In this episode of MarketFoolery, Bill Barker and Chris Hill talk about earnings and a recent IPO. Twitter (TWTR +0.00%) profit was light, but no one is complaining, since the company posted higher-than-expected revenue. Peloton's (PTON 2.20%) revenue is still impressive, although growing slowly. And finally, the guys chat about Kellogg (K +0.00%) and its future outlook.
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This video was recorded on Feb. 6, 2020.
Chris Hill: It's Thursday, Feb. 6. Welcome to MarketFoolery! I'm Chris Hill, with me in studio Mr. Bill Barker. Thanks for being here!
Bill Barker: Thanks for having me!
Hill: We've got a recent IPO reporting earnings. We're going to dip into the Fool mailbag. And this time, it's actual mail. We're going to start, though, with Twitter, because shares of Twitter up 17% today. Fourth-quarter profits were light, and nobody cares, because Twitter's revenue came in higher than expected, and in terms of user growth, I think this was the biggest quarter they've had.
Barker: Yeah, and what they highlight -- and you can break down the words to get at how important this may be, and it's certainly being considered by the market today -- monetizable daily active usage, MDAU. So you've got monetizable. That's important. Daily, and we'll touch on the addictive quality of Twitter. Active, and usage. So these are people who not only are using it at all -- and most internet media companies report in monthly active users; they're talking about daily active use here. And of that daily active use, the monetizable portion, the ones they're getting ads to. So that's for the bottom line, and the top line, a pretty good metric to focus on. And as you note, 21% year-over-year growth is the best, and is really a different caliber than what we're seeing about a year ago when it was growing that metric about 9% to 11%.
Hill: And there was a point in time when Twitter's growth -- one of the things that we talk about is their international growth. And I think part of the reason they stopped really counting that -- it wasn't that they weren't growing internationally; it's that it pretty quickly became clear that the amount of money that Twitter makes outside the United States just doesn't really compare to what they were making inside the United States. So I'm not saying a 17% pop in one day necessarily makes sense. Maybe it does, but at least there is a specific metric you can point to, that you can say, whether or not you agree with 17% in one day, this is a legitimately good number for Twitter.
Barker: It's a legitimately good number -- and to back up and give a little more context to it -- over the last five quarters, that number has grown by 9%, and then 11%, and then 14%, 17%, today 21%. So the market in part is looking at that progression and extending it out a little bit further. I don't know that Twitter does need to grow faster than 21% year over year to start justifying the price that it's at today, but if it does, I think that the bottom line is also going to improve.
Hill: So where do you think we are with Twitter as a stock? Because putting aside what it's doing today, the stock, over the past year, it's up, I think from $34 to $38, which is where it is today. It's only -- and I realize this may sound crazy -- it's only a $30 billion company. Yesterday, we were talking about Snap, which is a $24 billion dollar company. So when Snap came public, if you would ask me, "Well, where do you think these companies are going to be in relative size in a few years?" I would have said, "Oh, well, Twitter is going to be at least a couple of times, if not more, larger than Snap." So it seems like a good trend in terms of the monetizable daily active users.
But I also feel like we've seen this movie before with Twitter. There have absolutely been times, where they've had a good quarter. And there are people saying, "Well, now they've turned the corner," and really, they haven't. So I guess what I'm asking is, do you think they've turned the corner? Or do they actually need to come back in three months and continue this trend line and find this metric up 25% instead of just 21%?
Barker: Well, it's continuing to be a fair fight between the things that Twitter is proving they can do and the questions. Which include -- Jack Dorsey. What's up with that?
Hill: Jack Dorsey, CEO of Square, appears to be, at least from a stock perspective, better than Jack Dorsey, the CEO of Twitter.
Barker: Also, on top of that -- and that's part one of what's up with that; it's Jack Dorsey going to Africa for some period of time. What's up with that? And there's an answer to that. And Twitter can grow there as well as Square --
Hill: What is the answer to that, by the way?
