An Investor's Look at Delta Air Lines' Report and Amazon's Letter

In this podcast, Motley Fool senior analyst Asit Sharma discusses:

• Delta Air Lines' first-quarter results.
• Why Delta CEO Ed Bastian is not worried about consumer spending.
• Highlights from Amazon CEO Andy Jassy's annual letter to shareholders

Motley Fool producer Ricky Mulvey and Motley Fool senior analyst Jason Moser dig through some of what our listeners have been buying and discover companies with moats and one person who shorted a teddy bear business.

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 April 13, 2023.

Chris Hill: We're taking a closer look at the stocks some of you have been buying. Motley Fool Money starts now. I'm Chris Hill joining me today, Motley Fool Senior Analyst, Asit Sharma. Good to see you, my friend.

Asit Sharma: Good to see you, Chris. I'm excited to be here as always.

Chris Hill: Let's start with Delta Air Lines, shall we? Delta posted a bigger loss in the first quarter than was expected. CEO Ed Bastian, next month is his seven-year anniversary in the corner office at Delta Air Lines. I'm going to take them at his word when he says he is not worried about the potential for lower consumer spending. He said in an interview that air travel is something that the consumer is prioritizing. They may be pulling back on other areas, but I don't see it in our credit card data and I don't see it in our bookings. I believe him but I can't help but notice the tense he is using there. It's a present tense, I don't see it. I wonder if six months from now he's going to be seeing it because I don't know, it really seems like in the background over the last 6-8 months, one of the narratives for the overall economy has been consumer spending data, credit card data going up, stuff that we're seeing in the housing market, in auto loans that thing. Going any direction you want, whether you want to start with Delta's actual numbers or how the CEO is feeling at this moment.

Asit Sharma: It's interesting, Chris, in some ways he's right. Near-term, Delta is seeing great advanced bookings per the summer. Business travel is coming back. They're seeing more demand for their premium products to first-class. They're doing well on their affinity revenue, so revenue comes in from credit cards and such loyalty as well. But I would be talking up nice demand that I see as well because the problem that Delta has, which all airlines face, are stubbornly high costs. On the fuel side, fuel is up double-digits over last year. On the labor side, Delta and its peers in the Legacy Airline industry have been negotiating with pilots and other union workers. I think Delta is going to spend some seven billion bucks in cumulative costs over the next 4-5 years to adequately compensate their pilots per agreement. If you're looking at those cost hurdles, you probably want to be mired in the present where you see some lift on the revenue side because if that lift doesn't materialize, if the caution that I here in your voice materializes, then they've got some further losses on their books in the quarters ahead, and I will point out here that Delta is still sticking to fairly nice projections both on the top and bottom line. Projecting great top-line growth and better operating margin as the year progresses.

Chris Hill: I think that's why we're seeing the stock basically flat, maybe down, at one point it was down half a percent or something like that. The first-quarter numbers weren't great and yet to your point, the optimism for the near term, I think that's part of what is keeping the stock afloat at the moment.

Asit Sharma: Sure. When you think about this quarter in terms of airline metrics, total revenue per available seat mile. This metric was up 16 percent against the prior quarter. They are seeing that capacity is getting used up. Very important metrics that you want to try to evaluate, any business that has such high fixed costs. In that side, they look fairly healthy and this is the only thing that's keeping the stock from being down, I think 7-10 percent today given the fact that with all this revenue lift, they still couldn't produce a profit. Delta was still on a GAAP basis, negative for the quarter, although I will say their loss is much improved over the prior-year quarter as business conditions in the economy have picked up. If we go into a recession though, we will see those same metrics start to move the other way. Capacity will move from being utilized to being underutilized if that all-important consumer element begins to soften. I do agree with Ed Bastian that the business consumer is important to the story. They see corporate travel coming back but we need everything to be working at once. We need a strong consumer, we need strong business travel, we need fuel prices to decline, and we need those other costs that aren't wage-related to be managed pretty well for Delta to hit the numbers it's talking about for this year and for the airline industry as a whole to have a positive year.

