Motley Fool Money - Apple Watch’s Clock is Ticking

Episode Date: December 20, 2023

Apple will have to halt sales of its latest Watch products this week due to patent disputes… unless the president’s office decides to step in. (00:21) Tim Beyers and Dylan Lewis discuss: - Why you might not be able to buy the Apple Watch soon in the U.S. - Comcast’s data breach affecting 30+ million customers. - Fedex’s latest results and why they might be better than the market thinks. (16:39) Mary Long caught up with Kristy Akullian, Senior Member of the iShares investment strategy team at Blackrock. for a look at her team's 2024 outlook and one country to keep an eye on. Companies discussed: AAPL, MASI, CMCSA, FDX Host: Dylan Lewis Guests: Tim Beyers, Mary Long, Kristy Akullian Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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If you're looking to get a new Apple watch, the clock is ticking. Motley Fool money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst Tim Byers. Tim, lean, mean, full of caffeine? I mean, you said it, and I agree with it. Love it. We've got the latest data breach, a look at trends in shipping, and some thoughts on what 2024 might bring from BlackRock.

But we're going to start out talking about an item that might be on a lot of holiday gift lists this year, Tim. And that's the Apple Watch. And if you're in the market for one, if it is on your shopping list for someone for Christmas, you better act soon based on the current state of things because Apple will pause selling some of its latest models before Christmas, Tim. Yeah, it's really interesting. So sales of the Apple Watch Series 9 and Ultra 2 are supposed to be halted. This is according to Fortune here at the company's online store as of the 21st. So we are recording on the 20th, so that is tomorrow. And at its physical retail locations, apparently beginning on Christmas Eve. So, I mean, giddy up, hurry up and get in there and get one.

And apparently this is because of a ruling by the International Trade Commission from October that said that Apple has violated patents from Massimo that include in these watches. a blood oxygen sensor. So it looks like a software patent here that Apple has violated. I think it is interesting. I know that Apple has been very interested, and I have seen this myself. I mean, Apple is pinging me even on my old, you know, my ancient iPhone SE to use the health features on my iPhone more often. It wants me to do things like learn to use walking speed on my iPhone, and apparently I have to download another app to do this. But the watch was really like the entry point for Apple doing a lot more health-related innovations, introducing more health-related innovations into the ecosystem

and making its devices much more attractive to the health-conscious consumer. So this feels like a little bit of a setback, Dylan. So this all has come about because of a ruling from the U.S. International Trade Commission back in October. I'm not sure whether it was convenient or them being nice to allow for the bulk of the holiday season to fall into a spot that they were comfortable with sales continuing. Is this the kind of thing you think may actually get resolved? or do we have to kind of prepare ourselves for there to be an actual impact to U.S. Apple Watch sales? I think there will be a little bit, but, I mean, you know, this timing is very, very generous.

I mean, it's not banned until Christmas Eve. Dylan, who's buying on Christmas and who's buying between Christmas and New Year's? All the people that have forgotten, Tim. Right. So, like, I mean, does this actually have a genuine? material impact? Probably not. Anybody who wants one of these watches is going to get one. I mean, if they genuinely want it. So, no, I don't expect it to have a material impact. Now, there's probably a lawyer out there who is yelling into their phone and we want to hear that feedback.

So I want to hear why I'm wrong about this. It feels wrong to me, Dylan, but there's probably a very good legal reason why Apple has to go take a strident defense here, especially since, to your point, Apple's going to sell these watches. They're going to move. I don't think anybody believes that come January 2nd, there's going to be a bunch of unsold, you know, ultra Apple watches just sitting on shelves or sitting in a back room somewhere like the Ark of the Covenant, you know, in the back of, you know, some government warehouse somewhere. That's probably not going to happen, Dylan. Yeah. Last minute shoppers, you're in luck. This may get resolved. And for our listeners that are legal experts, podcasts at fool.com is where you can send those legal takes. Tim, I will be sure

to forward any of them along to you. Yeah, I'm sure I'm wrong. And I welcome being corrected. Let's stick with tech. We had news of another data breach this week. Comcast this time in focus, announcing nearly 36 million Xfinity accounts had been compromised in a data breach with hackers accessing personal information, like contact info, birthdays, and the last four digits of customer's social security numbers. Tim, the stock has not moved on this news. So I'm curious, how does the market, or how do investors look at a news piece like this? Because it sounds bad, but also, the stock is totally unfazed. I mean, that's probably because we expect nothing from Comcast,

and so, you know, is this surprising? No. Not, I mean, this is, you know, the stock market often trades on expectations, and the expectations for Comcast are like a shrug emoji like, me, all right, they did it again. I'm disappointed. Shocker. I mean, that, not to, you know, I have Comcast. It's not like I am, you know, anti-Comcast or anything.

