In this podcast, Motley Fool analyst Bill Barker and host Dylan Lewis discuss:
- Waste Management's planned $7 billion acquisition of medical waste company Stericycle, and how it's a cheap addition to help WM build out its offerings.
- Costco's strong quarter, why membership prices are an untapped lever, and how the chain keeps selling its hot dog combo for just $1.50.
- Why it looks like being bigger is better for retailers right now.
Also: How is AI changing search? Motley Fool analyst Tim Beyers and engineering manager Tim White breakdown why Google has welcomed a technology that used to be its greatest fear onto its site.
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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Dylan Lewis: Waste Management trucks are making a big pickup this week. Motley Fool Money starts now. I'm Dylan Lewis and I'm joined over the airwaves by Motley Fool analyst Bill Barker. Bill, thanks for joining me.
Bill Barker: Thanks for having me.
Dylan Lewis: You know, Bill, Merger Monday, living up to the name today. It's an acquisition if you want to get pedantic, but we have Waste Management set to acquire another waste company, Stericycle, in a $7 billion deal. Some speculation about this late last week. Press release out today confirming. What do you think Waste Management sees here with Stericycle?
Bill Barker: I think it sees a relatively low-cost way to grow some revenues, and as it's announced the acquisition on its site, see some synergies, some cost savings. I think that's very likely given that Stericycle is not well known for extremely smart execution, at least over the last decade. I think that Waste Management's superior size and scale is going to allow it to take a close look with some fresh eyes at the way that Stericycle has been doing business and probably save a little money. Talking about, I think, over $125 million of projected annual synergies. That is what it sees. The market doesn't see quite as much today, at least and as reflected by Waste Management stock price, which is off a little bit.
Dylan Lewis: I think most of our listeners know the green Waste Management trucks, maybe not as familiar with Stericycle's business. They are in the biohazardous waste, often from medical applications. They also have a document-shredding business. This isn't exactly what Waste Management's known for. It looks to me like this is them taking a step in the direction of being a little bit more of a comprehensive service provider for some of their customers.
Bill Barker: Yeah. They in fact, announced that this will make for a comprehensive suite of environmental solutions. Getting rid of medical waste, you can sort of link that to environmental ideas. But I think that it does give them some adjacent markets. They haven't been growing. Now, the announcement, again, from Waste Management, talks about attractive near- and long-term growth dynamics for the healthcare market. Stericycle is doing OK in its organic growth there, but has been shedding some of the non-core operations it acquired. It was a roll-up machine, as, of course, Waste Management has been over the years.
Ultimately, Stericycle got a little bit outside of its core competencies in terms of some of its acquisitions, and it's divested some of those. I think that there's probably a little bit left to do still. But this looks like something that is a way for Waste Management to juice its top line a little bit.
Dylan Lewis: Yeah. There seems to be something there. This is a business with Stericycle, about $2.7 billion in revenue for the last fiscal year. As you noted, though, stock not necessarily lighting the world on fire. It has not been a great performer, and the business itself has been losing money -- I think about $20 million in losses for fiscal year 2023. That said, similar gross margin profile is what we see over at Waste Management in the mid to high 30% [range]. I have to imagine at some point, Waste Management says, you know, I think we can help you on the profitability side here and get you with our scale and integrating you into our offerings to something that looks a little bit more attractive than what you guys have been able to do on your own.
Bill Barker: Yeah. Let's take a look at Stericycle's revenues for the last five years. $3.3 billion in 2019, then $2.6 billion, then $2.6 billion, then $2.7 billion, then $2.6 billion last year, $2.7 billion expected this year, $2.7 billion expected next year. This is a flat revenue story as experienced by Stericycle. It has been losing money at least on a GAAP basis, which I think is appropriate to look at virtually every year of those five years. On an adjusted basis, of course, it's making money, if you just don't look at all the costs of acquisitions and divestments and all that. Then somehow it's making money but not on a GAAP basis. I do think that this is an easy act to follow to me for Waste Management's execution on Stericycle's business.
