Spotify Can't Catch a Break
In this episode of MarketFoolery, host Chris Hill chats with Motley Fool interns Alise Montgomery and Greg Bechtel about some market news. Shares of Apple (NASDAQ: AAPL) popped 4% on a decent earnings report. iPhone sales were down, but some other trends seem to be enough to make up for it. Meanwhile, 2U (NASDAQ: TWOU) dropped some 60% in one day on a grim report and equally grim guidance. Online education is definitely booming, but 2U's place in the market is less certain than investors would like to see. Spotify (NYSE: SPOT) missed on guidance for paying subscribers, but Greg and Alise are still super bullish on the company's long-term future. 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 31, 2019.
Chris Hill: It's Wednesday, July 31st. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, Greg Bechtel and Alise Montgomery. Thanks for being here!
Alise Montgomery: Yeah, thanks!
Greg Bechtel: Thanks for having us!
Hill: We've got entertainment. We've got online education. We've got a couple of stocks on our radar. We're going to start with the world's biggest fruit company. Shares of Apple up 4% today. Third-quarter profits and revenue came in higher than expected. Greg, obviously, there's always a lot to consider when you're looking at Apple's business. You tell me, what stood out in Apple's quarter?
Bechtel: I think that this quarter was definitely critical for the company to rebound after this last year and last two quarters of iPhone revenue dropping a little bit. Although iPhone revenue continued to drop 12% from last year, I think overall their earnings were pretty promising for the future. They're definitely showing us that they're much more than just an iPhone company. Their services and wearables reached all-time highs this quarter in revenue. Their wearables, I think, are the key point to look out. They raised to $5.5 billion, which is up 50% from last year.
Hill: That's amazing! Particularly when you consider where wearables as a division started out. We'll get back to the iPhone in a second. But, Alise, I'm curious what you thought of the quarter. Similar to Greg, I looked at -- the iPhone gets all the attention, but I looked at the continued growth in services and in wearables. And I think if you're an Apple shareholder -- which, to my detriment, I am not -- you have to be pleased with that.
Montgomery: For sure. I'm really pleased with the wearables market. I'm a happy consumer, actually, of an Apple wearable. I think it's great! I think they're going to continue to grow their wearables market, and the demand will continue to be there.
Hill: Let's get back to the iPhone for a second. This is getting a headline, and I don't think this is unwarranted -- for the first time since the iPhone launched back in 2012, that iPhone, which has been such a cash cow for Apple, was less than 50% of revenue. As encouraged as people should be about what's happening in services and wearables, you string together a couple of more quarters of that type of drop, Greg, and then Apple is...it would be an overstatement to say that they would be in trouble, but that's a trend line that you don't want to see.
Bechtel: Yeah. The good news is, I think we're seeing that decrease slow. One of the takeaways I got was, China makes up a fifth of the revenue. I know over the last two quarters, their iPhone sales have dropped 20%. It only dropped 4% this quarter, which was promising, I thought. So, hopefully we see it moving in the right direction.
Hill: When you look at the stock today -- as I mentioned, up a few percentage points today, it's closing in once again on being a $1 trillion company -- does the stock look expensive to you? I think it's easy for people to anchor to the size of the company and be like, "God, that's got to be an expensive stock!" But it seems like on some levels, it's really not.
Bechtel: Yeah, I don't look at it as overvalued. I think it's a good long-term investment, and it's got a really exciting and promising future. But I am a little wary of the size myself. I think it's a good investment, just not my first pick for a growth stock because of how far it's come.
Hill: Let's move on to 2U, which is the online education company. 2U is having the worst day I can remember a public company having in a long, long time. Shares of 2U are down 60% today after second-quarter results were worse than expected. Alise, guidance for the near term was, quite frankly, for a much wider loss. You'd be hard-pressed to find something that happened either in 2U's quarter or on the conference call to give you a lot of confidence.
Montgomery: Absolutely. They really emphasized how their graduate school programs are shifting, and they have to shift their structures. They're going to expect greater losses while they're doing all this restructuring. So, in the near term, it's going to cause a lot of issues, and probably their bottom line will increasingly be negative. Not a good sign for a company like this, especially when their revenues aren't growing as much as they would like them to be, especially as a growth company.
Hill: Yeah. You and I were talking earlier today, this is one of those situations -- and we've seen this with other businesses -- where if you're a growth stock, and you stop growing, then a lot of people on Wall Street just don't want to be a part of that. Chip Paucek is the CEO at 2U. We had him as one of our speakers at our Fool Fest event earlier this year. I think it's fair to say we're fans of Chip as a business leader. One of the reasons I'm a fan of Chip's is because he strikes me as someone who's a pretty straight shooter. He was pretty straight on the call today when he was talking about not just the restructuring that you mentioned, but how competitive the online education market is getting.
