Motley Fool Hidden Gems Investing - "It's a landscape in chaos right now."

Episode Date: April 24, 2023

Streaming video was an industry in flux even before this weekend's surprise news. (00:21) Jason Moser discusses: - Ripple effects for Peacock in the wake of NBCUniversal CEO Jeff Shell resigning - Disney, and the fate of NBCUniversal's minority stake in Hulu - Johnson & Johnson aiming to raise $3.5 billion in the IPO spinoff of its consumer healthcare division (11:31) Nick Sciple continues his conversation with anonymous Substack writer Doomberg about Tesla's plans for the future and investing for energy pinch points. Companies discussed: CMCSA, DIS, JNJ, TSLA Host: Chris Hill Guests: Jason Moser, Nick Sciple, Doomberg Producer: Ricky Mulvey Engineers: Rick Engdahl, Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. look who showed up over the weekend it's the news fairy motley fool money starts now i'm chris hill joining me in studio motley fool senior analyst jason moser happy monday happy monday indeed not for jeff shell because for those unfamiliar and i'll admit i was not familiar with Jeff Schell, before this weekend. But he was the CEO of NBCUniversal, and he is now out of a job, because over the weekend, the company announced he is leaving immediately because he had an inappropriate relationship with a woman at work. And now, parent company Comcast, President Mike Cavanaugh is going to take his place for now. And Schell had a big portfolio,

which is why we're talking about this. He oversaw the company's theme parks, television news, sports production, and, oh, by the way, Peacock, the streaming service. And as much as anyone, he was a champion of that service. And that's where I want to go with this, Jason, because this is a curveball for the streaming industry that no one really saw coming. Peacock has been trailing its competitors in terms of overall subscribers, that sort of thing. Where do you want to start with this? Well, I think it's important. You did mention Peacock. I think that really is probably the biggest question mark, because it is still relatively new. While Shell succeeded Steve Burke, and Burke ultimately helped launch Peacock back in 2020, Peacock has grown and

developed under Shell's tenure. So, that this happened does put a big question mark on exactly what the future holds for Peacock. Now, I think the intention is certainly for Peacock to stay. And the numbers that they've been able to report here as the streaming service has developed have been good, I mean, at least on the user side. Now, it is a money loser still. But if we look at just the most recent performance. Now, I will say, Comcast reports earnings on April 27th. But if we go back to the fourth quarter of last year, Peacock ended the year with 20 million paying subscribers, which was more than double where they started the year. And they added over 5 million paid subscribers in the fourth quarter alone. And we had talked about Peacock

several months back on this show and the purpose behind it. We talk with streaming services like Netflix, and it's always been a focus on subscribers, subscribers, subscribers, right? They want that paid sub. That's kind of telling you how that's dictating success for the company. And with Peacock, it was a bit different, really more of a focus on the ad dollars. They want subscribers, but they have a number of different tiers. A lot of it is ad-supported. And it's also worth remembering that folks can get Peacock a number of different ways. It's not just subscribed directly to it. It's something that's available free of charge to existing cable and broadband subscribers of Comcast and other cable providers as well.

There are a number of different ways you can get it, which ultimately leads to that focus on the ad dollars that it does bring in. Now, with 20 million paying subs, they clearly have more users than 20 million, but they do feel that they're on the right path here. But the numbers are a bit challenging still. If you look at the quarter, the end of the quarter, fourth quarter last year, media revenue, the media segment, revenue increased 2.6% to $6 billion. Now, that was driven mainly by Peacock, which nearly doubled its revenue to $660 million for the quarter. For the full year, if you look at Peacock, though, it reported an EBITDA loss of $2.5 billion. Now, the good news is that management views 2023 as the

ultimate peak year for losses for Peacock. In other words, the investments that they're making in the service, they really feel like they're going to start paying off in 2024 and beyond. Now, that remains to be seen. But as it stands today, this is still, unfortunately, a money loser for the business, as many streaming services are. It goes back to, really, the advantage that Netflix has had in being the first to the space, so to speak. So, Peacock's not unique in that it's losing money, but it does bring to question exactly how they want to proceed forward with this, because at the end of the day, it really is all about content. And I don't think we've seen proof yet that Peacock is one of those

compelling services that folks feel like they need to have. Complicating matters, or you could argue making matters more interesting, is the fact that NBCUniversal has a minority stake of Hulu. And among the reports that we've seen about Shell leaving the company is that Comcast CEO Brian Roberts is going to get more involved in the running of this whole process and the decision-making. And I think one of the questions that's out there is, how badly does Brian Roberts want Peacock? How badly does he want Hulu? The future of Hulu and what Disney does and what Comcast decides to do, this is what makes the landscape all the more interesting to me for the next, let's just call it, six months or so.

Yeah. You can say the same thing about Paramount+, and all of these other streaming services. I mean, it is very much a landscape in chaos right now. I think, as consumers, we are getting to that point where I don't want to subscribe to any more services, right? I mean, we are getting to the point where it's becoming a little bit difficult to navigate. You're starting to go through and weigh which services are bringing you the most value, kind of cutting out the ones that you might not use on a consistent basis. And so, yeah, I mean, it is still very much up in the air as to how this space is ultimately going to shape out. I do think that NBC fully intends to hang on to Peacock as its own,

though, because again, it serves multiple purposes. It's very complementary to their overall business, given the number of different ways that you can get it. So, I think they view it as not only an acquisition tool, but really a nice source of advertising dollars that could probably continue coming forward, especially when you consider the live nature. I mean, they do broadcast a lot of sports. I was just going to say, when you think about the investment that Comcast and NBC have made in the rights to the Olympics through, I believe, 2032, maybe it's 2036. Yeah. I'm sure Peacock and the distribution platform that it offers, and to your point, the advertising dollars that they have probably

penciled in for the next, let's just call it decade or so, yeah, that's got to factor in. Yeah. We're going to find out at the end of 2023, too. Is 2023 really the year of peak losses? We know things change very quickly. This year may shake out a little bit differently than they intend. But I think at the end of 2023, it's going to be very important to pay attention to that sort of view on the business. If they start pushing that out a little bit, that'll be an indicator that maybe they've bitten off a little bit more than they can chew. But it does feel like this is a very complimentary part of their overall business, it's a number of different ways they can bring revenue in. So, it does appear that they are going to

continue investing heavily. It sounds like 2023, the back half of 2023, is going to be a little bit more content heavy. So, yeah, we would hope to see that subscriber count continue to grow, but ultimately, we'll focus on the revenue that it's bringing in. And pay attention to that EBITDA loss, because $2.5 billion is a lot, and we can We can assume it's going to be more here in 2023, but then we need to see that taking a different direction for 2024 and beyond, or else I'm sure they're going to be having some other conversations. The Wall Street Journal is reporting today that Johnson & Johnson is planning to start the roadshow for its consumer healthcare

business as early as this week. The spinoff IPO will be later this year for Kenview, the name chosen for the business familiar for consumer products like Tylenol, Band-Aids, Neutrogena. The goal is to raise $3.5 billion in the IPO, which would put the valuation of Kenview around $40 billion. Back of the envelope math seems like that's pretty achievable. I think so. If you look at $40 billion for that IPO, and look at Johnson & Johnson today, it's a $425 billion market cap. You're basically talking about 10% of the size of the overall company today. Now, if you look at the consumer health segment, this past year represented 15.7% of overall revenue and 12.5% of overall operating profits.

So, 10% is actually a little bit of a discount. But you also have to remember that the consumer business comes with some baggage. There's still some stuff hanging out there with these talc lawsuits, particularly on the international side. And also, the consumer side of the business has portrayed some lackluster growth here over the past several years. If you look back to 2013 to today, the top line is essentially flat. Now, they've been able to bring some profitability down to the bottom line, so it's a bit more profitable. But it's not the part of the business that's really lighting the world on fire to begin with. So, it does feel like that $40 billion valuation could be a little bit of a discount, because when

you look at all of the brand names that they have out there, it's really impressive. I mean, they have, what, four $1 billion brands, and then, I think, another 20 worth $150 million each. So, it has a lot of very popular brands, a lot of money-making brands, but there is some baggage that comes with it as well. I think the discount makes sense in part because of, as you said, the lackluster growth that we've seen out of the business over the past decade. Also, the overall environment. I mean, to date, this is the worst year for IPOs since 2009. So, I think that's part of the discount that we're seeing. But that may also create an environment where there are people just rooting for them to succeed in

their IPO, because they're looking for more IPOs to do well. Yeah, I bet you there probably will be a warm reception for this. This is an IPO where there's going to be some certainty, right? This is not some business where they've got to prove themselves. Band-Aid and Aveeno and all of that stuff that you buy at the drugstore, this is a very, very well-known entity at this point. This could be one of those ideas that ultimately plays out very well for folks looking for value because, again, they don't have to prove themselves.

I think it's just, it comes with a little baggage. You're right about the current environment, but I wouldn't be surprised at all to see this one warmly received. Jason Moser, always great talking to you. Thanks for being here. Thank you. As promised on Sunday's show, we've got more of Nick Seifel's conversation with Doomburg, the anonymous writer on Substack.

They discuss Tesla's plans for the future and investing for energy pinch points. So we've talked some about what's happened over the past six months, what's happening today. Let's talk a little bit about what's happening going forward. You've written about there's lots of energy forecasters out there, not least of which Tesla and its latest master plan 3.0 that have predicted that a shift to electric vehicles along with a massive build-out in solar and wind power and in conjunction with large-scale energy storage can allow us to shift away from fossil fuels over the long term. You've written a piece where you said that was mission impossible. Why do you think that is? There's just not enough green metals around, and there's not enough new mines being

cited impermanent to come anywhere near those projections and um you know it's fascinating to ponder these questions because it's just provably impossible to do and yet because people like elon musk and and others to be fair he's not the only guilty party um they sort of do some back of the envelope hand wavy um calculations and and describe what is anything that is not impossible is therefore possible that's the sort of lens through which such um through such uh you know predictions are made and and we would say in the absence of constraints anything is possible but those constraints are real and they must be dealt with and one of the major constraints ironically is violent opposition on the part of the exact same

environmentalists who would like to see this electrified future this this global utopia um they are the very ones who are the most violently opposed to the permitting and setting of new minds especially in the western world and we wrote a piece god last winter it was called i believe it was called transition to nowhere where we talked about this really amazing high quality lithium deposit that was found in maine in the united states and unfortunately for the owners of that deposit it is situated um 10 miles as the crow flies from a very nice ski resort and maine has among the most restrictive laws preventing the permitting and setting of new mines. That lithium deposit is never going to be developed. And yet, I can assure you that if we toured the

ski lodge 10 miles away, we would find many, many Teslas plugged in as the relatively wealthy vacationers who like to feel like they're making an impact on the planet enjoyed some fresh powder and a weekend on the slopes and so this hypocrisy um is there um you know the the recent development that the epa is making carbon emissions so restrictive that some two-thirds of all new cars in the u.s will be mandated to be electric by the early 2030s this is literally impossible it opens up several interesting opportunities from an investment perspective because um just because it's impossible doesn't mean tens of billions of dollars won't be wasted trying to do it. And so you can sort of model this out from a sort of chaos theory perspective and see where

these pinch points will occur and position your portfolio accordingly. We are going to spend several hundred billion dollars running an experiment that we know in advance isn't going to work. But that money is still going to flow. The spigots are still going to be turned on and much of it will be wasted. Yeah. It's just impossible. It's really crazy to watch. So like we were in that piece, you referenced Mission Impossible. I believe we need something like 40 times the amount of lithium that we are currently producing in order to achieve some reasonable market penetration and there's just not nowhere to be found it's not happening you just look at the inventory of existing mines and their decay rates lined up against new mines that are either

