this quarter and the stock was up 20%, we probably wouldn't even be talking about that poorly worded phrase.
Jayson: Monetizable daily users! Step up and let us plug this right in!
Hill: A rough year for iRobot got rougher this week. Third quarter results were adversely affected by tariffs. Shares of iRobot down more than 15% this week.
Jayson: And a lot for the year. Down from somewhere in the mid $120s to about $50 nowadays.
Hill: Actually, this spring, shares of iRobot were over $130 a share. It is now trading in the high $40s. I don't look at this company very closely, but I remember in the spring seeing the stock price and thinking, "Boy, that's high! I wonder if the business is that good." And now, it's come down so much, my question is, "Wait a minute, is it really that bad?"
Jayson: iRobot is a stock in the AI service that I run the picks and analysis for here at The Motley Fool. It was chosen by my predecessor colleagues. When I got in, it was at these price levels.
Hill: Which ones, the high ones?
Jayson: The high prices, yeah. And there's some interesting AI involved here, but I don't think it's groundbreaking at this point in time. In other words, I think other people can invent a robot that will go around your house and not kill your cat. So I wasn't very enthusiastic about the pick, especially from the AI angle. But the more you read about the company, especially when you see prices like this, the more you realize they actually have a pretty recognizable brand. They've got a decent intellectual property position, they can defend some of their technology. And they're a very high-selling vacuum. They have a lot of market share. People want these things. I wish I could get one, frankly. It wouldn't work in my house. I have steps all over the place. But it'd be great if the thing swept the floor for me. Even though it doesn't do the job of my 400-pound upright, it would still save me some time. Apparently, a lot of other people think that, too. We're talking about a company that sells a billion bucks worth of mostly vacuuming robots every year.
At prices like this, it starts to be worth a look, especially because they're getting killed on tariffs, because their products are made in China. That's killing them. They're doing OK anyway. They were trying to hold the line on price. They couldn't do that. They had to discount and absorb the tariffs themselves, because that's what the competitors were doing. But if that situation changes, and it will eventually, when that happens, they're going to immediately get back several points of margin. That could be a big catalyst. So, this is definitely a good speculative buy if you think people are going to keep buying robot vacuums. I think they will. And if their robot lawn mower works as well as they hope it will, that would be helpful, too.
Hill: Next Monday, Virgin Galactic will begin trading on the New York Stock Exchange. This is the first stock in the category of space tourism.
Jayson: How can you not want a piece of that?
Hill: Would you say you're very interested, interested, or very interested?
Jayson: It's got to be very, very interested. It's a "grab the popcorn" kind of situation here. If you're prepared to invest, grab for something else. What you get with your Virgin Galactic trading shares is actually a minority piece of actual Virgin Galactic. There was a special purpose vehicle, these are called (unclear 13:46) is the acronym, where somebody said, "Hey, here's a stock that I'm offering. We're going to have a couple of hundred million bucks. This stock will trade. Guess what? We don't have a business. We're going to find one. We're going to find an awesome business. In the meantime, you can trust me that I'm going to find a good business, because I'm a smart CEO." So, they ended up buying 49% of Virgin Galactic back in July, which values it at about $1.4 billion overall.
The interesting thing is that we don't have commercial flights going on yet, although I guess they're coming soon. Under Armour, did you see the release of the Virgin Galactic clothing?
Hill: Yes, I saw that Under Armour basically said, "Yeah, we'll design your spacesuits."
Jayson: Yeah. They debuted them, and they were blue Hollywood extra stuff that is embarrassing to me as a shareholder of Under Armour to look at. I guess you do what you can.
Hill: Let's be honest -- and I'm a fellow shareholder -- there are more embarrassing things about being a shareholder of Under Armour than the space suits.
Jayson: [laughs] Yeah. Kevin Plank was involved with it, then ran for the exits a day or two later. Anyway, if you're considering buying these shares, and I don't think you should be, you might want to take a look at the numbers, which are not easy to come by. But if you do some digging, you can see that Virgin's cash burn, the most recent reported here, it was about $155 million. They say they're very excited, "We have 600 people waiting to buy a ticket." These tickets are about $250,00 each. That conveniently comes out to about $150 million, about what they would burn in a year. If you could get them all to pay, and you can get them all up, and keep the costs the same, which I doubt, well, you'd lose $5 million. You'd burn $5 million in the next year. But hey, that's what you get for your share of Virgin Galactic. And, as a buyer of a $250,000 ticket, here's what you get. I'm quoting from their website. "Several minutes of high-quality microgravity." These are suborbital space flights. This is worse than Alan Shepard's little pop gun up and down after Yuri Gagarin had already orbited the Earth. This is, they're saying about 10 minutes. You don't even go into orbit. $250,000. I have to believe that the market for a $250,000 ticket for 10 minutes of microgravity isn't that big.
