Motley Fool Money - Investing in Great Leadership

Episode Date: February 2, 2022

Sundar Pichai (Alphabet), Dan Schulman (PayPal), and Kevin Johnson (Starbucks) have been running their respective companies for years, giving investors a track record by which to judge them. While all three stocks have been long-term winners, each is in the spotlight for a different reason. Alphabet announced a 20-for-1 stock split. PayPal's guidance sent shares to their worst day ever. Starbucks plows ahead in the face of multiple headwinds. Ron Gross analyzes each business through the lens of their CEOs and the leadership teams they've built around them. Plus, Ricky Mulvey talks with Maria Gallagher about the history of the NASDAQ and why it matters to investors today. To read about seven more top CEOs click here: Just go to https://www.fool.com/investing/how-to-invest/top-ceos/ Stocks: GOOG, GOOGL, PYPL, NFLX, SBUX, MSFT, META, TSLA Host: Chris Hill Guests: Ron Gross, Maria Gallagher Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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app, which makes it so much easier to stay on track. And you can get unlimited expert help at no extra cost, even on nights and weekends during tax season. Visit turbotax.com to get matched with an expert today, only available with TurboTax full service experts. The word of the day is leadership, because we're going to examine three well-known companies through the lens of the people running them. Motley Fool Money starts now. I'm Chris Hale, joined by Motley Fool Senior Analyst Ron Gross. Thanks for being here.

Always a pleasure, Chris. How are you? Doing well. We've got three CEOs in the spotlight today. I want to start with Sundar Pichai, who has been quietly running Alphabet since the fall of 2015. I say quietly because it just, he just doesn't really get that much attention for someone who's running a business that has grown to be worth $1.8 trillion. And I feel like today sort of is emblematic of his leadership of the company because all

of the attention today is on the company announcing a 20 for one stock split. And I'm excited about that as anyone is, because I believe that my More is better. I know, I know. Stock splits don't matter. But come on. More is better. More is more is more fun. It totally overshadows what was an incredible fourth quarter report. For sure. And after today's increase, we're actually just a hair away from home, $2 trillion in market cap. As you say, stealthily approaching $2 trillion. It's just wild. But this is quite a report. Really crushed expectations. Analysts were pretty far off the mark here. A few metrics to share. Total sales up 32%. Very, very impressive, but it was the lowest the company

has recorded in terms of growth for a three-month period since late 2020. But 2021 was somewhat unprecedented, being that we were all homes searching and searching and searching away. Revenue from the flagship advertising segment of Alphabet of Google, the most important part currently of the company was up 33%. That's strong results, despite COVID disruptions to its biggest categories, its biggest search categories being travel and retail. So really, really impressive numbers despite that. Their network business, which runs ads on other websites, also impressive up 26%. Now, if we get into Google Cloud, it's interesting, because that only accounts for a small portion of Alphabet's revenue, about 7%. They increased revenue by about 45%. And,

and now we're over about $5 billion in revenue. Investments in higher costs in that business still have it generating a loss, almost about $1.5 billion for that segment, but there will come a time where that $1.5 billion loss shifts to a whatever, $500 million gain, billion dollar gain. That's quite a flip. You then go from $15 billion in operating income overall to a $17 billion or $18 billion operating income overall. I don't know what's that somewhere between a 10, 15% increase.

That's going to be interesting to watch when that actually makes that flip, because I think the investments will pay off. Right now, they only have about a 7% share of that market versus Amazon at 40, 41%, Microsoft at 20%. But I do see the day where that flips and the costs are lower and that goes to a profit. So really interesting. Couple other things to note, YouTube, an important part of Alphabet, up 25% of the cost. Actually, a little light versus analysts' expectations, but still pretty strong.

That's the segment that's actually most exposed to changes Apple has made to limit targeting on iPhones. So the executives at the company did say they saw a modest impact as a result of that. Their new Shorts, YouTube Shorts feature, it's really the competitor to TikTok. Now has 15 billion daily views. That's a number, it's hard for me to wrap my head around, to be honest. That's a lot of views, Chris. And they're adding a live shopping feature over on YouTube as well to keep it competitive.

The other Beck's segment we like to talk a lot about, they make various bets in autonomous vehicles and healthcare and lots of other interesting things. That's still losing money to the tune of about $1.5 billion for the recent quarter. And finally, I'll note, traffic acquisition costs, which are the funds Google pays out to publishers and device makers like Apple, those costs were up. about 28% in the quarter, but operating margins overall were up, and that led to an earnings per share increase of 38%, not too shabby. As we said, we're approaching a $2 trillion market cap. Warren Buffett is famous for any number of informative slash humorous quips, one of them being

he likes to invest in a business that is so sound that even an idiot could run it because someday an idiot might be running it. And I like that quote. But it does sort of dismiss the importance of leadership at a company. And that is a box that we like to check at the Motley Fool. Like, who are the people running this company? And I think if you're an alphabet shareholder, not only do you have the confidence with the increasing track record of Pichai as CEO, as Bill Mann and I touched on yesterday, Ruth Porat, the CFO, any investment they are making is getting her sign off. So, whether it is sort of the decision to split the stock or the continued investments in cloud, as opposed to, you know, we've, there have been times in the past few years

where part of the story for Alphabet is they're pulling back some of the investments that they're making because Pichai and Porat and the others just sort of look and say, we don't think that one's going to pay off. You haven't proven it to us yet. Whereas the cloud, I mean, you touched on the cloud investments. Like, yeah, that's one they have to feel confident about. Yeah, agreed. Both from the CFO and the CEO perspective, very strong leadership, very, very good capital allocation skills, notwithstanding the other bet segment, which they're kind of throwing money at,

at a number of different really interesting things, but they're not necessarily claiming that they're all going to generate profits, maybe ever, or something. Certainly not in the near term. So they're being honest about that. With respect to the traditional business, whether it's search or cloud, very strong capital allocators, they keep an eye on the purse, if you will, very tightly. $140 billion in cash at the end of the quarter. It gives them enough powder to kind of do what they want.

I'm sure we'll see some thoughts about tuck-in acquisitions and maybe in artificial intelligence or getting ready for the Metaverse, whether it's in gaming or, or wearables, smart home. The one thing overhanging that is the intense scrutiny they're getting from the Justice Department, all really globally, not just here in the U.S. And anything that they propose is going to really be examined quite a bit to make sure that it does not increase what many view as a monopoly that the company has, certainly, on the search side of their business. So that is one thing they'll need to contend with. The 20-for-one split, we kid around. If you have a pizza, it doesn't matter if you have

six slices of it or you turn it into eight slices, you still have a pizza. Nothing has changed. It doesn't change the economics of your investment. Perhaps it makes the stock available to be now in the Dow Jones Industrial Average, which is interesting because that does create demand for the stock as people, as investors, add it to various indexes, various ETFs. So perhaps a little boost there. It does make it more accessible to the average investor that doesn't have the ability to buy fractional shares. As fractional shares become more widely available, things like stock splits for that reason

become less and less important, but not all brokerage firms offer fractional shares quite yet. So that will make it a bit more accessible. Well, and options as well. I mean, probably a slight increase in options activity as the price comes down. Yeah. Let's move to Dan Shulman, who joined PayPal and 2014, when it was still a part of eBay, and he was brought in essentially to oversee the transition

to PayPal being a standalone public company. Their fourth quarter results weren't great. Their guidance was weak, and the stock is being punished today. It's down 25%. And I say punished, because I actually think investors are punishing Dan Shulman for not doing a better job of explaining how the transition away from being eBay's exclusive native payment system last year was going to impact them. And I'm a PayPal shareholder, and I'm a fan of Dan Shulman, and I'm not selling the stock, but I really think he didn't do as good a job as he could of in explaining how this was going to go.

That almost has to be true, I think, because of the severity of the sales. off, losing a quarter of their market cap as a result of something we all knew was taking place. This didn't come as a surprise. We knew eBay was transitioning to its own platform. So it had to be in the communication or perhaps in the severity and the guidance that investors are receiving. So perhaps management should have been holding investors' hands either a little bit more or quite a bit more because this is quite a sell-off. The loss of eBay expected to put $600 million of revenue pressure in the first half of this year, the CEO, Dan Shillman, said on the call, listen, that's not the only thing going on here as well, as we see across

the companies we look at. Management listed, high inflation, the end of stimulus checks, the impact of the ongoing supply chain issues on cross-border volumes. All of these things are hurting performance. So it's kind of a perfect storm with the lead edge of that storm being the loss of a major, major customer. A few other things we're seeing. E-commerce growth rates during the holiday season were lower than some expectations. Growth in digital payments during the pandemic are beginning to slow as people resume their regular routines. So these are all factors that investors need to take into account when they're looking at. at future cash flows. For the actual quarter, they had some fine numbers, despite eBay starting

to transition away. Revenue up 13%. Added 9.8 million net new active accounts. Processed $340 billion of payments. That's up 23% from a year earlier. Venmo processed $61 billion in payments. That's up 29%. Adjusted operating profits were down as a result of a lot of these, excuse me, that were mentioned earlier. So that took an operating margins took a hit. Adjusted profits fell to $1.11 per share versus $1.32 per share a year earlier. And some guidance. It was kind of lackluster, a 6% increase in revenue for the second quarter, 15 to 17% increase for the full year was the guidance. Investors clearly not happy about really any of this, taking 25% off the stock.

I do wonder if this is going to be a quickster moment for Dan Shulman, if you think back to Reed Hastings in 2011 and the Quickster debacle. And at the time, Netflix was a young enough public company that there were legitimate questions about Reed Hastings. They were like, what is he thinking with this move? He quickly reversed course. And the further we get away in time from that moment, you look at Reed Hastings' longer track record, And you go, well, that was a speed bump.

That's going to be a footnote when eventually he's no longer the CEO. With Shulman, you know, this is one of those situations where it's like a year from now, we may look back and, you know, think, okay, that was a bad moment for him. But it was a stumble. It was not the beginning of a steep fall. That could be. I mean, eBay does represent hundreds and hundreds of millions of dollars impact to this business. So that's got to be replaced somehow.

Do you want to pay 29 times full year guidance for a company that has a lot of headwinds right going for it right now? I think you probably do if you believe what you just said, that you look forward a year or two or three, and this is just a blip. It's hard for me to get around that right now, paying almost 30 times for a company that's in a little bit of trouble. Let's move to another business with some headwinds. You and I are fans of Kevin Johnson, the CEO at Starbucks.

dealing with so many headwinds at the moment, higher costs. This is a company that traditionally is known for being generous to its employees. They're dealing with more sick leave from employees. China is such an important market, and you look at all of the store closings there and the comps down 14 percent this quarter. So it's not surprising the first quarter results weren't great. But Kevin Johnson is so transparent as a leader. You know, the stuff. that in the immediacy of the earnings report yesterday, the stock was down 10%. It's basically flat right now because you've got Kevin Johnson sort of methodically saying, this is what's going on, this is what we're doing about it, these are the investments we're making.

He is so reassuring. I encourage anyone to go on YouTube or whatever and just watch him on a CNBC interview or wherever. He's plain spoken, he's honest, as you said, he's transparent. It makes you really happy to be a partner alongside him. Now, does that mean is an amazing capital allocator? No, but I think he actually is. Does it mean he's a great leader? Maybe not, but I think he actually is.

