Deep Dive
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Dylan Lewis: All eyes on Fed Chair Powell. Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst Asit Sharma. Asit, thanks for joining me. Asit Sharma: Dylan, happy Monday.
Happy Monday for some. For some, it is a bit of a down Monday. Rough start for the market this week. We see S&P 500, Nasdaq, investors processing. Some commentary on the macro picture from the Trump administration with them setting their sights on Fed Chair Powell. Seems like the administration would like to see someone else sitting in the Fed chair seat. Asit, what is the tension here?
Dylan, the tension is that President Trump really wants lower interest rates. He's been an advocate for this, not just in this administration, but the past administration. President Trump feels that low interest rates spur economic activity, and they're good for the stock market. Generally, investors like lower interest rates in many scenarios. He's a very vocal advocate for this. But the time that we're in just now is one that
Jerome Powell, the chairman of the Federal Reserve and many Fed governors, believe is one where we have to be very careful about lowering interest rates. As you know, we've had a high-interest rate, high-inflation environment in the U.S.,
One of the things you want to be careful of is backing off interest rates too soon. If you lower interest rates too soon in a highly inflationary environment, inflation can increase. That's not good for the markets. It's not good for the Fed's mandate, which is to keep inflation around 2%, to keep a steady scenario for economic growth, and also make sure that the labor market is healthy. Here we have President Trump
pushing what's actually a heterodox type of policy for this environment. It doesn't make a lot of sense to many economic observers. As with many things we see with President Trump, he's not afraid to use his very loud megaphone to make a point. He's been putting a lot of pressure very publicly on Jerome Powell, saying that he needs to go. Here we are. The market's opened up pretty in the red.
today because of this tension, as President Trump recently made some comments on social media
about Jerome Powell having to go. Yeah, I think the Nasdaq is down about 3% today on the news that they may be looking for ways to end his term before May 2026. S&P down around 2% as the market processes that. A reminder, Fed Chair Powell was nominated by Trump during his first term. You brought up that this has been a longstanding thing. I look at the Fed, and I think even
Before we got into the situation with tariffs, there was a bit of a wait-and-see, slow and steady approach to macro policy because there had been that stubborn bit of inflation that would not get down to that target of around 2% that the Fed likes to focus on.
Then we saw tariffs come out, and the stance of the Fed was, we need to wait and see and digest this a bit more before we are willing to make any really big action down, which is what the administration wanted to see. I imagine that this is not something that is going to change. I don't think the Fed's outlook on any of this is going to change anytime soon. That's kind of why we're here.
Yes. I think the Fed is really, under Jerome Powell, an organization that takes its time to make decisions. They look at trailing data very closely. It's not an economic organization that likes to look at forward indicators on the balance. This in some ways serves them very well for the purposes of the two mandates that I just mentioned.
Also, it opens up the Fed to criticism in lots of different environments. "You guys are moving too slow." We've heard this, "You're too slow to increase interest rates when inflation and the economic activity was boiling upwards, and you've been too slow to lower interest rates and spur that economic activity." There are some economists who make an argument that maybe a little bit of a lower-rate environment would be healthy.
The tariffs, as you mentioned, Dylan, is a big sticking point here. That creates its whole level of uncertainty. A tariff regime indicates higher prices, not lower prices in the near term. If you're sitting in Jerome Powell's chair, you're probably going to be thinking, too, I'm not going to
drop these rates yet. Let's wait and see. And this just increases the tension between an organization that is trying to do its job by its state objectives and sort of a political pressure to do the exact opposite.
You mentioned the Fed being the recipient of a lot of criticism. I think it comes with the territory. We've adopted an approach of almost rooting for a sports team when it comes to Fed policy. It's become a much larger event than it used to be in the lower-rate environment post-GFC. But here we are now, a lot more eyes on the Fed. While it is a recipient of criticism, it is also the beneficiary of independents.
That is what they are set out to do. It is meant to exist without influence from the private sector, without influence from Congress or the sitting president. That is part of the system that we have here in place, Asit, where we have this check and balance, this stabilizing element to things.
So much of what I think we are noticing here in the red today with the market is that there's a concern about what happens if something jeopardizes that independence. I agree, Dylan. What we're looking at here is a spooking not just of domestic investors, but international investors as well.
We often talk about themes that make sense, like, the dollar is the world's reserve currency, so we don't want to jeopardize that. Those are easy enough to understand. But I think what many of us miss often is that the rest of the world sees the U.S. as an investable asset. The rest of the world can buy U.S. stocks. We also see the rest of the world investing in government IOUs, promissory notes.
Those are the bonds that the U.S. Treasury Department sells to finance our debt and to provide us with liquid money to run our operations as a business, if you will.
