In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Abi Malin about the latest earnings reports and news from Wall Street. They discuss a big partnership in the entertainment space. They go through the reports of iRobot (NASDAQ:IRBT), a social media giant, and much more.

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This video was recorded on July 22, 2020.

Chris Hill: It's Wednesday, July 22nd. Welcome to MarketFoolery. I'm Chris Hill. With me today, Abi Malin. Good to see you.

Abi Malin: Thanks for having me.

Hill: So, we've got the latest reports from iRobot and Snap (NYSE:SNAP), but we're going to begin with Spotify's (NYSE:SPOT) latest partnership, and it's not a podcast, [laughs] which has been sort of the trend for a while with Spotify when they come out with material news. But today, it's the fact that Spotify has a new long-term licensing deal with Universal Music Group. Help me understand this, it seems like Spotify is going to provide, not just marketing, but also, data and analytics from their platform so that they can give Universal Music Group a sense of who is listening to what?

Malin: Exactly. So, I actually, when we talked this morning to choose topics, I chose this topic because, just yesterday actually, we were having sort of an investor roundtable about Spotify. And well, I think the platform is great. I kind of have a couple of questions, particularly around the valuation that they're demanding right now; it's at almost a $55 billion company.

And for a little bit of backstory or history on that market. So, four music labels actually own about 90% of the market. And so, historically what we've seen is that pricing power is solidly in the hands of the labels, not within Spotify. So, they've struggled to really turn or demonstrate a consistent level of profitability. And so, you mentioned that they've pursued podcasts, as one thing. I think that's a great idea, because if we think about exclusive content, so they pursue a strategy similar to, say, Disney or Netflix or Hulu, it's not really possible in music. Again, four music labels own about 90% of the market. They tried to start their own label and actually backed off from that initiative, because it sort of put them at odds with their suppliers in some respect, right. So, podcasts is one way that they have tried to get that exclusive content deal.

But I still remained a little bit hesitant about this platform, just given I think podcasts are sort of a secondary offering that Spotify has, particularly right now. And people are still going there for the music. And I think valuation today didn't necessarily justify their music offering.

But today's deal, like you mentioned, is sort of a game changer for Spotify. So, they've signed this agreement with Vivendi's Universal Music Group. And for background, Universal owns about 40% of all U.S. music for streaming. And so, you're right, the agreement right now is that UMG will provide their sort of massive music catalog for streaming, and in return, UMG is becoming Spotify's testing and development partner for new tools, services and marketing products.

So, like you've mentioned, there are a couple of things that have already been started. It is part of what they're calling their two-sided platform. So, for example, what they've already been doing is that labels can now pay to deliver push notifications that promote new music to a user who has either previously listened to that promoted artist and added it to their library. And what they've seen is that spending in marketing in this way is actually more effective than other options. So, hopefully more agreements like that will come into play. And it is yet another way for Spotify to get a little bit more margin on their core music streaming business.

So, this is one I actually think, could be a very strong game changer for Spotify.

Hill: Yeah, for all of the headlines that Spotify has made, and rightfully so, for the acquisitions they've made in the podcast space, my first thought, when I saw this deal was, oh, they're getting back to their bread-and-butter. [laughs] Like, this is the main reason people are going to Spotify and signing up for it. You mentioned the valuation. The stock is up 5%, 6% on this deal, it's nearly doubled in 2020. So, I mean, [laughs] you're not wrong when you say, boy! The valuation of Spotify, you can be bullish on this business and still look at what it has done over the last 6.5 months and sort of shake your head and say, boy! It's not a cheap stock.

Malin: Right. I mean, I would say, I think they've had a strong year, they have demonstrated stickiness to this platform that was certainly tested during COVID. So, pre-COVID, about 50% of their listening hours were spent outside of the home. So, assumed that was sort of commuting time, so either on a smartphone or in the auto; things like that. And so, as COVID happened, people were worried that you don't have those same hours anymore. So, are people really going to stick with continuing to pay for this premium platform? And the answer actually was, yes. So, rather than listening out of the home, people are just shifting where they're listening and what they're listening to. So, they talked a lot about smart connected devices. So, like, gaming consoles and things like that have seen an uptick in usage, and then also sort of these wellness or calming playlists rather than their communing upbeat things. But I mean, that was one significant test of this platform that I think pre-pandemic we wouldn't have necessarily seen or known that data. So, it was encouraging, they've had a good year.

Hill: Let's move on to some earnings news, and we'll start with iRobot. Second quarter profits and revenue for iRobot came in higher than expected. They raised revenue guidance. Why is this stock down 6% today? [laughs] This really seems like the kind of thing you would want to see if you're an iRobot shareholder. Is it just about valuation?

Malin: Great question. So, you're right, they did have an excellent quarter. On April 24th, the U.S. trade representative granted iRobot an exclusion for its Roomba robot and vacuums, and that was guaranteed to go through until August 7th, 2020. I think people/analysts and Wall Street, in general, were looking for more updated terms as it relates to those trade negotiations. And the company commented that they don't yet have an extension for exclusion beyond the expiration date, so there was no news; and no news, in this case, was not great for iRobot.

