Wall Street Earnings News

In this episode of MarketFoolery, host Chris Hill is joined by Motley Fool analyst Bill Barker to talk about the latest stock news. Microsoft (MSFT 0.37%) hits a new high after second-quarter cloud revenue impresses Wall Street. Shares of AMC Entertainment (AMC -3.25%) triple as short-sellers run for the exits. AT&T's (T 1.88%) second-quarter report shows solid growth in HBO MAX subscribers. Bill analyzes those stories as well as a decidedly mixed first-quarter report from Starbucks (SBUX 1.00%).

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 January 27, 2021.

Chris Hill: It's Wednesday, January 27th. Welcome to MarketFoolery. I'm Chris Hill, with me today, Mr. Bill Barker. Thanks for being here.

Bill Barker: Thanks for having me.

Hill: We've got earnings. We've got restaurant earnings, we've got entertainment earnings. We're going to start with the behemoth that is Microsoft. Second quarter revenue for Microsoft grew 17% and once again, sorry to sound like a broken record, but every quarter we say it because it's true, the Azure Cloud business is getting it done and shares of Microsoft up this morning and hitting a new high.

Barker: Yeah. Azure getting it done even a little bit better than one might have hoped for as the growth, you point out, this is the lead every month or every quarter as to Azure's growth, but it's been trending down from very, very high levels and up 50% year-over-year. It's a little bit better than the last two quarters, which are 47% and 48%. Even if it were a trend that it had over the last couple of years and only growing at 45%, you'd still be thrilled and yet it's growing even better than that. That's the lead, but you just look up and down the categories and it's just a sea of green in terms of growth division across division.

Hill: Yeah. This is one of those quarters where it's hard to see anything and just feel like they got to work on that.

Barker: Search ads only up 2%, but that was better than down 10% and 18% over the previous two quarters. Windows OEM only up 1%. Yeah. Everything was up and most of the divisions were up well more than that. So, all adds up to, I think, 17% of total revenue growth and 33%, 34% net earnings growth. Just an outstanding quarter, and the lead sentence that Microsoft had in its press release on many other days would have dominated the narrative for the day, Microsoft's earnings, of course, and the first sentence being, I'll quote Satya Nadella here, "What we've witnessed over the past year is the dawn of a second wave of digital transformation sweeping every company and every industry." Some companies are being swept away by this wave of digital transformation, but not Microsoft. It is solidly on the right side of that wave, and a lot of other companies are going to be, I think, telling the same story over the course of the earning season.

Hill: Thank you for saying that, because when you read that I thought, "That's the thing about sweeping, it kind of goes both ways."

Barker: Yes. If you're doing it right, well, you can have a push broom, and then you're just sweeping everything forward. But no, it's good news from Microsoft and companies that look a lot like Microsoft, and we'll be talking about some today that are not looking quite as much like Microsoft and are not as digitally ensconced as Microsoft. But it's a thoroughly good quarter and cloud services and Azure predictably enough the best parts of it and, as I said before, doing even better than what one might have been thinking they were going to do.

Hill: The stock of the day is not GameStop (GME 7.58%), it is AMC Entertainment. Shares of the movie theater chain up more than 200%, because like we've seen recently with GameStop, short sellers are running for the exits. I have to believe at least a little bit of the impetus here is AMC Entertainment coming out earlier in the week and basically saying, in terms of their financing, we've got enough money to get us through 2021. With that being said, I don't think that statement alone accounts for the tripling of the stock that we're seeing this morning.

Barker: No, for those that were listening, I guess, yesterday to your discussions with Jim Gillies about GameStop, this is today's chapter in that story, and we're one of the chapters today. You say it's up 200%, by the time people listen to this, it could be down. It could be up 600%, too. You can put any number and it's as good as any other number in terms of how much this stock might be up at the end of the day because it's being controlled by forces which are not predictable. Although I think the list of companies, heavily shorted companies, small-caps, produces a set of stocks that you can look at and predict maybe this is going to be the thing that takes off today or this week and that's been the case, that is responsible for 99.%-some of today's move, and the news earlier on Monday is less than 1%. That was covered by yesterday's and Monday's stock action. So, today it's really about trading.

Hill: I said this yesterday, it's going to be interesting to see how all of this plays out. I'm not involved in either of these trades: GameStop, AMC Entertainment. I'm just sitting back, watching it all play out, curious to see how it ends. It would be amazing if some of the people who are benefiting from the rise of the stock actually decided, "No, I'm in this for the next five years." That would be interesting to see, but my hunch is that that may not be the time frame that some of these buyers have in mind.

Barker: No. I think some of these companies that are on the ropes, and that's why they are where they are in the play, the game that's being played right now, is because they are beaten-down stocks, they're heavily shorting stocks that are shorted because the fundamentals of their business have attracted short-sellers. Whether the companies take advantage of the stock prices and get out some secondaries and shorting up their financials, that is to be seen. There's something to be said for taking advantage of that, and there is also, I'm sure, a lot of legal analysis behind the scenes about whether they could be doing anything wrong by taking advantage of what is this market-mania manufactured by things really beyond the fundamentals of the company. I don't know if they will be able to take advantage in that way or not. That's one of the many interesting parts of the story that remains to be seen.

Hill: By the way, we should mention, and you brought this up when we're chatting earlier today, we should mention just sticking with entertainment, AT&T came out with their second quarter report and one of the highlights of profits and revenue higher than expected for AT&T, one of the highlights of the report was they did demonstrate some pretty nice subscriber growth for HBO Max, which is pretty great considering, as we've talked about before on the show, how awful they botched the rollout of HBO Max. The fact that they're growing subscribers, well done.

