This podcast was recorded on Feb. 10, 2017.
Chris Hill: It's The Motley Fool Radio Show. I'm Chris Hill and joining me in studio this week from Motley Fool Supernova, David Kretzmann, and from Million Dollar Portfolio, Jason Moser, and Matt Argersinger. Good to see you as always, gentlemen.
All: Hey, hey, Chris.
Hill: We've got the latest earnings from Wall Street and we'll talk with best-selling author, Beth Kobliner, and as always we'll give you an inside look at the stocks on our radar, but we begin this week with the Magic Kingdom. Walt Disney's first quarter profits came in higher than expected. Revenue was a little light though. David, I'll start with you. The ESPN narrative that we've seen the last few quarters continues, even though the parks and resorts are really kind of getting it done.
David Kretzmann: Beating a dead horse there. It's kind of Wall Street style with Disney at this point when it comes to ESPN but last quarter management set expectations for 2017. The company's going up against a very tough comparison largely due to the success of Star Wars: The Force Awakens last year which globally topped $2 billion at the box office. Rogue One, you know, came out in December. Did great. It hit a billion dollars but that's half of what Force Awakens brought, which is a great problem to have but still a problem.
Hill: I think you mean "only" a billion.
Kretzmann: Right. Only a billion. At this point that's a low mark for Disney. But all in all I think the quarter was good. You did see revenue down 3%. Operating income down 7%. But like you said, the parks and resorts segment you saw sales up 6%, operating income up 13%, Shanghai Disney Land is expected to break even this year. A lot of things to look forward to with Disney across all these different segments.
Matt Argersinger: That is the beauty of the company, right? It's got its hands in so many of the premiere entertainment properties in the world and so when one's kind of down, and it's hard to call the studio business down when you've got a billion-dollar film come in, but when one's down, the others can pick it up and it's an extraordinary company and consistent.
Jason Moser: So would you say when Disney has a flop it's a little bit easier for them to . . . let it go?
Kretzmann: Oh, man. I would expect that with Simon . . .
Hill: I expect puns from Simon but . . .
Argersinger: Looked a little forced, Jason, looked a little forced, but it's good stuff.
Hill: Jason, we saw this story before the earnings report came out and it got confirmed by the man himself, this idea that Bob Iger who is due to leave the CEO office in June of 2018, may stay on a little longer. He has said, "I'm going to do what's best for the company. I'm going to listen to the Board." If you had to bet right now, do you think he stays on a little bit longer? Because it feels like the window for him to put someone in place is closing pretty quickly.
Moser: I think, yes, and the reason why I say that is many-fold honestly but I mean, I think this is going to be perhaps the most important transition of power for this company in many, many years to come. And I think that with all of the success that Mr. Iger has had to this point, and we were talking about this before taping, Wall Street is very persistent about this ESPN question and until he can really firmly I think and successfully answer it and really show the path to success with that, I think he wants to be able to do that and we're seeing the signs there. I mean, the Hulu relationship that's getting ready to launch additional over-the-top opportunities, all of the investment and time spent with BAMTech, I think there are seeds there that are starting to show some green shoots but I do think that Iger would love to be able to really prove that out.
So to give him a little bit more time, he seems to enjoy what he's doing and he does it really well and typically when you have that combination it's almost like you're not working anyways so I suspect for him he's just having a really good time doing what he's doing and I think shareholders wouldn't mind seeing him stick around.
Kretzmann: When you look at that media network segment, you really do need to keep it in perspective. I think this conference call, we saw Bob Iger and company talk about digital media, BAMTech more than they have in previous calls so that's clearly where their attention is focused and they're not being caught off guard with this transition from traditional cable bundles to digital streaming.
But when you look over the past five years, Disney is becoming increasingly diversified to Matty's point so when you go back to 2011, the media network segment made up 70% of Disney's total operating income. Last year it made up less than 50% so the company is growing and in the process becoming more diversified so I think if you're only focused on ESPN, you're overlooking a very quality and increasingly quality business.
Hill: Shares of Twitter falling more than 15% on Thursday and Friday in the wake of a fourth quarter report that was disappointing to say the least, Jason. Revenue was not only light, it was the slowest growth they've seen since they've gone public.
