Fox Seeks Growth in Europe, Tesla Hunts for It in China

Several U.S. giants are hard at work on their next acts overseas, though one of the world's biggest is bracing for a minor EU setback.

Mac Greer
Mac Greer
Jul 17, 2018 at 1:19PM

In this MarketFoolery podcast, host Mac Greer is joined by analyst Aaron Bush to dig into a trio news items. First, Twenty-First Century Fox (NASDAQ:FOXA) (NASDAQ:FOX) has come back with a new bid to buy the 61% of Sky that it doesn't already own, hoping to keep it out of the hands of Comcast (NASDAQ:CMCSA)

Next, Elon Musk says Tesla (NASDAQ:TSLA) will sidestep China's heavy tariffs on imported cars by building a large factory there to manufacture electric vehicles for that market.

Finally, a heavy EU fine is coming down the pike for Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) for its abuse of the power of its dominant Android operating system. But the specific anticompetitive penalty may be less important to tech investors than the policy direction it reflects in European regulation.

A full transcript follows the video.

This video was recorded on July 11, 2018.

Mac Greer: It's Wednesday, July 11th. Welcome to Market Foolery! I'm Mac Greer. Joining me in studio is the one and only, Motley Fool analyst, Aaron Bush. Aaron, it's just you and me. How are you feeling right now?

Aaron Bush: I'm feeling special.

Greer: Are you feeling special?

Bush: I'm really glad to be here. Thanks for having me!

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Greer: That's good. It's great to have you here. So, if you would have to sum it up in one word would that be special or anxiety, you don't quite know what to expect. How would you characterize it?

Bush: I'm always excited to be here.

Greer: Well, I'm excited because we have a lot of exciting stories here. A little later in the show, we're going to talk about Elon Musk and Tesla going to China. Some big news there. And then, Google seems to get in a lot of trouble in the E.U., when it comes to Europe. We're going to talk about the latest kerfuffle there, and what it may or may not mean for investors. 

But I want to begin with the latest wheeling and dealing in the world of media and entertainment. 21st Century Fox hasagreed to by Britain's Sky TV in a deal valuing Sky at around $32.5 billion. Sky is paid television, for those who don't follow the company. That offer trumps a rival offer from Comcast. This all happens, Aaron, against this backdrop of Disney and Comcast battling it out over most of Fox's assets, as well. We have a lot of wheeling and dealing in media and entertainment. What do you think?

Bush: It's an absolute frenzy, that's for sure. Fox already owns 39% of Sky, so they're acquiring to bid the remaining 61% that they don't own right now. I think what's amazing out of all of this is, the bidding for Sky, for this particular deal, started back in 2016, and it keeps on being a back-and-forth between Fox and Comcast and regulators. Now, if you look at Sky today, it's trading at an 80% premium to when the bidding first started, which is crazy. What that tells me is that these big players trying to consolidate the space, they're kind of desperate to, a little bit.

Greer: We were talking about this before the taping, does this desperation come from Netflix (NASDAQ:NFLX)? Netflix has had such an incredible run. Is this all in response to this fear of what Netflix is and could become?

Bush: I definitely think that's a piece of it. Essentially, this is a battle for who will own the content and distribution that will define the next decade. I think what Netflix proved is that scale is especially important. All of these large companies, even though they're large on their own, and they do other things besides just content and distribution, but they're realizing that to stay at peak relevance, to be meaningful to everyone, to own the customer relationship, have people pay lots of attention to them, they have to pay up a whole lot more than they would have expected even two years ago. But they're doing it, which is crazy, in my opinion.

Greer: Against that backdrop, who do you see as the biggest winners and the biggest losers with all this wheeling and dealing?

Bush: The biggest winners are whoever is getting acquired. Sky, for example, is an obvious winner. Right now, Sky's market cap is trading above what Fox is offering, which tells me that they're expecting Comcast to come back again. Really, these companies that are deemed to have valuable assets, those are the winners, at least for the short-term. 

In my opinion -- this might be controversial -- the losers are whoever is buying them. The reason is because they're not prioritizing price, and they're just trying to stay relevant. Relevancy is important, but if you keep on raising the price, then you're raising the barrier for making these assets actually be worthwhile to you. It becomes harder and harder to justify price. 

As all these companies keep on taking on debt, they keep on trying to force their balance sheets to make this work, looking for synergies and all that good stuff, it'll become harder and harder. I really view this as, whoever is getting acquired today is stealing the returns from the investors in these larger companies in the future.

