Motley Fool Hidden Gems Investing - Microsoft Wins Netflix Ad Biz

Episode Date: July 14, 2022

Can a $1.9 trillion company still be a dark horse? Microsoft beats the odds and wins the Netflix ad business. (0:21) Maria Gallagher discusses: - How Microsoft being "agnostic" helped it beat Google and Comcast - Netflix purposefully timing this news ahead of next week's earnings - Why she's focused on the ripple effects of Target's upcoming report (9:13) Ricky Mulvey and Rick Munarriz discuss Celsius Holdings, an energy drink company with triple-digit growth. Got a question about stocks? Call the Motley Fool Money Hotline at 703-254-1445! Stocks mentioned: NFLX, GOOG, GOOGL, CMCSA, MSFT, TGT, CELH, KO, PEP, MNST Host: Chris Hill Guests: Maria Gallagher, Rick Munarriz Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

When WestJet first took flight in 1996, the vibes were a bit different. People thought denim on denim was peak fashion, inline skates were everywhere, and two out of three women rocked the Rachel. While those things stayed in the 90s, one thing that hasn't is that fuzzy feeling you get when WestJet welcomes you on board. Here's to WestJetting since 96. Travel back in time with us and actually travel with us at westjet.com slash 30 years. We're going looking for the next monster. Meanwhile, Netflix has found itself a new

partner. Motley Fool Money starts now. I'm Chris Hill, joining me today from the financial capital of the United States of America. It's Maria Gallagher. Good to see you. Nice to see you too. Netflix has chosen its partner to help with its ad-supported streaming plan, and it is not Google or Comcast, who were reportedly the frontrunners. Netflix has chosen Microsoft. This struck me as a dark horse kind of choice, to the extent that a company as big and as valuable as Microsoft can be a dark horse in anything, until I remembered that Microsoft does not have its own streaming service. Microsoft Apparently, they stressed this in the negotiations. Hey, we're agnostic. Comcast has Peacock.

Google has YouTube. We're just little old Microsoft. Were you surprised by this? I mean, I think you really nailed it. I think that the agnostic argument is really what cinched it for them. They also recently acquired the digital ad business Zander from AT&T in 2021. So before 2021, they didn't really have those digital ad capabilities. But after that acquisition, I think that they said, we have these ad capabilities. We're willing to work with you. We can innovate together and we're not competing with you. And Netflix said that part of this is that agnostic quality that Microsoft is really

heavy on privacy and that they can kind of innovate together and make this work for them. So like you said, as much of a dark horse as it could be, I do think it was a little bit surprising, but I think it makes sense. Since the news first broke earlier this year that Netflix is going to go this route, it seems like they have been moving about as quickly as possible to make this happen. Do you think they felt it was important to get this news out there before they report earnings next Tuesday? Absolutely, I think they do. Last quarter, they lost about 200,000 subscribers. This quarter, they're predicting a loss of 2 million subscribers. And so I wonder

what that number is even actually going to be if they want something to kind of say, listen, we know this doesn't look great. We predicted it wasn't going to look great, but we have this other thing coming. We think it's going to be here at the end of 2022. They're also working on making Netflix bigger and better and more kind of specific in the movies and the shows that they produce. So they fired about 2% of their workforce, about 150 people. They have kind of focused where those firings are, family live action film, original independent features. So you're seeing them trying to kind of compete more with the typical Hollywood movie of those bigger films like Knives Out that had a really big splash and less on those romantic comedies or indies that

they were kind of their bread and butter for the past couple of years. Yeah, it is going to be interesting to see what we hear from Netflix. I do wonder if maybe they were buying themselves some wiggle room by putting out the number of 2 million. Who knows? Maybe they come out and they're like, hey, we only lost 1.5 million subscribers, which would be seen as a win of some sorts, I suppose. You and I were chatting about this earlier. The Emmy nominations came out earlier this week. From a creative standpoint, this is one more pressure point for Netflix. They don't have the bragging rights in terms of the most Emmy nominations. Let's face it, bragging rights count for something. Yeah. You've seen it change so much. In 2013, they picked up their first Emmy

nomination with House of Cards. This year, they picked up 105, which sounds great, but it's actually their weakest number since 2017 when it peaked at 160. HBO received more. They had 140 nominations. And also what's interesting is that Netflix is a lot of kind of aging favorites. So you have Stranger Things, which has had a couple of seasons. Ozark nailed it. All of these are already established and not that many new entrants as compared to things like Euphoria, White Lotus, Only Murders in the Building, who are all getting Emmy nominations and are in that kind of earlier iteration. So, I think we're seeing Netflix trying to have that next big show that they haven't quite figured out what that is yet. Let's go back to Microsoft for a second,

