Does Comcast Have Enough Firepower in the Streaming Wars?

Viewership on Peacock is not as high as Comcast (CMCSA -5.93%) would like, so they're doubling their investment in 2022. Maria Gallagher analyzes the streaming landscape and the role the Winter Olympics plays in Comcast's plans. She also discusses how McDonald's (MCD -0.57%), one of the largest employers in the U.S., is dealing with rising costs and why Levi Strauss (LEVI -2.50%) is optimistic about 2022. Plus, Emily Flippen and Asit Sharma take a closer look at Wise (WPLC.F 0.24%), a financial tech company aiming to make global currency transactions cheaper.

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This video was recorded on Jan. 27, 2022.

Chris Hill: Some businesses are built to last. Today on Motley Fool Money, we've got a dominant communications company, a worldwide leader in restaurants and the consumer business that's been around since the 1850s. All that and more coming up right now. I am Chris Hill and joining me from the Financial Capital of the United States of America. Motley Fool Senior Analyst, Maria Gallagher. Good to see you.

Maria Gallagher: Good to see you, too.

Chris Hill: We've also got Emily Flippen and Asit Sharma coming up later in the show to take a look at the business of global money transfers. But we're going to start with streaming video because we talk a lot about Netflix and Disney+. We don't talk as much about Peacock. But that was front and center in Comcast's fourth-quarter report where profits were higher than expected. But, I don't think that I'm wrong and saying that Peacock really isn't going as well as they would like it to. They said it's not going to be as profitable as soon as they originally thought. But, it is clear that Comcast is pouring money into Peacock. They're investing in this.

Maria Gallagher: Yes. There's so much to think about with Comcast. In 2021, revenue was up about 12%, net income was up about 35%. They generated free cash flow of $17.1 billion. Their theme parks came back to a strong start. Again, there were a good demand from domestic guests in the U.S. and Japan. There was an opening of a Universal Beijing resort. But like you said, Peacock, their monthly active accounts in the U.S. reached 24.5 million, which for some comparison, that's about 9 million paid subscribers. If you're comparing it to Netflix 222 million, Disney+ 118 million, Amazon Prime 112 million, HBO Max 73 million, Hulu 43 million. Peacock is really coming in the rear in terms of people's interest in the amount of paid subscribers they have, but they are spending a ton of money on it. They lost $1.7 billion scaling it up last year, and so it's really tiny compared to competitors. They also missed their net adds for their high-speed internet, so they weren't about lower-than-expected broadband customer growth, which is a big focus for 2022. It was a lot to take in a mixed bag in terms of strong revenue growth in certain areas. I do think the theme parks coming back is going to be interesting, but they're definitely pouring a lot of money into Peacock and they're definitely not getting a huge return yet. According to them, hopefully they will at some point, but so far, it has a lackluster response would be, I think, a nice way to say it.

Chris Hill: That is such that probably nicer than I would've put it. Yeah, no. They said they're going to double the amount of money they are going to spend on content this year. They're going to spend $3 billion. Thank you for reminding me of the fact that the way they launched Peacock really was different from all the others we've been talking about. They went with essentially this two-track model of saying yes, you can subscribe, you can pay us for this. But we're also going to have an ad-supported model, and at the time, if you wanted to give them the benefit of the doubt and let's be clear, if you're a long time Comcast shareholder, that has worked out well for you. 

This is a company that has rewarded shareholders. There was every reason to give them the benefit of the doubt when they launched this thing. But now, we can look at it and say, OK, it's not really working out by your own admission, it's not working out the way you wanted to, which leads me to this question, Maria, did they give any indication that they would abandon one of those tracks? Or is it too early to tell? I don't know why you would necessarily tip your hand like that. But that was one of the thoughts I had when I was looking at their results and looking at the way this, "well we've got the ad-supported model, but we also have the subscription model." I just thought, are they having conversations about ditching one of those?

Maria Gallagher: What's interesting with this tier as well as that it's ad-supported but only for certain episodes. If you like Parks and Rec, you can only look at the first two. I think at least one, maybe two seasons with that ad-supported model. To get the full range, you need to pay for premium. I think that's with Parks and Rec and The Office and all of those brands that Peacocks has really leaning on to get people to pay up. I think that there may be even then I'll lean more into that. You just get a couple of episodes to try and get people's interest piqued to say, ''Oh, I do remember why I love this show. Let me just pay them money so I can keep watching my favorite show.'' I think that that's their strategy is to pique people's interest right in the beginning. But again, it hasn't really working. I think that they have to get a new strategy, maybe get more content people are excited about because they are really leaning on those legacy brands like The Office and Parks and Rec. They don't have that many new and exciting things if you compare them to an HBO Max with Euphoria and Succession and Netflix with their whole content, and so I don't think Peacock's really coming out with anything strong that I haven't heard anyone say, ''Oh, I am loving Michelle, you've got to watch it on Peacock.''

