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The Friday Five

WhatsApp with Facebook's big buy? Plus, rumors rev over Apple's next move and budget-focused firms face headwinds.

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Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five: five stories from the market this week and Morningstar's take.

Joining me, as always, with The Friday Five is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: You're welcome, Jason.

Stipp: First up this week, we learned about a $19 billion acquisition of WhatsApp by Facebook. This sounds like a lot of money, but it might not be quite as much as it seems?

Glaser: This is the obvious place to start this week. Facebook is spending, as you mentioned, $19 billion to take out WhatsApp, a fast-growing social networking app that lets people send essentially text messages without using their carrier's network.

Facebook is spending a lot of money on WhatsApp, and part of it is that they're trying to head off at the pass a potential competitor in the social networking space, and that's not going to be cheap. They know they have a lot of growth ahead of them. Another part of it is that they get to use their shares, which look fairly overvalued. So maybe that makes at least the economic value they're giving away a little bit less [than the $19 billion acquisition price]. And part of it is that it helps them get into some markets that they're not as penetrated in right now. WhatsApp has a big following in Latin America and Europe and developing markets, and Facebook is trying to grow in those areas, so this potentially gives them a toehold or a way to better understand what those customers want.

Rick Summer, who covers Facebook for us, certainly doesn't see this as a slam dunk. He sees it as an aggressive move, but one that doesn't move the value on Facebook's valuation.

Stipp: Also in the digital realm, this week, King Digital, maker of the popular Candy Crush game, announced that they're going to go public, but you say investors should really be careful to make sure this IPO is as sweet as some people might think.


Glaser: King is hoping that investors get as addicted to this IPO as they are to Candy Crush, and I think that everyone really needs to take a step back before getting too excited.

You could just look at Zynga from recent history to see how a company that really is staking a lot of its revenue on one game--Candy Crush for King and Farmville for Zynga--can get into trouble very quickly or could really see growth shrink very, very quickly if the game falls out of fashion.

These viral games tend to rocket to popularity, but they can sink just as quickly when something else comes to market. And we just don't know yet if King will be able to continue to produce a string of these successful games.

[King is] already very profitable. They are making over half a billion dollars in profit in 2013. So it seems like this IPO is not meant raise capital to invest back in the business. It's probably just that they think they can get a good valuation, and that this is a good time to sell. If it's a good time for them to sell, it's probably time for you to [question] if it's really a great time for you to buy.

Stipp: Automaker Tesla has really been on a roll, and part of that recently might be driven by some rumors that Apple is interested in the company. Is there any truth to those rumors? And what does this say about Apple if they are looking in the automaker space?

Glaser: We absolutely have to file those rumors under "unsubstantiated." Even though [Tesla CEO] Elon Musk has said that he has had discussions with Apple, it seems pretty farfetched, and Tesla is the first to admit that it seems farfetched, that any sort of acquisition is happening anytime soon.

But you could see a partnership, and I think those kind of partnerships, where Apple is thinking about how to move its technology outside of its current product base, is important to think about for Apple investors.

One of the big questions [for Apple] is, where is growth going to come from? Even if iPhone growth and iPad growth aren't played out, they aren't on the kind of trajectory that they once were. So, is the next category wearables? Is it a TV? Is it a better auto integration, coming up with ways to get people to use [Apple] technology in their car.

Obviously [Apple is] sniffing around all of these opportunities. Cars are going to be one of them, and it could be part of the answer to that question of where growth is going to come from. This is going to be one of the big stories that could drive the future of Apple, versus thinking about what their current product lineup looks like.

Stipp: Wal-Mart reported earnings this week, and they disappointed with their forward-looking guidance. What headwinds are facing the giant retailer right now?

Glaser: Wal-Mart really is under a lot of pressure right now, and you are seeing that in the financial results. You are seeing that in their guidance. And what's happening is you have some short-term things, like weather, being a big problem, and some of the cuts to food stamps that make comparisons difficult year-over-year. But some other trends like online shopping, a highly promotional environment, and generally constrained consumer spending aren't going to go away anytime soon.

Wal-Mart is really trying to see--and investors in Wal-Mart really need to think about--if they can use their global supply chain to eke out more profitability. If any of these new store formats, these smaller stores, are going to get people to shop there more often and just not on these big shopping trips. If that's going to be able to turn things around and really fight against some of these headwinds.

Our analyst Ken Perkins thinks the answer is yes and sees the shares as somewhat undervalued. But it could take some time for the story to really play out.

Stipp: Wal-Mart is not the only budget-focused company wishing they were having better days. Budget-focused hotels are also underperforming their higher-end peers. So what does this hotel trend tell you about the consumer?

Glaser: This could just be because I am a former hotel analyst, but I think the hotel industry does give you a pretty good glimpse into what's happening with the consumer mindset and what's happening with consumer spending.

A lot of trips aren't booked that far in advance, and you can see in what's happening in the results we got from Marriott, InterContinental Group, and Choice Hotels this week that business travelers and high-end travelers are still doing well. Those hotels are performing. Developers want to build more of those hotels. That area of the market looks very healthy.

Meanwhile the budget part of the market is growing at a much slower pace. A lot of individuals are still very cautious about taking big vacations. They still don't want to spend that money right now. And that's really being played out in the results of a player like Choice Hotels.

I think this is part of a broader trend that we saw in those Wal-Mart results, that we saw here, and that we're seeing in restaurants and elsewhere--a lot of consumers are still feeling very squeezed, even if high-end consumers are spending a little bit more freely and businesses are still spending. How this trend kind of plays out over the next couple of years is going to be a big driver of a lot of businesses and a lot of places that investors could be looking to put money to work.

Stipp: Always 5-star accommodations on The Friday Five. Jeremy, thanks for joining me.

Glazer: You're welcome, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.

Jason Stipp does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.