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Microsoft Strikes a Big Deal With the London Stock Exchange

Motley Fool - Sat Dec 24, 2022

In this podcast, Motley Fool senior analyst Jason Moser discusses:

  • The "win-win" deal between Microsoft and the London Stock Exchange.
  • How cloud services like Azure and AWS are becoming utilities.
  • The short, not-so-happy public life of Weber Grill.
  • Peter Lynch's advice being a starting point (not a finish line) for investors.

Motley Fool producer Ricky Mulvey talks with Eddie Alterman, host of the Car Show podcast, about the used car market and how GM is competing with Ferrari.

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

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This video was recorded on Dec. 12, 2022.

Chris Hill: Tech giant strikes a new deal and shares of Weber Grill go up in smoke. Motley Fool Money starts now. I'm Chris Hill. Joining me today Motley Fool Senior Analyst, Jason Moser. Happy Monday

Jason Moser: Happy Monday indeed.

Chris Hill: Let's start with Microsoft, shall we? Because Microsoft struck a deal with the London Stock Exchange. The deal calls for the exchange to spend nearly three billion dollars over the next decade on Microsoft products. Sounds like most of that is going to be spent on Azure cloud services. The London Stock Exchange gets a greater use of data and the chance to appeal to a broader customer base in exchange for nearly three billion dollars. Seems like a win-win here.

Jason Moser: Yeah. It definitely feels like it's a good thing for both companies. When you look at it in the grand scheme of things, I think it's an agreement over 10 years to spend a minimum of $2.8 billion on cloud-related products with Microsoft. If you stretch that out, you're looking at what essentially, basically $280 million per year over the next 10 years at the minimum. For a company like Microsoft, a business that brought in $203 billion over the last 12 months, obviously, not terribly meaningful from that perspective. Just from a simple numbers perspective, it's a drop in the bucket. When you consider LSE, they brought in around $9.1 billion in trailing 12 month revenue. So a little bit different there for them to spend $280-$300 million a year. That's a bit more of a commitment for that business. But generally speaking, yeah, it does feel like it's going to work out for both businesses.

Interesting from Microsoft, everybody, the thinking here is that this is good for Microsoft as it pertains to Azure, but I think it also gives them an opportunity to continue leveraging the other properties and specialties that they have, namely Teams. This is going to be something that is going to allow them to rollout Microsoft Teams and really embed that into LSE's workflow and continue building capabilities from that platform. Microsoft Teams in this age of Slack, and Zoom, and working remotely, Teams is certainly proven to be a worthy competitor. I think over the last few years, the conversation is certainly centered around things like Slack and Zoom. Teams is a very good platform, a very good product. Having used it myself, I liked it a lot. I feel like this is a good way for them to continue growing that as well with LSE's 23,000-plus employees. Yeah. I think all things considered, it's a sensible thing for the London Stock Exchange and absolutely a nice win for Microsoft.

Chris Hill: Probably can't hurt to make a couple of friends in the neighborhood of, I don't know, Europe's biggest stock market. I'm just thinking from a regulatory standpoint. I'm not saying that's why Microsoft did this deal. I'm just saying it probably is a tiny thing that goes in the plus column.

Jason Moser: A potential perk, I think maybe we can call it. I don't think it can hurt the cause. You're right. Microsoft is clearly squarely on regulator's radars right now for the Activision Blizzard acquisition. Obviously, the FTC filing a suit in order to try to stop that deal from happening or at least bring some concessions about. It remains to be seen how that all shakes out. But yeah, it does probably give Microsoft a few more friends in a market that would apply to something like this. I agree with you. I can't believe this would be why they did something like this, but I'm sure they probably look at it and think, hey, that old saying, Chris, that's not what you know until you know. It feels like maybe they're getting to know a few more people here that could serve them well down the road. That really, I think, shines the light on the nature of this relationship being a fairly long one. Ten years is a nice start, so to speak.

I don't think that's anything that we should expect to just conclude after 10 years. The nice thing about this is they've got 10 years to really establish this relationship and establish a deep relationship. You get very sticky. The switching costs grow as you embed yourself with these cloud providers. When you look at the overall cloud market, cloud infrastructure service revenue over the last 12 months totaled $217 billion. If you look at the way the CloudShare breaks down today, you've got Amazon with AWS at 34 percent. Microsoft is starting to close in there a little bit at 21 percent with [Alphabet's] Google in third at 11 percent. You remember Amazon share used to be higher. They used to hold the lion's share. Now you're just seeing more competition and that makes a lot of sense. When you look at the length of this relationship, the duration of this relationship, it gives you a little bit more of an idea as to the potential that could develop even beyond 10 years, which I think should be exciting for Microsoft shareholders.

