Big Deals, Big Earnings, and Big Wins

In this Market Foolery podcast, host Mac Greer is joined by Motley Fool analysts Andy Cross and Matt Argersinger to discuss the top financial and business stories of the day. High on the list: Walmart (WMT 1.10%) finally closed the deal to buy a majority stake in India's top e-commerce company Flipkart. But closer to home, Disney (DIS -1.43%) turned in a great quarter, as did Electronic Arts (EA -0.66%). And shares of troubled TripAdvisor (TRIP 0.63%) took a giant leap upward on an earnings beat. The Fools dig into the details.

A full transcript follows the video.

This video was recorded on May 9, 2018.

Mac Greer: It's Wednesday, May 9th. Welcome to Market Foolery! I'm Mac Greer, and joining me in studio, we have Motley Fool analysts Andy Cross and Matt Argersinger. Guys, welcome!

Matt Argersinger: Thanks, Mac!

Andy Cross: Thanks, Mac!

Greer: How you feeling?

Cross: Good!

Argersinger: Pretty good!

Greer: Good. We're going to talk some TripAdvisor, some Electronic Arts, and some Walmart/ Flipkart, the deal finally getting done. We've been talking about these rumors for a while.

Cross: Yeah. It's Walmart+Flipkart.

Greer: Yeah, Walmart+Flipkart. No slashing. Sorry. Walmart+Flipkart. Well, guys, let's begin with Disney, which reported better than expected earnings after the market closed on Tuesday. Now, Matt, I look at these numbers -- Studio revenue up 21% thanks to Black Panther. Disney's biggest division, its Media Networks, beat expectations. Its second-biggest division, which is its Parks and Resorts, beat expectations. So, I quote the stock this morning because I'm excited, because I'm a Disney shareholder, and the stock is down! What gives?

Argersinger: [groans] Mac, everyone loves Disney except for investors, apparently. I'm also a shareholder. I think what's happening right now is that investors are just so focused on the ESPN, the cable issues, cord cutting, and this 21st Century Fox deal, which kind of got a [...] bid from Comcast over the last few days, which has thrown a wrench in things there. It's easy right now for investors, I think, to ignore all the really good things that are happening. As you mentioned, I think the Networks business, which has beared the brunt of challenges, is actually outperforming. Actually, revenue was up 3% year over year, even though profits were down a bit. 

But, the Studio business, up 21%. We know Black Panther was a massive hit. The one thing that people have said about the Studio business, for Disney or many other companies, is that it's a hit-driven business. You'll have a blockbuster one quarter, and you might have a total bomb the next quarter. But, I think Disney is kind of in its own league. I think Disney has the ability to put out a great blockbuster movie, a billion-dollar movie, every quarter, if you think about it. Just use this year as an example. We have Black Panther last quarter. We have Avengers Infinity War, which has already crossed $1 billion, and worldwide is going to make multi-billion dollars at the box office. And then, later this summer, you have Incredibles 2 and the Solo movie for Star Wars. I mean, there's just so much from that library, and I just think investors right now are so focused on the challenges with the cable business and Fox acquisition that they're ignoring the other parts of the business like the Studio and the Parks.

Cross: I think that's an interesting point, Matt, the Studio business becoming more consistent. The Media Networks has always been that consistent cash business. When you're basically flat-lined on sales and down on your income because you're investing in things like their BAMTech business, continuing to invest into basically helping to support that business. But the eyeballs and the impressions are just continuing to melt away. Investors look at that and say, "If you can't fix that in that cash part of the business, that's going to be long-term trouble for Disney on that side," even though the Studio business and the Parks and Recreation business, which go hand-in-hand, are so strong right now.

Greer: Andy, you say that, but when I look at the Avengers numbers right now, which are just astronomical -- it's about to pass Black Panther already, it hasn't even opened in China. And we're just talking about the movie. We're not talking about licensing yet, we're not talking about all of the implications for theme parks. So, The Avengers and the Studio business, that's not enough, as an investor?

