Big Tech Earnings, Results From a Couple of Financial Companies, and a Look at Spotify – The Motley Fool

In this podcast, Motley Fool host Dylan Lewis and analysts Emily Flippen and Jason Moser discuss:

• Big Tech earnings, trends in cloud spend for Amazon, Microsoft, and Alphabet, and what ad market softness might mean for Meta Platforms.
• Visa and Mastercard earnings, and why consumer spend might lighten up a bit in Q4.
• Spotify‘s fantastic past 12 months.
• Two stocks worth watching: Masimo and Okta.

Motley Fool co-founder and CEO Tom Gardner caught up with Michael Lewis at the ONE: NYC event to chat about about FTX, Sam Bankman-Fried, and the investing dynamics of Silicon Valley.

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 Oct. 27, 2023.

Dylan Lewis: Earnings, earnings, earnings. You want the updates? We got them. Motley Fool Money starts now. It’s The Motley Fool Money radio show. I’m Dylan Lewis; joining me over the airwaves, Motley Fool Senior analysts Jason Moser and Emily Flippen. Great to have you both here.

Jason Moser: Hey.

Emily Flippen: Hey, Dylan.

Dylan Lewis: We’ve got lessons learned from FTX, stocks on our radar, and an absolute parade of earnings reports, and that’s where we’re going to kick things off. This is one of the biggest earnings weeks because by sheer market cap, Jason, many of the biggest companies in the world reported, and we heard from some of the big tech companies this week. Let’s start with Amazon. Shares up over 5% after its third-quarter report and one of the better market reactions we’ve seen. What jumped out to you?

Jason Moser: Nice to see that market reaction holding. It does feel like, with this earning season, good results don’t quite seem to be good enough, but in this case, maybe that’s the case, it was a good quarter. There was respectable growth on the retail side of the business. Amazon Web Services continues to drive the profits of the company, and they are definitely seeing some benefits from restructuring their fulfillment network. They’re trying to whittle that down, make it a little bit more efficient, get into fewer shipments and faster delivery. It’s helping the numbers tell a good story. Net sales up 11%, excluding currency impacts. AWS $23.1 billion in revenue for the quarter, that was up 12%. $6.97 billion in operating income, and that was up 29%, so that gives us operating margin performance up 400 basis points from a year ago. AWS represented 16% of revenue, but 62% of operating income, so that just shows you the importance of it. In regard to AI, which is clearly a big theme with all of big tech, it’s still very early for all of these companies, but with Amazon, in particular, they’re investing in their own silicon. There’s the partnership with Anthropic. They’ve got services like Amazon Bedrock and CodeWhisperer which are gaining traction. I think something that’s sneaking under the radar but becoming a little bit more obvious now, it’s the advertising business for Amazon. It’s just really impressive, $12.1 billion for the quarter, exceeded the expectations there for the quarter. If you look at the same quarter back in 2019, they chalked up about $3.5 billion in advertising revenue, so clearly a big opportunity that they’ve capitalized on. It starts to make sense now these investments that they’re making on the entertainment side of their business.

Dylan Lewis: Jason, you mentioned the margin story there and the ad business. All told that led to net income tripling year-over-year for the business. Just under $10 billion, a rosy quarter for Amazon. A slightly different story when we look over at Alphabet, Emily. Shares of the Google parent down over 10% since the company reported Wednesday. Emily, the biggest single day decline since March 2020 for this business.

Emily Flippen: It must be nice to be Alphabet, though, if less than 10% decline is your largest single day decline in almost three years. It could be worse, let’s say that, but despite the fact that both earnings and revenue did beat expectations, I think the cloud business really acted as an overhang. That has been their fastest growing segment, and growth slowed quarter-over-quarter, which the market didn’t appreciate, but as Jason was just mentioning, it’s a strong quarter for ads sales, and the vast majority of Alphabet’s business is ad-based monetization, and so affirming up the ad market is really a massive benefit for this company, and that’s showing up in their financial results this quarter. Unfortunately, Alphabet doesn’t really do anything to drive ads sales. They can make that more efficient. They can operate on the margin, but in terms of whether or not companies are actually spending money to advertise, it really comes down to the state and feelings about the economy, which Alphabet understandably doesn’t control. I understand a little bit of the ding that they’re getting just because the cloud business, which should be their strongest segment, was sequentially weaker.

