Motley Fool Hidden Gems Investing - Let's Make a Deal

Episode Date: October 28, 2016

Amazon and Apple slip on earnings. Mastercard surprises. Chipotle stumbles. And Google gains. Our analysts discuss those stories and weigh in on a mega merger. Thanks to Criquet for supporting The Motley Fool. For 20% off your first purchase, go to criquetshirts.com/fool and us the promo code "fool". Learn more about your ad choices. Visit megaphone.fm/adchoices

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From Fool Global Headquarters, this is Motley Fool Money. It's the Motley Fool Money radio show. I'm Chris Hill, and joining me in studio this week, for Million Dollar Portfolio, Jason Moser. For Motley Fool Rule Breakers and Supernova, David Kretzmann. And for Motley Fool Pro and Options, Jeff Fischer. Good to see you, as always, gentlemen. Hey there, Chris.

Earnings Palooza rolls on. We've got the latest results from Wall Street. we will take a closer look at the big merger in the media industry. And as always, we'll give you an inside look at the stocks on our radar. But we begin with the AAA stocks, Apple, Alphabet, and Amazon. Apple's fourth quarter profits came in higher than expected, but that did not stop the stock from selling off a little bit. Jeff Fischer, you looked at the quarter. What stood out to you? It looked good, really, Chris. Revenue was down 9%, as expected. But the company sold

45.5 million iPhones down just 5%, and it's selling every iPhone 7 it can make. It's sold before it even hits the shelf, basically. They are supply constrained, which is the unfortunate news right now. They have more demand than they can meet supply, and that may subsist through the rest of this quarter, and even go into the next quarter for the iPhone 7 Plus. So, that's what analysts didn't like. They're not making enough product to meet all the demand. That said, it was a record September quarter for operating cash flow, which grew 19%. Free cash flow jumped 23%. And China still has a lot of opportunity ahead as LTE networks roll out there. India, they talked about, finally has promise as 4G networks

take hold there. You can't really sell a smartphone until you have networks that can support it. So Apple, the stock is up 10% this year, 100% the last five years. It still trades at about a 13 PE. And they're expected to grow earnings modestly, but reasonably, through 2019 at this point. So, it still looks like a good holding. Having more demand than supply is definitely a good problem to have, better than the opposite. Something I really like to see with Apple is the growth in services. Services revenue accelerated 24% for the quarter. That's the fastest that segment grew in the 2016 fiscal year. That's made up of things like Apple Music, the App Store, which the App

Store grew more than 40%. You're seeing a lot of strength there. I think that's just a great sign that users are engaging with the services and software side of Apple, which is often higher margin revenue, recurring revenue in the case of Apple Music. The more that that services segment grows, now more than $6 billion each quarter, that's a plus for Apple over the long run. So true. And the installed base of Apple users on every product continues to grow every quarter, which then feeds into that service, as David talked about. The service business alone at $25 billion a year is bigger than most companies. Jeff, you mentioned the analysts and

the supply chain, and how the holiday quarter that we're going into, the guidance there is pretty light. I think they're sandbagging it. Pretty light? I think they're sandbagging it. Yeah, they only see revenue of $77 billion at the midpoint in this last quarter. Isn't that why the stock sold off, though? The analysts were looking for a more robust guy? It's funny the level of scrutiny that Apple withstands. It is a huge company, obviously a world-changing company, a very important company in everyone's life to some degree. But, it is still, at its core, a phone company.

That is what it is. That's how it makes most of its money. I think the big question ... Tim Cook just hit his five-year anniversary as the CEO, and the stock has done very well. Shareholders have doubled their money. I don't know that the next five years are going to be quite that easy. And the question we have, we've been talking about this a lot in MDP, is, with that balance sheet that they have, that whopping load of $8.5 trillion in cash, what are they going to do with it? I think Cook's legacy is going to need to be as a capital allocator, and that's the question he has not even come close to answering yet. Chris, Jason makes a good point. Going back to the next quarter, though, it will

be their strongest, if they hit their estimates, their strongest quarter ever, and it represents a return to growth year-over-year. So, people who are saying Apple's done growing are wrong, if this proves right. One of the reasons I think they're sandbagging is their biggest competitor, Samsung, makes a phone that keeps blowing up. Tim Cook spoke to that, too. He said, you know, it's unfortunate, competition is stumbling, and we can't make enough phones to meet demand. So, it's not really helping Apple all that much, because they're selling everything they make. As David said, that's a good problem to have. Alphabet's third quarter revenue

