Why Supply Disruptions May Impact Apple's Next Quarter

In this episode of Industry Focus: Tech, Dylan Lewis chats with Motley Fool analyst Joey Solitro about the latest earnings reports from Wall Street. They talk about why the Dow Jones Industrial Average doesn't make sense, and take a closer look at Apple's (AAPL -1.22%) earnings report, its latest stock split, and how supply chain disruptions may impact upcoming product launches. Lastly, a social media platform with great ad-to-sales conversion rates and much more.

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 July 31, 2020.

Dylan Lewis: It's Friday, July 31. We're talking about a flurry of big tech earnings. I'm your host Dylan Lewis, and I'm joined by Motley Fool premium analyst Joey Solitro. Joey, what's going on, man?

Joey Solitro: Oh, so excited to be here and talk earnings with you.

Lewis: [laughs] Yeah, I mean we really had our pick here. This is like being at the buffet table and just being able to talk about whatever we wanted to. Ton of companies reported, I always love the earnings season. We're going to be focusing on Apple, and maybe one of your favorite stocks to talk about, Pinterest (PINS -1.55%).

Solitro: Oh, I absolutely love Pinterest. I've been in love with this company for a while now. So, it's just exciting to see what it's doing today.

Lewis: [laughs] I think you and Brian Feroldi one day should just have a show where it's a Pinterest lovefest. I think the two of you are perhaps the biggest advocates for that company. We'll start with Apple first, though.

A lot of folks kind of wondering, you know, what we were going to see from big tech. And I think Apple is probably one of the easiest indicators of that, as, you know, one of the two biggest companies in the world. Record revenue in this most recent quarter, for Q3 at least, at just under $60 billion, up 11% year-over-year. They came in way ahead on earnings per share versus what the market was expecting. It looked like a pretty darn strong quarter for Apple.

Solitro: Yes. So, everybody is always doubting Apple. And what I like to think is, so, like, Dylan, how far away from you are your phone right now? Like, I'm guessing it's right next to you.

Lewis: It is eight inches away from me. [laughs]

Solitro: Mine is six inches away from me. So, like, we are all attached at the hip with our smartphones. We probably have our laptops, and as we're stuck at home doing nothing, you know, we're playing on our phones more, we're investing, we're downloading different apps to keep ourselves occupied. If our phone breaks and we can't go to an Apple store, you bet we are ordering one online. Like, Apple is just a way of life right now. So, doubting the product, it just doesn't make sense. And as they just completely continue to deliver on earnings, it's like, you know, why would you expect anything less now?

Lewis: Yeah, I think they managed to show year-over-year growth in pretty much every major product category. And it's possible that some stuff got pulled forward a little bit because people are staying at home. I mean, they saw growth in iPad, they saw growth in Mac, they saw growth in the services space. So, some people might be buying consumer hardware that they weren't planning on buying originally or were going to have some point down the road as a purchase plan for them. But you know, knowing that they were going to be at home, we're like, well, we might as well buy it. But, yeah, to your point, Joey, once you're in the ecosystem, it's just a matter of when.

I think some people might have been a little surprised, though, because we had seen that this was probably going to be a disruptive thing for Apple supply chain. And it was also disruptive for Apple's retail locations, you know, looking at COVID. They closed a lot of their stores, and they lean on contract manufacturers in China to produce almost all of their devices.

Solitro: Yeah, the supply chain disruption was quite significant, so to see them able to do this, it was either like, they had an incredible inventory or they were prepared for a pandemic like this. It's great execution on their hand. And I think one of the most impressive things we're seeing at the end of the quarter, I want to say, it was $193 billion in cash. And I'm just thinking, like, do the math, like, that's more than, what, 400 of the S&P 500 companies, just in cash, like, that's absolutely absurd what these guys have.

So, to continue just generating this cash flow, to be able to deliver strong results even in the eye of, you know, every headwind in the book that you could possibly face. And the retail store side of things, like, yeah, that's their showroom, that's where they can drive growth. But I feel like they might have had a lot of cost savings by not having those stores in operation, just like Microsoft closed all of their stores and they're like, yeah, we're not going to do that anymore. You know, this might be a situation where Apple can say, you know, we don't need the showroom, people know us, they love us, like, we can just operate e-commerce and basically improve margins that route.

Lewis: You mentioned before that they were able to seemingly navigate a very difficult supply chain. And it does seem like there could be some hiccups coming down the road. You know, we typically look to the Fall as the release of the updated iPhone, that's when we typically see whatever the next version of their line is going to be ahead of that huge holiday quarter. And so, this quarter that we just got results for, tends to be the light quarter because it comes just before that Fall release and before that holiday season as well.

Management did say that it's possible that the iPhone supply could be delayed a few weeks in the Fall, which might have some effect on results. But I think what's kind of interesting with this earnings season is, Apple is one of those companies, there are a lot of these companies that have decided we're not going to be issuing firm guidance. And it's really hard for us to put a number out there and really feel confident with it because we're not exactly sure of this landscape that we're navigating. And when you take that guidance away, I think it can often lead to far more surprises when companies actually report their earnings.

Solitro: Yeah, I've never been a fan of outlook anyways. I mean, companies always sandbag it. They're like, yeah, we expect this. And it's always a little bit less than they really want, because then, you know, they get halfway through the quarter, they've raised their guidance when they probably knew that that's what they could have hit, but it's still below what they're going to end up doing. Analysts, I mean, analysts it's all a guessing game. All these price targets, upgrades, downgrades, it's ridiculous.

So, I'd love it if no companies gave guidance. And it's like, look, we crushed it last quarter, why would we stop crushing it now? Like, own our business for the next 10 years, not what we're going to do for the next couple of weeks. Like, I've never understood why people care so much about each quarter when I'm thinking, I own this company because I think in 2030 it could be 10X from where it is today.

Lewis: Oh, I don't disagree with you. I mean, if we're investing, we're looking long-term. But I think what happens in the industry is, you have all of these analysts estimates, and let's be honest, a lot of those are based on inputs that are provided by the company. And they're saying, you know, we're guiding for this, we think roughly this will be where gross margins fall in. And those wind up going into the spreadsheet or they are the basis for whatever goes into the spreadsheet, because then you have some slight puts-and-takes based on whatever the analysts think might happen. When you remove that, I think you [laughs] put analysts in a position where they, kind of, have to come up with the numbers themselves.

Solitro: Yeah, how dare Apple make it harder on those analysts to make worse guesses than they already are. I remember when Apple stopped giving individual guidance, I don't know if it's like by region or, hey, we're not going to tell how our iPhone and iPad and all that breaks down anymore. And everyone was like, I'm not going to own the stock if you don't tell me how that breaks down. It's like, you know what, you've missed out on probably a 50% gain now just because you think, you know, throwing up your hands and walking away means Apple is going to say, oh, sorry, you know what, we'll come back to providing that.

But, yeah, it might make the jobs of analysts a little bit harder, but I was like, the numbers speak for themselves. And, man, Apple just continues to deliver and they just keep buying back their shares. [laughs] It's just a cash flow machine, and now they're splitting their stock to make it even more accessible. Now, we do have fractional shares here, so you know, the stock split isn't all that significant anymore. But it is that psychological level, hey, the stock is $400, it's only going to be $100 now, which I mean, we know that that doesn't make a big difference because it's the same exact market cap as it would be. But it is cool seeing how they continue to play all these different factors, and I just wish more companies would follow suit, kind of like Amazon or MercadoLibre, bring those stock prices down so more people find it accessible to own a full share.

Lewis: Yeah. This actually might have been the biggest story that came out of the earnings release. I mean, we saw that the market was very happy with the results that they put up, you know, with record revenue for the quarter in a period where they were, obviously, dealing with a lot of issues. But the company announced they were doing a 4-for-1 stock split, and this is not the first time they've done that, I think this is actually the fifth. And you go back a handful of years and they did, I believe, a 7-for-1 split when shares were starting to get pricey a little while ago, in the Tim Cook era. So, if you are a shareholder, if you own one share of Apple, you're going to be getting three, which effectively takes that one share and quarters the value of it.

But I'm someone who generally believes, when it comes to stock splits, Joey, they're kind of pointless, they're an administrative and, kind of, cosmetic way to change things up. I understand the argument of making things more accessible; I think that argument holds a little bit less water now because we're able to have these fractional shares, people are able to kind of create their own mini mutual funds using some of these brokerage accounts and access these companies anyways, but it does wind up getting a lot of coverage.

