Game-Changers Ahead of Us, Earnings Behind Us

In this Motley Fool Money podcast, host Chris Hill is joined by Fool senior analysts Jason Moser, David Kretzmann, and Andy Cross to reflect on a week's worth of major business items, and they can't start anywhere but the peculiar saga that began when Tesla (NASDAQ: TSLA) CEO Elon Musk tweeted that he was looking into taking the electric automaker private. But even if Musk sucked a lot of the air out of the media room with that news, there were other noteworthy stories to cover, because earnings season is in full swing.

The Fools weigh in on the situations at Disney (NYSE: DIS), Match Group (NASDAQ: MTCH), Trade Desk (NASDAQ: TTD), Etsy (NASDAQ: ETSY), Booking Holdings (NASDAQ: BKNG) and more. And naturally, the guests will answer the perennial question: What stock is on your radar this week?

A full transcript follows the video.

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This video was recorded on Aug. 10, 2018.

Chris Hill: It's the Motley Fool Money radio show! I'm Chris Hill. Joining me in studio: senior analysts Jason Moser, David Kretzmann, and Andy Cross. Good to see you as always, gentlemen! We have the latest headlines from Wall Street. We'll talk about the business of space with author Christian Davenport. And, as always, we'll give you an inside look at the stocks on our radar.

But we begin with the most compelling daytime drama on Wall Street: As the Tesla Turns. Elon Musk dominated the headlines by tweeting that he's thinking about taking Tesla private at $420 a share. He did this on Twitter with a single tweet that concluded with Musk stating, "funding secured." Andy, there's a lot to unpack here. I'll start with you. Where do you think we're going from here?

Andy Cross: Well, the funding has yet to be secured, at least yet to be disclosed, Chris. What a week this was. It's amazing, story after story. In my mind, this is Elon not wanting to run a public company. He's fed up, he's tired. He had his little apology on the conference call, I get it. But he just doesn't want to run a public company. Maybe he wants to spend more time thinking about his space initiatives, which are super exciting. The fact that it was through a tweet, we're seeing a little bit of the frustration.

We haven't heard any information. We'll see this weekend what's going to happen. The board has come out and said they're going to consider it, and they've asked Musk to recuse himself, not be involved in those conversations. We'll have to see what comes from the board. Clearly, a lot of uncertainty.

By the way, the $420 price point that he quoted is not that far off from the all-time high. It's only about 13% above the all-time high. So, if you're a shareholder of Tesla, you're like, "What's the upside from here?"

David Kretzmann: I think it's understandable that Musk is frustrated at this point. Tesla is at this relatively early stage of ramping up investment in the Model 3, ramping up production there. So much of the focus from Wall Street has, understandably, been on week-to-week production numbers. Musk is someone who's thinking in terms of five to 10 years and beyond. So, when Wall Street is forcing him to be so hyper-focused on short-term results, and short-termism in general -- then, on top of that, you have close to a third of Tesla's float being shorted by short-sellers -- I think it makes sense that Musk wants to be done with this era of Tesla as a public company and going private.

By the way, I think it's interesting that he wants to give existing shareholders the ability -- assuming the company is able to secure funding to go private -- to continue to own shares of the private entity. In that case, if Musk and Tesla can convince existing shareholders to hold their shares, that reduces the amount of money the company needs to raise to take the company private.

Jason Moser: Chris, you may remember, a couple of months ago on Market Foolery, we asked this question, and I answered with Tesla. I was thinking, "Man, I would love to see this company go private," because of all these reasons we've stated. I think it gets this company off of that quarterly radar that Wall Street holds them to and gives him a chance to run the business without having to hit these arbitrary marks. For me, to see Musk get out of the limelight ... he's been able to do it with SpaceX, and I think that has allowed for that business to advance more quickly. I think the same would happen with Tesla, if he's able to pull this off.

Hill: Andy, I don't own shares of Tesla. If I think he's going to be able to pull this off and it's going to go at $420, why shouldn't I buy shares just to get that little 13% pop?

Cross: Actually, I think there's a chance that the price may go up and he may have to raise this price. Again, not that much higher from the all-time high. To David's point, maybe he can continue to run it as a private company, keep some investors in there. But he may have to raise the price.

But, Chris, still, if you're going to buy shares, you have to be prepared to hold these as if you were going to be a private shareholder. I would not go into it thinking you're going to get a little 13% pop.

Hill: Third quarter results for the Walt Disney Company came in lower than Wall Street analysts were expecting, but Studio revenue was a bright spot thanks to Incredibles 2 and Avengers: Infinity War. Jason, thank God for superheroes!

