In this podcast, Motley Fool host Ricky Mulvey and analyst Asit Sharma discuss:
- Fed Chair Jerome Powell's appearance on 60 Minutes, and the market's reaction.
- The commercial real estate risk for the central bank.
- Spotify's strategy shift in podcasting as well as its operating loss and big free cash flow number.
Plus, Motley Fool host Alison Southwick and personal finance expert Robert Brokamp discuss the rise of exchange-traded products tracking Bitcoin.
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. 6, 2024.
Ricky Mulvey: Just give us a rate cut already. You're listening to Motley Fool Money. I'm Ricky Mulvey joined today by Asit Sharma. Asit, how are we doing?
Asit Sharma: We are doing well, Ricky. How are we doing?
Ricky Mulvey: How are we doing? I'm doing pretty good. The royal we. Let's talk first big story, I guess it was over the weekend, is Jerome Powell goes on 60 Minutes and the market really didn't like this appearance, Asit. They were not a fan in part because he slowed down a little bit on the rate cut talks. He said, "Our confidence is rising. We want some more confidence before we take that very important step of beginning to cut interest rates." It just means you're not getting rate cuts in March but you're probably getting rate cuts this year. There's a consensus, he says. What's the market so sour about?
Asit Sharma: Ricky, the market is acting a little bit in a juvenile manner here. We want stuff now. We want immediate gratification. I like that Jay Powell was talking about price stability. When you shift interest rates too much or too soon that can cause prices to be more variable which is something that can lessen consumer confidence, business confidence so I got what he was saying. I dug it. Markets, they want the rates to be cut sooner because look, theoretically lower rates mean that debt, it costs less so corporate earnings can rise. It's easier for companies to do business in a lower rate environment than analysts who plug stuff into their models. See that the value of future money is actually going to be worth more that gets reflected in stock price. Is there reasons that the market just wants this done with? Let's stop the one direction and start in the other. But patience is a virtue in investing.
Ricky Mulvey: Give me my sugar. At a basic level though part of the interview he talks about how the economy's doing pretty well. The economy's strong. If that's the case, why touch the machine? Why cut rates at all? We're not far off from historic average. The period we had before was low interest rates for longer but it seems like things are relatively all right right now.
Asit Sharma: I have the feeling that they're relatively all right too, Ricky. I believe you're correct to say that we're not that far from historical averages especially when you look at out at the 30 year treasury bill. The issue here is that if you look at the post-war period and scroll to the odds like the early 2000s, as we get closer and closer to the current day really the decline in interest rates is noticeable. While historically we're on average it's felt like for a lot of us that the rate environment is lower. The times we've lived have seen long term rates a little lower than the averages. If you would talk to a corporate finance manager or to the consumer on the street, I think both would tell you this doesn't feel quite right. Interest rates still feel a little bit higher whether you're buying a car, you are trying to refinance a mortgage, or you're working for a business and deciding how you're going to allocate that capital over the next 12 months.
Ricky Mulvey: I think a couple things that were less talked about from the interview there's when is the Fed going to cut rates? That's always the big talk and if anyone tells you, they know, they probably don't. But a couple things that got less attention but I think I deserve it, one is how the Fed dealt with the collapse of Silicon Valley Bank last year. The second largest collapse that knock on wood seems to be contained right now and also it's got this maybe looming commercial real estate debt problem but with Silicon Valley Bank that didn't seem to spread that much. Are we crediting Jerome Powell and the Fed? Is that a lucky break? What do you think?
Asit Sharma: I think we should do that and also credit Janet Yellen and the Fed's colleagues over in Treasury. They did a lot of work to restore investor confidence. They put in some backstops for big banks so that they would have quick access to government capital if they needed it. In a scenario like a bank run, God forbid, we should have another one this year. I think what the government did in the spring of 2023 was important but Ricky, pals been warning that the banking contagion isn't over. He seems to be implying that it could crop up again and we see this in regional bank balance sheets. They're still stretched and you're pointing out the specter of all that commercial real estate debt that banks are holding on their balance sheets. To me this is an underappreciated risk in our economy.
Ricky Mulvey: Then I want to take a step back for a second. We started by talking about the Fed this show. But ultimately how much attention should stock investors give these statements from Jerome Powell on 60 Minutes or pour over the notes from the meetings. Having an opinion about the Fed it's a really good way to sound smart. I can be the star of a cocktail party, Asit, but I don't know if it's ever profitable.