Barker: Yes, we danced upon that grave at a little bit early. I brought it up as one of my ideas for surprisingly bad investments of 2020 was how badly they had been managed. Nevertheless, the content is there in part due to now getting on the Roku and Amazon Fire platforms. More people are able to get onto HBO Max. I know that it was a struggle before that. So, simply being where people are going to use the services, which is the devices such as Roku, has dramatically enhanced their subscriber numbers and at 37 million HBO Max eligible subscribers, I think that's the number they came out with, compare to that 70-75 million for Disney+, 200 million for Netflix, there is a lot of growth available still, given the quality of the library there. Whether they achieve those levels, it's going to be a function of how well they manage this going forward.

Hill: If you look at the way that they are marketing the HBO Max service right now, they are not overthinking it at all, which I think is the smart move. They are marketing it exactly the same way that Netflix is marketing its service in the same way that Disney+ is marketing. It's basically like here's what we've got, here is what's coming up later in 2021 and even sneak preview to 2022. I think you're being smart about it. It wouldn't surprise me to see this number go higher for AT&T in a pretty significant way later in the year, but it comes down to execution. But there, again, for all the ways they bungled the rollout of HBO Max by having, I think, by my count, four different services that started with the letters HBO, and four different price points, it was so convoluted. So, good on them that they were able to get to the number they're at right now.

Barker: Yeah. It's difficult when you got your diet HBO, your HBO lite, your new HBO zero.

Hill: HBO zero.

Barker: Yeah. The consumer can't be blamed for not being able to keep track of all that. Nevertheless, what they have benefited from more than anything else is 20-30 years of outstanding HBO branded original content, which is known to just about everybody, plus a lot of Warner Brothers stuff on top of that. Now that they are where people want to find the service, if it's as easy as clicking a couple of buttons, HBO is going to deliver the experience that people are looking for right now, which is to be able to watch a lot of stuff at home.

Hill: When it comes to Starbucks' first quarter report, the good was outweighed by the bad. Profits were higher than expected for Starbucks, but revenue was light. Same-store sales in the U.S. fell 5%, and Chief Operating Officer Roz Brewer is leaving Starbucks to become the new CEO of Walgreens Boots Alliance.

Barker: Yeah. Which did you say outweighed which, the good or the bad? I mean, it's a fair fight, especially if you're just looking at a one-day stock movement, which is not what you would --

Hill: Really? Because I think the bad outweighed the good on this one, and I think the fact that the stock is down nearly 7% as you and I are talking right now, I think the market agrees with me that when it comes to Starbucks today, just for today, the bad is outweighing the good.

Barker: Yeah, the bad is outweighing the good. It's a loss of key personnel. Of course, they've got a deep bench there, so I don't fear that they will be unable to have talent rise to the occasion. It's good for Walgreens. Yeah. I was at Starbucks this morning, which is a bit of a rarity these days, which is the problem, right? It is far more rare to be going into Starbucks than back when we were working in an office together and we'd find ourselves at a Starbucks occasionally, [laughs] you and I. Well, you and I were known to take out a cup of coffee at Starbucks here and there.

Hill: Here and there.

Barker: Here and there. There is Starbucks coffee in the coffee machines in our office. So, I went in today and it was empty as it is supposed to be. People are not invited to hang out in Starbucks. They are to take whatever they're getting and get out quickly. Starbucks is not advertising this element of the experience right now as being the third place because, of course, right now, what people mostly have is the first place, home. They don't have a second place office and certainly not a third place Starbucks. To only be down 5% in that light, isn't too bad. China sales, where things are ahead of the U.S. in terms of how open things are, I think that that was up 5%. So, that's one good sign outweighed by what is still the story of the moment here in the U.S., which is people are not leaving their homes to the degree that Starbucks needs them to.

Hill: I'm glad you mentioned China, because it's Starbucks' second largest market. That's certainly a silver lining to the report that we saw. The average ticket sale being up in the U.S. despite overall comps being negative, I mean, I think that's also a silver lining. If that can continue three months from now, six months from now, if they can continue to see a boost in the average ticket and then you add in some higher traffic, that's obviously the golden combination that you want to see for any retailer restaurant business.

I hope you're right about Starbucks having a deep bench in the executive ranks. I don't have a great feel for who else is there. I will say it's Roz Brewer as the Chief Operating Officer, also a board member. I mean, she was one of those people that in addition -- like, when Howard Schultz stepped down and Kevin Johnson got elevated to CEO, I remember thinking, "Okay. They got Kevin Johnson, they got Roz Brewer. Okay." As a longtime Starbucks shareholder, I'm OK with this, because those two people are there. One of those people is now gone, and by the way, shares of Walgreens hitting a 52-week high today, because they made a great hire, but I hope you're right. It's not an easy act to follow.

Barker: No.

Hill: Not a horrible act to follow, but whoever is the next Chief Operating Officer at Starbucks, I hope they are every bit as good as Roz Brewer has been.

Barker: Starbucks investors can hope. They may have to sell for something not quite at that level because that's a rarity. But at any rate, I think that they have access to a lot of talent, both in-house and out, but I would expect to be an in-house move. So, longer-term? Yes, people are not walking into Starbucks today in the U.S. in the numbers that the company needs, but they are picking up, making mobile, or Starbucks is vastly enhancing the sales if it makes mobile and increasing its drive-through, and the competition in the mom-and-pop boutique coffee places is suffering more than Starbucks is right now. So, I think that the long-term for Starbucks has not derailed terribly much.

Hill: 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 that 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.