Insights

Mega Caps Struggle, Becky Quick on Berkshire-Hathaway’s Future

Emily Flippen and Ron Gross discuss:
Amazon (NASDAQ: AMZN) falling more than 10% after a weak 1st-quarter report.
Apple’s (NASDAQ: AAPL) supply chain outlook.
Microsoft (NASDAQ: MSFT) delivering strong earnings across its business units.
Atlassian’s (NASDAQ: TEAM) guidance outweighing great 3rd-quarter profits.
Pinterest (NYSE: PINS) bouncing back from a 52-week low.
The latest from Meta Platforms (NASDAQ: FB), Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), and Pinterest.
CNBC host Becky Quick calls in from the Berkshire-Hathaway annual meeting to discuss Warren Buffett’s investing strategies, inflation, the strength of the U.S. economy, and more. Emily and Ron share two stocks on their radar: Teladoc Health and Sherwin-Williams.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on April 29, 2022.
Chris Hill: [MUSIC] The Nasdaq is on track for it’s worst month since 2008. But we’re going to get through this. All of us together, starting now. [MUSIC]
MALE_1: Everybody needs money. That’s why they call it money. [MUSIC].
MALE_2: From Fool global headquarters, this is Motley Fool Money.
Chris Hill: It’s a Motley Fool Money radio show. I’m Chris Hill, and I’m joined by Motley Fool Senior Analyst Emily Flippen and Ron Gross. Good to see you both.
Ron Gross: How are you doing, Chris.
Emily Flippen: Hey Chris.
Chris Hill: We’ve got the latest headlines from Wall Street. CNBC’s Becky Quick is our guest. As always, we’ve got a couple of stocks on our radar. But we begin with the mega-caps. T. S. Eliot was not referring to the stock market when he wrote the line, April is the cruelest month. [laughs] But that certainly has been the case in 2022. The overall market had its worst April performance in 20 years, and part of the drag this week was from some of the biggest companies in America, starting with Amazon shares falling more than 10 percent on Friday. While Amazon Web Services posted good results in the first quarter, overall revenue was lower-than-expected and the company took a big loss on its investment in Rivian Automotive. Ron, where do you want to start?
Ron Gross: Boy, as you say, times are tough out there and Amazon is not immune. Real story here, it can boil down to weaker sales and higher costs. I’m no accountant, but I will tell you that’s a recipe for not anything too good. What happened here is that during the pandemic, Amazon went on a surge of hiring and warehouse building. That is now catching up with them as cost balloon and sales growth slows. That buying binge left them with too much capacity, too much warehouse capacity, too many workers.
They hired 780,000 people over the past two years. That’s a lot of people, Chris. The next several quarters, I think there’s no way around it. They’re likely to be shaky as consumers return to their pre-pandemic habits, sales growth slows, costs remain high, and inflation puts the break on some spending. That’s what we’re in for, so buckle up a little bit. With respect to some of the metrics for this quarter, sales were up about 7.3 percent. Now that’s the slowest pace of growth since 2001. The first-time Amazon has ever recorded back-to-back quarters of less than 10 percent growth.
There’s just an indication of what’s going on. Cloud does remain strong. Cloud was up 37 percent, so that’s nice to see. Commitments that customers have made to the Cloud business up 68 percent. Again, that’s pretty good. But cost have just ballooned here, about 6 billion dollars in greater costs led the company to report a net loss of 3.8 billion. But as you mentioned, that included a loss of 7.6 billion from their investment in electric carmaker Rivian. If you back that out, they’re still profitable. But business, clearly is weak. Management’s forecasts included the potential for another loss in the current period, somewhere in the range from a loss of one billion to a profit of three billion. A big range there, basically indicating that they don’t have a lot of visibility even into this current quarter they’re in now. Some shaky quarters, I think, are going to be a foot for Amazon.
Chris Hill: They are not alone in lacking visibility. Apple’s revenue grew nine percent in the second quarter and the company announced a $90 billion share buyback plan. But concerns about China and overall supply chain issues cap shares from Apple from rising Emily, and Apple sticking with Amazon in terms of not really giving any guidance.
Emily Flippen: I’m actually surprised to see the business flat to down on this report, given that much of the dynamics that we’ve been hearing about are just more of the same that have been told by Apple over the past couple of years. As you mentioned, they didn’t issue any guidance, but they haven’t since pre-pandemic. They did talk about the supply chain disruptions, in particular for silicon that have happened because of the lockdowns across the world, because of the pandemic.
None of this was new, but what was new was how management is thinking about future problems. In particular, the lockdowns that we’re seeing in China right now. They didn’t impact this quarter for Apple, but management still expects they’ll have significant disruptions in the next quarter, so that could be weighing on the stock. All-in-all the supply chain and disruptions, and the lockdowns in China are projected to have around a 4-8 billion dollar impact for this business next quarter. They’re certainly notable. But if you just look at this quarter in isolation, the earnings report was actually pretty good. Both earnings and revenue solidly beat expectations. Revenue rose nearly nine percent year-over-year in the quarter, driven primarily by iPhone in services revenue.
That’s important because they did launch a new iPhone this quarter. But if you go back to 2021, they had new product launches. Management’s pulling out this quarter and saying, we see a long tail on the demand, especially for things like iPhone and services. But I think the big question mark is really what happens to consumer confidence here over the course of the rest of the year? If that changed at all and if at ways at all, at Apple sales, if you just take this quarter in isolation, we don’t see that happening yet.
Chris Hill: In terms of stock performance, Microsoft was the lone bright spot among the mega-cap companies this week, shares were up five percent after Microsoft posted strong earnings across its business units. Ron, the guidance was strong for Microsoft.
Ron Gross: Yeah, I love this report, strong report, better-than-expected. The cloud-based businesses are largely insulated from supply chain disruptions, which is very nice, and that’s showed up in the numbers. Sales up 18 percent. Revenue from their Intelligent Cloud segment, which includes Azure, was up 26 percent. Their cloud business is second only the Amazon in the cloud infrastructure services, that specific Azure business was up 46 percent, which matched the rate in the second quarter. Really strong numbers there. The revenue from their productivity and business processes unit were up 17 percent. We saw strength from LinkedIn, 34 percent increase. Sales to Office 365 business customers up 17 percent. Also strong numbers. Now revenue in the More Personal Computing division. Again, this is the worst name for a division in all of public companies. Revenue in the More Personal Computing division was up 11 percent. Indications that Xbox has actually gained market share in each of the past two quarters. Even Surface revenue was up 13 percent. It all boils down to a really strong quarter. Adjusted earnings up 14 percent. Forward guidance solid. I wouldn’t call it stellar though, but they do expect double-digit revenue growth for the fiscal year. Stocks are 28 times from a forward price to earnings basis. That’s not cheap, but it’s a wonderful company that continues to put up really strong numbers.
Chris Hill: Hey, when your biggest problem is one of your internal divisions has allows you name. [laughs]. On balance, you’re doing well.
Ron Gross: Exactly.
Chris Hill: The first-quarter results from Meta Platforms were highlighted by a rise in daily active users and revenue per user. CEO Mark Zuckerberg said the company will slow the pace of investments that they are making in their Metaverse aspirations, and shares rose after hitting a 52-week low the day before, Emily.
Emily Flippen: This report can be summed up as just the power of low expectations, which no investor should be discounting in this market, because as you mentioned Ron, we see great companies that are still trading at relative premiums. Meta Platforms, formerly Facebook, is one of those businesses that has been severely discounted because of the business, and I guess publicity issues that the business has been facing over the course of the past year. While the stock is up nearly 20 percent, before this report, the stock was down more than 40 percent just in the past three months. Some people may point this quarter as a turnaround quarter for Meta. I won’t say that it was not that, but I will say, I think what we’re seeing, the impact is largely driven by just a very base level of expectations from investors in this business, because this quarter at face value wasn’t great.
Earnings were down year-over-year. They still did beat expectations. But revenue was a miss, only rising six percent, which is the weakest quarter of revenue growth since Meta or Facebook went public. The slowdown wasn’t just due to the macro economy. They had issues in eCommerce. They had issues in targeting and measuring their ad spend. There are still platform level concerns that I think investors have with this business. But as you mentioned, the bright spot here is monthly active users, they’re up three percent year-over-year, even rising for the Facebook platform itself. There was a little bit of reprieve, I suppose, for investors who were afraid that sites like TikTok were stealing away the content and the users from Meta Platforms, numerous platforms.
