Motley Fool Hidden Gems Investing - Do You Need a New Phone?

Episode Date: October 22, 2024

The answer is probably no, and that’s impacting telecom companies. (00:21) Ricky Mulvey and Tim Beyers discuss: - What a longer hardware upgrade cycle means for Verizon. - If this delay could impact the PC market, and electronics retailer Best Buy. - Major League Soccer’s record regular season. - YouTube’s advantages for streaming sports. Then, (17:06) Alison Southwick and Robert Brokamp continue their conversation about the history of Berkshire Hathaway with Motley Fool Senior Analyst Buck Hartzell. Companies discussed: VZ, AAPL, BBY, GOOG, GOOGL, BRK.A, BRK.B Host: Ricky Mulvey Guests: Tim Beyers, Alison Southwick, Robert Brokamp, Buck Hartzell Producer: Mary Long Engineers: Desireé Jones, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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So usually the top of the show is a way to get listeners interested in what we're about to talk about. That's more of a personal question for you because I think you're still on, what is it, the iPhone 1? What's it going to take for you, Tim Byers, to buy a new phone? I do have the original iPhone SE. So yes, my potato phone is still alive and well. Although to be fair, I did promise Tim White that I would upgrade and I am going to make good on that promise. But I don't have a hair on fire need for this, Ricky. And it's for two reasons. The first is I can plug my potato phone into a battery and it still works and the software is good. But I am part of the problem here, aren't I? I mean, it is fair to say that a lot of people

like me are waiting to upgrade their phones because good enough is good enough. So I'm going to upgrade because I badly do need a phone. And once I get my savings in order, I will absolutely do it. I am the exception rather than the rule here. Like I'm going on eight years with this thing. There are a lot of people, Ricky, that are waiting just longer than average, not like eight years, but like four years or five years. And that's a problem. And I know we're going to talk about Verizon. That is a big problem for Verizon. You are a micro example of the problem that Verizon talked about when they reported this morning, or actually the CEO went out of his way to not talk about it, but it is a problem for the company. His total upgrade volume was down 10%

year over year. If you just listen to CEO Hans Vestberg's statements, you would think that this is a company that's on fire right now. But this is what led it to miss expectations with that total upgrade volume sort of declining. Yeah. I mean, to be fair, we should note that total handset volume did beat expectations. So $222,000 was the expectation that came in at $239,000. But revenue was, I mean, it just, revenue did not hit expectations. $33.3 billion versus $33.4 revenue mostly flat. If you are selling handsets and that does not give you the lift that you would like, that is a problem because it means you're not selling at a premium. Consumers aren't willing to pay the premiums that we once did. Let's just posit a scenario here, Ricky, based on what we

saw from those Verizon results. How many of those handsets are older, either Android or iPhone handset. So they're not the latest. They're like, I don't know, let's say like the iPhone 14 or something like that. Yeah, I'll upgrade, but I'll upgrade to like two generations ago. I'm not going to upgrade to the latest. I mean, that's a problem. And I mean, it's not completely new, but it wasn't that long ago, Ricky, that I remember when every new iPhone handset brought a new price hike. Those days are gone. They're gone. So what did Apple used to do as we set the table for the problem today? What did Apple used to do for telecom carriers when it was releasing new iPhones every 12 months with significant improvements than the last generation? What

did that mean for a company like Verizon? I mean, it used to mean that you would get a fresh impetus of willing upgraders. So every 12 to 24 months, you're getting just a flood of upgrading and contract renewals and just more predictable revenue, higher margin revenue. You're getting you know, just better overall, you're just getting a better influx of higher margin revenue. And you're getting more sustainable revenue because you used to be able to tie those upgrades to new contracts. And now you're seeing, I mean, the amount of things that Verizon and not just Verizon, really, the entire industry gives away now. So you get, for example, deals on streaming services. You have no contract upgrades. You have get the latest phone for your

terrible trade-in. Just all of these things, they are begging you to just stay with them or to get in the door on the hope that they can keep you for a longer period of time. It is becoming an increasingly difficult business. But the upgrades, so to the point of your question, which is what did Apple used to do? The upgrades used to be more noticeable. So for example, the differences in the camera used to be way more noticeable. The difference in the battery life used to be way more noticeable. The difference in the speed of the phone used to be way more noticeable. It was a big deal when Apple went to the ARM chipset or a much more customized that they built. They built their own silicon into their iPhone, and they made a much faster, more battery-efficient phone.