Chris Hill: Yeah. It's hard to imagine this market when you lay out those numbers. It's hard to imagine this market getting anything but bigger over the next 10, 20, 30 years.

Jason Moser: It feels like it. We talk about this from time to time on the team here in regard to just looking at the perspective of utilities. Utilities people tend to think of water companies, gas companies, power companies, and then the like. I would certainly put cloud providers in that category as the modern-day utility. Now it's a little bit of a different model in a different way that the finances work there. Ultimately, these cloud services are part of companies that do other things. But I think it's very fair to look at cloud infrastructure as absolutely a form of utility that's only becoming more and more relevant as time goes on.

Chris Hill: As they say and pardon the interruption, happy trails to the public life for Weber Grill. BDT Capital Partners is taking Weber private in a deal worth $3.7 billion. Weber went public in August of 2021. The opening day share price closed at just over $18 a share and the buyout price is just over eight dollars a share. Seems like the best possible outcome. Not a great outcome, but the best possible outcome.

Jason Moser: I think you're right. You got to give BDT Capital some credit here. Helping take the company public at the time, they were the controlling shareholder in partnership with the Stephen family and management since an investment back to December of 2010. BDT very familiar with this business and ultimately, hey, listen, they took it public for one price and they're getting to buy it back for a much lower price. I'm a little bit torn as to when, I guess probably this is a good business to own at the right price. I think that grilling in that lifestyle, that's not something that's going away. There's plenty of opportunity there. I don't know that it's an opportunity to grow to the moon, but I think about this every time I fire up my trigger. Chris, as I did yesterday, when I was smoking some ribs through those ribs on there at 12 o'clock took them off at seven Chris, they were delicious.

I'm not going to lie to you. I hadn't gone over some cherry all day with a little extra pecan in the smoke tube, they were sublime. Now, as I was doing this, I'm thinking to myself how much I enjoy not only the finished product but the process. It's just enjoyable, it's fun. But it also reminded me the man, I don't know that I want to be an investor in one of these companies and the main reasons because the products, so darn good. I hope this is the last trigger I ever had to buy. It's the first one, my family got it for me as a gift last Christmas. It is very well-made and if you take care of it, I think it can last a really, really long time. You and I were talking earlier today. We both have gone through the experience. You have grills for 15, 16, 17 years. That's not prompting a bunch of repeat purchases, is it?

Chris Hill: It's not. It's a mistake that a lot of investors myself included have made.

Jason Moser: Sure.

Chris Hill: Thinking of the great Peter Lynch and his principles around investing in one of them being, look at the products and services that you're already using in your life. The mistake that a lot of people make is just stopping right there, is just stopping with while I use this thing and I love this thing, so therefore, I'm going to buy shares of it. It's like no, that's where the process of investing begins. Then once you get the idea, then you start to dig in, well, how is this business, and are they making money? In the case of Weber, have they made a product that is so good and so durable that people don't need to buy another one for 20 years? If that's the case and it is the case in Weber Grill, then yeah, not a great investment.

Jason Moser: I think you put it perfectly there, man, and that is where the process begins. Once you see that you say, that's the starting point. Now let me understand how this business actually works. I look at Traeger for example, I'm partial to Traeger obviously because I have a Traeger. I think all of these companies, they do things very well whether it's Big Green Egg, Traeger, Weber, they make wonderful products and I think what we're starting to see these businesses do is try to figure out how to monetize beyond that great product. Then it boils down to ancillary services, consumables, accessories, things like that. Whether it's meal kits, coming up with new sorts of accessories and the nerdier you get about grilling and smoking memorial, love all of those accessories.

But then really I think the consumable side of it, and this really comes into play with something like a Traeger just because it's fueled by those wood pellets. That is something that you have to keep on buying. It's not a gas grill, it's fueled by those wood pellets and the app to buy those pellets in order to use the grill. If these companies can find new ways to grow those consumable offerings and ancillary offerings, they can become more attractive because there is that installed base. There is a switching cost that comes into it. If you buy that Weber, you're probably going to be using the Weber for the next 15-20 years if you take good care of it.

Figure out ways to monetize that relationship. I would imagine that BDT Capital, given their history with Weber, they probably have some ideas. I'm sure they'll probably execute on those ideas. It's neat to see innovation in this space. Essentially that tweet earlier about Traeger partnering up with WhistlePig and that new Bourbon Barrel wood pellets. I'm going to have to give that a try, Chris, I feel like I'd be letting my family down if I didn't otherwise. But yes, seeing that kind of innovation is pretty neat and I think that's going to be the key to these businesses succeeding, is taking that awesome product, that awesome installed base, that razor and just figuring out new compelling blades to go with.