Moser: Yeah and I told Mac on Market Foolery, I think the Twitter investor relations feed needs to change their avatar on their Twitter feed back to the Twitter egg because these guys just lay egg quarter after quarter after quarter on the earnings side and they continue just to disappoint. It seems to be as regular as the sun coming up almost. But I do think that for all of their shortcomings and I've been extremely critical of a company that I was very bullish on for a long time, I'd say I'm still quasi-bullish. I mean, it's hard for me to imagine a world without Twitter. I mean, I think it does really serve a very important purpose, but I think it's been a very poorly run business for a long period of time.
There is maybe a little light at the end of the tunnel. I think you saw modest growth in users but I think more importantly you saw the third consecutive quarter of accelerating growth in daily active users and I think for something like Twitter, that speaks volumes because it is that type of a platform where more or less the users are using it and checking in on a daily basis. That's a sign that engagement is improving and engagement really is going to be something born of all of the new things that they roll out on to the platform.
So Jack Dorsey I think hit the nail on the head when he was talking about the fact that while Twitter remains very relevant, they're still not meeting those growth expectations that have been set for them. Again, hard to imagine a world without Twitter. I think for shareholders it's easy enough to sort of hang on to your shares because it's that ticket to the potential that still exists, but no question it seems like it's going to take a while for them to ultimately get there.
Hill: Yeah, because if you're an ad business and you're struggling during a presidential election, then you're not doing it right.
Kretzmann: That's what's brutal and that's what I really don't get with Twitter. So this quarter they had higher user engagement both with monthly active users and daily active users. Their ad engagement was up 151% for the quarter, which is accelerating, but ad revenue still fell year-over-year. I just don't get that. As far as an advertising company, they are really dropping the ball here.
Moser: Yeah, and I agree there. I think it's important to note that they've been very consistent, Dorsey's been very consistent when he said, "Listen. Revenue is going to trail user growth," so user growth is going to come first and once they can prove out the platform and engagement, that makes it more attractive for advertisers which then helps spur revenue along. So that remains to be seen. I mean, they have a lot of lofty goals for 2017 one of which is to become GAAP profitable, and if they can hit that, if they can become a profitable business, then I think all of a sudden you've got something there. You've got an actual business that has some promise and then you can sort of more traditionally value the stock and you can make a little bit more of a case for it as an investment.
Hill: Shares of Activision Blizzard up more than 18% on Friday after a blowout fourth quarter report. The video game maker's profits and revenue both higher than expected. What's driving it, Matty?
Argersinger: They absolutely crushed it. You know, going into the quarter a lot of investors including me were worried about the Call of Duty sales which really disappointed. That's usually their big game every year in the holiday season. Didn't do well. Had some bad competition with Battlefield 1 which everyone seemed to like but clearly Call of Duty did not matter because revenue in the fourth quarter was up 49% to over $2 billion. Here's what's really impressive that for the first time, Activision had at least $1.5 billion in sales each on PC, console, and mobile. So absolute home runs on every gaming platform, and of course we know the mobile story there is there because they purchased King Digital, the leader, about a year ago.
A few interesting points. consumers spent 43 billion hours playing or watching Activision games last year. That's on par with the number of hours watched on Netflix, and maybe this is Bobby Kotick throwing a little shade out there, but it's 1.5 times the amount of time spent on SnapChat, which we know is about to go public at about the same valuation as Activision Blizzard. So I'm just saying ... But the story here with the video games space and with Activision, it's just the move to digital that we've seen over the last several years. In-game content sales were $3.6 billion last year. That's a record. Even if you take out King Digital, that grew 30% year-over-year. They generated $2.2 billion operating cash flow and announced a $1 billion share buyback. I think Bobby Kotick's just dropped the mic there.
Hill: King Digital, the maker of Candy Crush, they paid a lot of money for King Digital and a bunch of people and myself . . .
Argersinger: Took on a lot of debt . . .
Hill: . . . included were very critical of that. It looks like, based on this latest report, I need to eat a little crow on that one.
Argersinger: I don't know about that but it's generating . . . That mobile business is now generating hundreds of millions of dollars in cash flow. If you look at King Digital, they might pay that back in about two years, and pay off all the debt they took out to do it. So very impressive buyout.
Kretzmann: One potential blemish with King Digital is the monthly active user count for King Digital has dropped from about 500 million at the time Activision bought them at the end of 2014 and now that number's down to "just" 355 million, so that number has steadily gone down each quarter. The users that they do have are increasingly engaged but at some point they need to come up with another Candy Crush-esque hit to bump up that user count again.
Hill: Sticking with gaming, Take-Two Interactive shares hit a new all-time high this week. David, they got a new partnership with the NBA?