Asit Sharma: Well, Ricky. To me life takes hustle and both the macro economics and the micro economics that are relevant to you they're going to follow from you getting out and doing your thing. The Fed is like a few minutes of narration while you're watching TV or listening to the world's greatest investing podcast. That would be this one while you're hustling your day job or relaxing. I and many investors have this idea that if you focus on the businesses, the companies when you invest you'll be much better off over the long term. On the other hand I can't help it Ricky. I want to sound smart at dinner parties.
Ricky Mulvey: Who doesn't? Let's go to micro. Let's go micro. We've gone to macro.
Asit Sharma: Let's do it.
Ricky Mulvey: Let's get to some Spotify earnings. Quick disclaimer. We've got a content partnership with the company, Motley Fool recommends it in some services. I also own the stock. That's some bias for you to know. Out of the way the stock is up 8% this morning. What's the story? Are we still talking about top line revenue growth, the subscriber growth, or are we excited about the focus on efficiency here?
Asit Sharma: I'll take subscriber growth for the wind, Ricky. I think the numbers surprised Wall Street. Spotify added 10 million new premium subscribers to its business this past quarter and they're up to 602 million active users on a quarterly basis. This is something that I feel many investors keep waiting for that other shoot to drop. Because Spotify has become so pervasive in the music world and the podcast world and now they're getting into audio books. It seems when you hit these large numbers it should be near impossible to grow by leaps and bounds in a quarter. But that's what they did over the past 90 days and so the market's rewarding them. They don't get an immediate benefit from that but those are really future revenue streams that the company can capitalize on. The complexion of the story is positive and there was a little bit of march and efficiency also in the mix. I think their marches were just a tad bit better than maybe some investors were expecting. Between those two that's most of the story today.
Ricky Mulvey: Daniel Ek, saying basically to the investing analysts, the one number I want you to focus on is lifetime value to customer acquisition cost and we'll talk about the other ones but that's the one you really need to focus on. I liked that because even if it's not one that the stock analysts focus on a lot, free cash flow earnings per share that's one that ultimately matters for the long term growth of the company. If subscriber growth matters this much we talked about the specter of the commercial debt story. I also have the specter of the Netflix story. I think it was last year, where they lost a million subscribers and the stock fell by I think half because this is the end of the growth days for Netflix. It's never coming back again. If subscriber growth matters this much for these companies, should Spotify investors prepare for a quarter like that maybe where the subscriptions aren't growing to get ready for a potential downfall if that happens?
Asit Sharma: Yeah, that's a really great thing for a Spotify investor to prepare for, Ricky. Netflix, Spotify, both have something in common though. Both companies fearlessly have invested in content, pouring in billions into content creation. They have management teams that understand the big picture. If you're operating at scale, you want to be the best, you want to be number one, you're going to allocate as much of your cash flow and balance sheet as you can to getting the content people want. It's going to be inefficient. You're going to lose a lot of money in some years going up to getting that skill and reaching that point where you start maximizing the lifetime value of the customer, and so inevitably also your membership is going to ebb and flow as it builds over time. It's never going to be a linear progression that's perfect, and many investors will bail the day that you miss those subscriber numbers. A lot of near-term investors will just head out the door. But as we saw with Netflix, with a truly great company, this can just be a resetting of both subscriber base and expectations. Doesn't mean that they can't keep growing subscribers, and it doesn't mean that they can't monetize them further, which both companies I would say are very savvy at doing.
Ricky Mulvey: I'm going to refocus on this quarter. Spotify is still running at an operating loss. One of the headline numbers is that it made about 400 million Euros in free cash flow. This is an in-the-weeds question. Most of this came from a line item called "Increase in trade and other liabilities." Asit, what's going on here?
Asit Sharma: Ricky, I want to point out we're taping on a Tuesday. You could have waited till a Wednesday to ask a difficult question like, come on lob those on hump day but no.
Ricky Mulvey: No. That's because Dylan does the show on Wednesday, so I can't wait till then I got to pass it to him.
Asit Sharma: Trade payables for Spotify in any given quarter can range in the 400 to 500 to 600 million pound range. The rights and fees that they owe for licensing, those can be on up there, Ricky, like 1.6 billion Euros. When you put those two numbers together, $400 million swing isn't that huge, their cash flow can be lumpy. But I think the bigger picture here is that Spotify's cash flow is improving as they pull back a little bit from those massive investments in podcasting and tweak their business model.
