In this episode of MarketFoolery, host Chris Hill talks with analyst Andy Cross about some recent market news. Apple's (AAPL 1.94%) fourth quarter showed some weakening sales for iPhones, but investors should probably focus more on the gobs of cash the giant company made, along with the growth in wearables and services. Speaking of gobs of cash, Facebook (FB 2.52%) reported quarterly results. It also said it won't be culling political ads from the platform like Twitter (TWTR +0.00%) did. Etsy (ETSY 1.33%) tanked 15% on earnings, but the long-term picture is still so good that investors might want to use this as buying opportunity. Tune in to find out more!
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This video was recorded on Oct. 31, 2019.
Chris Hill: It's Thursday, October 31st. Happy Halloween, and welcome to MarketFoolery! I'm Chris Hill. With me in studio is Andy Cross.
Andy Cross: Happy Halloween, Chris!
Hill: Happy Halloween, my friend! Are you excited?
Cross: I'm excited for what happened last night in the baseball game.
Hill: Very exciting times!
Cross: Very exciting times here in D.C.!
Hill: Absolutely. We've got retail earnings. We're going to wrap up Halloween candy week. And we will get to Facebook. We're going to start with the fruit company -- Apple's fourth quarter. iPhone revenue came in higher than expected. It was also down 9% year over year. There are always a ton of numbers when it comes to Apple's quarter. What stood out to you?
Cross: Back out the iPhone, Chris, and sales were up 17%. Overall revenue up 2%. A little bit ahead of some guidance estimates. Ex the iPhone business, it was up 17%. As you mentioned, iPhone down 9%. That's a little bit of an improvement from what we've seen the last couple of quarters, so that's good. But really, with Apple, Chris, as we've been talking about, the story's really on the service side. You see service and wearables continue to be the real excitement behind Apple. When you see folks like Gene Munster get excited and boost his Apple target price up to $350 from Loup Ventures -- which we spoke to this week. Thank you very much for that time, guys! The wearables and the services, that continued growth there, with more than 450 million paid subscribers to all of their services now. That's up from 330 million a year ago. That's growth of 36%. That's where the excitement is. Service in general was up 18% this quarter on the revenue side. It was the best quarter ever for Apple Care. As they continue to evolve and add in more products on the wearables side -- watches, iPhone buds -- to help make up for some of the slowing on the iPhone side, which is still a big part of their business, right? It's really the services and the subscription businesses that are going to be the big drivers for Apple on the growth side over the next several years.
Hill: You look at the stop up a little bit today, but, to your point about the wearables, when you factor in the fact that we're going into the holiday quarter, they are pushing these new, higher-end iPod --
Cross: Noise cancelling earbuds.
Hill: Yeah, and the fact that their most recent phone, the 11, some of those sales factored into this quarter, but not much. So, if you think that's going to move the needle, the combination of those things, going into the holiday quarter, then it's reasonable to see what we're seeing with the stock today, and it's reasonable to expect that next quarter is going to look pretty good, too.
Cross: And the guidance for the quarter was pretty good. It was a little bit higher than some people were expecting. Listen, the story with Apple, it's a huge company. You got a trillion-dollar market cap. It generates so much cash. They buy back more stock than they actually earn, so they actually borrow that, as we've talked about with the borrowing, too. They're trying to get to a net cash neutral position. Because they generate so much cash. They just have to invest it into the higher-growing areas, and that's really on the wearables and the services side. iPad actually had a very good quarter, too. That was actually a nice little bright sign.
The story for Apple is really on the wearables on the growth side, but you have a business that's huge, is more and more meaningful to so many of our lives around the world. That's probably only going to continue. And the stock, relatively, to a multiple of earnings compared to the market, isn't horribly expensive, and probably will do pretty well for yield-seeking, stable investors out there.
Hill: Last thing I'll just add. You've got the streaming service getting ready to launch. The early reviews have not been great for The Morning Show with Jennifer Aniston and Reese Witherspoon, Steve Carell. I'm of two minds on that. One is, you go back to the earliest original shows that Netflix produced and that Amazon Prime produced, not all of them were hits right out of the gate. So, even if this first one isn't a hit doesn't mean Apple's not going to iterate, get better, and do with programming what they've done with devices. But the other thing is like, hey, this isn't their business. This is just a side hustle, almost, for Apple, for all of the money that they're pouring into it. You read the reports of how much money they're spending on this, and the Jason Momoa show See. Just, tens of millions of dollars they're throwing at that. But it's like, you know what? They can do that.
