Motley Fool Hidden Gems Investing - Disney’s Activist Investor (Reprise)

Episode Date: October 10, 2023

Activist investor Nelson Peltz has some ideas for Disney’s board. But are they ready to listen? (00:15) Ricky Mulvey and Jason Moser discuss: Unity Technologies CEO, John Riccitello, stepping down from his seat. How Unity handled pricing changes with its developers. Trian Partners increasing its stake in Disney. Questions about Disney’s turnaround story. Plus, (15:45) Alison Southwick and Robert Brokamp discuss the growing trend of unretirement. Companies discussed: U, DIS Hosts: Ricky Mulvey, Alison Southwick Guests: Jason Moser, Robert Brokamp Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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Again, you're listening to Motley Fool Money. I'm Ricky Mulvey. Joining us today is Jason Moser. J-Mo, good to see you. Hey, Ricky. Good to see you. How's everything? It's going all right. We got a little bit of a leadership shakeup to talk about over at Unity. Unity Technologies CEO, John Riccitello, is stepping down amid a controversial change to the company's pricing structure. So the company itself helps developers create and operate content in 2D and 3D. A lot of video games in it. There's some other applications, but if you're on Pokemon Go or Among Us, that is operating on the Unity system,

makes a lot of money from ad revenue from those games, and it's looking to move to a more of a royalty model. What are some of those pricing changes that has the developers upset? Yeah, this was an interesting one. I'm glad you mentioned the gaming aspect of it, because Unity does a lot, but I think it's a very important part of the gaming universe. This was something they referred to as a runtime fee. What is that? What is a runtime fee? The Unity runtime is a code that executes on player devices. It makes made-with-Unity games work at scale. And when you're talking about billions of monthly downloads, I mean, that ultimately is what matters most, right? These games need to work for a lot of people all at once. And so, ultimately,

they introduced this thing, this Unity runtime fee, which ultimately was based on a fee every time a qualifying game was downloaded by an end user. And so, if you remember, this was something really created a lot of controversy. And a collective of developers actually came together and penned a letter voicing their anger regarding this, right? They were not happy. And I think it's important, this developer's letter, actually, they put it into, I think, relatable terms. And that's what they said in the letter, actually, to say, to put it in relatable terms. They said, what if automakers suddenly decided to charge us for every mile driven on the car that you bought a year ago, right? I mean, the impact obviously would be through the roof. And so ultimately,

it seems like this runtime feed that they were trying to implement was kind of like changing the rules of the game after the fact. And even worse, they never actually took into consideration feedback from developers. So they kind of just went in and did this unilaterally, didn't really think about their community of developers and how this was ultimately going to impact them. And so, the community of developers came together, they penned this letter, they voiced their disapproval with this, and ultimately said they were going to be bowing out of really being using this Unity software until they actually came to a resolution here. And ultimately, Unity kind of backtracked on this, Mark Whitten, who's the leader of

Unity Create, put together a letter and walked this back, said they were sorry that they didn't really take into consideration the feelings of the developers in this case. They sort of shot first, aimed second. Ultimately, it's hard to understand exactly where Riccatello's role was in this, but as the CEO, ultimately the buck stops with him. So, I'm not certain if this is something that ultimately sort of pushed him out, but ultimately here we are. Yeah. And they did change some of the runtime fees. It's like these fees are only forward-looking. I think a lot of the developers were upset that it was going to be retroactive and it was difficult to measure, hey, what's an install if you install a game on multiple devices.

