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Big Deals and Snap Judgements

Financial technology provider Fiserv (NASDAQ: FISV) announces plans to buy payment processor First Data (NYSE: FDC) in a $22 billion all-stock deal. United Continental (NASDAQ: UAL) flies higher on strong earnings. Snap (NYSE: SNAP) sinks on news that its CFO is leaving after only eight months on the job. And McDonald's (NYSE: MCD) loses a Big Mac battle.

In this episode of the MarketFoolery podcast, host Mac Greer and analysts Emily Flippen and Jason Moser tackle those stories and talk about some surprising news from Apple (NASDAQ: AAPL).

A full transcript follows the video.

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This video was recorded on Jan. 16, 2019.

Mac Greer: It's Wednesday, January 16th. Welcome to MarketFoolery! I'm Mac Greer. Joining me in studio, we have Motley Fool analysts Emily Flippen and Jason Moser. Emily and Jason, welcome!

Jason Moser: Hey, now!

Emily Flippen: It's great to be here!

Greer: Lots to talk about. We have some Snap. We have some United Continental. We have some Apple and we have McDonald's losing -- yes, losing -- in court. You don't hear about that every day.

Let's begin with the big deal of the day, financial technology provider Fiserv is buying payment processor First Data in a $22 billion all-stock deal. Jason, that $22 billion number represents a nearly 30% premium over where First Data closed on Tuesday. First Data up big today.

Moser: This is a very good deal for First Data shareholders. Congratulations! You should feel good about this. Fiserv is a company Matt and I talk about on Industry Focus here and there on Mondays. Ultimately, in a nutshell, this buys Fiserv market share into a part of the value chain that moves money around in this world of electronic payments. It gives the combined entity a chance to cut costs and boost margins over time, assuming they execute.

The mechanics of the deal, as you mentioned, are relatively fair. All stock. It does seem like Fiserv has had a decent past 12 months over the past three years. Before today's sell-off, the stock was up 67%. It's not like they're selling with the stock at depressed levels. That's good. Probably could have gotten away with issuing debt to do this. The thing about stock deals, stock is still theoretical. It doesn't cost them any money to do it. You see these big tech companies do it all the time, like Facebook buying WhatsApp. Everybody has an opinion on that.

Ultimately, First Data is a merchant acquirer. They just play a part of that transaction when you're going from the merchant to the Visa network to the bank. That's what Fiserv does. It could be argued that its competitive position is a little bit trickier in today's world with Square and PayPal. That's why I think the deal was a pretty good one. I'm not sure I feel as strongly about First Data as I do about Fiserv. All in all, probably a sensible acquisition.

Flippen: I think this is probably a testament to what's happening in the bigger space. We're seeing a lot of consolidation. There's a lot of small players acquiring other small players, big players acquiring small players in technology, in general, like IBM and Red Hat, which we talked about. There's a lot of consolidation going around because we have so many new start-ups operating in the space. So when I see stuff like this happen, it's not really a surprise. You can't have so many different operators within payments or other industries operating independently. There needs to be some consolidation.

Greer: Let's talk about that space, to wrap this story up. Jason, you talk a lot about the war on cash. We talk about names like Square and PayPal. Does this deal change your thinking at all in terms of that bigger war on cash?

Moser: It makes me feel like Square and PayPal's position is a bit stronger perhaps today than it was five years ago. To understand what Fiserv does -- these are two very different businesses. Fiserv is essentially a software provider for smaller financial institutions. That's a good business in which to be. You provide some good software to big banks like this. They don't want to switch systems ever. So you deliver a decent product. Over time, you can develop some switching costs there, which is a little bit of a competitive advantage.

But I think the real question here is going to be, where is First Data's position in this value as we move toward this trend of electronic payments? Ten years ago, First Data's value proposition would be a lot clearer than it is today. I think today, investors, including myself, would ask themselves the question, why does First Data need to exist in a world where Square and PayPal are becoming more and more able to do more and more things? That question, time will only answer. A nice thing for Fiserv if, for some reason, First Data's business falls by the wayside -- again, they only issued stock to do it, so they're not really out of pocket. Shareholders get screwed, but hey, that's life.

Greer: Let's turn our attention to the airlines. Emily, shares of United Continental up around 6% at the time of our taping after United reported better-than-expected earnings and revenue.

