In this podcast, Motley Fool analyst David Meier and host Deidre Woollard discuss:
- The macro and micro of job cuts.
- What companies are signalling when layoffs happen.
- If Bitcoin is more like an IPO or gold.
What is the "snap test"? Motley Fool analyst Alicia Alfiere and host Ricky Mulvey explore this snappy way of reviewing companies.
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.
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This video was recorded on January 11, 2024.
Deidre Woollard: New year, new job cuts. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard here with Motley Fool analyst David Meier. David, how are you today?
David Meier: I'm doing very well. How are you?
Deidre Woollard: Good, we've got sun, I'm happy about it. Wanted to talk to you this week about job cuts because this year has kicked off with a lot of cuts, and I'm surprised by it. But we've got Amazon, Unity Software, BlackRock, Rent the Runway, Google, even Xerox. Last year to me felt like the year of the big layoff. This year maybe the small layoff, but what's happening here?
David Meier: Time will tell if we're going to find out if this is a new round of bigger layoffs or if this is just, sort of ones companies didn't get to in 2023. Because if we go back and think about what was being communicated in 2023, a lot of the growth in tech companies slowed, and the push for profits and cash flow increased. So that leads me to believe that, hey, if there's any, now's the time when companies are finalizing their budgets and getting ready for the next year, so if the companies are rationalizing their growth plans, where investment dollars are being cut, unfortunately, there's a good chance labor dollars have to get cut with it. That's the idea of matching your potential revenue with the potential expenses. We'll see what happens. But obviously, a lot of announcements to start the year.
Deidre Woollard: The question I'm asking myself, is it iterative? Is it incremental? Are we honing our focus here? It's hard to know. The other thing I'm juxtaposing that with is the macro. I chatted recently with Liz Ann Sonders from Schwab. We're going to have her on our Saturday's show. She said that some companies might be hoarding labor, so there's this conflicting data between the macro. Job numbers are still strong, but we're also seeing all of these little layoffs, so how do we balance all of that?
David Meier: That is an excellent point you've made and an excellent question. As a bottom-up investor, what I'm trying to stay focused on is what the companies are saying and doing more so than the higher-level data. That's because, first and foremost, what I'm trying to figure out is if a stock is attractive or not, and that starts with company data. But as you so rightly pointed out, we have to pay more attention to the macro data. Because what that does is it helps us understand the type of investing environment that we're in. To your point, right now the data from a company level versus the higher level data seems to be a little bit conflicting. Unemployment is still very low, and that's even as interest rates have been rising. Right now with overall good employment, we have wages that have gone up, we have the rate of inflation falling, that seems to be good for the economy and should be good for stocks. However, we need to evaluate what's happening at a company level in order to figure out if the particular stock we're interested is attractive or not.
Deidre Woollard: That's such a good point because some of the companies I mentioned, there's a big difference between an Alphabet versus your Rent the Runway because they are just very different types of companies.
David Meier: Hundred percent.
Deidre Woollard: All of that really is interesting when you think about this because you've got the overall macro and then you've got the underneath of like, OK, there's a lot of layoffs, and then you've got the layer deeper and you talked about being a bottom-up investor. It's always conflicting for me because as an individual, I hate layoffs. I was a victim of one, way back when I worked at AOL, and there were a few more before me and it was painful. But as an investor, I have to look at this, and sometimes I see the stock go up, and I have to think about this from a more impersonal standpoint. What questions are you asking yourself?
David Meier: I have fortunately not been in a layoff, although I have seen them happen around me at some companies that I used to work for so I can completely empathize with what you're saying. But as an analyst, the main thing that I want to know is, is this decision consistent with what management's outlook going forward is? Or if it's inconsistent, is what we're seeing a sign of potential problems ahead? As an outsider, as an outside investor looking at the company's data, I'm not privy to the internal conversations that happen about these things. They can be made for a variety of different reasons, but it's important for me to think about the decision relative to the strategy and the tactics that the company is communicating. Again, it's about consistency, like, tell me, does the decision that you're making make sense with where your business is headed?
Deidre Woollard: Well, that's such a good point too, because I look at the press releases. I used to work in PR, so I understand PR speak a bit. But, you know what? I look at this with BlackRock. They were talking about we're doing these layoffs, but that's because we see more money going toward ETFs. We look at Amazon and Google and they each have a reason that is interesting. With Google, they're laying off some of the people around the Google Assistant, but they're also putting more energy into it. With Amazon, you've got cuts in Twitch, you've got cuts in Prime Video, MGM Studios, maybe that's indicating cost of content. These are small, little, niggly moves in these massive behemoths. But what, are they also signals not just about the job cuts, like hey, we need to balance the budget, but also, hey, we're going in a different direction, and that's why this is necessary?
David Meier: So we're bringing in another variable here.
Deidre Woollard: Exactly, yeah.
David Meier: That's what you're telling me. But again, your point is spot on, and again, I'll go back to the consistency question. Let's use Google's announcement as the example to walk through here. There may be costs and benefits of the work that needs to go into maintaining and improving Google Assistant at this point in its life cycle, but you could argue that that technology is probably matured, and if it's matured enough, it may need a different amount of labor to do the maintenance and incremental innovation that's required to keep it going. One thing could be, hey, I don't need as much direct labor making these big leaps and bounds in terms of technological innovations, maybe I need less labor and more AI in order to have a better control of my costs that keep that service up and running and interesting for the people who are using it on their phones.
Deidre Woollard: It makes me start to wonder, we don't know if these are AI-related parts.
David Meier: Correct.
Deidre Woollard: And everyone's looking for that, so it's tricky where we're at right now in the cycle.
David Meier: But I think that point is, again, spot on. These are the types of things that I think people don't necessarily appreciate in terms of what AI can do. It's not just, hey, I'm going to revolutionize the way we do business. It's also if I can assign AI to do tasks and be more efficient at tasks that I need done, companies are going to do that. That's one way you get a scale advantage in your labor, unfortunately, is to reduce the labor and get more output as a result of that labor using technology.
Deidre Woollard: Well, and then you have to balance also the optics of this coming back to the PR. Google announced this and immediately there was a tweet from the Alphabet Workers Union saying, these small cuts, they're unnecessary for a company of this size, and then you had another story that was like an almost job cut from Salesforce. Fortune had this story of Salesforce might be freezing hiring, and so then Salesforce had to come out and say that they're strategically hiring, which is interesting because CEO, Marc Benioff of Salesforce, big job cuts last year. Then their last earnings call, he seemed to be throwing open the door saying AI is making us boom, we're hiring. How do you like to see companies handle some of these really tricky optics?
David Meier: Be consistent.
David Meier: If we look at the context, focus on Salesforce and Marc Benioff here and we look at the context, look, Marc Benioff is a promotional CEO. He loves to grow, he loves to talk about his company. He loves to talk about the culture within Salesforce and there's nothing wrong with that. But, as a mature company, if growth is picking up and your company needs more labor to execute and capture that growth, then you can talk about hiring. There's no problem with that. But if growth is slowing down and your company needs less labor as a result in order to provide a return to shareholders, look, that's not a fun story to tell, and, you know, Marc Benioff doesn't want to tell that story. That's just not who he is as a person, as a CEO, but it's the right one to tell. Again, just be consistent. Try to be rational here and again, for me as an analyst, I'm looking for that consistency. I want to make sure there is a match between what you're saying, what you're doing as a company, and why you're doing it. If there's a mismatch, that leads to more questions.
