How Strong Is the Bull Case for Bitcoin?

In this episode of Market Foolery, Chris Hill and Simon Erickson review Discovery Communications (DISC.A) after its solid quarter; talk about where bitcoin is headed -- possibly into an ETF; and reflect on the rumors that Burger King's parent has been testing the waters for an acquisition of spicy fried chicken specialist Popeyes (PLKI).

A full transcript follows the video.

This podcast was recorded on Feb. 14, 2017.

Chris Hill: We've got earnings to get to. We're going to follow up on yesterday's story that we did on Restaurant Brands (QSR 1.43%), because the news continues there, and we're going to share some Market Foolery news at the end of this episode. We've got a little bit of an announcement. But let's start with fourth-quarter profits from Discovery Communications, which came in a little higher than expected. When you're looking at media companies, I think it's safe to say that the thesis for Discovery Communications, as much as anything, is this is a global play. If you live in the United States and you have cable, you're familiar with at least some of their networks -- Animal Planet, TLC, the Discovery Channel, that sort of thing. But when you look at the global footprint of where Discovery Communications operates, I think that's part of the thesis, isn't it?

Simon Erickson: Absolutely, it is. I think that's probably what investors are looking at for this company right now. Like you said, there's some definitely established channels here in the United States. We actually saw a slight decline in U.S. subscribers. So the real story here is that international growth. The one that really sticks out for me, Chris, it's actually in Europe of all places. Discovery Communications has Eurosport, which is kind of broadcasting live events. They have done Wimbledon. They've done Formula 1. They've done a variety of other events. Typically not soccer, because that's expensive, but other live sports in Europe. And they've got the exclusive rights for the Winter Olympics of 2018, to broadcast nearly 740 million people across in Europe. Great, right?

Hill: Yeah.

Erickson: But the other thing that's really interesting to me is, there's various ways that you can reach people. They're going to, of course, do the free network TV. They're going to do some other paid TV events like that. But the thing that's interesting to me is the over-the-top offering, the digital streaming that they're going to be doing in the next few years. They're using BAMtech technology to create this. We know BAMtech because Disney is also working with them for live sports here in the U.S. Discovery is using them in Europe. They have the guy from DirecTV. They built out the NFL Sunday Ticket, incredibly successful here in this country.

Hill: I was going to say... that's a nice thing to have on your resume.

Erickson: Yeah, the right guy on the right project. I think that more and more, you and I talk quite a bit about where the media industry is heading. It's not just that linear free TV anymore, but stuff you could watch at any time over computer and have it streamed directly to you for a certain price.

Hill: I want to go back to the first point you hit, which is declining subscriber ship in the U.S. Nice reminder that, for all of the headlines that Disney has gotten over the last 18 months about the following subscribership of ESPN, this is a nice reminder that it's not just ESPN. When people are cutting the cord, it's also affecting companies like Discovery Communications.

Erickson: Absolutely. The subscriber number is only one piece of this puzzle. As that continues to evolve over time, you can't just look at that and that's the only thing that you're following as an investor, there's a lot of other things going on, too. And let's not forget currency, too. A lot of this is revenue that's generated overseas. When you translate that back to a strong dollar in U.S. dollar, it doesn't look, sometimes, as strong as it really is out there.

Hill: Where is this stock in terms of its valuation? This is a good quarter, but I think the declining cable subscriber number might be a little bit of why we're seeing the stock fall 2.5% today. That's not a big drop, and this is a stock that was trading near a 52-week high. But it's really been in the 20s for a year now, and I'm just wondering if it's pricey, if that has anything to do with the drop today, or if it's really all just about the cable subscribers?

Erickson: Well, I mean, a $13 billion valuation for a media company -- that's a smaller media company than the juggernauts -- but obviously larger than a smaller regional one would be or anything like that. So, I still think it has room to run, Chris. I think a lot of that over-the-top and digital streaming stuff really isn't priced into the stock at this point, but we still need to continue to see them gain traction on that, especially with that Eurosport in Europe.

Hill: All right. Here's something we haven't talked about in... I don't even remember the last time we talked about bitcoin, but we're going to talk about bitcoin.

I feel like, if he's listening over in Germany, Matt Koppenheffer is smiling, if not outright laughing at me, because I've been bearish on bitcoin from the start, and over the past year, the price of bitcoin has quadrupled. It broke the $1,000 mark last week, and it's dipped back down. But you're someone, like Matt Koppenheffer, who's been pretty bullish on bitcoin. First, before we dig into the news with bitcoin, tell me why. Why the bull case for bitcoin? Because, to me, it just seems like Monopoly money, it seems like a made-up currency, and as I have admitted before, the fact that the Winklevoss twins were involved in this doesn't help the bull case, in my opinion.

Erickson: Right. This is kind of an ethereal discussion here, Chris. There's a lot of speculation in bitcoin right now. We don't have any stocks tied to this --

Hill: Not yet. We'll get to that.

