In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Bill Barker about the latest headlines and earnings reports from Wall Street. They discuss the antitrust lawsuit against a social media giant and the market's reaction to the news. They talk about Starbucks' (SBUX +0.79%) guidance and crazy IPO valuations as a new IPO hits the market, and much more.
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This video was recorded on December 10, 2020.
Chris Hill: It's Thursday, December 10th. Welcome to MarketFoolery. I'm Chris Hill, with me today, Bill Barker in the house. Good to see you.
Bill Barker: I am in my house. It's good to be here.
Hill: We have, for the second day in a row, another red-hot IPO, we're going to get to that. We're going to get to Starbucks hitting a new all-time high. But we will start today with the social network.
The Federal Trade Commission and 46 states have filed two separate antitrust lawsuits against Facebook (FB +0.71%), both alleging anti-competitive conduct that could result in Facebook having to spinoff Instagram and WhatsApp. But based on the fact that shares of Facebook are basically flat right now, it kind of seems like nobody thinks that's actually going to happen.
Barker: Well, the market as a whole doesn't think that's going to happen. You've got the individual Attorneys General, State Attorneys General, FTC thinking it might happen, hoping that they're not wasting their time here. They've got people who are probably involved in this for the right reasons and some who are involved in it for publicity or I'm not sure what. But I don't know that a lawsuit that has 47 leaders is the one that I would bet on being more successful than something more targeted. And as you say correctly, the most important observer of this, I would say, the collective market, sees it as a non-event so far.
Hill: And part of Facebook's initial response is to say, and they're right to say this, hey, Federal Trade Commission, you cleared these acquisitions of Instagram and WhatsApp, [laughs] you already had a shot when we came and said, hey, we're thinking about buying this company, are you OK with that? And you're like, yeah, no, that's good.
Barker: Yeah. Well, that is a fact in their favor. And I guess that as things stand now, the monopoly power that is alleged by the FTC and the states is greater for Facebook today than at the time of the acquisitions. And so, that would be one of their responses. A. you're more of a monopoly than we understood you to be, you've grown, in part, because of these acquisitions, and you're abusing your power. I mean, ultimately that's where the FTC or any plaintiff in an antitrust case like this has to get, is A. you're a monopoly; B. you're using monopoly power illegally.
It is possible to be a legal monopoly and to operate as a legal monopoly. And that is where Facebook would like to, behind closed doors, imagine itself to be. Yes, we're a monopoly. This is fun. Fun to be a monopoly, you get to have all the money. But we're not the illegal kind of monopoly.
Hill: Oh, yeah. I mean, let's be clear, if you're an investor, and you can find a legal monopoly to buy shares of; oh, yeah, [laughs] that usually works out for you as an investor.
Barker: Yeah. And so, if you're evaluating, here's the downside. Downside is this is a case which ultimately goes against Facebook. And then I guess the sort of data that you would look at is, what did AT&T and its shareholders do after the break up, how did Standard Oil's shareholders do after that was broken up? And how did Microsoft ultimately do in the aftermath of the government attempting to break up Microsoft 20 years ago? And that didn't come to fruition, the market moved much faster than anybody could have anticipated and Microsoft's monopoly power was revealed, over the length of time, to not be as potent as was alleged. And you know, administrations change and priorities change. So, the amount of time that it will take to actually see litigation like this all the way to the end, if in fact that happens, so much will change that I don't think that, again, the market is giving this a lot of concern today.
Hill: On Wednesday, Starbucks held its investor day and talked about a significant rebound in the overall business and predicted earnings growth of at least 20% in fiscal year 2022, which will start, I would say, about 11 months from now, 10 months from now, something like that. So, analysts clearly liked what they heard, because shares of Starbucks are up 4% and hitting a new high today.
Barker: Yeah, they've, sort of, reaffirmed, raised the floor, I would guess, on what the story is. And the story, in the immediate future, looks a little bit better than it was looking. And in the longer-term, intermediate term, 10% to 12% is pretty good. So, they're going to achieve that. They actually narrowed down some of their unit growth projections for both the U.S. and international. I think China is now estimated to -- or the expectations are that they will grow China in the low-teens rather than the mid-teens in terms of unit growth. And what is the U.S., like, 4% unit growth something like that, 2% to 4%, so they are still opening a lot of stores, especially in China. They've got a long way to grow there, it's a good market for coffee. And, yeah, they're happy with how they have done this year and looking forward to the next couple of years where they're going to continue to seemingly grow in the, you know, double digit percent. And that's in terms of earnings per share. They are buying back some shares. They're not growing sales that fast, but they do expect to improve margins a little bit through artificial intelligence.
Hill: Which will be pretty impressive, if they can pull that off, because one of the other things they talked about was the investments they're going to be making in changing up the footprint in the U.S. in terms of closing hundreds of locations, revamping others, looking to invest more in drive-thru and sort of the smaller footprint locations which are designed much more with people who are doing mobile app ordering and just, kind of, walking in and picking up.
So, again, it'll be impressive if they can pull it off, but I think this is one of those situations where Kevin Johnson's track record as a CEO and the way that he communicates, I think, people know by this point that this is not someone who is given to hyperbole. You know, there are CEOs out there [laughs] who are given to hyperbole and they are entertaining to various degrees, Kevin Johnson is about as steady a CEO as I can think of in terms of the way that he talks about the business that he runs.
Barker: Yeah, they've had a number of good leaders. And it was an interesting year, of course, for Howard Schultz, projection for his year would have gone a different trajectory, I guess. I don't know if you remember this, but he wanted to be President?
Hill: [laughs] You know, I hadn't thought about the fact that Howard Schultz [laughs] came out and said he was going to run for President, because I think that was, I don't know, 15 years ago, or maybe it just feels like it was 15 years ago.
Barker: It does seem like a long time ago, and yet, do you consider, like, drive-thru Starbucks to be a little bit exotic?
Hill: Exotic in the sense that there aren't many around me?
Barker: Yeah.
Hill: Yes, exotic in that sense, not in the sense of --
Barker: Like, when you are outside of your area and you come across a drive-thru Starbucks, like, oh, this is cool, a drive-thru Starbucks, I never get to go to one.
Hill: Years ago, I went to my hometown in Maine. I was staying in a small hotel and when I got out of my rental car, I looked across the street, and not only was there a Starbucks, it was a drive-thru Starbucks. And I did get excited, I was like, oh, my God! There's a drive-thru Starbucks [laughs] in my hometown. There are none near where I live, you know, right now, but, hey, here in my hometown, that's great.
Barker: Yeah, we've got, if you expand walking distance, I don't know how many are within walking distance of the office now, because we lost one, but still four or five. And there are none really around me either that are drive-thru. So, I consider that exciting and a good opportunity for Starbucks to retrofit some of their locations to provide more of that. And yeah, the mobility issue and the progress they've made with their app and the percentage of order ahead that they can fulfill, gets better over time. Artificial intelligence will help with that and the implementation of the drive-thru.
So, I don't know, it's just another good day for Starbucks and its shareholders on a story that doesn't change a lot, but keeps being, you know, incredibly impressive, a true compounder.
Hill: On yesterday's show, John Rotonti and I tried to kill as much time as we could waiting for DoorDash to come out with an opening price on the day of its IPO, we didn't make it. DoorDash was up 85% on its initial public offering. And I mention all this because Airbnb (ABNB 1.10%) is going public today. It's expected to be the biggest IPO of the year in terms of money raised. It was priced at $68/share. At this moment, indications are that when it is available for trading it's going to be at $150/share, [laughs] which, if I have the math correct, would make Airbnb, as a company, bigger than Marriott and Hyatt combined.
Barker: Yeah, a different company in a lot of ways, obviously; we'll get to that in a minute. And to make the math even more, sort of, alarming, if you're worried about some of these things or something to celebrate if you're thinking that today's price is the best reflection of Airbnb's true value, it was going to be priced -- early pricing was $44 to $50/share after going through the whole, you know, Wall Street IPO S-1 process. And so, there was enough enthusiasm for it that those getting in first were willing to go $68, and now the investing public at large just wants it. Just the initial buyers seem to just want it. Because it has been more than a triple from three or four days ago, by some, you know, sober analysis, it indicates that there's at least some optimism here that is sending those prices up to $150. I think you've got to be cautious about that.
And it's a great company, it survived a tough year, and is in, I think, a relatively more powerful position against the Hyatt, Hilton, Marriotts of the world than it was at the beginning of the year, where it was already looking much more like the future than those companies, it looked more like, both, the past and the present. So, I am not against Airbnb as a business, but if it's coming on at $150, I would say that is not enticing.
Hill: [laughs] Yeah, it is one of those things where I thought, boy! Yeah, that might be an interesting company to own shares of. This is why we don't get in on opening day, right? I mean, this is why we say to folks, yeah, be careful about that, because every year there are people who just say, yup! I'm going to put in my order, and your order gets filled, it just gets filled at a price much, much higher than you thought it was going to get filled at.
Barker: If you thought about what price it was going to get filled in at all, right, and that's the danger, is that, there are people who are just buying it to buy it, or buying it because they think they can own it for a few minutes and make money. And they see that some of the same discussion would have come around the Snowflake IPO, the Palantir IPO, and yet those things have been big winners for people who bought them on the market on their initial day anyway. So, no one's lost on that kind of bet recently enough that there is any memory of it, seemingly. And if there are millions of people that do remember the 1990s, the late-1990s and some of the much flakier IPOs than what we're really talking about here, but the ability of investors to pay too much during a lot of enthusiasm on day one, a lot of those people are staying out, but it just takes the people that never saw that, haven't been burned yet.
And I think that, you know, I'm sure I would be thinking that Airbnb could be worth all the money in the world if I were a long-term employee and had options and things and put in my years of hard work, and why not $150? Sure. But that would be, if I'm putting, I'm drawing up a little biased circle to put myself in, right, [laughs] and then declaring. The problem with being in that circle is a little bit too much myopia.
Hill: Yeah. I mean, we can look at Airbnb at $150/share and say, boy! That's a really rich valuation, but to your point, there is an actual business there unlike in the late-1990s; flaky, I think that's a charitable word for some of the businesses that [laughs] went public in the late-1990s and what happened to those stocks and what happened to shareholders.
Barker: Yeah. And Airbnb is an asset-light business, although not employee-light necessarily. It can't run its business without a large number of employees, many of whom were laid off earlier in the year when business dried up. And so, there are real significant costs to this business, it's still not consistently profitable. And I think that I love what the business is going to do and has done, but you know, this is a reminder that in the short-term, the market is a voting machine and everybody is voting "buy" today.
Hill: Two quick things before we wrap up. For those who have inquired, and a few of the listeners have inquired, we're going to be recording an Apropos of Nothing episode early next week, and it'll show up in the MarketFoolery feed probably at the end of next week.
Barker: This is both a promo and a warning.
Hill: Yes, absolutely. This is a promotion for those who are interested in it, and this is a dire warning for those who have let us know, over the years, I am not interested in this. And we get that; we get that. Go ahead, and just as soon as it shows up in your feed and it's automatically downloaded, just go ahead and delete it.
Barker: I'm with them, I'm with them, on like, [laughs] there are shows that I listen to, and when the host goes into long descriptions of their own personal life, I say, can you just get to the point? I love your show, I love what you do, just get to what I came here for ...
Hill: Can we get to the guests?
Barker: [laughs] Yeah. So, we're going to be indulging in our own, you know, very, very light topic analysis.
Hill: Right, and if anyone wants ...
Barker: And looking for suggestions, by the way.
Hill: I was just going to say, anyone who wants to suggest a topic, drop us an email in [email protected]. In the past, we've talked about various Mount Rushmores; that's always good. Hey, what's, you know, the Mount Rushmore of standup comedy or just comedy in general, Mount Rushmore. Han Solo versus Indiana Jones, that was one ...
Barker: Have we covered that?
Hill: We did that one before, yeah.
Barker: Tiger v Shark, of course.
Hill: Yeah, Shark vs. Tiger, yeah, who wins that?
Barker: We're going into the Santa Claus buddy-cop movie, or TV show, again ...
Hill: Well, in greater detail, because I think Santa Claus is solving crimes, there's a lot to be mined there.
Barker: We'll probably touch [...] because spoiler alert, we will be in a gazebo. We'll be touching on that briefly, the Christopher Hallmark lightly fictionalized tale of your life via a Hallmark-Disney or Hallmark holiday comedy romance.
Hill: I think some people, to the extent that anyone is still listening, because we're done with the investing part of the show, anyone wondering like, is that code for something? No, we're actually going to be in the gazebo and [laughs] we'll take a photo and put it on the MarketFoolery Twitter feed.
Barker: A gazebo is a critical element to any Hallmark holiday movie, in your experience?
Hill: Absolutely. Absolutely. And second thing before we wrap up, happy first night of Hanukkah, for those who are celebrating.
With that, 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 on Monday.
