What’s Next for Disney and Snap?

Snap (SNAP -1.14%) reported a smaller-than-expected loss for the fourth quarter on Wednesday, and more importantly, it told the market its active user base isn't shrinking anymore. But the real question is whether the investment thesis on this troubled business has fundamentally changed -- and whether it can start turning a profit.

Elsewhere, Disney (DIS 0.34%) beat expectations on profits and revenues, but its future success will be heavily influenced by how well it navigates the curves of its sharp turn into the world of streaming.

Check out all our earnings call transcripts.

In this Market Foolery podcast, host Chris Hill and guest David Kretzmann reflect on the quarterly reports from both companies and discuss the key issues that will dictate their futures. They also chat about David's new role as head of Motley Fool Asia and what's happening with that segment of the company.

A full transcript follows the video.

This video was recorded on Feb. 6, 2019.

Chris Hill: It's Wednesday, Feb. 6. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today, back from a very long trip, which we will talk about, it's David Kretzmann. Thanks for being here! 

David Kretzmann: Great to see you, Chris! Thanks for having me!

Hill: I'm glad to see you in one piece and upright. I know the jet lag is already crushing you.

Kretzmann: Yeah. That'll be my excuse if I say anything stupid or blank out for a few seconds. That's the reason!

Hill: We'll keep this tight, and then you can go catch a nap.

Kretzmann: Sounds good!

Hill: We're going to talk about your trip. We've also got earnings from Disney. We're going to start with the stock of the day, and that's Snap. Miraculously, the stock of the day is Snap. Shares up 27% this morning. Snap's fourth-quarter loss was not as big as expected. That counts as a win for this business. They stopped the bleeding in terms of the user base. Look, for all the fun that we poke at Snap, I think that second one is both real and important. The two previous quarters, Snap was losing users. They stabilized that this time around. 

Kretzmann: Yeah. At least you've stopped the bleeding. Right now, you're at 188 million daily active users. The stock is up over 26% as we're taping this, but that really is just bringing it back to where it was in September. Not a ton to celebrate if you're one of those unfortunate Snap shareholders. 

In the case of Snap, even though the loss was narrower than anticipated, I still don't see a whole lot to get excited about here. Over the past year, in 2018, the company burned over $800 million in cash. Right now, they're sitting at about $1.2 billion in net cash on the balance sheet. Maybe it's a little bit more than that. But essentially, with their current cash burn rate, they just have a runway of about 18 to maybe 24 months with their current cash on the balance sheet. At some point, they're going to have to raise more money or really accelerate the pace that they're narrowing that cash burn. They're in a bit of a pinch. They're trying to do more. They went through a redesign of the app through 2018, trying to point users more toward publishers, stuff from media outlets like NBC, CNN. It seems like that's worked. They say that engagement is stronger. As we talked about, daily active users is stabilizing. But, still, that's a far cry beneath the engagement that you see with Instagram or Facebook. They're going up against Titans in this space, and when you're burning money, still, at such a huge rate, and at this point, it's a win to just stop the bleeding, it's tough for me to get excited. 

Hill: It is. To go back to the stock for a second, first, recognize that this is one of the most heavily shorted stocks in the public markets, so some healthy portion of this boost that we're seeing today is short sellers saying, "OK, I'm going to go ahead and cover my short." And as you said, the stock is back to where it was in September. This is a company that went public two years ago. The IPO price was $17. It's up big today, and it's still under $9 a share. So yeah, it's hard to get excited about this unless... they stopped the bleeding, but if they come out three months from now and start to show some actual growth, start to show an actual operating profit, then maybe the narrative changes. But for right now, this seems like one of those businesses where the clock is ticking and as you said, the clock is set for 18 to 24 months.

Kretzmann: Yeah. They're facing pressure in a lot of different ways. In the meantime, you're seeing engagement, users, continue to rise at a pretty incredible pace with Instagram, Facebook, these other social media platforms. For Snap, I agree with you, they really need to find a way to demonstrate to investors that they are keeping the platform relevant and making it increasingly relevant. That'll be something we track through daily active users, time spent on the app, things like that. This quarter, I guess, is a start. It's flat quarter over quarter. Hopefully, they can tick that up, and in the meantime continue to grow revenue, hopefully accelerate revenue, minimize losses, shrink that cash burn. That way, that at least buys them more time to continue to figure it out. But I still don't feel like they found the formula that'll make them a sustainable business at this point. 

Hill: Walt Disney Company's profits and revenue both came in higher than expected in the first quarter. You tell me what your headline is. One thing that's getting a lot of attention is the number of subscribers that Disney has for the ESPN+ streaming app.

Kretzmann: Yeah, ESPN+ fits into this new direct-to-consumer strategy. Now, they're even breaking it out as a direct-to-consumer segment. It includes their new direct-to-consumer streaming offerings, the theme parks. That's a direction Disney should be moving. ESPN+ has been their first foray specifically from Disney. They've also had that stake in Hulu; now it's a bigger stake. 

Obviously, for me, I think we all should be watching Disney+, which is getting kicked down the road. Later in 2019, they're going to debut some of the original content for it and some of the features at an investor presentation in April. I was anticipating Disney+, which is their direct-to-consumer streaming offering, to launch earlier in 2019. I was expecting that they would be ready to go as soon as they pulled that content off of Netflix (NFLX 0.43%), which happened at the end of last year, that they'd be ready to launch that. But it's like, "What? Seriously? You're waiting until the end of the year?" That's a head-scratcher for me. 

Hill: You're not the only one!

Kretzmann: [laughs] I know you and Emily talked about it yesterday.

Hill: Emily and I talked about this. You're absolutely not the only one who's looking at that and saying, "OK?" Just to give a little bit more context, this is not the first delay that we've seen for this project for Disney. Look, I'm a longtime shareholder, so I'm willing to continue to be patient. I want them to get it right. If they get it right, then a year from now, two, three years from now, nobody's really going to care all that much that it came later in 2019 as opposed to earlier. But they really had better get it right. 

The ESPN+ streaming numbers, I feel like you could argue either way on the success of that. On the one hand, it launched last April, they've doubled the number of subscribers. They're up to two million subscribers. That's nothing to sneeze at. On the other hand, it's hard not to have the knee-jerk reaction to immediately compare that to Netflix subscribers and say, "OK, two million subscribers."

Kretzmann: What's the price point on ESPN+? Are you a subscriber?

Hill: I'm not.

Kretzmann: Me neither.

Hill: I'm pretty sure it's single digits.

Kretzmann: Yeah, I feel like low to mid-single digits.

Hill: Yeah, like $6.99 a month, maybe. For some reason, that number sticks in my head. I'm sure there's at least one listener right now who's yelling at his or her phone, saying, "No!"

Kretzmann: "You guys should know this!"

Hill: One thing that they have done, I think pretty effectively, and it'll be interesting to see if they continue to do this, is that they've pulled some pretty nice promotional levers to get people into the ESPN+ streaming app. I think that the bet that they're making there is a smart one, which is essentially, "Look, if we get people to try this, we feel like the experience is going to be good enough that they're going to stick with it. And then, we get that recurring revenue month after month." It's not a bad approach. When you think about all of the sporting events that they've got under their umbrella, there are a lot of levers they can pull there.

Kretzmann: Yeah. An optimist would look at it -- and I put myself in that camp. I'm with you, I'm a shareholder. I've been a little disappointed of the pace of the change here. [laughs] I feel like they're moving in the right direction with this focus on direct-to-consumer. It's like, OK, with ESPN+, you have a couple of million subscribers. It's a much lower price point compared to Netflix. But ESPN+ is also more of a niche offering. Along with that, Disney+ should have a much wider array of content. Once Disney+ comes, that'll be able to be offered at a higher price point. I would hope within a couple of quarters, you'd be able to get to 2 million subscribers with Disney+.

Disney is being squeezed a bit now because they're no longer getting the licensing fees from Netflix for the content that they had on Netflix. That's $150 million that Disney isn't getting right now. In the meantime, they're also investing in original content for Hulu, Disney+ and ESPN+. They're going to be squeezed on an earnings level throughout 2019. 

Now, from a long-term perspective, these are absolutely the investments they need to make. But as a shareholder, you do have to be aware that this isn't going to be a year of earnings growth for Disney. 2019 will be a year of reinvesting back in the business, reinvesting particularly in these direct-to-consumer offerings. 

I was just surprised. I feel like by now, they would at least have a launch date ready for Disney+. But they're still being very ambiguous with that. Like you said, they do need to get it right. Even if they do push this back further, the content is so strong and compelling there that they will be able to attract people, but I would hope that they would be able to do it sooner. Keep in mind, Netflix launched the online streaming in January 2007. Disney has been very slow here. But, better to be slow and get it right than rush it out and botch the tech, botch the content. For me, that'll be the main thing to watch through the rest of the year.

Hill: It will be interesting to see at that investor day in April when they're unveiling some of the content if they also choose to share the launch date then, assuming they have it by then.

One other thing. This is getting a little bit in the weeds. The stock is basically flat today, as it's been basically for the last 12 months. It's in that $105 to $115 range that it's been in for a while now. I think you're right, this is going to be a year of investment for them. But, also worth noting that movie studio revenue for this quarter down compared to the previous year, because the previous year had a Star Wars movie, Thor Ragnarok. You think about what's coming in the last three months of 2019, what's going to be baked into the earnings report in terms of the movie studios 12 months from now -- you're going to have another Star Wars movie. If they had a tough comp this time around, 12 months from now, it's going to be an easy comp, and I'd go ahead right now and bet on them to beat that.

Kretzmann: Yeah, this should be a strong year for movies. We have the live-action Lion King coming out this summer, we have Star Wars in December, and that's just a fraction of the names.

Hill: Yeah, two Avengers movies coming in the next couple of months. 

Kretzmann: Those will probably do all right.

Hill: Yeah, they'll do fine. 

Before we get to your trip, just a reminder, I mentioned this yesterday for the dozens of listeners, hopefully will turn into at least one or two dozen viewers on Thursday. Tomorrow, Thursday, Feb. 7, 4:30 p.m. Eastern, we're going to be doing a market wrap show on YouTube. It's going to be live. The potential for something to go terribly wrong is pretty darn high. It's going to be me, Andy Cross, Jason Moser. We're going to be taking questions from the audience. We're going to be talking about some of the stocks making headlines after the closing bell tomorrow. You can go to The Motley Fool's YouTube channel, which is youtube.com/themotleyfool, and subscribe. We'll see you Thursday at 4:30 p.m. Eastern. 

You just got back. I apologize, I don't remember if we talked about this before. You have a very exciting new role here at the company. You are heading up Motley Fool Asia. You've just spent a couple of weeks on the road. Singapore, Hong Kong, Japan. Again, sorry for the jet lag. What are a couple of the highlights of your trip, whether it's on the investing front or just working with the teams that we've got on the ground in those places? 

Kretzmann: I'd say the overall highlight for me is the chance to meet the teams in each of those countries face-to-face. We do a lot of Skype meetings, a lot of conversations on Slack, but there's never a substitute for that in-person interaction. I spent a week and a half in Singapore with our team there. Right now, we have six full-time Fools, soon to be seven, and growing there. In Hong Kong, we have one Fool. Shout-out to Hayes, who's our solo entrepreneur on the ground, helping us scale Fool Hong Kong. In Japan, we have two full-time Fools and several contractors who are working with us. In each of these countries, we're very much in growth mode, learning mode. The opportunity to work with the awesome Fools there in person... there's no substitute for that. 

From an investing perspective, hearing from David Kuo, who's a longtime Fool, he was with us in Fool U.K. and then he moved back to Singapore and helped us launch Fool Singapore, having several dinners with David -- one of the benefits of hanging out with David Kuo is, he's not only a great thinker, a great investor, but he's also a foodie and he knows where to take you. Even though I'm vegetarian and gluten-free, he's like, "OK, I can find some options for you!" The team is great accommodating my very challenging dietary restrictions, so kudos to all of them. 

Having dinner with David several nights, he would explain to me how there's really this shift toward Southeast Asia for a couple of different reasons. A lot of it stems from the issues that are going on in China. In China, obviously, we have the potential trade-war discussions, possible tariffs that the U.S. will levy on China starting in March, as high as a 25% tariff on Chinese goods. You have that headwind for companies that are currently manufacturing goods in China. Then you have another potential headwind for some manufacturers where labor costs are actually on the rise in China as the workforce becomes more specialized and manufacturing gets more specialized with electronics or whatever it might be. Labor costs go up as labor gets more specialized. Those two factors combined is now causing some companies to explore shifting their manufacturing or at least diversifying their manufacturing base from China into Vietnam, Malaysia, other countries through Southeast Asia. 

David Kuo is, I would say, more of a top-down type of investor. He likes to find those macro-trends. Within Asia, there's this secular shift from China to Southeast Asia when it comes to some manufacturing. That'll open up a lot of opportunities long-term as these economies begin to develop and you get more people in the workforce and more discretionary income, and all those ripple effects that come from that. That was an interesting conversation to have. 

Also, happy Chinese New Year to everyone!

Hill: Yes, Year of the Pig!

Kretzmann: A fitting time to have the conversation and talk about Asia. So those are a couple of the takeaways for me. 

Hill: I appreciate that, despite your dietary restrictions, you very nicely brought me a can of Pringles. 

Kretzmann: From Japan.

Hill: From Japan. I haven't tried them yet, but if I have this right, the flavor is Squid Noodle. Do I have that right?

Kretzmann: I think that's right, yeah. Lea Melton, who's one of our Fools there, her and Takashi, one of our new contractors in Fool Japan, they took me out exploring around Tokyo before I hopped on my flight back to the U.S. We went through Don Quijote, which is a local department store. There's nothing quite like it in the U.S. It has a little bit of everything. We were looking at some of the unique Pringle flavors and I was thinking, "I need to bring some stuff back to HQ. I need to find some bizarre flavors that you're not going to find anywhere in the U.S." And she was going through a couple of the flavors, and she was like, "This one is a squid spaghetti flavor." And I was like, "That's the one!"

Hill: "There we go!"

Kretzmann: [laughs] I don't think we've talked about that one on Market Foolery before. Maybe we can tweet out a picture of that to the listeners on Twitter. It was great! It was about a three-week trip, and obviously, the focus was spending time with the team, but I also had some time to do a little bit of exploring. For me, it's really drinking from the firehose right now, learning about the countries, working with our teams and thinking about how we grow across Asia. Right now, we're just in Singapore, Hong Kong, Japan. Hopefully within a year or so, we'll be able to launch Motley Fool India. A lot of exciting things happening within Asia. 

Here, we also want to debut a new Twitter account. If you're on Twitter and you're interested in following the latest coverage and updates on Asia from The Motley Fool, we have the @MotleyFoolAsia Twitter account. I think that'll be a hub for us on Twitter where we can synthesize the coverage that we're doing in each of those three countries individually, and then India down the road. And, we can share any updates that are coming from those countries. Definitely give us a follow. We welcome questions and feedback and all that stuff. 

Hill: Great stuff. Yeah, as you said, definitely some exciting things coming. We'll definitely talk on here as those come up.

Kretzmann: Absolutely! Looking forward to it!

Hill: We didn't get a chance to talk NBA trade deadline for our respective teams.

Kretzmann: Tomorrow's the day, right? That's the deadline. We'll see what happens. 

Hill: David Kretzmann, thanks for being here!

Kretzmann: Thanks, Chris!

Hill: 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 Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!