So you've got all of those things that make being a shareholder of Starbucks. Even during some tough times, you still feel pretty confident. I mean, Starbucks has not been knocking the cover off the ball. Stocks up about 1% over the last year. Rough January, down 16%, rough January for a lot of stocks. But it's not knocking the cover off the ball here, but you're still sticking with the strategy, the leadership. And you assume a lot of the things they're dealing with now, whether it's labor shortages,

higher labor costs, supply chain disruptions, are going to overtime go away. And the strong companies and the strong leaders will emerge victorious. I do put Starbucks in that camp. You mentioned China. China's somewhat of a wild card here. It's very important. It's the second biggest part of the company's business. As you say, comp sales down 14%.

That's partly COVID related. That's partly Winter Olympics related. So we might see that as a blip and look a year or two from now and see that firm up quite a bit and it better, quite frankly, or the company will continue to kind of falter. But I think guidance looks pretty good, earnings per share. They think 8 to 10% increase for the fiscal year. They're going to continue to raise prices. Very important aspect of a company like Starbucks is to have pricing power.

Costs are going up. They were already able to hike prices twice, and they're going to probably do it again. And they're going to get away with it. It appears because people love their Starbucks and they're willing to foot what already was, quite frankly, a pretty pretty pretty. pricey ticket. But, you know, you can get a strong company right here during a time where things are not going that great. You pay 28 times. That's not dirt cheap. But if you think earnings are going to progressively improve, especially as China improves, not a terrible entry point coming

off of a really weak January. And part of being a great leader is building a great team around you. We talked earlier about Pachai and Ruth Porad as the CFO. You look at Kevin Johnson, the leadership team he has around him, the product team in particular, one of the things he talked about this morning was sort of the rise of cold beverages, which as someone who only drinks hot coffee, it's something I don't really think about. Cold beverages make up more than 50% of the beverages sold in the United States. Kevin Johnson's not the one out they're testing all the products. He's got a team doing that. And it's, again, one more reason. I love him as the CEO of this company.

Yeah. The continued evolution of the menu has been very, very important, not to mention how we buy Starbucks, whether it's drive-through or digitally, the loyalty program, for example, very strong here. So a lot of these things, to not just kind of stick to your knitting, but continue evolve with the times, continue evolve with what you're concerned. are telling you they want and how they want it, that's what a great management team does. They react and they do it efficiently and cost effectively. I think that's what we see here with the Starbucks leadership team. Ron Gross, great talking to you.

Thanks for being here. Thanks, Chris. As we've talked about, it's been a rough start to the year for the NASDAQ, but for newer investors especially, it's worth asking the question, what is the NASDAQ? How does it work? And how does the history of the NASDAQ affect? investors today. For more, here's Ricky Mulvey. Thanks, Chris. Joining me now is Senior Analyst. Maria Gallagher. Maria, good to see you. Nice to see you too. All right. So I guess,

like, one of my questions, what do you like associate when you first hear NASDAQ? I feel like a lot of times you think really tech-heavy stocks, really growth stocks. You think Alphabet, Tesla, Meta, Facebook. I just always associated it with the earlier show on CNBC before they went to the New York Stock Exchange. But yeah, doing some research. It was is good to get a little bit of a history lesson. It's the second largest exchange by market cap right behind the New York Stock Exchange, but it has a higher trading volume. That means there's less water in the pumps, but the pumps are moving faster. One key characteristic as well is that all of the NASDAQ's trades take place electronically, does not have that

trading floor with people screaming into phones like you might normally associate with stock exchanges. There's also a company that owns the exchange called the NASDAQ. That's the one you see on CNBC. also operates exchanges in Philadelphia, Boston, 7 in Europe. And it makes most of its money by charging money to trade assets, also has some side projects in market data, investment intelligence, and listing fees. The way the NASDAQ works, it's what's called a dealer's market. So the terms of all trades in markets are established by these companies called market makers. So they pay for the right to buy and sell one particular stock on the NASDAQ. So they post a price at which they're willing to buy the stock and then a slightly higher price, which they're willing to sell it for.

