Steak-centric restaurant chain Texas Roadhouse (NASDAQ:TXRH) had been in the doldrums for most of 2019, but the stock spiked 20% following its recent third-quarter report. Turns out, its loyal customers like the food, and it has a business model that can be fine-tuned with good management. That's a sharp contrast to delivery service Grubhub (NYSE:GRUB). Its ugly Q3 report just showed precisely all the assets it doesn't have, and customer loyalty ranks high among them. In this MarketFoolery podcast, host Chris Hill and Motley Fool Asset Management's Bill Barker will consider the divergent paths of those two restaurant industry players, as well as what went mildly wrong at Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) this past quarter.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Oct. 29, 2019.

Chris Hill: It's Tuesday, October 29th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, from MFAM Funds, it's Bill Barker. Thanks for being here! 

Bill Barker: Thanks for having me!

Hill: If you like eating at restaurants or having food delivered to you, we've got two stocks in those categories. I would just add parenthetically, they're going very much in opposite directions today. 

We're going to start, though, with Alphabet. Shares down a couple of percent because Alphabet's third quarter... it looks to me like a speed bump, but you looked at it more closely than I did. 

Barker: Why would you assume that?

Hill: Well, I'll tell you why. They were light on earnings. Everything else was essentially as expected --

Barker: You're not giving yourself enough credit. Look at you, revealing how closely you've looked at it already. 

Hill: I don't want for one second for anyone listening to this podcast to think, for one second, that I'm an analyst. Over the years, I've gotten that comment from time to time. "You're a financial analyst." No. I'm not. [laughs] I'm really not!

Barker: What do you call yourself at parties?

Hill: [laughs] I don't really go to parties. Let's get back to Alphabet's third quarter. This did look like they missed on earnings. Revenue was in line with expectations. The different divisions seemed to be performing about as expected. They didn't really do anything radical to the guidance. So that's why I look at this and say, I get why the stock is down 2% for a company and a business that has otherwise been crushing it for the last 15 years.

Barker: Yeah, it was up 2% yesterday, down 2% today. I think it's up about 5% over the last month. It's a little bit of, I don't know, taking some profits kind of move, rather than a, "Oh, my God, there's something we didn't see here" kind of move. Continuing to grow mid-teens, which is awfully impressive. Top line growth was up 17.5% year over year. It continues to be an incredibly large company, growing faster than you could really have hoped for.

Hill: Well, one way that companies grow is through acquisition. Shares of Fitbit (NYSE:FIT) are up 30% since Monday morning on reports that both Fitbit and Alphabet are not commenting on, that Alphabet is going to buy Fitbit. Ruth Porat, the CFO of Alphabet, was asked about this, and declined to comment. No reason she necessarily needed to, although it's always nice when executives comment on things. Certainly, Alphabet has the money. And for a while now, I've been throwing out there about Fitbit --

Barker: Do you get a cut if this deal goes through, for putting this one together?

Hill: [laughs] You know I don't like to comment on that.

Barker: [laughs] You're pulling a Porat here. 

Hill: I'm pulling a Ruth Porat, I'm going to decline to comment on that. No, I mean, Fitbit has some level of brand equity. There's a basic interface that has led to some level of success. There is some value to Fitbit. For a couple of years now, it has looked like, at the right price, someone with deep pockets would come along and make them some type of offer. And if the reports from Reuters and other news agencies are to be believed, that has happened, and it just hasn't been formalized and announced yet.

Barker: Yeah. I think that it makes sense on the level of Google being a serial acquirer of ways to develop, first of all, but also acquire ways to get personalized data and then monetize it. Fitbit is in the business of collecting personalized data on you. Ever used one? 

Hill: A Fitbit? No.

Barker: Well, if you did, there would be all sorts of data about you captured. The question is whether you want Google to capture it. You do, because you're an advisor on this one. Therefore, you've got a stake in it, or at least you've got some mental stake in it. Like, "I suggested this, therefore it must be a good idea."

Hill: Look, any reports of my having dinner with Fitbit executives earlier this year, and then later in the year executives of Alphabet, those are rumors and I'm not going to comment on them.

Barker: Well, if Fitbit goes this direction, and, as you say, Google certainly has the money to do it, they put a fair amount of money in the last quarter to share buybacks, which is in a sense the absence of an idea of what to do with your money. And they are not typically running out of ideas. Certainly, the market is giving this report credibility, in terms of the likelihood.

