Barron's Streetwise - Butterbeer, Broadband, and the Box Office

Episode Date: January 3, 2025

Jack calls Comcast "America's most complicated company" and looks into plans to lift the stock. Listeners explain Schrodinger's cat. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Yeah. There's going to be people who are going to get fooled on that. There's going to be distracted parents or maybe there are grandparents out there taking the grade school grandchildren who haven't been following what's at the movies and they want to see the the one about the cartoon crime fighters and they end up at the one about woodsy disembowelment that's not what you want oh no is there two movies they're they're both coming out in January. They're both universal movies. That's part of Comcast. Remarkably similar names.

So we want to provide a public service here. We don't want to give away free advertising, though. Let's play three seconds from the trailer for Dogman, Jackson. Any three seconds you like. Greg the Dog, hit the siren. Two of the city's finest. Now, that's Dog Man. I know Greg the Dog was howling, but don't be confused. That's Dog Man. Let's have three seconds now of Wolf Man. And that's Wolf Man. I don't know if either of these movies are any good. All I'm saying is the eight-year-old movie lover in your life might be kept entertained for an hour and 33 minutes by one of them and will surely be sent to four or five decades of therapy by the other one. Choose carefully.

And with that out of the way, let's get into, we're going to do a quick discussion of Comcast and its stock and its outlook. And then later on, we'll answer a listener question on founder CEOs. And this is the big episode where we hear our Schrodinger's cat listener explanations. I'll explain what that means later. I mean, really, you'll explain what that means to me. I say, Jackson, the Comcast might be the most complicated big company in America. Can you think of a more complicated company? It used to be, GE used to be the easy favorite in this category,

but then it did all that selling and spinning for years and years. And now there's three companies and they're pretty easy to understand. One makes airplane stuff and that's beating the market by a little. One makes power stuff and that's beating the market by a lot. And one makes healthcare stuff and that's not beating the market, at least last year. So that's simple. Comcast is complicated. You have any nominations, Jackson? I definitely know some of the simplest companies in the S and P 500. Okay. Give me a simple one. I'll give you, you give me a simple one. I'll give you a simple one. Go ahead. Campbell's soup. That's I mean, that's you're thinking, cause it's just soup, right? But well, they certainly don't have a healthcare and airplane parts arm, but don't forget you got your

Snyder's pretzels. You got your goldfish crackers, your kettle chips, you got your Lance crackers, you got your V8 energy drinks. I mean, it's all stuff you ingest. So in that sense, yeah, it's pretty straightforward. Two companies spring immediately to mind for me. And that's one is called Lamb Weston and they just make French fries, just a French fry company. And the other is CalMaine, which I think is even simpler because all the chickens do the work. It's just eggs. CalMaine's in the egg business. All right, I got to look it up because I don't want to get angry emails from CalMaine fans saying they also sell. It says here they sell high-quality, fresh-shell eggs and egg products.

Egg products include shell eggs that are broken and sold in liquid, frozen, and dried form. Jackson, why am I talking about eggs? I'm supposed to be on Comcast here. You see, you do this to me. Most complicated company in America, I say, and I'll tell you why. First of all, just start with the ticker symbol. C-M-C-S-A. Five letters. Fancy, right? Anytime you have a NASDAQ

ticker with a fifth letter on it, the fifth letter is a backstory. It tells you something about the company or about the security, I should say. A means it's a class A share. B, of course, means class B. Jackson, pop quiz. On a different stock, not Comcast, but a different security, what would a Y on the end of a five-letter ticker mean? Is it Y not? Y not spelled with a Y? Yeah, like kind of chat lingo for, hey, why not buy us some shares? Well, you're close. It's an American depository receipt. depository receipt. And Q means the company is in bankruptcy. And W means these are warrants and so forth. So an A is class A shares, and you only tell people it's class A if there's a class B, maybe even a class C. And generally, the reason you might have multiple class shares is because someone out there is using that to hold on to voting power that is disproportionately

larger than their economic stake. Often that is a founder or a member of the founding family. In the case of Comcast, that is the son of the founder and the current CEO. So CMCSA, that's the stock that ordinary folks buy. And there are also B shares of Comcast. Those are not traded and those are controlled by the founding family. As I wrote recently in Barron's, one of the arguments for having a dual share class structure, and you don't generally hear these arguments from the companies themselves, that's the

whole point of the dual class share structure. You don't have to argue things. You can just get your way. But one of the arguments they might make is that you can protect certain assets or certain leaders, certain strategic long-term thinkers from the ups and downs of the stock market. And there are companies like this that have done very well over time, especially technology companies. But in Comcast's case, the structure seems to have mostly defended against the ups in the stock market more so than the downs. The shares, Comcast shares, have lost money over the past one, three, and five years. They've made money over the past 10,

