Shares of Affirm (AFRM 6.84%) pop 44% as the buy now, pay later business teams up with Amazon (AMZN +1.04%). Walt Disney (DIS +0.52%) looks to license the ESPN brand to sports-betting companies for a reported $3 billion. In this episode of MarketFoolery, Motley Fool analyst Jason Moser analyzes those stories and shares five great quotes from Warren Buffett on his 91st birthday.
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This video was recorded on Aug. 30, 2021.
Chris Hill: It's Monday, Aug. 30. Welcome to MarketFoolery. I'm Chris Hill. With me today, Jason Moser. Good to see you.
Jason Moser: Good to see you. How is everything going?
Hill: Things are going OK. I'll just start with a quick shout-out to everyone in the path of Hurricane Ida. The early word at this point out of New Orleans is that it made landfall at a faster speed than Hurricane Katrina. For those of us who remember Hurricane Katrina, it was terrifying to read that over the weekend, and cautiously optimistic that everybody's going to get through this OK.
Moser: Yeah.
Hill: With that, we've got some sports betting news, but we're going to start with the stock of the day, and that is Affirm Holdings, the buy now, pay later business. Affirm is teaming up with a young e-commerce site called Amazon.com. Affirm is going to be a checkout option for certain Amazon customers in the United States starting on Friday, this is for purchases of $50 or more. Then those customers can, if they want, split those purchases up into smaller monthly installments. Shares of Affirm, as of this moment, are up 44% today.
Moser: Yes.
Hill: I guess my first question is, is that how good this news is, 44%? I'm sure there are a bunch of things that go into a stock spike like this. But ultimately, that's where I start with this, like, how good is this for Affirm?
Moser: It's very important news. This isn't something that results in immediate, tangible financial impact. There is still a "show me that this actually is going to work," "show me the money," so to speak. But for a business in Affirm which generated around $750 million essentially in revenue over the last 12 months, it's a big deal. Part of the concern with Affirm, there have been a couple of things with Affirm that have been worth discussing a little bit. We saw the recent acquisition with Square buying Afterpay to get that presence into the buy now, pay later, and that's what Affirm is known for too, buy now, pay later. The criticism has been that it more or less is a feature and not necessarily a business on its own and that remains to be seen. Clearly, buy now, pay later is gaining a lot of traction, and it's not to say that companies like Affirm can't branch out and do other things. But I think that for Affirm, one of the bigger criticisms that we've had recently, is its reliance on one big customer, Peloton. If you look at the numbers for the nine months, ending March 31, 2020, approximately 25% of Affirm's revenue was driven by Peloton. A year later, that number had crept up to 31%. You couple that with the news that Peloton is starting to cut prices, it's witnessing some slowing growth, they're having some litigation issues, you're hoping to see Affirm spread that risk out, take the eggs out of that one basket, so to speak.
That's what this deal, that's what this news ultimately accomplishes. I certainly understand the enthusiasm. It doesn't mean these guys are out of the woods, and they've got it all figured out, but this was absolutely a headline that they needed.
Hill: In the short public life of Affirm Holdings, this is a stock that has been down in the mid-$40s, it has been as high as the mid-$140s, and with this move today, it's around $100 a share. It's where it was when it IPO'd earlier this year. Do you think part of what we're seeing here is, at least for some investors, a bet/hope that this first partnership with Amazon is a prelude to Amazon acquiring Affirm somewhere down the line?
Moser: Possibly.
Hill: If people are thinking that, how much should they put in that? How much should they hope for that?
Moser: I don't know what I would hope for it. Certainly, Affirm needs this way more than Amazon does. It is not the other way around. The one thing that stood out to me when this news came out, I thought, you know what, we use Amazon a pretty good bit in our household. I knew that I had always seen some type of installment plan or a way to break up payments when you purchase something on Amazon. I couldn't remember specifically what it was because I've never used it. But ultimately, what Amazon has done up to this point, you can break up the purchase over six months via your Amazon Prime Rewards Visa. Amazon was offering something similar, but it was through their financial product in their card. I think that for customers, ultimately, this is great in that it offers one more option. Now, it remains to be seen how utilized this option really is because it's worth noting this isn't just Affirm breaking these purchases out, you just get them interest-free. It depends on what you're buying and who you are. Some of these purchases will reflect interest. You have to weigh that with folks who have an Amazon Prime Rewards Visa. Maybe they just want to continue to use that and get the points. Maybe the younger generations coming up into the world here have a more skeptical view of credit cards and don't want to consistently rely on just having to open credit cards, which is very understandable as well.
