What we know is, a few years ago, Under Armour really started expanding beyond the "premium" sports apparel companies like Dick's Sporting Goods, and going to companies like Kohl's or other more discount retailers. In Dick's mind, that says, "People used to come to Dick's to buy Under Armour specifically. Now, they know they can get the same product or same item cheaper at Kohl's. So, why spend money at Dick's?"
It's just interesting to see. I think Under Armour is down in sympathy, because what they're suggesting is, not only are you cheapening your own brand by expanding your distribution so well, it actually is not working. If you look at Under Armour's sales last quarter, revenue in North America was up just 2%. If Under Armour has expanded out its reach in all these different channels, it's really not working. I think that's the reason why the market's suddenly taking Dick's for its word.
Bush: Yeah, Under Armour is definitely cheapening its brand, and it's showing through Dick's and the fact that people are leaving Dick's to buy Under Armour more cheaply at other places. If Under Armour truly had pricing power because of a stronger branding influence, we wouldn't be seeing this at all. Part of that is operational issues that they've dealt with. Part of it is, they just haven't done a good job rebounding from that. The stock actually has roughly doubled or so from its lows back in, I think it was around November. And we are seeing margins slightly tick up, revenue growth slowly tick up, but it's still really bad. Seeing these results coming from Dick's kind of proved that the badness isn't over yet. They're still wading through a lot of issues.
Greer: OK, so let's work through some of that badness. Looking forward at both of these companies, looking at Dick's and Under Armour. It sounds like the low-cost genie is out of the bottle a bit with Under Armour, if I can get it at Kohl's. What do you do if you're Under Armour going forward here?
Argersinger: One thing that's working for them is the DTC, direct to consumer, avenue. Either the Under Armour wholesale retail stores outlets, or their online commerce. That's working for them internationally. It's working. Growth there is still growing around 20%. The brand has legs. I think it's just a matter of, in North America specifically, which is our largest market, as Aaron has said, it doesn't have the allure anymore. I hate to say it, but if I'm going to Kohl's to buy Under Armour, maybe I should just buy Russell Athletic at my local Walmart. I'd save even more money.
Greer: So, you have a problem with Russell Athletic?
Argersinger: [laughs] No! I like Russell Athletic! In fact, I own a lot of Russell Athletic! I'm just saying, I think in consumers' minds, those brands are now a little more equal than they used to be. I'm no longer willing to pay a premium for Under Armour.
Bush: I also think Under Armour needs to do a better job of focusing. In the past, we've seen them spend hundreds of millions of dollars on fitness apps, which was part of a broader strategy. They expanded into more casualwear, where you could buy a sweater or something, like an Under Armour sweater that's $150. Naturally, that didn't really stick. [laughs] So, there are a lot of discounts coming from there. I know they've had issues with certain sports and success in other sports. But if they really want to revitalize their brand back to a point where they can have pricing power, they really need to focus in the areas where people respect them the most and where they can have that pricing power. The more random apparel items they throw out there, of course they're not going to be super successful and bringing back pricing power. So, watching them pick and choose the areas that they want to double down on, I think, will be an important indicator.
Greer: One name that we have not said throughout this discussion is Nike. Is it fair to say that Nike does not have this same problem? I know Under Armour, over the years, they've recoiled at that term athleisurewear. The idea that, a lot of people, when they're buying their Under Armour, they're not really working out. They're just kind of putting it on and going to school, doing their thing. Nike has a lot more pricing power?
Argersinger: I believe so. I think Nike's done a better job advancing its brand a little bit lately. Although, you could go back a year or two ago and Adidas was really cleaning both Nike and Under Armour's clock. It just shows you that apparel is very cyclical. People like what they like when they like it. Under Armour, for a lot of the reasons Aaron's talked about, it's just not been in vogue like it has been in recent years.
Greer: Guys, let's talk some Amazon. According to a report from TheInformation, Amazon is planning to launch a free ad-supported video service for the estimated 48 million people using its Fire TV streaming video devices, including HDMI dongles made by Amazon or its Alexa-powered Fire Cubes. Now, this Amazon service -- if reports are correct -- would be very similar to one that Roku recently launched, the Roku Channel, which airs old movies and reruns. Shares of Roku down on the news. What do we make of this?
