In this week's Industry Focus: Financials, we discuss recent earnings reports. We start with Square (SQ +3.25%), which declined after earnings despite strong results, and then pivot to retail REITs Simon Property Group (SPG +0.07%) and Tanger Factory Outlet Centers (SKT 0.11%). Then, we give a quick take on Berkshire Hathaway's (BRK.A +0.10%)(BRK.B +0.15%) latest results before ending with Zillow's (Z +1.55%)(ZG +1.73%) disappointing news.
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This video was recorded on Nov. 8, 2021.
Jason Moser: Monday, November 8th, I'm your host, Jason Moser, and on today's Financial Show, we're digging into the latest earnings reports for Square, Simon Property Group, Tanger Factory Outlet Centers, we'll even give Berkshire Hathaway a quick flyby, and we've got some Zillow news to get to as well. As always, joining me this week, it's my guy. He wasn't here last week, folks. He's back this week. It's Mr. Matt Frankel, Certified Financial Planner. Matt, you're on location this week. Tell everybody where you are.
Matt Frankel: I am in Las Vegas and normally I would try to find a sub, but I was out last week and I can't leave Jason for two weeks in a row. I am in Las Vegas. There's a couple of real estate focus conventions going on here this week. I get to talk to you, the CEO of eXp Realty, one of the more interesting companies in the real estate space. I'm really excited for that today. I'm on location here in my Las Vegas hotel room. Glad my Internet is holding on. [laughs] How are you doing, Jason?
Jason Moser: Doing all right. Keeping busy here with work and family. Everything was a nice weekend here in Northern Virginia. Just getting back to the grind here on a Monday as everyone else is. Matt, last week, Square reported their most recent quarterly results. This is a company clearly we cover pretty frequently on the show here. It's a company where a lot of our listeners own shares. You and I both own shares still in the company. It seemed like it was a good enough quarter. Now, you look at the stock, the stock was down almost seven percent for the week. Now, obviously, we don't invest on those types of short time horizons, but it's worth noting at least the sentiment for what seems like a relatively decent quarter. The market weren't really buying the stock hand over fist. Let's go through some of your takeaways here for the quarter because because all in all, it does seem like the business continues to perform well, but maybe there were some signs of some slowing growth that have some investors concerned. What do you think?
Matt Frankel: Well, speaking of the slowing growth, the big headline is that Bitcoin revenue slowed down considerably from the second quarter.
Jason Moser: Yeah.
Matt Frankel: I've said before that Square's fascination with Bitcoin is probably my least favorite part of the company as an investor. Not like an anti Bitcoin thing, it's going to be very volatile. It's not going to be predictable revenue. It's like how we were talking with trading revenue with investment banks, it's just really tough to predict from one quarter to the next. Bitcoin revenue was down significantly. They don't make a ton of money off that. But when you're doing billions of dollars in Bitcoin volume in a quarter, it's significant profit there. But elsewhere in the business, it's somewhat pretty strong. Square's gross profit was up 39 percent year-over-year, one of the rare quarters where the Seller ecosystem actually outpaced the Cash App. Because it was compared to the third quarter of last year when things were still pretty shutdown. Cash App revenue looking great, they rolled out a few new products. Square Capital, the business lending platform, remember they got their banking charter recently. They said that's approaching pre-pandemic levels, which during the pandemic, everybody was borrowing through PPP loans and things like that. They didn't have a reason to use Square Capital as much and now we're seeing that trickle back. They launched a few different initiatives that I'm excited to see where they go. They expanded to France during the quarter. That's interesting. They set the second biggest card payment market in Europe, pretty promising. They opened up Cash App to 13-17 year-olds with parent permission.
Jason Moser: With all that I wanted to get your take on that because as you and I, both are parents. Your kids are a lot younger than mine.
Matt Frankel: Yours are in that age group, aren't they?
Jason Moser: They are. I wish that Square had done this two years ago. That was one of the bigger challenges when we were getting our girls into a banking relationship. There weren't really very many compelling options because Venmo and Cash App essentially you have to be of age to do it. Consequently, what we did is we initially got them started through Greenlight, which is that team banking consortium. I think JPMorgan owns a good chunk of that. Ultimately, they have now transitioned into Capital One. As a great checking account for students. You can sign up for it online. Great mobile app. You get your card and no issues there. Now, they're working with Capital One and their direct deposits go there. I have a hard time seeing them. You know how those banking relationships are Matt, they're sticky. Once you get in there, you start moving forward with that.