Kretzmann: Yeah. So they're creating a joint venture with the NBA and this will be the first professional video game league with a US sports league, the NBA. So think e-Lakers and e-Knicks. Essentially the vision here is that each franchise in the NBA, whether you're talking about LA, New York, Sacramento, shout out to my Kings, they'll own or control their own e-sports team. So they'll draft players. These will be full-time salaried players. These different teams will deal with marketing, product licensing, and more. As someone who . . . my eyes glaze over whenever I play or watch a shooter game and I think this is something that will really broaden the market for e-sports and for a lot of people like me who might not be drawn to a shooter game, watching an e-sports tournament with basketball, football, hockey, I think that really does open up the market so I'm curious to see how this plays out.
Hill: Maybe your e-Kings can make the playoffs?
Kretzmann: I hope so, man. Better than the real Kings, hopefully.
Hill: Hasbro shareholders had their best day in more than two decades after fourth quarter profits came in much higher than expected. Jason, they also raised the dividend. That's always nice.
Moser: It sure is. Kind of continuing from the discussion there on Disney and its success, I think Hasbro is a very good example of a company that has figured out how to sort of hitch their wagon to the stars out there in the IP world, Disney being the main one, and I think in the face of what was obviously a very brutal retail season. I mean, we saw just it seemed like every retail stock just got peppered. Hasbro just went the other way. It was a phenomenal quarter for them. A phenomenal year really. I mean, you look at a company like this, they grew their top line 14%. They grew sales 14% for the year. Just phenomenal I think for a company like this when we've been talking so much about the secular challenges in the toy industry.
But I think they've made a very good shift there into the digital space and I think they've utilized a lot of the properties that Disney has to do that. We didn't really have any doubt here but we sort of were wondering would Hasbro winning that Disney princess partnership have a material effect on the business. It certainly has and we've seen on the other side of that coin, certainly Mattel has suffered, which just makes you wonder how leadership let that one slip from their fingers. But I also think this is a testament to Hasbro's leadership. Very smart and consistent leadership in CEO, Brian Goldner. He's been there since 2008. Look at the stock chart, Chris. The results speak for themselves.
Argersinger: Yeah, you wonder if we're always looking to see if Iger's going to make another acquisition. Obviously they've earned great licensing revenue for years if not decades from Hasbro but, you know, bring that in-house. Capture a lot more of that revenue.
Moser: Well, and they continue Disney trying to figure out how to make that consumer products part of the business, it's stronger. That can certainly be one way to do it.
Hill: Up next, earnings palooza rolls on. This is Motley Fool Money.
Welcome back to Motley Fool Money. Chris Hill here in studio with Jason Moser, Matt Argersinger, and David Kretzmann.
Nvidia's fourth quarter revenue rose more than 50%. It is the second straight quarter the graphics chip maker has done that and it just wasn't enough to impress Wall Street, Matty.
Argersinger: Well the stock's had an incredible run but this isn't how it's supposed to work in the chip space. Nvidia has been around for a long time. They've made GP processors for as long as I can remember playing video games in the 80s and 90s, but it's experienced certainly a renaissance and its chips have become attached to a lot more interesting and compelling end markets. We talk about autonomous driving, virtual reality, and artificial intelligence and, as a result, their sales have boomed in recent years. Their gross margin has held up around 60% and generally you'll see with a lot of chip companies that gross margin, it's super hard to maintain. Usually comes down over time. Nvidia's been able to maintain it and I would just say, looking at the stock and what it's done, it gives me the heebie-jeebies about the hype cycle that we talk about sometimes, David Kretzmann. What do you think?
Kretzmann: You had CES in January. Nvidia really stole the show with its keynote and I couldn't help but wonder if we're nearing the peak of the hype cycle but, man, you look at . . . the company has its hands in all these different valuable segments and its biggest segment is still gaming which makes up over 60% of revenue but there are a lot of tail winds behind gaming. So we talk about e-sports, virtual reality, the performance demands for that hardware and software will continue to rise so I think Nvidia's in a good position with that, let alone with other categories like automotive or data centers or whatever it might be.
Hill: Fourth quarter results for Buffalo Wild Wings (NASDAQ:BWLD) were anything but spicy. Profits came in lower than expected and same-store sales fell more than 4% and yet, David, the stock didn't really suffer.
