Alphabet's Out of Club Trillion

In this episode of MarketFoolery, host Chris Hill and Jason Moser examine the fourth-quarter results for Alphabet (GOOG -1.96%) (GOOGL -1.97%) and SiriusXM (LSXMB -2.99%) (LSXMK -3.17%) and the third-quarter results for Ralph Lauren (RL -0.76%). Shares of Alphabet were down on light revenue, while SiriusXM was basically flat. Shares of Ralph Lauren, meanwhile, rose by 10% after a better-than-expected third quarter.

They also talk about some memorable and not-so-memorable Super Bowl ads.

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 Feb. 4, 2020.

Chris Hill: It's Tuesday, Feb. 4. Welcome to MarketFoolery! I'm Chris Hill. With me in studio, Mr. Jason Moser. Thanks for being here!

Jason Moser: Not "Mr." I mean, Jason is fine. I mean, I tell everybody that there's no "sir."

Hill: Dr. Jason Moser.

Moser: There's no formalities here. Doctor, I guess, that's nice. I kind of like that.

Hill: Surgical Dr. Jason Moser.

Earnings season rolls on. We've got entertainment. We've got apparel. We're going to start with Google's parent company. Alphabet is, at least for the moment, no longer a member of Club Trillion. Shares of Alphabet down 3% despite the fact that fourth-quarter profits came in higher than expected, but revenue was light and so the market cap is, I don't know, only $990 billion. Do you support this? [laughs] And by this, I mean the slight market sell-off. It seems a little bit like nitpicking.

Moser: Well, yeah. I mean, I think it is nitpicking. I think when you look at everything together. I mean, this is still a very strong business. It's one that I own personally; it's one that I'm going to hang on to. I think that for investors, this was a great quarter from the perspective, we got some more granularity in how the company is making its money, right? They broke out the YouTube revenue and the cloud revenue and now --

Hill: ... for the first time.

Moser: Yeah. And I mean, you know, we always speculated how much money YouTube was making. I mean, now we know. I mean, they reached $15 billion in ads in 2019. That grew 36% versus the year ago. It's not surprising at all, but it's just really nice to see. And I think that when you consider how the cloud business is doing, the cloud business ended 2019 at a greater than $10 billion. That was up 53% over a year ago. Now, to put that in context. I mean, a $10 billion run-rate for the year. Amazon just recorded $10 billion for the quarter in AWS. So Amazon is still, really, the elephant in the room. But Google is picking up share. They're growing a little bit more quickly. And so we talked about that last week on Motley Fool Money. Ron mentioned, you know, hey, listen, Microsoft and Alphabet, they are picking up share in that space, and there's no question there. And now they've confirmed it by giving us some more solid data with which to go.

Hill: Are you surprised they broke out the cloud and YouTube segments?

Moser: I'm not. I mean, at some point or another you have to do that. And -- well, you don't have to, but I think it would be --

Hill: You don't have to, but I guess my question is, isn't it -- I had two questions. One is, are you surprised? But the other one was, isn't it safe to assume that part of the reason they broke out those segments is they feel good about the growth trajectory?

Moser: Yes. And I think they coupled that with the fact that quarter in and quarter out, we sit here, and others everywhere around the world, question this other bets and how much money is being, you know, just eviscerated in that segment of the business. And so I did notice in the call, they struck a bit of a quasi-defensive on the other bets segment of the business. Pichai, it was almost like he had to justify them. I mean, I understand, when you look at the numbers, for the full year, other bets brought in $659 million in revenue, but operating [laughs] losses were $4.8 billion from that revenue. So we were giving WeWork a hard time about their financials. I mean, that's nothing to really smile at either. But we also understand why they're doing that; we also understand this is a business that affords them the opportunity to do that. And so I think really breaking out the YouTube and the cloud revenue, it's a way for them to steer the conversation maybe away from the other bets and the advertising, talk about some of the other strengths of the business.

And so, you know, I think, all things considered, I mean, it was another encouraging-looking quarter. I mean, the number of cloud deals, over $50 million, doubled from a year ago, so certainly they continue to grow that space. They have customers, like, Activision Blizzard, Wayfair, Lowe's, among others -- $120 billion in cash on the balance sheet. I mean, that's really tough to compete with. They can do a lot of fun stuff with that kind of money, and they continue to repurchase shares.

