In this podcast, Motley Fool senior analysts Emily Flippen and Matt Argersinger and host Dylan Lewis discuss:
- Why more rate hikes are on the way.
- How housing's impact on inflation probably won't slow down any time soon.
- Why Activision and Adobe shareholders might not want their company's proposed acquisitions to go through.
- Two investments on their radar: Spotify stock and Schwab U.S. Dividend Equity ETF.
Motley Fool host Deidre Woollard chats with Atif Qadir, the founder of property tech company Commonplace, about how issues at regional banks affect real estate, and whether empty office space can really be turned into apartments.
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 June 23, 2023.
Dylan Lewis: Let's make a deal, or not. Motley Fool Money starts now. Everybody needs money. That's why they call it money. From Fool Global headquarters, this is Motley Fool Money. It's Motley Fool Money radio show. I'm Dylan Lewis. Joining me in studio, Motley Fool Senior Analysts Emily Flippen and Matt Argersinger. Great to have you both here.
Matthew Argersinger: Hey, Dylan.
Emily Flippen: Hey, Dylan.
Dylan Lewis: We've got some deals under regulatory scrutiny that that's connecting regional banks and real estate and, of course, stocks on our radar. But we are kicking off, as we often seem to these days, looking at the big macro. This week, Fed chair Jerome Powell indicated, while the Fed decided to keep rates flat recently, "there's a little further to go with rates." Matt, I think most people watching this thought this will fizzle likely, but we're seeing confirmation. Rates probably are going up in the future.
Matthew Argersinger: I think that is the case, Dylan, and you said "further to go." I think the actual quote was "a long way to go" when it comes to the process of getting inflation back to 2%, which is that stubborn number that the Fed is going after, and it's going to take a while. But what's interesting is, if you look at what the Fed has done and what the Fed is saying and what Jerome Powell is saying, this is not just a U.S story right now. You've got the Bank of England that raised rates surprisingly by 50 basis points. Most were expecting 25 basis points. The Swiss National Bank raised 25 basis points. The European Central Bank last week raised 25 basis points. The Reserve Bank of Australia raised rates earlier in the month, also by 25 basis points, and just for those keeping score at home, Turkey Central Bank doubled interest rates to 15%. Of course, they're dealing with a bit of a hyperinflation problem in that country. It's pretty sad. But the point is, one of the big premises, I think, of the stock market rally and the enthusiasm we've had in the market so far, certainly, in the spring, is that the Fed was close to being done. In fact, they were close to being done, and the market was expecting rates to maybe come down before the end of the year. I think that's going completely out of the window after the past couple of weeks. Credit is not getting cheaper. It's getting more expensive. Discount rates are not falling. Mortgage rates are not coming down. So if you're an investor, like we are, often who focuses on long duration investment stocks, stocks that have earnings and cash flow projections out into the future, or companies that have a lot of debt, especially variable debt on their balance sheets, the situation is getting more expensive and riskier.
Emily Flippen: The Fed is just in such an awkward position right now, isn't it, Matt? Because they've come out. Everybody was, like, things are getting better. It's interest rates from here, don't worry about it. Then that inflation data came out, and suddenly eyebrows are being raised a little bit, and it's almost like they're slowly ripping off this Band-Aid, or they're, like, not yet, but they got to come off at some point. So I think the market is reacting to that. But I have to ask Matt, what is the magic behind the 2% number? Because I've heard some arguments that have said, hey, maybe the Fed's rate shouldn't be a 2% target. Maybe it should be 3% or even 4%. Why 2%?
Matthew Argersinger: I love that question. I've tried to find out why as well, and I think [laughs] the consensus is 1% is too low, and 3% is too high, so 2% is half. [laughs] I'm serious. I don't think there's a whitepaper out there that the Fed is pointing to that says, no, 2% is the correct long-term rate of inflation. It's just a number.
Dylan Lewis: Two percent seems to be the Goldilocks number. We're happy to follow that and see what happens with it. I want to revisit something that came up on the show last week. Our colleague, Ron Gross, made a point to say that whatever happens with housing is going to have a pretty big impact on core inflation and CPI. Checking in there, Matt, what are you seeing with housing?
