Motley Fool Money - Deal or No Deal?

Episode Date: June 23, 2023

Regulators are taking a hard look at acquisitions for Adobe, MIcrosoft, and Amazon. And that might be a good thing for Adobe and Activision shareholders.  (00:21) Emily Flippen and Matt Argersinger discuss: - Why more rate hikes are on the way. - How housing’s impact on inflation probably won’t slow down any time soon. - Why Activision and Adobe shareholders might not want their company’s proposed acquisitions to go through.  (19:11) Deidre Woollard spoke with Atif Qadir, the founder of proptech company Commonplace, about how issues at regional banks affect real estate, and whether empty office space can really be turned into apartments.  (31:16) Emily and Matt break down two ideas on their radar: Spotify and Schwab US Dividend Equity ETF. Stocks discussed: ADBE, AMZN, IRBT, MSFT, ATVI, SPOT, SCHD Host: Dylan Lewis Guests: Emily Flippen, Matt Argersinger, Deidre Woolard, Atif Qadir Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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Let's make a deal or not. Motleyful Money starts now. That's why they call it money. Cool Global headquarters. This is Motley Fool Money Radio Show. I'm Dylan Lewis. Joining me in studio, Motley Fool Senior Analysts, Emily Flii, and Matt Argusinger. Great to have you both here. Hey, Dylan. Hey, Dylan. We've got some deals under regulatory scrutiny, the dots connecting regional banks and real estate,

and of course, stocks on our radar. But we are kicking off, as we often seem to these days, looking at the big macro. This week, Fed Chair, Jerome, Powell indicated while the Fed decided to keep rates flat recently, quote, there's a little further to go with rates. Matt, I think most people watching this thought this was likely, but we're seeing confirmation. Rates are probably going up in the future. I think that is the case, Dylan. And you said further to go, I think the actual quote was, a long way to go when it comes to the process of getting inflation back to 2%, which is that stubborn number that the Fed is going after, and it's going to take a while. But what's interesting is, if you look at what the Fed has

done and what the Fed is saying and what Jerome Powell is saying. This is not just a U.S. story right now. You've got the Bank of England that raised rates surprisingly by 50 basis points. Most were expecting 25 basis points. The Swiss National Bank raised 25 basis points. The European Central Bank last week raised 25 basis points. The Reserve Bank of Australia raised rates earlier in the month, also by 25 basis points. And just for those keeping score at home, Turkey's Central Bank doubled interest rates to 15%. Of course, they're dealing with a bit of a hyperinflation problem in that country, it's pretty sad. But the point is, one of the big premises, I think, of the stock market rally and the enthusiasm we've had in the market so far, and certainly in the spring,

is that the Fed was close to being done. In fact, they were close to being done, and the market was kind of expecting rates to maybe come down before the end of the year. I think that's going completely out of the window after the past couple weeks. And so credit's not getting cheaper. It's getting more expensive. Discount rates are not falling. Mortgage rates are not coming down. So, if you're an investor, like we are often who focuses on long-duration investments, stocks, stocks that have earnings and cash flow rejections out into the future, or companies that have a lot of debt, especially variable debt on their balance sheets, the situation is getting more expensive and riskier.

Yeah, the Fed's just in such an awkward position right now, isn't it, Matt? Because, you know, they've come out, everybody who's like, oh, things are getting better. It's, you know, interest rates from here, don't worry about it. And then that inflation data came out, and suddenly eyebrows are being raised a little bit. And it's almost like they're slowly ripping off this Band-Aid. Or they're like, eh, not yet, but it's got to come off at some point. So I think the market's kind of reacting to that. But I have to ask Matt, what is the magic behind the 2% number?

Because I've heard some arguments that have said, hey, maybe the Fed's rate shouldn't be a 2% target. Maybe it should be 3% or even 4%. Why 2%. I love that question. I've tried to find out why as well. and I think it's because the consensus is, well, 1%'s too low, and 3%'s, like, too high. So, like, 2% is that. I mean, I'm serious.

