In this episode of MarketFoolery, host Mac Greer talks with Motley Fool analysts Emily Flippen and Jason Moser about some of the latest market news. Roku ( ROKU -2.24% ) shares were down on earnings, but given the fantastic report and long-term performance, investors might want to buy the dip. TripAdvisor ( TRIP -3.55% ), on the other hand, is a different story, but at least the beleaguered company is offering investors a special dividend to ease the pain. Baidu ( BIDU -7.77% ) clocked in with a fantastic quarter, but vague and ominous guidance has Emily concerned. And Square ( SQ -5.64% ) crushed its most recent report, and Jason checks back in on his war on cash basket. Tune in to hear more!
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This video was recorded on Nov. 7, 2019.
Mac Greer: It's Thursday, Nov. 7. Welcome to MarketFoolery! I'm Mac Greer and I am joined in studio by Motley Fool analysts Emily Flippen and Jason Moser. How are we doing today?
Jason Moser: Hey, hey!
Emily Flippen: All right!
Greer: Well, we've got lots to talk about. We have Expedia ( EXPE -3.53% ) and TripAdvisor getting some bad reviews --
Moser: I see what you did there!
Greer: Thank you! Based on their latest earnings. A good day for Baidu, and a good day for Square. We will get to all of that. But let's begin with the streaming video company, Roku. Now, shares down around 10% on earnings at the time of our taping here. Now, Jason, I'm looking at the numbers here. Revenue up 50% year over year. That's better than expected. That sounds good. Active accounts up 36%. Also sounds good to me. Total streaming hours increasing 68%. By the way, Roku raising guidance. What's not to like? Well, their losses more than doubled. What gives here?
Moser: Yeah, well, and to your point on the adjusted guidance, they did pull back actually on the adjusted EBITDA guidance. The profitability number, I think, is where the market's concern lies today. And that's understandable in the sense that, we talked about this before, it's becoming more and more difficult to be a top line story today. In other words, companies that are just growing sales and then promising profits later, that's starting to become a little bit more of a difficult narrative to spin as the market is becoming a little bit more interested in bottom line profitability. Roku's not there yet. They will be. And so I think when you look at the business itself, you mentioned a lot of very good numbers there. Player revenue, which, those are the devices, was up 11% for the quarter. But gross profit was down 26%. That's in line with how we see this business going. It's less about the device, and more about the operating system and the ad tech behind it. To that point, platform revenue was up 79% and gross profit was up 59%. That's the gist of the business. When you look at this space, streaming and device makers and the ad tech behind it and everything, Roku and Amazon are separating themselves as really the device makers that are winning this space. Together, they control around 70% domestic share. And I think that when it comes to Roku, while the market may be concerned about profitability today, and I understand that, when you look at the opportunity that exists internationally, and you look at the value proposition that falls with this advertising-supported video-on-demand, and that's really they specialize, it's hard not to be excited about the opportunity that exists for Roku. After going through the report and the call, I do feel like Amazon, if they could, should try to buy Roku. I think it would make a lot of sense because then you would have one really dominating player in the space. Amazon looking to grow their ad business, that would be a really easy way to do it. They could buy this dip today, maybe get it for a little bit cheaper. They'd still be paying up for it. But it really does seem like there's a lot of opportunity still in front.
Flippen: What I thought was particularly comical about this pullback was that even with the heightening losses, their guidance for losses this year is still below what the company had previously been guiding. So, despite the fact that they are unprofitable, they're actually performing better than even they thought they would at this point. I think the pullback we're seeing today is mostly just because the company was trading at such high multiples. Anything less than, I'd say, not perfect, because they had to beat, they had to beat substantially to justify today's price. So, it's a natural pullback, but I agree. Couldn't agree more with what you said. Long-term, Roku is just so competitively positioned. And if Amazon were to make some offer, it would just be a testament to that fact.
Greer: And let's move onto the war on cash. Jason, one of your favorite subjects, I know. Payment processing company Square up around 7% on earnings. I'm seeing some success with their subscription and services business. Emily, what do you think?
Flippen: Yeah, it was a beat and a raise for Square this quarter. It was much needed after some criticism they got last quarter after selling off their food delivery business, Caviar. Looks like they're putting that capital to good use. They upped their revenue forecast. Admittedly came in a little light on earnings guidance, but they're still investing aggressively into expanding their business. They're more than just the Cash app. They're more than just those card readers. There's many different levers for Square to pull now. The one I'm most excited about is probably Square Capital, which has a lot of potential. It's a small business lending service. I think Square overall is just such a compelling company, because, similar to Roku, it's had a lot of skeptics, and it's a company that still continues to defy even the highest expectations -- as somebody who spends a lot of time looking in the cannabis space, Square was the first company to open up payment processing to CBD companies here in the United States. They're constantly forward-looking. It's an interesting company. I'm excited that it had a good quarter. I think it plays well into the war on cash.
