Motley Fool Money - Recipes for Sales Growth, Mac and Cheese

Episode Date: October 10, 2024

More is not always better. (00:21) Jason Moser and Ricky Mulvey discuss: - Why the Department of Justice may breakup Alphabet. - If the search giant is a cheap stock. - Quarterly results from Domino��s and its new mac and cheese offering. Then (15:25) Motley Fool contributor Lou Whiteman joins Ricky Mulvey to discuss RocketLab, the space industry, and the difficulty of valuing speculative companies. Visit our sponsor: Get $1,000 off Vanta at www.vanta.com/fool Jason’s mac and cheese recipe: https://docs.google.com/document/d/14iq3L1m8W1iBmXSkAIyIylDrtbnvoEcg3N5KfRwR0jA/edit?usp=sharing Vote for Motley Fool Money in the 2024 Signal Awards for best money and finance podcast: https://vote.signalaward.com/PublicVoting#/2024/shows/general/money-finance Companies discussed: GOOG, GOOGL, DPZ, YUM, RKLB, ASTS, LUNR Host: Ricky Mulvey Guests: Jason Moser, Lou Whiteman Producer: Dylan Lewis Engineers: Rick Engdahl, Desireé Jones Learn more about your ad choices. Visit megaphone.fm/adchoices

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Breakups are tough. listening to Motley Full Money. I'm Ricky Mulvey, joined today by mac and cheese expert, Jason Moser. Jason, thanks for being here. Man, you're making me hungry already, Ricky. How's it going? It's going pretty well. I want to dive into this Google alphabet antitrust story because there was another sort of shot across the bow from the Department of Justice late on Tuesday. They indicated in a court filing. They might be trying to break up that tech giant due to antitrust concerns in the online search market. The most recent filing writing, quote,

the starting point for addressing Google's unlawful conduct is undoing its effects on search distribution, end quote. So for those just catching up, those who just landed into this story, Jason, what's the beef that regulators have with Google? Right. Well, in short, the Justice Department alleges that Google has, as you noted, used unlawful tactics, ultimately to stifle competition and lock advertisers and publishers into its impressive suite of tools. And when you think about the strength of Google, a lot of it is in the data, right? Google is able to share data and customize advertising according to usage across all of these different platforms that they own and operate, right? Chrome, Android, Play, YouTube, and more. And so what we've seen through the years is just become a massive competitive position for this business. Hence the DOJ's focus on it now.

You don't spit into the wind. you don't tug on Superman's cape. You also don't want to mess with the Department of Justice, but it seems like Alphabet shareholders. I know I butcher the lyric. Don't come at me. I know that Alphabet shareholders really aren't too worried about having the DOJ on the company's tail. They're not really sweating the breakup if you look at the stock chart. Why aren't they concerned? Well, I think mainly because this is all just speculation at this point, right? There are plenty of scenarios to noodle over, and that pun was intended, by the way, Ricky. not to mention there is almost certain litigation.

If the DOJ decides to pursue this, right, and then the courts end up ruling that Google that Alphabet needs to split up, I mean, there is going to be just never-ending litigation that comes from that. So there's just a tremendous amount of uncertainty in regard to this. And for now, it's just a big game of wait and see. So I'm a shareholder of Alphabet myself. I mean, this is not something that really is top of mine right now. but absolutely a story that we'll continue to follow.

And one of the most interesting angles is one that's not getting cover that much, I think, is that these regulators, really for the first time, are trying to have to deal with how these big tech companies use artificial intelligence. And in Google's case, they have sort of a nifty rule, which is that if you're a publisher and you want to show up in Google search results, then you are required to allow Google to crawl your website for its own artificial intelligence product and AI training data. So here's what it means,

is that if you want to show up on Google, you have to use that data, which then Google news to put into its own search results, therefore meaning that folks might not be visiting your page to get the answers that you researched for or the articles you wrote. And it seems like that might be an outcome because these regulators are saying, hey, you need to be able to opt out of that feature. You need to allow publishers to show up in the search results and be able to opt out of using their data for these artificial intelligence, large language models. Yeah, well, I mean, it does, you know, you think about things that we sign up for, uh, website, subscriptions, whatever it may be. And oftentimes there's a box that, you know,

says, well, you want to share your data or not. And oftentimes, you know, you say, well, I don't really feel like sharing my data. So I'm not going to. But, you know, Google's in a win, they're in a win-win situation right now because they're getting their customers, right, pay them the money for their service. And then they're also getting all of that data, which, as you noted, helps them train their AI, their large language models, ultimately making the business stronger and giving an even greater competitive position. So I certainly understand that perspective. And because we're in such early days as it pertains to artificial intelligence and how it exactly is going to play out over the course of our lives and in all of these companies that provide all of these

different services and whatnot. I mean, this could be something that sort of sets the tone for how this AI space is going to be regulated going forward, because it's very clear right now, there is really no regulatory framework yet. Right. I mean, we're all kind of like trying to figure that out. And you kind of learn as you go along in some cases, and it sounds like that might be the case here. Alphabet is a sort of multi-headed Medusa. And I know search is a lot of the business. It's also got cloud services. It has some artificial. intelligence bets. It's even got a self-driving car program. But when you just focus on the business of Alphabet, how important is just showing ads to people on the internet?

Well, it's very important. It's still ultimately the core of this business. And from its most recent 10K, they noted that they generated more than 75% of total revenue from online advertising in 2023. Now, it's also important to know that number has come down over time as the business has evolved and built more things and look at subscription services and cloud services and whatever else that they're doing. So it is the core of the business still. They're becoming a little bit less reliant on it, but 75% is still a big number. Now, I'll also say there are signs that Google is seeding some share to competitors in the digital advertising space. You think of companies like TikTok and this little company that may have heard of called Amazon, among others. I mean, these are

companies that are actually starting to take a little bit of share in that space. And according to e-marketer, actually, Google's share of the U.S. search ad market is poised to fall below 50% by 2025. That'd be the first time that's happened in over a decade. So, very, very, very interesting to see how this is working out for Google right now. And some of that might be chat GPT as we rethink how we ask questions on the internet when you can develop a very special response that's just for me based on the context I've given you.

The nature of search is changing, absolutely. Markets having a good year. And right now, Google is also the cheapest Mag 7 stock, and I'm doing that just on a forward earnings basis. If we look at the free cash flow stuff, it's in the middle with companies, I think, like Apple and meta. So it 22 times forward earnings, that's about where the S&P 500 is.

And while it's seeding some market share in search, this is a company that kind of owns the internet, JMO. Is Google a cheap stock? I mean, cheap is such a subjective word. So I would say relatively, maybe so. I mean, if you look at the last 10 years, it definitely looks, I mean, that price to earnings ratio falls on the cheaper side of how it's, how it's been valued over the last decade. You know, I think there are still, there are a few questions out there, of course, in regard to the DOJ as well as AI in how search is evolving and what in what Google's role will be. in that, which has led to some uncertainty, and that seems to be reflected in the stock price

and in the valuation today. But I mean, I would also say that often can create opportunities for investors when we're talking about businesses as fundamentally strong as Alphabet is. Let's move on to Domino's, they reported this morning, the world's largest pizza chain by stores and sales. Here's some highlights, and then you can pick from the menu to see what stands out to you. We had same store sales. They rose 3%. That's worse than analyst estimates, but much better than competitors like young brands where they're seeing same restaurant sales decline. Domino's announcing that they're expecting to add 800 to 850, 800 to 850 news stores globally this year. That's down just a little bit. And then we also had 11 mentions of just the word value in CEO Russell Wiener's

remarks. What there stands out to you? Well, clearly value is front and center in this space. and it's not just dominoes. I mean, it's everyone. And QSR's, quick service restaurants everywhere are coming up with new menus to get the message across. And we noted last week in the McCormick call that they had pointed out that restaurant traffic was slowing down, particularly in the QSR space. Cooking at home was gaining steam as consumers continue to focus on the bottom line. So the numbers, I thought the numbers were fine. I thought they, I mean, didn't like the world on fire, but they didn't, you know, they weren't, they weren't too bad considering the state of things. I think, it was noteworthy. The global retail sales growth was guided down slightly. I mean, like a percentage

point from what they were targeting a quarter ago. But on the flip side, they do continue to target this 8% growth in operating income. So a business with this scale, very efficient, and they're able to bring it down to the bottom line. I think for investors, you look at a business like Domino's, and it's probably easy to forget. This is a dividend-paying stock, right? And it's So this is a dividend payer, and it's also one of Maddie Arger Singer's dividend nights. And he just tweeted this out, I think earlier today, actually. So I encourage you to go check it out. You can click on the link.

It'll take you to a Google Doc. He has with all of these dividend nights that he calls them. And his criteria is fairly simple. He's looking over the last 10 years that the company has paid a dividend each year, has grown its dividend by greater than or equal to 10% annually, and it's outperformed the S&P 500. Domino's is one of those dividend nights for Maddie Arger Singer. And so while pizza may seem very simple, it is worth noting, I think. Domino's has been a good

long-term holding, not only from the capital appreciation side, but also clearly from the dividend side as well. And the dividend nights are unique in that it measures that market outperformance, whereas a lot of the other dividend measures of companies just looks at sort of how consistently they pay those out. I'll tell you, one of my favorite lines that I've heard a CEO say is, we make our own tailwinds, and that was in the Domino's call. You know, you think of the value offerings, more inflation instead of inflation, which they're advertising. But it's funny, but they're showing relative strength. They're opening, basically from 2015 to 2023, Domino's opened the number of

pizza stores that other quick service restaurant pizza chains closed. They're gaining share. what do you what do you attribute to domino's strength here in this market well i you know i think you said you said i think what a key part of their business is is in in their campaigns their ability to offer these campaigns more flation campaign for example i think that was a brilliant one uh given that we're in this time where the conversation is is so centered around shrinkflation right and and this was just a this was just a campaign where you know customers mix and match any two or more medium two topping pizzas, they can upgrade one of those pizzas to a large, right? More inflation. So that's great to see, too. I think there are a number of things that Domino's

has just done very well through the years, right? Taking advantage of that scale is one thing, but they, in the process, they've expanded their menu. They invested heavily in tech early and built a really great app, right? I mean, I think you put Papa Johns in the same category there. As we started doing more and more on our phones. I mean, these were businesses that were just ahead of that curve. They built an app early on. It's something that they continue to benefit from. They attach their loyalty rewards program to that. It's free food for frequent guests. They're finding every which way they can to reach the customer, whether it's delivery or pickup or even partnerships. Remember, they recently inked that deal with Uber. And I mean, it's not a major

contributor to the business right now, but it's one more channel. And they actually have quantified the sales mix there. The sales mix from that Uber partnership was 2.7% this quarter that they just reported. That's versus 1.9% from a quarter ago. So seeing progress there, yeah, it's just, it's a business that I think is just, they've been very forward thinking and they've really benefited from a lot of those investments that they made early on. There's one innovation that happened with Domino's recently that not one single analyst asked

about. And that is that they launched their first new pasta. since 2009, this is a five cheese mac and cheese. And while CEO Russell Weiner is excited about this, this rollout, this new innovation, I have to ask you, Jason, how many cheeses does a mac and cheese need? So it may not come as a surprise to you.

I have very strong feelings about this, okay? And more doesn't always mean better. And I think in this case, that applies, right? Five is too many. unless you're really smart about the cheeses that you're selecting, because oftentimes they just throw a lot of cheese in there and say, well, it's just more cheese and it's better, but you want those cheeses to be complementary.

So I have very strong feelings about this one. I've got a go-to recipe that we love in our household here, and it is two cheeses, and there are cheeses that work very well together. So I think rather than more, you just got to be very smart about the cheeses that you're choosing. Hey, that's just my take. According to what I'm seeing on Reddit, so take this with a grain of salt.

the five cheeses in the dominoes mac and cheese. We're looking at mozzarella, Asiago, cheddar, American cheese, and Alfredo sauce. Yeah. This is creating something that appears to be a little bit of just a burnt cheese sauce abomination in a tin bowl. Lazzarella doesn't belong in mac and cheese. You know, don't at me. Listen, mozzarella belongs on pizza.

I'm not putting mozzarella in mac and cheese. It's just, it's not working. Surprised you went for that versus the Alfredo sauce. Anyway, I've got strong opinions there, too, if you want to hear them. I do. What are your basic tips for a mac and cheese recipe? Let's go with first the alfredo. I mean, like the traditional alfredo, right?

You're just going with loads of parmesan and use the pasta water. It doesn't require heavy cream and all that stuff to make a delicious alfredo. And I'm not really sure why it's playing a role in this mac and cheese either. But again, like I said, I mean, if they get this mac and cheese recipe, I'm using cheddar cheese. I like sharp, but you can use medium. And that couples with Fontina cheese, not mozzarella. You got to go Fontina. And furthermore, you know, I like to make pizza at home, and obviously I'm throwing loads of

mozzarella on there. But go ahead and try topping it off with a little fontina on top of the mozzarella. It adds a little creamy, smoky flavor that is delightful. We got stock picks and cooking tips. Jason Moser, thanks for being here. Appreciate your time and your insight. Thank you. As you can tell, Jason's pretty passionate about food. We've got a link to his mac and cheese recipe in today's show notes. All right, up next, I'm checking in on a few space company stocks with Motley Full contributor Lou Whiteman. We also talk about how investors can approach highly speculative companies. Some of the best lessons don't come from a classroom. They come

from experience. On the power of advice, a new podcast series from Capital Group, you'll hear from CEOs, investors, and founders about how they built careers, took risks, and reinvented themselves. If you're starting your own journey, this is the kind of advice you won't want to miss. Available wherever you get your podcast. Published by Capital. Capital Client Group, Inc. If you're a publicly traded speculative space company, then you're probably having a good year. Rocket launcher, Rocket Lab is up about 77% year-to-date. Intuitive machines, a space exploration company that already has a lunar rover cooking.

That's up 200%. An AST Space Mobile, a satellite designer looking to fill in coverage gaps for telecon companies is up 400%. Lou, basically everyone besides Virgin Galactic is having a great 20%. 24. And I guess let's start, let's set the table with this. Are these companies just making impressive strides? Is this a low interest rate speculation party like we saw in 2019? Maybe it's a mix of both. What do you think? Yeah, so I'm going to push back at the premise just a tiny bit. The idea that everyone's having a good year because you mentioned Virgin Galactic, Momentus, which is going to be a space tow truck concept. They're down 75% and basically trading in a cash

or couch cushion valuation. Satellite maker Taryn Orbital was just sold to Lockheed Martin at about 95% below its high from 2022. So there are winners and losers. That said, I think your premise is correct. A few years ago when rates were low and money was basically free, it allowed for a lot of experimentation when it came to space. A lot of concepts that were intriguing, but perhaps tough to justify economically got funded. And now I think what we're seeing is, is a bit of a shakeout where the winners are starting to, pardon-upon, take off, and the losers are falling off where these science experiments are playing out. The company I own personally is Rocket Lab.

And I'm going to paraphrase this. I own it as a, quote, idiot insurance policy. Because I think, like, space tech is real. I think it's going to be a significant part of the economy throughout my lifetime. But I also, I don't know how to value this thing. I don't know if it's going to be the real winner as all of these launch companies continue to fight against each other, especially as it competes against. SpaceX, and while you can see commentary that it's going to generate more cash flow if the

neutron rocket is more reusable than what they're doing now with just reusable engines, I can't tell you how that plays out into the valuation. So how do you, I know you follow this space a little bit more closely, how do you think about valuation for these companies that don't really have good historical comparisons? So full disclosure, Rocket Live is the one I own too, so I definitely happy to talk about it. But you're correct, though. This is a lottery ticket, not fundamental investing.