I don't know that Amazon looks at this and says, "wow, Affirm is just a company that we need, and this is going to be the first step in really understanding how we can work better together." To me, it feels like there would just be better opportunities for Amazon to try to invest their capital because Affirm, given where it is today, it made a little bit more than $750 million in the last 12 months, this is an $18+ billion company, and the market has bid this thing through the roof based on the potential in this buy now, pay later space. So I don't necessarily look at Affirm as an attractive acquisition target, so to speak, now granted, Afterpay was acquired for around $29 billion. A couple of things there, with Square, that was an all-stock deal, so cheaper currency, and I think the results of a timing issue there. I think Square felt a little bit under the gun to get something going, and they didn't have the time to focus on building it, so they decided to buy it. Amazon is not really in any position where they need an Affirm as a part of their business. So I think, ultimately, the two parties that really win here are, three parties really, Affirm, Affirm shareholders, and consumers, because it just represents one more choice which is good.
Hill: The Wall Street Journal is reporting that Disney is looking to license the ESPN brand to major sports betting companies. Reportedly, Disney is seeking $3 billion over a several-year period, and they're talking with Caesar's Entertainment and DraftKings. I'm not saying there would be no risk to a deal like this, but if Disney is able to get a few billion on the ESPN brand for something like this, if not a no-brainer, it seems like a good move.
Moser: I think it's definitely a good move for them to at least test the waters and see what they could get from it. I think this is the easiest way for them to participate in this space without necessarily being beholden to all of the red tape that comes with it, the licensing, the payouts, just that affiliation. We have to remember that ESPN, of course, is owned by Disney. Disney has a certain brand awareness. There is a certain affiliation there, and you don't want to start seeing them having to shore up a sin stock type identification, even if it's just for one little part of their business. I think this gives them the opportunity to participate in what is becoming an attractive opportunity in sports betting. But they don't have to necessarily get into the middle of it, which makes a big difference.
Now, I wonder, to me it's tough to say whether a legacy brand like ESPN necessarily carries the same sway here. Maybe it does, but when you look at the modern-day sports entertainment landscape, the brands, the partnerships, you have companies out there like Barstool, for example, which was acquired by Penn. They have Barstool sportsbook. You have OutKick, which was, I think, recently purchased by Fox. They have OutKick sports betting powered by FanDuel. You've got other little concepts that [...] bookie was starting to gain a lot of traction there. I don't know necessarily how important it is for any of these sportsbooks to actually carry that ESPN brand. That's the question I'm not quite certain of. It probably didn't hurt. But again, I feel like this is something where ESPN, more than likely, isn't going to be necessarily dictating terms, much like the Affirm thing.
I feel like ESPN probably needs this more than the other way around. But I absolutely understand why they're pursuing it. It makes perfect sense. But to your earlier point, this is the context of a business in Walt Disney that did $63 billion in revenue over the last 12 months. So a $3 billion licensing deal spread out over several years, sure, that's great, kind of a drop in the bucket for the business, but it also does give ESPN, and therefore Disney, an opportunity to participate in this market and see where it goes.
Hill: It will be interesting to see if this comes to fruition, the extent to which ESPN content is part of the deal. Because if you're Caesars, if you're DraftKings, like anybody, they are looking for engagement. They are looking for ways to keep people on their platform, or in some cases, physically in their sportsbook. If exclusive ESPN sports betting-oriented content is part of the deal, then I think it does make it more compelling for whether it's Caesar's, DraftKings, or someone else.