Cross: It might be. But here's a business that spends $4 billion in capital expenditures, and they spend twice as much of that in stock buybacks every year. The stock sells at 15X earnings. So, this is really much more of a consistent, value-orientation stock, rather than the big growth story that we've seen from the Amazons (AMZN -2.46%) and the Baidus and those wonderful businesses that we follow. So, I think investors are just trying to figure out, you want all three of these businesses to be very consistent. The Studio business is having these really nice, huge wins. But, the Media business, which is the largest business, has to figure out a way to stem those losses on there.

Argersinger: I'm glad, Andy, you mentioned the buybacks. In the last 12 months alone, Disney has bought back $9 billion in stock. You go back five years, they've actually bought back 15% of the total outstanding shares. I know the stock hasn't done much lately, but over that five-year period, the stock is up 50%. So, that's been a great, great investment for shareholders. 

But I have to say, I actually think this new Comcast bid for 21st Century Fox, if that eventually gets approved and they outbid Disney, that actually might work out for Disney. I think this deal is going after some legacy assets, some legacy entertainment properties. I think what Disney should do is scrap the deal, go get Hulu. I think Hulu, long-term, is the prize in this acquisition. They already have a minority stake. The Fox deal would give them a majority stake. But, I feel like that's the potential over-the-top direct-to-consumer platform that Disney's been lacking. And I don't know why they're not seeing that -- at least, it doesn't seem like Bob Iger sees that. He sees, "Well, we have the ESPN app, next year we're going to have the Disney app." But I feel like Hulu could be that place. It's already very popular as a competitor to Netflix and Amazon. Why not make that your destination for all future Disney content? So, I would do that, and I would buy back a heck of a lot more stock, and I think investors should do fine.

Cross: I think that's a great point, Matt, too, with Hulu. They're continuing to invest in that business, and it's requiring lots of investment. It's funny, what kind of Disney is going to be the future of Disney for shareholders and for all the wonderful properties and for all the consumers who love Disney? Because they're kind of stuck in this, we have these areas that are really exciting, and then we have these areas that are kind of struggling, we have this potential to invest in things like 20th Century Fox or things like Hulu and BAMTech. Which kind of company are we trying to be? And, what's going to be the one that's going to drive long-term value? And Matt, I think that investment idea into things like Hulu and BAMTech, which is really interesting, but it's definitely going to take lots of investments in over-the-top properties. And I think investors are like, "What kind of company is Disney going to be over the next five years?"

Greer: Let's talk about that. We mentioned Hulu, and we know that Disney is making a big push into streaming. They're going to be unveiling their own streaming service. This is a question we've kicked around from time to time. But, if Disney's streaming service is a smash success, better than anyone could have imagined, do you think that comes at the expense of Netflix? Or, is there room for both?

Argersinger: I think there's absolutely room for both. I've said it before, I think on this show, I feel like there's a future where you've got your Amazon Prime, your Netflix, and then YouTube is probably a big platform as well. But, I think Disney is probably in that top band. But, again, I think the easier road --

Greer: Get Hulu.

Argersinger: -- is to go through Hulu. As a consumer, and maybe I'm not typical, but, I don't like all these apps. I kind of like things all in one place. Now, there's a CBS app, there's other apps that I can subscribe to, as well. I just feel like it has to be simplified. It has to be a platform that has a lot of things on it. And right now, Hulu is becoming that.

Cross: There are few brands that can pull that off the way Disney can. I think Matt's right. I think the Disney streaming property can fit completely with Netflix. Not everyone can claim that. Disney can.

Greer: OK. Guys, shares of TripAdvisor having a huge day, up more than 20% at the time of our taping on earnings. Andy, the number that jumped out at me here, non-hotel revenue -- not hotel revenue -- non-hotel revenue, growing 36%. That includes TripAdvisor's Experiences and Restaurants categories.

