Zillow's Pause and Disney's Delay

Disney (DIS 0.18%) postpones a slate of movies over the next two years as the CEO reportedly looks at the pros and cons of spinning off ESPN. Motley Fool analyst Jason Moser analyzes this story and discusses Walmart's (WMT 1.32%) plan to boost subscribers to its membership service and more.

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This video was recorded on Oct. 18, 2021.

Chris Hill: It's Monday, Oct. 18, welcome to MarketFoolery. I'm Chris Hill, with me today, Jason Moser in the house. Good to see you.

Jason Moser: Good to see you.

Hill: We've got big entertainment in the spotlight. We've got big retail in the spotlight, but we're going to start with housing. Shares of Zillow Group (ZG -0.69%) (Z -0.46%) down 10% this morning after the company is hitting the pause button on its homebuying service due to overwhelming demand. Zillow issued a statement saying it is quote, beyond operational capacity in the Zillow Offers business. [laughs] You can look at this and say, "Well, this is the proverbial good problem to have, they have so much demand," that's great, so much demand for the homebuying service. But the fact of the matter is they're pausing this because they didn't plan correctly. They didn't staff this correctly?

Moser: I think you're right, to a degree. I think the market's reaction to me at least feels like an overreaction based on what we know. This is like you said, it's it's a nice problem to have, I think actually, it's less a Zillow thing. Zillow's partly to blame here. But I think they ran into some market conditions they simply weren't anticipating and so yes, they failed to plan for a given scenario and that scenario is occurring. If you look at the release on Zillow's investor relations website, they note that operational capacity Zillow Offers to focus on signed customer contracts and current inventory, suspend signing of new contracts through 2021. So through 2021 is essentially two and a half months. It's not an issue of capital, this is an issue of them being able to not necessarily deal with the given supply chain constraints in the market and it seems like Zillow Offers itself has gained a lot of traction. If you look at the numbers just from last quarter, they purchased 3,805 homes, they sold 2,086, and that generated 777 million in revenue for their home segment. That was half of overall revenue for the quarter so it's a part of the business that I think there was a fair amount of skepticism when they launched it because iBuying was so new and they were making such a pivot. But I think generally speaking, they've done very well with it. This hopefully for them is maybe they're just being conservative here. Maybe they're just being a little cautious. We'll have to wait and see, it's not going to be that long until 2022 and we'll get a better idea of where they feel like this is going to go. But you didn't get the sense in the last conference call, that this was coming. I will say this vibe didn't exist in that last earnings call. It is a little bit surprising.

Hill: As you said, we're only talking about two and a half months. Although because they are the ones who put that out there, they really need to in the next two and a half months, confirm we're starting this back up in early January 2022 because if they don't [laughs] then it does point to a larger problem than they are indicating right now.

Moser: I do agree. You don't want to see this just get pushed off throughout the beginning of 2022, you'd like to see some clarity there. When you -- when you look at the market opportunity that exists, there's $1.6 trillion of real estate sold in the U.S. annually. The iBuying is a real opportunity, so you're seeing businesses like Opendoor for example. They aren't missing a beat. Now granted, their business is more founded on that particular notion, Zillow is making a little bit of a pivot. The flip side of that is, hey, if you are Zillow shareholder -- and I'm not. But if you are, you've got to feel really good about this core business that they had established years ago through the Premier Agent listings in their app. They do have more to the business than just the homes segment. But the home segment is important, you remember too it's not just homes because when you look at the lending side of their business, which is small, but it's growing. Zillow Offers business is accelerating the Zillow home loans business. They saw Zillow home loans last quarter. They saw 40 percent of purchase originations in the second quarter were sourced from those Zillow Offers. This is something where it's not just one piece of the business that's insulated, it has an impact on other parts of the business. But it's also nice they can fall back to that cool internet business that they've built out so well.

Hill: Disney reports earnings on Nov. 10, but the company is getting a lot of attention in the meantime. This morning an analyst report from Barclays downgraded the stock due to slowing growth for the Disney+ streaming service. Few days ago, we had one news report that CEO Bob Chapek was reportedly tapping some of his executives to quietly explore what it would mean for Disney to spin off ESPN. What that revenue could potentially look like as well and right before we started to record this podcast, Disney announced a big shift in its movie lineup over the next couple of years, they pushed back the start dates of the next set of Marvel movies. The next Doctor Strange, the next Thor, the next Black Panther movie. They also pulled four movies off the schedule altogether. Take this in any order that you want. But I think you and I were talking right before we started recording. The movie decision is the one that seems like it has the most X factors at the moment.

Moser: It feels like the movie decision is partly a result of what just has been such a fluid situation here over the past year because dealing with headwinds just from the pandemic. Now we're in the middle of the supply chain crunch and clearly having trouble getting people back to work. [Unclear] talking about the relationship between these studios and the cinemas. Like you said, there are a lot of variables that are going into that decision and I don't know that it's something that is really as critical issue for the business right now. To me, I think it's really interesting to consider this notion of spinning out ESPN. It seems reasonable to assume that growth in subscribers for Disney's streaming services is going to slow. There was a lot of pull forward of the past year and a half for obvious reasons. To see that slowdown isn't terribly surprising, basing a downgrade on that seems like telling me water's wet, we just know it. I do feel like with the ESPN decision is one that I'm really fascinated by because just a decade ago, we would talk about how ESPN was such a strength of Disney, it was such an important piece of that overall puzzle. Things are just far different now. Streaming really has become the norm for so much of our entertainment and we're seeing that pivot. For so long we were all basically unconscious subscribers to ESPN. You had one way to get your entertainment, that was through cable. You got your cable package through your provider. ESPN was a channel there whether you wanted it or not, and and ESPN ended up getting a good portion of that bill as well because of the content that it had and the general demand for its channels. Today with streaming, we subscribe with far more intent for the most part. So that starts to play out, I think on where demand for something like ESPN is going because we have so many other ways to get our sports entertainment now, it's not necessarily as conducive to streaming because it is one-time.