Dylan Lewis: We’re going to get a little bit of an update on what that consumer outlook looks like in our next segment. Emily, you mentioned the cloud slowdown for Alphabet, and when we see slowdown in one spot, that probably means that companies are benefiting elsewhere. Jason, I think that’s probably the case when we look over at earnings from Microsoft.

Jason Moser: I think that was one of the big parts of the quarter that stood out for Microsoft, certainly, the cloud performance. It’s not the only one though. The company all the way around continues to impress. I think the big takeaway right now for investors is, at least early on, Microsoft is seen as the leader in AI. You hear a lot about Copilot. That’s a major theme, and as [inaudible] has mentioned 76 times that Copilot, their efforts in AI, helping customers infuse AI across every layer of their business to help drive productivity. You’ve got, for example, making coding more efficient with GitHub or transforming productivity at work with Microsoft 365 or aiding in Search. Any which way you cut it, it does feel like Microsoft has the early lead with AI, and the numbers, ultimately, they speak for themselves. Revenue, $56.5 billion, it was up 12% excluding currency impacts. Earnings per share up 26%. To your point on the cloud there, revenue $31.8 billion, it was up 23%. They are taking some share in that cloud market. That’s a big deal particularly when you look at the gross margin cloud that held steady at 73%. They continue to return capital to shareholders.

There were $3.6 billion in repurchases, $5.6 billion in dividends, and that share counts come down about 2.6% since 2019, so yes, it’s offsetting some stock-based compensation, but yes, it’s also bringing that count then a little bit. Dylan, let’s talk about really the elephant in the room here. What happened this quarter? That Activision Blizzard deal closed, and that I think is a big deal. It’s not just cloud anymore with Microsoft. Gaming is something that’s going to become more and more part of the conversation with this company. They had better-than-expected subscriber growth. Minecraft, I can’t believe this, it surpassed 300 million copies sold. With the deal closed now, with Activision Blizzard now part of Microsoft, they now have 13 $1 billion+ gaming franchises, from Candy Crush to Diablo, you have Halo, World of Warcraft. It just goes on and on and on. This is a big company. They do a lot of things very well.

Dylan Lewis: It’s not just about the cloud with Microsoft. It’s also not just about the cloud with our tech earnings update here, Jason. We’re also going to check in on results from Facebook and Instagram parent, Meta. Emily, you did the dive on this one, and we’ve talked a little bit so far in the segment about tech companies focusing on efficiency. It seemed like Mark Zuckerberg and Meta were early to the game on that one, and that was what we were seeing pay off in some of the results from this business.

Emily Flippen: What did they call it? Their year of efficiency? Efficient it is because this quarter was a blowout quarter for Meta. Their revenue rose more than 23%. Daily active users and average revenue per user also positively surprised the market. Net income up a whopping 164% compared to the third quarter of last year. All of this just highlighting the cost cutting, the effective controls about where they’re spending their money, focusing on strong return on investments plus obviously the turnaround in the ad market, all really benefiting Meta, but engagement has been a relatively bright spot for the company despite the fact that there’s so much competition for eyes and ad dollars. Meta, mostly their Instagram and Facebook platforms just really continue to shine as a pretty reliable place for companies to spend their money and get a decent return on their investment in terms of advertising dollars. But really the area to watch here is the billions of dollars that Meta continues to burn in their ambition to be part or the leader, I guess I should say, of the Metaverse. Earlier this year, they launched the Quest 3, which is an iteration of the Quest Pro, their virtual augmented reality headset. It has a much lower price point at around $500, which is great in terms of increasing accessibility, but here’s the problem with that. Who has a use case for this thing? If you’re not playing games, which I totally understand, I’m a gamer myself, but if you’re not playing games, who is using this platform? I don’t think they’ve made a really great use case for it for the average person. Until they do that, I’m looking at the $25 billion in operating losses this segment has stacked up as a weakness for this company.

