In this episode of Motley Fool Money, host Chris Hill and analysts Ron Gross, Emily Flippen, and Jason Moser discuss some recent business news. Disney (DIS +0.16%) gears up for the launch of Disney+. Expedia (EXPE +0.60%) and TripAdvisor (TRIP 1.53%) get crushed in light of their complete lack of a competitive edge over Alphabet (GOOGL +0.74%) (GOOG +0.61%) subsidiary Google. Papa John's (PZZA 0.68%) might just be turning itself around. Gap (GPS +1.34%) is now looking for new leadership. Plus, updates from Roku (ROKU 0.59%), Activision Blizzard (ATVI +0.00%), Take-Two Interactive (TTWO +0.72%), Match Group (MTCH +0.00%), Zillow (ZG +0.87%) (Z +0.55%), Uber (UBER +3.34%), and more; and some stocks the analysts are watching this week.
In a bonus segment, Chris Hill interviews best-selling author David Kirkpatrick about Facebook's (FB +0.48%) uncomfortable intersection with politics, what it is doing and should be doing to fix its image problem, and where the company might go from here.
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 Nov. 8, 2019.
Chris Hill: We'll begin with The Walt Disney Company, although let's face it, as we close out the decade for the 2010s, this really has been the Bob Iger company. Fourth quarter profits for Disney came in higher than expected. This comes just a few days, Jason, before the much anticipated Disney+ video streaming service launches. I have to believe that unless you're a direct competitor, there is a lot to like in this report.
Jason Moser: There is a lot to like. Remember, it wasn't all that long ago we were talking about Disney's reliance on ESPN, and how that was a bit of a risk given the change in the media space and competition out there. I think going through this release, going through this call, to me, they've put any of those concerns to rest at this point. And when you look at the amount of content that they're going to be bringing into your living room over the course of the next decade, the amount of content that Disney is going to control is astounding.
Ron Gross: My living room, too?
Moser: Your living room, too. I defy you to tell me this isn't a great value, Ron. And you're our value guy.
Gross: Yeah, I am.
Moser: The numbers itself, we talk often about how Disney makes its money so many different ways. This quarter was no exception. The studio segment, operating profit was up 79% thanks to strong performance from Lion King, Toy Story 4, much to Mac's chagrin. I know he wasn't a big fan of Toy Story 4. Also Aladdin. Parks, operating profit up 17%. But like you said, this really is all about the rollout of Disney+, how they're going to integrate that. They've got a deal with Verizon that's going to open them up to 20 million households as well. If you're a Verizon FiOS subscriber, you'll get a year of that Disney+ on the house. There are a lot of reasons to be excited. Hulu was a big point of the call. Go back a couple of quarters, you didn't hear Hulu all that often. Now, they're mentioning Hulu more than they're mentioning ESPN. You see the direction they're going.
Emily Flippen: Yeah, but here's the thing. They're not making a ton of money off of Disney+, at least not yet. And there's so much expectation baked into Disney's stock price, where it is today, about the success of Disney+. Now, do I think Disney+ is going to succeed? Yes, of course. And it's really going to be precipitated on how much they're able to increase that price as time goes on, and how sticky those customers end up being. So, it's great. They're running out with Disney+ now. The whole intention is to get as many people into that service as they can initially, and then slowly raise the price over time to the point where it is then a huge driver of profit for them. It's not there yet.
Gross: So are you, Emily Flippen, saying Disney is overvalued here?
Flippen: [laughs] I am not saying it's overvalued! I am simply saying that there are expectations there. And the expectation is that they do have some pricing power with Disney+.
Moser: I think she's spot on there. Chris, we had talked a lot leading up to this, probably the biggest risk is the execution risk, right? I mean, they roll this platform out, and if the infrastructure doesn't work, if this BAMTech acquisition doesn't prove to be as prescient as we thought it would be, I mean, that's going to be a big problem. But they have definitely tested this thing ad nauseum to try to make sure there's not going to be any hiccups. And to me, that really does remain the biggest risk, but it does sound like they're addressing it.