Matthew Argersinger: Such a good point by Mr. Gross. One of the criticisms of the Fed, at least in recent months, is that when it comes to rents, which is a big component of how they calculate inflation, the criticism is that they're relying on lagged data, data that's several months behind. The argument is, well, that's rolling over. Rents are flattening out. Once the Fed starts to take that into account, their preferred inflation rate is going to be lower. They can stop raising rates. But is that actually correct? Are rents rolling over? Because, Dylan, if you look at it, there's data coming out of single-family rental companies. These are companies that own tens of thousands of single-family rentals across the country, and a data point from John Burns, which is a great research and data firm, they look at housing and construction. If you look at the single-family rental owners, by the way, single-family rents being the largest single component of CPI, so it's not just the Fed, these single-family rental owners like Invitation Homes, American Homes 4 Rent, these companies are reporting recent rent growth, not lagged data, recent rent growth, as in, like, April of between 7% and 10%, year-over-year. If that is still happening, and we know that single-family rents are a huge component of CPI, does it sound like we're anywhere close to 2% inflation?
Matthew Argersinger: No. I don't think so.
Dylan Lewis: No, and so that's why I think the Fed is maybe a little justified in their track of keeping rates high.
Emily Flippen: To play devil's advocate, those increases are also slower than they were at this point last year. So while they're still much higher than 2%, last year was 10% plus in terms of rent increases, so it is slowing down. It's trending in the right direction.
Dylan Lewis: One thing I wanted to check in on while we're talking housing in the big picture is something that seems to be working against housing costs coming down, a little bit less so for the renting, more so for the buying, is the simple fact that we are in a supply constrained housing market. Homebuilding is also subject to these interest rate rises that we've been seeing. Given that, Matt, I was surprised to see a headline this week, US home construction surged in May.
Matthew Argersinger: It's remarkable what's happening in that market. You can see it also not just in the homebuilders which had been on fire but a lot of the industrial companies that serve the construction markets, they are on fire. It is that supply demand situation that you mentioned. There just simply isn't enough existing homes on the market for sale. I think one of the reasons is, it's obvious, right, it's anyone who bought a house before 2022, which is the vast majority of today's homeowners, are likely locked in a mortgage rate of 3%, 4%, at least under 5%. We know mortgage rates are much higher today. A lot of these owners just aren't willing to, even if they want to move or downsize, they simply can't because they don't want to give up that mortgage rate. All that you have now is this huge vacuum in the housing market, especially where the only homes that are really for sale are new homes. That's why the homebuilders in the construction market is booming. Is that sustainable? If the supply and demand situation doesn't resolve itself, yes. Like you said, that's going to keep prices high and can keep demand there pretty strong.
Dylan Lewis: Taking a step back here and thinking a little bit about how this rate environment and what we're generally seeing with the macro picture flows through to what to expect in the market and also just the decisions that companies are going to be making. It looks like the dot plot is going to be the guide, and we're going to be seeing two more rate hikes, at least. No rates coming down anytime soon. How does that factor into the big picture for you, Matt?
Matthew Argersinger: I think if we're looking on the stock market, and here we are almost six months through the year, the S&P is up almost 15% or lower of 15%. Nasdaq-100 is up 35% year-to-date. VIX is at its lowest level than before the pandemic. There just seems to me a lot of confidence and complacency in the stock market. If you're telling me that rates are going to stay high and go higher, the cost of capital is going to continue to rise, that worries me a little bit from a valuation perspective.
Emily Flippen: I think that's a fair argument, right? Any time interest rates are increasing, then your present value of your cash flows are decreasing, and the valuation there is decreasing. But for long-term investors, rates change over the course of their investing horizon, which is why I think it's so important to remain business-focused. If you actually look at where the market is in general right now, I don't think anybody will come out here and say it's incredibly cheap. If you're looking at great cash-generating companies, companies that likely won't have to hit the market for new bouts of capital as interest rates are increasing, valuations are still really reasonable for smaller cap companies. I think the market is trading at forward estimates of earnings of 13-14 times. It's not ridiculous. I think the S&P 500 is at something like 19-20 times forward earnings right now. The earnings are there, especially for some of these larger companies. While there's plenty of hype and froth, especially with AI and stuff that has ticked up a lot of these big tech companies, there's also a real businesses underneath the surface, and I don't think that should keep anybody out of the market.