Dylan Lewis: To your point, Emily, I’m not a gamer, and I think if someone gave one to me, it would sit and collect dust somewhere in my closet. I think that’s probably where it would wind up.

Jason Moser: Let me just jump in here because I can speak to this a little bit. We have one of those Oculus headsets we bought for our daughter. I’ve said this before. We bought it for our daughter for a late birthday present. We thought it would be just an extra little fun item. It was neat for a few weeks. It starts to collect dust. I was reading through the call there, and the thing that stood out to me in regard to Meta’s, and Zuckerberg, in particular, his language in regard to the Metaverse, the Metaverse was barely mentioned in this call. AI just got all the love. Metaverse, no love whatsoever, so this must be a really long term bet, but the language that you hear in regard to these glasses and these headsets, it’s just eerily familiar. It’s eerily similar to the stuff that we would hear from Snap, back when Snap was rolling out their spectacles in the use cases and why these could be revolutionary. It all sounds great on paper. The technology is amazing, it’s fascinating, but they’ve not come up with a core use case, and I think that really is the problem. It’s not going to be just a Snap problem, I think it’s a Meta problem too, that there perhaps is an end game there. It does sound like it still has ways to go before they really figure out how to make this something that appeals to the masses.

Dylan Lewis: Zuckerberg didn’t mention AI too too much in the conference call, but I’m going to take the bait here, Jason. If people are looking for AI as it shows up in company conference calls, especially with respect to big tech, is the cloud segment where we need to be looking?

Jason Moser: That’s certainly one part of it. Again I go back just to Microsoft, and I think Microsoft has the most fascinating way to get this out in front of people because they’re not only utilizing it to make their business better as far as efficiency, but they’re also coming up with ways to ultimately make it better for their users, and it’s manifesting through that Copilot program which just covers virtually everything that Microsoft does.

Dylan Lewis: Emily, taking a step back here before we wrap up this segment, anything else that you’re really struck by looking at earnings results from these four companies?

Emily Flippen: I’ll just highlight the AI thing. Look, if you want to follow AI demand, look at INVIDIA, look at cloud demand for companies, but don’t beg too much into the value that can be extracted from investments in AI quite yet. We might get there, but we’re still very early on in this life cycle, so understand that this entire industry, the demand that exists today, can very easily fall off a cliff, if and when, I’m not saying it will happen, but it could happen that these investments pull back if the economy worsens.

Dylan Lewis: Coming up after the break, we’ve got the latest update on how often consumers are pulling out their credit cards. Stay right here. You’re listening to Motley Fool Money. Welcome back to Motley fool Money. I’m Dylan Lewis, joined again over the airwaves by Jason Moser and Emily Flippen. We’re going to keep rolling with the quarterly updates, big tech reports together, so do two of the largest credit card companies out there. Jason, we have new numbers from Visa and Mastercard this week, and really, I think a critical look at consumer spending.

Jason Moser: Exactly. They are very similar companies and what they do obviously and very similar results. Visa, they saw revenue of $8.6 billion. That was up 10% including currency impacts. Earnings per share of $2.33 up 18%. They do such a great job of translating modest top-line growth into better than modest bottom-line growth. As investors, we love to see that. Payments volume was up 9%. They said that over the course of the quarter, they saw payments volume growth tick up from July to September, and that was driven ultimately by improvement in ticket size growth. There were higher gas prices. Some easier year-over-year comps helped that as well. They did note in Visa’s call that October’s spin, while it’s been stable, it’s been feeling some pressure from primarily declining fuel prices but product mix as well. Ultimately, at the end of the day with companies like these, you’re looking for them to return value to shareholders.

These are big businesses that do something that a lot of other companies can’t really do, share repurchases and dividends, $5 billion for the quarter, they increased their dividend, Visa did by 16% which is always nice to see, and they authorized again a new $25 billion share repurchase program. It’s worth noting, share counts down 7.8% since 2018, and that really is part of the thesis with a company like this. You want to see them keep on doing that. I think one of the interesting things with these businesses is, as we’ve seen fintech really become front of the conversation, everybody talk about fintech, fintech, fintech, and Visa and Mastercard, they’re going to get disrupted. They’re doing a really good job of finding their way into this value chain, establishing new positions. They signed over 500 commercial partnerships with fintechs globally over the course of the quarter. That was up 25% from a year ago, so I think that just speaks to their ability to find new and compelling positions in that payments value chain as a partner as opposed to a competitor, and ultimately, their top 265 largest clients use 22 products on average. Now that’s up 8% from a year ago versus their average clients who just use 11 products on average, so it tells me that Visa is doing a lot with their biggest customers, which is a good thing to see.