Hill: This is another stock that's had a pretty tremendous run; year-to-date up about 85% or so even with the drop today. And you know, it makes sense, as everyone is locked in their homes, you know, for people who maybe they had a cleaning service coming once or twice a month, that sort of thing, and instead they're saying, nope, I don't want people in my home, and so therefore, I'm going to invest in a Roomba or whatever is the latest version of the robot vacuum cleaners that they have.

Malin: Yeah, exactly. So, there was actually a report released about a week ago now by Million Insights, and day projected that robot cleaning market size is going to reach $6.2 billion by the end of 2025. So, that's a pretty big market, and it is growing significantly, that's above a 14% annual growth rate, if you worked that backwards. So, there's a lot of opportunity here, and I think you're right, people are a little bit nervous about having help come into their homes, and so, this is a good alternative. And also, we're all living in our homes way more than before, probably, and so you're noticing, you're bothered by your -- you know, it's top of mind for everyone, I think.

Hill: Yeah. And I still haven't bought a few shares of Home Depot or Lowe's, but I mean, you know, it's businesses like that that I think of as more and more people are, as you said, stuck in their homes, looking around, like, what can I fix, what can I change, you know? And it's usually one of those two things. It's like, that needs to be fixed or I'm sick of that and I want to change it.

Malin: Exactly.

Hill: Snap's second quarter revenue was higher than expected, but their loss for the quarter was up nearly 28% compared to a year ago. Shares of Snap are down more than 8% this morning. This seems, Abi, like a quarter where [laughs] there was sort of something for the bulls and something for the bears. You know, if you're a bull, you could look at Snap's results and say, you know, their average revenue per user was up higher than expected, I like that. If you're a bear, I mean, this is a big loss in a quarter where a lot of big companies were hitting the pause button for the entire month of July when it comes to Facebook, and as they were making those announcements in June, Snap was seen, rightly or wrongly, as a potential beneficiary from that.

Malin: Right. It's interesting, I feel like we've been talking about Snapchat ever since they decided to go public. And I think, you know, around the investing team, generally, we were all pretty bearish about the long-term prospects for this company, and every time I look at one of their quarterly reports I have to say, I'm pleasantly surprised, and this quarter was no different. I think I continue to have sort of negative sentiments or low expectations, which is part of it. But I mean, yeah, to me, this quarter was actually very encouraging.

So, like you said, they did have higher losses than the analysts were anticipating, and they sort of explained that they're continuing to make long-term investments to build on that momentum that they have established with their partners and with their community. They weren't super specific on exactly where or what, so that was kind of a pause for me. But global daily active users reached 238 million, and that was up 4% sequentially, and up 17% year over year, and that was across all geographies, with most notably outside of North America and Europe, what they call the rest of the world, was up 37%. And again, across all platforms, so, iOS, Android and even people -- Snapchatters above the age of 35 were engaging with Discover content more than 40% from a year ago. So, I think they have a lot of positive momentum, profitability remains to be sort of a struggle or a challenge for them.

Hill: I'm glad you mentioned the age range there, because Jason Moser and I were talking last week about Robinhood and basically trying to figure out, like, where is Robinhood going, what is their end goal, where do we think they are in two or three years, does somebody buy them, do they go public, and all that sort of thing. Kate Rooney from CNBC was on Motley Fool Money last week and made it clear that they seem like a business that very much wants to go public at some point. But Jason made the point, he said, [laughs] I kind of feel like Robinhood is like Snap, where it's like, if you're in college, you're a young investor, you're just starting out, you know, there are a lot of things about Robinhood that are really attractive, particularly, if you go back a year and they're offering free trades and basically no one else is, but all the other platforms have sort of co-opted that. And he was saying, you know, I look at Snap and it's like, yeah, I see the appeal for younger people, I don't know that people in their 40s and 50s necessarily want to be on Snap or will be on Snap.

So, it is going to be interesting to see sort of where this business is able to go, are they able to grow sort of an older, you know, a 35-and-over user base, if that's important to them? But I think you're right, that ultimately, like, [laughs] they got to figure out a way to be profitable. I mean, like you -- and I don't look as closely on a quarterly basis, as you probably do, but I'm just pleasantly surprised that this business is a $33 billion company. Because it really seemed like, when they turned down the offer from Facebook, when they were still a private company and Facebook basically said, OK, [laughs] well, we're going to come up with Instagram stories and we're going to try and put you out of business. And here they are, a much bigger company than when Mark Zuckerberg tried to buy them.

Malin: Right. I think you're right, the big question is going to be profitability here on this platform. In terms of the age that they're looking at, so they did announce expanded multiyear content partnerships with Disney, ESPN, NBC, CBS, NBA and the NFL. So, I mean, these are big players, right? And that's a lot of money, and it's not necessarily focused on any one demographic. So, I think there's certainly a little bit of opportunity for them to continue to engage or attract those above the age of 35 users.

But with that being said, I mean, it's hard, because it's kind of a catch-22, you want to be this cutting-edge technology company. And they've described themselves fully as a camera company, they're really pushing into augmented reality; and those things feel a little bit juxtaposed with the use case, which I think is news or discovery or enjoyment, etc., which, those use cases are for everyone, but the direction that they're trying to push this company feels younger and a little bit more limiting, in my opinion.

Hill: Abi Malin, always good talking to you. Thanks for being here.

Malin: Thanks for having me.

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 MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.