Cross: As our friend Dan Caplinger said on fool.com today, TripAdvisor's first quarter results exceeded all expectations. Well, fellas, the expectations were not very high. I mean, sales were up 2%.

Greer: A low bar.

Cross: A very low bar versus a negative number that analysts were expecting. Net income was much higher, on the earnings per share side, than what analysts were expecting. I think TripAdvisor has really struggled over the last couple years, ever since they tried the instant booking move to drive revenue directly from the booking operations versus using advertising for some of their big clients like Booking.com, formerly Priceline, and Expedia. That was a disaster. So, they pivoted, and now they're back. The big excitement that they continue to talk about, Stephen Kaufer, the CEO and co-founder, continues to talk about, is this non-hotel business, Mac, which is booking things like tours and restaurants --

Greer: Swimming with dolphins.

Cross: [laughs] Do you swim with dolphins, Mac?

Greer: Not typically. Not on a regular basis, no. [laughs] 

Cross: Please put that on air at some point. So, it's not profitable. It was not as loss-making this quarter as it was last quarter, and that was really the big difference on the margin, so, I think investors are seeing that. But, also, they guided for the rest of the year, maybe about flat on the hotel side.

I'm still not a huge believer. It's frustrating, because TripAdvisor, they have more than 400 million active users every month going there to look and get reviews. They posted, I think, more than 600 million reviews in total. There's a lot of assets there. We parted ways with the stock in Stock Advisor after a few years of under-performance just because of the competitive pressures they're facing from the likes of Expedia and Booking.com. But, this non-hotel business seems to be the direction they're really pushing.

Greer: Yeah. It's always struck me -- I love, love, love the service, and I was a stockholder, but when I finally decided to sell the stock, I just realized, you know what? I'm not going to be booking my travel on TripAdvisor. I'm going to use it for the reviews, and then I'm either going to Expedia, or I'm going to the hotel site directly, or going to the airlines. And because that direct booking, I couldn't quite see that working out, I'm like, I'm going to get out of this stock.

Cross: And we've seen this when stocks underperform like this and they lose a lot of excitement from investors, when they have a quarter that says, "Hey, things aren't nearly as bad as they were," and there's a little bit, like I said, on the margin, the profitability is a little bit better, and their guidance is not as bad, the stock reacts like this. And we see today, the stock's up more than 20%.

Greer: Another stock having a good day, Electronic Arts shares up on Wednesday on stronger than expected earnings. EA also announcing a $2.4 billion stock buyback. EA is known for video games like FIFA and Battlefield. Matt, there's a little game called Fortnite right now which is the hottest game in the world. That is not an EA game. And yet, EA says Fortnite was good for business.

Argersinger: Yeah, well, we'll see about that.

Greer: [laughs] 

Argersinger: I think that's a safe thing to say right now for Electronic Arts, but there are certainly a lot of eyeballs and gamers going to Fortnite right now. It's a Tencent property -- well, it's owned by a few other publishers. We'll have to see if that affects EA's sales in the medium-term down the road. 

But, it was certainly a great quarter for Electronic Arts. It's been a great bunch of years for Electronic Arts and video game stocks, the industry in general. They topped revenue and profit estimates. What I always look at is the digital net bookings. They were up 17% year over year to about $3.5 billion. Now, digital revenue, digital sales are about 70% of Electronic Arts' total revenue. That's a far cry from where they were just five years ago. And that's been huge for EA's margins. If you look over the last ten years, Electronic Arts' margins and the margins for the whole video game industry have just trended higher because digital sales are so much more profitable than physical game sales. 

Then of course, we know esports is becoming a big trend. I thought this was interesting. Last quarter, 18 million players engaged in competitive gaming across FIFA 18 and Madden NFL 18. That's a huge number, up 75% year over year. So, the excitement around competitive gaming just plays right into Electronic Arts. They've been known for having their sports brands over the years, and that's really paying off.