I think Xfinity is actually a fairly good service here. But, you know, they just don't have a whole ton of competition here. And we've kind of come to accept that there are some suboptimal things that come with Xfinity. But I will say here, Dylan, this one is squarely on. them and I think there's a larger narrative that we need to pay attention to. So, NetScaler, which is part of Citrix here, did put out a fix for this. Their Cloud Software Group released a build which affected the vulnerability here. This was on October 10th, and the vulnerability was targeted at NetScaler Application Device Controller and the NetScaler Gateway.

And they warned that if this was exploited, you could, you know, end up with allowing your network to have unauthorized data access. So what Comcast said, and which really stinks here, is, and this is according to the verge, that the exploit, there was unauthorized access between October 16th and October 19. So almost a week later. You know, so there had been a patch that was issued. You know, they said, hey, this is a problem. Fix it. Please fix it. To all customers, this is according to the blog post that the company put out.

And Comcast didn't fix it, apparently. I mean, we don't know. We don't really have all the details here, but it doesn't look like they fixed it because they said, this happened between October 16th and October 19th. And if a fix was available on the 10th, what happened here? So a shout out to, you know, my friend and a partner on this week in Tech, Tim White, who had been talking about for a while now.

And I think made a pretty accurate prediction about we can expect there to be lawsuits around cybersecurity liability or, you know, real focus on insurance. writing insurance policy around legal liabilities having to do with cybersecurity breaches because it's becoming more and more and more common. And in this particular case, these breaches do appear to have something to do with just how you orchestrate what's called a virtual private network. And a VPN is essentially, if you could think about, it's like going into your house, You know, you enter your house and now, you know, one key gets you in the front door, and now you can go anywhere inside your house.

You know, unrestricted access. And that's like a VPN. You get into the corporate network. You enter through the front door. And once you're through the front door, you have mostly unrestricted access. And so, of course, these miscreants got access to a lot of customer data. And now that's a problem for Comcast. That's very different than what some of the other points.

players have been talking about. The biggest one here that's been talking about it is Z-scaler. We talk about zero trust and the idea of, no, let's not have just one door and you get access to everything. We're going to give you zero trust. Once you enter a door and you get into a space, when you want to go to another space, you've got to ask for permission again. We're not going to trust you every time. You've got to keep asking for more permission. So I think this is the beginning the more we see this, Dylan, the more this is going to change how companies think about security policy. And if I'm an investor, I really don't want to be investing in a company that has access to a lot of customer data online and doesn't have a strategy for protecting that customer data. Like, that's got to be part of my risk analysis now, right?

I mean, it's a big deal. Yeah, so, Tim, Comcast is not alone in being hit by this. Boeing and Toyota also hit as well. And I think as investors, we only have so much control over that. Companies only have so much control over that. To a certain extent, there's a sense of kind of randomness to it. Is your view on this that what companies do have control over is the way they respond, and it sounds like maybe Comcast did not respond in a way

that you were particularly happy about. And also just the procedures they have in place and the data management network management procedures that they have to try to ensure that they can make things as secure as possible. Yeah, and I just don't think you can be lazy here. I mean, if anything, I should be careful about making a judgment here,

because I don't wanna call Comcast engineers lazy. That's not right. You know, this is a mistake. And I think we should label it as a mistake. But the environment is such that there isn't a lot of room for mistakes, Dylan. If you've got to patch a piece of software and you're being told by your provider, hey, patch this piece of software and do it now, then do it now. Do not wait.

And if that is a problem for you, then get a different system that doesn't require you to do patching in the same way that your existing. system does. I think this is a much, this is going to become an increasingly big deal. So it has some implications for security providers. It's probably good for companies like Z-scaler, like Crowdstrike, a lot of cloud security providers. It gives them more, more ammunition for their argument as to why you should upgrade. And at the same time, it puts a lot of pressure on chief information officers, chief information security officers, CTOs to say like, look, what is our security policy? What is our posture? What do we need to upgrade?

Let's do it now. All right, Tim, our final story moves us away from digital goods and assets and over to the physical world. FedEx shares down almost 10% after the company released fiscal Q2 earnings. And results came in a little bit below expectations. But it seems like, Tim, for me, the company's guidance, showing another quarter of year over year declines is really what's getting the headlines and really what's moving the stock today? Yeah, it seems like it.

I mean, so the reported earnings per share of $3.99 were well under the expectations of $4.19. Overall sales down from $22.8 billion the year prior to $22.2 billion. That's problematic. down, you know, not quite 3%, but down enough. It just doesn't look quite right. Now, they've cut costs materially and overall operating profit margins were up here. So the first thing I thought about when I saw these results is, is there a deep Amazon effect here? Because we've all seen it. We all see the Amazon delivery trucks every day. We can hear that weird noise that they all make when they're dropping off their packages.