Hill: Last thing on this topic, and then we'll move on. Right now -- and this is obviously after a 30% rise -- Fitbit's market cap is just under $1.5 billion. Let's assume that this deal goes through. Maybe there's even a slight premium to what we're seeing today. I don't know, let's call it $1.6 billion, $1.7 billion. How confident are we that Alphabet is going to make more of this acquisition than they made of, say, the YouTube acquisition that they made back in 2007, for which they paid roughly the same amount of money? If memory serves me correctly, I believe they paid $1.6 billion for YouTube, and all they did with that is turn it into the second-biggest search engine in the United States.

Barker: I would bet that it'll never come close in terms of value creation to YouTube. That's a tough standard. Also, if you were to compare, what do you put more faith in? People taking care of their health, or people sitting around and watching stuff? Just as a proposition, right?

Hill: I'm going to bet on the latter.

Barker: I'm going to bet on the latter. Google wisely bet on the latter. Now, that's not to say that people aren't spending money taking care of themselves and aren't interested in how to take care of themselves better. But I think that YouTube serves more of the lethargy that people are prone to.

Hill: Let's move on to Grubhub. Third quarter and coinciding guidance for Grubhub... I'm going to just use the word disaster, because that's what's happening to Grubhub's stock today. Their sales were weak. Their guidance for the fourth quarter was somewhere on the range of disappointing to terrible. Shares of Grubhub the last time I checked were down 43%.

Barker: Yeah, there was no good news for owners of Grubhub here. The competition continues, it continues to drive down prices, it continues to drive up costs, and it continues to erode market share for Grubhub. I think that, of the many questions that can be asked about Grubhub, is are you sure that you can convey how you are helping the businesses you partner with? That really is not coming through on any of their calls. They have started out with a pretty high price for the delivery service, and that is eroding through competition, and restaurants are not making enough money on the incremental meals that they're needing produced to serve what Grubhub is able to provide, in terms of possibly new customers, possibly just customers that are therefore not going to the restaurant. And if they're not going to the restaurant, they're maybe eating the same amount of food, but they're not purchasing alcohol. And that's where, as you know, restaurants make all their money. I'm just saying that because you know so much, not that I'm alluding to --

Hill: [laughs] Not that that's always my go-to move when I go to a restaurant. I'm reminded of what's playing out now with delivery services, is somewhat analogous to what we saw play out with credit card companies and restaurants over the last 25, 30 years. American Express charged a bit more, and with the rise of Visa and MasterCard taking a smaller cut from restaurants for their transactions, they became a more popular choice. So, whereas American Express as a card was very much a status symbol, and I'm sure some would argue, on some level, may still be, in terms of restaurants and increasingly retailers, as Visa and MasterCard became more ubiquitous, they basically went to American Express and said, "No, we're not interested in paying you more for transaction costs, so we're no longer accepting your card."

Barker: Yeah. I think that's true. Over time, the price will find itself for what the service that Grubhub is actually bringing is. In that vein, what Grubhub pointed to in the call, and has been highlighted in more than one article that I've seen, is that Grubhub referred to the consumers as being more promiscuous with their choice of food delivery services, implying that they understood that there was a monogamous relationship that they had with customers.

Hill: This is in the letter, it's attributed to CEO Matt Maloney. "We believe online diners are becoming more promiscuous." And let me just suggest that either they were trying to be a little cheeky with the humor there, to try and soften the blow of this abysmal report, or, on some level, they actually believed that; they believed that the value proposition that they were offering restaurants and diners was so amazing that they thought, "Well, once you try us, you're never going to do DoorDash or anyone else." 

Barker: Uber Eats.

Hill: Yeah. And, by the way, both of those are bad ideas. Going for the humor or actually deluding yourself into thinking, in 2019, when consumers have more choice than ever before, someone is going to "get married" to Grubhub.

Barker: As to using humor, and that being a bad idea, you may be correct in that that draws attention to itself. We are guilty of trying to use humor to lighten up situations, or cover the fact, when we don't know what we're talking about, just go to humor. I think that, in this particular case, it's the combination of humor and the word promiscuous, which connotes sex, right? 