I don't think there's a white paper out there that the Fed is pointing to you that says, no, 2% is the correct long-term rate of inflation. It's just a number. 2% seems to be the Goldilocks number, and we're happy to follow that and see what happens with it. I want to revisit something that came up on the show last week. Our colleague Ron Gross made a point to say that whatever happens with housing is going to have a pretty big impact. on core inflation and CPI. Checking in there, Matt, what are you seeing with housing?

Such a good point by Mr. Gross. Yeah, so one of the criticisms of the Fed, at least in recent months, is that when it comes to rents, which is a big component of how they calculate inflation, the criticism is that they're relying on lag data, data that's several months behind. And the argument is, well, that's rolling over, rents are flattening out. Once the Fed starts to take that into account, their preferred inflation rate is going to be lower. They can stop raising rates. But is that actually correct?

Are rents rolling over? Because, Dylan, if you look at it, there's data coming out of single-family rental companies. These are companies that own tens of thousands of single-family rentals across the country. And a data point from John Burns, which is a great research in data firm, they look at housing and construction. If you look at the single-family rental owners, by the way, single-family rents being the largest single component of CPI, so it's not just the Fed, these single-family rental owners, like Invitation Homes, American Homes for Rent, these companies are reporting recent rent growth, not lag data, recent rent growth as in like April, between 7 and 10% year-over-year.

So if that is still happening, and we know that single-family rents are a huge component of CPI, does it sound like we're anywhere close to 2% inflation? No, I don't think so. No, and so that's why I think the Fed is maybe a little justified in their track of keeping rates high. Well, to play devil's advocate, those increases are also slower than they were at this point last year. So while they're still much higher than 2%, I mean, last year was 10% plus in terms of rent increases. So it is slowing down. It's trending in the right direction.

One thing I wanted to check in on while we're talking housing in the big picture is something that it seems to be working against housing costs coming down, a little bit less so for the renting, more so for the buying, is the simple fact that we are in a supply-constrained housing market. and homebuilding is also subject to these interest rate rises that we've been seeing. Given that, Matt, I was surprised to see a headline this week. U.S. home construction surged in May. Yeah, it's remarkable what's happening in that market. And you can see it also, not just in the home builders, which have been on fire, but a lot of the industrial companies that serve the construction markets, they're on fire. And it is that supply-demand situation that you mentioned.

There just simply isn't enough existing homes on the market for sale. And I think one of the reasons is, it's obvious, right? It's anyone who bought a house before 2022, which is the vast majority of today's homeowners, likely locked in a mortgage rate of 3%, 4%, at least under 5%. We know mortgage rates are much, much higher today. So a lot of these owners just aren't willing to, even if they want to move or downsize, they simply can't because they don't want to give up that mortgage rate. And so all you have is you have now this huge vacuum in the housing market,

especially where the only new homes coming, the only homes that are really for sale are new homes, and that's why the home builders are in the construction market is booming. Is that sustainable? Well, if that supply-demand situation doesn't resolve itself, yes. And that's going to, like you said, that's going to keep prices high and keep demand there pretty strong. Taking a step back here and thinking a little bit about how this rate environment and what we're generally seeing with the macro picture flows through to what to expect in the market and also just the decisions that companies are going to be making, Looks like the dot plot is going to be the guide, and we're going to be seeing two more rate hikes at least.

No rates coming down anytime soon. How does that factor into the big picture for you, Matt? Well, I think if we're looking at a stock market, and here we are almost six months through the year, that the S&P is up almost 15%, or a little over 15%. NASDAQ on 100 is up 35% year-to-date. VIX is at its lowest level than before the pandemic. there just seems to me a lot of confidence and complacency in the stock market. And if you're telling me that rates are going to stay high and go higher, the cost of capital

is going to continue to rise. That worries me a little bit from a valuation perspective. I think that's a fair argument, right? Anytime interest rates are increasing, then your present value of your cash flows are decreasing, and the valuation there is decreasing. But for long-term investors, rates change over the course of their investing horizon, which is why I think it's so important to remain business-focused. If you actually look at where the market is in general right now, well, I don't think anybody will come out here and say it's incredibly cheap. If you're looking at great cash-generating companies, companies that likely won't have