because some people have already floated the idea that this relationship could be a prelude to Microsoft buying Netflix. As tantalizing a prospect as that sounds, The more I dig into this, the more it seems like Nadella and his team at Microsoft really seem interested in growing this advertising support network. Do you think that is the likely route? Because their ability to perform, not just on a technological level, but to go into meetings and just say, we are not content creators. are not going to compete with you with our own content. Therefore, we're the best choice

for your ad network. It seems like the better move for them. Yeah, I think absolutely. And I also think building out that infrastructure is easier to scale. It's easier to appeal to multiple audiences than saying, becoming content creators on their own. So I think that's going to be their continued route. And I think it's the smartest route to go for them. Yeah. Also, I think people who are floating that idea or forgetting the fact that at the moment, Microsoft is doing its best to make sure that its acquisition of Activision Blizzard goes through without a hitch. For those who are wondering about the competitive landscape in the gaming world and what Microsoft might

do to upset that balance, I don't think they're looking to jump into the video streaming world just yet. Earnings season has kicked off. A couple of the big banks this morning, it really kicks into higher gear next week. What are you watching this earnings season? I think what we've really been talking about is inflation, recession, consumer spending habits, unemployment. I think one that I am always really interested to see is Target, because you see an understanding of the consumer, their spending habits, their current employment rates and understanding how that's working in terms of pricing for employees. And then you also get a lot of interesting information about freight and

transportation and how that's impacting it. We saw last quarter that they brought in revenue, but their profitability was worse than expected because they had to work on inventory and they had to work on their freight and transportation costs. And so I think that's going to be one to really watch to see, well, how has that changed over the past quarter? What do they think that's going to look like in the next quarter? And how are consumers reacting to these type of global problems that we're seeing? This is music to my ears because I'm always interested in what the retailers are doing for the reasons that you laid out, particularly when you think about how important consumer spending is to the U.S. economy. For me, Target goes to the top of the list because

of what happened last time around, because of the stumble by Brian Cornell and his team around inventory. It's not just the usual, well, it's the summer and we get to hear some insight into how they're prepping for back to school. But yeah, I think it's going to be fascinating to hear the questions that they get about the challenges that they are facing right now. Yeah, I'm really interested to see and also kind of comparing the back to school environment of this year versus the back to school environment of last year. And as we're seeing kind of the tail end of COVID restrictions, what that means. Are people back with a vengeance? What does that spending look like? So I think all of that will be really, really fascinating to watch.

Maria Gallagher, thanks so much for being here. Thanks for having me. Over the course of two decades, the best performing stock in the S&P 500 wasn't Amazon or Google, or for that matter, even a so-called tech company. It was Monster Beverage. What's the next Amazon is a worthwhile question, but given the performance of its stock, it might also be worth asking, what's the next Monster Beverage? Ricky Mulvey and Rick Minares take a look at Celsius Holdings, a smaller energy drink company with triple-digit growth and a habit of beating Wall Street's expectations.

We're talking an energy drink company with who else? A Florida man, Rick Muneras. We're talking Celsius today. Welcome to the show. Thank you, Ricky. Great to be here. So why are energy drinks, I mean, you look back at a company like Monster Energy, which was one of the best performing stocks, I think, of the aughts in the 2010s. Why are energy drinks something investors, that have rewarded investors so well? Yeah. I mean, technically, you think there's no way that an energy drink or even a functional energy drink like Celsius should work as an investment in a world where there are beverage giants, where there are fads, where things go in and out of style so quickly. But Celsius,

just as Red Bull before that and Monster before that, has managed to grow a very fast-growing product, reaching an audience that's expanding with an energy drink. And they're competing against companies like the Coca-Colas and the Pepsi-Cos that have tried to make it go on their own with energy drinks and have not been able to crack the code. They haven't been able to become that cult fave that eventually evolves into a juggernaut as Red Bull and Monster and ideally Celsius will get there someday. For people who are unfamiliar with the energy drink landscape, what is the positioning of Celsius versus your Red Bulls and your Monster energy drinks? Yeah. Celsius is still very small. Again, it's almost weird to call Celsius an energy drink