62% in all, but that lags the S&P 500 by about 180 percentage points. And we can all figure out why that might be. Comcast is in the TV business. The TV business is troubled. But lately, the parts of the business that are supposed to be hurting Comcast don't look that business. The TV business is troubled. But lately, the parts of the business that are supposed to be hurting Comcast don't look that bad. And the things that are supposed to be helping aren't helping at all. I'll explain. Let me quickly run through the just okay to pretty darn good stuff, movies, theme parks, television, before I come to the surprising problem, which is cable. Movies are doing quite well. Third quarter revenue there rose 12% and there was a nice rise in what the company calls

adjusted EBITDA, horrible term. EBITDA on its own could hardly already be more adjusted. It's earnings before interest taxes, depreciation and amortization. So you take that measure and then you call it adjusted EBITDA. That's like, you ever been to a chiropractor, Jackson? You know, the part where they grab your head and they pull it out of your neck and then you scream?

That's adjusted EBITDA. I went once and I sounded like a little kid seeing Wolfman. All right, so Despicable Me 4 and the movie Twisters, those were standouts in the third quarter. In the fourth quarter, we had Wicked. Even I saw Wicked with two kids, so you know it's going to do a big number. And then in 2025, you've got the Train Your Dragon movies. There's a new one of those. There's a new one of the Jurassic movies.

And there's another Wicked, a Wicked follow-up. I think the Train Your Dragon is live action. Live action. So it's people--y looking not cartoony looking i like that phrase well it's good news for dragon actors out there okay so then we move ahead to theme parks have you heard jackson about epic universe do you do those two words mean anything to you epic universe no this is the biggest for people who take families to orlando for theme park vacations this is like the biggest for people who take families to Orlando for theme park vacations. This is like the biggest park opening since 1998 when Animal Kingdom opened in Disney World. This is not just a new land or a new part of one park.

This is an entire new park with multiple lands. It's a huge opening. And if you look at third quarter results, park attendance has slipped a bit for Comcast. That's partly because there was this big post-COVID surge, and now that has passed. I also wouldn't be surprised if some vacationers are holding out for May. That's when Epic Universe opens. The Comcast analyst at Bank of America Securities wrote, Epic may transform Universal into a destination park rather than simply an

add-on to a Disney World vacation. I consider it the park to go to when you're scared of the traffic to Disneyland. That's going to ruffle some feathers among Universal fans. People take these things very seriously. There's someone listening to this on a park bench right now in Harry Potter's Wizarding World holding a butter beer or whatever that stuff is called. And they're saying, how dare they call this an add-on park? I think that just made them angrier. Okay. Television. Now we all know the problem there. We've talked about it many times on the podcast. You have legacy TV players who are squeezed between rapid declines in cable

subscriptions. People are canceling their cable much faster than anticipated. And on the other side, they have these streaming services that they put out. They're not yet generating cash. They're burning cash. And those same factors are affecting Comcast. But the good news for Peacock, that's its big streaming service. Peacock paid subscribers jumped 29% over the past year. The Summer Olympics might have helped with that. And that sent Peacock's third quarter revenue 82% higher to $1.5 billion. Losses there narrowed.

And NBC, keep in mind, just won the bidding for NBA rights, for pro basketball rights. I say won, but really the news is that they just paid more than everyone else. $2.45 billion over 11 years. That's the reported number. But you would think that all that pro basketball would help with Peacock's momentum and subscriber growth. It's a wait and see thing because pro basketball viewership has recently been slipping relative to pro football viewership. And that's because, Jackson, why? Less contact?