Chris Hill: Last thing before we move on. One of the other things that Comcast has spent a lot of money on is the broadcast rights to the Summer and Winter Olympics from now, seemingly until the end of time. Really, it's sometime in the 2030s. But, do they talk at all about the Winter Olympics, which are starting in a week? I think they are starting next week. Do they talk at all about their hopes for that, either on the broadcast side or using Peacock to try and leverage the Winter Olympics and getting more people to use it? I always get sucked into the Olympics just because I love the stories. Obviously, I'm rooting for U.S. athletes, but invariably, there's some sport that just sucks me in at some point. But are they painting a lot on this Winter Olympics as being a way to maybe boost those Peacock numbers?

Maria Gallagher: I think definitely because they, you saw that we've recently had the Summer Olympics and then you saw a lot of success for them with the Summer Olympics. I think that they're just hoping to continue that momentum and see that more people will be tuning in, especially in the winter, it's colder so people are more likely to be at home. That's my general thought, is maybe people are going to be more excited because you can watch it from the comfort of your house. Whereas if it's in the summer, you have other things that you could be doing. I would be interested to see the comparison between having people tune in for the summer and winter Olympics.

Chris Hill: Yeah, I think you and a lot of people in the greater metropolitan New York City area and pretty much everywhere in Norris. You all are going to be inside this weekend if the weather reports are to be trusted. I'm always interested in McDonald's, not because I'm a shareholder, but because it's one of the largest employers in the US. I think if you're trying to get a sense of the economy, you can look at macro data, you can look at certain companies and I think McDonald's is one of them. When you look at their fourth-quarter results, one of the things that really struck me is costs are going up across the board and they are dealing with them as best they can. But when you look at the cost of food, labor, and the cost of paper, it's going up. What did you think that their latest results and what they have planned for 2022?

Maria Gallagher: I completely agree with you that this is such a good indicator for the rest of the economy. I think it's such a good indicator for other restaurants, and you see the higher operating costs of about 14% last quarter, their higher-cost of both ingredients. Wages and labor, do you have the commodity inflation for both beef and chicken, and like you said, we have increasing cost of paper, so they're expecting food and paper costs to rise by high-single or low double-digits, which in comparison in 2021 they rose about 4%, so that's a pretty steep comparison. I think that we're going to see this consistently, we're going to see it in the next couple of quarters, and what we're going to see is them bringing that price increase to customers. You see average ticket price increased a little bit over the quarter and that's a lot due to both their loyalty program, but it's also due to price increases in their menu. I think that we're just going to see that more and more across the board in all of these different industries, all of these different areas, because the wage prices aren't going down. I think commodity prices aren't going down anytime soon, so I think we're just going to be prepped for the next year for a lot of us as we go places thinking, "That was less expensive a couple of weeks ago."

Chris Hill: Although McDonald's, I'm not going to say a great job, but I think they've done a good job of the way they've invested in their business over the past five-plus years. If you think about the investments they've made in technology, in mobile ordering, making over some of the restaurants, that sort of thing. Did you get any sense from them of how that is going? Obviously, everyone wants to, if you're in the restaurant business, you want to be ratcheting up what you're doing on the mobile front. Unless you're the Capital Grille or something like that. I can't imagine that's a business that's doing a ton of takeout ordering, but any sense from them of what those investments are looking like?

Maria Gallagher: Digital same sales exceeded $18 billion in 2021, so over 25% of total systemwide sales in their top six markets are digital. You see them, they are really investing. If you go into a McDonald's, you can order on one of those kiosks without having to go to the front. So they are really investing in that, especially as you see all of the other increases. Their loyalty program, there are almost as many loyalty program members at McDonald's as there are members of Peacock, there are 21 million active users of their loyalty program. So you do see them investing in the ways to make their ordering as easy and seamless as possible and maintain the most reasonable prices that they have possible. They have some strategic menu increases, but they also have a lot of marketing promotions and the growth in those digital channels and loyalty programs. I think McDonald's as a corporation, is going to do its best to scale up a little bit in those price increases, but also really work with consumers on making it as accessible as possible for them.