Chris Hill: Amazon CEO, Andy Jassy released his second annual letter to shareholders. I haven't gone through it point-by-point, but what I've seen from the reporting on the letter doesn't surprise me in the sense that Jassy sounds like he's being very clear-eyed about how challenging the past year has been for this business.

Asit Sharma: The past year was difficult for Amazon to absorb on so many fronts, they had a hangover from all their COVID business. In the space of two years, they doubled their entire logistics footprint. At the same time, once interest rates and inflation spiked, customers came to Amazon in their Amazon Web Services unit and said we want to spend less on computing and storage because we have to manage our costs. Amazon I think rightly so has agreed with enterprise customers. We'll help you back off, endow those costs down. Now, that's not good for Amazon Web Services growth trajectory and it's not good for the margins at Amazon Web Services. Thirdly, you had in there other parts of the business so many places that it just didn't make sense to have lost centers, burdens of high cost, so Jassy started trimming. They've trimmed thousands of employees. We never like to talk about layoffs in any company that we tend to invest in or recommend for our members at The Motley Fool, but it's the reality of business. Massive layoffs and the shuttering of whole business lines and paring back on what's promising parts of the business. But I want to just read one or two points from the letter that made sense to me. Jassy said, over the last several months, we took a deep look across the company, business-by-business, invention by invention, and asked ourselves whether we had conviction about each initiatives long-term potential to drive enough revenue, operating income, free cash flow, and return on invested capital. In some cases, it led to us shuttering certain businesses. I'd like this because it crystallize what we've been seeing, what we've been reading in the tea leaves or the last three quarters. 

It was a very honest expression of wanting to operate in a more disciplined fashion. Now, I personally read the letter from the middle up, I jumped to the section where Jassy talks about Amazon Web Services because I think that's the true story here. I think what Jassy is really saying is look, this part of our business is going to be slow until at least 2024. We're not going to be able to rely on our cash cow, so I've taken the knife to parts of our business that maybe we should have looked at several quarters ago and we're not going to be as reliant on Amazon Web Services for our operating margin and our free cash flow. I read the letter backward. You don't have to read it that way. There's plenty in here that's fun to read. The advertising revenues are bright-spot. They haven't given up on the grocery business, but this is a complex business. Chris, it strikes me more and more that Jassy was a great person to put in this seat just watching how he's performed. What do you think? He's two years in. I've summed up the letter. What are your thoughts on Jassy?

Chris Hill: He was clearly the right person for the job. I talked to Brad Stone from Bloomberg recently on the show, and we talked about Jassy and Bezos and Brad Stone, as much as anyone in business media, Brad Stone has studied Amazon and Bezos as closely, if not more closely than anyone out there. I take Brad at his word when he's like no, Jassy is the guy. Bezos is not going to pull a Bob Iger, he's not going to pull it Howard Schultz and come back, but I think that one of the things that Jassy has picked up in his years of working in Amazon and working closely with Bezos is a pretty deft ability to speak plainly about challenges. It's one of the things that I appreciate about him as a CEO and this letter. Come on. At some point if you're an investor, you know when a CEO is trying to pull a fast one or just trying to snow you with rhetoric and it's like, come on. Would have been very much out of character if this was him whistling past the graveyard, everything's great actually. It's like no, come on, we all know there were charges. But I also appreciate the fact that this is the thing Bezos was always good at. I thought of speaking to questions that are lingering about the business that may not be at the forefront. 

An example of that in the letter from me is him talking about the investments that they will continue to make as a business. When he cites 2008 being a challenging time, not just for Amazon but for the US economy, and saying, I'm paraphrasing, but it's like, hey, if we had stopped investing in AWS in 2008, as I'm sure some people were saying they should do just as a way to pull an economical lever within the business. Hey, let's dial this back a little bit, if we'd stopped investing in AWS in 2008, we would not be where we are today. I think it's also a way for him to essentially play a little bit of offense with this letter.

Asit Sharma: I felt so too. There's really great points. I mean the last thing that I wanted to point out, because I know not everyone who's listening is going to take the time to read it. Something along these lines that occurred to me is just plain speaking and giving the investor perspective was his brief conversation on their fulfillment network. The one I mentioned, the logistics network which took so long to build two points there. He said, one, it's going to be easier to manage this as more of a regional operation versus this big national operation, we can drive some more efficiencies. Two now's the time to optimize. We moved so fast that we really didn't ring all the efficiencies that we could have out of the system, so we're out of building phase. Now comes that profit optimization phase. I think that could be a powerful contributor to their profits, and again I appreciate it, the clarity and directness that was there throughout this letter.

Chris Hill: Asit Sharma, always great talking to you. Thanks for being here.

Asit Sharma: Same here. Thanks so much, Chris.

Chris Hill: We recently posed two questions on Facebook and Twitter. What's the stock you bought recently and why did you buy it? Jason Moser and Ricky Mulvey dug through some of the responses to discover companies with moats, Peter Lynch-style investing, and one person who decided to short a teddy bear company.

Ricky Mulvey: We asked you on Twitter and The Motley Fool podcast Facebook group, what's the stock you recently bought and why? Joining us now to break some of them down, is Jason Moser. Credit where credit is due, this is not our idea. This is a segment that you and Matt Frankel did on Industry Focus.

Jason Moser: Yeah. Thanks. This is something that we did on the Industry Focus financial show for several episodes through the years. It started out as just a one-off, maybe we'd get a couple of responses. Then we saw very quickly that people were very excited to tell us about their ideas. Honestly, it makes sense. I get excited to tell people about my ideas, so it seems like it works both ways. As time went on, we kept on getting so many great responses, more than we could handle. I'm thrilled that we're able to do this today. Thanks.

Ricky Mulvey: Let's get started with it. I think there's a few buckets that the responses fell into, we're not going to get to all of them. But in the financial's bucket, there is a lot of love for Charles Schwab. @cunning project on Twitter, "Solid business across the board with a small percentage of risky exposure needlessly punished for the sins of others in the sector." Vince on Facebook also wrote us, "Charles Schwab beaten down with all the banks even though number 1, they're not a bank per se, number 2, they have actually served as a safe haven for depositors fleeing regional banks, and three, they're not exposed to a high percentage of uninsured deposits." Give them a grade. What do you think of that reasoning?

Jason Moser: I like this one. For me, the first thing that came to mind, this is like a baby being thrown out with the bathwater. We see this often when we see some crisis in the market in whatever sector may be. In this case, sometimes investors will shoot first and aim second. That's what happened here, I believe. When you look at something like the Schwab, it's a 100 billion-dollar company. I think it was down 35 percent year-to-date or something like that maybe a week or so ago. I agree honestly with everything that was said there. In many cases, Schwab has tremendous exposure to personal banking, we have retirement accounts that run through Schwab, Schwab acquired TD Ameritrade, so bringing in all of those account holders under the Schwab umbrella. There's just a lot of reasons to like Schwab, and I think our listeners they've listed those off. Our episode of Motley Fool Money on March 30, Matt Frankel and I actually spoke to this. Matt spoke a little bit about Schwab, why he was excited about that opportunity as well. For folks who maybe missed that episode, I would encourage you to check that episode out from March 30, and you can listen a little bit more to our conversation there. But in a nutshell, when you're looking at something like a Schwab, and I was asking Matt, beyond just Schwab investing in this sector folks are interested in banks. What should they be looking out for? The obvious answer, look for diversification. Don't put all of your eggs in one basket. For folks who are interested in banks, maybe regional banks particularly, maybe an ETF would be a good way to get some exposure there. 

But some of the things to look for in regard to banks if you're interested in investing in banks, looking for opportunities, Matt was talking about looking for a discount to book value. Take that with a grain of salt, of course, but understanding a bank's loan growth, looking at inflows versus outflows. What are depositors doing? I think that was one of the things we saw writ and large with so many depositors fleeing those smaller regional banks in favor of their larger brother because they felt more protected in that regard. Sometimes that is not necessarily something you have to worry about because of that insurance dynamic that does exist. Then finally, he mentioned, and I thought this was a good one, to look for their exposure to personal banking versus business banking. The idea here is that we are less likely as people to switch banks. It's a hassle. We've got everything automatically coming out nowadays. If you want to switch banks, that's a real process. Businesses are going to be more inclined to do that if it's something that will ultimately help their bottom lines. I thought that was another thing he said to look at. I thought that was a good tip there. Know their exposure between business banking and personal banking. That can give you some ideas as far as opportunities in this space.

Ricky Mulvey: Might add commercial real estate in there, something to keep an eye on.

Jason Moser: Yeah, absolutely.

Ricky Mulvey: I think with Charles Schwab, the bear case was that they weren't going to be able to pay much of a return on cash deposits, therefore, people would pull their money out and move it to somewhere where they could get a higher return. That's a very different reasoning for an alleged bank run. To your point, yeah, moving your money is a pain in the butt and people don't act as rational economic [laughs] actors. Let's move on to stocks for the long term. I liked this from @always_invest on Twitter about Boston Omaha, writing, "Added to existing holding, I feel very ignored by the market due to size and nature of the businesses within it but with large long-term upside for a long-term investor." A couple of key things that I liked in there, first of which was that it was a stock that this person had already owed.

Jason Moser: Well, what is it? Peter Lynch said oftentimes the best stock to buy is one that you already own. I've certainly seen that play out in my investing life as I've built on my portfolio. In this case, I agree. Boston Omaha, I think flies under the radar for a lot of investors because it's such a small company. We're talking about a sub-1 billion-dollar market cap. These great businesses all start out as small businesses and then they grow over time. I think with Boston Omaha, it's such an interesting collection of businesses. You've got that outdoor billboard advertising business, you've got Assurity insurance side of the business, you've got a broadband side of the business, you've got an investment side of the business. I think one of the qualities of this company that a lot of folks really enjoy is there are some similarities to something like a Berkshire Hathaway or even a Markel Insurance to a degree. Both companies were big fans over here at the Fool. There is also a tie. I think it's Warren Buffett's nephew, I believe, is one of the leaders of this company. It's one that a lot of folks here like and I think it's a fascinating business as well. I tend to agree. It's nice to be able to add to some of your higher conviction positions, and this one seems like it is ignored probably due to its size and just an interesting collection of business lines.

Ricky Mulvey: Also, I think the leadership of Boston Omaha tries to fly under the radar. They don't do a ton of media, they don't do earnings calls, so it's perhaps not only market inflicted. Also, how much credit do you get for being the nephew? What about cousins? Second cousin, third cousin, twice removed?

Jason Moser: Brand is a very powerful thing. Whenever you see that name, sometimes that's all it takes for some people. 

Ricky Mulvey: As long as we can use the stock photo, speaking of Peter Lynch that you mentioned earlier, there were a couple of Peter Lynch-ish types of investments. @BrandonWest38 wrote us that he bought Nike, a leader in athletic apparel that is 20 percent off its recent high. As a dad who recently started team sports with my boys, I see Nike products everywhere and feel very comfortable holding this company for the long term. Not looking for those big endorsements, looking for youth sports.

Jason Moser: Well, I mean, the endorsements are essentially advertising. You see more and more athletes sporting that Nike brand and it is just a very resilient business with a very strong brand. I mean, it's always brands ebb and flow. They wouldn't have their challenges and they capitalize on their opportunities and Nike is no exception there either. But I mean, my kids own Nike shares. They've owned them for a long time. One of the reasons is that it's one of those stocks that they can own indefinitely in our minds. It's through the years, they've just done a tremendous job of growing that presence. It is a global business. Tremendous distribution in, again, like you said, with the athletes that are supporting that brand, that is very powerful advertising that resonates with consumers.

Ricky Mulvey: The next one I found meaningful, it came from us from @Volvfans79 about Outset Medical, writing us, "Saw my mother-in-law suffer from kidney failure for two years before passing last year. Here, remote homemade three trips to the dialysis center. A major issue. Home dialysis would've been a huge help and even possibly allowed her to travel, which was a passion of hers."