Moser: Thanks God for the parks, too! The parks were, again, a shining spot on the quarter. Operating leverage there is traffic, continues to grow with those parks. That's a big advantage for the company.

But clearly, on the call, Bob Iger's point of focus is on this Disney streaming product that's going to be rolling out sometime in 2019, probably late 2019. This is going to be a more family oriented offering. I think they actually drew the line at rated-R movies. They're not going to have certain content on there. It's not going to be like a Netflix, cast this big, wide net and have something for everyone. What it's going to do is really leverage all of this property that Disney has, including what they're getting with this Fox acquisition.

Because they made it very clear that's the priority, they really need to make sure they execute here. I think it's going to get off to a slow start as they relieve themselves of these encumbrances on all this content that they've licensed out over the past few years. But as this product starts to grow and gain some momentum, they will continue to add to that catalog. I think that will give them the opportunity to exercise a little pricing power as time goes on.

The ESPN+ product continues to do well. They admittedly set modest expectations, but for right now, you really have to keep your eyes focused on this Disney product in 2019.

Kretzmann: I'm a little underwhelmed about that product. They're talking about launching it toward the end of 2019. You think about it, that'll be almost 13 years after Netflix launched its online streaming service. The fact that Disney is sitting on their hands there, saying, "We don't need to rush, we have good enough content," I mean, by that time next year, Netflix will probably have 150 million or more global subscribers. I wonder if there is a little bit of overconfidence there on Disney's part. And, the fact that they're spending around $70 billion to acquire and integrate Fox ... I just wonder if they'll have a lot to chew next year.

Hill: It might be overconfidence. Although, Jason, it might also be a recognition that they have one shot at this. We've been talking about this streaming app for a while now, and they'd really better nail it.

Moser: Yeah, I think you're right. Knowing that Iger had such a focus on this point in the call, they're putting their money where their mouth is. If they don't nail it, they're going to have some real questions to answer.

To me, the real question is... they have all of these different platforms now. They have ESPN+, they have Hulu and the Hulu live streaming offering that they now have a majority share in, they'll have the Disney streaming service. I don't want to see this big, cluttered, "I have to have all of these different apps to experience everything I want to experience with Disney products." It's going to be really interesting to see how they put this all together. I think that's where they have a big opportunity. I hope they don't blow it, because it's not going to be an easy task. It's a lot of stuff they have to put together and organize and make easy for the consumer to find.

Hill: Great week for Match Group, the parent company of Tinder, and others. Shares of Match Group up more than 30% on a strong second quarter report. And, David, they also raised guidance for the full fiscal year.

Kretzmann: Ah, the business of love, Chris! It's a wonderful thing. So much of this success is due to Tinder. Over the past four years -- when they just started monetizing the business, less than four years ago -- Tinder itself, on its own on, is on pace to generate more than $800 million in revenue this year. For this particular quarter, the number of premium subscribers for Tinder up 81%, subscription revenue up 136%.

Across all of their different dating properties now, has nearly eight million global subscribers. Average revenue per user was up 8% worldwide this quarter. Total paid users up 27%. I also like the fact that the company isn't just sitting on their hands. They have an internal incubator where they're supporting start-ups and new projects within that dating space. They're not resting on their laurels, by any means.

Hill: In terms of the growth opportunity from here, is it still here in North America? Or is it outside?

Kretzmann: I'd say, within North America, you don't necessarily need to see more penetration, but you will continue to see them try to drive that average revenue per user up through the premium side of Tinder, with Tinder Plus and Tinder Gold. Internationally, I think there's a lot more room to increase penetration. In markets like Japan, where there's still a stigma around online dating, it's a matter of getting people onto those platforms. Once you have that audience, you can start to look at direct monetization.

Hill: Trade Desk is in the business of advertising technology, and cousin, business is a-booming. Shares of Trade Desk up 35% on Friday after second quarter revenue came in at a record $112 million. Andy, they keep this up, I don't think it's going to be a company record for very long.

Cross: What a monster quarter. Actually, this is their second monster quarter in a row, now. Like you said, business is booming. When you think about the digital, the programmatic -- what Trade Desk does is, they offer technology to ad agencies and buy-side clients to basically make the bidding process for advertising, both online and offline, too, as they think about growing more toward programmatic television -- which is a big growth market. In the advertising market, televisions are a third of all spending. Very little of that is programmatic.