Dylan Lewis: Let’s switch gears and look over at results from Mastercard. My high level take here, Jason, is you mentioned these companies are pretty similar. The numbers look good but one of the things that jumped out to me was the company disclosed sequential growth slowdown for the month of October which seemed to spook investors.

Jason Hall: That was the one little difference there. Visa said that spending stabilized Mastercard. Their language was a little bit more glass half-empty, so I don’t know if that’s a leadership thing, if they’re just trying to set expectations a little bit differently, but it was a good quarter regardless. Revenue of 6.5 billion dollar up 11%. Earnings per share up 29%. Gross dollar volume up 11%. They did make the same mention of October and fuel prices there, but they are also experiencing success in new flows, new partnerships with fintech firms, so they’re doing a lot of the same things that Visa is doing, just at a little bit of a smaller scale. During the quarter, they repurchased 4.8 million shares at about $1.9 million. They paid $538 million in dividends. To the point on share account, share account for Mastercard, it’s down 8.5% since 2018. Listen, I own both companies. I think I’ve always made the argument, why own one or the other? You can really own both and just win either way. It feels like they just continue to do what they say they’re going to do, and that’s what we want to see.

Dylan Lewis: Rounding out our earnings update, we’ve got new numbers from Spotify. Emily, the music streaming service raised prices earlier this year. It didn’t seem to bother users too much.

Emily Flippen: Finally some appreciation for Spotify, but even more so than the great numbers they put forward in terms of both monthly active users but also paying subscribers, more importantly, the market was focused on their gross margin which continued to tick upwards and that’s really where the tension with Spotify has been, is when they went public, they communicated to members these goals for a gross margin around 30%, a little bit north of 30%, but their investments in the podcasting and the weakness in the ad market, as a result, have kept those gross margins muted, but this quarter was a step in the right direction, in part thanks to those price increases that you just mentioned. Those also helped the margin, although those were mainly for North American users and didn’t seem to get a lot of pushback. They came at the end of the quarter, so really next quarter will be the big question mark in terms of whether or not there was any churn, thanks to those price increases, but also as we continue to talk about the firming and the advertising markets, their ability to monetize those users continue to improve, and their ad-supported gross margin was 8.3% of the quarter. That might not sound impressive, but just the last quarter, that margin was 1.8%, so it’s a 600 something basis point improvement quarter-over-quarter, so a massive jump in the right direction here for Spotify.

Dylan Lewis: I want to take a step back with Spotify’s results, and I think we can lump Meta into this conversation. Two companies, in particular, but there are several others out there that have gone on incredible tears over the last year. I think Spotify is looking at almost a double, Meta looking at almost a triple over the last year, and there are some other beat up tech names that have had a similar path. When you look at some of these names and some of these returns recently, Emily, do you feel like some of the easy money maybe has been made with these stocks, and we’re back to something that feels a little bit more normal for where they should be?

Emily Flippen: I promise you if you were to wind a year ago and say that Meta and Spotify are “easy money,” you’d get a lot of pushback from the market because, to have the hindsight, right now it’s 2020, but in the moment, these were much riskier investments. We didn’t know where the ad market was going, we didn’t know the strategic investments those companies would make, so in hindsight, sure, but the reality is that both these companies are still well-off their highs, so if you’re looking at these companies and liking the direction they’re headed, in my opinion, there’s no reason to anchor to the previous price and think that you somehow missed the boat.

Dylan Lewis: Jason, what about you? Similar thoughts?

