Will Zoom Video's (ZM -4.58%) move into licensing pay off? How much is Microsoft (MSFT -0.45%) willing to pay to acquire Discord? In this episode of MarketFoolery, Motley Fool analyst Ron Gross joins host Chris Hill to dig into those questions and more.
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This video was recorded on March 23, 2021.
Chris Hill: It's Tuesday, March 23rd. Welcome to MarketFoolery. I'm Chris Hill. With me today, the one and only Ron Gross. Thanks for being here.
Ron Gross: Thank you for having me Chris, it's always a pleasure.
Hill: We're going to play another round of buy, sell, or hold. What's happening in the business news through the lens of Buy, Sell or Hold, and we'll start with Zoom Video, which needs no introduction. [laughs] But Zoom Video has had amazing success over the past year and now the company reportedly is going to start selling their video conferencing technology so that other companies can embed it in their own products. Ron, buy, sell, or hold Zoom's new licensing idea being a success?
Gross: Boy, oh boy. I'm going to buy this, but it won't be easy, it won't be without competition. As you say, they're going to embed their own products into other companies to allow for video technology functionality. Zoom will be paid on a permanent basis with the first 10,000 minutes each month free. In general, I think this is a good idea. Video is currently and will be embedded in everything, from telemedicine to social media, to so many other things. That makes sense, but it does put them even more so directly in competition with the big boys, and that is of consequence. Amazon has a partnership with Slack to bring its video conferencing tools called Chime directly into the chat app. I'm not sure what the Salesforce acquisition of Slack means for that partnership, but that's one example. Zoom would also compete with Twilio that provides communication software for businesses. They'll go head to head even more so with Microsoft, which offers similar features in Teams software. I also think it's important to note that there is an open-source video conferencing technology called WebRTC, which is HIPAA compliant. That kind of compliance is required for things such as telemedicine. That's open-source, it's supported by Apple, Google [Alphabet], Microsoft, Mozilla, and Opera software and that is something very interesting to keep an eye on as well.
Finally, I think I will add that if Zoom is doing this because they're concerned that they're going to start anniversarying really high-growth numbers and they're worried about coming in at decelerated growth, they're worried about Wall Street, they're worried about investors, that's a bad reason to do anything. If so, be it. The growth was artificially high because of COVID. There's nothing wrong with it coming down to more normal. Now, having said that, if it's a good business decision and they think this makes sense, then go for it. As I said, I think I will buy on this. But don't do it because you're worried about Wall Street.
Hill: I'm going to attempt to play mind reader and guess that they're doing this for the right reasons. It seems like a logical move. You and I were talking about this earlier today, there is a version of this where it dilutes the product, it goes bad. This is even worse than an apples to oranges comparison. But one thought I had when I was reading the story in the Wall Street Journal was about the way some fashion retailers go a discount route and then it just dilutes their brand. We saw that with Michael Kors and others, but I think you've got to buy it at least in terms of this initiative.
Gross: You won't see the brand, that's the point. It'll be opaque or it won't be visible to the user that so and so company is actually using Zoom technology to enable video conferencing. As long as the technology holds up and people don't start complaining, I don't think there will be a dilution because it won't be branded Zoom.
Hill: Microsoft is in talks to buy Discord, which is a video game chat messaging platform, and reportedly, Microsoft is looking at spending more than $10 billion to buy Discord. Some, however, believe Discord is more likely to go public than sell itself, so buy, sell, or hold, Microsoft making this deal happen?
Gross: Interesting how you phrase that. I'm going to say buy that it happens, but I'm going to say hold that, I'm not sure I would want it to happen as a Microsoft shareholder. But it sounds like it's going to get done for us as the reporting looks to be around $10 billion. They've reached out to a lot of potential buyers, Microsoft being one of them. This quarter, they raised $140 million in December at a $7 billion valuation, so this will be a nice premium for the last raise. It's really viewed as a strategic asset. It connects game companies with their biggest fans in audio and text-chat communities. When you're gaming, you can audio and text-chat with others in your same community. They have 140 million monthly active users, they monetize by getting you to upgrade to their Nitro subscription service, but many use it for free.
Their claim to fame is that it's high-quality audio, whether it has competition from Clubhouse, which I keep hearing more and more about, so we can't ignore that. I think successful IPOs from like Roblox and Playtika, if I'm pronouncing that right, have put gaming even more in focus like it needed to be more in focus. But from a capital raise, from an IPO perspective, these companies are pretty hot right now. It might be too early for them to go public. The Wall Street Journal reported that in 2020 they had about $130 million in revenue, up from $45 million a year before, so great growth, but still relatively small, not yet profitable. Maybe an acquisition is the way to go. A potential acquirer like Microsoft, Amazon, Twitter, Google makes sense, but what happens is Discord right now can be used across platforms. If Microsoft acquires it, it will likely only be used for Microsoft's platform. I think that is a concern to some that it will then only be narrowly used across the one gaming platform. But I think Microsoft can certainly afford it. It's not cheap, $10 billion is real money, but Microsoft certainly has a balance sheet to get that done.