Barker: Well, it's to expose himself more to what is a very large market. And it's probably more valuable on the Square space, where those sorts of financial transactions are growing faster than, say, the use of Twitter. But Twitter certainly plays a larger role, as you noted -- it's not getting the same success internationally that it's getting domestically. And Africa is one place to explore that. And I think just an interest in the continent itself. But all those are, sort of, questions about why can't we just have a CEO who works on our one company and does it from the home office? What's all this other stuff?
So it's going to be probably a very good year for traffic. 2020, you've got Summer Olympics coming up. And you're devoting your show to the Summer Olympics.
Hill: I am?
Barker: I hope. You'll talk about the business side of that a lot.
Hill: Oh, absolutely.
Barker: Like going all through the Olympics, hopefully. Everybody loves the Olympics.
Hill: [laughs] There's a lot to like about the Olympics. I don't know that we're going to go 17 straight days where the show turns into the business of the Summer Olympics, but sure we'll hit at some point.
Barker: I'm just putting that out there as a little challenge. You could do that.
Hill: [laughs] No. Nobody --
Barker: ... have faith in yourself.
Hill: Nobody including, and especially me, is interested in that show. [laughs]
Barker: And then I guess there's going to be an election this year, maybe.
Hill: I've heard a little something about that, a presidential election here in the United States, along with presumably some Senate elections and some House of Representatives elections. So yes.
Barker: Maybe a primary or two.
Hill: Once again. The table is set for Twitter to succeed. So I think they kind of do need to come back in three months and have this metric continue its trend.
Barker: If they do, I think you'll see the stock price higher than it is right now. If they can put up a number 21%, 22% year-over-year growth in this category, I think they're going to be justifying the price today.
Hill: Let's move on to Peloton, which recently went public. Peloton's third-quarter loss was not as big as Wall Street was expecting, but shares of Peloton are down as much as 10% on Thursday after it's clear that revenue growth is slowing. And we don't like that with our growth companies. We're fine if you're not profitable, just as long as that revenue growth continues. And once it starts to slow down, that's when some of us are going to sell our shares.
Barker: So revenue grew by 77% in the quarter -- part of the reason it beat estimates. But part of that was that they sort of actually got more efficient and pulled some sales into the quarter just concluded and reported and lowered their guidance for next quarter in terms of what previously had been the expected range for revenue. So they've grown connected fitness subscribers by 96% and the total revenue to 77%. These are pretty, pretty good top-line growth numbers.
They're still losing a lot of money though. So if people are looking today at the top line and saying, "When are you going to produce some profits?" and they're just like, "We're investing for growth." Yeah, you can have that conversation through your stock price with investors for a while, and many companies at some point make the transition and say, "You want to see profits? OK, we'll cut back on spending for the growth, and we'll show you the profits." And I think there are questions about whether that's going to happen and when it's going to happen for Peloton.
Now, with the stock price cut today by whatever it is, 9%, it's trading basically back at the price where it IPOed.
Hill: Is there a B2B side of Peloton's business? I know that, certainly, from a marketing standpoint, they are very focused on individual consumers. But it seems like the type of business that if they were able to strike partnerships with particularly higher-end hotel chains, that sort of thing, resorts, so that part of the attraction of staying at that hotel or resort is, "Oh, in our fitness center we've got ... " I mean, Peloton has a brand appeal that I think is probably higher than their competitors. And if they're not already doing that, that seems like an opportunity for them. But I don't know enough about the business to know if they actually do have a separate B2B segment.
Barker: Perhaps you should work in their marketing department or their business. Perhaps you should be the CEO, since they don't seem thrilled [laughs] with, you know, the performance today. And, of course, I think what gets raised here is Peloton, a controversial stock or a controversial ad issues --
Hill: Aren't we pass that?
Barker: I would hope.
Hill: I think we are.
Barker: I've brought it up, so I guess we're not. And the reason I brought it up is because I saw it quoted today.
Hill: Really?
Barker: Yeah. Because I think that's one of the things that people know or perhaps that the media enjoys. And here I am today participating in the media, talking about itself, "Hey, what about that ad? What about the controversy that we all surrounded ourselves with regarding an ad and talk about it, rather than the 77% growth, which, people's eyes start to glaze over?"
Hill: I think the -- no.
Barker: No? You're not going.
Hill: I'm not going there.
