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How Grubhub Outlasted Amazon

Chris Hill, The Motley Fool

In this episode of MarketFoolery, host Chris Hill talks with analyst Abi Malin about some market news. United Airlines' (NASDAQ: UAL) second-quarter results were pretty good, but they beg the question: Why doesn't United, and the rest of the airlines, just blame Boeing (NYSE: BA) for not doing better? In anticipation of Grubhub's (NYSE: GRUB) next report, Malin explains how the delivery company established its leadership position in a cutthroat space. Emmy nominations are out, and the big four broadcast companies are losing share. Meanwhile, one of Elon Musk's non-Tesla (NASDAQ: TSLA) companies has allegedly created a monkey that can control computers with its brain. Any investing implications to this sci-fi nightmare scenario? Tune in to find out more!

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on July 17, 2019.

Chris Hill: It's Wednesday, July 17th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, first time in a while, she's probably been avoiding me, it's Abi Malin. Thanks for being here!

Abi Malin: Thanks for having me back!

Hill: We've got the battle for the living room, we have an earnings preview, we're going to start with actual earnings results. Actually, let's start with this. Tuesday's episode, some of the dozens of listeners, there was a technical snafu, so only about half of the audience got the show. We're working to remedy that. If you were one of those who didn't get Tuesday's episode as expected, we apologize for that. Once every, I don't know, 150 episodes or so there's a technical snafu. We're sorry about that! Thanks for checking back today!

United Airlines' second-quarter results looked pretty nice. Their profits were 50% higher than a year ago. They are doing this while dealing with the grounding of the Boeing 737 max airplanes.

Malin: Definitely. They reported earnings of about $4 a share. That beat expectations. And they increased the midpoint for their full-year 2019 guidance. Previously, it was $10 to $12. Now it's $10.50 to $12. All positive implications.

Hill: I don't know about you, but I find it interesting to watch the fine line that a lot of these airline executives are walking when it comes to the Boeing 737 MAX. United didn't come out and talk about the impact. They referred to an order of some older Boeing airplanes that delivery is going to happen at the end of this year. On the one hand, don't you think they have to be dying to come out and lay some of the blame at Boeing's feet? But on the flip side, Boeing is their airline. They're the company that makes the planes, so they can't really annoy them too much.

Malin: Yeah. I mean, they signed an agreement to purchase 19 used Boeing 737-700 aircrafts. Those are expected to come in December. I think that's why this earnings call's interesting. It's not necessarily about United, but more for Boeing's side, it says something that airline executives are still choosing Boeing planes. You do have Embraer, you have Airbus. It's not a total monopoly. But it's still interesting that, regardless of this horrible complication that Boeing is having with their latest and greatest technology, it says something.

Hill: Part of the narrative throughout all of this for the U.S. airlines that have 737 MAX planes on order, or have them in their fleet, one of the things you hear analysts say is, "Look, it's not like these airlines can just go to Airbus." This is where I'm ignorant, because I'm not someone who's an airline industry analyst. But I think logically, at some point, if six months from now, Boeing hasn't fixed this, and you're United Airlines, don't you call up Airbus? At some point, doesn't it become a conversation with Boeing where you say, "Look, we love you. You've been doing great for us in the past. This is now impacting our business to the point where it is untenable."

Malin: I think the switch is actually slower than normal consumer goods companies just because the airline industry is so capital-intensive and so innovation-driven that there are certain requirements for specific flights and routes. I think it's a little bit more complicated, and I would foresee that being, like, maybe if we're still at this problem in two years, I would see maybe more of a transition. But at the time being, the capital intensity just isn't as flexible as competition would suggest it should be.