Matt Frankel: Sure. I think this could be a brilliant move, in like 10 years. Here's why, the teenagers of today don't want Wells Fargo, they don't want Bank of America, they want Venmo and Cash App because it's cool.
Jason Moser: Exactly.
Matt Frankel: If you have to be 18 to sign up for Venmo and only 13 with a parent permission to sign-up for Cash App, you're landing these customers, say 8-10 years before they get into their real earning years. You're building this relationship with these customers. Like you said, banking relationships can be very sticky. People don't change banks often. This could give them an edge with that demographic as they get into their earning years in the coming years. I really I'm a big fan of that. I have a list of stuff Square did this quarter, that's among my favorites. One of the less favorites is the Afterpay acquisition that's coming up.
Jason Moser: We talked about that before and I agree with you. I think Cash App opening itself up to that 13 year old and above demo, I think it's a great move. I just wish they did it sooner. I'd imagine we'll see Venmo doing something like that and shorter as well. But yeah, in regard to the Afterpay, it feels like that acquisition, you and I probably I think are coming at it from basically the same direction there. It's not Afterpay, but it's the price that Square paid for it.
Matt Frankel: Yeah. I don't have a problem with them acquiring Afterpay, I have a problem with them paying $29 billion in stock to do it.
Jason Moser: Yeah.
Matt Frankel: Especially I think Square's stock price a little bit down since the announcement so they're diluting shareholders. I'm not a big fan of that price to pay. I think PayPal did it better in that case. They're doing bolt-on acquisitions to build out their buy now, pay later.
Jason Moser: Yeah.
Matt Frankel: Not just buying one that's already up and running. Because I don't think Square needs it. I don't think they need it, $29 billion worth.
Jason Moser: Probably not.
Matt Frankel: That's roughly 1/5 of their market cap. Is it worth 20 percent of what Square's already built to add a buy now, pay later service? I have a tough time making that argument.
Jason Moser: Yeah. I'm with you.
Matt Frankel: But overall, the numbers look good this quarter. I'm still encouraged, I am still a Square shareholder. I don't plan on selling any shares. They're still growing their payment volume. Their core business, which a lot of people think of as boring, actually grew 37 percent year-over-year. They're processing on an annualized basis about $160 billion of payments. It seems like just a few months ago that they cracked that 100 billion barrier for the first time.
Jason Moser: Yeah. I'm glad you mentioned that. Even at, what you said, $125 billion or something like that, obviously, it sounds like a lot. Then you look at something like a PayPal. I was just looking through that call from last quarter with PayPal. Because PayPal earnings since then only they dropped the night after the market closes. But PayPal now, they're going to push through $1.25 trillion through their networks this year. That just gives you an idea, I think, Square could deal with it.
Matt Frankel: Roughly, 10 times the size of Square in terms of payment volume. Still a lot of room to grow, this is not a mature company by any means.
Jason Moser: Yes. Well, I agree there. I think it's a good take there. I remain a happy shareholder of this pullback in the stock here. It's not just Square. We've seen PayPal [inaudible 02:41:36] could open up some interesting opportunities for patient investors, but we shall see. Matt, you're a big real estate guy. Everybody knows that. I know it, our listeners know it, you even know it, man. Simon Property Group and Tanger Factory Outlet Centers both reported earnings last week. I tell you, we're talking about how Square got a lukewarm reception from the market. These two, I'll tell you, the market was picking up, but they were putting down. Tanger shares up 27 percent last week, Simon up 16 percent for the week. Let's start with Tanger as we reopen, I think these are two companies that you really like. Talk a little bit about Tanger and Simon together, however you want to break it down, but what's stood out to you in these quarters? Why is the market so enthusiastic?
Matt Frankel: You remember the retail isn't dead basket we did about a year ago?
Jason Moser: I do.