Chris Hill: Right, because there's only so much they can do in terms of passing on. McDonald's has some amount of pricing power, but it seems like they probably have more pricing power with their partners, with beef and chicken producers than they do necessarily with customers. Because providing a value is at the heart and center of what they do as a business.

Maria Gallagher: Yeah, absolutely. I think that with how big they are, there are over 40,000 McDonald's locations in over 100 countries. So they have such a large base to work with. I think they're going to do their best and they have historically been able to really work with the consumers to make it not super painful. Because like you said, they have some pricing power but not a ton, they can't really charge $15 for a hamburger. I think it'll be interesting to watch them to see what that inflation looks like and what those price increases looks like because I think they're going to set the tone for a lot of other companies in this industry.

Chris Hill: Levi Strauss started making jeans in the 1850's and before we get to their fourth-quarter results, I just wanted to point that out because I did the math and I think I have this right. That means if you're starting a business today, it needs to be still operational in the year 2190. Before I criticize their business right now, I want to give them credit for having a business that has lasted that long. Their fourth-quarter profits in revenue came in higher-than-expected. They had some upbeat guidance for 2022, and I hope that works out because as much as I respect the durability of this business, it really has not translated to the stock.

Maria Gallagher: To just lean into the history lesson. In 1873, Levi Strauss received a patent for improving fastening pocket opening, so they basically created the blue jeans. They added the buttons to work pants. They created the style of blue jean. In 1934, they created the first Blue Jeans for women's, in 1986, they launched Dockers. They're such a long-standing brand and they're so iconic. You have the little red tab on the pockets, everyone knows what they are. I think it's just so impressive how relevant this brand has stayed. Also not only how relevant it's stayed, how well it's pivoted to integrating things like ESG, sustainability and really leaning into those types of initiatives as a brand. Their revenues of last year were up 29% compared to 2020, about flat compared to 2019. 

They did create a separate structure for Dockers and Beyond Yoga. They saw revenue up 22% last quarter. Their direct-to-consumer revenues were up 25%. Their direct-to-consumer stores are about 30% of their sales. Their e-commerce is about 8% of their sales. What is also interesting is that people are really looking for the brand. People really know Levi's. You know, that they fit, you know that you like them, you know that they're a good quality, and that they're sustainable. You go to the store to try on the jeans, and you go to their online website. I think that that's really interesting, is that it's a brand that's really stood the test of time and has both pivoted and strengthened in those areas. But I do agree that has not really translated to an above-average stock, but I do think their jeans are above average.

Chris Hill: Do they need to consider an acquisition strategy? Because in looking at this industry, in looking at, again, this is a known brand, it's an iconic brand, but it reminds me a little bit of the beer industry. From the standpoint of, you look at a business like Boston Beer Company and Samuel Adams, which gets squeezed from mass-market beers like Budweiser, Bud Light, Miller Lite, that sort of thing, but then also local craft beer as well. You and I were talking this morning. We each have our own favorite pair of jeans that we like to wear, it's not Levi Strauss for either one of us. It's niche, smaller brands and I'm wondering, it's not just that they're competing with a large company like Wrangler. They're also competing with niche online brands like Martin Bao and Everlane. Is that yours?

Maria Gallagher: Yeah, Everlane's mine. I do think that in August they'd purchase Beyond Yoga for $400 million, and I do think that was a strategic acquisition in not trying to double-down on saying, we only do jeans, but trying to expand, and Beyond Yoga is, I think, a pretty well-known brand. I think people who I know who wear the pants really like them. I do think that they are trying to expand their footprint and expand their options. But yeah, I mean, it's just such a competitive industry with this basically zero switching costs. Some brand loyalty, I am very loyal to Everlane. But also if I find another pair of jeans that fits me really well, I'll probably buy those as well. It's not necessarily operating in such a foolproof area, but I do think that the brand legacy does stand for itself, and also the way that they're strategically investing in trying to grow those brands. I think it will be interesting to see how Beyond Yoga does, because I think that will be interesting to see if they lean into Athleisure, the way you see Decap does, and you see those other big brands trying to do as well, American Eagle with Aerie. Seeing if they could be one of those one-stop shops where you get everything from Levi Strauss.