It was interesting, I thought, they repurchased over $6 billion in shares in the fourth quarter. That was more than double what they were repurchased a year ago. So, clearly, they are seeing some value in their own stock.

Hill: I agree with you about Pichai's tone with regards to other bets. I also don't begrudge him one bit, because that's Larry Page and Sergey Brin's, that's their baby. And so, even if, just for political reasons, he's standing up and defending the other bets segments, that's just a smart thing to do.

Moser: It is. And I think -- I mean, it's a bit of a leap of faith, but we will see good things --

Hill: ... they've got the money.

Moser: They have the money and they have the smarts; they have this just tremendous pool of talent. And I mean, it's an attractive place to be. So you have to believe, it is a bit of a leap of faith, but I believe that over time a lot of good things will come from that. The one question I did have, I searched Fitbit on the call, because obviously, that's an acquisition they made -- I think a lot of people kind of forgot about it. They thought maybe they could sweep it under the rug.

Hill: Thank you for reminding me of the --

Moser: ... but you can't sweep it under the rug, because that was not a small deal by any means, the deal hasn't closed yet. But they only mentioned it a few times on the call. They say that it's going to add strong capabilities in wearables and it's going to "advance our vision of ambient computing for the Android ecosystem." And so ambient computing is essentially just this concept that we're going to be just existing and computing is going to be happening all around us, within us -- it's just sort of a way of life, more or less. It's kind of this cyborgification of people, more or less, and so wearables is one more step toward that. So it's an interesting future to think about, but we're going to see how they work that Fitbit acquisition into their business.

Hill: Don't you think they've been watching the growth of Apple's wearables segment and thinking, "We can probably do that"?

Moser: I think there's a big opportunity there. I mean, we saw with Apple with the Watch, I mean, they've tinkered around with the pricing and they've had to bring it down in order to make it attractive for the masses. Clearly, there is a market out there for people who want to wear a type of smart device that tracks fitness or something to that effect. And I mean, there are plenty of people out there that prefer Android over Apple. I mean, there's a big opportunity there. And imagine they can plug that into that big network of Android users and do something with it.

Hill: SiriusXM's fourth quarter, kind of a good news/bad news. They added subscribers for SiriusXM; they lost subscribers to Pandora. And just like, you reminded people that Alphabet bought Fitbit. For those who may have forgotten, yes, SiriusXM owns Pandora. The stock is basically flat, and that sort of feels right to me.

Moser: [laughs] Yeah, it feels right to me too. I mean, there's a time ago, right, I really wanted to believe in this company. I thought there was a lot of opportunity there. Now I'm really not so sure. And I mean, I'll anecdotally just refer to a recent experience that I had. My wife and I, we were Sirius subscribers for a number of years, and we recently cancelled all of our subscriptions. I mean, she just wasn't really using it very much, and I subscribe primarily to listen to the Stern show. And that show, to me, is just not as good as it once was. I just found myself not really listening to it as much either. And it's a lot of money for something I'm not really using.

So I called in to cancel. And yeah, you've got to call in. That's one point of friction. I'll get back to that. [laughs] So I called in to cancel, but immediately upon canceling, they said, "Hey, well, we'll give it to you for half." And I was, like, "OK." So then my investor brain starts thinking, "You guys don't really have any pricing power, do you?" Then I'm figuring, if I said that to the customer service representative, she'd just probably hit me with a big wave of silence. But the fact of the matter is, I don't think that SiriusXM really has any pricing power. I think perhaps once upon a time, they did, when Stern moved over there. And he resonated a bit more with his audience. But I think he -- I mean, he's going to be lost on this next generation of listeners. I mean, the next generation of listeners, they don't care about him, right? I mean, he's sort of had his day in the sun, so to speak in that regard. So then they have to figure out how to make that platform attractive from a content perspective.

One way they tried to do that was acquiring Pandora, which I think was a bad move. Pandora is a dying business, and if you look at the numbers, that shows. Monthly active users at Pandora, 63.1 million at the end of the quarter versus 68.8 million a year ago. The listener hours are down. And I mean, this is with Sirius being able to plug them into different avenues. So for me, I feel like we're going to see a day where they write that Pandora acquisition down to zero, but management is saying in the call, they want to maintain those two separate brands, which to me is kind of odd, because when you look at Apple Music and Spotify, I mean those are the two streaming platforms. Pandora has no chance against those two. None -- I'm not even -- none.

