We're in the thick of earnings season. To help get investors info on the companies they're following, we're going live on YouTube!
Motley Fool podcast host Chris Hill is sitting down with The Motley Fool's chief investment officer, Andy Cross, and senior analyst Jason Moser to talk about earnings releases from Mattel (NASDAQ:MAT) and Lionsgate (NYSE:LGF-A), take questions from the live audience on YouTube, and talk about some stocks investors should be watching.
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Chris Hill: Hey, it's Market Wrap Live! Thanks so much for joining us! I'm Chris Hill, joined by Andy Cross and Jason Moser. We're coming to you from Fool Global Headquarters in Alexandria, Virginia. We've got a lot to get to. We've got stocks to watch for next week. We're going to get to your questions, so go ahead and get those ready because we love taking questions about stocks.
Let's get to a couple of companies reporting after the closing bell, just moments ago. We're going to start with Lionsgate Entertainment. 2018 was a rough, tough year, the stock down nearly 50%. Third quarter results. They've got the movie business, they've got the Starz. Is one better than the other at this point?
Andy Cross: The revenues were down about 18% for the quarter. When you look at what's happening at Lionsgate, the brightness with the story is on the Starz business, the media networks business. That was up a little bit in revenues this year. They're seeing some subscriber growth there. Their streaming business is actually doing a little bit well, although a smaller part of that segment. The motion picture business really had a tough year and a tough quarter with some movies like Robin Hood that didn't do quite well.
The real struggle with Lionsgate is they're having trouble filling the hole that was left with Hunger Games and the Saw franchise. They haven't quite found that. There's a lot of debt on the balance sheet. They talk a lot about their free cash flow. It's a pretty steady company. Profit margins are about 10% overall. Really, not a lot of growth in the story, and we didn't see a whole lot in this quarter.
Hill: Yeah. I mean, you look at the chart and what the stock has done over the last 12 months, as you mentioned, look, like it or not, this is a hits-driven business. They had Hunger Games, they've got the John Wick franchise, but it seems like they need a lot more hits.
Cross: And not just that, but you're competing against some of the biggest and most innovative players in the space, when you think about Netflix and Disney, how much money is going into there. Lionsgate will spend probably about $2 billion a year on development work. Compare that to, what, $10 billion, $12 billion over at Netflix, and what they'll spend, not to mention Disney and how they're accumulating assets. And then, Comcast and Universal. You start thinking about all the players in this space, Lionsgate is a very small company. $3.5 billion market cap, more than $2 billion worth of debt on the balance sheet. A lot of troubles to compete against those players. Certainly, 2018 and the film slate they saw, it really didn't deliver for them.
Jason Moser: You think about content, just look at gaming, for example. We talk about gaming a lot. Gaming is based on content, too, when it comes down to it. And we've seen here over this past week these big gaming companies are getting shelled because of Fortnite. Who would have figured a year ago? You fast-forward to today... it's just a tough business all the way around. You're in the content business, it's just brutal. It costs a lot of money to compete, and there's no assurance that you're going to be on top for long.
Cross: Yeah. Lionsgate announced some layoffs recently. They continue to cut costs. It has helped on the profit side, but really not a whole lot of growth we're seeing until they can get some more wins on the motion picture side of the business.
Hill: Alright, let's get to Mattel. Just reported fourth quarter results. Revenue came in higher than expected. Good news, Jason, because the stock is down nearly 30% over the past year. But this was the holiday quarter, and they needed a win, and it looks like they got one.
Moser: Well, you said the key word there in "expected." I don't know that they necessarily chalked up a win because revenue is still down for the quarter. Now, a lot of that is because of Toys R Us. That's obviously been a problem for not just Mattel. Hasbro has dealt with that as well. Hasbro, fortunately, has been able to respond a little bit better. We'll find out tomorrow how Hasbro's holiday quarter went, as well.
All in all, Chris, you look back to Thanksgiving just last year, for Motley Fool Money, Mattel was my turkey stock. Turkey as in "stay away from this thing, gobble gobble." I don't know that anything has changed here for me to say, "Well, maybe you could start looking at it again." At the end of the day, they still have a top line that's falling. They have a margin problem here. Granted, let's give them credit here, gross margin improvement. First gross margin improvement for the fourth quarter and the full year since 2013. It was a better than expected year and quarter, but it wasn't necessarily a good one.
The balance sheet is becoming a big problem. I don't know exactly how they're going to deal with that. For me, it's a stock I can't get behind because it doesn't seem like the risk-reward is even worth considering. But, hey, I'm sure they're going to take a win any way they can get it.
Hill: Alright, let's get to some of your questions. As I mentioned, we love getting questions about stocks. One of our viewers asking, "Twitter down 10% today, is this a buying opportunity?" I know you're a fan of this stock.
Moser: Yeah, it could be, if you don't own it. I mean, it's not a stock that I would go overweight in. But I think we're beyond the days where you're going to see Twitter as some kind of $12 or $15 speculative stock now, because we actually have a real business. They're fully profitable. You can actually have a P/E with this company because there's actually an E. That's encouraging.
I think the big news that the market is probably reacting to, feeling like the revenue guidance for the first quarter here was a little bit on the lighter side. But let's not take away from the fact that they brought in almost $1 billion in revenue just this fourth quarter alone. Changing the metrics up a little bit for how they're going to measure their success. It's going to boil down to monetizable daily active users as opposed to that monthly active user number. I think that makes a lot of sense. Twitter is really a daily platform. It's where news is breaking. So showing the daily use gives you a better idea of how people are engaging with the platform. Frankly, when you're a profitable business, you can do that, you can change those metrics up and start reporting the business the way you feel like it matters most for investors. That was the reasoning behind what they did.
Hill: Their guidance for 2019 was a little soft. CEO Jack Dorsey has been doing a decent number of interviews recently. You watch him probably more closely than I do, but he sounds to me like someone who isn't quite sure what he wants Twitter to be. That's a little surprising when you consider that this is a $23 billion company.
Moser: I think at the end of the day, he wants Twitter to make sure that it can fulfill its purpose, which is essentially participating in that global conversation, helping to facilitate that global conversation. It's not easy to do because you've got a lot of voices channeling in there. And unfortunately, Chris, not everybody out there is as nice as us. We're nice guys, but not everybody on Twitter is nice. And that is a problem. They're going to be investing a lot of money in 2019 in safety. I think that's going to be something that's going to be more or less ongoing.
On the flip side, hey, you remember back in 2015 when Dorsey came back? He said one of their main priorities beyond all of the safety and utility of the platform, he wanted to get the company's financial picture back in order and bring down that stock-based compensation issue. They were getting shelled for that for so long. It was like 25% of revenue at one point. If you look at guidance here now, stock-based compensation is going to be around 9% of full-year 2019 revenue. That's important for a number of reasons. It gets them back down closer to what their peers are like, but it also shows that Dorsey was serious. He did what he said he was going to do. I think investors have to take that and feel good about it, because now you have a business that I think is going to keep on generating profitability. It seems like a viable platform. Probably better days ahead.
Cross: You also have 320 million monthly active users. I'll talk about that in a second. They're still extremely relevant in this space. And, all the initiatives that they're trying to bring out as Jack has tried to get the story right with Twitter. Really, the relevance. I see that relevance growing more and more over the next decade. I think Twitter is going to thrive, they continue to play in that space that is very healthy.
Now, it is interesting that they've changed this metric a little bit. We're starting to see companies do this a little bit more. It's not a GAAP metric, so it's not an accounting metric, but it is a metric to try to help investors understand where company management and leadership teams are putting their value. The fact that now, they're going to move away from the monthly number and start reporting this daily number, it does get me thinking, is it really for the reasons they say? I believe them, but, does that impact how we as analysts have to think about the Twitter investment?
Moser: I think it has to make you revisit how you're going to view revenue growing out over time, there's no question about that, understanding how that metric works. They've been really good about showing us the growth in daily active users over the past several quarters. That's always been really impressive. Now, taking that one step further and giving us an actual firm number behind it, it's going to be helpful, albeit smaller than that monthly number. But, look, Facebook (NASDAQ: FB) getting ready to do essentially the same thing. They're taking all of the users from all of their platforms and essentially just reporting one family user metric. Twitter may be taking a little bit of a dig at Facebook, saying, "Listen, we're not really trying to report this massive user base. What we're trying to do is paint the right picture for our advertising partners and our investors so they can see the long-term value in being on the platform." Time will tell as to whether this metric really does prove value there, but I like that they're giving it a shot.
Cross: 126 million daily active users, nothing to sneeze at.
Hill: And, whether it's Facebook, Twitter, we've seen Amazon (NASDAQ: AMZN) do this over the last couple of years. Look, any time a company comes out and says, "Hey, this metric we've been giving every quarter? We're going to stop giving it." I think you have to be a little skeptical, just as a general rule of thumb. Look, if everything was great, they wouldn't stop reporting that metric.
Moser: Eh, maybe. But, look, we were talking about that with Netflix when they wanted to stop reporting churn. I think everybody wanted to talk about some sort of nefarious ploy there. Zillow did similar things. Companies do it all the time. I think Andy really hit to the crux of the matter: why are they doing it? Is it really for the reasons they're stating? Or, is there something else behind it? Given Twitter's business to date, it seems like the business is going in such a way that I think this is genuine. But, again, time will tell.
Cross: I think it is.
Hill: Another viewer question. "Chipotle's stock has doubled in the past year. Is it too late to get in?" Chipotle just reported their latest results. They're really getting it done.
Cross: The comp numbers, the comparable store numbers, year over year were up 6.1%. We would have been crying for that just a few quarters ago. It's not nearly the story that it was. It's not growing like it used to be. But investors haven't really been expecting that. So, I think those who were making the pronouncements that Chipotle was dead and buried, it's lost all of its spice, clearly were wrong and have been shown to be wrong in the stock price.
Comps 6%. Profit picture, still not nearly as profitable as it was back in the heyday, with operating margin somewhere in the 5% to 6% range. But, at least they're making money. They're growing their store base, they're bringing in consumers. They're offering new offerings into the menu. I like what they're doing.
Now, as far as the stock price, I think now you can still own it. I own Chipotle myself, I've not sold it. I held all along the way, so that's been nice. I think now, it's not too late to get into the Chipotle story. The restaurant business certainly, Jason, has changed a lot since they've had all their troubles. A lot more competitive. But, I think Chipotle at least has a brand and the offerings and the simplicity of its menu that can give them a leg up, especially when it comes to managing some of the cost structure.
Moser: Yeah. You have to look at what Brian Niccol has been able to do here in one year, the way he's been able to change the narrative, the conversation for Chipotle now is such that not only have they gotten beyond all of these food safety concerns, but now they're growing traffic. Apparently, the queso is acceptable now, stabilizers or not, I don't know. The bottom line is, these metrics tell you that people are going back.
We rode these guys pretty hard for a little while. It was a really good example of a company that had hit a level where they needed someone else to come in there and fill that CEO role to take the business to the next level. Steve Ells, that wasn't his skill set. What Niccol has done in a short time, certainly encouraging. Doesn't mean he's home free because, as you said, restaurants are super competitive. They're not going to be messing around with Pizzeria Locale. We know ShopHouse didn't work out. We used to talk about all of these different concepts they could breed from this one platform. This is a Chipotle story clear as far as we can see. The next 10 years, this is just Chipotle. You have to make sure you understand what you're investing in.
Hill: I was just going to say, you talk about the same-store sales being up 6.1% in this quarter. What's pretty remarkable, and this speaks to the point you were making about what Niccol has done over the past year, you look at the last four quarters, and they've steadily increased them step by step. This time last year, comps were up about 2.2%. Then it got up to about 3.5%. Then about 4%, 4.5%. This next one, 6%. So, the trend in terms of same-store sales growth has to make you feel pretty good as an investor.
Cross: It really does. That's a great point. The worst thing he could have done is try to dramatically change everything overnight. We talked about this, you're not going to do that. Their online and app sales had a monster quarter this last fourth quarter. That now makes up 13% of their sales. He's continuing to make the right investments, as Jason said, to get the story right and help investors understand the story. And, actually, more importantly, help consumers get the story right, understand where Chipotle is going to go. I really like what he's done. Obviously, it's showing in the stock price, so investors have, as well.
Hill: Another viewer question. "How long can Match (NASDAQ: MTCH) keep growing?" For those unfamiliar, Match Group, match.com, all of the different dating and romance apps that they have. This is a stock that's up about 65% over the past year. This is one I think we generally like here at The Motley Fool because they're the dominant player in this space.
Moser: Yeah. The proof really was when Facebook a while back announced that they were going to try to dabble in this space and have an offering to compete against Match. And that's more or less fallen flat on its face. You have to remember, people use platforms for certain reasons. I don't think Facebook or Instagram, that's not what people are using those platforms for. Frankly, they probably don't trust those platforms for that particular use. What Match has done so well, and it's a strategy that Facebook has employed, too, it's a family of apps. They do something and they do it very well. And now, they've got that notoriety for that. It's known.
I think it can keep on growing as long as people are around. Right? I mean, we're humans, social creatures, right? As the population continues to grow, people want to interact and figure out ways to meet one another. Match is always going to have a place at the table.
Cross: Last year, sales grew 30%. It's exceptionally profitable. Their profit margins are north of 30%. You just think of the way that they built this business... they do use a lot of leverage, a lot of debt into the business. But clearly, it's meeting a need that people are finding, and a way to do it in a way that, gents, when we were trying to get our dating lives in order, it wasn't quite as easy to do.
Moser: To be clear, man, that growth is not going to be coming from me. I pray to God I never have to use one of their services, OK?
Hill: Another viewer question. "In a video on The Motley Fool's YouTube channel, I heard one of your analysts call Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) a 'cheap' stock. A single share of Alphabet costs over $1,000. Did I miss something?"
I still have a little bit of trouble getting used to calling Google Alphabet. But, obviously, Alphabet is the parent company of Google, YouTube, all their moonshots, that sort of thing. But, yeah, probably good to clarify that when we talk about something being a cheap stock, we're not necessarily talking about the actual price tag.
Moser: I see a lot of folks who are new to investing, friends of mine who are trying to understand a bit more about it, and they'll see a high stock price and immediately say, "Oh, well, that's expensive! It's $700." We're talking about in relation to the earnings. We're talking about price and cheap vs. expensive. We're talking about a valuation. There's the P/E, the price-to-earnings ratio. So, when we talk about something like Google or Alphabet or whatever, when we talk about the stock being cheap or expensive, that's in relation to what it's earning.
So, yes, on absolute terms, $1,000 is not cheap. That's a lot of money! I think we can all agree there. But when we look at it compared to what this company is able to earn, and the future that we think Google still has in all of its properties there with Alphabet, the stock actually does look like it's a pretty good value right now. I don't know if I'd say cheap. I hope that wasn't me. I don't know. It doesn't sound like me! But, I think it's a pretty compelling value today, for sure.
Cross: I definitely think it is. I'll flip that. The same reason we don't say penny stocks are such great buys just because they're nominally cheap, relatively, they can actually be super expensive. Like Jason said, it's all relative to the business and the earnings potential and the sales potential the business is generating, the market cap of the business. Alphabet is a $780 billion business. Some of those penny stocks are literally dollars in size. We wouldn't say that penny stocks, which are just nominally very cheap down in the sub $1 range, are better investments than a stock that's more than $1,000 like Alphabet or Markel.
Moser: It does get to a challenge that a lot of new investors are probably running into -- we have a lot of companies out here that have done really well over the last decade and beyond. They like having that big stock price. Now, Berkshire Hathaway is setting the standard with $350,000 or something for those A shares. But look at a lot of these companies that we use and we love every day. Between booking.com, which is Priceline, Alphabet, you look at Markel Insurance --
Moser: Amazon, another great example. These are companies where their share prices are getting a little bit prohibitive for certain investors. So, it's nice that some brokerages out there offer fractional shares, where you can own a piece of a share if you don't have the cash to put down for an entire share. But, I don't think that's a problem that's going away. These companies like that higher share price. Maybe it creates a little bit more of an investor base that gives them that long-term vision that they want to run with.
Cross: That's a great point, Jason! Warren Buffett of Berkshire Hathaway started this trend many years ago. He specifically split his stock to get the stock price cheaper because he wanted actual share owners to invest alongside with him. I think so many of the other businesses that you mentioned, Jason, are following along with that example. And the businesses have done very well, and the stocks have reacted to that, and that's why the stock prices are selling at such a high nominal level.
Hill: Good news, guys, we've got a marijuana question! "Do you have thoughts on cannabis stocks? Cronos Group keeps going up." I'm not intimately familiar with Cronos Group, except I will say, that stock has basically tripled over the past year. We've seen a lot of that when it comes to cannabis stocks. A lot of enthusiasm in 2018. But it almost feels like, Jason, 2019 is when we start to separate the promise of all of these businesses and see who can actually deliver in this growing market.
Moser: Is it the wheat from the chaff? Are we going to be separating the wheat from the chaff? The bud from the stem? I don't know. Whatever. I think you hit on something there that makes sense. The marijuana market is an exciting one for a lot of reasons. We're seeing, obviously, legislation in Canada completely changing the game. We'll eventually get to that point domestically here. I don't think you can put that toothpaste back in the tube. The problem is today, we've got a lot of excitement in the form of dollars that want to be a part of this market. And they're literally investing in anything and everything they can find, quality of the company aside. They’re not really concerned about that so much. Obviously, we don't invest that way. We're much more focused on the actual businesses at hand, which is why we recommend patience. We obviously have services to help investors deal with this market.
I do think you probably hit on something. 2019 is probably going to be a bit of a culling. We're going to see the pretenders probably bow out, and the real competitors continue on.
Hill: One more viewer question, and then we'll get to stocks to watch next week. "Nvidia looks like such a value buy long-term. Good cash flow, a moat, room to grow. What am I missing? I'm tempted to keep buying." Nvidia, certainly a company that's been on The Motley Fool's radar for a while.
Cross: Yeah, I think it's been a fabulous investment and a great business for many years. They've hit some stumbles a little bit with some of their chips sales. The business is not doing quite as well, tied to a little bit of the crypto boom that we saw a few years ago, now pulling back. That's hurt them a little bit. One of the big funds recently sold out all their positions in the stock. So it's been under a little bit of pressure.
But when I think long-term, the vision, the leadership they have at Nvidia, the quality of the business, certainly the market opportunity they have in a world that's going to be only in more demand of their chips, Nvidia is one of the leaders in that space. It's probably a good long-term investment at this price.
Hill: Alright, let's get to some stocks to watch next week. We've got four to watch. Actually, they're all reporting on Tuesday, I guess we'll be watching on Tuesday. Let's start with Shopify (NYSE: SHOP), a stock that's done pretty well over the past year, up nearly 30%.
Cross: Yeah, it's been great. Shopify, for those who don't know, is a leading e-commerce platform provider. It's run out of Canada. Tobi Lütke founded the business. It reports Tuesday, February 12th. They have more than 600,000 clients. The company really makes money two ways, subscriptions and merchant solutions. Subscription revenues, if you use their platform on a monthly basis, you pay a rate. Then, merchant solutions like Shopify payments and Shopify Capital, processing fees, that kind of thing.
Revenues are looking somewhere around 43%. The market's a little bit higher than that. The market's looking for 47% revenue growth based on the average analyst expectations. Adjusted EPS, earnings per share, growth of about 20%. What I'm watching for this is, A, it has to continue to grow. It's a very robust-growing stock with an expensive stock price. Shopify Plus which is their higher-end service for much larger clients, is now about 24% of their recurring revenue. Is it going to stay like that? Customers who are part of the Shopify Plus solution are extremely profitable, and it can be very sticky. Will Shopify Plus’s clients continue to be more and more relevant to Shopify's total top line growth?
Hill: TripAdvisor (NASDAQ:TRIP) is also reporting on Tuesday, Jason. TripAdvisor had some stumbles here and there. But 2018, a good year. The stock up about 40% or so.
Moser: Yeah, they certainly flubbed it with that instant booking effort, where they tried to become more of an online travel agency like Priceline or Expedia. That's a very difficult market to get in there and gain traction, especially when you're going against well-established competitors already.
Where TripAdvisor really specializes, obviously, is in the platform, the app, the website, the utility that it provides. I was obviously disappointed with the instant booking flub, but I never sold my shares in TripAdvisor because the one thing that has always remained constant through all of this is the platform still remains very healthy, very engaged. Growing users, growing reviews. I personally get a lot of value out of it -- guys, I'm already combing TripAdvisor for my trip to Costa Rica this summer! The kids are getting excited. They did change the experience, actually. Now it's a bit more of a social stream kind of function, as opposed to what it used to be before. I'm getting used to that. I do kind of like it.
I think that the big opportunity with them now, pivoting away from that instant booking, the experiences side of the business, which is a bit more complementary with what they have to offer anyway. You get somewhere, you're trying to find stuff to do, you can find that stuff through TripAdvisor. They're starting to book more and more of that stuff through TripAdvisor. They expect that experiences revenue to continue accelerating through the quarter into the new year. It'll be very exciting to see what they have planned here.
Hill: A lot of people are probably familiar with TripAdvisor. Not so much with Twilio (NYSE:TWLO), not really a household name, but maybe it should be for investors. This is a cloud-based communications company. They report next week. This is a stock that's up 350% over the past year! How much better can it get for Twilio shareholders?!
Cross: I'm not saying it's going to triple in the next year, but this is a business that's continuing to accelerate its growth. They provide in-app communication. For example, if you're waiting for your Uber and the application is telling you that your Uber driver is on the way, that's an example of some of the stuff that Twilio does.
What's really interesting is, they specialize in text messaging and voice and in-app communications, but they recently closed a $3 billion acquisition of SendGrid, which does similar communications through e-mail. So, now they have that e-mail channel as well. They really have all of the contact centers locked down, and they now have more than 145,000 clients who use Twilio's properties and SendGrid. So, I'm really excited to listen to what Jeff Lawson, who owns almost a billion dollars' worth of Twilio stock and founded the business 10 years ago, says about the SendGrid integration. It's already on their website. You can already see the SendGrid solution tied to Twilio. I'm really interested to see how he and his team are talking about that integration with SendGrid and with Twilio. It can be a very powerful and positive communication tool for consumers.
Hill: Jason, a year ago this time, you and I were talking about Under Armour (NYSE:UA) (NYSE:UAA) and saying that 2018 was really going to be a consequential year for Kevin Plank, the CEO, and his management team. It looks like they delivered pretty nicely last year for shareholders. Stock up just over 50% last year. What's something you're going to be watching when Under Armour reports next week?
Moser: We're starting to see signs that Kevin Plank is taking very seriously this issue of building a long-term sustainable culture with this company, where people want to be and prosper and grow. For a long time, we saw that it was very hard for him to hang on to leadership. He must have been difficult to work with or something. When he hired his new COO and CFO, Patrik Frisk and David Bergman, one of the big points of focus for us was that they're still there. If we see those executives still there, then we know that's probably headed in the right direction. And they're still there. And when you listen to the calls, they play a bigger and bigger role in the running of the business. I think they're starting to temper those big growth investments and just focus on building out a good business and understanding the growth will come in time.
A couple of other things really quick. North America needs to start performing for this company. Again, we know that they have a very strong international business. That's great! Nike just reported 9% growth in North America in its most recent report. I don't expect that kind of a number from Under Armour, but I do need to see signs that they can get back to those days. And then, one more thing. They did just hire a chief culture officer, Tchernavia Rocker. You have to love that last name. Big track record of success with Harley Davidson. She's coming in to really dig in and create a culture for Under Armour that will help take them to the next level. While they've been going through a bit of a tough time here, it does sound like they've got this thing going back in the right direction.
Cross: Jumping from Harley Davidson to Under Armour, from one struggler to another struggler, we'll see how she does.
Moser: I mean, I don't understand why they're struggling! I got my Under Armour pants on! These are the best things ever! Perfect fit! I mean, come on! Guys, get it together!
Hill: As a shareholder, I'd like you to buy five more.
Moser: Well, I am a shareholder, and I probably will.
Cross: We're all shareholders Under Armour. There you go!
Hill: Jason Moser, Andy Cross, guys, thanks for being here!
Hill: Thank you so much for watching! You can check out The Motley Fool's podcasts wherever you find podcasts. I'm Chris Hill. Thanks again for watching! We'll see you next time!
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