In this episode of Market Foolery, Chris Hill chats with Motley Fool analyst Andy Cross about the latest news on Wall Street. They go through Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) first-quarter results and their guidance. Next, they go through the results of a leading financial services company and a multinational coffee company. Get an expert analysis of their reports.
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This video was recorded on April 29, 2020.
Chris Hill: It's Wednesday, April 29. Welcome to Market Foolery. I'm Chris Hill, with me, from a safe social distance, Andy Cross. Good to see you, my friend.
Andy Cross: Chris, good to see you. I hope you're safe and your family is safe too.
Hill: Yes. Everybody, wash your hands. I haven't said that in a while. Everybody, just wash your hands.
Cross: Yeah. We can't get complacent. You got to keep washing your hands.
Hill: We have got Starbucks (NASDAQ:SBUX) today, we have got Mastercard (NYSE:MA), but we're going to start with Alphabet. Alphabet, the first quarter revenue came in higher than expected. The report was pretty good, but this seems like one of those times where it was the conference call that is driving the stock. The comments from Sundar Pichai, the CEO, and Ruth Porat, the CFO, that seems like what is pushing the stock up 8%, 9% today.
Cross: Yeah, Chris, I mean, Sundar and Ruth, I think, are just really two top managers, and the way they talk to their investors, to their employees, the way they run the business, I think, we've talked about how important Ruth has been to just the discipline of Alphabet and Google over the last few years, so. She tends to be very, I think, conservative. And so, talking about the real challenges they had in this quarter, especially late, Sundar talked about a tale of two quarters, to take a nod from the Charles Dickens novel. The fact that early on it was very positive, things were going very well, and then in March with ad sales dropping by 10% in March. So it's a very tough end to the quarter.
And the guidance, they were very conservative, I think, just talking about what's going to happen in the ad market going forward, we don't know how much of the increase in traffic we'll monetize. But, clearly, investors are excited by -- of which I am one -- excited by what is happening at Google. Like you said, the revenues came in a little bit higher. They were 13%, up 15% on a constant currency. The strong dollars had a big impact on so many businesses. EPS was a little bit light, but it was really just more talking about what the future is having and the impact that COVID-19 is having just on their business, but also on the world.
Just some comments from the call: for example, 100 million students and educators are now using Google Classroom. That's double the number from just March. So just March, an extensive use of Google Assistant, massive increase in demand from Chromebooks, Sundar said. So just there's continued interest.
YouTube revenues were up 33% in the quarter, up now more than $4 billion. So just a continued emphasis on the way that Google is managing their business and the value they are contributing.
And I think some excitement now in the analyst -- a lot of analysts upgrade this morning just that the advertising market isn't going to be as bad as some of them had expected.
Hill: Well, and you're right to say that Ruth Porat is someone with a history of being conservative. But I think the conservatism was certainly warranted over the past couple of months. I mean, you think about the impact of the travel industry. And then, you have comments from executives at Expedia saying things like, we normally spend $5 billion a year in advertising, this year we think we're going to cut that by 80%, we're basically going to spend $1 billion, not $5 billion.
And so, it's easy to just draw a straight line from comments like that to -- well, what is the impact going to be for a business like Google, where Expedia spends a ton of money? And they're not the only one. So I think they were appropriately conservative. And, you know, when Ruth Porat basically says, we think the worst is behind us, all the more reason for optimism.
Cross: Yeah. And she said that we anticipate a second quarter that will be difficult for the advertising business. So I think, again, she's just trying to be transparent and honest with investors and their employees. I mean, going into the call, Chris, I think there were expectations that they were going to lower their capex spending. And she's mentioned that will be tempered throughout the year. Talking about some hiring freezes at Google and at the parent company. So just managing their costs, they've done a very good job of managing their costs.