The correct answer was too many three-pointers. Is this like a case study or is this just your own opinion? I want to see Wemba Yama charge down the lane and jam the ball without his feet leaving the ground, not jacking up 40-footers. Okay, that brings us to the last big piece, which is cable TV. And speaking of basketball, that's supposed to be the slam dunk. Cable TV here, I'm talking about the subscription service where you pay for your bundle of channels.

We know that viewers are canceling their cable TV and they're going with streaming fine to do that They need broadband and for that many of them still need cable and the profit margins The cable companies get from customers who do broadband only service those margins are attractive That's why you saw two years ago when you had a fight over programming between charter and Disney Disney in the past would have just stomped Charter, but this time around, Charter held its ground and stuck it to Disney. That's because Charter has new leverage. They're basically saying, hey, we're happy to walk away from the TV business altogether if we have to and just do cable broadband. I guess Comcast is part of this

shifting power dynamic, but it's kind of arm wrestling with itself because it sells both cable service and programming. But the bigger problem here is rising competition from the phone companies. Jackson, I know we've talked about this in the past. For the cell phone companies, they've already shelled out that money on 5G infrastructure, and they've gotten solid growth, not just on the number of subscribers, but in the revenue they're collecting from each subscriber. And there's really not much sign of a price war out there or on the horizon. If you've gone to get a new phone with new service recently, you might have seen that the terms aren't quite as generous as they've been at some points in the past.

So with that high price and there's tons of money coming in, not as much to spend the money on, what does that leave? It leaves these companies shoveling billions of dollars into expanding their fiber optic broadband footprints. And that means they're fighting for share against the cable companies. The phone companies are bundling their broadband with streaming TV services. The cable companies are bundling their broadband with cheap cell phone plans. It's a battle over which company consumers hate less, their cable company or their phone company. And so far, phone companies seem to be winning that battle. There was a conference in December where Comcast's Cablehead

called the business, quote, competitively intense. And he projected a loss of more than 100,000 broadband subscribers during the fourth quarter. That compares with just under 100,000 lost during the whole first half of 2024. The stock reacted to that by falling 10% in a day. Good news, management has a plan. Not so good news, it addresses shareholder concerns from five years ago, not the biggest concern today. The plan is that Comcast will spin off most of its cable networks, MSNBC, USA, CNBC, E! which I believe is pronounced E! Oxygen, SyFy, Golf Channel, and there are some digital assets

too. It's going to keepvo because it's got those reality shows which are particularly peacockable good for streaming in other words so it's to compete with like disney's the bachelor and netflix's love is blind those sort of shows i don't know that one is it uh that's a reality show what what? Or they put contestants in pods and they speed date, but they can't see each other. That's like the dating game, the old dating game with Chuck Woolery. Oh yeah.

That was a long time ago. Anna Kendrick just made a movie about there being a serial killer on that show. That's based on a true story. I don't know who that is. That sounds really grim. I was just going to say that they used to use the word whoopie a lot. Yours is a lot darker.

Now I forgot where I was. Campbell soup. And then whoopie. Cable spinoffs. Right. There's going to be a spin co and that spin co will be free to do deals. For example, and this is a hypothetical, you've got Warner Brothers Discovery out there. That company could hang on to its studios and its streaming business and it could spin off its own cable networks.

Call that theoretical company Banish Co. So then Comcast spin co could merge with Warner's BanishCo. They could call that one Synergistic RebundleCo. And the benefits of doing that, Jackson, what do you think the benefits would be? They could provide you with a 64-channel split-screen view of them all on at the same time. That's better than any answer I came up with. I tried to think of it, I mean, I guess maybe there'd be some cost savings. Here's how UBS's analyst put it. He wrote when Comcast announced its spinoff in November,

greater scale amongst long tail networks is unlikely to meaningfully shift the secular headwinds facing TV. In other words, bigger ain't going to do it. There are some other problems with Comcast's spin co plan. It won't happen for probably at least a year. The cable networks that are leaving and the streaming service that's staying, those are going to have to remain tied for a while just for programming continuity. But the biggest thing is the plan doesn't really do anything about what is now the biggest concern for Comcast shareholders,

