In this podcast, Motley Fool host Dylan Lewis and analysts Andy Cross and Emily Flippen discuss:
- Chipotle's stellar comps and future store growth opportunity.
- Why Tesla's low-priced EV offering has investors overlooking down results.
- Alphabet getting in on the dividend game, and the market telling Meta not to spend on AI like that.
- What Spotify, Snap, and Roku have to say about the strength of the ad market for 2024.
- Two stocks worth watching: Tyler Technologies and Visa.
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.
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This video was recorded on April 26, 2024.
Dylan Lewis: It's earnings-palooza, we're celebrating with an entire show covering company updates. This week's Motley Fool Money radio show starts now.
It's the Motley Fool Money radio show. I'm Dylan Lewis joining me over the airwaves, Motley Fool, senior analysts, Andy Cross and Emily Flippen. Fools, great to have you both here.
Andy Cross: Hey, Dylan.
Emily Flippen: Hey. Good to be here.
Dylan Lewis: It is one of the biggest weeks in earning season and that means earnings-palooza, a marathon of updates from Big Tech, the streamers in audio and video. I look at what to expect in the ad market in 2024. I do want to start us off with the Big Macro, earnings edition. Taking a look at the current landscape as we are seeing all these reports come in this week and next. Andy, what are you paying attention to? Maybe outside of companies control but affecting some of the results and what we might see from companies this quarter and going forward for the rest of the year?
Andy Cross: Dylan, it's been a pretty good quarter so far. You have 80% of companies in the S&P 500 that have reported that are beating the earnings expectations if you play that game. Obviously, there's been some volatility in the market because of some of the macro issues with Federal Reserve wondering about the interest rate policies and whether we actually have to cut as soon. Remember, at the beginning of the year there were something crazy like six or seven rate cuts baked in, and now there's basically one or two after some of these initial data points that have popped up over the past couple of weeks and some commentary from the Fed. But overall, it's been a pretty strong earnings season, especially as we will talk about for Big Tech, that is driving really the big bulk of the earnings growth. Dylan, and I say that's the way it's been and it probably looks like what we're seeing from these companies the way it's going to be for the foreseeable future.
Dylan Lewis: Emily, Andy brought up the rate picture, so I'm going to take the bait here. We saw some updated inflation numbers that just continued this narrative of this is sticky. It's getting a little bit hard to resolve. What are you paying attention to you as you're trying to get a sense of where that picture is going?
Emily Flippen: The earnings season narrative is very happy. We're seeing a lot of companies report stronger bottom lines than we expected. But I think big picture for the economy, we're seeing some warning signs. It's not just the fact that rate cuts may not happen as aggressively, as quickly, as many investors expect. But I think we're actually seeing some initial warning signs of what could be a stagflationary environment. That's a pretty dramatic statement to say. Stagflationary environment is really the worst of both worlds. It's high inflation, low GDP growth, and also high unemployment. A lot of companies who are reporting strong earnings this quarter are doing so because they massively cut costs, which includes things like layoffs. Despite the fact that the economy seems to be doing well, consumers are still spending, inflation does seem sticky and to the extent that we see unemployment start to trend upwards, which hasn't happened yet. But if it were to happen while GDP growth stays low and inflation stays high, that could lead to stagflation, which is really, I would say impossible, I say that word loosely, but hard, really challenging for the Federal Reserve and for our government to fix.
Dylan Lewis: Digging into some of the company results from this week, we're going to kick off with two household names and two Fool favorites: Chipotle and Tesla. Andy, higher prices and in the inflationary environment, not necessarily taking a bite out of Chipotle's results. Shares up 8% this week after the Burrito Maker posted earnings ahead of expectations. It seems like Chipotle is in this spot and it's a magical one, Andy, where almost nothing can go wrong for them.