Cross: Are they saying, the Fortnite connection is just because it's bringing more players online, into the world?

Greer: Yes. They're saying it's growing the appetite, especially with younger people, they're playing more games. And, you know, I heard that back in the day when Starbucks really caught on, and there were independent coffee shops saying, "Actually, Starbucks is good for our business, because they're creating this whole new coffee-drinking culture." Now, I mean, I don't know what else you're supposed to say. Like, "Hey, we're dying out here."

Cross: Yeah, I think that's true. And I think, even in the esports space, Matt, the Maddens and the FIFAs aren't even really the big drivers. It's the Fortnites.

Argersinger: That's right. The multiplayer arena-based combat games are the ones that are really attracting a lot of attention. And to what extent that feeds off into sports-related gaming, I don't know. They seem like different players to me.

Greer: Fortnite is brilliant in that they're free-to-fee. I've learned this from my two sons. My one son is like, "It's not even a good game!" I'm like, "Well, it was free, though." And that was smart. Give it away, right, and then find ways -- to your point, Matt -- to charge people. Those in-app purchases, that's filthy. Those almost should be against the law. I know I'm sounding like an old man at this point.

Cross: You are.

Greer: What a racket.

Argersinger: It's funny. EA, Activision, a lot of these companies, really, they brushed that off. That free-to-play, freemium model, let's call it, was kind of a mobile gaming concept for many years. And they ignored it. They said, "We're never going to make money doing that. We're happy selling our $50-60 games and trying to sell a lot of those copies every quarter, every year." But the model has definitely changed. They're embracing that model.

Cross: It's a really interesting market, Mac. I was listening today to a Goldman Sachs podcast, and they said that only 20% of active real gamers have gone to an e-arena, a sports arena, to actually watch this, but there are actually companies that are building specific stadiums for esports. 

Greer: It's amazing.

Cross: And there's millions and millions of people across the world, really heavily into the Asian market as well as here in the U.S., that are really embracing this gaming. It's a fantastic growth opportunity for investors in there.

Greer: Yeah. And we talked earlier about Disney and the licensing with Marvel. I just learned that Fortnite now has a deal where Thanos, who's the villain in Avengers, is going to be integrated into Fortnite. 

Cross: Yeah, I saw that!

Greer: That's brilliant. Just when you thought, "OK, it's about to go away," it gets a new life. Guys, let's close out with a story we've been talking about for a while. It was more in the rumor, reportedly stage, and now it's official: Walmart has agreed to buy a majority stake in India's Flipkart for $16 billion. Flipkart is India's biggest online retailer. Andy, what do you make of the deal?

Cross: As we talked about, the rumors were out there this week and it became official today. They're buying 77% of Flipkart for $16 billion, which values Flipkart at about $21 billion. Walmart's down, the stock is actually down today because it will hit their earnings per share, shave $0.25 or $0.30 off earnings per share for Walmart this year and for next year. But clearly, Mac, as we talked about earlier, this is a growth story for Walmart. India is a huge market. The e-commerce market there is growing 30%. Plus, Flipkart is the biggest player, followed very closely by Amazon, hot on their heels.

Greer: I've heard of them.

Cross: Flipkart sales were a little shy of $5 billion, up 50% over the past year. That compares to almost $12 billion for Walmart e-commerce sales. Flipkart is going to be the back of Walmart's e-commerce business. Their Jet.com acquisition for a little more than $3 billion two or three years ago was a success, I think, and clearly, the CEO is driving into this area, recognizing the opportunity in India, but also where e-commerce going to go to. Obviously, it's gigantic. But, that's the future for Walmart. And, willing to fork over the capital. It's a lot of money. They have $6 billion of cash on the balance sheet, Matt. They're spending $16 billion on this. The co-founders and a few other partners will continue to own the remaining stake of Flipkart to have some skin in that game, too. But, clearly, it's a big investment for Walmart.