Dylan Lewis: The plan here, Bill, is a cash deal, and we see an offer price of $62 a share. Stericycle shares [are] currently trading around $59. That's a 15% premium from where they closed on Friday. It seems like there's a pretty high degree of confidence that this one's going to go through. Do you see anything getting in the way here?
Bill Barker: I don't see competing bids. Now, it's always possible. Of course, we've got a current administration that takes a closer look at mergers and acquisitions and whether they are going to be approved than some previous administrations. But I would say that this is likely to go through, yeah. I think the market already incorporated a little bit of a bump to Stericycle's price last week or the week before, when word got out from a Bloomberg article that Stericycle might be on the selling block. About 10% bump to the stock from that and then another 15% or so today.
Dylan Lewis: All right. We're going to go over to earnings and catch up on some results from Costco. Got lost in the way of things a little bit last week. Didn't get a chance to check up on their results. I look out at the quarter that they just posted, Bill, I say this looks pretty strong. The market reaction -- not too impressed. It was a flat reaction for what seemed like pretty strong retail results during a tough period.
Bill Barker: Absolutely. It was an outstanding quarter: 6.6% comparable sales growth, that was 6% off traffic, 20%-plus for e-commerce. Things going well, both in North America and elsewhere, margins improving. This is a stock that's had a great year. Sometimes a very good report just basically is enough to keep a stock where it was. It was off Friday, it's up a little bit today. It closed higher than it opened on Friday, and it's made up a little bit of that difference today. Really about where it was at the end of Thursday's training. But the initial reaction was we want to see more, or maybe just some profit-taking. After all of the rewards this stock has bestowed on owners of it, both short-term and long-term. I wouldn't be surprised if some people were willing to take a little bit of a profit.
Dylan Lewis: One of the things that came up in the company's results, just beyond the core strength of the business, was the topic of increasing membership [fees]. This was something that management discussed on the call, and they basically left it as: Hey, we know you guys expect this every five years or so. We are in that window. It's a matter of when, not if, here. But we feel like the business is performing so well and we have the runway. We don't necessarily need to be doing that right now.
I'm not a shareholder, Bill, but as someone who roots for this business, it is nice to hear management have the confidence to say: "We have this lever, we don't need to pull it." And investors now know that's there for them at some point in future.
Bill Barker: Yeah. That's a part, surely of what is being priced into the stock, now kicking along at a 50-times-earnings multiple. The confidence that Costco can raise its membership price, and will, and doesn't need to, is multiple areas of strength. It's got great retention -- I think maybe a record-setting retention right now: 93% at the U.S. and Canada level, and 90% worldwide. Of course, a bump up in price is going to cut into some of that retention at Costco, just as anywhere else. A few people will decide not to renew because of it. At the moment, they're enjoying that spectacular retention rate and knowing that they are growing membership. When they need to, and they will -- not "need to" -- but they will raise membership prices, and that's one of the things that is keeping the stock at the very lofty multiples that it's enjoying today.
Dylan Lewis: Yeah, let's check in on that a little bit. We got a P/E ratio of 50 at this point for Costco. It's about double the S&P's, and in some ways, it deserves a premium. It has been an absolute market crusher over the one-year, three-year, five-year, 10-year -- pick a time frame, and you could not have bet against Costco. It is one of those businesses that has continued to succeed. But we are looking at fresh all-time highs here, Bill. Do you feel like it's worth that price?
Bill Barker: I feel it's a great question. [laughs]
Dylan Lewis: Thank you.
Bill Barker: I don't know. That is really a big multiple. It's not where the company has historically traded. It's been more in the mid-30s. It's continued to justify everybody's confidence in it. It, of course, enjoyed some exceptional growth coming out of COVID, and during COVID, and has retained all that excessive growth and built on it. Not at the 17%, 15% growth rates that it enjoyed in 2021, 2022. It's mid-single digits now. A mid-single-digit top line that's carrying a 50 multiple -- yeah, you got to ask how confident you are. As we've said, that price bump is going to come, and the company is highly likely to retain the vast majority of its members when it does so, but anybody that just has as part of their discipline, they're not going to pay 50 times earnings for a company that's growing the top line at maybe 7% -- I can understand that kind of discipline.