Andy Cross: I was just going to say, Dylan, it was another outstanding report. The moving assembly line may have been made famous by Henry Ford, although not really invented by him, but Chipotle has made an art and science from the burrito assembly line and that's really showing up on all of the results that winning formula is about getting people in the door or the app through the line quickly and satisfied and charging these competitive prices, which they are all doing, and they do that over and over again. This quarter they improve that throughput by two full entrees, Dylan, during the average 15-minute periods. If you think about that, that's like what, 20 or 25 bucks per 15-minute period? Chipotle is just doing this time and time again. This helped drive comps growth of 7% for the quarter, that's 5% in transactions and only 2% in price, revenue increased 14% as they opened up 47 new stores. As you mentioned, the earnings picture, because operating margins increase a little bit. They now have all these Chipotlanes, the drive-throughs that they're opening up. EPS, Earnings Per Share jumped 27%. Lower food and beverages, packet and packaging costs fell to 28.8% of sales versus 29% of sales a year ago. With this revenue, they're getting scale, they're opening more stores. The balance sheet is packed with $2.2 billion in cash and no debt. Just so much going right for Chipotle right now.
Dylan Lewis: You mentioned comps and they actually up their comp guidance, Andy. Chipotle now anticipate same-store sales will grow by mid to high-single-digit percentage, which is up from mid-single-digit percentage, which was their original guidance. The company also is focused on that 7,000 location goal, continuing to make progress there. Is there anything not to like in what we're seeing from Chipotle?
Andy Cross: Well, maybe the price a little bit, but its sales that are not 55 times this year's earnings. That's actually a slight discount to what historically is traded out. For a company that returns equity of more than 40% and a five-year earnings compound growth of 45%, a premium price willing to pay for one of the premium operators in the restaurant business.
Dylan Lewis: We also saw results from Tesla this week. Any big time response to what seemed like, Emily, meh earnings results. Shares are up 20% even as the company posted revenue and earnings declines year over year, and both of those missed expectations. What exactly had the market so excited?
Emily Flippen: Well, it's more like what exactly at the market so disappointed throughout the course of 2024 because Tesla's stock prior to this quarter was down something like 40% for the year. There's an expectation heading into this quarter from investors that we knew the environment was going to be bad. It was just a question mark about how bad it was. As you mentioned, Dylan, there was a miss in general in terms of both profits, and deliveries, and sales expectations for Tesla on the quarter, but the market actually responded very positively. I think that's because the question wasn't how bad is it, but it's where is the company going from here? Because over the course of 2024, we've seen competition increase, especially for BYD in China. We've seen cheaper alternatives come onto the market, especially internationally in places like Europe, and we've also seen a slowing EV adoption rate. Other car manufacturers have actually pulled back in recent quarters on their expansion into pure electric vehicles, choosing to focus on hybrid vehicles. Meanwhile, Tesla's out here announcing all of these cool, new crazy initiatives like the robotaxis and having a big planned launch event for that initiative later this year. There's a question mark from investors heading into this quarter about what is Tesla's strategy? Because for years Tesla has been communicating that their goal is to provide a cheap, accessible electric vehicle that can be purchased by anyone and everyone, but they are not first in the market for that. BYD has beaten them, especially internationally. What is Tesla going to do today? We saw that in this quarter, management doubled down on the cheaper EVs, so there is still focus on providing widely accessible vehicles, with that margin being made up through upsells, things like autopilot and other AI initiatives that can actually do a lot to increase their gross margin past that of just a plain automaker. I think it was just a matter of things not being quite as bad as investors expected and a reiteration of that strategy that has remained unchanged despite the fact that the environment they're working in right now is increasingly challenged.
Dylan Lewis: Andy, I want to go over to you for a second because there were a lot of forward-looking things to be excited about in this report. Also, some things that I think we do need to note, they are cost cutting, they're laying-off 10% of their workforce. We saw this highly publicized Cybertruck recall, and we know the volumes for that are low. It seems like there's also some reasons to be concerned about this business going forward.
Andy Cross: Well, I think the push through the model too, that was the big news, that's the cheaper car below $25,000, say, and that's been in the market that the likes of BYD and others over in China have been pushing too aggressively and done so well in, as Emily pointed to, people are looking for cheaper cars, and Teslas are really always focused on and Elon Musk, on the more expensive ones including that Cybertruck. The layoffs getting more efficiently, Emily mentioned that earlier on top of the hour about the layoffs. I think investors have some reasons to be encouraged because this was test on Elon Musk, recognizing that there's a market that the investors are looking in to go into it. The cheaper market and Tesla is now going to spend time there. Whether they get there in two years, that's when they expect to start rolling in some of the Model 2s off by the end of 2025. That's pretty ambitious. But if they can get there, that's a good sign for investors.
