In this episode of MarketFoolery, host Chris Hill talks with analyst Jason Moser about some recent business news. Alibaba (NYSE:BABA) reported brain-breaking numbers coming out of Singles Day, and long-term investors might want to add the Chinese e-commerce giant to their watch lists. Apple (NASDAQ:AAPL) made unfortunate news twice -- first with some big concerns over the fairness of its credit lines algorithm, and second with a delay to its augmented reality headset. Tune in to find out why the latter is actually a good thing. Finally, the guys answer some listener mail about how to prepare for this upcoming market pullback that everyone's talking so much about these days.
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This video was recorded on Nov. 11, 2019.
Chris Hill: It's Monday, November 11th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, Jason Moser. Happy Veterans Day!
Jason Moser: Yes, happy Veterans Day, indeed!
Hill: Thank you to all the veterans out there for everything they've done and continue to do! We are going to dip into The Fool mailbag. We have a pair of Apple stories. I know which one I find more interesting. We'll let you decide, and the listeners can decide which one they find more interesting. We're going to start, though, with, as I mentioned, here in the U.S., it's Veterans Day. In China, November 11th is Singles Day. For those unfamiliar, Singles Day is the single biggest online shopping day in the world. Puts Black Friday and Cyber Monday to shame. $38 billion in sales, that was the latest total I saw for Alibaba.
Moser: That's a lot!
Hill: [laughs] By the way, as much as anything -- and I don't own shares of Alibaba, but on Motley Fool Money last Friday, Emily Flippen mentioned Alibaba and Singles Day coming up. As much as anything, it is this number that gets me thinking about, do I need to own shares of Alibaba? Just a couple of shares? I feel like I've got the e-commerce box checked in my portfolio with Amazon, which I've owned for a long time. But, that just is such a gaudy number.
Moser: Well, I'm glad you made that comment, because I think we will get to that question in a minute. Before we do, I really just want to go back to your pair of Apple stories. That was probably no pun intended, but well played. Pears, apples. Well done!
Hill: I wasn't trying to do that.
Moser: Starting the show like Mac Greer. With Alibaba, yes. Big, big numbers, of course, not surprising at all. You know that Singles Day every year is going to be a big driver. It's a big headline, very similar to Amazon's Prime Day. They should tout it. They should get as much of that out there as they can, because the business really is based on pumping a lot of money through that network.
When you look at Alibaba as an investment, it's been a bumpy ride, it's been a bit of a bumpy ride, at least since hitting the public markets in late 2014. But up to this point, the stock has performed pretty well. Investors have been able to hang in there through the good times and the bad. They're feeling better about that now. I think if you're looking for a sign that either the Chinese or the U.S. economies are obviously slowing, this is not it. It sure does seem like both economies are still humming along nicely.
To your question, why don't we invest in Alibaba? I don't think it's a recommendation in any services here in The Motley Fool. It could be. If it is, it's under the radar with some. But it's just not one that's garnered a lot of coverage. A lot of it is, we talk a lot about the geopolitical risks that are pretty obvious with a company like this today. But when you actually dig into the company itself, it is an extremely complex ownership structure, and therefore a complex management structure. So it makes it difficult to connect the dots there in many cases. We've seen a lot of news here recently, talk of a secondary listing in Hong Kong. A few different reasons why that might be happening. Money obviously is always good. Companies like to take that money and try to grow the business. This is similar to Amazon in a lot of ways. It's an e-commerce play with a cloud business and a very robust media presence and entertainment presence as well. A lot of different ways for the business to grow. But I think that secondary listing, that Hong Kong listing, could open avenues if for some reason the Trump Administration decides they want to make life more difficult for companies like Alibaba, Chinese-related companies that are listed here domestically.
But, when you look at the business itself, some of the numbers they chalk up are just phenomenal. 785 million monthly active users, and that's mobile. Those are mobile MAUs. Growing revenue at 40% rates. Like I was saying, they have a tremendous and growing cloud business to support that e-commerce business, a big media and entertainment-rich presence as well. So you could ask yourself that, if you're looking for China exposure, there's an argument to be made for just investing in Alibaba and calling it a day, right? You could feel like you're probably getting a pretty good cross-section of the Chinese economy just through that one vehicle there.
Hill: You mentioned the spending numbers. It's interesting, when you look at the macroeconomic in China, the trade war, consumer spending numbers, you would absolutely be forgiven for thinking that the sales numbers that Alibaba was going to rack up today wouldn't be $38 billion. This is roughly 25% higher than a year ago. I have no insight into how they're promoting this, if this is something that's just, "No, I don't care what's happening with the environment. I'm spending money on Singles Day." But, again, it really can't help but get your attention when you see a number like that.
Moser: Yeah. And, to your point, there's a lot that we don't know. There's that cultural black hole. We just don't have access and understanding like we do with a company like Amazon. So, you can be forgiven if you don't understand exactly how they are pushing these types of events and how meaningful they can be to businesses like these. But, it is a very impressive business. You get you need to look at the bigger picture. As it builds out a business that does more things -- remember, Jack Ma, who still has a noteworthy ownership in the company, the strategy has been from the very beginning to help make China more of an importer, as opposed to just being what we've traditionally seen it as an exporter, right? We see China exporting all of its goods all over the world, but they want to bring more goods in from places like the United States, from places like Brazil, and Russia, and wherever, to make China a more importing-type of economy. And so, when you do that, you can really get consumers fired up. And, to be sure, there was plenty of U.S. goods that were flowing through that Alibaba network for Singles Day. Again, it goes back to this idea that, hey, maybe we're having a little bit of a tough time coming to an agreement on a path forward in regard to trade; but both economies on their own still seem to be doing OK.
Hill: The New York Department of Financial Services would like to have a word with Apple and Goldman Sachs regarding the way that credit limits are being set for the Apple credit card that Apple and Goldman Sachs have teamed up for. This got some attention over the weekend because Steve Wozniak -- co-founder of Apple, always worth remembering -- Wozniak and his wife share bank accounts, and he was tweeting about the fact that the algorithm was such that somehow, he got a credit limit 10X higher than his wife's. You know, when the co-founder of Apple comes forward and says, "You might want to look at this," then yeah, you might want to look at that.
Moser: Yeah. This does feel like something that you would expect from Goldman Sachs, maybe more of a bungle from Apple. But, obviously, it's much more complex than just that. I do feel like, this news to me, this is interesting from the perspective of the risks that tech brings to the finance space.
Hill: Do you think the algorithm might need a little tweaking?
Moser: Perhaps. Let's at least have the conversation, right? We often utter that phrase black box, right? And we're talking about not being able to fully understand a business and what it does. I remember specifically, we talked about Goldman Sachs back in the financial crisis of, "This is a black box of a business. You don't know what in the world's going on underneath that hood." And that probably still rings true for the most part today. But we are living in an age where transparency and democratization of finance is becoming paramount. That is what a lot of these newer businesses are really basing their MOs on. It's trying to make finance more accessible, more transparent. And so, when you have something like this that happens, it's understandable that it happened, but it's not acceptable for it to continue. I don't specifically know what happened other than what we're seeing Wozniak and others say, that there was a discrepancy in how credit limits were given to male vs. female. I don't know their family situation. I don't know how everything is accounted financially. But the bottom line is, you and I know, and probably everybody that's dealt with our financial system, and in getting credit, it is a black box, it's hard to understand exactly what goes into making those decisions. We want to at least make sure those decisions are being made fairly, and taking all of the relevant information into account. And it doesn't seem like that's happening right now.
I think there's a modicum of brand risk to Apple here, but I don't think much, because I think Tim Cook could be very quick to get out there and say, "Whoa, we want to fix whatever's going wrong here." Not trying to be a naysayer here, but you kind of expect this stuff from a company like Goldman, right? They are the black box. When you look up black box, you probably see Goldman Sachs right next to it. What do you do?
Hill: No, you're right, it's not shocking. To your point about Tim Cook, I think this is an interesting story. It's a fun story. I think it's a story that gets remedied pretty quickly.
Unlike our next story with Apple.
Moser: Real quick, one more thing just before we move on. You know what I do find interesting in reading through all of this stuff about the Apple Card and Goldman Sachs? I mean, really, it's Apple and it's Goldman Sachs. You know who you just don't see anything about in here? MasterCard. MasterCard is the card issuer here. My point is, it really is nice to see -- MasterCard's able to sit back here and just not get hammered on this at all. Not too bad being the toll booth, is it, Chris?
Hill: It is not bad being the toll booth. Those are good businesses. If you saw reports last month that Apple is planning to launch an augmented reality headset in 2020, I'm sorry to say we have some bad news. The company has informed as many as 1,000 employees that the AR headset is going to be launched in 2022, and the Apple smart glasses are now reportedly coming the following year, in 2023. Similar to the Disney+ video streaming service, which launches tomorrow, originally supposed to launch a year and a half ago, if not further back in time; if we get to 2022 and this headset's fantastic, then it'll be worth the wait. The same for the glasses. But, I'm not suggesting there is brand risk here, but I'm wondering if analysts like you need to go back and factor this into your projections for Apple over the next couple of years, because I'm sure there were at least some analysts on Wall Street who, when those reports came out last month, started maybe not putting the numbers in ink, but maybe started to pencil in potential revenue for a new business line coming in the fall of 2020.
Moser: This goes back to June of this year for me, when we actually opened up our AR service here, augmented reality service. And Apple is a core part of that service. I would say, on the whole, while you look at these numbers, and you think, 2022 and 2023, it sounds like it's further out than maybe were hoping, the flip side is that really, what this announcement does is it gives us a lot more certainty that it's actually happening, because leading up to this point, a lot of this really has been speculation. We've had to connect the dots on certain patent filings or certain things they're doing with software, or just rumors we were getting from analysts who have inside connections that can get better information. We always knew there was something coming in regard to augmented reality on the hardware side, it was just not understanding fully what it was. I look at this news today and actually take it as a positive. No. 1, we know that they really are pursuing this. No. 2, this is the strategy that they're going to pursue. They're going to come out with something initially that's going to be on par with your Microsoft HoloLens or your Oculus, or maybe a Magic Leap is a good comparable there. We are in the really early stages of augmented reality and virtual reality and mixed reality and how those are going to be affecting our lives going forward. I think that, for me, with Apple, really, what they've been doing to date thus far with their AR Kit, they have the software already built and working. So, the hardware to me was always somewhat secondary. I feel like they've done such a good job of building this AR Kit. They've gotten to version three now. It's the biggest augmented reality developer's platform in the world. And they're learning from this AR Kit. All of the different things that people are building and want to build with augmented reality and mixed reality technology. And I think that helped steer their aspirations on the hardware side somewhat. And I think they look at this and they say, "The world over the next five years isn't going to change dramatically on this mixed reality front." Because it is so early on, and we're still learning so much about the potential, what it can do and what it can't do today. And so I think they're letting a lot of what's been developed on the software side help guide them on what they want to develop on the hardware side. And Apple's always been not really the first to the market with this new technology, but they take the developing trends and they try to make it their own, make it better, make it Apple. And so I suspect we'll see the same thing happen here with this hardware as it's slowly rolled out.
Hill: Well, and the phrase "make it better" should resonate with anyone who has watched this company over the last 15, 20 years, the way that we've seen improvements to the iPhone. Back in the day, the improvements to the iPod. The Apple Watch more recently. The first version of the Apple Watch didn't blow people away. You get to the latest version, and that's where it starts to move the needle, not just in terms of what the Watch can do, but in terms of what it actually means for revenue, a new business line, and moving the stock.
Moser: Yeah, and a lot of this comes from this general feeling, it's not just something inside these walls here, but the world, the investing world, the tech world, is looking for that next major computing platform. The smartphone was such a lightning in a bottle moment, and it's changed the world in so many different ways. And a lot of these companies, a lot of people are looking for that next smartphone moment. And I think there are some feelings out there that may be mixed reality is it in some capacity. And it may be. But I think it's important to keep our expectations tempered. This is, again, very early stages of understanding what this technology can do. To be looking forward with that much enthusiasm is probably a little much. Keep your expectations tempered. Understand they're going to iterate. They're not the only ones in this market. As I mentioned, you've got Microsoft, Alphabet has their second coming of Google Glass, which is Google Lens, you've got Oculus, you've got Magic Leap. You've got a lot of other companies that are building hardware for mixed reality, augmented reality, on the manufacturing and industrial side as well. Something that is completely off the consumer radar, but something that folks in manufacturing and industrials are a bit more familiar with. I think it's important to keep all of those expectations in check.
Hill: Our email address is email@example.com. Question from Clive Cameron in London, who writes, "Many well-known investors are saying that sometime soon, a decline will occur. If you believe this to be true, can you talk about some strategies for securing your investments from this decline, as well as options to prepare to buy in when this occurs? Thank you for all the time you spend sharing some great insights." Thank you, Clive! Thanks for listening and thanks for the question!
I believe this to be true. It's coming sometime. I just don't know when!
Moser: Nor do I!
Hill: By the way, nor does anybody. Nobody knows.
Moser: Anybody can flip a coin and get heads right at some point or another. That's what we're talking about here. I'll start with what I don't think is the solution. I don't think the solution is to go ahead and sell everything in an attempt to lock up your gains and time the market. There are myriad reasons why --
Hill: Pour my money into gold? It's a great hedge. That's what I keep hearing.
Moser: I'm not telling you what to do, Chris, but I'm asking you, please don't do that! We talk about market timing and how difficult it is, and why you shouldn't do it. Whether it is taxes, whether it's timing the market, whether it's missed opportunities, you need to stay invested. There's plenty of research that shows that if you're just missing a handful of the better days in the market, you're missing out on the majority of the gains. So, in order to participate, you have to be in whole hog.
Now, with that said, who knows when this pullback is going to occur? I agree with you. There will be a downturn. Something will happen. But I can also tell you, I'm getting ready to lock up 10 years here at The Fool, and I feel like for a good eight of them, we've been talking about this big pullback, this eminent pullback that's just a matter of time when that next shoe drops. Over the last five years, we've been really talking about this. The S&P 500 is up something like 50% over the last five years. Clearly, we could sit here and talk about it all day long. We feel like it's going to happen, but we don't know when it's going to happen. So, if you were operating on that premise over the last five years, and you decided to go ahead and pull out or get a little bit more conservative, you missed out on some real days and some really good gains.
So, we then say, if the solution is to not pull everything out of the market and get over protective, then really, we're talking about making sure we stay invested. So, how do we protect ourselves while we're invested? That's one answer to the question right there, is remaining invested. You need to stay invested in order to make sure that you are able to participate in the long-term gains and protect yourself from missed opportunities. But there are ways to protect yourself from downturns. One of the easiest ways, and we talk about it a lot but you cannot overstate it, is diversification, making sure that you have a portfolio that is diversified across a number of different types of companies and markets. If it's something where you feel like you want to have gold in your portfolio, that's fine. Plenty of people utilize real estate as well. There are a lot of different ways to invest. Ultimately, have your portfolio diversified in such a way that you're not overly exposed to any one given market. I like always having cash, personally. I know some people would rather find a return on that cash, feeling like that cash isn't returning anything. My philosophy has always been, having that cash, the liquidity, the availability is the return, because that gives you the ability to immediately pull the trigger if you see an opportunity. How much cash is up to the individual. Anywhere from 5% to 10% can make a lot of sense there. If you feel like the market is overvalued and you want to up that cash balance up to 15%, maybe 20%, that's your call. Again, we've seen plenty of times where we feel like a sell-off is going to come, and it hasn't come yet.
And then, we talk about exposure to recession-resistant stocks, we did a YouTube live stream not all that long ago, a few weeks back, and we talked about this very subject. I like looking at companies that serve markets that are fairly necessary. Look at companies like insurance companies. The question there mentioned Berkshire Hathaway. A lot of Berkshire Hathaway's insurance. Another company that performed very well during the financial crisis was Travelers Insurance, and another company that performed very well during the recession that is not an insurer, but you could relate to its necessity, is Alphabet, or Google at the time. You can sit there and criticize them for being a tech company, perhaps, but when you think about what it really does at its core, it's an information company, and everybody needs that information on a daily basis. As consumers, we may not pay Google or Alphabet directly, it's an ad-supported business, but those ads are supported by traffic numbers that, through thick and thin, are really impressive.
Hill: I feel pretty comfortable making this prediction. Others will have made this prediction, which is that when the next recession comes, when the next big market sell-off comes, there are going to be great companies that are sold off to a ridiculous degree. Just to go back to where we started this episode, with Alibaba, there's a price at which Alibaba gets sold off, that you look at and go, "Well, wait a minute! If you're going to cut the biggest e-commerce player in China to that degree, then yeah, I'm going to buy a couple of shares of that," keeping in mind everything we've already talked about in terms of the lack of transparency, that sort of thing. There will be plenty of companies, rock solid businesses, that get sold off, and you're like, "Well, that's stupid!"
Moser: Yeah, there is a price at which most everything starts to make sense. And one final point I would note is that, given, we're coming up here, it's almost the middle of November, it's just about the end of the year, I think this is a good exercise for every investor to do, I'm in the middle of doing it myself, go through your portfolio and take a look at some of those companies in there that you feel like, maybe it's time to cut this thing loose. Maybe it's not working out. Maybe you've got gains there but you're not feeling as good about the company going forward as I did. I've definitely got a couple of those companies on my radar. I'll be very forthright in letting people know which ones I do sell. But I'm going through and giving my portfolio a little end-of-the-year audit with the idea that I'm going to sell at least a couple of things to free up some money to either hang onto or maybe see if I can't put some of that money into some companies that are already doing well for me.
Hill: Jason Moser, thanks for being here!
Moser: 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! The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!