Greer: Jason, what do you think?
Moser: Yeah, every quarter, to me, it just seems like Square keeps doing what we want it to do. It's growing the total dollars flowing through the network. To Emily's point, they just continue to grow more levers that they can pull to help grow the business. I think selling off the food delivery business was... I don't want to say a stroke of genius, but I wholeheartedly supported it because it didn't fit in with the rest of the business. And after we saw Grubhub's quarter, we saw Uber and their commentary on the Uber Eats business, it's apparent that food delivery is a really tough business with zero loyalty, so there's no reason for Square to play in that sandbox anyway. But yeah, I mean, the Cash app, incorporating more functionality. You can buy stocks now through Square in the Cash. Just a lot of neat things they're doing. Obviously a tremendous market opportunity. We've said before, there are blueprints out there that show us how profitable these businesses can be if they make the right investments, and it seems like Jack Dorsey and his team are.
Greer: Jason, as I mentioned earlier, you are a fan of the basket approach when it comes to this war on cash area. What does your war on cash basket look like today? What companies are in there?
Moser: Sure, yeah. The update. The war on cash basket is MasterCard and Visa and Square and PayPal, it's just equal investments in all four. The idea was, why try to pick one winner when there are going to be many winners. We go back to July of 2017, when we came up with this basket idea, since that date, July 24, 2017, the basket is up 104% vs. the market's 30.7%. Yes, whistle-worthy, Mac! I mean, it was not really a big stretch to believe the basket could perform well, given the names in there. But it's interesting to me, the top performer dated as of today is Square, up almost 150%. But what do you think the laggard is? Out of PayPal, MasterCard and Visa, what would you think is the laggard in that basket?
Greer: I think you're asking that because it's a surprising answer, so I'm going to go PayPal.
Flippen: I'm going to go PayPal too.
Moser: Well, you read right through me there. I was asking because it seemed surprising. I think a lot of people would look at MasterCard and Visa and think really big businesses, probably slower growers, they would be the underperformers. PayPal is the laggard, up only 73%, and outperforming the market. But it's all to say, all four holdings are doing very well. The basket continues to do very well. I don't see any reason for that to change in the near future.
Greer: A rough day for a couple of travel stocks. Expedia down around 24% on earnings. TripAdvisor only down around 19%. Wow! What's going on here?
Moser: Well, let's start, I guess, with TripAdvisor. There are times where we tell investors to not let the stock price sway your view of the business. Sometimes they don't necessarily correlate. This is not one of those times. This stock probably should be lower than where it is today. I think maybe one of the reasons why it's not is because they promised shareholders -- and I still do own a handful of shares of TripAdvisor, for a little while longer, at least -- they promised shareholders a special dividend of $3.50 per share.
Greer: That's nice!
Moser: That is nice! It's also a white flag. It's basically them saying, "All right, we give up. We don't know what else to do. We admit defeat, we capitulate." Because at this point in the game, there is nothing else they really can do. They're stuck in this business where they're never going to be able to make it to that OTA status of a Priceline or an Expedia. They're never going to be able to outperform Google when it comes to the search side of the business. Google really is dominating that search side of the business. That's where TripAdvisor, I think, is finding a lot of problems there in just Google search results. And Expedia, too. Google is a big part of the problem. Thankfully, as a shareholder of Google, it's not as bad as it could be for me, Mac. I guess things could be worse, but they could be better. Expedia and TripAdvisor both seeing a lot of headwinds in the hotel space. Part of that is because of the changing market, people using things like Airbnb or VRBO, however you like to say that. And also, hotels taking that experience in-house. We talked before about how Marriott invested a lot of money early on to bring consumers to their site to do their booking, and the acquisition of Starwood and the marrying of those two loyalty programs only accelerated those investments they were making. So then you see, at the end of the day, a company like Expedia, they're seeing some of their traffic go away. A company like TripAdvisor, they were never able to make that leap to begin with. Hotel revenue on both sides of the business there are having a lot of trouble accelerating those sales. Unfortunately, it puts you where you are today.
Greer: With all of that in mind, is TripAdvisor ultimately an ad-supported businesses? Is that the way we should look at this? They tried the direct booking, they've tried different things. At the end of the day, is this just going to be a much smaller business?