to hit the market for new bouts of capital as interest rates are increasing, valuations are still really reasonable for smaller-cap companies. I think the market's trading at forward estimates of earnings of like 13 to 14 times. It's not ridiculous. I think the S&P 500 is at something like 19 to 20 times forward-eastern. earnings right now. So the earnings are there, especially for some of these larger companies. And while there's plenty of hype and froth, especially with AI and stuff that has ticked up a lot of these big tech companies, there's also real businesses underneath the

service. And I don't think that should keep anybody out of the market. One of the things I want to talk about with this, too, is when we talk about cost of capital going up as we're looking at the decisions that businesses make, that's going to have effects on strategy and just general direction for a lot of these companies. How do you expect management teams to weigh a sustained higher-interest-end environment meant? Well, yeah, that's the challenge. I think you're dealing with a near-term cost of capital issue, maybe at the same time you're trying to keep costs low, but also trying to demonstrate pricing power that you're getting

essentially for your goods and services. I think it's a balancing act that, for the most part, I think impressively, most companies have done. I mean, we've gone through several earnings periods now in this sort of environment. And I'd say earnings are holding out much, much better than you'd expected, and that's because I think companies are doing a great job and sort of managing. pricing power on one end on the demand side, but also costs on the other side. Now, at some point, you can't do that forever. You can't keep increasing prices.

And while your costs are continuing to rise, as we're seeing with inflation, that becomes a bigger and bigger challenge. But so far, it's been really impressive. And one of the things I feel like we don't talk about enough in terms of this is applied to the market broadly is that debt levels across the board are at historic lows, especially for some of the largest companies that are propping up the stock market today. So it's kind of an interesting, different environment for investors to be in, because the quality of the companies that are driving a lot of the market's returns are just so incredibly high. All right. After the break, we've got the latest on regulators kicking the tires on major acquisitions. Stay right here. This is Motley Full Money.

Welcome back to Motley Full Money. I'm Dylan Lewis here in studio with Emily Flippen and Matt Argersinger. We're going to do something a little bit unusual here. We're going to spend an entire segment talking about deals and regulators because there are so many right now that are pending. and frankly, several of them seem like they may not be happening. I want to start with Adobe and its planned $20 billion acquisition of design tool, Figma. Emily, this week we heard EU regulators are likely going to be more formally investigating the deal. Is it safe to say that if this deal does happen, it may not be happening anytime soon? Yeah, the interesting thing about this deal is that everybody in their dog kind of wants an essay, and in this case, the size of the acquisition and Figma, this wouldn't even be a deal that the EU would

typically investigate. Because of its implications, though, it has taken it upon itself to say, hey, no, actually, we're going to be looking at this deal. And to your point, there's a lot of skepticism in the market, given the regulatory interest, that this deal is likely to not go through. But interestingly enough, Adobe's management team is still talking about closing this deal by the end of 2023. And they're making active plans, changes to their product suites under the expectation that the deal will happen. So shareholders are in this place of limbo right now because regulators are notoriously cryptic and slow, unpredictable in a lot of cases. And in this case, the outcome for the Adopa Figma deal may feel the most black and white for

investors, which is to say there's an argument. I would make the argument that this is very anti-competitive in nature. Figma is Adobe's largest competitor. The $20 billion deal came out of time when deals really weren't going through, and it valued the business at more than 50 times annualized recurring revenue, which was incredibly frothy. It felt like the price you pay when the competitor doesn't want to sell out to you, but they can't say no. You can't say no price. And that's where Adobe got Figma. And investors, rightfully, said this is a change of strategy for this management team. It feels reactive instead of proactive.