Kretzmann: Defying logic. I mean, Buffalo Wild Wings had a rough 2016 and the company consistently over estimated what its future results would be so it closed out 2016 with the worst quarter of the year, fittingly enough. Total sales were up less than 1%. Same-store sales down 4%. Net income down 38%. They do have a new CFO on board and I think they're starting to feel the pressure from activist investor, Marcato Capital, so you're seeing the company tone down the number of company-owned locations its expecting to open. They're refranchising about 10% of their company-owned restaurants this year. They're going to be taking on debt to buyback up to $500 million worth of stock this year and I'm not really sure about that strategy because the stock is near a 52-week high, the valuation is questionable, and the fact that they're going into debt to buy back stock rather than focus on the core operations gives me pause. But all in all, they are shifting their strategy a bit.
Hill: Shares of Panera Bread hitting a new all-time high this week after fourth-quarter profits came in higher than a year ago and, Jason, you look at what they're doing in terms of digital sales and it's really impressive.
Moser: Yeah, I've really enjoyed watching this turnaround, particularly, sitting at my desk, enjoying a delightful chicken Caesar salad from the Panera right across the street. I think, wow, I mean, they really have pulled this turnaround off and I think that Starbucks is going to be taking some lessons from these folks in the near future here given the challenges we've seen at Starbucks with mobile ordering and ordering in advance and throughput and whatnot. As you mentioned, digital sales a big key here now, a quarter of total sales in company-owned stores. They have 25 million MyPanera loyalty members. I think probably every one of us here at the table are members of that club. And at the year end, a little bit more than 2,000 stores. A nice healthy mix of franchise and company-owned.
So I think when you look at this . . . the stock is doing well because the business is doing well and that's because of founder, Ron Shaich, taking a step back, looking at this pragmatically. I think the mosh pit concept was really when things started to turn around because that was when they realized they had a problem and they needed to do something about it. I think the most attractive part of Panera is still the upside here. They can open more stores and I think the market opportunity is there, a much broader cross section of opportunity than maybe some of their competitors so I suspect we'll continue to talk about more upside for Panera for many quarters to come.
Hill: Whole Foods (NASDAQ: WFM) first quarter results were almost an after thought as the company said it is scaling back its expansion plans. Matty, we always mention its CEO, John Mackey, is on the Board of Directors here at the Motley Fool. That goal of 1,200 plus stores that they've put out there for a while, that is now a thing of the past.
Argersinger: Right. I think a lot of us started questioning that pretty regularly over the past couple years. It just didn't seem that a lot of the new markets they were going into were bringing a lot of success and now we see comparable store sales continue to decline. Guidance was very weak for this coming year. But I actually think it's the right move. I mean, I think this is what we've talked about, which is if they've committed back to their core customer and not worry about the value-conscious customer who's clipping coupons and going to Safeway or Kroger, I think that's the right customer.
Now, if this is a story where we don't have 1,200 stores but we have 700 or 800 stores that are very profitable, well positioned . . .
Hill: Because now they're in about 450.
Argersinger: Right. That's still a relatively compelling story. I expect the unit economics of each store to improve because of that so this could be still a valuable investment for investors. It just won't be the growth store we thought it was.
Moser: Yeah. I think that's key there and I think we've seen some signs that really surprised us yet also made a lot of sense. Ratcheting back that opportunity, they've closed down a few under performers and they've more or less put that 365 concept on hold to further assess it. They have some leases they're going to fulfill as they open up a few new ones but I think they really want to get a handful of them open, run them, study them, learn from them. But the 365 concept doesn't really fall in line with the strategy shift that we just found out about . . .
Argersinger: No, it doesn't.
Moser: . . . their core customer. So my suspicion is, we probably won't see the proliferation of those 365 stores that we anticipated maybe a year ago.
Hill: All right. Jason Moser. David Kretzmann. Matt Argersinger. Guys we'll see you later in the show.
Up next, best-selling author, Beth Kobliner, is going to make your kid a money genius. Stay right here. This is Motley Fool Money.
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.
Welcome back to Motley Fool Money. Chris Hill here in studio once again with Jason Moser, Matt Argersinger, and David Kretzmann. You can check out past episodes of Motley Fool Money and all of our podcasts by going to podcast.fool.com. You can also subscribe on iTunes, Stitcher, Spotify, Google Play. Just click the "subscribe" button. It takes two seconds. Go ahead. We'll be with you.
All right. Let's get to the stocks on our radar and our man, Steve Broido from behind the glass. We'll hit you with a question. David Kretzmann, you're up first. What are you looking at?