They seem to have addressed that a little bit. Regardless, there's a long internet forum where you'll see the trust is broken by developers multiple times. So the stock has had a rough couple of years, and I'm being generous with that. As a shareholder, it's something that I have experienced with the roller coaster going exactly one direction. But today, the stock's up about 5% on just the announcement that Riccitello is leaving the company. What do you think the market's reacting to it? Like certainty, and now you've got a company with a little less of it. Yeah, true. I mean, there's a little uncertainty there as far as the CEO. I think when you consider the bigger picture, Rick Tell has been there for something like nine

years. He comes with a lot of baggage. There are some accusations of sexual harassment, just some questionable behavior on the part of him that I think rubbed a lot of people the wrong way for a while. I think when you make the argument for investing in Unity, not really a part of the bull case. It's not to say that you can't make a bull case for a company without putting leadership in there. You certainly can. But it is really nice when you can point it to good, strong leadership and make that a part of the bull case. I just don't think he ever really was a part of the bull case. I think that could be part of the optimism there. Maybe part of the optimism too is just that this ultimately is a sign that the company is more willing to,

at least going forward, listen to their customers, right? Their customers aren't really the end users. Their customers ultimately are the developers that are building all of this stuff with that Unity software. And so maybe this changing of the guard is a sign that going forward, they're going to be much more open to listening to their customers and helping sort of build this platform where they can develop and bring in new users. I mean, the business is still not profitable. It's still not cash flow positive. So there are those hurdles to get across as well. But maybe, again, the market is kind of looking at this uncertainty and saying, well, hey, there is a level of certainty in it, and that we know that Riccatello isn't going to be the

leader of this business going forward. And I can understand at least sort of the glass half-full perspective in regard to that. So what do you think about investors looking at the valuation? It's dropped from 40 times sales during the pandemic back to a more earthy six-time sales for a software company. Revenue is still growing like a growth stock. Does the uncertainty make you like this stock? Does it make it a little more palatable? Well, the revenue definitely is growing. Six-time sales is still a spicy meatball, as we like to call it. It's more palatable, for sure. But leadership transitions do come with big question marks. That said, this is a business that I think regardless of leadership,

what they have is something pretty special, right? I mean, they've been able to grow sales over the last five years at a compounded annual growth rate of 36.5%. I suspect that's something that's going to be able to continue. And I think that when you look at the letter from the creators regarding this fee, right, regarding this runtime fee, I think that exemplifies how important this business is to its respective industry. When you read the letter from Mark Witten, the leader of Unity create regarding that runtime fee and kind of walking that back, I think that's a sign that the business cares, that they're going to take into consideration what their creators think a little bit more going forward. So, you know, it's not something where on its own, I think now this

is a no-brainer, you invest in this business. I think it's certainly a lot more palatable. But again, I mean, the revenue growth is one thing. We need to see them eventually start bringing that down to the bottom line. If they can do that in a short order, I think that the market really starts looking at this thing with a glass-half-full perspective. Speaking of companies with leadership questions, let's talk about Disney. Activist investor Nelson Peltz is back in the mix. Triand Fund Management is now one of Disney's largest shareholders. They got about $2.5 billion worth of stock. It's about a percent and a half of the company. It's not the first time Peltz has waded his way into this hornet's nest. He pushed for a board seat about a year ago,

but withdrew his bid after a very long slideshow, or an intriguing slideshow, I should say. So, what do you think broke this detente? Well, I think his patience maybe is running thin, right? I think as investors, you know, we have to be patient, but eventually that patience starts running out, and a lot of times the stock price is just a proxy for that. Ultimately, you get to where we are today. There's still a lot of question marks in regard to Disney. I think probably the biggest headline we've seen recently is that they're going to be doubling their investment in their parks side of the business to something to the tune of $60 billion or something like that over the coming years. That's encouraging,

but really honestly, the theme parks, that's probably the most certain part of this business. not where the question marks really lie. When you start talking about the entertainment side of the business, the streaming, all of these media properties that they own, still a lot of question marks there. Iger hasn't done a whole heck of a lot to really answer that other than to say the wheels are in motion. Wheels in motion, that's one thing. We need a little bit more clarity as to what this business is going to look like in the coming years. Jason, that's a great corporate term if you haven't started a project yet. But people are asking for updates. The wheels are in motion.

