The new year is here, and it's time to look back on some of the biggest and weirdest stories from 2017. For the first time ever, Industry Focus is hosting the Industry Focus Awards, where the hosts from all five shows come together to pitch their contenders for various categories. In this episode, find out who wins the title of Best Fact and Most Valuable Player.
A full transcript follows the video.
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This video was recorded on Dec. 27, 2017.
Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. This is Wednesday, Dec. 27th show, and we're continuing on with our 2017 Industry Focus Awards. If you didn't listen to yesterday's show, please go back and do that before continuing on with this one. I still have the whole gang around the table with me, so let's keep things rolling. Our next award on deck is something I'm going to call "the more you know", which is our Best Fact Award.
Sarah Priestley: Do you want me to go first?
Harjes: That's why I'm looking at you.
Michael Douglass: Dylan, Vince, and I don't have facts so ...
Priestley: That makes sense, to be honest.
Dylan Lewis: Oh, shade!
Douglass: Wow, OK!
Priestley: So my "the more you know" nomination, I feel like I'm maybe shoehorning this in, but my best fact for this year going into next year is, in 2018, we could be looking at the largest initial public offering, what would be the world's largest oil company, seeking a valuation of $2 trillion, is Saudi Aramco, supposedly next year. The background for this is, at the beginning of 2016, the new Crown Prince of Saudi Arabia dropped a bombshell that the kingdom was considering taking its national oil company public. The company right now is solely owned by the King of Saudi Arabia, commonly referred to in company parlance as "the shareholder." The Crown Prince kind of threw out the $2 trillion valuation, but there's been a lot of analyst pinging the valuation about $500 billion up to $1.5 trillion. So it'll be interesting to see how it actually comes out for the IPO. The sale would only be for about 5% of Aramco, and the whole impetus behind it is the Crown Prince's Vision 2030, where he's trying to diversify Saudi Arabia's economy away from being dependent on oil exports and more dependent on alternative income.
Harjes: So he is hugely dependent on oil in order to help him get the money to diversify away from oil.
Priestley: Absolutely. Yeah, the 5% could be about $100 billion, if they receive the valuation that they're looking for. So this $100 billion is going to go into a pot, and it's essentially going to be a PE fund to back some investors in Saudi Arabia.
Harjes: Dang, that's crazy. Alright, so I guess it's just you and me on this one. I'll go ahead and pitch mine.
Douglass: We'll just go ahead and say things.
Harjes: On the last show, we talked a little bit about Equifax, and I wanted to follow up with a fact regarding Equifax, specifically Rick Smith, the CEO of Equifax, walked away from the massive data breach a very, very rich man. He resigned from the company. Makes sense. What doesn't make sense is that he took with him about $90 million into retirement, which ends up being about $0.63 for every one of the 145 million customers whose personal information was exposed.
Lewis: Yikes. That one just makes me angry. Sarah's is cool, and that one bothers me.
Harjes: [laughs] So which is better? I don't know.
Lewis: If we're talking about investing in learning stuff, Sarah's is better. That's really exciting and interesting. I guess that would make them the largest publicly traded company, right?
Priestley: It would. Right now, there's a lot of rumors going around that it might be delayed to 2019, even though the Crown Prince has come out and said no, that's not the case, it should be 2018. But right now, they're trying to find exchanges to accommodate the size of the IPO. It's definitely going to trade on Tadawul, it's the 10-year-old Saudi Arabia Exchange. And then, essentially, New York, London, Berlin, are all competing for a stake. So it's just seeing how it plays out.
Lewis: I'm giving Sarah my vote because I don't want to think about that. I don't want to think about Equifax. It's just going to annoy me.
Vincent Shen: I have a follow-up question, if you don't mind. Do you know how far along they are in the process for the deal? Or is it, at this point, very much a preliminary consideration?
Priestley: At the moment, it's not 100% clear. They're not very transparent. However, I don't think they actually have a broker right now. So I think they're still up for debate, which is why a lot of people are suggesting it may be delayed. But the sale has become emblematic of the Crown Prince's desire to transform the economy, so if it doesn't happen, it'll be a big hit to him, which I can foresee happening.
Harjes: It's also going to be delayed based on oil prices, because that inherently ties into the valuation of this company. If you think about the purpose of going public, it's to get this cash windfall. And you're not going to do that if valuations are suffering.
Priestley: Yeah, absolutely. OPEC, which is the Organization of the Petroleum Exporting Countries, just had a meeting recently, plus Russia and some other countries, and they agreed to continue the oil production targets that they had last year, which a lot of people have credited with propping up the oil price. The oil price is back up slightly from where it has been. And obviously, as you said, they're very dependent on having good crude oil prices, in terms of seeking a good valuation. Their reserves, however, are so vast that even if you look at a valuation on $10, which, it's crude oil, it's not been refined, it has not had value added to it, even if you look on that scale, they would be valued over $2 trillion. However, that isn't how oil companies are normally valued. There's a lot of other things that go into this. But it helps people to understand the scale of what we're talking about. So yes, definitely, crude oil prices have a huge impact. And if they do IPO next year, what's going to be really interesting to watch is what OPEC then does. Because Saudi Arabia kind of has the yay or nay vote in what OPEC does, and they need to transition slowly out of the agreement they made rather than dropping it. So that will be a story to watch, and that also plays into this IPO story.
