Disney Opening Shanghai Park

In this episode of MarketFoolery, Chris Hill and Motley Fool analyst Bill Mann go through some of the latest earning reports. They discuss Disney (DIS 1.54%) and why the stock is up. Next, they talk about a couple of e-commerce platforms, an online marketplace with impressive results and shares hitting an all-time high, and finally, a platform facilitating online stores.

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This video was recorded on May 6, 2020.

Chris Hill: It's Wednesday, May 6^th. Welcome to MarketFoolery. I'm Chris Hill, with me, from a safe social distance, it's Bill Mann. Good to see you, my friend.

Bill Mann: We're actually only six feet away. [laughs] How are you, Chris?

Hill: Each of us on our laptops, but we're in the same room.

Mann: Chris, we're directly behind you.

Hill: Earnings season rolls on. We've got a couple of different e-commerce earnings, but we're going to start with Disney.

Mann: A meaty day, Chris.

Hill: Oh, my goodness! I mean, the numbers for Disney were terrible, but we expected them to be terrible. And I have to say, as a shareholder I'm pleasantly surprised that shares of Disney are up. And I said yesterday, right when the numbers came out, because Disney reported after the closing bell yesterday and the stock was down a couple of percentage points immediately after hours, I said to our friend Jim Gillies, "This is going to be about the conference call." What happens to the stock on Wednesday, yes, it will be informed by this report, it'll also be informed by the conference call; and I'm guessing Bob Chapek did a good job.

Mann: I'm guessing he did do a good job, but as I've said all along, because we're in such a weird period of time, every single company, I think most companies that haven't actually gone up during this period of time, people are only really paying attention to two things. One, what's your balance sheet look like? And two, what access to credit do you have? And in Disney's case those things have been and will continue to be fine.

I was playing a game this morning that I'd like to play with you regarding Disney. So, let's pretend that the coronavirus has never happened and we wake up this morning and Disney has come out saying that their revenues are down 34%, earnings are down 19%, how much is the stock down?

Hill: Oh, if the virus hasn't happened?

Mann: In Bizarro World where we don't have a ready-made excuse for every company; how much is the stock down?

Hill: 30%? more?

Mann: Yeah, more.

Hill: [laughs] Yeah, it's getting gutted. And it's down from where it was at the beginning of the year, but you're right, this is not nearly as bad as it could be.

Mann: Yeah. So, Disney may have -- and this really goes to the transformation of the company that happened under Bob Iger, but Disney is being hit in three different places really, really hard. The cruise ships are shut tight. The parks are shut tight. ESPN is showing competitive knitting or whatever they can get their hands on, korean baseball now, by the way, I don't know if you've picked a team yet. But these are three huge drivers for Disney.

And keep in mind that the quarter they just reported, their parks were open through about the middle of March. So, most of the damage that's happened to Disney has happened after that, right after the quarter end. So, yeah, it's amazing, but it really does speak to the value of this company, the assets that it has in terms of the library of characters that it has. It just rolled out Trolls 2 and it went straight to Disney+. It has crushed it, which is probably not good news for the theater companies because a sacred trust has been broken for good reason and people understand why. But Disney+ carrying its weight, doing a good job. It was a fine quarter under the circumstances.

The other interesting thing, I don't know if you saw this, Chris, but Disney announced that its Shanghai park is opening on the 11^th of May, which is next week, so.

Hill: I did see that, and this is one more thing to watch in terms of businesses can open their doors and say, "Come on in," but then it's a question of how many people actually want to go inside. So, with Disney, this is absolutely going to be the thing to watch over the next month or so, because, hopefully, it will provide some clues to the reopening of parks at some point in the United States. But I'm keeping my expectations pretty low in terms of foot traffic in the parks in Shanghai.

Mann: Yeah, I think that that's the prudent thing to do, because obviously, even in China, you're going to see much greater barriers to people travelling from far outside of the Shanghai region to come to the parks, that people aren't pitching up in airplanes, they're not staying in hotels. But as a model, it's going to be really interesting to see what Disney does and how it handles being open.

