Why Microsoft Stock Is Down

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've got Microsoft's (MSFT 1.82%) earnings and the results from a top aircraft manufacturer, and they discuss air travel during COVID times. They also share some updates from the beer industry, and finally, there are some disagreements about Halloween candies.

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This video was recorded on October 28, 2020.

Chris Hill: It's Wednesday, October 28th. Welcome to MarketFoolery. I'm Chris Hill, with me today, Mr. Bill Barker. Thanks for being here.

Bill Barker: Thanks for having me.

Hill: Right off the bat, let me say this is a short week for us here on MarketFoolery, so this is our last episode of the week, because our annual meeting kicks off today. Yes, The Motley Fool has an annual meeting. For those of you among the dozens of listeners who are relatively new, thank you for listening. Yeah, The Motley Fool is closing in on 500 employees and our annual meeting starts today. So, this is our last episode of the week, we'll be back on Monday. And as I always say, check out the other Motley Fool podcasts whenever you get a chance.

Today, we've got earnings, we've got an update on the beer industry, we're going to start with the behemoth that is Microsoft. First quarter profits and revenue came in higher than expected for Microsoft, but I guess guidance for Q2 was a little bit lower than Wall Street was hoping for, because the stock is down around 4% today.

Barker: Yeah, you know, we had talked earlier in the day, we sometimes do, about the idea of doing previously s before the stories, so that people would have all the information they needed to know as we actually hit stories. And so, and I frequently do --

Hill: And by the way, as you know, many great dramas have done, "Previously on The West Wing..."

Barker: Yeah. And so, this actually is not a tangent, this is going to be relevant to the point. So, yes, Microsoft is down 4% today, but it's now up 30% instead of 35% for the year. The good year that Microsoft is enjoying is priced in to a degree, although a lot of people are still very enthusiastic about Microsoft at these prices based on those parts of the business that did very well for the quarter and are likely to continue to do well, basically games and cloud. And some other things are taking a little bit of a breather, but those are two items that are going to continue to be strong.

Hill: Yeah. I think this is where [laughs] it's great to be a Foolish investor, an investor with a long-term view, because if you liked Microsoft yesterday, guess what, you get to buy it at [laughs] a discount today. It's not a huge discount, but this is the short-term mentality at work. And, you know, not to rip on Wall Street, there are a lot of smart people who work there, but just the business model is different there for investors than it is for us.

Barker: Sure. And yeah, this is not a stock that you would be happy if you were jumping in and out of it over the last couple of years when it continued as a stock to be a roaring success, it did take about a 10-year breather from being a phenomenal stock, because back in the late '90s, 2000s, it really priced in ahead of time all of the success that it was about to enjoy for the next decade, and sometimes the market will do that. I don't think that the valuation of today is even an echo of the problems that the stock valuation had back then.

You've got Azure up 48% for the quarter, you've got Xbox content up 30% year-over-year for the quarter, you've got some of the other cloud parts up around 20%. So, it's certainly growing well, some of the other things are taking a breather, so I think the total revenue growth was more in the 12%, 13% category which, given the size of Microsoft, is still very impressive.

Hill: I like the idea of a stock taking a breather, as though Microsoft got together in, sort of, the early 2000s and said, ah! This run we've been on, it's kind of ... you know, what if we just took a break for the next 10 years, and just the stock really didn't do anything? Well, we'll keep being profitable. You know, we'll keep plugging along, but can we just -- it's so tiring.

Barker: [laughs] Well, the business didn't take a breather during that time, but investors in the stock had to wait for the business to catch up with what really was at the time certainly not restricted just to Microsoft. I think those that are newer to the market have heard about the late '90s, 2000s, sort of, period of dot-com, the bonanza stock valuations, many of which are no longer around, they flamed out, they were never going to thrive. Microsoft went along for the ride, as a stock certainly has had two decades since then of phenomenal compounding growth as a business. And the marriage of the stock and the business are much closer today than it was back then.

Hill: Shares of Boeing (BA 0.25%) down 3% after Boeing's third quarter loss came in at closing in on $500 million, this is compared to a year ago when in the third quarter Boeing put up a profit of $1.2 billion. And CEO Dave Calhoun, being pretty clear of continuing the trend of job cuts at Boeing.

