Which Company Might Buy Peloton?

Is someone going to buy Peloton (PTON -3.83%)? And if so, will it be Apple (AAPL 1.26%), Amazon (AMZN -1.80%), Nike (NKE 1.13%), or a player to be named later? Motley Fool analyst Jason Moser shares why Nike's track record of success makes it the more logical candidate. Also on this episode:

• Spirit Airlines (SAVE -3.07%) and Frontier (ULCC -4.03%) agree to merge, which will create the fifth-largest airline in the U.S., with a strong emphasis on leisure travel.
• What's the main driver of a toy business? Hasbro's (HAS 11.78%) TV production division gets the credit for a stronger-than-expected fourth quarter.
• Motley Fool analysts Deirdre Woollard and Matt Argersinger discuss real estate investing and why they're not worried about the Federal Reserve raising interest rates.

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 Feb. 7, 2022.

Chris Hill: Today on Motley Fool Money, what do Apple, Amazon and Nike having common? Apparently they're all kicking the tires of the same company, but only one of them can buy it. That and more coming up right now. I'm Chris Hill, joined by Motley Fool Senior Analyst Jason Moser. Thanks for being here.

Jason Moser: Hey, thanks for having me.

Chris Hill: Later in the week we're going to talk about what happens when one company buys another company, how they do it, what it means for shareholders of each. This is timely because of, I was going to say our first story, really our first two stories. Let's start with the reports that we got over the weekend of two separate companies exploring bids for Peloton. The Wall Street Journal reported that Amazon is interested in Peloton, Financial Times reporting that Nike is interested, and of course, Apple's name gets thrown in there as well. A couple of things I want to get to, but let's start with this. Assuming the price was reasonable, which group of shareholders should be hoping that their company makes this acquisition? Amazon, Apple, or Nike?

Jason Moser: Well, I mean, I feel like you could probably flip that question on its head and say, which group of shareholders does not want this acquisition to happen? Because it sure feels like Peloton has been through the ringer here recently. But I think you and I, we've talked about this a lot, not just in regard to Peloton, but other businesses as well, in that you can see this is not a business that's going to zero, there is value there. It's also a business where while it feels like it may have a floor, it probably also has a ceiling too, unless you can figure out a way to push that ceiling higher. I think that's where a deal like this could make sense for a business like Nike. If we just take into consideration, even a lot of this is just hearsay, this is more or less speculation at this point. 

We don't know a whole heck of a lot. But hey, let's talk about it anyway. Apple, Nike, Amazon, all three businesses obviously could digest this acquisition without even really blinking an eye. To me, Amazon, it doesn't feel like it makes sense. I mean, I get a little bit wary sometimes with Amazon, and they're wanting to try all of these different things that seem to step outside of what they really do so well. For me, this would be ultimately for Amazon. I think it would just be a way for them to really lose focus on the core of the business in their retail operations and their Cloud business. Apple could do something with it, but frankly, I mean, they don't seem to like going that route. I mean, Apple is already trying to build out their own fitness offering. It seems like they're taking a little bit of a different approach in just offering the service, not really focusing as much on the equipment side. Say something like an Apple watch. I mean, you have an Apple Watch and that can tie it fitness life. 

But maybe Apple's trying baby steps to see what opportunity there is and how consumers may react to what they can offer. But for me with Nike, I do see like it makes some sense. There's some complementary aspects to these two businesses. I think with Peloton, we've been very critical of the hardware side of the business. The cycles and the treadmills and whatnot. I mean, that is a bit of a trick there for them right now, but the ongoing community aspect, you get a lot of people that are in that community that are believers, they love it. Community can be a very powerful thing, as long as you take care of it. I think that to this point, that's probably where Peloton has executed best, is on their community. I think taking care of their community and giving people a reason to keep reupping that subscription. 

With something like a Nike, I look it like what Under Armour was thinking with its connected fitness pursuits back in the day. But Chris, actually it's successful. [laughs] It's important to add that in there. I mean, I could see the parallels there between Nike and Under Armour, but the difference is that Nike would actually had to execute and do this correctly. You can glean a lot of data from those users. Nike has a very strong brand to begin with. Even if there are concerns that Peloton's brand equity has suffered, that could be fixable, I mean, becoming a part of that Nike universe could could add a little shine and that could make a big difference. Then the relationship that you create with the community, with the users, you get a lot of data, you're fun are the gear that those users want. I mean, it could really help Nike break into some new product lines, but also just continued giving their customers what they ultimately want. That really is the most important part of that all, it's for a retailer to be able to continue to develop and give their customers ultimately what they really want.