Jason Moser: When it comes to Spotify, at least one thing I keep on wondering about is there’s not maybe another acquisition in their future to try to expand that growth a little bit. I’m a subscriber to Nugs.net Live Music. I’m a big fan of that stuff. I just wonder if maybe that wouldn’t just be an excellent little addition to their Spotify universe. I don’t know the user base there, but Nugs.net, keep an eye on that one.

Dylan Lewis: If you’re listening, folks at Spotify, here’s a free one for you. Jason Moser, Emily Flippen, we’ll see you a little bit later in the show. Up next, we’ve got to look into FTX and Sam Bankman-Fried from one of the greatest business writers of all time. Stay right here. You’re listening to Motley Fool Money.

Welcome back to Motley Fool Money. I’m Dylan Lewis. This past week, we were in New York City with our Motley Fool One members for our event NYC ONE. While we were there, Motley Fool co-founder and CEO Tom Gardner caught up with Michael Lewis about how one of the other big events in the Big Apple is shaping up, the trial of FTX’s Sam Bankman-Fried. Bankman-Fried was the focus of Lewis’ latest book, Going Infinite, and Lewis shared his wild insights from following the crypto kingpin as well as the dynamics of Silicon Valley and whether investors would really change how they approached investments like FTX in the future.

Tom Gardner: Let’s put you in a new role in life. You’re the Chief Compliance and Risk Management Officer for Silicon Valley. … Actually I’ll expand that role if you’d like to have an even broader set of responsibilities, and that is for all of our investors at The Motley Fool, all of us as investors, you’re now our Chief Compliance and Risk Officer because you’ve spent the time to study the most recent, most significant collapse.

Michael Lewis: What are the holes that allow this train wreck to happen? That’s mixing metaphors. One of them is that a lot of the big accounting firms wouldn’t audit crypto. Not that the big accounting firms are capable of presiding over a disaster, but you already had a situation as a Silicon Valley investor where you’re looking at firms that are not conventionally audited. They may have some little auditor you’ve never heard of, if they have one, or they might just sketch out their balance sheets, like a third grader, on a piece of paper and fax it to you. In retrospect it wasn’t obvious in the moment because 120 people invested in it. If you go back to say what we have flagged is like we’re not going there. I would say no board of directors is a pretty good sign that there is a problem. There’s absolutely no one else who knows what’s going on inside the business, added to no CFO, added to no organization chart like you can’t actually know who worked.

Tom Gardner: That was a pretty telling moment in Going Infinite when SBF simply asked, “Why would I have a CFO?”.

Michael Lewis: Why would I have a CFO, and actively hostile to organization charts and listed employees? You have the book there. Take the jacket off the book. If you take the jacket off the book and just hold it up, look on the inside of the jacket.

Tom Gardner: Thanks.

Michael Lewis: Sam, because there are so many emotional problems and psychological problems in the company, so the inside of the jacket, so that is the only organization chart known to exist for FTX, and it was created by the company’s psychiatrist. It was Sam and Caroline’s personal psychiatrist who they moved to the Bahamas to deal with all the unhappiness in the company. The shrink can’t get his mind around the problems people have unless he knows where they are on the organization, so in therapy, he starts to tease that out, and he creates the only organization chart, sticks it on a thumb drive and gives it to me, and he vanishes, but Sam didn’t know that existed, so you’re asking for compliance. Those three things tells.

You know what else is a tell? I don’t know what to say about this exactly. If you’re a venture capitalist, your biggest fear is not that Sam Bankman-Fried takes your money, and you lose $30 million. It’s that FTX is the next trillion dollar company, and you weren’t there. The calculation they’re all making is that this thing looks like a rocket ship. It actually has gone in revenues, from 20 to 100 to 950 to a billion, and the revenues are going to be a byproduct of, like, how many people want to gamble in this casino. The VCs I talked to, and I interviewed them before everything went bad and after, before it went bad, they said they thought Sam might be the world’s first trillionaire. They’re thinking like that. Now whether that’s right or not, they’re thinking that scale. What I would say is, Compliance Officer, whenever you come to me with a fear of missing out story, and it’s just like we got to do this because it’s going to be, that’s where you got to be the most.

Tom Gardner: Let’s see if they have a board.

Michael Lewis: Yes, let’s see that.

