IAC/InterActive (IAC -2.78%) spins off video tools business Vimeo as a stand-alone public company. AutoZone's (AZO -1.48%) latest same-store sales growth was in the zone of greatness. In this episode of MarketFoolery, host Chris Hill and Motley Fool analyst Asit Sharma analyze those stories and discuss Amazon (AMZN -1.54%) closing in on its latest acquisition target: MGM Studios.

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This video was recorded on May 25, 2021.

Chris Hill: It's Tuesday, May 25th. Welcome to MarketFoolery. I'm Chris Hill. With me today, Asit Sharma in the house. Good to see you.

Asit Sharma: Good to see you, Chris. Thank you for widening your parameters, and once again, taking a chance to have me come join you in the morning. 

Hill: You're a known quantity at this point, I'm no longer taking a chance. We have a big acquisition brewing in the entertainment industry. We have some automotive earnings to get to. But we're going to start with another, I guess we could put this under the umbrella of entertainment. IAC Interactive is in the spotlight this week. IAC is a holding company that has a lot of brands in its portfolio, brands that you're probably familiar with, businesses like Angie's List, Care.com, The Daily Beast, Brides Magazine. IAC is spinning off Vimeo as a separately traded public company. This is the video tools business. I encountered it with music videos on vimeo.com, but it'll now start trading on the Nasdaq under the ticker VMEO. 

What do you think about this move? Because IAC is one of those businesses I've always found interesting. Never so compelling that I actually pulled the trigger and bought some shares of, but I'm always interested in the holding company's strategy. At some point along the way, they decided, look, there's greater value here to be had over the next decade or so if Vimeo is on its own. Do you think this is a good move?

Sharma: I think it is a good move. Same with you, Chris, I don't buy a lot of holding companies in my portfolio. I think it's hard to make money in the holding company business. You either focus on one industry and you're doing what are called roll-ups or you try to be some kind of, I don't know, Berkshire Hathaway quasi conglomerate, but you can't be Berkshire Hathaway. No one can be Berkshire Hathaway. But look at IAC, I think that this is a good strategy because they grew Vimeo for several years. These spinoffs typically are tax-free to shareholders. If you are an IAC shareholder, you'll get 1.6235 Vimeo shares [laughs] for each IAC share you own. Yes, I'm reading off the decimal points, 1.6 shares. But Vimeo itself is an interesting business. Some holding companies do a great job in letting good ideas grow and then runoff on their own, giving shareholders a slice if they want to continue holding shares in that, and we should talk a little bit about Vimeo in terms of what it would look like if we didn't have this context of IAC. 

Chris, as you mentioned, it's interesting. They have a reputation for quality for those of you who have just landed on their site and seen a very nicely produced music video. This carries over to what they actually do. The video tools you mentioned. Vimeo provides tools to create content within business organizations. You can be a small business or an enterprise business. They have a really wide toolset. They help any kind of business out there create compelling video narratives without having to spend the thousands and thousands of dollars it takes to do it professionally if you hired a professional video company. But that's not all. They also provide streaming services. They provide lots of interactive video services. Not necessarily what Zoom does, more geared toward the business world and content. But I was surprised, Chris. I'll read a few numbers and then I'll ask to hear your thoughts on this. This company grew 44% year-over-year last year. They have high margins approaching 70%. 

They have a user base that is growing quite quickly. Their go-to-market proposition is that there are millions and millions of small businesses plus enterprise businesses. They only have 1.5 million subscriptions. So if you look at their big picture, they're talking about 300 million small and medium-sized businesses, one million enterprise customers out there. That's their total universe of potential customers. They're still really small. What I really love about this company, just seeing it at a first glance, looking through the investor presentation, some other materials, 65% of their enterprise customers, so these are big companies that are out there with multiple departments and they need to have video internally at skill for messaging, 65% of those customers start with one or two people in the organization. They're free users, so they take the free Vimeo product and they get a budget to subscribe. That gets picked up by other departments, very much a freemium plus land and expand model. There's a lot to like in this company alone and it's more interesting than I thought, just like landing on their site over the years and seeing a really nice music video.