Hill: It is worth remembering, to your point, that we are just a few weeks away from 2020, and the original launch for this streaming service was over a year and a half ago.
Moser: That is true. That is true. But, you know, all good things do take some time. And to that point, they really led up to the very last minute here in just getting on the Amazon Fire platform. And that matters, because, I mean, Amazon Fire is one of the leading streaming services out there.
Hill: Speaking of video streaming, real quick, Jason, Roku, that stock has had a great year. It had a bad week. Down 17%. Third quarter losses really overshadowed the revenue growth.
Moser: Yeah, I mean, when you look at the actual streaming platform space, we're talking about Amazon Fire, Roku is the other big player in that space. And so I think the market was reacting to a little bit of a pullback on EBITDA guidance for the quarter. Understandable, but Roku is making a lot of investments, and they are pivoting away from being the device maker and seller and more to becoming the platform. That page out of the book of Bezos, right? Make more money from us using the device as opposed to buying the device. They are executing. There's a big market out there, particularly internationally, when you look at that ad-supported video-on-demand market. It's just going to take some time. I think the stock price, it looks a little bit more attractive today, perhaps, than it did at the beginning of the week, and that's alright.
Hill: Shares of Zillow up more than 10% on Friday after the company's loss in the third quarter was smaller than expected. Emily, management says Zillow Offers, which is their home-flipping business, is going to generate $1 billion in revenue. Are you buying?
Flippen: I have not been a huge fan of Zillow's business model transition. That's not to say that I don't think the real estate industry is ripe for disruption. I think there is. But there are a lot of players that are ahead of Zillow. Zillow's Offers business, which is part of their home segment, is really what the entire company is revolving around at this point. They buy homes on the market, fix them up if needed, then resell them for a profit. The problem is, there is no profit yet. It's important to note that while there was significant revenue growth -- 117% year over year, largely driven by this home segment -- that raise of guidance for, I think, $1.25 billion in revenue from the home segment, that's gross. What they're doing is, they're recognizing gross revenue. That's where they're recognizing the entire selling price of that home as their own revenue, and then taking out the cost of selling it, before they get to the profit. It does make that number look a little artificially big. But, you get a better idea about the really low margins that exist on this business.
Gross: As was my question -- any guidance on margins, have they offered?
Flippen: They're not profitable yet, but they are saying that they want to be profitable in the home segment without including ancillary revenues. It's expected to be within the next couple of years. It's not quite sure. It's such a growing industry that they really don't know. But the idea is, "Look, we don't have to do your mortgage to be profitable on that transaction. We want to be profitable on the home itself." They definitely seem like they're one step closer to that goal today than they were yesterday, at least for investors. I'm not sure if I'm really sold. There are, like I said, so many businesses in this space. But I do think it's an interesting business. It's just, admittedly, a much, much lower margin one than the one they were in before.
Hill: It sounds like there are a lot of "ifs" in there.
Moser: There are a lot of ifs. I mean, we were talking about Wayfair last week, I think it was, about, hey, when are they going to be profitable? Zillow is another company. They've just strung this story out for so long. I just want to know when they're going to be profitable.
Gross: I'm not buying it.
Hill: From housing to video games. Activision Blizzard's third quarter results were fueled by strong sales of Call of Duty and World of Warcraft. Take-Two Interactive's second quarter revenue came in 74% higher than a year ago. You tell me, Ron, what stood out to you?
Gross: There's similar stories here with better-than-expected results, but weak guidance for the coming holiday quarter, which was a little troubling to me. The other main difference here is, Take-Two actually posted really impressive growth in revenue and earnings, while Activision, which is in the middle of what they're calling a transition year, had declining revenues and earnings. So, a pretty big difference there. Both companies dealing with this tough competition from online free-to-play games à la Fortnite and games like that, Apex Legends. So it is a tough environment for these guys right now. I don't like to see that guidance for the coming quarter.
Hill: Any chance they're sandbagging just a little bit going into the holiday quarter? They would not be the first companies to do that.
