Discovery+ Impresses Wall Street

In this episode of MarketFoolery, host Chris Hill is joined by Motley Fool analyst Jason Moser to discuss how Discovery Communications' (DISCA) streaming service got off to a hot start, sending shares to an all-time high. Also, Korn Ferry's (KFY -1.23%) stock hits a 52-week high after stronger-than-expected third-quarter results. Plus, they talk about Boeing's (BA 0.32%) latest headline risk and the potential for "re-opening" stocks.

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This video was recorded on February 22, 2021.

Chris Hill: It's Monday, February 22nd. Welcome to MarketFoolery. I'm Chris Hill, with me today, Mr. Jason Moser. Good to see you.

Jason Moser: Well, it's good to be seen, Mr. Hill. How are you doing?

Hill: I'm doing all right. We got a stock that's hitting a 52-week high. We've got another stock that's hitting an all-time high, but we're going to begin today with the not-so-friendly skies. United Airlines is grounding some of the Boeing 777s in its fleet. This is in the wake of the FAA investigation of the United Airlines flight from Denver to Honolulu over the weekend that had to make an emergency landing because the Boeing 777 lost an engine. Let me say that again. It lost an engine. No one was hurt, and that includes, by the way, the people on the ground, because there was debris falling from the sky because the Boeing 777 lost an engine. Not surprisingly, shares of Boeing are down, and we will get to the airline stocks, which are all up. We'll get to that in a second. But you and I were talking right before we started recording here. Are we in year four of Boeing having these types of headline risk problems?

Moser: Yeah, I guess it's been that long. [laughs] It feels like it's dragged on to the tune of Wells Fargo-like proportions. If it's not one thing, it's another. At least it's not the 737 Max. I think that's really been the big headline driver for the last several years for Boeing, and rightly so. Clearly, there's some real problems inherent with that design and the software behind it. So, in regard to this, obviously it's been a very difficult stretch for Boeing, the stock. I don't think this is one of those things that necessarily is going to play out on them in the same way. I think, primarily, because when we see Boeing, the headline, the subhead there is Pratt & Whitney engines that were found on the 777s. So it's not like it's a Boeing engine per se. It's on a Boeing plane, but Pratt & Whitney, which is a subsidiary of Raytheon, is part of this equation as well. Look, you never want to see something like this happen. Even just the notion that you could get on a plane and this is a possibility makes you think twice about getting on the plane in the first place. But by the same token, listen, we get out of bed every morning and there's risk inherent in just living life. I think this is one of those things that the responsible parties, they obviously dig into the problem. This could put a little bit of a crimp on demand for these particular planes for the foreseeable future, at least until they come up with an answer. I don't think this is one of those things that necessarily pins this company down like the issues with the 737 though.

Hill: The airline stocks are all up, as, by the way, are travel stocks like Expedia, I think Booking Holdings, Live Nation, these event-based stocks, in part because there was a analyst note that came out this morning from Deutsche Bank painting the picture of the U.S. consumer, saying, when the pandemic is over, U.S. consumers are, as a group, going to come out of it with lower credit card debt. If you're a homeowner, the value of your home is higher than it was before the pandemic, $1.5 trillion of excess savings, and that doesn't even include the gains that we've seen in the stock market. We've talked for months now about the cruise line stocks, the airline stocks. You don't want to necessarily try and time them, and I'm not suggesting that, but this is a pretty compelling case, because this isn't just the theoretical that we saw last spring. If you go back to March and April and stocks falling, and people theorizing, not incorrectly, well, when this is over, these businesses are going to bounce back. This is a note that is backed with 10 months worth of people trapped in their homes not traveling, their home values are going up, they're saving more money. Again, I'm not looking to buy airline stocks, but certainly, there are enough businesses outlined in this note that there's a play to be had here.

Moser: I absolutely agree. I think, with you, the airline stocks are probably the -- I don't want to say the last place I'm looking, probably one of the last places I'm looking.

Hill: No, the cruise lines are the last.

Moser: [laughs] Cruise lines are the last. I do think that we're going to see some epic pent-up demand because this is a matter of when and not if, now. We are really on the tail end of this pandemic, so to speak; vaccines rolling out, we're getting kids back in school here. The numbers are showing too clearly, the hospitalizations are down, cases are down, so hopefully, this really is the final leg of the race here, so to speak. I don't want to call it before it's done, but everybody out there just keeps making smart decisions. Life can go on with this stuff. You just got to be smart about it in some cases. I think, all throughout this time, it's not like airlines shut down, it's not like vacations stopped, but they were severely curtailed. Understandably, a lot of consumers just didn't feel compelled to go travel wherever they would normally go, whether it was because they couldn't get there or whether it's because the activities weren't nearly as robust as they would be in normal times. You are just going to see a ton of people ready to get out there and do all sorts of things. Travel is one thing, but the restaurants, I'm going to be very fascinated to see how the restaurant space responds to the growing flow of consumer spending that is getting ready to hit, because there is no doubt it is on its way.