And so it does kind of make you wonder. What's interesting to me is that FedEx had said in their comments that they'd been getting share from, say, their primary competitors. And we're not talking about Amazon there. We're talking about the Postal Service. We're talking about UPS. We're talking about companies like that. And there is an argument for that.

in terms of the ground business, FedEx ground, the operating margins, first of all, the operating income didn't double, but it was up massively, like $598 million to about $900 million. And the operating margin went from 7.1% in the year prior quarter to 10.4%. So there is an argument to be made that there might be some consolidation here. It may be not just be those weird Amazon delivery trucks. FedEx is actually doing significantly better in its ground business. The hard part is that this is a highly diversified business, and international may not be going as well as we like to see the express business.

It's not clear that that's going nearly as well as they wanted to go. But in that core business in the U.S. on the ground, FedEx does have something to build off of here. So it's not clear to me whether or not this is a very, value yet, Dylan. But there is something to build on here, and I found that to be interesting. So maybe put this one on your watch list and do a little more research because FedEx is probably not going away. It's still a big cash generator. We still rely on it for logistics around the globe and particularly here in the U.S. And Amazon does not want to do all of this either. So Yeah, I find it interesting. It's getting whack today, I think for a good reason, but there's this small little glimmer of hope. Who knew? The white FedEx ground trucks, they're still out there.

Love it. And I love that we are wrapping the show with a stock idea there, Tim. I think this might wind up being our final show together for 2023. And as we wrap, I just want to thank you for joining me today and joining me throughout the year. Thanks a lot, Dylan. I appreciate it. More caffeine on the way for me, I've only had one cup of coffee today. That is not nearly enough. But Merry Christmas and happy holidays to all of our listeners. Always a pleasure. The old adage goes, it isn't what you say, it's how you say it, because to truly make an impact, you need to set an example and take the lead. You have to adapt to whatever comes your way. When you're that driven, you drive an equally determined vehicle, the Range Rover Sport. The Range Rover Sport blends power, poise, and performance. Its design is distinctly British and free from unnecessary

details, allowing its raw agility to shine through. It combines a dynamic sporting personality with elegance to deliver a truly instinctive drive. Inside, you'll find true modern luxury with the latest innovations in comfort. Use the cabin air purification system alongside active noise cancellation for all new levels of quality and quiet. Whether you prefer a choice of powerful engines or the plug-in hybrid with an estimated range of 53 miles, there's an option for you. With seven terrain modes to choose from, terrain response two fine-tuned your vehicle for for the roads ahead. The Range Rover event is on now. Explore enhance offers at range rover.com. Thanks, Tim.

Coming up, our year ahead outlooks worth investors' attention. Christia Cullion is a senior member of the I-Share's investment strategy team at BlackRock. Mary Long caught up with A Cullion for a look at her team's 2024 outlook and one country to keep an eye on. Your team just published a 2024 year-ahead outlook. We'll chat about that in just a moment. But before we get there, I want to address our audience because The Motley Fool were about genuinely long-term investing, buying companies you believe in, holding them for at minimum five years. Why should those individual buy and hold long, long-term investors, even worry about the macroeconomic picture at all?

Yeah, I think that's a great starting point. So one of the things that we like to say here is that it's not timing the market. It's time in the market. So I think we would completely agree with that stance. that you're investing for the long term. And I think that staying invested and being invested even when it maybe doesn't feel comfortable, those are sort of our guiding principles too. And so I think that what you'll see and what kind of comes out in the guide and what we're talking about is actually just that we see a lot of investors holding cash and probably too much cash. So a lot of

what we write about is really just the importance of stepping out of that and actually investing. And to your point, having an idea, even if it's rooted in prediction, having an idea of what to expect in the year ahead can kind of help with that mindset piece. So when things kind of go off the rails, we hope that that doesn't happen. But if that does, we're maybe more mentally and emotionally prepared to kind of see our portfolios reflect that. Exactly. So with that, I'll give you the impossible task of predicting the future.

