Chris Hill: It’s Wednesday, January 23rd.
Welcome to MarketFoolery! I’m Chris Hill. Joining me in studio, Aaron Bush
back in the house. Good to see you! Aaron Bush: Good to be here!
Thanks for having me! Hill: I’m excited to talk to you! We’ve got
some big tech earnings. We’ve got IBM, we’ve got Comcast. And eBay hasn’t been this interesting
in years. We’ll get to eBay in a second. Let’s start with big blue.
IBM’s fourth quarter profit and revenue came in higher than expected. The guidance
for 2019, I think, is what is driving the stock. Shares of IBM up 8%.
Bush: I mean, I wouldn’t get too optimistic just looking at the guidance. The company
itself continues to trudge along. Like we say pretty much every quarter, IBM’s best
days are way, way behind it. This particular quarter was pretty much just more of the same.
Revenue fell a small amount, but revenue growth for the full year is essentially flat.
In any normal context, you’d say, “That sucks.” But looking at IBM and given what they’ve
been through over the last several years, just bleeding revenue, that’s progress.
It’s better than it used to be mainly because some of their growing businesses, like AI, analytics,
application management, are now a larger percentage of revenue than they used to be. The growth
from those businesses is driving larger changes in the business. But it’s still not that good,
as other core parts of the business are still in decline. Although IBM has relationships
with many major enterprises out there, there’s no way on its own that it can compete
against companies like AWS, Azure when it comes to the cloud. The core of IBM,
in my mind, is still entirely uninspiring. Hill: Let me push back in this regard.
The obituary for IBM has been written a couple of times in the last 20 years. You can go
back to the late 80s, early 90s, where people were saying, from an investing standpoint,
things not too different from what you’re saying right now. Essentially, best days
are behind it. And you can look at a chart of IBM, there were stretches of time where this
was a market-beating stock. Mid-90s to the early 2000s, late 2008 for the next five years.
It was kind of surprising, the way that they were performing. My question is, even though
they’ve got all this competition — particularly, as you mentioned, against the likes of AWS
and Azure — would it surprise you if, the next five years, this was
a market-beating stock? Bush: It would surprise me if it were a market-beating
stock. The core of IBM is still in a tough spot. I think the businesses that are doing
well are going to be a larger percentage of revenue. But when you have these other massive
businesses that are a part of IBM still in decline, coming to beat the market and beating
other companies that don’t have any of that baggage, that’s tough.
When you look at IBM’s earnings, though, it’s smart not to write an obituary mainly because
we can’t forget that their upcoming acquisition of Red Hat is still in the works and will
close later this year. IBM is about a $120 billion business now. They’re spending $34 billion
to acquire Red Hat. That’s the largest software acquisition ever. That should accelerate
their efforts to become more modern in the cloud market. I think that that deal is interesting.
Red Hat’s products are pretty much entirely open source, I think, and the business model
there builds around support and professional services, which IBM has lots of experience in.
It should help them accelerate their expertise in hybrid IT, helping companies work across
multiple public clouds, private clouds, legacy infrastructure. Red Hat has other more
technical products like Kubernetes, which helps what’s known as containerized applications, which means
developers don’t have to run a virtual machine for every single application that
they’re working with. That’s super technical, but that’s a big, growing field that
should help modernize IBM’s business. That said, it’s massive. It’s the most obvious
Hail Mary that I’ve seen in tech, I think. And it makes sense why IBM would do it.
They need something like this. But I don’t know how smooth it will go. I bet some of Red Hat’s
people will jump ship. There’s going to be culture clash. And even though IBM will probably
want to do lots of cross-sells, I don’t know if all of Red Hat’s customers will want to
buy lots of other IBM services. I think it’ll be fascinating how it goes down.
Definitely not writing an obituary here, but I think that we still
can find better stocks than IBM. Hill: Alright, let’s move on to Comcast.
Similar story to IBM, just in terms of the headline. Fourth quarter profit and revenue doing a
little bit better than expected. They raised their quarterly dividend. Shares up 4%.
