In this podcast, Motley Fool senior analysts Emily Flippen and Ron Gross discuss:
- FedEx shares having a historically bad day amid talk of a recession.
- Adobe spending $20 billion for a start-up software-design firm.
- Optimism around Starbucks after an impressive (and detailed) investor day.
- Twilio laying off 11% of employees.
- Two business leaders and their legacies.
John Ourand from the Sports Business Journal discusses Amazon‘s investments in NFL programming, Disney‘s thinking about ESPN, college football playoff expansion, and storylines for the MLB playoffs.
Ron and Emily share two stocks on their radar: Union Pacific and Costco.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on September 16, 2022.
Chris Hill: How bad is it for FedEx? How much does Amazon have riding on Thursday Night Football? And who gives away an entire company? Motley Fool Money starts now.
From Fool global headquarters, this is Motley Fool Money. Some Motley Fool Money radio show. I’m Chris Hill joining me in studio senior analysts Emily Flippen and Ron Gross. Good to see both. Hey, we’ve got the latest headlines from Wall Street. We’ll talk NFL prime time with John Ourand from the Sports Business Journal. And as always, we’ve got a couple of stocks on our radar.
But we begin with another rough week for the markets, the Dow, S&P 500 and Nasdaq all down again this week, punctuated by shares of FedEx falling more than 20% on Friday. First-quarter profits and revenue for the bellwether company were lower than expected. Ron will get to FedEx itself in a minute. But this was another rough week where it was hard to find optimism anywhere. If you can buy shares of pessimism, I feel like that is a stock.
Ron Gross: That’s fair. I didn’t enjoy this week. I’ll be honest with you. The bottom line is that we got some inflation data. The numbers came in hotter, higher than expected or even hoped for, which caused investors to believe that the Fed would have to continue to aggressively raise interest rates, and that sent the market down. At the same time, as you mentioned with FedEx, the economy’s starting to show signs of weakness, which is, after all, the desired outcome of the Fed. We shouldn’t be surprised; that’s what they’re trying to do. I think we’re likely to see companies start to miss their earnings estimates or actually bring estimates down over the next quarter or two as the economy does in fact start to slow, and then we’ll see if we actually slip into a recession or we manage to avoid one.
Chris Hill: Emily, normally, I get excited for earnings season, and this was one of those weeks that makes me think maybe when earnings season kicks into high gear next month, it’s not going to be pretty.
Emily Flippen: Yeah, FedEx is a bellwether stock for the global economy because you can think about the thousands of businesses that use their services to run their own businesses. It’s almost like a canary here saying, “Hey, headed into the holiday season, things might not be that great.”
Although I will say a lot of the headwinds that FedEx is experiencing in the quarter were things that were very prevalent last quarter as well. They didn’t make a lot of cuts decreasing their cost structure in order to meet guidance that they had set out previously. It just got my head scratching about why they weren’t a bit more proactive with this last quarter.
Chris Hill: Ron, in terms of FedEx itself, obviously, the profits and revenue were not great. They appear to be taking a pretty aggressive approach to cost savings. They’re talking about shutting down offices, deferring hiring, and more.
Ron Gross: Yes, out of necessity, quite frankly. When you have revenue up only 5% and earnings actually down 6% and margins getting smacked around due to weakness. Quite frankly, everywhere they highlighted — Asia and Europe, but domestically was no treat either — you have to look at rightsizing the business. They’re going to do things like close 90 office locations, close five corporate office facilities, defer hiring, reduce flights, cancel projects. They’re going to reduce their capex budget for the year by $500 million. It’s still $6.3 billion, but half a billion dollar cut to that.
They’re doing what they can. They withdrew their full-year guidance. One of the reasons the stock is down so much because investors and analysts just don’t like when companies are forced to do that because it shows that they don’t have visibility into their own business. If they don’t have visibility than why should an investor feel that they have any visibility?
Chris Hill: I was going to say, is that something we should expect more of as we get into earnings season next month? Or maybe not expect, should we not be surprised if other companies follow suit and just pull back guidance altogether?