Chris Hill: Ron, where should investors be looking in a market where the biggest, most successful companies, and in the case of Apple and Microsoft, with some of the most profitable companies over the last 20 years, are struggling like this?
Ron Gross: I think you have to discount what’s going on in any given quarter or perhaps any given the year, and look longer-term to business models that makes sense to you. In this environment, I will also focus on profits and cash flow. I’m not really doubling down on the more speculative, innovative growth companies that have yet to produce profits. Yes, there is an absolute place for that in everyone’s portfolio. I wouldn’t overemphasize it at this time. Big, strong, profit generating companies trading at 20, 30, 40 percent lower than they used to, I think are really interesting places for new money.
Chris Hill: Emily, you agree with that?
Emily Flippen: Generally, I will highlight though, that profits and cash flow were not made equal. A lot of investors may be looking at businesses that are on say prices sales, or priced earnings level cheaper than they used to be, but don’t discount the businesses that may not be GAAP profitable, but are still generating substantial amounts of cash flows. I think those are also some great business down significantly. That could be good buying opportunities as well.
Chris Hill: More tech earnings after the break, so stay right here. You’re listening to Motley Fool Money. [MUSIC] Welcome back to Motley Fool Money. Chris Hill here with Emily Flippen and Ron Gross. Atlassian third-quarter profits and revenue came in higher-than-expected. But shares of the Australian software company falling seven percent on Friday, despite that. Ron Atlassian’s results look good. Was this related to guidance or is this company just getting swept out with the tide?
Ron Gross: No, I think it’s guidance. Atlassian was my radar stock on the show last week, and it was that because the weakness over the last six months and the stock really got me interested. Well, one week later, Chris, it’s even weaker, so it’s something maybe getting more attractive actually because I do think results are strong. If you look at some of the metrics, revenue up 30 percent quarterly subscription revenue, up 59 percent cloud revenue, up 60 percent. These are pretty strong numbers. Their adjusted operating margin was 24 percent, that was down from 31 percent last year.
There is a red flag, some higher class eating away at profits, and as a result, earnings-per-share were down slightly. Company as Emily said earlier, is cash flow positive $350 million from cash flow from operations for the quarter, so adding to the balance sheet, they’re not losing money. They ended the quarter with a net addition of about 8,000 new customers. They lost about 1,800 customers that were Russia-based due to the Ukraine war, somewhat actually unable to pay as a result of sanctions which is very interesting. Couple of things, the CEO said we have a line of sight to $10 billion in annual revenue, which is interesting because I just did 740 million for the quarter. That’s a pretty good line of sight. That’s 2020 vision. That’s impressive. As we talked about earlier, guidance for the fourth quarter was not great revenue, operating margins and net income lower than in the quarter just reported, so the stock is rightfully so selling off a bit.
Chris Hill: Roku (NASDAQ: ROKU) showing some signs of life, first-quarter revenue rose 28 percent, and shares of the video streaming platform rebounded from their 52-week low. Emily, you tell me how much of this is Roku turning things around and how much is low expectations?
Emily Flippen: Mainly low expectations. But let me clarify something, Roku is not a turnaround story. There have been businesses that have been threatened, but Roku has been executing exactly the way management has communicated since Day 1 when this business went public. Just because the stock price has been bit down so significantly this year, doesn’t mean that the business itself needs to be turned around, and we actually saw that in this quarter for Roku. Now there were low expectations as a lot of investors already know, Netflix had an extremely weak quarter, very poor guidance for user growth, so it was a natural extrapolation that, that would impact a streaming service like Roku, which does depend upon that recurring subscription revenue from Netflix and other streaming services to generate revenue. Surprisingly good to see that platform revenue was up nearly 40 percent in the quarter gross profit also increasing.
Also, active accounts rising by more than a million active accounts in the quarter. All good news here for Roku, but it’s important to remember just how Roku generates revenue. I had to mention, they get a cut of their transactions that happened on their platform. Just because somebody cancels Netflix, doesn’t inherently mean that Roku won’t make up that revenue somewhere else. If that person moves toward an ad-based service on the Roku platform, Roku get the add revenue. If they move toward another paid subscription service, Roku gets a cut of that subscription service. I do think fundamentally, Roku has a very strong business model here, and it will be important to watch how the move toward advertising and streaming actually potentially helps Roku as they become a partner for a lot of these streaming services. Their guidance was still weak to be clear, there still inflating consumers from price hikes, but management talked about their opportunity as a massive billion-plus market opportunity for broadband customers, of which they only have around 60 million active accounts saturated, so they are still very much in growth mode here.
Chris Hill: Ultimate revenue in the first quarter was $68 billion but Wall Street was expecting more, especially out of YouTube. The Board of Directors approved a huge stock buyback plan shares of Alphabet still down slightly this week. Ron.
Ron Gross: You nailed that YouTube and focus here and some slowing growth. Revenue up 23 percent, that’s a slowdown from 32 percent last quarter, search up 24 percent, that was 36 percent last quarter. Google’s Cloud business was the standout up 44 percent, that’s flat with last quarter. But Cloud is still losing money about 930 million when that turns and it will turn. That’s going to really be a big deal for this business and its profitability. YouTube, the focus continuing to disappoint third quarter in a row, advertising only up 14 percent, down from 49 percent growth last quarter. Comparisons is very tough, again, Europe war in Ukraine hurting as well. TikTok, increased competition from TikTok, perhaps hurting as well. Earnings up only about seven percent or so, 24 one stock split coming in July, mark your calendars. I think Google’s pretty done cheap here at 20 times. Alphabet is looking like a good investment at this price.
Chris Hill: Similar to Roku one day after hitting a 52-week low, shares of Pinterest rose 14 percent after first-quarter profits and revenue came in higher-than-expected. We got a review on Apple Podcasts from Cloud rhubarb, so thank you Cloud for the review. In the review of the show, he wrote, “I’ve bought Pinterest at several different price points and I’d like to hear what Emily Flippen, thinks.” Emily, if investors have questions about an advertising behemoths like Google, I get why there will be questions over what that means for a small company like Pinterest.
Emily Flippen: Pinterest has always been a controversial business because it has a massive scale. We’re talking about over 400 million monthly active users globally on the platform. It is not small, so you can almost by the size of its audience, caught up behemoth within itself. But then bears and skeptics will point to the fact that this is a business that depends heavily on things like outside search traffic, and if you look at Pinterest most recent quarter, we saw that impact the business negatively as the change in search traffic decrease the amount of, I guess, redirection to the Pinterest platform. But the good news is that the quarter wasn’t nearly as bad as I think people were expecting, but the earnings and revenue beat expectations. Revenue rose actually 18 percent over $750 million in the quarter. It was a decent quarter. But they do need to figure out what they’re going to do to not bleed monthly active users. Because my thesis for Pinterest has always been on that average revenue per user rising. That has consistently happened since Day 1 for Pinterest, we saw it rise in this quarter, but they need to also not believe monthly active users while increasing their monetization. The improvements that they make to the Pinterest platform will be critical and reinvigorating that user growth.
Chris Hill: I know that stocks can always go lower, but one of the themes of what we’ve talked about so far today is, some of these companies bouncing back off a 52-week lows. I get that sometimes expectations are low, but is it possible that I don’t know, [MUSIC] it just seems like some of these may have reached the bottom.
Ron Gross: I would just caution investors don’t think about getting back to even or getting back to profitability on your positions. Stock could do very well from here on, but actually not get you back to profitability, but it’s still the right thing to do to hold onto that company.