Barker: Are you taking a stand? That controversy is dead.
Hill: [laughs] As far as I'm concerned. I mean, for anyone who would raise that -- and not that I'm suggesting that people are making this analogy -- but if they're giving it the same amount of attention or raising it as high in terms of flag-raising as someone would about a restaurant chain with a health scare. And it's like, "Well, they had that health scare back then, that could happen again." It's like, I don't think the Peloton television ad has any legs. And I think that if you're looking at this business and trying to figure out whether you should buy this stock? No, that's not something to take into consideration. That's done.
Barker: Yeah, it is done. I've just started typing Peloton into Google, and "ad" is the third thing that comes up in autofill, and "wife" is the fourth. So it's sort of embedded into part of the stock's history a little bit, and a year from now it'll be a good deal less. But if the outcome of all this was that it is part of the equation that led to nearly 100% subscription growth, they're probably working with that same ad company.
Hill: I don't know. I guess we'll see. Our email address is [email protected]. And I think it's fair to say that the overwhelming majority of questions that we get from the dozens of listeners come in via email, and we love it.
Barker: How many questions do the dozens of listeners produce in, say, a year? Is it one per listener?
Hill: I'd say it's dozens.
Barker: Dozens.
Hill: But our actual mailing address is 2000 Duke St., here in lovely Alexandria, Virginia. And we got a letter. And, actually, you and I each got the same letter on the same day, from Paul Weidman -- Paul, I apologize for possibly mispronouncing your last name -- of Chesterbrook, Pennsylvania.
Barker: No, it's Paul.
Hill: It's Paul. [laughs] Paul in Chesterbrook, Pennsylvania, who wrote a very nice two-page letter to the both of us saying how much he enjoys listening to MarketFoolery. And this letter came to us -- this is dated Jan. 26. And he writes, "I don't hear too many of your podcasts -- or any financial media for that matter -- covering Kellogg's very often. I was wondering if you might spend a little time on the company's earnings release on Feb. 6."
So here we are on Feb. 6. Kellogg's came out with their fourth-quarter report this morning. Paul started buying shares of Kellogg's in the $50 range. And when he was writing the letter, it was currently in the high $60s; that's when he was writing his letter. As of this morning, the stock is down about 8%; it's in the mid $60s. Because Kellogg's fourth-quarter report was kind of a familiar one, it's certainly one we've seen before in the sense that the snack division at Kellogg's was doing pretty well; the breakfast cereal division -- which is arguably what Kellogg is better known for, probably best known for -- not doing as well. And I think part of the drop that we're seeing today is the fact that coming into today, shares of Kellogg were up 17% over the past 12 months. For a stable, slow-growing business like Kellogg, that's a pretty sizable growth for a 12-month period. So I'm assuming at least a little bit of the drop that we're seeing today is valuation.
Barker: Yeah. And I think it's further confirmation that the growth is slow. And maybe the market -- in the very short period of time that it's been since it open today -- still trying to wade through whether the decline in sales is solely attributable to the divestiture of -- so, it sold the Keebler stuff --
Hill: Sold the elves.
Barker: Well, let's not put it like that. [laughs]
Hill: [laughs] OK.
Barker: [laughs] It just sounds awful, doesn't it, selling elves?
Hill: Have you ever heard the word "Keebler" and not immediately had the word "elves" pop into your head?
Barker: Well, that's why I said "stuff." Anyway, they sold Keebler and so they have less stuff to sell. So their total top line is off by 1% or 2%, something like that. But really that's a reflection of that divestiture. And the remaining elements grew by about 2% to 2.5%. So that's kind of what you're looking at with Kellogg. As some of the beloved brands -- and I'm quoting from their own website about the belovedness of their brands, but I think it's accurate, as they -- because of changes in diet and some of the health interests of today's generations, as opposed to ours regarding breakfast and a few other things -- get replaced with some healthier things, but also an expansion of the snack elements of some of these well-known brands. The push and pull of all that results in, sort of, a tiny bit of growth -- 2%. Something like that.