Barker: Yeah. Returning to the theme of the previously s, in a previous episode you asked if there was a CEO that I could spend a day or a week or whatever, a month with, and just, sort of, shadow and learn from and observe who it would be. And I went with Oscar Munoz, who at the time was the CEO at United, because of how fascinating the variety of issues that somebody in that business would be dealing with. And we're seeing some of the downside of that for Boeing right now. The issues predominantly are COVID and people's very specific fears about flying. Now, the airlines have the opportunity, and you're beginning to hear this, reports coming out, studies on the relative danger of flying from COVID standpoint versus some other things, and because of the circulation of the air. I'm certainly in no position to weigh in very much on whether this is safer than people think, but the airlines are trying to get that story out.

Boeing is a bit of a second derivative off of the story of airline use. And boy! You know, they have a lot of lost sales, not just from the [737] MAX but from COVID, and they've got a lot of painful job cuts to go through, both already this year and next year as they've now announced they're planning.

Hill: Well, and if you're any of the major airlines and you're buying your planes from Boeing, you're doing the math on the wear-and-tear on the aircraft, what you think the refresh cycle is going to be like. And because so many planes are grounded due to [laughs] lack of interest on the part of consumers to actually get on an airplane and fly, you know, this is a ripple effect that is not hard to see.

Barker: No, but it's a challenge for the airlines to -- so, the story that the Boeing CEO was pitching, I caught a little bit of his interview on CNBC this morning, it was that it was safer to be on a plane than to go to the grocery store from a COVID perspective, because of the air refresh technologies that are in planes and the circulation patterns of air. Now, I think that's not something that you're going to be able to sell quickly to people. And the science may be there. Certainly, people have to go to the grocery store, if they're not going to get their groceries delivered, and, you know, they don't have to fly. So, is it a health risk at all to fly? The airlines are going to be within the bounds of taking on any sort of legal liability for overpromising on what the science might be, going to try to promote everything they can. Just as you and I promote the science of coffee drinking, they're going to go with the studies, you know, try to not only promote a story that is in their interest, but to actually design the safest flights they can. And that begins in part by separating the passengers from each other, and that's a problem that's going to continue for a while in terms of how packed in you can make a plane and keep anything safe.

Hill: But don't you think that all of this is going to happen at once? And what I mean by that is -- I flew in September, I went up to Boston to visit some family, it was for not a great length of time and it was very targeted [laughs] in terms of what I did, where I went, once I got to Boston. You know, part of the challenge that the airlines are dealing with right now is, why would people get on a plane, what are you going to do? In the case of me and my family, are you going to go to a big Thanksgiving gathering? No, that's not happening this year. Are you going to go to Disney World? No, that's not... [laughs] so, it seems like, increasingly, we're going to get to a point where -- and this will be in a good way for the airlines -- the challenge at some point they're going to face is a massive increase in demand. When there is nationwide testing in place, when there is a vaccine, when there is a massive opening up of things, then people are going to be like, OK, thank God! we've been trapped in our homes for a year, for 18 months, for however long it is. That's how I see this playing out.

Barker: Well, certainly, the travel was coming back. There were headlines about up to a million passengers a day in the U.S. for the first time since March. And I think the number of passengers was more, like, 4 million a day at peak times, something like that; maybe it was 3 million a day. At any rate, the passenger traffic had improved now that you've got these headlines of the most recent week on new surges of cases, people have backed off flying again, even though you know, I think that the science would say, within the planes, it's about the same as it was, but there are more people just out in the population affected, so it stands to reason that there would be more people on your flight potentially affected and people are backing away from their flights again. There's certainly not going to be the kind of seasonal holiday traffic that airlines depend on.

And again, going back to Boeing. Boeing is going to be a lagging indicator, because the number of miles not flown by planes pushes back the need for new planes. So, both how many people are flying, and how rundown are our planes? Both of those are working against Boeing. And in the meantime, they've got, we've barely even talked about, the ongoing problems they've got convincing anybody that their MAX is a safe plane. And they're sitting on a stock price that's about a third of what it was before this all happened. And you know, they've got a long way to go to get back to having the prominence that they once had.

Hill: Let's move on to Tupperware (TUP). And, yes, I said Tupperware. Third quarter profits were 3X higher than Wall Street expected. Shares of Tupperware are up more than 30% today. And over the past six months this stock is up 1,000%. This is a 10-bagger since March. [laughs]

Barker: Yeah, no, more than that, I mean it was like $1.15/share, right, and now it's ... what is it right now?

Hill: It's in the high $20s.