Hill: Yeah. It really does seem like a situation where if Microsoft wants this, they're going to be able to make it happen. I think they have somewhere in the neighborhood of $75 billion in cash on the balance sheet. Even if they opt for a couple of billion, it would still be half of what they paid for -- you think about the acquisitions they made of things like LinkedIn and Skype, so it seems like they're going to make it happen. It was interesting, right before we started recording, I just went on to Twitter just to see, just to be like, "Are people talking about this?" The gaming community [laughs] that I saw on Twitter is not happy at the prospect of a platform that they really enjoy being on, being in the hands of Microsoft. That would be priority one for Microsoft is making sure that they either work with the Discord team to keep them in house to make sure that people understand, "No, we're going to take care of this. We're not going to ruin the thing that you love."
Gross: You have to be on the Microsoft platform or otherwise, it goes away for you.
Hill: Now, I really understand you. I'm buying that they make this happen, [laughs] but I'm holding whether that it's a good idea. Last month, GameStop's CFO stepped down. Today, the company announced the Chief Customer Officer, Frank Hamlin, is resigning at the end of the month. The timing is interesting, Ron, because GameStop reports fourth quarter earnings after the closing bell today, so we'll go with the stock here. Buy, sell or hold, GameStop's fourth-quarter report, beating expectations?
Gross: Adjusted expectations because there's going to be charges all over the place, COVID and other reason related. This is just for fun because we're not too hyper-focused on whether the companies be it on the quarter or not. But I think it's important to note that consensus estimates have been steadily falling since October. If you had asked me this question in October, I might have said, "Sell, I think the numbers look too high." Now, the consensus is $1.35 per share in earnings, which is only $88 million on $2.2 billion in revenue. I think that seems reasonable. I'd have to obviously dig in significantly more from a modeling perspective to say for sure. But since earnings have come down to earth, estimates have come down to earth, I think it's possible. I think more importantly for the stock is going to be what they say about the future. Activists have recently come in, taken over I believe three board seats, that Chewy Co-Founder Ryan Cohen is there. They are being tasked with transforming GameStop into an e-commerce focused business. There is a transformation committee that is tasked with doing so. Forget about the Reddit community for a minute. Just regular investors [laughs] are going to want to hear about the strategic plan for that.
At $14 billion in market cap right now, boy, oh, boy, that better be a good plan, otherwise, why would you need to take a position in this company at a $14 billion valuation? As you said, it's interesting that two executives have left. The CFO appears to have been pushed out a month ago, Frank Hamlin now resigning. Perhaps the activist investors are clearing the house and not finished yet. The one thing they said is that Hamlin is leaving with "Good reason," which under his employment contract include provisions such as a cut in pay or a material diminution of his authority, duties, and responsibilities. Perhaps, he left on his own accord, but for a good reason.
Hill: Yeah. You look at these two departures, anytime you have two C-suite executives leaving within a month of each other, particularly in the wake of new management coming in, it's like, "All right, did they just clash? Are they pushed out? Is this like a Bed Bath & Beyond situation when Mark Tritton took over, [laughs] and basically just cleaned the house?" Because he said, "Look, I'm the CEO. I've got a plan, and you people are not a part of it." There is a version of this that can work out in terms of Ryan Cohen, all the success he had at Chewy. There is also a version where two employees at the C-suite level decide, "No, no, this isn't going to work. By the way, my stock is worth more, so I'm going to leave now."
Gross: Yeah, that could be. As a former activist investor, I've seen this play out. New folks come in, the business is really changing significantly from what it was to what it will be. You need a change at the top to execute that or to make the directors feel comfortable that the right people are in place to execute. Maybe on both sides, some of the employees are disgruntled, and they are more than happy to take their much more expensive ball and go home, as you said, with the stock price being at $190 per share.
Hill: By the way, you mentioned the market cap of GameStop is $14 billion. That's a market cap for Domino's Pizza. [laughs] If I give you $14 billion, Ron, would you rather own all of GameStop or all Domino's Pizza?
Gross: Not even close, my friend, Domino's all the way.
Hill: Ron Gross, thanks so much for being here. I really appreciate it.
Gross: Thanks, Chris. Lots of fun.
Hill: 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.