because it has some distinctive features to the others, but Red Bull and Monster are the one and two top dogs way ahead of the rest of the pack. Then there's Bang Energy, which has run some troubles. They're third. Celsius has trailing revenue of like $400 million. It's very small in the landscape of the global energy drink market. But it's there and it's growing faster, obviously, very fast in the last couple of years. And you're a fan of it yourself? You're a fan of the product? Yes, yes. I have a can with me right now. It's fueling me right now. So if I talk faster than I have to, or if it looks as if I'm trying to work a workout in here because I'm increasing my metabolism and I want to burn it off so I lose an inch or two, I am standing behind

the product. I am a Celsius drinker. I'll be honest, the product does claim, I'm drinking a Celsius. I'm drinking the sparkling orange right now for science. It does tell me that it's going to burn body fat, which seems to be a pretty big promise for a 12-ounce can. Yeah. I'm drinking Peach 5 for enjoyment. I'm not doing it for science. I'm just enjoying it. Basically, energy drinks, if you think about Monster Red Bull, they have basically a burst of caffeine, burst of sugar, B6 vitamins, and in some cases, like Guarano with Monster, that basically give you a burst of energy, which is what an energy drink is about. It wants you to wake up. What Celsius does, it takes a lot of that. I mean, there's caffeine,

Guarano, but there's no sugar. Instead of that, it adds what it calls its Meta Plus, proprietary Meta Plus collection, which is basically green tea extract, ginger, Guarano extract, and it has all these things that basically it causes, and again, there are clinical studies to this, and it's not that people are saying, hey, it works, it doesn't work, but there are clinical studies that say that thermogenesis, these ingredients combine to increase your body temperature just by half a degree, but that picks up your metabolism. And so, if you have this drink and you sit down on a couch, nothing is going to happen.

But if you have this drink and then in 15, 20 minutes you start a workout, it will help you burn whatever fat you're burning will burn it faster. So, the cans claim, I think, 100 calories. They can burn through 100 calories in you and also help you out with just the metabolism, burn body fat and calories at the same time. That's the claim. There's clinical studies to back that. And the fact that they sell this at fitness centers all over basically the country and in Europe, at least people are buying it and they're using it for that purpose. And now, obviously, it's available at your Target, at your supermarket, it pretty much everywhere. But that is the claim. The claim is that they are able to pick up your

metabolism. And again, people swear by it online and in TikTok and in social media. It's obviously a very popular drink. Well, how much does podcasting count as a workout? Well, my mouth is moving up and down, but I'm not on a treadmill. I'm not on a walking desk. I don't think you are either, Ricky. So I think we're both sort of just being very, very sedentary right now. We are spoiling the Celsius cans that we have before us by sitting still. What a shame. All right. Let's look at some of the financials. As a stock investor, not just an energy drink connoisseur, why is this an interesting company for stock investors? Yeah. Just saying energy drinks and thermogenesis and throwing these things,

it's already like, oh, wait, this is a fad. I don't know. But let's look at growth. This is a company that the founder was bought out a decade ago by a guy that owned Rexel Sundown and basically sold the MLM Pharmaceuticals company, had money to put in, put it into Celsius, brought in a new management team, and basically growth lately has been off the charts. 2019, up 43%. 2020, a year where a lot of companies took a step back, we know why, up 74%. Last year, 2021, up 140%. In the first quarter of this year, up 167%. Growth has been off the charts, largely as it increases its distribution. You find it in more and more stores. It's impossible to walk into a Target and not run into a big display of Celsius cans. The same thing with

the Costco's and the warehouse clubs. Even at the local CVS, so drugstores, you'll see them single, single can servings available at most places right now. Obviously, this kind of growth is not sustainable, especially now that distribution has reached the point where it's at critical mass. but I do think that growth is obviously going exciting enough to make investors excited about it. As far as valuation goes within that growth, it's a $5.6 billion market cap company, which may seem high these days for a company with $400 million in trailing revenue, but analysts see that growing up to $2 billion by 2025. It was strong growth. While growth will decelerate at this point from the triple-digit growth we've had, we've had basically the last decade, since the new

ownership has taken over at least double-digit, if not triple-digit growth every year. There hasn't been a down year. This company has been taking steps up every single year. I know you don't want to play Cupid, but if you're a PepsiCo or you're a Coca-Cola, you're looking to add an energy drink to your portfolio, it'd be hard to not look at a company like Celsius. Yeah, it's definitely attractive, but I don't even want to talk about Celsius as a buyout candidate seriously, because to that's the wrong reason to buy any stock. Stop the thesis. Yes, stop the thesis. But again, you have the case where Coca-Cola years ago,