You've got a lot of parties involved there in regard to advertising, but the price tags for this content continues to grow up, and so you look at ESPN. Maybe it's a $10 billion revenue business for Disney today. They don't really break it out, but there's some estimates out there. You could say maybe $10 billion is a reasonable revenue number to peg on it today. Those expenses continue to add up. It's becoming less and less profitable, but particularly as they have to rely more on streaming and less on the cable relationships, so it seems like over time they're just not going to pull in as much money from ESPN. Maybe it is something that frees Disney up to do other things that they did decide to spin it off. It's fascinating for me to think that 10 years ago, we would have thought this would've been like the ultimate sin spinning off ESPN. Today you can really actually start to understand better why they might do it.

Hill: You can although it's hard to think about who's buying ESPN from Disney. Who has the money? Because this is not something that would be sold on the cheap. I feel like we're going to get more clues. This was a report that by the way, the company through Julia Boorstin at CNBC denied. They denied the report. But it's not an official denial from the company. Look, I've talked to Julia Boorstin a bunch of times for Motley Fool Money. She's a great reporter. I'm not disputing her source on that. But as a Disney shareholder, I want Bob Chapek to explore all aspects of the business. It makes sense that he will just say to a couple of his lieutenants, hey, just run the numbers. I just want to see what it would look like. My guess is, whatever that report ends up looking like includes the word complicated a number of times. [laughs] It will be very complicated if you think about the contracts, the live sports rights that ESPN has acquired, just taking that alone. So I think if Disney is truly going to one day spin off ESPN, we're all going to get a heads-up on that in the form of things like the next time a big live sports broadcast rights is up for grabs, ESPN sits it out. If they just say no, we're not going to lock it in the same way that we see businesses cutting costs before they are acquired by a larger business.

Moser: Yeah. I absolutely agree. You just want to know. Even if nothing ever comes up, you cannot blame Mr. Chapek for taking a look at the numbers and trying to understand the case today because it is markedly different than the case a decade ago. So just understanding the fact of the matter at any given point in time. You certainly can't hold that against leadership. Spinoffs are not always bad things. Sometimes you have to get adjusted to wow, a world where Disney doesn't own ESPN, that would be crazy. Well, yeah, maybe. But I mean, I think there'll be plenty of interested parties out there that would be willing to throw their name and I mean. One that stands out to me immediately is Amazon (AMZN -1.64%). Given the bets that it has been making recently in the entertainment industry, it would never surprise me at all to see Amazon express interest there because they have immediate distribution to 200 million-plus Prime members. So that would be an example that I think a party that could at least see a path to growth and monetization there. One thing I feel pretty safe in saying, regardless what happens if there's a deal on the table, I am certain that Facebook (META -0.52%) will not be allowed to acquire it. [laughs] Because I don't think Facebook is going to be able to acquire anything for quite some time.

Hill: Walmart announced a new perk for members of its Walmart+ service, early access to Black Friday deals. With more and more talk about items being out of stock this year, Walmart is looking to boost its membership. Best Buy (BBY -0.81%) is doing something similar with their new subscription service Totaltech. I think this is a smart move by Walmart and I also think the only way it backfires is if people sign up for it, they get the early access, and then they still don't get the items that they're looking for. Other than that, this seems like this could juice the numbers for the membership service.

Moser: I think you're spot on. I think the biggest risk to this is just failure to deliver on the promise. If you tell your customers or your members or whatever, you're signing up for something special and then you don't deliver on that something special, that really is a problem. What's worse is you could just straight up lose shoppers altogether. It's someone who has been frequenting Walmart for some time, they decide to upgrade as Walmart+, then they get shafted and just a poor customer experience and they decide to try to take their business elsewhere. I don't think that'll happen. I think this makes a lot of sense. I think that when you look at Walmart, the position that they're in today, I don't think they have any real firm numbers on how big their Walmart+ membership is. But I think I saw a Deutsche Bank estimate where the membership now is around 32 million households based on surveys and estimates. You compare that to something like the Amazon Prime, which has over 200 million Prime members. Maybe that smaller member base is actually an advantage in this case because it's a little bit easier for them to deal with the logistics and get things from point A to point B and ultimately deliver on that promise. It's going to be harder to deliver on that promise for 200 million-plus people than it is for 32 million people or households. Maybe this is a really good time for them to be able to do this because they have an interesting relationship there with Walmart plus the cost is a little bit less than Amazon Prime. I think the Walmart program is $99 a year versus Prime's 119. They're getting close in price which means that they're going to have to deliver some form of value. To me, that's the biggest risk for something like this is just not being able to actually deliver on what they're promising. But I fully understand why they're doing this. To me, it makes a lot of sense. We've been praising businesses like Costco (COST 0.17%) and Amazon for a long time for running those membership models that cater to their loyal and renewing members. I think Walmart wants a piece of that action.

Hill: When do you think they start sharing the numbers? It's got to be 100 million, right? Isn't 100 million the magic number where Walmart comes up and says, oh, and by the way, this is how many people we got in the service.

Moser: I actually think that if this is successful, this holiday season, I think this will be something they tout in their first quarter of 2022 report when they report this holiday quarter. If it performs well, say it bumps them the 50 million or whatever, I think they'd like to brag on those firm numbers sooner rather than later.

Hill: Jason Moser, great talking to you. Thanks for being here.

Moser: Thank you.

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. 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. See you tomorrow.