And the short answer is, I don't think you can be a value investor and really get your hands around it today. And certainly, that's not how they're valued right now. They're valued on potential. Rocket Lab is benefiting from actually doing launches. Most of these startups are just, it's still PowerPoint more than anything. So they are getting a valuation boost from actually just proof of concept. But a lot of it is what they can become.

And the real long-term potential is for them to become sort of this one-stop shop for non-space companies looking to get into space. A few years ago, Morgan Stanley estimated the global space industry could generate a trillion dollars in revenue by 2040. I'm kind of dubious about that number, but if we're going to get anywhere close to that, it requires a lot of companies that you don't think about with space today. You don't associate with space to decide they want to have satellites or they need to be in space. those companies are not going to hire a team of rocket scientists to do it all in house. What Rocket Lab is trying to build is they want to go to you, the non-space customer who wants to get into space and say, we can design your satellite, we can build it, we will launch it, and then we'll monitor and maintain it. You can outsource your entire space presence to them.

And I think, you know, that's sort of the killer app, so to speak, if the space market develops into what people hope it is. This company can just manage it all for you. That's what their value to want is based on this idea that if this reality comes true, Rocket Lab's going to be at the center of it. It's also a story I really like with the founder, Peter Beck. And while he's from New Zealand, it's almost the most American dream story you can find where he was attaching engines to bikes, like jetpack bikes.

He dropped out of college. He just wanted to build rockets. And now here he is getting a contract from NASA to go retrieve rock samples from Mars, from the Martian surface and bring them to Earth. It's a story where he's built this business pretty much on sheer force of will, starting with no money. We can get to the business side, but are you hoping we find signs of past life on Mars? So at the risk of being labeled that guy, I'm 100% convinced there was,

and perhaps is life on Mars, and they will eventually find it and back that up. And I'm not talking about Little Green Men here. I don't really believe in that. But these single-cell organisms, whatever it is, yeah, I think that probably that was, if not, is. And I think one of these times we're going to figure that out. Maybe not Little Green Men, but we'll have a different conversation about Tic Tacs and Little Gray Men off Air, Lou. Why do you think it wasn't just SpaceX getting this contract, though? Why do you think we're seeing NASA and government agencies really spreading the pot around?

So, yeah, well, for one thing, SpaceX has a lot on their plate right now. They've gotten plenty of rewards, and they did get awards related to this. But look, the government has a long history of not placing all of their bets with one company. And that's certainly what's going on here. The interesting thing for me here, from the Rocket Lab point of view, is, you know, Rocket Lab, this is sort of following the SpaceX model, and the SpaceX model has worked out very well for them. SpaceX figured out early on if they could get NASA and other government agencies to fund a lot of what they're doing R&D-wise. That broadens their pot and allows them to do a lot more.

SpaceX has done a great job of building their business and building all of Alain Musk's big dreams based on this foundation, the bedrock of government contracts. And, you know, it's important to note, Ricky, like for all these companies getting involved, they're getting involved in government contracting because, you know, for all this hype, for all this talk of a trillion-dollar market, The launch market in particular has remained pretty static since the beginning of the Cold War, like say the last 50 years or so. Perhaps in time, commercial demand will surge. And yeah, people sure do hope that materializes. But for now, if you want to be a viable rocket company, the government is going to be a major source of revenue. They're a big chunk of that flat market.

So you need to build good relations with these customers. you need to get on their list of reliable customers. And that's how you get that steady stream that funds all of these dreams that Peter Beck, Elon Musk, Jeff Bezos, all these people have. What are the commercial applications you're watching if the launch business is staying pretty static then? So it really is. In a way, it's a race to be the most efficient at that capacity.

You talked about Peter Beck, one of his genius is, to some extent, it's easier to make rockets, bigger. You know, all you have to do is just add more power, more thrust, and you can do bigger and bigger. Making it smaller is devilishly hard. And what Rocket Lab, kind of how they got their start was, to make a smaller version, it can't take the heaviest things up in the space, but it's much more efficient and therefore cost efficient. The reusable rockets, better sizing the rockets to the payload, getting costs down, and then to some extent, companies like SpaceX or Starlink, creating demand by kind of building subsidiaries that need launch capacities.

That's the way they've made money now. There is a big enough market for at least some of these players to coexist, SpaceX, Rocket Labs, United Launch. I don't know if there's a big enough market for everybody who would like to do this. So there is going to be, we talked about winners and losers at top. There are going to be more winners and losers up ahead, I think, unless we very quickly see demand just go through the roof. And I'm skeptical going to short term if that's happened. And in a long term, who knows? Besides the Mars mission from Rocket Lab, what storylines are you watching for that company in the years ahead?

You mentioned the neutron rocket. I think that is so important for this to come off because it does open up, kind of bigger capacity missions at an cost of an affordable price. So that's very big for them rounding out the business. The other thing is, as I says, the one-stop shop approach, if this company is really going to make it, It's, they could be the rare SPAC success story. They started out as one of these SPACs. We've had a lot of high-profile failures. Virgin Galactic was also a SPAC.

Most of the companies I mentioned started as SPACs. But what that SPAC did for Rocket Lab is it created a huge pile of cash that they could put to work as they need it. They have acquired satellite design. They have acquired some of this kind of satellite monitoring and maintenance capability. Long term, their ability to both expand their basic launch presence, which is the core of the business, but also build out those related capacities so they can be for the customer, kind of just the only call you have to make. That's going to be the key to this really being a, sorry, a rocket ship, I have to say it.

I did mention some companies, not just failures, ones that are doing pretty well. AST Space Mobile, the one that has some contracts with large telecom providers to essentially give you data where you don't get data right now on your cell phone. Intuitive of machines I've been looking more into just because I think moon stuff is really cool. And I didn't even realize we got another lunar rover on the moon. And I'm glad that that's happening after several decades of delay. There's also Spire Global, we had the CEO on the show Peter Placer. They do very high-quality weather data and predictions.

They had a deal with Nvidia where they're essentially sharing their data for their planet Earth digital twin that Nvidia is trying to build. All of these are incredibly speculative. But any of these that you're looking into for a speculative stab during this low interest rate party? So I'll pick on a couple. I mean, you mentioned intuitive machines. I will say about them, they have some great minds there.

And they are really doing interesting stuff. The question is going to be, I think, just long-term revenue with them. And they are going to have to zig and zag and figure out exactly what the business is. but as a research lab, they are top-notch. And I sort of see there was a company called Dynamics, a few years ago that merged into one of the bigger contractors. At the very least, you can see that with them. AST is fascinating because we were talking about science projects.

And we were talking about just kind of, let's see if this works, and then we can make a business. They have, I think, exceeded most scientists' expectations in terms of proof of concept, but they have a huge, huge, huge spending plan if they are going to actually get the satellites into Earth and actually be this terrestrial cell service, not rival, but compliment whatever it is. That, I hate to dismiss them because they have come so much further than I would have thought, but do not underestimate the costs that they have up ahead. And again, whatever you buy here, just keep it a small part of a diversified portfolio because not saying they can't work out, but you certainly don't want to bet the retirement

when something is complicated and is uncertain as space. All right, before we go, I wanted to plug that Motley Full Money has been nominated for a Signal Award for Best Money and Finance Podcast. If you like the show, get some value from it. We appreciate it if you cast a vote for us. I'll drop a link to do so in today's show notes. All right, as always, people on the program may have interests in the stocks they talk about. The Motley Fool may have formal recommendations for or against.

So don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.