rose 20%, net income was up 27%, strong advertising on YouTube and through Google's mobile platform. David, this is like a greatest hits album. Man, Alphabet has the ABCs of making money down. This was a great quarter. Free cash flow doubled to $7.3 billion. As you mentioned, margins are improving, so you're seeing strong continued growth in that income. And given the size of Alphabet, that's really astounding and very impressive. They're really showing a lot of strength in mobile search, particularly with YouTube. But when you look at the mobile portfolio that Alphabet has, you have Google Search, YouTube, Maps, Google Play, that is a very strong platform as far

as mobile goes. And they really are still in the early stages of monetizing YouTube. As a consumer, you'll notice a lot more advertising on the platform, a lot more promotion for YouTube Red, the premium subscription service for YouTube. That is a very powerful platform. I think that'll be something to watch closely going forward. Yeah, I think it's very interesting to see the juxtaposition between Apple and Alphabet. You have one that has a great reputation as a hardware provider, the other one that has a great reputation as a services provider. They do make their money via advertising, it's via all of the services. Both companies are trying to edge into those other spaces.

I would argue, actually, that Google has this huge opportunity on the phone side with the Pixel because of Samsung's failures, probably going to attract more people just because you don't have to switch operating systems. I don't know that Apple would pick up necessarily as many, but it would be incremental. On the services side for Apple, that is a huge opportunity that they certainly need to continue to try to capitalize on, but two very, very large and important businesses that are, you can see, they don't all have quite the total package. Yeah, it'll be interesting to see how the Pixel phone performs, because Alphabet has to prove that it can manufacture in a way as brilliantly as Apple has done all these

years. And Apple cited in this last quarter more Android customers coming over to Apple than they've ever seen before. Yeah, I think with the Pixel phone, Google couldn't have asked for a better opportunity given Samsung's flubs, because that's really the main upper-end Android phone competitor that the Pixel phone will be facing, is kind of that new higher-end Android phone. So it's a big opportunity for Alphabet. If they can't capitalize with the Pixel now, given the opportunity they have, that's probably not a good sign for their hardware business. Amazon continues to invest in its warehouse and delivery operations, and that is probably

why its streak of record quarterly profits came to an end in Q3, Jason? Well, with Amazon, I would also argue it's more about the top line with these guys. If you see the disparity in the way analysts project or predict earnings, it's quite large. But I think with Amazon, this quarter will be summed up with the, quote, history doesn't repeat itself, but it often rhymes. We are seeing the early stages of all of this investment that they're making into their international business, and particularly India. That was noted in the call. So, operating losses internationally that reflect that investment, that's okay because they're still growing that top line. It should pay off down the line. It's sort

of like what they did here over the past 10 years. And Amazon Web Services, that is a very competitive market. It is becoming a little bit more competitive, a little bit more saturated. So, growth is slowing, but I think they saw a very nice, healthy boost to their operating margin in that line of the business as well. So, it's paying off as we thought it would. I think, as always with Amazon, it is all about how they invest their money. And I think that's the key word, is invest. In the call, it showed up in some form 46 times. It's just constantly, they're investing in this, investing in that. Video, logistics, everything to really become this customer-centric company. And I think the

long-term thesis here is still very much in play. Third quarter profits and revenue for MasterCard came in higher than expected, and shares hitting an all-time high on Friday, Jeff. That's just another blowout quarter for them. It's been, you know, anyone who says you can't make money in the stock market during a flat market should look at MasterCard. Since it came public in 2006, the shares are up 2,300%. Not bad. That's just 10 years. It's now a $118 billion company. It trades at about 30 times earnings, 26 times forward earnings, but they just grew earnings per share 19%. So the company's growing

strongly even in a weak economy where they're only seeing a gradual recovery in Europe. Everything's mixed in Asia still, and Latin America is bottoming out, and the U.S. is steady as she goes, really not growing much. But they're able to grow anyway, double digits transaction growth overseas, single digits as usual in the U.S., and their profits are leverage, so they make more money on even small incremental gains in revenue. So, just a great business, MasterCard, as well as Visa, its main competitor. O' Coming up, we've got the Halloween-related financial stat that you've been waiting for. Stay right here. This is Motley Fool Money.