Flippen: This is really shocking, I think, to a lot of United investors. Last year, United said they were going to achieve a new strategy for growth via increasing capacity. And the market just killed them for it. I think a lot of people in their minds thought, "increased capacity means lower prices, competitors are going to increase their capacity, then we're going to see a bunch of airlines price for disaster because we're competing over fares and who can be the cheapest, and it's just not an environment that you want to be in."

This is their first earnings throughout 2019 and it's better than expected. They're seeing that they're actually making a lot more revenue from the increased capacity by expanding their bases. I think they're going to continue that strategy throughout 2019. It's really interesting, this news. I don't think a lot of investors were necessarily expecting it. But when you look at the hard numbers of what they're doing, it shouldn't be much of a surprise.

Greer: Is this a case of a business getting more efficient? Or are they just able to charge a lot more? Or both?

Flippen: Both, for sure both. The seat prices, we see going down, but the extras go up. By expanding the capacity, building out their three main home bases and making them more accessible, I think their idea is not that airlines are competing over the same customer, but they're actually drawing more customers to fly, as a result.

Greer: Jason?

Moser: Pretty sure, also, that Matty Argersinger was telling us to keep an eye on the airline industry for 2019.

Greer: He was.

Moser: That's in line with a lot of what Emily was just saying.

Greer: Let's move on to Snap, the Snap soap opera. Shares of Snap down almost 10% at the time of our taping. On Tuesday, the technology company said that CFO Tim Stone is leaving the company after just eight months on the job. Here are a few stats. Stone moved to Snap in May after working at Amazon for 20 years. In addition to his salary, he had $20 million in restricted stock with an option to buy 500,000 common shares. Stone will not get the majority of that stock, as it was scheduled to vest over four years. So he's leaving with all this stock on the table. What's going on here?

Flippen: That's a really good question. I think it's interesting to see someone coming from Amazon who has such a quick turnover at Snap. It begs the question of, Amazon doesn't have the best reputation for company culture, so how bad are things at Snap that he couldn't even last a year? I don't have much insight into the Snap culture, unfortunately, but I don't think it bodes well for the company.

Moser: No. We've read a lot into the culture at Snap. Again, you're reading that, but those are the only accounts we can go by. And they don't seem all that clear. I like to have a lot of fun with this company because I really don't like it.

Greer: What is Snap? What is this company?

Moser: They're a self-proclaimed camera company. I would argue that today, it seems they're more in the business of revolving doors, based on everybody who's leaving. Listen, I'm working a little bit on my roasting skills here.

Greer: I like it!

Moser: I came up with these on the ride to work today. If you scrounge through the change in your couch, you're likely to come up with enough money to buy a share of Snap before a cup of coffee at Starbucks. Hey-o! I'm not saying things are dire, but we may need to start referring to the company as Snapped.

Greer: Nice!

Moser: Shareholders' best chance for a double from today's price is a reverse split. I'm out. George Costanza, leave it on -- no, no. Listen, we give these guys a hard time, but really, we should, because this is a company that probably should have never come public. I blame the underwriters for that. It's hard to blame Evan Spiegel because they gave him a lot of money to do this.

Greer: I have a feeling you're going to blame Evan Spiegel.

Moser: Greed is just greed. The bottom line is investors deserve at least a competent leader, and he's not one. Listen, we hold other CEOs to the same account. Kevin Plank is one that I've kept on the hot seat all of 2018.

Greer: At Under Armour.

Moser: Put him on the hot seat in 2019 because we saw the same problem there at Under Armour. Executives would come in there, work, and then they'd leave. A pattern starts emerging, and you realize that he's not the easiest guy to work with. Thankfully with Under Armour, their COO and CFO have stayed on. That's the standard we've held. That's one of those red flags we've been watching. With Spiegel and Snap, unfortunately, executives keep on leaving. This is not the first person to leave. They have a big problem here.

The other problem, a really damning chart I ran across on Twitter the other day from Rob Price over at Business Insider, I think this says a lot, there's a Cowen survey that was done in December 2018. The question was posed to ad partners if, given the choice, which would your largest client prefer to advertise on? Choice was between Instagram stories and Snapchat stories. One hundred percent answered Instagram stories to 0% Snapchat stories.

That's a huge problem, and it doesn't seem like they've come up with any way to answer it yet.

Greer: Yeah, those numbers don't seem good.

Moser: No.

Greer: When we look out into the future, five years from now, and we're looking at Snap, has Snap faded away? Slowly or quickly? Has it been acquired? Or has it come up with some sort of second act? We're talking about the great rebound, the great recovery of Snap.

Flippen: There's 100% a second act here. No, no, I'm joking. [laughs]

Moser: [laughs] Wow! I was getting ready --

Flippen: It's a slow decline, I don't think it's going to be a fast decline. I think they're going to hold on for as long as possible. I really don't think anyone's making an acquisition here because they still haven't figured out a way to effectively monetize. Jason's stat perfectly encompasses it -- what are you getting when you're buying Snapchat? Not much! I think they're probably going to struggle along for a little while. It's going to be that sad, slow decline.

Moser: Yeah. I want to be glass half full and say there's something there. I tend to agree with Emily here, though. I don't know what it is. Maybe at a fraction of what the market's paying for it today, there's something that somebody out there might like. But clearly, the platform is bleeding users. I admittedly never used Snapchat, but it sounds like a lot of people don't use Snapchat, and that's a big problem. I think the only chance they really have is what we've seen other companies in the space, like Twitter and Facebook, do over time, acquire other apps, bring them into their family. They're not really doing that. Part of that is probably them recognizing themselves as a camera company. Most people say camera, they think hardware. We don't like investing in that stuff. So, yeah, I tend to agree with Emily.

Greer: OK, let's talk Apple. You have an iPhone. I have an iPhone. Emily, do you have an iPhone?

Flippen: I do have an iPhone.

Greer: What model? What vintage?

Flippen: I had a 4S up until a few months ago, when I upgraded to a 7S -- a refurbished 7S.

Greer: Wow. I've got a 6S. Jason, what do you have?

Moser: My wife and I just upgraded from 6S to the new X.

Greer: OK, Mr. Fancy Pants.

Moser: Well, let's wait a minute.

Greer: If you have an iPhone and you had your battery replaced this past year, you are not alone. Apple replaced 11 million batteries in 2018 during its $29 replacement program. During a normal year, Apple expects to replace between 1 [million] to 2 million batteries. So they replaced around 10X as many batteries as they expected. That news just came out. Apparently, gone are the days when Apple can assume that everyone wants the newest model.

Moser: I did that battery replacement on the 6 when they were offering that thing because they were pulling back on the performance of the phone. I took advantage of replacing that battery on the 6. And it did extend the life of it. I thought it was actually going to be a little bit better. It was OK.

Greer: How much of a threat is this to the business? There's been a lot of talk about China and the slowdown in China. But when I see this news as an Apple shareholder, I think this worries me even more. By the way, I'm not getting a new iPhone. You've got to bring back the headphone jack and you've got to improve the battery life.

Flippen: Well, you might be alone in that regard. [laughs] I have to wonder, do people who work at Apple use Apple phones? How could they only think that about a million people would want to replace it for the batteries? I know personally, my phone hardly makes it through a day with the battery life. It shouldn't have been a surprise for Apple that so many people got their batteries replaced.

But you know what? I don't think it matters that much. Apple has such a strong ecosystem. Push came to shove when I was getting rid of my old 4S. I was like, I could get any phone on the market, but it's just so much easier for me to go ahead and get that refurbished 7. It was about the same price as an alternative. And yeah, the alternatives are a little bit newer, but the process I'd have to go through to transfer, it's like, eh, I'll just bite the bullet.

Greer: So you think this story for investors, a bit of a nothing burger? Does it matter?

Flippen: It might be a bit of a nothing burger, but I don't think it bodes well for whatever person made that original estimate. I think somebody lost their job.

Moser: [laughs] Yeah, it's one where you think, as consumers, this is great. The phones get better over time. The phone should last longer over time. That's just the evolution of tech. But if you're an investor, that kind of sucks because that means people aren't upgrading their phone as much as they used to. So if Apple wants to get people upgrading more often, they've got to offer more incentives. Eventually, what that all plays out into is their ability to raise prices on the phones in one form or another. We're hitting that peak here, because I think we're hitting the peak of what these phones can do. I'll say, going from the 6 to the XR, I'm still not impressed with some of the user interface. I think Apple Pay took a major step back, they added more friction to that process, in a process where they need to take away as much friction as possible. The face ID is, eh. We're at a point now where the biggest advancements they can make in these phones, in my opinion, is to make the battery last as long as it can. And that, to me, has been the greatest part about going from the 6 to the X: Now I have a phone that can make it through all day without having to recharge it. But I know those days are limited, too.