Bush: I think what Amazon is doing is very similar to what Roku is doing. As I've mentioned in the past, in past episodes, I think the strategies vs. tactics lens is great to use in situations like this. What that means is that for Roku, this is the company's entire strategy, or a huge piece of the company's entire strategy. For Amazon, this is just one tactic to a broader strategy. When you are the company with the strategy going up against a larger company who's entering your market just as one smaller tactic, oftentimes there are reasons to be concerned. That larger company probably has a larger war chest to put to use. Also, they can afford to be irrational, in some ways. They're willing to lose money, for example, in order to make money elsewhere in the business.
I think a little bit of that is going on here. There aren't a lot of details on what exactly the content is going to be. I could totally see them coming up with some slimmed-down Prime Video-type offering that they make free but ad-supported. And if you look at what Amazon is doing across their entire business, ads are ramping up incredibly fast, more than doubling year over year. I think that's going to become a new pillar for the business. This is them flexing their muscle to ramp up ad revenue and to expand into audiences that maybe don't want to pay for all of these video subscriptions. It's not great for Roku, either.
Greer: So, Matt, how nervous should Roku be?
Argersinger: I think they should be pretty nervous. I love the way Aaron framed this. A small tactic for Amazon can be an entire company's margin. We've seen that. Roku right now is struggling to remain relevant. I mean, they are relevant to millions of people right now, but I think as the hardware goes away and people attend to understand that either their TV or some small device is aggregating all of their content choice, is Roku still a value add in that situation? If it doesn't have, say, this channel, this content that Amazon's not competing with them against? Is it just a commodity that people take for granted when they buy a new TV? I worry a lot about Roku. Here's just another (unclear 9:14) from Amazon that eventually might be a nail in a coffin.
Greer: Guys, I want to close with a story that played out earlier in the week, but we haven't talked about it yet on Market Foolery -- Microsoft turning the Xbox into a subscription service. They're selling it much like Apple sells its iPhones. Now, that means you can buy an Xbox like you'd buy an iPhone, paying off the cost over two years. Aaron, good move for Microsoft?
Bush: I think this is a very underrated move from Microsoft. If you unpack this news a little bit, this is their all-access pass that they announced. That means that instead of paying upfront for a console, you can pay monthly, which makes it easier for some gamers to enter that market. But it also bundles their Live service, which lets people play online; and, it includes Game Pass, which is their Netflix-like bundle of games that all of these people will then have access to.
A month or two back, when E3 came out, I mentioned on Motley Fool Money, I think, that Microsoft is a dark horse. A lot of the moves that they are making point to the future of gaming better than most any other video game company I've seen. A couple of points that I think are interesting. One, I think the future of gaming is almost definitely going to be streaming-based. That means that consoles could eventually disappear. Instead, the gaming companies will have to host these games on their own servers, and then could stream it to literally any device that a gamer might want to use. Obviously, that has huge ramifications for Xbox. But if you think about all of the gaming companies, who is better positioned than Microsoft to host using their Azure platform, the streaming capabilities?
And if you assume that streaming is going to be the future of gaming, and if gaming becomes 100% digital, then that naturally lends itself to subscriptions. Xbox is getting ahead of the curve by being one of the first out there. But it's also the case where, it doesn't make sense for all of these different publishers to have their own subscriptions. People likely won't pay up for that. EA is trying. I'm a little skeptical. But I do think what makes sense is that there will be a few players that can aggregate a lot of the different content from other publishers and put it together. To me, it makes sense to be someone like Xbox, who has the platform, who has the streaming, computing capabilities and can bundle it all together. I think we're seeing the future of gaming, where aggregation is going to move the industry, and a lot of money could be made for the winner.
Argersinger: Yeah, so well-put, Aaron. You covered it all. People, right in the near-term, are going to focus on the cost savings. "Oh, if I do this, I save a little bit money, I'm able to pay over time." But this is really, as Aaron put it, a mindset shift for Microsoft. The world is definitely going console-less. It's definitely going streaming. By getting people in that subscription mindset today, so that they're used to paying a fee every month to keep playing these games, get on the platform, get used to it, and always want to be a part of it, it gets out of this whole, like, "Every two years, the new console's out, I want to go buy it." No, you're already on the platform. You just have to decide to keep paying every month. It's much stickier.
Greer: We mentioned Apple earlier in the conversation. I'm curious, if this plays out, Aaron, like you think it might, with Microsoft being really underrated in this space, what do you think the chances are in the next five years or so that Microsoft overtakes Apple in market cap? Apple won the race to a trillion. What do you think?