Matt Frankel: These were two companies that were in it. I loaded up on these companies during the pandemic. Tanger was trading [laughs] about a fourth of what it is now. Everyone thought these companies we're going to go bankrupt. If only someone had been saying they were not only going to survive but thrive, this is going to accelerate their adaptation to the new digital economy in a good way. I was grading year-to-year when I was reading these earnings reports, I got to tell you. [laughs]
Jason Moser: Someone was out there beating the drum for these things and I can't remember his name.
Matt Frankel: I'm going to do an update on the retailers dead basket because the numbers, they might give your a war on cash basket a run for their money right now. Both of these were fantastic. Tanger was the winner, in my opinion. Simon's already had a really strong business, they didn't even completely eliminate their dividend during the pandemic like all the other companies including Tanger did.
Jason Moser: Yeah.
Matt Frankel: The big story, I'll start with Simon because that'll be a quick one. Occupancy is the big story with both of these. Simon's occupancy went from 91.8 percent in the second quarter, it increased by a full percentage point to 92.8 percent now. Even before the pandemic, retailers were losing tenants. The retail bankruptcy started way before COVID ever hit.
Jason Moser: Oh, yeah.
Matt Frankel: For a retail REIT to be trending in that other direction is something investors have been waiting for, for five years now. Net operating income from Simon's domestic properties is up 25 percent year-over-year. They're really getting past the pandemic even after acquiring one of their rivals, Taubman Centers earlier this year. Simon's has eight billion dollars of liquidity, including over a billion dollars of cash left to continue to innovate its properties. I'm very optimistic about they've raised their dividend in the past few quarters in a row. Their dividend is now 27 percent higher than it was this time last year. They did a 10 percent sequential dividend increase after raising it in the third quarter already. They raised their full-year guidance. Their numbers were just excellent. Tanger was another story altogether, they boosted their occupancy even better than Simon. Tanger's properties are 94.3 percent full. That's 150-basis-points greater than Simon, which is the best mall REIT in the world. Beating them in occupancy rent spreads were up 240 basis points, meaning when they're releasing these properties, they're getting more money now. Their tenants said here's the key statistic for Tanger's earnings report. Tanger's tenant sales are at an all-time high on a square footage basis. Thirteen percent higher than pre-pandemic levels for a retail REIT. Everyone's said no one is going to go to outlets anymore. You can't social distance at outlet stores and they're all crowded and no one wants to do that. Yes, they do.
Jason Moser: Well, we've talked about this a lot. I mean, you see on the headlines with companies that are keeping their offices closed, but you can look around, there are more that are opening up and you look all, I mean, anywhere you look with these NFL games, were ready to get out and do stuff and travel. We're seeing it. I mean, I'm sure that you are seeing it there in Vegas. I mean, people are letting their guard down and starting to go back out and that's certainly is reflecting in the traffic a lot of these stores are getting as well.
Matt Frankel: I mean, I think that per square foot sales number is at a record. That has big implications for the future growth of the outlet industry. Tanger didn't want to open any more properties when occupancy was falling before the pandemic. Now that occupancy is rising and it's tenants are happy, it has existing relationships with these tenants. So it can go to the gap, which is its biggest tenant and say your sales are killing it and all these properties, you have stores at now, we're about to open a new one in Nashville, which is where they're planning the next one. Are you in? All their tenants are going to say yes, it's a great catalyst for growth in the industry, which the outlet industry is a very small part of retails though. I'm very excited for Tanger. It's about quadrupled since the pandemic lows and I don't plan on selling any of it.
Jason Moser: Well, that's good to hear on both fronts there. Now, over the weekend, Matt, Berkshire Hathaway, as they do, released their earnings report and that's one that always just flies right under the radar because it's off hours, so to speak. There's not a whole heck of a lot of really going on with Berkshire. I mean, not a whole lot has changed, but you took a look at this report real quick. What are one or two things you feel like investors need to know from this quarter for Berkshire Hathaway?
Matt Frankel: Berkshire always releases its earnings on a Saturday, which is by design, they wanted to give the market time to digest it before it reacts. Berkshire's businesses are boring, which is why nobody really pays that much attention to it. They want to know what Berkshire did in it's stock portfolio, which is a different report. Three key takeaways, operating earnings were up 18 percent for Berkshire operating businesses, year-over-year, some nice recovery from the pandemic. Berkshire's cash stockpile is at an all-time high now surprise, surprise. It seems like we said that every quarter.