Welcome back to Motley Fool Money. Chris Hill here in studio with Jason Moser, Jeff Fischer and David Kretzmann. Twitter was in desperate need of a hit, and it looks like they might have gotten one. Third quarter profit and revenue both came in higher than expected. Jason, the company is also cutting costs in the form of layoffs. Jason Moser. Yeah, you said it. I mean, they were in need, desperate need of some kind of win, anything. And really, I think that the stock didn't sell off 20% the following day. That's probably a win in and of itself. But it actually was a decent quarter. They chalked up revenue of $616 million, which was up 8% from the year-ago quarter. Users

now at $317 million, which grew from $313 million the quarter before. And this is all kind of showing us whether or not they're able to capitalize on these opportunities of 2016 in the form of the Olympics, the presidential election, this NFL deal, this move towards live streaming. I think there is some light at the end of that tunnel. From a product perspective, it is a good experience, the video. And it's encouraging to see that they're right-sizing the business. I mean, it's a bloated business. Not going to be so bloated now. They're going to cut 9% of the workforce. And I know this is a bit of a heated topic maybe on Twitter right now. I actually fully agree with closing down Vine. They bought

Vine I think four years ago for about $30 million. That space has changed exponentially in just a short period of time. And Vine, really, they can do the same stuff with Vine, just in the core platform anyway. So, I think you focus on your strengths. Your core platform, Periscope live-streaming video, there is some light at the end of the tunnel there. They have the goal of GAAP profitability in 2017. The stock-based compensation issue is improving. So, there are signs of success, but we're going to need to see it on a sustainable basis. We own it in a million-dollar portfolio, but we have it on hold. It's staying on hold until we can see some sustainable signs of success.

Does this, you know, proving that no good deed goes unpunished, does this mean that they have to repeat this in the current quarter? Well, they definitely need to repeat signs of progress. Yeah, I mean, that's the standard that we're holding them to, is we need to see that in the form of growing revenue and users and, again, optimism as opposed to kind of playing defense. A tale of two restaurants. Shares of Buffalo Wild Wings up a bit this week after third quarter revenue rose more than 8%. Meanwhile, Chipotle shares hit a three-year low after third quarter same-store sales fell 22%. David, take those in whichever order you like.

David Gardner. Yeah, a lot of restaurants are struggling right now, of course, but I think Chipotle exists right now to make other restaurants feel better about the situations that they're in. Yeah, Chipotle revenue and store traffic both fell about 15%. Same-store sales still down 21.9%, net income down 95%. So, Chipotle is making incremental progress from the previous quarter, but obviously, you're still having a hard time bringing people into the stores. And I don't think the recovery is really going at the pace that management had anticipated or would like. But there are some bright spots. This quarter, the big story was the Chiptopia Rewards Program. That brought in 6 million participants, 2.5 million of

those people earned rewards, and 75,000 people earned the highest reward, which is free catering for 20 people, which is a value of about $240. So, that should be some positive goodwill for the company in the coming quarter, as people invite their friends to a Chipotle catering party. Moving forward, the company is really looking at cutting costs, investing in improving their digital ordering platform, and also renovating the second food line in the back of the kitchen. So, they'll take care of digital orders, catering, delivery, and just help boost the throughput and efficiency of the store. So, that'll be interesting to watch. But they're also ramping up national advertising. So, costs are not going to

be going down really anytime soon. They're probably going to launch a national TV ad pretty soon. They're looking into adding a dessert menu item in the coming quarter. So, some changes going on Chipotle, but I like the steps that they're taking. Yeah, dessert, because that's what you really want when you go to Chipotle, is something else after you're done with your burrito. Jason, Buffalo Wild Wings, don't get me wrong, I'm happy for the shareholders who see their stock increasing in value this week. This was not a particularly amazing quarter for them.

Amazing? No, not at all. It was kind of a depressing quarter, actually. I think one of the reasons why the market reacted to the stock the way it did was because the stock was relatively, I don't want to say cheap, but it looked like a pretty good bargain at least going into earnings, even with the reaction that put shares trading at around 25 or 26 times their revised full-year estimates, which were revised downward as well. Buffalo Wild Wings is a bit of a tough one, because they've grown so far so fast, but I'm not sure how far really they can take that concept. At some point, really, wings and beer can only go so far. It is very exposed to the mom-and-pop fragmented nature of the business