Chris Hill: Yeah, when I was reading through this stuff this morning, I was thinking about Nike, and I don't own shares of Nike and that is very much to my detriment. Not only such an impressive track record of success in the athletic space. If you just think about it as an aspirational brand, the marketing that Nike does, it's pretty hard to watch one of their television commercials and not be inspired when you are sitting there on the sofa, like I need to lease up by shoes and get out there. Can I just knock down one bit of speculation that happened that I came across this morning and I thought, no, that's absolutely wrong. This is an analyst note that came out at about this deal. I'm going to quote directly from this note. "Apple may be forced into this deal if Amazon, Nike, or potentially Disney aggressively goes after Peloton in a defensive blocking move".

Jason Moser: You seem skeptical.

Chris Hill: Apple has $200 billion in cash on hand. They're not going to be forced into anything with that amount of cash. They can do it if they want. Although if history is any guide, they're probably not going to do it. But the idea of the app that Tim Cook is going to be outside, well, we don't want to do this to you, but from a defensive standpoint, we just have to, Jason. No, I'm sorry. That's 100 percent wrong.

Jason Moser: I'm right there with you. I mean, I think it is very fair to say that any company that you mentioned, it feels like Peloton needs that acquirer more than the other way around, no matter who the acquirer is. Again, this is all somewhat speculation. I do feel like there's a world where Peloton just continues to go about it on their own too. Peloton can recover from this. It would take a lot of work, of course, but you make a very good point there in regard to Nike's. They just have such a long history of just spinning gold. They push a message that just resonates with so many people. They just always do so well maintaining and nurturing that brand. 

It just makes you feel like they could bring anything into that universe and continue to spend gold with it. There is a lot to be said for that. But to your point there, I don't think any company really would look at this and going in and saying, you know what? We have to have this. I don't think you'll see a bidding war coming from any of this. I think at the end of the day, they would be looking at Peloton and saying, you know what? We could see the merits of your business and we could see you doing some stuff with it, we'll buy it for pennies on the dollar, so to speak. I think garnering any a premium at this point would be not in the cards for Peloton. They need some time to come back from this and demonstrate that they can actually continue growing before they get ever garner any premium out on merging.

Chris Hill: Merger Monday appears to be living up to its nickname because Frontier Airlines and Spirit Airlines have agreed to merge. To do so would create the fifth largest airline in the US. I will point out that since this merger was announced, it turned out to be a bad day for Frontier Airlines and the people attempting to fly because all of Frontier's flights were grounded midday. They were apparently dealing with some tech issue, it was prompting flight delays and cancellations.

Chris Hill: This is just a hiccup for them and let's go through what this combined entity would be. You look at Frontier and Spirit, they are both heavily focused on leisure travel. They're not leveraged to business travel in the way that a lot of other airlines are, and given that fact, does that make this combined entity a little bit more of an attractive investment opportunity than ones that are focused on business travel, which is coming back slowly? Let's just leave it at that. It's coming back slowly.

Jason Moser: [laughs] Yeah. I mean, to an extent. I think it's going to come back in drips and drabs, right? Whether it's business travel or leisure travel. I mean, people are coming to their own sort of comfort level as we move forward and so business travel will continue to come back slowly. I think leisure travel it's a little bit easier to justify. People are a little bit more ready to go do something. You've got an airline here that ultimately the combined end of the year. I mean, it would ultimately still be a very small discount airline, and so what opportunity does that really offer investors? If that remains to be seen. I mean, at a time like this, inflationary times, where the cost of everything seems to be going through the roof, you could certainly see where travelers would be far more willing to maybe step down to a discount airline experience versus where they might normally just fly with one of the Biggs. I mean, airlines, it's such a difficult business, right? 

I mean, it's just there's so many moving parts, so many variables that come into play, so it is one of those industries where size really can make a big difference. And so from that perspective, I think this makes a lot of sense. I mean, it does seem like it's combining two airlines that are gaining more share. There is a data point that I saw on CNBC earlier this morning that looked back at 2013, it's Spirit and Frontier together at 2.8 percent of the revenue passenger miles flown by US airlines. That was according to the Department of Transportation. Fast forward to 2019, their combined market share had basically doubled, 5.4 percent versus 2.8 percent. You are absolutely seeing a trend there, and I feel like in this day and age, when the value of a dollar is becoming more crucial to more people, I'd think that would put something like a Spirit and Frontier more squarely on the travelers radar than before, but it's also worth remembering the Biggs have done a very good job over the years of developing loyalty, whether that's through their own individual programs or through credit card programs. I mean travelers have built up some loyalty in that regard, but all in all, it feels like this opens the world up for more travelers and that ultimately will be a good thing.

