Disney Pleases Investors; Google AI Stumbles

In this podcast, Motley Fool senior analyst Tim Beyers discusses:

• How the Parks and Experiences division drove Disney's first-quarter results.
• ESPN+ being a bright spot among streaming properties.
• Alphabet shares falling over an AI gaffe and concerns about Microsoft.

Just in time for Valentine's Day, Motley Fool contributors Jason Hall and Ryan Henderson engage in a bull-versus-bear debate over Match Group.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on February 9, 2023.

Chris Hill: We've got the latest plans from Disney and a bull-versus-bear debate over Match Group. Motley Fool Money starts now.

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I'm Chris Hill. Joining me today: our man in Colorado, Tim Beyers. Thanks for being here.

Tim Beyers: Thanks for having me. Fully caffeinated, ready to go.

Chris Hill: You know who else is fully caffeinated? Bob Iger. Disney's first-quarter profits and revenue came in higher than expected. Although one of the headlines here is they did lose about 2.5 million subscribers for the Disney+ streaming service. Maybe not a big shock because they recently raised the price of the service. There are a bunch of things we can get to here because among other things, Iger talked about something that Wall Street loves to hear, which is cost cutting. Where would you like to start, because there's a lot to cover here?

Tim Beyers: If you remember the old, we're in Super Bowl week, and it used to be after, this is years ago, after the Super Bowl, the winner would say, "I'm going to Disneyland, I'm going to Disney World."

Let me tell you, folks, a lot of people going into Disneyland, going to Disney World. I think that's the story here, the headline of the Disney earnings here, Chris. The Parks and Experiences segment, in terms of revenue and in terms of operating income, just absolutely crushed it. It is true that Disney did not have the greatest quarter because it does have some anchors that we'll get to in terms of its media business, but Parks and Experiences is absolutely crushing it, Chris. Just some quick numbers on this.

Overall, for the Parks and Experiences segment, which includes consumer products, that was up 21%, but domestic parks and experiences revenue, that was up 27%. International also up 27%. Here's the thing that I really like, Chris: domestic, so this is basically U.S. visits to Disneyland and Disney World parks and experiences, revenue up to $2.1 billion, that was up 36% year over year. That is in terms of operating income.

I think it's fair to say, Chris, that people deciding like, nope, you know what, I need to get out. My kids have been just yanking at me to go to Disneyland, go to Disney World. They said I yield, we are going, and we will pay whatever is required. And boy, did that show up in this earnings report, Chris.

Chris Hill: It really did, and thanks for shining a light on that, because we've talked so much over the last few years about the streaming business, and it is worth remembering that when Disney is getting it done at the parks, that really is such a strong financial engine for the overall business.

Let me go back to Iger for a second, because when he was talking about controlling costs, he talked about how they are going to cut the amount of money they spend on content by $3 billion, and I found it interesting.

If you think about Disney, everything that Disney has and all of the content it produces -- movies, television, and, of course, ESPN, which is now its own division. Iger essentially separated all of the content that the company creates into two categories, sports and nonsports, and he very specifically said, we're cutting this $3 billion from the nonsports category. Again, it's Super Bowl week and maybe not surprising that the success that businesses have with live sports media rights, everything that goes with that. He didn't say ESPN is untouchable, because in some ways, the division is going to be under more scrutiny as its own division, but that's not where they're looking to cut.

Tim Beyers: Yes. Exactly right, and for good reason. Let's get to some of the direct-to-consumer business here, starting with Disney+. If we look at Disney+ overall, Disney+ overall was down slightly in terms of total subscribers, to 161.8 million from 164.2 million in October of 2022. So that's a quarterly number, quarterly decline of about 1%. But most of that was driven by essentially India. Southeast Asia. Disney+ Hotstar was down 6% over this period, so to 57.5 million subscribers from 61.3 million, so that drove the decline. In the Disney+ core business, that was up about 1% year over year.

But here's the thing, just getting to your sports comment, Chris. ESPN+ up very slightly, 24.9 million from 24.3 million in the prior quarter, that's up 2%, but in a quarter where it's really hard like Disney+ domestic, average revenue per subscriber down, international down, Disney+ quarter overall down.

Hotstar average revenue per subscriber up 28%, but that's probably due to price increases and people left. Where's the one where people are joining and paying a little bit more? That's ESPN+, $5.53 in the latest quarter, up from $4.84, and total subscribers up. So there is some real staying power with sports.