all around the country. And while they are tackling the mobile front and the takeouts, that's great, but they really need to figure out ways to keep people in those restaurants as well. Yeah, with Buffalo Wild Wings, you can definitely tell that the company is transitioning from a focus on growth to a focus on profitability. So cutting and maintaining costs, possibly initiating a dividend, taking on more debt to fund buybacks and other growth opportunities. So, the company is in a transition period, but as long as earnings keep growing above 15%, I think Wall Street will be happy. Panera Bread put up strong numbers in the third quarter, and the company also

raised guidance. Despite that, shares still down a little bit this week. Jeff, I did not consider Panera to be one of those stocks that was priced for perfection. What gives here? It may well be, though, Chris. It trades at 25X forward earnings estimates, and earnings grew about 8% last quarter. And what Panera has done the last several years is invest in itself, in Panera 2.0, as they called it, revamping stores, going digital, setting up a loyalty program. It's all done really well for the business. And that positions them to, they hope, grow by at least 10%, the bottom line earnings, per year starting 2017, so starting next year. So that would be a good growth rate for this company at this point.

But still, the stock is priced, not cheaply, like so many stocks out there, other ones we haven't talked about today, but Under Armour, anything that's priced beyond reasonably, with high expectations, is really getting hit this earnings season if they don't blow the numbers out of the park, so to speak. Go Cubs. But overall, Panera has done a lot of things really well. You have to give credit to their CEO. They started talking about it years ago, and they've really revamped. Now, about 60% of their stores are revamped. They're still working on the other 40%, and they're doing well with it. Shares of Hershey up more than 5% this

week, as they should be, because for the seventh year in a row, spending on Halloween candy has risen. U.S. consumers buying an estimated $3.8 billion worth of candy this year. We've We've got about a minute left. Let's just go around the table real quick in terms of an underrated, undervalued Halloween candy. Jason Moser, you're up first. I said it on MarketFoolery earlier this week, and I'm sticking with it. Peanut Butter Twix. You don't see enough of them, and they're way better than the original. Jeff Fischer? I looked up online the top 10 candies, and Junior Mints were not there.

What? They should be. You get that little box of Junior Mints, it's gone right away. David Kretzmann? I'm going to go with Smarties. I don't know. I can never get enough of those. Let's go to our man behind the glass, Steve Broido. Steve, you must have an undervalued candy that you want to see more of in the world. Chuckles. You guys remember Chuckles? Do they sell Chuckles outside of a movie theater?

You can get them at Cracker Barrel still. I don't even know what that is. Oh, boy. You can always count on Steve. Yes, sir. Alright. Jason Moser, Jeff Fischer, David Kretzmann. Guys, we'll see you a little bit later in the show. Up next, media analyst Tim Byers weighs in on the AT&T-Time Warner deal and more. Stay right here. You're listening to Motley Fool Money. All right. Before we bring in Tim Byers, I want to give a shout out to our friends at

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Welcome back to Motley Fool Money. I'm Chris Hill. We are in the thick of earnings season, but the week did kick off with a blockbuster merger. AT&T announced a bid to buy Time Warner for $85 billion, which means, among other things, the battle for the living room just got more complicated. Here to help us make sense of it all is Tim Byers. He analyzes the entertainment industry for Motley Fool, Rule Breakers, and Supernova. And he joins me now from Colorado. Tim, thanks for being here. Hey, thanks, Chris. Good to talk with you again. We have a tech giant buying Time Warner. I feel like I've seen this movie before. Oh, wait. It was back in 2000 when AOL bought Time Warner. That was a bigger deal in terms of

dollars, but ultimately did not work out well at all. So I guess my first question out of the gate is, is this a good move for AT&T? I think they feel like they have no other choice. Financially, I think it is potentially a horrible deal. It's going to put AT&T, which already has $120 billion in debt, up towards $160 billion in debt. There's a $40 billion note that's out there that Bank of America and some others are looking at funding to make this deal happen. But there are serious questions as to whether or not AT&T can actually afford this and what the financial gain to shareholders would be. There are also serious questions being raised about whether or not this deal is going to get approved right and yes and and you know you have lots of different politicians

making political hay over this uh trump has already said that a trump administration would block it without any review uh draw any conclusions from that that you'd like uh the clinton administration has said they give it a careful review bernie sanders is against it lots of senators expressing deep concerns but i that feels like a red herring to me and the reason for that is because, you know, after AOL and Time Warner combined and there were big questions about media consolidation in 2010, Comcast and NBCUniversal got together. There were some concessions made to the FCC in order to make that happen. And there's really no reason that a serious review where some assets are sold off or what have you couldn't be made to get this deal through. I don't

