Motley Fool Hidden Gems Investing - Big Tech Bounces Back

Episode Date: July 27, 2022

Microsoft and Alphabet didn't disappoint with their latest quarterly results. (0:22) Bill Mann discusses: - Microsoft having tough comps, with the cloud division shining once again - Alphabet proving its resilience - Chipotle continuing to raise prices and profits (12:54) Ricky Mulvey talks with Jack Caporal about The Motley Fool's latest research into crypto scams and how you can avoid them. Stocks mentioned: WMT, TGT, AMZN, COST, SHOP ETH, SOL Host: Chris Hill Guests: Bill Mann, Jack Caporal Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll.

So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. Chris Hill. Big tech bounces back, and not a moment too soon. Motley Fool Money starts now. I'm Chris Hill, joined by Motley Fool Senior Analyst, Bill Mann. Thanks for being here. Bill Mann. Hey, Chris, how are you? You know, there's green in the market, so I'm doing better than I was yesterday. Also, still nice to see you in the studio. Yes, yes. This is happening, isn't it? It is actually happening.

Let's start with Microsoft, because Microsoft's fourth quarter revenue came in just shy of $52 billion, not as high as Wall Street wanted. It was the slowest revenue growth in two years. However, The cloud growth for Microsoft looked pretty strong. Their guidance was upbeat. They basically reiterated the guidance they put out three months ago for the new fiscal year. Guidance trumps results, right? Kind of. I think some of this has to do with the fact, and we're going to talk about another company that this fits also, that Microsoft's, the news that they came out with, even though they missed. We don't care that much about analyst estimates, whether they hit or miss, but it does, in fact, impact the stock. 2021 turns out to have been really, really hard

comps for a lot of companies, particularly because people were still inside. We were all pretty nervous and we, we, we, we solved that by shopping. So Microsoft's results, not only were they, were, were they great? They were bonkers in certain ways. You know, five years ago, Microsoft's total revenues were $97 billion for the, for the entire fiscal year. Yeah. Now for the quarter, if you take the quarter for just for cloud and put it on a run rate, which basically means you take the number, multiply it by four. It's a hundred billion dollars. They're making more in cloud than they made in everything five years ago. And once again, we're talking about Microsoft, which five years ago was 12 years removed from antitrust, you know, like antitrust

lawsuits in the U.S. and Europe. This company is absolutely positively massive. And maybe that's not a great insight, but it is growing rather quickly in areas that really didn't exist as revenue streams for it even a couple of years ago. So when the larger conversation around the economy, the potential for a recession, inflation, all of those things, continues to take place. What should we take from Microsoft maintaining their guidance of three months ago? They're looking out over the next 12 months and saying, yes, everything we believed three months ago, in inflation, rate hikes, increased talk of recession, we're still of the same mindset in terms of what we see for this business. What should we take from that?

I think it's important for companies in terms of operators to recognize that this may have been the hardest operating environment that companies have ever operated in, certainly certainly in the last 50 years, given the fact that it seemed like the economy around the world was coming to a grinding halt in 2020. And so, for better or for worse, our central banks around the world responded to that, which meant that they responded by making sure that growth came as quickly as possible. We were worried about deflation. Now we're worried about inflation, is here. I think with a lot of companies, particularly ones that are huge like Microsoft, you have to keep in mind when you see a company that's operating in the way that they have,

the environment that we're operating in is absolutely unprecedented. Let's move on to Alphabet. On last Friday's show, Jason Moser and Matt Argersinger and I were talking about the mindset going into this earnings season. I'm paraphrasing what Matty said, but he basically said, I feel like the message from Wall Street is, just don't disappoint us too much. That's right. You can disappoint us a little, but just don't disappoint us too much. I feel like that's what Alphabet has done with second quarter profits and revenue coming in lower than expected. And it's really across the board. It's their mainstay business. It's YouTube, et cetera. But shares up 4% or 5%, because essentially, this is Alphabet saying,

hey, we're not Snap. That's right, again. The thing that happened last week with Snap, we're not them. That's on them, pal. That's on them. That's not on us. There's something really, really important to keep in mind when you're talking about Google and you're talking about their results. So obviously, it was 16% growth in constant currency. But I don't know if you've heard about this, Chris, but the U.S. dollar is up against almost every currency in the world a lot. So if you take that currency factor out of the equation, they really, really did well. And importantly, their revenues for advertising, which is the area that blew Snap out of the water because their revenues went down so much, beat expectations at $56 billion.