Greer: That reminds me, on our recent trip to Philadelphia, we were part of a leadership development group here. We met with Jack Bogle, founder of Vanguard. He had this great quote. He said, "Trees don't grow to the sky."

Bush: They don't.

Greer: But it seems like Netflix has been growing to the sky.

Bush: Maybe Netflix is not a tree. Maybe it's a skyscraper or something, and everyone else is the tree. No, Netflix is playing a different game. I think this is especially important to understand. All of these companies, the Foxes and Disneys, they saw what Netflix achieved. All of these moves are their way of trying to match Netflix in some way. 

I think that's important. The future is definitely digital delivery of huge bundles of content, owning the customer relationship, scale is important. But what I think they're doing is trying to raise who Netflix is today, when Netflix is playing at a whole nother level, and is trying to become what Netflix will be tomorrow, which is something completely different.

Greer: Let's wrap this up. Let me give you some names here and see if any of these names jump out at you. When you define this space broadly, when we're talking about media and entertainment, we're talking Netflix, of course, we're talking Disney, Netflix, Comcast, Amazon (NASDAQ:AMZN), Alphabet, Apple, we could go on -- any of those names jump out at you?

Bush: I think that Alphabet, Amazon and Netflix are still the most interesting. Alphabet owns YouTube. They're playing a completely different type of entertainment game. Amazon, kind of similar to Alphabet in the sense that they have Twitch. I think, if you look at people saying the best tech acquisitions of all time have been Instagram and YouTube, maybe, Twitch is the next one. I think Twitch is probably going to be worth $100 billion at some point for Amazon. Amazon will have that. They'll also have Prime, which is similar to Netflix. 

I do think Netflix and Amazon will have a pretty striking future that a lot of people don't expect. I think Amazon recognizes that the future of them -- right now, they have 125 million subscribers. One day, that'll be 400 or 500 million. What can you do when you have half a billion subscribers? You can do a whole lot more. [laughs] 

There will be diminishing returns to the spending that they have on normal content. Big sports rights will be up in the next decade. They're probably going to be able to pay up for that more than other players. The future of video games is streaming. And cloud infrastructure, who does that better than Netflix? I think Netflix, there's hidden optionality there. For these newer, internet-native entertainment companies, they have hidden optionality that these massive, old-school behemoths aren't picking up on yet.

Greer: Let's move on and talk some Tesla. Tesla is opening its first factory outside of the United States. On Tuesday, CEO Elon Musk reached an agreement with the Shanghai government to open a factory in China -- a factory with the capacity to build 500,000 cars a year. Aaron, what does it mean for Tesla?

Bush: China is a really important market for Tesla. It's their second largest market outside of the U.S. Last year, they sold 17,000 cars there. Given the sheer population size of China, and their efforts through regulation to make electric vehicles more prominent, I think China presents huge upside for Tesla if they can get it right. I'm excited to see them coming in here. 

The second piece of it is more political. Last Friday, auto import tariffs to China were raised to 40%. If you're trying to sell a U.S. car in China, it's a 40% tariff. Tesla has already had to raise prices 20%, but prices for cars aren't that inelastic. A way to get around the terrible pricing and what they have to give up to the government, they're just going to go straight to China and build there. 

What's interesting about this to me is that most companies, manufacturers, entertainment companies, whoever, they go in with joint ventures, they partner with Chinese companies that can help them navigate the political waters and build more specifically for that region. Tesla is going it alone. There's some risk in that. They do have, Tencent owns 5% of Tesla. But, if all goes well, they will own 100% of the revenue that comes from China, which could be a big deal.

Greer: Aaron, I don't know if there's a company that elicits stronger opinions -- bull, bear -- than Tesla. I'm curious, when you look at Tesla writ large, what's your biggest question going forward?

Bush: I think the largest question around them is, will they be able to raise capital in an investor-friendly way? For example, raising these new manufacturing facilities is going to take a ton of money. It's probably only going to be three or four years from now that they actually start producing in a meaningful way. But it'll cost a billion dollars to get there. 

There's more going on than just this one factory. Tesla already has a lot of debt. All of these opportunities are fascinating. No one doing a better job pursuing them than Tesla. But, the accounting, the balance sheet issues, I think that could pose real issues. I don't really know. I could see it going either way. I wish I had a stronger opinion. But, that's definitely what has me a little paranoid right now.

