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SCOTUS Rules Against Apple

The Supreme Court ruled 5-4 that a lawsuit against how Apple (NASDAQ: AAPL) manages its App store can proceed. In this episode of MarketFoolery, host Chris Hill and Motley Fool Asset Management's Bill Barker analyze the potential damage. Plus, they discuss Uber's (NYSE: UBER) second day of trading, how the latest in the U.S.-China trade war is affecting the market, and Bed Bath & Beyond's (NASDAQ: BBBY) sudden need for a new CEO.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on May 13, 2019.

Chris Hill: It's Monday, May 13th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, from MFAM Funds, Bill Barker. Thanks for being here!

Bill Barker: Thanks for having me!

Hill: I wanted you to be here in the studio even before we got the legal news. But now it's even better that a lawyer is here in the studio with me. We'll get to what's happening on Wall Street in just a second. The Supreme Court has ruled this morning against Apple in a 5-4 decision. The justices ruled that consumers can go ahead with a lawsuit over how Apple manages its App Store. I guess this is a big deal? You tell me. I keep seeing that this is a big defeat for Apple. If you look at what's happening with Apple's stock, that's not really reflected there. Yes, Apple stock is down. But it wasn't like it took this big dip once this was announced.

Barker: It's down a little over 5% as we talk about it. The rest of the market's down about 2.5%, the Nasdaq 3%. If you want to isolate the portion of the bad news that is about this lawsuit that the market is pricing in, you might call it a 2% drop, something like that. That might be the status of the case. The case is allowed to go forward, but it is not a final verdict or anywhere close in terms of the number of years that may follow as the litigation continues. But ultimately, yeah, Apple doesn't want to be liable to the users of iPhones for misuse of its monopoly power.

Hill: Yeah. Again, you're the lawyer, not me. But I just look at this and say, OK, it's a close decision. It's not like this was some unanimous, all the liberal justices and all the conservative justices got together and said, "Yes, absolutely. This should proceed." It was a 5-4 split. I'm looking at the stock. I don't own shares of Apple. But if I'm an Apple shareholder, I think I'm more concerned about other parts of the business than I am about the impact of this lawsuit.

Barker: In terms of the liberal/conservative split, if you're looking for silver linings, you might decide that Kavanaugh, who wrote the opinion joining with the four liberal judges on the court, and not voting in a bloc with the other four conservative judges, is a good thing for the independence of thought on the judiciary. Possibly, you might make that argument. I haven't read the opinion, so I shouldn't make that argument.

But I do find it somewhere comforting when 5-4 decisions are other than the five currently conservative judges on one side and all four of the liberal judges on the other side. There's more to come in this. Stay tuned! In another few years, there should be a final verdict.

Hill: That was going to be my final question, how long is this --

Barker: You've got time! You've got time to get dinner, about 700 of them. Over, under, something like that.

Hill: [laughs] Let's get to what was going to be the lead story. That is the fact that it appears that every single stock trading today is down.

Barker: Including Apple.

Hill: [laughs] Including Apple. To the point where, I made this joke earlier, but I'm only half joking, I think if you're looking at your portfolio and you see a stock that's up on a day like today, you might want to ask some questions about what's going on with that business. This is one of those days where pretty much everything is in the red. I'm curious how you, as a portfolio manager in your professional life, view days like this. Put aside the politics of the trade war between the U.S. and China. On a day like this when everything is down, are you and your colleagues at MFAM Funds, and presumably a lot of other professional investors, just rubbing your hands in glee at the prospect of, "OK, let's go find some bargains"?

Barker: I think, we view these things in context. If the market is down 2.5%, as it is right now, but we weren't all that thrilled with the price of the market going into the day -- and I would say that the way that I value the market, it's a little bit overpriced. It's not as if a 2.5% sale means that it's a screaming bargain at the moment. It's back to where it was a few weeks ago, or whatever it was. In terms of the management of the portfolio, it depends on whether there's cash currently in the portfolios we manage. They're reasonably close to fully invested most of the time. So, I think it just means that we're down about as much as everybody else.

Now, I don't think that today's news, while it's not good for capitalists owning shares of stock at the moment, it's far from the final word. This is chapter whatever in the trade war, which will ultimately find a happier place, I think. How can it not?

Hill: Yeah, particularly when your comparison is days like today.

