Motley Fool Hidden Gems Investing - Betting on the Winter Olympics, Exploring Global FinTech

Episode Date: January 27, 2022

Viewership on Peacock is not as high as Comcast 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, one of the largest employers in the U.S., is dealing with rising costs and why Levi Strauss is optimistic about 2022. Plus, Emily Flippen and Asit Sharma take a closer look at Wise, a financial tech company aiming to make global currency transactions cheaper. Our free Investing Starter Kit includes 15 stocks and 5 ETFs. For a copy just go to http://fool.com/StarterKit Stocks: CMCSA, NFLX, DIS, MCD, LEVI, WISE, SQ, PYPL Host: Chris Hill Guests: Maria Gallagher, Emily Flippen, Asit Sharma Producer: Ricky Mulvey Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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 a consumer business that's been around since the 1850s. All that and more coming up right now. I'm 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. Nice to see you too. 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

Plus. 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 I'm wrong in 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. Yeah. So there's so much to think about with Comcast. In 2021, revenue was up about 12%. Net income was up about 35%. They generated a 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 Netflix, $222 million. Disney+, $118 million. Amazon Prime, $112 million. HBO Max, $73 million. Hulu, $43 million. So Peacock is really coming in the rear in terms of people's interest and 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 on their net ads for their high-speed internet. So they warned about lower-than-expected broadband customer growth, which is a big focus for 2022. So it was kind of a lot to take in,

kind of 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. That is a nice way to say it. That's probably nicer than I would have put it. Yeah, no, they said they're going to double the amount of money they're 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. 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 sort of look at it and say, okay, it's not really working out by your own admission. It's not working out the way you want it 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. And I just thought, are they having conversations about ditching one of those? So what's interesting with this tier as well is that it's ad-supported, but only for certain episodes, right? So 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. So to get the full range, you need to pay for premium. And I think that's with Parks and Rec and The Office and all of those brands that Peacock is really leaning on to get

people to pay up. So I think that they're maybe even going to 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 the money so I can keep watching my favorite show. So I think that that's kind of their strategy is to pique people's interest right in the beginning. But again, it isn't really working. So 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 of The Office and Parks and Rec. They don't have that many new and exciting things if you compare them to 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'm loving this show. You got to watch it on Peacock. 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 did they talk at all about the Winter Olympics, which are starting in, I don't know, a week? I think they start next week. Did 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 pinning a lot on this Winter Olympics as being a way to maybe boost those peacock numbers? I think definitely because you saw it. We recently had the Summer Olympics and you saw a lot of success for them with the Summer Olympics. So 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

in the summer, you have other things that you could be doing. So I would be interested to see the comparison between how many people tune in for the summer and winter Olympics. Yeah, I think you and a lot of people in the greater metropolitan New York City area, and pretty much everywhere north, 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 U.S. And 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're dealing with them as best they can. But when you look at the cost of food, labor, the cost of paper, it's going up. What did you think of their latest results and what they have planned for 2022? 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 costs of both ingredients and wages and labor. You have the commodity inflation for both beef and chicken. And like you said, we have increasing costs 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 it's a pretty steep comparison. And so 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. So 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. And 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. Although McDonald's, I think, has done a, 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, if you're in the restaurant business, you want to be ratcheting up what you're doing on the mobile front, unless you're, I don't know, the Capitol Grill or something like that. I can't imagine that's a business that's doing a ton of takeout ordering. Any sense from them of what those

investments are looking like? Digital same-wide sales exceeded $18 billion in 2021. Over 25% of total system-wide 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. 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. And 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. So they have some

strategic menu increases, but they also have a lot of marketing promotions and growth in those digital channels and loyalty programs. So 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. 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 is a business. Yeah, absolutely. And I think that with how big they are, right, there are over

40,000 McDonald's locations in over a hundred countries. So they have such a large base to work with. And so I think that they're going to, I think they're going to do their best and they have in 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. So I think it'll be interesting to watch them to see what that inflation looks like and what those price increases look like, because I think they're going to set the tone for a lot of other companies in this industry. Levi Strauss started making jeans in the 1850s. And before we get to their fourth quarter result, 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 and revenue came in higher than expected. They had some upbeat guidance for 2022. I hope that works out because as much as I respect the durability of this business, it really has not translated to the stock. To just lean into the history lesson, in 1873, Levi Strauss received a patent for improving fastening pocket openings, so they basically created the blue jeans. They added

buttons to work pants. They created the style of blue jean. In 1934, they created the first blue jeans for women. In 1986, they launched Dockers. And so, they're such a longstanding 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. And also, not only how relevant it stayed, how well it's pivoted to integrating things like ESG, sustainability, and really leaning into those types of initiatives as a brand. So 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. So what is also interesting is that people are really looking for the brand. People really know Levi's, you know, that they fit you, you know, that you like them, you know, that they're good quality and that they're sustainable. And so you go to the store to try on the brand, to try on the jeans and you go, um, to their online website. And so 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 that jeans are above average.