Tom Gardner: Let’s just see if they have a board. It is funny we had meetings with the venture capitalists in San Francisco when we took our learning and development group at The Motley Fool to meet a bunch of companies in San Francisco when they graduated the program, and one of them presented the challenge that they had faced at the firm, which is that they had decided to take the next incoming group of analysts and teach them about the mistakes that had been made in terms of the losers. They went through a whole process, and they’re, like, it would be great just to remove a few of these, and that analyst group ended up having the worst performance because they did remove the most losers, and they removed the one Tesla or the one Airbnb, and the math crushes you if you do that. So they went back and said, we are now training our analysts to make mistakes, to keep going as boldly as possible, and that does open the door on investing in something, a business that doesn’t have a board or a CFO and ends up being a total collapse.

Michael Lewis: This is also a story of the lure of crypto. What got me interested in this in the first place was not like Bitcoin. I was assaulted by Crypto people for 10 years to try to write a book about, and I never could get that interested, but when all of a sudden the market cap of cryptocurrency, is it $2 trillion, and you’re looking and you’re thinking this is getting to the size where this is going to have social consequences. It isn’t just like a funny little gambling side show, and so the VCs are looking, like, how do we get into this? Because it got so big, and you can’t really blame them, although you can ask them, why you didn’t insist on some insight into the business, but if you had insisted you would have been left out. You’re saying I’m the Compliance Officer. I would just say those are the moments where you were actually at the biggest risk doing something dumb. It’s that, I got to be there, I got to be at that part.

Tom Gardner: We had a wonderful conversation with a professor at NYU Business School named Dr. Melissa Schilling, and she was talking about a book, Quirky, that she’s written and really assessing the patterns of the great founder leaders of companies, I think not entirely companies, innovators and the changes that they drove. She was identifying that they often wouldn’t probably be high on the list of EQ. They might have been very high IQ, but they didn’t do a good job of collaborative work efforts and building consensus because they were separate from the group, and they were thinking differently, and they didn’t have a filter to understand how they were being perceived by others. I’d like to hear from you a little bit of the SBF balance of IQ-EQ and how you think about that, how we evaluate leaders and what we should be looking for, knowing that an emphasis on neither one is going to automatically give you one winner after the other, but how should we, in evaluating leaders of private or public companies that we invest in, evaluate somebody along the continuum of EQ and IQ?

Michael Lewis: In the case of Sam Bankman-Fried, he defines one end of the continuum that this is a totally socially isolated kid who knows he doesn’t feel empathy or pleasure, and he’s unable to make facial expressions until he’s 20 years old and does not feel your pain and born with these qualities. People around him are always compensating for the fallout from his lack of interest in your emotional state and lack of sense of emotional intelligence. Nishad Singh, who just finished testifying against him, said to me once, back when things were good, he said, “You know, my job here has been to be Sam’s emotional intelligence because he doesn’t have any. But I watched him, he was patting him on the back, saying, “In the last six months, he subcontracted some of his IQ to use it as EQ, and he’s gotten a little better.” But I think that to answer the second part of the question is like how you take that into account when you’re evaluating someone who’s doing something, creating a business.

You can’t create an organization. We have people without keen emotional intelligence that’s going to survive. It may be the person who creates the organization doesn’t supply that, but the absence of it should be something that puts you on a red alert, I think. I thought one of the ways I saw this story right from the beginning was this is what happens when you exalt a certain kind of intelligence and pay no attention to other kinds of intelligence. They’re only interested in really high IQ people. They’re really only interested in people who are mathy/sciency. Sam, at age seven, begins to think anything in the humanities is all bullshit, makes arguments how Shakespeare is an idiot. That kind of thing, this isn’t smart. This is a blind spot. It’s a blind spot that you need to compensate.

Tom Gardner: You probably end up being ultimately, more about evaluating the full team, and if everyone starts anchoring at one end of that continuum, or any particular skill becomes so emphasized in an organization that the other side isn’t represented, you start to get imbalance, and blind spots emerge potentially all over the place. Michael, if you were to testify, do you think you would be helpful to the Prosecution or the Defense?