Harjes: Sarah, if the award category was Story to Watch, I would let you have it.
Lewis: Woah, Kristine just got competitive!
Douglass: I'm going to go ahead and weigh in here briefly. One of the things that's so fascinating to me about the Aramco story is the amount of both national and international politics and intrigue that's based around that. I think that makes it the best fact, not just because it has a potentially much larger effect on the world economy long-term but also because it's just so darn interesting, it has so many interesting layers. Sarah's got my vote!
Priestley: A story to watch, some could say.
Douglass: [laughs] Some could say.
Harjes: Alright, fine, I'll let you have it. [laughs]
OK, time for our next award. This one is MVP. What product or business segment or company would you like to give the MVP award to?
Lewis: I'll hop in with another name -- I can't help but do this -- that I talk about quite a bit on the Tech show. This is none other than Amazon Web Services of Amazon (NASDAQ: AMZN). This is their web infrastructure arm. Amazon started the year at a market cap of $375 billion, and the stock still posted 55% gains in 2017, which is crazy to me. But some of that was obviously due to their e-commerce business, some of that is due to Prime, some of it is due to the Whole Foods acquisition. They've done a lot this year. But really, all of that is enabled and made possible by AWS. You look at their books. In the most recent quarter, AWS posted sales of $4.6 billion, good for 40% growth, but tiny in comparison to the $39 billion the company brought in North America and international e-commerce. But their massive retail sales led to an operating loss of over $800 million, while AWS created $1.1 billion in operating profit. So Amazon's North American e-commerce segment is in the $100 million-plus profitability range. They lose money on their international sales. Single-handedly, AWS makes them operating-profit positive, and it really allows them to invest in the business, expand internationally, do cool stuff with Prime, do content creation. It's the little engine that could help Amazon take over the world. [laughs]
Douglass: That's a strong pitch.
Lewis: [laughs] That sounded mildly patronizing.
Douglass: No, I truly meant that that was a strong pitch! And I was going to reply with another web-based service.
Harjes: And now, Michael will top it.
Douglass: I'm not sure that I can top Amazon. Amazon's pretty tough to beat. See, I'm coming in with humble now, since the other tack didn't work on the last show. You're just going to get four different sides of Michael.
Lewis: Classic A-B test right there. [laughs]
Douglass: See if you get a better outcome. Marcus by Goldman Sachs (NYSE: GS). So, Marcus is Goldman Sachs' new online consumer lending platform. It launched in 2016. It's ramped up to over $2 billion in loans incredibly quickly, shortly after the last quarter ended. Your thought is probably, OK, cool, so it's a me-too platform that's trying to copycat Lending Club, right? It's this online consumer loan sort of thing that you would use to consolidate your credit card debt, probably.
But Marcus has a couple of distinct advantages over its competition. First off, they offer lower maximum APRs. They only go up to 23.99%. I know, that's a lot. But Lending Club and Prosper are both right under 36% as of today, when we film this, so it's a big difference. Again, that's on the upper end. On the lower end, they're all in the 6% to 7% range, but Marcus also has no fees. So everyone else charges some kind of fee. Origination, check processing, prepayment penalties, something like that. They don't do this. But let's look at this from a stock perspective for a minute, because we're investors and this is an investing show. Management's key argument for this product is, they're able to grow it at the rate they want because, unlike the fintechs, they have the capital to put behind it, so they can scale it basically as they like. And one of the reasons it hasn't scaled a lot bigger is because they're lending conservatively, with an average FICO score of around 700. So you know it's a conservative product, which is a good thing for Goldman Sachs. This is, by the way, part of a larger Goldman Sachs move toward traditional banking and a little bit away from some of their investment banking roots. They are both trying to take more deposits, and they're also trying to lend out more money, which is something that traditional banks do that investment banks tend not to do. In a rising interest rate environment, that's exactly the right move, because that enables them to pocket the arbitrage between what they're paying out on those deposits and what they're taking in from those loans.
Harjes: Alright. Thanks, Michael! I'm going to give a niche nominee, but that's the nature of healthcare, I suppose. I would like to propose the launch of the first-ever gene therapy to hit the market, a CAR-T drug from Novartis called Kymriah. This drug and the science behind it could absolutely revolutionize cancer treatment. So far, it's been approved in a blood cancer called ALL, and another CAR-T from Gilead Sciences has been approved in NHL. These and other CAR-T drugs are working their way toward more FDA approvals in more different types of cancer. When you consider that these drugs are showing up to 50% rates of complete remission months and months after initial treatment, it's hard not to be amazed at the hope that they're providing to patients who were previously out of options.
Priestley: Kristine wins, I'm sorry. She's saving lives over here!
Harjes: It's truly awesome!
Lewis: I think we have one more pitch for this one?
