In this episode of MarketFoolery, host Chris Hill is joined by Motley Fool analyst Emily Flippen to discuss Alibaba's (NYSE:BABA) cloud computing division being profitable for the first time ever. Also, Pfizer's (NYSE:PFE) fourth-quarter results were mixed and UPS (NYSE:UPS) wraps up a very strong fiscal year. Emily analyzes those stories and shares why, despite a great year, UPS is in a precarious position.

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This video was recorded on February 2, 2021.

Chris Hill: It's Tuesday, February 2nd. Happy Groundhog Day. Welcome to MarketFoolery. I'm Chris Hill. With me today, Emily Flippen. Good to see you.

Emily Flippen: Hey, good to be here.

Hill: We've got pharmaceutical earnings, we've got some shipping and logistics earnings to get to, but we're going to start with some big e-commerce, and that's Alibaba. Third quarter profits and revenue, higher than expected. For the first time ever, Alibaba's cloud computing division was profitable. Based largely on that, Emily, I would have thought there would have been more enthusiasm for the stock. I would have thought we would have seen a rise out of Alibaba today. Instead, it's down 2%, 3% or so.

Flippen: There's a couple of things to break down in this quarter. The important thing to note for investors is that a lot of what would have been enthusiasm for this quarter is muted because of the regulatory challenges that Jack Ma and Alibaba are going through right now. We saw a similar thing happen with Single's Day whose numbers were actually included in this past quarter. Alibaba more than doubled their Single's Day sales from the year prior, but was down on the news back in November, largely because of the concerns that investors had around how the Chinese government was going to handle Alibaba, a business that is increasingly considered to be a sense of a monopoly in the space. So there's some concerns there which have reflected, I believe, in the stock price movement that we're seeing today. But you've hit the nail on the head there with the excitement around Alibaba's cloud business. This is a small part of Alibaba's business. Nearly 90% of core revenue is still generated from their e-commerce operations. But seeing this business move toward profitability, that's adjusted EBITDA, so profitability is a loose term there. But seeing it move toward profitability makes a lot of investors think, "Hey, maybe Alibaba's cloud business could be the next Amazon, the Amazon Web Services of China."

Hill: A lot of times, when we see a business in this situation, let's put the regulatory stuff aside. When we see a business that appears to be performing well, the stock isn't moving for one reason or another, a lot of times, we're looking toward the business and that's going to be something out of the business. Whatever that X is, we're looking for that to be the catalyst. It sounds like, based on what you said, the catalyst for Alibaba needs to come from the central government. I don't own shares of Alibaba, but for someone who looks at this business, looks at how dominant it is, looks at the fact that maybe their cloud computing division isn't going to be as big as Amazon Web Services, but maybe it becomes even a lesser version of Amazon Web Services, can move the needle on a stock. If a stock like Alibaba is on your watchlist, are you waiting for the central government to basically give, if not the green light, but at least, say, "You know what? We're no longer or we're far less concerned about the regulatory stuff than we were. For whatever reason we decide, we're good with Alibaba now."

Flippen: I don't think investors should wait for that exact moment to happen, because what we've seen with the way that the Chinese government has handled these issues in the past is that it's a slow tapering off of hostility. We never see a direct end to it. It just slowly falls out over a period of months to years. I expect we'll see that happen here with Alibaba. I actually think another reason that the stock could be muted, a thing that investors are looking for is more growth in the cloud business. We mentioned that it had positive adjusted EBITDA and it had a 50% increase year-over-year in terms of revenue from cloud, but that was still below expectations. The growth needs to continue to catalyze growth in general Alibaba when looking at its cloud performance. Because despite having 50% growth, investors were clearly looking for more here.

Hill: We got a mixed fourth quarter out of Pfizer. Profits were lower than expected, but revenue came in higher. Pfizer also raised guidance for the new fiscal year. What stood out to you?