Chris Hill: We’ll see later in the show, Becky Quick is next. So stay right here. This is Motley Fool Money. [MUSIC] Welcome back to Motley Fool Money, I’m Chris Hill. This weekend, the investing world turns its eyes to Omaha, Nebraska, for Berkshire Hathaway’s annual meeting. [MUSIC] The highlight as always is the marathon Q&A session with Warren Buffett, and Charlie Munger. At the helm of the event is Becky Quick, co-host of CNBC Squawk Box. She joins me now from her hotel room in Omaha, Nebraska where apparently she surrounded by questions. Becky, thanks for taking the time to talk.
Becky Quick: [laughs] Thanks, Chris. I always love talking before this and yes, I am in my hotel room and I literally have hundreds and hundreds of questions printed out. I have them placed in piles all over the floor, all over the bed, all over the desk. Because this is how I organize it. I can’t do it any other way than printing it out and I feel bad for killing the trees, but I just can’t make my mind work otherwise.
Chris Hill: These are questions that are submitted by hundreds if not thousands of investors and shareholders. But I’m curious, just left to your own devices. What are you interested in hearing from Warren Buffett this year? Because this seems like one of those years more than most, where the average investor like me, I’m interested this year, his thoughts on more macro things about inflation, and the prospect of a recession. But what are you interested to hear from him?
Becky Quick: Well look, we haven’t heard from him. The last time we had him on our air was back in May of last year when we sat down with you and Charlie. It’s been a long time, and there’s a lot that has happened that he hasn’t gotten the chance to comment on publicly especially what’s happening right now in the markets. Man, things have gotten interesting. This is that confusion moment. May you live in interesting times. If you’re investors, things have gotten a lot more interesting, a lot scarier probably, a lot of volatility out there and people are down pretty significantly on stocks.
I think when you see big moves like that in the stock market, when you know that the Fed is going to act and going to act pretty strongly, when you know that we’re going suddenly from this incredibly low to almost zero interest rates to higher interest rate environment again, that changes everything. I think that’s probably what people are most eager to hear about. Look, there’s that, and then there’s just the idea that when Warren wrote his annual letter to shareholders in February, he talked about how they hold this huge cash hoard of more than $140 billion. Then he and Charlie have been looking around, couldn’t find anything to buy. Well, since then we’ve heard about him buying a lot of stuff. Alleghany, they spent $11 billion on it, but an additional seven billion dollars in Occidental shares. They bought HP a huge number of shares there. You’re talking about billions and billions of dollars they started spending after that. You wonder what he’s seeing in the market if things have changed. You wonder what they think about the Fed up ending markets from changing the whole investing environment. This is a perfect time to be here and to have those two on stage for five-plus hours.
Chris Hill: I want to get to a couple of the investments in a second, but let’s stick with the Fed. How much does he factor in what the Federal Reserve is doing with interest rates into his investing? Because as much as anything, the Federal Reserve has dominated the conversation, particularly over the last six months when it comes to investing.
Becky Quick: Yeah. He’s been saying for years that interest rates are like gravity that bring down stock prices. While interest rates are so low and gravity is so low, stock prices have risen enormously. I think a lot. He doesn’t very often put macro events into what he is looking at, he’s just looking at prices, and looking at buying things. But you can say that the Fed, they’re the ones who are driving this whole show right now. Interest rates are going to be so incredibly important because the environment is changing and because we’re getting into this QE forever; quantitative easing and these incredibly low interest rates, no interest rate. That changes the whole environment. Again, Warren talks all the time about how he bought his first stock when it looked like we were losing World War 2. The Macro never really plays all that big of a role in what he is looking at. But the Fed does because it’s so key to everything that drives the investment outlook right now.
Chris Hill: That Warren Buffett and his team went out and spent $11 billion on Alleghany insurance. Probably not the biggest surprise in the world. More surprising to me was the very large stake he took in HP. What was the thinking behind that? Because I heard some people talking about like, well, he already has a big tech investment in Apple, and that’s technically true. No disrespect to HP, but it’s not Apple.
Becky Quick: You got me what he was thinking. If it’s even him, I mean, I guess it could’ve been Todd or Ted or somebody else too. But it’s pretty big buy. I have no idea. Like the idea that you have Alleghany, and HP, and Occidental altogether being bought at the same time, what’s the common theme here? You got me. [laughs] This is one of the things I’d love to hear on Saturday show, no idea.
Chris Hill: Despite the mystery around some of these moves, you look at the performance of Berkshire Hathaway since the last annual meeting, shares are up about 20 percent or so. This is against the backdrop of some of the better known names on the Nasdaq really having been crushed over the same 12 months. What do you think Buffett and his team are doing that others are missing? Or is it simply a matter of, they’re not doing anything different, they just didn’t get caught up in some of the excitement around the ”Stay at home stocks on the Nasdaq.”
Becky Quick: I think it’s exactly that. They’re not doing anything differently than they ever have. But there are times when the market gets really stirry over these tech companies. Remember, it feels like 1999 into 2001 to me. Just remembering there were all these high-flying tech names, all these companies that didn’t have earnings that were so beloved by the market for being valued on different metrics. The industrials and the value companies that were there, we’re not valued, were not looked at the same way. Then all of a sudden market sentiment changed. This feels like another period like that to me where you want to slow and steady and understood, and looking at how to value a company based on metrics that we stood the test of time.
Netflix valuation went from well over $700 to 191 or something. That’s simply a change in the mentality on Wall Street. It’s not that Netflix, OK, so they lost 200,00 subscribers. But is the picture that different from them than it was 12 months ago? There is just a complete shift in the way Wall Street values things, and what they are going to be willing to pay a premium for. I think when you get into scary times, that’s always when Buffett and Munger have drawn everybody back in because they have the money and they know how to plow a back-end. They are looking at the valuations that never change. I don’t think they do anything differently, I just think the flavor of the month on Wall Street comes and goes.
Chris Hill: This is the last year that Warren Buffett is having his charity lunch auction. I saw an article in the Wall Street Journal. This is where people can bid to have lunch with Warren Buffett and the money goes to charity. He’s raised more than $30 million since he started doing this, I believe about 20 years ago. But this is the last year he is going to do it. I’m not going to ask you when he is going to step down, but I am curious if you have a guess as to what it may look like when he finally turns the ranks over. Do you think he would ever maybe stepped down as CEO, remain as Chairman?
Chris Hill: Just in the way that we’ve seen some other CEOs do the same thing.
Becky Quick: I don’t know. I think he is really happy with the way things are set up right now. But I think they’ve very clearly laid out what the future structure is going to look like. Greg Abel, he’s the one who would be CEO if Warren were to step down at any point. We’ve made that pretty clear. Charlie slipped that in the meeting last year. You see the investments that Todd and Ted have both buildup and I think they each have more than $34 billion in investments that they are running at this point. Jane obviously runs all the insurance operations, everything goes through him.
The one difference would be, I don’t foresee Warren stepping down as CEO and just being Chairman. The one difference is when he’s not there, they’ve also made it pretty clear that it probably would be separated Chairman and CEO also when he’s not there, they’ve laid that out. Warren has said he would like Howard Buffett, his son, to be there as Chairman to maintain the culture of Berkshire and really keep a close eye on that. You know there’s this CalPERS though, where they would like to see the Chairman and CEO roles split here and they’re voting their shares against the company as a result of that. But that’s just the CalPERS thing where they’ve done that to every company. I think CalPERS didn’t make that big of a deal on it. Just said that this is what we do and we’d like to see that done. If it weren’t Warren Buffett being the Chairman and the CEO, I think the two roles would be split. But yeah, they’ve laid it out pretty clearly, but I’d be shocked if he steps down from that role anytime soon.