Wheels are in motion. Speaking of wheels in motion, though, Disney's made some moves besides the $60 billion promised spend in theme parks. It's also increased the streaming prices. Ad-free versions of Disney Plus and Hulu are up about 20%. And hey, the dividend is allegedly coming back in 2023. But I do wonder, do any of these moves matter if Iger has not named a successor? Because it seems like that could, you know, quell a lot of this investor outrage. I think they do matter. Now, Iger is going to be there for a little while longer, but I think that you've really sort of keyed in on there on a bigger problem. Perhaps the biggest problem is Disney's got an Iger problem, right? They still have not figured out how to get beyond

Bob Iger. And it's not to say Bob Iger is a bad leader or a bad CEO, but clearly they need to figure out a way to get past him. Because it's become almost comical now, how many times we've talked about Bob Iger is leaving. Oh, no, he's renewing for a few more years. I mean, the guy even wrote a book. And I bet you if he had it to do over again, he'd probably held off on publishing that book as soon as he did. But regardless, yeah, I think they do matter. But I do think, you're right, it speaks to the bigger problem here, which ultimately is succession. Yeah, one of my favorite memes is just basically, the book is titled, Ride of a Lifetime, crossing

out of and replacing it with four. Last time around, I think Nelson Peltz was pushing for one board seat. Let's say you get a call, J-Mo. Big Nelly P's on the phone. You guys have a little small talk about probably local sports teams, how your kids are doing. Look, it's tough to make small talk with a billionaire. Not a lot in common. But he's like, look, listen, I got a second board seat at Disney. What moves are you going to push for if he gives that to you? Yeah. I mean, I I certainly don't want to simplify this and sound like I have all the answers. I mean, some of the things that I think just kind of make the most sense, and we're seeing, again, the wheels are at least in motion in regard to some of this stuff.

You know, Iger has noted that Disney is looking to tone down or quiet down their culture wars and respect the audience. And personally, I would just hold their feet to the fire on this. I really think they need to follow through. They need to stay out of the headlines regarding all of this culture war stuff. It's a net negative at the end of the day for your business. I mean, unless that's the mission of your business, is to get yourself embroiled in culture wars. Otherwise, when you start throwing yourself into the middle of these socio-political culture wars, right, you're ultimately alienating half of your customer base, half of your market opportunity.

Half the folks out there just aren't going to agree with what you're saying, right? And that's not what Disney is in the business of doing. They're in the business of trying to attract as many people as they can to their parks, to their media properties and whatnot. Then furthermore, when you throw your company in the middle of stuff and you say that your company stands for X, Y, and Z, particularly in regard to these debatable social issues, forget about just your market opportunity. Now, all of a sudden, you've got a company with 200,000 employees. I mean, Ricky, it's a lot like the sun coming up in the morning that not all 200,000 of your employees are going to agree with you either. So now you're creating

internal strife. It creates an abrasive culture, friction within your culture there. So the best bet is to try to keep yourself out of the headlines in regard to these sort of social and culture wars. Let that stuff kind of just take care of itself. Take the big picture. Hey, we believe in being nice to people, right? We want to be inclusive and want to create a great product that everyone can enjoy. Kind of leave it at that. Go for it. So I would hold their feet to the fire in regard to that stuff. I also think that their streaming operations have the potential to be another one of the core entertainment holdings of most households. I think when you look at it today, Netflix is absolutely the core foundational entertainment sort of property that

most households revolve around. I think that Disney has the opportunity to be another one of those sort of core holdings, given all of the properties that it has. But they need to figure out a way to really bring these properties together and create a seamless experience that everyone can enjoy. I know they're working on it, but they've been facing some setbacks and some delays. So I would really, really prioritize that. The $60 billion they're investing in the park side, that's great and everything, but the parks aren't where the question marks are, right? Really, it is these entertainment properties. They're streaming aspirations, still a lot of question marks there. It holds a lot of potential. And then finally, you mentioned it earlier,

the dividend allegedly is supposed to pick up here very soon. I would absolutely figure out a way to make this just a top priority. I mean, I know there are some concerns in regard to finances and the money they may need to spend in acquiring Hulu or whatever else. I mean, this is a big company with a ton of financial levers. And right now, investors in Disney just have zero reason to be patient because they're not even able to rely on just some form of income there, whether it's semi-annual or quarterly or whatever they may get back to. So I would make that dividend a priority again as well and get that thing reinstated ASAP. Yeah, the political issues are always interesting for a company whose business is quite literally escapism. Very well put.