Dylan Lewis: One of the things I wanted to talk about with this too is when we talk about cost of capital going up as we're looking at the decisions that businesses make, that's going to have effect on strategy and just general direction for a lot of these companies. How do you expect management teams to weigh a sustained higher interest rate environment, Matt?
Matthew Argersinger: That's the challenge. I think you're dealing with a near-term cost of capital issue. Maybe at the same time, you're trying to keep costs low but also trying to demonstrate pricing power that you're getting essentially for your goods and services. I think it's a balancing act that, for the most part, I think impressively, most companies have done. We've gone through several earnings periods now in this environment, and I'd say earnings are holding up much better than you would have expected. That's because I think companies are doing a great job of managing pricing power on one end on the demand side but also costs on the other side. Now at some point, you can't do that forever. You can't keep increasing prices. While your cost will continue to rise as we're seeing with inflation, that becomes a bigger challenge. But so far it's been really impressive.
Emily Flippen: One of the things I feel like that we don't talk about enough in terms of this, as applied to the market broadly, is that debt levels across the board are at historic lows, especially for some of the largest companies that are propping up the stock market today. It's an interesting different environment for investors to be in because the quality of the companies that are driving a lot of the market's returns are just so incredibly high.
Dylan Lewis: After the break, we've got the latest on regulators kicking the tires on major acquisitions. Stay right here. This is Motley Fool Money. Welcome back to Motley Fool Money, I'm Dylan Lewis here in studio with Emily Flippen and Matt Argersinger. We're going to do something a little bit unusual here. We're going to spend an entire segment talking about deals and regulators because there are so many right now that are pending, and frankly, several of them seemed like they may not be happening. I want to start with Adobe and its planned 20 billion-dollar acquisition of design tool Figma. Emily, this week we heard EU regulators are likely going to be more formally investigating the deal. Is it safe to say that, if this deal does happen, it may not be happening anytime soon?
Emily Flippen: Yeah. The interesting thing about this deal is that everybody and their dog once said, and in this case the size of the acquisition and Figma, this wouldn't even be a deal that the EU would typically investigate. Because of its implications though, it has taken it upon itself to say, hey, no, actually we're going to be looking at this deal, and to your point, there's a lot of skepticism in the market, given the regulatory interests that this deal is likely to not go through. But interestingly enough, Adobe's management team is still talking about closing this deal by the end of 2023. They're making active plans, changes to their product suites, under the expectation that the deal will happen. So shareholders are in this place of limbo right now because regulators are notoriously cryptic and slow, unpredictable in a lot of cases, and in this case, the outcome for the Adobe-Figma deal may feel the most black-and-white for investors, which is to say there's an argument. I would make the argument that this is very anti-competitive in nature. Figma is Adobe's largest competitor. The 20 billion-dollar deal came at a time when deals really weren't going through when it valued the business at more than 50 times annualized recurring revenue, which was incredibly frothy. It felt like the price you pay when the competitor doesn't want to sell out to you, but they can't say no. It's that you-can't-say-no price, and that's where Adobe got Figma. Investors rightfully said, this is a change of strategy for this management team. It feels reactive, instead of proactive. It feels anticompetitive. We'll see where regulators fall, but I think there's a good argument to be made that this deal does not go through, at least not as it's built right now. Worst-case for shareholders is, if Adobe does close the deal in 2023, it could spend the money to acquire the business, spends time and effort on integration, and then it's later told no, you actually have to spin it off.
Dylan Lewis: Matt, there's a slightly different story with the Microsoft-Activision deal. This is one where Microsoft is planning to buy video game publisher, Activision. It seems to be hitting some snags as the US Federal Trade Commission is looking for a temporary block of the deal until the agency can fully rule on whether it would impact competition. This is one that people have been watching for a long time, too.
Matt Argersinger: A long time. I got the sense that Emily was rooting against the Adobe-Figma deal happening. I'm also rooting against the Microsoft acquiring Activision Blizzard because I don't know how this is going to turn out with the regulators, but I think Activision as a stand-alone company, with an extra $3 billion breakup fee, by the way, is interesting. The latest results from Activision were excellent. If you go back to the first quarter, bookings were up 25%, Blizzard revenue was up 62%. They just launched Diablo 4 this month. It broke records. It generated sales of 666 million over its first five days. I don't know why Activision used that particular number in their press release. From an investor perspective, either Microsoft and Activation make this happen at $95 per share, or it doesn't happen, and you have a business that's growing fast. I mentioned the $3 billion breakup fee. When you add that to the company's already existing strong balance sheet, you're looking at a company that could have something somewhere around 15 billion in net cash by the end of this year. I think that means they resumed the dividend. They might even pay a special dividend because they'll just have so much excess cash on the balance sheet, and this was one of my radar stocks back in April, Dylan, if you recall, and I thought at the time that investors could do well in either scenario, and I still feel that way today. I'm actually, you know what, let this regulatory process play out. But if it doesn't work out in Activision or Microsoft's favor, I think that's fine. The deals for Adobe and for Microsoft have gotten a lot of headlines and attention. We also got an update recently on one that is flown under the radar, and if I'm being honest, one that I forgotten about entirely, and that is the Amazon iRobot deal. Regulators in the EU are launching a four-month investigation into Amazon's planned acquisition of Roomba-maker, iRobot. The deal was announced last August for $1.7 billion, and it looks like we're going to wind up going a full year before this one closes. Emily, when you look at this one, do you see concerns?
Emily Flippen: This is the type of deal that really highlights the regulatory environment we're in today because you can understand how there's question marks about Adobe and Figma or Activision and Microsoft. But iRobot, it's a small acquisition of a company that wasn't performing super well before Amazon expressed some interest in it. Nobody's really worried about the at-home robot market getting taken over because of this acquisition. But it does highlight how much pressure is on, especially US-based large tech companies, any acquisition they want to make is likely to be investigated by regulators, not just the United States, but across the world. In the United States, the FTC in September actually said they submitted a second requests for more information to ensure that this deal was not Amazon just further empowering itself. This one feels a lot less anticompetitive and a lot more just the environment ran. If it had been years prior, I think this deal goes through without a second glance, but given how much pressure there is on tech companies, given how regulators are behaving and what they're looking for, I think it's fair to say that there is still a threat to this deal that it does not go through, and iRobot is being valued as if this deal will not go through. I think it's still something like 30% off the acquisition price.
Dylan Lewis: One of the things I want to talk about is we've been talking about deals that have generally been announced over the last year with this conversation. But given the environment and what we've been seeing in terms of regulatory response, what should people be expecting going forward for new deal activity? Do you think it's the thing that might squash some of the ambitions that companies have?
Matt Argersinger: I think it might, Dylan, but only for really a specific segment of the market. I think Emily nailed it when she talks about the environment for big tech, because I think this is an antiregulatory environment or anti acquisition merger environment for big tech almost exclusively, like, for example, a company called Quest Diagnostics did a pretty big deal for them that closed this past week. They bought a blood cancer testing company to add to their dominant blood diagnostics business. If you know Quest Diagnostics, they operate almost a duopoly, yet they were able to make an acquisition. Regulators didn't bat an eye. That tells me it's not really about the environment itself. It's more about big tech. If it's Amazon doing a deal, if it's Adobe doing a deal, if it's Alphabet or Microsoft doing a deal, that's when the regulators are stepping in. It seems like the rest of the market, deal-making is probably still fairly open.
Dylan Lewis: I'm going to ask you both to look into your crystal ball. We have the Adobe deal, the Microsoft deal, and the Amazon deal. Emily, which of the three do you think has the highest likelihood of going through?
Emily Flippen: I actually think iRobot and Amazon does just because of the size and the anticompetitive nature of the proposed acquisition, but I still would not be surprised to see it not go through.
Dylan Lewis: Matt, what about you?
Matt Argersinger: I think that's got to be, I have to copy, Amazon-iRobot. It's got to go through. If doesn't go through, you're shaking your head.
Dylan Lewis: Shareholders of Adobe and Microsoft might be happy, or Activision might be happy if that winds up happening. We'll stick with Amazon for one more story here. In addition to the iRobot deal also, the company getting some attention from the FTC related to its Prime membership offering. It's being sued by the FTC which claims that it deceived millions of customers into becoming Prime members through a lengthy checkout process and dark patterns in its customer experience. Emily, you took a look at this one. What did you think looking through the results and what the FTC's claiming?