the known existed permitting or beginning under construction and so on like these things take time they take years they take billions of dollars and and the flow just doesn't add up forget lithium and nickel and copper and cobalt and you know all it takes is one constraint to slow things down dramatically and we have constraints everywhere we look and and so yeah i mean we can say it and it makes for happy political talk and um we could spend billions and billions of the of the us treasury's um taxpayer money um chasing this dream but it's literally impossible and no pronouncements from elon musk are going to change the physics um and so you know it is what it is here's a i wish i could remember where i saw this i read a great article

where an analyst was saying hey why don't we run this experiment before we spend all these hundreds of billions of dollars let's build one small town and let's have that small town only have access to wind solar and batteries and let's see how the town does what it costs and what the resulting standard of living would be for that price like why don't we just do a demonstration project the town of 10 000 people wouldn't cost that much and if it doesn't work at a minimum we'd learn what doesn't work and it might make it more likely that all of this money we're spending might be more efficiently done we need to do that project and it'll show that there isn't enough batteries in the world to come

anywhere near the type of grid reliability that we would need if we're going to mandate that no fossil fuels be used everywhere in the world today even in germany where we have massive deployment of renewables you see that there's a shadow grid of nuclear and coal reactors that are standing by ready to take the lead when the wind doesn't blow and the sun doesn't shine and there's not enough battery storage and that cost is always conveniently ignored and those carbon emissions are never assigned to the intermittency of the carbon-free, quote-unquote, renewable miracle technologies that never seem to work where we try them. And so let's build an entire town where all you're allowed is wind, solar, and batteries. Let's see how many batteries they need,

how reliable that grid is, and how the people who live there feel about getting six hours of rolling blackouts every day while they try to live their normal lives. so you mentioned ways to position your portfolio i can hear all my podcast listeners you know kicking me if i don't ask this question what are some of those ways that that you would think about positioning your portfolio given uh what you just laid out about the the gap between projected demand uh for some of these base metals and the available supply so i i should say up front that we you know don't give investment advice and so this is all just sort of two people chatting There are several ways that investors can profit from this.

One of them is that you participate in what you know to be stock promotes. In other words, if you think that there's going to be a huge investment in this space, there's going to be a lot of hype around it, there are plenty of greater fools trades that you can participate in, as long as you know that the underlying company is actually probably never going to make money and that you should be prepared to sell once you have a significant enough profit. You know, we wouldn't participate in such trades because we feel like we generally invest privately where there's going to be, you know, an assurance of dividends and shareholder remediation from remuneration from from the quality of the underlying business. So that's one way to invest in promotes. And there'll be no shortage of such greater fools trade in the years ahead.

And there will be some substantial growth, might not be profitable growth for some of the sort of channel captains in this space. Another way, which is a little more attractive to us, is to invest in what we call pinch points, which are sort of critical to completion goods and services that have limited competition, sort of the shovels to gold miners approach to these big wind and solar projects. You know, if you're a solar company selling your equity to Wall Street based on growth and you don't care about profitability and you have a very critical part or service or material that you need to finish that project, you'll pay whatever it takes. and such companies can extract a huge share of value in a chain. But remember, this is only as

durable as the underlying promote. And so, you know, setting up a store to sell shovels to gold miners in San Francisco was a great business, almost a cheesy sort of business school case today. But once the gold rush ended, you know, owning a shovel business in that area wasn't all that lucrative. And so you just, again, have to keep your eye on the ball. You could invest in contrast. Our view is what must happen eventually will happen and being mindful that eventually can be a very long time. You could have invested in coal companies at the beginning of the energy crisis and that would have been a real career-maker trade. They're still selling for incredibly cheap valuations. But in this case, you have to focus on dividends and buybacks

because the market will be slow to reward you on a multiple basis. That would be the three ways we would look to invest, a known promote, a pinch point, and a contract. Just a couple more questions for you. So you talked about, you know, you look at many of these energy forecasts out there, you can argue more policy documents are aspirational targets than kind of genuine, true forecasts in some cases. So for an investor who's trying to understand where the energy markets are going. How would you advise them to go about analyzing or trying to understand, given those limitations of the research? You know, it's such a chaotic system. And what do I mean by chaotic system is it's sensibly dependent on initial conditions and