Hill: It's going to be interesting to watch the rest of this year. Let's move on to Elon Musk. Listeners may be familiar with some of his business ventures that are not named Tesla. SpaceX, Solar City, etc. I was unaware, until a few listeners emailed and tweeted this at me, one of his business ventures called Neuralink, which is a neurotechnology company that has a goal of, for people who choose this, implanting chips in people's brains. During a live Q&A session last night, Musk announced that they've been testing this with animals. And he said, and I'm quoting here, "A monkey has been able to control a computer with its brain." There weren't details beyond that. But let's just...let's just...

Malin: Let that sink in for a second.

Hill: Let that sink in. A monkey has been able to control the computer with its brain. I've seen movies. I'm as nervous about the animal revolution as anyone is. So part of me looks at this and thinks, this is terrible. On the flip side, for human beings, maybe there's a medical application here. I don't know. When you saw this story, what went through your mind? Did you just think, this is nuts? Or did you think, I want to learn more as an investor?

Malin: I think it's interesting. They mentioned that they're looking to start trials on humans within the foreseeable future, roughly a year. They're initially going to focus on helping people with brain disorders, so things like strokes, or cancer lesions, or congenital brain dysfunction. The article that I read said that their goal is to become as common as a LASIK eye surgery that people get all the time now. I think there's a fundamental difference between correcting function or giving a recall mechanism, almost like a Google in your brain, vs. an actual learning and understanding tool. Recalling facts is going to be a lot easier vs. helping people to understand physics by having this chip there. And I think that's a crucial distinction for me for how sci-fi scary this gets. But it is super interesting, and just because it's Elon Musk, it feels sort of Dr. Evil, so you have to sort of be intrigued, right?

Hill: [laughs] I think so. Yet again, I'm not a shareholder in Tesla, but it is one of those things where I look at it and I think, OK, are you still working on the cars? Are you still working on the deliveries, getting the Model 3s out the door and all that sort of thing? I know he's got a lot of people working around him. But he's...

Malin: In so many different directions. 

Hill: He is in so many different directions. 

Malin: Where's the candy company? [laughs] 

Hill: I don't know. It also seems like Tesla is the business, in some ways, he's the least interested in. I don't know. Maybe it's just because we see these stories about SpaceX, and we know that space is, maybe not his No. 1 passion, but if it's not No. 1 by itself, it's probably tied for first with something else. He's clearly intrigued by this. He's a brilliant guy. 

Malin: I wonder, though, if it's not that Tesla is not his main passion, but more that there's so much available information on Tesla, given that they are a public company, and now there's all this skepticism, that it's just frustrating or not interesting for him to talk publicly about. But, as a shareholder of Tesla still, I would hope that he still is passionate about that project.

Hill: Emmy nominations came out yesterday. Probably not a surprise that HBO led the way with the final season of Game of Thrones, and Succession, and all that sort of thing. What leapt out to you? I wasn't surprised by this, but I was struck by the fact that when you look at the four traditional broadcast networks -- ABC, NBC, CBS, we'll put Fox in that group as well -- the aggregate number of nominations declined year over year.

Malin: Definitely, I think that same exact fact jumps out right away. It also brings to attention how many different options there are outside of even Netflix, Hulu, Amazon, NBC, ABC. We have things on here like FX Networks, Showtime, VH1, National Geographic, AMC. As much as we like to talk about the big players, there's a high level of fragmentation in this market.

Hill: Absolutely. You mentioned Netflix. HBO was No. 1 with nominations. Netflix was a pretty close second, and actually got a few more than last year. Prime Video more than doubled the number of nominations they got. Tim Beyers is going to be on Motley Fool Money this week, I taped that interview on Monday. One of the things we talked about was the streaming wars. I think it's really going to be interesting to watch over the next couple of years. There's going to be so much money invested in it. Even when you have Ted Sarandos at Netflix, the chief content officer recently telling a group of executives, "We're actually going to be more cost-efficient with the way that we spend money," you couple that with Apple launching their service, Jeff Bezos is never shy about spending money, so Prime will continue to throw money at shows. And then, for consumers like us, I think a year from now, if not sooner, we're going to start to see stories about people picking and choosing among the different services. Once Disney+ is up and running, let's say that by next summer, NBCUniversal has their streaming app up and running. A lot of it, I think, is going to come down to, what are the shows you want to watch?