It feels anti-competitive. So we'll see where regulators fall, but I think there's a very good argument to be made that this deal does not go through, at least not as it's built right now. And worst case, for sure, shareholders, if Adobe does close the deal in 2023, spends the money to acquire the business, spends time and effort on integration, and then it's later told, no, you actually have to spend it off. Matt, there's a slightly different story with the Microsoft Activision deal. This is one where Microsoft is planning to buy video game publisher Activision. Seems to be hitting some snags as the U.S. Federal Trade Commission is looking for a temporary block of the deal until the agency can fully rule on whether it would impact competition. This is one

that people have been watching for a long time, too. a long, long time. And I got the sense that Emily was kind of rooting against the Adobe Figma deal happening. I'm also rooting against the Microsoft acquiring Activition Blizzard, because I don't know how this is going to turn out with the regulators. But I think Activision as a standalone company, with an extra $3 billion breakup fee, by the way, is interesting. I mean, the latest results from Activision were excellent. If you go back to the first quarter, bookings were up 25%. Blizzard revenue was up 62%. They just launched Diablo 4 this month. It broke records, it generated sales of $666,6 million over its first five days. I don't know why Activision

used that particular number in their press release. For an investor perspective, either Microsoft and Activision make this happen at $95 per share, or it doesn't happen, and you have a business that's growing fast. I mentioned the $3 billion breakup fee. When you add that to the company's already existing strong balance sheet, you're looking at a company that could have somewhere around $15 billion in net cash by the end of this year. I think that means they resume the dividend. They might even pay a special dividend because they'll just have so much excess cash on the balance sheet. And this was one of my radar stocks back in April, Dylan, if you recall, and I thought at the time that investors could do well in either scenario.

And I still feel that way today. So I'm actually, you know what, let this regulatory process play out. But if it doesn't work out in Activision or Microsoft's favor, I think that's fine. The deals for Adobe and for Microsoft have gotten a lot of headlines and attention. We also got an update recently on one that has kind of flown under the radar. And if I'm being honest, one that I'd kind of forgotten about entirely, and that is the Amazon I-Robot deal. Regulators in the EU are launching a four-month investigation into Amazon's planned acquisition of Rumba Maker I-Robot. The deal was announced last August for $1.7 billion,

and it looks like we're going to wind up going a full year before this one closes. Emily, when you look at this one, do you see concerns? Well, this is the type of deal that really highlights their regulatory environment we're in today, because you can understand how there's question marks about Adobe and Figma or Activision of Microsoft. But IROB, it's a small acquisition of a company that wasn't performing super well before Amazon Express some interest in it. Nobody's really worried about the at-home robot market getting taken over because of this acquisition. But it does highlight how much pressure is on, especially U.S.-based large tech companies. Any acquisition they want to make is likely to be investigated by regulators, not just the United States, but across the world.

and in the United States, the FTC in September, actually said they submitted a second request for more information to ensure that this deal was not Amazon just further empowering itself. So this one feels a lot less anti-competitive and a lot more just the environment we're in. If it had been years prior, I think this deal goes through without a second glance. But given how much pressure there is on tech companies, given how our regulators are behaving and what they're looking for, I think it's fair to say that there's still a threat that this deal does not go through. and I-Robot is being valued as if this deal will not go through. I think it's still something like 30% off the acquisition price. So one of the things I want to talk about is, you know, we've been talking about deals that have generally been announced over the last year with this conversation.

But given the environment and what we've been seeing in terms of regulatory response, what should people be expecting going forward for new deal activity? Do you think this is the kind of thing that might squash some of the ambitions that companies have? I think it might, Dylan, but only for really a specific segment of the market. I think Emily nailed it when she talks about the environment for big tech. Because I think this is an anti-regulatory environment or anti-acquisition merger environment for big tech almost exclusively. For example, a company called Quest Diagnostics did a pretty big deal for them that closed this past week.

They bought a blood cancer testing company to add to their kind of dominant blood diagnostics business. If you know Quest Diagnostics, they operate almost a duopoly. Yet they were able to make an acquisition. Regulators didn't bat an eye. So that tells me, like, it's not really about the environment itself more. It's more about big tech. If it's Amazon doing a deal, if it's Adobe doing a deal, if it's Alphabet or Microsoft doing a deal,

that's when the regulators are stepping in. It seems like the rest of the market, dealmaking is probably still fairly open. All right, I'm going to ask you both to look into your crystal ball. We have the Adobe deal, the Microsoft deal, and the Amazon deal. Emily, which of the three do you think has the highest likelihood of going through? I actually think I robot in Amazon does just because of the size and the anti-competitive nature of the proposed acquisition, but I still would not be surprised to see it not go through. Matt, what about you?

