It's not that Starbucks' (SBUX 2.05%) third-quarter comps were higher than a year ago, it's that they were higher than two years ago. Alphabet (GOOGL 3.85%) (GOOG 3.25%) demonstrates that online advertising isn't dead. Shopify (SHOP 4.14%) continues to impress with its second-quarter results. In this episode of MarketFoolery, Tim Beyers analyzes those stories and provides his insights on the latest earnings reports from Apple (AAPL +0.06%) and Microsoft (MSFT 2.77%).
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This video was recorded on July 28, 2021.
Chris Hill: It's Wednesday, July 28th. Welcome to MarketFoolery. I'm Chris Hill, with me today, our man in Colorado, Tim Beyers. Thanks for being here.
Tim Beyers: Thanks, man. Good to see you, Chris.
Hill: Holy cow. This is one of those days where we could go for an hour.
Beyers: Yeah.
Hill: We're not going to go for an hour. We're going to talk Shopify, Alphabet, Starbucks, real quick. We're going to hit this in greater detail on Motley Fool Money this week, but give me your quick headline on the latest results from Apple, and the latest from Microsoft.
Beyers: Incredible. I feel like we have gone full shrug emoji on both of these stocks. Meaning that the numbers are incredible, but the stocks really aren't moving. Just for perspective, 36% revenue growth year over year for Apple. They have essentially $130 billion on their balance sheet that's in long-term savings, non-current assets. That doesn't even include the $70 billion that they can draw on at any time. Apple is just killing it all the way up and down, but apparently the stock is down because there is a chip shortage, and we will not have enough M1 Macs. For Microsoft, another amazing quarter all the way up, and down the business. Again, the cloud computing business, Azure, up 50%, year over year, 51%, 45%. If you go in constant currency, nobody gives Microsoft nearly enough credit for how much their cloud computing business is killing it. Both of these stocks are not moving very much at all. Apple in fact, I think Chris, is down a little bit as we're recording. It's just a little bit staggering. What we've come to expect of these businesses is extraordinary, because the numbers they are putting up under any other circumstances would be mind-blowing.
Hill: Well, let's move on to Starbucks then. Shares are down more than 3% this morning despite the fact that the third quarter for Starbucks had so many good things you can point to. Yes, the profit and revenue were higher than expected. I know the year-over-year same-store sales numbers are extraordinary because a year ago, pretty much the United States were shut down, but if you go back two years, same-store sales are up 10% compared to two years ago. That's pretty great.
Beyers: It's amazing. I would say, I'm risking hyperbole here Chris, but that is bananas. The 83%, comps up in the U.S., 73% up worldwide. Yes, we were dealing with empty stores last year, but if you just factor in that two-year number, forget about recovery. We're not even talking about recovery. We're now talking about sustained growth from where Starbucks was, and apparently Chris, we're the out of touch ones here because we like our hot coffee, and it's the iced coffee that's driving all this. Shocker; people like coffee. That is not very much of a surprise, but give the operations leads at Starbucks a lot of credit here, Chris, not only are they building stores strategically, and I think the thing that's easy to undersell is that during the pandemic, Starbucks was making investments. At a difficult time to make investments, they were making investments, and it looks like it's paying off.
Hill: To go back to the temperature of the beverages for a second, I knew that you and I we're out of step with a lot of people in that we drink hot coffee, and there are a lot of people who like cold beverages. I didn't realize it was to the tune of 74% of beverages sold were cold beverages. Kevin Johnson was on CNBC this morning, and he addressed an issue which has come up. We've got an email about it, people have been tweeting at me about it. As you might have seen, the price of coffee is spiking because of what's going on in Brazil. Kevin Johnson talked about their buying strategy, which is essentially Starbucks locks in, in the same way that there are airlines that will lock in jet fuel prices, they locked in their coffee prices over a year ago.
Beyers: Yeah.
Hill: To me, it's another reminder. Part of what's happening with them, stock being down today, there were a couple of analysts who came out with new notes on Starbucks pointing to some weakness in China, and this was not a perfect quarter and this was not perfect guidance. I understand the drop, particularly when you consider that the stock hit an all-time high last week. But listening to Johnson, it was just such a reminder of how smart he is in so many different ways, how experienced he is, and he and his team, they've seen this all before.
