Motley Fool Hidden Gems Investing - Disney Passes Netflix

Episode Date: August 11, 2022

The House of Mouse is firing on all cylinders, and now its total number of subscribers for Disney+, Hulu, and ESPN+ is greater than Netflix. Dylan Lewis and Maria Gallagher (00:21) discuss: - Disney’s pricing power and streaming fatigue. - How Coinbase is faring through a Crypto Winter. - What Softbank is telling investors about the private markets. Plus, Nick Sciple interviews Tim Johnston, Co-Founder of Li-Cycle Holdings (15:41), a lithium-ion battery recycler. They discuss how Li-Cycle can meet some of the growing demand for the metals that go into electric cars, and the company’s partnerships with major energy providers. Stocks mentioned: DIS, NFLX, COIN, UBER, SFTBY, LICY Host: Dylan Lewis Guests: Maria Gallagher, Nick Sciple, Tim Johnston Producer: Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

Stop wasting your nights on a mattress that doesn't get you. Experience the most comfortable mattress in the world. The Sleep Number Smart Bed. At the touch of a button, you can personalize your comfort. Choose firmer or softer. Adjust cooler to warmer. And right now, save up to $2,500 during our massive Labor Day event. Hurry into your local Sleep Number store today.

Because we have your number. There's a new king in streaming video. Well, kind of. Motley Fool Money starts now. I'm Dylan Lewis, sitting in for Chris Hill, and I'm joined by Motley Fool Premium Analyst, Maria Gallagher. Maria, thanks for being here. Thanks for having me. Maria, Disney reported earnings after the bell Wednesday, and the results were good news for people who like good news. Revenue is up 26% year-over-year, operating profit jumped 50% year-over-year, thanks in large part to a triumphant return for the company's theme park division. If there were any questions about people's desire to get back out into the world,

I think Disney's parks experience and products division says it all. 70% year-over-year growth, And we're seeing that segment come in above pre-pandemic levels. It was a great quarter for them. So, like you said, revenue was up 26% to about $21 billion. Their media and entertainment segment is up about 11%. Parks, experiences, and products up, like you said, 70%. And what's interesting there is their guest spending grew. So, their average per capita ticket revenue was up, as well as there was higher average daily hotel room rates.

And this is the first quarter, or one of the first quarters, where Cruises operated fully throughout the whole quarter. so you saw a return in cruises as well. So I think it's really interesting to see the comeback of the parks business because now they've always had a pretty holistic ecosystem, but now the holistic ecosystem is really up and running in a way it hasn't been able to really run for the past couple of years. Yeah, I think we're finally seeing a business that is, to quote one of our colleagues, firing on all cylinders, right? It's not that certain parts of Disney's business have to carry along these other struggling parts due to the pandemic. We're kind of seeing these results materialize because every piece of this business is moving and starting to grow in a meaningful

way. Yeah, absolutely. So if we look at things like Disney Plus, Disney Plus now has on its own 152 million total subscribers. In the U.S. that was up 17%. ESPN Plus has about 22.8 million, and Hulu has about 46.2 million. So they have surpassed Netflix in their total users of 221 million. And what is also really interesting about this is that their average monthly revenue per paid subscriber. Hulu's is by far the highest with $87 for the live TV bundle and about $13 just for video. And so then Disney Plus comes in about $6, ESPN about $4 to $5. So I do think also with Disney, it's firing on all cylinders, even within all of their segments. So you see strength from each of their video streaming platforms as well as strength throughout their whole ecosystem.

Yeah, it's interesting to see, because they are, in the grand scheme of streaming, a relatively new entrant, despite being the size that they are and the company that they are. In addition to them putting the crown on and saying, hey, we're the new king of streaming, look at our numbers, we also got an update on the company's offerings in streaming, specifically the way that they're pricing some of their subscription tiers. Yeah. I think also what's interesting is, like you're saying, it's newer, but it has so much strength because everyone knows Disney, right? And so, they have this loyalty already baked in the way you see some of these newer streaming services trying to build out franchises.