Solitro: Yeah. And the other thing is, because you know, the biggest joke is how the Dow Jones Industrial Average is a price-weighted index. So, then you see all these articles come out, oh, what does this mean for the Dow, since it's price-weighted, because now Apple is going for $400 to $100, it won't influence the Dow as much. It's like, you know, it's a joke of a process anyways for that to be price-weighted. Like, it doesn't make any sense. So, maybe this will -- you know, everybody splits their stock makes Dow figure it out and then realize, hey, maybe we should fix this broken process that we have.

Lewis: Yeah, I think anyone that listens to the show long enough has heard me rail against [laughs] the Dow and price-weighted indices before ...

Solitro: The Nasdaq is the market, like, stop focusing on the Dow or the S&P, it's all about the Nasdaq, it's all about tech. It's Industry Focus: Tech.

Lewis: [laughs] That's a true Friday show motto right there. Joey, for folks that are unfamiliar, though, let's quickly touch on this difference between the Dow and the S&P, because I think it can be instructive.

The Dow, you've got 30 companies and it is a price-weighted index. And I guess this made sense when the Dow was originally created, because it made the math really simple to follow what was happening, you know? So, you had this basket of stocks, and the weight that those stocks held was effectively dictated by the share price. And we know, share price is pretty arbitrary, it basically reflects on how many ways you decide to slice up the pie, that is the value of a company.

Conversely, the S&P 500 is a market cap weighted index. And so, you are looking at companies and their weight in that index is going to be reflective of how big they are as a business. And I have kind of long argued, the S&P 500 is a far better economic indicator than the Dow, and I think this stock split example really highlights that. Because we're going to be going from a spot where Apple is the largest component of the Dow to, I think, being somewhere in the middle, despite being a $1.8 trillion company.

Solitro: Yeah. I'm looking at the list now. So, Apple's influence will be less than Travelers, which seems to be, like, halfway down the list. Yeah, so it's like, because it's a $400 stock, it influenced more, it's the same on the negative, on the downside, when Boeing goes from, like, $430 to $99. It caused the Dow to look significantly red, because this one high-priced stock was falling so hard. But it's like, yeah, the whole price-weighted index means absolutely nothing to me, just like the price of a stock. When you tell me, hey, this looks cheap, it's $30; I'm thinking, well, what's the market cap, what are the sales? You know, tell me the multiples that give me that number. I don't care about the price, tell me about the value of the business.

So, I'm right there with you, the S&P is a much better gauge, I'm always going to side with the Nasdaq because it's so tech heavy and I just live and breathe tech. So, yeah, I'd look at both of those before I ever look at the Dow Jones.

Lewis: The one other thing I want to hit with this Apple earnings release, in kind of checking in on this business before we turn things over to Pinterest is, I think it's really instructive to look at Apple over the last year-and-a-half or so, as an example of how companies that are on top can stay on top even as they get big. You know, there were a lot of [laughs] questions that came out around the time that Apple hit $1 trillion. People saying, I mean, how much bigger can it really get? And I was definitely someone who said, it's great starter stock, if you're just getting your feet wet, this is a great company to own, it's not going anywhere, they pay a dividend, there's still plenty of growth ahead of them. They're probably not going to light the world on fire with the growth, just given their size, but I think they'll probably be a market-beater. They've been a market-beater by a pretty wide margin over the last year-and-change, despite being such a massive company.

Solitro: I was in the same boat, once it hit $1 trillion. I always do my, kind of, 10X in 10 years. I'm like, you know, $1 trillion, $10 trillion, seems absurd. It could take them the next 10 years just to double, and here they are going on it in, you know, a year-and-a-half, something like that. So, yeah, it's -- the one thing people always kind of look at is, you know, they have the iPhone, they have the Mac, they have all these different products. Where is the challenger to the iPhone? Like, it's just nonexistent. They have the absolute gold standard of a product, and until something better starts coming along and challenging them more than Samsung.