Ron Gross: I think it’s fair to say yes. The more that do it then it easier becomes for others to do it. Companies are hesitant to do it because even though we’d prefer they worry about their business and not their stock price, they do worry about the stock price and the analyst community, so I wouldn’t be surprised if we start to see a lot of guidance being pulled.
Emily Flippen: Oh, here’s my confusion. They talk about this impending recession, and certainly they’re seeing the impacts in their business today. But everywhere I look. Chris, we’re talking earlier, we’re seeing lines outside of Apple stores for their new iPhones. We’re seeing unemployment still really low. So part of it just has me confused, because we’re getting one narrative from companies right now saying look, earnings are going to be bad, headed into next earnings season. Shipments are down. But at the same time, American consumers still seem to be spending money.
Ron Gross: They should do sending money, and employment is still quite robust. But as earnings come down, that’s when companies will, you’ll see the lag, companies will start to say where can we cut? Just like FedEx is. Then we’ll probably see the employment picture change a bit. That’s where you probably either enter a recession, hopefully a mild one, or maybe just skirt around it, but clearly the economy will weaken.
Chris Hill: Well, not every company is cutting back on spending money. On Thursday, Adobe announced third-quarter results that got completely overshadowed by their other announcement, which is that Adobe is buying Figma, a software design firm, in a cash-and-stock deal worth $20 billion. Shares of Adobe fell 17% on Thursday.
Emily, safe to assume that absolutely everyone thinks they overpaid for Figma?
Emily Flippen: Well, this is just chump change. Who can’t reach into their couch and pull out a good $20 billion and change?
No, this is a huge deal and it led to Adobe’s largest drop in over a decade. So investors are very scared. Unfortunately, it overshadowed what was a pretty strong quarter otherwise. Revenue rose 12% for the business. Margins expanded. And while guidance was predictably weak, the business itself still remains very stable.
But there were two main things that were contributing to, I think the investor response to this acquisition. First being, obviously, the price tag; $20 billion is a lot. It’s double Figma evaluation that they had this time last year, and that’s at a time when other tech valuations have dramatically fallen over the course of the year. It values the company at around 50 times annualized recurring revenue, extremely lofty valuation. Part of the response we’re seeing is in regard to the price tag.
But secondarily, it’s in regards to Adobe strategy here. I mean, this is a big departure for Adobe in the past. They’ve always been acquisitive, but acquisitions to this point have largely been tuck-ins and at reasonable multiples. It shows how disciplined the management team has been with capital allocation to this point.
But clearly, there is something about this deal that is reactive and not proactive, in my opinion. They’re looking, in my opinion, to take out what is probably a really formidable competitor, which does leave me confused about what potential regulatory impact there could be as regulators take a look at this massive deal. But it’s certainly rubbing investors wrong way this week.
Chris Hill: You think if Microsoft made this exact same deal, they would get not the same level of scrutiny? You would like to thank any deal gets scrutinized by regulators, but would they have a better chance of having an approved?
Emily Flippen: I definitely think they would, in part because their offerings aren’t as directly competitive as Figma is with Adobe’s offerings today. They also have a bit of a better budget, I suppose, for purchases of this size. More importantly, it’s not completely different strategy for Microsoft. I still think it’d be scrutinized in terms of the price. There’s no reason why a valuation should double in a year when other valuations have come back down to earth. But in this case, I think it’s a combination of both that price tag and Adobe’s past strategy.
Chris Hill: Shares of Adobe are at their lowest point in almost three years. You’ll look at that and think, oh, this might be an opportunity to buy? Or still too many question marks around this deal.
Emily Flippen: I still have too many question marks around this deal. Large acquisitions like this rarely pay off, especially when they’re made out of necessity instead of desire.
Chris Hill: Shares of Starbucks up this week. On Tuesday, the coffee giant held an investor day presentation. Among the highlights, the company will be investing $450 million to improve coffee machines and stores with the goal of speeding up the process for baristas.
Ron, when you consider 70% of coffee sales are cold drinks and some of those cold drinks are really complicated to make,…
Read More: Why Everyone Pays Attention to FedEx | The Motley Fool