And I appreciated your point on animation, which is something that Iger held Michael Eisner's kind of feet to the fire on saying, so goes animation, so goes the company. And that's a place where you'd like to see a little bit more innovation to maybe get some people in the parks beyond those upgrades. Anyway. Absolutely. Jason Moser, appreciate your time and your insight. Yes, sir. Thank you. The pandemic pulled forward the retirement date for many Americans, but now some retirees are ready to go back to work. Allison Southwick and Robert Brokamp talk about the trend and what it means for savers. You just found out that your sales team is at risk of missing quota. Don't

panic. Just ask Rippling AI. Since it's built on your real-time people and business data, Rippling AI can pull metrics from Rippling and Salesforce into a meeting-ready dashboard showing quota attainment, headcount plan, and monthly revenue to quota by region. In seconds, you'll see exactly what's behind your quota risk and fix it before it's missed. Question answered, action taken, crisis averted. When you have critical business questions that need answers, don't just file a ticket and wait weeks for an outdated report. Describe what you need and have Rippling AI build it instantly from your live people and business data. Whether it's a dashboard with detailed charts or automated workflows with the right triggers, conditions, and approvals.

Ready to rule your business? Head to rippling.ai slash fool to get the only AI built to give you full visibility and take complex actions across your entire organization. That's r-i-p-p-l-i-n-g dot a-i slash f-o-o-l. Sign up for exclusive access today, rippling.ai slash fool. During the pandemic, we heard a lot about the Great Resignation, a time when more than two million people retired earlier than expected, according to the Federal Reserve. But many of these retirees are having second thoughts. Last year, an analysis by Indeed found that 1.7 million retirees were returning to work, some because they want to and some because they need to. Bro, let's take a trip in the Wayback Machine to March of 2021. Anthony Klotz, a professor of

management at University College London School of Management, coined the phrase great resignation amidst many factors that made quitting and even retiring altogether extremely enticing. What were some of those big factors? Well, the bottom line is when people feel wealthier, they're more likely to retire. And crazily enough, the pandemic was good for many people's pocketbooks, at least until last year. So the pandemic really started spreading in the beginning of 2020. The stock market drops by more than a third, and then it quickly rebounded. So in 2020, the S&P 500 was up about 20%. The NASDAQ got more than 40%. House prices up 10%. And that continued to 2021, where, again, stock market, double-digit gains, housing market up

almost 20%. So, you have that. But then there was all the government help. Almost $1 trillion in stimulus payments were made to households, so straight into their checking accounts. And then another $4 trillion came in other forms of assistance, like tax breaks or loans to businesses that didn't have to be repaid. So, you have all that money, and then you think, okay, well, how much is going out? And the answer is not so much because we were all stuck at home. The personal savings rate reached 32% in April of 2020, highest ever, and was still over 10% a year later. So many people looked at their net worths and said, you know, it's time to retire, especially older people who may have had concerns about going into the office while COVID was still

a big concern. So in an environment like that, I can see how you might feel richer than you actually are. But overconfidence or even potentially being forced to retire, that can probably happen in any economic climate. Yeah. So let's start with most people actually aren't very good at predicting when they'll retire. So a new study from Zikan Liu, David Blanchett, Key Sun, and Naomi Fink found that more than 50% of people retire sooner than they expected. And only 16% of people retire at the age when they predicted. And some of this is health, right? Anywhere from a quarter to a third of people retire sooner due to health concerns, either their own or maybe a spouse or a parent, so they have to stop working to take care of them.