What’s your main takeaway when you look at this business at this point in time? In the recent past,
there was a good stretch of time where, for whatever customer service issues one may have
with Comcast, this was a market-beating stock for a good stretch of time. And the last 18 months,
it’s anywhere from struggled to just tread water. Bush: I think we need to break apart the business a little bit. The main business,
which is TV and broadband, it’s pretty much as business as usual there. On the traditional
TV side they continue to lose paying TV subscribers, but the loss is shrinking. No surprise there.
However, on the broadband side, this quarter, they added over 350,000 customers,
and their total revenue there grew 10%. I think people need to realize that, as much
as you may not enjoy dealing with Comcast itself as a customer, this business is here to stay.
When you realize that Google Fiber has shut down, Project Loom isn’t going anywhere,
Facebook’s internet drones or satellites aren’t going anywhere, SpaceX isn’t close to doing
anything at scale — disruption of players like Comcast is a really long ways away.
I do think some of the ups and downs that they’ve experienced have less to do with this side
of the business. This side of the business will hold steady. It’s the other
side of the business, entertainment, where there are a lot of other moving pieces.
There’s been a lot of uncertainty on how that will play out. I think this quarter was pretty
meaningful in moving in certain directions. This quarter, the acquisition of Sky closed.
That’s massive. Their NBC Universal segment grew, and guiding for more growth there,
which is great. There are hints that they may launch their own NBC Universal streaming service.
I don’t know how well that’s going to do. It obviously can’t compete at scale with
something like Netflix, but I think it’s smart. It’ll help them own customer relationships,
probably turn to something like what CBS is doing. And then there’s the whole, what are they
going to do with their 30% stake in Hulu? What’s going to go on there? I don’t know.
My guess would be, they probably don’t like that Disney now owns 60% of it.
Hill: No, I wouldn’t think so. [laughs] Bush: So, they’ll probably look to sell,
maybe to Disney, and then maybe use the proceeds to invest in their own service. That’s what
I would think. There’s still a lot of uncertainty there. But really, most of this business is
still broadband, and they’re doing very well in it. Hill: The streaming service is interesting, and I think you’ve keyed in on something crucial
there: this was almost under the radar. Like, “Oh, by the way, we’re launching this streaming
service in 2020.” But, to your point, I think if they lowball expectations, if they go into
it with an eye towards advertising partners, where they just say, “Look, we’ve got these
news properties, we’ve got the Olympics,” I mean, 2020 from an advertising standpoint,
it’s shaping up to be a lucrative year for this side of the business. If they use the
streaming app to essentially enhance the advertiser relationships, I think that sets them up for
further growth down the road. But, they have to make sure it works.
Bush: Yeah, I think so. We’re seeing a lot of competition, mainly in paid services.
People are competing with Amazon Prime, HBO, for paid subscriptions. I think they’re smart
to lean the other way and do advertising. At some point, people are going to hit the
wall of what they’re willing to pay. And Comcast with NBC Universal, they have a lot of big
shows and brands and sports that they actually can do something interesting there and
hold their own. I think it’s a question of how much scale they can really succeed at. I don’t
really know. We’ll have to wait and see what their plans are. But I think it’s smart that
they’re doing this. Being connected to Comcast, which is in tons of people’s homes around
the country, that gives them a great head start. Hill: eBay is going
to report their fourth quarter earnings next week. But yesterday,
shares of eBay were up 6% on, well, activist the investors looking to make some changes.
And it’s not just one, it’s two. Yesterday, catalyst was Elliott Management coming out
with this letter. Elliott Management owns about 4% of eBay. They came out with this
letter saying, “Hey, we’d like to see some changes. Specifically, here are the changes we’d like
to see.” We’ll get to those in a second. Starboard Value, probably a better-known
name than Elliott Management — Starboard Value also has a stake, they revealed that
recently — they’re going to come out with their own letter at some point soon.
Pretty interesting timing, planting this flag a week before eBay reports earnings,
and putting the CEO on notice. But I’m curious what you thought specifically of the headline
changes that Elliott is agitating for — spinning off the StubHub business
and the Classifieds business. Bush: I’m not surprised to see this happening.