think that's the big concern. I think the bigger concern is the financials and what this really means for AT&T. Do you think, let's go back to the Comcast Universal, because that was a deal that took over a year to get approved. It was also a smaller deal. That was about a $30 billion deal. This is something that's nearly three times the size. Do you expect there to be concessions? And And if so, does it lead to any sort of a spinoff of any of the major properties involved, whether it's with AT&T or with Time Warner? Yeah, sure. I mean, I could see TBS spinning off as an independent network. That's one of the biggest contributors to the Time Warner profit pile right now because of just the cable fees that are still there. I mean, cable is suffering from cord cutting, but ESPN and TBS are still big contributors.

They earn a lot of affiliate fees. They earn a lot in subscription fees. So I could easily see TBS spinning off as an independent entity as part of the concessions. But the real property, the real gem here that AT&T wants is the content, and that's going to be Warner Brothers. So the one thing you won't see spinoff, there are things that could spinoff. The one thing you would never see spinoff, at least I'd be shocked if they did, because it would invalidate the logic for the deal, would be Warner Brothers. They need Warner Brothers and Warner Brothers Studios in order to cash in on the content

that they think will help push the company forward. AT&T may have some issues with their balance sheet, but one company that doesn't is Apple. They're sitting on $200 billion worth of cash, Tim. Are you surprised that Apple is not more aggressively going after a major content deal, like whether it's Time Warner or something else? Yeah, I am surprised by that, frankly. Apple TV is a non-starter of a TV platform. And not because it's a perfectly fine distribution platform.

You plug it in, you get Wi-Fi access, and now you're going to get Netflix and YouTube and other things. But it's just an aggregator, which makes it no different than any other type of box. And if you've got $200 billion and you have the means to be investing in original content, or better yet, make good on the rumors from a year ago and strike over-the-top deals with networks like CBS, ABC, and so forth, to actually bring live TV through the Apple TV box. or programming to that box? Yeah, of course. But they seem to be unwilling to anger cable providers, and they have more than enough clout and money to take on the cable industry. And Google, or Alphabet, I guess, the company formerly known as Google,

has no bones about taking on the cable industry. So what the heck is Apple afraid of? Do you think at some point, you mentioned YouTube, do you think at some point we see a significant splash made by YouTube in the content space? Definitely. Definitely. And there will be a YouTube subscription service coming in the next, I guess these are the most recent reports, the next few months. There will be a real YouTube subscription service to go alongside YouTube Red. Right now, for those who don't know, YouTube Red is essentially YouTube without ads, and so it is a subscription service, and there is some custom content for that, but it's not much. What they want to do instead is have a real subscription service whereby you can subscribe and get on YouTube CBS shows, ABC shows, Fox, and so forth. So they're negotiating with all the networks right now, so I do expect that to happen. And the key there, and what makes that so interesting, is that YouTube does generate 2 billion views per month on its service, and a lot of those views are on mobile devices.

And when I watch my kids, you know, the three kids, they watch a lot of TV on their iPads or on the phone or what have you. They're used to mobile consumption, so it really is smart for CBS and these others to be looking at YouTube as a potential distribution source for their content because, you know, I could very well see my youngest son, who's 11 right now, 20 years from now, have no TV in his home because he's already got his TV. He's building consumption habits on a mobile device. When you think about the deep pockets that Apple has, that Alphabet has, all of these companies, it has got to be an absolute golden age to be a showrunner. If you are someone who produces particularly limited series television, the options that you have available to you are incredible. Right. No doubt about that. And so that's why we're seeing so much of it. But there is, you do wonder whether or not there is a saturation point.

So like the other, you know, as we're taping this, I think it was either yesterday or the day before, Chris, but then Snapchat said they're going to get into the original content business. So at what point is it Fonzie jumping the shark? Is it the Snapchat moment? I'm not sure. But there's so much of, you know, these companies that want to invest in original content that somewhere we're we're going to have that moment we're going to you know retrench a little bit

but for the meantime uh netflix has done amazingly well with original content and it is actually driving subscriptions for them if you look at what they said in their latest quarter that the attraction of stranger things which by the way is a great show if you have not seen it um brought in a significant beat on the subscriber line. And so when it works, it works incredibly well. So in that sense, it's really not surprising to see AT&T make such a rich bid. All right, one more topic, and then I'll let you go. And this is pivoting from television. But I think it's fair to assume that at the end of this year, when we look back and we think about the major stories in entertainment business in 2016, one of them at or near the top of the list