Hill: Not that we're saying people need to be locked to their screens everyday checking their portfolios. That's not a great habit for a long-term investor. But this is one of those times if you're an IAC shareholder and you're not paying attention to the Vimeo spin-off, then you're forgiven for your heart rate increasing when you see that in a 24-hour period, the value of IAC stock drops 30%. It's just like, what happened? But what happened was they spun out Vimeo as a separate public company. You're now a part owner of that stock so the overall value hasn't dropped 30%. It's just coming in the form of two stocks, not one. It will be interesting to see where IAC goes from here just as a business and a stock because it really has had a good past 12 months, but prior to that, it's a few years of basically just treading water, and I think if you're a shareholder, you're hoping that there are more stories like Vimeo within this portfolio of just scores and scores of companies. I don't know that there are that many more like that, but as you said, if you're interested in holding companies, then this is one to look at. But I don't look at this and think in the way that a lot of people a decade ago looked at eBay and its ownership of PayPal and thought, boy, if they could spin that out, that's going to be a homerun on its own most likely. I look at the underlying brands on IAC and a lot of them are names I'm not familiar with. It's not to say that there aren't some home runs to be had there, but I don't see anything that looks obvious in the way that PayPal was an obvious homerun.

Sharma: Yeah. Agree, Chris. There are some counter-intuitive academic studies I've seen that show that after a spinoff, the parent company performs better than it would have before the spin-off. That's crazy if you think about it. If you look at a company like Vimeo, it seems promising. It's got such a big growth rate. Why wouldn't IAC perform better with everything under one roof? The answer comes down to this. It's that business units get obscured. The average investor can't see how promising one idea is, and that idea of Vimeo in this case, doesn't have its own autonomous management team. It has to argue for [laughs] resources with the parent company. So both companies benefit. They can each focus on more and more core strengths. But it's hard to see when you look through that portfolio another company that to me is as compelling as this one, and as you say, there are no clear homeruns like PayPal, I think was visible to many people from far away and they've proven that out. But we'll see. Maybe we can revisit this, I don't know, at some point in the future and see how IAC is doing post spin-off.

Hill: You can add AutoZone to the list of retailers that are crushing same-store sales expectations this earnings season. AutoZone's third quarter comps grew 29% much higher than Wall Street was expecting. Profits and revenue also came in higher than expected. I know the stock is flat or maybe down slightly, although year-to-date, it's still up around 25%. To me, this is just another strong quarter from AutoZone.

Sharma: Yeah, I think so too. I think maybe they should be getting a little more love to date. But investors are often driven by just so high expectations, especially when a company like AutoZone has been benefiting from COVID. I've almost come down now to Chris, where we are now at this point in time, thinking, OK, is this steamy performance? Is it a sticky performance? Is it stimulus based? Is it just coming off of COVID, something sticky where the company is retaining new customers? In AutoZone, I don't think this has much to do with stimulus as many retailers we've looked at. This is more of a story of, I think, reopening and the fact that they're a commercial business. It happens so often. We have a car which we've been doing some repairs on. A lot of times the quickest place for our repair shop to get the part is from AutoZone. It is to go straight there. They get it, I think at a different price than we could have if we took part and part and took it over. You can see how my wills are returning to decrease the amount I'm putting in this old vehicle. But I love old vehicles. I love a vehicle that's been paid off and [laughs] I can drive it into the ground. 

Having said that, that commercial business is really taking off. That shows some reopening strength so this non-retail business and also their do-it-yourself business. Surprisingly all through the pandemic AutoZone, Advance Auto, and other Auto Retailers, they did pretty well even though cars were parked in driveways, Chris. People were doing projects in their driveways. They may not have been driving as much last year, and that effect is still there. Their DIY business was strong this quarter. Net income increased 74% year-over-year in this period. Operating profit increased almost 64% to $804 million. The one other thing that I wanted to talk about when we think of AutoZone and Advance Auto is a little bit like this, they are just a solid cash flow machine type company. If you missed out on this business idea, it's probably not too late. Not suggesting anyone run out today and buy an AutoZone or Advance Auto. But the auto-parts retailers, because their business is so solid-state and stable cash flow, they tend to be big acquisitions of their own shares. 

Just skimming through their statements today, really strong balance sheets, current assets of $6.2 billion, total assets of $14 billion, just debt of $5.3 billion, and just churning out great cash flow. If you were to chart their performance, which I actually did [laughs] prep for this show, you'd see how there's this widening gulf between the company's price and the market capitalization over the past 10 years. Price has gone up 385% over the last 10 years, not bad for an auto-parts retailer. But the market cap has only increased 158%. So they are consistently decreasing shares that are available to buy, and that's propping up the stock price. Deceptively, good investments. Do you own any auto-part retailers by any chance?

Hill: I don't. You and I were talking before we started recording about capital allocation and AutoZone's management has a long and good track record in terms of buying back their own stock.