Jason Moser: Yeah. Buffett before is really talked about how cash just isn't where you want to be. Now you see where his cash balances is just an interesting dissonant there.
Matt Frankel: Don't get me wrong. I think having $149 billion of cash is a negative in times of inflation, like we're starting to see right now. That's losing five percent of its purchasing power a year right now. I wish he would do something with it. That's my biggest complaint about Berkshire right now. But he is buying back Berkshire's own shares at the highest rates so far, Berkshire spent 7.6 billion on buybacks in the quarter, a little over 20 billion so far this year. But the third quarter buyback pace was a little greater than the first and second, and the cash stockpile still went up so that tells you how much money Berkshire's businesses really generate. But I'm happy to see them spending money on buybacks. I hope they continue to do that, especially if Buffett continues to think, I don't necessarily disagree that acquisitions are expensive right now. I hope he continues to pull the trigger on some buybacks.
Jason Moser: Yeah. Well, I mean, he's buying stock he just its his own. Exactly. You can't fault him for that. I mean, I feel like if anyone knows that business, it's Warren and Charlie, so it seems like much more of the same year and Berkshire shareholders should be, I would think at least encouraged, feeling good about the big picture with this business. Matt, let's wrap up this week with a conversation regarding something that happened early last week and it's something that I think took a lot of us by surprise. Last week, Zillow announced that it is getting out of the iBuying business. Now, if this seemed a bit out of nowhere, it kind of was even given the recent headline that they were pressing pause on the initiatives for the remainder of 2021. Chris Hill and I had talked about this on Market Foolery one day and it felt like, well, you understand they want to just get their feet set underneath and then make sure they understand what they're doing and the sign was if they kept that pause button held down for a considerable part of 2022.
If they kept on stringing that alone, then you start wondering, do they really know what they're doing and then lo and behold, they decided they're getting out of iBuying altogether. It sounded like they're getting out of it basically because it's just not working out, how they thought it would. But I want to read what you tweeted and let's go from there [laughs] because you have some strong feelings about this. Honestly, I mean, I understand where you're coming from, but I'm going to read your tweet here. You said "The recent news from Zillow is one thing I've ever been in a company I invested in, terrible execution, poor shareholder communications, and a high level of incompetence, planning to sell my shares very soon and walk away." I don't think you're the only one that feels this way, Matt, but let's dig into this a little bit. I mean, this happened so quickly. Particularly Rich Barton has been thinking about it for a while and now it sounds like it's gone.
Matt Frankel: I'm apparently not the only one who thinks this way because that was my most liked tweet of 2021 so far. [laughs] Apparently, I'm not the only one who feels that way. People don't really see my salty side very often.
Jason Moser: I love it.
Matt Frankel: It's an old Buffett quote that I tweeted right after that. "Lose money and I will be forgiving, if you lose reputation and I will be ruthless." I feel like they lost reputation here with me and that's really the problem. I have a bunch of numbers to go through, but let me tell you why I'm disappointed. It not just that they're getting out of iBuying. If Zillow is getting out of iBuying, if it wasn't working out, if they weren't doing a good job, I'm fine pulling the plug on a money losing business before things get really bad. That's fine. I even agree with what they said. The business there, it's not working out economically the way they thought it would. They said it's alienating a lot of their customers who are disappointed in the offers they're getting, things to that effect. Fine, whatever. I don't like the misleading communication, number one. You mentioned that they just said they were taking a pause on iBuying like a week before this came out. That means one of two things. Either this was a knee-jerk reaction to one bad quarter or they already had the decision made when that news came out. One of those has to be true.
Jason Moser: It feels to me like the latter. It really does feel like they had that decision made. I can't believe they went from hitting pause [inaudible 02:52:27] altogether in the stretch of like a week. It just doesn't add up.