Barker: [laughs] Right. Well, I think there are a lot of new words out in the market today about who's going to do what next. The Chinese having announced their new tariffs of 25% on up to $60 billion worth of materials, mostly agricultural. The ball is now back in the U.S. court on how to respond to that response to the U.S. response. One imagines that there may be more words and more actions. I think that would be unfortunate, but it's a little tough to predict. Some of the players in this are hard to predict. [laughs]

Hill: [laughs] One more reason why we like being investors here at The Motley Fool who focus on businesses, just focus on the individual companies and the businesses and the market opportunities. Let the macro do what the macro is going to do.

Barker: Yeah. If you're looking for silver linings, I'm looking at what we own in our portfolios, and the only thing that looks to be up at the moment, and just fractionally, a couple of pennies a share, is Texas Roadhouse. All right, they don't have operations in China. One of their main costs is the price of meat. If we're not shipping as much meat to China because of tariffs that are being put on beef, that's less demand. The supply and demand will find a lower price point here in the U.S. Texas Roadhouse is not exactly moving up that much, but it's not being slaughtered the way companies which more obviously have trade with China are, of course, getting the brunt of it today, other than Apple, which also is in the list of things which are down the most.

Hill: By the way, I'm glad you mentioned the percentage that the market is falling today, which is basically 2.5%. The headlines that people are going to see are, of course, about the number of points that the Dow is down. Down 650 points! Yeah, that's 2.5%.

Barker: Yeah. Having been in this game as long as we've been in it, we're used to knowing that in part, that's because some people think of the Dow as a way to keep track of where the market is. We've always held up the S&P. People don't even know off the top of their head what the level of the S&P is for the most part, because it doesn't get those Dow 15,000 headlines. So, yeah, 2.5%. Takes you back down to where the where the market was mid-March.

Hill: Hoo. We all remember...

Barker: Those were tough days.

Hill: Yeah, we all remember mid-March 2019.

Uber's second day of trading is not going a whole lot better than its first day of trading. Shares of Uber are down about 10%. I was surprised --

Barker: By "not a whole lot better," you mean even worse.

Hill: Even worse, yes. Here's what surprised me. I say this as someone whose job it is to, among other things, follow what's happening in the financial media and try and get a sense of what the overall coverage of different stories is. I was genuinely surprised that after Uber's IPO, which was not successful in that it finished down for the day. It was set at $45 a share, it closed around $42. I was surprised at the number of people who were making the following comment or writing the following story, which was essentially, "Well, it's over now." And they weren't referring to Uber. They weren't even referring to the ride-sharing industry. They just appear to be referring to IPOs. "We've had a great run. This is it for IPOs, and possibly capitalism." OK, maybe not that last part, but there really were a lot of people on Friday afternoon and over the weekend saying, "Look, this caps the end of a nice run of IPOs. This is the end of this."

Barker: Yeah, it is, of course, remarkable how quickly things move, the pendulum swings. Peak craziness was the Beyond Meat IPO a couple of days before. "How much crazier can things get than this," being the story, "let's look and see how crazy things are for Uber." And then Uber comes out and does not perform well as a stock over a grand total of two days so far, which will be meaningless in the long term. Although that doesn't necessarily mean that Uber is going to be some great post-IPO investment like Facebook was after its IPO. It had a little bumpiness in the early days, and then it's up many, many times from where it IPO-ed. The next couple of years are what are going to be telling.

Now, you've got Lyft, having followed a similar pattern, and Uber, in terms of their price from IPO. I think that there are legitimate questions about whether the ridesharing market was properly valued by investors, or whether there was just enthusiasm. "Hey, an IPO." This thing's in the headlines all the time, that creates a certain amount of demand. I'm sure everybody out there who follows the market closely was aware when Uber was coming public. There was attention, and therefore demand, ginned up by that, which is not backed up particularly well by Uber's and Lyft's numbers yet. The numbers of how much money they are going to make, which remains completely speculative, I would say.

Hill: Yes. Something that Ron Gross mentioned on Motley Fool Money over the weekend was, it certainly doesn't help Uber that they're going public at a time where it's in the wake of the Lyft IPO, which, obviously, that stock just continues to go down after its opening-day pop. And then also, in the midst of the trade war with China. But I'm glad you mentioned Facebook. Dara Khosrowshahi, the CEO of Uber, sent out an email to employees. I haven't read the email. I read a report of the email. Apparently one of the things he referred to, I'm assuming in an attempt to get his team fired up for the future, was to point out that Facebook had a rough debut in the public market. Which is true, over a short period of time. Facebook went public at $38. Within a few months, it was down to $20. And then, a year and change later, it was somewhere in the mid $50s. But apparently, he also referred to Amazon having a rough debut in the public market. I would just like to point out that the numbers don't back that up at all. In fact, Amazon had a great debut in the public markets and a great first few years. Once the bubble popped in 2001, yeah, it took a tumble. It was a few years before Amazon's shares regained their footing. But I would argue that the first three years or so of Amazon being in the public markets was amazing.