Jason Moser: That's powerful, right? I mean, so sorry for your loss, of course. By the same token, you're implying that Peter Lynch's mentality of investing in what you know, you're basing this on something that you've experienced. In this case, it was obviously a very powerful experience. I'm a fan of Outset Medical, Ricky, I mean, I've pitched it on the show before, I own the shares myself, have recommended at my services and for a lot of those reasons that were just stated. This is dialysis historically has been a hurdle, a challenge. It's something that's needed. It's not optional and it's something that a lot of folks here in the United States alone require and the barriers to deal with that. They've just been so difficult. Then along comes something like Outset Medical, which is utilizing technology in order to make it easier in order to help scale healthcare. That's one of the things I like about a lot of these healthcare companies that are building on technology is they're really solving a problem in scaling healthcare, making effective healthcare more available to more people. I'm very hopeful that Outset works out. I'm optimistic that it will. It sounds like probably an opportunistic purchase in this case.

Ricky Mulvey: Also loves to see some moats in the thesis, @NealnRockville wrote us, finally made a move on ASMLF. Be careful got to buy the ASMLF, been hearing and watching its growth. It has a true moat to boot with new chip plants being built in the US, you got to believe it will be needed more than ever.

Jason Moser: Yes. Well, lithography, which is what ASML does, very specialized and expensive process the machines that they sell or $300 million plus. This EUV, extreme ultraviolet lithography machines is what they specialize in. We know the tailwinds in the chip space. They do have a bit of a monopoly on much of this equipment, big barriers to entry and not only the tech capability here, but the capital requirements as well. Again, understanding that the tailwinds in semiconductors, that seems like a pretty sensible.

Ricky Mulvey: ASML builds the machines that builds the machines to build the chips. It takes some incredible engineering that even if you just copied and pasted what they were doing, you couldn't replicate what they're doing because it's such highly specialized knowledge.

Jason Moser: That's spot on.

Ricky Mulvey: As we're wrapping up, Jason, when you ask people on Twitter what they're thinking, you don't always get the answers you expect. [laughs] We did get some folks who did not share stock purchases with us. In fact, they shared with us stocks they sold. @Ryan tweets, "I shorted Build-a-Bear and lost. How's that company doing so well these last few years?" First of all, [laughs] I'm not going to lead in with one statistic, Jason, Build-A-Bear's trading at eight times earnings?

Jason Moser: Yeah. Well, that's not surprising to me. I can just tell you as a parent, having gone through the Build-a-Bear experience many years ago and it's got its puts and its takes. It's a wonderful quick solution when you want to throw your kid a birthday party. But very quickly you realize you only need so many teddy bears in your house. It's a really great experience for little kids birthday parties, and it's a great way to keep your kid entertained for a while. Its market opportunity is capped. It is one of those things that requires a physical presence, so to speak. You're going to a mall in most cases to do it. I'm not sure what the price was when you shorted this company, but as of today, it's a $350 million market cap. Shares are up like almost 1,400 percent over the last three years. It's coming off a very low base. The financials of this business are still not terribly encouraging. I understand why you shorted it, but I think this is just a good lesson and that I don't short stocks, Ricky. It's just not my style. If I don't like it, I just take a pass and don't buy it. With your short thesis, you can be 100 percent right and the market can still stick it to you. Hopefully, lesson learned.

Ricky Mulvey: It's also tough shorting small-caps where you get the volatility and the upside can be more upside based on what a few buyers are doing. But I don't want to end there. What were your broad-scale takeaways from the responses you saw? I was pretty impressed. Most of them I read. I was like, that makes sense.

Jason Moser: Absolutely. I love this exercise because it forces you to think, why am I buying this? There are a lot of reasons to buy something. In most cases it's personal. That is one of the bigger takeaways is it's just investing is a very personal exercise. Some ideas resonate more with some folks than others. It just goes to show there are a lot of ways to get it done and so that's always worth remembering. There is a ton of information out there. There are a ton of opportunities out there. You're going to probably take a pass on most ideas, but it's always worth remembering. Investing is a very personal exercise and it's always worth remembering that you just learn as you go along and you incorporate what matters most to you as you build your investing philosophy.

Ricky Mulvey: Jason Moser, appreciate your time as always.

Jason Moser: Thank you.

Chris Hill: Got a stock that you've purchased recently? Tell us about it. Drop an email to [email protected]. 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, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.