56.3 versus 56.1, which you do that math backwards, that means they beat by $200 billion. So this is a great business, and it is showing that in a very difficult environment. And the companies that compete with it that are lower quality are suffering in a way that Google or Alphabet is not. When Alphabet's CEO, Sundar Pichai, talks about, as he did on the call, about this is a time where they're going to be focusing more, they're going to be looking more intensely at all of their business units, do you read anything into that with respect to the parts of Alphabet's business that don't really make much money? If you're part of the other bets division, are you nervous when you hear that? Or do you think, no, this is just a little bit of extra focus and a little bit

of extra color from the CEO? No, I think one of the things that's really important is that Alphabet came out a couple of weeks ago and said that they were pulling back on hiring, basically. Their employee headcount, quarter over quarter, going through the second quarter of 2022, was 10,000 additional employees. If you do the math backwards a little bit, there's about $300,000 in expenses per new employee per year. If you just ratchet that back. And this is not an entirely fair way to think about it. This is not a bad way to think about it. That's about $6 billion in additional free cash flow that may fall to the bottom line. So Alphabet hasn't said that they're cutting anywhere. They're simply removing

some of the bets that weren't working out. They're simply ramping back a little bit in terms of hiring. So I wouldn't be nervous at all if I was anywhere within that big weighted blanket that is Alphabet. Chipotle's second quarter revenue was a little lower than expected, but their profits were strong because, amazingly, Chipotle continues to raise prices and it continues to work. When I saw this, I thought back to earlier this year when they were talking about how they had been raising prices up to that point, Brian Niccol, the CEO, saying, yep, we're going to continue to do this. I think I may have said on this show, this is going to be interesting to watch because I'm not sure how much higher they can go.

Clearly, they can go higher and it's working. The stock is up 15%, Bill. Yeah, there was an amazing number, an amazing number in this report. And it is this. Chipotle's food cost as a percentage of sales dropped despite inflation, which just shows how much power they have had to go to their board and raise prices. And they've stuck. Now, at some point, they're going to come up on a natural limit. But the fact is, they weren't raising prices at least 100% as a response to inflation. They were, they were raising prices because they felt like they had capacity to go to the board and, you know, and, and increase that way. I I'm going to make the mistake of comparing Chipotle, which is a business

that makes burritos to Apple, which is a business that makes one of which, which is one of which has a name like a food. So, yeah, okay. It fits. But in the earlier days, you go back a decade, people would ask, and it was a reasonable question at the time, can Apple continue to do this? Because the law of pricing when it came to consumer technology for the longest time was, prices come down over time. Flat-screen TVs, which used to cost $1,000, now cost just a couple hundred dollars. How much longer can Chipotle keep this up? Because if you'd asked me earlier this year, are they going to be able to do this in the summer? I would have bet no, and I would have been wrong. Our friend from Technomic, David Henkes,

made a really interesting point about Chipotle's earnings. And it was observational versus anything else. And it was that Chipotle is on a list of other businesses that are struggling with their in-store experience because of the lack of labor availability. And so, I think if there is a risk for Chipotle being able to keep doing it, it's because they are, and maybe it's not their fault because labor has been really, really tight, that they do have some labor costs that I think are latent at this point that fully staffed stores would, in fact, increase that cost in a way that's not being measured now. Great point, Bill Mann. Always great talking to you. Thanks for being here. Thank you, Chris. One investment scam is on the rise and we'll help you avoid it

right after a word from our friends at BiggerPockets. Real estate investing is one of the best ways to build long-term wealth. But to be a successful investor, you need to know what news and trends to pay attention to, and what's just noise. I'm Dave Meyer, real estate investor and VP of analytics at BiggerPockets. And in my new show, On the Market, a BiggerPockets podcast presented by Fundrise, we bring you expert perspectives in a digestible format so you can make informed investing decisions. And we make it fun. I promise you, On the Market is definitely not another boring news show. Each week, I chat with a panel of experts about the latest news and trends affecting the real estate investing world. We touch on things like government