So that's where you start with this company. Are you interested in a company that is likely to grow in the very low single digits, if it does well? So that's one thing. The brands, we were talking about the brands a little while ago. And their Web page says: "Our beloved brands include" -- and some people will now learn what's under the Kellogg's umbrella -- "Pringles, Cheez-It, Special K, Frosted Flakes, Pop-Tarts, Corn Flakes, Rice Krispies, Eggo." And I must say, you probably love at least three of those brands.
Hill: I think I love the majority of those brands. But to get into the numbers of it, you did some research last week where -- because Paul, in his letter, had asked about some potential drivers for the business of Kellogg. And one of the things he mentioned was Pop-Tarts and how Pop-Tarts are morphing into these different products where it's like, it's not just the traditional Pop-Tarts. They've got Pop-Tarts Bites. They've got a cereal version of it.
And I was surprised to learn from your research that Pop-Tarts is not a billion-dollar brand. Kellogg has four brands that do $1 billion or more in annual revenue, and Pop-Tarts is not on that list. Pringles, Frosted Flakes, Special K, and Cheez-It, those are the four billion-dollar brands. And then below that, between $500 million and $1 billion in sales, you have a few brands. Pop-Tarts is one of them. Again, I'm a little surprised that Pop-Tarts haven't crossed the $1 billion mark, but I'm guessing over time they will.
Barker: Yeah, since the publishing of the data that I was looking at, things may have changed, because it was back in November, but they are being kind of aggressive. I think they've got these Pretzel Pop-Tarts now.
Hill: Yeah, that was one of the Super Bowl ads.
Barker: Are they pretzels or are they Pop-Tarts? Are they pretzel-flavored Pop-Tarts or Pop-Tarts-flavored pretzels?
Hill: I think it's the latter.
Barker: What kind of Pop-Tart flavor?
Hill: I think they've started out with just two of them that was featured in the ad. And it was one of those things where it was not one of my favorite Super Bowl ads, but I'm curious enough about that product that I may -- it's one of those things that I thought, that could work.
Barker: Well, you like a Pop-Tart.
Hill: Well, I like a couple of Pop-Tarts. On any given day, you can go into a grocery store and be faced with upwards of 15 to 20 different flavors. I'm interested in maybe two or three. But this pretzel move that they're trying out, that could move the needle.
Barker: You'll give it a shot because it's a Pop-Tart. Because it is a beloved brand to you. And so they've got that permission to go to some interesting places, potentially. Whether it's Rice Krispies or Frosted Flakes or Pop-Tarts. Any one of those, actually, seems equally probable to me to marry up with pretzels. Cheez-It seems more likely.
Hill: No, not really.
Barker: No? Not eating a Cheez-It pretzel?
Hill: I mean, I'll give it a try, but they're doing enough innovation on the Cheez-It front. By the way, that's part of why it's a billion-dollar brand.
Barker: Yeah. So you're really, I think, investing in this company largely for the yield, offering about 3.3% right now. And then maybe you get some price appreciation along the way, maybe they buy back some shares. But they're sending out a large chunk of their annual earnings to shareholders, because they have just demonstrated they might be more interested in tightening up the ship, focusing on the brands and the categories breakfast and snack, and not getting into the cookie, getting out of that.
So you're not going to love Kellogg's if you're a big growth investor. If you like a pretty safe stock, though, I think it's a very safe stock.
Hill: Oh, absolutely. This is a business that's going to be around in 30 years. There are plenty of technology companies that won't be, because that's how technology changes. The idea that Americans, in particular, our love of snacking, is going to materially change in the next 30 years? No, I'll take the other side of that bet.
Barker: Right. And you have to consider, as diets change and as new innovations come on -- things like Beyond Meat and what is its threat to meat -- when somebody comes up with Beyond Pop-Tarts, so that you can have artificially created Pop-Tarts rather than the naturally grown ones, what does that do?
