Today's episode of Market Foolery has it all -- international intrigue, grocery stores, and the value of Friends. Host Mac Greer, together with Motley Fool contributors Jason Moser and Bill Mann, talk about the market's biggest news and what it means for investors.
First, U.S. officials arrested Huawei's CFO in Canada, but the story runs deeper than that and has far-reaching implications across the market. Second, Kroger (NYSE: KR) reported a solid quarter, but comments from the CEO about Kroger becoming a growth company raised some eyebrows. And finally, Netflix (NASDAQ: NFLX) paid a whopping $100 million to renew streaming rights for Friends, and long-term investors shouldn't be too thrilled about that. Tune in to find out more.
A full transcript follows the video.
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This video was recorded on Dec. 6, 2018.
Mac Greer: It's Thursday, Dec. 6. Welcome to Market Foolery! I'm Mac Greer, and joining me in studio, we have Motley Fool analysts Bill Mann and Jason Moser. Gentlemen, welcome! How are we feeling?
Jason Moser: Howdy!
Bill Mann: Well, we were talking earlier, and I'm not sure that Jason and I have ever been on the program together at the same time.
Moser: I think maybe we might have done a Motley Fool Money at one point together.
Mann: That's probably true, but I don't think we've been on Market Foolery, so this is a big moment for everyone.
Moser: This is a banner moment.
Greer: I like this. It's like Laverne and Shirley coming on Happy Days or something like that.
Mann: Maybe the moment that Chevy Chase and Bill Murray are in Caddyshack together?
Greer: Yes, I think that's better!
Moser: Yeah, because the story behind that was, they had such a tight window to do that, and top it off with, the guys didn't really get along all that well, either.
Mann: So, same.
Moser: Yeah. Except, I'd like to say that Bill and I get along famously.
Greer: You know what? We're going to be talking about Friends later in the show. See what I did there?
Moser: Nice segue.
Greer: Netflix shelling out some big bucks just to keep Friends. We have some thoughts on that well.
Moser: Much like Friends, Mac, remember, for our investors, "we'll be there for you."
Greer: Oh, that's so sweet!
Mann: That was terrible!
Greer: And nauseating.
Moser: It wasn't as bad as Mac's elevator puns from the other day, though.
Greer: That's true. We're also going to be talking about some high-tech intrigue.
Guys, let's start with a story that you may have heard before: the stock market selling off. At the time of our taping, the market down big on Wednesday. Jason, thoughts for investors?
Moser: First and foremost, this is one of those situations where I'm actually extremely thankful for being able to go through the Great Recession as an investor. It's helped me develop a very, very thick skin for stuff like this. We know that the day-to-day machinations of the market often aren't going to make sense. There are plenty of reasons out there to be somewhat skeptical, at least. We like to invest with the glass half full here. You know that; our listeners know that.
With that said, you've got a lot of headlines out there that start begging some questions, whether it's tariffs or that dreaded yield curve inversion. Perhaps the economy is tightening up a little bit here. Unemployment can't get much lower. We've got consumers out there with loads and loads of debt. Non-housing consumer debt jumped up $88 billion in the third quarter. Pick your poison there.
But again, when you look back to the longer term, the numbers bear it out. You have to stay patient in times like these, and perhaps even look to invest in some of your favorite businesses in times like these. Trust that over the longer haul, things will get better.
Mann: You know, Mac, over the last 10 years, we basically have been in a market where there has been a Fed put underneath the stock market, underneath the bond market. They've kept rates almost close to zero. And at some point in time, what they've been trying to do is bring inflation back into the market. And this has happened. I don't think that there's anyone who would argue that things are not much more expensive than they were two years ago, five years ago, even though the way that they measure inflation, maybe it hasn't completely shown up yet.
At some point, the market has to get off of the ventilator of having that Fed put. And with the rate hikes, that's what's happening now. And there are going to be bumps. There's going to be turbulence. We are getting back into a normal market, which feels bad. We're not getting pure oxygen anymore. It feels bad. But really, we're in an OK place. Wages are up. Inflation is generally a pretty good sign, but it's not necessarily good for a market that's been living off of, basically, everyone being nervous about it going down.
Greer: Speaking of turbulence, and, Jason, speaking of headlines that beg questions, we have some high-tech intrigue with Chinese tech giant Huawei. On Saturday, Canada arrested Huawei CFO Meng Wanzhou, who is also the daughter of the founder of the company. Bill, the arrest came at the request of the United States. She's now facing extradition to the U.S. We don't know specifics, but reports are that she violated sanctions against Iran. What does it all mean for investors?
