Shares of CVS Health (NYSE:CVS) fall despite strong second-quarter profits and raised guidance. Live Nation Entertainment’s (NYSE:LYV) second-quarter results have the CEO excited for 2022 and 2023. In this episode of MarketFoolery, Motley Fool analyst Jason Moser analyzes those stories and discusses Apple’s (NASDAQ:AAPL) new partnership with Affirm Holdings (NASDAQ:AFRM).
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This video was recorded on August 4, 2021.
Chris Hill: It’s Wednesday, August 4th. Welcome to MarketFoolery. I’m Chris Hill. Here’s the thing about August, people. It’s August, people are taking vacations, people are moving apartments, there are a lot of scheduling conflicts, and that’s just context for saying I’m joined today once again by Jason Moser. Thanks for being here.
Jason Moser: Well, you have to make an excuse. You can’t just hit them out of the blue. Wait a minute, didn’t I just hear from that guy on Monday, you’re bringing him again? Listen folks, I’m sorry. You get what you paid for here, but yeah, happy to be here as always. Chris, thanks for having me.
Hill: I appreciate it. You know what? I have a conflict next week, so next week is going to be the proverbial short week on this show.
Moser: I know.
Hill: We’ve got more earnings, we’ve got more of the war on cash, but we’re going to start in the arena of health. Second quarter profits for CVS Health were higher than expected, they raised their guidance for the full fiscal year. Normally, that is the one, two punch we’d like to see, but shares of CVS down a little bit because they are planning to increase wages for employees and they are planning to invest in more digital options for customers. Both of those are good things, and I think things you would want to see if you’re a shareholder, but it probably also accounts for why the stock is down a little bit.
Moser: Yeah, I’m glad you said that. I think you’re right. On the whole, this was a very respectable quarter. But yeah, I think there’s probably some near-term headwinds that may have investors less than enthused today. This hasn’t been the greatest investment over the past several years. Over the past year, it’s done OK, but you stretch that out three and five years, it’s just not really been the greatest investment in the world. We were talking about this last quarter. I feel like we’re going to see some goodwill and some brand equity come from all of this stuff with the pandemic. CVS has been seen as a part of the solution. They’ve done a very good job, I think, serving their role as one of the national partners for the federal pharmacy partnership program. That is something geared toward rolling these vaccines out, and certainly, CVS has done their fair share then. But yeah, you said it, they’re going to raise the minimum wage to $15 an hour by July 2022. That is, I think we can all agree, the right thing to do. It is going to impact cost structure in the near term, it’s going to create an incremental $600 million of labor costs over the next three years, noted on the call. That is something that we’re going to have to cope with on the investing side. But again, you can feel good about the fact that they’ve done that.
Then yeah, the investments in digital only make sense. They put some data out on the call that I think really makes sense of it all, and you certainly understand more and more why they continue to invest in digital. Because digital retail customers spend 2.5 times more than non-digital customers in their store, and they manage 1.5 times more prescriptions than non-digital, and they remain customers for longer than non-digital pharmacy patients. Digital, while it’s very convenient, it’s also a tremendous retention tool. Once you get in that digital ecosystem, so to speak, regardless of the concept, whether it’s CVS, or Amazon, or whatever, the convenience starts to take over, and it becomes much easier to get things done and people stick with you. Near-term maybe there’s a little bit of concern there on how these investments are going to impact the bottom line, but looking further out, I think it’s absolutely the right thing to do and I think the company and ultimately investors should benefit from it.
Hill: I’m glad you mentioned what the stock has done the last few years because you go back to the end of 2017, and CVS Health announces the acquisition of Aetna, and I’m wondering with the benefit of hindsight, if you look at that now and think to yourself, that was a mistake, or do you look at it and say, that’s going to take longer to pay off for shareholders than we probably all thought at the time?