That was a big deal. But the number of things that really distinguish a new iPhone have kind of disappeared. They're not really things that say, wow, I've got to have it. And to be fair, when Apple says they have new AI-related features coming out, those are software features. It's not entirely true. They do build Apple intelligence into the phone, baked into the hardware itself. But to take advantage of that, Ricky, we are waiting for more software. So is the latest iPhone like a wow device? I'm not so sure that it is.

much is it, you know, it works pretty well for zooming and recording. I was going to say recording podcasts. That's not a general professional problem, but for the most white collar workflows, it works well enough with a regular PC. Yeah. And, and there's a, there's a strong, maybe here. I mean, the last time we had a massive upgrade cycle was during COVID because we were all stuck at home and we all wanted the, the, the best possible machine to engage with the world as we could, because the only way we could engage with the world was digitally. So yeah, there was a big upgrade cycle there. Now, four years may be just the right amount of time to get us to a new upgrade cycle, especially with things like recent chip innovations, to your

point. Those chip innovations give us what we need to run maybe the new, more advanced workflows. So there might be something to that. I mean, and they may be doing, the PC manufacturers, that is, may be doing what the phone manufacturers need to do, like putting more AI into the silicon. There's something to be said there. But again, Apple does embed some AI into its iPhone directly into the hardware and it hasn't proven to be enough so do we really think the pc sector is going to be in for an ai fueled renaissance i say wait and see i i'm not so sure about that ricky let's move on to a fun story the mls playoffs start tonight you're you're a big soccer fan football fan me a little bit less so but cnbc reporting that mls scored a record year

in attendance and sponsorship the regular season ended this past weekend nearly 11.5 million people attended mls matches during the regular season that's up a little bit from last year up 14 from 2022 sponsorship revenue also growing double digits at 11 i'm not a big soccer fan but i have noticed the entrance of one person and that's leonel messi how much of that growth is due to that one person? A ton. Huge. I mean, he is at Inter-Miami. He is a Latin player in a heavily Latin community. There is no doubt, no doubt he has transformed Major League Soccer. And you know what? I mean, right now, there is a debate in football circles. Is Inter-Miami just given the talent on that team is it generationally one of the best teams in history just by virtue of the

talent that david beckham has brought into to that team i think you know that that's hyperbolic let's be fair but i will say luis suarez jordy alba sergio busquets and i mean these are players who are champions league winning players you know extraordinary talents in in the world of football that are playing in Miami with Lito Messi. So it is kind of mind-blowing, Ricky, that yes, the influx of talent from overseas has materially changed MLS. Now, it's fair to say that players at the end of their careers have seen the MLS as a destination for years.

But Messi, to your question, has absolutely been transformative. But I think overall, the game is getting better. And another one of those players who is kind of an expat from Europe, used to play for my club, used to play for Crystal Palace, Christian Benteke. Christian Benteke for DC United won the golden boot for the MLS this year. I find that staggering. 23 goals. Messi and Suarez each had 20. So that's the top goal score in the MLS. So I think the quality of the game is getting better. But I also think the cultural influence, like having the gravitas of real football players that are known worldwide coming in and applying their trade at a very high level in MLS is changing the game. it's drawing people and i mean it drew apple it drew apple to pay a lot of money real real soccer players let's talk about the streaming side because you have that tailwind that you mentioned of the rising talent i think there's a headwind and this is happening for a lot of uh sports which is they're taking the streaming money but i have to think that there's going to be a long-term effect of making these games harder to find um the mls shows some games on on fox sports that's

where a lot of playoffs and the championship is going to be seen. But the MLS also has this exclusive media rights deal on Apple. So most of the matches are only available through Apple, then through a separate MLS season pass, which goes for 10 bucks a month if you're a subscriber or 15 bucks a month if you're not an Apple TV Plus subscriber. A little uncertain of how that works. But I mean, this is a sport that's trying to grow. And I have to think that this is not an optimal strategy to win new fans. Am I wrong here? No. And it is frustrating. And I guess I'm speaking from the perspective of a US fan and US analyst, but I think this is also true in other parts of the world where rights for different sports get bifurcated. And in football

and soccer, it's particularly true. So for example, if you want to watch the English Premier League here in the US, you got to have Peacock. If you want to watch the FA Cup, which is an in-season tournament, you got to have Paramount Plus. If you want to watch the EFL Cup, which is another in-season tournament, you got to have Paramount Plus. So this is all a big part of the problem that if you want to grow the game, making it this confederation of rights holders is probably good financially, but I don't know that it does anything to grow the game. And I think this is a real missed opportunity for the MLS. You got 18 teams. I mean, you can argue whether or not that's outrageous, like 18 teams fighting for the MLS title going from October 22nd