And then the other is wealth. If you're wealthier, you retire sooner. And the pandemic was both, right? You had health concerns and we were wealthier. And another factor of people retiring maybe sooner than they should in any circumstance is something called basically, you talked about overconfidence. I think it's over-optimism. There's something called the planning fallacy, and that is basically people often underestimate things like the amount of time it takes to do something or the amount something will cost, especially like home repairs and stuff like this, and that people tend to make decisions based on best-case scenarios, partially, frankly, I think is a justification to do something they wanted. And then I would say the other thing to

point out is that people aren't very good at calculating whether they've saved enough to retire. And they often retire based on outside factors. And the best example of this is that the most popular retirement age is 62, because that's the earliest age at which people can claim Social Security. And there are two problems with this. The first, just because you can claim Social Security doesn't mean you have enough to retire. And secondly, people are choosing permanently reduce benefits, because the sooner you claim, the smaller your monthly Social Security check. And except in cases where you have a shortened life expectancy, claim Social Security at age 62 is the wrong choice for most people. So, you put all this together, and most people probably are

retiring sooner than they should, and especially over the last couple of years. Vanguard published a report last year entitled The Great Retirement or The Great Sabbatical, and they used Federal reserve data to estimate whether recent retirees had enough to stay retired. Vanguard's conclusion was probably not, especially those with a median level of retirement wealth who could run out of money as early as 75. Now, it's very much on brand for you, bro, to make the defense of awfulizing your finances. But that's not the only reason why people want to un-retire, right? Right. So, there is about half the people who retired due to financial reasons. And we all know that, right? First of all, it came down to having smaller portfolios and larger grocery

bills. Last year, both stocks and bonds were down, stocks down between 20% and 30%. That's bad, not unusual. We should expect 20% bear market every 2.7 years on average, according to Ryan of the Carson Group. It was that bonds also dropped by more than 10%, worst year ever for bonds. And I think that really wowed many retirees. And then as we know, inflation has reached levels not seen in more than 40 years. So the higher cost of living is also driving some people back to work. But the other half of unretirees basically went back to work for some of the other benefits that a workplace can provide besides a paycheck. And that's like social interaction, intellectual stimulation, a reason to get out of bed in the morning.

Because the bottom line is that I think retirees go through a honeymoon period and they take the trips they always wanted to take. They do the projects they want to do, but that eventually fades. And for some, they decide to just go back to work because they actually didn't really want to retire. They just needed a break. Now, you said a lot of people who were enticed into retirement, they were maybe a few years out anyway. So it just kind of brought it forward by a little bit, which means that they were in the back nine of their career. So, for those who are unretiring, how hard is it for them to reenter the workforce? So, there was a survey published by Paychex earlier this year that found that about 20%

of retirees are considering going back to work again. And just again, half of them are doing for money, but 47% chose that they're getting bored and 28% said that they're lonely. So again, emphasizing that it's money and other reasons. But there are a couple of disturbing parts of this survey. So one is that of the retirees who returned to work, 74% said they experienced some sort of judgment from their coworkers, their younger coworkers, or discrimination. And 62% of hiring managers said that they're skeptical about hiring retirees. And the three biggest reasons were concerns about their ability to culturally reintegrate, possible ignorance of industry trends, and possible loss of job skills. And some of that may be true, but frankly, to me,

it also sounds like ageism is alive and well. And so there definitely could be some challenges to unretiring. That said, the unemployment rate is still historically low. So many employers are eager to hire older workers because the evidence is that they're obviously more experienced, they're more reliable, and they're actually more likely to show up at work at time and things like that, and in many cases, more productive. So for those who want to go back to work, I think the first place to start may be your former employer, as long as you're left on good terms. Many of these unretirees are what we call boomering employees because they're returning to their previous job, but often on more flexible terms. All right, Bro, so what is your big takeaway

for someone who wants to make sure they only have one retirement party? Well, I have a few takeaways, of course. And the first is that traditional boring advice that anyone who is close to or in retirement should have five years' worth of portfolio-provided income out of the stock market and in something super safe. Cash, CDs, treasuries, maybe short-term bonds, which fared a little better last year than the overall bond market. And I've heard from Motley Fool readers and listeners who were retirees. They saw their portfolios drop 25%, 30%, 40%, and they didn't have the cash on the side, and now they're concerned. So definitely, you've got to make sure you have that to weather any downturn,