Chris Hill: Although it doesn't exactly boost confidence that part of this announcement, they haven't decided on a name, where headquarters is going to be, or who the CEO is going to be, so presumably they'll figure all that out, but we'll move on. [laughs] You and I have talked in the past about the toy industry. What is the main driver in your mind of a toy business? And I'm asking because Hasbro's 4rth quarter profits and revenue came in higher than expected, and their TV production division is getting the credit, which I don't really understand at all [laughs], but back to my original question, when you think about a toy business, what is the main driver of that business?

Jason Moser: Well, I mean, having followed Hasbro for most of my time here at the Fool, so more than a decade. I mean, a toy company really it's about the toys, right? The main driver is toys and for Hasbro today it clearly is still the consumer products side of the business that's responsible for better than 60 percent of the company's overall revenue, and we need a consumer products, you're talking about that stuff that kids buy in stores, toys. All sorts of different characters and licensing deals that they get with IP companies out there to really build out that consumer products offerings. But I think that the future for Hasbro, more and more, is becoming gaming and entertainment. The consumer product side of the business will still be a very key part of the business. And I think that ultimately what you look at is you see, they're bringing more gaming and entertainment into the fold here. And it ultimately plays into this brand blueprint strategy that they have, which is ultimately just trying to leverage all of the brands at its family across, all of these different opportunities. 

And so you take it to the farthest degree back when we were growing up, right? I mean, there was no app on your phone for the Mr. Potato head that you bought at the store, or that you got for Christmas, right? I mean, you've got Mr. Potato head and that was it, right? You didn't have an app to go with it. But to now, like tech has become an integral part of virtually every experience, whether it's physical toys or virtual entertainment. We're seeing Hasbro making a lot of investments across a lot of these different entertainment platforms in order to capture that opportunity. I think the interesting thing, when you look at Hasbro, if you go back to 2019 and they made that acquisition of Entertainment One for around four billion dollars. That was a very clear sign on the entertainment side, right? You think of Hasbro, you think of kid's toys, but then you actually look at the catalog of entertainment that they are part of. 

I mean, there are shows that aren't necessarily what you would be recommending the 7, 8, 9 year olds, right? I mean, you've got Cruel Summer and Yellowjackets as a couple of examples that they called out in the release of successful shows that they are part of now by virtue that Entertainment One acquisition. Then again, you look to their Wizards and entertainment segments that the Wizards gaming segment. We've seen the gaming market itself between hardware and software, gaming all together. I mean, we've seen companies talking about a $300 billion market opportunity. So I mean, that obviously mean Hasbro isn't going to tap that whole thing, but it's a big universe and that's where they see the puck headed. It is a business that has changed materially here over the last decade, and it is not sacrificing the physical for the sake of the virtual. It's really coming up with a strategy to be able to marry the two together. It feels like they're doing a good job of that.

Chris Hill: I'm just glad that Clifford, the Big Red Dog live-action movie was not a financial success. I'm not wishing ill for Hasbro and its shareholders, but I found that film to be so terrifying, that I thought [laughs] if that thing's a hit, they'll make another one. And based on the numbers I'm seeing, I don't think they are.

Jason Moser: I feel like Clifford the Big Red Dog it's a better cartoon. Live-action, I'm not feeling in either and I'm a dog lover, you know it but yeah, to me I saw the commercials for that one and I'm like, oh, yeah. I don't want to go see that. No, not even at home. I don't want to watch it at all.

Chris Hill: Jason Moser, great talking to you. Thanks for being here.

Jason Moser: Thank you.

Chris Hill: We didn't talk about interest rates, but a few topics have gotten as much attention lately. When is the Federal Reserve going to raise rates? What will it mean for stocks? What will it mean for real estate? For all the speculation of rate hikes coming in 2022, you can count our real estate experts among those who are not sweating the Feds next move. With more, here's Deidre Woollard.

Deidre Woollard: Thanks, Chris. I'm Deidre Woollard, and I'm here with lead real estate analyst, Matt Argersinger. Now, last time we chatted was a little bit about how REITs had an extraordinary 2021. Some of our REITs have been dragged down a little bit in the overall market volatility. What's happening there?

Matt Argersinger: Hi Deidre, I think it's a symptom of two years here. If you go back to the 2021 when REITs really did well real estate sector and really outperformed historically. It was really about a rotation, I think away from some of the high-flying technology, COVID, momentum names that really, we're familiar with. Thinking those were too highly valued some money rolled into real estate. But here in 2022, I think the overall market's reacting to the idea that it's no longer a hypothetical that the Fed is going to raise rates. It's really a fact and it could happen as early as March. The higher interest rates when that's on the horizon is a knee-jerk reaction from investors to say, well, let me sell off some riskier assets like stocks and go into other assets, fixed income, et cetera. I think that's just affecting all asset classes. I'm not surprised that the market has been volatile. Lot of technology names have been hit, but real estate has also been hit because it's all being lumped together in this inflationary interest rate rising fear environment that we have beginning here in 2022.