Malin: I think it's interesting, too, with this shift in how people are consuming media. You talked about the cost. Historically, movies have obviously been the bulk of production costs. Now, with movies, TV, limited series, everything is available on your laptop, those cost balances are shifting. I don't know if movies have necessarily come down on budgets, but I know TV shows have increased. As a consumer, it's more, better content, so a win there. But as a player in this market, it's going to be very, very hard to win.

Hill: In terms of the movies, it really seems like the middle-budget movies have almost completely gone away. It's either the tentpole, the superhero movies with the budgets of $150 million and higher, or it's the independent, smaller, "We're going to give you more creative control, but we're going to give you a ham sandwich, we're going to pay you with a single ham sandwich and that's it."

Malin: Right, right. 

Hill: In terms of the nominations, I don't know what shows you're watching, but were there any shows that you're like, "Oh, good, a show I watch got some nominations."

Malin: I watched Killing Eve. I loved it! Got a couple of nominations. That was my big one that I was excited about for them.

Hill: As a fan of Better Call Saul, I was happy to see that get some nominations as well. 

Grubhub. Second-quarter report is coming out next week. This is a stock that's down more than 30% from a year ago. It seems like they need a hit. This is a business that you look at closely. What are you going to be watching for?

Malin: I think something that's pretty interesting is that you've seen a shift in that competitive landscape. Amazon has officially chosen to shut down its restaurant delivery service, Amazon Restaurants U.S., after four years. That was after they exited the U.K. market back in December after two years of operation there. They have subsequently invested in the U.K.'s Deliveroo back in May, I believe it was. But I think that shift in strategy, especially for a behemoth like Amazon that has all of the capital in the world, and if anyone could make logistics businesses work, I would think it would be Amazon, it substantiates that barrier to entry that I've always seen with this business and I think is constantly in question for Grubhub.

Hill: Does that give you optimism? If you're a Grubhub shareholder, are you excited about that? That's one way to look at it. Another way to look at it is, Amazon has never had a problem throwing money at a new business idea, and if they're getting out after testing it for a few years, that tells me they've decided this is not a business we're interested in.

Malin: The way I took it was that there's high barriers to entry and they're very geographically focused. I don't even think it's necessarily U.S. vs. U.K., it's as small as like Washington, D.C. vs. San Francisco vs. Chicago. You're going to see large players within each of those regions. Amazon was late to the game. They didn't have quite the base that Grubhub and even some of the other big players do. So, that was going to be a lot of money for them to catch up. From a competitive space, yeah, I do think it's a very positive implication for Grubhub.

Hill: This is one of those things that doesn't show up on the balance sheet, but it seems like from a brand standpoint, Grubhub appears to be the leader. All you have to do is look at stories about this industry, and you have companies that are self-identifying as a competitor to Grubhub.

Malin: Correct, yeah!

Hill: Abi Malin, always good talking to you! Thanks for being here!

Malin: Thanks for having me!

Hill: 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 stocks based solely on what you hear. That'll do it for this edition of MarketFoolery! The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!

John Mackey, CEO of Whole Foods Market, an AAPL subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Abi Malin owns shares of GOOG, AMZN, AAPL, Grubhub, Tesla, and DIS. Chris Hill owns shares of AMZN and DIS. The Motley Fool owns shares of and recommends GOOGL, GOOG, AMZN, AAPL, NFLX, Tesla, and DIS. The Motley Fool has the following options: long January 2021 $60 calls on DIS, short October 2019 $125 calls on DIS, short January 2020 $155 calls on AAPL, and long January 2020 $150 calls on AAPL. The Motley Fool recommends Grubhub. The Motley Fool has a disclosure policy.