Erickson: Yes, exactly. But it is a very interesting story. Just, generally, my personal thesis, disclaimer, I own one bitcoin, have had quite a year with that. [laughs] 

Hill: Congratulations, that's worked out well for you.

Erickson: But, I think there's just a lot of transactional friction in the way that we buy and sell things today. Think about it, we're build off of a financing infrastructure. You have a bank account that you have a credit card that ties into, you pay your statement at the end of the month, and every step along the way, somebody is taking a small piece of this. But it's the way that we built it out over the last several decades. And if you build a digital infrastructure correctly, as bitcoin did and Blockchain is trying to do, you don't need a lot of those steps. It's basically digital cash. I always think about it as, you're handing a digital dollar to somebody, and that's it. There's no statements. There's no financing. There's no APR at the end of the year, anything like that. But to do that, there's a lot of regulators who don't like that because you can do bad things with that. You can't track the person giving you the cash at the end of the day and various other things. That's had bitcoin held back on what its true potential, possibly, could be. But at the end of the day, you're starting to see more and more transactions using bitcoin all across the globe, not just in the United States, but in China and Japan and a bunch of different places. Because bitcoin is going to tap out at 21 million bitcoins, once they're mined, you have a fixed supply and increasing demand, and that's pushing the value of each one bitcoin up over the years.

Hill: We've seen this run up over the past 12 months, and you look at the fact that the SEC is considering three separate potential bitcoin ETFs. Considering approval of any one of the three. Let's say one of them gets approved -- what kind of run-up are we going to see then? Because if we're seeing this run-up now... this actually gets me, I don't want to say bullish on bitcoin, but it gets me slightly less bearish as an investor, because ETFs are a way that a lot of people invest if they're looking to get exposure to something without really having the concentrated upside and, therefore, downside of a single stock. I'm not looking to buy a bitcoin, but I'm slightly more interested in a bitcoin ETF. What happens if they actually approve one of these things?

Erickson: Sure. On the continuum of uncertainty, it goes down a notch. If the SEC is going to say, "This is alright, to create bitcoin ETFs," and they have until March 11th, I believe, to approve of this, but the people who said, "No way, this is too early, I have so many questions about this even being possible," those people will start saying, "You know, this still sounds speculative to me, but I think it's interesting now that the SEC is behind it." Basically, anything new, almost all of innovation has got a zillion questions when it first gets introduced that, over time, as it grows and gets more and more approvals or people behind it, the questions tend to either linger or go away. And I think that's what you're seeing with bitcoin. That's what the SEC decision is going to have an impact on this.

Hill: Yesterday, we talked about the latest earnings from Restaurant Brands, which is the parent company of Burger King and Tim Hortons. After we taped the episode, Restaurant Brands was back in the news reportedly talking to Popeyes Louisiana Kitchen about a potential acquisition, and as a result of those reports, shares of Popeyes are up 14% at one point yesterday. They have since come back down to earth, so they are basically flat day to day. This is interesting to me, though. We were talking about this earlier this morning -- it seems like, in the restaurant business, anyway, that if you're good at managing one type of restaurant, keeping in the category of quick-serve restaurants, if you're good at that, then that's a skill that translates to others.

So, without knowing what they were looking to buy Popeyes for, just on the surface of it, assuming they got the right price, I saw that news and I thought, "You know what? That could work out well for Restaurant Brands." Ultimately, they walked away because they didn't want to pay the price, because Popeyes is a stock that has done well recently, and as a result of that, the company is more expensive. I guess, the larger question for me is, when you think about acquisitions, when you just see, "Company X is thinking about acquiring Company Y," what goes through your mind? Do you have any gut feeling in terms of "That makes sense" or "I need to see the terms first?" What's the first thing that you think of?

Erickson: Sure. First of all, to step back, there's definitely different types of acquisitions going on. The most speculative, if you will, of acquisitions is technology acquisitions, especially software acquisitions, because things change so quickly. There's a lot of unknowns of what's going to happen five years from now. It's very difficult to tell. And maybe HP is the poster child of making bad acquisitions, very large, $10 billion acquisitions that they write down significantly in a couple of years.

Hill: [laughs] If they're not the poster child, they're on Mount Rushmore.

Erickson: [laughs] So many uncertainties for that. But then you have more predictable businesses like we're talking about in the restaurant industry. Restaurants are not software companies, they're much more predictable as far as the traffic and how the business looks. At that point, the acquisition is much more predictable for the acquirer, and if they're larger and can scale the business, and be more efficient than they were previously, then you can drop a lot more money to the bottom line to your shareholders and your investors. And I think that's what Restaurant Brands, who was actually majority-owned by 3G Capital in Brazil, is after in this. They want the predictable, steady cash flows of a restaurant, but they want to be a little bit more creative, I think, on how they're raising financing and taking what I would call non-strategic costs out of this business to drop more down to the bottom line.