When the world elevates the U.S. and says, "There's this really good risk-reward equation when you invest in U.S. Treasury bonds or if you buy U.S. stocks, which is, they're safe, they're liquid,"
and they're isolated via this structural framework from the chaos that often consumes the rest of the world, that's a premium that we get. When we jeopardize that, what we're signaling to investors around the world is that we're not so stable. There are many ways we can do that. We can not agree as two parties in Congress to extend the borrowing that we do. Every time we have to fund the government, this argument comes up.
Or we could say we're going to remove the structural guardrails that make this place seem so stable. So sort of talking down the head of the Fed and demanding that he be replaced is sending a signal to the rest of the world that we're really not as concerned about being perceived as stable.
We have this more important objective, which is to put someone in place who will act more by what the executive branch wants versus what the perceived mandate is. What I'm dancing around here, Dylan, without trying to get too political, is the rest of the world is saying, if you just kick Jerome Powell out of that seat, we're not so sure we want to buy your bonds or invest in your stock markets. That's why the selling is going on today. People are removing
capital flows from the U.S. markets. That's why the amount of interest that the U.S. government may have to offer for different institutions to buy its bonds in the future may keep rising, as we've seen in recent weeks.
The market is selling right now very much on the rumor of this. If this becomes a real story, it feels to me very similar to the tariffs, where this becomes another rail of volatility that investors are going to have to be ready for and brace themselves to weather. Yeah, totally. I would say, as I've been saying, I've incorporated
tariffs as a feature of my investing landscape. And this would be another feature. If this becomes an increasingly politicized seat in the U.S. government, the chairman of the Federal Reserve, then we have to understand that's going to make our future as investors prone to more volatility. And we're just going to have to plan around that or maybe choose to invest elsewhere. There's nothing that says you have to invest in the U.S. stock market.
Alright, in what is a pretty rough day for the U.S. stock market, there are some companies that are doing OK. Netflix getting close to new all-time highs after releasing earnings last week. And Market continuing to digest them, continuing to see a lot of the upside there. Asit, revenue was up about 12% for the business, net income up about 24% when they reported last week. We also had the first quarter where the company got rid of their subscriber counts as part of their reporting, giving us a feel for this new-look company.
What jumped out to you in the results? I liked that the operating margin keeps climbing for this company. If you look at the nice little table Netflix presents every quarter with its shareholder letter, you can see that operating margin is just sequentially moving up. There was a little bit of a bounce back last quarter, but here, up to almost 32%. In other words, for every revenue dollar that Netflix is bringing in, it's taking home
$0.32 on that dollar, before a few adjustments for debt and taxes, etc. But that's a very high operating income margin. It shows that Netflix is hitting its sweet spot. Dylan, as a content company, one that deals in intangible assets, it's always a good business to be in. You have a business which is now at scale. It's not a young upstart anymore, but it is still growing
Pretty convincingly. I really like that. I like the free cash flow that the company is generating. Again, $2.8 billion of net cash provided by operating activities, so about $2.7 billion in free cash flow. That's not bad off of a revenue number of about $10.5 billion. The company is extremely efficient on generating cash as well as it is on generating operating
income. I'm liking those numbers. There's a little theme to what I'm saying here, Dylan. I haven't talked about any of the other stuff that we've been talking about over the past several years for Netflix. I'm focusing on the numbers, which is what management wants investors to do. There's something else they don't want us to focus on. You were going to talk about that. You were going to ask me about that. Yeah. We, for a long time, have focused on subscriber counts in addition to focusing on dollars. This is the first quarter where we are not getting those subscriber counts.
And I do understand that we are moving into an era of this being both a subscriber-based business and an advertising-based business. But you can't convince me that that is a shareholder-friendly move. For my money -- I'm not a shareholder -- I would love to see as much information as possible. And it is still a driving force behind the dollars that that company reports. I feel that way, Asit, in particular because we're not getting the advertising breakout yet. They haven't told us what the advertising numbers are yet.
Yeah, it's becoming opaque. I'm going to agree with you, Dylan, but I'll try to give you a counter for it. I would love to have the subscriber numbers as well. But maybe from management's perspective, they're looking at it this way. Look, all you investors, we trained you on these subscriber numbers. It was addictive when we were a small company and growing, because those numbers were always going up.
They weren't always linear, but for the most part, that growth was. Now, they're just really bumpy. We're a mature company now, but you guys are still so focused on the subscriber numbers. Look at all this free cash flow we're giving you! Look at all this net income!