I think it's got to be Amazon and I-Robot, right? It's got to go through. If it doesn't go through, you're shaking your head. Well, shareholders of Adobe and Microsoft might be happy, or Activision might be happy if that winds up happening. We'll stick with Amazon for one more story here. In addition to the I-Robot deal, also the company getting some attention from the FTC related to its prime membership offering.

It's being sued by the FTC, which claims that it deceived millions of customers into becoming Prime members through a lengthy checkout process and dark patterns in its customer experience. Emily, you took a look at this one. What did you think looking through the results in what the FTC is claiming? Well, there's certainly merit to the argument, which is to say, of course, Amazon purposely obfuscates the process of canceling your prime membership. They don't want you to cancel, but these are practices that are widely used by any internet company.

If anybody is checked out or subscribed to something, they're aware of how easy it is to sign up and how hard it may be to cancel. But it's good the FTC is looking at these practices, but if they decide to make a change for Amazon, it could have wide-reaching consequences for companies across the board. Yeah, it seems like something here where a lot of businesses take this approach, Matt. And if this is something that we wind up seeing and get regulatory scrutiny, it's going to affect a lot of software.

Have you signed up for cable ever or even YouTube Premium or the Wall Street Journal? I mean, all these, as to Emily's point, all these make it super easy to get in and take free trials, really hard to cancel. All right, Emily Flippin, Matt Argersinger. We will see you a little bit later in the show. But up next, we've got a look at regional banks and real estate. Stay tuned. This is Motleyful Money.

Welcome back to Motleyful Money. I'm Dylan Lewis. We've heard plenty about issues at regional banks. But how might those concerns affect the real estate market? And can empty downtown office space really be turned into apartments? Motley Fool Money's Deidre Willard spoke with Attaff Carter, the founder of Commonplace, a property tech company to answer those questions and talk through the things he's excited about during a challenging period for real

estate. I know from your background, you've got a history with some of the banks that have been most in the news lately. So tell us a little bit about that. And how do you should kind of is this unique view into what's happening with commercial real estate and banking right now? Absolutely. So I think I'm maybe the only person in America that has a connection to all three of the collapsed banks in this particular banking crisis. So I'm a residential banking. a loan customer as well as a personal banking customer at First Republic, which is now JPMorgan Chase. I was a business banking customer at Signature Bank. And then I was part of a tech founder's accelerator at Silicon Valley Bank. So I've wound my way through all three of those collapsed

companies. But I would say that the particular perspective that I have on this also comes from being a advisory board member at Provident Bank, which is a major regional bank in the tri-state area with huge exposure to business lending as well as real estate lending. So thinking about real estate lending, it's been in the news a lot lately. How concerned are you right now about what we're seeing and about the possibility of loans, especially with those smaller banks? I think it's actually a huge area of concern because with these three major banks that have already collapsed, they on their own have a significant exposure to real estate. Just for example, so Silicon Valley Bank, Bank, 15% of their loan portfolio was in commercial real estate. First Republic was the largest

lender of multifamily in San Francisco area. Signature Bank was known as a huge low-income housing tax credit buyer. So the exposure of those three banks, their commercial real estate is notable, particularly in multiple markets. But I think more broadly, what the concern that I would have would be that community banks and regional banks may not have the name recognition of a Wall Street bank, for example, but actually together hold about one-third of all of the commercial real estate debt in the country. So when there are, for example, runs on banks or perception or worries about stability amongst the large array of the 4,500 American banks that qualify as regional and community banks,

that is hugely concerning for often the small to mid-scale developers and property owners that form the vast array of ownership types for commercial real estate in the country. There might be a crisis facing commercial real estate. Part of that is the fact that people aren't going to the office that much anymore. As our relationship with office kind of changes and evolves, we've got these buildings. There's a lot of discussion about conversions and what can and can't be converted and what other uses. You're kind of, what are you seeing right now from a developer's perspective about what kind of can and can't happen when we think about central business districts and office real estate?