Dylan Lewis: I have a higher degree of confidence, We'll see an update on the robotaxis because they gave us a firm date of August 8th, 2024, remains to be seen on the lower price models. Coming up after the break, we've got the latest trend in Big Tech dividends. Stay right here. This is Motley Fool Money.
Ricky Mulvey: Ricky Mulvey with Motley Fool Money here. I want to tell you about another podcast though called the Next Wave. AI is all the rage right now and you may be feeling overwhelmed with the constant barrage of information. I know I have trouble keeping up with this stuff and I don't want to get left behind. The Next Wave podcast is going to keep you updated. Matt Wolfe and Nathan Lands aim to be the chief AI officers for your business to help you get ready for this upcoming wave of change. I checked out Matt's YouTube channel, he does a good job connecting news and technical updates in AI to what you see on the user end. Like what more powerful data-centers mean for the videos you see from Saura and why companies are rethinking voice authentication? The Next Wave is going to be a weekly show, so you'll get Matt and Nathan's insights and they're going to introduce you to other key players in this exciting space. Look, if you're curious about AI, you want to understand how to implement it in your business strategy, the Next Wave is a good podcast to add to your rotation.
Dylan Lewis: Welcome back to Motley Fool Money. I'm Dylan Lewis joined again on the air by Andy Cross and Emily Flippen. If you like big numbers, this segment is for you. We've got updates on about six trillion in market cap coming with looks at Meta, Microsoft, and Alphabet. Andy, let's start with Alphabet. Shares up 10% this week after the company earnings results were out. It seemed like the results were pretty strong, but I have to say a lot of the investor excitement seemed to be more about the capital allocation decision that the company is making.
Andy Cross: Dylan, it was finally a positive reaction from investors. If you look at the last two earnings reports, the stock fell 8% and 10% the next day. Now I'm not a daily investor of course, but it was nice to see the reaction and a lot of that obviously was from the dividend launch that they announced. I think there was hope that they would, but not really the expectations so that's nice to see in a $70 billion additional buyback. But operationally they're really starting to get it done. Cloud was the real nice spot with revenues up 28%, an acceleration from last quarter. I think there were some worries that that's not going to continue to accelerate and profits jumping almost 5X in that business to 900 million. It really seems that the artificial intelligence initiatives, the AI initiatives tied to its Cloud business is really starting to help. The generative AI overlays if you are using this in Google search, is those results have led to more than a billion queries with that Gen A and it's still rolling out. They're seeing encouraging results that keeps search tied in a competitive position for them, or so they say. They see a clear path to monetizing more and more AI through Gemini, its Performance Max tool, which is this ad campaign manager tool, all through search in ads in the Cloud and their subscriptions. All this leads to revenues that grew 15%. Company operating income jumped 46%. Earnings per share was up 62%. Search revenues grew 14%. YouTube grew 20%, that's the fastest year-over-year quarter growth in many quarters. YouTube and Google Cloud, Dylan, are now expected to end this year with a 100 billion sales run rate out of about 300 billion in total sales so it's not just search. Importantly, as we'll hear a lot, capital expenditures into infrastructure was 32 billion last year and this year now they're on a $50 billion run rate. That's about more than half of their earnings estimates so they're investing heavily into infrastructure across the board to be able to be competitive when it comes to artificial intelligence, and that's starting to show up in all of the results.
Dylan Lewis: Emily, you and I are both millennials and have generally grown up in an investing environment where dividends were almost a dirty word, especially for high-growth tech companies. Alphabet following in Meta's footsteps here, what do you make of this?
Emily Flippen: I thought we were over this point of history, right? So many investors get started in the market because they're interested in things like dividends. But Dylan, younger investors, especially I think they want to invest in what they see as the cutting-edge of the future. That's technology, that's the Metaverse, that's growth. Whatever it is, it's not dividends. It's a little bit interesting to see the market respond so positively to Alphabet's news because it just goes to show that money in your pocket is money in your pocket. I do think that this could be a little bit of Alphabet plugging their ears and saying lalalala to the impending threat, that is AI. It's an opportunity for them but also a threat to their search business, which is part of the reason why I think they're focusing on ad-generated content on things like YouTube, for instance. But still, the fact that they are sitting here saying, we don't have a better place to invest this money other than share buybacks and now a dividend, I think speaks a lot about the capital allocation of this business moving forward. Great company, but one that I am a little bit more questioning over now, simply because they're telling us they don't have a better place to reinvest.