Hill: Yes.

Barker: That's what grabs attention.

Hill: And, let me go back to something you just said, which is using humor to cover the fact that we don't know what's going on --

Barker: Why didn't they just use non-sexual humor, I say. Next time.

Hill: Do better, communications team at Grubhub. 

Barker: It ends up not being worth the quality of the laugh. Perhaps they got some laughs on the call and they used that. But here they are, stuck with us talking about this rather than the business, although they don't really want us talking about the business today either. 

The other point that you have brought up is, they may believe -- and I think that is part of the business plan -- "Hey, how do we get people to really be married to our business, and to not use the competition? How do we create brand loyalty? How do we stop people from going anywhere else? And if we can do that, then we're going to have a great business." And to date, they have found they cannot do that. And the reality is probably that it's just an app on people's phones. They don't have that much loyalty to Grubhub vs. DoorDash vs. Uber Eats. The person bringing the food to them is always going to be somebody different than the last time, so they don't have a personal connection. They do with the end restaurant, but they're not going to have it with the middleman.

Hill: Yesterday the stock was $59 a share. Today it's in the low $30s. Do you buy it at this price? Or are there more than enough questions that this is in the don't touch zone?

Barker: I don't think they've provided the answers that an investor would want to have to know where this thing shakes out against the competition. They are talking about spending more money. They're talking about their costs going up. We already see that their market share is eroding. Where do the profits end up being? Are they able to survive, keep the level of profitability that they need to satisfy their debt covenants? If the margins decline further, the answer to that is, they will not. They need to provide answers to that.

Hill: At the other end of the spectrum, we have Texas Roadhouse. Shares up 21% this morning. Third quarter profits and revenue for Texas Roadhouse came in higher than expected. Same-store sales, they've got the company-owned restaurants, they've got the franchise restaurants. Company-owned doing about 1% higher. Both doing pretty solid. Basically, solid comps for a restaurant of this size.

Barker: Yeah, solid comps. Look, the stock is up 20% or so, so far today. Let's remember that it was down about 15% for the year going into today. Really, it was showing similar solid comps for the earlier part of the year, not giving enough answers to margin decline, which it has now produced a little bit better an answer to. They've raised prices a little bit. They're not talking about raising prices anymore. They've gotten a little more efficient on the labor. If labor prices are stabilizing and you can look at the business as making more money as they make more sales -- and really, they were getting increased sales but flat profits. They bought back shares. They did a little bit of everything right. They also pointed to the first four weeks of this quarter that we're now in as being better comps than last quarter in the 5% somewhere range. So, people are showing up, they're eating, they're getting a little more efficient. They bought back some shares while share price was weak. Whether all that should amount to a 20% rise in the stock price, I don't know. I think that's maybe a little bit short covering. Maybe people were expecting some continued margin weakness. But they've provided answers that are reversing people's opinions about that today.

Hill: So, Texas Roadhouse has the namesake restaurants. That's obviously overwhelmingly the biggest part of the business. But they've got essentially a sports bar concept, Bubba's 33. One of the things that came up in the conference call was -- obviously, that's a much smaller part of the business, but they've been growing that. They've been seeing much stronger comps there, encouraging enough that they're looking to expand those. That's one of those things that, because it is such a small base, there's only so much that Bubbas's locations are going to do to move the overall needle. But, I think, if you're looking at Texas Roadhouse, that's something you want to keep an eye on over the next, call it six to 12 months. See if they are able to continue to grow that location count. At some point, if they can keep those comps growing -- and in this latest quarter, those comps are roughly double what they were doing at the company-owned Texas Roadhouse location -- if they keep that up, that's something that actually will start moving the needle in 2020, 2021.

Barker: Yeah, I think that Bubba's has been a question for a number of years. They have conveyed they're still working on things. They like what they see over the long term. But they put a little bit more of an immediate future in terms of, they've sorted out some of the issues that they were finding in terms of locations, and now that the name has a little bit more of a national presence, as it has grown, it's got a lot more room to grow. Texas Roadhouse has never been a rapidly expanding operation. They're a solid, consistently expanding operation. But you can see an end to that, especially given the markets that they tend to pursue, which are not an infinite number of downtown locations. They're more outside, and they like to be the best restaurant opportunity in the town or the area that they locate in. That reaches a limit on the number of times you can do that. Bubba's gives them, perhaps, a second idea, which is actually working out well.