Gross: Yeah, I think it's appropriate to be conservative here. If you want to go as far as sandbagging, sure. I think some appropriate conservatism makes sense.
Hill: Match Group posted solid growth in the third quarter, thanks in part to Tinder, but guidance for the fourth quarter was lower than Wall Street was hoping for, and shares of Match Group sold off more than 10% Wednesday morning. Although, Emily, the stock really recovered most of those losses later in the week.
Flippen: Which, it really should have. That immediate sell-off was a little bit ridiculous, because if you actually look at their reports, virtually all of their numbers were up. I mean, the most important ones, which is engagement on their platforms, really exceptional results. I mean, Tinder, obviously being Match Group's most well-known and popular platform. They're saying that people are on average using their app more than five times a week. That number's gone up over the years. They're aggressively expanding into new markets like Japan and India, where they're seeing lots of success with OK Cupid. So there's lots of areas for them to continue to grow. They had an impressive 38% year over year growth rate in average subscribers. That's on top of a 9% year over year increase in average revenue per subscriber. So, lots of great numbers here. A little bit light on guidance, but not nearly justifying a 10% sell-off.
Hill: Boy, there's nothing like the energy of youth, is there? The idea of using a dating app five times a week just sounds exhausting.
Flippen: It's funny, if you go through the call, you'll notice that management commented on the fact that among young users, more than 50% say they feel lonely. They see that as an opportunity. I saw it as a little bit depressing.
Moser: Kind of makes you wonder why IAC wants to spin this thing off, right? IAC has a big stake in Match, and I'll tell you what, they have proven time and time again to be so resilient. I mean, I think, you look at that competitive space, the way that Etsy stood up to Amazon, I think Match stood up to Facebook the same way. Really, it's a compelling business.
Hill: The Gap is looking for a new CEO. Art Peck is stepping down after four years and a half in the corner office. During that time, Gap's stock has gone from $42 to Friday's price of lower than $17 a share. Ron, they've got an interim CEO, but the main job is open if you're looking for one.
Gross: Son of the former founder is back in on an interim basis. I'm actually surprised it took this long for Peck to leave. I thought maybe when they announced the spin-off of Old Navy, they would take that opportunity to put new folks in place. But better late than never. I think this certainly makes sense. The problem is, is that Gap continues to deteriorate. And the bigger problem is that Old Navy's not doing that well, with comp sales down 4% this quarter. That spin-off doesn't look as attractive as maybe it did a few months ago or a few quarters ago. So far, we haven't heard anything related to the fact that that spin-off is going to be put on hold. Right now, I think it's plowing ahead. However, they've got to get the merchandising right there. They've got to get merchandising right in all their stores, whether it's Banana Republic or Gap, Gap being pretty much the worst of them, with comp sales down 7%. They had to lower guidance. This is not going well. It's time for some significant changes at the top. I'm glad to see they're making them.
Hill: Do they also have inventory problems as well? I think of The Gap, Old Navy, Banana Republic, I think of them as, maybe not the most fashionable brands, but certainly reliable.
Gross: If you go into any of those stores, you'll typically see 40% off the whole store. That's an indication that they have inventory problems and they need to be promotional to clear it out.
Hill: Last thing before we move on. 2019 is going to be a record year in terms of CEOs leaving. Is it just harder to be a public company CEO in the age of social media, among other things?
Gross: I think investors have less patience, and it gets harder for CEOs to take the longer view. There's more pressure. Activist investors have stepped in in a number of these cases and said there has to be a change at the top, so companies are following through there. So, I do think it's more difficult. In the old days, you could probably stick around for 10 or 20 years with a board that's entrenched and not really putting too much pressure on you.
Hill: Shows like ours probably don't help.
Rough week for travel stocks. Booking Holdings (BKNG 0.13%), the parent company of Priceline, TripAdvisor and Expedia all issuing third quarter reports. All three stocks falling this week. Though, to be fair, Jason, Booking Holdings down around 8%. You look at Expedia, TripAdvisor, those things down to the tune of 30%.