Sharma: Makes all the sense in the world. One more thing about this, I know we have to move on, but I really liked that they were opening stores during the pandemic. It's a global business. I mean, they have business in South America as well as the U.S. But that's another thing that I'm noticing about retailers I really like, Chris. The ones that managed to open stores during the pandemic, they're the ones that worked anywhere on stronger footing. It's just a little plus that I see, and AutoZone, they let up a little bit. They didn't take their foot off the gas too much in their store opening cadence.

Hill: The Wall Street Journal and CNBC are both reporting that Amazon is in the final stages of acquiring MGM Studios, an announcement could come later this week. What is the film and TV library that includes franchises like James Bond and Rocky Balboa class. MGM studios would like a check for $9 billion, thank you very much, and I don't know, they got the money, Asit. I feel like even if this is overpaying, I feel like this is going to get done.

Sharma: Yes. Right now, this is a reported deal, as you and I were chatting about before the show. Is it going to happen? It looks like it will. MGM was a glorious name back in the day. But as you say, their catalog isn't quite as phenomenal as that of Disney. They do have the Pink Panther franchise to add to some of the glorious names. I actually personally I'm a fan of the Pink Panther movies, I think they're awesome. It takes a certain sense of humor, I guess. But on the other hand, they also have a pretty decent TV studio. The way I think about this is, Amazon is just spending a little bit of maintenance money. Their Prime Video service is a distant challenger to the Netflix and Disney streaming options out there. But it never has to be number one in the marketplace because at the end of the day, it really is just a value add for the Amazon Prime subscription. 

For just a few dollars less a month, you can buy Amazon Prime Video. I'm not sure how many people actually do that when it's just a little bit cheaper. You might as well get a Disney+ or Netflix. However, for them as they become a little more successful at churning out some creative content, shows that are increasingly gaining an audience and winning some awards. I think about the Marvelous Mrs. Maisel and other shows. I think this is just flushing out the library, you know, $9 billion with the balance sheet, the size of Amazon's, which is like north of $300 billion. I guess you could call it chump change. Part of me is curious, are they just like squandering [laughs] $9 billion, because this isn't the most renowned of catalogs. On the other hand, it'll flush out their offerings a little bit, keep people who have the subscription interested. What are your thoughts?

Hill: It reminds me a little bit, back in 2006 when Google [Alphabet] bought YouTube. At the time, Google had its own video platform, and it wasn't doing as well, it wasn't as popular as YouTube was. At the time they paid $1.7 billion for it. They overpaid, by their own admission, Eric Schmidt, who is the CEO at Google at the time. It came out in documents later, their own internal valuation of YouTube was, we think this business is worth somewhere in the neighborhood of $600-$700 million. They overpaid by $1 billion. Part of the reason they did that was because they knew someone is going to buy this and we want it to be us. Like in part so we can keep it out of the hands of others. That's what I thought of when I was reading through some of the reports this morning . It seems like at least part of what is driving this decision is the idea that someone is going to MGM Studios. MGM has been for sale for a couple of years now. I think that's part of the calculus for Amazon, and they're like look, someone's going to get this catalog of content. Is it worth nine billion on its own? Probably not. But someone is going to get it, and we've got the money. We talk all the time about whether it's Netflix or this new Time-Warner discovery mash up. They're going to be spending somewhere between $15-$20 billion each. In terms of content creation, in one fell swoop, nine billion gets a lot of movies. As you said, the TV studio, the ability to create more stuff, I think that's part of it.

Sharma: Yeah. There are increasingly fewer studios available. That could be part of the reasoning probably is, I guess the last thing that I'll say about Amazon, they have ingrained view of the world that derives from all the investment they've been doing and logistics over the year assuming since day one really, they always see what that return on investment is going to be, regardless if it's in building a warehouse or logistics center or buying out Whole Foods, or maybe looking at a movie and TV studio deal. They always look for a place where they can invest their own money, streamlining some processes and eventually get a much greater return on investment. We shouldn't leave that out of the equation as well. Amazon probably sees something here that you and I don't see, Chris. This one will also be a fun one to revisit, maybe not next year. At Amazon's cadence, maybe in a few years, take a look at what they did with this piece. Maybe they'll surprise us, but let's see. The next step is to see if this deal actually goes through, I'm guessing we're at 90%, 95% Chris.

Hill: Asit Sharma, great talking to you. Thanks for being here.

Sharma: Thanks so much, Chris.

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 with this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.