Ricky Mulvey: Yeah, there was a bigger discussion about podcasting in the analyst Q&A than in the opening remarks. Spotify is making a change. I don't know how much of that is talent induced. I don't know how much of that is self-induced. But what seems to be happening is that instead of exclusivity for the big talk shows, it's still doing exclusive releases of the audio fiction, that is, audio dramas that are less discussed but I would say very important. It's maximizing ad revenue over subscriptions. Joe Rogan reupped under this agreement. Spotify is now publishing Call Her Daddy widely, which is a big interview show. What do you think about this pivot from, let's maximize subscribers by getting these big stars to draw people into? We're letting our stars out of the exclusive area and drawing in as much ad revenue as possible.
Asit Sharma: I think it's smart. Ad revenue is a focus area for Spotify. It's still less than 20 percent of the business. I think it's high teens. If you look over the trailing 12 months, what they want to do is have a win-win situation where Spotify can optimize how it monetizes podcast content for its bigger stars. It can also optimize what those stars can make, not simply from Spotify, but letting them out into the world. I think this is appealing for people like Joe Rogan who can get on other platforms and maybe generate more in total revenue than they would have under the exclusive contract for Spotify. They will pay maybe a little less. It depends but they'll also have the advertising revenue now, which is something they keep experimenting with so they can draw from this experience going forward and push that downstream to other podcasters with smaller audiences.
Ricky Mulvey: There's an element where I think they're keeping some exclusivity for the videos of these podcasts which is significant. Anyway, what do you think about the audio books? Because I would say this has been a curveball from Spotify. The big story was exclusive podcasts, a ton of money being thrown there. Some not-so-good investments into companies that they ended up folding in shows that they canceled, unfortunately, great shows. But now they're going in deep on the audio books. What do you think about this move to put audio books on the platform in the focus that it's getting from CEO Daniel Ek?
Asit Sharma: I like it. I just feel like you're putting me in a number of tough spots today, Ricky, because I have to confess now. I'm not an audio book listener at all.
Ricky Mulvey: What?
Asit Sharma: I like to read physical books. I don't even like to read text on screen if I can avoid it. But I did like listening to audio books back in the day on long road trips. Now, is this a good move for Spotify? I think it is. The biggest organization of this sort is held by none other than Amazon.com, so Audible, great brand name, a very big entrenched business is ripe for competition. To date, really, there haven't been any challengers who have the deep pockets and breadth of distribution to really challenge Amazon in this space. I really think it's smart for Spotify to get into this business. I think the edge that Spotify has is its platform and its easy user interface and almost anything you try to do on Spotify. While I haven't checked out any audio books yet, and I do intend to, just for my investment research, I have a sense that they will be a very formidable competitor to Amazon. I do think it's smart. What do you think?
Ricky Mulvey: It depends. For book recommendations or for the move? I like the move.
Asit Sharma: Let's take book recommendations. Talk move but then book recommendations. I think we all want to hear that.
Ricky Mulvey: Book recommendation, I would say there are some books that are meant to be read aloud. One of them is the great memoir, Kitchen Confidential, by Anthony Bourdain.
Asit Sharma: Such a good book.
Ricky Mulvey: Yeah. Wonderful and haunting. I read it a few years ago and the way he reads the story has such a lyrical quality to it and it's beautiful and now heartbreaking. I highly recommend listening to it. I think it's less than eight hours, which is pretty short in terms of audio books. In terms of move, it's always going to get the beef of is this scalable because it costs so much to distribute? I think it's a great idea to own the audio experience. If you can be the number one in that, that's a good thing. Asit Sharma, thank you for your time and your insight.
Asit Sharma: Thank you, Ricky. Always a pleasure.
Ricky Mulvey: Before we get to our next segment, first a quick ad. The analysts you hear on the show, have a whole other day job providing premium coverage and recommendations for The Motley Fool suite of stock investing services. We're giving our listeners a discount on Motley Fool's flagship service. It's called Stock Advisor. Asit, who you just heard works on it. If you're interested in more analysis from our team, two stock recommendations per month and access Stock Advisor's full scorecard of companies, visit fool.com/mfmdiscount. I will also include a link in the show notes. Up next Bitcoin. It's a little more regulated now and investors can get exposure through something called an exchange-traded product. How the heck do those work? Alison Southwick and Robert Brokamp talk about it and the risks for investors to understand.