Flippen: What stood out to me was the $15 billion that Pfizer expects to generate from COVID vaccines in 2021, this is a number that financial media has really focused on as a catalyst for what could be a pretty significant portion of Pfizer's earnings heading into the next year. But even at $15 billion, that's still only 25% of the total revenue that's expected in 2021. There's a lot more to the Pfizer story than just looking at their COVID vaccine sales. But part of the reason investors could be excited here is not just because of that $15 billion, but also because the potential to develop new strains and new vaccines for different variants of COVID. Right now, Pfizer's in the process of developing a booster to fully help better protect against the new strains of coronavirus that we're seeing crop up across the world. But if they will need to continue to vaccinate people across the world for new strains, then that $15 billion that we expect in 2021 could become a sense of recurring revenue year after year, if they're having to develop new and new strains of the vaccine.

Hill: What do you think is a reasonable expectation for investors to have if they're thinking about buying shares of Pfizer? Because I'm struck by the fact that this is a nearly $200 billion company. Yet, you look over the past five years, this really has not been an impressive stock in terms of rewarding shareholders.

Flippen: If investors are looking to buy Pfizer, they should be doing so because it has a really strong and steady dividend, recurring cash flow that they return to shareholders in the form of share buybacks and dividends. They should not be buying it because they expect for this to be the next growth company because of COVID vaccines. As I mentioned earlier, 75% of revenue is not expected to generate from coronavirus, which means that you have to look toward the existing drug pipeline as a good example of what type of growth you can expect in the future. That's important, because a lot of their sales are actually driven from drugs for rheumatoid arthritis, and one of their biggest drugs in the space is actually under investigation from the FDA for potentially serious side effects that were not known until late in 2020. So, that's the sort of thing that investors need to be digging deeper into with Pfizer, instead of just taking the coronavirus headline and expecting to get a growth company.

Hill: I know you are not at the point of life as an investor where you're necessarily looking to dividend paying stocks. You're much younger than I am, so you are much more focused on growth stocks. I will just say, in my experience, one of the great benefits of looking at a stock, buying shares of a dividend payer, and essentially allocating it in your portfolio and in your mind as 'you're a dividend payer, that's all I need you to do.' Just setting those expectations there, in my experience, any material growth you get out of those stocks is just wonderful. It's total icing on the cake. As long as they're paying the dividend, you're happy. So, it's good to have that context around Pfizer.

Let's move on to UPS, which is wrapping up a really great fiscal year. Fourth quarter revenue was nearly $25 billion. Shares of UPS up about 3% this morning. We'll get to their lack of guidance in a second, but this was just a monster year. You go back 12 months, and then the previous four or five years before that, UPS was like Pfizer. It was this big company sort of plugging along. The stock wasn't really moving in any significant way, and this caps off a great year.

Flippen: There was a clear catalyst that happened in 2020 to explain why it was such a great year for UPS. Beyond just coronavirus, over 20% of all U.S. retail sales in 2020 happened online, which means that a lot of these businesses that were doing in-person sales suddenly had to pivot digital. We're suddenly using UPS and many different delivery alternatives a lot more than they were previously. In fact, when we dig into their quarter and you try to break down where a lot of the growth they saw this past quarter came from, it's actually not from large customers, it's from these small to medium-sized businesses. They were the true catalyst. Over the past quarter, they saw nearly 29% increase in total growth versus just 4% for what UPS considers their larger customers. A lot of that growth over 2020 and the past quarter came from these small businesses that were forced to digitally pivot during the coronavirus pandemic. It led to what was a pretty great quarter in terms of adjusted earnings. We can talk about that more deeply, but UPS saw over $2.5 in earnings per share, versus just over $2 expected. They beat pretty significantly on both the top and the bottom lines.

