Motley Fool Hidden Gems Investing - Apple is Peloton's New Nightmare

Episode Date: September 8, 2022

"Incremental upgrades" were the theme once again, and that seems to be working out well for Apple's customers and shareholders. (0:21) Tim Beyers discusses: - Fitness+ becoming a serious problem for Peloton - Apple not raising prices (in the U.S.) on the new iPhones - Tim Cook reminding us of his ability to be "a stone cold assassin" (13:22) Jason Moser and Matt Frankel do a "medium dive" on Boston Omaha, a small-cap holding company focused on billboards, bonds, broadband, and its asset management company. Stocks mentioned: AAPL, GOOG, GOOGL, PTON, BOC Host: Chris Hill Guests: Tim Beyers, Jason Moser, Matt Frankel Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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starts now. I'm Chris Hill, joining me from Colorado, Motley Fool Senior Analyst Tim Myers. Thanks for being here. Thanks for having me. Fully caffeinated, ready to go here, Chris. Let's talk about Apple's event. There are a few things we can get to. We'll get to the phones themselves in a second, but I was struck by the focus on fitness and the new high-end Apple Watch, which is aimed squarely at serious outdoor athletes, marathon runners, all that sort of thing. What did you make of the continued push into that area? You can make the argument that the high-end watch for the really outdoor people, that's a niche market, but it seemed to sync up with what

Apple has been doing for a few years now in terms of the overall push into health and fitness? Absolutely. I mean, this is a digital lifestyle company now. Let's be clear about that. This was a hardware company that was also a design company. Now that design has seeped into living. So Apple is trying to orchestrate and serve your digital lifestyle. And so I think the interesting piece of this, Chris, is less so. Certainly, the watch is an interesting showpiece, for sure. And it's incredibly impressive. More important, is Fitness Plus going to 21 countries at $9.99 a month?

If that does not scare the bejesus out of the folks at Peloton, then I don't know. I mean, they're braver than I am because that's a real gauntlet being thrown. And what it suggests to me, Chris, is that the Apple strategy is, yes, it is to sell more hardware, but the growth strategy is to serve more parts of your life. Apple is intending to become an ever-present, always-on servant of your lifestyle. It's kind of the digital companion, and that can be via the watch, it can be via the phone, it can be via your computer, it can be via your entertainment options on Apple TV. but all of this is like Apple becoming surround sound in our lives. Yes, it does continue things, but I think it's bigger than health and fitness, Chris. Yeah. The price point for Fitness Plus reminds me of when they launched their video streaming service at $4.99 a month. I just thought,

oh, right, when you have all of the cash in the world on your balance sheet, you can afford to do that sort of thing. In terms of the iPhone 14, four new versions of the phone rolled out, and congratulations to anyone who was betting on incremental upgrades. If you had that on your bingo card, you won, and I'm not knocking them for it, that's what we've come to expect more of in these events and it looks like we got it yeah you you almost imagine that there were people out there watching the event and there was you know it was like the bob newhart drinking game incremental upgrade take a drink you know like there is um yes for sure they are incremental upgrades better camera more storage better battery life all the things we've come to expect

multiple handsets. Price is not going down, not going up, but not going down. So, continuing to serve a very premium product. But again, Apple does not need to win new customers. What Apple needs is, I mean, yes, they do, but really what they need is for you to see, you and I to see the iPhone as the indispensable must-have device that helps orchestrate our life, because that's what it is. That's what it is right now. It's our pocket computer that helps us orchestrate our life. We do banking with it. We do entertainment with it. We do communications with it. It is ever-present for us. It helps us unlock doors. We get two-factor authentication you know type of alerts it helps us it does so many things it's like a life assistant

and so really where this lives what where this apple lives for apple is like they need you to believe that in order to be a participant in modern society you need an iphone And so far, I think they're succeeding in convincing us that we need that. Now, to be fair, there's a cohort of people who don't say, you need an iPhone, you need a smartphone. And those people are Android users. But still, there's a massive cohort of iPhone users. And what Apple really needs is for them to not unplug. They need to get them deeper into the ecosystem.