Moser: I think you're right. I think it's important that the folks involved with ESPN need to be believable. In other words, the content associated with this, it needs to be coming from people with skin in the game, people who know what they're doing, people who are making these bets, familiar with the betting landscape and how things work. You want people very familiar with this line of work to be out there delivering that content. Otherwise, it comes across, I think, as probably, maybe a little bit disingenuous. I don't know if it comes across quite as believable as if you get it from something like a Barstool or an OutKick, for example, because they have built these parts of their business solely around this, and these guys, companies like these, they breathe and live this stuff. So I think that would be the one thing they would need to make sure that they get the talent, the individuals, in place who really embrace it and know what they're doing. Otherwise, it comes across as probably a little bit half-hearted, and maybe doesn't work out.
Hill: Today is Warren Buffett's birthday. Happy 91st birthday, Mr. Buffett, though there's no chance whatsoever he's actually listening. Among other things, I think this gives hope for people who don't have the best eating habits in the world, because if you know anything about Warren Buffett and his daily morning visit to McDonald's for breakfast, his love of Dairy Queen, of Cherry Coke. Again, it provides a little bit of hope for those of us who aren't necessarily digging into that kale salad every night. You've prepared the list? You have a little birthday list for Mr. Buffett?
Moser: Sure. I've been following Mr. Buffett for as long as I've been following The Fool, which has been a decade plus, and he has had a profound impact on me as an investor. There are a million and one quotes out there from this guy, and they're all good. Some of them are a little bit more folksy than others. I picked five quotes that I think are just worth remembering. They'll make you smile. They'll make you think. But let's hit it here.
First quote is, "Risk comes from not knowing what you are doing." Just put into simple terms, this doesn't even have to be specific to investing. Ultimately, you got to know what you're doing. I feel like these days, we've seen in the days of "stonks" and memes in Reddit and just WallStreetBets. It does feel like there's a lot of speculation, a lot of folks out there that maybe don't necessarily know what they're doing. It's not to say that it can't work out for them, maybe it does, but they are taking on a little bit more risk than probably they need to. It will take a little bit of time to get themselves educated. So that's one.
Next one here, No. 2, "There seems to be some perverse human characteristic that likes to make easy things difficult." My mom has been telling me this for probably all of my life. She has been telling me I just make things way harder than they have to be. Maybe that's where I feel like I got this idea, something I always say. Maybe that's where this came from, I don't know. But to me, investing is as easy or as difficult as you want to make it. I think that's why this quote resonated with me. There are a lot of things in life, you just don't have to make it so difficult. But nevertheless, some people just really take joy, I guess, in making things as tough as they can.
Next quote, No. 3, "Unless you can watch your stockholding decline by 50% without becoming panic-stricken, you should not be in the stock market." I couldn't agree more with this. Chris, I have had more than one holding get cut in half or worse. But they are businesses that I liked, they're businesses I believed in, and I saw those businesses, and I saw their stock prices come roaring back over time simply because the business performed. You have to accept the fact that you're going to see that happen. That's why we advise diversification. That's why we advise knowing what you are doing, back to that first quote. But you have to understand that you're going to see that in the short run, but it doesn't necessarily mean it's going to last.
Hill: I've also been in that position, and I will just add that it certainly helps if you're able to extend your time horizon.
Moser: Yes.
Hill: Your stock drops 50%, you're, like, I was going to sell this in the next year or so. If you can make that five, 10, 20 years, you'll sleep better at night.
Moser: Easily. Absolutely. This next quote, "Buy into a company because you want to own it, not because you want the stock to go up." This is exactly in line with the way we invest here at The Fool, business-focused investing, and it's exactly how I taught my daughters from the very beginning. We're not buying these lottery tickets, so to speak, like Peter Lynch would say, we're buying into businesses. Find these businesses that you like, a business with a company that you want to be an owner of. The stock is just the instrument that gives you that ownership, and so I think it's important to view that perspective there. We're focusing on buying into the business. The stock is just the instrument that gives us the ownership.
Then finally, this one, a little humor, I think, but I think the underlying point is a very important one, "You can't produce a baby in one month by getting nine women pregnant." Chris, you know this, I know this, I think a lot of folks know this, yet, for so many investors out there, they just don't have the patience. They want to get rich quick. That's not how it works. You got to take the longer view, see the forest for the trees. Understand that good things do take time, and you will certainly be a better investor for it.
Hill: Happy birthday, Mr. Buffett. Jason Moser, thanks for being here.
Moser: Thank you.
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. This show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. I'll see you tomorrow.