Chris Hill: Yeah, I was very loyal to Levi Strauss, and then I tried on some other jeans. I was like, I think I like these better. Maria Gallagher, always great talking to you. Thanks for being here.

Maria Gallagher: Thanks so much for having me.

Chris Hill: When it comes to the war on cash, you've heard a lot about larger companies like Visa, MasterCard, and PayPal. But there are more businesses in this space than just the usual suspects. For more on a financial tech company that's making global currency transactions cheaper, there is Emily Flippen and Asit Sharma.

Emily Flippen: My name's Emily Flippen. I'm here with Asit Sharma. We're going to be talking about a really interesting payment business. You can you call it a fintech player and that business is Wise. Asit, thanks for jumping on.

Asit Sharma: Emily, thanks for being here with me and having me on with you. I have a question for you before we talk about Wise is very related. Do you remember the first time you ever sent or received money remittance by any chance?

Emily Flippen: Well, when I think about remittances, I think about my time in China actually. I think that was the first time that I ever really had to deal with the issue of receiving money from a different country. Let me say it was a pain in the butt.

Asit Sharma: I had a similar experience. This was going back to the '90s. I was in college and was a profligate spender. My sister who lived an hour away, she in college as well, a year older than me. She was really good with her money. She was the investment banker to my wasteful spending self. I remember calling her up one day and just letting her know I was flat-out broke. She sent me some money via Western Union. [laughs] I had to go to a physical location, pick up cash, pay a fee to do that. That was my first experience with sending and receiving funds outside of the normal way of doing things.

Emily Flippen: Truly a sign of the times. When people think about money payments, their first thought probably goes to Venmo, from PayPal, or the Cash App from Square [Block]. But Wise, maybe isn't top of mind, unless you are somebody who is living in one country and doing business in another or a frequent international traveler. That's because they're a platform for cross-border payments. They pitch themselves as the fastest, easiest, and cheapest way to spend capital across 80 different countries. Certainly would have been nice to have that at our disposal, especially during my time in China.

Asit Sharma: Absolutely. This company is interesting. They describe themselves with the slogan, "Money without borders." I think that does encapsulate what Wise is really good at. They use middle-market rates for currency conversion with very small fees. You are getting, when you use their platform, the same rates that investment bankers get today or your bank will get when it moves money. Of course, the selling proposition here is Wise is going to be a lot more efficient and cheaper for you to use than your own bank or another service.

Emily Flippen: If you're thinking to yourself that this isn't a really massive market, you'd be wrong because Wise currently has over 6 million active customers. They've issued more than 1.5 million debit cards. They are increasingly finding easier ways to connect with their consumers and they're even building up an enterprise business that small or entrepreneurs can use to manage things like invoices, especially when those payments are going from one country to another. It actually is a massive trillion-dollar market opportunity that Wise is trying to tap into here.

Asit Sharma: Emily. I love the way that they're going about it. They partner one by one with local financial institutions in more than 80 countries. They build their own banking rails and they try to cut out the middleman where they can. They request and apply for banking license and have integrated themselves with some countries' own sovereign payment systems. That includes one system in the UK called the FPS or faster payment service. A similar one with Hungary central bank and yet another one with Singapore's fast and secure transfer system. 

I think they are really aggressively trying to cut costs and go after this very big market. I will say that I am one of those people who received recently my Wise debit card. I have a son who studies abroad and have been using them since 2018. One of the value propositions here is that Wise is constantly sending me emails saying how they've reduced my fees for transactions. Once in a while, they'll send me an email saying, "Hey, your fees are actually going up, but we're going to try to bring them back down again." I think this is something that potential investors should understand about the company. They are trying to reduce their customers' fees to zero. They make money, of course, off of these fees, but as you know, they are branching into enterprise services. This is a company that is pretty profitable, that I should say.

Emily Flippen: The financial picture here is really astounding. If you just look at their customer growth, their customers have grown at a CAGR of 35% over the past few years. Their revenue has actually increased even faster than that at 54% from 2019 into 2021. They have expanding gross profit and EBITDA margins over 62% gross profit margins. A lot of that capital flows down not just to the bottom line, but to a ton of cash flow as well. This is one of those rare fintech businesses that is already scaled to the point where it's making money hand over fist.