Dylan Lewis: When Andy was giving his rundown on Alphabet, he mentioned strength in the Cloud. We also saw that showing up in results from Microsoft. A little bit more of a muted response from the market on them, but it seemed like we saw really strong core earnings numbers here from the business.
Emily Flippen: It's unfortunate for Microsoft, they're reporting earnings this week when we've had such a big stories from other large tech companies because what is otherwise a really stellar quarter for Microsoft has gone unnoticed by the market. It's not inherently a bad thing for Microsoft, but as you mentioned, Dylan, this is a business that continues to push in the correct direction, which is to say they're looking for what is next for the business. Yes, a lot of that focus is on Cloud revenue, which as you mentioned, was really strong in the quarter, up 23%. In particular, using Azure, they're gaining market share. If I'm Amazon, I'm scared a little bit personally. But it's good for Microsoft shareholders to see Azure still stealing market share and part thanks to that dedication to their forward-looking AI initiatives. With the launch of Copilot across so many different functionalities for enterprises and individuals alike, there's a lot to like with Microsoft moving forward. Now, I give Microsoft a pass in comparison to Alphabet. Yes, they have a little bit of a dividend, but I feel a little bit more of a forward-looking management team when it comes to Microsoft, so I like the direction this company is headed.
Andy Cross: You know what's interesting, Dylan, is on the call Satya Nadella said we're doubling down on this very important work, putting security, I'm talking cybersecurity above all else before all of our features and investments. Now this is an important part because they got a little bit, not just a little bit, very flatly criticized by the Cyber Safety Review Board earlier this year when they criticized the cyber-security capabilities of Microsoft and pretty much said they require an entire overhaul, particularly in light of the company's centrality in the technology ecosystem. The fact that with all going on, AI spending, infrastructure spending, of which Microsoft is spending gobs as well, it is very interesting to see that they realize cybersecurity is not a strength of theirs or at least it needs some work and that they are also very focused on that space and going to put real resources behind that to address these shortcomings.
Dylan Lewis: Andy, speaking of AI spending, we got an update from Meta this week as well as part of the big tech rundown. I was a little surprised because they said, hey, we are heavily investing CapEx in AI and it seems like the market was like, yeah, wait, no, not like that. We want you investing in this space, but it doesn't seem like they were too thrilled with the way that Meta is doing it.
Andy Cross: Well, if it takes money to make money, investors certainly were not thrilled at the up to 40 billion expected CapEx this year, a pretty large increase. Really for pretty good reason because again, from a percentage of income or cash flow, it's a much higher level than the other larger tech companies. I think that was a concern weighing on people as Meta is continuing to invest in AI. Now, I think it's starting to have real impacts when you start to see about their growth and how much impact they are having on their ad business. That's really coming through in some of these results. Now, they still have massive operating losses in the Reality Labs, they're not backing away from that, so you're going to see these investments in the business, but overall, the ad business of Meta continues to be very healthy and a lot from these investments, but they are investments and to be competitive, they got to spend the money in this space.
Emily Flippen: The Metaverse won't build itself. Maybe they're taking a lesson from Roblox here, which is to say, hey, why would we spend all of our time and energy trying to build the Metaverse when we can let the robots do it for us?
Dylan Lewis: Yes. At $45 billion in cumulative losses so far for Reality Labs, Andy, I'm just curious what needs to happen for that investment to make sense and to pay off from it?
Andy Cross: You know what's really interesting, Dylan, is that Mark Zuckerberg on the call started to group together Reality Labs and the AI initiatives and saying that they're really tied together. I wouldn't be surprised that eventually at some time we start to see them not break out the Reality Labs disclosure even with all those losses they generated for about 440 million in revenues this quarter. There's so much attention on those losses and those investments. At some point if they even pull back on that, that might be a very encouraging sign for investors and the stock price, but right now he's not slowing down in that space and in fact he is doubling on it.
Dylan Lewis: Do you think that's why there was a little bit of pessimism around that CapEx AI spend? They're like actually we know what you're doing here. This is Metaverse Ben, this is isn't AI.
Andy Cross: Well, I think for sure. Again, just because the volumes are so high, but also they realized that the company needs to be competitive, continuing to invest in this space, it's a lot of money.
Dylan Lewis: All right. Up next, the earnings rundown continues. We check out streaming and trends in digital ads. Stay right here. You're listening to Motley Fool Money. Welcome back to Motley Fool Money. I'm Dylan Lewis, joined by Emily Flippen and Andy Cross. It is one of the biggest earnings weeks in the market. So our look at the post-earnings movers continues. This time we're zooming in on digital ad market spend and streaming. Emily, we're going to start that look with Spotify. The stellar 12-month run for this company continues really strong earnings results. Looked like we saw some great revenue growth and a lot of positive user trends for one of the leading music streamers.
Emily Flippen: It's absolutely mind-boggling or it shouldn't be mind-boggling to investors about just how much Spotify has continued to grow, despite how saturated the business is already with over 600 million monthly active users on their platform. For context, that's something like 13% of the global world population and I'm not adjusting for babies and others. This is an incredible number of monthly active users on Spotify. Now not all of them are premium subscribers, only around 40% or so of those members actually pay to get rid of ads on their platform, but as the ad market has ticked up here over the course of the past year, so has monetization for the platform. So between rising subscription prices for those who are willing to pay for the platform and a better ad market, it's created just a one-two punch in terms of strong financial performance for Spotify. But despite the fact that the market has really rewarded Spotify over the past year, which is well-deserved after a couple of years of challenging growth, I will say I'm a little bit more cautious around some of the commentary that management provided in this most recent quarter. I Like a lot of the initiatives they're getting into. Podcasting now pushing to become profitable this year. Audio books remain a great growth opportunity, but the fact that management reiterated that they pulled back too much from advertising over the past year and they want to spend more on advertising moving forward has me scratching my head a little bit because maybe they're seeing a growth opportunity that I am missing here, but the number of hundreds of millions of monthly users that they already have, personally, my focus would be better on monetizing and engaging those users as opposing to try to create double-digit user growth because I think they could run into a Netflix-esque problem if that user growth falls off a cliff because right now, that's what the market is rewarding the business for.
Dylan Lewis: In recent weeks, the stock is basically back at all-time highs, very close to them, and shares are up over 100% over the last 12 months. It's been an incredible run, but you did mention that the user growth, it seems like it's got be saturated at some point. They've been in that magic period where they've been able to grow because there are more people using the platform and they've been able to raise prices. Emily, are you saying that we should be a little bit more careful here, maybe not expect the same type of growth and share price appreciation from Spotify going forward?
Emily Flippen: I would always rather be overly cautious and then pleasantly surprised as opposed to baking in a level of growth that I think could be untenable for the company over the long term. I do not think this is a business that is going to see double-digit monthly active user growth over the next five years, the same way they have over the previous five years. Then the question mark for investors just becomes, where does the business start to drive profits from this point forward? Because that gross margin is capped, so they've done a great job of reducing their costs, which has driven up profits and free cash flow for the business over the past 12 months, but that's not going to be sustainable to the extent that they continue to invest in advertising, so they really need podcasting to expand their margins, which is again, benefited by a stronger ad market, but they also need audiobooks to drive up engagements because those can have higher gross margins than their pure music streaming business. I love the fact that they are in land-grab mode. I want them to be the most dominant streaming platform. They are the most dominant streaming and podcasting platform. Maybe one day the most dominant audiobook platform as well. I understand that takes a lot of reinvestment, but I want to hear management talk about how many, hundreds of millions of people they think they can truly get on the platform because I'm pretty happy with 615 million.
Dylan Lewis: We're going to stick with ad talk shares of Snap up over 20% after the company reported 20% top-line growth. Andy, Snap is one of those companies. I feel like every time I let it fade off my radar, it goes and puts out a quarter like this and a market reaction like this.
Andy Cross: Well, it's probably the most volatile stock around earnings that I can recall. The average move of the past couple of earnings reports have been around 20%, both highs and lows, that includes a 35% drop in February after its fourth quarter when it guided to a negative operating profit, which really has sent investors fleeing and for a good reason. But instead, this quarter, Dylan, it delivered around 45 million in operating profits, if you measure it by earnings before income taxes, depreciation, and amortization. Its guide for the next quarter is ahead of analyst's estimates as well. So that's why the stock reacted so positively. But this is really volatile stock, especially around earnings season. But the quarter was quite positive daily active users up 10% to 422 million, and Snapchat plus users as their subscription business, that more than tripled to 9 million. From what I read, that was really far ahead of what analysts were expecting. Ad revenues were up 16%, total revenues up 21%. So you can see they're starting to get more and more efficient with how they are driving revenues relative to who they are coming in. It's also much better than it was in the fourth quarter and far better than it was in the first quarter, a year ago, Dylan, because that was a negative number. So they're lapping some weaker comps per se, but still overall pretty good quarter, spotlight and creative stories viewing that was up 125%. They did mention augmented reality. More than 300 million users engaged with augmented reality every day on snapshots. I'm not quite sure what that is, but they have a lot of people engaging with that 400 million daily overall and 300 million using some form of augmented reality. What was interesting, Dylan, is the gross margin was lower because of infrastructure investments. That's what we heard constantly about these companies making more and more investments into their business, into their infrastructure, regardless of what it is. That really continues to hit, but they're operating margin strength was great because of further restructuring they've done including with 7% fewer employees than a year ago.
Dylan Lewis: You mentioned the Snapchat Plus subscription offering, and I want to zoom in on that for a second. You pointed out 9 million subscribers as it relates to the financials, 87 million in revenue for the other revenue category for them, not ads, primarily that is their Snapchat Plus subscription. It is small in the grand scheme of the overall revenue pie, but I think a lot of people have looked at Snap and said there's a loyal user base here that continues to use the product. Are you encouraged by them looking for other ways to monetize it outside of ads?
Andy Cross: Yeah, it's small. It's drop in the bucket right now. That was one thing that all of these companies that are so ad-driven because the ad market can be so fickle. That says one thing they need to continue to focus on to help to drive other subscription parts of their business. One interesting commentary was the engagement around small and medium-sized advertisers. Now, again, so thinking about the ad market and the concerns around who is spending for advertising. The ad market, what they said on small and medium-sized advertisers, those active advertisers on the platform were up 85% in the quarter. That's encouraging. You start to think about the platform and all these monetization efforts they are trying to do. You got to get the advertisers on the platform, not just the users. You got to get the advertisers until when the advertisers are fleeing into the platform, they're seeing something. Maybe these investments that Evan Spiegel and his team are making are starting to play out. They're starting to make more and more investments into the platform, into artificial intelligence and the like, as well as what we saw for Meta. Maybe I starting to have an impact and it's starting to help their advertisers be more efficient in their spend that they have on the platform, which is why they're there in the first place.
Dylan Lewis: So we've had looks at audio ad spend, social media ad spend, and now we're going to look over at video and streaming ad spend. Emily shares of Roku down 8% this week after earnings. A lot of the results were ahead of expectations, but the company did warn that competition is heating up. Is this the impact of streamers like Netflix and Prime beginning to explore those ad-supported options?
Emily Flippen: Competition for Roku that has more than 50% market share in the North American ad-home Smart TV market. No. It's funny to me when a business comes out, they report earnings and then headlines get a cold up. Maybe one or two sentences. That they didn't attribute the underperformance too. In this case, we're actually seeing a lot more of the same for Roku. The underperformance, in my opinion, comes down to the inability to expand streaming margins in the quarter. This was a strong ad market. We've seen it from businesses like Snap, which Andy just talked about, as well as others. Spotify being another good example. But for some reason, Roku's gross margins just did not move in the same direction as other ad-based platforms. So there was this question mark about why. There was a commentary from CEO Anthony Wood, who did note that they were seeing a little bit of a headwind in terms of expanding that margin because of the number of ad-based streaming platforms that were available to subscribe to. But they also attributed it too, which I think is the larger impact of those price hikes, lapping, challenging price hikes at this point last year. They had a lot of growth at this point last year because as businesses like Netflix and others raise their subscription prices, if you buy those subscriptions over the Roku platform, Roku gets a cut of it. If the price of that subscription goes up, naturally, Roku's revenue goes up as well. They're lapping challenging comps at this point last year, which meant that that margin didn't quite move in the same direction as other ad-based streaming platforms. While it's true that these ad-based options, things like ad-based Amazon Prime being a good example or ad-based Netflix, our lower margin, lower revenue share for businesses like Roku. If you're going to have ads on the Roku platform, you still have to enter an inventory split with Roku in the first place, so regardless of whether or not people are watching via ads or subscriptions, Roku is still getting a cut. So the most important metrics in my opinion for Roku shareholders are just watching those engagement numbers, watching their market share. Market share continues to expand the Roku branded TVs while dragging those platform margin, or those hardware margins down will help support higher platform margins over the long term, at least that is the thesis for this business. Remain focused on what matters and ignore the silly headlines saying and things like ad-based platforms that are hurting them because, in fact, it's all supporting the same narrative.
Dylan Lewis: Taking a step back and looking at the results from Spotify, Snap, and Roku all together, Andy, what I'm seeing is a lot of strength in the ad markets and a lot of these businesses feeling pretty good about the back half of 2024. This is an election year, which means we typically see elevated ad activity. It seems like the consumer spend story is holding up. Do you feel like the rest of the year bodes fairly well for ad-based businesses?
Andy Cross: Compared to what we saw near the end of last year, when there was a lot of concern from some of the AdTech companies on how much activity would be available from clients who spend on platforms. Would they be more cautious going into a period when the interest rates were high? This is before a lot I talk about in the Fed rate cuts. I think there were some concerns around that, Dylan, and now we're starting to see that these platforms are so large and online and video and streaming advertising is such a new way to reach other clients, including, by the way, retail when you look at what's going on with Walmart and Amazon and retail ad spending on retail platforms. That's a really exciting spot to it. I'll be very interested to see what Amazon reports on their ad business that's done very well. I think the ad market is starting to slowly show up and come back, and like you said before, going into an election season which tends to be quite good for ad businesses, that bodes well. Now we'll have to see how all the AI concerns around advertising on different platforms for elections and concerns around that impact is. But overall, a pretty good spot for the ad market right now it seems.
Emily Flippen: Well, it really depends on where you're situated in the ad market too, because election years are good for ads because, guess what? Everyone is trying to reach consumers, voters. You look at things like Roku with connected TV being a good example, or even Spotify, YouTube, all the businesses we've talked about, those all benefit from higher ad click per cost ad spend because they're trying to reach voters. That happens during election years, but when we talk about Etsy and Amazon and these other ones that depend on enterprise ad spending. I'm spending more money to get my product in the face of consumers. That gets increasingly expensive for those companies in a tougher environment, so they may actually pull back on that spending because they're not reaching consumers as effectively as they would be in not election years. I think it helps some ad businesses but could actually potentially hurt others.
Dylan Lewis: Alright, coming up after the break, we've got an earnings look ahead, and we've got stocks on our radar. Stay right here. You're listening to Motley Fool Money.
Well, it's not so easy now the way it was never back then.
Yeah. Oh yeah. What condition my condition was in.
Dylan Lewis: As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis, joined by Emily Flippen and Andy Cross. We've covered eight different major results from companies this week, but the party continues next week. We've got Apple, Coinbase, Amazon, McDonald's, Starbucks, a lot of big names reporting next week. Andy, as you look out to some of the companies that'll be providing updates. Anything in particular you're watching?
Andy Cross: Well, the big one, I think one of the big ones, Amazon, you mentioned there what's going on with their cloud spending? You see the acceleration in Cloud growth from Google, from Alphabet, and from Microsoft. Is that taking share or not? Lots of Game of Thrones going on with these tech giants it seems. Then, obviously, in their advertising has been, which I mentioned before, is really starting to come on. I think one of the third largest advertising platforms out there right now, so very interested to see what goes on with Amazon from that spend and then also Starbucks. I talked about Chipotle and how great and Dylan with you had mentioned their comp growth and their expectation for continued comp growth. How does that impact Starbucks, and what are they seeing in the marketplace when it comes to that comp growth? Can they be competitive and still continue to drive higher comp growth when it comes to their overall business?
Dylan Lewis: Emily, what about you as we see earnings continue? What are you watching?
Emily Flippen: There are so many great consumer-facing names that are reporting next week, but honestly, I'm bored by those companies. We already know consumers spend from all of our GDP data has been strong. I expect for a lot of these consumer-facing businesses to come out of the gate with decent results. It's on par with what we've seen already. I'm interested in those enterprise-looking businesses, the ones that are looking to sell to other companies. Because that's where I think we'll start to see some of the economic pressure. I'll pull out a name here that I think is interesting, almost like a second radar stock; if I can, it's AAON. A-A-O-N is their ticker, and they are a specialized HVAC manufacturer for large-scale industrial projects. They make these custom HVAC. It's been an incredibly strong-performing business operating in a really interesting market, but one that admittedly depends on a lot of CapEx spending that is not related to things like data centers or GPUs. I'll be interested to see what that actual industrial CapEx spend looks like next week.