Sure. Yeah, there's an excellent research report that a colleague of mine at the New York City Economic Development Corporation was a part of Melissa Birch, so she's the chief operating officer. She was part of a group that was convened to assess for the city of New York, which will probably be a template for many other cities across the country. What can actually be done with these post-pandemic era, class B, class C office buildings, which still might be floating at a maybe 10% occupancy, 20% occupancy, nowhere near break-even. So there is a motivation from the emptiness perspective of not having vitality in the city,

not being able to support secondary businesses. There is a very timely other issue coming up, which is the fact that there's about a trillion worth of commercial real estate debt that's coming due by the end of 2025. and a lot of that's distressed is going to be in the office sector, in the retail sector. And where that crosses with our other topic in terms of commercial and regional banks is that commercial and regional banks actually have an outsized portion of the office and retail CRE debt relative to Wall Street banks. So their exposure is really significant on that perspective as well.

So all of that said, I think that the way to approach the repositioning or the conversion of office buildings is understanding what that first filter is, which is what can actually get converted from a physical sense. So typically office buildings that were built after the 1970s have, if you kind of think like Wolf of Wall Street style, it's very like low ceiling heights, very large floor plates and windows ringing the facade of the building, which is fine for like an open format office plan. But what? When you're trying to divide that into actual residences that meet the light and air requirements, for example, for the building code of the city of New York, then it's impossible to lay out

a floor plan that actually does anything more than use 40% of the floor plan for residential, when typically as a developer, you're looking to use 85% of your floor plan for monetizable square footage. So given all those constraints, that study that I mentioned determined there's about 30% of the buildings in the city of New York can actually be converted. And I think from that perspective, the biggest challenge is convincing lenders that the risk of completely changing an asset class type from office to residential is worth it for a relatively conservative industry that is going to become increasingly conservative with the collapse

of those three major lenders. So I think that if I were in a position such as the mayorship of the city, of New York or Portland or another city that probably is feeling the weight of emptiness from post-COVID, I would look to say, what is the thing that we need to get over? And in this case, I think there is no amount of economic development incentives that can make a performa makes sense when the cost is that much for a conversion. But what I might actually say is the idea of credit enhancements. So a bank is solving around risk, and there's a large perceived risk in asset class change. But a city, for example, the city of New York, which has a

massive balance sheet from all of the residential and the commercial residents of the city, to be able to say, why don't we leverage our balance sheet as a credit enhancement to banks that are willing to lend around a conversion? That feels like, to me, might be the secret sauce of being able to actually drive this change quickly and in a manner that I think is necessary so you don't end up with ghost towns in midtown and downtown. You've hosted this podcast called American Building. I listened to a few episodes. You've talked to all sorts of people in real estate and outside real estate a little bit.

But talk to designers, developers. What does make you optimistic about the built world? So we know it's not going to be 3D printing at scale. What other, what things have you heard about from other, from architects or designers or anything that makes you feel kind of optimistic about where we are headed? I would say, in terms of a level set in my career, at least, over the past 15 to 18 years, I would say that there has never been an alignment of political will, economic will, and social will around the production of housing like there is now. So I think with that table setting, the things that I

would say make me most excited would be the growing array of investors of all types that are moving into the impact capital space. So that would be types of housing that is not regulated affordable housing, which tends to be incredibly costly per door. But unregulated affordable housing often called our industry little A affordable or workforce housing or workforce housing or naturally occurring, affordable housing. All of the new flow of capital from, say, debt funds like acre management, being able to deploy capital in this space, I think is going to allow for a lot more construction to happen a lot more quickly than it has in the past, and I'm really excited about that. I would say number two would be the beginning of change in leadership in economic development

corporations and economic development agencies across the country. So I have a chance to talk to leaders in those types of organizations in the states of New Jersey and Connecticut and New York and Florida, and oftentimes with leadership that is younger and really excited and really wants to make change. I think the ability to provide for procedural improvements in things like the economic development incentives I mentioned earlier will help their impact become a lot greater and a lot more durable. I would say from a technology perspective, it's, I think, a lot to do with the incremental

