Motley Fool Hidden Gems Investing - Consumers, Choice, And Apple

Episode Date: March 4, 2024

The European Commission is the latest to take aim at Apple’s app store. (xx:xx) Jason Moser and Deidre Woollard discuss: - Why Spotify and Apple are engaging in a new music streaming battle. - If Spirit Airlines will seek another buyer. - Why the latest go-private offer may be good news for Macy’s shareholders. (18:03) Ricky Mulvey and Lou Whiteman cover the state of play for airline stocks. Companies discussed: AAPL, SPOT, JBLU, M, UAL, DAL, AAL, LUV, ULCC, AER Claim your Epic discount: www.fool.com/epic Host: Deidre Woollard Guests: Jason Moser, Ricky Mulvey, Lou Whiteman Producer: Ricky Mulvey Engineers: Tim Sparks, Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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Whatever lies ahead, don't change your morning. Let your morning change you. Discover Coffee Plus on Nespresso.com. Apple faces fines? Jeff Blue whips goodbye to spirit. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Willard here with Motley Fool analyst Jason Moser. Jason, how's your Monday going so far? Hey, so far, so good, Deidre. It's beautiful weather here in Northern Virginia. And just another good reminder that spring is right around the corner. It is, indeed. If it's not maybe the best Monday in the world for Apple, one of the most interesting

stories out today is about this $1.8 billion euro fine from the European Commission leveled at Apple. And what's happening here is, the European Commission says Apple really sort of gate-kept and kept users from learning about other music apps, which led to consumers paying higher prices. Not the first time we've heard this about the App Store, is it? No, it's not. And we'll get to the gate-kept part of the story here momentarily, I'm sure. But, I mean, you're right. This is something that, as Apple gets bigger, the drumbeat for this only grows louder. And I think many will call this the fight for a more open internet for consumers. I think most of us are kind of on board with that.

So, I think the big picture, that's probably the right side on which to be. And Apple kind of seems to be pushing against that narrative a little bit. So, it doesn't really look good. The optics don't really look that great for them in that regard. To me, one of the things that really stood out to me, the response to the find, Apple said Spotify stands to gain the most from this EU pronouncement. And I don't know, to me, I feel like the longer-term implications of something like this, consumers by far and away have more to potentially gain from something like this.

I understand Apple needs to defend itself, and they will at virtually any cost, as we've seen. But this is clearly something that's not going to go away. My guess is, they're seeing the writing on the wall, the trend, where the puck is headed here. And it's not necessarily a favor of Apple at this point. No, and it's interesting because Apple will tend usually to take a very sort of neutral response to these sorts of things. I felt like their reply was not very neutral. They took aim at Spotify. They said, you know, Spotify has benefited from Apple's reach, and they paid nothing.

And it's definitely, it's going to appeal. So this isn't over for a long shot. But basically, it sounds like they feel like Spotify was not going behind their back, but certainly very deeply involved with the European Commission in everything that led to this outcome. Well, Spotify definitely didn't just sort of let things play out, right? They were very much on top of this one. They never really let it go. I mean, they absolutely really paid attention to this ruling and fought for this outcome. And it makes sense. There's no question Spotify has benefited from being on Apple's platform.

That's not really the point, though. Ultimately, the point, when you look at it from the bigger picture, is, getting back to that gatekeeper mentality, there's a point where you see a company like Apple wielding so much control over everything that's going through that closed garden, so to speak, or that walled garden, so to speak, we're at a point where antitrust, regulatory concerns are out there abound. It's very hard to imagine that this is not something that will continue to gain steam here. Spotify, right now, they have a greater than 50% share of Europe's music streaming market. That's more than double their closest competitors. When you look at

Spotify compared to Apple, Spotify is clearly winning on the streaming music front. But it's important to note, too, Apple is a competitor in this space. That Apple competes with their own music streaming service, I think, makes this hurdle a little bit more difficult for them to clear. It's sort of interesting to see the way that the app store has evolved, because when you think about it in the beginning, when we first had the iPhone, it made sense to have this central location for security's sake, as Apple has said, you know, to make sure that everything met certain expectations. And of course, if you had a physical store and you had people selling goods in it, you would charge rent, you would want to

be compensated. So all of that made sense in the beginning. But now we've got all of these larger movements that are happening. Rules are changing country by country. I do believe it's better for the consumer in the long run, but it also seems like this is becoming a really chaotic and confusing experience. Well, it is. That actually could work out. Ironically enough, that could work out in Apple's favor over the longer haul. I absolutely understand Apple's perspective. been, hey, we can run this app store, we can make it the most efficient, we can give people the best experience, we can make it the most secure. I think where a lot of people would