Moser: When you look at the actual engagement metrics, they continue to bring a lot of visitors to the site, more reviews get submitted --
Greer: Love of the service. I know you do, too.
Moser: It's a great product and I use it whenever I travel. It's a horrible business. It just is. It's not an opinion, it's a fact. The numbers tell us that. I think at this point, the only way forward for TripAdvisor, I would advise Stephen Kaufer to shop this thing around, to sell it, because at this point in the game, you're doing shareholders a disservice.
Flippen: We're missing a part of the story here. TripAdvisor had some other news come out today that was overshadowed by earnings. That's actually a joint venture with Ctrip in China. Ctrip's now coming out with, I guess, a co-branded, they're licensing that TripAdvisor content on their site. trip.com, which is Ctrip's new site, Qunar, Skyscanner, these are the places that TripAdvisor now is going to get a little bit more leverage in China. It's not enough to save the business. But I will say, it's not a very large business as it stands today, and it still does have a pretty strong brand. But, I do agree with your takeaway that unfortunately, Google, at least here in the U.S., has been killing it.
Greer: What has you more excited -- the Ctrip partnership or the special dividend?
Moser: To me, they're both white flags. Honestly, they really are both white flags. I think that management with TripAdvisor -- I'm really not kidding. Management, I think, at this point, is trying to figure out anything they can do. Giving some cash back to shareholders is extending a little bit of an olive branch there.
Greer: And the reciprocity, right? It reminds me of the nonprofit that sends you the nickel in the mail. Then I'm like, "I don't want to support them, but now I have this nickel and I don't know what to do."
Moser: I think the China JV is a good thing. But again, TripAdvisor has 40% interest in that. I think this is a sign that they are trying to figure out any way possible to create value. China's a more or less meaningless part of TripAdvisor today anyway. So, yeah, it can add something, but it's not going to be much of anything. I think at the end of the day, it's going to be something that maybe adds to the idea that it could be a good acquisition for someone somewhere. But I think at this point, you just have to call it. It seems like we're beating a dead horse every quarter, just talking about how poorly this business is performing, and here's just another one.
Greer: OK. Minimal excitement for TripAdvisor. Neither has you more excited.
Moser: Hey, listen, I used to be excited. I used to be a bull on this business. For a long time, I really was encouraged. I felt like there was an advantage there with the content and the reviews and the information. They've done just a horrible job monetizing it. They've not been able to figure out a way to do that. And when you're spinning your wheels, and you've got companies like Alphabet and booking.com continuing to gain share, those are far bigger, better-capitalized businesses. You don't have a chance.
Greer: Tough competition. Let's wrap up with Baidu. Shares up more than 12% on better-than-expected earnings. Emily, Baidu, a Chinese company, best known for its search and advertising businesses. But for this most recent quarter, one of the highlights was video streaming.
Flippen: Yes. Baidu had a good quarter. Admittedly, the bar has been low for Baidu for a while. Their income ex marketing -- we'll get back to that later -- increased 34% year over year thanks to strong performance from iQiyi, which is their spun-off streaming platform, often called the Netflix of China.
Greer: It's Netflix of China, so the stock must have done incredibly well over the last year, right?
Flippen: [laughs] Not at all! Calling it the Netflix of China, while a simplification, is an over-simplification, because the business is quite different. It's actually largely dependent on ad revenue. Ad revenue for both Baidu and iQiyi was down 14% year over year. That's concerning. However, the platform itself actually had a pretty good quarter, at least according to the market. They had 31% increase in subscribers. Over 100 million paid subscribers now. Revenue was up 7% year over year.
What really struck me was the decline in revenue they expect next quarter. It was really not explained, either, despite analysts continuously asking them about it, why they were projecting negative 2% to 4% revenue growth for next quarter. It just seems like ad revenue for both of these businesses, iQiyi and Baidu, is going to be strained over at least the near-term future. Unfortunately, it seems like the competition here has gotten very, very strong. I actually think that Baidu is probably the better investment over iQiyi because it still has that exposure to iQiyi, but it also has a strong core business, lots of strategic investments. I've mentioned this lots of times before, but their self-driving initiative is further along in China than anybody else's. There's some value still stuck there. iQiyi is a little bit of a conundrum to me right now.
Greer: iQiyi, I kidded earlier, but it has had a rough 12 months. Today, up around 14%, trading around $20 a share. But well off its 52-week high of closer to $30. So, iQiyi, not out of the woods yet.