I think it could make sense to some degree. What eBay has done incredibly well over the
past many years is, they’ve done a good job pinpointing and buying businesses that are
relevant and can scale. If you think about buying PayPal, buying StubHub, those turned
out to have some pretty fantastic returns for eBay shareholders. That’s great. The problem
is that eBay’s core marketplace platform isn’t the best business to really connect
to all of this other stuff. It’s hard to build a larger encompassing business that has
synergies and is all-inclusive. We saw that with PayPal. It was obvious, PayPal isn’t a marketplace.
We’re starting to see that now. StubHub is a marketplace. The Classifieds business is
a marketplace. But is eBay really the best connection for those companies to exist?
I think for the Classifieds business, maybe it is. It’s pretty similar to what eBay does,
people buying and selling goods and services. It’s mainly international, so there could be something
there. That doesn’t make as much sense to me. But on the StubHub side, absolutely. I can totally see StubHub being a separate business,
and being separate, being able to unlock value, make deals that they couldn’t have otherwise.
Honestly, a company like StubHub could do well independently, but it wouldn’t surprise
me if it got spun out and then was acquired by someone like Amazon or Sirius XM, or even
connected to Spotify in some way to help those companies build a more complete
music experience, adding live to just streaming. Hill: You and I were talking before we started
taping about the customer experience when you’re looking to buy tickets,
whether it’s to a game or a concert. Essentially, once you’ve made the decision,
“I’m going to go to this thing,” then it’s all about, “Where am I going to sit?” And that sort of thing.
By the time you get to buy the tickets, that’s when it clicks in, like, “Oh, my god, how
much in fees am I being charged here?” But at that point, you’re like, “OK, alright,
I’m just going to buy this because I want to go to this thing.”
Bush: Yeah, it’s not the friendliest for the consumer.
Hill: [laughs] No! Bush: But it’s a pretty great business to
be invested in. It tends to generate lots of cash, which can then be either just delivered
straight back to investors in dividends or share repurchases, or used like we see in
Live Nation, which owns Ticketmaster, they continue to make lots of new deals that
strengthen their ecosystem. I could totally see someone wanting StubHub for that great business and
being able to use it to strengthen a music ecosystem. And that’s not going to be eBay.
It makes no sense why that would be eBay. So, I can totally buy why they’d want to spin
out StubHub. That would be about a $4 billion business. Hill: I think back to a few weeks ago, when we were here in the studio, we were doing
Motley Fool Money, first episode of 2019, sort of our preview of the year. One of the
things we talked about was CEOs to watch, whether they are on the hot seat or just set
up for an interesting year. None of us mentioned Devin Wenig, the CEO at eBay. But I think
the next couple of weeks are going to be really interesting for him. He took over as CEO of
eBay back in July of 2015 when the PayPal spin-off occurred. You think back to then,
shares of eBay were around $26 a share. Today, they’re around $33. And that alone isn’t
enough to necessarily get a CEO fired, but I think the combination of the attention being paid
because of the activist investors coming in, being very specific about unlocking value,
I really think this conference call next week is going to be interesting.
Among other things, they’re coming out of the holiday quarter. And I saw a lot of eBay
commercials on television. And personally, as a longtime shareholder of eBay, I’m curious
to see, not just what they put up in terms of revenue and profits, but what was their
marketing spend? What did that look like? It wouldn’t surprise me at all if they came
out next week and it was, “Oh, yeah, we ended up shooting for the moon in terms of trying
to bring in revenue, and because of that, we spent a ton more
on advertising than we normally do.” Bush: Right. I think it’ll be interesting
to see how open-minded he is to changes being made. If he is stubborn… the previous CEO
was also stubborn when it came to spinning off PayPal, and that didn’t exactly work out.
I think what he should do is be open-minded and recognize that some of these businesses
could have value elsewhere. His legacy could come from how great of a dealmaker he is.
Even if you think about, you spin out StubHub, maybe you spin off the Classifieds, that leaves
a much smaller eBay. And what do you do with that? Does that become acquired? Do you make
other partnerships with that? I think that if the snowball starts rolling, it’ll start
accelerating. Maybe nothing happens, but if something even small happens, it could trigger
other things afterwards. Those are legacy-making decisions on his part.
Hill: Aaron Bush, thanks for being here! Bush: Thanks for having me!
Hill: 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 tomorrow!