Beyers: Right.
Hill: Particularly now that, as you pointed out, they've been investing through the pandemic. If you don't own shares of this, and you want to get it 3% cheaper than it was yesterday. Today's your day.
Beyers: Right. I think the point you make is a really excellent one here that operations do matter. You're right. Sustained weakness in China is a possibility. There are a lot of weird things going on in China, and not just in tech, it's just across the board. There's a lot of regulatory change, there's a lot of unknowns, and that is fair because Starbucks has made huge investments in China. Having said that, you do not get to 10% two-year comp growth for lack of operational expertise. Think of the things that go into a comp raise, it's not just that you have more stores. It is that you're making the most of every square foot in the stores that you've got, and you're figuring out ways to reach your customer. There's a principle about using every dollar of investment wisely, and I think Johnson just gets it. Up and down the board, I think this is a guy that knows how to invest capital well, and more than anything else that is out of your control, that is in management's control, the thing that will drive your return is their ability to put a dollar to work, and earn a great return on that dollar.
Hill: Alphabet's second-quarter profits and revenue came in higher than expected. YouTube is getting a lot of attention this quarter, but holy cow, the online advertising. For anyone who thought this was a long-term problem, this is one of those quarters that demonstrates what goodness can look like if you're a Google shareholder.
Beyers: Yeah, I'll admit it here, Chris. I fell for the banana and the tailpipe here. I thought that search advertising was starting to decline, and here boy was I wrong. Search advertising as part of the Google business was up 68% overall, Google ads was up 69% year-over-year, YouTube, I think up 83%. It's just extraordinary. Once people got back to the business of, yes, I want to shop for stuff, search advertising came roaring back in a massive way. What's interesting too is that it's not really a side business, it had been the business that we were expecting Alphabet to help grow them out of the advertising business, Google Cloud, their cloud computing business. It did well, it was up 54% year over year, but it was a laggard. It was the advertising business that really lifted Google this past quarter. Apple has an extraordinary amount of capital. Google has got just as much, they've got $135 billion sitting on the books and management has said, "You know what? Take $50 billion of that, put it to work, and start buying back shares, both A and C shares." I think we're going to see that over the next, let's say, four quarters here, Chris. Management is going to start getting aggressive, buying back shares to look for that EPS number in future quarters. It's going to get even fatter than it is today.
Hill: It's interesting to see this development because there was a point in time, you can go back five or 10 years, where if they announced this type of buyback program, there would be passionate shareholders pounding the table saying, "No, you've got to invest it, you got to look for acquisitions," that sort of thing. This seems like a smart strategy in part because look, it's not all the cash, they can afford this. Even if you don't think Alphabet is going to get broken up, the regulatory threat is real, make no mistake about it. Even if it ends up being a wash and the business is the same a decade from now as it is today, it is still something that executives at Alphabet have to keep in mind, they have to spend time on it, and so this seems like a very prudent use of $50 billion.
Beyers: Right. You make a really good point there. If Alphabet, no matter what size it is makes an acquisition right now, the government will be taking an extra close look. It may be a perfectly sensible acquisition and the government still may say no. Just because of the regulatory environment we're in, so where else are you going to put that capital to work? One alternative is to pay a dividend, they've certainly got the capital to do it, they just have shown no appetite for that. Of the things that they could do, this makes the most sense other than piling just a huge amount of money into new data centers and things of that nature, which frankly, I still think they're going to do.
Hill: Shopify's second quarter is more evidence for anyone who needed it that online shopping has just exploded over the past year because Shopify is in the business of making online shopping possible. There are always a bunch of numbers with Shopify. What stood out to you as particularly noteworthy?
Beyers: Seventy percent growth in subscription solutions here, Chris. What's interesting to me about this is this isn't the part of the Shopify business that usually leads growth, usually, it's Merchant Solutions. The Merchant Solutions piece of the business is, Shopify gets a little juice from the amount of commerce that's coming onto its platform, and there is a lot of it. My goodness, the gross merchandise volume was $42.2 billion, that's for the quarter; that's crazy that that's just for the quarter. That was up 40% year over year. Forty-eight percent of that is payments volume. Shopify is doing a ton of business and overall revenue was up 57%, I should say. But the fact that for the second consecutive quarter subscriptions were up over 70% means primarily that you've got a lot of businesses that say, "You know what? They are right, we need a Shopify store," and they signed up for the subscription. It's not the major piece of Shopify's revenue, it's like a third. But the fact that it's driving subscriptions and the world is coming to the conclusion that, "Yes, I need a Shopify store, I'm a brand and I need a Shopify store." That says something, that is probably a leading indicator that GMV is going a lot higher over the next couple of years.