Argersinger: As an Amazon shareholder and holder, as a lot of our listeners know, I actually think this is a win for Amazon. The headlines aren't saying that right now, they're saying Amazon, Jeff Bezos, they missed out on this opportunity. But, having followed Amazon so closely, I really wonder how much they were into this --

Cross: Totally.

Argersinger: I really feel like this was forcing Walmart to pay a big premium. And, I think Amazon knew that, like them being shut out of China, or at least having given up their business in China, Walmart was desperate to make a big deal. And India is the big emerging market prize. So, I feel like they forced Walmart to pay a big premium. 

Amazon, from a standing start less than five years ago, has already grabbed about 30% market share. Now, that's behind Flipkart, but they are leading in certain categories, depending on the research report you believe. But, apparently, Amazon is leading in categories like grocery and household items, which I think are stickier, they're more recurring, in a lot of households. 

I feel like, I just hearken back to what Bezos wrote, some of the things he wrote in his shareholder letter, which is: amazon.in, which is their Indian site, is the fastest-growing marketplace in India, the most visited site on both desktop and mobile -- I think that was kind of a shot across the bow at Flipkart. Amazon's mobile shipping app in the country was the most downloaded shopping app in India in 2017. And, Prime added more members in India in its first year than any previous geography in Amazon's history. 

So, he's just throwing out those things, which makes me think, they gun for this country, they're making big progress. They forced a big competitor of theirs to pay a big premium for what I think ultimately could be the second-largest e-commerce company in India.

Cross: There's definitely a lot of game theory in this by Jeff Bezos.

Argersinger: Sure. [laughs] 

Cross: I think you're right, Matt, I think they played this very well. I mean, it might have been nice, but they have an e-commerce platform, it's Amazon.com and amazon.in.

Greer: Which is pretty good.

Cross: Which is pretty good! Flipkart, I think, needed a partner like Walmart to help build out, continue to build out, their distribution network, and tie in on the e-commerce side. I think for them, it was, Walmart needs a splash like this. Jet.com was nice but it's not going to propel Walmart into where they need to be, especially when you're competing globally against the likes of Amazon.com.

Greer: So, compared to where you were yesterday on Walmart's stock, does this deal make the stock more attractive, less attractive, or it doesn't really matter?

Cross: To me, personally, I'm not buying Walmart and I'm not necessarily advocating for it. I think it's a good deal for them, because they need to have a bigger presence online. Even Walmart and their offline retail presence, as large as it is, that area is going to continue to get pressured over the next ten years.

Argersinger: Yeah. I'd say, as we tape, Walmart's down a few percent. Amazon's up a little bit. I think the market's made its assessment of the deal.

Greer: OK, guys, I want to close with my favorite completely arbitrary, ridiculous desert island question. We've talked about a few stocks. I want to say, over the next five years, if you're on a desert island and you can only hold one of these stocks, what are you going with? We have Disney, we have TripAdvisor, we have Electronic Arts, or Walmart, which includes Flipkart.

Cross: What happened to Amazon?

Argersinger: That's too easy.

Cross: I had my answer all set!

Argersinger: I know, that's what I'm saying. I knew he was going to keep that out.

Greer: That's like me mentioning Costco, which I have not done on this show.

Cross: Go again, Disney ... ? Sorry, I had Amazon.

Greer: OK, focus. Disney, TripAdvisor, Electronic Arts, Walmart. Over the next five years, what are you going with?

Cross: Electronic Arts.

Greer: Interesting!

Argersinger: Ooh, that's good. I'm waffling. I was going to either say Electronic Arts or Disney, but I'll go with Disney since Andy went with Electronic Arts.

Greer: OK. The Mouse. Don't count the Mouse out. 

Argersinger: Yeah.

Greer: OK. Andy, Matt, thanks for joining me!

Cross: Thanks, Mac!

Argersinger: Thanks, Mac!

Greer: As always, people on the show may have interests 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 it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! We'll see you tomorrow!