Dylan Lewis: I think Emily just found a loophole to getting a third radar stock or a second for herself into the mix. Let's get over to our formal radar stocks, and maybe Dan will have a question about that too. Andy, what are you watching this week?
Andy Cross: They are not new to you. I'm sure Visa, $550 billion largest payment processor, doesn't need much of an introduction, but it's one that I've never personally owned, preferring the smaller MasterCard and Visa continues to put up these robust growth numbers, 10% EPS growth per year for the last few years. The stock has pulled back from 290 to about 275 or so. I just think it's really interesting is issued 4.3 billion credit and debit cards that processes more than 280 billion payments across its network. Payment volume was up 8% last quarter, and their earnings were up 17% on top of 9% growth. Pays out nearly 4 billion in annual dividends, bought back 12 billion in stock last year. It's a long-term earnings growth. It's compounded at more than 10% for the last few years, has a price-to-earnings ratio of about 26 with pretty low volatility. Obviously lots of regulation concerns and the potential merger of Cap One and Discover. But Dan, I think it looks pretty attractive at these prices and definitely worth considering.
Dylan Lewis: Dan, I've got this one in my wallet, and I'm guessing you might too. A question or a comment about Visa?
Dan Boyd: What can I ask about Visa? It's a titan. It's a shoo-in for potential radar stock win here. Come on, Andy. Come on.
Dylan Lewis: Well, what I'm hearing there is Emily, bring it. What's on your radar? You got to beat Visa, which is a titan.
Emily Flippen: Here's what I will say. I didn't think I could pick something more boring than Visa, but I do. I have managed to outdo Andy's boringness because my radar stock this week is Tyler Technologies, the ticker is TYL. You may not be familiar with the name, but they are an enterprise software provider for federal, local, and state governments. That sounds very boring, and trust me, it is. But let me sell you on something. Have you been to Georgia? How about Palm Beach? Have you been to Idaho, Juneau, Alaska? All of these cities and counties rely on Tyler Technologies to supply their everyday transactions and enterprise software operating behind the scenes. If that doesn't get you excited, Dan, honestly, I don't know what will.
Dylan Lewis: Dan, a question about Tyler Technologies.
Dan Boyd: I think Emily is trying to sneak in a lot of Texas into today's show, with AAON having a factory in Texas and Tyler Technologies being based in Texas. Emily, you're not fooling me.
Emily Flippen: [laughs] I'm a Texan through and through. What can I say?
Dylan Lewis: Dan, which one's going on your watch list this week? We have Visa, we got Tyler Technologies, or if you want to go off-menu with Emily's other one, AAON.
Dan Boyd: It's a snooze fest through and through today, Dylan. But what can I say bad about Visa? It's a great company, it's a huge company. It's got to be the winner.
Dylan Lewis: There you have it. It's a titan. Emily Flippen and A. Cross, appreciate you guys being here. Dan, appreciate you weighing in. That's going to do it for this week's Motley Fool Money radio show. The show is mixed by Dan Boyd. I'm Dylan Lewis. Thanks for listening. We'll see you next time.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Andy Cross has positions in Alphabet, Amazon, Apple, Chipotle Mexican Grill, Etsy, Mastercard, Meta Platforms, Microsoft, Netflix, Roku, Spotify Technology, Starbucks, and Tesla. Dan Boyd has positions in Amazon and Chipotle Mexican Grill. Dylan Lewis has positions in Etsy and Spotify Technology. Emily Flippen has positions in Aaon, Roku, and Spotify Technology. The Motley Fool has positions in and recommends Aaon, Alphabet, Amazon, Apple, Chipotle Mexican Grill, Coinbase Global, Etsy, Mastercard, Meta Platforms, Microsoft, Netflix, Roku, Spotify Technology, Starbucks, Tesla, Tyler Technologies, Visa, and Walmart. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard, long January 2026 $395 calls on Microsoft, short January 2025 $380 calls on Mastercard, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