Dylan Lewis: For any Costco members out there that might be sweating potential price increases, management also weighed in on the iconic $1.50 hot dog meal and said, don't worry, the cost is not going up anytime soon. Bill, we know that's not a lever. But it is, I think, a way that we can look at the management and the culture of this business and the value that they are trying to provide for their customers. At least that deal is staying put for the time being.
Bill Barker: Yeah. They are not trying to make money on that deal. It may be a loss leader. I don't know what the margins are on that, but they continue to get good press out of it. We're talking about it right now. It seems to always be discussed as some very critical part of the Costco story. I don't know what percentage of its sales it is, but I would assume way, way, way, way, way less than a fraction of 1%. But it seems to be the thing that people need to have answers about, and need to know that there's some constant in life, and appreciate that Costco provides one.
Dylan Lewis: It's a third rail, I think. Especially during the summertime. People want to make sure that they are getting the deal they've been promised for a long time, Bill.
Bill Barker: That is true. I wonder if they could go someday -- I guess they talk about this, right? Someday we'll have to bump it up.
Dylan Lewis: It's been the same price since the 80s. That is remarkable stability.
Bill Barker: Would $1.75 offend people? If you don't want to go to $2, I get that. I think that it's another element of a great story that they're able to provide that, and that they're able to get good press for doing so.
Dylan Lewis: All right. As we wrap our news rundown for today's show, a surprisingly strong earnings season for a lot of retail names. Taking this Costco report and putting it into the same frame as reports from Kohl's, Target, Walmart. We saw results from Dick's last week as well. Any themes emerging to you?
Bill Barker: Well, I'd rather be on the bigger side than the smaller side. Costco and Walmart are doing exceptionally well, and Amazon, always. I think that the department stores have been -- you know, their death has been reported for a long time, and Kohl's contributes to those reports. I think it was off around 20% on its report. More specialized operators, even something like Foot Locker, which has struggled for a while, are at least having another chapter, a better chapter right now than they have had. But the "do it all for us" -- outside of Costco and Walmart -- the department stores, the mall-based department stores ... and not that Kohl's is as mall-based as a number of the other department store chains, but I don't know, I think the model has a lot of problems up against competition like Costco's.
Dylan Lewis: Bill, you do it all for us here on Motley Fool Money. Appreciate you joining me on today's show.
Bill Barker: Thanks for having me.
...
Dylan Lewis: Coming up, what happens when Google does the Googling for you? Tim Byers and Tim White, the hosts of This Week in Tech on our member live stream, discuss how AI is changing search and why Google has welcomed what used to be its greatest fear onto its website.
...
Tim Beyers: Fools, welcome to This Week in Tech. He's Tim White. I'm Tim Byers. This is our audio edition, and we are going to talk -- shocker -- AI. Tim, we need to talk about the emerging content market for training AIs, because this is not a thing that existed really even, would we say two months ago? But now OpenAI is paying for content. Others are paying for content. How do you think this plays out here? Are we going to see a vibrant market for selling content for AI training?
Tim White: Well, certainly, a number of companies have signed up with OpenAI to allow their content to be licensed and used inside of ChatGPT. Companies like the Financial Times, Vox, the Atlantic, News Corp, Axel Springer ([which] owns Politico), quite a few more. The reason is, last year when ChatGPT came out, they were not paying anybody for all this content that they had scraped off of the web. Of course, The New York Times have sued them and several other people have sued them. They're going back to the well and saying we should pay for this. In the meantime, a lot of companies have put in a block that says, "Hey, ChatGPT, you're not allowed to crawl our website to use our content." Supposedly, ChatGPT is respecting that. But I think the big exception here is there's one big company that everybody wants to crawl them, everybody wants to come knocking on the door. That includes using their content in the AI, and that is Google.
