Apple Isn't Innovating Anymore, but It’s Still a Fantastic Company to Own

In this episode of MarketFoolery, Mark Reeth and Jason Moser look at three of the week's biggest market headlines. First, earnings from GrubHub (GRUB) and New York Times (NYT 0.39%); then, Apple's (AAPL -0.57%) steady decline for the past few weeks (and the past few years).

Find out what might set GrubHub apart from its competition in a market as tough to stake out as online delivery. Learn why the hosts aren't buying what New York Times is telling us about amazing growth potential in online advertising, and find out why, even though Apple keeps promising world-changing products that might or (more conceivably) might not exist, it's still a great company. That includes examining Tim Cook's role and looking at whether it's even possible for him to fill the shoes of his legendary predecessor, Steve Jobs.

A full transcript follows the video.

This podcast was recorded on May 3, 2016. 

Mark Reeth: I'm Mark Reeth, and joining me in studio today, from Million Dollar Portfolio, Jason Moser. Jason, how's it going?

Jason Moser: Howdy!

Reeth: Happy Tuesday!

Moser: Happy Tuesday to you, too.

Reeth: We've got plenty to get to today, including some comments from Tim Cook that don't exactly make things look good over at Apple. But we begin with earnings. Jason, why don't we start with The New York Times? We've been telling the same story about newspapers for a while now. Money is heading in the opposite direction. Paper is the way of the past. Print is dead. But The New York Times is showing a little spark of life this quarter.

Jason Moser: You're going to have some big pro-print people who are going to say, "How dare you, Mark Reeth! Print isn't dead!"

Reeth: [email protected], send it my way. Send it via email, because print is dead.

Moser: Definitely facing some challenges there. We had talked about this, I guess, a couple of weeks ago in regard to the big Gannett acquisition recently. The bigger question today is, what's worth more -- the information you're getting or the brand that's giving it to you? And I think, for the longest time, the brand was very important, because it signified a reputation and earned trust. I think, as time goes on, you see a lot of these brands maybe skew to one side of the political spectrum or the other. You have your loyalties there.

Reeth: You pick and choose your side.

Moser: Exactly. And I think that's fine. There's no big deal with that. But, generally speaking, what the Internet has done is disrupt virtually everything that we do in our lives. Newspapers indeed fall into this category. I think, when you look at The New York Times, the good news for them is, they've made this pivot away from print and toward digital media subscriptions, and circulation is growing in that regard. That's a positive. I think the bad news, though -- there are a number of bad points, or challenges they have to deal with. They're dependent on advertising as part of their revenue generator.

Reeth: It's newspaper, yeah.

Moser: And advertising is dwindling. It's becoming less and less a piece of the pie, which isn't good. We look at this quarter, advertising was 37% of total revenue. A year ago, it was 39%. A year before that, it was 41%. So they're becoming more and more dependent on paying subscribers. And that's fine, if you can grow paying subscribers. And they are growing their paying subscribers. But when you look at the actual subscription revenue, the subscription revenue is growing far more slowly than the actual subscribers, which would indicate a lack of pricing power. And that's not surprising. We don't really have to make a leap to get there. 

But then, you have to start asking yourself, from an investor's perspective, is this something that is really worth investing your capital in? I see enough challenges here to where -- I think really, the best opportunity for anybody in this space is going to be consolidation. And we're watching that shake out right now. And I think The New York Times is going to have to be a part of some type of consolidation in order to make it a more attractive story for investors. As it stands today, I just don't see enough there to make investors excited about the years to come.

Reeth: Yeah. They're clearly trying to make investors excited. They've got some big promises. And one of them, I pulled this from their earnings, they generated $400 million in revenue through online advertising and subscriptions in 2014. They want to double that to $800 million by 2020.

Moser: I want a toilet made of gold, Mark. It doesn't necessarily mean it's going to happen.

Reeth: [laughs] When you have other companies, like Facebook, for Pete's sake, is struggling with online advertising right now. I think you said this earlier -- it's a large pie, but it's getting divided up very quickly between some large companies out there. The New York Times is going to be fighting for the same ad revenue with Facebook. Facebook, with their news feed, is trying to become the New York Times of the Internet. The New York Times is going to have to fight them, on Facebook's home turf. I don't see $400 million turning into $800 million in six years. I don't see it happening in 20 years for The New York Times.

Moser: [laughs] I tend to agree with you there. I think this landscape only becomes more and more competitive. And when you have platforms out there like Facebook and Twitter and Instagram and Snapchat and maybe even LinkedIn, to a lesser degree, competing for all of those digital eyeballs -- for The New York Times to be able to grow advertising revenue at that kind of a rate seems like a stretch. I think it'll boil down to consolidation in the industry. I think there are going to be more partnerships reached with a lot of those major platforms in order to potentially offer some revenue sharing there that could be beneficial for them down the road. But it's just a far different space than it was even 10 years ago. Unfortunately, The New York Times was built in a different time, on a different premise. It's not as nimble or as savvy as a lot of these newer media companies are. And I think that's where a lot of the challenges are going to be for a while.

Reeth: Really quick, let's speculate wildly. Who buys The New York Times? What conglomerate does The New York Times become a part of? A lot of media companies, like you said, are combining forces these days. I think Comcast just bought [DreamWorks Animation] the other day. Is it so far afield to say that one day, The New York Times and, I don't know -- Warren Buffett owns a whole bunch of newspapers out there. Is it so crazy to say Warren Buffett gobbles up The New York Times someday? Again, speculating wildly. What are your thoughts for the future?

Moser: Yeah, I don't think that's necessarily as crazy, or as big of a leap. Buffett likes newspapers a lot. I think he really likes going down to the local level. I think, when you look at it from a national level, that's probably where more competition is. But that local level, that's where, I think, probably, those local tabloids have a little bit of a better advantage, because they're the only ones covering that space. 

I mean, that's a really good question. I mean, Jeff Bezos bought The Washington Post for himself. That's not an [Amazon.com]-owned business. But it is a Bezos-owned business, and it's becoming more and more a part of Amazon's model. I mean, I don't think it would be all that far-fetched to see a digital property consider bringing something like The New York Times under its wing, in order to bring some more national media savvy. 

I don't know -- speculating wildly, perhaps Google? Perhaps Facebook? I mean, I don't know that I necessarily see that happening, but it wouldn't shock me if it did.

Reeth: Yeah, absolutely. Let's move on to GrubHub, which also announced earnings earlier. Bit of a mixed bag here. Quarterly revenue was up; net income was down. What's your takeaway from the earnings report from GrubHub?

Moser: I think the crucial part of the equation for anyone looking to compete in this market is, it's all going to revolve around customer service. This is a customer-service deal right here. When you're having your food delivered, you want two things -- you want it in a timely fashion, and you want the right order. If you miss out on either one of those, it really creates a bad experience, and you're not as likely to use that service again.

This is a really interesting space, because this is what GrubHub does. This is the advantage that they have. This is what they do. So when you look at the competition in this space, something like Amazon, for example, in their Prime offering now, they are getting more into this space. I'd worry that Amazon ...

Reeth: It's Amazon?

Moser: [laughs] The mandate of the business, the mission of the business is to be the most customer-centric company on the face of the earth. On the flip side there, you look at other competitors like Uber, Postmates, DoorDash -- I'm a little bit more on the skeptical side as far as Uber being able to incorporate this into their model and being as effective with it. I think Uber does something very well in getting people from point A to point B. I don't know that it's necessarily as easy to leverage that infrastructure and throw food into the mix. It could ultimately work out for them. But again, I think, it's not their specialty. It's not what they do. 

We are seeing partnerships with companies like Postmates. I think Postmates is the one that's partnering with Chipotle. And I'm sure that more and more partnerships like that will shake out. But GrubHub went public at a very good time. Now they're there. They have that funding, and they're out there. All these others are still private, with the exception of Amazon, so they have to deal with raising more and more capital and building out the business.

There are a lot of attractive qualities, I think, about GrubHub. This is kind of a pure play. It's a big market opportunity. You have some estimates out there of a $70 billion takeout market here domestically. Now, that's not their market opportunity, but they'll measure total food sales, and their revenues are going to be a part of those total food sales.

All of the metrics are trending in the right direction. They have a solid balance sheet. They're profitable, they're cash flow-positive. Shares are actually trading at a semi-reasonable level at 32 times full-year non-GAAP estimates. So, it's not like it's really all that outrageous of a stock right now. Yeah, it's going to be a very competitive environment, for sure, but --

Reeth: Actually, I want to come back to that. You mentioned this right at the top. In fact, you actually said something about the New York Times earlier that I wanted to go back to as well. You talked about information versus brand, and how in the news industry, brand used to be everything, and now information is everywhere, so brand has become less important. I kind of feel like it's almost the same thing here with GrubHub and its competitors. That's what you were talking about at the beginning of this portion of the show. 

I've used GrubHub. I used it this past weekend. I also used Eat24, which is a Yelp product. I think I used that two weeks or so ago. In case you didn't know, I am about 75% of this market. The eat-in market is all me at this point.

Moser: [laughs] There you go.

Reeth: But in my mind, the two are interchangeable. Even in terms of offerings, of the different kinds of food out there, even in terms of service and delivery times and everything. To my mind, there's not much differentiation between brand or information at this point. You can get food from anywhere, any of these different services out there. If I can call an Uber from a bar and have them have a pizza in that car on my way home, that's the golden ticket right there, that's beautiful. 

I guess, what it comes down to for me, and maybe there is no correct answer here, but what differentiates GrubHub? Why GrubHub over all the others? Again, their business sounds great. You've been giving us some great numbers here. It doesn't sound like GrubHub is a bad investment. Just, is there a moat? Is there any way for it to distinguish itself from the competition?

Moser: I think the quickest way to building any kind of a moat is to have the biggest network. I think, with any of these businesses, having the biggest network is going to be a great way to separate yourself from your competitors. Whether I'm in Georgia or California, I could use GrubHub, and I'll find a large selection of restaurants where I can get basically whatever I want. Ultimately, yeah, you're looking for the food first, and how do you get it is going to be secondary.

Back to the newspaper conundrum there, I think you're going to see consolidation being a part of this industry as well. GrubHub, which also owns Seamless, and they just made another acquisition here of a Los Angeles-based delivery service.

Reeth: LABite.

Moser: I think we're going to see a lot of networking here early on. It's kind of the Wild West right now. That's going to be, I think, the biggest advantage. And I think that's an advantage that GrubHub certainly has over other businesses that haven't been able to go public yet, because they're going to be a little bit more constrained financially. And as your network grows, those network effects start to take place, other restaurants see you as being the company with the biggest network and the most reliable service.

Then you can develop a brand from that. They kind of work together. I think it's going to be building that network out. And the faster they can do that, the more of a competitive advantage, or at least some sort of a moat they'd be able to develop.

And after that, really, it just becomes about execution, making sure you're providing that great service, and making sure that you really are focused on that. It's easy for companies to be customer-centric in the early years. It's another thing to really sustain that behavior and grow it. Customer service is one of those things that's difficult because it's really not so scalable.

You're looking for that human interaction, which is why I'm generally a bit skeptical of these bots we hear so much about. I think they can provide certain things, like, you could find out the hours a restaurant is open, perhaps. But, if you're having an issue with a service, you're probably going to need to interact with a person. I think that service, again, is going to prove out to be a very important dynamic to this market.

Reeth: All right. Let's move on to our final topic of the day, which is Apple. Tim Cook, Apple CEO, went on Kramer the other night, trying to convince investors and shareholders that everything is A-OK. And one of his quotes that you sent to me before the show, I quote: "We are going to give you things that you can't live without, that you just don't know you need today."

Moser: Yeah ...

Reeth: Well, Jason, I just don't know what the hell he's talking about. They've been saying over at Apple that the pipeline is strong, there are more products coming, the next iPhone, the next iPad, the next whatever. The Watch was an attempt at that, which I think largely has flubbed. I'm not confident, personally, in Apple's pipeline. And I think that's drawing a lot of fire from investors these days. What's your take, first of all, on Tim Cook's comments from the show the other night?

Moser: I think, with Apple, let's separate the stock from the business. I think they each deserve their own fair consideration. From a business perspective, this is a phenomenal company. It's huge. The balance sheet is a fortress. And a lot of different resources and ways they can go. And obviously, it's one of the most important businesses of our time. 

Apple the stock, though, yeah, that's a bit of a different story right now. And I'm not sure there's an easy answer there. I am growing a little bit tired of hearing Tim Cook say that as well. Every call, he's talking about the pipeline, and these products you're going to need that you don't even know you need. And that sort of sounds familiar, because I think that's what Jobs was always really good at doing, was giving us things we didn't even really know we wanted or needed.

Reeth: Yeah, just one more thing.

Moser: Just one more thing. And I mean -- a lot of people are investing in Apple these days because they think it's dirt cheap, and they think that's a reason to invest. And I get that. I'm not necessarily disagreeing with the idea that it is cheap. It sells for something like 10 times earnings, and backing the cash out of the balance sheet there, it's pretty phenomenal.

By the same token, I think a lot of the story is very well known already. We know they're going to pay a dividend. We know they're going to keep on buying back shares. I think a lot of that is priced in. Maybe not all of it, but I think a lot of it is. The market generally is a forward-looking mechanism. 

I think Tim Cook has done a wonderful job managing this business. I think Tim Cook is not an innovator. And I'm not saying innovating is easy, either. I think innovating is something that is very unique, and that's why you don't see it happening all the time. If it was easy, everybody would be doing it. I think Tim Cook is basically doing the best he can. I think he's making the best of a given situation. And I don't know that it's fair to really expect much more from him.

I tend to agree with you. I think the Watch has basically done what I thought it would do. It's done OK. It's not going to be a new direction for the company, I don't think. I think they're facing a lot of challenges on the tablet front. I think the phone is certainly becoming more and more commoditized as time goes on. And I think as technology improves and more companies out there are doing more things, Apple's closed ecosystem becomes less attractive.

I think most people like to be able to utilize all the options that are out there. A number of people love Apple and only want to use Apple. That's great; have at it. But a number of people also want to be able to use everything else that's out there, and maybe have an iPhone while they're at it, and that's cool, too.

I saw a tweet from Joe Magyer maybe a week or so ago that I think really sums this all up. You look at when Tim Cook took over in 2011, I think it was, they first implemented a dividend in 2012. You look at that stock from 2012 to today, and it's clearly underperformed the market.

Even with the dividends and buying back shares and everything. I think that's for a number of reasons, but part of it is, it's obviously a very big company. They are trying to sell hardware at a high price point, which is not going to work everywhere. There's a reason why the majority of the world is using Android and not Apple. People tend to want to be able to utilize all of the options that are out there.

I think Apple stands a chance to do very well. I think they're going to need to make some acquisitions. I think a catalyst could be in that balance sheet, because so much of that money is overseas. I'd love to see our government here offer up a tax holiday and let some of these companies repatriate some of that cash. I think they could do a lot of great things with it, and shareholders could really win from that. Who knows what'll happen on that front?

I do think that a lot of people are probably getting a little bit tired of the "Just wait, we've got a great pipeline" talk, because you know what? I'm just not seeing it yet.

Reeth: Been waiting for a long time. Apple shares closed down for an eighth straight day yesterday, which might be a non-headline, but it's the headline today. That's the first time this has happened since July 1998. The stock has lost 11% since April 26. In your mind, it's looking a little cheap. Is now the time to buy?

Moser: I think if you're looking for a steady dividend play that you can sleep well at night knowing is in your portfolio, Apple is a very fine stock to own. You have to put into context to try to figure out, how does this stock double? It's already a huge company. You need to keep your expectations in check. This is a far different Apple than it was five years ago. But it's a great company that's doing great things, and they have a lot of opportunities to take the business in new directions. 

I wouldn't be backing up the truck on the stock today. I think it's cheap for a reason, and I don't know there's necessarily a catalyst that takes this thing to the moon. But it's a very high-quality business, and again, I think Tim Cook has done a very fine job, given the situation. He's not Steve Jobs, and we all knew that. I think the biggest challenge for him is trying to figure out what the next innovations are. And he has a great team there; it's just probably taking a little bit more time than a lot of people feel like they have.

Reeth: Waiting and seeing and hoping and wishing and praying.

Moser: I still like my iPhone.

Reeth: Sure, nothing wrong with that.

Moser: Not at all.

Reeth: Jason Moser, thanks for being here, man.

Moser: Thank you.

Reeth: 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 don't buy or sell stocks based solely on what you hear. That's it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Mark Reeth. Thanks for listening. We'll see you tomorrow.