Cross: They have to do that, because it's a very expensive market with all the players that are in there, led by Netflix. What caught my attention from the call was that customers who have purchased the qualifying Apple devices starting on September 10th can opt into 12 free months of Apple TV. That's how they're going to continue to widen out and build out this ecosystem. That's the real power with investing into Apple vs. something like investing into Netflix, which has its own benefits as well too. As you mentioned, it's a small part of their business. It'll be interesting to see how that grows.
Hill: Facebook put up record revenue in the third quarter. Profits came in higher than expected. Shares of Facebook up more than 3% today.
Cross: Really nice quarter. Revenues were up 29%. We continue to see an acceleration in revenue growth. It's been shown in the stock price over the past couple of months as well too. Revenue up 28%. Earnings per share up 20%. Facebook daily active users up 9%. That's an acceleration from 8% growth in the second quarter. Now, 2.2 billion users use either Facebook, Instagram, WhatsApp or Messenger at least once per month. That's up from 2.1 billion a year ago. 94% of ad revenue is still mobile. That's the big driver, of course. Ad impressions across the network up 37%, Chris, but the revenue per ad down 6%. A little bit of a deceleration there. The payments and other are nice, but it's a small part of the business. Up more than 40%, driven by Oculus Quest. A lot of comments and questions, and even Mark Zuckerberg opened up the conference call with conversations around political ads, and what's happening there. We saw what Twitter announced, with taking political ads off their platform. A lot of conversation around what he testified about, and how they continue to see themselves as a supporter of free speech. Won't get so much into those details, but that was a bulk of the call.
On the expense side, expenses were up 30%, which is actually less than they expected. The operating margin, north of 41%. Really continued to be an impressive quarter with Facebook.
Hill: For those who missed it, Jack Dorsey, CEO of Twitter, came out yesterday -- and this, I'm guessing, was timed so that Facebook would have to respond to it -- came out and said, "Yeah, starting end of November of this year, Twitter is banning all political ads. We're just not going to do it," and laid out the numbers. It's a tiny percentage of the ad revenue that Twitter makes. I understand the rationale that Mark Zuckerberg is laying out, but I think if I were a shareholder, I would want him to just follow suit, because, one of the things he said was, political ads will make up less than 0.5% of their ad revenue in 2020. It's like, that doesn't seem like it's worth the headache. You're taking all the shots, and you're getting less than 0.5% more ad revenue than you would otherwise.
Cross: Yeah. I think he sees this as a real principal fight. They talked about that to employees, when he said, "You go to the mat and you fight for this." Whether that's the right approach or not still remains to be seen. What is important is that you have these two very meaningful platforms going into the political election season. One's going to have ads on it. By the way, Twitter has plenty of folks that use that and tout their political beliefs through tweets, not necessarily through ads. Facebook is going to go the opposite direction. So, you have these two big platforms. But, the quarter for Facebook that they reported continues to be very impressive. They continue to be very soft on some of the guidance, but they've outperformed that guidance over the last few quarters. It'll be very interesting to see how they make out for the fourth quarter coming up.
Hill: Yeah. For all of the talk recently about Amazon's growing ad business -- and I think the talk is warranted -- this is one of those quarters by Facebook that's a nice reminder of like, oh, yeah, Facebook is really good at this.
Cross: Yeah, and it's a $500 billion market cap company. Not inconsequential.
Hill: Etsy shares are down 15% today. The third quarter didn't strike me as being 15% bad. What is happening here?
Cross: Yeah, I see it as a nice quarter for a company that is very meaningful when it comes to helping provide individuals and people who want to sell their goods into a platform in a very efficient way. They have millions of people who sell on their platform every year, and more who actually buy. When you look at the merchandise that is sold across their platform, it was up 30% for this quarter. Very nice. That was up from 20% a year ago. More and more merchandise continues to come across the platform. But what was interesting is that revenue growth almost 32% but that was a deceleration from what we've seen last quarter and last year.
