1 Big Question for Alphabet, 1 Totally Different Question for Viacom

The internet giant formerly known as Google just keeps plowing ahead, with growth on a host of fronts. But despite its beating fourth-quarter expectations on profits and revenues, its share price dipped a few percentage points Tuesday. Media B-lister Viacom (NASDAQ: VIA) (VIAB), by contrast, reported mixed numbers, but got a share price pop.

In this Market Foolery podcast, host Chris Hill and senior analyst Emily Flippen discuss the diverging stories that moved these stocks, and where their futures lie. For Alphabet (GOOGL 10.22%) (GOOG 9.96%), the issues come down to whether or not you trust it to spend its money wisely -- because it is spending a lot in pursuit of new growth. For Viacom -- home to Nickelodeon, MTV, Comedy Central, BET, and Paramount Pictures, to name a few -- the question is how it can pivot to success in a streaming video future without undercutting the legacy segments that provide most of its profits today. 

Check out the latest Alphabet and Viacom earnings call transcripts.

A full transcript follows the video.

This video was recorded on Feb. 5, 2019.

Chris Hill: It's Tuesday, February 5th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, Emily Flippen in the house. Thanks for being here!

Emily Flippen: Thanks for having me!

Hill: We've got entertainment stocks, we've got a programming announcement that we're going to share soon. Let's start with the big kahuna, the big fish. Nobody calls Alphabet either of those things, I don't know why I just said that. Let's talk about Alphabet. Fourth-quarter profits came in higher than expected. Overall revenue, which I should point out was just north of $39 billion --

Flippen: Just a little bit.

Hill: -- also came in higher than expected. The stock is down 3, 4 percentage points today. I'm assuming at least part of this has to do with the spending that's going on at Google. 

Flippen: Oh, yeah! They beat estimates for all intents and purposes, but operating profits were marginally lower than I think expectations were. That concern came from a doubling in [capital expenditures] year over year. A lot of people thought, "Man, Google's spending a lot of money to reach these growth targets. Is that going to be sustainable in the future?" It's a big fish, whether or not people call it that. 

I think it's important for Google to make good use of the money that it does generate. And while the stock's down a little bit, I think analysts might look at this and think, "Yeah, it's necessary." A lot of these areas in which Google is trying to compete require a lot of capex. Look at them in the cloud business, they're significantly behind Microsoft, for example. They need to catch up. That's going to require a lot of capital. So as an investor, I'm not too sure. I like to see good earnings. Regardless of the market's irrational response, I think it was a good quarter for them. 

Hill: It was a good quarter. Advertising rates coming down, I think that's probably also a point of concern. But it seems like we've seen that before in Alphabet's past. To go back to the amount of money that they're spending, I'm a little surprised only in this regard: Ruth Porat, the chief financial officer, has earned tremendous respect from so many corners. And rightfully so. And I look at the sell-off today, and I can't help but feel that there's just a little bit of doubting of Ruth Porat baked into that. Maybe I'm reading too much into that, but I look at her and go, you know, I trust her 100%. I don't own this stock, but I think that if you're going to question the amount of money that Alphabet is investing, then inherent in that is questioning the wisdom of Ruth Porat. And I...

Flippen: You're not in the business of questioning?

Hill: [laughs] I'm not in business of questioning Ruth Porat. She's one of the best CFOs out there. I just think, if anyone had Alphabet on their watch list yesterday, well, good news. Today, you can buy it for 4% less.

Flippen: A little bit of a discount. I think some of that might have already been made up in the market as people did take advantage of that short-term drop. To address the ad revenue, ad revenue is still growing faster than their traffic acquisition costs. That's what's really important. Some of these concerns, when you put them in the larger context...I mean, of course I'm concerned about Google competing in the cloud space, but a lot of the money that they're spending is also being turned back into YouTube, for example, which is an amazing platform that Google is just getting into realizing the true potential of. So I'm not concerned. I like to see it when a company is a good investor. And Google, up to this point, has been a great investor! The important thing to me is that they're investing for the purposes of future growth, and that the investments that they're making today are not going to potentially harm the company in the future, and nothing Google is doing today leads me to believe that. 

Hill: I'm glad you mentioned YouTube. It's really pretty amazing, when you look at all of the businesses under the Alphabet umbrella, you look at YouTube, how big it is, how dominant it is, how much time is spent on that platform. As an investor, you step back -- I think it's fair to say that the people at Alphabet themselves are not satisfied with the business of YouTube. They look at YouTube as something they can improve on. So, the idea that they're somewhere between only scratching the surface of YouTube's potential and fully realizing its potential, it's pretty mind-blowing.

Flippen: Yeah. YouTube, it's not grown without its challenges. A lot of that comes from the roots of YouTube, the way that YouTube is monetized. Inherently, you're looking at what has grown into celebrities developing on this platform. So, obviously, it's a platform that's demanding not only a lot of ad revenue, but a lot of viewer hours watched. So it's important for them that they monetize it, but not to the point where it potentially harms the platform that it's grown into. It'll be interesting to see how this develops. I do think that developing YouTube and all of their other initiatives are going to require a lot of capital. To me, as an investor, if they're making good returns on that capital, I'm not worried. 

Hill: Speaking of YouTube, save the date, people: This Thursday, Feb. 7, 4:30 p.m. Eastern, we're going to be doing a market wrap show live on YouTube. Andy Cross, Jason Moser. We're going to be talking stocks after the closing bell. We're going to be taking your questions. How do you find the show? You go to The Motley Fool's YouTube channel, which is youtube.com/themotleyfool. You can go there, subscribe, and we'll see how this goes. It's going to be live, which means, the potential for mistakes is, well, pretty high.

No editing. Unlike this show, where if I screw up, Dan Boyd can fix it in post. That's not going to be happening. Thursday, Feb. 7, 4:30 p.m. Eastern. I hope you can join us. 

Let's move to entertainment. First-quarter results for Viacom were mixed, but shares of Viacom are up. I'm assuming that has to do with a little bit of optimism about their new production deal with Netflix (NFLX -0.63%). 

Flippen: Yes, exactly. And low expectations. There might be a whole generation of people who have no idea what Viacom is, right? The industry is changing. It's important for Viacom to stay relevant. A lot of the ways that they're staying relevant, like you said, Netflix. They had some great hits this year on Netflix, getting licensing revenue from, if I remember correctly, some of their TV shows -- Haunting of Hill House was very popular; Maniac. They're still producing those TV shows, licensing them to companies like Netflix. 

But the core of their businesses, a lucrative part for them is still charging for cable packages. So it's going to be interesting to see how they change their core business from getting this revenue from monthly subscriptions to maybe being more content-based or advertiser-based thanks to their acquisition of Pluto TV. These are things that are going to be really interesting to watch to see how Viacom develops in the future, if they end up fading away and turning into a legacy of the past, or if they can carve themselves a relevant portion of the streaming service in the future. 

Hill: Viacom is one of those businesses -- we've seen this in other industries as well -- where the properties that Viacom owns are almost certainly better known than Viacom itself. As you said, Viacom, that's one of those things where you scratch your head, and you're like, "What is that?" But people have heard of Nickelodeon, MTV, Comedy Central, BET, Paramount Pictures. They've got these properties. In the case of the Netflix deal, I think it's a new deal with Nickelodeon, creating some more children's programming for Netflix. 

In the same way we've seen consumer products conglomerates become more efficient by selling off some of their brands, I wonder if at some point Viacom starts to look at some of their cable systems and say, "OK, we don't really need this channel. This is not really moving the needle for us." Or if there's strength in numbers. And, as you said, it is for now still about the bundling. 

Flippen: It'll be interesting to see because Viacom's treading this line. They have, like you said, all these name-brand channels, this content. They can either license it or sell it and use it on an ad-based platform and get licensing or ad revenue from that. Their recent acquisition of Pluto TV is a great example. This is a free ad-based TV streamer. It doesn't have a lot of great content on it now, but now that it's under the Viacom umbrella, that might change in the future. But if they add too much content to these types of free websites, they're inherently undercutting the value of having a cable subscription. It's going to be important for them to change with the times, but also not dig their own grave in that process. 

Hill: Sticking with entertainment, after the closing bell today, the Walt Disney Company (DIS -0.04%) is going to be reporting. What's something you think investors should be watching for in that report? I say this as a shareholder, it seems like for the first time in a long time, there's not an obvious announcement that we're waiting for from Bob Iger and his team. Yes, I'm interested in how all the different divisions are doing. But for a while, there were a few quarters in a row there where it was like, "What are they going to say about the new streaming service? When are they going to announce that?" In terms of time-stamping upcoming big initiatives. It seems like we don't have that this quarter.

Flippen: I think, to an extent, we might still have that this quarter, because now there's been some doubt cast about whether or not Disney's streaming service is really going to happen in 2019. 

Hill: Really?

Flippen: Yes. Some people are worried about their ability to turn not only their streaming acquisitions like ESPN+, but turning that into its own streaming service -- they're doing a lot right now. They have to monetize these platforms. They have Hulu, they have the assets they acquired in that deal with Fox. They have fingers in a lot of pots here. It's going to be important for me to watch these earnings because I want to see if they have a hard plan for their streaming service. If they come out and say, "Oh, we're still in the process. We're figuring it out. All these things are going to come in due time," that's when I start going, "Hmm." I'm not seeing a strong management story for growth in these areas. They're kind of figuring it out as they go. That doesn't mean it won't succeed, but as an investor, it makes me worried. I want to know that management knows what they're doing. And if they continue to kick the ball down the field in terms of setting up hard dates and hard expectations for their streaming service, then I'm just going to start thinking, "Are they really getting around to it?"

Hill: See, I wasn't at all worried about the streaming service coming in 2019. And now, [laughs] now, you've got me nervous!

Flippen: I didn't mean to add to the nervousness! A lot of people are bullish about the streaming service, whether or not it happens in 2019 or 2020 or 2021. If you see value in what Disney creates, then a year means nothing to you. But if you're talking about a fast-moving streaming industry, maybe that year means a lot. That's a year of lost loyalty of subscribers, if you aren't able to push that out. I think it really depends on the investors. Maybe you're right to have no worries. Maybe, on the other hand, I'm right to have some minor worries.

Hill: To that point, in terms of what kind of difference a year makes, we talked recently on this show about Comcast, and Comcast coming out with their earnings report and saying, "Oh, by the way, we're going to launch a streaming service," I think it was sometime in the middle of 2020. That sets them up nicely, in terms of the news-oriented content that Comcast has under its umbrella. I'm thinking both in terms of, it's a presidential election year, and they've got the Olympics. But we also said, "God, they're really giving up a lot of room to Disney to let them launch their app, unless Disney comes out and says, 'No, it's not going to be until early 2020 for us.'" All right, now I'm totally going to pay attention to this.

Emily Flippen, thanks for being here!

Flippen: Thanks for having me!

​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 Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!