Motley Fool Money - The Market and Fed Chair Powell

Episode Date: April 21, 2025

Fed independence brings stability, and markets love stability. (00:21) Asit Sharma and Dylan Lewis discuss: - The Trump Administration’s focus on Fed Chair Jerome Powell. - The role of an independent Federal Reserve Bank for the market and investors. - Netflix’s earnings and status as a “recession-proof” stock. (16:23) Anand Chokkavelu hosts Fool Contributors Dan Caplinger and Rick Munarriz for a Scoreboard episode on Shopify. To become a premium Motley Fool member and gain access to all Scoreboard episodes, go to www.fool.com/signup. Companies discussed: NFLX, SHOP, AMZN Host: Dylan Lewis Guests: Anand Chokkavelu, Dan Caplinger, Rick Munarriz Producer: Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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Powell, Motleyful money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motleyful analyst Asit Sharma. Asset, thanks for joining me. Dylan, happy Monday. Happy Monday for some. For some, it is a bit of a down Monday. Rough start for the market this week. We see S&P 500, NASDAQ investors processing some commentary on the macro picture from the Trump administration with them setting their sights on Fed Chair Powell. Seems like the administration would like to see someone else sitting in the Fed chair seat. Asset, what is the tension here? So, Dylan, the tension is that President Trump really wants lower interest rates. He's been an advocate for this, not just in this administration, but the past administration. President

Trump feels that low interest rates spur economic activity, and they're good for the stock market. Generally, investors like lower interest rates in many scenarios. So he's a very vocal advocate for this. But the time that we're in just now is one that Jerome Powell, the chairman of the Federal Reserve, and many Fed governors believe is one where we have to be very careful about lowering interest rates. As you know, we've had a high interest rate, high inflation environment in the U.S. And so one of the things you want to be careful of is backing off interest rates too soon. If you lower interest rates too soon in a highly inflationary environment, well, inflation can increase. And that's not good for the markets.

It's not good for the Fed's mandate, which is to keep inflation around 2%, so keep a steady scenario for economic growth and also make sure that the labor market is healthy. So here we have President Trump pushing what's actually like a heterodox type of policy for this environment. It doesn't make a lot of sense to many economic observers. And as with many things we see with President Trump, he's not afraid to use his very loud megaphone to make a point. And he's been putting a lot of pressure very publicly on Jerome Powell saying that he needs

to go. So here we are. The markets opened up pretty in the red today because of this tension. As President Trump recently made some comments on social media about Jerome Powell having to go. Yeah, I think the NASDAQ sound about 3% today. the news that they may be looking for ways to end his term before May 2026. S&P down around 2% as the market processes that. A reminder, Fed Chair Powell was nominated by Trump during his first term. You brought up that this has been kind of a longstanding thing. And I look at the

Fed, and I think even before we got into the situation with tariffs, there was a bit of a wait and see slow and steady approach to macro policy because there had been that stubborn bit of inflation that would not get down to that target of around 2% that the Fed likes to focus on. Then we saw tariffs come out, and the stance of the Fed was, we need to wait and see and digest this a bit more before we are willing to make any really big action down, which is what the administration wanted to see. So I imagine that this is not something that is going to change.

I don't think the Fed's outlook on any of this is going to change anytime soon, and that's kind of why we're here. Yes, I think the Fed is really under-true. Jerome Powell, an organization that takes its time to make decisions. They look at trailing data very closely. It's not an economic organization that likes to look at Ford indicators on the balance. And this, you know, some ways serves them very well for the purposes of the two mandates that I just mentioned. But also, it opens up the Fed to criticism in lots of different environments. You guys are moving too slow. We've heard this. You were too slow to increase

interest rates when inflation and the economic activity was boiling upwards, and you've been too slow to lower interest rates and spur that economic activity. And there's some economists who make an argument that maybe a little bit of a lower rate environment would be healthy. But the tariffs, as you mentioned, Dylan, is a big sticking point here. That creates its whole level of uncertainty and indicates, a tariff regime indicates. It's higher prices, not lower prices in the near term. So if you're sitting in Jerome Powell's chair, you're probably going to be thinking, too, I'm not going to drop these rates yet.

Let's wait and see. And this just increases the tension between an organization that is trying to do its job by its state objectives and sort of a political pressure to do the exact opposite. You mentioned the Fed being the recipient of a lot of criticism. I think it comes to the territory. We've kind of adopted an approach of almost rooting for a sports team when it comes to Fed policy. It has become a much larger event than it used to be in the lower rate environment post-GFC. But here we are now, a lot more eyes on the Fed.

And while it is a recipient of criticism, it is also the beneficiary of independence. That is what they are set out to do. It is meant to exist without influence from the private sector, without influence from Congress or the sitting president. And that is part of the system that we have here in place, Asset, where we're, we have this check and balance, this stabilizing elements of things. So much of what I think we are noticing here in the red today with the market is that there is a concern about what happens if something jeopardizes that independence. I agree, Dylan. What we're looking at here is a spooking, not just of domestic investors, but international investors as well. So we often

talk about themes that make sense, like, okay, the dollar is the world's reserve current So we don't want to jeopardize that. Those are easy enough to understand. But I think what many of us miss often is that the rest of the world sees the U.S. as an investable asset. So the rest of the world can buy U.S. stocks. We also see the rest of the world investing in government IOUs promissory notes. So those are the bonds that the U.S. Treasury Department sells to finance our debt and to provide us with liquid money to run our operations. as a sort of business, if you will. And so when the world elevates the U.S. and says there's sort of this really good risk-reward equation when you invest in U.S. Treasury bonds or if you buy

U.S. stocks, which is they're safe, they're liquid, and they're sort of isolated via this structural framework from the chaos that often consumes the rest of the world, that's a premium that we get. So when we jeopardize that, what we're sort of signaling to investors around the world is that we're not so stable. And there are many ways we can do that. We can not agree as two parties in Congress to extend the borrowing that we do. And every time we have to fund the government, this argument comes up. Or we could say we're going to remove the structural guardrails that make this place seem so stable. So sort of talking down the head of the Fed and demanding that he be replaced is sending a signal to the rest of the world that we're really not as concerned

about being perceived as stable. We have this more important objective, which is to put someone in place who will act more by what the executive branch wants versus what the perceived mandate is. And so what I'm dancing around here, telling him, without trying to get too political, is the rest of the world is saying, you know, if you just kicked Jerome Powell out of that seat, we're not so sure we want to buy your bonds or invest in your stock markets. And that's why the selling is going on today. People are removing capital flows from the U.S. markets. And that's why the amount of interest that the U.S. government may have to offer for different institutions to buy its bonds in the future may keep rising, as we've seen in recent weeks.

So the market is selling right now very much on the rumor of this. If this becomes a real story, it feels to me like very similar to the tariffs, where this becomes another rail of volatility that investors are going to have to be ready for and kind of brace themselves to weather. Yeah, totally. I would say, as I've been saying, I've incorporated tariffs as a feature of my investing landscape, and this would be another feature. If this becomes an increasingly politicized a seat in the U.S. government, the chairman of the Federal Reserve, then we have to understand that's going to make our future as investors prone to more volatility, and we're just going to have to plan around that, or maybe choose to invest elsewhere. There's nothing that says

you have to invest in the U.S. stock market. All right, and what is a pretty rough day for the U.S. stock market, there are some companies that are doing okay. Netflix getting close to new all-time highs after releasing earnings last week and market, continuing to digest them, continuing to see a lot of the upside there. Osset, revenue is up about 12 percent for the business, net income up about 24% when they reported last week. We also had the first quarter where the company got rid of their subscriber accounts as part of their reporting, kind of giving us a feel for this new look company. What jumped out to in the results? Well, I liked that the operating margin keeps climbing for this company. If you look at the nice little table, Netflix presents every quarter with its shareholder

letter, you can see that operating margin is just sequentially sort of moving up. There's a little bit of a bounce back last quarter, but here, up to almost 32%. So, in other words, for every revenue dollar that Netflix is bringing in, it's taking home 32 cents on that dollar before a few adjustments for debt and taxes, et cetera. But that's a very high operating income margin, and it shows that Netflix is hitting its sweet spot. Dylan, as a content company, one that deals in intangible assets. It's always a good business to be in.

So you have a business, which is now at scale. It's not a young upstart anymore, but it is still growing pretty convincingly. So I really like that. And I like the free cash flow that the company is generating. Again, $2.8 billion of net cash provided by operating activities, so about $2.7 billion in free cash flow. That's not bad off of a revenue number of about $10.5 billion. So the company's extremely efficient on generating cash as well as it is on generating operating income. So I'm liking those numbers. And there's a little theme to what I'm saying here,

Dylan. I haven't talked about any of the other stuff that we've been talking about over the past several years for Netflix. I'm focusing on the numbers, which is what management sort of wants investors to do. There's something else they don't want us to focus on. And you were going to talk about that. You're going to ask me about that. Yeah. I mean, we for a long time have focused on subscriber accounts in addition to focusing on dollars. This is the first quarter where we are not getting those subscriber accounts. And I do understand that we are moving into an era of this being both a subscriber-based business and an advertising-based business. But you can't convince me that that is a shareholder-friendly move. For my money, I'm not a shareholder, but for my money, I would

love to see as much information as possible. And it is still a driving force behind the dollars that that company reports. I feel that way, Asset, in particular, because we're not getting the advertising breakout yet. They haven't told us what the advertising numbers are yet. Yeah, it's becoming opaque. Well, I'm going to sort of agree with you, Dylan, but I'll try to give you a counter for it. I mean, yeah, I would love to have the subscriber numbers as well. But maybe from management's perspective, they're looking at it this way. Look all you investors, we trained you on these subscriber numbers, and it was sort of addictive when we were a small company and growing because those numbers were always going up. They weren't always linear,

but for the most part, that growth was. And now they're just really bumpy. We're a mature company now, but you guys are still so focused on the subscriber numbers. Look at all this free cash flow we're giving you. Look at all this income, this net income. Look at all the investments we're making around the world. Why we're spending a billion bucks in Mexico for new content. We have an amazing operation in the UK.

We've gone from a company that exports U.S. content to one that makes it on the ground in places like South Korea. where we know the very best shows are created. So management wants us to focus on this business as something that's really dynamic and that can wrink a lot more profit and cash flow out of its machine. And they're pointing us to engagement, right? They're talking about things like 52 weeks worth of live WWE entertainment that folks can now access on Netflix.

So, they're trying to really shape how we view the company. But underneath this is an implicit message that, yeah, I mean, don't expect us to grow our subscriber count like we did in the past. We're going to focus on monetizing that with really great content. So basically, if the market won't shift the narrative, management will shift the narrative by forcing it with the disclosures. Yeah, yeah. And maybe this thing about we'll only share the subscriber account and we hit big milestones is okay if they keep putting out numbers like they've been putting out, and Netflix stock reacted pretty well to the latest results. And even today, I think this is a defensive

play because everything else is in the red today. I note the stock is up a little bit this morning. Yeah, I saw a headline calling Netflix recession proof today. And we've been keeping an eye on the way that different management teams early on in this earning season have been trying to manage the expectations game. For Netflix's part, they reiterated their full-year guidance. They said that there were no interruptions that they were seeing. They felt like entertainment is a very sticky place for people to be spending, that they're at a nice price point. What do you think of that recession-proof label, awesome? I mean, yes and no. They're recession-friendly because we love our subscription businesses. But as one analyst asked on the

call, the earnings conference call, if the economy gets worse and all this tariff stuff keeps going on, won't people drop down from those premium subscriptions down to the, you know, advertising tier, which is pretty cheap and attainable, what will that actually mean for the business? And Greg Peters didn't really have a great answer for that. He did say, well, we have such an attractive price point at that ad-supported tier, but it begs the question if things get really bad, maybe some folks won't even bother with an ad-supported tier. Maybe they'll just cut different subscriptions. Netflix isn't the only one that I can think of, of course. But I do think that they have some insulation against that. They're not in a business.