And to me, I don't want to call it hopeful, because China is far, far, far down the road in terms of the backend of the COVID-19 crisis compared to where the U.S. or even Europe is, but they are going to have a model in place for when inevitably, and I've said this all along -- inevitably we will beat this semi-sentient beastie, what is it going to look like?

Hill: The last thing I'll just add is, one of the questions going into the conference call was the presence of Bob Iger, how much is he going to participate, because he's the Executive Chairman, we've seen these reports that he's now, sort of, pulled the CEO reins back. I mean, Iger talked at the top of the call, just made some opening remarks and then he just handed the microphone to Bob Chapek, and he never appeared again. And as a shareholder, I feel like that was absolutely the right move.

Mann: Yeah, this wasn't one of those Friday Night Lights when Matt Saracen gets benched and has to try and figure out his way. Obviously, Bob Iger had no way of knowing when he left in early February that he was leaving and like, "Hey, here's a basket of snakes, Bob, good luck." So, it is a very, very good thing. And I think Bob Chapek would say the same thing, it is a very good thing that Bob Iger came in and at least took one of the reins for the time being. And I don't see that as emasculating to Bob Chapek at all. There's a learning curve with every job you go into, especially a company that is as dynamic, as complex as Disney is, and so yeah, you're exactly right, I noticed the same thing, he started and I immediately thought, "Oh, no, no, no." But then handed over, and that was the last you heard from him. You can feel his presence, I mean, I felt, but, you know, nothing more from him, so. I can't believe I'm saying this, but kind of good stuff from Disney, like, OK. The market, I think, is reacting appropriately.

Hill: The stock of the day is MercadoLibre (MELI 1.96%), shares are up 20%, hitting a new all-time high. MercadoLibre's first quarter was kind of everything [laughs] you could dream of if you're a shareholder. Active users up, the total payment volumes through the Mercado Pago was up, transactions were up. I mean, was there anything bad, was there anything? I mean, you're a shareholder, was there anything in MercadoLibre's quarter or their guidance that made you go, "Well, that's not so good?"

Mann: [laughs] "Well, that's not so good." Well, I mean, they did miss earnings and they have pretty much pulled guidance back for the year, but they also said that they're about to spend something on the order of $700 million in Brazil. And it's an Argentine company, but to be quite fair, and I apologize to any Argentines who are here with us because you hate hearing this sort of thing, Brazil is its most important market. And MercadoLibre laid out a plan where they are doubling down on their investments into Brazil. They want to win this country. They want to win.

So, what I saw that was most impressive for MercadoLibre wasn't so much the results, and the results were fine, they were good, they were what you might expect, but the fact that they were saying, look, other companies don't have access to credit right now. And they're playing a game that I have -- I've been playing this game of what changes are going to be permanent on the backend of this crisis. And one, that I think that MercadoLibre is playing right now is, there's going to be less competition. There's going to be less competition, so we should drop the hammer now.

Hill: You look at the rise in the stock, obviously up big today. The market cap for MercadoLibre is $37 billion, and when you look at the markets that the company operates in, does that, I mean you tell me, is that the right size, do you look at the $37 billion market cap and think, "No, that seems about right," or do you think, "Boy! they still have a lot of room to run?"

Mann: They've got a lot of room, but I think their share price is going to visit lots of places because it is trading at nearly absurd multiples, the kind of multiples that you would've almost never seen in a pre-internet environment where you're talking about asset light companies that are pretty good at generating capital returns. So, a lot is expected of this company from the existing share price.

And let's be honest, through its own missteps or through exogenous things that have nothing to do with its own operations, it could fail to live up to current expectations. And that's true of any company that is valued at +10X sales. But, yeah, no, this is a company that is in Latin America, which has a massively rapidly growing middle class, it has to do with Mercado Pago, which is virtual payments in markets that are entirely underbanked and it's just a massive opportunity for the company.

People tend to think of MercadoLibre, Chris, as being the eBay of Latin America, it's just not true at all. I mean, it's eBay plus it's PayPal, you know, they have a huge number of opportunities in front of them.

Hill: Do you think the people at eBay, because eBay once owned nearly 20% of MercadoLibre, do you think they -- how much are they kicking themselves, I guess is my question? Is it daily or is it every hour or is it just when the quarterly report comes out?

Mann: It was right when you said that, when you started talking about eBay, yes, the answer is, yes. I think the capital allocators at eBay may be incompetent. Between selling out MercadoLibre and selling out PayPal and not holding, really, any kind of stake in either of them. eBay is now a $28 billion company; PayPal is in the hundreds of billions. And that used to be eBay's baby. Yeah, $150 billion. That was a wholly owned subsidiary of eBay.

I don't think they're very good at capital allocation or at least they historically have not been. You know, they've had two golden tickets, like, "I don't know what to do with these, let's not risk having all that money coming our way."

Hill: Shopify's (SHOP 4.90%) first quarter revenue came in nearly 50% higher than a year ago. Still not profitable, but the stock up about 5% today, and it has more than doubled in the past six weeks.

Mann: Yeah, more than doubled. It was at $313 on the 18^th of March and now it is closing in on $700. That's not usually how six-week periods go, Chris. I don't know if you know this, but that's not even for the growthiest of growth companies; that's pretty good.

We've talked about Shopify quite a bit, it is a beloved company here at The Motley Fool. Nearly every service that we have it seems has Shopify in the portfolio. Shopify did an amazing, amazing job supporting its small and medium business clients during the early days and up till today with the economic damage and fallout that was falling upon them because of all of the closures from the coronavirus. There's a really cool thing that came out in their report, and I know it's kind of terrible radio broadcasting just to read big quotes, so I'll try and be quick.

But the gross margins for their point-of-sales were down 71% between March 13^th and April 24^th, which is a sign of all of their small and medium vendors closing up their physical locations. The retail merchants managed to replace 94% of those revenues by going online and that was Shopify supporting them, getting them up as quickly as possible and really averting disaster for a lot of these merchants. What they have done at Shopify is amazing. And I think that they've hit, you know, they're at the point where they've had escape velocity, they're not going to be caught, they are at a $2 billion run-rate for revenues now, and this company just astounds me.

Hill: But similar to MercadoLibre, when you just look at the stock price, expectations are robust. They've got insanely high -- and let me, you know, just to draw the comparison further, let's go to the market cap. This is an $84 billion company. How much bigger can Shopify get?

Mann: It can get bigger, I really think it can, but you're entirely right. I mean, it is, on a price-to-sales basis, it is now 53X. That means if you take the trailing 12-month revenues, 53 years worth of that. And that's before you take any expenses, like, pay somebody, any of those sorts of things. So, yes, absolutely heroic expectations on Shopify.

But at this point, given what they've just done under these circumstances, getting back to what we talked about before, I don't know who's going to be competing with them anymore, I don't know how they are going to be displaced? Could Amazon do it? It's not what Amazon really focuses on. Yeah, they're in an amazing, in an amazing place, and they are a company that we should just hold up as one that has managed this crisis exactly right.

Hill: I don't want to gloss over what you just said there, because I think it's an important distinction, because when we talk about e-commerce companies broadly, Amazon and Shopify get namechecked, appropriately so, but I think that can lead some people to think they are in the exact same business, and they're really not.

Mann: They're not at all. No, they're not at all. Yeah, they're absolutely not at all in the same business.

Hill: Last thing and then I'll let you go. Which baseball team in Korea have you picked as your own?

Mann: I have not picked a Korean baseball team yet. In Taiwan, I am a big Uni-President 7-Eleven Lions fan. So, yes, that's right, the 7-Eleven Lions. It's fantastic, there's only four teams, they play with robots in the audience, all with masks on, socially distanced, they have live cheerleaders though, which seems odd even for baseball to start with.

So, I've not picked a Korean team yet, so the next time I'm on with you, we will, by that time, you and I will have picked teams and we will be superfans.

Hill: [laughs] Sounds like a deal. Bill Mann, thanks for being here.

Mann: Great! Thanks for having me, Chris. It's good to see you, brother.

Hill: As always, people on the program may have interests 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.