Emily Flippen: There's certainly a merit to the argument which is to say, of course, Amazon purposely obfuscates the process of canceling your Prime membership. They don't want you to cancel, but these are practices that are widely used by any Internet company. If anybody is checked out or subscribed to something, they're aware of how easy it is to sign up and how hard it may be to cancel, but it's good the FTC is looking at these practices. But if they decide to make a change for Amazon, it could have wide-reaching consequences for companies across the board.
Dylan Lewis: It seems like something here where a lot of businesses take this approach, Matt, and if this is something that we wind up seeing and get regulatory scrutiny, it's going to affect a lot of stuff. Have you signed up for cable ever or even YouTube Premium or the Wall Street Journal? As to Emily's point, all these make it super easy to get in and take three-months free trials, really hard to cancel. Emily Flippen, Matt Argersinger, we will see you a little bit later in the show, but up next, we've got to look at regional banks and real estate. Stay tuned. This is Motley Fool Money. Welcome back to Motley Fool Money, I'm Dylan Lewis. We've heard plenty about issues at regional banks, but how might those concerns effect the real estate market? Can empty downtown office space really be turned into apartments? Motley Fool Money's Deidre Woollard spoke with Atif Qadir, the founder of Commonplace, a property tech company, to answer those questions and talk through the things he's excited about during a challenging period for real estate.
Deidre Woollard: I know, from your background, you've got a history with some of the banks that have been most in the news lately, so tell us a little bit about that and how [inaudible] this unique view into what's happening with commercial real estate and banking right now?
Atif Qadir: Absolutely. I think I am maybe the only person in America that has a connection to all three of the collapsed banks in this particular banking crisis as, so, I'm a residential banking customer, a loan customer, as well as a personal banking customer at First Republic, which is now JPMorgan Chase. I was a business banking customer at Signature Bank and then I was part of a tech founders accelerator at Silicon Valley Bank. I've wound my way through all three of those collapsed companies, but I would say that their particular perspective that I have on this also comes from being a advisory board member at Provident Bank, which is a major regional bank in the tri-state area with huge exposure to business lending as well as real estate lending.
Deidre Woollard: Thinking about real estate lending, it's been in the news a lot lately. How concerned are you right now about what we're seeing and about the possibility of loans, especially with those smaller banks.
Atif Qadir: I think it's actually a huge area of concern because with these three major banks that have already collapsed, they, on their own, have significant exposure to real estate, just for example, so Silicon Valley Bank, 15% of their loan portfolio was in commercial real estate. First Republic was the largest lender of multifamily in San Francisco area, and Signature Bank was known as a huge low-income housing tax credit buyers. The exposure of those three banks at commercial real estate as notable, particularly in multiple markets, but I think more broadly what the concern that I would have would be that community banks and regional banks may not have the name recognition of a Wall Street bank, for example, but actually together hold about one-third of all of the commercial real estate debt in the country. When there are, for example, runs on banks or perception or worries about stability among the large array of the 4500 American banks that qualify as regional and community banks, that is hugely concerning for often this small to mid-scale developers and property owners that form the vast array of ownership types for commercial real estate in the country.
Deidre Woollard: There might be a crisis facing commercial real estate. Part of that is the fact that people aren't going to the office that much anymore. As our relationship with Office changes and evolves, we've got these buildings, there's a lot of discussion about conversions and what can and can't be converted and what other uses. What are you seeing right now from a developer's perspective about what can and can't happen when we think about central business districts and office real estate.