I'll say one more thing on this: It supports why Iger is thinking about this. There is a lot of appeal to not just domestic sports but international sports, like it's becoming more global. You have people in other countries, for example, paying attention to LeBron James setting the new NBA scoring record. That's a global event now. The Super Bowl, that's a global event. You have Association Football in other countries becoming more popular here in the U.S. It does make sense to me that Iger wants to spend more in this area. I don't think he's just talking about more to "30 for 30" documentaries, Chris?

Chris Hill: I don't think he is either. Because we've also talked about this recently, worth pointing out that activist investor Nelson Peltz has declared victory in his proxy fight with Disney and basically said, OK, we're good. I get it, you look at just the recent past shares of Disney are up nearly 30% in 2023. They have a lot of work to do.

Iger talked about wanting to reinstate the dividend by the end of the year. But they are saying and doing a lot of things that is resonating with Wall Street.

Tim Beyers: Well, I hate this part, but this is something we see a lot when the cost-cutting includes a lot of job cutting, and that will be the case here, about 7,000 jobs, the Wall Street Journal is reporting. Wall Street tends to like that because those are permanent cuts for the moment, and that will dramatically reduce the cost profile here. But where I want to focus, that I don't love because those are real people and those are real jobs.

But I do think there is clearly some room for optimization inside the Disney+ business because there's a lot of really good long-lived content. You could probably focus... The Mandalorian is amazing. It has a huge audience. People love it. People can't get enough of their Baby Yoda, give me more Baby Yoda, and there is a new season coming up. Double down on the things that you know really work.

I think that's probably more of what we're going to see from Disney because the cash flow numbers are not great. They're still burning cash, about $2 billion. Disney does have cash. It's not like they don't. But when you're burning $2 billion, that seems very un-Disney, Chris, and I think Iger wants to fix that pronto.

Chris Hill: Absolutely. Thank you for mentioning the job cuts. It's about 3% of the overall workforce. It's very much in line with what we've seen from a lot of other companies.

I want to move off of Disney before I let you go. We had talked earlier in the week on the show about Microsoft rolling out its partnership with ChatGPT. Yes, shares of Alphabet are down 12% in the last two days because Google held their own event to show off Bard, which is the company's new AI chatbot, and the demo included a mistake. On the one hand, I look at Alphabet as a business that has not really methodically changed in the last 48 hours, and I look at the stock drop and think, well, that's an overreaction. At the same time, but what are they doing at Google? How did they allow this to happen?

Tim Beyers: It's good question, and it is a gaffe. It is worth noting. The overreaction here -- what? The internet overreacts? Please, come on. No, but I do think it's a bit of an overreaction. Having said that you are right, they had time to plot this out to get it right. You want it to be perfect. It is embarrassing. Having said that, please let's not forget that this is a company on its balance sheet that once you subtract the debt, has a net $100 billion of cash available to itself, right now, to invest in this thing. You could take it down to closer to $85 billion if you're going to include the lease obligations. But still, Chris, that's $85 billion. Google's got time to get this right.

Please, let's not forget that the brains behind OpenAI and ChatGPT, in large measure, come from Google. There's a lot of experience here inside the Google machine to build something that is comparable. Let's also not forget that ChatGPT is amazing at making hilarious mistakes. Just ask it enough questions and you will get hilariously bad answers. Or, as Bill Mann put it on the morning show as we recorded this is about an hour ago, he called it mansplaining with confidently delivered bad answers. That is ChatGPT in a nutshell. It does that quite a lot. Google isn't alone in this area.

I think the main concern about this -- and I'll wrap around this point. The main concern is that when ChatGPT gets better -- and it will -- the idea of ChatGPT not just giving you a place to go to but actually giving you the thing eliminates the need for Google. Because Google's like, hey, here's where you find the stuff, and here's some of the stuff you need, and here's where to go find the rest of it. ChatGPT just says, here's your thing.

I called it this morning as we were talking about this. It's like the thing that Ask Jeeves, the old 1990s butler search engine. The thing that Ask Jeeves actually wanted to be, like, here's all of your stuff. Your butler delivers everything to you. ChatGPT is trying to be like that full service. Let's just give the whole thing to you, not show you where to go. That's a difference.