Hill: Because we're going back and forth a little bit this morning, when you say that it's unusual to see this as the growth driver. There are times when a business will come out with their quarterly results and some small division is the reason they put up good numbers. You can look at that and say, "No, that's not that good." It's nice at the moment for this one report but if this continues, this is going to be a problem for this business. Is this a problem for Shopify that this is the growth driver two quarters in a row?
Beyers: No, I think it's a leading indicator of massive growth down the line. It's a lagging indicator. You get a store on the Shopify platform then that store, presuming it succeeds, it starts generating more GMV, it starts generating more payments which leads to more Merchant Solutions. The more subscriptions there are, the more it can feed that other bigger piece of the business, the Merchant Solutions piece of the business. So I think it's great, I think it's surprising, but I think it's great. The Shopify thesis has been, "Look, we got a lot of stores here and they're doing a lot more business and because they are doing a lot more business, our revenue is going to compound." Not, "We're going to get a lot more people onto our platform." But it turns out, both things are happening, and the fact that both things are happening means, man, again, it's not my way to copy from my boss, Ron Gross here, but this one is, it is firing on all cylinders, it really is.
Hill: When you look at the stock, it's $1,500 a share, it's basically flat today. Off of a quarter like this, do you look at it is just like, look, this is a richly valued stock and they would've needed something even better for the stock to be moving higher today?
Beyers: Yes. It's another one of those shrug emoji stocks where we are like, "Yes, we're used to seeing this." It doesn't move the needle very much, it just proves the inherent greatness of the business. This is one, I've said this before, Chris, if you don't own shares of this and you understand that it's richly valued, that's totally fine. If you're interested in it, buy one share. If you can do that, if you're here in the United States, if you're overseas and you don't get the benefit of free trades, just make a small amount, just a small trade in the stock, and then build over time because this is one that is not going to get cheaper anytime soon, but its greatness is going to compound.
Hill: To go back to Starbucks, and again, I'm not knocking the Wall Street analysts who come out with these notes, that's their job and they're smart and I'm not questioning their intelligence. I do, however, like to remind myself every now and then that their time frame is different than the time frame we talk about here at The Motley Fool because Starbucks, the picture in China is not perfect and there's always going to be challenges in running and growing a business that big. But Johnson's experienced, he's got a smart team around him. He knows what he's doing. It's like, if your time frame is the next three months, yeah, I get why you're neutral on Starbucks. If you're thinking about it for five and 10 years, and that's how I look at Shopify, I don't own shares, it's on my watch list and part of me is like, "I should probably just buy a couple of shares just to stick it away and not think about it for the next decade because I bet a decade from now, which is my time frame, it's going to be higher."
Beyers: Right. I look at it the same. The Starbucks argument is, "Do we believe people are still drinking coffee and drinking it in greater volume over the next 10 years?" Yeah, I think so. With Shopify, same thing. Do we think a greater portion of business will be done globally and online? Do we think that's a reasonable assumption? I think the answer to that is, yeah. The portion of business that can be done online or done in a hybrid fashion, where you order online and pick up or order online and get it delivered. Yeah, that's going to happen and it's not going to all be centered around one vendor called Amazon, it's going to be a lot of businesses. If you were to put Shopify and Amazon together, and you thought of Shopify as one ecosystem and Amazon as the other, how much of the world's business are you talking about? It's a lot, but it's also still less than 50%; that is extraordinary. I think there's a lot of room for growth here, Chris, no doubt, no doubt in my mind. But yeah, there's also no doubt it's a very richly priced stock, so one or two shares and tuck it away, I think it's a good strategy.
Hill: Tim Beyers, always great talking to you. Thanks for being here.
Beyers: Thanks, Chris.
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 Austin Morgan. I'm Chris Hill, thanks for listening. We'll see you tomorrow.