improvements in the processes. So one company that I'll mention that I'm a huge fan of is Bronto Housing. So what they're working to do and they're rolling out across the Tri-Sit area and across the country is standardizing and creating transparency in the affordable housing lease-up process, because there is an insane statistic that in New York, there are a very important. are affordable housing units that have been designated as affordable, which we call Big A affordable, that's regulated affordable, that sit empty for a year or more because of the inability of the right paperwork to get to the right agency to get the right thing to happen. So I would say that

those are probably the three areas that I'm super excited about. So that would be new finance, new capital flowing to this area, new leadership from a public sector perspective and incremental improvements that really, I think together will change the game for our industry. Coming up after the break, Emily Flippin and Matt Argersinger return with a couple stocks on their radar. Stay right here. You're listening to Motleyful Money. Our mom, she's so house proud Nothing ever slows her down

And a mess is not allowed Our house In the middle of our street Our house Father gets a playful work Mother has to earn his shirt Then she sends the kids to school Sees them off with a small kiss

She's the one they're going to miss in lots of way 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 ourselves stocks based solely on what you hear. I'm Dylan Lewis, joined again by Emily Flippen and Matt Argersinger. We're going to get to stocks on our radar in a minute, but first, this week, the USDA gave approval to lab-grown chicken in the United States. The FDA had previously given sign-off, and now with USDA approval, companies good meat and upside foods can sell lab-grown chicken in the United States. I want to start very high level with this one. Matt, are you buying lab-grown chicken if you see it on the shelves at a supermarket?

I think I might. I just would love to know if it actually tastes like chicken. I assume it does. And the second question I have is, this is great. I mean, if this really does, you know, prevent us from having to slaughter millions of cows and all that's great stuff for the environment that I could do, how scalable actually is this? I mean, do we need, like, industrial warehouse-type labs to produce this? stuff or how effectively, cost-effectively, can to be done, I guess is my big question.

Emily, what about you? Before we start digging too far into the ramifications for the meat market and some of the meat alternatives, is this something that interests you just on taste? Oh, yeah. I'm a little triggered because of my history with beyond me, but I am interested, and I do think that I would be one of many consumers that would at least purchase it one time out of a curiosity, but that within itself in lies the problem. Dan, I'm going to give you a little context here. The meat is developed from animal cells by feeding them, nutrients. And is this something that you'd be interested in if you saw on supermarket shelves? Two quick things, Dylan. One, Maddie, I don't think they're slaughtering millions of

cows to get chicken. Just want to point that out there. Two, yeah, I would try it. I would definitely try it. But why are we calling this chicken? There's no birds involved. Can't we come up with a different name for it? Well, that sounds more like a philosophical question, Dan, because that's really where is a chicken and where does it start, right? I mean, we're talking about an animal cell driving this thing. It seems to me like it's natural. The clips that I saw were looking like real chicken nuggets. So I think this is chicken in the chicken sense.

When I saw this story, Emily, I couldn't help but think about beyond meat. We've seen so much over the last couple of years in development of meat alternatives and looking to build out a market. When you see news like this, you're someone who's followed this company closely. do you feel like this is a good thing or an existential threat? I think it's a good thing for the world. I think it's an existential threat for companies that are trying to sell what are effectively plant-based alternatives without getting into the actual meat game because on a molecular level, this is chicken.

So if you're trying to recreate something that tastes and looks like chicken, you're not going to do better than lab-grown meat without, obviously, slaughtering chickens. But here's the thing is that beyond meat, its audience is not just vegan and vegetarians who are unlikely to buy lab-grown meat. their audience is supposed to be anybody who is supposed to be making a better choice for the environment, for the animals, with more options. That's inherently a bad thing for Beyond Meat. But I do think this idea right now could potentially not be investable, even if it does reach scale. Not only will be expensive and hard to reach scale, but we've seen it play out with