Atif Qadir: Sure, there's a excellent research report that a colleague of mine at the New York City Economic Development Corporation was a part of Melissa Birch, so she's the Chief Operating Officer. She was part of a group that was convened to assess for the city of New York, which will probably be a template for many other cities across the country. What can actually be done with these post-pandemic era, Class B, Class C office buildings, which still might be floating at maybe 10% occupancy, 20% occupancy, nowhere near breakeven. There is a motivation from the emptiness perspective of not having vitality in the city, not being able to support secondary businesses. There is a very timely other issue coming up, which is the fact that there's about a trillion worth of commercial real estate debt that's coming due by the end of 2025, and a lot of that's distress is going to be in the office sector and the retail sector. Where that crosses with our other topic in terms of commercial and regional banks, is that commercial regional banks actually have an outsized portion of the office and retail CRE debt relative to Wall Street banks. Their exposure is really significant on that perspective as well. All of that said, I think that the way to approach the repositioning or the conversion of office buildings is understanding what that first filter is, which is what can actually get converted from a physical sense. Typically, office buildings that were built after the 1970s have, if you think like Wolf of Wall Street style, it's very low ceiling heights, very large floor plates and Windows ringing the facade of the building, which is fine for an open format office plan, but when you're trying to divide that into actual residences that meet the light and air requirements. For example, for the building code of the city of New York, then it's impossible to lay out a floor plan that actually does anything more than use 40% of the floor plan for residential, when typically as a developer, you're looking to use 85% of your floor plan for monetizable square footage. Given all those constraints study that I mentioned determined there's about 30% of the buildings in the city of New York and actually be converted, and I think from that perspective, the biggest challenge is convincing lenders that the risk of completely changing an asset-class type from office to residential is worth it for a relatively conservative industry that is going to become increasingly conservative with the collapse of those three major lenders. I think that if I were in a position such as the mayorship of the city of New York or Portland or another city that's probably is feeling the weight of emptiness from post-COVID, I would look to say, what is the thing that we need to get over. In this case, I think there's no amount of economic development incentives that can make a pro forma make sense when the cost is that much for a conversion, but what I might actually say is the idea of credit enhancements. A bank is solving around a risk, and there's a large perceived risk in asset class change. But a city, for example, the city of New York, which has a massive balance sheet from all of the residential and the commercial residents of the city, to be able to say, why don't we leverage our balance sheet as our credit enhancement to banks that are willing to lend around a conversion? That feels, to me, might be the secret sauce of being able to actually drive this change quickly and in a manner that I think is necessary, so you don't end up with ghost towns in midtown and downtown.
Deidre Woollard: You've hosted this podcast called American Building, I listened to a few episodes, you've talked to all people in real estate and outside real estate a little bit, but talk to designers/developers. What does make you optimistic about the built world? We know it's not going to be 3D printing at scale. [laughs] What things have you heard about from architects or designers or anything that makes you feel optimistic about where we are headed?
Atif Qadir: I would say, in terms of a level set in my career, at least, over the past 15-18 years, I would say that there has never been an alignment of political will, economic will, and social will around the production of housing like there is now. I think with that table setting, the things that I would say make me most excited would be the growing array of investors of all types that are moving into the impact capital space. That would be types of housing that is not regulated affordable housing, which tends to be incredibly costly per door, but unregulated affordable housing often called in our industry literally a affordable or workforce housing, or naturally occurring affordable housing. All of the new flow of capital from, say, debt funds, like ACRE Management, being able to deploy capital in this space, I think, is going to allow for a lot more construction to happen a lot more quickly than it has in the past, and I'm really excited about that. I would say Number 2 would be the beginning of change in leadership in economic development corporations and economic development agencies across the country. Have a chance to talk to leaders in those types of organizations in the states of New Jersey and Connecticut and New York and Florida, and oftentimes with leadership that is younger and really excited and really wants to make change, I think the ability to provide for procedural improvements in things, like the economic development incentives I mentioned earlier, will help their impact to become a lot greater and a lot more durable. I would say from a technology perspective, it's I think a lot to do with the incremental improvements in the processes. One company that I'll mention that I'm a huge fan of is Pronto Housing. What they're working to do and they're rolling out across the tri-state area and across the country is standardizing and creating transparency in the affordable housing lease-up process. Because there's an insane statistic that, in New York, there are affordable housing units have been designated as affordable, which we call Big A affordable. It's regulated affordable that sit empty for a year or more because of the inability of the right paperwork to get to the right agencies to get the right thing to happen. I would say that those are probably the three areas that I'm super-excited about that would be new finance, new capital flowing to this area, new leadership from a public sector perspective, and incremental improvements that really, I think, together will change the game for our industry.