because there's going to be one, if not many, during your retirement. And the other thing I would say is if you're thinking about retirement, decide if you really want to retire or if you just need a break. So you can take a sabbatical, or if you want to work fewer hours. The majority of people who are on retiring are going back on a part-time basis, which I think is a great situation for many people. But the biggest takeaway is that everyone should have a solid plan for how they're going to figure out whether they have enough to retire. That could be just becoming very educated. It could be using a good retirement calculator, and there are a lot of bad ones on the Internet. I've said before on the show, my favorite is one

provided by CalcXML. Just do an online search for CalcXML comprehensive retirement planning module and you'll find it. That's a good one. But I think everyone should also see a fee-only financial planner a few years before they retire just to make sure they have all their bases covered. One field that's famous for unretirement is the entertainment industry. Whether you're an athlete, an actor, or a musician, you can get away with calling it quits and then returning again when the fans demand it so before we go we're going to play a game inspired by an old friend of mine that he invented called dead alive or branson now for those of you who don't know branson missouri is a family vacation destination in the ozarks they call themselves the live

entertainment capital of the world wowing millions of visitors a year with more than 100 musical acts dinner theaters and more in my family we have a number of tin type photos dressed up as depressed pioneers taken at Silver Dollar City Amusement Park in Branson. I believe we have something like that too. Yeah. So I know a thing or two about the town from my childhood. But instead of playing Dead Alive or Branson, we're calling it Retired Unretired or Branson. So I'm going to name a performer, actor, something, and you're going to tell me whether you think they are retired, unretired, or performing in Branson, Missouri. Are you ready? I think you're going to do well. I'm not too worried. I think you're going to do well. All right. The first one is

Yakov Smirnoff, retired, unretired, or Branson. All right. So he was, wasn't he a comedian from the 80s or 90s or something like that? Yes. Do you need me to give you a quick bio of Yakov Smirnoff? No, I think I remember, but I'm going to say because I'm going to say retired. I have not heard anything from him in a long time. Ah, bro, I'm sorry. You're wrong. The answer is Branson. Yakov Smirnoff, the Russian born comedian and actor became a whole thing in the eighties starring in movies and TV shows with his catchphrase. What a country. Remember that? But yeah, I remember that. You can see him performing a new show, Make America Laugh Again, in his 2,000-seat theater in Branson.

Wow. Yeah, it's over the whole family. All right, next up. Are you ready? I'm ready. Daniel Day-Lewis, retired, unretired, or Branson? I can't imagine him being at Branson. Someone I can't imagine at Branson, and I think I'm right about this, was Terry Bradshaw.

He did a whole live show there. I'm going to say retired, if I remember correctly. Ah, correct. The Oscar award-winning actor retired in 2017, and he has yet to return to acting. However, if I'm being honest, he did retire in 1997 and unretired five years later to be in Gangs of New York, Lincoln, Phantom Thread followed. His form of immersive method acting apparently takes a toll on him. So maybe a light stint in Branson is just what he needs.

All right. The last one is ABBA. Oh, my gosh. I'm going to say Unretired. I can't imagine them in Branson. And I thought they were doing some reunion shows or something like that. So that's my answer. Unretired is what I'm saying. So this one maybe kind of has it all. So the Swedish pop group ABBA had a number of massive hits in the 70s, such as Dancing Queen. And did you know they were the first winners of Eurovision Song Contest with the song Waterloo? I did not know that. I feel like you would have known that. I didn't know.

But I would just point out Mamma Mia, of course, is also a great ABBA song, which many people are familiar with. I think my favorite is SOS, but whatever. We don't need to get into it. Now, the band disbanded in 1982, but unretired more than three decades later in 2016 and released a final album in 2021 just before qualling it quits again. And so far they are still retired. But the good news is that you can still go to Branson and see Thank You for the Music, the ultimate tribute show dedicated to the Swedish pop group ABBA. I'll bet it's a fun show. I bet it is, too.

As always, people on the program may own stocks mentioned, 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 Ricky Mulvey. Thanks for listening. We'll see you tomorrow.