Chris Hill: Before I let you go and let you get back to all your questions, separate from the annual meeting, every day, you’re on the set of Squawk box, you’ve seen what’s played out over the last six months. Whether it is more macro topics like employment, wage, data, inflation, or just particular industries, when you think about the second half of 2022, what are a couple of things that you are going to be watching in terms of the overall health of the market?
Becky Quick: I think a huge part of the story is the supply chain. We were hearing last year that, things are getting better. We’ve worked through some of these issues and people like Jamie Diamond and others are saying that it was going to be much better than the first half of the year, starting in the first half of this year. That’s not the case and these rolling lockdowns that we’re seeing in China are continuing to disrupt things. We spoke with Scott Gottlieb, the former head of the FDA, who keeps pretty close eye on these things. By the way, he also was at the American Enterprise Institute before so he watches policy and watches the markets pretty closely too, just how business works for these waves.
He was telling us just this week that these rolling blackouts in China are probably going to be the norm for a while because they have not spent the time that they’ve been in the zero-tolerance, zero COVID policy to prepare their population better by making sure they get MRNA vaccines, by making sure everybody is boosted, by making sure that they have some of the drugs like Pfizer and Merck have, some of the antiviral drugs so that if you do get COVID, you don’t get as sick. Because of their policy, their zero COVID policy, they don’t have any natural immunity really built up in population. They are facing this as if you just turn the clock back two years and didn’t have any of the tools that we have to this point. It’s crazy because BioNTech, which is Pfizer’s partner with it’s MRNA vaccine, has actually helped the license for the Pfizer-BioNTech vaccine for China and they chose not to do it because they were pursuing their own MRNA vaccine and it hasn’t gone very well. So they just have an unprotected population. They’ve been too proud to use any of the American or Western vaccines or antivirals that have come along and as a result, they have this huge population that’s just not prepared if the virus gets out. So every time you see a few cases here or there, or maybe it’s 20 cases, maybe it’s 30 they’re shutting down population cities of 20 billion people. The idea that that’s going to continue for the foreseeable future, that’s bad news for the supply chain. So that’s one issue.
The other obviously is inflation exacerbated by what’s happening with Russia and Ukraine. Then that part of the supply side of things, that’s not something that the Fed can fix with its tools. So they’re trying to tamp down inflation. The only thing they really can do is really hit the brakes hard and try and cut-off demand, the demand side of picture. That means pushing us right up to the edge of recession and hopefully not into it. It’s pretty clunky tool to be using in such a scenario. I think that is the biggest question for me. The economy is great right now. You heard these economic numbers today that we were looking at GDP that shrunk. But if you looked at the consumer part of it, it was up 2.4 or 2.7 percent. That strong demand to have coming through. So you still have a strong demand and you still have a strong consumer but you are dealing with a lot of other problems and I just don’t know. It’s just an incredibly tricky tight rope for the Fed to be walking and they don’t exactly have the tools to be dealing with it in the most specific way.
So I think I’m watching that. If you watch what CEOs and CFOs are doing when they start talking about how they anticipate their costs going up and then how they are going to raise prices to deal with their input costs going up, that’s where you get into the self-fulfilling prophecy of higher and higher inflation. They’re expecting prices to go up so they have to raise prices as a result of trying to protect their margins. That’s the crazy scary thing that you get out of it. But it’s also hard to think about complaining when the economy is so hot right now and so strong. That’s just, I am looking for clues around that entire picture everyday, whether that be from companies, whether that be from government numbers. [MUSIC] That’s the picture that I’m trying to piece together from everybody we talk to every day. [MUSIC]
Chris Hill: If you want to watch the Berkshire Hathaway Annual Meeting, you can go to CNBC.com this weekend. Thank you Quick, always great talking to you. Have a great time in Omaha.
Becky Quick: Thanks Chris, it’s always great talking to you too.
Chris Hill: Coming up after the break, Emily Flippen and Ron Gross return with a couple of stocks on their radar. Stay right here. This is Motley Fool Money. [MUSIC].
As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against. So don’t buy or sell stocks based solely on what you hear. Welcome back to Motley Fool Money. Chris Hill here once again with Emily Flippen and Ron Gross. If you’re just starting out investing or you know someone who is looking to get started, we have a free investing starter kit. It covers everything from saving money to 401-k plans to buying your first stock. It includes 15 stocks and five ETFs selected by our investing team and it is free. Just go to fool.com/starterkit. Let’s get to the stocks on our radar. Ron Gross, you’re up first. What are you looking at this week?
Ron Gross: I’m going with Sherwin-Williams SHW yesterday, and they are the paint company. I know it’s very exciting for you. I like Discovery. It’s a strong company, large and growing retail distribution system, a key for professional contractors, very talented management team, global growth opportunities. Have increased their dividend each year for the past 43 years. Yield is currently just under 1 percent. Strong report this week, shares are up about 15 percent on the week, sales were up 7 percent. They reaffirmed guidance, which represents about 16 percent growth from 2021 at the midpoint, 30 times earnings. So I’m not claiming that this is screamingly cheap for a non-tech growth company, but it is a very strong company with an increasing dividend.
Chris Hill: Dan, question about Sherwin-Williams?
Dan Boyd: Chris, I think we need to create some stinger for old economy, Ron, because he’s back I’m happy to see him. Ron, here’s my question for you, is there anything worse than painting a room in your house?
Ron Gross: I wouldn’t know, Dan. I’m sure those are worse thing, yes.
Chris Hill: Emily Flippen, what are you looking at this week?
Emily Flippen: On the other side of the spectrum here, here’s a high-tech, high-growth business that ended up on my radar for the worst of reasons this week and its Teladoc, the ticker is TDOC. For investors who aren’t aware, Teladoc had a no good, very bad quarter seeing the stock drop nearly 40 percent after reporting earnings. Not just because the business has struggled, but because of how management handled expectations. We’ve talked a lot about expectations in this show. This is an example of how not to manage your investor expectations because management pulled back much of the guidance they had just reaffirmed for investors. The silver lining here is that Teladoc now looks very cheap relatively. It’s trading at around 20 times free cash flows, less than 25 times for an EBITDA with guidance of 20 percent growth. From here on out, maybe not bad, but definitely want to rebuild that trust and management.
Chris Hill: Dan, question about Teladoc?
Dan Boyd: So the answer to my question, is there anything worse than painting a room in your house is yes. Being a Teladoc shareholder, Emily what are Teladoc shareholders to do these days?
Emily Flippen: While if you’re like me, you will curl up in bed, get yourself a hot cup of coffee or something, cry a little bit and then try to get over it.
Ron Gross: But we will reiterate what we said in the last segment is don’t focus on trying to get back to even. The stock could probably go up 30, 40, 50, 60 percent. You might still not be back to even, but that’s a wonderful return from this point forward. That’s what matters, not whether you have a gain or loss on the position [MUSIC].
Emily Flippen: What Ron said.
Chris Hill: Dan, what do you want to add to your watch list?
Dan Boyd: I’m adding what Ron just said to my watch list man. This guy, he’s got some wisdom. Can you believe it?
Chris Hill: Ron Gross, Emily Flippen, thanks so much for being here.
Ron Gross: Thanks Chris.
Emily Flippen: Thanks Chris.
Chris Hill: That’s going to do it for this week’s Motley Fool Money radio show. The show is mixed by Dan Boyd. I’m Chris Hill. Thanks for listening, we’ll see you next time. [MUSIC]John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Chris Hill has positions in Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Atlassian, Microsoft, Pinterest, Sherwin-Williams, and Teladoc Health. Dan Boyd has positions in Amazon and Berkshire Hathaway (B shares). Emily Flippen has positions in Pinterest, Roku, and Teladoc Health. Ron Gross has positions in Amazon, Apple, Berkshire Hathaway (B shares), Meta Platforms, Inc., and Microsoft. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Atlassian, Berkshire Hathaway (B shares), Meta Platforms, Inc., Microsoft, Netflix, Pinterest, Roku, and Teladoc Health. The Motley Fool recommends Sherwin-Williams and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy. –

Emily Flippen and Ron Gross discuss:

Amazon (NASDAQ: AMZN) falling more than 10% after a weak 1st-quarter report.
Apple‘s (NASDAQ: AAPL) supply chain outlook.
Microsoft (NASDAQ: MSFT) delivering strong earnings across its business units.
Atlassian‘s (NASDAQ: TEAM) guidance outweighing great 3rd-quarter profits.
Pinterest (NYSE: PINS) bouncing back from a 52-week low.
The latest from Meta Platforms (NASDAQ: FB), Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), and Pinterest.

CNBC host Becky Quick calls in from the Berkshire-Hathaway annual meeting to discuss Warren Buffett’s investing strategies, inflation, the strength of the U.S. economy, and more. Emily and Ron share two stocks on their radar: Teladoc Health and Sherwin-Williams.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on April 29, 2022.

Chris Hill: [MUSIC] The Nasdaq is on track for it’s worst month since 2008. But we’re going to get through this. All of us together, starting now. [MUSIC]

MALE_1: Everybody needs money. That’s why they call it money. [MUSIC].

MALE_2: From Fool global headquarters, this is Motley Fool Money.

Chris Hill: It’s a Motley Fool Money radio show. I’m Chris Hill, and I’m joined by Motley Fool Senior Analyst Emily Flippen and Ron Gross. Good to see you both.

Ron Gross: How are you doing, Chris.

Emily Flippen: Hey Chris.

Chris Hill: We’ve got the latest headlines from Wall Street. CNBC’s Becky Quick is our guest. As always, we’ve got a couple of stocks on our radar. But we begin with the mega-caps. T. S. Eliot was not referring to the stock market when he wrote the line, April is the cruelest month. [laughs] But that certainly has been the case in 2022. The overall market had its worst April performance in 20 years, and part of the drag this week was from some of the biggest companies in America, starting with Amazon shares falling more than 10 percent on Friday. While Amazon Web Services posted good results in the first quarter, overall revenue was lower-than-expected and the company took a big loss on its investment in Rivian Automotive. Ron, where do you want to start?

Ron Gross: Boy, as you say, times are tough out there and Amazon is not immune. Real story here, it can boil down to weaker sales and higher costs. I’m no accountant, but I will tell you that’s a recipe for not anything too good. What happened here is that during the pandemic, Amazon went on a surge of hiring and warehouse building. That is now catching up with them as cost balloon and sales growth slows. That buying binge left them with too much capacity, too much warehouse capacity, too many workers.

They hired 780,000 people over the past two years. That’s a lot of people, Chris. The next several quarters, I think there’s no way around it. They’re likely to be shaky as consumers return to their pre-pandemic habits, sales growth slows, costs remain high, and inflation puts the break on some spending. That’s what we’re in for, so buckle up a little bit. With respect to some of the metrics for this quarter, sales were up about 7.3 percent. Now that’s the slowest pace of growth since 2001. The first-time Amazon has ever recorded back-to-back quarters of less than 10 percent growth.

There’s just an indication of what’s going on. Cloud does remain strong. Cloud was up 37 percent, so that’s nice to see. Commitments that customers have made to the Cloud business up 68 percent. Again, that’s pretty good. But cost have just ballooned here, about 6 billion dollars in greater costs led the company to report a net loss of 3.8 billion. But as you mentioned, that included a loss of 7.6 billion from their investment in electric carmaker Rivian. If you back that out, they’re still profitable. But business, clearly is weak. Management’s forecasts included the potential for another loss in the current period, somewhere in the range from a loss of one billion to a profit of three billion. A big range there, basically indicating that they don’t have a lot of visibility even into this current quarter they’re in now. Some shaky quarters, I think, are going to be a foot for Amazon.

Chris Hill: They are not alone in lacking visibility. Apple’s revenue grew nine percent in the second quarter and the company announced a $90 billion share buyback plan. But concerns about China and overall supply chain issues cap shares from Apple from rising Emily, and Apple sticking with Amazon in terms of not really giving any guidance.

Emily Flippen: I’m actually surprised to see the business flat to down on this report, given that much of the dynamics that we’ve been hearing about are just more of the same that have been told by Apple over the past couple of years. As you mentioned, they didn’t issue any guidance, but they haven’t since pre-pandemic. They did talk about the supply chain disruptions, in particular for silicon that have happened because of the lockdowns across the world, because of the pandemic.

None of this was new, but what was new was how management is thinking about future problems. In particular, the lockdowns that we’re seeing in China right now. They didn’t impact this quarter for Apple, but management still expects they’ll have significant disruptions in the next quarter, so that could be weighing on the stock. All-in-all the supply chain and disruptions, and the lockdowns in China are projected to have around a 4-8 billion dollar impact for this business next quarter. They’re certainly notable. But if you just look at this quarter in isolation, the earnings report was actually pretty good. Both earnings and revenue solidly beat expectations. Revenue rose nearly nine percent year-over-year in the quarter, driven primarily by iPhone in services revenue.

That’s important because they did launch a new iPhone this quarter. But if you go back to 2021, they had new product launches. Management’s pulling out this quarter and saying, we see a long tail on the demand, especially for things like iPhone and services. But I think the big question mark is really what happens to consumer confidence here over the course of the rest of the year? If that changed at all and if at ways at all, at Apple sales, if you just take this quarter in isolation, we don’t see that happening yet.

Chris Hill: In terms of stock performance, Microsoft was the lone bright spot among the mega-cap companies this week, shares were up five percent after Microsoft posted strong earnings across its business units. Ron, the guidance was strong for Microsoft.

Ron Gross: Yeah, I love this report, strong report, better-than-expected. The cloud-based businesses are largely insulated from supply chain disruptions, which is very nice, and that’s showed up in the numbers. Sales up 18 percent. Revenue from their Intelligent Cloud segment, which includes Azure, was up 26 percent. Their cloud business is second only the Amazon in the cloud infrastructure services, that specific Azure business was up 46 percent, which matched the rate in the second quarter. Really strong numbers there. The revenue from their productivity and business processes unit were up 17 percent. We saw strength from LinkedIn, 34 percent increase. Sales to Office 365 business customers up 17 percent. Also strong numbers. Now revenue in the More Personal Computing division. Again, this is the worst name for a division in all of public companies. Revenue in the More Personal Computing division was up 11 percent. Indications that Xbox has actually gained market share in each of the past two quarters. Even Surface revenue was up 13 percent. It all boils down to a really strong quarter. Adjusted earnings up 14 percent. Forward guidance solid. I wouldn’t call it stellar though, but they do expect double-digit revenue growth for the fiscal year. Stocks are 28 times from a forward price to earnings basis. That’s not cheap, but it’s a wonderful company that continues to put up really strong numbers.

Chris Hill: Hey, when your biggest problem is one of your internal divisions has allows you name. [laughs]. On balance, you’re doing well.

Ron Gross: Exactly.

Chris Hill: The first-quarter results from Meta Platforms were highlighted by a rise in daily active users and revenue per user. CEO Mark Zuckerberg said the company will slow the pace of investments that they are making in their Metaverse aspirations, and shares rose after hitting a 52-week low the day before, Emily.

Emily Flippen: This report can be summed up as just the power of low expectations, which no investor should be discounting in this market, because as you mentioned Ron, we see great companies that are still trading at relative premiums. Meta Platforms, formerly Facebook, is one of those businesses that has been severely discounted because of the business, and I guess publicity issues that the business has been facing over the course of the past year. While the stock is up nearly 20 percent, before this report, the stock was down more than 40 percent just in the past three months. Some people may point this quarter as a turnaround quarter for Meta. I won’t say that it was not that, but I will say, I think what we’re seeing, the impact is largely driven by just a very base level of expectations from investors in this business, because this quarter at face value wasn’t great.