that is going to be directly affected by tariffs from a tax perspective. That's what they're communicating by not changing the guidance. And they did say in the conference call that they're always having to figure out different tax structures because they have all this local production of content around the world and they sell everywhere. So they're already constructed in a fashion and manner that they can be a little bit price reactive. So, you know, I would say there is some truth to that, but I wouldn't be surprised. if things really head south with the economy this year, for Netflix to come out in the summer, fall, and say,

whoops, I mean, we didn't know things were going to be this bad. We have to pull that forecast back a little bit. They only know what they know, right? Of course. Austin Sharma, you know plenty. Thanks for joining me today. Thanks a lot, Dylan. If you're early in your career and looking for insight, inspiration, and honest advice,

listen to the Capital Ideas podcast, hear from Capital Group professionals about leaning into the differences that make you unique, making decisions that last and what it means to lead with purpose. The Capital Ideas podcast from Capital Group, available wherever you listen, published by Capital Client Group, Inc. Coming up on the show, what do tariffs mean for e-commerce? Up next, Anand Chak Valu hosts full contributors Dan Kaplanarlinger and Rick Minarez for a scoreboard episode on Shopify. Talk about the business first, including factors like industry and competition. A 10 is invincible.

A one is hopeless. Dan's at a 7. Rick, you're at an 8. Yeah, so Shopify, obviously, an e-commerce platform for the masses, a Canadian company, but global with 175 country reach. It started as Toby Luckay and a friend wanting to sell snowboards online about 20 years ago. When he didn't see an e-commerce platform that he liked, he created his own. And other budding online entrepreneurs asked him that they could use it, and voila, the Shopify business model was born in 2006. So more than one trillion in merchandise has been sold on Shopify's platform since then.

More importantly, more than half of that, gross merchandise value has actually happened in the last two years. Shopify started as a place for sole proprietors or small companies wanting an online presence, but now it's evolved through Shopify Plus and other initiatives to cover companies of all sizes. 875 million unique shoppers, unique online shoppers purchased something from Shopify, from a Shopify merchant in 2024. It's seamless, intuitive for sellers, but naturally there's Amazon, eBay, and other e-commerce rivals that can make that small learning curve even smaller. Shopify's advantage here, I see it, is that the users own their own site.

They're not competing against anyone else for attention, but they also have to generate the traffic to their sites. Shopify also has made a move offline, providing point-of-sale solutions for physical retailers and event vendors, making it a direct competitor of Block Square platform. The Shopify model isn't perfect two years ago. They did unload their logistics business, but however, winners keep winning, and Shopify is Canada's second-largest company by market cap. Only the Royal Bank of Canada is larger, but it's easy to see why growth investors may prefer to bank on Shopify.

Yeah, Rick, pretty much covered everything. I think Shopify has done a really good job of democratizing e-commerce a little bit, providing someplace where smaller companies, smaller retail businesses can go without necessarily getting totally overwhelmed by the platform. Shopify's done a good job of expanding the platform and adding services. And it's just, you know, as you say, some growing pains along the way, but overall done a really good job. For management, 10 is Warren Buffett, one is Homer Simpson, Dan's at a 7, and once again, Rick's at an 8.

Lucky is still at the helm here, obviously. He's still quotable. He's still winning. Shopify is a 54 bagger since going public 10 years ago. President Harley Finkelstein has been there for 15 years, so he has also been there for the entirety of Shopify's run as a successful public trade life. The only reason I'm not higher than an 8, it's surprising to me that half of the employees pulled by Glass Store, prove, or in other ways, don't approve. Either way, 50, 50% of luck

as CEO. And actually lessen that 48% of the employees would recommend working at Shopify to a friend. So I do not like that. Yeah, I give it a 7 in part. Kind of because I get that same kind of feel to it. I almost wonder if this is a situation where you have a co-founder, CEO, who might be happier moving into less of an executive management role. You know, we've seen a bunch of former CEO co-founders switch over to like become chief technology officer or do something else that more aligns with whatever it is that they're passionate about. I kind of wonder if that might be the move for Shopify here, but you can't dispute the fact that Lukie puts his money where his mouth is, still has a huge stake in the company.