I mean, those are good phones, but it's not nearly on the level of an iPhone, at least in my opinion. And the ecosystem that it created between -- you know, think of all these multibillion-dollar businesses built within its App Store. Like, Snapchat, [Snap, Inc.] Facebook, all these companies would not exist if not for this App Store that gave these smaller companies access to billions of people around the world that use Apple's products daily. So, it's just incredible this ecosystem that they've built. And I know they were getting some crap on Capitol Hill for the 30% take rate that they usually charge people within the App Store. But I mean, that almost seems like a steal to get access to just how large its user base is, and you see case study after case study of the companies built just within that App Store. So, I mean, yeah, you can trash them all you want, but that ecosystem is something else.

Lewis: Yeah. And there are going to be a lot of takes on their position, whether they are anticompetitive, whether they're monopolistic in how they run things, but I have seen some people working in the software development space say, you know, it's not an insignificant amount of money for them to take, but if you think about the immediate audience that they give you access to, often it's worth paying up for that. Having it centralized, not having to jump through hoops in order to access all those people, it becomes worthwhile. And it's a big part of that services revenue that they've been pushing as a major narrative for this company for a while.

Solitro: Yeah, it's much like -- I worked in food distribution for a little bit. And the trade shows that, even like a UNFI, [United Natural Foods, Inc.] the largest supplier, like, the organic and natural grocery stores, theirs were very expensive, if you want to have a booth, but you pay for your booth, because you know hundreds upon hundreds of stores are going to be at that show that you get to pitch to. So, I mean, you can make the same case in multiple industries, like, oh, why should I have to pay so much to set up a booth? It's like, we're giving you access to the people that will make your business much larger than it is today, so it makes complete sense to me, but you know, only time will tell how that will pan out.

Lewis: Yeah, I think that the government investigating big tech is probably a good thing, there are a lot of really good conversations that's causing. And this is certainly going to be one of the major stories of 2020, probably 2021 and the next couple of years as well, because I don't think this is going to be something that's swiftly resolved.

Solitro: Yeah, I think breaking up those companies, and I said this on Live with Tim Beyers yesterday, I think breaking up those companies would be one of the biggest wealth creating opportunities for investors ever, much like when Standard Oil was broken up, and it panned out to be like eight of the largest oil companies today. I mean, oil is not where I would invest today. But it's one of those, like, imagine if Google [Alphabet] was forced to split off YouTube, and Facebook was forced to split off Instagram, or Apple was forced to split off its App Store, Amazon was forced to split off AWS and Prime Logistics. Like, between all those companies being broken, they could be worth 4X what they are today. So, I'm almost, like, rooting, yes, break them up. I'd love to own AWS and the marketplace independently, or just this part of Apple, take me away from the hardware, let me focus on the services. But I don't think that'll happen, but if it did, woah! I want to own all four of these.

Lewis: Joey, switching gears to talk about a dramatically smaller business, [laughs] we're going to talk about one of your all-time favorites, Pinterest. Shares are up 30% after the company reported this week. A lot of ad-based businesses have been tested in COVID, we've seen this with The Trade Desk, we've seen it with Roku, we've seen it with a lot of different businesses. What's your take, what are your immediate highlights on this report?

Solitro: This is one of my babies and I am absolutely in love with it. It's one that my kids own, all three of them, I own it, my in-laws own it, my best friend owns it, it's one of those that literally everybody I love owns this company. And it's almost like that day where everybody is texting me, I just sent a screenshot when it was up 36% of the premarket, but the texts of love just flood in. And it's a beautiful thing, because this business is just incredible. And my wife Kaylee, investing in stuff that she likes has been very successful for me my entire investing career. I bought Etsy because her and her sister were buying stuff on there like crazy. We invested in Target and Starbucks in her account, because she would go there, she's been at Target, I think, five times this week just doing pickups. So, investing in her trends has always been successful.

So, seeing Pinterest, and now I'm always baking with my daughters during quarantine, I'm going to Pinterest for the recipes. I was building a home gym, luckily before the pandemic, before prices of everything spiked, I was using Pinterest to get ideas and links and find the right flooring and all this different stuff. So, I saw the power of the platform, and then to see, you know, the stock was getting absolutely pummeled in March, and we were all just building positions, building positions. And now, like, the revenue growth wasn't significant this quarter, it's up 4%, but the thing is, it's all about users. And you see its monthly active users surge 39% to 416 million people, that is no joke, 416 million people.

