How Powerful Was "Avengers: Endgame" for Disney?

If your mental media bandwidth hasn't been totally occupied by Game of Thrones or the NBA Playoffs, you probably were well aware that Marvel's Avengers: Endgame was on course for a monster opening, but the degree to which it smashed all box office records this weekend was in excess even of the high expectations: $1.2 billion in ticket sales. In response, Wall Street pushed Disney (DIS 1.62%) shares to their own new record at the open of trading Monday.

In today's Market Foolery podcast, host Chris Hill and senior analyst Abi Malin discuss Disney, as well as two companies with more nuanced stories. First, they review the latest quarterly report from Spotify (SPOT 14.04%), which has hit 100 million paid subscribers, but has yet to earn a profit. Then, they check in with Restaurant Brands International (QSR 1.41%), owner of Burger King, Tim Hortons, and Popeyes, none of which is delivering on its growth potential. Finally, they talk about what Abi is expecting to see when Alphabet (GOOGL 1.23%) (GOOG 1.15%) reports earnings after the bell Monday.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on April 29, 2019.

Chris Hill: It's Monday, April 29. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today, the one and only Abi Malin. Thanks for being here!

Abi Malin: Thanks for having me!

Hill: We've got earnings. We're going to get a sneak preview of Alphabet, which is reporting after the closing bell. We have to start, though, with the house that the mouse built. Shares of The Walt Disney Company opened this morning at an all-time high. It's down a little bit now, but probably not a surprise it had that strong open, because Avengers: Endgame broke just about every box office record under the sun over the weekend. $1.2 billion globally. I don't know about you, I went and saw it, I contributed to that. I thought it was going to have a great weekend. I didn't think it was going to be this great!

Malin: I didn't see it, but I am not surprised by these numbers. 

Hill: When we look at a number like this, I think it is tempting to just think, "Oh, my gosh, this is amazing." But the context for investors when it comes to Disney and movies is always looking at the studios part of the business. It's not the biggest part of the business by a long shot. 

Malin: Right. It's all the little third-party synergies that you get from having these amazing characters. 

Hill: That's the thing I wanted to get to. Go back to August 2009. Disney buys Marvel for $4 billion. Let's say that again. They bought Marvel for $4 billion. Now, I'm wondering, how big has the ripple effect been? It seems like -- and I've gotten a little bit of this on Twitter, because I tweeted something about what a great weekend it was, and a couple of people came back with, "Well, the studio business isn't that big." Yeah, but, this is something that feeds not only into consumer products, licensing deals, T-shirts, toys, etc., but it has to help with the launch of Disney+, doesn't it? 

Malin: Definitely. I think it just shows Disney's dominance in that space. It's not just kids driving that $1.2 billion worldwide.

Hill: No. My kids didn't pay for the tickets.

Malin: Right. It's everyone. That's future visits to Disneyland, that's T-shirts, that's toys, that's games. That's going to be huge! That's really going to be huge for them!

Hill: I went back and looked at a couple of things that The Motley Fool was writing at the time of that acquisition.

Malin: Mainly asking, was it too much? 

Hill: There was a little bit of that. And I think that's a fair question. I think that's a natural question. anytime there's an acquisition. Any acquisition, any industry, I think it's fair to be like, "OK, was this a good price?" That I was able to find, there was not a lot of people saying, "That's outrageous, that they're paying that much!" 

What I was reminded of, though, was, part of the case for acquiring Marvel was boys. I was reminded of the fact that --

Malin: They wanted to reach that younger boy demographic.

Hill: Yeah. Just, how dependent Disney was on princesses to drive their films and to drive the parks experience. Obviously, the decision to acquire Marvel, on top of the decision to acquire Pixar, has just been amazing. 

Malin: Yeah. I think also, when you think about a broader competitive landscape perspective, Disney has three key competitive advantages. It's this brand, the IP, the characters, things like that, that can be utilized throughout all aspects of the business. But it's also their above-average profitability and their low-risk balance sheet. I think one of the key points that this really demonstrates is, for a long time, we've seen really cheap money. We've seen a lot of competitors do well and thrive in the face of Disney, or keep up with Disney. But as debt becomes more expensive, and it becomes harder for competitors to actually finance those projects, you see Disney, where they can continue to do this, there's no reason that this is going to stop for Disney just because of a change in the economic interest rate structure. It doesn't just show that Disney's good at it, but it really solidifies a dominance in that space for them. 

Hill: Bob Iger is the CEO at Disney. He's obviously a well-known, I would argue one of the better-known CEOs, in part because it's Disney, in part because of the amazing job he's done. Far less well-known, I would argue, is Kevin Feige, who is the president of Marvel Studios, and has been for about a dozen years or so. When you think about what has been accomplished under his leadership, and I say this is a Disney shareholder, let Kevin Feige do whatever he wants. Maybe he already is doing whatever he wants. But that's an incredible track record he's amassed.

Malin: Right. Amazing. 

Hill: God help whoever is the next CEO at Disney. 

Malin: They have to make magic happen. 

Hill: [laughs] The shoes that Bob Iger is leaving, when you look at the acquisitions of Pixar, Star Wars, Marvel... all right, let's move on to some earnings. 

Spotify has hit 100 million paying subscribers. That's probably the highlight of their first quarter report. I mean, their revenue is growing, but their losses are also growing. 

Malin: Yeah. I mean, that number is up 32% year over year, which is huge. It's also about 2X as large as the latest figures given for Apple Music. So, again, huge. Total monthly users, that includes people who don't pay but have ad-supported service, reached 217 million. That's pretty astonishing when you think about the growth and the competitive landscape of this industry as well. 

Hill: When are they going to be profitable? It's not like they lost a ton of money. But they have 100 million paying subscribers. Is there a pathway to profitability that is short? I haven't talked to anyone who uses Spotify who isn't happy with it. But I'm wondering, at what point do they turn on the money machine?

Malin: I think it's about conversion, going from an ad-supported free user to a discounted trial period to then paying full price. That really brings out the customer lifetime value. They're still in a land grab mode, those prices maybe aren't reflective of the most profitable or the most revenue generating that Spotify could be when they have that dominance. But they're still in a land grab space, so they're not necessarily trying to pump the volume. But I do think that conversion rate and how quickly you can turn customers from free to paying full price, will really be impactful for that tipping point. 

Hill: As an analyst, is this an industry that interests you at all, when you consider Pandora, Apple Music? Obviously, it's a small part of Apple. But is this something that you look at and think, "Oh, yeah, shareholders can make money in this industry"? 

Malin: I do. I think it's something to watch for economics, not just for this industry, but the whole integration from the artists, the concerts, the music, streaming, the ticket sales, everything. There's a balance of power, and maybe who holds that pricing power is shifting. So I think it's definitely interesting, something to watch. 100 million is kind of an arbitrary number, the same way we think of the fiscal year ending in December is sort of an arbitrary time. It's not necessarily indicative of a change in thesis for me, I would say. But I do think it's interesting to watch, the pace at which it's happened. 

Hill: Yeah, I guess I'm just surprised that they're still not profitable when they have that many. It's one thing to be like, "We're building our paying subscriber base. Yes, we still have the ad-supported." I mean, that's been the story with Spotify for a while. I just look at that and go, that's a big number. That's an awful lot of people who are paying you every month. 

Malin: Where's the cash going?

Hill: Right. What's going on with your business, that you're not able to make money? 

Malin: Yeah. Again, I think 100 million suggests maybe dominance in that space. But when you look at the music consumption value chain, I don't necessarily think that the most valuable part of that music... I would not make the argument that long-term, it'll be with Spotify. 

Hill: Let's move on to Restaurant Brands International, which is the parent company of Burger King, Popeyes, and Tim Hortons. First quarter, I mean, it wasn't terrible, but it certainly wasn't great. Burger King's same-store sales were just over 2%. That was the highlight. [laughs] I mean, if that was the low, I'd think that was OK. What's going on with this company right now? 

Malin: The really interesting story here is with Tim Hortons. Their same-store sales declined 0.6%, which is a continued decline. I would say it's a really moderated decline. It's not falling off a cliff. But it's definitely a negative trend. Management is talking a lot that they've opened their first three Tim Hortons in China. We've seen Starbucks really look at China for growth for coffee for the past three to five years. We've also seen Luckin Coffee, a Chinese coffee company, file their S-1 to go public later this year. So it's really a hotbed for coffee, I would say. So the decline -- although, again, they just opened three stores, it's not necessarily indicative that it's going to fail. I just think it's maybe not the trend you want to see as you expand in a hot space. 

Hill: One of the things I saw from the conference call was, someone on the leadership team, I think it was the CEO, talking about weather being a factor in Canada. Because overwhelmingly, that's where Tim Hortons is located. I think he even said something to the effect of, "I hate to use weather as an excuse, but... " And that's always fair to me, when it comes to restaurants. It's not cars. It's not like, "You didn't buy a car last week because the weather was bad, you're probably going to go buy it next week." Whereas those are just lost sales for any restaurant chain. 

Malin: Right. You're not out and about, you're not stopping by, especially with coffee. It's really a convenience factor, location-based. 

Hill: Right. If the weather's bad, I'm not going back next week and buying double the amount of coffee. One thing I think that'll be interesting to watch with Tim Hortons was a stat I saw that half of their transactions involve their loyalty program. All I could think, as a Starbucks shareholder, was what are you doing with your loyalty program that it's going that well? That's impressive, that they are doing that. I don't know if they are particularly great at their loyalty program, and Starbucks is particularly terrible at theirs. But if that's something that they can sustain as they continue to open locations around the world, that bodes well for QSR. 

Malin: I would agree with that, yes.

Hill: Alphabet's going to report after the closing bell. What are you going to be watching? I was reading some stuff this morning. It seems like, on the surface, anyway, no one is expecting anything dramatic out of this earnings report. What are you going to be looking for? 

Malin: Just putting it into context a little bit. Tech stocks in general have had a very positive year. If you remember, we saw a little bit of a market contraction back in December. Year to date, tech stocks are up 26%, give or take a little bit. Google as its own equity is up 22.3% for the year. So I feel like there's a lot of very high expectations in here, particularly on that revenue number. People are looking for about $37.32 billion, up 20% over last year. I think the potential for maybe a little bit of a wiggle or something maybe a little bit dramatic will be in that top line. You have seen increased competition, notably Amazon's advertising business. And because of that, Alphabet has shifted. They're looking at more of their cloud architecture products, YouTube, hardware, and all of these things have lower margins. So I think maybe that leaves a little bit of room for disappointment at such a high valuation that it is, as it stands. 

Hill: All right. Well, we'll find out in about four hours from now. Abi Malin, thanks for being here!

Malin: Thanks for having me!

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!