Kretzmann: We're talking a lot about video games and I don't want to overlook Electronic Arts so I'm going to go with that once again. I just love the different franchises the company has under its belt. You have Battlefield, Mass Effect, Star Wars, Titanfall, EA Sports, and I think we will see more sports leagues look to shift to e-sports and if that happens, EA is just in a great position with Madden, FIFA, NHL, really across the board. So I think the company's in a good position if that trend continues. $3.2 billion in net cash, a really liked CEO, Andrew Wilson, so I think a lot of things to like here for this year and going forward.
Hill: Steve. A question about Electronic Arts.
Steve Broido: Are any of these phones I can play on my cellphone? I saw at the Super Bowl there were a lot of ads for them. Are any of these cellphone games any good these days?
Kretzmann: Yeah. They just launched NBA Live for mobile. They have Madden on mobile. So all those traditional franchises are on mobile and they keep seeing those user counts going up so you should try it out, Steve.
Hill: Jason Moser, what are you looking at?
Moser: Yeah, checking out Control4, ticker CTRL. This is one I've called out on the show before but it's been a while. Seems like this one was headed for mediocrity at best but perhaps we were just a little bit early to the game in looking at this stock but the company focuses on solutions, both on the hardware and software side for the connected home, which is becoming more and more a thing now with the success of Amazon's Echo and recently Control4 integrated with the Echo so it has I think opened them up to a much larger market opportunity. It makes ultimately what Control4 does more relatable to the every day person and easier to integrate into the home. Historically Control4 has focused more on the high end total solution and now that they are integrating with things like the Amazon Echo, this really I think expands their market opportunity in a very significant way. The stock had a phenomenal Friday after earnings of I think around 20%. Perhaps this is something on the road to recovery.
Hill: Steve. Question about Control4.
Broido: Are there security concerns here? I think about somebody opening my garage door while I'm at work, online, going to my phone and just opening up . . .
Argersinger: Hacking it.
Broido: Open the windows and . . .
Moser: I think there's many concerns as your mind will allow and I'm with you, Steve. I have security concerns myself, but we have an Echo at home where I've hooked up our lighting to the Echo but I'm not going to hook up our locks to the Echo. There's just a point where I just can't make that leap.
Hill: All right. Matt Argersinger, what are you looking at?
Argersinger: I'm going with American Tower, ticker AMT. It's a longtime rule breaker. We just added it recently to our MDP watch list. This is a real estate investment trust. They own 144,000 tower sites around the world including places like India where they have almost 60,000 sites, and Brazil where they have about 18,000. And this is all about wireless data and the growth of wireless data and they own one of the biggest, actually the largest wireless data footprint in the world. It pays a nice modest dividend, a growing dividend. Like the business.
Hill: Steve. A question about American Tower.
Broido: I'm a shareholder. What's their next move? What's the next big play? Can they just put in more towers, more American towers?
Argersinger: Well, they're mostly an acquisition company so I expect them to continue to make acquisitions but mostly outside the US, probably in emerging markets like Asia, Latin America.
Hill: Steve. Three stocks. You got one you want to add to your watch list?
Broido: I might play some video games this weekend. Let's go with Electronic Arts.
Argersinger: All right.
Hill: All right. David Kretzmann. Jason Moser. Matt Argersinger. Guys, thanks for being here.
Hill: That is going to do it for this week's edition of Motley Fool Money. Our engineer is Steve Broido. Our producer is Mac Greer. I'm Chris Hill.
Thanks for listening. We'll see you next week.
John Mackey, CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon, Walt Disney, and Whole Foods Market. David Kretzmann owns shares of Activision Blizzard, Amazon, Buffalo Wild Wings, Electronic Arts, Hasbro, Netflix, Panera Bread, Take-Two Interactive, Twitter, Walt Disney, and Whole Foods Market. Jason Moser owns shares of Control4, Hasbro, Twitter, Walt Disney, and Whole Foods Market. Matthew Argersinger owns shares of Activision Blizzard, Amazon, Netflix, Twitter, Walt Disney, and Whole Foods Market. Matthew Argersinger has the following options: long January 2018 $25 calls on Twitter. The Motley Fool owns shares of and recommends Activision Blizzard, Amazon, American Tower, Buffalo Wild Wings, Hasbro, Netflix, Nvidia, Panera Bread, Take-Two Interactive, Twitter, Walt Disney, and Whole Foods Market. The Motley Fool has the following options: short April 2017 $110 calls on American Tower and long January 2019 $80 calls on American Tower. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.