Interesting enough, they will continue with their buyback program. I know we've seen a lot of companies, kind of, suspend their buyback program, but they're going to continue with it, and they've bought back $20 billion in the first quarter; that was way down from the $37 billion they bought in the first quarter of last year. But they are continuing to do that, and they generate $25 billion in free cash flow a year. So they have the cash to do that, but interesting, they're going to continue to do that.
So I think, from my perspective, I think it's obviously a very large-cap stock, more than $1 trillion of market cap. I think it has the potential to continue to be much more dominant in our lives post-COVID, which is one reason why I continue to own it and continue to like it, and it's got a business model that I think is not going away anywhere. And the cloud business just ramping up through 50% this quarter, so that's just another bright star in the Alphabet universe.
Hill: Last thing on Alphabet real quick, this is one of those companies, because of its size, because of the cash that they have, we've talked about Alphabet as being potentially more acquisitive in 2020 than they would have been otherwise. It seems like, given the comments of Ruth Porat, maybe that's not going to be the case.
Cross: Yeah, I think that's probably, again, I think that's the case, Chris, and I think it's just the conservative nature that Ruth has brought to the financial world of Alphabet. And I mean, they made more than $2 billion of acquisitions last year. So they do make these tuck-in acquisitions, I think. And I think they'll probably slow down in this environment.
Hill: Mastercard's first-quarter profits and revenue came in higher than expected, the stock up about 7% so far today. You know, seems like a similar story to Alphabet, in that expectations, rightly so, were definitely lower for Mastercard, as we'll probably see later in the week with Visa.
Cross: That's right, Chris. They received a couple of big downgrades in the past couple of weeks that talked about the concerns over the lack of travel that the COVID-19 lockdown has caused us all to face and slower and lower cross-border payments activity, which is a pretty important part to Mastercard's overall business. So going into the quarter, I think there were some very muted expectations.
For the quarter, revenues were up 3% to more than $4 billion, up 5% if you back out the strong dollar. And earnings per share at $1.83 versus $1.72 estimates. So they, both, on the revenue side and the earnings side, they kind of beat some lowered expectations. Gross dollar volume across their business was up 8%, including a 9% growth on international, which is 70% of the total. Their transaction growth across their cards was up 13%, number of cards up 5%, the cross-border fees were down 4%. So that's the real concern. I think, when you look at the margin of revenues for Mastercard, is just what will be the impact of much lower travel? Not just in the near term, but really as we go on for the experiences that Mastercard cardholders go through over the next year or two.
So when I see Ajay say that we're seeing early signs of spending levels stabilizing, I'm encouraged by that talk. I think some of the expectations that the analysts had were a little bit too dour.
Hill: We were talking before about Alphabet -- they're keeping their buyback program going. Last month Mastercard pulled their guidance, no surprise there, but also now they've come out and said they are actually going to suspend the buyback plan.
Cross: Yeah, and that's meaningful for Mastercard. I mean, their operating margins are more than 50%, they generate so much, so much cash. And they have a very strong balance sheet with plenty of cash to invest and they've taken on some more debt recently and made some smart investments, I think, but they'll continue to pay the dividend. It's not very big. I think it yields 0.6% or something. So it's a small dividend, and they're going to pull back on the spending for their share buyback. So that's something to watch, because that has been a meaningful part to the earnings growth of Mastercard. But again, in this environment, I think it's a safe move for them.
Hill: Well, unfortunately, not every stock we're going to talk about today is up [laughs] to the tune of 7% to 10%, because Starbucks' second-quarter global same-store sales fell 10%. I'm a little surprised it wasn't even higher than that. [laughs] But, you know, the stock is not really taking a big hit, it's down somewhere in the neighborhood of 12% for the year. And the more I hear Kevin Johnson, the CEO, talk, the more encouraged I am that he's got a plan to get things back on track and get stores open again.
Cross: I agree, Chris, I really do like Kevin Johnson, the way he's run this business, the way he's been very vocal. They were very early on in recognizing the impact of COVID-19 and the challenges because of what they experienced in China. The China comps are down 50% in the quarter, Chris, [laughs] so, you know, international itself was down more than 30% comparable stores in the quarter, contributing a big part to that minus 10%. And analysts were expecting an 8.5% drop. So they actually underperformed the analyst, but I think it's also hurting the stock a little bit.