Montgomery: Yeah, they actually mentioned a lot of regional competition that they're experiencing. That's why they have to do all this restructuring. They're saying, in the long term, this is going to be good; but right now, it's going to be an issue, at least for their bottom line and top line, probably. Hopefully they can recover and grow their revenues more and cut back on their losses.
Hill: Back in April, shares of 2U were in the mid $70s. Today, this stock's going for $14.
Montgomery: It's on clearance.
Hill: [laughs] This isn't on sale, this is a clearance sale. And I'm sure it's natural for people to ask, OK, if I think online education is going to continue to grow -- and I do. I'm not a shareholder of this company, but I think that will continue to grow -- is this a screaming buy right now? I don't know. It seems like they have a lot of challenges. Chip Paucek and his team are being very up-front about that. But this may be one of those situations where two years from now, we look back and say, "Oh, my God, that was the time I should have bought." What do you think?
Montgomery: Yeah, the higher education system is growing. It's huge now. But the thing is, I feel like there's going to be a reactionary effect if you're talking economically. This could be a potential downside. I honestly don't know. I wouldn't say it's an investment. Possibly. It might be. I would maybe say, buy? Hesitantly. [laughs]
Hill: Like I said, I think the market will continue to grow. I'm a fan of Chip's as a leader. Someone is going to win this race. 2U could be one of the winners of this race. But given all the challenges he was very up-front about, it's also quite possible they're not one of the winners.
Montgomery: If they can provide a platform where it's cheaper to get your graduate degree, that's good. That's what people would like, because they want a cheaper education. They don't want to spend tens of thousands of dollars on a degree. If they can do that they can lower that price, and still get to a huge market because it's online, so you can get to more people, that's where I see the potential.
Hill: Let's move on to Spotify. Spotify's revenue in the second quarter was higher than expected, but shares are down a little bit today. Greg, I'll start with you. They've got 108 million paying subscribers. Wall Street analysts were expecting 108.5 million. So, OK, I suppose technically, they missed. But it seems like the business is going well.
Bechtel: I definitely agree. I understand why, I guess, the stock is down a little bit. They missed that one guidance point, which is probably the most important metric for the company. But they also did hit every other single guidance they were going for. As an investor, I'm really not too worried. I think it's pretty small. I'm still extremely bullish on the company and excited for the future.
Hill: Why do you think shares of Spotify have basically been flat since they went public? The optics of it -- they're the clear leader in the music-streaming space. They're, I think, doing a pretty effective job of expanding beyond music. They've made a lot of investments in podcasts. I'd be remiss if I didn't mention, you can listen to all of The Motley Fool's podcasts on Spotify as well. But, for all of the success they've had, usually we see market leaders rewarding shareholders. I'm just wondering if on some level, there are investors on Wall Street who look at this and go, "Yeah, but Apple." [laughs] Just to bring it back to Apple.
Bechtel: Potential competition.
Hill: Potential competition, doesn't have as many paying subs, but God knows their pockets are deep.
Bechtel: Right. Part of that is definitely the risk of larger companies coming and taking over the industry. I guess another potential issue is, they're still unprofitable for the last two years. What do you think?
Montgomery: I love Spotify. People mention Apple as their competitor, and, "Oh, Apple's amazing, isn't their Music service good?" I personally don't think their service is anywhere close to Spotify's. Spotify's algorithms that track and recommend so many different artists, it's a great platform where people love to find new music. They're selling tickets through it, they're expanding into podcasts, expanding so much. I can see a great future for this company in the entire entertainment industry, actually.
Bechtel: So much more than just music streaming.
Montgomery: Yeah. I think they've talked about a little bit of more visual type of stuff. I don't know if that's actually going to be a thing. But there's a lot of potential for this company. I think their brand's great. I don't see any reason I would switch to Apple. I don't see that as much of a threat.
Hill: That's the thing. We've talked before about video-streaming services, and how you don't need to have just one. They're priced in such a way that there are plenty of people, myself included -- I'm a Netflix subscriber, but when Disney+ launches, I'm probably going to subscribe to that, too. Music, however, really seems like one of those services where, if I've got Spotify, I don't know why I would get Apple Music, and vice versa. It seems a little bit like a zero-sum game. More so than video, anyway.
Montgomery: I find it to be a sticky platform, actually. I have probably way too many playlists that I've made over the years. But I don't want to have to change those and shift them over to a whole entire different platform. I like to go back to my playlists and listen, what music did I listen to five years ago? That's where I think this platform is so great. I think that if they're going to continue to add users, they're going to retain users as well.
Bechtel: Yeah, and with all of very noteworthy threats and future competition, Spotify has been growing. You can hear in the way we talk about it, they definitely have a loyal customer base. They have 108 million -- not 108.5 million, but we'll let that one slide -- loyal customers who love the service. I think in the future, it is a sticky product, and overall, people are not going to want to switch. They're fans.