To Emily's point, Apple is more than just the iPhone. I know a lot of investors will love to make a big deal out of this. Let's step back and take a little bit of a longer-term view there and recognize all of the strengths of this business still. I think they're going to be OK.

Greer: Any chance I get the new model, I get my headphone jack back?

Moser: I really wish.

Greer: I'm grieving still.

Moser: I applaud them for sending me the headphones with the new jack. But I ran into the situation, I was on a plane the other day, and I'm thinking, "I'd love to plug in and watch one of the movies on the screen there." And guess what?

Greer: You couldn't do it.

Moser: I couldn't do it.

Greer: You could do it with my headphones -- and my rotary phone.

Moser: I could have. That was a bit of a downer. These are the advancements, you have to make these trade-offs, I guess. What's more important, the battery or the headphones?

Greer: Let's move overseas for this last story. This is, I think, my favorite story. An EU judge has ruled against McDonald's in the battle of the Macs. McDonald's had been engaged in a trademark battle over the Big Mac with the Irish-based fast-food chain Supermac's. Now, because of this judge's decision, Supermac's will be allowed to expand throughout the U.K. and Europe. More importantly, it means McDonald's no longer has the right to their Big Mac trademark. Supermac's managing director hailed the decision as "the end of the McBully."

Flippen: [laughs] This is not a nothing nugget. This is a big deal for McDonald's. Now, anyone can start selling Big Macs all across the EU. I think my favorite quote from the proceedings was from the EU Intellectual Property Office. I quote, they said, "McDonald's was not putting the Big Mac trademark to genuine use." [laughs] My challenge to McDonalds now is to start selling Super Mac burgers across the EU. Stick it to the man in that regard.

Greer: I like that.

Flippen: I think it's a missed opportunity if they don't.

Moser: I mean, who do you think wins that case, though?

Flippen: Oh, McDonald's, 100%.

Moser: More than likely.

Greer: That's amazing! It's amazing they would say it's not genuine use. Now, having said that, I'm a McDonald's shareholder. Why are they wasting time with lawsuits like this? Supermac's was started by a guy who says that the name came from a nickname that he was given. Why is McDonald's worried about that? What are they doing?

Moser: What's more valuable for McDonald's -- is that the actual food or the way they've branded it? I think that McDonald's right now is more a brand than anything else. I mean, the food is totally replicable for the most part.

Greer: But does anyone confuse Supermac's for McDonald's?

Moser: No, I don't think they are. But I think that when you have a business that values its branding, as McDonald's does, and they've built that stuff through the years, they're going to try to set every example they can.

Greer: It's a waste of money.

Moser: It seems like it.

Greer: Improve your food and just keep your eye on the ball.

Moser: Every time Mac hosts MarketFoolery from here on out, we have to introduce him as Supermac.

Greer: They may sue me. McDonald's may come after me for my name. It's this arrogance.

Moser: I'd like to see them get past us.

Greer: Just try it.

Moser: We've got your back. Don't worry, buddy!

Greer: As long as I have my iPhone 6S with the auxiliary headphone jack. OK, Emily, Jason, thanks for joining me!

Flippen: Thank you!

Moser: Thank you!

Greer: As always, people on the show 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 it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I'm Mac Greer. 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. Emily Flippen has no position in any of the stocks mentioned. Jason Moser owns shares of Amazon, Apple, PayPal Holdings, Square, Starbucks, Twitter, Under Armour (A Shares), Under Armour (C Shares), and Visa. Mac Greer owns shares of Amazon, Apple, Facebook, McDonald's, and Square. The Motley Fool owns shares of and recommends Amazon, Apple, Facebook, PayPal Holdings, Square, Starbucks, Twitter, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of Visa and has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, short January 2019 $82 calls on PayPal Holdings, and short January 2019 $80 calls on Square. The Motley Fool has a disclosure policy.

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