Financial incentives totally aligned, and we're always glad to see that. For financials, a 10 is a fortress. A one is yikes. Dan's at a 7. Rick's at a 9. Yes. So a lot of growth stocks slowed down as they get larger, but Shopify is actually accelerating right now. Revenue went from rising 24% in in 2023 to 26% last year. It's doing even better if we zoom in. Revenue rose a better than expected 31% in its latest quarter. It's strongest quarterly growth showing in more than three years. Shopify has been generating positive free cash flow for nine consecutive quarters, and its latest quarter generated 22 cents in free cash flow on every dollar of revenue. Shopify also has a relatively clean balance sheet with a strong net cash position.

And it also doesn't hurt to zoom out. Revenue at Shopify has more than tripled in the last four years and sword fivefold in the last five years. You can't spell Shopify without H-O-P. I gave it a lower number. I gave it a seven. I can't dispute the numbers that you've seen. I think that part of where I'm a little bit nervous, as we tape this in early mid-March, the whole bunch of geopolitical tension that is affecting trade of goods. and the extent to which, you know, a lot of Shopify transactions happen within national borders, and so you're not going to have a tariff issue. You're not going to have any sort of trade war issue. But a decent amount does happen internationally. And so the question for me is between the direct impact of tariffs on e-commerce

and the indirect impact potentially, if there is an economic slowdown because of it, I have to be a little bit wondering whether future growth might slow as a result of that. Especially, you've got a Canadian company and you've got a whole bunch of U.S. participants that somehow in 2025 has turned into something that we're having to pay attention to. Rick, let's talk valuation. How well will Shopify stock do over the next five years? How safe is it? Ten is a short thing.

One is a lottery ticket. Yeah, so I want a 5 to 10 percent five-year return on the stock. a safety score of seven. So Shopify, the stock has nearly tripled over the past five years, so suggesting it will only grow at a 5 to 10 percent annualized clip over the next five years with a long runway of double-digit revenue growth in that time. May seem conservative. I just think the valuation here seems a little stretched at this point. Shopify is training for 13 times trailing revenue and more than 60 times trailing earnings. To me, it's a bit rich, and I don't know if it's 100% justified, but I do see that obviously

doing well overall, making that back as growth keeps outpacing the stock in the next couple years. I agree with the evaluation comment. I think I'm a little more pessimistic just on the general economics of retail and e-commerce going forward. I gave it 0 to 5% with safety score of 6. I think we're going to be in the mid-single digits. I don't see a 0% return. We have seen a big rebound recently. I think that there is a real risk that we have a consumer-led recession. It might put pressure on retailers. It might last longer than some of the many recessions that we've seen in the past. Trade tensions, trends, towards de-globalization. I'm just concerned that that's going to hurt the company more than a lot of

people are giving credit to at this point. Time for everyone's favorite topic. Rick, is there a company in Shopify's space you like more? I like Shopify, obviously, but I went with Block, now a direct competitor with Square, now that Shopify is a bigger force in point-to-sale and offline sales. Block is growing a lot slower than Shopify, and revenue is decelerating. It was just less than 5% revenue growth in its latest quarter, but it's trading for 12 times earnings and just one and a half times sales and LLC growth accelerating this year and again in 2026. So I went with Block sort of as a value-based play on digital finance. I give you two companies. I think if you like e-commerce and you like the idea of an area with what could be potentially stronger economic

growth, Mercado Libre, particular M-E-L-I, gives you that Latin American exposure. I think that's a more interesting market than the North American market at this point. They also, too, have done Mercado Libre, has done a good job of giving associated services on top of e-commerce. And so you get payments, you get shipping, you get a whole bunch of stuff that I think helps, it helps their customers, both their customers and their merchants do things better. On the other hand, Amazon, ticker AMZN, an obvious choice in e-commerce, and you get Amazon Web Services for no extra charge. And so that's something that I think may appeal to a bunch of people.