Tim Beyers: Yeah. It is fascinating. You may have noticed if you are using the Google machine lately, that you will put in a query, you will get a result, and that result will include an answer from the Google Gemini machine. Tim, it is a little bit hilarious that there have been some results that pop up that are comically bad, and those have appeared on social media. But for the most part, I think we would say that Gemini has done a pretty good job of providing an answer that is sourced and then with a bunch of search material underneath it, which is perfectly acceptable for Google's model.
Tim White: I agree. But I also would say this has been Google's greatest fear. This is why pretty much every AI engineer that you've seen work at a company like OpenAI or Anthropic started at Google doing AI. The question is, why hasn't Google released an AI product before now? The answer is, this is what they were afraid of. They were afraid of everybody making a fun of how AI occasionally makes mistakes or "hallucinations," as we call them. That's why they didn't want to do it, but of course, ChatGPT really forced their hand.
Tim Beyers: Well, let's be clear. We'll dig into this a little bit. We've talked about this previously, but Google doesn't have to pay for any of this. Everybody wants Google to index and crawl and search their websites. They want to appear in Google search results, so Google has a massive advantage here. They can get all of the data. They can train Gemini all they want, and they have to pay a grand total of $0 presently. Is there any world in which Google joins the collective of saying, "OK, we hold our hands up here, we are going to be part of the responsible AI community that pays for a bit of content," because they don't have to.
Tim White: Right. What you see at the top of Google search results now is this AI panel that has some linked sub-footnotes, I guess, at the bottom, where you can click on the sources it used for doing that. Historically, Google hasn't had to pay for content to show up in Google search results because you get paid when someone clicks on a link and goes to your website.
Tim Beyers: Absolutely.
Tim White: It was a symbiotic relationship, maybe a weird symbiotic relationship, but certainly symbiotic in that way. But now, if someone entirely gets the answer that they need from reading that knowledge panel and never clicks to footnote, never goes down to the search results below, that doesn't seem quite so symbiotic anymore, and that may force some hands.
Tim Beyers: It's hard to say. There is another element to this as well. Something that we didn't talk about before the show, but I want to bring up now, is that Google, arguably, is the company more than any other that has more logged-in user experience data than any company in the world, because when you and I log into Chrome -- and a lot of us use Chrome -- we are telling Google, "Hey, I'm here, this is all of my search experience, these are all the things I'm interested in," which is how they build a search advertising business here, Tim. Does that give them an additional layer of advantage here?
Tim White: Well, I think it sure does, because this week also, we had a leak -- Google engineers leaked all the documentation about how the actual search results algorithm works. Despite the fact that Google for years has said they're not using data from Chrome about what people do to influence search results, shocker, the code says differently. The code says and sure enough, the Chrome sessions and the Chrome browsing is absolutely a factor in how pages are ranked, and we know page speed is a rank factor. Specifically, page speed as measured from Chrome from real users using Chrome visiting a website rather than artificial test metrics. I think that there's a whole lot of secrets that Google has and data that they have that they are leveraging here that are now getting put into the spotlight.
Tim Beyers: If we had to maybe ballpark it here, we're talking about Google's advantage here. Not only do they not have to pay for the training data, but which is more important for the Gemini machine? Is it the logged-in data, or is it the data from the third-party provider? For example, the Financial Times data or the Atlantic data. Which is more important for that Gemini machine?
Tim White: Well, I think the most important part is that Google has had the No. 1 search engine since the beginning of time, basically, right?
Tim Beyers: Right.
Tim White: ChatGPT is stuck using good old Bing. If you were thinking about it, if you're answering a question and you're going to ChatGPT and it says, hey, I'm doing research with Bing, you're immediately just like, "oh, geez." Like, "I'm not going to get what I'm looking for here." Whereas, Google is using Google for all of this, and so it's immediately theoretically better. Many people have criticisms of the current way that Google search results are working, especially after recent changes where they're trying to pull in a bunch of stuff from Reddit and whatnot, that is, let's just say not always accurate. But the bottom line is that Google's got Google, and ChatGPT does not.