Moser: I don’t think it was a mistake. I go into something like that, that’s such a big acquisition. Aetna being really an insurer, a healthcare company, it’s a bit of a different business than CVS was primarily. They play in the same sandbox, but that just is all to say that an acquisition like that is going to take a while, I think, to integrate and really cut the fat, so to speak, and make sense of it all. It does to me though, it diversifies CVS even a little bit more. I think it gives them the opportunity to really scale out these digital investments. They are seeing a tremendous response to their digital and virtual offerings in the MinuteClinic. I think that when you look at the business itself, revenue grew 11.1% versus a year ago, and they saw strength really in all three major segments in pharmacy services, the retail business, in the healthcare benefits segment as well. Retail business grew 14.2%, believe it or not. But to me, again, I think when you look at the investments they’re making, an acquisition only makes sense, but it is one that would take, I think, some time to work through the system. That could be something that keeps people on the sidelines as well. But it’s worth noting to me, they did raise guidance, as you said. Generally speaking, I think that we’ll come through this pandemic and I think CVS will be in a stronger position than they were before, which ultimately should serve them well.
Hill: Concerts are coming back and that is good news for Live Nation Entertainment. CEO Michael Rapino says that 2022 and 2023 will be a roaring era for concerts and live events. Before we discuss whether or not we think he’s right about that, in terms of Live Nation second quarter results, anything in particular stands out to you?
Moser: Well, this is one of those companies that so many of us love and hate at the same time. It gives you access to all of your favorite live events, but dang it those fees. I mean they really hold the power there, so to speak. I think it was really not worthy for the quarter revenue, for this quarter was $576 million. The thing that stood out to me was that $576 million, that compared to $74 million from a year ago, $576 million this quarter versus $74 million a year ago. On the one hand, you’re like, OK, I get it, that’s $74 million, second quarter of 2020, we know what was going on then, so you’ll have to see that Delta there, but by the same token, I thought they’d done $74 million last year. That sounds high. Given everything that was going on, $74 million seemed high. I was like, wow, they did probably a little bit better than I would’ve assumed before actually digging into it. But it has been a tremendous bounce-back for Live Nation for obvious reasons. It’s great to see all three business segments more than double their revenues from last year. Not a surprise.
Moser: To me, I think what stood out is just the, across the board, robust numbers that they recorded in all segments: tickets, traffic, just the general attitude. It does feel like this is a business that is really getting ready to get started.
Hill: I don’t blame Rapinoe for focusing the Wall Street’s attention on next year and the year after that. But to be fair to him, it really does seem like everything we suspected about pent-up demand for travel, for live events, concerts, sports, whatever, that really did seem to be coming true before the Delta variant raised its ugly head. When you look at shares of Live Nation Entertainment, do you think it looks like, I don’t want to say a value opportunity, but do you think for investors who are thinking in years and not quarters that this is a decent investment on a reopening strategy over the next 24 months?
Moser: Yeah. Absolutely, I think so. It’s one of those businesses where on the one hand you can look at it and really, customers do have some fair amount of vitriol based on the fees. I certainly get that. This is more than just a fees business. There are advertising and sponsorship sides to the business as well. But primarily, it is fees. But they hold such a market-leading position with Ticketmaster in their expertise and operating all of these live events. To me, I love the fact that they are talking about 2023 and ’24. You just look at these next several quarters though. June was Ticketmaster in North America. It was the fourth best month in history for transacted ticket volume, driven by literally reopening of the economy and people getting back out there. I think I saw they’re doing a really good job in regard to making sure these are safe events. You’re seeing a big focus on making sure that folks that are going to these shows are either vaccinated or have been tested. I think they quoted a number for the recent Lollapalooza festival in Chicago. I think they said on the call that 90% of attendees had actually shown proof of vaccination. 90%, that’s a lot when you’re talking about hundreds of thousands of attendees.
