Google's Weak Stadia Launch Dims Some Hopes

In this episode of MarketFoolery, host Mac Greer talks with analysts Emily Flippen and Aaron Bush about some of some of the biggest news in the market. PayPal (PYPL 1.96%) forked up a whopping $4 billion to buy a browser extension/mobile app, Honey, which might not be as insane as it sounds. Macy's (M 1.44%) put up another depressing quarter, and turnaround hopes are getting dimmer. Charles Schwab (SCHW 1.31%) is snapping up TD Ameritrade (AMTD), which should make the industry a lot more competitive. Finally, Aaron and Emily disagree on how much Stadia's underwhelming launch will hurt Google's (GOOGL 1.27%) (GOOG 1.25%) future ventures in cloud gaming.

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This video was recorded on Nov. 21, 2019.

Mac Greer: It's Thursday, November 21st. Welcome to MarketFoolery! I'm Mac Greer and I am joined in studio by Motley Fool analysts Aaron Bush and Emily Flippen. How are we doing this Thursday? 

Emily Flippen: Alright!

Aaron Bush: Decent. 

Greer: Decent, OK. I'm going to try to upgrade you to slightly above decent.

Bush: [laughs] I don't know why I said that, it's been a good day. 

Greer: No, that's OK. You're lowering expectations.

Bush: We have Fools getting lunch around the corner. 

Greer: That's true. We have our annual Thanksgiving lunch that we're very, very excited about. We're also excited about some news of the day. We've got PayPal buying Honey for $4 billion. No, not honey the food. We're going to talk about it. But, PayPal's biggest acquisition ever. We'll get to that. And we're going to talk about Macy's. Macy's not doing well. Selling off on earnings. And, speaking of not doing well, Aaron, Google's gaming service -- you, as one of our resident gamers, are excited about Google's gaming service, right? Stadia?

Bush: It's one of the dumpster fires we'll be talking about today. 

Greer: OK, so, not as excited. Well, we will get to that. 

But let's begin with a big deal of the day. Fox Business news reporting that Charles Schwab is buying TD Ameritrade for $26 billion dollars. TD Ameritrade shares up around 18% at the time of our taping. Schwab up around 8%. Interesting that both companies are up. Emily Flippen, let's talk about what the deal means for investors, for consumers, and for the competition.

Flippen: Well, for investors, this is a big deal in the sense that both Schwab and TD Ameritrade are the largest publicly traded brokers in their business, some of the biggest competitors. Earlier this year, we saw Schwab slash their fees to nothing, which sent TD Ameritrade's stock down something like 30% in a single day. It was really substantial. The idea that there's acquisition in the space isn't completely unsurprising because of the fact that fees have gotten so low. This now feels like it's a game about scale as opposed to just monetizing the users better. You need more users because you're making a lot less money off of them. It's going to be interesting to see what this means for their competitors, the biggest ones being Interactive Brokers, Fidelity, obviously Robinhood has been on the out and out since earlier in October. This is just putting additional pressure on also the larger brokers that maybe won't have the scale that Schwab and TD Ameritrade will have.

Greer: You just mentioned the competition. Robinhood's special sauce was their free trades. As you mentioned, Emily, a month ago, both Schwab and then TD Ameritrade announced they were eliminating commissions for most online trades. Where does that leave Robinhood? Where does all of this leave Robinhood?

Flippen: Robinhood's, as you say, special sauce was more than just its free trades. That's how it got its start, for sure. That's what made it such a compelling platform. But I think they also have a little bit of an advantage in their ease of access. Their interface is much slicker than what you'd get otherwise. It's simplistic. You're not getting a lot of the research and stuff you get at other brokers, but you do get a nice app, you get Bitcoin trading, and they're recently spreading internationally as well, spreading to the U.K. 

I think that this does have a material impact on their business, clearly. As Aaron showed me maybe a month ago, it's way too easy to move your assets from Robinhood -- so, I have moved mine from Robinhood into my Fidelity account, the little that I had there. It's a really low switching cost business, and unfortunately, that's going to hurt Robinhood.

Bush: To be clear, I think this is about more than just fees going to zero. If you look at Schwab's business, when they announced that fees were going to zero, that's only going to impact about 3% to 4% of their revenue because they make most of their money from net interest margins, like interest on assets that are being held by lots of consumers. They make money from their registered investment advisor, RIA, business. So, in some ways, this is really competing more with like a BlackRock than like a Robinhood. 

But TD Ameritrade also makes money in some other areas, but maybe a quarter of their business or so comes from these transaction fees. So, they got hit hard for a reason. I think what we're seeing is Schwab being smart in their timing, announcing fees going to zero, which weakens competitors, which lets them buy still one of the strongest players for a lower price. Even with what they're rumored to be paying right now, it's still about where the stock was not too long ago. I don't know, it seems pretty smart on Schwab's part. And, they get lots of scale advantages beyond just trading, but across tons of different investments.

Greer: It sounds like a complementary deal, right, given what you're saying about Schwab's business and TD Ameritrade's business. You have potentially... I don't want to use the word synergy, but maybe you have some synergy?

Bush: I think you get scale advantages. And I think that this could just be the first move of many for the entire industry, consolidating. We will see.

Flippen: And it's bigger than just trading fees. It's fees across the entire financial industry going to nothing. There's registered investment advisory services, there's been a lot of downward pressure on everything from funds to individual access to trading. Yeah, it is a game of scale now, I agree with Aaron. 

I'll also say that, when you look at this combination and the purchase price that is being paid by Schwab for TD Ameritrade, it is curious, because what caused that value in the first place was competition. So, when you have somebody that's eating up the competition, it begs the question of, if competition is what caused the fees to go down, what happens when you start seeing consolidation in this space? I don't think that fees will go back up, but I do think that the government's probably going to take a hard look at this acquisition and say, at what point do we see something that's anti-competitive?

Greer: Let's move on to retail. Macy's down on earnings. Earnings were better than expected, but well, sales were not. Macy's cutting its full-year sales and profit outlook. Macy's citing a warmer fall and weaker spending by international tourists. Aaron, is there any good news here? What's going on with Macy's?

Bush: No, there unfortunately is not any good news. Sorry to say. I feel like it's funny, because we probably could say everything that we're saying right now five years ago, and it could be the exact same radio show.

Greer: Which, you were saying before our taping, I think was the last time you shopped at Macy's, right? Around five years go? 

Bush: Probably. So, you can blame me. You can blame everybody else like me. This quarter was bad. Sales were down, comps were down, guidance is being lowered. As you mentioned, according to management, it's being impacted by international tourists shopping less. If I'm an investor, that's not really what I want to see propping up my retail store like Macy's. Weaker than anticipated performance in lower-tier malls. That sentence in and of itself should be self-explanatory about the entire past decade and next decade. And then, cold weather. I don't know, every time people blame weather for a store like this, it irks me. Lots of duh, lots of eye-rolling going through the press release. So, it's really more of the same. 

You still have to recognize that this is a business that generates cash. The stock looks cheap when you look at the cash that's being provided. But, it's tough to have any confidence in the future of this business when it's still relying on malls and international tourists and weather, apparently. Even if you look at the major stock price decline of the past five years or so, the price is still double what it was at the lowest point in the 2008, 2009 recession. So, if you don't think this can get worse, you're probably wrong.

Greer: Wow! OK, that sounds pretty ugly. I want to have us do a little thought experiment here. This very same week, Target, just yesterday, just blew out earnings. Target up big, hitting a new all-time high. Emily, in five years from now, we're looking at Macy's and saying, "What an incredible run. This was the time to buy." What happened?

Flippen: A comet came down from space destroyed Walmart, Target, Burlington, TJ Maxx. [laughs] No. I'm not sure at this point what could save them. I'd say being smart with their merchandising is probably the best thing they can do to make use of the assets that they have right now. I think part of the reason why Target's done so well is because they've really had strength in the way that they've marketed and merchandised their apparel. If you look at their last quarter, that was a big growth driver for them.

Bush: They do produce a lot of cash, but they're not really smart about how they use it in terms of investing for growth. That's fine if you don't think that there is anywhere good to invest in growth. It makes sense to give it all away in the form of dividends. But, if you want to see this business return to growth and fund a new type of catalyst, you'd better find something to invest in.

Flippen: Maybe a comet?

Greer: I like that, a comet. Aaron, what gets you back into a Macy's? What would it take for, the year is 2019, Aaron Bush to go to Macy's?

Bush: This sounds bad, but probably bankruptcy, so that everything goes like 90% off. [laughs]

Greer: [laughs] That's not really a business strategy.

Bush: [laughs] I know.

Greer: OK, not helpful for Macy's. Wow! 

Let's move on to PayPal. PayPal buying Honey Science Corp for $4 billion. Honey is a discount and rewards platform. It's developed a browser add-on and mobile app that helps consumers find discounts. Honey also offers up other money-saving tools. Now, Emily, this is PayPal's biggest acquisition yet. Is it a good buy?

Flippen: $4 billion for a Chrome extension and an app. It's PayPal's biggest acquisition. At first, when I saw that number, I was sticker shocked. I was like, "There's no way this is a good deal." And then I realized something. Honey is making a lot of money off me. I am a Honey user. That sounds like a weird thing to say. I'm not addicted to Honey, I do use the app. I'm a Honey user. And apparently, Honey makes a good chunk of money off of, I think it's 79% female millennial users. So, I'm right there in their target demographic. They have about 17 million users. That's a small number of users for a $4 billion price.

Bush: $235 per user.

Flippen: Thank you! [laughs] I couldn't do that math in my head. It's a lot of money. I don't know if I'm worth $235.

Greer: You're definitely worth $235.

Flippen: Aw, thank you, Mac! Well, to PayPal, apparently I'm worth it. It's interesting because at the end of 2018, those 17 million users were really using it, like you said, just to get coupons. But apparently, PayPal thinks that Honey is going to be accretive to their bottom line as soon as the acquisition goes through, which says that Honey is being profitable off of their browser extension. PayPal has been a little bit trigger happy with acquisitions in the past. It'll be interesting to see if this one pans out as well as some of their previous ones have.

Bush: Yeah. I think the deal looks expensive if you look at the current state of Honey's business. The deal very much hinges on being able to tap into PayPal's broader network and rapidly scale out across all of its other users in different ways. Strategically, I think it's interesting. There's been so much focus in competing for the checkout experience. PayPal is very much a pioneer in that. Other things like Apple Pay, and now the Visa Checkout, and all these other things have come on board. Even though PayPal has done well, it's very obviously lost market share. So, it's almost shifting the strategic focus and saying, OK, we'll still compete in the checkout experience, but now we're also going to compete in the browsing and discovery and what leads up into the checkout experience. I think Honey probably is a good deal for doing that. It's a good strength. 

This was a fun fact, but I was surprised, like, is this really PayPal's largest acquisition? Especially since Braintree is big, Venmo is big. It turns out that it is. 

Greer: I didn't want to have to redo that.

Bush: I was surprised. In 2012, Braintree acquired Venmo for $26 million. The next year, PayPal acquired Braintree with Venmo for $800 million. Looking back, that was probably one of the smartest acquisitions, at least in the fintech world, that we've seen, period. They're not buying Honey for $800 million, but if they think that the network effect potential is there the same way, the upside could be pretty substantial.

Greer: And it's a great name. Hearing you just say, "They're not buying Honey," I mean, come on! Don't we love the name Honey? Don't we love honey? Do we love honey? 

Flippen: I think it's a terrible name. I hate honey, I hate the name!

Greer: You hate honey?

Flippen: "Hate" is a strong word, but if I'm going to sweeten something, I'm going to use something other than honey. It's not strong enough. And it comes from bees. Nobody thinks about that. Where does honey come from? It's not exactly an appealing thing to put on your food and put in your mouth.

Greer: What do you have against bees?

Flippen: The fact that they're bees and I don't want them near me. I know they help the environment and they do lots of good stuff, pollination. They could just do that very far away from me and my mouth.

Greer: Wow! Send your emails to...

Bush: To extend this unnecessarily, I learned that, you know the honey that's in the bears? 

Flippen: I don't think I want to know this.

Bush: It's mostly not honey. It's all just artificial stuff, and barely --

Greer: Oh, you're talking about the little plastic bears. I lost you there for a moment.

Bush: It stretches the definition of what honey is.

Flippen: I should get that, then.

Greer: OK, but I think it's fun to squeeze it out of the bear. I don't know. It's just one of these simple things I find satisfying.

Bush: Yeah, it's nice. Emily's a hater.

Flippen: As usual.

Greer: I love, love, love me some honey! 

Our final story. A rough debut for Google's new video game service Stadia. Launched this week. Now, the idea here is, they will be able to stream video games like, well, you stream TV shows. But, not working out too well. Stadia taking heat for a lack of features, a poor lineup of games, and a slow response time, and that's just to name a few. Now, Aaron, that does not sound very good. I wanted to say fun and games, but it sounds like the fun is lagging.

Bush: That was a good pun, Mac. The original premise of Stadia was, and still is, compelling, to be able to play any game on any device because the game is streaming to you from a server somewhere in the cloud. That's still interesting, and one day inevitable. But Google, in its attempt to be the first mover, instead of the best mover, completely and utterly failed to execute well.

Greer: Wow, strong words! 

Bush: And, yeah, now it's the laughingstock of the industry.

Greer: But it's early. This is the first week. Two weeks from now, could we say, "Hey, they've got it all figured out?"

Bush: No. Not in two weeks. There's a ton of problems. The lag is horrible, which is really just a fundamental technology problem that will take time to solve. It doesn't support many devices. Sure, they can add more devices over time. The game library is just comically bad. Like, there's nothing there.

Bush: There are some games. They have Red Dead Redemption and stuff, so games that are still relevant, but they only have 22 games. Originally they were only going to launch with 12. [laughs] That's nothing.

Greer: So, the gameplay is bad, and there aren't many games. 

Bush: Yeah. Lots of broken promises about wireless, about shipping times. In my mind, it's just a classic case of over-promising and under-delivering. Even if this was a beta test, they never framed it up that way. Emily is giving me weird faces. They didn't frame it up that way. They tried to get everybody excited. They tried to get as many pre-orders as possible. There's no way that they wanted to come out this terrible. Even if you think there's a long-term future here, I think there are a ton of headwinds. There are technology problems, there are business model problems, there are content problems, there are perception problems. There is a world where Stadia can succeed, but I think it's fair to question whether they will get there. And, when they get there, there will be more competition. Their investments in exclusives might not be good enough compared to other people. I think it's unclear whether they can target a specific enough demographic to actually be able to pivot their business model toward something like subscription that would work for something like this. So, yeah, lots of problems. 

Greer: What I hear you saying is, if you're Macy's this week, you may want to hang out with Stadia because you feel better about yourself. 

Bush: Yeah, this is dumpster fire No. 2 of the episode. 

Greer: OK, Emily?

Flippen: Look, I might be a honey hater, but I'm not a Stadia hater. 

Bush: What? [laughs]

Flippen: Stadia succeeds in my world. It's not succeeding right now. All the points you mentioned are good points. They're fair points. But they're all fixable. I think that the gaming community in general expected a lot from this. There was a lot of excitement about the concept of cloud gaming. It's a concept that's not new. It's been tried before, and it has failed before. But Google has the infrastructure needed to make cloud gaming possible. And it was a beta test, and it was advertised as a beta test, because of the fact that it's going to be a free service. It's not a free service right now. It's a paid service right now. You need to buy their special Chromecast dongle. You need to buy their special remote. You need to pay up for that, getting that immediate access to it. And people have been angry because it's lagging a bit and because they didn't immediately get their access codes. I get it.

Bush: It's not usable.

Flippen: It is usable, actually. People have access to it right now. No, the concept is there.

Greer: I'm not a gamer, but usability sounds important.

Flippen: Aaron is grossly misleading listeners right now, I genuinely believe so. 

Bush: I'm not.

Flippen: It is a usable product. In fact, if you listen to the reviews from people who have access to it, all the games are playable. They're transferable across their Google devices, and you have to have the special whatevers to make them play. But that's how it is right now. There is a little bit of lag. However, the lag is really noticeable if you are trying to competitively play games online. So, for the average gamer, it's fine. And it does beg the question of, what's the average gamer paying $130 to get Stadia for? Yeah, they aren't.

Greer: What about the below-average gamer?

Bush: That's the thing. The lag is bad, and it's really inconsistent. Depending on where you are and what you're playing on, it's not going to be the same experience. For like a lot of games, that's a problem. I think part of the problem is that right off the bat, they're trying to be everything to everybody. If you study textbook disruptors, innovation, like those disruptive ideas, when they're able to first target a niche that isn't being served well by what exists today -- like, that the hardcore gamers of today wouldn't be satisfied by. But Stadia isn't doing that. So, if I were them, and I wanted to turn things around and succeed, I would focus very much on delaying expectations, refocusing on finding that one audience that is being underserved, making it a great experience for them, and then building out to other gamers that are more critical and have higher expectations. They could do that. I don't know if they will. By the time they get there, again, Microsoft's going to be doing this, Sony is going to be doing this. They'll still probably be the weakest link in the industry. So, yeah, I don't think it's 100% game over, but it's a really bad start that gives them headwinds that are tougher to deal with going forward.

Greer: Let's talk about that going forward. Five years from now, if we're talking about a company that has become the Netflix of streaming video games, who are we talking about?

Bush: I think Microsoft is the best position because they have already a leading console, lots of exclusive content. They're building up a library game pass of hundreds of titles that you can play. They're very much shifting the model over toward a subscription model, but also for the device, where it's more like an iPhone model. They have all the pieces worked out. Microsoft owns Azure, they have everything. PlayStation will be relevant, maybe not. They're probably not going to be as successful on that front as Microsoft. Stadia is a question mark. Amazon is a question mark.

Flippen: I don't disagree. Google doesn't own content. That's been part of the biggest challenge for them entering cloud gaming, the fact that they don't really have any games. I think I see a bigger future for Google Stadia as a neutral platform, as opposed to something like Microsoft, or Amazon, if it were to ever enter that field. And I think that's probably where the future is for them. I don't think they're trying to be a content generator the way that Xbox has really provided a great platform for content.

Bush: I think they could be like a Roku. That analogy works. But also, all the other platforms will be, too. It's essentially like different Rokus competing based on exclusives.

Flippen: I think the question is, do they want to? I think Google doesn't want to be a content generator. I think it wants to be a platform. And I think the other ones should focus on what they do best, which is content generation, and then leave the really, really annoyingly complicated process of cloud gaming to the company that has huge numbers of cloud service and can dedicate that space to it.

Bush: Yeah, we'll see. Google traditionally is pretty bad at facing problems that aren't technology problems. They really suffered for a while with Google Cloud because they didn't have any salesforce expertise. They suffered with YouTube Red, trying to create like a premium YouTube, because of not having exclusive content expertise. Google very much is one of the best, if not the best technology company in the world. Their hammer is technology and they view every nail as a technology problem. There's a cultural change that needs to happen if they want to succeed in all these other areas that also have content problems, media problems, salesforce problems, other problems that need to be solved. 

Greer: Let's wrap up with our desert island question. You're on a desert island. You have five years and you've got to buy one of these stocks: the combined Charles Schwab-TD Ameritrade, assuming that deal happens, PayPal, Macy's, or Alphabet, the parent company of Google and Stadia. 

Flippen: I'll go down with this ship. I'll go with Google just to be contrarian. I think there's a good future for TD Ameritrade and Charles Schwab if that merger goes through. But that's a big if. So I'm not going to count my eggs before they're hatched or count my chickens before they're hatched. I think you count the eggs first. So I'm going to go with Google.

Bush: I'm going to go with PayPal. They're a lot smaller than Google and they have a lot going for them across a lot of different dimensions, and are proving that they can reinvest and acquire into other areas and grow through that, too.

Greer: Excellent! Emily, Aaron, I hope we're now feeling more -- Aaron, are we feeling more than decent now?

Bush: I'm feeling good, and I'm really excited for lunch!

Greer: [laughs] Excellent! Thanks for joining me!

Bush: Thanks, Mac!

Flippen: Thanks for having us!

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, so don't buy or sell stocks based solely on what you hear. That's it for this edition of MarketFoolery! This show is mixed by Dan Boyd. Thanks for listening! I'm Mac Greer. We will see you on Monday!