Microsoft (MSFT -0.78%) stock hits an all-time high. Robinhood's (HOOD -1.08%) third-quarter revenue is much lower than expected and shares fall close to their IPO price. Motley Fool analyst Bill Mann analyzes these stories, discusses Twitter's (TWTR) ongoing struggles as a business, and shares why Almond Joy needs to be rebranded.
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This video was recorded on Oct. 27, 2021.
Chris Hill: It's Wednesday, October 27th. Welcome to Market Foolery. I'm Chris Hill. With me today, Bill Mann. Good to see you.
Bill Mann: Hey Chris, how are you?
Chris Hill: I'm doing well. We've got the latest from Twitter, we've got the latest from Robinhood. We're going to start though with Big Tech getting bigger. Microsoft's first quarter profits were higher than expected. Revenue grew 22 percent, which is the fastest growth since 2018. Shares of Microsoft up five percent and hitting a new all-time high. Five percent is a lot.
Bill Mann: Five percent is a lot for any company, but we were doing the math, that's $100 billion. It's $100 billion just conjured out of thin air. Microsoft, it's crazy how good this company is operating right now. That is not just massive gains this quarter, that's 17 straight quarters of double digit revenue growth, and it's been accelerating. It's been getting faster. They are growing at a rate that the tiniest of start-ups would kill for. It is a $45 billion revenue per quarter company right now and growing really quickly. Beat every estimate, Azure is going great, LinkedIn is going great. This company is just firing.
Chris Hill: I know we talked about this on the show recently. There was the news about LinkedIn being shut down in China, or I should say Microsoft saying, "We're shutting down our LinkedIn operations. We don't need to rehash all of the reasons why." But to me, the headline was less that they were doing that and more that it's something that [inaudible 00:01:58] came out and said, "Yeah, LinkedIn is contributing more than $10 billion in revenue every year," which I know it was a surprise to me. I think that's a surprise to others as well.
Bill Mann: Yeah. When Microsoft bought LinkedIn, it was one of those transactions where I think most of us said, "I'm not sure that I really see how this fits into their suite," but once again, I don't think we were right about being skeptical about it. The results would suggest that they knew what they were talking about when they brought LinkedIn into the fold.
Chris Hill: Agree 100 percent. I think the most generous of expectations at the time was, well, you've got all the money in the world and you can buy that thing if you want to.
Bill Mann: [laughs] That's right.
Chris Hill: If it works out, it will take years. My memory of the time is like, "Yeah, I suppose that can work out." It's going to take years. I don't think anyone expected it to be contributing in this way on a relatively soon basis.
Bill Mann: In fact, Chris, there was a theory that was baded about, perhaps by me but by others as well, that LinkedIn was being acquired, that Microsoft was taking it out so that they didn't have to compete with it in some way. One of those things that you hear, well, we're the deep pockets, this is something that is perhaps a threat to us, let's just buy it, but that's not what's happened. That's absolutely not what's happened, and the incredible thing is that this entire time, Microsoft is paying a substantial dividend, buying back tons of shares. It's almost like they can't get rid of the capital that they are creating fast enough. This is an amazing business.
Chris Hill: That was going to be my last question before we move on, is where do you think they go from here in terms of acquisitions? Because we and others were raising our eyebrows at the prospect of what did they pay for LinkedIn? Twenty six billion, something like that. Do you think there are large acquisitions in Microsoft's future or do you think that their capital allocation strategy looks more like what we've seen over the last couple of years?
Bill Mann: They absolutely have had a capital allocation strategy of build and buy. I think that we will see that continuing particularly in the areas of artificial intelligence and as bolt-ons as they really try and get into the metaverse through the Xbox platform and other places. I think by large, Microsoft is more comfortable building, but they'll buy in a heartbeat if there are targets out there. The thing is, and maybe gone unmentioned in your question, is that as a $2.3 trillion company, it has to be a big company for them to buy to really move the needle.
Chris Hill: If you are one of those investors who feels bad about missing out on Robinhood's IPO in July, [laughs] good news.
Bill Mann: I got some good news.
Chris Hill: Shares of Robinhood are down 11 percent and basically trading where they were on day 1. Third quarter revenue came in much lower than expected because crypto trading volume was much lower than expected.
Bill Mann: Down 78 percent. The revenues were down 78 percent quarter to quarter, which is a staggering loss. These are highly profitable revenues for Robinhood. Robinhood, to me as a company that is a bit of a mess, it is possible that we'll work out, and we have described it in the past as being a mutant company because it really did change. It changed the game for brokers everywhere. A lot of these brokers were not going to move to free trading until Robinhood came along and forced the issue. It's absolutely a credible company, but they have massive regulatory risks facing them. I don't even know how you would describe it. In clothing, they call it fashion risk. You would say they have meme risk. They have meme risk at Robinhood. Any type of risk-off scenario in Robinhood shares I think are in big trouble.
Chris Hill: One of the things the company said was barring any change in the market environment, the headwinds that they are seeing right now are going to continue the rest of the year. I'm not trying to pick on them on a day when their stock is dropping more than 10 percent.
Bill Mann: No, but go ahead. [laughs]
Chris Hill: Here's the question though, is it the market environment or is it just Robinhood's environment? The market environment on a macro level seems really strong.
Bill Mann: Well, but keep in mind where Robinhood was making most of its money. They were making money in crypto trading and they were making money in options trading. Those parts of the market are not behaving in the same way. Obviously, Bitcoin was near an all-time high. We've had a good crypto environment, but the trading volumes have not been there in the same way. There was not the same level of a meme coin like Dogecoin in this quarter, and it can't be overstated how much Robinhood's revenues were depending on that in the last quarter. I guess you could call that market environment. The other thing that's facing Robinhood right now is they just came public and a bunch of shares are getting ready to unlock, which means that the insiders are going to be able to sell, up to 100 million shares are about to come onto the market. Yes, I don't think it's fair just to pick on Robinhood, but I don't think that this is a really great time to be brave with Robinhood shares.
Chris Hill: Twitter says that Apple's recent privacy changes to their operating system had less of an impact than Twitter was expecting. That's good to hear because shares of Twitter are down nine percent today after their third-quarter report, so I would hate to see how much more damage would be happening to this stock if Apple really had impacted them.
Bill Mann: At least partially that has to do with the fact that Twitter's ad AI is terrible. They're brought being it back into the same way by virtue of the fact that they haven't figured out how to monetize it in the same way. It's like some of these people who lose a huge amount of money, like, well, at least they had a huge amount of money to lose. Twitter was not really succeeding in this realm to start with. It's a little bit disingenuous for them to say, "Well, we're not being impacted by it."
Chris Hill: It's really hard to believe that Jack Dorsey is running Twitter and running Square. When you look at the performance in those two stocks, it is bizarre to look at one stock that is up basically ten times what the other one is in a five-year period, and the fact that the same person is running both.
Bill Mann: The funny thing, Chris, is if you we're to ask the average person what company does Jack Dorsey run? They're saying Twitter. Twitter is the one that has people's attention. The problem with me with Twitter right now is they had $165 million in stock-based compensation in this last quarter. Negative free cash flow. Essentially, Twitter is being run as an employee stock option plan. This is not a company that's firing, not even on all syllables, all cylinders, it's not firing on anything. The funny thing about Jack Dorsey being in charge, this is what I would want to see from Twitter if Jack Dorsey is being true to his word. I don't know if you saw last week or if you all have talked about it, but he came out and said hyperinflation is here.
Chris Hill: Yes.
Bill Mann: Hyperinflation is here, it was a tweet that he put out and everyone paid attention to it. If hyperinflation was here, here's what I would want to see from Twitter. I would want Twitter to come out and say, we are raising as much debt as we possibly can. Because if hyperinflation is here and rates are still low, would you not want to pay back that debt years down the road in deeply devalued dollars? The actions do not match the words. I want to love Twitter, and as a platform, it's the most useful one that I have with the exception of Market Foolery. But beyond that, Twitter is the best. They haven't figured out how to be a company rather than a utility yet. It's amazing to me.
Chris Hill: Well, and I'm glad you made the point about if you ask, you take 100 people and you say what company does Jack Dorsey run? The majority are going to say Twitter. Because he doesn't get hauled in front of Congress to answer questions about Square. It's one of those things do you think he has any friends who just say to him, "Hey, do you want to just give up the Twitter corner office and just focus on Square?" Because it seems like the hassle factor for running Twitter is a hell of a lot higher than the hassle factor of running Square.