Moser: Six little letters, guys. Six little letters did it all. G-O-O-G-L-E. Man, I tell you, Google is really causing these travel companies to take a step back and try to figure out how to deal with their dominance in search, because that is how so much of that traffic gets to where they want to go. TripAdvisor, I mean, they're just waving the white flag. That's the point of the $3.50 special dividend. That's the point of the share repurchases, reassessing the business. I think the best thing they can do at this point is shop that business around, sell it, and do right by shareholders in some capacity.
Expedia, bigger business. They've already made that leap into being an OTA. Still difficult for them to combat Google and their dominance in search.
Booking.com is the winner of the three. Certainly, the biggest network. And I think we've seen time and time again, they continue to invest in the service, in the app, in the website, making sure that people go back to booking.com or its properties, as opposed to going to Google and searching for stuff. So they're a little bit more resilient on that front.
But, yeah, I mean, when you look at it as a whole, it's a very competitive space. It's a huge market opportunity. But you're seeing very clearly Google and booking.com are turning into really the best ways to play it.
Flippen: Yeah. And it's not just Google, either. When you look at these businesses, a lot of their sales, the higher-margin sales are actually hotels and vacations, these sorts of things. And more and more hotels are trying to get people to book on their own website. So there's just less incentive for customers, people like you or I, to actually go and use one of their platforms to book vs. using Google or using just their own platforms.
Hill: Jason, I know that TripAdvisor is a smaller company than it used to be, but it's still $4.5 billion. Who do you think is going to buy TripAdvisor at this price? Or, do you think that maybe an Alphabet looks at them and thinks, "Well, if they get a little bit smaller, maybe we'll put down some money"?
Moser: I mean, given the content, booking.com and Facebook are always companies that seem like they could be good fits. But they've introduced this joint venture partnership with trip.com in China to grow the presence out there. I think that could be a company under the radar, probably off lot of people's radars there, they could think, "Hey we roll this thing in for cheap and get a lot of free content and then build out this additional side of the business that focuses more on the side of the world."
Hill: Should investors be worried that all this is happening in a time when the economy in the United States is doing relatively well?
Moser: Oh, absolutely! Yeah. I mean, you would hope these businesses, particularly these businesses that are profitable and make so much cash, you'd want to see them performing well. But the market's telling us something.
Hill: Uber lost $1 billion in the third quarter. Shares down more than 10% this week, Emily.
Flippen: Yeah, there's a lot wrong with the Uber story. Honestly, you can get that anywhere. There's so many problems -- Really! Google search Uber and you'll see the problems that are associated with this company. [laughs] I mean, not only are there just fundamental ways that the company, in terms of their margin profile and how they make money, but there's lawsuits now against how they pay their drivers, there are questionable legal practices. Lots of concerns here. And honestly, like I said, you can get that anywhere. So I'm going to give you the bull case for Uber, because I feel like there's so much pessimism out there that people forget just how ubiquitous Uber truly is. While I'm not saying to buy it, all of those are very legitimate concerns, nonetheless burning $1 billion last quarter, I think Uber actually has a decent amount of pricing power that's going largely unrecognized by the market right now. That's not just associated with the Uber name and saying that you'll "grab an Uber," but it actually goes down to the fact that this is essentially an oligopoly, at least in the United States. As we see with most oligopolies, it comes down to some sort of price fixing, and it's going to result in higher prices for people who use ride-shares. We've already seen Uber stop rider incentives. They're increasing the prices. What's your alternative? We've all become so entrenched in the ride-sharing culture that we'll pay the higher prices. I think it's just a matter of time for Uber before they work out the profitability picture. But I don't think they're just down and out like people may have you think.
Gross: My question is, do higher prices accrue to the driver, which is a major problem, of drivers being underpaid? Or, does it actually flow through to the company and result in increased profitability?
Flippen: What you'll notice is that Uber, different to the way that Zillow reports, they report net. Their revenue is reported after they pay their drivers. And it does, in some places, accrue to the driver. Naturally, Uber is trying to prevent that as much as possible. But, we'll see. Over this quarter, their revenues were up 30%. Obviously, some of that is coming down to their own revenues, which is reported in that.
Hill: Shares of Papa John's up 8% this week on a surprising third quarter report. Ron, for the first time in a while for Papa John's, I mean surprising in a good way.
Gross: Perhaps a turnaround has begun here. Certainly, the stock price this year would indicate it, up 55% this year. Comparable sales in North America turned positive for the first time in nearly two years. Up 1%, not huge, but still up. International comp sales up 1.6%. Adjusted earnings up 10%. Looking pretty good here. New CEO, Rob Lynch, made several top-level changes. Five executives, including a new CFO, will be coming on board. They put in a very impressive guy named Max Wetzel as chief commercial and marketing officer. You've got my buddies over at Starboard Value with a $200 million investment, now have the chairman role as well as the director role on the board there. They're looking at the menu, the recipe, they're baking that garlic sauce into the crust now, which I'm not a fan of, but more power to all those who are. This could be an interesting one for the next few years.
Moser: Is that Max Wetzel of Wetzel's Pretzels?
Gross: I don't think it is. He's formerly from PPG.
Moser: I just want to go on record here, I mean, I think I said midway through the year here, right when Shaq came on board, I was calling the bottom there. I said it's nothing but blues skies for Papa John's, I'm liking what I'm seeing.
Hill: Never bet against Shaquille O'Neal.
[...]
Hill: David Kirkpatrick has spent his career covering technology. In 2010, he wrote The New York Times best-seller The Facebook Effect: The Inside Story of the Company that is Connecting the World. Earlier this week, I caught up with David to discuss the latest headlines involving Facebook and CEO Mark Zuckerberg.
Let me start with the political ads. As I'm sure you've seen, Jack Dorsey coming out recently and saying, "We're not doing this anymore. It's just not worth it to us." Mark Zuckerberg on the one hand said, "Yeah, political ads are going to make up less than 0.5% of our revenue in 2020, but we're still doing it." And I guess my first question is, do you think he's going to change his mind?
David Kirkpatrick: I actually doubt that he's going to change his mind. I have my reasons for that. I think if he was going to do it, he would have done it already, because he's been under such extraordinary pressure from so many corners, and he's doubling down, really. He's not yielding at all.
Hill: Why do you think that is?
Kirkpatrick: Well, I have a cynical explanation. He says it's because he believes in freedom of speech. But, as many commentators have pointed out, there's a difference between freedom of speech and, as we say, freedom of reach. When you're advertising on Facebook, you're essentially buying reach. It isn't the same as having the right to speak when you're having the right to promote what you say. I think, in the opinion of pretty much everyone that I can see, except for a number of Republican Party supporters and commentators -- and that's an important distinction -- people are pressuring Zuckerberg to change this policy. But it is significant, it is widely believed that if he were to change his policy, it would be a negative for Donald Trump's political campaign, for the President's reelection, and probably for conservatives generally. So, here's my cynical theory, unfortunately. I hope I'm wrong, but I'm afraid the evidence suggests that it's probably true: Facebook doesn't want to offend the ruling power. If they were to change their policy now, it would be perceived by the White House in particular -- and we know you don't want to get on the wrong side of that guy -- as a fundamentally hostile act. And, at a time when even many Republicans -- notably John Hawley and others, Senator from Missouri -- and some of the people in some federal regulatory agencies are making noises about increased regulation of social media, Facebook, internet giants, I think the calculation is, if you get the White House mad at you right now, you are in business jeopardy, at least in jeopardy for much harsher regulatory treatment, possibly break-up. And I'm afraid that that is probably the way they're thinking.
Hill: I want to come back to the regulatory stuff in a moment. But let me ask you about Sheryl Sandberg. She's been credited with a lot of Facebook's commercial success. In your book, you wrote about her ability to really get Facebook focused on its ad business. To what extent, if any, do you think Sheryl Sandberg deserves blame for the current state of Facebook?
Kirkpatrick: Well, it's a very tough question. Who's really responsible for any one thing inside that black box is hard to say. I mean, she is in charge of ads. So, presumably... but, then again, Mark is ultimately in charge of everything. And Cheryl works for Mark. So I think we can reasonably assume that whatever Cheryl does is what Mark wants Cheryl to do. And Cheryl is enormously effective. I mean, we've got to remember, she essentially built the best business that anybody's ever built for per dollar of revenue in terms of the profits per dollar revenue. You've never seen a more profitable scale business machine than Facebook. Sheryl Sandberg built that entirely from whole cloth. She is a master businessperson. Mark's very grateful to her for that. Really, a lot of his wealth is attributable to that. But I honestly think the buck stops at Mark Zuckerberg on every matter at Facebook, literally and figuratively.
Hill: One business initiative of Facebook's that's got a lot of attention this year is Libra, the cryptocurrency. I think it's fair to say that Libra has hit some snags with Visa and MasterCard, among others, saying they're not going to be part of this initiative. What is the state of Libra right now? If I was at a sports book in Vegas, should I be betting on Libra to even happen?
Kirkpatrick: No. I would be very surprised if Libra happens at all in any near term. Maybe a redesigned, much different, less ambitious version could come about over some very lengthy period of time. Mark Zuckerberg has said he's not going to launch it anywhere in the world unless he gets the blessing of U.S. regulators, which really surprised me when he said that. Up to that point, he had made it sound like he wouldn't launch it here or in Europe unless he got the support of regulators in those geographies. Some of us were assuming he would launch it in a place like Vietnam or some other relatively remote country, where it might be a better received, and might be more needed -- I actually think Libra is a good idea, by the way, in many ways. Not so much because it's a cryptocurrency. I think that's the mechanism. But, in order to have a global transaction tool that can increase financial inclusion, and particularly serve the remittances market globally, that is a really desperately needy marketplace. Many, many immigrants -- and there's hundreds of millions of them -- are sending money around all the time, and they pay ridiculous, usurious fees. And I do believe Facebook wants to help that. That's one of the things about Libra that I really like. But I think they've managed and launched it very clumsily.
Going back to, quickly, the issue of Sheryl Sandberg, my understanding is that she opposed the announcement of Libra at the time it was announced, believing that Facebook's reputation was not good enough to embark on a fundamentally new initiative of this scale and controversial nature. But, she did not prevail. Mark and David Marcus instead prevailed. They wanted to do it regardless. There's a point in Sheryl Sandberg's favor, probably because she was right. It shouldn't have been done now, because it's getting universal opprobrium from the people that have to approve it. If it's really true that they're not going to launch it until they get U.S. regulatory approval, they're not going to launch it, because that ain't coming anytime soon.
Hill: We've talked a little bit about the scrutiny that Facebook is getting from the federal government. The same can be said of Amazon and Alphabet. Meanwhile, you've got Microsoft and Apple, the two biggest public companies. They appear to be in less danger than the other three in terms of onerous regulations, breakups, etc. When you look at the big tech companies in the United States, who do you think is in the greatest amount of danger in terms of being forced to break up? Is there one that you think is the most likely to pre-emptively, if not break itself up, at least spin off a major part?
Kirkpatrick: Well, Amazon is a company that wouldn't mind breaking itself up, is my own impression and belief. I think Amazon's AWS could be separated from the rest of the company relatively cleanly. There are those who believe, who are relatively well-informed, that that's what the company actually even intends to do at some point. It's been said that AWS might be worth as much as $500 billion on its own. That may be an exaggeration, because we don't know all the numbers there, but it's a hugely successful business in the center of the global economy, and more and more critical parts of companies and governments are depending on it. And it's a very fast-growing business. So, there's an easily separable part of a major tech platform. I think it could happen.
Who's most vulnerable to having imposed on them? Facebook. I mean, I personally oppose breakup as a tool. I don't think it's really rational. I think it's too punitive in its feeling and I don't really think it would solve the problems. It's not because I think, as they say at Facebook, they're going to be stronger if they can all stick together and use all the same software. If they really cared about that, which is their argument, that they're more powerful at combating misinformation, etc., when they have all their networks under one roof and they can collectively row the same boat -- if they really cared about that, they could be helping Twitter, too. They could be using the tools that they've developed for the entire industry, and making them, basically, public, to some substantial degree. I'm surprised, frankly, that Facebook has not volunteered to do that, because their public reputation is so negative, they need better PR, and that would be a great move. In any case, there certainly is an impulse -- and Elizabeth Warren talks about it, and even Donald Trump has made noises like he wouldn't totally oppose it... again, I think he does everything for political reasons, for his own personal benefit, the President. So, he might decide he wanted to hurt these people. That's when it might happen. I don't think it would happen, probably, under most other circumstances. And I don't think it would happen to Google. And I don't think it would happen to Apple.
Hill: It's funny, because you think back 20 years ago, when Microsoft, from a market cap standpoint, was a much smaller company than it is today, they were squarely in the crosshairs of the government. And even some of the words that are being used today to describe Mark Zuckerberg -- words like ruthless, stubborn -- they were being used 20 years ago to describe Bill Gates.
Kirkpatrick: Oh, yeah! I was there. I definitely was covering tech at the time, so I remember that.
Hill: Think about Gates now -- he's honored and revered for his philanthropic work. He's one of the most respected corporate leaders in the world. 25, 30 years, hence, do you think that's what the future holds in store for Mark Zuckerberg? At some point, he just hands the reins off to someone else, and he goes to start his foundation?
Kirkpatrick: There's not a whole lot of likelihood that he is going to hand the reins to somebody else in the near term. He just is too passionately joined at the hip with his creation, and it's too important to him to let somebody else do that. It's unilaterally his own decision. Nobody's going to make him leave. I really don't think he would want to leave in any near term. Do I think he could resuscitate his reputation by giving away a large percentage of his $75 billion in wealth intelligently? Yes, I think he could. I think, you can do penance for a lot of sins with enlightened philanthropy. But the thing that's more amazing to me about Gates and Microsoft is that the company itself is now perceived as the most responsible, conscientious, law-abiding, non-harmful of the tech giants. Nobody would even suggest breaking up Microsoft now, and their market cap is bigger than the others most days. So, yeah, I mean, I think that's amazing. Gates got out at a good time. He's so brilliant in terms of understanding social issues, and he's such a scientist in the way he studies things. He's really known what to focus in on. I don't know if Zuckerberg would do it that way. Frankly, I think Zuckerberg should spend his time remediating the problems and the harms at Facebook before he goes out and starts curing the problems of the world. Remedies are generally short, and if he started doing some very high-profile stuff in some very important areas, he would be applauded for it.
Hill: Last question, and then I'll let you go. I know it's a busy time for you. What should we be watching with Facebook and Mark Zuckerberg in the next 12 months? What are you going to be focusing on to give you an indication of what the following three to five years are going to mean, either for the direction of the business or for Mark Zuckerberg's reputation?
Kirkpatrick: I think, the issue you started with, of political ads, the whole issue of political disinformation, which I discussed, the whole role that Facebook plays in what many would say is damaging democracy -- and not just in the United States, this is in pretty much every democratic country in the world, or formerly democratic countries. If you look at the rise of autocracy around the world, in Turkey, Hungary, Brazil, Philippines, to some extent India, Poland, Brexit, Trump in the United States, and some of the people that he's surrounded himself with, Facebook has played a big role in a lot of that, and the bad sides of some of that. The key thing I'm always looking at the company for is to see, what are they going to do to try to reduce the harm that they're causing to global democracy? I worry about it. I worry about it tremendously. I don't think they worry about it enough, although I do think they worry about it a lot more than they used to. I think they would like to come up with the answer that would allow them to get us to stop worrying about it, so that we would be impressed with them. The problem is, they don't want to sacrifice a lot of revenues in the process, and profits. Nothing much that they've done to remediate some of their social harms has really been salient in affecting their business results. I think the thing that would most impress me and everybody is if they took gestures for social benefit that actually were not to their commercial benefit. I don't rule out the possibility that it might happen. Luckily, with Zuckerberg as unilateral power-wielder, it could. He could wake up one morning and decide to do that. I think Wall Street pressures him very hard not to do that. You guys are the investing guys, and I'm sure your listeners and readers probably would prefer he not do that, also, to be honest. It's kind of a conundrum and I don't think the world has a clear path forward for these companies to be both profitable and not causing social harm.
Hill: It's always good talking to you, David! Thanks for making the time!
Kirkpatrick: Well, thank you!
Hill: David Kirkpatrick is also the founder of Techonomy Media. You can read more from him and his team by going to techonomy.com. You can also learn about the Techonomy 2019 conference that's happening later this month in Half Moon Bay, California.
[...]
Hill: Alright, let's get to the stocks on our radar. Ron Gross, you're up first. What are you looking at this week?
Gross: I'm looking at Boston Omaha, BOMN. Just a radar stock for me here, not a recommendation. Financial holding company with operations in advertising and insurance, sometimes compared to an early stage Berkshire Hathaway. Been public for only a couple of years. Market cap of $500 million, little bit over. Small-cap stock, for sure. Run by two guys who are co-president, co-chairman, co-CEO. It's a billboard company. 52% of the company's assets are billboards. They have 2,900 billboard structures, and they also have an insurance business that primarily writes surety policies. Reasonable valuation at only 1.6X book value.
Hill: Steve, question about Boston Omaha?
Steve Broido: Where does this name come from? How are Boston and Omaha connected in any way?
Gross: One of the CEOs lives in Boston, and the other one's in Omaha.
Hill: Jason Moser, what are you looking at?
Moser: Yeah, well, you know it probably as the PDF company. I am taking a look here at Adobe, ticker ADBE. Actually looking at it for my augmented reality service here. They have a new product called Adobe Arrow, which is allowing designers to design and share augmented reality experiences. So a neat part of the business that's starting to grow out. But you've already got this really well-established subscription business that, I mean, it's brought us to a $140 billion market cap at this point. Subscription revenue is the overwhelming driver for the business, and those subscriptions go anywhere from one month to 36 months and everywhere in between. So, just, I like the trend toward digital media. And the stock, while it's at 35X free cash flow today, it's a company that deserves that premium, I think.
Hill: Steve, question about Adobe?
Broido: We use a ton of Adobe products. I'm recording on Adobe Audition right now. Do you think there's any way that they will unwind the subscription thing? A lot of producers and media folks don't like having to pay a monthly fee.
Moser: Understanding that's the case, I have a hard time seeing that they would actually do that because it really does help drive a lot of money for them to continue to invest in that business and provide us with better tools to produce this awesome content that we're bringing to our members and listeners every week.
Hill: Emily Flippen, what are you looking at?
Flippen: Well, I'm looking at the largest shopping day in the entire world, and no, Black Friday has not come early. This is Singles Day on Monday, 11/11. Singles Day in China launches. One company I think is poised to benefit well from that is Baozun, ticker BZUN. Often called the Shopify of China, although that's not a one-to-one comparison, Baozun helps manage the e-commerce presences for international and domestic brands in China.
Hill: Steve, question about Baozun?
Broido: Do you think we'll see a big spike in this stock once this trade war stuff gets resolved?
Flippen: I think it's possible, although Baozun has admittedly relatively limited influence with the trade war. It'll be interesting to see, though, if the Chinese economy slowdown affects Singles Day at all.
Hill: What do you want to add to your watch list, Steve?
Broido: Well, I own Adobe, and I think I would add more because I just love that.
Hill: Alright, Ron Gross, Jason Moser, Emily Flippen, thanks for being here! That'll do it for this week's show! Our engineer is Steve Broido. Our producer is Mac Greer. I'm Chris Hill. Thanks for listening! We'll see you next week!