to December 7th. I mean, good grief. That is a long time and that's a lot of teams. But could you imagine if that was available to you, maybe not just on Fox, but it was available to you on YouTube and you get any game you wanted? Now that would really create a level of exposure that might put more people into the stadium. And we have seen that in other parts of the world, Ricky. Yeah, let's talk about the YouTube piece, because there is a league that struck a deal with YouTube, the Women's Super League. And that's basically what the Premier League is for men in the UK. What have they been able to do with YouTube? And where do you see YouTube fitting into this sports streaming landscape? I mean, it's very impressive. So you're right. The WSL is the women's game version of the Premier League for the men in the UK. There are 12 teams. Just shout out to the Palace women. They got promoted last season and they're playing really well. And it's been fun to watch them. And on a Sunday morning, I could tune right in on YouTube and watch the games. You can watch all of the game. Now, it does remain very much in its infancy, but the YouTube deal has helped more than triple viewership for the women's game in the UK. And that's just in the first few months. That's astounding. We're still fairly early in the season, 1.5 million viewers on YouTube already, which is incredible. And attendance at WSL, this is not hurting attendance at WSL matches. WSL matches are growing. So it appears to be a way to expand the game. And this feels like the sort of thing that MLS should be exploring. They really should be paying attention here. So by the way, should the

NWSL, which is the National Women's Soccer League here in the US, YouTube is pretty impressive. and I'll say this about it, which is interesting and different. YouTube does something very different as a streaming platform that, say, like an Apple does not. If I go in and I'm watching a match on YouTube, there's a chat right alongside it. There is banter going on as you're watching the match, rival fans bantering at each other, talking about the game. And that's happening in real time there is serious engagement happening there so it's not the same as being live at the match but it is the closest approximation we get if you're not there live at the match which i think is something that alphabet should be paying attention to youtube has a real advantage here

i'm surprised we don't yet have a youtube sports network maybe it'll come someday i haven't thought about the comments part. And you know what, Tim? Surprisingly, we went longer on soccer than I thought we would. Football, fine. I'll say it. Anyway, thanks for being here. Thanks, Ricky. Up next, Alison Southwick and Robert Brokamp continue their conversation with Motley Fool senior analyst Buck Hartzell about Berkshire Hathaway, this time looking at the investments that defined the company. Last week, Buck Hartzell, senior analyst here at The Motley Fool, joined us to talk about Buffett's money minting operation that he has going on over at Berkshire Hathaway. Today, we're going to focus more on the actual investments made, both through private

acquisitions, creative funding, and publicly traded stock. And then more importantly, what lessons we can learn from them. So let's start with an early acquisition, one that honestly, when you hear about what an incredible investor Buffett is, and then you see, pun intended, that he owns this company, the only correct response is really a, what? Huh? And I'm talking See's Candy, which if you don't live in California, you've probably never heard of. Right. Yeah. And that's true. I mean, they purchased See's in 1972. And that was when him and Charlie Munger were controlling blue chip stamps. It didn't merge into kind of the Berkshire Hathaway that we know today until 1983, really. And it, and it illustrates a lot

of important points, but they paid $35 million at the time. And Warren Buffett almost walked away from the deal. He said it would have been his biggest mistake of all time. How do you, because the price was just a little bit too high for him. He paid 35 million, but they had 10 million in net cash. And, and so they essentially were paying $25 million or five and a half times pre-tax earnings for a wonderful business, right? And over the next 43 years, to give you an idea, they generated pre-tax earnings of almost $2 billion, about $1.9 billion. And in classic Buffett fashion, he reinvested that to purchase other really important companies that have grown Berkshire Hathaway's profits over the long term. So Seas, one of those very early purchases,

it really funded a lot of the companies and the growth that Berkshire experienced since then. So what are some lessons that we can take away from that? Well, first of all, this was an exceptional business. It was the first really exceptional business that Berkshire had purchased. And they generated returns that were really astronomical on the small amount of capital that they employed. So that was wonderful. It was a really good business, but here it was, it wasn't the best business. And there's one reason for that. They couldn't reinvest all that capital generated back into the business and earn similar returns. They tried to expand Seas over to the East Coast. And you know what they found out? People didn't love Seas on the East Coast. They

loved Hershey's because that's what they grew up and they associated all their fun times and memories with. And so although he tried to grow this franchise across the country, it really has been a regional company out west. And so that was one thing. The other thing that we can take away from Buffett's lessons, this was really brand. I mean, he learned a lot about consumer goods when he purchased See's Candy and how valuable brands are. He can raise the price of See's once a year, every year, and he's done it since they bought it back in 1972. People are willing to pay a premium for that company. And then the last thing we talked about is pricing power, right? So you have a brand, you have pricing power, you have consumer behaviors that