Chris Hill: Microsoft's got a lot of cash. Maybe they can buy the Ask Jeeves name and just to throw it on there for nostalgia.

Tim Beyers, always great talking to you. Thanks for being here.

Tim Beyers: Thanks, Chris.

Chris Hill: Valentine's Day is just around the corner, and one company is a leader in helping you, yes you, find a date. Ricky Mulvey hosts a bull-versus-bear debate on Match Group, the online dating conglomerate with more than 45 brands around the world.

Ricky Mulvey: We've got a very special Valentine's Day edition of bull versus bear today. The company is Match Group, the online dating service that has brands including Tinder, Hinge, and Plenty of Fish. Taking the bull case, it's Ryan Henderson. Ryan, good to see you as always.

Ryan Henderson: Good to see you, Ricky. Looking forward to this.

Ricky Mulvey: Jason Hall, thank you for taking the bear case on this.

Jason Hall: Hey, Ricky. This is one that looks so interesting because everybody seems like the online dating is a thing. But there are some things you got to really understand before you jump into this one with both feet.

Ricky Mulvey: Jason, if you thought Twitter had a good dopamine burst, wait until you hear about these online dating services. That's why we're doing the bull case first. Ryan Henderson, five minutes is yours.

Ryan Henderson: Awesome. All right, well, I think it's best to probably set the groundwork because maybe not everyone knows exactly what it is, but Match Group is the largest online dating company in the world, and they've basically been the pioneers of the space altogether. Started with Match.com, as some people might remember in the early days, but today, it's comprised of a dozen or so digital properties. They segmented into four different parts, so Tinder, Hinge, Asia, and then they have Evergreen and Emerging. And so Evergreen's a lot of the legacy ones; Emerging is the smaller, more niche ones.

But I know there's still a stigma around online dating among certain age demographics and especially in certain geographies. But regardless of what people think about it, the results have been astounding. According to one study, I believe it was initially conducted by Stanford, the percentage of couples in the U.S. who met online was at about 10% in the year 2000. That number jumped around 20% by the 2010 time frame, and then by 2018, it reached nearly 40%.

I think a lot of the remaining percent, you could maybe say are bending the truth. People maybe say that they didn't meet online or they met in a bar, but really, they started messaging online, something like that. It's even higher in same-sex couples. In developed markets, this is really the No. 1 way relationships start.

One of the great characteristics of Match Group is that within dating, there's really prominent network effect. The more singles or potential partners that are online or on a platform, the greater the values of the service. That alone further attracts new users. The cycle goes on and on.

Additionally, that means there's barriers to success here. Even though the barriers to entry are low, all you have to do is write the code and ship it. It's hard to scale and have success because if you're a user, you want to be on the properties that have the widest selection of other people. This provides really low-cost growth for Match Group.

Then this is part of why I think the opportunity is so large: They have a number of levers they can pull to make people pay. This is obviously, finding a partner is obviously something that a lot of people are willing to pay for. It varies depending on the brand, how they generate revenue. But at Tinder, they've been growing both payers and average revenue per payer consistently. Hinge, they've seen remarkable growth over the last three years. For those that don't know the app, it caters to more serious daters, people that are willing to spend more, a little more affluent, older.

That's the way I look at it. There's two primary brands. There's Tinder and Hinge. Tinder's the leader in terms of users and influence globally. It's going to grow seamlessly, I think, just through the sheer network effect.

Then Hinge has seen remarkable success in the U.S., and it's just beginning its push into Europe. In fact, it's the No. 2 most-downloaded app in the U.K., Ireland, Sweden, No. 3 most-downloaded in Germany, Austria, Switzerland. Some of these, they haven't even officially launched in. People are so eager to get on the app, they're doing it before they have the native-language app version. It really is show, I think, that there's the demand for it. It'll take some time to monetize, but I think there's plenty of users around the world that want an app like Hinge.

That's the way I see it. Two online dating giants and potential cash cows and Tinder and Hinge. Then you're getting a basket of potential upside or call options that can leverage the best practices from the successful brands.

I think the opportunity here is clear. I think investors are getting a really attractive valuation as well. Over the last 12 months, Match Group generated just over $3 billion revenue. If you exclude a one-time litigation settlement that they paid out to the Tinder founders this year, they would've earned just under a billion dollars in free cash flow. The value of the business stays about $16 billion to $17 billion. You're paying roughly 18 times last year's cash that they generated. I think it's one of the premier assets and a booming industry. I really like that. I think it's a fair price to pay.

