Should You Be Worried About the Google Lawsuit?

In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Bill Barker about the latest headlines and earning reports from Wall Street.They talk about the latest news involving Alphabet's (GOOG -1.96%) (GOOGL -1.97%) Google and other hot topics. 

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 October 20, 2020.

Chris Hill: It's Tuesday, October 20th. Welcome to MarketFoolery. I'm Chris Hill, with me today, the one and only, Bill Barker. Thanks for being here.

Bill Barker: Thanks for having me.

Hill: We've got yet another tech company that is benefiting [laughs] from people working from home. Uncle Sam is suing Google; we will get to that. We're going to start with consumer staples.

Procter & Gamble (PG -0.03%) sales in the first quarter rose 9%. The company raised revenue guidance for the full fiscal year. And shares of Procter & Gamble up around 1.5%, which is not a lot but just enough that that stock is hitting an all-time high.

Barker: Yeah, an outstanding quarter, largely a margin story, on the outstanding part, you know, they sold 7% more in terms of volume, about 9% total. So, that's not extraordinary but it's good in this economy. People are cleaning both their homes and themselves more, actually. And the thing that Procter & Gamble has going for it is that it is, I think, the best margin quarter that I could find over the last 15 years. So, it is not forced into discounting right now. There are not a lot of promotional sales that it has to make; people are still going to the stores, paying full price for a lot of their goods. And they are not in the position where they have to raise salaries at the moment or, you know, they've done very well at keeping costs down. So, between those two, being able to charge what they want to charge for their products and doing it more efficiently, a great quarter.

Hill: Great quarter. And if they're not spending more money on salaries, Jon Moeller, who is the Chief Operating Officer and the CFO, made it very clear, they are going to be spending more on marketing, because they look at the current environment -- look, Procter & Gamble, they sell stuff all around the world, but North America is their biggest market. And I think they're looking at the numbers of how many people are spending time on screens and they're saying to themselves, yeah, it is a good investment for us to start ramping up our marketing.

Barker: Yeah, they are spending a lot of time on screens; not necessarily on the screens and where the ads traditionally have been, which would be TV ads, more people are watching Netflix, watching things that are video recordings and just skipping through the ads. So, it's more and more online advertising and more is coming, since everybody, it looks like they will be locked inside for another couple of quarters.

Hill: You know, right before we started recording, you mentioned -- are they making some acquisitions? You said something about them expanding their product line, which you go back 10 years, Procter & Gamble underwent essentially a culling [laughs] of sorts with their portfolio, because, you know, 10 years ago they had food products. And I think they, sort of, looked at everything they were selling, and said, you know what, we're going to get rid of the food, we're going to sell off those brands, we're going to focus on the household products, the cleaning products, the grooming products, and that has worked well for them. Are they now expanding what they're doing in terms of household goods?

Barker: Well, one of the things that they've done, this is the power of having a brand, if you can remember back into the early days of the pandemic, New York in a rush to do as much as possible with limited supplies, we're getting, I think, hand sanitizer developed within the prisons, right? I mean, they were using prisoners to help make that. And I think that, sort of, underlines the degree to which hand sanitizer is a complicated product to make, which is not really.

One of the things they highlighted in this report was the launch of Safeguard hand soap and hand sanitizer. Safeguard, one of many brands that you're probably aware of through advertising, whether that was a brand you actually ever used in your home. So, they get to charge more for hand sanitizer than, you know, prisoner-brand hand sanitizer, which I just don't think comes at a premium. And I think that this is part of the equation.

You're seeing Church & Dwight do this as well with some of its cleaning brands. You can use any brand that is associated with cleanliness and go to where people are buying things right now, which very much includes hand sanitizer. I just pointed out that they highlighted the launch of Safeguard hand sanitizer. And I think that, sort of, extends to where their strengths are at the moment.

Hill: We saw, sort of, a ripple effect of this with the latest quarter from Albertsons; shares of that grocery chain up around 5%, 6% today. Similar headline story with Albertsons, second quarter profits were more than double what Wall Street was expecting. Revenue was up. And my assumption is that they were working off of a small base, but Albertsons digital sales [laughs] in the second quarter rose more than 240%.

Barker: Yes. So, people are buying things produced by Procter & Gamble and they're buying them at Albertsons and the many other brands that they operate under, including, in our area Safeway, and back in my hometown, Acme; and in your home -- well, not your hometown, Star Market in Massachusetts. So, it's not really your home. It was a one-time home ...

Hill: Within shouting distance.

Barker: You made it home for a small period of time.

Hill: Yes.

Barker: Yeah. So, they're known across the country and under various different names. And everybody is buying more groceries or enough people are buying more groceries that they had same-store sales, I think, of 11%. And so, the digital sales increased 240%; that's still a small part of what they have, but you know as more people get used to finally buying groceries online, which is one of the, sort of, the last developing categories in a lot of ways for online sales, they're there. They're not the only ones, but 243%, you can do some profits with that.