Matt Frankel: Right. It's either incompetence of management or misleading communications, it's one or the other. On that note, you have to take a step back and decide what Zillow's core businesses is worth because they still have their premier agent business, which is profitable. But my problem with that, Zillow gets 227 million unique viewers a month. They had 2.8 billion visits to their site in the third quarter. They have the biggest collection of real estate data in the world in terms of residential real estate. For them to take that, translate it to an iBuying business and have worse economics than their rivals like Opendoor and Offerpad and Redfin, who have much better unit economics on the houses they're buying and selling in Zillow. For them not to be able to leverage that data to their advantage, that's the biggest red flag to me because they weren't able to take the key advantages they have. They've been developing Zestimate for over a decade now, the way to algorithmically price homes. For them not to be able to have that to the point where it does a better job than their rivals of pricing homes, that is a big red flag for me. I want to see what Zillow's going to do from here. They ended the quarter with 9,790 homes in inventory, and another over 8,100 under contract to buy. That's a lot of houses. When they unloading to sell all those, they're going to have roughly $5 billion of cash on their balance sheet. I'm wondering what they're going to do with that. What I'd like to see Zillow do is become the kayak of iBuying, where they partner with Opendoor and Offerpad and Redfin. You can go to Zillow and get your get offers on your house from all of them and decide which one is best for you. Zillow makes some money off that, doesn't take any of the risk. The other three get some lead generation, so it's a win-win for everybody. I would like to see them do something like that. If Zillow's management's listening, please take that advice. [laughs] But I'm disappointed, iBuying was probably the big part of my thesis with Zillow. But it's really the way they went about it. I never felt a company for walking away from a business that's not working if they do it the right way.
Jason Moser: Yeah, I agree. I think I tweeted something out to that extent too. It's easy to pile on. I respect the decision, I respect them getting in there and saying, "Hey, you know what? This is working, let's go ahead and bag." It's a good investing once in there. You get an investment and it's not working. If there's a thesis has changed or it's busted. Being able to admit you're wrong and then moving forward, that's a great quality to have. I do want to ask you a couple of things, so number one, don't you get the feeling that real estate agents are just relishing this news? Because this has traditionally been a very difficult market to disrupt. Traditionally, it's been a very difficult market to disrupt. It felt like Zillow was helping blaze that trail, leading the way to doing that. I feel like real estate agents are looking at this and saying "Yeah, you know what? We told you it was harder than you thought," and they're feeling OK about it.
Matt Frankel: I'm interviewing eXp Realty, which is a brokerage business, I'm interviewing their CEO later today. I can't wait to ask them about this news because he believes that traditional brokerage business that's growing rapidly. I can't imagine he's disappointed that Zillow's getting out of iBuying.
Jason Moser: No, I can't. Then the other thing, because it feels like so much of this decision to get into iBuying in the first place, hinged on their proprietary data and certainly centered a lot around that Zestimate that you mentioned earlier, they've been developing for the better part of a decade. It really feels like this is another strike against the Zestimate. They have to feel like maybe the big picture view is that folks look at the Zestimate is really nothing more than cosmetic at this point and not so informative, at least not informative enough to where you're making decisions based around it.
Matt Frankel: Yeah, that's a good point. They're essentially saying that Zestimate is just for fun is what it sounds to me. If you're saying you can't do a good job predicting houses, their unit economics went from positive 1,200 basis points, so 12 percent profit margin in the second quarter, to a negative 5-7 percent profit margin in the fourth quarter. That's a pretty bad job of predicting what you're going to be able to do with these houses. You're saying that that volatility and your inability to predict houses or the region, you're pulling the plug. It really makes me think what have you been doing with the Zestimate all this time? Because they specifically said they wanted to get to the point where the Zestimate was the offer of the house. When someone can just click the Zestimate and that's the offer. It's just a big about face, they've been hyping this up as the future of the company for a long time now.
Jason Moser: Well, it sounds like the Zestimate has become a bit more of a pestimate, [laughs] Matt. I'm going to go ahead and leave the building now. [laughs] Matt, I think that's going to do it for us this week. I really appreciate you taking the time to be here, particularly [inaudible 02:57:51] preparing for all these means. Good luck with everything on the trip there, I can't wait to hear all your takeaways. Hey, thanks again for being here.
Matt Frankel: Awesome, always fun to be here.
Jason Moser: Remember folks, you can always reach us at MFIndustryFocus or drop us an email in [email protected]. 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. Thanks as always to Tim Sparks for putting the show together for us. For Matt Frankel, I'm Jason Moser. Thanks for listening and we'll see you next week.