Earnings were down year-over-year. They still did beat expectations. But revenue was a miss, only rising six percent, which is the weakest quarter of revenue growth since Meta or Facebook went public. The slowdown wasn’t just due to the macro economy. They had issues in eCommerce. They had issues in targeting and measuring their ad spend. There are still platform level concerns that I think investors have with this business. But as you mentioned, the bright spot here is monthly active users, they’re up three percent year-over-year, even rising for the Facebook platform itself. There was a little bit of reprieve, I suppose, for investors who were afraid that sites like TikTok were stealing away the content and the users from Meta Platforms, numerous platforms.

Chris Hill: Ron, where should investors be looking in a market where the biggest, most successful companies, and in the case of Apple and Microsoft, with some of the most profitable companies over the last 20 years, are struggling like this?

Ron Gross: I think you have to discount what’s going on in any given quarter or perhaps any given the year, and look longer-term to business models that makes sense to you. In this environment, I will also focus on profits and cash flow. I’m not really doubling down on the more speculative, innovative growth companies that have yet to produce profits. Yes, there is an absolute place for that in everyone’s portfolio. I wouldn’t overemphasize it at this time. Big, strong, profit generating companies trading at 20, 30, 40 percent lower than they used to, I think are really interesting places for new money.

Chris Hill: Emily, you agree with that?

Emily Flippen: Generally, I will highlight though, that profits and cash flow were not made equal. A lot of investors may be looking at businesses that are on say prices sales, or priced earnings level cheaper than they used to be, but don’t discount the businesses that may not be GAAP profitable, but are still generating substantial amounts of cash flows. I think those are also some great business down significantly. That could be good buying opportunities as well.

Chris Hill: More tech earnings after the break, so stay right here. You’re listening to Motley Fool Money. [MUSIC] Welcome back to Motley Fool Money. Chris Hill here with Emily Flippen and Ron Gross. Atlassian third-quarter profits and revenue came in higher-than-expected. But shares of the Australian software company falling seven percent on Friday, despite that. Ron Atlassian’s results look good. Was this related to guidance or is this company just getting swept out with the tide?

Ron Gross: No, I think it’s guidance. Atlassian was my radar stock on the show last week, and it was that because the weakness over the last six months and the stock really got me interested. Well, one week later, Chris, it’s even weaker, so it’s something maybe getting more attractive actually because I do think results are strong. If you look at some of the metrics, revenue up 30 percent quarterly subscription revenue, up 59 percent cloud revenue, up 60 percent. These are pretty strong numbers. Their adjusted operating margin was 24 percent, that was down from 31 percent last year.

There is a red flag, some higher class eating away at profits, and as a result, earnings-per-share were down slightly. Company as Emily said earlier, is cash flow positive $350 million from cash flow from operations for the quarter, so adding to the balance sheet, they’re not losing money. They ended the quarter with a net addition of about 8,000 new customers. They lost about 1,800 customers that were Russia-based due to the Ukraine war, somewhat actually unable to pay as a result of sanctions which is very interesting. Couple of things, the CEO said we have a line of sight to $10 billion in annual revenue, which is interesting because I just did 740 million for the quarter. That’s a pretty good line of sight. That’s 2020 vision. That’s impressive. As we talked about earlier, guidance for the fourth quarter was not great revenue, operating margins and net income lower than in the quarter just reported, so the stock is rightfully so selling off a bit.

Chris Hill: Roku (NASDAQ: ROKU) showing some signs of life, first-quarter revenue rose 28 percent, and shares of the video streaming platform rebounded from their 52-week low. Emily, you tell me how much of this is Roku turning things around and how much is low expectations?

Emily Flippen: Mainly low expectations. But let me clarify something, Roku is not a turnaround story. There have been businesses that have been threatened, but Roku has been executing exactly the way management has communicated since Day 1 when this business went public. Just because the stock price has been bit down so significantly this year, doesn’t mean that the business itself needs to be turned around, and we actually saw that in this quarter for Roku. Now there were low expectations as a lot of investors already know, Netflix had an extremely weak quarter, very poor guidance for user growth, so it was a natural extrapolation that, that would impact a streaming service like Roku, which does depend upon that recurring subscription revenue from Netflix and other streaming services to generate revenue. Surprisingly good to see that platform revenue was up nearly 40 percent in the quarter gross profit also increasing.

Also, active accounts rising by more than a million active accounts in the quarter. All good news here for Roku, but it’s important to remember just how Roku generates revenue. I had to mention, they get a cut of their transactions that happened on their platform. Just because somebody cancels Netflix, doesn’t inherently mean that Roku won’t make up that revenue somewhere else. If that person moves toward an ad-based service on the Roku platform, Roku get the add revenue. If they move toward another paid subscription service, Roku gets a cut of that subscription service. I do think fundamentally, Roku has a very strong business model here, and it will be important to watch how the move toward advertising and streaming actually potentially helps Roku as they become a partner for a lot of these streaming services. Their guidance was still weak to be clear, there still inflating consumers from price hikes, but management talked about their opportunity as a massive billion-plus market opportunity for broadband customers, of which they only have around 60 million active accounts saturated, so they are still very much in growth mode here.

Chris Hill: Ultimate revenue in the first quarter was $68 billion but Wall Street was expecting more, especially out of YouTube. The Board of Directors approved a huge stock buyback plan shares of Alphabet still down slightly this week. Ron.

Ron Gross: You nailed that YouTube and focus here and some slowing growth. Revenue up 23 percent, that’s a slowdown from 32 percent last quarter, search up 24 percent, that was 36 percent last quarter. Google’s Cloud business was the standout up 44 percent, that’s flat with last quarter. But Cloud is still losing money about 930 million when that turns and it will turn. That’s going to really be a big deal for this business and its profitability. YouTube, the focus continuing to disappoint third quarter in a row, advertising only up 14 percent, down from 49 percent growth last quarter. Comparisons is very tough, again, Europe war in Ukraine hurting as well. TikTok, increased competition from TikTok, perhaps hurting as well. Earnings up only about seven percent or so, 24 one stock split coming in July, mark your calendars. I think Google’s pretty done cheap here at 20 times. Alphabet is looking like a good investment at this price.

Chris Hill: Similar to Roku one day after hitting a 52-week low, shares of Pinterest rose 14 percent after first-quarter profits and revenue came in higher-than-expected. We got a review on Apple Podcasts from Cloud rhubarb, so thank you Cloud for the review. In the review of the show, he wrote, “I’ve bought Pinterest at several different price points and I’d like to hear what Emily Flippen, thinks.” Emily, if investors have questions about an advertising behemoths like Google, I get why there will be questions over what that means for a small company like Pinterest.

Emily Flippen: Pinterest has always been a controversial business because it has a massive scale. We’re talking about over 400 million monthly active users globally on the platform. It is not small, so you can almost by the size of its audience, caught up behemoth within itself. But then bears and skeptics will point to the fact that this is a business that depends heavily on things like outside search traffic, and if you look at Pinterest most recent quarter, we saw that impact the business negatively as the change in search traffic decrease the amount of, I guess, redirection to the Pinterest platform. But the good news is that the quarter wasn’t nearly as bad as I think people were expecting, but the earnings and revenue beat expectations. Revenue rose actually 18 percent over $750 million in the quarter. It was a decent quarter. But they do need to figure out what they’re going to do to not bleed monthly active users. Because my thesis for Pinterest has always been on that average revenue per user rising. That has consistently happened since Day 1 for Pinterest, we saw it rise in this quarter, but they need to also not believe monthly active users while increasing their monetization. The improvements that they make to the Pinterest platform will be critical and reinvigorating that user growth.

Chris Hill: I know that stocks can always go lower, but one of the themes of what we’ve talked about so far today is, some of these companies bouncing back off a 52-week lows. I get that sometimes expectations are low, but is it possible that I don’t know, [MUSIC] it just seems like some of these may have reached the bottom.

Ron Gross: I would just caution investors don’t think about getting back to even or getting back to profitability on your positions. Stock could do very well from here on, but actually not get you back to profitability, but it’s still the right thing to do to hold onto that company.