and that's those broadband cancellations. That's the part of the business that was supposed to be doing well. What shareholders want to know most, I think, is are cancellations there going to get worse, or are they going to stop and we're going to see some stabilization or even improvement? That can make a big difference for the stock. Matthew Harrigan, he covers Comcast for benchmark securities, and he's bullish. He writes that with spinco and the movie momentum and the new Epic Park, you've got, quote, multiple 2025 propellants for the stock. He predicts 50% upside. We'll see, I guess. On average, the other analysts lack that same conviction, but they also seem to think the stock is cheap. The average price target out there implies a 26%

gain from recent levels, but barely half of the ratings on the stock are buys. And that is a bit of a contradiction, which is befitting America's most complicated company, Comcast. I did reach out to Comcast. They pushed back on my description of the company as complicated, saying that all the parts, including broadband, have to do with entertainment. On the stock performance, they point out that they've done better than their TV peers. On broadband losses, they emphasize that those are small relative to the installed base and that they're growing average revenue per user and seeing healthy growth in bundled cell phone plans and business services. And on the spinoff, they say that it will position both companies for growth. Capital called Comcast its top media pick for 2025, describing it as, quote, a financially robust, low multiple, unloved name with clear catalysts and significant potential for price

appreciation. Anything I'm leaving out, Jackson? You didn't give us your review of Wicked. Well, it was super long. I mean, it wasn't wasn't bad the uh the teenage girls that i was with liked it uh their big number is titled defying gravity and uh the only two words i remember from it are defying gravity it was like a seven hour movie i can't remember any of it they're the monkeys the the wizard of oz i think jeff goldblum might have been in it. I like the rotating bookshelf dance number.

It's not ringing a bell? I might have been checking my phone then. Let's take a quick break. I clearly need one. When we come back, we'll answer a listener question and we'll hear our Schrodinger's cat explanations. Welcome back. Time for a listener question. Jackson, who do we have?

We have Jacob. Hi, Jack and Jackson, do publicly traded U.S. companies in any industry with a founder or co-founder serving as CEO tend to deliver outsized shareholder returns over the long term compared to those led by non-founder CEOs? I'd appreciate it if you could either confirm or debunk this idea. Thanks and keep up the great work. Your podcast is truly one of my weekly highlights. Thank you, Jacob. Your question is, do founder CEOs beat the stock market? I'm going to give you two resources you can go to anytime you have a question like that. Does blank beat the stock market? Because America is filled

with universities, with professors who have to publish studies on things, and that's one of their favorite things to study. And not just in America, universities all around the world. And published studies tend to take rigorous approaches to these things where they try to control for hidden variables. You can find these studies in academic journals like the Journal of Finance, but what happens often is they circulate as working papers for years in order to get feedback from peers before being published in the journals. So if you're looking for fresher evidence, you might want to do a search for working papers. And there are two good places to do that.

One is called SSRN.com. That stands for Social Science Research Network. And the other is good old Google. But you put Scholar in front of Google. Scholar.google.com. That's a special search tool for academic reports. And you can put in not only the keywords, but also the date range and so forth if you want to look for fresher papers. It is common on the subject of stock market anomalies. I call them anomalies because that's

a term academics use for things that predict stock market performance. They use that return because you're not supposed to be able to predict stock market performance, so it's something unusual to them. What's not unusual is when you look at studies of stock market anomalies, you'll see conflicting evidence. Sometimes a thing that used to work doesn't work anymore. Sometimes we thought it worked, but then someone else came up with a better explanation for why it seemed to work but really doesn't.

I'm looking at one paper here from just over a year ago in the Journal of Business Research. It's titled, Founder vs. Agent CEOs, Effects of Founder Status and Power on Firm Innovation and Cost of Capital. And this is a study of about 500 high-tech companies over 15 years ended 2010. And the authors conclude that powerful founder CEOs enhance an organization's innovative performance. However, having a powerful founder CEO is also likely to raise the firm's cost of capital, resulting in lower investment returns and detrimental consequences for firm performance. They conclude that on average, a founder CEO tends to be good for innovation, but poor for stock performance. We can all think of examples to the contrary, and you don't have to have too many NVIDIAs in your portfolio over the years to make up for any of the duds. Now, when I talked about Comcast earlier, I mentioned dual class stock structures, and that's not the same as founder

CEOs, but it's closely related. And on that subject, there's plenty of published research. A lot of those studies seem to find positive effects early on, and then they reverse and become negative effects after a while. Here's an example. This is a 2022 paper from the Journal of Financial Research that's titled Dual Class Share Structure and Innovation. It says that it does find evidence of higher patent output and creativity and research and development efficiency in companies with a lot of insider control. But it also says the effects are concentrated in, quote, financially constrained firms and firms in highly competitive industries.