Dylan Lewis: Coming up after the break, Emily Flippen and Matt Argersinger 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 interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, soo don't buy or sell stocks based solely on what you hear. I'm Dylan Lewis, joined again by Emily Flippen and Matt Argersinger. We're going to get to stocks on our radar in a minute. But first this week, the USDA gave approval to lab-grown chicken in the United States. The FDA had previously given sign off, and now with USDA approval, companies Good Meat and Upside Foods can sell lab-grown chicken in the United States. I want to start very high level with this one. Matt, are you buying lab-grown chicken if you see it on the shelves at the supermarket?
Matt Argersinger: I think I might, I just would love to know if it actually tastes like chicken. I assume it does. The second question I have is, this is great. If this really does prevent us from having to slaughter millions of cows, and all that great stuff for the environment that could do, how scalable actually is this? Do we need like industrial warehouse-type labs to produce this stuff, or how cost-effectively can it be done, I guess, is my big question.
Dylan Lewis: Emily, what about you? Before we start digging too far into the ramifications for the meat market and some of the meat alternatives. Is this something that interests you just on taste?
Emily Flippen: Yeah. I'm a little triggered because of my history with Beyond Meat. But I am interested, and I do think that I would be one of many consumers that would at least purchase it one time out of curiosity. But that within itself then lies the problem.
Dylan Lewis: Dan, I'm going to be a little context here. The meat is developed from animal cells by feeding them nutrients. Is this something that you'd be interested in, if you saw in supermarket shelves?
Dan Boyd: Two quick things, Dylan. One, Matty, I don't think they're slaughtering millions of cows to get chicken. Just want to point that out there. Two, yeah, I would definitely try it, but why are we calling this chicken? There's no birds involved. Can't we come up with a different name for it?
Dylan Lewis: That sounds more like a philosophical question, Dan, because that's really, where is the chicken, and where does it start? We're talking about an animal cell driving this thing. It seems to me like it's natural. The clips that I saw were looking like real chicken nuggets, so I think this is chicken in the chicken sense. When I saw this story, Emily, I couldn't help but think about Beyond Meat. We've seen so much over the last couple of years in development of meat alternatives and looking to build out a market. When you see news like this, you're someone who's followed this company closely, do you feel like this is a good thing or an existential threat?
Emily Flippen: I think it's a good thing for the world. I think it's an existential threat for companies that are trying to sell what are effectively plant-based alternatives without getting into the actual meat game. Because on a molecular level, this is chicken. If you're trying to recreate something that tastes and looks like chicken, you're not going to do better than lab-grown meat without obviously slaughtering chickens. But here's the thing. It's that Beyond Meat, its audience is not just vegan and vegetarians who are unlikely to buy lab-grown meat. Their audience is supposed to be anybody who is supposed to be making a better choice for the environment, for the animals. With more options, that's inherently a bad thing for Beyond Meat. But I do think this idea right now could potentially not be investable even if it does reach scale. Not only will be expensive and hard to reach scale, but we've seen it play out with Beyond Meat where consumers themselves are a little bit less concerned by the ethics behind their purchases and more concerned about their price. Right now you can have a lot of people who may buy it out of a curiosity initially, but ultimately if that decision is more expensive than the real thing, then I think there's going to be a lot of consumers that will continue their current purchasing patterns.
Dylan Lewis: Is the test for this or for really anything that would come into this space that it has to reach parity with cost for traditional meat products?
Emily Flippen: I think it needs to be a situation where, when you walk up to a shelf and you buy yourself some chicken thighs, you don't know if this is a lab-grown chicken thigh or if this is a regular chicken thigh, kind of the way that we use antibiotics or other growth hormones. For the most part, you don't really know. You just buy it, and you grab it. You move on. It needs to reach that level. But that within itself is implying it's eventually going to be a commodity, which then you could argue, it's not an investable idea simply because how commoditize it could potentially become.
Dylan Lewis: The press release indicates that it won't be on supermarket shelves anytime soon, but when they are available, I promise, we will have a taste test on Motley Fool Money. Let's get over to 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: I'm looking at Spotify. I think everybody is familiar with this music streaming service. We got a report out this week that Spotify is apparently looking on launching a HiFi audio service that'd be an upsell for its existing paid members. A much-needed development that could potentially help this company's gross margins. I'm a big fan of Spotify, and this could potentially be a move in the right direction for our company. The shares I think are up over 100% or something this year, so it's been on fire. But this ultimately is a business that needs to increase its cash flow to justify its valuation, which could be a move in that direction.
