This special episode of MarketFoolery was taped live at The Motley Fool's member event this week. Host Chris Hill grills senior analysts Ron Gross and Jason Moser for their thoughts and some market predictions.
- Why are so many investors going the way of the bear on Netflix (NFLX +3.23%)?
- What do Netflix shareholders need to watch?
- What are a few sports betting companies to check out as U.S. regulations ease up?
- How can investors value companies that have no earnings?
- Which aspects of today's market landscape are a little too much like the dot-com bubble peak? Which really aren't?
- What's going to surprise investors in the next six months?
Find out more below.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Sept. 24, 2019.
Chris Hill: It's Wednesday, September 25th. Welcome to MarketFoolery! I'm Chris Hill, not in studio. We'll get to location in a second. Joining me, Jason Moser and Ron Gross. Thanks for being here, guys!
Gross: It's a pleasure!
Hill: We're wrapping up a three-day member events. We're at the Ritz Carlton in the heart of Washington, D.C.
Gross: The lovely Ritz Carlton Hotel.
Hill: You don't need to say lovely. If you just say Ritz Carlton --
Gross: [laughs] It implies lovely?
Hill: It usually implies loveliness. With us, we've got a gang of Fools here.
[audience cheers]
Jason Moser: I love these settings. We should do this more often. Let's at least capture that and then play that as we tape Motley Fool Money this week. That'll get us in the right frame of mind.
Hill: So we should defraud the dozens of listeners on my Motley Fool Money?
Moser: I'd like to think we're just enhancing the show that we're delivering. You appreciate that, right?
Hill: Very nice. We've had this three-day event. We don't have any amount of time to cover all of the stock ideas that have been discussed over the last couple of days. But I did want to start, Jason, with you. One of the things that we do at events like this is essentially an investing version of speed dating. You and Ron and other analysts have eight minutes to sit with a group of people, talk about a specific topic, and then you get up, change tables, that sort of thing. You participated in these. What was your topic? Could you share a couple of highlights?
Moser: Sure. I covered entertainment. A lot of this stems from the entertainment presentations I've given an events like this before, as well as some work that we're doing on that front here toward the back half of the year. Entertainment is a big word for investors. It spans a lot of different areas, from video to music to advertising and social media, all sorts of stuff. The conversations at our tables did seem to revolve around a couple of topics in specific. One was Netflix. I think it's an interesting discussion to have on Netflix from a number of angles. It's obviously a very popular stock in the Foolish universe. One of our biggest winners on the scorecards. A lot of people in this room, I'm sure, have benefited greatly from hanging onto those Netflix shares for a long time. I was a little bit surprised at -- I don't want to say the pessimism, but maybe that concern going forward for Netflix, as opposed to how folks felt about it two or three years ago. Generally speaking, it's competition in the space. Netflix used to essentially own that market. Now there's a lot of competition out there. We've got a new Disney service coming online here soon, and there's this HBO Max streaming service coming online. There are a lot of different substitutes out there for streaming content. I think the concern was based on how much more Netflix can raise prices, how much further they can push up that price before people start saying, "You know what? It's not something I use as much," or, "Maybe I'll downgrade to a cheaper subscription," or whatnot.
So, for investors, focusing on two things with Netflix -- more subscribers, and figuring out a way to raise those prices over time. They have a lot of money that they owe for that content. Not to mention the fact that a lot of that content is now coming off their platform and going to the platforms of the people that own that IP. It was just interesting to see that change in sentiment.
And then, we did talk a little bit about sports betting companies because of the changing landscape here, regulation-wise. You're starting to see more interest in that. We talked about a couple of companies Flutter Entertainment, which is actually over in Ireland. That was a business built where sports betting was traditionally legal. Big opportunity, I think, with Flutter. One that I've kept on the watch list for a while here is Churchill Downs, which is far more than just Churchill Downs. That's a number of racetracks around the country, a number of casinos, as well as online betting. Pretty interesting conversations.