Hill: I'm not worried about that. If I were Kellogg, [laughs] I wouldn't be worried about that. You're going to threaten Pop-Tarts? No. You made the point when we were -- a few months ago -- when we were leading up to Halloween and we were doing overrated/underrated candy. And you made the point that overrated candy was the mini-Reese's Peanut Butter Cups. And you had very sound logic, which was, it's No. 1 rated on the FiveThirtyEight list, and also, you can go into a place like Trader Joe's and get mini-peanut butter cups that are not only less expensive but they actually taste better. That's not the case with Pop-Tarts. There's a farmers' market here in Old Town that I go to every Saturday and --
Barker: There they grow their own Pop-Tarts.
Hill: Well, there's a baker that has all these different breads and pies and they've got their artisan version -- their version of Pop-Tarts. And I just look at them and just think, no, I'm never -- [laughs] no, you're not going to do -- Starbucks, I think, tried that for a while as well. Chalk it up to one more food item that Starbucks attempted that didn't work out. And no, you're not going to beat Pop-Tarts. Come at Kellogg with something else, but don't come at them with --
Barker: ... artisan Pop-Tarts. Not happening.
Hill: No. I mean, they're happening. They're just not successful, and they don't deserve to be.
Barker: [laughs] So anyway, the quarter just wrapped up. I think was a little bit disappointing, mostly because the growth is tepid and will continue to be tepid. It's done a little bit better on taking some cost out of the business. But the top line is going to continue to grow somewhere around here, and sometimes that's going to produce stock in the mid $60s and maybe the high $60s, when the market sentiment is a little bit higher.
Hill: Real quick, before we wrap up. I mentioned this the other day. We've got a new free investing starter kit. It's a 15-page report. It covers everything from saving money to 401(k)s to buying your first stock. And it includes five stocks that were picked by our investing team, and it's free. So if you're just starting out investing or you know someone who is looking to get started investing, this is a great way to do it. You can just go to fool.com/starterkit and just put in your email address, and we'll send you the kit. And it's just that simple: fool.com/starterkit.
Barker: Two quick thoughts. One, are we going to talk about the Mookie Betts trade?
Hill: When we get closer to opening day for the baseball season, we can talk about the Mookie Betts trade.
Barker: Is Dan going to talk about the Mookie Betts trade?
Hill: I think at that point, Dan will have some thoughts.
Barker: So we'll revisit this.
Hill: We will revisit this. Absolutely.
Barker: And the other is -- I mean, this letter, just again to highlight, how special it is to receive a letter and --
Hill: Yes. Thank you. By the way, I don't think I said thank you. Thank you, Paul for -- I mean, we love the emails. So thank you for sending the emails. But Paul taking the time to write out a letter. And by the way, [laughs] mail two copies -- one to you and one to me.
Barker: Yeah, it's typed out. It could have been an email in terms of typing something and the way to send it. But printing it out, putting it in the mail, just feels a lot more special. And so if people want to get your attention, that's one of the ways to do it. They don't have to go that far, buying stamps and all that. You ask for emails and reviews.
Hill: Sure. We love all of that.
Barker: Podcast reviews. You were telling me about one that somebody sent that to you and you kept this from me for about 24 hours, but then it was, like, somebody tweeted their criticism of a show I was on that I had been vague.
Hill: Really?
Barker: Yeah, which I think is perfectly useful constructive criticism.
Hill: That you were vague?
Barker: Yeah, because you can work with that. Like, oh, OK, on that stock I was vague. Could I have brought in more numbers and more specificity?
Hill: OK. As opposed to, Bill Barker -- don't like that guy. [laughs]
Barker: Don't like that guy. [laughs] That's criticism, but not necessarily constructive. It's like, oh, what do I do with myself? [laughs] So if you want to get the show better than the constructive criticism to you works, and just praise to the whole thing out in the public.
Hill: Oh, yeah. As our friend Eric [...] always says, if we stink, please tell us, but if you think we're doing a good job, please tell others. Please spread the word, and you can tell your friends, or you can post a review or that sort of thing, but, yeah.
Barker: Yeah, you're going to be getting a lot of direct email today rather than the public. [laughs]
Hill: People are, like, I'm firing out this email today. [laughs] I'm not putting a letter in the mail; I'm not spending money on stamps. I'm going to fire off the email [email protected] and tell Bill Barker, exactly what he can do.
Thanks for being here!
Barker: Thank you!
Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.
That's going to do it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you on Monday.