policy, 3D printed houses, investing in the metaverse, and more. So join us every Monday for On The Market, the podcast designed to help you invest with confidence. Just search On The Market in your favorite podcast app. That's On The Market. The cryptocurrency market may be crashing, but we are trending toward a record year for crypto scams. Ricky Mulvey caught up with Jack Caperell to talk about The Motley Fool's latest research on investment fraud and how you can avoid these scams. 2022 will be a record year for investment fraud, and a lot of that money is going to come from cryptocurrencies. Joining us to talk about investment fraud and The Motley Fool's research

on crypto scams is Jack Caperell, analyst for The Ascent. Thanks for being here, Jack. Oh, thanks for having me. So what did you learn? What did you guys research on crypto and investment scams? What did you find out? Yeah, so we used a combination of data from the FTC and survey data that we collected. And like you said, we found out that 2022 is going to be a record year for losses, both in terms of investment scams and then crypto scams in particular, most of which are a subset of investment scams, right? And the numbers are pretty mind-boggling, especially in relation to the past five years. So in the first quarter of 2022 alone, we're looking at a total of $672 million in losses from investment scams.

2017, for the entire year, there were $50 million lost in investment scams, right? And in the first quarter of 2022 alone, losses have already totaled more than a third of the total losses in 2021, right? So in a quarter, you've done a third of all of the losses last year. A quarter's doing a third. That's way too much math for my head, Jack. Basically, we're on track to potentially have 50% more losses from investment scams overall this year compared to last year. And so we're probably looking at a range of, of maybe 2 billion in losses reported. Uh, and that's definitely an undercount, right? Our survey shows that not everybody reports losses. And then in terms of crypto fraud alone, you know, 2021, there's about

$680 million lost reported loss as a result of crypto fraud. We're going to smash through that this year. In the first quarter of 2022, there have been $329 million reported lost, so nearly half in a quarter. I want to clarify something. You said 2018, there was about $12 million lost in investment fraud. That was cryptocurrency fraud in 2018, where $12 million was lost. Investment fraud has been around for a very long time. We're just now seeing a new flavor of it. What are these cryptocurrency scams looking like? Crypto scams, they really are just a new type of wrinkle in old scams right so instead of being contacted by phone or online text message about some great investment opportunity an investment manager that can take your money

and guarantee you 25 return in six months uh they're just saying we can do that but with crypto Yeah. So we're like a crypto fund manager or you'll see it as a play on a romance scam where, you know, you'll be kind of tricked into online relationship and your alleged partner will say, hey, I've got a great investment opportunity. It's in crypto. This is how you can send me some crypto. You know, obviously the victim never gets that money back. We're seeing scams of old use crypto as an investment opportunity and also as a method of payment or transaction. It's like a little cayenne pepper into an old recipe, where you got essentially the classic romance scam, which is someone essentially catfishing as someone else, then saying, hey, I need money for XYZ, or hey, here's a cool ... Which, by the way, I am shocked

that these romance scam partners are not just shutting down the conversation once they start hearing about crypto. That doesn't seem like a good lead-in if you were trying to meet people online. Yeah. I mean, the way that I think about the romance scam thing in particular, and also the investment scams where, in my experience, I'll get a WhatsApp from a random number and I'll be like, hey, I'm a Bitcoin fund manager. Click on this link and I'll set you up with these crazy returns. The way I think about it is, there are very few people in my life that I would be comfortable sending a significant amount of money to to manage right and if i don't know you in person and haven't known you for a very long time and trust you there's like a zero percent

chance i'm going to send you any money any crypto whatever so it's a it's a huge red flag if you get that type of message and and you should really think twice uh before you send money or crypto So, to someone, to some number who you've never met in person, who you just know online. One interesting part of your research is, you looked specifically at how much money people are losing on all these types of scams. I thought it was interesting that the investment fraudsters are netting an average of $575 per scam. Meanwhile, the government imposters, I assume those are the folks calling me with information about my Social Security benefit, are only netting $40. What are the investment fraudsters

doing right? It seems like that's a very little amount of money to get from a scam. I think there are probably two things going on there. First is, it's more attractive to send money or crypto to someone who says, we can double that, versus you owe, you owe me money. You're going to drag your feet on the person who says, you owe me X amount of money uh or you need to pay this amount to get your social security unlocked or whatever but the reward is enticing right the investment opportunity is enticing and then second you know this is another just like gut feeling there are like pretty hefty uh legal ramifications for impersonating government officials and i think that type of risk probably makes that type of