Barker: So, it's, you know, 20X, and a lot of that having come today, up 35%. So, yeah, back from the dead. This was basically a zombie in March. And not just that it took a hit like all the other stocks out there took going into the worst day of March, this has been bleeding both sales and share price for years. You know, once a proud company, it didn't get to $1/share just off of COVID fears in March, it's about a $2.5 billion/year revenue company four or five years ago, about $1.5 billion, $1.8 billion last year, and it's beginning to perk back up, people are at home, people are cooking more at home, storing their food. Tupperware has seen a surge of sales, you've got, as in our case, we've got the most recent Tupperware purchase from children being at home and seeing ways that we could be more environmentally friendly in our food storage and not using so much aluminum foil or something to wrap up leftovers. So, I think that's a thing they're pushing is that they're an environmental company, which is, you know, a nice play for somebody that makes as much plastic as they do.

Hill: I want to get to Halloween candy in a second, but before we do, we got some news out of the beer industry today, and it's from Carlsberg and Heineken, which, you know, those are two publicly traded companies, they're not really on the radar of U.S. investors in the way that Anheuser-Busch or Boston Beer Company are, but they're two of the biggest brewers in the world. They came out with their latest quarterly results, and I'm curious what you think of them, because it seems like, and this probably shouldn't be a shock, but it seems like they are struggling to varying degrees because of the various shutdowns we've seen in restaurants and bars and pubs around the world.

Barker: Yeah, both global companies. So, Carlsberg is a Danish company; and Heineken out of the Netherlands. So, in part, this is a function of Carlsberg being a Scandinavian company, and more of its sales coming there. And Scandinavia has done, for various reasons, a better job with this. And there have been far fewer deaths than on the rest of the continent of Europe. Even Sweden, which had, let's just try opening everything up and go for herd immunity, that certainly produced far worse numbers for cases and fatalities than the rest of Scandinavia. But Scandinavia has got just better numbers than the rest of the continent.

And, you know, its bars, its sports, the numbers that are off for the first half of the year I think are 11% for Carlsberg, 16% for Heineken, so not that much different, but the stocks are going in different directions today. And you know, bars are seemingly the one thing that everybody agrees on, wow! That's where this stuff really spreads, it is when you have indoor bars open.

Hill: Yeah. As I said earlier, I've been on a plane, I've been to an indoor restaurant a couple of times. It's going to be a long time, I think, before you and I are, you know, watching a game sitting at a bar somewhere together.

Barker: Yeah, that is trouble for the brewers. And people are drinking more at home, but they're not necessarily drinking as much more beer at home as harder things. I think those sales are doing better than beer, which is mostly consumed in groups and around events, parties, sports. There's still plenty of room for your more, sort of, premium beers to be enjoyed in one or two at a time. But the Heinekens of the world are looking for people who are drinking more than two beers when they're drinking.

Hill: You can follow MarketFoolery on Twitter, the handle is just @MarketFoolery. And if you go to @MarketFoolery on Twitter, you'll see the description that we've put about the show. For those unfamiliar, it says analysts discussing stocks, business investing news, and occasional tangents. And I mentioned that to let people know we've reached the occasional tangent section of the show.

Before we get to Halloween candy, as a New York Yankees fan, were you pleased with the outcome of the World Series or were you hoping for Tampa to bring it home?

Barker: The Dodgers are one of the longtime foes of the Yankees, so if I had been rooting for anybody, I would've been rooting for Tampa. I was rooting for game seven. At the point that it got to, you know, game five, six, I was really rooting for that. I didn't watch a lot of the series, because I was licking my wounds from the Yankees being beaten by The Rays; credit to them for doing what they've done. You know, you as a Boston Red Sox fan, are you just trying to forget about the existence of baseball for the foreseeable future I assume?

Hill: Like all Red Sox fans, [laughs] I'm trying to forget that inexplicably the owner said, uh, we should get rid of this Mookie Betts guy. [laughs] We're going to go on an austerity plan now and we're going to get rid of Mookie Betts. Nothing but respect for the Tampa Rays. I was rooting ever so slightly for the Dodgers, just because I'm a fan of Mookie Betts, and Dave Roberts, the manager of the Dodgers, holds a special place in the hearts of all Red Sox fans of a certain age who lived through decades of futility before finally getting to the top of the mountain in 2004, and Dave Roberts playing a key role in that, so I'm happy for the Dodgers. [laughs] But yeah, it's going to be a while for the Red Sox, the way they're currently constructed.