is going to be the success of Pokemon Go. And for all the fun that people may make of it, that has been a huge success. I'm curious, as someone who watches the entertainment industry as closely as you do, what should we be looking for next in terms of either trends or just individual companies moving into this augmented reality space yeah well i think you you use the right phrase because i don't think it's virtual reality i do think it's augmented reality and vr as a component of that where programming has a multi you know channel experience so you take a netflix show that has you know real world components so say they you know broadcast a original series or stranger things too and you can have a the vr experience on your oculus if

you want and it'll be broadcast through facebook and you could you know go outside and visit the or in your living room and visit the world of stranger things and have interactive you know experiences like that i i think that pokemon go opens the door to you know making we they have proven the model that, you know, if you give a consumer an interactive experience and a challenge that, you know, they can accept and they can find, you know, new and interesting things and it gravitates towards something they're already interested in. And Pokemon has been popular for a very long time. So there already was a built-in demand there. But I do think there is a big opportunity for cross-channel media and there's a lot of companies that can participate that in

that one of the biggest interestingly enough i think is is just facebook as a way to uh because it's becoming a video platform it's already a a built-in connection point with your friends um and you know they have obviously that big interest in in oculus so uh we'll see where where it plays out but i i like the future for cross-channel media cross-channel entertainment Tim Byers covers media and entertainment for Motley Fool Rule Breakers and Supernova, which means this week has been busier than most. So I'll let you get back to work. Thanks for being here, Tim.

Thanks very much. Coming up next, we'll give you an inside look at the stocks on our radar. You're listening to Motley Fool Money. 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. Welcome back to Motley Fool Money. Chris Hill here in studio once again with Jason Moser, Jeff Fischer, and David Kretzmann.

A couple more earnings stories to get to before we get to the radar stocks. Under Armour shares falling more than 15% this week after third quarter sales growth came in at the lowest it's been in six years. And Jason, their profit margins get a little squeezed. A little bit, but I think really here, it's more a situation of timing is everything. And for Under Armour, the timing, I think, has been adjusted a little bit, but it doesn't change the bigger picture thesis for the company. This all boils down to the adjustment in operating income price target that they had set back in 2015. They were calling for, by 2018, $7.5

billion in revenue and $800 million in operating income. They're ratcheting back on that operating income in order to invest more in the business. What they see is opportunities in footwear, international, direct-to-consumer, all of that good stuff. So, it's really more of a matter of when and not if they're going to hit that $800 million. It's just going to be probably 2019, maybe 2020. It's very simple. The stock was priced based on one set of expectations the day before, and then the day after, it was priced on a new set of expectations. That that sell-off made sense, it was right. It doesn't mean that the business is impaired, and I'll let everybody in on a little secret here, Chris, we actually added to our Under

Armour position after this sell-off in million-dollar portfolio. So, take that for what it's worth. Yeah, I think if you're an Under Armour shareholder today, you shouldn't be investing with the expectation of where operating income will be in a few years. This is a company that's investing for growth over the long-term, this is not a two- or three-year story, this is a five-, ten-, fifteen-year story. Very well said. Yeah, I think part of the reason the stock fell so much is, sometimes when a company says we need to invest more for growth, it's because things aren't going as well as they

hoped without that extra investment. But I agree with these guys on the long-term outlook for Under Armour. Well, as an Under Armour shareholder, I feel better. So, thank all three of you. You got it, bud. What we're here for. Next week marks the five-year anniversary of when Groupon went public. At the time, it was hailed as the biggest IPO by an internet company since, wait for it, Google went public in 2004. That was then. This week, shares of Groupon falling more than 20% after a bad third quarter report was compounded by the announcement that Groupon is buying LivingSocial, one of its rivals, for an undisclosed sum

of money. That's probably good that they're not disclosing that they spent, I don't know, any money on LivingSocial. Is that mean of me? Well, we love to find the big dogs in the space, but that doesn't apply when the space sucks. I think it could be argued that this space is less than stellar. It's not good. We've talked about a lot of the weaknesses with this space, the online discount. It doesn't elicit any brand loyalty. It has a lot of risks for bad customer experience, which then probably chases people off forever. And Jeff, we were talking about this earlier, a lot of people nowadays are very aware of what brands they want to shop with, and they're