Moser: Video streaming is a hard business. It's a really difficult business. I think that's only becoming more apparent as we see more players actually get into the space.
Flippen: Yeah, and iQiyi is spending more and more on content costs. Maybe that's where it gets its Netflix name from. Maybe it's not the platform itself, but the amount of money that they spend on content. iQiyi is competing with so many different apps now, Douyin just being one of them. I think their most expensive tier is still only $5 a month. It's a hard business to be profitable on, at least at this stage.
Moser: What's going to be fascinating to watch is, as Apple gets into the video streaming space, Apple is obviously, well, let's just call them well-capitalized, Mac. They have cash on the balance sheet. But they can spend basically whatever they want on their video streaming content. It's going to be inconsequential to them. Whether they burn $5 billion, $10 billion, or $20 billion, that's just, at the end of the day for them, eh, no big deal. But my point is, if they find good, compelling ideas, good, compelling projects, they can really bid that stuff up and pay for it. That means companies like, whether it's Disney or Netflix or Amazon, they're going to have to figure out how to pay for that stuff as well. Netflix being the pure play of them all, that can be tricky. We already are a little bit critical of the debt load and the capital needs that they face. It's going to be very, very interesting to see how this all shakes out with more money being thrown at more projects.
Greer: OK, as we wrap up here, if iQiyi originally being billed as the Netflix of China, and it's not the Netflix of China, what is it of China? If you had to go with another analogy, what would you go with?
Flippen: YouTube, actually.
Moser: That's a good one!
Flippen: It goes back to the fact that Netflix is never going to be an ad-supported business. They've been really upfront about that. iQiyi is an ad-supported business. They have a free streaming site. You can go to their website, download their app, and you can watch all the free content that you want, or you can pay up and get premium content and remove those ads, very similar to what we're seeing YouTube do with YouTube Premium. But, the same struggles that YouTube is seeing, having people transition from free to premium, is that people are accustomed to getting content for free. The thing that makes Netflix exciting is that you can't access their content for free. You've never been able to access that content for free. So, there's value in being a pure play platform, actually, in my opinion, from Netflix's perspective, vs. iQiyi, which is trying to make two things work.
I can't understate the volume of subscribers they have. The people I'm friends with who still live in China and are subscribers to that service love iQiyi. It's just a matter of making it economical at this point is going to be challenging. But long-term, it could still be a winner. That's why I think Baidu is probably the safer bet here.
Greer: OK, time for the desert island question. You're on a desert island. There's not a lot going on. You've got a five-year time horizon. At least.
Moser: You can stream videos, apparently, because it's a desert island.
Greer: Exactly. So, over the next five years, which of these stocks are you going with? You can only own one. Roku, TripAdvisor, Expedia, Square, or Baidu?
Flippen: I'm a huge, huge fan of Square, and I don't want to hit the table on Square anymore, so I'm going to go with Roku. That's because Jason was a little on the fence earlier, and I want to reiterate that I think this pullback in Square is a buying opportunity. I genuinely do. It goes back to the fact that bears have been against Roku for a long time now, and I think that company has a lot more still to offer. So, I'm going to go with Roku.
Greer: OK, and you said the pullback in Square, but you meant the pullback in Roku?
Flippen: Ah, yes. The pullback in Roku is a good buying opportunity. Square's luckily not pulled back.
Moser: If I was a little on the fence with Roku, I want to make sure you understand, if I fell off that fence, I would fall on the bull side, OK? I'm going with Roku, too, believe it or not. I'm a big Square fan, don't get me wrong. It's six of one, half a dozen of the other. The more I look at Roku, the more you look at the streaming space, and you see how it's shaking out that Roku and Amazon are starting to really own that space, and the international opportunity that still exists, and the value proposition with the advertising-supported programs -- there's just a lot to like about what Roku is doing. I think that those profitability concerns are going to disappear, and when they do, the stock price is going to be well ahead of where we see it today.
Greer: Well, you can't spell Roku without U-R-O-K, and you are both OK with me.
Moser: [laughs] He finishes good! Finishing stronger than he started, and that's no small feat!
Greer: You can't teach that. You either have it or you don't. email@example.com is our email. Jason and Emily, thank you for joining me!
Flippen: Thank you!
Moser: Thank you!
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. It's a free show, just remember that. So, don't buy or sell stocks based solely on what you hear. Thanks for joining me for this edition of MarketFoolery! The show is mixed by Dan Boyd. I'm Mac Greer. U-R-O-K. Thanks for listening! And we will see you tomorrow!