Deidre Woollard: The two I words, inflation and interest rates seems to have been on everybody's minds certainly for the last month or so. We're real estate people, how does that affect our world?

Matt Argersinger: We've talked about this. It's fascinating. I think in the short run, higher interest rates, fears of inflation, they're going to cause stock formally going cause real estate to under-perform. But if you look historically, National Association breach has done some great data on this. CBR has done some data analysis on this. If you go back around 50 years, REITs, the real estate sector of the economy has done pretty well in periods of high inflation and higher interest rates. Deidre, I'd be remiss if I didn't point out some of our own research here at The Motley Fool that shows real estate being a pretty good inflation hedge. There was a study done by Jack Caporal back in January that should read so beaten inflation 26 out of the last 41 years. As a real estate investor myself with a substantial amount of my portfolio in real estate stocks, equities, and private real estate, I'm OK with higher interest rates. Generally that means the economy is doing well in companies with pricing power and real estate as an asset in good locations, with good uses, is an asset with a lot of pricing power. I think overall real estate is going to do just fine. We just might have a short-term challenges with our performance. Then later on as the economy suggest these higher rates, I think real estate will do just fine.

Deidre Woollard: We've seen so many tech companies are still investing in big purchases, partly I think, because they see real estate as that store of value too.

Matt Argersinger: That's absolutely right.

Deidre Woollard: Let's pivot and talk about one of our favorite trends, which is industrial real estate. My goodness, this has been just a crazy sector. We all know about supply chain issues. One of the biggest recently space Prologis. I looked at their earnings recently and their CEO had said that the demand is just showing no signs of slowing. What's going on there?

Matt Argersinger: Why? Industrial has been so strong for years now and before COVID hit, which is this long-term transition to e-commerce across the US economy. By the way, I saw a stat, their data almost blew my mind. That retail sales as a whole, only 16 percent of retail sales in the US are happening online. You compare that to see, China or other countries where it's 30, 40 percent of sales or online. Think about that way or e-commerce seems like it dominates our life these days, but yet it's still a fraction of how we shop generally as consumers in this country. That's been a trend that's been going on for years. This transition to e-commerce and what you need with e-commerce is of course, warehouse space, logistics space, fulfillment centers, transportation hubs, all these spaces that we as real estate investors took for granted for years and decades, as we love to office, retail and other things. But we actually need spaces like this. We need spaces like this close to big cities or at least close to major transportation hubs or airports or things like that. We just don't have enough of it. We haven't had enough of it for years. We're trying to catch up to it. But in reality, I think we're hundreds of millions of square feet short of where we need to be in industrial space. That's really exciting if you're a Prologis or another industrial REIT, because the demand for your facilities has never been higher. Vacancy rates have never been lower. You almost see just growth as far as the, I can see.

Deidre Woollard: Yeah, absolutely. One of the things that you and I've talked about too, is just the acquisition that's happening in this space. Individual research trying to grab up as much space as possible. Larger companies are gobbling up smaller REITs. Really seems like there's so much capital flowing to this area right now.

Matt Argersinger: Yeah, that's right. I think a lot of companies are going take advantage of it. I was worried about some of the valuations I'm seeing across the space because a lot of companies that we follow, like STAG Industrial or Prologis, they're out there making acquisitions all the time. But the real estate is getting price here by the day. It's really about identifying those markets where you can still find value, still find opportunity. That's why I like STAG Industrial,  ticker, S-T-A-G or an EastGroup Properties, ticker E-G-P, because they are in the more secondary markets, some of the hotspots where they can go in and buy single assets at good valuations. 

I was surprised, Deidre. I mean, we just reopened this segment talking about the market volatility and a decline a lot of real estate stocks. I was surprised to see the industrial REITs have been hit pretty hard as well down 10-15 percent depending on which one you are looking at. To me that's a tremendous opportunity given the macro setup we just talked about, which is just this massive tailwind with many years of growth and yet these stocks have come down quite a bit, just like all other real estate stocks. I think there's definitely some opportunity in this space. If you're looking to add some more real estate exposure to portfolio, I would certainly look at the industrial space.

Deidre Woollard: Yeah, absolutely. Well, thank you so much, Matt.

Matt Argersinger: Thank you, Deidre.

Chris Hill: That's all for today, but coming up tomorrow. Allison Southwick and Robert Brokamp are getting ready for valentine's day by answering the financial questions that can help improve your relationships. As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against. Don't buy yourself stocks based solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow.