Motley Fool Hidden Gems Investing - Bob Iger 2: Return of the CEO!

Episode Date: November 21, 2022

Late Sunday night the board of directors at The Walt Disney Company fired CEO Bob Chapek and re-hired Bob Iger. (0:21) Jason Moser discusses: - The board's sudden reversal on Chapek - Expected changes in Disney's executive ranks - Iger's strengths in building relationships - Iger's track record in succession planning (13:11) Dylan Lewis and Kirsten Guerra engage in a bull vs. bear debate over Pinterest. Stocks mentioned: DIS, PEP, PINS, META Host: Chris Hill Guest: Jason Moser, Dylan Lewis, Kirsten Guerra Producer: Ricky Mulvey Engineer: Dan Boyd, Tim Sparks, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. Coming soon to a theater near you, it's Bob Iger II, return of the CEO. Motley Fool Money starts now. I'm Chris Hill. Joining me in studio, Motley Fool Senior Analyst Jason Moser. Thanks for being here. Hey, hey! Late Sunday night, the Disney board of directors fired CEO Bob Chapek. Former CEO Bob Iger is back in the corner office for the next two years. In the statement from the board, Susan Arnold, who's the chairman, said, we thank Bob Chapek for his service to Disney over his long career, including navigating the company through the unprecedented challenges of the pandemic. The board has concluded that

as Disney embarks on an increasingly complex period of industry transformation. Bob Iger is uniquely situated to lead the company through this pivotal period. Shares of Disney up 7% this morning. We'll get to the company, we'll get to the business, and we'll get to Bob Iger. Can we start with the board? Sure! Can we start with the board of directors that four months ago, five months ago, Renewed Chapek's contract for two more years, and the statement behind that news was, we are lockstep behind Bob Chapek. This is our guy. Yeah. Take a trip back in time with me, Chris.

At the very top, I think you read the statement from the board. I understand what they're saying. But if you go back to just June, when they re-upped them, like you said, let's read what they said then, too. I quote, Disney was dealt a tough hand by the pandemic. Yet with Bob Chapek at the helm, our business from parks to streaming not only weathered the storm, but emerged in a position of strength. In this important time of growth and transformation, the board is committed to keeping Disney on the successful path it is on today. And Bob's leadership is key to achieving that goal. Bob is the right leader at the right time for the Walt Disney Company, and the board

has full confidence in him and his leadership team." Wow, that escalated quickly. I don't know what changed. All I can tell you, there is something here that we're not getting. Something changed. I refuse to believe that it's just this most recent quarterly results. That could have been the straw that broke the camel's back. But something else is going on here because this doesn't fully add up. Yeah, we were saying right before we started recording, there's going to be a story that comes out later this week or later this year or at some point in the future that really gives more insight into this process.

Reportedly, the board contacted Bob Iger Friday night, and by Sunday, they had a deal in place, and the announcement went out at 10 o'clock Sunday night. But you're right, it can't just be this one. Now, granted, the quarter was bad, the most recent quarter was bad. I get that. But there has to be more going on there. And I do wonder, when you think about Bob Iger's skill, part of his skill, part of what made him a great CEO of this company for 15 years was his ability to build relationships with business partners, with talent, and his ability to sell Disney within Hollywood. I think we said on the show at the time, when there was the snafu, I think in 2020 or 2021,

about the Black Widow movie and Scarlett Johansson's compensation for that movie that blew up and went public, I remember saying at the time, either here in the office or maybe on one of these episodes, this is one of those things that, if Bob Iger was CEO, we never would have heard about this. It would have been handled behind closed doors. They would have figured it out. And Chapek, you said this recently on the show, Chapek made his bones in the parks, which is such a key part of the business. It's probably a big part of why Bob Iger himself tapped him. Yeah, and I think I read where Chapek did have some experience in the media segment, but that's back when VHS ruled the day.

I feel like the landscape has changed significantly since then. To your point, yes, Bob Chapek has definitely had a few stumbles along the way as a new CEO. Maybe the sentiment started to form after a little while that he wasn't the ideal cultural fit. I really do believe there's something cultural here that is part of what's going on with this decision. It's not to say that's good or bad, I just think that's probably part of it. But the modern-day media landscape is not his specialty, like we said. Given his background with the company, the modern-day media landscape, that's the part of the business that's in the biggest state of flux right now.

You look at Disney, it's in the middle of a generational transition in how it produces and distributes media. And these next few years are just utterly crucial. I do get that. I think we all agree with that. Bob Iger has been there for all the big deals, all the strategy planning over the past decade-plus. I absolutely understand if the board has a level of comfort with him navigating this terrain as opposed to Bob Chapek. But I will say, I don't think these challenges are so easily solved. He definitely has his work cut out for him. Everything that's happened here just over the last 24 hours or less, this all creates a whole new set of questions

that just aren't easily answered. I assume achieving streaming profitability is still the goal, the key. We need to know that, for sure. They need to explicitly state it. Is 2024 still the goal as well? Chapek had laid that out there. Whether he got there or not, that would have remained to have been seen. But he at least had a path to how to get there. He listed that out on the last call, where he's talking about three key things to help them get there, focusing on increasing prices of the offering along with the ad-supported model. They said, the second is a realignment of their costs, including a meaningful rationalization of their marketing spend.

And then third, ultimately leveraging all of their learnings and experience in developing a content slate that was just steady and high-impact, that never left you wanting. And that was something that we noted early on in Disney Plus' rollout, the content was somewhat limited, it was hit or miss, and it wasn't really as steady a state as I think they would like it to be. But those go to the things that JPEG was looking to in order to build this streaming offering. Will Iger guarantee this performance regardless of economic conditions? I think that's one thing they got in the market a little bit, in that earnings call when JPEG

said, yeah, we'll get to profitability in 2024, assuming there are no adverse economic conditions. There's that condition, and I just think the market maybe isn't looking for conditions there. What do we make of Chapek's recent rigorous review and cost structure task force? He was looking to go through the entire business, maximize efficiencies, cut costs that weren't really contributing to return. I think we all probably would agree that's a good thing. Is that set to continue? I don't know. How will Iger approach pricing for this? That was one of the big differences. Chapek was raising prices. Iger was in favor of lower prices as a differentiator. Higher prices is going to be an easier way to get you to

profitability sooner. We'll have to see how Iger approaches the pricing scenario there. It's almost certainly going to result in more managerial musical chairs. It's all to say that two years sounds like a long time for Iger to be stepping into this, But I think that time's going to go by very quickly, and he's going to have to deliver the goods. He is. I'm glad you mentioned the musical chairs. Bob Chapek has spent part of his time as CEO installing his team into leadership positions. I am assuming that the board of directors knew, when they made this decision over the weekend, that part of what they were signing up for is almost certainly a huge changeover

in the executive ranks over the next six to 12 months as Iger looks to put his team in place. And part of his job, as you said, two years is going to go by quickly, part of his to-do list is finding a successor. And for all the things Bob Iger has been great at as CEO, I would argue the thing he has been abjectly bad at is succession planning. He delayed his own retirement three times. He picked Chapek. Tom Staggs at one point was the heir apparent. I was thinking about this last week when we had our annual meeting. Part of our annual meeting here at The Motley Fool was, our CEO, Tom Gardner, interviewed Indra Nooyi, the former CEO of Pepsi. It's about four years ago that she stepped down.

And I think, when you look at Nuye's time as CEO at Pepsi, part of what goes in the plus column is the very last thing, her successor. The hand she had in picking Ramon Laguardia, who's been CEO for four years, that's a business that's done well under his leadership. I'm not rooting against Disney. I'm rooting for them. But this knee-jerk reaction of, oh, JPEG's out, Iger's in, great, let's pop the stock. It's like, there is still so much work to be done here. And Iger knows that. I just hope shareholders know it. Yeah, well, you're right. Again, I go back to all of those questions. We talked

about this over the last couple of weeks here at HQ. You and I and Bill Mann were chatting about it just the other day. It would be odd to see them get rid of Chapek so soon based on the kind words that they said about him when they re-upped him. He clearly had a plan in place. He's got goals set. Then we're saying, if you get closer to that goal of 2024, and it's becoming increasingly clear that he can't achieve that, then he really is on the hot seat and you start to get it. But you take this and you say, all right, you kick JPEG out and you bring someone in, it's Iger or whoever else, but what do they do? What do you do? Clearly, you're not going to come in and blow up the streaming offering.

That's core to the business for the coming decades plus. So, what do you do? Maybe that is where some of the cultural stuff comes into play. I mean, I know there was a reorg that Chapek undertook right as he got in there that took some power, I think, out of the content executives' hands. They didn't like that that much. It seems like Hollywood didn't really get it either. So, I suspect we would probably see Iger make some adjustments there as well. But yeah, again, it's one thing to replace the individual if there's just this long track record of not getting it done. But man, these guys stood up this streaming offering with 240 million subscribers in no time whatsoever. You have to tip your cap to them.

Clearly, the board not all that long ago was 100% on board. It's a phenomenal change of sentiment. in such a short period of time. Jason Moser, thanks for being here! Thank you! Pinterest is a great place for finding ideas on everything from recipes to home decor. But it has been a rough year for the stock. Ricky Mulvey hosts a bull vs. bear debate over the social media platform. Welcome to Bull vs. Bear. We get a stock, find some analysts, and then flip a coin to see which side they'll take. Today, the stock is Pinterest, the social media and image-sharing site. We have

two contestants making their Bull vs. Bear debut. On the Bull side, we have Kirsten Guerra. Thank you so much for joining the show. Thanks, Ricky. Happy to be here. And on the Bear side, it is Dylan Lewis. Dylan, good to see you. Happy to be here. Both of you own the stock, so I'm excited to hear the cases. We will start with the bullseye. Kirsten, five minutes is yours. Thanks, Ricky. Pinterest, for anyone who's unfamiliar, is an online platform for discovery, finding inspiration, collecting, and planning. It's kind of a half-social media, half-search engine. Pinterest attracts nearly 450 million monthly active users across the globe.

Now, that user base has declined sequentially over three quarters before coming in flat in the most recent quarter. But Kirsten, you're saying, this is supposed to be the bull case. Let me finish. Here's the thing. Growing the user base isn't how Pinterest plans to grow earnings for investors. The growth story here is all about increasing monetization of those existing users. So that monetization goal is best tracked in a metric called average revenue per user or ARPU. Before I share with you Pinterest's ARPU, I want to give you some context for some other companies. Facebook, about $49 ARPU. Twitter, around $26 ARPU. Now, Pinterest, $6.13 in the US and Canada. Only $0.72 in Europe, $0.11 across the rest of the world. We can see that

social media platforms have a lot of opportunity to monetize users and Pinterest is just getting started. So here's why Pinterest is uniquely poised to generate a much stronger ARPU from here. Pinterest is an advertiser's dream platform. So one, users visit Pinterest with the mindset to discover and consume. They are primed to explore new clothes that they like, find their next travel destination or plan their wedding. And that openness of users to discovery is very attractive to advertisers. As is its trove of user data, knowing user searches, saves, and pinboard curation really helps advertisers to keep ads highly targeted. And that's very efficient ad spend for them. Two, Pinterest is also just, I mean, it's a really pleasant place to be with

Facebook and Instagram parent meta pivoting in a wildly different direction and Twitter melting down, Pinterest is looking more and more attractive to advertisers. So we saw a ton of advertisers pull back from Twitter in response to fears that the platform would become less moderated, more politically charged. And Pinterest just doesn't stir those same fears. It's not built around controversy. It's just a place for people to explore, to be inspired, and to curate things that they like. Three, Pinterest is making a lot of moves to make the overall ad experience better for both advertisers and its end users. So with the acquisitions of video editing app Bochi

and AI-powered shopping app The Yes, it's never been easier to make modern content like videos on Pinterest and have that content find its way to the most interested users. So how has this focus already played out over the last year? Well, international users, which represent Pinterest's biggest opportunity

at nearly 80% of its monthly active users, their international average revenue per user is up 24% compared to a year ago. US and Canada is up 15%. Now, a quick note on management, because Pinterest did recently replace founder Ben Silverman with new CEO Bill Reddy. Now, I really liked Ben Silverman, but I think it says a lot when a company recognizes that a new lead is needed to take a company to the next level. That's where Pinterest is now. CEO Reddy did not step up from within the ranks of Pinterest, which could be concerning, but his background is strong for the task at hand. He was president of Commerce, Payments, and Next Billion Users at

Google. Finally, I could also mention that the company is profitable, free cash flow positive, has a very respectable debt-to-equity position, but I don't want to dilute the Pinterest argument too much. Again, the big story here is Pinterest's massive opportunity to monetize its existing users in a way that's beneficial to both advertisers and consumers. Kirsten Guerra, thank you for the bull case. But surely there's a reason the stock has been more than cut in half. Let's hear the bear case. Dylan Lewis, five minutes is yours. There are reasons that this company has been cut in half. It's tough to see. I'm a Pinterest shareholder. I love the academic exercise of this because it's putting me in

a spot to really question holding. I think it's something that everyone should do with any company in their portfolio. I agree with a lot of what Kirsten said. I will say my confidence in Pinterest has been shaken recently. Let's get a little bit into why. The promise of Pinterest when it came public was, we are just beginning to effectively monetize a social media property that has a critical base of users, and we have decent levers for growth. We're going to go through a ramp-up in monetizing, where we are increasing our ad inventory and expanding it over time. We're going to be exploring new ad products. We're also going to be adding more users to the site and growing the monetizable activity

that happens on it. Now, I honestly think Pinterest could not have timed its public debut any better for people who were early insiders and early investors. The company came public at a time when it was putting a serious concerted effort into monetization and was pretty much guaranteed to show gaudy top-line growth. Increasing ad load, still showing user base, there's a lot of things moving in the right direction. There's a growth story and a monetizing story happening there. It was founded in 2009 and did not make significant progress on monetizing for a long time. Just to go back in the history of it, it crossed $500 million in trailing 12-month revenue in 2018, at a point where it had roughly 200 million users

and had been around for almost a decade. When it came public in 2019, it had a $1 billion annual run rate. They then doubled their top line again at the end of 2021, where they were a major beneficiary of the pandemic, because there was a lot of focus on DIY, cooking, and home improvement inspiration. We have seen over the last couple of years the year-over-year growth rate grow from the 50%, 60%, 70% year-over-year range, and in the last couple of quarters, decelerate dramatically to single-digit growth. My concern with Pinterest is that over the the last few years, we saw the easy money get made with monetization. Because the site was barely monetized over the last couple of years, there was a lot of low-hanging fruit

for this business. As a cautionary tale, I went through that period that we saw with Pinterest. That growth story is very similar to what we saw with Twitter just a few years earlier. Explosive growth until the top line hit about $2.5 billion. Then, for several years, the company had a very hard time finding meaningful growth because the platform was not growing users in a big way in the most valuable ad market, which is North America. In Pinterest's case, I worry that if they're not showing growth on the user side, they're going to have to focus on monetizing the platform effectively. I think that that's going to get a lot harder for them, because as the economic outlook gets cloudier and budgets

tighten up for advertisers, ad budgets are going to be focused on where marketers get the highest ROI, and that is not Pinterest. HubSpot put together a State of Marketing Trends report, and they do this every year, they surveyed marketers to get a feel for trends in spend and performance. They asked the question, what channel has the best ROI on paid social media campaigns? Leaders, Facebook, Instagram, YouTube, Twitter, TikTok, Tumblr, Reddit, all in front of Pinterest. That is a lot of numbers to go through, and it's a lot of names to go through for marketers. Just as a case in point for the profile that Pinterest has in the digital ad market, in a 50-page report, Pinterest gets named four times.

Facebook, YouTube, TikTok, et cetera, get name-checked dozens of times. I worry that they're going to face that same bottom-of-the-pile status when we're looking at tighter ad budgets going forward over the next couple of quarters. Dylan Lewis, he's bringing Tumblr back to the mainstream. Thank you so much for the bear case, Kirsten. Thank you for the bull case. You can go to at Motley Fool Money on Twitter and decide who made the better argument, because today's lucky winner will receive. Today's lucky winner will receive salt, pepper, and storytelling. That's right.

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Produce and spices are not intended. 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! Thanks for watching!