But Kevin Johnson, I think, is a good CEO, a very effective CEO to have in this position, in this environment. I feel very comfortable that I've invested in Starbucks and owned it for a while, and I really like the way that he is talking and communicating to shareholders and to employees and to clients. They've been very out front on this.
And then they've got a quarter that saw revenues drop 5%, their operating margin dropped to 8% versus almost 14% last year. We mentioned the comparable-store sales drop in America. It was down only 3%, but it's a drop of 7% in transactions. So again, it just talks about the lack of volume going through their stores.
Interestingly, I heard Kevin talk today about that 80% of their orders already, even pre-COVID-19, 80% of their orders were already for takeaway. So they have an environment and have an experience with how to handle consumers that aren't necessarily accustomed to going into Starbucks, sitting down there, and enjoying a half-an-hour, hour-long meal that you might have at other restaurant stores. So their experience with takeaway, and they've really amped up their drive-thru experiences really well in front of this, but they've just managed this business very well.
And I think the stock reaction today is probably part of the impact, part of that is, like, listen, yes, it's not going to be over any time soon, but this is a management team and a brand and a company that, as COVID-19 and the lockdown situation starts to improve over the next 6, 12, 18 months, Starbucks is a company that will be able to do quite well.
Hill: And if you're a longtime shareholder, you've been spoiled for a while, because I think it was 2009 was the last time Starbucks had a quarter where they put up negative comps. But I want to go back to the throughput for a second, because I also watched Kevin Johnson in that interview this morning, and one of the things he talked about was, they are looking at early June as a target date to get all of the stores in the U.S. open again. Now, we're a long ways off from early June, so we'll see if they can actually make that work. But one of the things he's touched on there was, sort of, this idea of throughput, of serving people right at the door.
Obviously, as you said, 20% of their sales are people who actually do want to come in, hang out, maybe they're going to have a meal, maybe they're going to sit down with their laptop, do some work, write a screenplay, whatever. But it got me thinking about, what does a future Starbucks location look like? And I know I'm talking 6, 12 months down the road, but it is going to be interesting to see what Starbucks and other businesses like this, whether it's fast-casual or fast food, if they start to move to new locations where there's less space to dine in, where it's much more about the drive-thru, it's much more about pick up and leave. But more immediately, I think the next thing to watch with Starbucks is, are they going to be able to make this work by early June?
Cross: Chris, I think that's a really great point. We've been talking about the movement of the restaurants to smaller footprints, more takeaway, leveraging technology. I mean, now Starbucks has almost -- they're approaching 20 million loyalty members here in the U.S. now. It was up 15% year over year, that's a big driver, they've been a big driver of their sales. They've been very innovative in building out their app.
I will note that 90% of stores in China are now open. Now, granted, they are operating in a much more limited fashion in a different environment now than they were before. So again, Starbucks has experience with this in China. So when Kevin says that by June, he hopes to open up all the U.S. stores, they will be operating much differently than what we are used to as Starbucks stores. But again, this is a team that I think I have a lot of faith in that they will be able to do that right.
Now, I mentioned that 80% and that 20% number; that's 1 out of every 5 orders are for in-store eating or in-store enjoyment. So that's not inconsequential, that is an important part of their business. So they'll have to figure out how to, kind of, satisfy that environment, if we have much more limited traffic going through the stores, because so much more now is takeaway or delivery or smaller kiosk, where you pick up your Starbucks beverages and meals and take it with you as opposed to eating in the store. But, again, it's a management team that I have pretty high confidence they'll be able to get that right.
Hill: Andy Cross, thanks for being here.
Cross: Hey, Chris, thank you. Be safe, my man.
Hill: As always, people on the program may have interests 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 Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.