A lot of conversations around, as people are selling more goods across the platform, how is Etsy actually benefiting from this? They talked a lot about how they have to educate their sellers on how to handle the pricing initiatives, and the free shipping that Etsy is starting to build into their platform. A lot of conversations around education.
But to me, this was a story of understand that growth is not free. Companies have to invest into their platforms to continue to grow their businesses. And that ultimately hurt some of the margin picture, and some of the profit growth. It seems like investors today, or algorithms, woke up to that fact and said, "Hey, it's worth 15% less than it was yesterday." It seems a little bit aggressive for a quarter that was actually pretty nice for a nice little business that is growing pretty handsomely.
Hill: I don't know. This seems like one of those situations where, if Etsy is a stock you've had on your watch list for a while, we're going into the holiday quarter, and now it's on sale 15%. This seems like a potential buying opportunity.
Cross: Yeah. It was selling a little north of 8X revenue. For a business like this, which is now profitable and generating some cash, that was fairly reasonable. Now, after today's haircut, it's even a little bit more reasonably priced. So, I would tend to agree with you, Chris. Definitely worth looking at if you're interested in getting some exposure to that kind of growing market.
Hill: Alright, more stock ideas to come on Motley Fool Money this weekend. It'll be an Earningspalooza type of show. If you're looking for even more stock ideas and recommendations, check out Stock Advisor. It's our flagship service. You can go to stockideas.fool.com. You get recommendations from Tom and David Gardner. You get their best buys now. You get a lot more. It's our flagship service for a reason. Check it out!
Cross: Check it out!
Hill: stockideas.fool.com. 50% discount for the dozens of listeners.
As Andy mentioned, congratulations to Washington Nationals, to their fans, our man behind the glass, Dan Boyd, Austin Morgan, producer at Industry Focus. Nice reminder that some long-term investments aren't about money; they're emotional. I've lived in this area for more than 25 years. I remember when I first moved here, in the early 90s, it seemed like every year, there was talk of, "Oh, some franchise might be moving here. D.C. might be getting a team." That kind of thing. And then it was basically 15 years before the Montreal Expos moved here, and then after some heartbreak in the playoffs, they got it done in a historic World Series where the road team won every game. It's never happened before.
Cross: Just incredible performance by the Washington Nationals, especially the pitching staff. Really great to see those wins on the road. Pretty impressive. Congratulations to all the Canadian baseball fans out there! This is for you, too, for the long history of the Montreal Expos before they came to Washington D.C.
Hill: Let's wrap up. Halloween candy. What do you got for overrated and underrated?
Cross: Well, Chris, I'll start with the overrated. I'm not a fan of regular M&Ms. The whole "they melt in your mouth, not your hand," I don't buy it. They always seem to melt in my hand. I just don't like the candy shell, chocolate center. I love peanut M&Ms and almond M&Ms, but just not regular M&Ms. Not my favorite. So, for overrated, I'm going to go with regular M&Ms.
Hill: OK, I'm just going to say 3 Musketeers. Bill Barker earlier in the week referred to the FiveThirtyEight ranking list. Working off of that, 3 Musketeers ranked way too high. It's not objectionable. I don't dislike 3 Musketeers. But, come on!
Cross: I like them because they're light and fluffy. Now, for my underrated, Chris, I have some props. I'm sorry this is not on video. I have two candies with me. One is Cow Tales. If you don't know what that is, caramel with a creamy center. Just delicious! One of our good friends, Dayana Yoakum put me onto those one year. And, Swedish Fish. I think both of those are underrated. I got both of those from the candy bin outside the studio, and I plan to eat them not on the air, after the show, so Dan Boyd doesn't get mad at me.
Hill: [laughs] I and all the listeners and Dan Boyd appreciate you not chewing into the microphone.
Dan, do you have thoughts on what you've just heard?
Dan Boyd: Andy, way to bring candies in from the Great Depression.
Cross: [laughs] Old school, baby!
Boyd: Cow Tales, huh? Cool!
Hill: I'm just going to go with Junior Mints as underrated.
Cross: I agree!
Hill: Phenomenal candy! Never disappoints. Should be ranked way higher than 25th, which is where it is on the FiveThirtyEight list. Andy Cross, thanks for being here!
Cross: Thanks, Chris!
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 next week!
