Why TripAdvisor and Activision Blizzard Have Investors So Skittish

TripAdvisor's (TRIP -0.83%) latest quarterly report was a tale of two segments --  hotel and nonhotel -- and the stories coming out of them are very different. But the company faces intense competition on many fronts, and it's not entirely clear if its strengths will compensate for its weaknesses. For Activision Blizzard (ATVI), though, the past few months have all been about one story: Certain rivals are eating its lunch, and analysts could tell. So when it revealed a revenue miss, weak guidance, and layoffs, the stock price recovery that followed only makes sense in the context that it came off a 52-week low.

In this MarketFoolery podcast, Motley Fool Asset Management's Bill Barker and host Chris Hill dig into the situations at the travel website and the video game powerhouse, homing in on their issues, their strengths, and what it will take for each to get its mojo back. (They also talk baseball -- it may be winter now, but spring is coming, and there are some amazing free agents available.)

A full transcript follows the video.

Check out the latest earnings call transcripts for companies we cover.  

This video was recorded on Feb. 13, 2019.

Chris Hill: It's Wednesday, February 13th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, from MFAM Funds, Bill Barker. Thanks for being here!

Bill Barker: Thanks for having me!

Hill: I'm just going to say right now, I don't know if the dozens of listeners can hear the construction noise that you and I can hear, but if you hear some construction noise, pardon our dust!

Barker: Yeah, it'll be going on for months, won't it?

Hill: I think so. We've got some new neighbors moving in the floor below us.

Barker: So it's a feature of the podcast going forward.

Hill: [laughs] Exactly, a limited-edition feature. We've got gaming news, we've got entertainment news, Wall Street's impact on Major League Baseball. We're going to start with TripAdvisor. On paper, it looks like the fourth quarter was mixed for TripAdvisor. But investors are not treating it that way. Revenue was higher than expected. Monthly visitors were up. Shares of TripAdvisor down about 8% this morning. It comes on the heels of a really good year, though. 2018, very good year if you were a TripAdvisor shareholder.

Barker: Yeah, and I think that's most of the explanation for the stock price movement so far today, which as you pointed out, is negative. Met expectations, which at this point, the market was looking for a little bit more, a little bit of guidance that the hotel operations were picking up. That was not the part of the business that improved, and that's the biggest part.

Hill: So, you take the drop today combined with a good 2018. When you look at this stock, does it look look cheap? Does it look like, even with the drop, it's still a little expensive?

Barker: As I indicated before, you've got two different parts of the business right now, hotel and nonhotel. And for the year, hotel started the year off about four times as big as the non-hotel, $244 million of revenue for the fourth quarter of 2017, only $240 for 2018, so off 2%. The nonhotel increased 38% and is now about half the size. You have to be able to read through which of those stories is going to be the dominant one going forward. You can have that kind of growth for a while. The nonhotels is the restaurant and experiences category. But hotel was a big bet of the company and at the moment, it doesn't look to be a great long-term one, given the competition, which is pretty ferocious there.

Hill: I was just going to say, it would seem like if not the No. 1 reason for buying shares of TripAdvisor today, certainly in the top three is you think that nonhotel part of the business is going to grow pretty significantly. As you said, it's not just the Pricelines and Expedias of the world, it's also the hotels themselves which walk this fine line between "Yes, we want to be available on platforms like TripAdvisor, Expedia, Priceline, etc. We would also really like it if people just came straight to our website and booked that way."

Barker: Yes. So, the competition is on a lot of different fronts, and a lot of very well-funded fronts, from Booking Holdings and everybody else, and is a lesser on the experiences and restaurants. People might benefit more from the review options that TripAdvisor has there than hotel, where the reviews are plentiful on other sites. 

Hill: Let's move on to gaming. Shares of Activision Blizzard up 5% this morning. That, however, is the opposite story than what we saw with TripAdvisor. This bump this morning is coming off of a 52-week low. Fourth-quarter revenue for Activision Blizzard was lower than expected. Their guidance for the first half of 2019 was pretty weak. And on top of all that, they're cutting 8% of their global staff. 

Barker: Yeah, exactly. It was hitting a multiyear low going into this report, and things are not worse than the worst expectations, in terms of the guidance. I know there was a Deutsche Bank call that went out a couple of weeks ago, a fairly rare sell recommendation by a Wall Street research operation. That basically played out and was closed today, turned around. The recommendation now is that the short-term sell call was closed, the thesis having played out over a mere two or three weeks since the call was made. And the stock did go down from $47 to $40 over that time. It's back up to $42 today. The thesis there was that expectations were going to be cut, guidance was going to be cut for 2019 over where consensus was, and the revenue guidance is about a billion shy of where consensus was. So, it was possible, through research, to be on top of the fact that that might play out that way. Maybe we've hit a bottom here. The stock is about where it was three or four years ago. 