Bush: Oh, man, that's tough. I don't know how much I'd bet on that. Apple tipped the trillion-dollar market thing. I think Microsoft right now is an $800 billion business. So, I wouldn't put it past them. I don't know. I don't know if I would take that bet. I think I would maybe more take it than not, because I think cloud, and if Microsoft can invest well in creating the next generation of Microsoft Office, whether it's acquiring Slack, or making really interesting moves there, they could have a longer stretch than people think. But Apple's a monster.
Greer: Matt, if memory serves, I know in the race to a trillion, weren't you team Amazon?
Argersinger: I was team Amazon.
Greer: OK. So, the race to two trillion, or maybe not two trillion, but, do you think Microsoft at some point in the next five years or so overtakes Apple?
Argersinger: I don't think so. I might have said that a little while ago, but the shift that Apple's making to Services, I think, is going to keep them in the game. Microsoft's already been in that world. All respect to the shift Microsoft has made since the new CEO, getting more into cloud-based and services. But it could be a little more competition. I like the question, Mac, because I do think a few years from now, we'll look back and say, "Gosh, Microsoft was right there, right on their tail."
Greer: OK, guys, before we get to my favorite, incredibly arbitrary, ridiculous desert island question, I want to do a little shameless plugging here. You guys are teaming up on a new Motley Fool offering -- Global Partners. Tell us a bit about that.
Bush: Yeah, I'm really excited about this. Matt and I are working with Bill Mann together on this new offering. Essentially, what we were thinking is that, with the number of U.S. companies shrinking, and with more really innovative hubs around the world, there are so many opportunities to invest in amazing businesses around the world. Some of them you can access on U.S. exchanges. We are recommending those. Some, you can only access on foreign exchanges. For the first time in Motley Fool newsletter history, we're branching out and being able to recommend foreign listings to people. These are some of the most innovative companies in the world. A lot of them are still small-caps. We have 16 initial recommendations, but we will be making more in time. I'm really excited to see what we can do with this new service.
Greer: For more information, where do I go?
Argersinger: You can go to join.fool.com. If you go there, you'll read a little bit about what we're thinking, the three pillars that Bill, Aaron, and I are using to pick these 16 stocks, and you'll get a little bit of a taste of the kinds of companies we're looking at. For example, I won't mention the name, but there's a company that we're recommending that -- listeners probably know Grubhub pretty well. Grubhub's had a phenomenal year -- several years, actually. Well, this company has a 50% market share. It's like a Grubhub of Japan in its markets. It's a very exciting business, and it's still a small company. That's an example of the type of companies we're looking for with this new service.
Greer: join.fool.com.
Argersinger: You got it!
Greer: Excellent. Guys, let's wrap up with my desert island question. You're on a desert island. For some reasons, you're going to invest in a stock for the next five years. Here's your choice. Your choices are: Dick's Sporting Goods, Under Armour, Amazon, Roku, or Microsoft.
Bush: Maybe the boring answer is Amazon, but I have to go with it. I think they still have so many growth levers to pull. It seems like we talk about every week or so, they're tackling someone else's turf. I don't think they're slowing down anytime soon.
Greer: Matt?
Argersinger: I was joking before the podcast that if Xbox was its own publicly traded company, I would be all in on Xbox. But it's not, it's part of the behemoth we know as Microsoft. I agree with Aaron. If I was on a desert island and had to pick one, Amazon's still the choice.
Greer: Well, if you have thoughts on the show, if you have thoughts on the stock you'd pick on your desert island, or if you have questions, marketfoolery@fool.com is our email. Aaron and Matt, thanks for joining me!
Bush: Thank you!
Greer: As always, people on the show 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. That's it for this edition of Market Foolery. The show is mixed by Austin Morgan. I'm Mac Greer. Thanks for listening! We will see you tomorrow!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Aaron Bush owns shares of Amazon, Apple, Electronic Arts, Netflix, Under Armour (A Shares), and Under Armour (C Shares). Mac Greer owns shares of Amazon, Apple, and Netflix. Matthew Argersinger owns shares of Amazon, Netflix, and Under Armour (C Shares). The Motley Fool owns shares of and recommends Amazon, Apple, Netflix, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Electronic Arts and Nike. The Motley Fool has a disclosure policy.