small flows in one area can tip over into others. It's really, really challenging to model, which is great for us because there's no shortage of interesting things to write about. I would say it's probably impossible to get a grip on the entire energy market. And so our advice would be to focus on a region, an area, a company, something you know, like the tech example that we just talked about. And when those opportunities present themselves, be prepared to make a well-informed cost-benefit analysis and to manage your risk accordingly. And our view is truly the riches are in the niches. And frankly, when we do our investing, it's almost all private with companies that we know the management of and can even potentially personally and directly help with the success of that company.

That's always been much more successful for us than our ability to sort of pick especially large stocks. And so I would develop a niche. For example, if I was truly just trading my own portfolio for a living as opposed to writing Bloomberg for a living, which is how we spend most of our time. I might, for example, just decide I was going to become a world expert in coke and coal and understand literally where every ship of coke and coal was in the world and what the markets were looking and understanding the steel markets. Coke and coal is used to make steel. It's not burned to make energy. I would pick a market as narrow as that and I would become as deep an expert in it as I could and then invest in the small universe

of equities long and short, depending on our view of the market accordingly. And so that's an example of something we would do. I think it's very, very difficult for the individual investor in particular to beat a broad market, you know, systematically over time, especially if you're managing any reasonable amount of funds. And so either, you know, our whole strategy is we make money in fiat, we save by buying real assets, and we invest privately where we can affect the outcome. That's our broad investor policy statement that works for us. Others, of course, have their own approach. For example, they might be junior gold miners, and they're going to know every single prospect and management team in the industry, and they're only going to invest in that

space. They can certainly create alpha for themselves in that regard. That would be our advice. If you're going to invest in public equities, go narrow, go deep, and understand a small part of the market extremely well. Last question for you. What is your biggest question about the energy markets over the next six months? The biggest question in the energy markets over the next six months to us are actually twofold. One, what is the true production capacity of OPEC? Because there is some belief that this cut may have also been motivated by the fact that they were kind of stretched already and couldn't really keep production at these levels and it was healthy for them to take a step back. You know, where is the true increment of

supply going to come for OPEC? And then what is the true sort of Chinese demand for oil at year end? There's a lot of talk about, you know, global recession or recession in the U.S. or recession in Europe and this somehow being bearish for oil. One wonders whether the grand reopening of China might swamp such sort of bearish flows on the oil demand side of the equation and might be swamped by bullish demand for things like jet fuel and so on in China as they continue to reopen.

And if you gave me a shot at a third one, where will U.S. oil production top out and how fast will the descent be? Will the shale producers continue their disciplined approach to renumerating shareholders with cash flow as opposed to growth? So those are sort of the big, big questions.

And, you know, as the oil market goes, the energy markets go. All right. Well, hopefully we can have you back in six months to see where those things played out. Until next time, though, Doomberg, can you remind our listeners where they can find your work if they'd like to read more and keep up with what you're doing? Sure. We are predominantly on Substack, both in the form of our subscription-based service, which you can find at doomberg.substack.com.

We are, thankfully, amazingly, the number one finance sub-stack on the platform, which is thrilling and humbling and life-altering all at the same time and truly the work of our lives. So we publish six to eight pieces a month there on the platform, roughly a piece and three quarters a week, roughly every four days or so, every five days. As a subscriber, I know that you see our cadence. And then sub-stack just rolled out a new sort of competitor to Twitter

called Notes, which we're also very active on, And it's still in its very early days, but you can find us on Substack Notes as well. And of course, we're still on Twitter at DoomburgT. Add the letter T as in Twitter to the end of Doomburg. Somebody was squatting on Doomburg. We've since purchased it from them, but we're not going to switch now.

It's just sort of too far gone to switch, but at least nobody else will grab it and pretend to be us. And so that's where you'll find us, predominantly on Substack, also on Substack Notes. And then lastly, on Twitter as well. 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.