Disney has over 2,000 active patents compared to Netflix has about 400 patents. So, we just see Disney, I think, is pretty unique in its capability to come in and have such strength so immediately. And so, we are seeing a rate hike. So, we're seeing the ad-free tier of Hulu is going to jump to $14.99. There's going to be a price hike for unbundled ESPN Plus. There's going to be more for Disney Plus as well. So we are seeing, as is pretty typical of a lot of the streaming services, more of the rate hikes coming in towards the end of 2022. I feel like pricing power has been one of the main focuses of the last six or so months. It's been something that we've kind of been looking at to businesses to say, do you, in an inflationary environment, have the ability to

raise prices, maintain the relationship that you have with customers? We're seeing these prices come up. I think to some extent, we knew Disney priced low early so that they'd be able to bring a lot of subscribers on board. When you see where Disney's offerings are priced now, how do you think it stacks up and where do you think the ceiling is for them in terms of pricing power? Do you feel like they have room to run? That's a great question. I think it's kind of the million dollar question is how many people are going to get lost with these price hikes. And so I do think that having those built in franchises is going to be really good for them. Whereas we see with Netflix, there isn't as much loyalty as kind of the rewatch shows. The only

one that's really left on Netflix now is new girl. Now there's Seinfeld, but we saw friends leave. We saw parks and rec leave. We saw the office leave. Um, and so I think Disney has a lot of advantage in that a lot of people already have loyalty to a lot of the options within Disney. So I think that it has more room to run, but I don't think that the ceiling is that high because most people aren't just buying one service. Now you have multiple services. So if you're paying more than $15, $20 for a service, that's, I think, I think the top is really between 15 and $20. And we're starting to see them hit that even with some of their bundled options already. I know that there's going to be that streaming fatigue as people start to look at all the different

things that they're paying for and figure out, okay, what am I actually using on a rolling basis? That, I think, to some extent, is going to dictate people's price sensitivities. One of the other things I was struck by, Maria, just looking at the new offering and what they're thinking in terms of pricing and tiers is, they announced that they had an ad-free experience moving up to $11 a month from its current price of $7.99. At $7.99, they are now going to be offering a lower ad-supported tier. Is this just basically the future of streaming? We're looking at cable, but kind of with more steps? Yeah, I think we've really come full circle. I remember when DVR started and everyone was so excited to not have commercials,

and then you had Netflix, which was even better, and now we're back to commercials. And so I think that's kind of an interesting thing to see, that it really comes in a loop and that advertising really pays. And so they're trying to see the value in that. And so I wonder how many people are just going to say, fine, I'll just keep watching commercials. I did it for most of my life. I guess it's coming back versus how many people are going to say, no, I don't want commercials. I'm going to pay up, but that means I'm probably going to have some streaming services on the chopping block. I'll only pay up for two services as opposed to saying, okay, fine. I'll have everything, but I'll have them all at the cheapest tier. I think if you're looking for an

upside there, it's that you could maybe have an opportunity to get up and go to the bathroom while you're watching TV. You don't have to hit pause as you're streaming shows anymore. But I know some people are going to be a little disappointed about that. Maria, there were a couple other earnings results that I wanted to touch on from this week, in part just because I think there are some companies out there that are bellwethers for larger trends. And what we saw in these reports is kind of an interesting indication of the dynamics that we're seeing in those markets. The name that comes to mind to me first is Coinbase. When they reported earnings earlier this month, we saw a 60% decline in revenue year over year and losses of $5 a share, nearly double

what the market had been expecting. We know to some extent this is really just a business that is going to move with crypto markets in general. You pick any of their major metrics, that is going to be driven by the performance of crypto and generally interest and sentiment in crypto. Were there any numbers that jumped out to you as something that was surprising in what was It was kind of a rough report or even worse than maybe the market was making it out to be? I mean, it was a really interesting report and they did really go in a lot of depth. So I have to give them credit for that. So I think the first one is just the crypto market overall. It saw declines of over 1.3 trillion. We saw this echoed obviously in Coinbase results. So

their trading volume was down about 30%. Their transaction revenue was down about 35%. Their net revenue was down 31%, but their operating expenses were up 8%. So you saw an operating expense of nearly $2 billion on $803 million in revenue. So, obviously, they have to do some pretty intense management of expenses moving forward, and that's something that I think is really important for them. You saw they are obviously aware of that with an 18% employee reduction count in June. Something else that I thought was pretty interesting, though, is their trading volume breakdowns. So, retail investors are a much smaller percentage of their trading volume, but are a much higher percentage of their revenue. So, we see that institutions have a lot

of volume, but they have a low fees and the retail customers generate more of those fees. So I think it's going to be really interesting to see as we're facing a crypto winter, what those retail investors, how they back bounce back and what, what that looks like. And then the last thing that I noticed as well is that other crypto assets are about 47% of their trading volume. So a lot of users on the platform, they're not only going for Bitcoin and Ethereum, Bitcoin's about 31%, Ethereum's about 22%. But so those other crypto assets are larger chunk than I thought they would have been on this platform. So I also think that's going to be something that might change as people are looking to have some more stability in this very volatile market.

You mentioned crypto winter. And if it's reassuring at all to folks that are holding shares of Coinbase, in their shareholder letter, management wrote, it's never as good as it seems, and it's never as bad as it seems. And in their materials, they had charted out crypto's rise over the last decade plus, and noted that there were basically four cycles, as they see it, with over 70% declines peak to trough each time. When we see times are good with this business, and there's a lot of interest and activity in the crypto space, this is a solidly profitable company. But we have to acknowledge it's cyclical, and it's going to be at the whims of this larger market. What do you want to see from them when times aren't good to know that they're positioned

to capitalize on these rises and runs that the overall market will go in? Yeah, I mean, I just think that highlights such the intense volatility and uncertainty with four pullbacks that were that massive over the past decade. So I think that that just kind of underscores the volatility of the market overall. So at the first iteration, there were kind of different exchanges that no longer exist. So to be completely transparent, I fall a little bit more on the cryptical side of the crypto market. But so I would say that in times like this, obviously cost cutting and focusing on trying to diversify their revenue streams so they aren't as tightly correlated with this volatility, and trying to see some kind of

momentum in terms of being sustainably profitable and not being as cyclical. However they can manage that cyclicality is just really important, I think. We've seen them have some initial signs of success there. They are trying to launch a subscription business and a subscription revenue stream that gets them a little bit away from more of the activity-based revenue and business model that they currently have. It's a small part of the overall pie, but I think if you see signs that that's continuing to grow and become an increasing piece of the pie for them, they're probably onto something there. Yeah, absolutely. They had a 44% growth in the subscription and services revenue. They talk about their highest priority opportunities are

things like Coinbase Prime, the retail app, developer products, Web3. They are definitely trying to do that diversification, but I wonder how many people are coming onto Coinbase for those diversification offerings and how many people are just coming to buy or sell Bitcoin or Ethereum. And I think that that's going to be what we see over the next couple of quarters, next couple of years, really the test for Coinbase. One of the other earnings results and kind of follow-on announcements after earnings that I wanted to focus on was from SoftBank, the telecom-turned-massive tech investor. The company posted a record net loss of $24 billion, and this was largely driven by paper losses on investments in the public and private markets.

The good and the bad of SoftBank is pretty well documented over the last couple of years. We saw when WeWork was going through its massive debacle, this was a name that was very closely associated with it because they'd been a major source of funding for WeWork. There are a lot of other really big public and private names that SoftBank has been associated with. I think, Maria, when we're seeing the results come in and we're seeing some of the follow-on news items after the earnings that have come in, we have to start to question a little bit where this company is and what it's been doing over the last couple of years because we're starting to see these drawdowns or these paper losses. Yeah, absolutely. And I think it's kind of a signal of the investing philosophy

of a lot of venture changing because really SoftBank came on the scene and it was so powerful. It had so much money. It kind of changed both the volume and the intensity with which you could do VC spending. And so seeing them kind of say, we're going to look at being really critical. We're not looking into invest anymore. We're going to look and they are selling a lot of its sale of SoFi, Alibaba, T-Mobile. And it's also kind of interesting because Alibaba is the first investment that kind of put SoftBank on the map. So I wonder what the next couple of quarters will look like in terms of them selling some of their steaks and companies. They own or partially own so many different names. They own part of Cameo, ByteDance, which owns TikTok, Dice, DD Grocery,

Ding Dong Fresh, which is another grocery delivery. All throughout the world, they own parts of Klarna. So I think it's kind of a signal of a new era in VC where we've seen for a very long time, pretty free-flowing money within the private market space. And I think that this is a signal that they're working on being maybe a little more critical moving forward, which I think will be pretty fascinating to watch. Yeah. And I think it's particularly interesting because we don't really get a lens into the private markets all that often. We can, to some extent, get a sense of what's going on with some of their public stakes. And we saw that they had a very large position in Uber, and they liquidated that position recently, seemingly at a gain in

order to raise some cash. But we don't necessarily get a look at the valuations of private companies all that often. And when I see them going and saying, you know what, we are going to wind down some of our position in our most fabled investment, Alibaba, that really kind of put us on the map to raise tens of billions of dollars to shore up our cash position, it does make me think what we've been seeing from them with their private investments, we're probably going to start to see some haircuts. Yeah, absolutely. And I do think that what we've seen also in the past couple years, maybe past 10 years, is that companies are coming public so much later because there's so much money in the private market. So unicorns used to be things that you never saw, but now

we're seeing unicorns all the time. And so I think that's also going to be interesting as I wonder if with this more frugal idea of VC, if we're going to see more companies going public at an earlier stage, which is something that we haven't seen in quite some time. So that'll be pretty interesting for me to watch as well. Maria, thanks so much for joining me today. Thank you for having me. To build more electric car batteries, the big auto manufacturers will have to get creative finding rare earth metals. Li-Cycle is a small cap battery recycler hoping to meet the growing demand for lithium for electric cars. Nick Sciple caught up with Li-Cycle co-founder

Tim Johnston to talk about his company's partnerships with major energy providers and its growth plans for the future. Hey, everybody. I'm Motley Fool senior analyst Nick Sciple. I'm excited to be here today with Tim Johnston, co-founder and executive chairman of Lycycle Holdings, a Canadian company working to become a global leader in battery recycling. Tim, thanks so much for joining me today. Thanks, Nick. Thanks for having me. So just to start, why'd you found this company? What's the opportunity you're going after today? Yeah, absolutely. So I came from the traditional world of mining lithium materials, and I was doing that for about 10 years, working all over the world, helping companies develop different lithium

assets. But it was clear that whilst we were generating a lot of material to go into what is a very important part of this new economy that we're developing in terms of lithium-ion batteries, that there really wasn't a good way to recover these materials and return them back to the industry in a form that's suitable to go back into new batteries and new products. And so that was really the problem opportunity. I felt that with my co-founder, RJ Kocha, who is our CEO, that we had the right technical background to understand how to solve this problem.

We have some experience in technology development and business. We really saw that this was a great opportunity to develop and solve a problem that was really very important for the industry and, to be frank, for the wider economy. Absolutely. You see headlines pretty regularly today with electric vehicle manufacturers talking about supply constraints for some of those key commodities. When you talk about recycling an electric vehicle battery or a lithium-ion battery in general. How do you do that? How do you even start? Basically, we have a two-part process. We refer to this as the spoken hub model. It follows both the technology, but then also the business model. The idea with our spokes,

these are relatively small-format pre-processing plants, where we accept all different forms of lithium-ion batteries. You can think of everything from the smallest lithium-ion battery you might and have at home, maybe from an airport or something like that, all the way up to and including electric vehicle battery packs and all the manufacturing scrap that's generated in the process of making these batteries in the first place. These plants, as I said, are a small footprint. We have a facility in Canada where we build these plants in-house, and then we deploy them. And today, we have three commercially operating. We have a fourth one that's about to come online here. And the goal is, and this comes back to the business model, is to have

facilities close to where batteries are being generated. At the end of the day, one of the biggest costs associated with recycling lithium-ion batteries today is actually the logistics cost of moving them from wherever this material is generated to the point in which it can be processed into a usable product. And so we do that. We developed our own process in order to process these batteries. At our spoke level, we call this a submerged shredding process. Basically, we're processing these battery materials all in the one line. We can process any set of charge, any form factor, any chemistry. We do it in a safe way whereby we're minimizing the amount of handling that operators have to do with the batteries. And then at the end of it,

what we're doing is we're producing three key products. We're producing a low-density plastic product, which goes on to other secondary uses, a metallic foil product, which is predominantly copper, aluminum, steel, which goes on to further metal recovery through one of our partners. But the key thing that we're after through our spoke network is what we call black mass. And black mass, putting it very simply, is just the anode and cathode materials from within the lithium ion batteries. It's where your graphite, your nickel, cobalt, lithium, manganese, they all reside within what we call this black mass. Now that we've turned the batteries, which are somewhat heavy, difficult to handle, into these intermediate materials, We now have a product that is safe and easy to transport.

These materials are non-flammable, you know, you can ship them in bulk, you can do all sorts of wonderful things that reduce the cost, coming back to the economics, of getting it to a refining facility. And that's our hub. So today we're constructing a hub facility in Rochester. It's for 35,000 tons per year of this black mass material. It's the equivalent material of about 90,000 electric vehicles, if you want to think about it in that terms. And what we do with the refinery, the hub,

is that we then take that black mass material and we turn it back into the material. So coming back to, you know, RJ and I's original background coming from the battery industry, the chemical industry, was what we're doing is we're producing materials that are fit for purpose to go back into the lithium ion battery sector. And that's a major facility. It will be one of the largest of its kind in the world when it's complete. We're on track for starting commissioning next year. Very, very exciting time for that. But most importantly for the industry, it's going to be the first large-style demonstration, at least in the Western world, of this ability to really close the loop for these lithium-ion battery materials. When I think about it with these

spokes, it's basically this giant shredder with some hydrochemical treating to put it into this into this usable form, this black mass that you then send out to the hub that will treat that into a usable form. You almost think about it like an oil refinery, maybe. You mentioned, though, this will be the first of its kind. So far, you have some test facilities, but you haven't scaled up to this massive full-scale facility. What are the obstacles now between where you are today and reaching that full-scale production? Yeah, absolutely. At our spoke level, We are commercial today. We process thousands of tons of batteries per year through our Spoke network. And as you said, we built a demonstration plant. We ran it for about 12

months, processing black mass in Canada through to the same materials that we'll be producing in Rochester using the same process. And so, we've gone through that. We've done a lot of work on the engineering development. We've secured offtake for all of our end products. We're only able to do that because of that early work that we did. So, going forward, the key thing that we're focused on now is really execution. We have two great partners that are working with us in the development of the hub in Rochester, being Hatch and MassTech on the construction side. These are large global firms, very, very capable when it comes to both engineering and construction management.

And so, now we're working through with them, with our team. Collectively, we're building out the asset and very much looking forward to completing the project. Sure. So, you talk about some of these engineering partnerships to actually construct the facility. Other partnerships also important to this business. You've signed some deals with Glencore, LG Chem. You're working with Ultium Cells, which is the partnership with GM and LG Chem to make batteries. Can you talk about some of the partnerships you've made and how you're using that to help fund the business, to actually build these facilities? takes cash to make these things happen. Yeah, absolutely. It's a capital-intensive

process. We've raised over $1 billion to date. Since we went public about 12 months ago, we've partnered up with three key partnerships. The first was with Koch Industries. Koch is a big international industrial firm. The great thing about their partnership is that they are increasing their investment involvement across the battery sector, which is helping us form strong commercial partnerships. But also, they're very strong on the engineering and operational readiness side of it. So, they've been a great resource for us to be able to work with and help steer the project down the right path. But then going forward, we did an investment with LG. So, LG made an equity investment in Lifecycle earlier this year. It was the first

recycling investment that they had made. They are today the largest producer of electric vehicle lithium-ion batteries in the world. And so, a great cornerstone partnership as we work with them as that part of that deal was really, truly closing the loop in the sense that there's an agreement whereby we receive materials from the manufacturing of their lithium-ion batteries, and we're providing the materials back from our hub facility in Rochester. But then the latest was with Glencore. And Glencore today is one of the largest producers of nickel and cobalt in the world. They have operating assets all over the world that support the existing lithium-ion battery

sector. And what we saw with the partnership with Glencore was more than just capital. It was really an ability to partner with a significant organization when it comes to ability to build out additional assets going into the future. We're doing a lot of work with them on our next phase of growth. And what we're really focusing on is trying to leverage their expertise. They are truly experts when it comes to producing finished metals. They go into the lithium-ion battery sector, and they've been a great partner up until this point. I'm sure they will be going forward.

All right. So, we've talked about your plan, that you're moving forward with the Rochester hub, making some of these significant partnerships. Today, the company is burning a fair amount of cash as you reach this kind of full scale. where do you see the path to reaching self-funding and maybe capital needs for the business to reach that point? Yeah, absolutely. We're fully funded for everything we've announced to date. We have seven spokes that we've announced to date that are in various stages of operation and construction. Our facility in Rochester, we're fully funded for that all the way through commissioning and start up there. So, there's no real initial capital needs for the business today. You know,

so, going forward, we're not looking at bringing on any additional equity or anything like that in the near term. What we're really focused on is execution. In terms of going and turning to profitability, we haven't put out specific guidance in terms of when that may be, but it's very clear to those who follow the business closely that the hub in Rochester will be a key catalyst for the business. It's a great business unto itself. And once that's complete, that will definitely be a significant step change for the organization. Certainly. So, the hub in Rochester, obviously, is the priority today. You mentioned that being a significant catalyst. But moving forward, you have aims to build facilities in Norway,

Germany. So, moving on from North America to Europe, as you look at future hubs or maybe other hubs in North America, how should we think about that? Yeah, absolutely. I mean, once again, we haven't said anything specific in terms of where the next major facilities will be. We are building out Spokes today in Germany and Norway, which are moving ahead well and looking forward to having them complete. We are continuing to assess options to build out additional refining capacity in the future. But as we do that, we'll make sure that we have a fully-fledged business plan, which aligns with both what we're doing, but also where the market is and where our partners

are as part of that. So, we'll come back to you with more information when we're able to on that. So, the last question I always like to leave folks when I do these interviews is, okay, For a potential investor, a market watcher who's listened to this podcast, listened to this interview, what would be your one or two, three bullet points you'd want them to leave this conversation with, want them to remember about Lifecycle going forward? Yeah, absolutely. I think when it comes to evaluating recycling technologies and evaluating what people are doing, I think it's important to consider both the technical aspects and the business model. For Lifecycle, the

important parts for our business model is that we have this diverse network of spoke facilities that allow us to improve the overall economics for processing lithium-ion batteries. Also, we haven't really touched on this very much in this discussion, but we also have a very strong focus on how we do it. And so, when you talk about what we're doing, we're processing lithium-ion batteries in a way where we're not generating any wastewater, we're not generating any meaningful air emissions. We're definitely not burning off plastics and organics as part of the process. It's a process that works in lockstep with the industry and why this industry exists in the first place.

And we'll continue to grow. We're going to have one of the major refining facilities for the first half of this decade. is going to be online here in North America. And it will be a very, very important part of the fabric of lithium-ion battery, not just recycling, but product development globally. Tim, thank you so much. I really enjoyed this conversation. Really excited to watch Lifecycle as it develops and as the lithium-ion battery industry as a whole is set to grow in a significant way. Thank you, Nick. Appreciate your time. Dylan Lewis As always, people on the program may have

interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening! We'll see you tomorrow.