Beyond Meat, where consumers themselves are a little bit less concerned by the ethics behind their purchases and more concerned about their price. And right now, you can have a lot of people who may buy it out of a curiosity initially, but ultimately, if that decision is more expensive than the real thing, then I think there's going to be a lot of consumers that will continue their current purchasing patterns. Is the test for this or for really anything that would come into this space, that it has to reach parity with cost for traditional meat products? Yeah, I think it needs to be a situation where when you walk up to a shelf and you buy yourself some chicken thighs, you don't know if this is a lab-grown chicken thigh or if this is a regular chicken thigh,

kind of the way that we use antibiotics or other growth hormones in plain. For the most part, you don't really know. You just buy it, you grab it, you move on. It needs to reach that level. But that within itself is implying is eventually going to be a commodity, which then you can argue, well, it's not an investable idea simply because how commoditized it could potentially become. Well, the press release indicates that it won't be on supermarket shelves anytime soon, but when they are available, I promise we will have a taste test on Motleyful Money.

Let's get over to stocks on our radar. Our man behind the glass, Dan Boyd, is going to hit you with a question. Emily, you're up first. What are you looking at this week? I'm looking at Spotify. I think everybody's familiar with this music streaming service. We got a report out this week that a Spotify is apparently looking on launching a high-fi audio service. That would be an upsell for its existing paid members, a much-needed development that could potentially help this company's gross margins. I'm a big fan of Spotify, and this could potentially be a move in the right direction for a company. The shares, I think, are up over like 100% or something this year, so it's been on fire.

but this ultimately is a business that needs to increase its cash flow to justify its valuation, and this could be a move in that direction. Dan, you're a fan of music. You're clearly a fan of podcasts. What's your question on Spotify? I had no idea Spotify was a Swedish company. It is, and there's actually an interesting Netflix documentary about its founding story if you want to learn more. That's almost floored me here. I looked up the stock and it's not in dollars, and I was like, what is happening?

It is traded on the New York Stock Exchange as well, but if you Google it, you will find did I believe in what Swedish cornos, I probably got the currency incorrect. That's like saying, you know, chicken comes from cows, Dan. Come on, man. Yeah, you got to be with it. Come on. All right. Matt, you had to get that jab in.

What is on your radar this week? Well, I'm breaking the rules a little bit this week, Dan. I'm going with an ETF, the Schwab U.S. dividend equity ETF. The ticker is SCHD. As I've mentioned on this show recently, dividend payers just have not participated in this, quote, new bull market that we have here in 2023. In fact, the Schwab ETF is down about $4. year to date, but it's a nicely diversified ETF, low cost, great track record. Over the last 10 years,

it's up 200% with far less volatility than the average stock in the market. If you go back to 2022 last year, when the NASDAQ 100 fell 33%, S&P 500 fell nearly 20%, this ETF fell only 3%. Some dividend stocks tend to hold up really nicely during bare markets while paying you steady income. That's what they're supposed to do. And today, you can grab the ETF with a dividend yield of 3.8%, which is more than twice the yield of the S&P 500. Dan, Dan, your question about the Schwab dividend ETF. I know you all are thinking that I'm going to excoriate Maddie here for bringing an ETF to our show about stocks, but I actually love investing in ETFs. They're my preferred vehicle generally over stocks because they give you a little bit more exposure and they, you know,

diversify you a little bit. And, you know, they're nice low-cost options. So I'm a big fan, Maddie of the ETF. That is the exact opposite response. I was expecting. I love it. I was expecting some fire. I got to be honest. I thought that was going to be coming. To Dan's point, ETFs, great way to immediately get access to a market, be instantly diversified. A lot of pros there, Matt. Love it. Love it. Dan, you might have tipped this already with your reaction to Matt's suggestion, but which company is going on your watch list this week? To nobody's surprise. I'm taking the ETF this time, Dylan. Great job, Maddie. All right. Thanks, Dan.

Dan, appreciate it. Emily Flippin, Matt Argusinger. Appreciate you guys. Thank you so much for being here. Thanks, Dylan. Thanks. That's going to do it for this week's Motley Full Money radio show. The show is mixed by Dan Boyd. I'm Dylan Lewis. Thank you for listening.

We'll see you next time.