Hill: Let's move to tech and devices. Shares of Logitech (LOGI -0.87%) up more than 15% this morning. Second quarter profits tripled Wall Street's expectations. Logitech is in the business of computer keyboards, mice, headsets and business is going well right now.

Barker: Yeah, gaming is one of the biggest parts of that. I think this was the first quarter where they did over $1 billion in sales and they went $1.25 billion. So, by far the best quarter in the history of this company. And they see more of the same. Again, as the time that people are going to be spending indoors extends itself, and as people, I think, take a longer term look at how much they're going to be working from home, adding to their work-from-home technologies. Certainly, gaming is growing and still growing fast. And they have a lot of products that -- you know, I've had the Logitech mouse here or there over the years, and the Logitech camera. And you know, don't pay a whole lot of attention, but they show up in your technology, and they are having one of the great quarters. You know, it's hard in the hardware space to be an outperformer over long periods of time, because the brands don't tend to give you that much strength; Apple being a real stand out and, you know, exception to that. But at the moment, they're selling in all the right places, and I wouldn't be surprised if some of that advantage gets competed away over time, but it's not getting competed away today.

Hill: No, I think that's right. And, look, this is one of those situations where I think that longevity is an advantage. Logitech has been around for about 40 years, it is a known brand, it is a known entity. And I think it's easy to imagine, at least part of what we saw in this latest quarter was company's employers and others, sort of, saying, OK, how can we set our folks up for success in their home and just placing large orders to Logitech? Again, it's a known quantity. I think, as you said, it's an advantage that probably gets reduced over time, but in the short term, you know, go with the brand you know.

Barker: Yeah. And they don't have to do promotional offers right now, people are just adding more keyboards, more monitors, more, certainly, cameras, to what they've got. And at some point, we'll find that we have a large inventory of things in various offices that didn't end up getting used as quickly as they were acquired, but those days are not upon us yet. And they were able to raise their guidance for the rest of the year. And they've, I think, doubled as a stock over the last year after a few years that were significantly less interesting than that for shareholders. But, you know, one year of doubling your money can make up for a number of previous years of, you know, less stellar performance.

Hill: Our email address is [email protected]. Question from Pete in Ohio who writes, "I have a question for Bill Barker the next time he's on MarketFoolery." I got to be honest, when I read that line, I didn't think the actual question was going to be about stocks, I just ...

Barker: It seems like a trap, doesn't it?

Hill: Not a trap, I just assumed it was going to be tangent related, but, no, it's an actual investing question.

Barker: I mean, the question is so specific, it seems like maybe I've said something in the past and forgotten about that now I'm going to have quoted back to myself when I answer this question incorrectly, but go ahead.

Hill: Instead, what comes next from Pete in this email is, "Let's suppose you've held an investment for 17 years and have experienced an average annual return of 10%. Is this a reason to celebrate or meh? Should the benchmark be the S&P 500?"

I'll take the second one first. In general, I think, as stock investors, we try to compare what we're doing to the S&P 500. Part of the thesis being, look, when you're starting out, get a low-cost S&P 500 index fund and then if you want to get into buying individual stocks, measure yourself against that index. So, I think that should be the benchmark.

To his question, is that a reason to celebrate or meh? What do you think?

Barker: Well, two answers. One, it depends; and the other, yes. Hey, this is an investment. Is it, are we just talking about a stock investment, was it real estate investment? Like, if you made, you know, 10% on bonds over the last 17 years, you'd be ecstatic. If you made 10%, and I looked up, between September 2003 and September 2020, in the S&P you made 9.4%. So, if the 17-year period we're talking about are the last 17 years, should you be ecstatic? You should be happy you beat the market. If you're assuming you pocketed that 10% or paying, you know, 1% or 1.5% for financial advice or management or something like that, yeah you beat the S&P 500.

Now, when somebody talks about 17-year periods, what I think of and what everybody really thinks about is, one, the 17-year locusts, which is a misnomer, but also, because they're really cicadas. And also, Warren Buffett's essay on this topic in which he dissected the returns of the market over two 17-year periods. I think it was 1966 to 1983 and 1983 to 2000, more or less. And '66 to '83, you made zero. The Dow Jones didn't move from the beginning of '66 to the end of '82. So, you made some dividends, but the Dow didn't move at all. The next 17 years, you made, like, 18%/year, something like that. So, is a 17-year period where you make 10% a good thing? Almost certainly, you should be happy with that. If you put money away 17 years ago for your child's college and you're looking to spend it today, you're happy you put that money away in stocks and made 10%. But there are certainly no guarantees that that's going to be the case over all 17-year periods. I think you should put up Buffett's essay on this, it was published in Fortune or Forbes at the end of '99, it's pretty famous and it's got a lot of good investing concepts in it.

