In this Market Foolery podcast, host Mac Greer is joined by David Kretzmann and Aaron Bush of Motley Fool Rule Breakers and Supernova to discuss a trio of interesting stories from Wall Street: Tencent reported earnings and proved that it can still grow like a much smaller company; Target (NYSE: TGT) delivered a decent report that still left investors cold, thanks to a tepid outlook; and Square (NYSE: SQ) is integrating bitcoin purchases and transfers into its app, which seems like a win for both the company and the cryptocurrency.
A full transcript follows the video.
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This video was recorded on Nov. 15, 2017.
Mac Greer: It's Wednesday, November 15th. Welcome to MarketFoolery. I'm Mac Greer, sitting in for Chris Hill this week, who will be back in the saddle tomorrow. So, Chris will be back tomorrow. Joining me in studio, we've got David Kretzmann and Aaron Bush from Motley Fool Supernova and Rule Breakers. Guys, welcome!
David Kretzmann: Hey, Mac!
Aaron Bush: Thank you!
Greer: Guys, lots to talk about. Bitcoin getting what appears to be a stamp of approval. So, you all are going to talk me through that and help demystify Bitcoin, because I confess, I'm a bit of a skeptic. I also want to talk about Target, because Target is having a rough, rough day. Aaron, let's start with one of the world's 10 most valuable companies. Do I have you interested?
Bush: Oh, I'm interested! What is it?
Greer: That's just it, it's not a household name, at least in the U.S., for a lot of people. Tencent, the Chinese internet giant, reporting a 69% jump in its quarterly net profit, blowing past expectations thanks to strong growth in its smartphone games and payment services. Now, Aaron, I know you're a Tencent shareholder, so I have to ask, what do you think? I'm resisting the urge to ask for your two cents on Tencent, because that's --
Kretzmann: Mac ...
Greer: No, that is beneath the dignity of the show. So, what do you think of Tencent?
Bush: Who said big companies can't grow, because Tencent is proving all of those doubters wrong. This was a company, this quarter, it grew revenue 61% year over year. It grew net profit 55% year over year. And it's not a one-trick pony. It's doing a lot of good in a lot of different ways. Its gaming business, which is the largest piece of the business -- and it happens to be the largest gaming company in the world, by the way -- is on fire, especially their mobile games. It's up over 80% year-over-year. So, taking share, making a lot of money there. They also happen to have pretty much a monopoly on social media in China through WeChat. This quarter, they reported now 980 million monthly active users --
Greer: Which is a lot.
Kretzmann: A good amount.
Bush: It's quite a few. And that's just a phenomenal business, because they actually don't make that much money on advertising. They make more money from transactions that go throughout the platform. And as more people spend money in more different ways, WeChat becomes both more relevant through merchants, but also it takes a larger cut of all the things that go through it. So, there's a lot going on here and there's a lot to like.
Greer: David, what do you think?
Kretzmann: An incredible company. Going off of what Aaron said, Tencent has just 14% market share in mobile advertising, so there's still room for them to grow that. Considering that they control 55% of all mobile internet traffic in China, and WeChat alone accounts for about 30% or so of all mobile traffic in China -- so, just the scale that they have with WeChat, let alone their video game business. And then, they have so many other investments in Tesla, JD.com, a big e-commerce player in China, Flipkart, an e-commerce company --
Bush: Recently IPO-ed.
Kretzmann: Yeah. They have their hands in so many different pieces here. The company is generating an insane amount of cash. I would say, the main risk that sticks out to me with Tencent, I think they have a solid competitive position, but last month there were discussions that Beijing was interested in the government taking a stake in Tencent and some of the other big tech companies in China and potentially having their hands in some of decisions going on with the company. So, we'll see where that goes. I think that's a similar risk to what we see being discussed more and more here in the U.S. with the big tech giants, where more politicians and regulators are whispering the word monopoly or, talking about, do we need to regulate some of these big tech players. I think there are similar risks there in China for Tencent and some of the other big players. So, if the government actually does go that route where they start to treat Tencent like a state-owned utility or monopoly, I might get a little less excited.
Greer: What about that, Aaron? How worried are you about the government regulations?
Bush: I think it's important to look at. It's kind of funny, because essentially what the government would be doing is saying, "Hey, we're going to advise you, and we're going to ask that you pay us a fee for us advising you. And you don't get any say in that, by the way." So, I do think that's a potential risk. But, for the most part, I actually think regulation works to the favor of someone like Tencent, because regulation is why Facebook isn't in China, it's why Google isn't in China, and it's basically giving a company like this free reign to dominate. So, I think there might be some risk of the government nitpicking some policies here and there, but for the most part, that's actually been the fuel to their fire.
Greer: You mentioned Facebook and Google. I want to talk market caps in terms of what these companies are worth, just to put it in a relative context. Right now, at the time of this taping, Tencent worth somewhere in the neighborhood of $464 billion. Facebook, $515 billion. Amazon, $541 billion. Alphabet, aka Google, $714 billion. And, of course, Apple, the leader in the clubhouse, $871 billion. How much bigger do you think Tencent can be?