Michael Lewis: Probably the prosecution because what gets into a court room is pretty sterile. You’re not allowed to introduce context, emotion, feeling, all that stuff really, and the facts of the book that would find their way into the court all would just be damning. I could list them, but at this point, I don’t think the prosecution needs a lot of help. Also, at this point, it’s funny. Lawyers, they don’t like uncertainty, and I think what I really be is a little ball of uncertainty, then I can create a odd climate in a court room, and I don’t expect to be asked to testify.

Dylan Lewis: Michael Lewis’ book, “Going Infinite” is out now. If you’re waiting for the book but want to see the org chart Michael mentioned in the interview, head over to our Twitter feed, we’ll be posting it at Motley Fool Money. Coming up after the break, Emily Flippen and Jason Moser return with a couple of stocks on their radar. Stay right here. You’re listening to Motley Fool Money.

As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell anything based solely on what you hear. I’m Dylan Lewis, joined again by Jason Moser and Emily Flippen. Normally we wrap up our radio show with something fun and food related for our final segment. But before we head over to our radar stocks, it was a busy earnings week, and so we’re going to split the difference and talk about Chipotle earnings and maybe have a little fun with food as well. Jason, what did you see from the King of Guac?

Jason Moser: This is..my radar stock last week I think. The big focus has been on these price increases. It seems that the price increases right now are not scaring customers away. Revenue of $2.5 billion, it was up 11%, with comps at 5% for the quarter. Digital sale is normalizing, I think, getting back to normal, this company 37% of sales. If you go back a year ago it was around 37% but a year before that it was closer to 45. I think that just speaks to store traffic coming back, which is of course, good to see. Nineteen percent growth in earnings per share transaction. Comps up 4%. I think it’s interesting they’re still standing by that 7,000 store target there, Dylan.

They’re like halfway there. That’s a big goal. I’m not saying they can’t do it, but the restaurant business is a very competitive one, so I think 7,000 stores, I probably I do, as an investor, I discount that a little bit. It speaks to me the growth opportunity that’s still there for this company. I think it’s really neat to see that they continue to experiment with all this automation, man. You’ve got the autocado that’s peeling and pitting avocados. You got Chippy that’s making the chips. Now they’re partnering with Hyphen for digital order make line and helping make those bowls a little bit more of an automated process. It feels like this is a company that really is enjoying thinking about how technology can make their business better.

Dylan Lewis: Emily, I feel like Chipotle is one of those companies that has continued to defy what people expect it can do. Jason talked about the gaudy or impressive location growth goals it has. I have doubts sometimes when it comes to their extended pricing power just in wondering how much more they can charge. What do you look at when you look at the business these days?

Emily Flippen: Let me put it this way. It’s a lot easier for Chipotle to succeed when they’re selling burritos, rice, chips, and salsa. The demand for that type of food, I think is pretty resilient, which is why they have these ambitious goals. But I do agree with you that I think I always wonder what’s next for the company. Because at this point, when Chipotle reports earnings, I’m bored. I’m going to tell you what management’s going to say before they said it. If they’ve instituted price hikes, they’re going to spend most of their time talking about the price hikes, their pricing power, how resilient they think that customers are. If they haven’t instituted price hikes like they didn’t in previous quarters leading up to this quarter, they are going to talk about their new menu items like the Carne Asada Lounge, which is, you know, why they don’t have price increases.

They’re going to get customers to spend more money by buying into these more seasonal or limited time offerings that cost more. It’s an interesting strategy. It’s been incredibly successful for the business. But you have to wonder, how long does this go on? I’m waiting for that shoe to drop. I’m waiting for the customer pushback to be there. It hasn’t happened yet. I want to give props to Chipotle that they perform so well, so consistently. But I have to wonder if the economy continues to turn, how much pricing power, how much Carne Asada, can the consumer really afford?

Jason Moser: I think to your point, Emily. I think you’re spot on it. I think that’s why this next quarter that they report is going to be so crucial because that’s going to reflect some more recent price increases that they’re pushing through. Like I was saying last week, at some point the customer does start to push back on that. I can make burrito bowls at home for a heck of a lot less than they’re selling them to before. At some point or another, you feel like they have to maybe take a break because right now those price increases are just offsetting inflation more than anything else. But we’ll see, I think next quarter, really how the consumer is reacting to this because they’ve got some price increases that are flowing through now.

Dylan Lewis: Jason, when we were together earlier this week, you said that you had a homemade guac recipe that rivaled what you could get at Chipotle. Does the chain have something to worry about? Are you going to start franchising? Doing some locations?

Jason Moser: In full transparency, my guacamole recipe I essentially lifted from Chipotle. Let’s just be very clear, you’re getting Chipotle’s guacamole when you get mine. I added a couple of things to it from their recipe that really rounded it out. But I’m a Chipotle guac fan.

Dylan Lewis: Let’s get over two stocks on our radar. Our man behind the glass, Dan Boyd, is going to hit you with a question. Emily, you’re up first. What are you looking at this week?

Emily Flippen: Now the stock on my radar this week, which is not on the radar for a good reason is Okta. They’re the authentication management security platform, and they had yet another security breach through their company support systems, which led to the compromising of a few of their key major customers. This is not the first time the company has faced this type of pushback. Earlier this year, they had some systems that were compromised that resulted in massive losses for a couple of casino companies. A couple of years before that, a third party of theirs was hacked. It’s a status of life that I think, if you are the go to authenticator, that you are going to be the subject of hackers looking to conduct malicious actions. But how you respond to that is critical in being well-received security business. In both cases, Okta received flack that they didn’t respond quickly enough to these breaches and, more importantly, ignored notifications from their customers that these breaches had happened. This is a great business. It’s unfortunate timing because their quarterly results up to this point have actually been incredible. They’ve been expanding their financial scalability a bit, expanding their bottom line. But if they lose trust, then they lose everything.

Dylan Lewis: Dan, a question about Okta.

Dan Boyd: Emily, I’m glad that you’re talking about Okta for the wrong reasons this time. Because to me, this is one of those companies that Bill Mann would say, if it disappeared tomorrow, most of the world would not notice. We use Okta here at the Fool.

Emily Flippen: I disagree.

Dylan Lewis: But if Okta went away, would we stop producing our content here at the Fool?

Emily Flippen: A lot of people would probably be able to get access to our systems in a lot easier fashion, so quite possibly.

Dylan Lewis: Jason, what is on your radar this week?

Jason Moser: If Okta disappeared, that would result in a lot of password reset emails. I’m just saying that upfront. I know I’d be on that list. Take a look at Masimo one we’ve talked about before, ticker MASI. On Thursday evening there was an interesting news break there. There was a previous ruling that Apple violated Masimo’s rights and light-based technology for reading biomarkers like heart rate and blood oxygen levels. That’s Masimo’s specialty. That ruling that Apple violated Masimo’s rights, that was upheld this week by the ITC. That’s resulted in some optimism in regard to ITC, and it has been question marks in regard to Apple and their watch. Apple has included a sensor, a pulse oximeter in their watch, and that Apple watch since 2020. The commission found that Apple was in violation of this trade law, and ultimately it could result in banning the import of Apple watches into the US. Now this is a bigger deal for Masimo than it is for Apple, clearly. It’s not the end. The Biden administration has 60 days to overrule the trade commission. Apple could make changes to the watch, they could settle with Masimo, who knows how this turns out. But it’s just an interesting potential win for the little guy there.

Dylan Lewis: Dan, a question about Masimo?

Dan Boyd: Jason, it really seems like Masimo’s punching above their weight this time.

Jason Moser: There’s a long and sorted history with Apple, I tell you. Read up on it. It’s amazing.

Dylan Lewis: Dan, which one is going on your watch list?

Dan Boyd: Despite the fact that a password reset is just about the worst thing to happen to anybody, I’m going to go with Masimo this time. Sorry, Okta, a business that I really appreciate obviously. The tough week for Okta gets even tougher, it turns out. Jason Moser, Emily Flippen, thanks for being here. That’s going to do it for this week’s Motley Fool Monday radio show. This show is mixed by Dan Boyd. I’m Dylan Lewis. Thanks for listening. We’ll see you next time.