So, I mean, I really do believe that they will write that acquisition down to zero, even if they don't do it in such an obvious way. To me, it's just they're trying to do a lot with the platform. And in doing that, they've made it really difficult to use from a user's perspective. It's just not user-friendly anymore. And when you look at something like Apple Music or Spotify, those are slick platforms that are easy to use, SiriusXM is just not there. They were very late to this mobile game, and I think that's going to cost them dearly. The Pandora acquisition was an effort to try to be a part of that, but I think that's a little bit too little, too late.

Hill: It's interesting from a stock perspective because, yes, it's flat today on this report. It's up about 20% over the past year. It's a $30 billion company. So if they're really in some sort of methodical decline, they've got ways to fall.

Moser: Yeah. No, I mean, I don't think there's a world where Sirius goes out of business. I mean, I think there are plenty of opportunities for them to stay relevant. One of them is, when they made this Pandora acquisition, you started seeing more and more talk of an ad-supported product. And I think, to me, that seems like a very obvious lever for them to pull that could, at the very least, keep things going in the right direction. I mean, they had this tremendous install base out there of cars with that capability. So, I mean, you can't dismiss that distribution. That's a big deal. And so, while maybe we're not paying Sirius any more money, if they said, "Hey, you can still listen to SiriusXM and you can pick up this category or this catalog of channels and listen to them for free and it will be ad-supported," well, then, that would be nice. I'm sure we would be tuning into something here and there. Again, I mean, ad-supported is only going to take you so far, and again, they still have to be content with where the listeners really are going and the money and the listeners, the numbers all tell you. I mean, Spotify and Apple are where the listeners are going. Sirius has got a lot of work to do to be able to catch up with how user-friendly those platforms are.

And I will tell you, like, when they offered me that half off, I thought "That's nice, but no." And they said, well, why don't we try month-to-month?" And I said, "That's nice, but no." And you want to know why? Because in order to cancel, I'm going to have to call you back, and I'm not doing that ever again.

Hill: A couple of quick things before we move on. Shout out to Bob Phelan, who's a teacher at Catoctin High School and a listener. That's a high school in Thurmont, Maryland. I got the chance to -- on his invitation -- go to the high school yesterday and talk with a couple of his classes. They're starting a stock market segment. These are high school seniors.

Yeah, it was a lot of fun. I thought it was a lot of fun, I don't know, you know, if you ask the students, they might be like, "Oh, my God! God! That old man was boring and he wouldn't stop talking." But I appreciate it. And for anyone who's just starting out, we have a free investing starter kit. It covers everything from saving money to 401(k)s to buying your first stock. And it includes five stocks selected by our investing team, and it's free. And you can get it just by going to fool.com/starterkit. Just put in your email address. We'll send it to you right away. It's a really good report, I have to say. Shout out to our colleague Rik Silverman, who made it look as good as it does.

Shares of Ralph Lauren are up 10% today after a better-than-expected third quarter. And this seems like, among other things, a margin story for Ralph Lauren, because through the holiday quarter, they were able to keep their prices relatively high.

Moser: I think you're right. I think they actually saw a little expansion in gross margin and guided for a little bit higher on the operating margin side for the business for the quarter, and I think the market is responding to that. Along with the fact that -- I mean, let's -- God bless the power of low expectations, right? I mean, retail, in general, is just a really tough space. And there's a reason why all these apparel companies trade for 10, 12 times earnings. It's just a tough space to maintain any sustainable competitive position, and you're always competing on pricing, with the exception of some brands out there that can hold some sway in the market. And I think that Ralph Lauren, for the most part, is able to do that to a degree. I remember growing up, Polo, that was the thing. I mean, that was really a big deal. And I think it still holds water today in the fashion industry, along with all of the other brands that Ralph Lauren produces.