Mann: This is a huge story. China has a program called China 2025. It basically is China's program to get itself weaned off of Western technology. Huawei is at the very, very center of it. This is a massive story. The stock sold off huge all over Asia.
This has to do specifically with Huawei breaking the U.S. sanctions on Iran, but it's a much, much bigger story than this. A couple of weeks ago, Trump came out and asked our allies to stop using Huawei equipment. There's all the tariff negotiations that are going on now. A lot of people believe that this has something to do with that. I'm not sure that the two are directly linked, but it's definitely linked in this way: We're no longer letting China get away with things. So there's a lot of pressure that's being put on China, in a lot of different areas.
A lot of U.S. companies are huge suppliers to Huawei. NeoPhotonics, ticker NPTN, has 47% of its revenues in sales to Huawei. Claro, Broadcom, Amphenol, there's a lot of big companies that have substantial revenues that go specifically to Huawei. So it's a big deal.
Greer: If I'm a U.S. investor and I don't own this stock, it's privately traded, it sounds like I should be careful before I go out on a limb and say this isn't going to affect me. It sounds like the ripples, especially if it feeds into a U.S.-China trade war...
Mann: Yeah. That's really it. And there's really no information now that suggests that this is a direct link, although to the trade war, the timing is somewhat amazing, the fact that it happened the same exact day that President Trump was meeting with Prime Minister Xi. But yeah. It puts a whole lot more pressure on China. One thing that people maybe don't understand is just how much worse the trade war is for China than it is for the United States. And I think one thing that will happen from this is that China is going to press a whole lot faster to quit being dependent on any Western technologies.
Greer: Guys, let's move on to the exciting world of groceries and Kroger. We have to talk Kroger, right, Jason? We don't have to talk Kroger.
Mann: Are we going Krogering?
Moser: When you say "exciting," I immediately go to Publix. That's a concept near and dear to both of our hearts.
Greer: Publix is great. I love Publix, but I have to say, if you haven't gotten into Kroger lately, they're really nice. And I'm not just saying that because you can mix and match your own six-pack with craft beer. I mean, that may influence my thinking a bit. But back to the story here. Kroger reporting better-than-expected earnings and revenue. The stock down today, Jason, but, you know.
Mann: A lot of stocks are down.
Moser: Remember a little bit more than a year ago, we were having a conversation as to whether the Amazon acquisition of Whole Foods was going to be a Kroger killer. I already knew at the time that it wouldn't be, and I think that's proven to be the case. The one thing to remember with grocery stores, regardless of the economic climate, it's a difficult space in which to operate because it's such a low-margin game. It really is all about being that low-cost provider in a lot of cases. And now, on top of that, you have to meet your customer on more fronts. It's not always about just going to the grocery store. You have to be able to get those groceries to the customer. And thankfully for Kroger's sake, they're doing stuff like that.
I found it interesting in the release, the CEO, Rodney McMullen said, "We're moving away from being a traditional grocer to being a growth company." Let's not get carried away.
Mann: [laughs] A growther?
Moser: The top line was essentially flat from a year ago. But I understand the sentiment.
Greer: I like that. Your neighborhood growther.
Moser: They're offering more than just groceries at this point --
Mann: Growtheries! [laughs]
Moser: -- and I think that's important.
Mann: [laughs] Go ahead. You're doing great, Jason! [laughs]
Greer: [laughs] OK, so, Jason, there appears to be some skepticism about the idea of Kroger as a growth company. Do you think --
Moser: I'd say that's extremely reasonable when you look at the fact that the top line this year is essentially flat compared to last year.
Mann: That's not really growth.
Moser: Last I heard, growth companies did grow for a living. But with that said, they are offering more services to their consumers. They're doing very well on the digital front. Sixty percent growth for the quarter. They developed a very compelling private-label brand called the Our Brands line. That continues to take more and more share at their stores as folks look for those lower costs to their grocery bill.
All in all, I think they're doing a lot of the right things. It's just understanding what you're getting into before you get into it. If you're going to invest in a grocery concept, you're going to invest in a company that is not going to be growing a whole heck of a lot, no matter what the CEO says. It's a difficult environment! But certainly, Kroger is utilizing their scale to navigate the waters quite coolly.
Mann: Yeah, that's right. The grocery industry is basically a knife fight. This is an industry where basically any gains that you get come at the expense of one of your competitors. The irrational and poor competitors are much smaller component of the industry than they used to be.
