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"Never invest in a business you cannot understand" is among Warren Buffett's most oft-repeated bits of investing advice. For him, that philosophy has largely meant keeping the Berkshire Hathaway portfolio out of the tech sector. For senior analyst Seth Jayson, it means staying away from the speculative side of the pharmaceutical sector, an area that produced some interesting merger and acquisition news over the past week.
On the other hand, here's something we all can understand from personal experience: Streaming video providers have upended the entertainment industry. Leading that revolution is, of course, Netflix (NFLX 0.28%), which picked up five Golden Globes on Sunday. But a whole lot of other media companies want a piece of that action, which is why Jayson sees Roku (ROKU 0.68%) as the next big long-term winner from the streaming trend. He and MarketFoolery host Chris Hill discuss those stories in this podcast, as well as other tidbits from the awards show.
A full transcript follows the video.
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This video was recorded on Jan. 7, 2019.
Chris Hill: It's Monday, January 7th. Welcome MarketFoolery! I'm Chris Hill. Joining me in studio today, Seth Jayson in the house.
Seth Jayson: Terms and conditions apply to that, too.
Hill: [laughs] I think that's fair to say of any analyst who shows up. Definitely with you. We're going to get to the Golden Globes. There's some relevant investing stuff coming out of that.
Jayson: Red carpet! I'm so psyched!
Hill: Should we have a red carpet here for this show? No, we absolutely should not. Quick thing. Last Thursday on the show, I mentioned in the wake of the Bristol-Myers Squibb deal with Celgene.
Jayson: The oncology buy. What'd they pay?
Hill: Just a cozy $74 billion.
Jayson: Ah, I was counting in my head, is it 35 sticks? Only 74.
Hill: Only $74 billion. But, I was talking to Shannon Jones, who hosts the Healthcare episode of Industry Focus on Wednesdays. I can't remember if I mentioned this on the show last Thursday or not. I remember in the conversation with her, one of the things she said was, more deals are coming, in particular with oncology. Cut to this morning: Eli Lilly.
Jayson: 68% premium or something for...
Hill: Loxo Oncology. An $8 billion deal. If you're a shareholder of Loxo Oncology, you're having a good day.
Jayson: I wouldn't have been.
Hill: [laughs] Before I get to my question for you, just a reminder, that's one more reason you want to listen to Industry Focus, for insights like that from Shannon Jones.
The JPMorgan Healthcare Conference is going on this week.
Jayson: That's where this was announced, right?
Hill: It was announced there. Presumably more details on the deal coming later this week. Healthcare, such a huge industry. Is it one that you invest in? If so, how granular do you get? For me, it stops with Johnson & Johnson.
Jayson: It's tough. I've given up trying to invest in the Loxo Oncologys of the world. I don't know enough to have any sort of edge there. Remember, your edge in investing is pretty thin anyway, in terms of knowledge. You're almost never going to have a knowledge edge. You may be able to have a temperament edge. I think that's a very important edge. But in terms of trying to pick companies who have drugs that are going to do well, or have technology to make those drugs and then the whole company will be acquired -- in other words, some of these aren't about so much getting just a drug, they're about getting the team of people that created the drug, and so forth. I don't do it. I'm no good at it. There are people out there who are good at it. I'm not one of them.
I do invest in healthcare companies. I tend to go for something more like an AMN Staffing, or somebody selling picks and shovels to the hospitals, healthcare services, someone doing laundry and food service at healthcare centers, hospitals, and so on. A little easier for me to figure out what's going on. I just feel like there, I can have some kind of an edge. At least I can know what's going on.
Hill: The Golden Globe Awards were last night. I don't know if they timed it this way, but it certainly is working out well for Roku. Roku this morning released preliminary data for its fourth quarter results, and the viewership numbers are better than expected. Shares of Roku up 20% this morning.
Jayson: 20%? That's good for me!
Hill: You're a shareholder?
Jayson: Oh, yeah! I've been for a while. I've been a big fan of Roku for a few months now.
Hill: Certainly, I understand why you're a fan today.
Jayson: I might actually be in the positive on that one now. Roku is probably still almost down by half from its all-time high just a few months ago, I'm guessing, if it's in the $35 range. I think we were up in the $60s at one point. I didn't buy it there.
It's interesting. Netflix was a big winner at the awards. I saw articles saying, "Does this mean that things are great for their development strategy?" I don't know that it does. I tend to look at the winner in this entire cord cutting movement as Roku. I don't mean that Roku is going to put Netflix out of business or something like that. I mean, if you're looking for a company that stands to benefit from all the competition, Netflix isn't it. The competition is coming for Netflix. Netflix may continue to do fine, but it's going to have a big battle on its hands.
Roku is sort of the Switzerland of online streaming. They're agnostic. They have apps for just about every service out there. They're becoming kind of the default operating system for smart TVs and devices. My smart TV in my basement, actually, I've got one. What happens on smart TVs is, after a while, if it's a proprietary smart TV -- and this was a Samsung, so a pretty big brand -- Netflix and others just quit making and updating the apps for the smart TV. They only want to update their Roku app or maybe their Android app.
With Roku, you get all of that. Roku also sells advertising on its own channel. They also have a payments platform, so you can pay for stuff that you're watching on these other services through Roku. They can take cuts of that. Roku is growing very quickly. I think it's a really interesting investment because of that. They may be the ultimate winner in the cord cutting battle because they're one of the leading, probably the leading platform in that space, I would say.
Hill: It's interesting, when you look at Netflix shares this morning, up about 5%. Amazon (AMZN 1.41%) up a couple of percentage points. They were both winners at the Golden Globes.
Jayson: That just makes me laugh so much. Do people really care about quality? If we call Golden Globes award winners quality. This is what's crazy. I had not heard of any of these Netflix winners, and I watch Netflix a fair amount. How do they not bubble this up to me?
Hill: It's interesting. We've seen this trend for the last decade, where the Golden Globes, you've got television awards and movie awards, as well. Particularly with the television awards, we've seen this very steady trend of broadcast television dropping when it comes to the awards. Whether it's Netflix, HBO, Amazon, Hulu has even gotten some old award nominations and wins here and there, it's pretty surprising.
Jayson: It is and it isn't.
Hill: Yeah, maybe it's not all that surprising.
Jayson: They've been going for, this is a loaded term, but a lowest common denominator sort. Network television, I feel like, when I see the shows, still have the mindset of pie-in-the-face. Stuff that my 70-year-old uncle would have laughed at when he was 50. You know what I mean? That's just what I see from a lot of network TV. Netflix, good for them, decided, "We're going to do some stuff," and originally, it was stuff that had been rejected by the main studios. A lot of interesting stuff out there.
The problem for Netflix is, in order to be as big as they are, they have to pretty much say yes to almost everything right now. As a result, they send me emails to try to get me to watch Sabrina the Teenage Witch. Swear to God! I don't get emails from anything, and they sent me, "New season of Sabrina!"
Hill: I don't know that you're the demo for that.
Jayson: No! Also, I thought it was creepy. It was a Lolita kind of picture, she was sprawled out, this young girl, she was in Mad Men when she was little. Like, I felt grossed out by it. So I don't understand. What I do get from Netflix these days is, there's so much original material. Some of it is amazing like the Lemony Snicket series on there. Just incredible. Neil Patrick Harris, doing a great job. And then there's a lot of stuff that's really not very good, I don't think. They've done so much.
And then you've got others coming in. Apparently Walmart (WMT 0.93%) Vudu might be doing original programming. You've Amazon doing some original programming, some of it pretty good. But I mean, you've got some real problems if you're Netflix if you've got Disney coming out with their service, you've got DC Comics doing their own service, you've got -- if I can read my tiny writing -- Time Warnerdoing one, you've got Facebook Watch coming out with some original programming. I'm not sure what that will be. Apple is doing something, which primarily is Reese Witherspoon and Oprah at this point, which seems like a narrow demographic to me. I suppose they know what they're doing.
So, there's a lot of competition. That's why, to circle back to Roku, I think that by going with a platform that is agnostic and stands to carry all of these services to every TV, I think you probably have a very interesting opportunity there.
Hill: If you just think about the basic business model of broadcast television -- we'll put basic cable aside for the moment -- the reason a company like Netflix is so attractive to showrunners is because if you're doing a deal with CBS, ABC, NBC Fox, they're saying, "Look, we're probably going to give you more money than Netflix. In return for that, we're going to need 22 episodes. You're going to have to go on this schedule." With Netflix, Amazon Prime, Hulu, and others, they're not laying out as much cash per show necessarily, but the amount of freedom and the fact that it's like, "You want to do 10 episodes? You want to do eight episodes? That's fine."
Jayson: Yeah. "We can find a price that works." Broadcast television is never going to find a good price for an eight-episode series.
Hill: Three quick things from the Golden Globes. One, at one point, I think it was when the Marvelous Mrs. Maisel won an award, Amazon had won an award. Whoever was doing the thanking on stage was name-checking a lot of people. And one of the people was Jeff. And they cut to Jeff Bezos, who's sitting there watching.
Jayson: Does he really warrant a one-name name?
Hill: I don't know why I find it amusing that the wealthiest person on the planet is just name-checked by first name only, but I do. Two, Carol Burnett getting an award. You didn't watch the awards. I did.
Jayson: If I had known Carol Burnett would be on, I might have watched. One of the funniest people in history.
Hill: Yes. An award was created in her name, so she was the first winner of said award for television achievement. I'm sure, for a lot of people who either watched the awards or are just reading the news coverage and scratching their heads and wondering like, "Who... I think I know who she was... " An absolute groundbreaking performer. First woman to ever host a variety show.
Jayson: Not only her own stuff was funny, but did an amazing job with that show, bringing in that cast with all those other people. Korman, Tim Conway, Vicki Lawrence, they were hilarious!
Hill: Yeah. In the same way that we talk about businesses that have great CEOs, and one of the things we like to see is they've surrounded themselves with great executive talent, that's basically what Carol Burnett did with her show. She was not one of these people who's like, "I need to get all the laughs." She knew that if people were laughing at anyone on her show, they were laughing at her show.
The Walmart commercial. I sent you the YouTube clip for this. Walmart had an ad. I'll put this out on the MarketFoolery Twitter feed.
Jayson: I'll have to watch it because somehow I didn't do it before the show. I didn't do my homework. But I know the gist.
Hill: It was great! The purpose of the ad was to get across that Walmart is doing more and more to help customers get their stuff. Some of that involves delivery. But some of that involves pickup.
Jayson: Which people really seem to like to do, order on the app and pick it up. I guess that's because you know when you're getting it.
Hill: Right, and just drive by and pick it up. And what they did for this commercial to demonstrate how easy it is to pick up stuff at Walmart is, they had all of these iconic vehicles from television and movies. They had the Batmobile, they had Doc Brown's DeLorean from Back to the Future, Kitt the Talking Car, which only geezers like you and me remember from Knight Rider, Bumblebee from Transformers. It was fantastic! Although, when I was telling you about the ad, what was your reaction?
Jayson: We know there are some important cars that don't seem to be there. Christine. Where was Christine?
Hill: Had the same reaction. One of the news emails I get from The Wall Street Journal, same sort of thing. They were like, "Where was Christine?" For those unfamiliar, Christine, the 1958 Plymouth Fury --
Hill: -- possessed by hell, basically. [laughs] Not surprising that it was a Stephen King novel turned into a movie. Where was Christine?
Jayson: Did they have Chitty Chitty Bang Bang?
Hill: They did not.
Jayson: Did they have Burt's car from Cannonball Run?
Hill: No. They had the pumpkin that turns into the carriage from Cinderella.
Jayson: They're going mass market.
Hill: Well, yeah!
Jayson: More 70s, those convoy things, along with a murdering Plymouth.
Hill: [laughs] Look, they had Kitt the Talking Car. And, yeah, probably just as well that you and I were not in on the decision making process there.
Jayson: Walmart, give us a call! We've got notes! [laughs]
Hill: [laughs] Do you think that's how that meeting goes down? They show us the commercial before greenlighting it, we're like, "Look, I love the direction, but if you could just add a vehicle that actually murders people, we think it'll be better."
Jayson: "Right in front of the store, right at the end. We think that would be great for walk-in traffic." Nobody wants our notes.
Hill: [laughs] Not on that. Seth Jayson, thanks for being here! 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 MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!