push back on, I think this is where this is going, is ultimately that there aren't any other choices. Spotify, for example, in order to subscribe to Spotify, I'm fairly certain you have to do that through the web operating system. You can't do that through mobile. Apple, going back to that, Spotify has not had to pay anything for benefiting from being a part of our ecosystem. That is true to a degree. If you want to subscribe to Spotify, I believe the only way to do that is through that web interface. Listen, as time goes on, we're only going to see consumers want more and more choice. That seems to be the trend. However this stuff plays out, ultimately, consumers want more choice. That's what this

all boils down to. I think that's why this puts Spotify and any other company that's going to join in on this in a little bit of a better spot here. Again, Apple has gotten so big. It's not saying we don't want to have that Apple option out there. We just want more choice. Now, a lot of consumers will look at that and say, you know what, that's fine, I'm glad I have that choice, but the Apple experience is just far better, and I'm happy to deal with that Apple experience. A lot of people love that Apple ecosystem and want to stick with it. But I think ultimately, at the end of the day, it really just boils down to choice. Typically, I think having more choice tends to win out.

Well, speaking of more choice, I want to pivot to another story, which was is essentially about about choice in a way, which is that JetBlue and Spirit are calling off their merger. This is not a big surprise because there's a choice issue here, too. A federal judge had blocked the deal after the Justice Department said it would be anti-competitive. Spirit really they needed this deal. I mean, they had the deal with Frontier before JetBlue got involved and, you know, obviously that fell apart. So you've got this company, they've got a large amount of debt. Travel is still good.

We still, I mean, people joke about Spirit, but they still fly it. It's cheap. It's not, it's, you know, it's an adventure, but it can be worth it. But I'm worried about this company. And, you know, if part of the idea here was to keep choice open and to keep options open for consumers. If this company falls apart, that doesn't seem like it's good for consumers. Well, yeah. This is a bit of a conundrum. I'm glad you brought up the Frontier thing. I wonder if we won't see the idea of some sort of partnership or merging with Frontier.

I wonder if we won't see that come back into play here. Obviously, not surprising, the writing was on the wall here. But when you look at JetBlue and Spirit, I agree with you, Spirit much more needed this. JetBlue didn't need this. Spirit really needs this. But when you have two discount airlines, I absolutely understand the concern of combining them, ultimately making it a little bit more difficult for the price-sensitive consumer. I think it probably makes sense in that regard. I think this speaks to the difficulties in running a business like this. Airlines, as we know, very difficult line of work. I think we've talked about this before. You go back to that 2007, Warren Buffett wrote

in one of his letters to Berkshire Hathaway shareholders, the quote, if a farsighted capitalist had been President Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. He just wasn't really the biggest fan, isn't the biggest fan of airlines. That still doesn't even keep him away. He still goes back to the well there every once in a while. But, yeah, I think this just really puts Spirit in a difficult spot. Speaking of choices, they don't have a ton of choices right now. When you look at the capital position they're in, they have a ton of debt on the balance sheet. There's 8% secured notes that are due in September 2025 to the tune of $1.1 billion.

And this company's financials are just hemorrhaging cash. So, this really puts them on the clock. They're going to have to figure out a way to shore up their balance sheet. They get, I think, $69 billion from the termination of this deal, but that really is just a drop in the bucket compared to their bigger-picture problems. I'd have to imagine the executive team at Spirit right now is working around the clock trying to figure out how to deal with this. On the other side of this, I want to look at JetBlue, too, because their stock went up after this was announced.

They're not in danger, they're back to business. But I was thinking about this and then about their partnership with American Airlines that was deemed anti-competitive. So are there some strictures on how big JetBlue can be? I mean, it's always been smaller compared to the big airlines, and it was going to try to use either the collaboration with American or the acquisition of Spirit to kind of grow. And now it's kind of struck out twice. So what does that mean for the company in terms of how it thinks about growth?

I think that given the market on which they focus, very value-oriented offering, that's just going to limit the market opportunity in general. They are a portion of that overall airline market. It's not to say they can't do a great job in that space. It may limit exactly how much they can grow, but they can still go in there and really own that space. I think that for JetBlue, at least, they can get back, focus on what they do well. This isn't something that ultimately puts them behind the eight ball in any fashion.