So, then you look, OK, so their Average Revenue Per User [ARPU] is still -- globally, they're only making $0.70/user. Facebook makes north of $7/user, last I checked. I didn't look at their earnings release from yesterday to see what they're making now. Even companies like Snapchat and Twitter are making more than this. So, I think if Pinterest -- I know that they can, because I believe in their management team, Ben Silbermann, he's phenomenal. I believe they will monetize these users much better in the years ahead. And to see they've got this massive base that's growing quickly, all these different optionality is huge. They've got the optionality, they've got the brands that love them, they've got the partnership with Shopify. It's becoming that gold standard of advertising.

And you know, the woes going on with Facebook and Twitter being, like, platforms of hate. And all the different meddling or it could be influencing elections and all this stuff, all the negative stuff that comes there does not happen on Pinterest, because you create your experience on Pinterest by what you like. You know, it's not people sending you stuff, it's not people putting out tweets; it's not a platform of hate. Pinterest is what you make it. It's almost like the Joe Dirt quote, you know, it's like this what you make it. This is what they're doing right here. And I just cannot get enough of this company.

And, yeah, it's up +30% today and it's soaring, but I strongly believe this is a $100 billion company in the next five years and I hope it doesn't get acquired before then, because this ride could be quite significant. And, man, it's so exciting to see what it's doing today, but I'm still very optimistic about where this company is going.

Lewis: Yeah, I think there's probably a little bit of a pecking order in the social media and digital ad spend landscape. You know, there's the duopoly of Alphabet's Google, YouTube, and Facebook and Instagram. So, you know, those properties wind up commanding about 50% of the overall ad market. But the crucial thing with any of these platforms is, you need to prove to advertisers that money is well spent there. And having a thriving and growing user base is one way to make that happen. And one of the things that I think is wildly impressive from this quarter is, you mentioned that MAU [Monthly Active Users] number, they actually added more MAUs in the United States this quarter than in the previous three quarters combined. And so, they had an acceleration of user growth. But we know, from having talked about his businesses for a long time, the U.S. users are crucial, because it is the most lucrative ad market in the world. That's where purchasing power is the highest and that's where consumer spending tends to be the highest too. And so, those users are just going to be more valuable. And if you can keep growing that platform in that dominant market, it's only going to bode well for the business.

Solitro: Yeah, and that's where that Average Revenue Per User comes into play, because where it's 70% globally, it's just a fraction of that internationally. I think, internationally, they're making something like $0.14/user, but in the United States they're making $2.50/user. So, yeah, adding those users in the U.S. they're going to be able to monetize them much better. But you then see the blueprint of how they can do this internationally.

But, yeah, they were getting knocked because they were not adding many users domestically. So, the pandemic helped accelerate that. And you've seen, you know, like, with Wayfair and Etsy, you know, people redecorating their homes and doing everything; Pinterest is a key player in that. And like you said, the brands will go where they get the conversions. You know, people go to Pinterest with an intent to purchase much higher than any other platform. I want to say, it's odds -- to bring up the stats and actually share it on Twitter or something like that to show, you know, they go there with the intent to purchase. So, the brands have more incentive to actually spend there.

And then you look at, Pinterest doesn't take a commission. You know, if you click a link, you go and buy something, Pinterest isn't saying, oh, hey, you owe some money from that, like a lot of platforms do, it's more like, no, hey, you have more incentive to spend more advertising because look at all of these users that are coming and converting for you, spend more here, convert more there.

So, Pinterest has just become this incredible platform for consumers and an incredible way for brands to get out there. And having companies like Target be able to upload their whole product catalogues with those little different pins, I'm sure you've seen the pictures where it's like a full room of them and you can click the chandelier, you can click the couch, the pillows, that's what Pinterest has done. And they've had this immersive experience, like, I love this whole room, let's just click and go to all these different spots. So, people can design their own rooms and insert the brands, or Target can put all their products there.

The Shopify partnership lets people just upload their product catalog quickly to Pinterest, so it's almost like they're building out their mini-ecosystem, and it's been impressive to watch. And, man, they're delivering on that.