What does the crystal ball have in store for 2024? Just a level set here, too, and think about things, you know, from the broad macro environment of what we expect to happen and then translate to what that means for markets as well. So at the macro and kind of the economy level, I think that we expect that growth is going to slow down. It's been really, really strong, stronger than investors and everybody really anticipated in 2023. So we think it's still going to be positive. We're not necessarily saying, our base case isn't that we think we're heading into a recession. But that process of going from growing really fast to growing a bit slower or something more normal, that can be painful

in and of itself. So we want to be a little bit of downside protection in a portfolio. We want to be a little cautious while still remaining invested because we think that that could come. In terms of things like what the Fed is going to do for next year, we do think that we're probably at the end of the Fed's hiking cycle, but we actually don't think that they're going to cut interest rates as much or as soon as the market thinks right now. So that could be another kind of cross-current at the macro level for investors to think about. And then translating that to kind of what to do in markets is, you know, our crystal ball for next year just like staying up in quality. We think that makes sense. I think in the news we've seen more discussion recently about this

tension between what data says the economy is like and then how people feel the economy is like. So when you're looking to the year ahead, how much are you weighing those classic economic data points? And are you at all kind of seeking out more anecdotal feelings-based stories from consumers and individual investors, people that are active in the economy as opposed to institutions? Yeah, I think that's exactly right, right? Like this year, if you just look at the data of it all, it looks pretty good. And if you go talk to people, it felt pretty bad.

I think a really big part of that was inflation. And I think that there is a sense, maybe even outside of the investing community, but just sort of like the American public, that they feel like inflation falling should mean prices are falling. And of course, we know that that just means they're not going up by as much as they used to. So I think that there's a little bit of a dissonance there just in terms of what people are experiencing. And I do think, even though it's harder to get exact data on this, This isn't something that is like perfectly measurable, but I think that there's a transmission

mechanism between how people feel and how the markets react to something. And a lot of that can kind of just be chalked up to animal spirits or how much risk appetite people have. And when people feel less wealthy and they feel less confident in the future, they're going to spend less. And so, you know, the risk of the consumer no longer power in the U.S. stock market, like it has this year is one of the risks that we highlight for next year just in terms of what performance could look like. So there is a really real mechanism whereby how you feel about markets actually

impacts how they perform. Your outlook talks a lot about the yield curve that changes to it, make cash less appealing, that the shape of that curve will kind of determine what the best will be determined by all these various factors. What's the yield curve? Why should investors face such close attention to it? I don't think that any, you know, I don't think we have said, yield curve as much in the last 50 years as we have in the last one, right? Like, it's such an important thing that we're thinking about. I think it first came into kind of the public, you know, in common conversation, if you will, when it inverted, and that was over a year ago now.

So what that means is that yields on longer dated bonds were actually lower than yields on shorter dated bonds. And if you think about what that does in terms of an incentive structure, it just, it inspires less people to actually invest for the long term and to actually just play it really safe and do things like hold cash. So that point that I started with in terms of the importance of staying in the market, what an inverted yield curve did was it, it disincentivized people to do so. And so we still see that the yields on closer to cash are very short, date, and fixed income exposures are still higher than longer term ones. And so that,

to us looks like something in the economy that isn't functioning exactly as properly. We still think that that needs to return to a normal upward sloping yield curve, meaning that you get more interest rate or more interest and more yield on those longer dated exposures. So we're waiting for that to happen before we, you know, we think that we're in the all clear, but we do think that now is important of a time, is such an important time to step out of cash because we've seen that start to happen. To step out of cash and into fixed income or other asset classes? Yeah, so I think both.

The yield curve in particular, though, is telling us stepping out of cash and into something like core bonds. So, you know, in the way that in finance, there's so much jargon, right? They think of this as the intermediate or the belly of the curve, if you will. Where we see the most opportunity is sort of in the three to seven-year maturity range. So something like IEI, the I shares three to seven-year Treasury ETF, is one that we're talking about a whole bunch with investors right now as an alternative to holding cash. Your outlook touches on this. I don't know that they mentioned demographics specifically, but you do talk a lot about

international exposure. Which international markets do you have an eye on and why? A big one that started this year and I think can continue is Japan. They're really undergoing kind of a sea change at the macro level. So Japan has not had inflation for decades, but they did finally realize some. There have been some important changes to the way that their central bank is reacting to that. And back to the yield curve question, I think that there's some opportunities in Japan that we really haven't seen in multiple decades just because we're starting to see more normalized interest rates there.

Inflation can inspire people to go out and actually invest as well. So I think that looks relatively positive. one that specifically on the demographics side is India. Well, we see really strong growth out of India, both as a partner in sort of the friend-shoring and economic competition way, but also just in terms of how young their population is and how that can continue to drive even more GDP and broad growth from that country as well.

So those are two places we're keeping an eye on for next year and the years ahead. This is perhaps unsurprising, but it sounds like there is a lot all over the world and in many different industries to keep our eyes on in 2024 and ahead. Christy, thanks so much for the time and all of your insight. We really appreciate it. Awesome. Thanks so much for having you today.

As always, people on the program may own stocks mentioned, and 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 Dylan Lewis. Thanks for listening. We'll be back tomorrow.