Hill: Shares of Korn Ferry are hitting a 52-week high this morning. Third quarter results for the management consulting firm came in higher than expected. I mentioned the U.S. economy overall, we still have millions more people unemployed than we did a year ago, and yet, you look at the results from Korn Ferry, an indication, among other things, that executive hiring continues.

Moser: It does. Consulting itself is a good business to be in, and you can build a really strong business around it over time. We've seen businesses like Cognizant and Accenture, for example. Korn Ferry is essentially a smaller version of those types of companies. It's a small cap still, but a strong little business and one that continues to chalk up some pretty impressive results. The stock is actually up 47% over the last year, beating the market soundly. This is through what's obviously been a very difficult time, but as you noted, there are pockets of the economy that aren't feeling the same way. When you look at Korn Ferry's numbers, revenue for their fiscal third quarter was down 9.5% from a year ago understandable. It was up 9% sequentially, and I think that's important. It goes back to what we were talking about just earlier with this forward looking notion that we are going to start to see more spending, more activity, start to see some recovery here. Then I think we're starting to see some signs of that through a company like Korn Ferry in its results. Adjusted earnings were up 27% to an all-time high of $0.95 per share, and actually, operating margin expanded considerably from a year ago. It was 13.7% versus 6.1% a year ago. A lot of that was just to smart management, conservative financial management in the face of a very uncertain time.

Korn Ferry, it's a neat little business. They serve a number of different markets. I think that when you look at the markets it serves specifically: industrial, consumer, financial services, and the tech markets are its biggest serve. That makes up the overwhelming majority of its revenue. We saw across all four segments of the business, relatively modest contraction, save the recruitment process, outsourcing it, and the professional search side of the business. But also, this is a business that continues to be very resilient in the face of a pandemic, the stock is trading around 70 times earnings. I would not let that multiple fool you though. It's really because of what have been very depressed earnings year over the past year for, again, understandable reasons. Seems like a business smart management, making a lot of smart decisions. Listen, 71% of their revenue comes from clients that utilize multiple lines of their business. So, they are doing something right, and I'd imagine they'll continue to benefit as we see this bounce-back.

Hill: Discovery Communications wrapped up a strong fiscal year. Fourth quarter profits and revenue came in higher than expected. The company said its Discovery+ streaming service is on pace to have 12 million subscribers by the end of this month. Keep in mind, it only launched on January 4th. This is a service with Discovery Channel, HGTV, Food Network, TLC, Animal Planet. I think we talked about this at some point in the last few months, Jason. At the time, when they came out with the pricing plan, you and I were like, yeah, that seems like a smart move. There was the whole $5 a month with ads, $7 if you want the ad-free version, and shares of Discovery Communications up 7% this morning hitting a new all-time high.

Moser: I'm actually not really surprised by this. I know we've talked about it in this market of just streaming service saturation. I mean, it seems like there's so many now. We're getting a little bit tired of seeing all of these different little $4.99 charges on our credit card for whatever streaming service we maybe used a couple of times a month or whatever. I do think, however, Discovery, thanks to the portfolio of brands that it has under its umbrella, I think in a world of fewer pay TV subscribers and never quarters, folks who just don't want to pay for that type of cable relationships, Discovery to me and their Discovery+ service seems to be one of the streaming services that should fare better than most. I think this is one where a lot of advertisers will want to be. I think to your point on the pricing, very smart, very forgettable price point. I think that, for a lot of those streamers, we talked about this, I think, on Motley Fool Money briefly last week, but we're seeing a lot of these streaming services, I think are going to have a little bit of an issue in raising prices as time goes on. It's something that has to be done very methodically, very strategically in raising prices, because obviously, people are going to pay for it. You have something that people want.

I think that with Discovery, with all of the different content they have, from food to home, to travel, to education, it scratches so many different itches. I feel like they will have more pricing power than most, and some of these initial numbers really do support that. I think something that was fascinating I saw was that 93% of their entire 55,000 episode library, 93% has already been watched from this Discovery+ sub, from this product they've rolled out. What they're seeing is just a ton of engagement. They refer to this whole idea of becoming a streaming company, they essentially view this as next-gen revenue. They are focused on working on this next generation type of business that is taking this leap from linear television and essentially going into over the top and streaming, and what they're seeing is a tremendous response from it. They're seeing that advertisers are flocking there. They have over 100 advertisers and brands on the platform now here in the U.S. They expect that to actually double by the end of the second-quarter. Again, with the service like this, it's going to certainly be an ad play, as we've talked about things like Paramount+ and Peacock. Advertising is going to be a very significant part of this platform, and it sounds like early indicators tell us this is where advertisers want to be.

Hill: One thing that will be interesting to watch, particularly with the streaming service is how does growth look like in terms of the subscriber count? Because it's easy for me to imagine the people who really love HGTV or Food Network or any of these things jumping in early. We saw that with Disney+, we've seen that with a lot of services. So what does it look like six months from now? Are they able to sustain it? And then the other thing is, and this gets a little bit in the marketing, is what are they able to do to provide the unexpected spike in subscribers? In the last year, we saw Disney+ with the success they had of the first season in The Mandalorian, they really promoted the hell out of season two, and we saw that that really boosted the numbers. We saw that spike go up. I'm not familiar enough with their portfolio of brands to know what they have to bring that in. Is Shark Week part of theirs?

Moser: Yeah. That's a Discovery thing.

Hill: Maybe that's something that's a lever they can pull there. But now, this was great to see, and when I was going through some of the articles this morning, I was reminded of the fact that it wasn't that long ago that people were looking at Discovery Communications as a business and asking the perfectly reasonable question, does this business have what it takes to survive? Do they need to sell off some of their brands? Are they going to get bought by someone? Is someone going to look at some of the value creators within their portfolio or brands and say, OK, we're going to buy the company so we can get at those, and then, we're going to get rid of the rest. It's a testament to their leadership that they've pulled this off.

Moser: I think you're right. If you go back to March of 2018, that's when they closed that big script, the acquisition that brought more of those brands into their family. It was around a $15 billion deal. Ultimately, that was about just making that umbrella that much bigger. Having all of that different lifestyle content really is proving to be very valuable. I think to your point in coming up with new things, for me it begins and ends with Diners, Drive-ins, and Dives. You know I'm a guy for you, a Triple D nation junkie. I watched that show. It's like ambient noise in my house. It's either that or The Office, Chris. I'm not going to lie to you. Now, the interesting thing is we get access to all of that content with that Hulu Live subscription. So instead of cable, we get us the over-the-top version of cable through that Hulu Live product, which is really great. It's interesting, because it gives us linear TV. It gives us all of that HGTV, Food Network, and whatnot linear TV, which is fine, but then you also have a library of the on-demand content as well. So we essentially get Discovery+ by virtue of having that relationship with Hulu Live, and so you can see there's going to be a number of different ways for them to win even though they're talking about next-generation.

Linear is still going to be a part of the mix to a degree. It's going to be a smaller part of the mix, I think, but we're seeing linear, at least still with those over-the-top live subscriptions. I don't think those are going to go away. It's just going to be a lot of different choices for consumers. Then when you look at all of the different content, the different properties, the different people, the talent that they have working under that Discovery brand. I mean, a good example, I think you'd look at someone like Chip and Joanna Gaines, they were the ones who did that show Fixer Upper. It's very popular. I mean, I think probably six or seven seasons it ran and they brought it back. But they've started their own business called Magnolia. This is something they talked about on the call actually. They have come up with a creative partnership with Magnolia and Chip and Joanna Gaines. So, it's beyond even being just video streaming. Like, they're looking at Magnolia because Magnolia, itself, is a transactional business. They're selling things and designs and services.

So, Discovery is not only going to be a part of that, and not only they're going to build a mobile presence around that specific brand, but then also all the content that is developed from that relationship, then is part of the Discovery+ family as well. You can see how they're doing sort of a very Disney style move there. It's a bit of a page of the Disney playbook and taking that IP and then building a little bit more of a transactional business around that, participating in that transactional business via partnerships with some of their talent. I think there's plenty of potential there. I think it has all sorts of opportunities to work out. I can't help, and we talked about this, I think, a number of times over the years here at Fool HQ. I'm not saying this will happen, I could absolutely see a world where this company is owned by Walt Disney. This to me, just seems like, of all of the opportunities that they are for Disney; given that we know Disney is really building out this next-gen entertainment company, and focused on streaming in over the top. I'm not saying it's going to happen, Discovery is a $30 billion company, but a guy could dream, because I could absolutely see Disney coveting this, wanting it and going out, and getting it. If that happened, it wouldn't surprise me in the least.

Hill: I'm glad you mentioned the market cap because yes, Discovery right now, it's actually around a $25 billion, but given the way that they are going, yes $30 billion is probably where that conversation begins, but much bigger than what Disney paid for Pixar, or Marvel, or Lucasfilm. But we'll see and kudos to the people of Discovery. Jason Moser, who today is celebrating 11 years at The Motley Fool, cannot imagine this place without you, thank you, sir.

Moser: Thanks, man. Thank you very much, kind words. It's a pleasure to be able to work with folks like you every day.

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have a formal recommendation 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.