Look at all the investments we're making around the world. We're spending a billion bucks in Mexico for new content. We have an amazing operation in the U.K. We've gone from a company that exports U.S. content to one that makes it on the ground in places like South Korea, where we know the very best shows are created. Management wants us to focus on this business as something that's really dynamic.
and that can wring a lot more profit and cash flow out of its machine. They're pointing us to engagement. They're talking about things like,
52 weeks worth of live WWE entertainment that folks can now access on Netflix. They're trying to really shape how we view the company. But underneath this is an implicit message that, yeah, don't expect us to grow our subscriber count like we did in the past. We're going to focus on monetizing that with really great content.
Basically, if the market won't shift the narrative, management will shift the narrative by forcing it with the disclosures. Yeah. Maybe this thing about, "We'll only share the subscriber count when we hit big milestones," is OK. If they keep putting out numbers like they've been putting out -- Netflix stock reacted pretty well to the latest results. Even today, I think this is a defensive play because everything else is in the red today. I know the stock is up a little bit this morning.
Yeah, I saw a headline calling Netflix recession-proof today. We've been keeping an eye on the way that different management teams early on in this earnings season have been trying to manage the expectations game.
For Netflix's part, they reiterated their full year guidance. They said that there were no interruptions that they were seeing. They felt like entertainment is a very sticky place for people to be spending, that they're at a nice price point. What do you think of that recession-proof label, Asit? I mean, yes and no. They're recession-friendly.
because we love our subscription businesses. But as one analyst asked on the earnings conference call, if the economy gets worse and all this tariff stuff keeps going on, won't people drop down from those premium subscriptions down to the advertising tier, which is pretty cheap and attainable? What will that actually mean for the business? Greg Peters didn't really have a great answer for that. He did say, "We have such an attractive price point at that ad-supported tier."
But it begs the question, if things get really bad, maybe some folks won't even bother with an ad-supported tier. Maybe they'll just cut different subscriptions. Netflix isn't the only one that I can think of, of course. But I do think that they have
some insulation against that. They're not in a business that is going to be directly affected by tariffs from a tax perspective. That's what they're communicating by not changing the guidance. And they did say in the conference call that they're always having to figure out
different tax structures because they have all this local production of content around the world and they sell everywhere. They're already constructed in a fashion and manner that they can be a little bit price reactive. I would say there is some truth to that, but I wouldn't be surprised if things really head south with the economy this year.
Netflix to come out, you know, in the summer, fall and say, whoops, I mean, we didn't know things were going to be this bad. We have to pull that forecast back a little bit. They only know what they know, right? Of course. Austin Sharma, you know plenty. Thanks for joining me today. Thanks a lot, Dylan.
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Coming up on the show, what do tariffs mean for e-commerce? Up next, Anand Chakvalu hosts Fool contributors Dan Kaplinger and Rick Minares for a scoreboard episode on Shopify.
We'll talk about the business first, including factors like industry and competition. A 10 is invincible, a 1 is hopeless, Dan's at a 7, Rick, you're at an 8. Yeah, so, Shopify, obviously, an e-commerce platform for the masses, a Canadian company, but global with 175 country reach. It started as Toby Lutke and a friend wanting to sell snowboards online about 20 years ago. When he didn't see an e-commerce platform that he liked, he created his own.
and other budding online entrepreneurs asked them if they could use it. And voila, the Shopify business model was born in 2006. More than $1 trillion in merchandise has been sold on Shopify's platform since then. More importantly, more than half of that gross merchandise value has actually happened in the last two years. Shopify started as a place for sole proprietors or small companies wanting an online presence.
but now it's evolved through Shopify Plus and other initiatives to cover companies of all sizes. 875 million unique online shoppers purchased something from Shopify from a Shopify merchant in 2024. It's seamless, intuitive for sellers, but naturally there's Amazon, eBay, and others e-commerce rivals that can make that small learning curve even smaller. Shopify's advantage here, I see it, is that
the users own their own site. They're not competing against anyone else for attention, but they also have to generate the traffic to their sites. Shopify also has made a move offline, providing point-of-sale solutions for physical retails and event vendors, making it a direct competitor of BlockSquare platform. The Shopify model isn't perfect. Two years ago, they did unload their logistics business. But however, winners keep winning, and Shopify is Canada's second largest company by market cap. Only the Royal Bank of
Canada is larger. But it's easy to see why growth investors may prefer to bank on Shopify. Yeah, Rick pretty much covered everything. I think Shopify has done a really good job of democratizing e-commerce a little bit, providing someplace where smaller companies, smaller retail businesses can go without necessarily getting totally overwhelmed by the platform. Shopify has done a good job of expanding the platform and adding services.
And it's just, as you say, some growing pains along the way, but overall, done a really good job. For management, a 10 is Warren Buffett, a 1 is Homer Simpson, Dan's at a 7, and once again, Rick's at an 8.