And I think this helps with that. As you mentioned, they did not raise the price of the latest and greatest version of the iPhone. Here in the United States, in other countries, the price is going up. That's true, yes. I'm curious, how much do you think that was debated behind closed doors? Because I can see the argument in the same way like we just talked about with Fitness+. Hey, look, we don't have to charge a lot for this. We just want to get people adopting Fitness+. Somewhere down the line, if we feel like we need to bump up the price, we can. I'm wondering if the way inflation has dominated the headlines

this entire calendar year, if that was the part of the conversation behind closed doors. Look, we want to get people moving into the iPhone 14 and we don't need to raise prices this time around. yes and you're right that it did vary by country and let's be clear so does inflation by the way in other countries around the world inflation is much hotter than than it is here and historically that has been true so how much of a debate was this i don't know but i think your illustration of the strategy is right, that what we really want is to get you an on-ramp to the Apple Superhighway and get you cruising, the wind blowing in your hair, so you want to stay on that highway and enjoy the view for as long as humanly possible.

Because the longer you're on that highway, the more profitable you are to Apple as a customer, particularly if you are a services customer. And that's an increasing portion of Apple's business. In fact, it's one of the biggest, fastest-growing portions of Apple business. And so, Fitness Plus will be a part of that. Apple TV subscriptions will be a part of that. But more importantly, iCloud, music, and other books, and other types of entertainment. there's a lot of very high margin revenue that Apple can get if it keeps you cruising on that superhighway. So, yeah, I do think there was a debate about, let's see about keeping people where they are. And maybe if we can incrementally convince some people to make the jump to the next

version. Let's see if we can do that by keeping prices stable. One price that did not stay stable was the price of the newest version of the AirPods. $250. That's a high-end listening device they've just rolled out there. Yeah, that's for real. Sometimes Apple does this. Sometimes they do tout some of the innovations they have. They talked about sort of pairing one of the more interesting things. I forget exactly what they call it here. Let me look at this. They call it the spatial audio, personalized spatial audio.

So you use your iPhone to kind of give a sense of what your personalized space is and helps measure this with your iPhone. And then the AirPods learn from that. there's a chip on board of those AirPods. And so the way that it delivers sound to you is sort of tailored to your personal space. I don't get the nuance here of exactly how this works, Chris, but I do find it fascinating that once again, here is an Apple device that is made better by another Apple device. Shocking. Shocking that there would be multiple Apple devices involved in this, right? I mean, so, yes, I predict that this will not be a massive seller, but there will be people who want it and want the highest end. And if it gets a little bit of a

foothold, we're going to see more of this. You'll see a next generation of it, and it'll be more more interesting as it grows. Tim Cook has had a busy week, not just because of his involvement in this event, but he also appeared at the Vox Media Code Conference in California. He did an interview on stage. I want to set the stage here for listeners, because he was asked about the relationship between iOS and Android, and specifically texting between iPhones, because iPhones use iMessage, Android phones, when they text the iPhone, it's SMS messaging, it shows up as a green bubble. And Google is pressuring Apple to adopt RCS, which is essentially a next-gen replacement for SMS messaging.

And Cook basically said, this is not something we're spending a lot of time on because it's not a priority for iPhone users. When he was pressed by the interviewer who said, I can't send videos to my mom because of the limitations of SMS messaging, Cook said, well, you should buy your mom an iPhone. I got to say, I'm sure there are some people who may view that as a flippant response. To me, that's a CEO who's talking his own book. Right. And you know who that sounds like? Steve Jobs. That sounds like Steve Jobs. We forget. I don't buy the argument that the Tim Cook apple is like a watered-down version of the Steve Jobs apple. No, it isn't. No, it isn't. It looks different. That's true. It looks different. But can we just for a moment recognize that Steve Jobs and Tim Cook worked together really, really well because

Tim Cook at his job and operations at Apple was a stone cold assassin. He was a stone cold assassin. And as CEO, he is also really clear that he wants to build an Apple ecosystem that is fitting with the vision that Jobs always had. So these two may be different people, but in how they go about their business, I think they're very, very similar. And that's probably one of those rare instances where a diplomatic man like Tim Cook sort of revealed a little bit of those, you know, it was kind of a Walter White moment. Who do you think you're talking to? It was one of those. Tim Beyers, always great talking to you.

Thanks for being here. Thanks, Chris. Up next, Jason Moser and Matt Frankel have a medium dive on a small cap holding company, Boston, Omaha. Hey, Matt, great to catch up with you again. This week, we wanted to dig in a bit more on a company that I think many listeners have probably heard of. Maybe they don't know as much about it as they'd like to, which is why we're here today. We're talking about Boston Omaha. This is an interesting business from a number of different angles. First and foremost, let's just go ahead and start with what the company actually does. Because again, this is a bit

of a diversified business, a bit of a unique business model. So, what does Boston Omaha do? Yeah. So, this is going to sound like a really weird answer, but Boston Omaha itself doesn't do anything. It's a holding company. So, Boston Omaha, right now, what do they hold? They hold a lot of cash. They have four major business lines. They have a billboard subsidiary operated under the name Link Media that has about 7,500 billboard faces. It's got an insurance business under the brand name General Indemnity. They operate in the surety insurance industry. They have a broadband internet business with about 43,000 subscribers that they've invested heavily in lately that operates mostly in rural areas. And last but not least, probably the most

exciting part of the company is Boston Omaha Asset Management that has a bunch of different kind of, they have minority investments. They have a built-for-rent homes business that's just kind of building out. They're raising outside capital for some of their opportunities they see. And it's just a really exciting part of the business. And they have a bunch of cash on the balance sheet. They also own common stocks, primarily in two companies. They have a big stake in DreamFinders Homes, another public company. And they also took Sky Harbor Public by SPAC during the big SPAC boom, because why not? It was 2021. So that was their actual largest investment to date. They have a pretty big stake in that one. So you've got billboards,

which essentially that's advertising. You've got insurance and you've got asset management and you've got internet. A very wide range, right? An interesting cross-section of revenue generators. But I guess ultimately leading into this next question, how does it make money? It feels like they make their money really a number of different ways. Is there a part of the business that is responsible for the lion's share of the revenue today for this holding company? For most of its history, it's been billboards. But it's really interesting that you say that it's kind of like an interesting collection of businesses, but they all have one big thing in common. They all have great economics. They don't have high overhead.

The billboard business, for example, 99% of their billboards are static, not the new digital ones that everyone else is investing in. The reason is because the overhead on those is just 6% of revenue. That's a fantastic gross margin, 94%. The broadband business has gross margins in the 90% range. Because once they build out the wireless infrastructure, there's almost no ongoing costs. So the kind of common denominator between all their businesses, Sky Harbor included, they build out these aviation terminals and rent out the space, but on an ongoing basis, there's almost no investment required. So it's, yes, a diverse collection of businesses and investments, but with that same kind of target on low ongoing CapEx.

You and I have talked about this business before, going back years ago with Industry Focus when we were doing that show. I feel like this is a business that has evolved a little bit over time. I think for the most part, we knew of it as billboards and the surety business. It feels like they continue to tack on new lines of business ultimately to build this business. Is that what's going on? Because I don't know that the asset management wing of the business really, I'm not sure it existed. If it did, it didn't seem like it was material. I would say the same for the broadband. At least it seems like the broadband is becoming a bit more central to the story than it's been historically. Yeah. Well, there's a lot to unpack in

that. But in the asset management business, they started it for a few reasons. Their minority investments were all just held separately under the big holding company at first. They ended up running into trouble with the Investment Company Act of 1940. They had to sell off a bunch of their DreamFinders homes because it was just a separate business under their banner. It prevents them from future stock sales like that. Number two, and most importantly, they said this at their recent annual meeting, for the first time in their history, they're starting to see more opportunities than they have money. The asset management structure allows them to raise outside capital for these individual opportunities. There's two examples. The built-for-rent homes business,

they're putting in about $10 million. They're trying to raise about $100 million of outside capital to be able to build that out quickly. Not only do they get their own $10 million investment making money, but they could get performance fee income on that other $100 million if they deliver for their investors. In the broadband business, they're partnering with home builders and check out the economics of this business. What they're doing is they're partnering with homebuilders to build at construction the fiber infrastructure for internet into the homes. It's paid out of the HOA dues for a period of at least 10 years. They pay about $2,000 per home to put this in. They get $60 in guaranteed monthly revenue at 90% margins for 10 years. Obviously,

there's a lot of demand for this. They have over 15,000 homes in the backlog and don't have enough capital. They're aiming to raise $500 million to build out the broadband. They see this as a huge opportunity. That's $500 million of investor money. They could be generating fee income for them if they deliver for their investors. There's an old saying in investing that the best way to make money is with other people's money. You're not risking any of your own capital, you just get fees. The asset management business allows them to do that. Yeah, that makes a lot of sense. I do like that. The best way to make money is other people's money. It seems like that's what they're doing now. When you look at this business,

we want to talk about competitive advantages. I feel like the competitive advantage side of the conversation lines up also with the leadership side of the conversation here, because ultimately, the more and more we dig into this business, the more and more it sounds like at least part of the thesis or at least part of the advantage is the investing acumen of leadership. This is, at least in part, a jockey play. You've got a co-CEO situation with Alex Rozek and Adam Peterson. You mentioned they don't have enough capital for the opportunities they see, they're going to be raising more money. Obviously, still a small company at $750 million or so market cap. Am I on the right path there? Do you consider this a jockey play more than anything else,

or is there another competitive advantage that I'm missing? As you've probably heard, Boston Omaha gets a lot of comparisons to an early-stage Berkshire. Because not only do they invest in a bunch of different businesses, Alex Rosick is actually Warren Buffett's grandnephew. And they've specifically said they're modeling this after Berkshire to some extent. But one of Warren Buffett's big investing mentalities is, our plan is to find the 400 hitters and then not try to teach them how to swing. So, it's not necessarily the two co-CEOs. They're doing a great job of hiring the right leaders for each of those individual businesses

and kind of just letting them run with it. Yeah. They just hired somebody for the fiber home builder partnership. I mean, and he's just running with it. It's his business. So yes, it is a management play, but they're using kind of the Buffett mentality of decentralized management in that Warren Buffett doesn't control any of the 60 businesses that Berkshire owns on a day-to-day basis. The only reason he steps in is if one of the CEOs is doing something wrong. And that's kind of the mentality they take. They're capital allocators. They're not billboard executives. They're not insurance experts. They're not asset management experts even. They're capital allocators,

and that's how they see them. Well, I like that. Those are fun businesses to invest in because you're investing right alongside investors. Clearly, there's a blueprint out there in Berkshire Hathaway. Even to an extent, a company like Markel, we would say, follows this playbook to a degree. Then when you look at a business like this and you think about the risks involved for investors, again, to me, and you said it, this is a management team that really they try to do the hard work upfront and making sure that they're making the right investments with the right leadership and then letting that leadership go do their thing. Feels to me like one of the more obvious risks with a business like this

is if Boston Omaha leadership becomes a little overconfident perhaps in their ability and starts trying to micromanage or control more than perhaps they should. One great example is that built-for-rent homes business. One of the reasons they're doing that is there's no shortage of companies doing built-for-rent housing these days. But what they're doing is they go to a home builder like DreamFinders or a DR Horton or one of those, and they buy homes from them and then rent them out. Now, those homebuilders charge a 20% to 25% markup on their homes. Boston Omaha, their plan is to build the homes themselves, act as their own general contractor. They're going to hire somebody to get in there who knows how to build houses.

That is a big risk factor. If Alex and Adam decide to tell them how to build houses, I mean, that would be like me going out to my, when I had a pool put in, me going out to the contractor and telling him what to do, what he was doing wrong. I'm not going to do that because that's not my wheelhouse. My wheelhouse is to allocate my capital to how I want my yard to look and then let them run with it. And it's kind of the same thing here. That's a great cost advantage by building houses yourself if you can partner with the right person. If you get the right person in charge who knows how to supervise the construction. They want to initially build out 154 houses. It takes a level of expertise to be able to coordinate that. If they get the

right person in there, that's a huge cost advantage over all these other companies doing built-for-rent housing. Yeah, that's really interesting to think about. You wonder if Alex ever has any conversations with Warren about this stuff, trying to learn lessons, glean some of his experience. Let's wrap this conversation up ultimately with where you stand on this business today. Because when you look at the stock, it seems like it could be considered as sort of a defensive stock given what they do. I mean, you look at the performance year to date, I mean, it's had a tough year to date. I mean, this stock's down something like 10%, but it's outperforming the market. But you stretch that out over a five-year time horizon there, and the

stock has performed very well. It's up 71% and outperforming the market. Where do you stand on this stock today? Is it one that you like? Is it one that you've got your eye on? It seems like you're kind of glass half full where this one's concerned. Well, it's my second largest investment to answer that question. So, then glass three-quarters full. But having said that, I view them as low-risk businesses, but not a low-risk stock, if that makes sense. So, what I mean by that is, and Boston Omaha kind of went meme stockish about a year ago. It just got rocketed up to about $50 a share and went parabolic for a little while. It's going to be a lot more of a rollercoaster ride in the early stages than a Berkshire

Hathaway or Markel, if it was easy to build a $700 billion conglomerate like Warren Buffett has, anybody would do it. There's a ton of execution risk. Like you said, the downside to having a bunch of different businesses is any one of them can go wrong. If the billboard business starts going wrong, that's a risk factor. If the insurance business starts ... I view them individually as all low-risk businesses, but in the aggregate, I wouldn't call this low-risk stock at this point. But the risk-reward to me makes a whole lot of sense, which is why I own a lot of it. All right. Well, we'll leave it there. Matt, it's been a pleasant conversation. It's always fun catching up with you. Thanks for digging into this one for us,

and we'll see you next time. Always happy to be 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. I'm Chris Hill, thanks for listening. We'll see you tomorrow.