I think they’re creating an environment where people are going to feel pretty good about going back to the Delta variant and whatever subsequent variant arises notwithstanding. Because honestly we have the tools to be able to deal with these variants that we didn’t have a year ago. The pipeline for 2022 is up double digits from 2019. Obviously, no surprise there. Ticketmaster added over 11 million new fee-bearing tickets year-to-date. That has already surpassed any previous full-year growth and so I think those are just the signs of what’s to come. When you look at 2022, ’23, ’24, there are a lot of reasons to be optimistic for businesses like this. When you see a market leader like this, a company that holds such a strong position in its market, it’s really difficult to bet against them. The biggest risk for a business like this other than a pandemic, for example. The risk that we all focused on more was and still is, I think, probably just being under the microscope for the fees that they charge. Anti-competitive behavior is going to be something they are probably always going to have to answer to. At the end of the day, I don’t know that that puts them in a bad position because they do what they do so well and they hold such a market-leading position already.
Hill: We talked on Monday about Square’s acquisition of Afterpay, the Australian payments company. Sticking with the buy now pay later model, Affirm holding shares up a little bit today on the news that Affirm is going to partner with Apple to offer buy now pay later services for purchases of Apple devices in Canada. I know that Affirm was up earlier in the week off of the Afterpay news. Maybe in the absence of that, shares would’ve been up even more today. But you take them together and the stock’s up about 20% in the past week.
Hill: I don’t want to overblow the partnership with Apple, but it seems like nothing but upside.
Moser: Certainly it doesn’t feel like there should be any downside or something like that. It’s funny because you read that headline and immediately the first thing that sticks out is Affirm and Apple partnering and you’re thinking, “My God, now it’s happening. It’s just for Apple device purchases and it’s only in Canada.” Maybe this isn’t as big of a headline as some would want it to be given what we saw with Square and Afterpay earlier this week. I do think this puts Affirm in a bit of a, I don’t want to say a bind, but I think that the burden of proof for them is going up. I think that one of the reasons why Square is paying so much for Afterpay like we were talking about on the show on Monday, I think time was a factor there. I think that Square felt like they really needed to get this and get it now. When time is an issue, you’re going to offer a little bit more than you typically might, and so that it is a $29 billion deal. You look at Affirm today, market cap of around $17.5 billion, very similar financials, very similar sized businesses. You can see just the difference there between what Square paid for Afterpay and where Affirm is today. Apple’s looking to make its own waves in the space as well too.
They are going to be building out a “buy now, pay later” feature for their Apple Pay service. It’s going to be something they call Apple Pay later where ultimately you have a zero interest plan that would consist of four payments or you could actually have a plan that runs over a longer stretch of time and perhaps that incorporates some interest there. It’s hard to say exactly why Apple felt compelled to go with Affirm in this case. Maybe they’re kicking the tires, I don’t know. But it certainly does feel like Affirm now, the burden of proof is even greater for them to really make the case for why this business is something more than just a “buy now, pay later” business. Because as always we’ve said, that more or less is a feature that can be replicated. But maybe there’s another bigger player out there in the fintech space that would like to incorporate that feature as well. Apple certainly could be one of those companies maybe giving Affirm a little bit of a closer look.
Hill: Last time I checked, Apple has somewhere in the neighborhood of $200 billion in cash on the balance sheet. Yeah, it probably goes on the list of reasons to do this partnership just so they can find out a little bit more. Because if Apple decides they want to get into this, who better than them to make an offer that Affirm can’t refuse?
Moser: Yeah. That is a good point. My first inclination, my first instinct is to say that Apple would not be interested in buying Affirm. Now, I could be totally wrong. We’ve talked before. Sometimes it’s easier to buy it, sometimes it’s easier to build it and Apple’s in a position where they aren’t necessarily really so pressed for time. They have a far more established business with a far more established base of device users than most any company in the entire world. They do have the luxury of time. Partnerships with Goldman Sachs, Mastercard, are all helping make Apple Pay work. You start to ask the question, does Apple really need Affirm now? Probably not, but it will be interesting to see what potential fruit this relationship bears because it’s a win for Affirm. Like you said, it’s hard to see any downside from this happening.
Hill: Jason Moser, thanks so much for being here. I really appreciate it.
Moser: Well, it’s always a pleasure.
Hill: 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. That’s going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd, I’m Chris Hill. Thanks for listening, we will see you tomorrow.
This article represents the opinion of the writer, who may disagree with the official recommendation position of a Motley Fool premium advisory service. Were motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.