They can get back to really focusing on serving the customers that they know how to serve. If they come up with some ideas of perhaps expanding beyond that value offering, then that potential certainly exists. But again, like you said before, this is something where spirit is absolutely feeling this one more so than JetBlue ever will. I want to go to one more story that you and I have talked about before. This is like the ongoing saga of, is Macy's going to go private? It's an interesting one, because Ark House Management and Brigade Capital, they upped their offer from $21 to $24 a share, values the company around $6.6 billion, current market

cap is just under $5. It is an interesting time for them to up the offer, because last week, Macy's announced they're closing around 150 stores in the next couple of years. They're restructuring. It's obvious that things quite aren't working. Both Arkaus and Brigade noted the plan failed to inspire investors. Yeah, a little bit of an understatement there. If I'm a shareholder, I'm probably asking myself, is there any way the company can do better than this offer via performance? And I'm not sure I see the path. What do you think? I think that's the right question to be asking yourself. And I think the answer is, very clearly, no, this is as good as it's going to get. I mean, if I'm a shareholder in Macy's,

which I'm not, I never have been, but if I were a shareholder, I would be absolutely voting in favor of this. And I probably wouldn't even be wasting time worried about the vote. I would probably go ahead and just be selling my shares, taking advantage of this bump on the raise of this offer. Because, like you said, we talked about Macy's before, the challenges that they've had. There are plenty of concerns with a business like this. Obviously, this is a business playing defense. They are absolutely not playing offense. They're not looking for ways to grow. They're really looking for ways to whittle down the cost structure and find a way to be more efficient. If you look at the operating margins, they've been cut by

more than half over the last 10 years. Talk about financials hemorrhaging me. This is another company where, financially speaking, it's just not in a very good position. And again, back to playing defense, there are clues out there that tell us there may not necessarily be a need for Macy's in this world. I'm not calling Macy's JCPenney, but I am saying that we watched this happen. We watched this happen in real-time with JCPenney. You watched investors get in there and try to take advantage of the opportunity, see if they couldn't turn things around, fix things. Ultimately, you have to ask yourself the question, in this day and age, is Macy's something necessarily

that the world needs? I would argue, need? No. Maybe there's a want there, but it feels to me like the want is going to ultimately manifest itself in a smaller footprint. That's OK. Macy's can exist, albeit a little bit smaller than it does today. But if that's the case, then clearly, shareholders today don't want to be on that ride. We invest for growth, we invest for reliability, dividends, things like that. Macy's right now not in a position to offer investors that case. So, to me, this is one of those things where you take advantage of the opportunity you

have in front of you here. Honestly, like we see all the time, when private equity gets involved with things like this, Ultimately, in a lot of cases, they end up spinning these companies back out to the public markets anyway. If there are a bunch of Macy's loyalists out there, then, hey, listen, maybe you don't have to wait long. It'll come back around as perhaps a little bit more of a realistic opportunity. Yeah, it'll be interesting to see what it becomes on that side. You just mentioned selling. This had me thinking a little bit about, anytime I see news about a company I'm invested in, if there's a potential merger or a takeover, anything like that,

I always wonder, when do you know when the moment is to say, OK, this is going to be great, I should stay here? Or, no, this is going to look weird? What kind of questions do you ask yourself? Yeah, that's a really valid concern. It's looking at that company, looking at the thesis that your investment was based on from the very beginning. You could have invested in something like Macy's with a value thesis, not necessarily a growth thesis. You go into something like a Macy's and say, well, I feel like it's undervalued, I'm going to buy shares today, I'm going to reach this intrinsic valuation that I've determined that I'm going to sell shares, versus something where you feel like you're investing in a business that you want to own for the next

10, 15, 20 years because you feel like there's a growth opportunity there. I think, ultimately, it's understanding that perspective of, why did you invest in the business in the first place? What is the ultimate endgame there? And then figuring, what's the upside from where we are today? You look at Macy's, for example, and you think, well, they're probably not a ton of upside at this point. But you look at other companies out there that may still have years upon years of growth in front of them, even if they're suffering from some unforced errors, you can still overcome that. Things can change. Macy's, I think, is a good example of a business where maybe we've seen they've tried to change,

they've tried to improve the situation, but the market dynamics, just the nature of the market that they serve, just makes it very difficult to do so. Yeah, it seems like we've seen what we're going to see with that one. Yeah, very well said. Thanks for talking with me today, Jason. Thank you. We talk about a lot of stocks on the show, but it's just a peek at The Motley Fool's investing universe. This year, we're rolling out a new offering. It's called Epic Bundle. The service includes seven stock recommendations every month, modeled portfolios, and stock rankings, all based on your investor type.