Hill: We're going to get to the Halloween candy in just a second. But if you're looking for even more stock ideas and recommendations, you can check out our flagship service, which is called Stock Advisor. You get recommendations from David and Tom Gardner. You get their Best Buys Now and a lot more. You can just go to stockideas.fool.com. 50% discount for the dozens of listeners on Stock Advisor. That's what we're bringing to the table on this podcast. 

And we're going to dip into the Fool mailbag. All week, we're doing Halloween candy, overrated/ underrated. Seth Jayson actually got the ball rolling last Thursday with a strong take on candy corn. E-mail from Adam Nelson, who writes, "Candy corn by itself is not underrated, however, simply throw some candy corn and peanuts into your mouth at the same time and enjoy the totally underrated synthetic Baby Ruth candy bar."

Also, an email from Brian, who writes, "As discussed on last Thursday's show, candy corn is definitely underrated, just like banana Laffy Taffy, a candy I believe was dissed last year. Therefore, I do question the palette of these dislikers. Overrated candy to me would be Snickers." Our man behind the glass, Dan Boyd, I think, would take issue with that last comment, given his strong take on yesterday's show. And I have to say -- Dan, if you want to jump in here -- I'll just say, Snickers to me is like Microsoft. Yeah, it's a trillion-dollar company. It's the biggest company. Yeah, there's still room to run there. Snickers might be the most popular candy bar in America, yeah, there's a reason for that.

Dan Boyd: I was saying earlier that it's good when people write in and just expose themselves as having terrible opinions. Snickers is unbeatable. It is the best candy. Don't at me, listeners. I don't need to hear how wrong you are.

Hill: In Brian's defense, he wasn't atting you. 

Boyd: I think he wasn't responding to yesterday's show --

Hill: Right, he wasn't responding to yesterday's show.

Boyd: -- where I was disparaging Milky Way and talking about Snickers.

Hill: Yeah. Also, there were some people on Twitter who really were taking the other side of Seth Jayson's defense of candy corn, and calling it underrated.

Boyd: Seth Jayson was defending candy corn?

Hill: Oh, that's right, Austin Morgan did last Thursday's show. Yeah, he was saying, candy corn, underrated.

Barker: I'm going to defend him on that. Again, it comes back to where the ratings are. 

Hill: Where is this stock trading?

Barker: Candy corn has run into a lot of bad press lately. I say, it's not an offensive candy. The first three, four, eight candy corn you eat, pretty good. It's just when you go a little past that, you start getting sick. 

Hill: Let's move on to your ratings, your overrated, your underrated candy. Bill Barker, you've been around since the 1930s. Obviously, you have a lot of experience to draw on when it comes to Halloween candy. 

Barker: Right. So, Mary Jane's, I guess. [laughs] Were it the case. And root beer barrels. No. I've pulled up the FiveThirtyEight power rankings of Halloween candy. I'm bringing some data to the equation. What they did is, they put every one of these 80-some candies up against each other to see how often people picked one over the other to rank them all. The No. 1 rated candy was Reese's Peanut Butter Cup. I'm going to say that, although I like it, it is overrated on that basis. And one of the reasons why I would say Reese's Peanut Butter Cup -- still a good candy -- has to be overrated at No. 1 is, you can get better peanut butter cups from almost anybody. Like, if you go to Trader Joe's and get their peanut butter cups, they're better, and cheaper. So, how awesome can it be if the most obvious comparisons are better and cheaper? That's my take on an overrated one. Although -- don't at me -- if I had 30 Reese's Peanut Butter Cups in front of me right now, I wouldn't have 30. [laughs] 

Hill: [laughs] What do you got for underrated?

Barker: I did have candy corn. As I say, it's not that bad. It's perfectly harmless, as compared to some of the press that you've heard about it, which seems to make it out as being very harmful.

Hill: marketfoolery@fool.com is our email address.

Barker: What are yours?

Hill: I'm doing this all week, man. Just tune in Thursday, you'll get mine.

Barker: You're only going one?

Hill: I'm only going one. I don't need to bombard the listener with this. [laughs] Bill Barker, thanks for being here!

Barker: Thank you!

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! This show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!