Alison Southwick: On January 10, the SEC approved the creation of Bitcoin ETFs. The news was hailed by Bitcoin proponents as legitimizing Bitcoin as a viable asset class for investors. It seems the appetite is there. Less than 24 hours after the SEC's approval, more than $4 billion had been invested in various Bitcoin ETFs. If you love Bitcoin or maybe you're just a bit curious, we figured it's overdue, we talked about these new investment opportunities. I've got five basic Bitcoin ETF questions for Bro to answer. But before we get to that, how has Bitcoin been doing lately? This does not count as one of my five questions by the way, Bro.
Robert Brokamp: Well, it's been quite a ride. Let's just look at the 2020s which Bitcoin entered at a price of 7,000 but by November of 2021, it was over 67,000 which is just amazing. But as was the case with most investments, 2022 was not a good year for Bitcoin. It plummeted to below 16,000 so that's a decline of 75% from peak to trough. It has since rebounded, currently sitting at 42,800 as of this taping. A very impressive return over the last year or so but still about 37% below its all time high.
Alison Southwick: That's where Bitcoin has been but where is it going? The investment world is divided. If you ask crypto executives, people who aren't clearly biased, Bitcoin could surpass $100,000 in 2024, and a bajillion dollars not long after that, I'm exaggerating, but only slightly. If you ask most financial planners or people who tend to be a bit more cautious, they are of course skeptical, but wherever Bitcoin goes, these ETFs will go along with it and so can you. It promises to be a wild ride. Bro, my first question, well, technically we're all tossing the phrase Bitcoin ETF around. It's actually not being regulated like a typical ETF. It's instead a "product." What's the deal with that?
Robert Brokamp: When you read the announcement of the approval of these investments from the SEC chair, Gary Gensler for uses the term Exchange Traded Product, or ETP. That's really just an umbrella term for anything trade on an exchange. An exchange traded fund is a type of ETP, but ETFs generally are regulated by the Investment Company Act of 1940 and importantly, have certain diversification requirements. These Bitcoin products are not ETFs in the same way that most people think of an S&P 500 ETF. If you read the prospectuses for these Bitcoin products, you'll see a disclaimer about how they're not subject to regulation from the SEC as other companies that fall under the 1940 Act. This all probably sounds a lot of legalistic semantics and to a certain degree it is. But I think it drives home an important point. One reason people invest in ETFs is that they can buy a diversified basket of investments all at once with a single purchase. A Bitcoin ETF is not diversified, it just holds one investment which is Bitcoin. That investment has historically been four times more volatile than the stock market. Now volatility is not all bad because it measures the ups as well as the downs. There's been plenty of ups with Bitcoin as well. But people should appreciate the potential risks when they invest in these so called ETFs.
Alison Southwick: A slight diversion here. My best friend's husband worked at Dairy Queen as a teenager and they were taught not to call the ice cream ice cream. They were supposed to call it product because it's technically, I don't think has a lot of dairy going on in there.
Robert Brokamp: No queens, there were no queens in it. That was the issue.
Alison Southwick: Ever since then, I've just been so skeptical whenever something can only be defined as a product, like if that's the only word you can use to [laughs] define something product, then that should trigger some warning bells. Moving on my second question. Before this year there were already funds with the word Bitcoin or crypto in their names. What is so different and special about these new ETFs? Because everyone flipped out.
Robert Brokamp: Well, so the funds that were traded before this year fall into two broad categories. One is a fund that invested in Bitcoin futures, which are options contracts that trade based on the price movements of Bitcoin but not actual Bitcoin. In options trading involves additional cost. You have to also invest in a lot of in cash and treasuries as collateral. They didn't exactly track Bitcoin. The other type was a fund that invested in companies that were judged to likely benefit from the increased adoption of crypto companies like Coinbase and MicroStrategy and Robinhood. They are basically, stock ETFs. What's different about these new ETFs is that they actually invest in Bitcoin. Now that the Bitcoin is generally custody with some other company like Coinbase, but ideally the movements in the prices of these ETFs will be nearly in lockstep with the price movements of Bitcoin.
Alison Southwick: Third question, and it's a three for I'm totally cheating on [laughs] these rules. Who is providing these Bitcoin ETFs? Who isn't offering these Bitcoin ETFs? Can anyone just load up on them?