Hill: Yeah. When we talk about addressable market for a given industry, this seems like not a large one.
Jayson: It seems low, especially because there's risks that people might try to forget about. There's a lot of risks. Very many things can go wrong when you're doing this. This thing could easily kill everybody on board. For $250,000, you're not riding on an airplane platform that's got millions of miles tested onto it. You're in a spaceship that can really go through some problems and incinerate you. So, I don't know that this is going to be a great investment opportunity.
Hill: You'll be avoiding this stock on Monday and days thereafter?
Jayson: I also think that, even if it works out, they're going to need so much more money that they're going to be diluting you. It's going to be like when your relatives from the Midwest come over and they want coffee and you give them a cup of coffee and they pour most of it out and then fill the rest with hot water. That's what the dilution is going to be like in order to make this palatable.
Hill: Is that what relatives from the Midwest do?
Jayson: Oh, my God, you give them a regular cup of coffee, and they're like, "That's too strong. I can't see the bottom of the cup."
Hill: [laughs] A couple of notes before we wrap up. Next week, all week on MarketFoolery, it's Halloween week, so we're going to be talking Halloween candy, overrated, underrated.
Jayson: Underrated: candy corn.
Hill: You think -- hold on, you think candy corn is underrated?!
Jayson: It's underrated.
Hill: Wow! OK. email us, [email protected]. You can also tweet at us, @MarketFoolery. Give us your hot takes on Halloween candy, overrated and underrated.
Jayson: I'm going to bring you a candy that's especially underrated on the top of a cake pop. It adds perfect texture to a cake pop. I'll bring you one.
Hill: I'm so confident we're going to get emails, not even people giving us their overrated/ underrated, just responding to you saying candy corn is underrated. The hate for candy corn is real, and we're going to hear from people.
Jayson: [laughs] The hate should be for those chalky heart things on Valentine's Day.
Hill: Yeah, those aren't good. Also, quick shout out to longtime listener Mark Goldman and his entire team at the Marine Corps Marathon. Mark is the director of marketing and sponsorships at the Marine Corps Marathon. This is, for him and his team, the busiest week of the year, because the marathon is on Sunday. Latest weather report --
Jayson: Let's hear it!
Hill: 100% chance of rain. 100%. What do you have for me?
Jayson: I've run seven or more of these particular marathons.
Hill: I'm running on Sunday.
Jayson: What's the temperature supposed to be? That matters a ton at this point.
Hill: As the percentage chance of rain has increased over the past few days, so has the temperature forecast.
Jayson: That's good!
Hill: We're looking at low 50s to start, upwards to maybe high 60s, maybe even 70.
Jayson: That's a lot better. If you have rain and it's like 45 to 50, you have major hypothermia problems. That is the worst hypothermia weather possible. Anything cooler than that, and people are bundled up more. You're in the danger zone. If it's warmer than that, you can still get hypothermia when you're wet. It'll also depend on the wind a ton. But it is easier to stay warm.
Were it me, and I were heading out, I would have my trash bag at the start to stay dry. I would keep it with me. I'd roll it up. I'd stuff it in my compression shorts. It's key to have those compression shorts and Wranglers. And two words: nipple tape, or you're going to be suffering. Once that fabric is wet -- and it'll be wet right away, because it doesn't have to wait for you to sweat -- it will be sawing you into pieces. So, everybody, nipple tape.
Hill: You're not getting that advice on Bloomberg.
Jayson: By the way, what also works really well are those really thin, see-through 3M bandages. But use a little alcohol on your skin to cut the oil before you put them on. They are so good that they will hold even when you've sweat underneath them. They stick to you enough, like they pressurized from underneath with sweat coming through them. That's how good they are. They'll stay on.
50-ish, and rain, if there's going to be wind, I'd go with a wicking T-shirt or wicking long-sleeve. That's what I'd do. And I might just put the number on the T-shirt underneath. Make sure the long-sleeve has a big head hole that you can take it on and off during the race. Usually, two wicking layers will be enough because you're going to heat up. But keep that bag because if, for any reason, you need to walk and you're not creating heat anymore, you're going to want that bag, or you will get hypothermia. And I say this is somebody who finished a race one time with a 92 degree core temp.
Hill: So, just as there's a 100% chance of rain for the race, there's 100% chance that I'll be walking at various points during the race.
Jayson: It's important to keep the baggie along for that.
Hill: Seth Jayson, always good talking to you!
As always, people on the program may have interests 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 is mixed by the Iron Man, Austin Morgan. I'm Chris Hill. Thanks for listening! We'll see you next week!
