On today's MarketFoolery, host Mac Greer talks with Motley Fool analysts Emily Flippen and Jason Moser about some earnings news.
Disney's (DIS +0.31%) earnings were better than expected, and the future looks brighter every day at the House of Mouse. Meanwhile, shares of Etsy (ETSY 3.63%) were down despite a great quarter, and long-term-focused investors might want to look at this drop as an opportunity. Roku (ROKU 2.70%) popped more than 20% on earnings and user numbers that are trending in the right direction -- profitability concerns can wait until later. Facebook (FB 2.11%) co-founder Chris Hughes is calling for Facebook to be split up, and he has some pretty good points. Tune in to find out more.
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 May 9, 2019.
Mac Greer: It's Thursday, May 9. Welcome to MarketFoolery! I'm Mac Greer and joining me in studio, we have Motley Fool analysts Emily Flippen and Jason Moser. Happy Thursday!
Jason Moser: Hey!
Emily Flippen: Thank you!
Greer: How are we doing?
Moser: Almost through the week.
Greer: Almost through the week. That's good news!
Moser: Big day this weekend. Don't forget!
Greer: Mother's Day. Yes.
Moser: Reminder to all of our listeners.
Greer: Uh-oh, there's an expression on Emily Flippen's face right now suggesting that she may or may not have forgotten.
Flippen: I actually am joining this podcast after just coming back from lunch with my mom, who was traveling through the area.
Greer: So an early gift, early Mother's Day.
Flippen: I completely forgot to say Happy Mother's Day.
Greer: It's early, you don't have to. You've got plenty of time.
Moser: You can text her.
Flippen: I'll let her know over Skype.
Greer: I also know, hypothetically speaking, if you had to order flowers, let's say on Saturday, I know that works.
Moser: It does. I will say, I got on there and ordered my flowers yesterday. You never know, getting them down to Moultrie, Georgia... there's a little bit of a delivery gap there from your mainstream metropolis. You have to make sure you get it in there early so they can get there on time. I went ahead and opted for Saturday delivery in case somebody screws something up. You still have that on time.
Greer: I like it. Well, speaking of deliveries and delivery gaps. Etsy, down on earnings. Roku up big. We're going to talk about both of those. One of Facebook's founders calling for the company to be broken up.
But we begin with better than expected earnings from Disney. Theme parks once again a highlight, and oh yeah, Disney CEO Bob Iger says that Avengers: Endgame will be streaming exclusively on Disney+ starting December 1st. Disney+ launching in November. Nice way to kick things off.
Moser: Yeah. I reckon if I do see Avengers: Endgame, that's how I'll see it. But I probably won't see it just because I'm not really into that universe to begin with.
Greer: Send your emails to... [laughs]
Moser: Yeah, I know, I know. [laughs] There's more HGTV going on, I have some Food Network, more than Disney+ at this point. My daughters are a little bit older now, so I don't know that Disney holds the same status. But, yeah, you look at the quarter itself, it was like the Goldilocks quarter. There was nothing too terribly great, nothing really bad. It was kind of just right down the middle. I think that's what we were all hoping for. When you digest this big acquisition like they're doing, you really just want to avoid any major faux pas, and they've done that. I think when you look at the major money makers for the company, it continues to be the media division and the parks division. They saw some decent operating leverage in parks with sales up there 5%, but operating income up 15%. They're doing a good job capitalizing on traffic there. I think the real stories -- I mean, Avengers, obviously being one of the big headlines, and you've touched on that. I think it's more astounding when you actually look at the rollout of the films that are coming for the rest of 2019. I mean, it would take the entire show to go through the merits of that lineup. But then we also saw the films that they have planned out for, I think something like the next five years. It just borders the absurd. I mean, it's hard to believe that anybody will actually be able to get out there and compete with Disney when it comes to this now because they have so much IP and so many films that they're going to roll out. And then of course, the over-the-top opportunities with ESPN+, Disney+, Hulu. ESPN+ now has two million-plus subs. Hulu has, I think, 25 million-plus. They're forecasting Disney+ to have anywhere between 60 and 90 million by 2024. They're starting to make the required investments in that product. I think that consumers will be pleasantly surprised because that's where all of that great content is going. I don't know if you saw, there was a little headline here earlier that Netflix bought some little child's content provider. Nothing anyone has ever heard of. The bottom line is, it was another effort for Netflix to try to develop their own IP. I think that we're going to see that's a very difficult thing to do. So while you know I hate that term "Netflix killer," I think we're also going to see Netflix facing a lot of challenges in trying to develop their own universe of IP, whereas Disney already has that.