Chris Hill: Jason Moser, thanks for being here.

Jason Moser: Thank you.

Chris Hill: Amid all the talk this year about rising inflation, the cost of used vehicles has been steadily declining. Ricky Mulvey caught up with Eddie Alterman, the Chief Brand Officer of Hearst Autos, to talk about the used car market. Surprising storylines of 2022 and one way that General Motors is beating Ferrari.

Ricky Mulvey: You think the Chevrolet 06 Corvette can compete with the Lamborghinis and the Ferrari's Detroit s back is this because you're a Detroit guy or did Lambos and Ferrari's get worse.

Eddie Alterman: My pistons had, I think last time we talked, I was wearing the tigers hat, I can't quite muster the enthusiasm to you the lions had. No, I think Detroit has created something with a new Corvette that is fully competitive with Lamborghinis and Ferrari's. Corvettes were always the budget supercar. They would deliver it sometimes equivalent performance of a Ferrari or Lamborghini and McLaren for a third of the products. But they weren't maybe taken as seriously as some of those European supercars because it wasn't made in it. The big step change that happened with this the eighth generation of the Corvette, is that the engine moved from the front of the car or the weights on the masses on the front wheels to behind the passengers like a true European-style supercar. Corvette has been threatening to do this for a very long time.

They finally did it with the eight generation. It truly is a bona fide and vintage and supercar like a McLaren, like a Ferrari, like a Lamborghini, but it's just a lot cheaper. But it has a ton of character. It drives great. The ride is not harsh, the interiors beautiful, and I think in many ways on I rather have it than a Ferrari or Lamborghini. I think it's better everyday driver, and it's more comfortable to be in. The transmission is like silky smooth and the seats are great and you don't have to worry about the European repair prices. There's funny story about Lamborghini guys versus Ferrari guys. I don't know where this office, but the Ferrari person will have had his mind on a car for years and years and work toward it and finally buy it and keep it for the rest of his life. That's his car. Where the a Lamborghini person. It is said, well buying a Lamborghini is an impulse purchase, and an 18 months, they'll be dead or in jail or broke.

Ricky Mulvey: Earlier point, which is that the Ford dealerships are now picking up EVs at a conference in New York. I think this was like in march or something. Jim Farley said "We've got to go to a non-negotiated price. We've got to go to 100 percent online. There's no inventory, it goes directly to the consumer and 100 percent remote pickup and delivery." He's bringing the dealerships back or was he just mad that they were selling cars above MSRP?

Eddie Alterman: I don't know if it was either one of those. I think that the dealers really do a lot for America. The franchise laws protect those dealers. But I think ultimately, local politicians get elected by dealers and all their cash and I don't think dealers are going away anytime soon. I think Farley's provocative and he's trying to push the industry and he is really smart, really dynamic, and I think he's a provocateur in the best possible way. I think what he was doing is saying, look, Tesla's doing this. There's some indirect. They're getting all the data on their dealers and the data is what we want. I'm sorry, the data on all their customers. Whereas in the current system, once the OEM sells to a dealer, that car is counted as sold and now it's a dealers problem. The customer relations exist with with the dealer and the customer, not with the carmaker customer.

Ricky Mulvey: I think part of it I'm sure there were stock pressure or investor pressure which was in 2020 during the pandemic, let's just say. All of these cars were selling above MSRP and it wasn't reflected in necessarily the revenue for the investors in your Ford's. Hey, what's going on? Why aren't we benefiting that and you just have angry consumers or angry car buyers, I should say, who are just upset about feeling gouged? You're seeing the same thing in the used car market with what was it? The Honda sports Sedans that are going for like $10,000 more a year used versus the new MSRP?

Eddie Alterman: The Civic type are the 2021 version, which was the last generation, it's going for 50 grand, whereas the new card is 43. But the interesting point about what you said about Ford, whereas the investors were not getting the returns that dealers were. It was a simple supply demand equation. The car makers, because of the silicon chip shortage, were not able to produce at the volumes they needed. It created tremendous pressure at dealerships. Toyota usually have a 30-60 day supply depending on the model, they're having a 36-hour supply. Things that come on the truck are already sold. Dealers making money hand over fist, but the car makers were the ones that were incredibly challenged by this, and working hard to pump things out, and so it really strengthened the dealers' position and gave them a cash hoard. Hopefully, they're not spending that.

Ricky Mulvey: Between us how much of that was advertising? We have to start sell it above the manufacturer's suggested retail price because we just don't have any inventory.