Hill: Let me go back to Netflix for a second. There was an article over the weekend I read, maybe in the Washington Post. I say this as someone who owns shares of Disney, I don't own shares of Netflix, but even as a shareholder of Disney, I was pretty blown away by this admission. Essentially, it was about how several people in the entertainment industry were talking about these recent deals -- you talked about the shows that are coming off Netflix, and how other streaming platforms are throwing $500 million at Jerry Seinfeld, that sort of thing. Basically, this admission that the companies don't really know how to value these streaming deals for existing content in the way that they very clearly know how to value TV syndication. There's a very clear advertising metric you can run against any show to figure out, "This is going to be profitable," and therefore, in the case years ago of TBS, they said, "Sure, we'll pay this amount of money for Seinfeld because we're confident we can get the ad revenue to back that up." In the case of the streaming platforms, they're like, "Yeah, we're not really sure. We're just kind of throwing money."
Moser: [laughs] It feels that way. I think there's some validity to that. It's a new age. I think they're learning as they go along how to value that content. Sometimes those numbers don't make a whole lot of sense. I saw something, Big Bang Theory is going on HBO Max, and it was somewhere in the neighborhood of a billion dollars. I don't know that I've ever even seen a full episode of that show.
Gross: It's a good show.
Moser: That's what I hear. Apparently. It's trying to figure out how you can get your hands on that lightning in a bottle show, whether it's Seinfeld or The Office. It's about engagement, making sure that you have people using that platform.
Gross: I think it'll be interesting to see if the enormous sums of money they're paying comedians -- like Chappelle to do a three-part series, or even a one-part series -- tens of millions of dollars to these folks. Will that compress over time as there are more avenues for these people? Or, will it actually go up because you've got to pay to get the content because you've got to be the winner in the streaming war that's going on? But these are astronomical sums.
Hill: They are. Although, it's interesting, if you just look at the categories of TV, movies, and stand-up comedy, it's almost as though every other platform has ceded stand-up comedy to Netflix.
Moser: Yeah, more than likely. I see some of that stuff on Amazon. That stuff will live its own life. It is relatively timeless. I do think it's interesting. We talk about these astronomical sums. When you look at a service like HBO or Disney, these are streaming services that are backed up by very big businesses that do other things. They can hide behind those large sums. They can pay it, and they have a big business that keeps on chugging along. Something like a Netflix, this is what they do. This is all they do. So, when we see those astronomical sums coming out from a company like Netflix, it's very clear to see how that's affecting their financial position, because they don't have anything else to fall back on. It'll be interesting to see over time here how Reed Hastings decides to let Netflix evolve. We talked about their potential for bringing advertising to the model for some time at FoolFest back in June. I think the room was split 50/50 -- maybe he will, maybe he won't. But in a recent earnings call, they were very clear that they're not going to bring advertising on their platform because it's completely in the face of what they built the whole thing for the first place. They're going to have to figure out a way to evolve the platform, keep it engaging. Original content can only take you so far, as we've seen.
Hill: Ron, what'd you talk about?
Gross: I don't have as much as Jason, but my topic was valuation, which is something very near and dear to my heart. The problem was, I followed the analysts that were talking about marijuana stocks. Every table I sat down at, they had just finished this robust conversation about this burgeoning industry, and here comes Ron Gross to talk about valuation! But, everyone was kind and engaged. It actually really was interesting to hear from all of you about the role that valuation plays, or doesn't play, in your investment-making decisions. Some of us are focused on it. Some of us don't know anything about it. Some of us follow Motley Fool recommendations and count on us to do the work. Thank you for that. It was a wonderful conversation. We talked about high growth stocks, whether they're the cloud computing stocks or the Netflixes of the world, and how one would value a company like that versus maybe an old economy type of company, one that's been around for a while, pays a dividend, is a much slower growth company. We had some really nice conversations around that.
Moser: It feels like price to sales is the new price to earnings. I don't know how everybody out there feels about that. Given the nature of a lot of these tech companies, software-as-a-service and whatnot, a lot of them are yet to reach profitability. How do you value something like that? Well, price to sales is one way to look at it. But it really does seem like that's a metric that's being used more and more these days.
Gross: In a vacuum, I would say that's a sign of a market top. When we talk about things like that, it feels like 1999 and 2000, when we were talking about internet stocks that didn't have earnings and probably shouldn't have gone public in the first place. Thankfully, I don't think we're there now. The IPO markets, I think, are better. Most companies that should go public, do. Some that have a little trouble get pulled, like WeWork, and they go back to the drawing board. But we are valuing companies without earnings, but have strong revenue growth at very, very high multiples. It's going to be up to those companies to eventually earn the cash flow to support those stocks. If they don't, then those stocks will suffer. But there are so many exciting new technologies out there that you almost are happy to see the capital markets supporting these companies. They really change the way we all live, and a lot of it is very exciting.
Hill: I think it's safe to say one of the highlights of the past three days was the interview that our CEO, Tom Gardner, did with Eric Yuan, the CEO of Zoom Video (ZM +2.06%). The interview was conducted over Zoom Video. The technology appeared to work flawlessly. Jason, you and I were talking earlier -- I don't own shares of Zoom, but I found myself watching this interview and just thinking, one, I cannot help but like this guy. Two, I'm totally rooting for this company. He seems like the type of CEO that we like to see, which is someone who is not just putting together a good business, but is also someone who cares immensely, both about his employees and his customers.
Moser: Very easy to pull for, no question about it. I don't own shares of Zoom, either. I probably will be changing that at some point or another. It's a recommendation in our Augmented Reality service already and I think there's a lot to like about the business itself. When I watch interviews like that, for me, the takeaway is the power of the customer-centric leader. I think it's almost impossible to quantify. It can have such a big impact, not only on the culture of the business and how you grow the business, but how outsiders, how investors perceive that business. Oftentimes, when you see customer-centric leadership like that, the market's going to give it a little room to run even as it's getting its feet underneath it. You look at companies -- Amazon, obviously, is the one that led the way here. But, companies like Netflix, Wayfair is another good example. Very customer-centric, CEO. Shopify. Zoom as well. When you find businesses like those, keep them on your radar. Even though the valuations seem like they're a little out of hand, there is a reason behind it. The market will give businesses like that some credit.
Gross: I was just going to add, good people don't always make great CEOs, but when you find the intersection of a great human being combined with a great business, it can be extremely powerful and can be an exponential outcome as a result. You hear The Fool talk a lot about conscious capitalism, where companies care about all of their stakeholders, not necessarily just the shareholders, but they care about their employees, their stakeholders, their suppliers. When you find companies that do that, and do it real, and really, truly care about all their stakeholders, and attach that to a great business model, it's very powerful.
Hill: Our colleague Mac Greer made an interesting comparison. He invoked the name of Jim Sinegal from Costco, in part because of what Eric Yuan was talking about, in terms of the way he's so relentlessly focused on his customers. And, like Sinegal, he knows there are no annuities in business. You have to win your customers, and you have to keep your customers on a daily basis.
Gross: Sinegal is a smart guy. He's also a really nice guy who would answer his own phone. CEOs don't typically answer their own phone and take all their calls. But, he was very smart because he knew that retention was the key to growing Costco. Getting us all to renew our annual membership at Costco, which drives 75% of the operating profit of Costco, was essential. A happy customer is a strong business. And he made sure that he put forth a value proposition for all of us that made us happy to support him and his company.
Moser: I feel like we have a cool Venn diagram we could put together from all of this. It might be a helpful visual, just taking everything we talked about here in regard to good leaders and pull up a little Venn diagram. The intersection, that word Ron used there, I think is a really good one. When you find CEOs that really hit all of those main points, that's special.
Hill: I think we can put some of our interns on that.
Gross: [laughs] Shortly, yes.
Moser: I'm sure I'll be part of that program next year.
Hill: Last thing before we wrap up. We closed the opening panel, which was focused on the market in general, with a couple of fill-in-the-blank questions. You guys were not on stage for that, but I wanted to hit you with those questions and just have you weigh in. Jason, "No matter what the bulls say, I'm not touching ____ with a 10-foot pole."
Moser: This one was easy for me. It's crypto. I'm not a crypto hater. Crypto fans out there, please don't find me afterwards here and rip me a new one. Just, for me, I've yet to find the true investing case for it. I see the utility for it. I understand how it works and the merits of it. I just can't buy into the investment case. I have zero interest in owning Bitcoin or buying Bitcoin or spending Bitcoin. I think we're seeing a lot of shake-out from the crypto markets here, and I think there's more come.
Hill: What about you, Ron?
Gross: I can't get behind Uber. I just can't do it. As a customer, I'm all in. Use it all the time. I just can't bring myself to buy the stock, at least not at these levels, at this point in their business model, at this point of their profit and cash flow generation, with some other problems that they've had with the business and the executive suite. Maybe I'll be there one day, but I'm not there now.
Hill: I think the bulls would be quick to point out the diversity of their business lines compared to Lyft, something like Uber Eats and how that drives revenue. That doesn't do it for you?
Gross: Uber Eats is probably going to be the part of that business that becomes profitable before anything else. It certainly helps. But it doesn't get me there.
Moser: Did you see the data that like 30% of those drivers are tasting your food before they deliver it?
Gross: Is that true?
Moser: There's been study after study here.
Gross: They could take a fry!
Moser: Ron, you and I are both the cooks of our households. I do like to cook a lot. Beyond pizza, though, I just don't think I can have any food delivered to my house. I just don't trust them!
Gross: That's ... yuck!
Moser: You can google it and find it.
Hill: That makes sense, though. Depending on what you order -- if someone takes a couple of French fries, you're not going to miss that. A pizza gets delivered to your house and a piece is missing, you're going to know right away!
Moser: I've got a big problem!
Hill: Last one. Jason, "In the next six months, _____ is going to surprise a lot of investors."
Moser: I feel like we're seeing a little bit less tolerance for risk-taking today. Companies like Uber and Lyft aren't getting those same valuations. A lot of these SaaS companies are also falling prey to that. I feel like maybe we'll see some consolidation in that SaaS space. I think we'll see, as time goes on here, some of these companies couple up and try to bring more holistic solutions. There's a lot of great solutions out there, and they do one thing really well, whatever it may be, but we're at a point here where you want to be able to offer multiple solutions, whether it's something like a Microsoft or an Alphabet. So, I wouldn't be surprised to see some consolidation happening in the SaaS space.
Hill: Ron, what about you?
Gross: I think within the next six months, certainly within the next year, we're going to start to see some early results of FDA trials from gene editing and gene therapy companies that are going to be very promising and are going to change the face of medicine as we know it today. There's some very exciting things coming out, several different technologies that literally can alter our genes and fix things that are wrong with us. Obviously, a lot of ethical and moral conversations need to take place with respect to that. But I think they're very exciting, starting with relatively easy things to fix, like diseases that are affected by one gene that has gone wrong. But we're going to start to see these roll out, certainly over the next 12 months, and I think it really will change the face of medicine.
Hill: Are there any stocks in particular in that arena that we should be keeping our eyes on?
Gross: For sure. CRISPR technology is something that I focus on mostly, so it's companies like Editas, Intellia, CRISPR Therapeutics, bluebird bio. There's lots of companies that are attacking it. I think the most exciting ones right now are those that are focused on the CRISPR technology.
Hill: Jason Moser, Ron Gross, thanks for being here, guys! Thanks everyone for joining us here at the Ritz Carlton in Washington D.C.
As always, people on the program may have interest in the stocks they talk about, so don't buy or sell stocks based solely on what you hear. That'll 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.