Hill: Should expectations change for UPS in the minds of investors? Because again, this was a company that was plugging along. We talk all the time about Boeing and Airbus being a duopoly. UPS is one of the few big players in this industry. I'm curious if you think that it's fair for investors, not necessarily to look at UPS and think, "The 60% rise we saw in shares over the past 12 months, I'm expecting that every year from now on." I'm not suggesting that. I am asking though if it's fair to look at the rise in shipping, look at more and more retailers developing their online businesses, and saying, "Yeah, it's absolutely fair to expect more out of UPS."

Flippen: I'm actually not super excited about UPS as an investor. Part of that reason is because if you buy into the idea that the retail sales that digitally shifted this past year will continue to digitally shift in the future, in my opinion, there's a lot of retailers that are stronger in the value chain that you can buy into as opposed to buying UPS. The reason why I say that is because if you look at the metrics of UPS, it's really not that compelling in terms of scale. Over this past quarter, part of their growth was catalyzed by a nearly 8% increase in domestic shipping prices. That was the highest price growth they have seen in the past decade. Now, that would make some investors think to themselves, "Well, here is some pricing power." As these businesses have to shift, they really need to pay whatever they can to get their products delivered to their customers, and that has led to an 8% increase in prices over the past year. But at the same time, if you look at the margins of UPS, their cost per piece was also up 8%. They weren't actually being super creative in terms of their bottom line when picking up this new business. When you look at that adjusted earnings per share, when you add back in all of these very real expenses for UPS, things like billions of dollars of cost for their pension plan, these are very real costs for investors which has led to an over $3 billion loss on their bottom line not adjusted. For all those reasons, I think if you're buying into the digital shift, which I think most investors are at this point, there's probably better businesses you can be invested in as opposed to UPS.

Hill: Is the lack of guidance unsettling to you at all? Because I truly don't know how to think about this. When I first saw that, they weren't giving any guidance for the new fiscal year, I thought, "Boy, that seems a little troubling to me." I would think that maybe they would have the most insight and therefore they would be among the first companies to come out. But the more I think about it, maybe their guidance needs to be informed by the people whose packages they're shipping and so, maybe it's unfair to me to expect UPS to be on the front lines of large companies in the commerce space offering guidance.

Flippen: UPS is stuck between a rock and a hard place when it comes to offering guidance. Investors expect guidance, maybe not for a quarter out, but for a year out. It's good to know that management has some plan about what to expect in the future. We saw this huge backlog of packages happen in the fourth quarter of 2020. If management doesn't have any expectations for what the next year could look like, how can we expect them to effectively manage their business? At the same time, if they issue expectations, if they issue guidance that is just clearly incorrect for what we see happen in 2021, which is really challenging to look at 2021 and say, "Well, how much sales are going to go back in person?" We don't know when people are going to be vaccinated. We don't know how people will respond once they're vaccinated. How will these new variants respond with people on how they live their lives? There's a lot of uncertainty in what UPS can expect over the next year, so I can understand the fear that comes from investors with a business that's supposed to be stable and predictable like UPS. The fact that management won't even issue guidance for the upcoming fiscal year, while at the same time, management needs to be really thoughtful about the fact that if they issue guidance, especially if that guidance ends up being misleading to investors, the fallout from that could potentially be worse than not issuing guidance at all.

Hill: This is one of the many reasons I enjoy talking with you, because you are so smart, thoughtful, and measured. In your smart, thoughtful, measured way, you just issued arguably one of the most damning indictments of UPS [laughs] and their management at a time when some people at UPS would be forgiven for popping champagne, by capping off their fiscal year with their shares up +60%. Here you come in with, again, smart, thoughtful, measured, not ranting. It's just like, "No. No, it's really not that great and I'm really not interested."

Flippen: Well, there's a first time for everything. I think you might be the first person who has ever told me that I'm measured or thoughtful in my responses. Hey, I appreciate that, Chris.

Hill: It's great talking to you, Emily, thanks for visiting.

Flippen: 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. This show is mixed by Dan Boyd. I'm Chris Hill, thanks for listening and we'll see you tomorrow.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.