Tim Beyers: When we look out a few years here, and we have a bunch of models that are all trained -- let's say OpenAI has spent, I'm making up a number here, they spent $500 million getting all of the data. They are paying the content providers. They're training the models. Is there ever a world where OpenAI can catch up to a Google Gemini that is constantly being fed free data? Or in order to level the playing field, does Google have to start being part of the "you've got to pay for content" collective?
Tim White: I don't know. I think it's going to be really interesting to see how this evolves over time because no one right now can afford to not let Google crawl their website, whereas we all can afford to have ChatGPT not crawl our website.
Tim Beyers: Sure.
Tim White: But will that last forever, or will we be forced to open the doors and let ChatGPT in, even if we don't want to?
Tim Beyers: It's really fascinating here. Maybe before we end this segment, let's talk about the darkness a little bit. What can go wrong? If you are Google, and you are indexing all the data for free, and you are OpenAI, and you are paying for all of the data you need, where does this go wrong for Google, and where does this go wrong for OpenAI? I'll tee you up with this -- the idea here that you have maybe users who are logged in that are deliberately trying to manipulate the Google machine, because that's been a practice we've been seeing for years, we call it search engine optimization. Does that mess up the Gemini algorithm, as it were?
Tim White: I think it already has. I think we've already had just an absolute mess over the last year of people realizing that SEO doesn't work the way it used to, and that it's very hard to keep up with it. Every person who's in the search engine optimization field that I've talked to says, "I don't know what Google wants. I don't know how to change my website so that I show up on Google search results, and I don't think Google knows either." I think that that is very frustrating for a lot of people who've spent a lot of time building content machines in that symbiotic relationship. So if Google is no longer symbiotic, if you're no longer getting traffic to your website from Google search results, that could really affect a lot of things. It affects how much people spend on advertising in Google, because Google becomes less valuable. People don't build content that Google can crawl, so Google search results aren't as useful. That could definitely be a problem over time.
Tim Beyers: Let's end on this. How does OpenAI, Anthropic all of the other models -- how do they take advantage of that maybe slight soft underbelly that Alphabet has. That SEO was one thing, now it's something very different, and it's a bit unpredictable here, and it maybe makes Google a little less reliable than it used to be. How do OpenAI and Anthropic and others take advantage?
Tim White: I think they take their absolutely massive pile of venture capital money that they have, and they use that to buy content for pennies on the article, if you will. Way less than those companies would get from traffic from advertising. But they can pay for it all up front, which a lot of these beleaguered news organizations really like -- they get this money up front. And you buy it for cheap and you use it, and as soon as you are in a world where you can just get the answer you're looking for from ChatGPT -- and spoiler, I suspect Apple Siri very soon -- then why would you go to an ad-filled website like Google search results when you could get the answer directly as a user?
Tim Beyers: So when OpenAI can give a content provider more for their dollar than they could get from that advertising revenue, that is when you start to worry about Alphabet.
Tim White: Right. Or maybe not even more, but a whole lot right now.
Tim Beyers: All up front.
Tim White: Yeah.
Tim Beyers: Yeah.
Dylan Lewis: Listeners, if you enjoyed that conversation, and you're a member of one of our premium products, every Friday, from 10 a.m. to 11 a.m. Eastern, Tim's chat about all things tech on our members-only live stream Motley Fool Live. That's on their show, This Week in Tech. You can also catch any of the episodes from any time over on our member replay hub. As always, people on the program may own stocks mentioned, and the Motley Fool may have formal recommendations for or against, so don't buy anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Bill Barker has positions in Alphabet and Apple. Dylan Lewis has no position in any of the stocks mentioned. Tim Beyers has positions in Alphabet and Apple. Tim White has positions in Alphabet and Apple. The Motley Fool has positions in and recommends Alphabet, Apple, Coles Group, Costco Wholesale, and Walmart. The Motley Fool recommends Waste Management. The Motley Fool has a disclosure policy.