And it says, quote, the positive effects dissipate within 10 years after the initial public offering. Here's a working paper from researchers at the Federal Reserve Bank of Chicago and the University of Hong Kong. It's from five years ago and it's titled, Sticking Around Too Long? Dynamics of the Benefits of Dual-Class Voting. It says it looked at companies from 1971 to 2015 and found that, quote, young dual-class firms traded a premium and operate at least as efficiently as young single-class firms. As dual-class firms mature, their valuation declines and they become less efficient in their margins, innovation, and labor productivity compared to their single-class counterparts.

So I think, Jacob, that the evidence suggests the answer to your question is no, founder CEOs on average aren't great for stock returns. But again, if you're holding individual stocks, I think your success can come down to whether or not you hang on to just a small handful of astonishing winners for a long time. Average results in the studies, in other words, might not be your results. Thank you, Jacob. Jackson, time for cat stuff? Time for cat stuff.

I'd bring everyone up to speed on this, but I had a hard enough time the first time around. We did a recent episode on quantum computing. You can check that out. These quantum computing stocks are going nuts, even though commercial uses of quantum computing seem to be years away. It involves computers that are just monumentally faster than even today's fastest supercomputers by orders of magnitude. And it comes down to computers that instead of being based on zeros and ones,

are based on the behavior of subatomic particles, based on quantum mechanics. And there's this famous illustration called Schrodinger's cat. It involves a cat in a box and you don't know whether the cat is alive or dead until you open the box. But as quantum mechanics would have it, the cat is both alive and dead at the same time with probabilities of each, I don't know.

I don't get how the cat stuff relates to fast computers. But Jackson, are there listeners who have explained this in a way I can understand? Yeah, we got a flood of responses. And I think the best way to go about this is play one response with a couple add-ons from some other responses. This is a medley. We're going to hear a medley?

A medley, yeah. How long is a full medley? Just under a minute. Good. Let's hear it, and then we'll credit the folks after. With single atoms, we have an experimental proof that the atom could be in two states at the same time, like in two different places at the same time. The point of Schrodinger was to try and ask, why don't we see that with macroscopic

objects like a cat. We never see the cat in two places at the same time or live and dead at the same time. In quantum computing we don't use cats, we use atoms, so the paradox is not relevant. And since the atoms could be in two states at the same time, we get parallel computing and we get two results on the same atom at the same time, unlike what happens with classical bits. If you have 10 bits, classical computers handle 2 to the power of 10, or 1024 combinations sequentially, one after the other. However, if you have 10 qubits, you can handle those 1024 combinations simultaneously. More qubits means more universally long problems becoming trivial.

This enables processing of very large sets of zeros and ones a lot quicker, enabling computers to process and be a lot faster, solve password and encryption problems, and huge data set optimization issues. Okay, that was Joab, who is a venture capitalist focused on quantum computing, followed by Jake in New Mexico and Michael in L.A. Was Michael, Jackson, was Michael in L.A. driving while explaining Schrodinger's cat to me? Was he windsurfing? What was going on there? He was playing it pretty casual for a guy who was laying down such heavy concepts.

Okay, great job, Joab, Jake, and Michael. Thanks for breaking it down for me. And thank you, Jacob, for the question on founder CEOs. And thank you all for listening. Jackson Cantrell is our producer. Jackson, I think we've done it. I feel like we've defied gravity here. It kind of reminds me of a little song.

A little song called Can't Afford the Royalties. Go ahead, Jackson. A few bars, if you would. I can't afford the royalties. That's enough. We can't say any. Nope. Nope.

It's too similar. They got vanilla ice on that. I think I can't remember the details. If you have a question you'd like answered on the podcast, just tape a voice memo on your phone. You can windsurf while you do it. Send it to jack.how at barons.com. See you next week.