Chris Hill: We’ll see later in the show, Becky Quick is next. So stay right here. This is Motley Fool Money. [MUSIC] Welcome back to Motley Fool Money, I’m Chris Hill. This weekend, the investing world turns its eyes to Omaha, Nebraska, for Berkshire Hathaway’s annual meeting. [MUSIC] The highlight as always is the marathon Q&A session with Warren Buffett, and Charlie Munger. At the helm of the event is Becky Quick, co-host of CNBC Squawk Box. She joins me now from her hotel room in Omaha, Nebraska where apparently she surrounded by questions. Becky, thanks for taking the time to talk.

Becky Quick: [laughs] Thanks, Chris. I always love talking before this and yes, I am in my hotel room and I literally have hundreds and hundreds of questions printed out. I have them placed in piles all over the floor, all over the bed, all over the desk. Because this is how I organize it. I can’t do it any other way than printing it out and I feel bad for killing the trees, but I just can’t make my mind work otherwise.

Chris Hill: These are questions that are submitted by hundreds if not thousands of investors and shareholders. But I’m curious, just left to your own devices. What are you interested in hearing from Warren Buffett this year? Because this seems like one of those years more than most, where the average investor like me, I’m interested this year, his thoughts on more macro things about inflation, and the prospect of a recession. But what are you interested to hear from him?

Becky Quick: Well look, we haven’t heard from him. The last time we had him on our air was back in May of last year when we sat down with you and Charlie. It’s been a long time, and there’s a lot that has happened that he hasn’t gotten the chance to comment on publicly especially what’s happening right now in the markets. Man, things have gotten interesting. This is that confusion moment. May you live in interesting times. If you’re investors, things have gotten a lot more interesting, a lot scarier probably, a lot of volatility out there and people are down pretty significantly on stocks.

I think when you see big moves like that in the stock market, when you know that the Fed is going to act and going to act pretty strongly, when you know that we’re going suddenly from this incredibly low to almost zero interest rates to higher interest rate environment again, that changes everything. I think that’s probably what people are most eager to hear about. Look, there’s that, and then there’s just the idea that when Warren wrote his annual letter to shareholders in February, he talked about how they hold this huge cash hoard of more than $140 billion. Then he and Charlie have been looking around, couldn’t find anything to buy. Well, since then we’ve heard about him buying a lot of stuff. Alleghany, they spent $11 billion on it, but an additional seven billion dollars in Occidental shares. They bought HP a huge number of shares there. You’re talking about billions and billions of dollars they started spending after that. You wonder what he’s seeing in the market if things have changed. You wonder what they think about the Fed up ending markets from changing the whole investing environment. This is a perfect time to be here and to have those two on stage for five-plus hours.

Chris Hill: I want to get to a couple of the investments in a second, but let’s stick with the Fed. How much does he factor in what the Federal Reserve is doing with interest rates into his investing? Because as much as anything, the Federal Reserve has dominated the conversation, particularly over the last six months when it comes to investing.

Becky Quick: Yeah. He’s been saying for years that interest rates are like gravity that bring down stock prices. While interest rates are so low and gravity is so low, stock prices have risen enormously. I think a lot. He doesn’t very often put macro events into what he is looking at, he’s just looking at prices, and looking at buying things. But you can say that the Fed, they’re the ones who are driving this whole show right now. Interest rates are going to be so incredibly important because the environment is changing and because we’re getting into this QE forever; quantitative easing and these incredibly low interest rates, no interest rate. That changes the whole environment. Again, Warren talks all the time about how he bought his first stock when it looked like we were losing World War 2. The Macro never really plays all that big of a role in what he is looking at. But the Fed does because it’s so key to everything that drives the investment outlook right now.

Chris Hill: That Warren Buffett and his team went out and spent $11 billion on Alleghany insurance. Probably not the biggest surprise in the world. More surprising to me was the very large stake he took in HP. What was the thinking behind that? Because I heard some people talking about like, well, he already has a big tech investment in Apple, and that’s technically true. No disrespect to HP, but it’s not Apple.

Becky Quick: You got me what he was thinking. If it’s even him, I mean, I guess it could’ve been Todd or Ted or somebody else too. But it’s pretty big buy. I have no idea. Like the idea that you have Alleghany, and HP, and Occidental altogether being bought at the same time, what’s the common theme here? You got me. [laughs] This is one of the things I’d love to hear on Saturday show, no idea.

Chris Hill: Despite the mystery around some of these moves, you look at the performance of Berkshire Hathaway since the last annual meeting, shares are up about 20 percent or so. This is against the backdrop of some of the better known names on the Nasdaq really having been crushed over the same 12 months. What do you think Buffett and his team are doing that others are missing? Or is it simply a matter of, they’re not doing anything different, they just didn’t get caught up in some of the excitement around the ”Stay at home stocks on the Nasdaq.”

Becky Quick: I think it’s exactly that. They’re not doing anything differently than they ever have. But there are times when the market gets really stirry over these tech companies. Remember, it feels like 1999 into 2001 to me. Just remembering there were all these high-flying tech names, all these companies that didn’t have earnings that were so beloved by the market for being valued on different metrics. The industrials and the value companies that were there, we’re not valued, were not looked at the same way. Then all of a sudden market sentiment changed. This feels like another period like that to me where you want to slow and steady and understood, and looking at how to value a company based on metrics that we stood the test of time.

Netflix valuation went from well over $700 to 191 or something. That’s simply a change in the mentality on Wall Street. It’s not that Netflix, OK, so they lost 200,00 subscribers. But is the picture that different from them than it was 12 months ago? There is just a complete shift in the way Wall Street values things, and what they are going to be willing to pay a premium for. I think when you get into scary times, that’s always when Buffett and Munger have drawn everybody back in because they have the money and they know how to plow a back-end. They are looking at the valuations that never change. I don’t think they do anything differently, I just think the flavor of the month on Wall Street comes and goes.

Chris Hill: This is the last year that Warren Buffett is having his charity lunch auction. I saw an article in the Wall Street Journal. This is where people can bid to have lunch with Warren Buffett and the money goes to charity. He’s raised more than $30 million since he started doing this, I believe about 20 years ago. But this is the last year he is going to do it. I’m not going to ask you when he is going to step down, but I am curious if you have a guess as to what it may look like when he finally turns the ranks over. Do you think he would ever maybe stepped down as CEO, remain as Chairman?

Chris Hill: Just in the way that we’ve seen some other CEOs do the same thing.

Becky Quick: I don’t know. I think he is really happy with the way things are set up right now. But I think they’ve very clearly laid out what the future structure is going to look like. Greg Abel, he’s the one who would be CEO if Warren were to step down at any point. We’ve made that pretty clear. Charlie slipped that in the meeting last year. You see the investments that Todd and Ted have both buildup and I think they each have more than $34 billion in investments that they are running at this point. Jane obviously runs all the insurance operations, everything goes through him.

The one difference would be, I don’t foresee Warren stepping down as CEO and just being Chairman. The one difference is when he’s not there, they’ve also made it pretty clear that it probably would be separated Chairman and CEO also when he’s not there, they’ve laid that out. Warren has said he would like Howard Buffett, his son, to be there as Chairman to maintain the culture of Berkshire and really keep a close eye on that. You know there’s this CalPERS though, where they would like to see the Chairman and CEO roles split here and they’re voting their shares against the company as a result of that. But that’s just the CalPERS thing where they’ve done that to every company. I think CalPERS didn’t make that big of a deal on it. Just said that this is what we do and we’d like to see that done. If it weren’t Warren Buffett being the Chairman and the CEO, I think the two roles would be split. But yeah, they’ve laid it out pretty clearly, but I’d be shocked if he steps down from that role anytime soon.