Ricky Mulvey: Ryan Henderson with the bull case for the Match Group. Also the most polite distinction I've ever heard between Tinder and Hinge. Thank you so much for that.

On to the bear case. Jason Hall, up to five minutes is yours.

Jason Hall: I'm going to start with a couple of things on the bull case that Ryan talked about that I think are important and they are true and they are real. I'm going to challenge a little bit the stigma, because I think that stigma has certainly started to fall away, particularly for younger singles who are using these apps. They grew up with them, and that stigma isn't really there. As a result, we've seen more online relationships for other parts of our life expand for older people. I think that stigma has certainly gone away. Again, if you look at the data, particularly, like you said, for younger people, and the data for older people, when people tend to most likely be single, those are certainly good trends when you combine that with the global population growth. I agree with that completely.

I also think that if you look at electric vehicles and the total growth of electric vehicles over the past 5 years and over the next 10 years, you see really attractive tailwinds to like.

The thing that I question with this industry broadly is how much of those tailwinds are going to result in per-share cash flow growth for investors. Ryan, you talked a little bit about with the per-share free cash flow that we've seen from Tinder and some of the free cash flow for Tinder. There's some positive things there to like. But what we're also seeing happen as more people are going to these apps, as Match Group is beginning to expand outside of the U.S. and into Europe and into other emerging markets, is we're also seeing increased competition.

Now that's a good thing, again, because it means there's a lot of opportunity. But a quick search just in the U.S., there are more than 20 dating apps right now that come up just when you type in the words "dating app" in iOS. It comes up that quickly and they become very targeted based on lifestyle, based on demographic, based on gender, based on sexual identity. That makes it harder and harder as you grow your scale to necessarily deliver the right customer-facing product. I think that as Match Group continues to grow, that could be a thing that it faces and that it deals with.

You talk about international expansion. There are few things that are more affected by social norms than establishing a relationship. I think we're really going to find out how well run this company is and how good its talent acquisition is with its ability to develop and launch successful dating products where cultures are very different than they are in the U.S. where the company got started.

I think that's going to be the thing that it struggles with to grow outside of the U.S., and we're going to find that maybe it's the total addressable market. There's the number and then there's the realistic part of what it can actually go after. I think the scalability of the business, as attractive as it sounds, and may not be as attractive as it really seems to be.

You look at this business, you look at the TAM, and you think about all of the complexities and challenges that are there. I really think maybe this isn't such a great guaranteed no-brainer that it might seem like it is today. Because part of that scaling up in that talent acquisition is scaling up its costs. A lot of times, we think of these businesses as having really wonderful operating leverage, where their growth rates for their revenues are going to vastly exceed the growth rates of their operating spending.

I'm not convinced that that's truly going to be the case with Match Group over the long term. I think investors look at EVs, I'll use that and say an example again and say, well, I want to find the next Tesla of dating. We always fight the last war. I think sometimes the risk is investors, as we look at these industries, we look at the great growth, we look at the TAM, and we say, OK, I'm going to find the one that's going to be the winner. Sometimes it's harder to be a winner in a growth industry than we think. While it looks compelling, I think investors should be really careful about thinking that the things that they've done that have been successful, are going to scale up around the world and continue to generate cash flow per share growth that we've seen.

Ricky Mulvey: Don't fight the last war. Great advice for foreign affairs, dating, and investing. Jason Hall, thank you for the bear case.

You get to decide who made the better argument at Motley Fool Money on Twitter. That's because today's lucky winner is going to receive a date-night package, that's right. A buy-one, get-one coupon for a Wendy's entree and a steady-cam recording of Phantom of the Opera. Make sure to decide who won. Again at Motley Fool Money on Twitter.

Ryan Henderson, Jason Hall, appreciate your time.

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Chris Hill: That's all for today, but check out the latest episode of Stock Advisor roundtable. It's our member-exclusive podcast available only on Spotify. The latest episode is out now with Andy Cross, Asit Sharma, and Emily Flippen talking about the new stock recommendations in our Stock Advisor service and a whole lot more. We've got a link in the show notes for how you can connect your Motley Fool premium account to a Spotify account so you can start listening today. If you're not yet a member of Stock Advisor, we've got another link in the show notes so you can join.

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, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.