Barker: Yeah. I had not remembered Amazon as having any post-IPO trouble, either. So that may be some fact checking that arrives on Uber's door. But it was true in the case of Facebook. All the movements right now are a reminder that both of these things are in the past in terms of their IPO histories, Facebook and Amazon vs. Uber and Lyft. Over the short term, the market is a voting machine. Over the long term, it's a weighing machine. There would be no way to arrive today and not see the profits that Facebook is making, the sales that Amazon's making, still kind of light on the profits. But the weight of those companies is far easier to see today. And the market has done a reasonable job of weighing them. Right now, it's kind of hard to weigh Uber and Lyft. In the absence of the kind of data that helps you traditionally value companies or to know, whereas with some other tech companies, software-as-a-service companies that are launching as unprofitable companies but there is more of a known path for how the subscriber model works out, and how you get to profits from there, it's still up to Uber and Lyft to show that their model is going to produce profits. Until they do show that, yeah, they're going to be buffeted by the latest story or something other than, "Hey, look at our profits." That helps.

Hill: Absolutely. In the case of Facebook and Amazon, when they went public, there were legitimate questions about both businesses. In the case of Facebook, it was, mobile is becoming increasingly important, and at the moment, you appear to make $0 off of mobile advertising. How are you going to do that? And they answered that quite nicely. In the case of Amazon, it was, how are you going to get to profitability? And it took them years to get there. But while they were doing that, they were expanding their footprint, going well beyond books and music and movies. And oh, by the way, creating Amazon Web Services. So, yeah, as you said, when we look at Lyft and Uber, the numbers that are being thrown out there in terms of what they could do are speculation. And if they answered the question, the very reasonable question, in the same way that Facebook and Amazon did, then yeah, these will be great stocks to own.

Barker: It's also worth remembering that all IPOs get judged by, how much did the stock go up on the first day or the first week, something like that. Beyond Meat, what was that up?

Hill: 160%.

Barker: So, what you would want as a shareholder of the company is for the company to have sold its shares at a higher price. That would have been better. They'd have more money on the balance sheet if there had been that kind of demand known and they could have sold IPOs shares for 100% more, the same number of shares but pocket twice as much money. Their company would be in a better spot today, at least in terms of leaving aside market sentiment. OK, market sentiment isn't high for Uber today. But they're sitting on more money on the balance sheet, which in their case, they kind of need. Rather than, if they had gone public at $35 a share and they were $37 right now, in the sense of the market valuing them a little bit higher, that would be good but they'd have less money on the balance sheet today.

I don't want to say they did a great job with the IPO by possibly pocketing more money than their shares were worth. We don't have enough data to really know what the shares are worth right now. But at least they have something tangible, which is cash, which they need.

Hill: Yeah, I saw that Impossible Foods, which is a competitor of Beyond Meat, raised $300 million in another round of financing. The CEO said something to the effect of, "We're not planning for an IPO just yet." I have to believe that at least one person in the room, when they do get around to planning an IPO, and the topic turns to, "Which investment bank should we use?" Then it becomes, "Who did Beyond Meat use for their IPO? OK, not them. Whoever priced the Beyond Meat IPO and left that much money on the table, let's use somebody else."

Real quick before we get out of here, Bed Bath & Beyond is looking for a new CEO because longtime CEO Steven Temares stepped down this morning effective immediately. I get that this is on a day when the market is down across the board. But shares of Bed Bath & Beyond are down slightly more than the market. I'm a little surprised at that just because this guy's been running the company for a long time. It at least seemed like an opportunity, as we've seen before with other companies that struggle, when the CEO leaves, the stock gets a pop on his or her way out the door. If you'd told me that Bed Bath & Beyond is going to get a new CEO, my assumption would be, "Shares have to be on the rise because of that." No.

Barker: No. And I'm surprised in a way that you're surprised. We've kicked at Bed Bath & Beyond here before.

Hill: We have. But I think there's a viable business there if someone else is running it.

Barker: You're wrong, though.

Hill: [laughs] I'm certainly wrong today. I'm absolutely wrong today!

Barker: The stock is still up 30% for the year. Does that make you feel differently? It's down 6% today, but it's beating the market this year. Bed Bath & Beyond is beating the market this year. Process that.

Hill: They sell stuff that people need. They sell good stuff. They just do a bad job of selling it. I don't know.

Barker: See, that's going to be a problem. The problem for them is that Amazon is going to continue to take market share. Even worse than that, it's going to continue to set the pace on pricing. So while Bed Bath & Beyond hasn't gone away, it's selling, I think, all-time highs in terms of sales, more or less -- they keep growing sales by about 1% or 2% a year, but their margins are collapsing. They're making about a quarter as much money on their sales as they were five, 10 years ago. They were making way more money 10, 15 years ago than they're making today. That's despite inflation, that's despite being a larger company. There is currently no reason to believe that they have a solution for the margin problem. There's no reason to believe that Amazon is going to change its business model in a way that takes the pressure off of what they can make. So, as I say, you're wrong.

Hill: Five, six years ago, you could have said the exact same thing -- and people were saying the exact same thing -- about Best Buy. And then Joly comes in there and turned that company around. That stock doubled over the past five years. Again, Best Buy is a big-box retailer selling things that Amazon sells. There was the whole joke that Best Buy was Amazon's showroom. And they turned that business around. So I think there is still hope for Bed Bath & Beyond. But, clearly, I'm wrong today.

Barker: That's the exception that proves the rule.

Hill: I had to give one example. What, did you think I was just going to roll over and die?

Barker: [laughs] But, why is Best Buy doing better today? Why have they survived and thrived a bit in this climate?

Hill: I think there are two reasons. One is hard for me to imagine that Bed Bath & Beyond can pull off, but the other isn't. One is, they remodeled their locations. The other is, they've got the Geek Squad.

Barker: Yes! So, what, are you going to have the Geek Squad come in and change your bedsheets for you? What are you getting at Bed Bath & Beyond, to the extent that you can even find what you're looking for there, because as I have argued before, it is a bit, in my experience, like going through the last scene of Raiders of the Lost Ark when you're looking for something there. What is this place?

Hill: You mean the very last scene?

Barker: The very last scene.

Hill: Where the credits start to roll in the warehouse.

Barker: Where they're putting the Ark of the Covenant away into a completely dense and unimpenetrable warehouse, right after we lapped the great line.

Hill: That's what Bed Bath & Beyond needs right now.

Barker: They do. Top men. They've got room. It doesn't have to be a man.

Hill: I was going to say. Top men, top women.

Barker: They need top.

Hill: I think, with the right leadership, this is a salvageable business.

Barker: Would you ever invest in it? Let's say you care about your children and giving them money someday. Let me just make that possibly untrue assumption. In that scenario, would you ever invest in them?

Hill: Depends on who the next CEO is. It really does. I'm going to give you another example, which did not work out well. To look back to the first company we talked about, do you remember a few years back when JCPenney got a new CEO? I think it was Ron Johnson from Apple.

Barker: You were a big proponent of that.

Hill: Yeah. And I was not the only one. Ron Johnson was the guy who made the Apple Store a hit. So people looked at him and said, "Gosh, look what he did for Apple. He has a low bar to clear with JCPenney." And in fact, it did not work out well at all for JCPenney.

Barker: Turns out, it may have been the things that you could buy in the Apple Store, rather than the individual creating the store, that was mostly responsible for their success.

Hill: So, that's who Bed Bath & Beyond needs. They need the next version of Hubert Joly, and not the next version of Ron Johnson.

Barker: Yes. Who's on your shopping list?

Hill: I don't have that kind of insight at this point. But we'll see. They have an interim CEO right now. We'll come back to this when they name a permanent CEO.

Barker: The Sixers coach might be available.

Hill: The Philadelphia 76ers coach might be looking for a new job sometime soon. On that note, Bill Barker, thanks for being here!

Barker: Thank you!

Hill: 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 or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery! The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Bill Barker is an employee of Motley Fool Asset Management, a separate, sister company of The Motley Fool, LLC. The views of Bill Barker and Motley Fool Asset Management are not the views of The Motley Fool, LLC and should not be taken as such. Bill Barker owns shares of Apple. Chris Hill owns shares of AMZN. The Motley Fool owns shares of and recommends AMZN, Apple, FB, and TXRH. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.


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