scam less attractive right it's a much riskier proposition to impersonate a government official than it is to say, you know, I'm an alleged investment fund manager. What's social media's role in the rise of these crypto scams? It does seem like I'm seeing a lot of those account takeovers on someone's Instagram where, surprise, now they're shilling a crypto, but actually it's a hacker who got into their account and now they're running a scam. Yeah. So the data on this is pretty wild. In 2018, 11% of scams that used crypto as a payment method started on social media more recently that number has jumped up to nearly 50 percent right so scammers uh and operating in the crypto space are leaning heavily on social media and it's working

and i think it's working for a couple of reasons first is there's an insane amount of information personal information that people put on social media that scammers can use to kind of personalize scams or target certain individuals that they think are more likely to fall for the scam right so it's way easier to gather information on potential targets over social media and then second i think there's so much fomo originates from social media right you see folks who have allegedly made big gains on crypto over the past few years and you know social media you're just one or two DMs away from trying to get in on that game. It makes sense that you see these big success stories, you're already on social media, someone reaches out to you

through social media, it's all in the same space. To your point about the success stories, that was the story for maybe the past couple of years. Right now, the crypto market is down precipitously. Yet, according to your research, scams are still going to skyrocket. What do you think gives there, where you have this very down market, you would think there's less interest in crypto, and yet scams are going to skyrocket this year? I think it's two things. I think there's still quite a bit of that FOMO that I was talking about. 2020, the latter half, and 2021 were pretty insane, unprecedented runs, especially for the crypto market and i think you know people still want to get in on that if you're like a real

believer in in crypto the thought is that you know it's going to go back up eventually and this is just a period where yeah there's a downturn but you know the true believers still think that it's going to go to the moon and all that and then second i don't know how much the average scam victim is taking into consideration kind of the longer-term, down-term trend, right? I think if someone approaches you and they say, send us some crypto, we can manage it, get you 25% in two months, that sounds pretty good, even if it might even sound better given that the crypto market's a downturn. The idea of just making a quick buck is so attractive. History shows that it could be possible. Why not give it a shot? One of the things you found is that

the average age or the most likely age to get caught by a crypto scam was 30-39. I thought that was particularly interesting, that it's millennials especially getting hit with this. you would think are more internet savvy. For someone listening right now, you might think you're too good to get scammed, but it's always good to know the common signs. What are some of the common signs, you would say, of a crypto scam getting thrown at you? Yeah. For any scam that's investment-related, if the opportunity seems too good to be true, it's usually a scam. No one can guarantee you outrageous returns over an extremely short period of time uh it's just not going to happen do your own research you know at the fool we say

don't invest in something if you don't understand it or haven't heard of it and if you're approached by someone who's who's hawking a token that's new to you just throw that token in google with scam or review or complaint next to it and if it is a scam it'll be uh very clear and then if you're approached about investment opportunity that requires you to pay by crypto, by wire transfer, or by gift card, that's definitely a scam. Those three methods of payment, once you've sent the money, is extremely difficult, if not impossible, to get it back. That's the reason why those are the most common forms of transactions in scams. Full disclosure, I own a little bit of Solana, own a little bit of Ethereum. Has

Has your research on crypto scams affected the way you invest? And do you invest in any cryptocurrencies personally? So I don't own any crypto. I wouldn't say that my research hasn't affected my thought process behind investing in crypto. It doesn't fit my risk profile. And I'd like to see more regulation in the space on par with how traditional equities are regulated. The research for me has just crystallized that this is a space where more education is needed.

I think 47% of the folks that we surveyed said that financial institutions and the government have done a poor or very poor job educating them about investment in crypto scams. And it's unfortunate because the amount of money that's being lost by just average Americans of all ages is really mind-boggling. But not everybody. In separate research, you guys found that 62% of high-net-worth crypto owners say they're actually more interested in investing in cryptocurrency because of high-profile scams. That was something you did back in November, and that's a conversation for another time. Hey, Jack Capril, he's an analyst for The Ascent, for The Motley Fool. Appreciate your time. Thanks for having me. 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. I'm Chris Hill, thanks for listening, we'll see you tomorrow.