One of the investing mistakes is, of course, the 17-year locusts, because really, they're cicadas. They're cicadas, but everybody calls them locusts.

Hill: So, this morning the U.S. Department of Justice filed an antitrust lawsuit against Google. 11 State Attorneys Generals have joined as plaintiffs. The lawsuit alleges Google has unlawfully maintained monopolies in the market for "general search services, search advertising, and general search text advertising." They claim that Google has maintained its monopoly through anticompetitive and exclusionary practices. From the time we started recording this podcast to just now, Google has posted their response, this is from Kent Walker, who's the Senior VP of Global Affairs and the Chief Legal Officer. And the headline [laughs] in Google's response is, A deeply flawed lawsuit that would do nothing to help consumers.

And the fact that shares of Alphabet, the parent company of Google, are up 1%, 1.5%, makes me think that investors as a group aren't too worried about this lawsuit, should they be?

Barker: No. Well, one, I just want to go back; I was thrown for a while. If you want to try again on the attorneys state generals that you talked about, because it's a hard one.

Hill: State Attorneys Generals?

Barker: Well, it would be State Attorneys General.

Hill: Oh, OK.

Barker: Yeah. Some people get that wrong. [laughs] You went with Attorneys State Generals and I hope that you get the chance to correct me several times in the rest of this podcast, because I would deserve it. And, at any rate -- and you'll probably get to right now when I start talking about the merits of the case -- you're right, the market is shaking this one off perhaps sensing that the Attorneys General involved from the various states all seem to have something in common, which is a Republican-leaning agenda. And if that is the case and the election holds up where the current polling goes, one might guess that this is not a suit that is going to have a great longevity. So, that's one reason to interpret the markets, you know, putting this aside for the moment.

You know, it's interesting. I think you've got the two issues here, what is the monopoly power which is being alleged, and is it being used illegally? So, you got to win both sides of that. Does Google have monopoly power in search? You can argue both sides of that. I mean, de facto it does, but there are reasons that the other search engines allow it to certainly argue that it's not a monopoly. And then in what manner? Even if it is, you're allowed to be a monopoly, it's just, do you then use that power legally or illegally? And I haven't read the suit to know what the exact illegal use of the power is, I think, part of it is advertising and part of it, I think, seems to be, you know, a political right.

Hill: Well, and just to add a little bit more clarity, because we rarely get into politics on the show and for anyone who -- I don't want anyone to mistake what you just said as political commentary. The fact of the matter is, the 11 State Attorneys General who have joined this lawsuit are Republicans and they represent the state of Arkansas, Florida, Georgia, Indiana, Kentucky, Louisiana, Mississippi, Missouri, Montana, South Carolina, and Texas; and to what's happening with the stock. Yeah, it does [laughs] kind of seem on the surface that this seems like one of those lawsuits that depending on the outcome of the election in a couple of weeks, if a different administration takes over and a new Attorney General for the United States takes over, there's a decent chance this lawsuit just goes away completely.

But I don't know, [laughs] if you're Microsoft with Bing, if you're, I guess, Verizon owns Yahoo! now. Like, part of Google's response is, hey, people can use Yahoo! Search, people can use Bing, it's really easy to do so. I haven't read through their entire response, but it wouldn't surprise me if they draw a comparison to what you and I as kids knew as the phone company and, sort of, the breakup of the phone company, where it really was a situation where, yeah, you don't have any choice, this is it. Which led to the breaking up of the phone company into the so-called baby bells.

Barker: Yeah. And the short-lived attempt to break up Microsoft back in '99-2000, this seems a little bit like that in terms of what the monopoly power would be and what the choices are for it. And to reiterate what you said, I'm just saying, if the market is dismissing this, one of the interpretations of that might be that this has politics as part of the suit, that's not to say that 11 Republicans or 11 Democrats Attorneys General couldn't bring a suit that is completely winnable on the law. But the market is looking at it as that seems to be part of the flavor of this from what, you know, and I think the interpretation, like, what the market thinks is always something that you should stop and say, the market doesn't think, that's not a thing. But the market collectively reflects actions. And I think that right now, for whatever reason, possibly a handicapping of the political environment, the market is not too worried about this one.

Hill: I think it's interesting that you described the Federal government's attempt to break up Microsoft as short-lived. My hunch is that Bill Gates and Steve Ballmer and the people at Microsoft who were working there at the time, I bet they don't think of it as short-lived.

Barker: Yeah, well, it depends on ...

Hill: That was years and God knows how many millions of dollars.

Barker: It depends on how much litigation you've done, years of litigation can really be quite short in the scope of how long litigation often takes.

Hill: We will end there. Bill Barker, always good talking to you, thanks for being here.

Barker: Thanks for having me.

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.