Bush: That's kind of tough to say. I do think Tencent might have the opportunity to become bigger than maybe, the likes of Facebook or Alphabet, simply because it does more things. It does dominate social media. That's important. But, it's also a giant entertainment company through games. It's a giant player in social media. And it's been more aggressive in investing in so many different players that, I think that's a really powerful position to be in, especially in China and that Asian region in general. If they can scoop up a lot of the growing community of new start-ups, that puts them in a sort of unstoppable position where they can win no matter what. And I think that can keep their trajectory going for a really long time. I would not be surprised at all if this becomes a well over $1 trillion company.
Greer: Let's switch gears here and talk about a company that is nowhere close to $1 trillion, Target. A rough day for Target on Wednesday. David, at first glance, this looks like a good report. You have better than expected earnings, same-store sales, better than expected, and Target raising its outlook for the full year. So, that's all good, right? But investors are hung up on this fourth quarter forecast, the holiday forecast, which came in much lower than what was expected.
Kretzmann: Yeah. Obviously, a tough environment for retailers here in the U.S. Target, I think they are doing everything they should be doing. They're testing a lot of different things, and the question is, can some of these new initiatives grab hold soon enough to really become a meaningful growth driver for the company, and stabilize some of these results? But you did see same-store sales and traffic tick up just slightly this quarter. So, at least it's not dropping. Their digital sales were up 24%. And like I said, they're testing a lot of different things, especially around digital, convenient different options for customers. They have ship from store in 1,400 locations, essentially where you can buy something online and they'll ship it from your local store. So, that should theoretically make it easier for them to roll out same-day or next-day delivery, make it more convenient for customers. They're remodeling hundreds of stores. Right now, they're planning to remodel another 325 or so next year. And when they do remodel the stores, they see sales accelerate about 2-4%. So, so far, that seems to be on track. But, again, how quickly can they do that, and can they ensure that those remodels do continue driving those returns? And some of the other initiatives they're testing drive-up, where you essentially drive up to the store, anything you ordered there is ready for you, you just pick it up, you've already paid online. So, I think, if you're not a destination retailer, if you don't have a very dynamic experience within the stores, you need to find ways to get closer to customers and make it so convenient for them, where they can continue to come back and make repeat purchases. So, I like the fact that they're testing a lot of different things here, but a lot of these tests are isolated in a few stores, in a few markets. And it'll be something to watch. But in the meantime, yeah, the quarter to quarter numbers for the company can still be mediocre.
Bush: Survival can be expensive sometimes. All those tests are good. They're really needed, in my opinion. But the costs of that can add up. You see, sales are relatively flat, up a little bit, but their profits were down about 20% this quarter. That's mainly the result of, we have to compete on lower prices against Wal-Mart and Amazon; we have to raise wages, because minimum wage is rising, and we have to compete with that, and that's a pinch. And then, anytime you're trying to compete online when you're not a native online business, you're duplicating a lot of your investments just to retain the same customer. So, that can get expensive. I do think that Target has done a pretty decent job adapting so far, but it's a really tough spot to be in. And when you see the results, they're holding steady, the business is holding steady on top, but they're paying for that to happen.
Greer: Guys, let's talk Square. Shares of Square up big on Wednesday after the digital payment company said that it's adding a Bitcoin-buying option to its money transfer service. Aaron, I confess to not really understanding Bitcoin. I don't think I'm alone. But I am a Square shareholder, and this seems like a stamp of approval for Bitcoin. So, what does this deal mean for Square, and what does it mean for Bitcoin?
Bush: I think Square has had the option for the POS system where merchants can accept Bitcoin. This is different from that. This is more specific with their Square Cash app, which is a competitor to Venmo, where I can send David money, David can send me money. Now, they're making the option, maybe we can send each other Bitcoin, or maybe it might just be easier for me to buy or sell Bitcoin on that particular app, just because it might be more difficult to buy it and store it elsewhere. So, that's really what they're doing here. And it's definitely a stamp of approval for Bitcoin. I think Jack Dorsey, the CEO kind of has been pro-cryptocurrency, pro-blockchain for a really long time. So, he sees the benefit of what this does for technology. I think this has been in the back of his mind for a while, but this is really maybe the first or second steps Square has taken to make it available or applicable to the average consumer or the average user. I don't know how much this really moves the needle, but it's just a way for them to stand out and do something different from someone like Venmo. And I think this might not be as widely known, but the Square Cash app has actually bypassed Venmo recently in terms of downloads in both Apple and Android. I think this is just a way to make sure they can secure that lead and take even more market share.
Greer: Is it fair to say -- because I know you're a Square shareholder -- given the two, if I just to spot you up with these two options, you could invest in Bitcoin or you could invest in Square, are you more bullish on Square?
Bush: [laughs] That's really tough. I think, if you invest in Bitcoin, you have to be willing to lose all your money.