ignoring a lot of the noise out there in the form of spam emails and whatnot. Yeah, Jason, there's less and less reason to go out searching for things when you can find them from your favorite few with a quick click. So, I think everything's becoming more competitive, and a few companies are rolling up so many of the profits that are available out there. But, LivingSocial was worth $6 billion at its peak, and Amazon, speaking of Amazon, was an investor. So, they don't get everything right. Maybe they sold early, though. But, yeah, it was acquired for nothing material. Yeah, I think in this case, Groupon is in a hole, and they're just digging the hole

deeper by doubling down with LivingSocial. Just to paint a picture, the gross margin has basically been cut in half since they went public in 2011. In the most recent quarter, sales only grew 0.4%. So, when your sales are decelerating to that level, and you're a lot less profitable, that's not a good combination. Yeah, still, David, they see $3 billion in full-year sales, so it isn't like they're a tiny company. But structurally, they haven't built the business correctly to capitalize on that. Alright, let's get to the stocks on our radar. We'll bring in our man Steve Broido

from the other side of the glass to hit you with a question. David Kurtzman, you're up first. What are you looking at this week? I'm looking at Etsy. This is a company that had a rough IPO within the past couple years. This is the online platform to buy and sell homemade, vintage, and ultra-customizable items. And I think there might be something to this platform. You have 1.7 million active sellers and 26.1 active buyers. Those numbers are up a healthy amount year over year. And the company is seeing most of its growth from seller services, where it provides services to sellers like web stores, payments, and shipping solutions. They recently upped guidance

for 2016. They're expecting 20% to 25% sales growth over the next three years. Healthy balance sheet with $266 million in net cash. So, it's one I have on my radar. And the ticker? E-T-S-Y. Steve, question about Etsy? Do people that sell on Etsy have their heads on straight regarding pricing? I've gone to Etsy, and things are really, really expensive. It's high-quality stuff.

It is. It's customizable. It's the price for quality. You've got to pay up, Steve. Yep. This ain't what's Olive Garden we're talking about here. Ottery bar. Don't you dare disparage Olive Garden. Jason Moser, what are you looking at? Going to keep an eye out on Wednesday for Craft Brew Alliance's earnings. The ticker is BREW. We've seen a very challenging quarter here in beer, from Boston Beer to even the

bigs. Anheuser-Busch, InBev, ratcheted back their guidance as well. That was due to a particular weakness in Brazil. Craft Brew Alliance is a tiny, tiny company, $300 million on our market cap. Earnings come out on Wednesday. They recently amended a distribution agreement with Anheuser-Busch & Bev, which gives it a lot of certainty going out. This is really becoming a story about the Kona brand, the Hawaiian brand that is really the main focus of their portfolio now, trying to develop a lifestyle beer brand around that, like Bud has done with Corona. So, we'll get a little bit better clarity as to whether that strategy is actually working. Steve, question about Craft Brew Alliance?

So, if I'm in a big liquor store and there's 155,000 beers to choose from, which one do I go for? I think you hit right on the biggest problem that this industry is facing right now, is such a massive amount of choice out there, it is becoming almost difficult as a consumer. And therefore, you're seeing a lot of consumers just fall back on old, reliable brands that they already know. Jeff Fischer, what are you looking at? Well, I think we talked about it earlier, MasterCard, even though it's hitting a new all-time high, is still worth investors' consideration if you don't own shares yet. But I'm going to pivot and mention O'Reilly Automotive, ticker is O-R-L-Y. I don't want

to excite anyone too much here, but it's an auto parts retailer with about 4,700 locations, a great performing business and stock. And it fell quite a bit this week on earnings that were strong once again. So, I think it may be a bit of a long-term opportunity for investors to look at. O'Reilly Automotive, Steve. Where are the big margins for O'Reilly? Are selfers, I guess, going in and saying, I'm going to change my own brakes. All bearings. That's one advantage or attractive thing about the business.

It's pretty evenly split between do-it-yourselfers and professionals. And they have operating margins that are far better than their competitors because they've figured out the distribution and cost structure of their business better than anyone else. Steve, you got a stock you want to add to your watch list? I may have to go with O'Reilly. That's a very wonderful answer. O'Reilly? On that note, Jeff Fisher, Jason Moser, David Cretzmann, guys, thanks for being here.

Thank you. That is going to do it for this week's edition of Motley Fool Money. our engineer is Steve Broido, our producer is Mac Greer. I'm Chris Hill. Thanks for listening. We'll see you next week.