Dylan Lewis: Dan, you're a fan of music. You clearly are a fan of podcasts. What's your question on Spotify?
Dan Boyd: I had no idea Spotify was a Swedish company.
Emily Flippen: It is. There's actually an interesting Netflix documentary about its founding story, if you want to learn more.
Dan Boyd: That's almost fooled me here. I looked at the stock, and it's not in dollars, and I was, like, what is happening?
Emily Flippen: It is traded on the New York Stock Exchange as well, but if you google it, you will find it I believe in Swedish Kronas, I probably got the currency incorrect.
Matt Argersinger: That's like saying chicken comes from cows, Dan, [inaudible] .
Dylan Lewis: Yeah. You got to be with it. Come on. Matt, you had to get that jab in. What is on your radar this week?
Matt Argersinger: I'm breaking the rules a little bit this week, Dan. I'm going with an ETF, the Schwab US Dividend Equity ETF. The ticker is SCHD. As I've mentioned on the show recently, dividend payers just have not participated in this ''new bull market'' that we have here in 2023. In fact, the Schwab ETF is down about 4% year-to-date, but it's a nicely diversified ETF, low-cost, great track record. Over the last 10 years, it's up 200% with far less volatility than the average stock in the market. If you go back to 2022, last year, when the NASDAQ-100 fell 33%, S&P 500 fell nearly 20%, this ETF fell only 3%. Some dividend stocks tend to hold up really nicely during bear markets while paying you steady income. That's what they're supposed to do. Today you can grab the ETF with a dividend yield of 3.8%, which is more than twice the yield of the S&P 500. Dan, your question about the Schwab Dividend ETF.
Dan Boyd: I know you all are thinking that I'm going to excoriated Matty here for bringing an ETF to our show about stocks. But I actually love investing in ETFs. They're my preferred vehicle, generally, over stocks because they give you a little bit more exposure, and they diversify you a little bit, and they're nice, low-cost options. So I'm a big fan, Matty, of the ETF.
Dylan Lewis: That is the exact opposite response I was expecting. I love it. I was expecting some fire. I got to be honest. I thought that was going to be coming. To Dan's point, ETF is great way to immediately get access to a market, be instantly diversified. A lot of pros there, Matt.
Matt Argersinger: Love it.
Dylan Lewis: Dan, you might have tipped this already with your reaction to Matt's suggestion of which company is going on your watch list this week.
Dan Boyd: To nobody surprise, I'm taking the ETF this time, Dylan. Great job, Matty.
Dylan Lewis: Thanks, Dan. Dan, appreciate it. Emily Flippen, Matt Argersinger, I appreciate you guys. Thank you so much for being here.
Matt Argersinger: Thanks, Dylan.
Emily Flippen: Thanks.
Dylan Lewis: That's going to do it for this week's Motley Fool Money radio show. The show is mixed by Dan Boyd. I'm Dylan Lewis. Thank you for listening. We'll see you next time.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. SVB Financial provides credit and banking services to The Motley Fool. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Dan Boyd has positions in Activision Blizzard and Amazon.com. Deidre Woollard has positions in Adobe, Alphabet, Amazon.com, JPMorgan Chase, and Microsoft. Dylan Lewis has positions in Spotify Technology. Emily Flippen has positions in Beyond Meat and Spotify Technology. Matthew Argersinger has positions in Activision Blizzard, Alphabet, Amazon.com, Invitation Homes, Netflix, and Schwab U.S. Dividend Equity ETF. The Motley Fool has positions in and recommends Activision Blizzard, Adobe, Alphabet, Amazon.com, Beyond Meat, Invitation Homes, JPMorgan Chase, Microsoft, Netflix, Spotify Technology, and iRobot. The Motley Fool recommends SVB Financial and recommends the following options: long January 2024 $420 calls on Adobe and short January 2024 $430 calls on Adobe. The Motley Fool has a disclosure policy.