Robert Brokamp: Well, so here's a quick rundown of who is behind the 11 new ETFs that most people are talking about. It's Ark, Bitwise, Fidelity, Franklin Templeton, Grayscale, Hashdex, Invesco, Valkyrie, VanEck, WisdomTree, and BlackRock. In my opinion, the one with the best ticker is the VanEck Bitcoin Trust with the ticker HODL, which stands for hold on for dear life, which is an often used phrase in the crypto world. If you look at all those names, there are some that may be unfamiliar to many investors, but others that are among the biggest companies on Wall Street. Notably absent is two of the three biggest ETF providers, Vanguard and State Street, which offers all the SPDR ETFs. Which brings us to whether anyone can just buy these ETFs. It really depends on your broker. Most discount brokers have decided to allow it, with Vanguard being a notable exception. Vanguard is very sceptical of crypto in general.
Alison Southwick: A fourth question, of course, can and should are two different things. What are some things investors should consider before they invest in a Bitcoin ETF?
Robert Brokamp: All these ETFs theoretically hold the same investment. The returns will come down to costs, execution, and liquidity. The expense ratios are going to range from 0.2%-1.5% with Bitwise being the cheapest and Grayscale, the priciest. Many of these ETFs have waived expenses for an initial period of around six months or so. It depends on the ETF or until they've reached a certain asset threshold. They're doing that just to encourage people to invest in their ETFs, but they'll all eventually charge annual expenses. Then there's the process of running an ETF. Doing things like managing redemptions and so forth. Some of these may be a little better at it than others, which means that some may do a better job of actually tracking Bitcoin's price. But right now, it's too early to tell who's going to be able to do that better than the others. I looked at the returns of these 11 ETFs over just the last week, and the difference between the one with the highest return and the lowest return was 0.2%. Now, that may not sound much, but if you compound that over a year, more that could add up. You definitely, want to pay attention to the costs, the ability of the ETF to track Bitcoin's price. If you're a more active investor, you probably want to pay attention to liquidity, which is generally measured by daily volume and the bid-ask spread. The final point I think it's important to remember here is that Bitcoin trades 24/7. Any day, all day, all the time, but these ETFs don't. If there's a big after hours or weekend drop in Bitcoin, you won't be able to get out of these ETFs until the next market open.
Alison Southwick: Fifth and final question, and whatever you say in response to this question should in no way be construed as personal finance advice. But Bro, what is your big takeaway on Bitcoin ETFs?
Robert Brokamp: Well, I think many people have been intrigued by Bitcoin and crypto in general, but they didn't pull the trigger because the process of buying it is different from investing in say just, a regular stock and bond. You had to choose a broker or a custodian that you may not be familiar with. You had to learn about things like hot wallets and cold wallets. Then there have been many stories of scams and people having their wallets hacked. Of course, there was the collapse of FTX in 2022 and all the people who had crypto with FTX who got locked out. By the way, last week it was announced that FTX will be able to repay its customers, but the repayments will be based on asset prices when the company collapsed, which is what Bitcoin was only worth around 16,000. Those investors have missed out on the recent run up, which to me is just brutal. Anyway, I think that because such big established names like BlackRock and Fidelity and Invesco are now entering the market and making it much easier to buy exposure to Bitcoin through these ETFs.
I think many bit curious as you say investors will be willing to dip their toes in. But before you do so, make sure you do plenty of research to understand why some people think Bitcoin will be a good investment. It doesn't pay interest like a bond and it doesn't generate revenue like a publicly traded company. A few years ago, some of the arguments for Bitcoin were that it was a good portfolio diversifier and a good inflation hedge. But then came 2022, inflation skyrocketed, stocks dropped, and Bitcoin plummeted. Investors in Bitcoin are betting on greater adoption and thus greater demand that will drive up the price. It might happen, it might not. I should point out that in early 2021, The Motley Fool invested $5 million in Bitcoin. We as a company have a vested interest in it doing well, but we also know it's going to be very volatile. I think you have to really fully understand and believe in this investment to hold on during those volatile times. I'll just close by saying, you don't have to invest in this. There are many ways to invest and make money. You don't have to do them all. Which is for why me personally, I'll be mostly sticking to boring old stocks and bonds.
Ricky Mulvey: As always, people on the program may have interests in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so you don't buy or sell stocks based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll see you tomorrow.