But I mean, you have to look at the business itself and think, well, is this still a business I'd want to be invested in? I can't say that it necessarily is. I mean, the income statement makes you wonder. Top line is down 16% since 2015. Margins are definitely constantly under pressure. But with that said, they were able to grow earnings. They do have a plan in place to try to reinvigorate the business. The downside to that is, it's kind of all of the same language you hear from all of these other companies -- "Oh, yeah, we're going to energize core products and we're going to lead with digital and become omnichannel." And they call it their next great chapter plan. It's nice to see it, but the execution still has to be there, and I'm not so sold on that.

Hill: I wouldn't buy it today, in part, because of the rise that we're seeing. But also because they do a decent amount of business in China, and by their own admission, there's enough uncertainty in China with their locations there and the sales that they're doing there that I think that that alone puts it on hold. On the flip side, it really does seem to be a brand that's held up over time. I'm not -- I agree with you; it's always more interesting for us, as investors, if we get interesting specifics about how apparel companies are going to move the needle on sales as opposed to things like we're going to reinvigorate the brand.

This is a brand with some equity in it. I'm a little surprised that it's a $9 billion company; I wouldn't have guessed it's that big. So there is something there. I just don't think today is the day to buy.

Moser: Probably not. And I'm glad you said that, because, you know, we talked a lot about these companies -- is this a value play or is this a value trap? And in most cases, I think these apparel companies, most of the time they can be value traps. Every once in a while, though, you find a business with some brand power there, and I think this is an example of one where if you buy it at the right price, there probably is a nice value play here. Today probably isn't the day. But I mean, you know, you look at their balance sheet, better than $1 billion in net cash. And again, they bumped up expectations on the operating margin side for the quarter that we're in now.

And I think, at the right price, this could be a fun value investment. Because, again, I mean, it is a big company with a rich history, smart leadership, and I think still better days to come honestly.

Hill: Before we wrap up, on yesterday's show, Mac and Andy and Ron talked about the Super Bowl ads. I enjoyed the conversation and found myself agreeing with the general tone of the conversation with respect to the ads from Amazon, Hyundai, etc., in part because we were talking about this before we came in the studio, in part because I felt like they did a good job, not just of being humorous but also of featuring the product. We're talking to Austin Morgan, and I asked him, "What did you think of the ads?" And he said, "I really liked that Jason Momoa commercial, but I can't remember what it's for." And I thought, you know what, now that you mentioned it, I can't remember what it was for either. And I think that's always a trap for those companies. When they're coming up, the creative, it's like, "Yeah, that was a funny commercial. I couldn't tell you what that product was."

Moser: Yeah, I'm drawing a blank too.

Hill: Whereas the Hyundai Sonata with the smart park, I mean, that was great.

Moser: The ghost car. That was good. I mean, I think that's to me -- and I said this to my wife the evening watching the game. To me, through the years, I feel like the Super Bowl commercials have jumped the shark. I think they're just abjectly worse today than they were 10 years ago. I don't know why that is. I mean, it does seem like we're in a tough creative spell where they're trying to reboot everything. And so maybe those creative headwinds are carrying over into commercials as well. But I do agree with you -- you start throwing stars in these commercials and it's like, you've got to be careful, because you may remember the star but you don't remember what the commercial was for. And I think the one that had Toby from The Office. And I mean, I love The Office. I cannot remember what the commercial was for.

Now, on the flip side, I do remember the Dwight -- Little Caesars commercial, right? Rainn Wilson and the Little Caesars commercial. Maybe that's just because I ate a lot at Little Caesars when I was growing up. I don't know. But yeah, that to me, yeah, I feel like maybe we passed the Super Bowl commercial's prime, but every once in a while, there are a couple of outliers. The ghost car was by far and away my favorite.

Hill: So they mentioned on yesterday's show that those were the top five ads, according to Ad Meter. And there was one ad that I saw, for a publicly traded company, and I thought to myself, "If that stock is down on Monday, it's not going to surprise me at all." And the public is Intuit and Intuit is the parent company of TurboTax. Because I thought that ad was atrocious. And it ranked 44th on the Ad Meter list. So I felt vindicated assuming that. I'm not wishing anything bad on Intuit shareholders, and in fact the stock was up 0.5% on Monday, something like that. But I just thought, "No, just stop."

Moser: No, getting the spot, paying the money. That's only half the job. You've still got to deliver the goods. And that's a lot easier said than done.

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.