the difference is called the spread and it allows them to make a profit. So the market makers put their orders onto the NASDAQ computers. Investors enter their orders into the computers, and then when it's in sync, the computers process the order. So this is in contrast to the way the market makers work at the New York Stock Exchange, like you talked about those yelling and screaming on the trading floor, while at the New York Stock Exchange, they have certain physical parts of the trading floor. So the NASDAQ is what's called a dealer exchange. The New York Stock Exchange is what's called an auction exchange. So the NASDAQ, these market makers that I just described, they are the dealers of the certain stocks. So, investors buy and sell stocks to those market makers. As opposed

to in the New York Stock Exchange, these specialists function as auctioneers. They set the prices so that buyers and sellers can make trades with one another. So the functions behind the scene of these trading platforms are a little bit different of these exchanges. It's a little bit different how they like separate the territory. And I think the early days of the NASDAQ is also fairly interesting. They were doing this data tech-driven stuff in the late 60s. So in 1968, the National Association of Securities Dealers said, hey, let's start listing the prices just for over-the-counter stocks, and they designed a system to handle 350,000 inquiries over a trading day for these stocks with less volume behind them. And average trading volumes today are in the billions for the

NASDAQ, so huge growth there. And the NASDAX's computerized system was the alternative to the old specialist system that you just talked about. So now in the 70s, the NASDAX introduced. There's no trading for it. And all of these trades are taking place more or not. autonomously over computers. This was great for brokers. They didn't have to place multiple phone calls just to get the bid-ask spread for securities. They could just look at a computer screen. And there was a little bit of resistance, but it was hyped at the onset. New York Times writing in April of 1971, quote, some people in Wall Street even suggest that the countermarket may one day replace the New York Stock Exchange as the primary securities market. And at first,

the NASDAQ was only allowed to quote, unlisted stocks. This changed after a small Texas brokerage filed a lawsuit and a New York House member threatened antitrust action. Of course, the New York Stock Exchange didn't love having this stock data more freely available. And also, the traders had to get used to it. Times writing, quote, one of the big problems for traders was getting them, quote, computerized. They had to become accustomed to pushing a button to get quotes, end quote. So there were some shenanigans, though, even though quotes were more visible. Regulators had to implement a rule that market makers had to buy or sell at least 100 shares of the price they quoted to the NASDAQ, Maria, because what would happen is they had these sort of phantom buy

sell orders that ended up being a problem later in the 21st century with high-frequency traders. So, while the NASDAQ started with over-the-counter stocks in 1972, then the SEC unanimously ruled that the NASDAQ could show stock quotations on any listed security. And then after that, you get up to the dot-com bubble, which Obviously, between 1995 to March 2000, the NASDAQ rose 400%. It fell by 78% by 2002. At its height, it reached a PE of 200. So many companies were listed on the NASDAQ that have been synonymous of the bubble.

So Pets.com is the first one that comes to mind. Went bust. You had bigger companies like Cisco down over 80% between 2000, 2002. By the end of the downturn, in total, stocks had lost $5 trillion in market cap since the peak. So during the dot-com bubble, it did bad. It has rebounded since, but it definitely wasn't the best time for the NASDAQ. Tech bubbles and NASDAQ sort of became synonymous after that. So I think there was a lack of trust for a lot of retail investors that still maybe exists today.