Lucky is still at the helm here, obviously. He's still quotable. He's still winning. Shopify is a 54-bagger since going public 10 years ago. President Harley Finkelstein has been there for 15 years, so he has also been there for the entirety of Shopify's run as a successful public trade life. The only reason I'm not higher than an 8 is
It's surprising to me that half of the employees pulled by Glassdoor approve, or in other ways, don't approve, either way, 50-50% of Luck as CEO. Actually, less than that, 48% of the employees would recommend working at Shopify to a friend. I do not like that. Yeah, I give it a 7 in part because I get that same feel to it. I almost wonder if this is a situation where
You have a co-founder CEO who might be happier moving into less of an executive management role. We've seen a bunch of former CEO co-founders
switch over to become chief technology officer or do something else that more aligns with whatever it is that they're passionate about. I wonder if that might be the move for Shopify here. But you can't dispute the fact that Lutke puts his money where his mouth is, still has a huge stake in the company, financial incentives totally aligned, and we're always glad to see that. For financials, a 10 is a fortress, a 1 is yikes.
Dan said a $7. Rick said a $9. Yes. A lot of growth stocks slowed down as they get larger. Shopify is actually accelerating right now. Revenue went from rising 24% in 2023 to 26% last year. It's doing even better if we zoom in.
Revenue rose better than expected 31% in its latest quarter. Its strongest quarterly growth showing in more than three years. Shopify has been generating positive free cash flow for nine consecutive quarters. And its latest quarter generated $0.22 in free cash flow on every dollar of revenue. Shopify also has a relatively clean balance sheet with a strong net cash position. And it also doesn't hurt to zoom out. Revenue at Shopify has more than tripled in the last four years and soared fivefold in the last five years. You can't spell Shopify without H-O-P.
I gave it a lower number. I gave it a seven. You can't dispute the numbers that you've seen. I think that part of where I'm a little bit nervous, as we tape this in early-mid-March, there's a whole bunch of geopolitical tension that is affecting trade of goods.
And the extent to which a lot of Shopify transactions happen within national borders, and so you're not going to have a tariff issue. You're not going to have any sort of trade war issue. But a decent amount does happen internationally. And so the question for me is,
Between the direct impact of tariffs on e-commerce and the indirect impact, potentially, if there is an economic slowdown because of it, I have to be a little bit wondering whether future growth might slow as a result of that. Especially, you've got a Canadian company and you've got a whole bunch of U.S. participants
That somehow in 2025 has turned into something that we're having to pay attention to. Rick, let's talk valuation. How well will Shopify's stock do over the next five years? How safe is it? 10% is a short thing, 1% is a lottery ticket. I want a 5% to 10% five-year return on the stock and a safety score of 7%. The stock has nearly tripled over the past five years, so suggesting it'll only grow at a 5% to 10% annualized clip.
over the next five years with a long runway of double-digit revenue growth in that time. It may seem conservative. I just think the valuation here seems a little stretched at this point. Shopify is trading for 13X trailing revenue and more than 60X trailing earnings. To me, it's a bit rich. I don't know if it's 100% justified, but I do see it obviously doing well overall, making that back as growth keeps
outpacing the stock in the next couple of years. Dan? I agree with the evaluation comment. I think I'm a little more pessimistic just on the general economics of retail and e-commerce going forward. I gave it 0-5% with a safety score of 6%. I think we're going to be in the mid-single digits. I don't see a 0% return. We have seen a big rebound recently. I think that there is a real risk
that we have a consumer-led recession. It might put pressure on retailers. It might last longer than some of the mini-recessions that we've seen in the past. Trade tensions, trends towards deglobalization. I'm just concerned that that's going to hurt the company more than a lot of people are giving credit to at this point. Time for everyone's favorite topic. Rick, is there a company in Shopify space you like more? I like Shopify, obviously, but I went with Lock
now a direct competitor with Square, now that Shopify is a bigger force in point-of-sale and offline sales. Block is growing a lot slower than Shopify, and revenue is decelerating. It was just less than 5% revenue growth in its latest quarter. But it's trading for 12X earnings and just 1.5X sales. And I want to see growth accelerating this year and again in 2026. So, I went with Block sort of as a value-based play on digital.
I'll give you two companies. If you like e-commerce and you like the idea of an area with what could be potentially stronger economic growth, MercadoLibre, M-E-L-I,
gives you that Latin American exposure. I think that's a more interesting market than the North American market at this point. MercadoLibre has done a good job of giving associated services on top of e-commerce. You get payments, you get shipping, you get a whole bunch of stuff that I think helps their customers, both their customers and their merchants, do things better. On the other hand, Amazon, ticker AMZN,
an obvious choice in e-commerce and you get Amazon Web Services for no extra charge. And so that's something that I think may appeal to a bunch of people as well.