We're offering Epic Bundle to Motley Fool money listeners at a reduced rate, as in thanks for listening to the show. So for more information, head to fool.com slash epic. we'll also include a link in the show notes for you. We're kicking off travel week with a look at some airline stops. Motley Fool contributor Lou Whiteman joined my colleague Ricky Mulvey to talk about the state of air travel and some literal radar stops. Lou, we're going to check in on some airlines. But before that, you know, I often hear that this is an industry that retail investors should just stay away from. They've got uncontrollable oil prices, driving business cycles. They're very mature. They're hard to scale. There's

fairly low switching costs for customers. You've got a lot of pensions you've got to pay for. Why are these companies worth investors' attention? We're going to do some bull cases. Why? Why are we focusing here? Yeah, I'll put it in the words of Warren Buffett. He once said that if there had been a capitalist back at Kitty Hawk, that person would have done the world a favor if they just shot the experiment down. So yeah, that's what Warren Buffett feels about the airlines. Historically, going all the way back to the late 1970s deregulation, this has been a tough industry to invest in. Every time we had a down cycle, we know the names, Braniff, TWA, Eastern. Airlines just went out of business.

I will say, at the risk of saying it's different this time, we've had a lot of consolidation starting in, say, 2007, 2008. We've built up a big four of United, Delta, American, and Southwest. They are better able to control costs now because they have some pricing power. I think the days where companies go out of business when times get bad or over, it still is a cyclical business that, even at the best of times, has low margins. Investors have to be careful here. But for maybe the first time since the late 70s, there is a case for buying airlines because they're just better-run companies than they used to be.

Yeah. Instead of the Fed backstop, what we saw in the pandemic is a congressional backstop for a lot of these companies. There seems to be two big macro forces hitting these airlines at the same time. One is that a lot of the margin that airlines made was on business travel. And that doesn't appear to be getting back to pre-pandemic levels. There's some of it returning, but Zoom has been adopted. And it's hard to convince companies to open up their budgets for a lot of those kinds of sales meetings. There's also a greater interest in traveling abroad, more flights to Central America from North America, for example. There's the well-wrought story of revenge travel. How are airlines responding to these trends? Are there any

that are performing a little bit better than others? Definitely, historically, the big three now, Delta, United, and American, who are left, they made their money off business travel. That has sort of changed. You're right, business travel has lagged in terms of recovery. It's less of a big deal than it would have been because of a lot of the changes in the way airlines price. They're a lot smarter about pricing. There's a lot more technology in pricing. But yes, this industry is at its best when business travel is flourishing. I do think it's coming back. Yeah, Zoom has taken over some meetings, but in a work-from-home world, you do come check in sometimes and it creates new

opportunities. The way the industry has thrived the last few years, though, is this pent-up demand for tourism travel and for vacation travel. If you've traveled in the last few years, you know airports are full, planes are full, they have great pricing power, they're using their technology to price each seat and maximize revenue. A lot of us, myself included, have been surprised at how well that trend has continued, even as things have gotten a little shakier in other areas. To the extent that it continues, these companies are looking at a strong 2024. However, yeah, we don't know how long it holds out this time. It would be nice to have that business cushion, that higher margin, less price-sensitive fare to fall back on. The companies do hope we do see

at least a return to trends, if not growth in that area. I think you're also going to see, while business travel may return, it may not necessarily mean that businesses are going to pay for business class, especially as there's those wide company meetings where everybody's getting together once a quarter, that kind of thing, where there's, let's say, high-level salespeople are jet-setting and traveling business whenever they like. But just real quick on that, look at how smart they've been in recent years. If you've flown, you know there's economy plus. There's economy of legroom. You pay extra for a window seat. Yeah, we don't have that delineated first class, business class, and coach, but they

are finding more ways to extract additional revenue out of each seat on the plane with some of these economy plus features. That has helped to offset, at least. A big story of this year for the airlines has been the attempted mergers, and in most cases, them getting blocked. You had JetBlue and Spirit, which we've covered a bit on this show. Hawaiian and Alaskan airlines, which were two smaller regional players. And I think that's surprised some market observers. And there's also this story that we haven't talked about

with Delta and Aero Mexico. And we were chatting in Slack about this. You said this was fascinating. And I didn't ask you why, because I wanted to save it for this. Basically, the airlines had a joint partnership, which the Department of Transportation is unwinding. Let's first get into the argument to break these companies up. This is not something that I heard a lot of people calling for. Let's step back here, because I think it is interesting. It talks about how these airlines are trying to position themselves. In most countries, the United States included, there's a cap on foreign ownerships. You can't do cross-border mergers and acquisitions in this industry. Contrast that with the need by airlines to get their customers, especially business