When you think about all the advertising we are exposed to, it's a $700 billion business. The programmatic side is growing 20% per year. Trade Desk is growing twice as fast as that, sales were up 54%. It's profitable. Jeff Green, the founder and CEO, owns 15% of the business. They are building tools for their clients, their clients are seeing the value there, and they are spending more and more money across those platforms. It's clearly working for not just Trade Desk the business, but for shareholders as well, who today are seeing a really nice pop in the stock.

Hill: Shares of Trade Desk, you look at the rise, you look at the market cap of Trade Desk, it's just north of $5 billion. Alphabet has that in pocket change. Are they going to be at target to be acquired, do you think?

Cross: They might, but here's a nice thing, Trade Desk really prides itself on independence. They are a technology company that's independent, there's no conflicts, they don't own the inventory. They just basically match up the buyers with the sellers of that inventory, and they really pride themselves on that. We talked about the Disney streaming, those kinds of properties, more and more of the bundles, the skinny bundles, the streaming services, that all speaks really well to the opportunity for Trade Desk.

If you look at where they're going, they're using more and more augmented intelligence and AI to drive their suggestions for their clients. They really are pushing both the technology and the media side in really healthy ways, and that's doing really well for their business right now.

Kretzmann: To me, it's really impressive, what they've been able to accomplish over the past few years, being profitable from a very early stage. When you look at the advertising technology space, which Trade Desk operates in, it's littered with a ton of companies that failed or really struggled after going public. But Trade Desk is really bucking those trends.

To Andy's point, when you're talking about the potential for a larger company to acquire Trade Desk, Jeff Green, founder and CEO -- who has about a 15% stake, like Andy mentioned -- strikes me as the type of person who wants to stick it out as an independent company. Having that healthy stake probably means they can be independent for a long time.

Cross: I'll just follow up with, the international business is really taking off. Jeff Green took the conference call from Hong Kong. To be able to reach out to more and more clients, more ad agencies, as well as other clients, is really attractive around the world for Trade Desk.

Hill: Zillow's (NASDAQ: Z) (NASDAQ: ZG) second quarter revenue came in lower than expected. Shares of the real estate website operator down 14% this week. Jason, it was not just the weak revenue that Wall Street didn't like.

Moser: No. You may have seen, Chris, they are buying a mortgage company. Didn't shed much more light on that, other than, they're going to try to become more a part of the transaction. Honestly, this is something they have to do if they want to grow the business. That's where the money is, in the transaction. They'd better execute, though, and I don't think it's going to be very easy to do.

We're going to have to keep a close eye on this, because this could turn out to be their TripAdvisor instant booking moment. I don't mean that in the good way. They're getting into a part of the business where competition is fiercer. This is not in their wheelhouse. Flipping houses, mortgages, that stuff isn't nearly as scalable as the advertising platform that they've essentially built to this point.

My biggest problem with Zillow to date is, this business is still unprofitable. I will give them cash flow positive, but unprofitable. It's just an ad company, basically! It should be making money hand-over-fist! I don't know how much longer the market's going to give Spencer Rascoff the benefit of the doubt here, but they'd better execute on this, or the stock has further to fall, in my opinion.

Hill: Second quarter results for Papa John's (NASDAQ: PZZA) were ugly and adding to the ugliness is former CEO John Schnatter criticizing current management from the sidelines. David, you look at this stock, it's basically been cut in half in the last 12 months.

Kretzmann: And in the meantime, so far this year, Domino's is up over 50%. That kind of tells you the story there.

Papa John's is facing pressure from all sides. Customers are avoiding the stores now after all this controversy. Same-store sales in North America, in July alone, were down 10.5%. Now, the franchisees are struggling as a result of that weak customer traffic -- so, potentially looking at royalty relief or even potential store closures down the road.

Financially, just over a year ago, the company accelerated their share buyback program by going further into debt to fund those buybacks. The stock is down over 40% since then, by the way. So, you have a company now with a lot of debt, falling sales, struggling franchisees. And you have the founder and former CEO, Papa John himself, on the sidelines criticizing management and saying he's not going away. And, he owns 30% of the company, still.

Hill: Is there any way this company survives without a significant makeover? And I mean changing the name and everything.

Kretzmann: I think you have to have everything on the table at this point. But really, before you get to that point, you need to figure out a way to get Papa John himself out of it. I really don't know what brand, at this point, would want to take that on.

Hill: Another example of guidance outweighing results, second quarter profits for Booking Holdings came in higher than expected but shares of the parent company of Priceline and fell on their forecast for the third quarter, Andy.