Flippen: I think it's so interesting that as analysts, we tend to be so bullish on a company like Disney because their intellectual property and their universe of characters and optionality event is so strong; yet we're both so unaware of the Avengers. Is Avengers: Endgame the last one? Is that why it's doing so well? Because there's going to be no more Avengers after this?
Moser: I have a hard time believing that they'll just cut that thing off.
Flippen: Right?
Greer: It's the last of this series, but you've got so many Marvel characters.
Moser: Right. That's just it. The Avengers, the stretch of movies was something like 21 movies in all here that have all just shelled box office receipts. This one was the culmination, I think, of a story that was being told.
Greer: It's worth noting that when we talk about Disney+, we're not just talking about movies and legacy content. We're talking about the potential to take all of these characters and spin them off into their own shows.
Moser: That's what they did so well.
Greer: If Disney+ has a few Stranger Things, or a few hundred Stranger Things --
Flippen: [laughs] You're really hung up on that one.
Greer: Yes. I know Jason doesn't love Stranger Things. But you think about the importance of Stranger Things for Netflix. I mean, Disney+, can it crank out a few of those?
Moser: In their sleep. That's going to be the difference here. They're going to be able to do this without even really giving it much thought, because they already have the property. Chris Hill made a very good point the other day, we were talking back and forth on Slack. It's one thing for a company to have that IP. It's another thing for that company's media division and films division to be able to attract such quality directors and producers in the matter. Disney does that obviously, seemingly constantly. I mean, everything they put out, for the most part, seems to do really well because they attract a lot of talent on the directing side, the producing side. Mac, I think you look at your companies like Netflix that are starting to do that as well. But it costs a lot of money to do that. And we're seeing the differences there between the two businesses.
Greer: Well, and, researching this story, I want to take a trip and The Fool Wayback Machine. December 27th, 1996. I found this story online, this news story. "Marvel Entertainment Group, publisher of Marvel Comics, today filed for Chapter 11 bankruptcy protection in New York. Over the past three years, Marvel has been bleeding money thanks to a market decline in comic book and trading card sales, its core businesses."
Moser: That sounds like the real endgame.
Greer: Isn't that incredible? And now look where we are.
Moser: We talk about it all the time. With Disney, the beauty of the business is, you have a lot of different ways to win. It's not to say it's bulletproof. It's not. We saw in the Great Recession. They were facing a lot of pressure on the traffic side at the parks. Remember, traffic was down, they had to resort to a little bit of pricing to bring traffic in. But it's just that they have other ways to cope with losses in other segments. That's the beauty of the diversity of their business. I don't suspect that'll change. I mean, this is not a stock that's going to double overnight. But if you're looking for a good holding in your portfolio that you can focus not much attention on and hang onto for a long, long period of time, I mean, I think Disney today, it's around 17 times operating income, which is totally reasonable in the face of a market that is seemingly bidding everything up to the moon.
Greer: OK, well, speaking of up to the moon, a big, big day for Roku, the video streaming service. Shares of Roku up more than 20% on earnings. Emily, a few numbers here. Roku saying that the number of active accounts increased by two million during the quarter. They've got around 29.1 million users now. Net revenue up, as was average revenue per user. But Roku, still not profitable. For someone who is not a Roku consumer or investor, why all the excitement here?
Flippen: Well, you're missing out on both fronts. You're missing out on the consumer front because the Roku platform is just far superior to whatever you're using. I promise you. What are you using right now to watch your streams?
Moser: Is it really, though?
Greer: Amazon, Netflix, and Fios. And we watch a lot of stuff on Amazon and Netflix.
Moser: What makes it superior, is my question. I'm not saying it's not. Just, what makes it superior?
Greer: What does it give me that I don't have right now?
Flippen: It's twofold. When you sign up for Roku, you're actually giving them a lot of data and a lot of information that these other companies aren't collecting that make it easier for advertisers to make effective use of the advertising. It's a very attractive advertising platform.
Greer: OK, but that doesn't help me. That's about advertisers.
Flippen: That's true. What you're getting is a content neutral platform. A lot of people I think are discounting this fact. Really, all of Roku competitors are doing something in streaming themselves. That might not sound like a big issue right now. But when you look back to 2017, I believe Google pulled YouTube from the Fire TV and Echo because they were having this big feud with Amazon. And it's like, OK, this is terrible news, because either can prioritize the content that they're creating, targeting it toward you. You as a consumer don't care if you're consuming it over Amazon Prime or Netflix or Hulu, you just want to watch your shows. And so the fact that Roku makes it easy -- if you read reviews about the platform, if you just use the Roku platform itself, it's much simpler to use than a lot of the existing platforms, regardless of age. Everybody is capable of using it. The remote is intuitive and simple. Moreover, it's not something that's connected to your Amazon Prime or your Netflix subscription. It's independent of all of those things. You can make great use of it regardless of who you use otherwise.
Greer: OK. How about the stock? When does the company need to start turning out a profit?
Flippen: I'm not too worried about it right now because they're reinvesting a lot of money. The way I see advertising and digital advertising revenues going, I'm not too worried about them over profitability. They're unprofitable, but, especially with Disney+, they get a fee every single time somebody comes and buys something over an app. So someone buys Disney+ on their Roku device, they get a cut of that. I think there's a lot of ways for them to expand monetization in the future. Right now, I think it's important for them to continue to expand the user base. As you mentioned, while users are growing a lot, they're still not as big as their competitors. So I don't mind the fact that they're unprofitable. That doesn't make me nervous. Over the long term, sure, I don't want to see them filing for chapter 11 bankruptcy like Marvel did. But I don't think that's an issue right now.
Greer: Jason, you warming up to it?
Moser: You know, when they went public, I initially saw it as simply a hardware play. That's obviously a race to the bottom. I've always felt like this one was a bit beyond me. I just didn't quite see the advantage. I mean, we use the Amazon Fire TV box at our house. I mean, it works really well. But I think your points about a neutral platform are good ones. I think that is what is making me come around to understanding the stock a little bit better.
Flippen: And let me tell you about why advertisers like to advertise have a Roku as opposed to something like Amazon Fire. What they're doing is, when you sign up for Roku, in order to make an account, you have to give them information about your current cable subscriptions. They want to know, are you attached to a cable company right now? Or are you not? They collect the time that you spend in various apps. Moreover, if you're watching or doing something in those apps, the time that you spend within those apps themselves, they pass this information along to advertisers, which lets advertisers make more informed decisions about how they're going to advertise. If you're a cable customer, and they think there's a chance that you could be seeing their advertisements on some type of a traditional platform, your cable subscription, they're not going to advertise to you. They're going to devote their advertising resources to people who don't have cable subscriptions. The fact that they're collecting this data, it makes the advertising value so much more valuable to these advertisers.
Greer: OK, well, you've got me interested. I'm going to think about it.
Flippen: I will admit, the valuation, especially with today's pop, is pricing in a lot of continued growth for this company. But, have you ever seen the founder and CEO talk? And I'm not just saying this because he went to A&M. I know I'm from Texas. But man, is there no person that loves this company more than he does. He's really inspiring.
Greer: He's an Aggie, the founder?
Flippen: He's an Aggie, yep! For engineering, I believe.
Greer: Let's talk Etsy. Shares down around 11% on earnings. Some sales concerns here. Etsy shares hit a high in March. It's had a nice run. Now, Emily and Jason, Etsy is an online marketplace for crafts and all sorts of homemade items. When you look at these numbers, what do you make of the earnings?
Moser: The market's reactions are always so interesting, and sometimes a bit confounding. I mean, when you look at the actual quarter itself, this was a really good quarter by virtually every metric. We'll talk about those in a minute. I mean, as a shareholder myself, I'd say today's reaction is pretty short-sighted. I guess that's in line with how the market does things anyway. If there's a theme for this quarter, I think it was marketing. Marketing was a word used 46 times on the earnings call. The point was that they had pulled back a little bit on some of the marketing spend. They were recalibrating in order to figure out areas where marketing worked best, where it wasn't working well enough, to ultimately get better long-term ROI on those investments. So perhaps the feeling was that profitability this quarter was a bit inflated, because they will pick back up on that marketing spend throughout the rest of the year. Maybe that plays out on profitability. They did raise revenue guidance for the year while leaving EBITDA guidance essentially the same. Maybe that's where the market is a little bit concerned. It doesn't help that the stock was not what we would call cheap anyway. But I mean, to their credit, at least they're profitable, and they make a ton of cash. It's a good business model.
But we're talking about the metrics. Gross merchandise sales were up 19%. Revenue was up 40%. Sellers up 13%. The number of buyers up 18.3%. International is becoming a bigger part of the pie at 38% of total gross merchandise sales. I mean, everything this business is doing is working. With the market selling the stock today, I mean, I get it perhaps on the short-term concerns there. But I think if you're a shareholder and can look at this with a three to five-year timeline, as I am, I do look at today as perhaps an opportunity to pick up shares of a good business that are substantially cheaper than they were yesterday.
Flippen: I love how when the market pulls back, we focus so much on profitability. It's always a thing you want to remind people. It's profitable! It's profitable! Big pullback, but it's profitable!
What's interesting to me about Etsy is -- I couldn't agree more with your analysis that this is a short-term, short-sighted response. I don't worry about Etsy's business long-term because a lot of the things that would have put this company under have already happened, and Etsy has survived them. Amazon moving into this space. There were concerns over whether or not they'd be profitable. Etsy has proven that it has a good business model. It's doing something that's great in the world. Smart management. And, of course, profitability. So, long-term, this doesn't really change the needle much for me. I will say that it does look expensive by traditional metrics, but it still has 40% revenue growth. I mean, the market is killing it over 40% revenue growth. It's still growing significantly.
Moser: Yeah. I mean, it's been selling at over 80 times earnings for a while now. I mean, today, it is trading at about 80 times earnings, 40 times free cash flow. That's not that crazy. Your point about leadership, I think, was just spot on. Josh Silverman is the CEO there now for two years, and he's just done great things with the business. I liken this business a lot to Wayfair. They're very similar because they're both ultimately just networks connecting buyers and sellers. Etsy isn't this company that has this big, inflated balance sheet with inventory that ultimately will become obsolete. I think the biggest difference between something like Etsy and Wayfair is on the margin line. Etsy brings in 65% to 70% gross margins. Wayfair, it's around 24%. The reason is simple -- shipping furniture across the country is a lot more expensive than shipping these craft made goods. There are a lot of things that Etsy is doing well. I do feel like, looking through the call, I just don't see any red flags that made me think, "Hmm, I'm not sure about still owning this business." If anything, it's the other way around. I feel like today, I saw so many good things, I feel like maybe buying a few more shares, to be honest.
Greer: Let's close with a little Facebook. Chris Hughes co-founded Facebook back in 2004 with Mark Zuckerberg. Now Hughes is calling for Facebook to be broken up. Hughes said that Facebook has become too big and "far too powerful." Emily, Hughes says that CEO Mark Zuckerberg is not accountable. What do you think?
Flippen: I think it must be so uncomfortable to be Mark Zuckerberg. The world we see today, I'm not jealous of his position at all. The piece was interesting. Definitely, I would not call it a hit piece. It was just expressing concern over the acquisitions that Facebook made of Instagram and WhatsApp. I thought it was interesting because it says, this whole marketplace exists -- 80% of American adults use Facebook or one of their products. That says a lot, in terms of Facebook being a monopoly. I don't think anybody could say that Facebook is not a monopoly, to be honest with you. And I think there's probably a good argument to be made that these acquisitions shouldn't have happened.
That being said, you cannot fault Mark Zuckerberg for trying to return shareholder value to the best of his and his management's ability. Clearly, as things started to go mobile, they needed to get on that train. Facebook itself at the time was not really a mobile-use platform. So these acquisitions were smart.
But I just think it's interesting. Social media in general is a natural monopoly, simply because the network effects are so strong. Once you have a strong group of people in, it fuels itself. You're never going to have small local social networks, not to the extent that any person would be willing to invest in a company like that.
This doesn't concern me very much. I don't think a dissolution of Facebook is coming. But I will say that future acquisitions, I think they're going to be hard, if not impossible for Facebook to come by.
Moser: Yeah, I tend to agree. I mean, we could sit here and hash it out all day long about the drawbacks of how big Facebook has become. But the bottom line is, it's not like they're twisting people's arms to use the platforms. I mean, in hindsight, yeah, they probably shouldn't have let some of those acquisitions happen. But you can't do anything about it now, other than perhaps try to split it up. Maybe there is the effort down the line to do that. I wonder if that ultimately will happen. But I think Emily's right, any future acquisitions are going to be held under a serious microscope, probably won't be able to happen.
I am a little bit concerned with Facebook's efforts to try to get more into the payments sector. I mean, I just can't fathom giving them any type of payment information whatsoever.
Greer: They've got some trust issues.
Moser: That's coming from someone who doesn't use any of their services, either, so take that for what it's worth.
Greer: You don't watch Stranger Things and you don't use Facebook.
Moser: I don't. I tell you, I did see the first season of Stranger Things. You pay me to be a hater. I'm really just indifferent.
Greer: What did those kids ever to do you?
Moser: The nuance just didn't strike me like it struck you. We're the same age.
Greer: That's not true. I'm older, and I appreciate that. Look at all my gray hair. You should know that.
Moser: [laughs] But, yeah, I do think Facebook is going to face a lot of challenges going forward, trying to find ways to grow beyond the advertising model. For investors, that's a problem. For Zuckerberg, that's a big problem. But hey, he's got some time to try to figure it out.
Greer: I want to give a quick shout out to our weekly show Motley Fool Money. Chris did a great interview with NYU Business Professor Scott Galloway. We talk a lot about big tech. Galloway makes the case for breaking up big tech. He actually uses the phrase "invasive species." He says, break them up, not because they're evil, not because they're destroying jobs, but -- well, I won't give it away. But he has a very compelling case for why he thinks, if you're a capitalist, it's in our best interest to break these companies up. He also makes some predictions about what some of these companies like Amazon may do to get out in front of any potential breakup.
Moser: Well, think about breakups that have worked out well. eBay spins off PayPal, and it's been a wonderful situation for PayPal investors. I suspect if Amazon spun out Web Services, that would be a phenomenal investment. Facebook could certainly spin something out, whether it's Instagram or WhatsApp or anything that comes down the pike there for them, and I suspect that would work out well. But I mean, also, let's be very fair here, and not just hold Facebook in the crosshairs. You mentioned big tech. I mean, Amazon's not exactly guilt-free here, either. I was just reading something earlier about the fact that they have this Echo children's product, and they've been recording those conversations when they shouldn't have been doing so. Google, Amazon, Facebook, they're all complicit to a degree. These are conversations that certainly we need to continue to have, because these companies really aren't getting smaller.
Greer: Have you listened to our Scott Galloway interview already?
Moser: I have not.
Greer: You just previewed it.
Moser: I've read something that he wrote in regard to the Big Four. He makes you think a lot about some interesting points.
Greer: He sure does. Let's wrap up with our desert island question. As always, don't invest this way. I mean, you're on a desert island, but you've got time, but you probably shouldn't invest this way if you weren't on the desert island. But you're on a desert island. So here we go. You've got Disney, you've got Roku, you've got Etsy and you've got Facebook. You have to buy one of those companies and hold it for the next five years. What are you going with, Emily?
Flippen: I'm so used to you giving me four or five really questionable investments. All of these, I think, are good investments -- yes, including Facebook, at least right now. I probably say Roku out of those. I think it has the most growth potential. Even at today's valuations, I think it's a great company, changing this space. Really inspired by it.
Greer: Jason?
Moser: I feel like, if I'm stuck on a desert island for a while, I'm going to get bored, so I'm going to resort to making some things, painting or crafting or whatever it may be. So hey, why not buy Etsy, with the thinking that whenever I get off that desert island, I could probably use their network to sell these things that I've made!
Greer: I like that. Or, you could sell your desert island story to Disney+.
Moser: That could be more lucrative because there are potentially many characters you could spin out from that, from what's going on inside my head.
Greer: And I mean, they're probably not going to have that many ideas, right? You're just competing with, what, 4,000-plus Marvel characters? Star Wars? Pixar? You know what, stick with Etsy. [laughs] Emily, Jason, thanks for joining me!
Moser: Thank you!
Greer: As always, people on the show 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 it for this edition of Market Foolery! The show is mixed by Austin Morgan. I'm Mac Greer. Thanks for listening! And we will see you on Monday!