Harjes: We have one more.
Lewis: Something I'm curious about before we go to the next pitch is, as a portion of the business, how big are Marcus and the CAR-T drugs?
Douglass: Marcus is tiny right now, and that's intentionally so, because Goldman Sachs is trying to grow it thoughtfully and responsibly,
Harjes: Of the specific companies that I mentioned, Novartis and Gilead, relatively small. There are entire CAR-T developers, where that is their entire business. For example, Gilead actually acquired their CAR-T segment, it used to be an independent company called Kite Pharma. So for Kite, that was 100%. For Gilead, I'm not going to spitball a number, but it's a relatively small fraction.
Douglass: And to be fair, because these are new entrants in that market, it's going to take a long time for them to ramp up. So it'll be a while, particularly as they try to get these full-on indications and other diseases, before you really get to see what their full potential could be. It's not, shall we say, a more mature business, like AWS.
Lewis: What I'm hearing is that they don't meaningfully contribute to operating profit. [laughs]
Douglass: [laughs] I think what you're hearing is, their potential is, as of yet, completely almost entirely unrealized.
Lewis: Ooh. Nice retort there, Michael.
Douglass: Thank you!
Shen: OK, well.
Douglass: Vince is like, "Now you can stop tooting your own horns." [laughs]
Shen: This is Vince. I'm going to bring up the rear here with my MVP nominee, who I'm really excited about. This is probably my favorite nominee of all the categories. And it is, drum roll, Oprah Winfrey for Weight Watchers (NYSE: WTW). Back in Oct. 2015, Oprah announced a multi-year partnership with Weight Watchers, becoming an advisor, board member, and 10% shareholder of the company.
At the time, Weight Watchers was struggling pretty significantly. They had new competition in the weight loss industry from places like the tech world, thanks to wearables, apps, and other alternatives. The stock was down about 70% year-to-date before the announcement of the partnership with Oprah. After the announcement, in just two days' time, the stock gained 170%. But as excited as investors were, the stock did return to more reasonable levels in 2016. We're talking about this year now, right, this is the 2017 Awards. Overall, in that time since the announcement, Weight Watchers has broadened its focus to include general health and wellness on top of weight loss. And there's been a huge impact that Oprah has had as a brand ambassador in terms of reaching her fans, and a lot of consumers, with that kind of name recognition. For 2017, I nominate Oprah as MVP, because Weight Watcher's stock is up 300% year to date.
Douglass: Year to date?!
Shen: Year to date. It's one of the best performing stocks on the market, period. If you listen to their earnings calls, in the second quarter discussion, for example, you hear management say again and again how Oprah's partnership has been pivotal to the momentum the company has seen in terms of rising membership, rising revenue, and earnings growth. I'm not going to say she's single-handedly responsible for all the strong results the company has been delivering. But the company has definitely made big changes to its promotions and its product offerings as a result of the partnership, and she has become the face of the company. Her personal progress with Weight Watchers is a very powerful marketing tool. In terms of how impressive it has been for her own role, she initially invested $45 million in Weight Watchers back in 2015. That was for 10% of the company. Her stake is now worth $300 million. So for me, that's MVP material.
Douglass: So I think two things just happened that are pretty rare here at The Fool and in the broader investing world. No. 1, Dylan just got blown out of the water, and number two, Amazon just got blown out of the water.
Lewis: Yeah, that was an incredible pitch for a couple of different reasons. I think, one, you have incredible company performance. Two, you have something really cool as a hook into it. Like, I like that you had a person figurehead part of it, rather than it just being a business segment. That wins!
Harjes: Well, especially when you think about what MVP means, most valuable player. That's Oprah.
Douglass: Yeah. I mean, who can compete with Oprah?
Lewis: Apparently not Amazon. [laughs]
Harjes: I would love to see that battle, Oprah takes on Amazon.
Lewis: You know that they probably have to have some Weight Watchers-Amazon partnership at some point down the road. There has to be a way to deliver that.
Harjes: Sure, I could see it. So, it sounds unanimous, Vince has taken home MVP?
Lewis: Unless Sarah just wants to throw a contrarian vote for the heck of it?
Douglass: Vote for Marcus! [laughs]
Priestley: No, I think 300% year to date is pretty compelling. And, you gave a very good pitch. Dylan, your pitch was also very good, but I'm going to ... [laughs]
Shen: Thanks, Sarah!
Douglass: Notice she didn't say anything about ... she had a diplomatic science for the other two people at the table, but that's OK.
Priestley: It was a two-horse race.
Harjes: That's OK, I can respect that. Alright, we have reached the end of today's Awards, but we will be back tomorrow with the third installment of our four-part awards show. 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. This show is produced by Austin Morgan. For the whole gang, I'm Kristine Harjes. Thanks for listening and Fool on!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Dylan Lewis owns shares of Amazon and Gilead Sciences. Kristine Harjes owns shares of Gilead Sciences. Michael Douglass owns shares of Amazon and Gilead Sciences. Sarah Priestley has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Gilead Sciences. The Motley Fool has a disclosure policy.