Chris Hill: Before I let you go and let you get back to all your questions, separate from the annual meeting, every day, you’re on the set of Squawk box, you’ve seen what’s played out over the last six months. Whether it is more macro topics like employment, wage, data, inflation, or just particular industries, when you think about the second half of 2022, what are a couple of things that you are going to be watching in terms of the overall health of the market?

Becky Quick: I think a huge part of the story is the supply chain. We were hearing last year that, things are getting better. We’ve worked through some of these issues and people like Jamie Diamond and others are saying that it was going to be much better than the first half of the year, starting in the first half of this year. That’s not the case and these rolling lockdowns that we’re seeing in China are continuing to disrupt things. We spoke with Scott Gottlieb, the former head of the FDA, who keeps pretty close eye on these things. By the way, he also was at the American Enterprise Institute before so he watches policy and watches the markets pretty closely too, just how business works for these waves.

He was telling us just this week that these rolling blackouts in China are probably going to be the norm for a while because they have not spent the time that they’ve been in the zero-tolerance, zero COVID policy to prepare their population better by making sure they get MRNA vaccines, by making sure everybody is boosted, by making sure that they have some of the drugs like Pfizer and Merck have, some of the antiviral drugs so that if you do get COVID, you don’t get as sick. Because of their policy, their zero COVID policy, they don’t have any natural immunity really built up in population. They are facing this as if you just turn the clock back two years and didn’t have any of the tools that we have to this point. It’s crazy because BioNTech, which is Pfizer’s partner with it’s MRNA vaccine, has actually helped the license for the Pfizer-BioNTech vaccine for China and they chose not to do it because they were pursuing their own MRNA vaccine and it hasn’t gone very well. So they just have an unprotected population. They’ve been too proud to use any of the American or Western vaccines or antivirals that have come along and as a result, they have this huge population that’s just not prepared if the virus gets out. So every time you see a few cases here or there, or maybe it’s 20 cases, maybe it’s 30 they’re shutting down population cities of 20 billion people. The idea that that’s going to continue for the foreseeable future, that’s bad news for the supply chain. So that’s one issue.

The other obviously is inflation exacerbated by what’s happening with Russia and Ukraine. Then that part of the supply side of things, that’s not something that the Fed can fix with its tools. So they’re trying to tamp down inflation. The only thing they really can do is really hit the brakes hard and try and cut-off demand, the demand side of picture. That means pushing us right up to the edge of recession and hopefully not into it. It’s pretty clunky tool to be using in such a scenario. I think that is the biggest question for me. The economy is great right now. You heard these economic numbers today that we were looking at GDP that shrunk. But if you looked at the consumer part of it, it was up 2.4 or 2.7 percent. That strong demand to have coming through. So you still have a strong demand and you still have a strong consumer but you are dealing with a lot of other problems and I just don’t know. It’s just an incredibly tricky tight rope for the Fed to be walking and they don’t exactly have the tools to be dealing with it in the most specific way.

So I think I’m watching that. If you watch what CEOs and CFOs are doing when they start talking about how they anticipate their costs going up and then how they are going to raise prices to deal with their input costs going up, that’s where you get into the self-fulfilling prophecy of higher and higher inflation. They’re expecting prices to go up so they have to raise prices as a result of trying to protect their margins. That’s the crazy scary thing that you get out of it. But it’s also hard to think about complaining when the economy is so hot right now and so strong. That’s just, I am looking for clues around that entire picture everyday, whether that be from companies, whether that be from government numbers. [MUSIC] That’s the picture that I’m trying to piece together from everybody we talk to every day. [MUSIC]

Chris Hill: If you want to watch the Berkshire Hathaway Annual Meeting, you can go to CNBC.com this weekend. Thank you Quick, always great talking to you. Have a great time in Omaha.

Becky Quick: Thanks Chris, it’s always great talking to you too.

Chris Hill: Coming up after the break, Emily Flippen and Ron Gross return with a couple of stocks on their radar. Stay right here. This is Motley Fool Money. [MUSIC].

As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against. So don’t buy or sell stocks based solely on what you hear. Welcome back to Motley Fool Money. Chris Hill here once again with Emily Flippen and Ron Gross. If you’re just starting out investing or you know someone who is looking to get started, we have a free investing starter kit. It covers everything from saving money to 401-k plans to buying your first stock. It includes 15 stocks and five ETFs selected by our investing team and it is free. Just go to fool.com/starterkit. Let’s get to the stocks on our radar. Ron Gross, you’re up first. What are you looking at this week?

Ron Gross: I’m going with Sherwin-Williams SHW yesterday, and they are the paint company. I know it’s very exciting for you. I like Discovery. It’s a strong company, large and growing retail distribution system, a key for professional contractors, very talented management team, global growth opportunities. Have increased their dividend each year for the past 43 years. Yield is currently just under 1 percent. Strong report this week, shares are up about 15 percent on the week, sales were up 7 percent. They reaffirmed guidance, which represents about 16 percent growth from 2021 at the midpoint, 30 times earnings. So I’m not claiming that this is screamingly cheap for a non-tech growth company, but it is a very strong company with an increasing dividend.

Chris Hill: Dan, question about Sherwin-Williams?

Dan Boyd: Chris, I think we need to create some stinger for old economy, Ron, because he’s back I’m happy to see him. Ron, here’s my question for you, is there anything worse than painting a room in your house?

Ron Gross: I wouldn’t know, Dan. I’m sure those are worse thing, yes.

Chris Hill: Emily Flippen, what are you looking at this week?

Emily Flippen: On the other side of the spectrum here, here’s a high-tech, high-growth business that ended up on my radar for the worst of reasons this week and its Teladoc, the ticker is TDOC. For investors who aren’t aware, Teladoc had a no good, very bad quarter seeing the stock drop nearly 40 percent after reporting earnings. Not just because the business has struggled, but because of how management handled expectations. We’ve talked a lot about expectations in this show. This is an example of how not to manage your investor expectations because management pulled back much of the guidance they had just reaffirmed for investors. The silver lining here is that Teladoc now looks very cheap relatively. It’s trading at around 20 times free cash flows, less than 25 times for an EBITDA with guidance of 20 percent growth. From here on out, maybe not bad, but definitely want to rebuild that trust and management.

Chris Hill: Dan, question about Teladoc?

Dan Boyd: So the answer to my question, is there anything worse than painting a room in your house is yes. Being a Teladoc shareholder, Emily what are Teladoc shareholders to do these days?

Emily Flippen: While if you’re like me, you will curl up in bed, get yourself a hot cup of coffee or something, cry a little bit and then try to get over it.

Ron Gross: But we will reiterate what we said in the last segment is don’t focus on trying to get back to even. The stock could probably go up 30, 40, 50, 60 percent. You might still not be back to even, but that’s a wonderful return from this point forward. That’s what matters, not whether you have a gain or loss on the position [MUSIC].

Emily Flippen: What Ron said.

Chris Hill: Dan, what do you want to add to your watch list?

Dan Boyd: I’m adding what Ron just said to my watch list man. This guy, he’s got some wisdom. Can you believe it?

Chris Hill: Ron Gross, Emily Flippen, thanks so much for being here.

Ron Gross: Thanks Chris.

Emily Flippen: Thanks Chris.

Chris Hill: That’s going to do it for this week’s Motley Fool Money radio show. The show is mixed by Dan Boyd. I’m Chris Hill. Thanks for listening, we’ll see you next time. [MUSIC]

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Chris Hill has positions in Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Atlassian, Microsoft, Pinterest, Sherwin-Williams, and Teladoc Health. Dan Boyd has positions in Amazon and Berkshire Hathaway (B shares). Emily Flippen has positions in Pinterest, Roku, and Teladoc Health. Ron Gross has positions in Amazon, Apple, Berkshire Hathaway (B shares), Meta Platforms, Inc., and Microsoft. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Atlassian, Berkshire Hathaway (B shares), Meta Platforms, Inc., Microsoft, Netflix, Pinterest, Roku, and Teladoc Health. The Motley Fool recommends Sherwin-Williams and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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