Bill Mann: Square's a much more complex business, and it's worth 15 times as much. Why would you split your time 50-50 between the two of them? Get somebody, take on some debt, put your money where your mouth is.
Chris Hill: No, it's a great point because it got a lot of attention in the financial media. Plenty of people including, but not limited to Cathie Wood took to Twitter and say, "Let me take the other side of what you're saying." It was entertaining to see. But to your point, if you actually believe that there are actions you can take as a business leader. Before we wrap up, what are we? Seventy-two hours from Halloween? No, I'm not doing the math right. Ninety-six hours, somewhere less than 100 hours from Halloween. What is overrated underrated Halloween candy?
Bill Mann: I think the most underrated Halloween candy, first of all, people be heroes, don't give out that orange and brown wrapped candy. Give kids the good stuff. But the good stuff that I think is most underrated has got to be Butterfingers. We don't talk about Butterfingers enough. Butterfingers were the candy that my mom would steal from us. I almost don't know what they taste like because I would show up in the morning like as a kid you never feel richer than that moment when you open up the bag and pour all the candy on the floor, like that is your moment and it's all downhill from there.
Chris Hill: Real quick, before we get to your overrated candy, I was thinking about this the other day in the same way that our CEO, Tom Gardner will frequently make the point about the stock market. Don't think of it as the stock market, think of it as a market of stocks, like if you were going to an all-time market and you're trading. For a lot of children, unwittingly, it is their first exposure to the concept of value with commodities. Because if you are a fan of a candy that is not beloved by the majority of children, the day after Halloween is your day to shine because if you're someone like me who actually likes Whoppers, and I get that Whoppers are not the most popular candy.
Bill Mann: No. They are a crime against humanity, come on. You can corner that market.
Chris Hill: I can go in there and just be like, OK, I've got this one who likes Snickers. That's the Johnson & Johnson dependable value blue-chipper of the candy world. I'll give you one Snickers I'm going to need five Whoppers in exchange for that, and people would be like, absolutely, I'll give you 10.
Bill Mann: Oh, yeah. I'll throw in these Good & Plentys.
Chris Hill: I didn't say I wanted those.
Bill Mann: Somebody does. Just not me. Don't give those away either.
Chris Hill: Somebody does. Overrated?
Bill Mann: You're going to laugh, but I actually think it's Almond Joy. Because there's no joy in Almond Joy. Almond tolerate, Almond taking up room in my bag. It's so poorly named, Almond joyless.
Chris Hill: If you think about candies and like where they're rating, and some of the listeners have written in to make this point and it's a good point which is like, hey, not everything is rated the same like Good & Plenty. It's hard to make the case that Good & Plenty is an overrated candy because if it was a stock, it would not be trading at some sky high-valuation.
Bill Mann: That's right. Sometimes penny stocks don't work out, Chris.
Chris Hill: But to your point, Almond Joy has gotten a little bit of a bump in valuation because of almonds. Whereas I think when we were kids, nobody was really making a big pitch for Almond Joy, but I feel like it's gotten more attention than maybe it should.
Bill Mann: Almond sadness that's what they are. Hey, by the way, do you know that Necco Wafers are back?
Chris Hill: Are they really? This came up in conversation in my house last night.
Bill Mann: Spangler, it was the New England confectionery company closed in 2018, they're back including probably those weird chocolate flavored ones.
Chris Hill: I'm going to have to do a little deep dive into this story to find out the why. For anyone who's ever had a Necco Wafer that's one of those where you go, "Oh, that makes sense that they're no longer in business."
Bill Mann: That's right. I don't want to see anyone go out of business but I get it.
Chris Hill: We're not missing them. That's my point. It's like, no, we're not wishing them bankruptcy, we're not wishing that people lose their jobs, but we're not missing the product. It's not like when Twinkies went bankrupt, or Hostess went bankrupt, and then it was like collectively the business media was like someone's going to step-up and save them. This is an American icon. We're not saying it's good for you but come on someone's got to step up here.
Bill Mann: For better for worse Necco Wafers are American icon too and they're back. Don't give them out.
Chris Hill: Don't give them out. Bill Mann, great talking to you. Thanks for being here.
Bill Mann: Take care, Chris.
Chris Hill: As always, people on the program may have interest in the stocks they talk about in the Motley Fool may have formal recommendations for or against, so don't buy yourself stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. See you tomorrow.