NASDAQ also worth comparing to the New York Stock Exchange, why go to one and not the other? For many companies, the issue is cost. The NASDAQ's listing fee is usually just 150,000 to 300,000. And I was looking through the NASDAX documents. I think this is funny that companies have to pay a $1,000 application fee. It's not just for running apartments, Maria, also for listing your company on a stock exchange. Hey, it's not just $150,000. We've got to charge you that extra thousand for the application. NASDAQ also has a minimum annual listing fee of just under $50,000,

while the New York Stock Exchange's minimum annual listing fee is $70,000. NASDAQ also has a little bit more liquidity, while the New York Stock Exchange has that higher market cap. Why would you leave the NASDAQ? Go to the New York Stock Exchange or vice versa. According to the New York Stock Exchange, more than 97 NASDAQ companies have left for the New York Stock Exchange since 2000. That group includes Spirit Airlines, BlackBerry, and Norwegian cruise lines. Why bounce? Well, New York Stock Exchange would say they have better media visibility, a little bit more prestige with the brand name. Hey, maybe you like the investor relations team a little bit better. And do you get to ring the bell at the NASDAQ, too?

the way you get to ring the bell at the New York Stock Exchange? I don't know. I think you just get to log on. Less exciting. I know. So I go to the NASDAQ. The primary reason there is cost. You've seen this a little bit when companies spin off famously craft left the New York Stock Exchange. They were spinning off into two different brand names and said, hey, let's go to the lower cost competitor. Stocks can also be delisted. Sometimes you're not leaving these exchanges by choice.

For NASDAQ, it's if your share price falls below $1 or you have fewer than 400 shareholders, you're already seeing some controversy. Some Chinese companies might be kicked off the NASDAQ. They're seeking dual listings on the Hong Kong Stock Exchange. New York Stock Exchange didn't exactly welcome the NASDAQ when it came out publishing those quoted prices. There's always been a battle of who's going to get the big companies on there. For example, one thing the NASDAQ did in 95 was named Microsoft's CFO Michael Brown to its board. And if you're Microsoft and you're thinking, hmm, maybe we should switch listing. the NASDAQ offering a board seat to the Microsoft CFO could be interpreted as a encouragement

to stay. Interesting. And so if you're thinking about the returns, if you're comparing the two of them, you have, the NASDAQ has outperformed the S&P 500 by a really wide margin between 2007 and 2021. So they've outperformed 11 years out of that time with the total returns of approximately two and a half times that of the S&P 500. But what's actually really interesting is you would associate because they have these high-growth tech stocks, you would associate that volatility with the NASDAQ saying there's probably way more volatility. But the volatility is actually pretty closely aligned. You think about it, the NASDAQ falls about 10% every year, 15% every two to three years, 20% every six years, 30% or every couple dozen years, and 40% every couple

decades. Compareding that to the S&P, it looks really similar, 10% every year, 15% every two years, 20% every four years, 30% every decade, and 40% every few decades. So the S&P is a little bit less volatile, but the performance of the NASDAQ has been so incredible in comparison that it'll be interesting to see in the market environment we're currently in how they perform moving forward. One other thing that's really interesting to note as well, the NASDAQ has a lot of sustainability initiatives, both as a company and then through their indexes. So as a company, they've published their first task force on climate-related financial

disclosures. They've been carbon neutral for three years in a row. They have a proposal out to the USCC right now to standardize board level diversity statistics through a new disclosure framework. They launched the NASDAQ Next Generation 100 ESG index, which was launched in 2021, in combination with sustainability using ESG data and methodology to ensure all constituents meet a specific ESG criteria. So it screens for problematic areas of business activity at the company level. So what you see is they're trying to be a leader in this space from both a company level and index level. And they're trying to recognize the interest that investors have and pivot into these areas and work on their corporate governance, which I think will be really

interesting because looking at the tech names and seeing how they treat, you know, their stakeholders. I think that the NASDA could really make a big impact if they shift more and more into sustainability as well. And that's going to be a huge decision factor for companies deciding the list for their IPO. Yeah, absolutely. All right. Thanks, Maria. much for having me. That's all for today, but coming up tomorrow, Dylan Lewis and Brian Feroldi will have a deep dive on a cloud company that's reminding some investors of a young Shopify. 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 yourself stocks based solely on what you hear.

I'm Chris Hill. Thanks for listening. We'll see you tomorrow.