It was a pretty good quarter for Kroger. And Kroger is a company that I've been negative on for quite some time, just because of the factors in the grocery industry and Amazon coming in with the Whole Foods acquisition.
I am pretty intrigued by their teaming up with Walgreens. They're offering a lot of their products through Walgreens, a new project that they have where you can order online and pick up your groceries at a Walgreens.
It was an OK quarter. I just don't see this as being a growthery.
Greer: [laughs] Trademark.
Moser: On the Walgreens point, it's probably worth noting -- last quarter, we talked about this -- they're opening up distribution to international markets via Alibaba's Tmall platform. They are looking at new ways to get that distribution outside of just the domestic arena here. That's admirable. But I think Bill hit the nail on the head. It's such a tough concept. Everybody's gunning to be that low-cost provider, which, of course, plays out on profitability. Regardless of what the CEO says... they may want to be a growth company, but the numbers tell the story here. Just be aware.
Greer: Guys, let's wrap up with our final story -- Netflix paying big, big money to keep the TV show Friends through 2019. Netflix paid around $100 million to continue licensing the program from Warner Media.
Greer: It is incredible, Bill, because Netflix was paying $30 million for Friends.
Mann: Yeah, a 20-year-old show!
Greer: What do we think?
Mann: I did love that their press release came out and said that the holiday armadillo has a friend, that they're keeping their Friends. That was their announcement.
Greer: And that's a reference to one of their episodes, right? I confess that I did not watch Friends a lot. And by "a lot," I mean ever, really.
Mann: Oh, we were totally down with Friends.
Greer: Is that right?
Greer: I watched a few. I find it generally kind of annoying.
Mann: This is really interesting to me, and Netflix doesn't break out its data, but Friends has literally skipped to the next generation. Jason and I were talking before we were taping; my girls watch Friends incessantly. It's on in our house all the time. Netflix doesn't break out its data on usage by program, but this is a big, big deal for them, and will remain so.
Greer: It aired originally from 1994 to 2004. So it hasn't been on network for 15 years or so.
Mann: And it stunk for five years before that!
Greer: Now, I was talking to a colleague of ours, and I was a little skeptical. I told her something to the effect of, I thought Friends was the most overrated show in television history. You know, just some mild statement like that. And I was taking issue with this, and she basically said, "I think you're missing it. It has huge appeal to millennials." She also thinks that maybe, just maybe, they're testing whether they're going to reboot the show. So this is almost R&D -- $100 million of R&D for Netflix.
Moser: We've just clearly hit the age where nobody can come up with a good idea. It seems like they're rebooting everything, and the reboots always suck.
Mann: They do!
Greer: So you don't want a reboot?
Moser: No! I'm apathetic when it comes to Friends. We did watch it. As a matter of fact, when we were in Egypt from 2002 to 2005, we had to put a lot of miles on the DVD player. I think we had all the seasons on DVD.
Greer: Are you more Joey? Are you more Chandler? Or are you more Ross?
Moser: Eh ...
Greer: Oh, that sounds like Ross.
Moser: [laughs] Yeah, maybe so. Always feel like you're fighting an uphill battle, right? But what it does show is, whether it's Netflix or Amazon or Hulu, they're all coming out with their own compelling original content, but they need something to bolster that mindless time where people just want to put something on the TV, and they're not sure what they want it to be. Hulu did it with Seinfeld. Netflix did it with The Office, and I think Netflix still has The Office. I think Seinfeld and The Office and Friends are all similar in that they maintain a fairly stable shelf life.
The one thing I found, and I don't know if you feel this way, too -- I'm far from a prude, so don't get me wrong here but watching Friends with my daughters now, the level of sexual innuendo in that show is far greater than I ever recall watching it pre-kids. Sometimes you hear these things, and you're --
Mann: Back then, you were excited about it.
Moser: -- "How am I going to navigate that with the kids when this is over?" But I mean, they're not going to pay that kind of money if people aren't watching it. Netflix is renowned for using its data to make decisions. You have to tip the hat for that.
Greer: Let's talk a bit about Netflix before we wrap up here. What's the biggest threat to Netflix? This stock has been so incredible. The company's been on such a tear. But there is a real question of, can Netflix continue to afford to pay this much for content?
Moser: I think that the biggest threat for them is what their ultimate pricing power is going to be. A time ago, it was easy to see them performing so well because they were coming out with some fairly compelling original content. I don't find a lot of their content to be really all that good.