Asit Sharma: I think that gross profit margin is key there Emily, because they've been able to hold that at roughly 62% for several quarters. As they have grown and scaled, they've also scaled that bottom line, their annual operating profit margin increased by about 3 percentage points over the last three years to a really healthy 9.7%, almost 10% net profit margin. If you're looking for a fintech that's already profitable, has great cash flow, is scaling, I think this is a fun candidate. They processed last year $73 billion in total payments volume, and they generated revenue of about 568 million off of that. This is not a small company, may not be as well known here in the U.S., but it is growing pretty quickly.

Emily Flippen: I will say the competition in this space, as I think many investors know, it's really fierce. You're going up against basically any consumer-to-consumer payment processing platform. But what it really stands out to me about Wise is that their management team is extremely invested in this mission. It's created by two engaged co-founders who faced this problem themselves in their career. They are really motivated to make Wise to standout option for cross-border payments. Lots of competition in this space, but I think they are differentiating themselves and their fee structure is still the most competitive.

Asit Sharma: For sure. Those two co-founders, CEO Kristo Kaarmann and Taavet Hinrikus, who is still very involved with the company. They own about 27% of outstanding shares together. They've got a lot of skin in the game. Emily, one risk that I see with this company is that focus on reducing costs. If you look at their take rate for fiscal 2021, that was just 0.77%. That means that they took less than 1% in transaction fees and revenue from all that massive volume that came across their platform. But to me, this is almost an opportunity as well as it is a risk because it makes customers very loyal. I must say that having tried out other platforms to send money to my kid in Europe, this one has consistently had great customer service which they've built out over the past years. I think that it's price-wise the most competitive product I've been able to find. At this point, I've stopped looking for alternatives. I'm a happy customer. I think this works to their advantage. They work on volume, it's a volume proposition. I think they can keep grabbing more share in this market.

Emily Flippen: To be clear, that mission is to bring those fees to zero. Management has stated long-term, that's where they want them to go. It's natural that a risk is well, if your revenue model is made up of fees right now, you are saying that you want your revenue to go to zero. But as they've shown by introducing these different verticals, especially with small to medium-size businesses and entrepreneurs, there are different ways to engage and monetize while still facilitating the transfer of payments across borders.

Asit Sharma: Absolutely. Let me just illustrate one potential way this works, which is very consumer-facing and friendly. In my Wise account now with my pretty little Wise green debit card, I've been buying up some Turkish lira because I want to travel to Turkey at some point. While the Lira has taken a beating against U.S. dollar. In my Wise account, I can just transfer U.S. dollars for a small fee and buy up Turkish lira. It's almost like I'm becoming quasi-currency trader over the last few months, [laughs] hoping that I'll accumulate some lira at a good exchange rate, so I can actually use them when I travel. But innovations like this point to the way that the company can expand its fee base aside from that take rate, and worrying about that going to zero. I think they've got a lot of opportunity here. I have a question for you before we get out of here Emily. Desert island question, if you had to go to a desert island. If you were to imagine a desert island which has some capability to process transactions [laughs] and you can only take one platform, Wise, PayPal, another great fintech player massive, or the artist formerly known as Square, which I think we call Block today, which is platform would you take?

Emily Flippen: I'm going to sound like such a hypocrite when answering this question because I am a shareholder of both PayPal and Square. But I think I'm actually picking Wise here. When I have the opportunity, I wouldn't be surprised to add it to my own personal account. I think their narrow focus really edges out the competition. I think they operate in a really interesting niche. I love this co-founder team, really strong business model. Having a little bit of geographical exposure rights to London stock exchange here. My portfolio is never a bad thing. What about you Asit?

Asit Sharma: Maybe I'm going to sound a little hypocritical here too. I am a shareholder of PayPal. I use the PayPal debit card. But if I had to go to that island, I think it would be Wise. I like their customer service and I think they would save me fees on that mythical island. Also, the co-founders really want to solve this problem. They were miffed by the fact that it was so costly to transfer their payment in London back to Estonia when they were working for other companies. That ethos has never left them. It's still very evident their communications today and I think they're going to keep pushing on behalf of their customers. That is such a great way to acquire a massive user base. They're also going to expand their merchant base as well. I see this as a PayPal or Square, but at an earlier stage, I think I would go with Wise.

Emily Flippen: Definitely one that we'll have to keep our eyes on. Asit, thank you for joining me and Chris, thanks for having us.

Asit Sharma: So much fun. Thanks, Emily.

Chris Hill: That's all for today, but coming up tomorrow, we'll have the latest on Apple, Atlassian, Tesla, Visa, and more. As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against. Don't buy yourself stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.