Eddie Alterman: Well, there was some gouging, but there's just a lot of natural competition there. Look, we're in a cycle where people have to get new cars because 30-40 percent of cars are leased. The churn is built into the system, so you'd have to either buy it out, you lease, which a lot of people did because it was advantageous for them to buy the original residual value where the car on the open market is worth more, but people need new cars. The interesting thing that you see is even in this supply constrained environment, the volumes are still around 13 million.

Everybody's saying that the natural new car volume is around 17 million, which is a very, very high number. I think the demand is always very strong for new cars, especially because we're going through this real once-in-a-century prime mover technology change where we're going from gas to EV, and people are excited in a way that they haven't been about cars in a very, very long time. For a long time, the car business was like why can't we be more like the iPod? Why can't we be more like Apple? Now the car business is like why can't we be more like Tesla?

Ricky Mulvey: Well, there's going to be a huge headwind, especially for new and used cars, which a lot of these companies make their money on financing, they don't make money on selling the car. You got interest rates that are like, what is it? The baseline interest rates are around four percent this year, so that means that your car loan is going to be significantly more expensive. Move into the price of cars and especially used cars, well, I guess new cars are $48,000 on average right now. Where do you think we are in the used car market? Because, for a new car, that's not affordable for most people. You can't get a new car.

Eddie Alterman: Not too far behind. The three-year-old cars are really leading to some very, very elevated prices because people want to keep up with the technology. People want the latest safety stuff. It's a huge emotional driver for people, so they want the newest cars and those are in the best condition. Generally, they have the most feature content and people want those. Average use price is around 35, 38, which is insanely high. But that is not to say that you look a little bit deeper into a CarGurus or AutoNation. You can get something for 15, 20 grand. A buddy of mine just bought a 15-year-old. There are deals out there.

Ricky Mulvey: For your money, what are you getting for, let's just say $20,000-$30,000 if you were buying a car right now?

Eddie Alterman: I would get a Lexus GX460. That's a lot of feature content for not a lot of money. They can go off-roading in it. Or it can be Miata.

Ricky Mulvey: Your suggestion is it's either that or Miata?

Eddie Alterman: Those are the only two.

Ricky Mulvey: I'm looking at used electric cars and basically, if you want something under 30k, your option is the Nissan Leaf, that's it.

Eddie Alterman: Yeah, exactly.

Ricky Mulvey: What are my hopes of buying a decent electric car under 30 grand in the next five years, you think?

Eddie Alterman: Fairly high. I think that the costs are moving down. You look at what General Motors is doing with their BEV pricing is very aggressive and that's why Bolter sounds so well. I think Equinox EV is going to celebrate same with Blazer. I think that they've mastered the pricing there. You look at what Hyundai and Kia are doing and they're really aggressive on price, but the Hyundai IONIQ 5, which is essentially very big vehicle, doesn't look that big in pictures, but it's really big. It's the same wheel basis as the Palisade three-row SUV, that's mid-'40s to '50s, so it's above that $30,000 threshold.

Ricky Mulvey: I want to keep talking trends a little bit because this year I feel like you can sound smart about investing new stuff. It's full of surprises for investors. There's been a lot of surprises for car stuff too. I'll put it this way. On my Bingo card, I didn't have Apple, Ford, and Volkswagen delaying their self-driving plans and putting those on the back burner. Nikola has delivered trucks. Any big surprise storyline stand out to you for this year?

Eddie Alterman: Well, the Nikola one is interesting because the head of that company got busted for fraud, and the stock collapsed, and part of that was the bond yield, but Nikola seems to be back a little bit. But to me, the most interesting story on the product end is that if you were to ask me five years, 10 years ago where the greatest cars were coming from, I would've said Germany, maybe a little Japan in there. Now I feel today it's Korea and Detroit with the most interesting product. I think what Genesis is doing is phenomenal. Their SUVs are incredible, their electrics and ton of appeal, and just the fidelity of the design is so high. Growing up in Detroit in the '80s, I never thought I'd drive a Cadillac that was better than BMW or Mercedes. I'm driving one right now. I'm driving Cadillac CT4-V Blackwing that I'd rather drive than a BMW M3 to tell you the truth.

Chris Hill: If you want to hear more from Eddie Alterman, season two of his podcast Car Show is out now. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, 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 Activision Blizzard, Alphabet, Amazon.com, and Microsoft. Jason Moser has positions in Alphabet and Amazon.com. Ricky Mulvey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Activision Blizzard, Alphabet, Amazon.com, Microsoft, Tesla, and Zoom Video Communications. The Motley Fool has a disclosure policy.

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