are used to buying this around February, Valentine's Day, around the holidays. And those strong associations and consumer kind of psychology things have played into many of his future purchases that have gone on to do really good things for Berkshire Hathaway and their shareholders. I'm still just baffled by this company, though, because you just got done telling me they can't expand past the west coast all they've got is basically pricing power and that's that's enough for them to be this successful yeah pricing power is part of it but they've you know they're a modern company too i mean they've adopted digital sales as something they can have now people from california moved to the east coast and guess what they took seas so if you go out to like a mall

even in the east coast here where we are allison around the holidays you'll see pop-up stands selling See's peanut brittle, which is personally my favorite. I mean, they're great. And so you do expand, but you can't just kind of roll it out, you know, right away. The other thing he found out is like people on the East Coast eat dark chocolate. You know, he said nobody on the West Coast would eat dark chocolate. They're milk chocolate people, right? But you kind of learn about consumer preferences and they, yes, they have grown their sales. And when people move from California to the U.S., guess what? You can just order it online now. I can't remember the last time me or anyone i know has had a seize candies i think i need like our listeners to

drop us a line and convince me that seize candy is not actually a front for something much more like profitable because you are such an east coaster allison come on you know i grew up in idaho we gotta get you some peanut brittle nobody gets rich investing in peanut brittle that's just this is a front for something else. I don't know what it is, but this is going to be, we're going to get to the bottom of it. So, all right, well, let's move on. So the next example is a good reminder that as Morgan Housel says, investing can be as simple as this or as complicated as you want it to be. And we're going to talk about U.S. Airways, an airline stock. This sounds like it's going to get fun. Right. So this was 1989, by the way, and he invested $358 million

dollars in the US Airways. But this was in preferred stock. So essentially, it was a loan to the airline. And he was very careful afterwards to say, I've never bought a common stock at that time of any airline. This was preferred stock. And so he earned dividends on that investment. And it was a roller coaster ride. Munger summed it up and said, this was a very unpleasant experience for us, but we're slow learners. So anyhow, a little foreshadowing there. But in 1998, so almost a decade later, they paid back the $358 million that Buffett had loaned them along the way they collected $240 million in dividends. And they, by the way, sold. They got common stock at that time when they were paid back. They sold all of that right away. They

didn't want to own it. So Berkshire did okay on that investment. But there were some big lessons that I think Warren Buffett and certainly Charlie Munger drove home afterwards. First of all, unlike see's candy airlines require a lot of capital you need to buy property plant and equipment namely airlines up front secondly you have very little pricing power you know the candy you could raise the price of that every year bucks still buying that peanut brittle doesn't matter doesn't care i'm getting ready to fly to chicago and guess what i shopped on i shopped on price who can get me there direct without the transfers and what's the lowest price right so luxury peanut but you're going to be munching on luxury peanut brittle the whole flight.

That's right. That's right. And then the other thing I'd say is you have some volatile costs within the airline business that aren't necessarily the same in candy, right? So fuel is a big cost, for instance, in the airlines. As we know, the price of gas goes up and down and you have no control over that as an operator. And then the last thing I'd say is not much brand loyalty, though you may love American Airlines or United or whatever. I mean, does anybody really care anymore. As long as you get there, you're happy, right? Get there safely. So the airlines, he learned a lot of great lessons, but I think those were a lot of lessons on what not to invest in, in the future. Sometimes you read articles about, you know, how to invest like Warren

Buffett. And then other people will point out, well, you actually can't invest like Warren Buffett because he gets certain deals that the average person doesn't. So I'm curious your thoughts on that. And was this an example of that? Was this preferred stock something special for Berkshire Hathaway? Yes. I think there are cases like that. And I'll give a more modern day one as well. But yeah, most of us can't buy the same deals and get the same terms that he can demand because at that point in time, we didn't have $358 million to lend the US Airways, right? So bigger person, bigger money can demand better terms. Most recently, they invested in kind of interesting investment, which was Snowflake before they went public. All right. And that

seemed like kind of out of left field. It might not have been Warren Buffett. It could have been Ted Weschler, Todd Combs, which are two of his investing lieutenants. Um, but they got better terms. And although Snowflake went public, the stock went up and it crashed back down to earth again. It's, you know, I think it's down 80% or so Berkshire sold out of all that position and they actually made money on it. So they were able to invest before the IPO at the IPO price. Us average investors aren't going to get those terms. So there are some cases certainly where Berkshire Hathaway does get better terms and better deals than we can get. All right, let's get a little more straightforward and talk about an investment in a publicly traded

company. This one caused a lot of waves, made a lot of headlines, and that is Apple. Sure. I mean, we would be remiss if we didn't talk about this because it's probably been the most profitable single investment that's ever been made in the history of the world. Berkshire began buying this in 2016 and it sold for 10 times earnings. He invested about $40 billion. And in 2023, at one point, that position was worth $174.3 billion. That's a huge gain. I mean, we're talking about almost $130 billion gain on a single stock. That's pretty immense, right? And there's lots of lessons. And I think Seas started it in 1972 where he said, I'm going to pay up for quality. Now, paying up for quality in 2016, what do you guys think Apple traded at at that point in time? What multiple earnings do you think he was picking up Apple shares, which today are over 30 times earnings?

I'm going to say 21. Yeah. I mean, that's a decent guess because this is a great company. He was buying it at 10 times earnings back then. So the value investor of him was like, hey, I'm getting a great business here at a multiple that's less than the average market. So yeah, he bought it 10 times earnings. And it's interesting, Allison, because he said he doesn't know technology. And for many years, Buffett said, hey, I don't invest in technology. I don't know it. I eschew it. This was not a technology investment for Warren Buffett. This was a consumer goods investment for Buffett. And he had owned companies like See's Candy. He owned Coca-Cola, big stake in Coca-Cola, which he still does, big stake in American Express, big stake in Kraft and Heinz. He knows consumer goods really well. And so this was a purchase that was made based on his knowledge of how consumers act and behave. It wasn't based on his knowledge of Apple's technology. Right. So that's first thing. Second thing, he realized people value their phones more than anything else they own. And there's all kinds of competitive advantages wrapped up in this cell phone ecosystem. Right. Those network effects or switching costs, all these things. Once you people have your phone, you don't want to switch to an Android because you know how to use an Apple. And then the other thing I would say for this investment is it really benefited from multiple

expansion. He bought it at 10 times earnings. They grew their earnings in a huge way. They also bought back stock, which will necessarily, they reduced their share count and it's now trading at over 30 times earnings. So he got big growth in just revenues and normal earnings, but also multiple expansion from 10 times earnings to 30 times earnings. And their shares reduced in that time frame by about 29%. So he got the benefit of a triple whammy with Apple, which has obviously turned out to be a hugely important investment.

All right, let's sum it up here as succinctly as possible, which is hard. but what do you feel are some of the tenets of how Buffett and, there you go, Berkshire Hathaway invest? Yeah, I think, so a couple of quick points. First, the price does matter. He is a value investor at the heart of things. He will buy growth companies and he'll buy ones that buy slower, but price matters a lot in the investment returns. And I would say it matters even more for those investors out there listening that are buying average companies, which he tries to avoid these days, right? He wants to buy wonderful businesses and pay fair prices instead of buying a fair company at a below market price, right? So price does matter. The other thing I'd say

that matters even more perhaps is intangibles. We're talking about things that don't show up on the financial statements. These are things like who's the leader of the company, right? We know Berkshire Hathaway and a lot of companies that outperform are owner-operator businesses. that means the people calling the shots at the company have the vast majority of all their net worth tied up in the company. So that matters. Leadership brand matters quite a bit, particularly when you're talking about consumer businesses. Right. So those intangible assets are really important. And I think Berkshire has shown that over the course of Buffett's 50 plus years at the helm. And then the other thing I'd say is companies that eat themselves, that buy back their stock at

attractive prices, have an opportunity to outperform the market in a huge way. And Mr. Buffett has written about this, and he only has two rules for buying back stock. One is you have to have excess capital. He's not really in favor of borrowing out a lot of money to go buy back stock. And then secondly, you have to purchase at a price below its intrinsic value. That's something that Berkshire has done over the last five years. They've slowed up from repurchases now as the stock has hit a much higher multiple. But anyhow, if you can find a founder-led business with a great brand, with unbelievable leadership that's got their worth tied up in the business, and that are buying back their stock at attractive prices in strategic ways, not just every quarter,

no matter what the price is, you probably have some ingredients to find some pretty darn good investments. All right, next week, we'll be back for a final look at Berkshire Hathaway's business model and discuss some little baby bookshows that are following Buffett's lead in capital allocation and can bring individual investors along for what is hopefully a very lucrative ride. As always, people on the program may have interests in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.