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 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 sort of niche, smaller brands. And I'm wondering if that's part, you know, it's not just that they're competing with a large company like Wrangler. They're also

competing with niche online brands like Mott & Bough and Everlane. Is that yours? Yeah, Everlane's mine. And so I do think that in August, they purchased Beyond Yoga for $400 million. And I do think that's, 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. Um, and I think people who I know who wear the pants really like them. So I do think that they're trying to expand their footprint and expand their, their options. But yeah, I mean, it's just such a competitive industry with 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. So it's not necessarily operating in, in such a foolproof area, but I do think that the brand legacy does kind of stand for itself. And also the way that they've, they're strategically investing in kind of trying to grow those brands. And I think it'll be interesting to see how, um, beyond yoga does, because I think that will be interesting to see if they lean into athleisure the way you see the Gap does, and you see those other big brands trying to do as well, American Eagle with Aerie. So, seeing if they could be kind of one of those one-stop shops where you get everything from Levi Strauss. Yeah, I was very loyal to Levi Strauss, and then I tried on some other jeans. I was like, oh, I think I like these better.

Maria Gallagher, always great talking to you. Thanks for being here. Thanks so much for having me. 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. Here's Emily Flippen and Asit Sharma. My name's Emily Flippen. I'm here with Asit Sharma, and we're going to be talking about a really interesting payment business. You could call it a fintech player, and that business is Wise. Asit, thanks for jumping on.

Emily, thanks for being here with me and having me on with you. I have a question for you before we talk about why this is very related. Do you remember the first time you ever sent or received money remittance by any chance? Well, when I think about remittances, I think about my time in China, actually. And I think that was the first time that I ever really had to deal with the issue of receiving money from a different country. And let me say, it was a pain in the butt. Yeah, I had a similar experience. I mean, this was going back to the 90s. I was in college and was a profligate spender. My sister, who lived an hour away, she was 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. 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. Well, truly a sign of the times. And when people think about money payments, their first thought probably goes to Venmo from PayPal or the Cash App from Square. But Wise maybe isn't top of mind unless you're somebody who is living in one country and doing business or in another, or a frequent international traveler, and that's because they're a platform

for cross-border payments. They pitch themselves as the fastest, easiest, and cheapest way to send capital across 80 different countries. Certainly would have been nice to have that at our disposal, especially during my time in China. 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're 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. If you're thinking to yourself that this isn't a really massive market, you'd be wrong because Wise currently has over six million active customers. They've issued more than one and a half million debit cards, so they're increasingly finding easier ways to connect with their consumers. 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. Yeah. 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 middlemen. 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 U.K. 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 MyWise 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 note, they are branching into enterprise services. This is a company that is pretty profitable, though I should say. 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 two years, but 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 has already scaled to the point where it's making money hand over fist. 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 three

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. It may not be as well-known here in the U.S., but it is growing pretty quickly. I will say the competition in this space, as I think many investors know, is really fierce. You're going up against basically any consumer-to-consumer payment processing platform. But what 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 face this problem themselves in their careers. They are really motivated to make Wise the standout option for cross-border payments. Lots of competition in this space, but I think they're differentiating themselves and their fee structure is still the most competitive. For sure. Those two co-founders, CEO Christo Karman and Tabet Heinriches, 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 few 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, and I think they can keep grabbing more share in this market.

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're 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-sized businesses and entrepreneurs, there are different ways to engage and monetize while still facilitating the transfer of payments across borders. 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 Emily, you know I want to travel to Turkey at some point. While the Lira has taken a beating against the 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've become a quasi-currency trader over the last few months, 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, you have to imagine a desert island which has some capability to process transactions. 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 platform would you take? 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,

and having a little bit of geographical exposure to the London Stock Exchange here in my portfolio is never a bad thing. What about you, Austin? Yeah, maybe I'm going to sound a little hypocritical here, too. I'm 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. 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 a Square, but at an earlier stage, I think I would go with Wise. Definitely one that we'll have to keep our eyes on. Azit, thank you for joining me. Chris, thanks for having us. So much fun. Thanks so much. 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, and 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. Thank you.