Hill: Last thing before we move on. We talked about Apple and the iPhone being such a dominant part of that business, but how they've been growing the other segments. You look at Spotify. Alise, you mentioned some of the other things that they're starting to get into. In terms of how Spotify makes money, it is those 108 million paying subscribers. That's overwhelmingly where the money is coming from. What do you think is the best other opportunity they have out there? Obviously, they're going to continue to focus on growing the paid subscriber base. But I'm wondering if it's selling tickets to concerts, if it's live events, if it's video. Where do you think they can go, in the same way that Apple launched wearables a while back, and it was this tiny fraction right out of the gate of their overall revenue pie, but they've steadily grown that piece, what do you think is, maybe not a moonshot, but something that Spotify should look to expand?
Montgomery: That they're not currently doing right now?
Hill: Or that they're doing in a smaller way right now.
Montgomery: Podcasts. They say they're growing a lot. I think that's amazing, especially if they have their own content. But besides podcasts, man, I have no idea. This is a big one. I think the concert one -- I actually don't think that many people know that they do that on their platform.
Bechtel: I just heard about it today as well.
Montgomery: Oh, really?
Bechtel: Yeah.
Montgomery: I think it's great! I'm not someone who would typically go to a concert that often. But they're saying, these are these obscure artists that I listen to, and they'll recommend concerts that are in the area. This guy's coming to your area in the next three months, buy tickets here, and it takes you directly to Ticketmaster or another ticketing website. I think they have a partnership with Ticketmaster. But I think that's a huge market they can tap into for sure.
Hill: Before we wrap up, every week on Motley Fool Money, we talk about stocks on our radar. Greg, I'll start with you. Give me a stock to add to my watch list.
Bechtel: Yeah, no problem. Actually, as we discussed, it may be on the border of your watch list. The stock I've been looking at is Smartsheet, ticker SMAR and their stock price is at $53. It's a pretty newly public company, IPO-ed in 2018. What they do is, they have a cloud-based platform for unstructured work management. That's any company with work that is project-based, has to do with emails, in-person meetings. It really streamlines that process through the platform, helps employees make better decisions. The product's scalable. They sell to customers of all different sizes and also customers in all different industries, it's applicable. They've had a three-year compounded annual growth of 63%, so they're grown like crazy.
Hill: Wow! Smartsheet is about a $6 billion market cap. For me personally, this is never a reason to buy a stock, but if it's on the list of reasons, that adds a little something for me -- it seems like they're doing really well, it's a $6 billion company, so it's not enormous. Would you be surprised if, at some point in the next three years, someone came along and made them a Godfather offer and acquired them?
Bechtel: It's crossed my mind. I'm not totally sure, I haven't given it too much thought. But for now, I'm thinking, in the next five years, they'll continue to do what they're doing well and continue to grow. But that's definitely something to consider.
Hill: All right, Alise, what about you?
Montgomery: A stock I have loved and looked through this whole internship has been Revolve. They IPO-ed in the beginning of June. Their ticker is RVLV. They're an online retailer. They're mostly a tech company. They're a retail company at face value, but they're a tech company behind the scenes. I think it's a great play on that industry. They're one of the few profitable IPOs. Their annual revenue net income was around $500 million. They're growing a lot. I'm really looking forward to seeing this quarterly earnings report, their first one as a public company, next week, I think.
Hill: What do they sell?
Montgomery: They sell women's fashion primarily. I think they're trying to get into the men's wear industry, but they're mostly fashion, high fashion. High fashion was about 17% of their sales. They're trying to get into the male industry. Hopefully they can tap into that. That's much harder because a lot of their advertising is on Instagram. They use a lot of Instagram influencers to tap into that market. It's primarily for that millennial, Gen Z consumer, because everyone shops online now. It's like an online Nordstrom, I would say, a fully online Nordstrom is probably the easiest way to sum it up. They're trading around $34.50 right now. Hopefully they'll have a good earnings report.
Hill: It'd be interesting to see if Nordstrom can actually make the transition to being an online Nordstrom. That would probably help their business.
Montgomery: They have a website, but...
Bechtel: But no one knows about it.
Hill: Exactly. Greg Bechtel, Alise Montgomery, thanks for being here! Thanks for all your work this summer!I really appreciate it!
Montgomery: Thank you so much!
Bechtel: Thank you so much!
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's going to 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!
Chris Hill owns shares of DIS. The Motley Fool owns shares of and recommends 2U, Apple, NFLX, Spotify Technology, 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 Apple, and long January 2020 $150 calls on Apple. The Motley Fool recommends JWN. The Motley Fool has a disclosure policy.
This article was originally published on Fool.com