Lewis: Yeah, I'll admit, I was a little bit more of a skeptic, and I think you and Brian Feroldi, when it came to this space, just because we've seen the next major social media company narrative a few times now. And you know, it was Twitter and then it was Snapchat, and you know, look at where those businesses went. I think that they've been, kind of, lost in this purgatory of having enough users to be relevant, but still trying to figure out how to operate as a business. You know, ad rates are generally going down on Twitter, and I think it's because there's less purchase intent there.

If I'm forced to rank these platforms based on purchase intent, I think there's basically -- and in no specific order, Facebook, Instagram, Google search, and Pinterest in this top-half, and then everything else.

Solitro: Yeah. And Pinterest, one of the ultimate tests is kind of like, where we're talking before, you know, not only just purchase intent, but could this platform be utilized in negative ways that could drive users away? And it completely passed that test, because like we said, you know, you're creating your own experience. You go on there and like what you like. So, I'm weird. I like shipping container architecture. And I'm not going to buy a shipping container or something like that, but then I see something called a studio shed, and it's got, like, hey, yeah, we can turn your shed into like this whole, it almost looks like a tiny house, and I love tiny houses. That's another show I love, Tiny House Nation, I have a lot of weird likes.

But I'm seeing these little things, like, hey, if I'm going to be working from home forever and there's a $10,000 thing that could turn my shed into a studio, tiny home/gym/workspace, like that's pretty cool. And that was all driven by Pinterest. I would have never known that stuff existed.

So, it's like I can pick my likes, I like CrossFit workouts, because, hey, I've got to figure out stuff to do at home, I can't go to my gym and start spreading COVID around and all that. So, it's like, I put everything that I like, and when I go to that page, it's like, OK, I can do this work out, I can look at this shipping container and I can bake this with my daughters tonight. It is just an incredible experience, and you're not seeing people spew hatred toward each other or say why would you vote for so and so, that's ridiculous, and then see that whole argument.

Lewis: Never a dull moment with Joey Solitro on the show. I love the [laughs] tapestry that you're weaving for people between the gym, the Tiny House Nation and the cargo container interests. [laughs]

Solitro: Hey, you know, there's a lot of things about me that people don't know, and we're going to slowly just bring them all out. Shipping container architecture, CrossFit and Pinterest ...

Lewis: [laughs] Peel back the layers, man. [laughs] Before we wrap up here, I just want to ask a quick favor of our listeners while we have you toward the end of the show. So, the team that is working on podcasts at the Fool, we have a special request. We have a quick two-question survey that will help us understand who is listening to our podcasts and help us cater our content to that. So, if you've been listening, you may have noticed that over the past couple of weeks we haven't had many ads on our shows, and what we're trying to do is prioritize our member experience and also prioritize making sure that we're helping people invest better. That's really been the focus over the last couple of months, and we want to make sure that we can put out some messaging that is focused on that, and some of it's a little bit product-related to what we do here at the Fool, to hopefully point people to the right solutions.

And so, to help us do that, we would love to know a little bit more about you, our listeners. If you go to Mot.ly/survey, there's a little two-question survey, it'll take you less than a minute, it'll be a huge help for us in figuring out who's listening to us and what makes the most sense to send your way. There'll be a link in the episode description, but again, that's Mot.ly/survey, really appreciate all you folks helping us out.

And, Joey, I appreciate you hopping on today's show to talk with me about your baby and a company that I follow quite closely; it's always good to have you on.

Solitro: Thank you so much. And we've got a lot of shows to do. We've talked about a lot of companies, you know, off-air and we've got a lot to tell people about. So, I'm sure I'll be talking to you very soon.

Lewis: That's right. Yeah, I think we have a couple of ideas in the hopper, one of them is the biggest year-to-date winner so far in tech. Joey already has a list going on that one. But, listeners, if you have any ideas for episodes that you'd like Joey and I to tackle -- IndustryFocus at Fool.com or @MFIndustryFocus, that's where you can get the show handles. Joey, you're @JoeySolitro on Twitter?

Solitro: I am.

Lewis: You can hit him up there. I am @WileyLewis. And, of course, listeners, if you want more of our stuff, subscribe on iTunes or wherever you get your podcasts.

As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear.

Thanks to Tim Sparks for all his work behind the glass. Thanks for listening, and Fool on!