Hill: I don't think this is over, in terms of their pursuit of Popeyes. I think, at the right price, and today is clearly not the right price because, again, this is a stock that has done very well over the last few years, I think if there was some sort of short-term hit the stock took, I could see Restaurant Brands going back to them. In the meantime, they clearly seem like they are looking for, Warren Buffett talks about the elephant gun, I don't know if they have an elephant gun, because they don't have that amount of cash on hand that Berkshire Hathaway does. But they clearly seem like they are looking to expand their portfolio.

Erickson: I'm glad you mentioned Warren Buffett, because Berkshire Hathaway is kind of partners with 3G Capital. They go after and make big deals like these together, which is kind of interesting because I think 3G is clearly a leader in the food space and the restaurant space, and that's directing a lot of Warren Buffett's, the greatest investor we have in the United States, capital. And they're looking to build an empire here, and they got creative in doing deals in the past. If you look at the acquisition of Tim Hortons, people were calling that a tax inversion deal, you're avoiding a lot of U.S.-based taxes by acquiring and moving the company to Canada. The Popeyes one is going to be interesting because that's based here in the U.S. That's not something you have to worry about, the inversions. But, there's a reason that they're looking at it for doing this. They have a price and their mind. You see them walking away now as Popeyes stock price has increased significantly over the last four or five months or so. But, it'll be interesting to see what they're going after on this one. It's not as obvious to me, but they see something they like.

Hill: Well, I think it's probably just the category. Yes, it's a quick-serve restaurant, but it's not burgers, it's not coffee and donuts. Quick-serve chicken makes up somewhere in the neighborhood of 10-15% of quick-serve restaurants. And, as we were talking about with our man behind the glass, Dan Boyd, beforehand, yes, you can have KFC. If Jason Moser were here, I'm sure he would be talking about Bojangles. Give me Popeyes every day. Their biscuits. And the honey, oh!

Erickson: Their biscuits are great. So good.

Hill: As Chris Rock said, it's too good. It's too good! That was his comment to Jerry Seinfeld on Seinfeld's web series, that Popeyes is so good that you actually need one of those memory sticks from the Men in Black movies to erase your memory, because otherwise you would just go back every single day.

Erickson: Right. Now, do they do significantly more business today because it's Valentine's Day?

Hill: [laughs] I don't know. I don't know if they're doing any sort of big promotion. Look, you could do a lot worse for that special someone in your life than take them to Popeyes. Dan, you're a Popeyes fan, aren't you?

Dan Boyd: I am, yes.

Hill: Any chance you're going to be thinking Valentine's Day or anything like that?

Boyd: If my girlfriend was amenable to the idea, which, I'm sure she's not, I would love to go to Popeyes for Valentine's Day.

Hill: Let's flip this around. If she came to you and said, "Hey, here's what I'm thinking for Valentine's Day. I'm taking you to Popeyes," you're even more in love?

Boyd: We'd make a short stop on the way to Popeyes to a jewelry store so I could buy her an engagement ring.

Hill: [laughs] All right. Before we wrap up, as I mentioned, a little something, apropos that Simon is in the studio for this, because I'm happy to say that next month, we are going back to South by Southwest. If you're in the Greater Austin Texas area or you're going to South by Southwest, drop us an email, [email protected], or hit us up on Twitter, because Simon, Dylan Lewis, who you may know from the Industry Focus podcast, Dan Boyd and I will be going. We're going to be recording from the brand new podcast center that they have at South by Southwest. Excited to check that out. Simon, I know that you have only begun to look at -- I mean, we're going to be doing a whole week's worth of Market Foolery there, but there are also breakout sessions, there are keynote speakers that you're going to be checking out. Do you have an early sense of what's going to be on your agenda?

Erickson: Absolutely, Chris. This is one of my favorite events in the entire year. It has such a window to what the future is going to bring in, especially in the tech world. Kimbal Musk will be speaking about trust. I saw that on the agenda. I saw Ray Kurzweil, going to be talking about collaboration. And two topics that I'm very personally interested in is connected health and the future of wearable technology. Those are both going to be tracks at South by Southwest in Austin. I'm super stoked about the event.

Hill: And I should say, just as we did last year, we're going to try and put together a little meet and greet. Stay tuned for more details on that, but we did that last year, we went to Guero's.

Erickson: Guero's Taco Bar.

Hill: A bunch of listeners came out, a bunch of Motley Fool members. It was a great time, and we're looking to do that again. In terms of dates, we're looking broadly at March 11th through the 15th. Again, if you're going to South by Southwest, if you're in the Austin area, we would love to see you. More details to come. Dan Boyd, are there food trucks on your agenda that you're looking to hit?

Boyd: Absolutely, Keith's Barbecue is the main one. They operate out of an old school bus, and I think I ate there every single day last year in Austin, because it was amazing.

Hill: All right! Simon Erickson, thanks for being here!

Erickson: Thanks, Chris!

Hill: As always, people on the program may have interests in the stocks that 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 was mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow!