Walmart Chips Away Another Day

In today's episode of Market Foolery, host Chris Hill chats with Motley Fool analyst Seth Jayson about a few of the market's biggest stories.

Walmart's (NYSE: WMT) quarterly report showed more of the same -- that it's quietly continuing to grow while rising up to meet e-commerce challenges such as one-day shipping. Meanwhile, Elon Musk, by way of SpaceX, announces another random, expensive, far-fetched idea, this time featuring Wi-Fi and satellites. It'd be more exciting if plenty of experienced pure plays hadn't already tried and struggled to make this work.

Plus, the guys look over Berkshire Hathaway's (NYSE: BRK-A)(NYSE: BRK-B) 13-F, some surprising sells in the equity portfolio, what we know about the (NASDAQ: AMZN) investment, and 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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*Stock Advisor returns as of April 1, 2019The author(s) may have a position in any stocks mentioned.

This video was recorded on May 16, 2019.

Chris Hill: It's Thursday, May 16. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, first time in a while, Seth Jayson. Thanks for being here!

Seth Jayson: Good deal!

Hill: We're going to start with Walmart's earnings. Obviously, anytime a company the size of Walmart is reporting, there are a lot of numbers. You tell me what leaped out to you. What leaped out to me was same store-sales growth coming in at nearly 3.5%.

Jayson: Pretty decent. Lot of retailers haven't been able to do that.

Hill: Right. In terms of first quarter comp growth, that's the best in almost a decade for Walmart.

Jayson: Yeah, that's pretty good. The online growth was also pretty strong, about 37%. I really like what I'm seeing from Walmart. It's similar to what you've seen from Home Depot, doing a very good job of putting together a nice omnichannel retail presence. You can order on the app. I was just looking at their app, it's a very nice app. It's cleaner than the Amazon app, seems easier to find things. You can order stuff. They have stores everywhere, you can go in and pick it up. They will be offering one-day shipping, they said, in many cases could be cheaper than two-day because it's going to come straight out of the stores. They're very intelligently using their store footprint. They've got these pickup lines. If traffic weren't horrible here, and I lived somewhere they were I was picking things up, I would definitely order groceries from Walmart and just go to that line and pick them up. You've seen the ads. It's a cool ad, where Jurassic Park cars or Batmobile are picking things up. They're doing a lot of good things, and it's showing. The earnings were decent. I think they're just going to continue to chip away here. Bricks and mortar retail is not dead, especially when the people running it are smart.

Hill: By the way, I don't know if listeners can hear the buzzing in the background. This is the "pardon our dust" episode of Market Foolery. There's construction in our building.

Jayson: It's not even our dust.

Hill: It's not even our dust. It's the people who are moving in on the third floor. Anyway. You mentioned the ads; they've been running those for a while. I think they're both charming and effective. But like you, one of my reactions when I see that ad is, "Ooh, I bet that would be nice to do in an area that isn't quite as crowded with traffic."

Jayson: In a rural or more suburban area, where you're going to be driving past the place and it's easy to get in and out, it would definitely be an option I would consider. Makes your life a lot easier not to have to walk around picking up. Because let's be honest, we all buy the same 15 things every time we go.

Hill: You used, I think, an appropriate phrase when it comes to Walmart's e-commerce. You said they're chipping away. E-commerce sales up 37%. That's a really good quarter. They've been compiling these for a while now. When they first started out, it was this kind of number, if not lower. And obviously, they're working off a lower base. So you could forgive people for looking at those early e-commerce numbers out of Walmart and saying, "This is fine, I suppose, but it's not really meaningful." But the thing is, just like compounding interest works over time in the favor of investors, it works the same for racking up e-commerce sales.

Jayson: And you get a virtuous cycle where people are coming into the store, maybe because they went online, they checked the app, and then they realized they wanted to come in and look at five different options for something else. By giving them the entire ecosystem, what they might need, either online, pick up in store, it's a really smart way to capitalize on money that's already been spent. The stores are there, engage people where they are and use that store base intelligently. Something poor Sears, [laughs] poor Sears could have learned. They could have been ahead of Walmart on this, had they figured this out 15, 20 years ago!

Hill: Yeah. You know what one of the key differences is there? Walmart has Doug McMillan in the corner office, and forever, Sears has --

Jayson: Had a hedge fund guy running it? Yeah.

Hill: [groans] Yeah...

Jayson: There's something to be said for expertise in a field, instead of just the field of being rich.

Hill: Yes. And a nice reminder that expertise in one field does not guarantee expertise in another field.

Jayson: Yes. [whispers] Don't tell anyone; I used to be an art historian.

Hill: [laughs] We'll just keep that between us.

Jayson: [whispers] All right.

Hill: And the dozens of listeners. So, from time to time, we use the word "optionality" when we're talking about businesses. It's something we like to see, because if businesses can pull that off well, that bodes well for them, and it certainly bodes well for their shareholders. Optionality is clearly something that Elon Musk is interested in when you look at the Tesla business and the end, the solar business and the SpaceX business --

Jayson: Don't forget digging holes in the ground to run a single car through the [tunnel] business.

Hill: There's that. But I'm having trouble understanding what they're trying to attempt at SpaceX. SpaceX is getting ready to send 60 satellites into space. I believe, if I have the timing correctly, they were planning to do it yesterday, and it was too windy. So that's going to happen probably in the next 48 hours or so, assuming the conditions work. But they're sending these satellites up to set up a network with the goal of providing high-speed internet all around the world.

Jayson: All around the world!

Hill: Not only does that sound complicated, it also sounds like something that's not going to be free and they're going to look to make money off of.

Jayson: It's a really cool technical challenge. I love the idea! Now, I own shares in Iridium, which you could argue is a similar business. But this business is complex. Iridium, of course, very famous bankruptcy for sending up sat phone satellites and then not being able to find enough subscribers. Iridium is a business now that has newer satellites up, still does the sat phone and tracking business and does a lot better. But this is all about wavelengths. Iridium has some electromagnetic spectrum, which works very well for their use case. This stuff is scarce. SpaceX's satellites will be using what is a commodity wavelength car, Ka/Ku-band, which is the stuff you get with the airplane Wi-Fi, which right now gives you an idea of expectations that some people might have. This is a wavelength that a lot of businesses have been able to access. It's subject to something called rain fade, the humidity in the atmosphere can make this difficult. As a result, the satellites need to be pretty low. And that is SpaceX's plan. But because they're going to be so low, they have to have hundreds -- actually, more than 10,000 is their grand plan. The way it'll work is, you'll beam up information from a ground station, and then the satellites will pass it to each other via lasers. And it's not like you'd be able to just have a phone, because it would have to be even bigger than Gordon Gekko's original cellphone, it would have to be the one his dad carried. You need a large antenna that can follow these satellites as they move across the sky. These satellites are going to be visible wherever they are for less than five to seven minutes at a time. This is not an easy technical challenge.

If they can pull it off, the question is then, what kind of money can you make? Other companies have tried to do this. They don't make any money. They end up being sold to somebody and being a portion of a larger satellite operator's business. The Wall Street Journal a while ago got a hold of a presentation that said SpaceX was -- and Elon Musk even said this yesterday -- they want to fund their Mars aspirations with this Wi-Fi sale. Which doesn't make a lot of sense, because they said they were going to get 40 million subscribers and make $30 billion in revenue a year. Well, that's $65 a month-ish. Kind of hard to imagine, when a company like Cox doesn't have -- everyone knows Cox is an internet provider. They don't do those kind of numbers.

The other thing is, they originally pitched this as a way to connect people in Africa or other places where they don't have internet. But people in those places can't afford these prices. So I really wonder, what is the point of this, besides a technology demonstration? And I'm pretty sure it is not going to fund a Mars mission.

Hill: Yeah. It's one of those things where, I was reading a couple of articles this morning, and I just thought to myself, this sounds good in theory, but in execution -- and this comes back to something I've said about Elon Musk before. I don't own shares of Tesla, but if I did own shares of Tesla, I would want him spending as much of his time on that as possible.

Jayson: Right, rather than trying to figure out how to get 12,000 satellites to laser beam information to each other at high speeds?

Hill: Yep.

Jayson: The other fun thing about this is, I read that if they got this full constellation up, within six years or something, as these things start decaying, you might have like 40 of them a month falling out of the sky, and only 95% burning up in the atmosphere. There'd be decent odds over a six-year period that somebody's house or cranium is affected by a piece of SpaceX internet satellite.

Hill: Are you old enough to remember Skylab falling?

Jayson: Yeah.

Hill: I believe that was 1979.

Jayson: The panic.

Hill: The relative panic of, "Oh my gosh, this thing is going to fall to the ground!"

Jayson: Yeah, but that's a government satellite. That hits you, it's an affront. But if you're killed by a piece of Elon Musk's space junk, then your family has something to brag about.

Hill: Well, and presumably, it's actionable. Berkshire Hathaway has filed their 13-F. We get some more color on their holdings. They cut their stake in Southwest Airlines. They cut their stake in Phillips 66 by half.

Jayson: Not such believers in that gasoline future, it sounds like. Well, they got enough BYD, right, the battery and carmaker in China?

Hill: Not as much in the Philip 66. And we knew going into the annual meeting that they'd bought shares of Amazon. Now we know how much they bought. It's to the tune of roughly $900 million worth of stock.

Jayson: So, not very much.

Hill: Yeah, it was one of those things where my gut, in-the-moment reaction was, "Wow!" And then I thought, "Oh, wait!"

Jayson: "It's these two companies, they're both huge."

Hill: Yeah, the scale of Amazon and the scale of Berkshire Hathaway... but also, it would not surprise me if this was just the opening stake. And whether it was Ted or Todd, I'm not sure which one of them bought it -- because Buffett was very quick to point out before the annual meeting, "Hey, it was one of the guys down the hall. It wasn't me."

Jayson: What if it was Charlie? What if that whole thing is just an act, and Charlie's not a grump? He's day-trading internet stocks! [laughs]

Hill: Well, how great would it be if Charlie was still the grump that he is, but behind Warren's back, he orchestrated this.

Jayson: That would be awesome! It's not a silly move, I don't think. I bought Amazon about the same time, mostly on the basis of the expanding cloud business. Not actually that big a fan of the retail business, either, as a user; and of course, I use it as much as everybody else.

Hill: Thank you! [laughs]

Jayson: [laughs] I'm increasingly dissatisfied with it. But the cloud business is rolling along. And I often, this is something you'll learn with old age, sometimes you buy a stock, even if you're not a fan of the service or the company. If it seems like everybody else is doing it, do you want to fight against the tide? Not me!

Hill: That's a fair point! To go back to Walmart for a second, we had Scott Galloway on Motley Fool Money last week. He made the point about Walmart, it's one of the few legacy businesses that can really compete against the huge tech companies, including Amazon. But I think, you look at shares of Walmart up today and close to an all-time high, you look at everything Amazon has going on, it wouldn't be the worst idea in the world to just buy a couple of shares of each.

Jayson: Yeah. I actually wonder if, in the future, we won't see Amazon as well as Google busted apart because they're just becoming so powerful in their respective markets. I don't even think that that would necessarily be a bad thing. I can see a value case for separating a cloud business out -- well, maybe not the case of Amazon. It might be subsidizing the retail. But, for instance, at Google, where you've got Search and then you've got a cloud business. How many people want to use the cloud business if they're worried that Google is going to compete with them on their own turf, informing things through the search business? So, these businesses are definitely, I think, going to evolve in the future, and maybe be split apart.

But it's encouraging to me to see that an old, huge business like Walmart can actually get with it and move with the times and improve itself. Now, that said, there's still the headwind of tariffs. A lot of stuff they sell at Walmart comes from China, and is going to become more expensive. And management just said, "Yeah, we're going to have to raise prices," which puts the lie to the idea that the Chinese are paying these tariffs. They're not. We are. Whenever we shop, and whenever you shop at Walmart, you're going to be paying more.

Hill: Yeah. It seems like, if not every quarter, at least every other quarter, there is a buzzword or phrase that we expect is going to pop up in multiple conference calls across a variety of industries. There's no question that this earning seasons, tariffs. You don't want to pull the word tariffs in the conference called drinking game. You're going to be going to the hospital.

Jayson: Yeah, you're going to be tipsy. Yeah, we're all going to end up paying more if the tariff regime continues. Expect to see those costs passed onto consumers. Companies can only absorb so much of that before shareholders revolt.

Hill: Seth Jayson, thanks for being here! 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 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. Chris Hill has no position in any of the stocks mentioned. Seth Jayson has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Berkshire Hathaway (B shares), Southwest Airlines, and Tesla. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.