Mann: That's because you're not watching Terrace House!
Moser: Maybe so.
Greer: Stranger Things!
Moser: Yeah, I didn't really get into that first season.
Greer: Are you a witch?
Mann: Do you know about Terrace House?
Mann: Erik Rydholm, one of the co-founders of The Motley Fool, turned me on to Terrace House. It's a reality show set in Japan with six young Japanese people. It's almost like a bizarro-world Jersey Shore.
Moser: Sounds like kind of a niche audience? Maybe I'm wrong.
Mann: They're super polite to each other! It's so great! It's so great. And I'm sure they didn't pay much for it.
Greer: Terrace House, OK, got it.
Moser: I think now, everybody's realized that original content is the name of the game. And whether it's HBO, Amazon, Cinemax, Showtime, they're all coming out with their own great original content. And that makes me wonder, at some point Netflix is going to hit where they can't charge much more for it. And when they hit that point, how are they going to address it? How is that churn of original content going to look then? I don't know the answer. I just don't think they can price that thing to the sky.
Mann: It feels a little ESPN to me at this moment. You think about how much ESPN has had to pay to keep college basketball, to keep football. A hundred million dollars to keep Friends seems like... I'm sure they've done the math, but it also seems like they came to the realization that this was not optional for them. And that would concern me a little bit as a shareholder. Where that happens with Friends, it is going to happen with other linchpin shows that are not original content.
Greer: Guys, as we wrap up here, time once again for the never-invest-this-way-but-it's-still-kind-of-fun desert island poll. Let's make it interesting here. I'm going to present you a few different investments. If you're on a desert island over the next five years, which one of these are you going with? We talked about the market, so let's throw the S&P 500 in there. Let's throw an index fund in there. Huawei, which is technically privately traded.
Mann: It's private.
Greer: But we'll throw it in there. S&P 500, Huawei, Kroger, or Netflix? Over the next five years.
Moser: See, I would have asked this a little bit differently. You're pretty forward thinking in these questions. I thought you might be going with stranded on a desert island, which cast would you prefer to be stranded with? The cast of Seinfeld, the cast of The Office, or the cast of Friends?
Greer: Ooh. We can do that one, too. Do you have an answer for that?
Moser: The Office, no question.
Greer: Is that right?
Moser: Oh, yeah!
Mann: Oh, yeah!
Greer: Oh, I go Seinfeld.
Moser: Really? I'm a big Seinfeld guy, but --
Mann: And talk about nothing for five years?
Moser: The Office cast would be more dynamic and diverse. Good point.
Greer: I thought the British Office was one of the best TV shows ever. I thought the American Office was better than Manimal, but not that much.
Moser: False. The American version of The Office was awesome!
Greer: Did it have a laugh track? The British version is darker.
Mann: It's unreal.
Greer: But Ricky Gervais is so tremendous.
Mann: But I would so much rather hang out with the American cast than I would the British cast. Even Gareth.
Greer: And you'd rather hang out with the American cast than Seinfeld? With George and Elaine?
Mann: Yeah, you don't talk about anything. Ever.
Greer: Do we talk about anything?
Mann: Not so much.
Moser: It's the podcast about nothing.
Mann: The chocolate-vs.-cinnamon babka? How much are you going to do for five years?
Greer: OK, we've established that. Back to the stock questions. S&P, Huawei, Kroger, Netflix. What are you going with, Jason?
Moser: That's a good one. I think that Netflix still has some good years ahead of it. Given the pullback in the stock market these days, and Netflix in particular, I think I'd go with Netflix on this one.
Greer: OK. And their CFO is not being extradited.
Moser: That's a plus!
Mann: I'm pro-extradition. I mean, I think from this point, given the Chinese determination to internalize as much of their production of telecommunications and networking equipment, you've got one of the biggest promoters in the world and the Chinese government behind Huawei.
Greer: Wow! The contrarian play. Bill Mann. I like it!
Mann: It's not necessarily socially... [laughs]
Moser: Everybody needs to know their line. That's all that is.
Greer: Well, this is a good time to mention that email@example.com is our email. You can send your questions and your comments, your thoughts on the desert island, or which Friends member you are, or which cast you want to hang out with -- [laughs] Bill and Jason, thanks for joining me! As always, people on the show 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 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. Bill Mann has no position in any of the stocks mentioned. Jason Moser owns shares of Amazon. Mac Greer owns shares of Amazon and Netflix. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool recommends Broadcom Ltd. The Motley Fool has a disclosure policy.