Deidre Woollard: Yeah. That consistency is so important. I'm going to switch topics a bit because yesterday on the show, Dylan and Jason, they talked about the SEC's approval of Spot Bitcoin, ETF. They were waiting to hear the official announcement because it hadn't come out when they did the show. Now we've got Gary Gensler, of course, head of the SEC, and his statement. There was a phrase that stuck with me that the SEC doesn't really approve or endorse Bitcoin, and they said, investors need to remain cautious. So I read that as the SEC they had to do this. What do you think? What's your take?
David Meier: What's the idea for Bitcoin? Etf got started and got support from the various service providers that were going to, you know, make this happen. It was inevitable the momentum was not going to stop, and it was not going to be a case where, you know, no, we're just not going to do this. What I think the SEC has been trying to do in this code and code negotiation phase before the approval phase is figure out how they can get best organized in order to provide some oversight. Look, the gravitational pull of Bitcoin is very strong, and the opportunity for service providers to make incremental revenue fee that could actually be really big is also strong, so look, it was going to happen sooner rather than later. That's always been my feeling.
Deidre Woollard: Well, now it's happened. We've got a potential 11 of these coming to market. The frenzy is on. We've got the grayscale Bitcoin Trust and the shares Bitcoin Trust, those were first out of the gate. Early trading went way up. We know people, there's spent up demand here, right? There's going to be this flurry of excitement I think about this like, is it more like like an IPO where I want to watch, maybe wait a year, see how the market, the way the market works on a company, or is it more like, like a gold ETF or something like that? How do you think about the comparison here?
David Meier: This is an excellent question and one I had to think quite a bit about. But I think I lean toward the IPO approach that you just mentioned and think it's best to wait and see how lots of things shake out and especially how the market for Bitcoin actually responds. I mean, yeah, the potential for, you know, how is this all going to work? Because if there is all this potential demand, that wants it, what's going to happen to the Bitcoin? Well, I guess it's not a security yet. The Bitcoin [OVERLAPPING] asset, how it responds. What I'm really looking for is to see just how much institutional demand there is for this ETF because that's who they're targeting. You know, it's difficult for many institutional investors to actually invest in Bitcoin itself, so this provides them a way to do that. To your point, between this one being approved and 11 more right behind it. Look, we know there's demand, otherwise I shares wouldn't have been pursuing this product. It just remains to be seen how much there is. I think the key to making any decision about whether or not you want to buy this ETF early on is you have to have some way of handicapping that demand. As well as a way of figuring out what's the potential impact of that demand on the asset itself, Bitcoin.
Deidre Woollard: I thought of it like an IPO and then I went back to maybe it's more like gold because with an IPO you have the revenue potential. You have the story emerging. With Bitcoin you've got a price, like there's fewer variables there.
David Meier: That's an excellent point. The comparison is not perfect, because we don't have an asset, which is a company. If you go through the IPO process now we have all of the financial statements. We have all of the information that gives us insight into what this company is going to do and how it's going to do it and how it's going to grow, et cetera, we just don't have that with an asset like Bitcoin. But on the other hand, it is all about price. I mean, that's really, it's supply and demand. Supply is for now, held constant, and we know demand is there, so the implication is price go up. It's difficult. But unlike gold, this approach, the wait and see approach is better. Because I think there'll be a lot more volatility in Bitcoin than they're likely be with something a commodity like gold.
Deidre Woollard: Yeah, yeah, I think that makes sense. Thanks for breaking this down with me today, David.
David Meier: Thank you, Deidre.
Deidre Woollard: We talk about a lot of stocks on the show, but it's just a peek at the Motley Fool's investing universe. This year we're rolling out a new offering. It's called Epic Bundle. The service includes seven stock recommendations every month, model portfolios and stock rankings, all based on your investor type. We are offering Epic Bundle to Motley Fool Money listeners at a reduced rate as a thanks for listening to the show. For more information, head to www.fool.com/epic198. We'll also include a link in the show notes for you. One of the most powerful questions that investors can ask doesn't involve any math. Ricky Mulvey caught up with Alicia Alfiere for an introduction to the Snap test and apply it to a few companies.
Ricky Mulvey: Alicia, I think this is a Foolish test for a company, but I think it's a powerful question that anyone can and maybe should ask before buying a stock, it's called the snap test. To set the table, can you explain what the question is and how it works?
Alicia Alfiere: Yeah, definitely. The snap test is from David Gardner, and so for fans of the Marvel Universe, it's essentially the Thanos test, which means if you snap your fingers and the company is gone, would people be angry? Would they notice? It's shorthand for figuring out if a company has an incredible moat, or a competitive advantage. Sometimes, again, to help you think structurally about a company, is there competition? Are there adequate substitutes? Can anything be rebuilt with time and effort? Of course. But would the loss of a thing drive the need to rebuild? But I would also caution you and say that it's just a piece of the puzzle for investing.
Ricky Mulvey: Yeah, it's not one question you can ask and then say move on. But it would be easier if it was that way. I think the obvious company to apply it to would be Snapchat because it's one of those things where you can talk about very necessary companies, where if they shut down, things would go very very awry. But also, with a company like Snapchat, if that was immediately shut down, you would have a lot of upset people who could not communicate with their friends.
Alicia Alfiere: You would and perhaps I have a bit of a hot take here because I do think for those who are unfamiliar, the Snapchat app is an app that allows for visual messaging and it is wildly popular. In the third quarter, 406 million global users and over 5 million subscriptions. According to Pew Research Center report, Snapchat was one of the most widely used online platforms for teens. Here's the problem though, I do feel like there are a lot of social media apps and therefore a lot of substitutions. If this company were to be snapped away, would its users miss it? Yes, I think so, but I don't think they would have to really wait long before turning to TikTok, Instagram, maybe even the old school Facebook or Whatsapp.
Ricky Mulvey: I think they would figure something out. I don't know about Facebook. One of my favorite takes is I don't use Facebook anymore, I'm just on Instagram. It doesn't really work. I was talking to a teenager for this volunteer thing, and he told me that he is on Snapchat and he lets everyone see his location and the reason he does that is because what if you were dying and you needed someone to come save you, so he allows every single person that he's ever met in high school to see his location at all times.
Alicia Alfiere: Wow.
Ricky Mulvey: The social dynamics with Snapchat, there's a lot of hurt feelings because people can see if their friends are gathering without them, it is terribly unhealthy. Maybe not Snapchat, but how about Netflix? That's something that people have been snapped, especially over last year when Netflix started cracking down on password sharing. A lot of people understood like, I'm a little upset, I'm not getting my Netflix right now.
Alicia Alfiere: Netflix is just about everywhere. Streaming content in over 190 countries with content in lots of different genres and languages, 247 million paid subscribers at the end of the third quarter and it's still the only major peer play streaming content provider. It was incredibly disruptive to the old way of watching and distributing content and it did so well that as we know, a lot of companies tried to copy the model. It has an incredible amount of content that continues to resonate with its users. I was reading about a Nielsen study and they looked at the US watching habits for the first 38 weeks of 2023 and Netflix had the most watch original series for 37 of those weeks and the most watched movie for 31 of those weeks. We're talking about something that really resonates with people. It was also found that it was more than all of the other streaming services and platforms in terms of screen time, except for YouTube. But the snap test, so several years ago, when it was mostly just Netflix in the space, the company could easily pass over that hurdle for the snap test. It's a little bit more complicated now, there are plenty of substitutes, Disney+, Apple TV, Amazon Prime, Hulu, and others. But we can argue about whether those are actually adequate substitutes for Netflix. Netflix change the way we consume entertainment, and it's still the largest streaming service out there. I think that this one passes the snap test for now. Though, maybe not in another few years if others can catch up.
Ricky Mulvey: When I think of the snap test, I think Snap, Netflix, those are some fun ones, but then there's ones where the world would be seriously damaged if these companies wouldn't exist. For that, my mind goes to a lot of the semiconductor companies, whether it's Taiwan Semiconductor which manufactures the chips, or ASML which manufactures the machines that make the chips. If either of those companies went away, there would be very serious problems for the fragile civilization we live in.
Alicia Alfiere: Yeah, no, that's absolutely correct, because we're talking about semiconductors are vital to electronics and to your everyday life and that's not at all being hyperbolic, it's true. We're talking about companies that are important in terms of the supply chain of those electronic goods. Definitely, those would pass the snap test.
Ricky Mulvey: You mentioned this earlier where you said, just because you passed the snap test, it doesn't mean that it's an attractive stock for an investor. Let's put that to practice then. What are some companies that you think maybe pass the snap test, the world would go awry, it would be very difficult if these companies didn't exist, but you're not running out to buy those stocks?
Alicia Alfiere: Well, everything in context. It depends on individual companies. But I would say that the sector where this would be the case would be the utility company sector. We know if the electrical grid in your area were to disappear, that would be a massive problem. But that doesn't mean you would want to invest in a company. As with everything, it depends on the individual company and circumstances, but these companies often have a fair amount of debt so the utility industry is one of the most leveraged and that's because it has this requirement to maintain and build infrastructure. A lot of these companies pay a dividend, but if a company is taking on too much debt and burning cash, it can put their ability to pay dividends at risk. If that's your reason for investing in one to have the dividends, that you're going to run into some trouble there.
Ricky Mulvey: They've also run into some trouble with the cops now. As interest rates rise and a lot of the utility companies we're paying a healthy dividend, that becomes a little bit less attractive if you can get a United States literally, risk-free investment for four or 5%.
Alicia Alfiere: Right. It might sound crazy that a utility company would suspend or cut their dividend, but it has happened. Last year, a utility company called Algonquin Power and Utilities actually cut their dividend something like 40% to shore up their finances.
Ricky Mulvey: To add even a little bit more nuance, maybe there's a company you like that completely fails the snap test, but maybe has historically been a good stock. One example I talked about recently with Bill Barker on the show was Crocs. I think that's a company for the past few years, it's beaten the market. If one did not have Crocs in existence, people could find alternate footwear, Clog, sandals, that kind of thing.
Alicia Alfiere: Yeah, definitely. For me, it would be Costco.
Ricky Mulvey: Really?
Alicia Alfiere: Yeah.
Ricky Mulvey: That would be a very painful loss if I didn't have Costco?
Alicia Alfiere: It would be for sure. We know they pioneered the membership warehouse club, keeps customers coming back. Member retention rate in the 90% range, continues to grow, generate cash, but there is a lot of retail competition and there are substitutes in the space like Sam's Club. If you snapped it away its members including me and I'm guessing you, would definitely feel the loss and be sad about particularly the loss of those bargain hot dogs. But competitors could come in to fill the gap.
Ricky Mulvey: If you're a Costco member, you could still get groceries, you could still get tires somewhere else. It would be incredibly annoying and I wouldn't like it very much.
Alicia Alfiere: Great.
Ricky Mulvey: Alicia Alfiere. Thank you for your time and your insight.
Alicia Alfiere: Glad to be here.
Deidre Woollard: 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. I'm Deidre Woollard. Thanks for listening. We'll see you tomorrow.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Alicia Alfiere has positions in Alphabet and Costco Wholesale. David Meier has no position in any of the stocks mentioned. Deidre Woollard has positions in Alphabet, Amazon.com, and Costco Wholesale. Ricky Mulvey has positions in ASML, Netflix, Taiwan Semiconductor Manufacturing, and Unity Software. The Motley Fool has positions in and recommends ASML, Alphabet, Amazon, Bitcoin, Costco Wholesale, Netflix, Salesforce, Taiwan Semiconductor Manufacturing, and Unity Software. The Motley Fool has a disclosure policy.