All right. We got just a couple of minutes left. Halloween candy, overrated, underrated? Let's do overrated first, what's your overrated Halloween candy?

Barker: Yeah, well, I'm going to retire the category here. I mean, I'm going to bring the thing that is the most overrated, and when I reveal it to you, you're going to be like, oh, yeah, come to think of it, yes, and that's Pop Rocks.

Hill: Is that a Halloween candy?

Barker: Yes. If you go through your kids' candy at the end of the night on any given Halloween, and they've been out doing the whole neighborhood, yeah, they'll come back with some Pop Rocks, which have this gimmick, they are painful, and as a kid that seems like, oh, this is interesting ...

Hill: This is exciting and dangerous.

Barker: But can you imagine an impulse purchase of Pop Rocks? Like, well, I haven't had one of these for a while, yeah, Pop Rocks, that would taste great?

Hill: No, I can't.

Barker: Can you imagine that? Like I get, like, I had as much fun with Pop Rocks when I was a kid, like, the one or two times and then you're like, oh, yeah, you know, that was fun, I'll do it again next year. But, no, Pop Rocks, [...] overrated.

Hill: I think that's a strong choice. The seasonal choice that I'm going to go with is caramel apples, because it's the only time of the year that we really see caramel apples. And caramel apples on a stick is such a horrible execution. The two tastes work together, but just do it at home. Slice up a fresh apple, heat up some caramel sauce, dip it in that, do it that way, but just the traditional caramel apple on a stick is just awful.

Barker: Yeah, I don't know how highly rated they are anymore? You know, everything that's not in a wrapper today is presumed to be potentially lethal. So, that kind of thing, the homemade cookies, your apples, your caramel apples that were given out when we were kids, you know, don't get a lot of play these days.

Hill: Underrated, what are you going with?

Barker: By the way, I just want to return to -- I understand that Jason Moser said that the Hershey Bar was overrated.

Hill: The basic Hershey Bar, yes, he did say that.

Barker: That's outrageous, that's outrageous. And it's a slap against orphans and I won't have it. [laughs]

Hill: [laughs] I don't think he was talking about the Hershey company and the legacy of Milton Hershey and the good work he did with the school for orphans, I don't think he was talking about any of that, I think he was just focused on the basic candy bar.

Barker: I doubt it, I doubt it, I think it's, you know, an attack on the orphanages of this country, if they still exist. And, you know, the Milton Hershey fund having Milton Hershey School in Hershey, Pennsylvania. $12 billion endowment. One of the great charity acts of modern history, and under threat from Jason Moser, who wants people to buy fewer Hershey Bars. And the school still exists off of, you know, the stock price of Hershey. So, I say, he needs to apologize.

Hill: [laughs] I don't think that's where he was going. What are you doing for underrated?

Barker: Underrated. Can you give ...

Hill: I'll give mine.

Barker: I forgot what it was for just a second, but give yours.

Hill: Mine is Whoppers, and the reason I say that is because, if you like Whoppers, as I do, what you quickly find out is that [laughs] there are plenty of people out there who do not like Whoppers at all. And yet, it's frequently given out as a Halloween candy. So, it is the value play of Halloween candy. Because when, at the end of the night, you're trading with your siblings, or the next day you're trading with your friends, if you like Whoppers, you can give away just -- you can do, like, 1-for-5 trades; that's how hated Whoppers are. [laughs] So, many people dislike them that you can just be like, I'll give you this one Krackle and why don't you give me those five little bags of Whoppers, and people would be like, done, I'm happy to give these away.

Barker: I'm going to tell you, along the same lines, and maybe even more so, the Almond Joy, which the kids just can't appreciate, and you know, like, it's almonds, who needs that. You're not even onboard the coconut a lot of the time, but if you are, you just want the chocolate and coconut on Mounds. So, the addition of the almond, which actually, to the more adult palate, and by the way, I'm not saying that the taste of an Almond Joy is all that adult, but you know, more so than the competition which is Mounds. Yeah, you can basically -- when you go into your kids' room and you start stealing their candy, they're like trying to give you the Almond Joy, like, they'll pay you to take the Almond Joys. And so, you can, if you play your cards right, end up not only with Almond Joys but with a few bucks just stealing candy from the kids.

Hill: It's the perfect way to end. Bill Barker, 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 are off tomorrow, but we're back on Monday, we'll see you then.