Greer: Let's move over to Europe and talk about the E.U. The E.U.'s antitrust division is reportedly preparing another multibillion dollar fine against Alphabet, Google's parent company. Aaron, this fine reportedly is for Google illegally abusing the dominance of its Android operating system. When I looked at shares of Alphabet today, they were up slightly.

So, once again, investors seem to shrug it off. I'm a shareholder in Alphabet, you're a shareholder in Alphabet. Is this just more background noise, or should we be worried?

Bush: I think, for now, it might be background noise for Alphabet. It's a "Congratulations, you're a monopoly, here's a slap on the wrist, the best we can do to keep you from becoming even more of a monopoly." But it still doesn't change the fact that their platform is super dominant. The fine, even though it's in the billions, it's not a huge deal for them. It does hurt them. But what's actually interesting to me about this move, not only this move but the fact that it's one in a series of moves, not only against Alphabet but all companies at large, I think it says bigger things about the state of technology and Europe and the future, what that could hold for the future there.

Greer: What is the bigger thing? Are you getting at the whole idea of innovation -- if you have a company you're looking to start, then you're going to go somewhere other than the E.U.?

Bush: I guess one part is that these regulations do hurt large companies, but they hurt smaller companies even more. That's tech companies, that's non-tech companies. Also, it's harder to be a tech company in Europe. Moves like this are one piece of evidence. GDPR is another piece of evidence. It might ultimately be good for people, E.U. citizens, but the cost associated with it is huge for large companies, and borderline terrible for smaller companies. 

Further privacy regulations, data portability measures, copyright directives, there keeps on being more and more of these things that are designed to help customers, but they have unintended consequences. I saw a study maybe a week or two ago that was saying, where are the future unicorns going to come from? Naturally, there were a lot of them that people predicted were going to come from the U.S. 

Greer: Define a unicorn, for someone who doesn't know that term.

Bush: A start-up that becomes $1 billion.

Greer: Not a horse with a horn on his head.

Bush: No. A start-up that reaches huge scale. It's essentially saying that lots of them are going to come from the U.S. A lot more than people think will come from China. Maybe some will come from India. But people were predicting one or zero coming from Europe. That's because of regulations like this. 

When I look at Europe, I'm not that optimistic about the future of technology companies there. I think the government can change things, but I don't know if they will. Seeing this unfold with Alphabet, this isn't a big deal for them, but it points to what could be a very big deal for everyone else in the future.

Greer: As we wrap up this story, you were talking about unicorns, how about one private company that you're excited about, or at least that's on your radar right now?

Bush: Sure. I run our crypto service here, so I'm looking at all sorts of weird things that are coming up. To point to one company that had me excited over the past year is a company called Blockstack. They raised venture money. Essentially, what they're trying to do is become a decentralized App Store. If you look at Apple, for example, they take a cut of every transaction. What if you could have an App Store that isn't run by a company, where the governance over time gets distributed to a larger community? The community lets you keep 100% of the revenue, and it facilitates decentralized applications that help rewire the way the internet works. 

Who gets to own the data -- companies or the individual? What does that mean? There are a lot of really interesting implications to the way that the internet is transforming for the future, and where value can be accrued. This is a company that will probably launch a token soon and become public in that sense. I think investors should be looking at more of these types of companies. I'm personally excited to see this and others like it continue to make progress.

Greer: And the name is Blockstack?

Bush: Yeah, Blockstack.

Greer: We have to wrap up with my desert island question, totally unfair, totally arbitrary, don't invest this way at home. With all that being said, let's talk about some of the stocks. If you're on a desert island and you have to own one of these for the next five years: 21st Century Fox, Comcast, Disney, Tesla, Alphabet.

Bush: Alphabet. Search is still ramping up. Their monopoly is not going away anytime soon, not in the next five years. YouTube is very underrated. They're producing so much cash, I'm sure they'll make other value-accruing moves.

Greer: OK. Aaron Bush, thanks for joining me!

Bush: Thank you!

Greer: I want to give a shout out to our Motley Fool Podcast Shop, lots of great Motley Fool swag. Shirts, coffee mugs, caps. That's If you have any questions, if you have any comments, you can always email us at Thanks, as always, for joining us. 

Remember that The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. People on the show may have interests in the stocks we talk about. 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!