customers, access to the globe. You can't buy foreign competitors. You don't want to fly a plane to every airport on the face of the earth. That's why we have these huge alliances. You've seen them on the side of planes, SkyTeam, OneWorld, Star Alliance. This is a way to connect your customer to wherever they have to go around the globe. Problem with alliances, though, is it's pretty easy to break one alliance and go into another. Delta was on the forefront here of trying to make equity ties by minority stakes in key partners. They did it with Virgin Atlantic. They did it with Aeromexico. They did it with LATAM, where they're trying to forge permanent ties short of a merger. So, the downside of that is that it opens yourself up to more regulation

on these alliances because there's money involved, there's equity involved. Delta and Aeromexico, two strong partners. This is an area where Delta desperately needed a partner. American Airlines with its hubs in Phoenix and hubs in Dallas, they had Mexico covered. United has always had a strong presence there. Delta needed a partner. They have an arrangement with Air Mexico. And yeah, now suddenly, a couple of years in after it was approved, regulators are having second thoughts. The backstory here is a lot of this is a dispute between United States officials and Mexican officials over a new airport in Mexico City. The president of Mexico opened up a second airport. Mexico City International is one of

the biggest in the world, but a new, smaller Felipe's Angeles International Airport. Put a lot of money into it. Not a lot of people are flying there. Mexican government has decided that a lot of U.S. airlines, especially cargo airlines, will be required to use that new airport. The United States isn't happy with this. Department of Transportation, in part, they are targeting this Delta Aeromexico to try to get leverage to reopen negotiations on this. It could still happen. It could happen that Delta and Aeromexico have to unwind. They have until October. If I was to be a cynic, and Ricky, I'd never be a cynic with you, but I can't help but wonder if closer to that date, if we'll see some movement on

the airport issue, and then maybe that will be movement on this Delta Aeromexico partnership. But if it does happen, and it is scheduled to happen now by the end of the year, that would be a blow to Delta. Not a fatal blow, but that would be bad news for Delta. So, is that why you don't think Delta shareholders seem to mind, as right now, it's maybe some political puffery, if you will? I think there's a lot of that. And also, I mean, Mexico is a very important destination. Delta will still fly to major cities. They are going to lose, by their estimate, it would cancel nearly two dozen routes, so they would lose access to some second-tier

Mexican markets. It's not the end of the world, even an important market, if you lose access to second-tier cities in a foreign market. How material would it be? I don't think it would be significantly material. It would be a blow to their business and their aspirations to grow in the region. But I don't think it's the kind of thing that investors need to lose sleep over. I'm not losing any sleep. Let's wrap up. I hope Dylan forgives me for stealing this from the Friday show. Let's do some literal radar stocks. I know you've got three. What are some airline stocks that investors should put on their radar? I'm breaking this down into three categories here. If you want slow and steady, and as

we said at the top, I do think it's a safer environment to be a long-term investor in airlines. Delta sort of led this revolution. They are well-managed. They are the ones that came up with this new pricing scheme. They've tried, with some success, but sometimes not success, to spread themselves internationally with these investments. Delta is just a forward-thinking, well-run company with good hubs. They have a better labor situation than most of their rivals. Delta is a reliable company to buy, and I think my favorite of the big four. If you want a little more risk, but with some growth upside, there's a company out of Denver called Frontier. ULCC is the ticker there. They are the best potential growth story in this

industry. It's a model not everyone likes. It's the kind of pay-for-everything model. But it is popular in Europe. It's growing popular in the U.S. They have a huge order book of planes. If it goes to script, and if management is able to do what they want, and there is more risk here, That is an if. But they are the best potential for five to 10 years out, significant growth to the company, and hopefully, that would mean significant growth to the stock there. That's your better, more risk, more reward candidate. Then, the other option is, and this is the one personally, Ricky, I've taken, I believe in the long-term growth of global air travel. You have a rising global middle class. You have people, hopefully, I think,

permanently prioritizing experience over maybe material goods. There is a lot of demand out there around the globe for Airtrack. It's hard to buy into that by buying just one airline stack. But there's a company called Aircap that I know is a full favorite. What they do is they finance planes. They buy planes directly from Boeing and Airbus, and they lease them to the airlines. Aircap right now is my favorite way to get exposure to this, what I think is a sustained multi-decade trend towards more travel without taking all of the single company risk and single geography risk that comes with buying an airline. So kind of a wild card, kind of cheating because it's not an airline, but that's one to look at if you're a believer in these trends and maybe

don't want to saddle up with just one carrier. If you have an issue with Lou Whiteman cheating on his three airline radar stocks, our email is podcasts at fool.com, podcasts with an S at fool.com. Lou, thanks so much for your time and your insight. Always a pleasure. 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 Deidre Bullard. Thanks for listening! We'll see you tomorrow! Thank you.