Hill: You look at Activision Blizzard, which for a good stretch of time, a very high operator. They've got some good franchises in their portfolio. But, as we say all the time, both about the movie business and about the video game business, this is a hits-driven business. This is one of those things that doesn't really show up on the balance sheet, but you look at some of the media coverage specific to Activision Blizzard, and they've got a creative drain problem on their hands, in addition to everything else going on. They've got creative people at their company who are leaving Activision Blizzard and either going to competitors or just going out and starting up their own business. I think that, just on the face of it, makes you have to be a little bit bearish about their ability to create more hits. That's probably overstating a little bit, but it certainly doesn't make it easier to create more hits.

Barker: Right. In terms of what the focus is going to be, apparently it's going to be on bolstering and supporting the current monster franchises that they have --

Hill: Call of Duty.

Barker: Call of Duty, World of Warcraft, and many others that somebody more versed in video games than I am --

Hill: And, bizarrely, Candy Crush.

Barker: [laughs] You know, some of the things that the developers are working on, in their disclosure, they're cutting 8% of the workforce, said that that wasn't going to be in the developer area. But they've got stuff, Overwatch and Hearthstone and various other combinations of words which don't mean anything but sound cool. 

Hill: You're not a Hearthstone player? There are a bunch of people at this company big into Hearthstone.

Barker: I'm just saying the name doesn't convey anything.

Hill: Well, I mean, the "stone" part probably does.

Barker: OK, what's the plot of Hearthstone, since you seem to know so much about it? 

Hill: I don't know -- 

Barker: Don't point to Dan for help!

Hill: [laughs] Of course I'm going to point to our man by the glass, Dan Boyd, because not only does he know more about any great number of things than I do, he definitely knows more about Hearthstone than I do. Dan?

Barker: I'm not criticizing the game. I'm just mentioning that the title doesn't tell you very much. 

Dan Boyd: Well, the title notwithstanding, it's an electronic version of a collectible card game. Are you guys familiar with Magic the Gathering or something like that? 

Hill: Sure. 

Boyd: So, instead of actual physical cards, you're collecting digital cards, and you're playing basically wizard poker with them against other people via the internet.

Hill: Wizard Poker is a pretty strong name. But Hearthstone has to be catchier.

Boyd: The core mechanic of the game is, you buy packs of random cards and you open them and hope for good ones. You buy them five at a time. 

Hill: Can I just say, I know there are a lot of other podcasts out there, and therefore there are a lot of other podcast producers out there, I put Dan Boyd up against any producer of any podcast in terms of adding value. Oh, sure, there are a lot of producers who'll push the buttons and make the people on this side of the glass sound good. But I've yet to listen to a podcast and hear a producer really weighing in with tangible, meaningful contributions. Thank you, Dan!

Barker: That's because Dan's got his own podcast.

Hill: He does have his own podcast.

Barker: He's got those mad skills that are developed by actually doing this better than, I don't know, you or I do it.

Hill: Yeah. If this were baseball, we would refer to Dan as a five-tool player.

Barker: Yeah.

Hill: Did you have more on Activision Blizzard, the stock itself? Or should we just move on from here? 

Barker: I don't know. What would you like to know? I don't have anything to direct people with, except to say it's more interesting to look at now that it's been cut in half in the last three, four months. This was an $80-some stock before, it's now a $40-some stock. There are a lot of other growth companies that have come down like that. A lot of them have bounced back better this year because once things went badly in October, November, December, the selling fed itself as people sold to realize tax losses before the end of the year, and a lot of other things that are in that category bounced back starting in January more so than Activision Blizzard has. It might be more interesting to somebody that's been waiting for an opportunity. 

Hill: Spring training has begun and there are still roughly 100 free agents that are unsigned when it comes to Major League Baseball. You have sent me a pretty interesting article from CNBC, just published in the last day or so. It seems like the Moneyball revolution has taken hold to the point where, possibly, there's an over-correction. You tell me, you're more of a baseball enthusiast than I am. One of the stories in baseball in the offseason has been centered on two of the 10 to 12 biggest stars in baseball, Bryce Harper and Manny Machado, who are free agents and are unsigned. That was the big story after the World Series last year, like, "Who's going to sign these marquee free agents?" The same it is in any major sport. And yet, here we are, and spring training has begun, and they're still unsigned. And on top of that, you've got all these other players who are unsigned as well. 

This is bizarre to me. If this were the NBA and training camp had started and Kevin Durant was unsigned, or if it were football and Aaron Rodgers, or soccer, take your pick, training camp begins in soccer and Messi and Ronaldo and Neymar are unsigned. This is bizarre to me. I'm wondering what your take is on this. It really seems like there are more teams that are focused on just making money rather than trying to win games.

Barker: I don't know. It's an interesting topic. But to do the comparison, like why are these guys still out there, and they're each asking for, the ballpark, round the numbers, $300 million over 10 years, which is something that their agents are saying they might be able to get and that they want to get and that they've heard is possible. The thing is that in baseball, unlike basketball, the best player in baseball does not move the needle anywhere near as is the case in basketball. You can look. You don't even need to get your calculator out and be versed in advanced baseball or basketball analytics to look at what's happened to the Cavaliers this year, how many wins they had last year and how many they have this year, and what's the difference in LeBron James moving off the team. The best player in basketball, because he is one of five on the floor and is touching the ball more than 20% of the time, could be worth 30 or 40 wins. The very best player. In baseball, the very best player is maybe, maybe, going to get you -- Dan, seven more wins? About seven, eight, for an MVP?

Hill: I saw some stats about Manny Machado, who was last with the LA Dodgers, and the estimate on him and the Wins Above Replacement is that Machado is worth five to six wins. And he's one of the 10, 12 best players in baseball. 

Barker: So, if you want $30 million for that, the state of the analytics today is indicating that what you want to have is a lot of B+ players rather than a couple of A+ players and a bunch of C- players. You're better off having a low dispersion of your best and worst players on the field than having the one guy, especially because in postseason, things get even more random. How much is that guy really doing for you? 

Hill: But, to that point, if all we were talking about was just these two high-priced star players, that would be one thing, and in fact, we probably wouldn't be talking about it today. To me, it's the fact that there are 100 other guys, some of whom are probably in that B+ category, who are still unsigned. That's the weird thing to me. It's not just, "Everybody's team is set except for these two stars." Dan?

Boyd: Just so we have a little bit of perspective here, Barry Bonds, the greatest player of the modern age, his highest career Wins Above Replacement -- which is a weird, formulaic aggregated stat -- is 11.9, so, about 12 wins. If you had the greatest baseball player ever on your team, you could expect about 12 wins from him for a season. 

Barker: Twelve wins more than you would have with the guy who's the replacement, which might be your fourth or fifth outfielder, or your best guy from AAA who's available. Barry Bonds goes down on day one, and you've got to replace him with your guy who's available on the bench. That's the estimate of his best year. In a normal year, the MVP would be worth around eight, nine, maybe 10 wins. 

Boyd: Yeah, maybe. Usually, we're getting into six and seven for what's happening now with baseball.

Barker: Anyway, you can make up those wins with a bunch of little moves using your AAA roster more. One of the problems with the analytics that's becoming more and more evident is the incremental value that you get from bringing in relievers earlier to face just a couple of batters is interrupting to the detriment, at least some think, of the rhythm of the game. But, as a quant-driven thing, it's slightly more valuable to keep bringing in a pitcher for a couple of batters rather than leave the starter in, even oftentimes into the sixth inning or something like that. So, the quant part will tell you, yeah, this makes all the sense in the world, to have a 12 pitcher, 13 pitcher staff. But it isn't that entertaining for the fans.

Boyd: That's actually something that people like Rob Manfred, the commissioner of baseball we've been talking about a lot recently, is this increase in strikeouts, decrease in putting the ball in play. They're talking about things like lowering the mound again to make it harder for pitchers to strike people out and have more action during the games. 

Hill: And also speeding up the game with a pitch clock, in terms of, you have 20 seconds between pitches, that sort of thing.

Boyd: Man, that's a whole 'nother thing. That's a can of worms. We can open it!

Hill: [laughs] Let's not open it!

Barker: To bring this back to the larger theme of the show, rather than get into the weeds of advanced baseball analytics, a lot of this does come from the intersection of Wall Street work on quantitative analysis and baseball. Baseball certainly was first in terms of the study of statistics in baseball. I think that's been applied to basketball and football, I would say to a lesser degree. But, it's changing the way all the games are played. Do you see any of that in basketball? You follow basketball more.

Hill: Yeah, you do see it, in terms of different strategies. The simplest thing is just the number of three-pointers that are attempted, by team, by player, across the league is so much dramatically higher than it was 10, 15, 20 years ago. 

Just to close this out, if you haven't seen the movie Moneyball, it's a good view. Obviously, it's a very good book by Michael Lewis. We love Michael Lewis. But if you just want to knock out a good, entertaining two-hour movie, Brad Pitt gets it done in Moneyball.

Barker: The intersection there, of course, being Michael Lewis's historic interest in the markets, coverage of them, leading him into the study of what was being done by the A's almost 20 years ago now, to start. There's a lot to be learned from that book. 

Hill: Before we get out of here, this morning the marketing geniuses at The Walt Disney Company (DIS 0.16%) dropped the first teaser trailer for Frozen 2, a movie that does not come out until late November. I watched it, it's about two minutes long. It shows the main characters from the first Frozen movie. It reveals nothing about the plot, and that doesn't matter. [laughs] It's going to make all the money in the world.

Barker: They seem to be involved in some sort of an adventure.

Hill: [laughs] There's an adventure. There's some sort of Frozen magic power that Elsa has.

Barker: It's science.

Hill: Is it science?

Barker: I think so.

Hill: OK. If you're a Disney shareholder, it's a good day. [laughs] 

Barker: Well, compare and contrast that with the Aladdin promo. Also a Disney property. 

Hill: Also a Disney property and will probably be profitable. Probably not to the degree that this thing is going to be profitable.

Barker: Will Smith seems to be scaring people.

Hill: Well, I don't know. I wasn't scared when I watched that. 

Barker: I'm not saying you were scared. 

Hill: OK. You're just saying people.

Barker: People. Some people. People are saying.

Hill: You're welcome, Disney shareholders, Frozen 2 is coming. At one end of the spectrum, with the Disney Company, if you're a shareholder, is the streaming app. We're not sure when it's going to be launched, and it's being pushed off, delayed, delayed, delayed. At the other end of the spectrum, good news, Frozen 2 is coming. And, I don't know, two or three weeks after that, another Star Wars movie.

Barker: I'm going to ask you to rank. A little bet here. The Avengers conclusion, Star Wars, and Frozen, in box office.

Hill: In box office?

Barker: Yeah. There'll be an MFAM T-shirt in it for you if you get it right. It's got to be the trifecta.

Hill: I have to do it in order?

Barker: Yeah. It's only three.

Hill: Dan, do we get to do this just by calendar year? Typically, box office is done in calendar year, so logic would dictate, go with them in chronological order.

Barker: No, by the completion of their box office run. About a month after they've opened, you know what the final number is going to be, more or less. They don't have four-month legs to box office anymore. You have your opening weekend, and at the end of the second weekend, you can pretty much guess what the range on the final number is going to be. 

Boyd: We're talking rank one, two, three, not combined?

Hill: Right. Who's going to come in first?

Barker: First, second, and third.

Hill: Of Avengers: Endgame, Frozen 2, the unnamed Star Wars movie --

Barker: Episode IX.

Hill: Episode IX. Oh, boy!

Barker: And anything else on the Disney slate you think is going to come in ahead --

Boyd: I don't think anything's coming ahead of those.

Hill: [laughs] God bless the people who are making the movie Dumbo, that's not coming in ahead of these three.

Boyd: Oh, my God, that's the most depressing movie ever! I don't understand why any adult who's seen the animated version of Dumbo would want to put themselves through that again, but whatever. I think Avengers is going to be No. 1, followed by Frozen 2 and then Star Wars. I think Avengers has that wide appeal. It's very broad, everybody loves it. We're talking probably billions of dollars for each movie. I think it's going to be Avengers, Frozen, Star Wars.

Hill: I'm going to flip it ever so slightly. I'm going to go Avengers, Episode IX, Frozen. And, by the way, all three clearing the billion-dollar mark with ease.

Barker: Yeah, I think Frozen's third out of those. There's a lot more built-up expectation for both Avengers and Star Wars. I don't know how to rank those two. But I'm not playing this game, you are. I already have plenty of MFAM T-shirts.

Hill: That's true!

Boyd: So convenient!

Barker: I have plenty of MFAM T-shirts. Whichever of you guys comes closer, I'll give you one, or whatever our tchotchkes are these days.

Hill: Well, considering we're talking about the end run of a box office for Star Wars Episode IX, which will probably be in about 12 months, it's even money as to whether we're still doing this podcast then. But if we are, we'll come back, and we'll check.

You can go to mfamfunds.com --

Barker: You're scaring your listeners!

Boyd: I hope we're still doing this, guys! I need a job!

Barker: Wow, they're like, "Is there something I don't know?"

Hill: No, no. Believe me, after listening to this episode, a few of them are relieved. "Thank God!"

Barker: It's a pretty good bet I'll never be invited on again, but you'll still be here.

Hill: That's true. mfamfunds.com. I don't know if you're going to see pictures of Bill Barker and his colleagues with T-shirts, but what you will find is some good investing content. Check it out at mfamfunds.com. Bill Barker, thanks for being here!

Barker: Thank you!

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