In this episode of MarketFoolery, Chris Hill talks with Fool analyst Seth Jayson about some market goings-on. IBM (NYSE:IBM) finally broke its losing streak, but it's still not an exciting stock. Netflix (NASDAQ:NFLX) is down a bit on net subscriber growth, probably because that growth was mostly outside the United States. It's also making some changes to its view metrics. Will it be able to survive the apparent success Disney+ (NYSE:DIS)? Meanwhile, Express (NYSE:EXPR) shares popped a little on news that the company is closing some stores, which is probably going to be terrible news for long-term shareholders. Seth explains his evolving relationship to retail investing. 

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This video was recorded on Jan. 22 , 2020.

Chris Hill: It's Wednesday, Jan. 22. Welcome to MarketFoolery! I'm Chris Hill. With me in studio, Seth Jayson, good to see you. Thanks for being here!

Seth Jayson: Maine's own, Seth Jayson.

Hill: [laughs] Maine's own. Minnesota's. The pride of Minnesota.

Jayson: It's cold, it starts with M, followed by a vowel ...

Hill: Exactly. You know what, let me just start with the apology. Let me get the apology out of the way -- speaking of cold places that start with the same letter. I misspoke on yesterday's episode of MarketFoolery when I was referring to the World Economic Forum event in Davos. I said it was in Sweden. I know it's in Switzerland. I just ... my brain wasn't working yesterday morning when it came to that. I apologize. I heard from some very nice people in Sweden who gently pointed out, "No, it's actually not here. It's in Switzerland."

Jayson: God, next you'll be telling me they eat shrimp on the barbie in Salzburg.

Hill: [laughs] Is that your go-to move? Australia and Austria?

Jayson: I try to train my little girl to be nonsensical. I tell her, "If someone tells you they're from Austria, you say, 'How about a little shrimp on the barbie?' And wait and you see if they pity you or correct you."

Hill: Nice, getting your kid in trouble. Let's get to the news. IBM broke its losing streak. Bricks-and-mortar retail, that losing streak is still intact. We're going to start today with Netflix, because Netflix added nearly 9 million net global subscribers in the fourth quarter. That's a big number. Most of those, however --

Jayson: They have the whole globe, though.

Hill: That's what I'm saying.

Jayson: We might have added more people to the globe than they added subscribers.

Hill: Most of those subscribers were outside the United States. Shares a Netflix down 2%, 3%.

Jayson: Really? I thought they were supposed to be up. Premarket, everybody was all excited. See, that's the problem with knowing stuff. I always tell people, if you gave me the earnings news before anyone else got it, I still couldn't make any money. No way.

Hill: I think you're right to look at this and go, "Well, wait a minute, that's a big number. Why wouldn't the stock be up?" It's not like the stock has been lighting the world on fire over the last six months.

Jayson: And greater lousiness was supposedly expected in the U.S. on the heels of Disney+ and the other competition. I mean, the membership numbers look decent. I should say that. I'm not a very big fan of Netflix, the stock, and missed out on all of those great gains because of it. I did mean to buy it years ago. I forgot one day. And then I looked and it was like up 10% in a week, and I said, "Oh, let's wait." And I've still been waiting.

The membership numbers looked decent. I went through the results. There were a few things that stuck out. There was a weird change in how they account for views. They used to say a program was viewed like if you viewed 75% of a specific item, like a piece of an episode or a movie or something. They want to change that now to a different number. Apparently, if you watch anything at all, they count it as viewing it. And maybe that's only even a minute. They weren't very clear. The point is, it's going to mean that views of individual items will be up by 35% according to this new rule. It's not out there in the ether, because the way Netflix markets, and the way the whole world works with virality, is a social proof thing. If you say, "Hey, 9 million people watched this," it seems to matter, and more people will want to watch it. So, it's a weird change that I think looks forward to trying to build more hype around programming -- which, of course, is their big spend right now, all of this original programming. Witcher is a big deal. Just, too bad it was lousy. I finished it yesterday, the day before. Huge fan of The Witcher video games and the books. Wanted to love this. Started out liking it. They're so lazy in the storytelling, I got to the end and I was like, "Oh, this is awful!" But, very popular anyway.

Hill: The views thing is interesting to me because I think you're absolutely right, from a marketing standpoint, it does matter, it is helpful for whether it's Netflix, Hulu, Disney+ anybody, a traditional broadcast network, to be able to say, "X million people watched this."

Jayson: You just juice your numbers by one-third.

Hill: But I think that if I were a show runner, I would want more specific data.

Jayson: And they work with that behind the scenes, right? They'll use that stuff behind the scenes. But the headline material is going to be -- and this may be just a case of trying to be more comparable. If they think everybody's fudging the numbers, they're going to fudge the numbers the same way so that they can have the same comp to others. The Disney+ thing, like I mentioned, didn't seem to hurt them as badly. I own Disney, by the way. The Netflix call, they actually compare The Mandalorian with The Witcher, which I thought was interesting. The Mandalorian, the curve of interest on the internet as measured through Google was not as high, didn't spike like The Witcher, but it was like spike, down, spike, down, spike, down, week over week. Nobody can see me moving my finger here. I'm directing the Boston Pops.

Hill: [laughs] Right. I was going to say, you know this is an audio podcast, right?

Jayson: But very interesting, because I also think that The Mandalorian is really not up to the hype, although the CGI's a lot better in The Mandalorian.

Hill: You know what? If you want to short baby Yoda, you go right ahead.

Jayson: [laughs] I heard baby Yoda cost $5 million. Wow!

Hill: Worth every penny.

Jayson: Yeah, but Disney's got free cash flow, right? This is the problem for Netflix, is they're spending all this money. I asked investors at a Fool conference one time, what kind of profit does Netflix make? And everyone said, "It's usually profitable." I said, "Well, not if you cut free cash flow." In order to not count the costs of programming against what I would call cash profitability, you have to assume that this stuff has a long shelf life. And I think that's true for some of it, but I'm not sure it's true for all of it. I think the jury's still out on whether Netflix is going to actually turn a corner on free cash flow. They do say they're working on it now.

Hill: I'm going to close on the stock, but before that, I do think it will be interesting to watch -- obviously, with Netflix every quarter, we're going to be watching the subscriber number. I think it'll be interesting with Disney to watch not only what is the subscriber count for Disney+, but also the international rollout. I mean, Disney+ is only in four countries -- U.S., Canada, Australia, New Zealand. There was a stretch of time where Netflix was surprising, in a good way, Wall Street by the number of countries they could roll out to internationally. I say this as a Disney shareholder -- I think it's going to be interesting to watch how quickly they're able to roll that out.

Jayson: Yeah. And if they can get that done, Disney obviously is a pretty good brand name. I wouldn't not be a buyer of Netflix at this point.

Hill: That's what I was going to ask. The stock is basically where it was a year ago.

Jayson: Yeah, and if you're looking at this like a horse race -- nobody can see me. I'm exasperated, my arms are spread. You don't have to pick the winner. You can bet on the four horses leading the race. You can buy all of them, right? That works in this case. I kind of like Disney better, because it's a much broader thing; it owns a lot of content and still makes that cash flow. If Netflix ever turns the corner, it'll be huge. It's just a question of, can they actually scale this spending on programming? And that's still not certain.

Hill: IBM's fourth-quarter revenue grew slightly. And slightly is all it took to break the losing streak of five straight quarters of declining sales for big blue. Shares of IBM up a little bit this morning.

Jayson: [laughs] But how excited can you get about 3% revenue growth?

Hill: Again, against the backdrop of five straight quarters of decline, it's like, "Yes, we broke the losing streak."

Jayson: [groans] I've got my Napoleon Dynamite face on, [groans] when he's frustrated. IBM has some very good technology. Great AI. They make some cool computers. They get tons of patents. They have super-smart people working there. And it's just one of those slow slogs. And the entire question at IBM is, are they going to be able to make this pivot to hybrid cloud? On and off-premises cloud, which is kind of their specialty right now. Everything inside the walls of the business.

You have companies like your Amazon cloud, that are, "Let's have everything outside the business." Most companies are using a combination. They have different clouds of subscriptions. They use more than one service. They have some stuff in-house, some outside. This is a great place for IBM to take its expertise. And, of course, they acquired Red Hat. It just doesn't look like it's enough, you know what I mean? Their trajectory was down; now it's barely not down.

And so, as somebody who looks at AI a lot -- I'm working on our AI service these days -- I've really wanted to say, "Hey, IBM is awesome," because Watson is really top-notch AI and doesn't seem to be moving the needle. It's almost impossible to tell, because even though IBM reports in some detail what the different segments are, it's hard to tell which piece of which segment is cloud, which piece is AI. And in fact, Watson and the AI systems that are underlying it are sort of spread out throughout everything they offer. And they even term this, if you read the 10-K, the word "cognitive" is in there everywhere. It's like the word "quantum" in an Ant-Man movie. They just keep saying "quantum."

Is it enough? I don't know. Red Hat was growing 24%. But IBM is still carrying a lot of debt, $66 worth per share. Making a lot of free cash flow. They can pay that. In fact, I think they said they were going to stop buying back shares, try to pay down the debt. So if you think IBM can make that pivot, people still aren't very excited about it -- it makes a lot of cash; there's worse places to look for a quote-unquote value investment, probably, than IBM. But it ain't been a good buy for Buffett, right?

Hill: It hasn't been, although I'm reminded a little bit of the stretch that Microsoft had, go back before Nadella was the CEO, where you have this huge tech company, they're making money, Microsoft didn't have the debt issue that IBM has right now, but when Steve Ballmer stepped aside and Nadella became the CEO, that was absolutely the time to buy shares of my Microsoft. And Ginni Rometty has been CEO since late 2011, and the stock is down about 15%, 20% during that time, while the market in general is up more than 250%. And I'm not saying she's on the hot seat, and I'm not saying she's got to go, but I am saying, if we're just judging the CEO by the stock performance, then it doesn't look good for Rometty.

Jayson: When you're head of IBM, it's heads you win, tails you lose, right? You do a crummy job, you get fired, you still can laugh at the rest of us and sit on your piles of money.

Hill: Fair enough.

I wanted to get your thoughts on retail, because there were a couple of headlines this morning. And unfortunately, the headlines that we've seen over the past couple years, and I guess we'll be seeing more of in 2020, and it's about bricks and mortar locations closing. Express shares are up a little bit on the news that Express is closing about 100 locations.

Jayson: Oh, man. [laughs] I've been through this with Guess? and some others. When they say they're going to close their way to profitability, run.

Hill: Well, and on top of that, you have Papyrus, not a public company, but a stationery store --

Jayson: Public-facing, that's for sure.

Hill: Public-facing, and closing all of their locations. Four hundred-plus locations.

Jayson: Cheap clothes at the mall. Are they going to sell stuff online or just fold it up? I didn't see that headline.

Hill: I saw that last night.

Jayson: I can't imagine it that much of an online presence if you're losing all your stores.

Hill: If you're looking to buy greeting cards or stationery or high-end wrapping paper, get yourself to a nearby Papyrus, because they're having a sale.

Jayson: Oh, I was thinking of Papaya, the clothing store.

Hill: No, Papyrus.

Jayson: Oh, forget that. There was a 400-store stationery chain?

Hill: Yes. [laughs]

Jayson: Wow!

Hill: I know.

Jayson: See, I went digital a long time ago.

Hill: So when you look at the retail landscape as an investor, what goes through your mind? Because obviously, we've seen this play out with some larger retailers that are either going out of business altogether -- Toys R Us; Sports Authority. They're shutting down all of their locations and they're hanging up their spurs. In other cases, it's companies that are trying to get a little bit smaller, a little bit more of closing underperforming stores. But we're also seeing some bricks and mortar retailers that are doing really, really well.

Jayson: Well, there's very few of the latter though, right? I've had plenty of fashion and retail stocks over the years. And even the ones that survive and seem to remain on the public radar screen, an American Eagle or something, for shareholders, you've just been creamed.

So in terms of retail, I kind of got out. A couple of weeks ago or last week, I went through my portfolio and I said, "Out, out, out." The only one I hung on to in terms of apparel was Lululemon because they just get the job done like nobody else in that business. I held on to one online fashion retailer, app-based.

And then, in terms of general retail, I own shares of Five Below, which is a unique store in that it's kind of a fun discovery. I know now they actually have $10 stuff, but it's cheap stuff. You can go in there and it's actually a great place to get your sunscreen, by the way, in the spring. But those are the only real concepts that I've got.

It is so tough to compete these days, with the huge companies, with Amazon, and then, your traditional stores that have stepped up their game. For instance, Target or Home Depot or Walmart, which have done a great job of integrating online sales or app-based sales with pickup, and doing a good job with their physical store footprints. It's really tough for some companies that aren't super good to compete. What are you going to do if you're Macy's? Why does anyone go to a Macy's anymore?

Hill: Your point about Lululemon, I think, is a good reminder that anytime there is a company that is succeeding, when there is talk of competitive threats coming in, if you own shares of that company, it can be tempting to say, "Well, I'm going to get out now because competition is coming." It also, in the case of Lululemon, might just be worth is holding on to see how the competition does. Because you go back five or six years, even beyond that, and some of the talk with respect to Lululemon was, "Oh, you know who's getting into this space? Under Armour and Nike, and they're going to undercut them on price, and they're going to take out Lululemon. Who's going to keep buying yoga pants at $100 a pop?"

Jayson: And nobody does now. It's $130.

Hill: [laughs] Right. They've just continued to perform well. And the competition came and went.

Jayson: And the yoga pants market oddly turns out to be larger than anybody thought. But, yeah, I sold Under Armour. I didn't sell Lululemon. Under Armour has been stinking it up for years now. Plank stank the place up and then left. And I just don't see things getting a whole lot better. I think they became more of a commodity. Lululemon's got that weird name, but they kept the upscale vibe. I just don't think you get the same thing with a company like Under Armour.

So it really does matter. I mean, Lululemon's got competition from a division like Athleta, which makes really good stuff. But Lululemon continues to sell more and more of that really expensive stuff. I don't even know what the multiple is anymore. I don't care. They do a better job; I'll hang onto them. 

Hill: Seth Jayson, always good talking to you. Thanks for being here!

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.