Cross: It's the MO of They tend to go a little light on the guidance, and they beat it time and time again. Sales are up 20%. Rooms booked were up 12%, that's down a little bit. But all these numbers are above their guidance. It was a nice quarter.

One interesting point from the conference call that I took was, the CEO said, "We're going to see a bit of a slowdown in the third quarter due to the size of our business." I'd never heard someone complain about the size of their business impacting the growth. I mean, I can get it. It's a monster company, they do more than $80 billion of bookings a year. But this is a business that's going to grow their revenue in the high single digits for the year on the dollar side, and EPS to be down to flat.

They generate a ton of free cash flow, David, and they buy back a lot of stock. That's kind of the story you have for Booking. It's not a cheap stock, but it's also not the super growth story it was a few years ago.

Kretzmann: It's still a good story. This is one of the most profitable companies on the planet. Speaking of free cash flow, since 2013, even though the company is still at a good size today, free cash flow has more than doubled since 2013 to nearly $5 billion. This is a company churning out a ton of cash, and that should be able to increase going forward, as well.

Hill: Shares of Etsy up more than 10% this week after second quarter revenue came in 30% higher than a year ago. Jason, I've never bought anything off of Etsy, but they're carving a really nice niche for themselves.

Moser: Chris, there are a lot of things in life that are hard. Golf is hard. Understanding our tax code is hard. I think existing as a retailer in an Amazon world is hard. I'll tell you, Etsy makes it look really easy. If you look at their numbers, quarter in and quarter out, sellers keeps growing, buyers keeps growing, gross merchandise volume keeps growing. This is obviously a platform that's resonating with a lot of folks out there. It's because it's a great network, it connects buyers with sellers for a very specific offering.

It's great brand recognition. It's a capital light model, no inventory on the balance sheet. Nice and profitable, cash flow positive, a holistic solution. There are so many things to like about this business. I really do expect them to continue on this trajectory for many, many quarters to come, if not years to come. They've built out a tremendous offering that's resonated with a lot of people out there.

Kretzmann: A lot of credit for the company's success over the past year or so is really owed to new CEO Josh Silverman, who stepped in last May. Since that time, the stock is up 300%. He really helped the company focus its strategy. Since that time, margins and free cash flow, like Jason mentioned, have really exploded over the past year. They're really making great progress.

Moser: They're also talking about, they're going to increase the seller transaction fee a little bit. Exercising a little bit of pricing power. That'll be something we'll want to keep an eye on, but it sounds like they're going to be able to pass that through without any problem at all.

Hill: A couple of things before we get to the stocks on our radar. First, Jason, thanks for the interview!

Moser: Listen, thank you!

Hill: Great stuff!

Moser: There's a reason why you do that week in and week out. It's not an easy thing to do. But that was a big thrill, having just read the book.

Hill: It was fun stuff. This week, Pepsi (NASDAQ: PEP) announced that CEO Indra Nooyi will step down in October. This is after 12 years in the corner office. She will remain as chairman of the board of directors through early 2019. Jason, good luck to the next CEO, because that guy has a tough act to follow.

Moser: She set the bar really high. I think this is a really big loss for Pepsi. I can't say that I blame her. We see the industry headwinds coming. She's 62 years old, she has other things she wants to do in her life. And she is, quite frankly, a very good person. You can tell by researching her, she's a good person. I think she's going to do bigger things for the world with the time that she has away from the company. No doubt, whoever's stepping in there, good luck!

Hill: We were talking about this earlier, part of it, Andy, is just the industry. Coca-Cola, Mondelez, Kellogg's, all of these food and beverage companies that have CEO turnover over the last couple of years.

Cross: Just like what's going on at Campbell's (NYSE: CPB), too, they're talking about trying to take it private or sell off the assets.

Kretzmann: Hershey's.

Cross: Yeah, Hershey's, too. It's tough, it's super competitive, it's only getting more competitive, just because of what's happening at their prime buyer market, which is, the grocery stores, with the likes of Whole Foods getting bought by Amazon. That's getting more and more competitive. It's harder and harder to get shelf space, and there are just other brands out there that are bumping up against the large players.

Hill: Kudos to Indra Nooyi, a heck of a track record. Let's get to the stocks on our radar. Our man behind the glass, Steve Broido, is going to hit you with a question. David Kretzmann, you're up first. What are you looking at this week?