Greer: OK. I'm not, by the way, but thank you.
Bush: But the upside for Bitcoin is potentially significantly larger if it does take hold. Square, you're not going to lose all your money, probably.
Kretzmann: Hopefully not.
Bush: Very, very unlikely. But, I do think it has tremendous upside, but it won't be as extreme as something like Bitcoin. Personally, I would be more willing to invest in something like Bitcoin, which might make some people be like, "What? That doesn't make sense." But, I think, what Bitcoin is doing is so groundbreaking that, even though the odds of failure are significantly higher, the chance that you're getting in closer to the ground floor of a humongous movement, I think that's enticing and worth a small position.
Kretzmann: I still I have a hard time wrapping my mind around this. Hearing Aaron, as he's learned more about it, definitely helps. He helps make it more digestible and understandable and relatable. But, with Bitcoin, the thing I have a hard time wrapping my mind around is, I feel like a lot of people describe it as a store of value. It's almost like becoming a digital version of gold. Especially right now, where it seems like a lot of people who are buying it, at least all these financial bloggers who are jumping on the Bitcoin train and crypto train, they're buying it with the anticipation that it will become more valuable. They're treating it as an investment. So, thinking, five years down the road, maybe I'll be able to sell my one Bitcoin for $100,000 a Bitcoin up from whatever it is today, like $7,200. If that's the case, if that's how you're treating it, it would make no sense to use it as a currency, because why would you give away something to buy an apple when you expect that currency, that Bitcoin, to become 10X more valuable in a few years? That's why I don't think this particular announcement will necessarily drive a whole lot for Bitcoin. But, I can't pretend to know a whole lot about it. And then, there's all these things, like forking and all these subsets of Bitcoin, so maybe this plays into that. But, I don't know. For me, I still toss this into the "too hard" category as investments. I think, if you do invest in Bitcoin or another cryptocurrency, you keep it as a small portion of your net worth that you're willing to lose everything, like Aaron mentioned.
Greer: What worries me, and I'm with you on the "too hard to understand" category, but I was walking the dog recently, and a neighbor came up to me and presented me with this "opportunity" to invest in this new initial coin offering that he was part of.
Kretzmann: [laughs] Oh, God.
Greer: Yeah. Based in Europe. And then he starts talking to me about blockchain technology and all that. And I'm walking the dogs. So, first of all, don't ever approach someone with a business deal when they're walking their dogs, that's just wrong. That's a sacred space. Our dogs have various issues that I will not go into, but you have to focus on the dogs when you're walking them, that's all I'll say. You have to focus on the dogs. And he's hitting me with this ICO stuff. And I know it's probably not fair to Bitcoin, but when people start presenting you with these can't-miss investing opportunities, it makes me a little worried in terms of the hype cycle.
Kretzmann: It seems reminiscent of the heyday of the .com era, where everyone was talking about the new .com or tech stock. My feeling with this is, I think there's a lot of potential with the underlying technology. Just about everyone will say, it's not necessarily that one or two coins will win out. But, the underlying blockchain technology, there's something there, and that tends to be the line of reasoning I subscribe to also at this point. But, with the ICOs, I haven't seen a lot of sustainable value driven from that. I don't know, when you buy an ICO, what would you actually get, because you're not getting a stake in that company. It's often companies that haven't even launched a product yet. So, I think that's probably even riskier than buying Bitcoin itself. But, again, a lot of this is still over my head, so I can't pretend to be an expert.
Greer: Let's wrap up. I want to present you with my typical arbitrary, shameless, incredibly unfair desert island question. We have three stocks we've talked about in terms of publicly traded companies: Square, Target, Tencent. Over the next five years, you can only buy one of those three stocks, what do you buy?
Bush: I'm going to go with Square, actually.
Kretzmann: That's a good choice.
Greer: OK. David?
Kretzmann: I'll go the conservative route and go with Tencent. I feel pretty confident that Tencent will still be around in five years from now, especially if the government takes a stake, then they'll be even more motivated to keep the company around, and they have their hands in so many different areas, so why not. I think they could be bigger.
Bush: Or, you could not live on a desert island, and own more than one.
Greer: That's no fun.
Bush: [laughs] I mean, I own Tencent and Square, full disclosure.
Kretzmann: Not Target?
Bush: Maybe one day.
Greer: I know, it was an unfair question. Duly noted. Guys, thanks for joining me!
Kretzmann: Thank you, Mac!
Greer: 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 Market Foolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! We'll see you tomorrow!
John Mackey, CEO of Whole Foods Market, an Amazon 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. Aaron Bush owns shares of Alphabet (C shares), Amazon, Apple, Facebook, JD.com, Square, and Tesla. David Kretzmann owns shares of Alphabet (C shares), Amazon, Facebook, JD.com, and Tesla. Mac Greer owns shares of Alphabet (C shares), Amazon, Apple, and Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, JD.com, and Tesla. The Motley Fool owns shares of Square and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.