Kretzmann: I'm looking at Axon Enterprise (NASDAQ: AAXN), ticker AAXN. This is the company behind law enforcement technology, best-known for the Taser electrical weapons, but they also produce body cams. Most interesting to me, they're moving into software, as well. They have the platform, which stores footage that police officers will capture on body cams or from in-car camera systems. They now have over 200,000 accounts on, moving them more toward a software-as-a-service subscription business. They're adding more and more layers on top of that. So, an interesting company altogether, growing about 25%, founder and CEO at the helm.

Hill: Steve, question about Axon?

Broido: I'm a shareholder. My question is, when do they move into the private markets? You see a lot of dash cams that people are using, Uber drivers use dash cams. When do they move into the private sector?

Kretzmann: They do have a self-defense business line, but I think the opportunity with law enforcement and military is so big, that'll probably be their main focus for several years to come, at least.

Hill: Jason Moser, what are you looking at this week?

Moser: Talking about retailers that are existing in an Amazon world, the Home Depot (NYSE: HD) earnings come out on Tuesday the 14th. Ticker is HD. Last quarter, they reaffirmed guidance for the year, targeting $120 billion in sales by 2020 with gross margin expansion. I'll tell you, every time I drive by, their parking lot is so full -- no offense, Mac Greer -- it makes Costco jealous. I think you have to love this business. It's a nice 2% plus yield that'll keep on growing.

Hill: Steve, question about Home Depot?

Broido: Do you think Amazon can compete with Home Depot? There's something about, when you need a part, you need something, you feel like, "I'm just going to go to Home Depot and pick it up. I'm not going to order it online."

Moser: I just don't think Amazon is going to be able to compete with Home Depot in that regard. There's something to that, Steve. When you need a joist holder, you need to see exactly what kind of joist holder you need.

Hill: Andy Cross, what are you looking at this week?

Cross: MakeMyTrip (NASDAQ: MMYT), the Priceline of India. One of the largest providers of ticketing and hotel packages in the Indian market. More than a billion people live in India, and they don't have huge penetration in online usage right now. Thinking about what the booking market is, just looking at what's going on with Priceline, MakeMyTrip's bookings are up 70% in the numbers over the last year. Will they continue to see bookings growth? How's that going to be for the revenue stream? In India, the travel penetration is far less than what it is in China. When you compare those two markets, you see a lot of opportunity for MakeMyTrip in India.

Hill: The ticker symbol?

Cross: MMYT.

Hill Steve, question about MakeMyTrip?

Broido: With all of these booking services, how critical is the bundling? It seems like, when you go to Expedia, potentially MakeMyTrip, it's not just a hotel. It's a hotel, plus airfare, plus car, plus this, plus that. How important is that?

Cross: Definitely important. You need to see that across all those properties. Especially in India, the booking market for them needs to continue to grow, and packages are going to be a big part of that, as they are for Priceline, as well.

Hill: MakeMyTrip, Home Depot, Axon. Three very different businesses, Steve. Do you have a stock you want to add to your watchlist?

Broido: I think I might take a look at MakeMyTrip.

Hill: Do you have a trip planned any time in the next six to 12 months or so?

Broido: We're going to New Jersey with the family. I don't think that's anywhere near India, but that's OK.

Cross: Well, if you do make your way to India, you know where to go!

Hill: Never underestimate the staggering drawing power of the Garden State. David Kretzmann, Jason Moser, Andy Cross, guys, thanks for being here! That's going to do it for this week's edition of Motley Fool Money. Our engineer is Steve Broido, our producer is Mac Greer. I'm Chris Hill. Thanks for listening! We'll see you next week!

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. Andy Cross owns shares of Booking Holdings, Home Depot, MDLZ, NFLX, and PepsiCo. Chris Hill owns shares of AMZN and Walt Disney. David Kretzmann owns shares of GOOG, AMZN, Booking Holdings, COST, DPZ, Etsy, Home Depot, Match Group, NFLX, Papa John's International, Tesla, The Trade Desk, TRIP, TWTR, Walt Disney, Zillow Group (A shares), and Zillow Group (C shares). Jason Moser owns shares of TRIP, TWTR, and Walt Disney. Steve Broido owns shares of GOOGL, GOOG, AMZN, Axon Enterprise, COST, Home Depot, NFLX, The Trade Desk, TWTR, and Walt Disney.

The Motley Fool owns shares of and recommends GOOGL, GOOG, AMZN, Axon Enterprise, Booking Holdings, MakeMyTrip, NFLX, Tesla, The Trade Desk, TRIP, TWTR, Walt Disney, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool has the following options: short February 2019 $185 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends COST, Etsy, Home Depot, and Match Group. The Motley Fool has a disclosure policy.