and again, Coca-Cola had Full Throttle, PepsiCo had Rockstar, I think they may even still do. Coca-Cola years ago said, we can't do this. I don't know why we can buy a water company, we can buy a juice company, we can't get into the energy drink market. They spoke to Monster, they took a stake in Monster, and they agreed that, hey, you take our energy brands, You do your thing. Give us some of your non-energy brands. We'll work on your Hanson juices and stuff like that, and we'll call it a deal." Even a couple of years ago, when Coca-Cola rolled out Coca-Cola Energy, which is basically the Coca-Cola flagships cola that we all know, with a little bit of an energy kick, there was a little bit of a legal dispute whether

they could even do that. Coca-Cola is hamstrung at this point. PepsiCo, not so much. But PepsiCo just recently ended their distribution with Bang. The opportunity is there, more for PepsiCo than a Coca-Cola thing at this point. But I don't see that happening, and I would not buy the stock based on the buyout possibilities. I think Celsius is best served on its own and independently growing the way it has. But I appreciate you giving some color to the reasons why Coca-Cola and PepsiCo have had so much trouble entering this space, because for someone like like myself, who doesn't follow it that closely, I would think that those would be the strongest competitors and it would be fairly easy for them to enter the market. We talked about a lot of the

good things with the company, but you are also putting 200 milligrams of caffeine into a 12-ounce can, which can create some health risks, some issues for consumers. What are some of the risks of Celsius energy drink? The can, it's 12 ounces of danger that you're pouring into your body. I get that. But also, on the can, just as Red Bull and Monster before that, there were cases of people just drinking too much and basically going into cardiac arrest. You're putting all these things into your body. It's not something you're supposed to be drinking four or five. You don't want to go through a six-pack of Celsius during a workout or any day. This is something that has to be taken in moderation. The cans themselves say, do not give at all, so not even a can or a

a sip if you're pregnant or if you're under 18. They basically want to keep this off the hands of children. Basically, if you're going to work out, you have a healthy lifestyle, it works in that scenario. But just like Monster was very appealing to video gamers and stuff like that. It did hit a much younger audience than a Red Bull or a Celsius does. There were obviously some very tragic stories that come out of that. But again, with a product that sells so many, the energy drink is so large, you're going to have these issues just as you have car accidents. Obviously, it's a risk. I can't deny that. If the cases pick up and if there's regulatory risk, definitely if they try to curb that. But I do think that it's all part of the

fact that you're trying to get your body to do something and it's no different than you would if you were doing any dieting or any body supplements that you may take. they can hurt you if they're not taken in moderation. The reason it's dangerous is the reason why it works outside of just the health risks. The reason people like it is the reason why it's dangerous or vice versa, however you want to take that. Outside of just the health component, what are some of the other risks you think about in Celsius Holdings? The biggest risk for any popular energy drink ban is someone comes out with a better mousetrap. Again, Again, the ingredients are on the back of the can, Ricky. You know what is inside the

Celsius can. You know what you're taking in. Anybody can copy it. And again, Monster was basically Red Bull, except they added a couple more things, a couple more items in there to make it a little different, mix up the taste profile. So, there could always be the Celsius killer. But again, we've seen beverage giants try to come out with the Red Bull killer and the Monster Killer, and basically fire blanks. I think you have a case where Celsius, eventually something could overtake it. These cans aren't cheap. It's about $2 and change at the retail level for a single can. You can get them on Amazon for about $1.50 if you get in a 12-pack or 8-pack or a 16-pack. But it's not cheap. But then again, most energy brands,

most energy drinks are in that price range. So it is definitely something to keep in mind. That is a risk as well. The other risk, another risk I want to point out, is right over the past year, I've talked about this explosive growth at Celsius, but European sales have actually declined over the past year for many reasons, Europe in general. But you do have a case where the U.S. used to be 78% of the market a year ago, now it's 93%. So, it's clearly becoming more of a U.S.-centric brand, so they need to reestablish themselves overseas, especially now that they're everywhere in the U.S. They need to duplicate that success in Europe and other markets internationally. Celsius is more popular in America

than Europe is what I'm hearing, and that sounds very difficult for weather nerds. Any conclusions you got about this company for people thinking about investing in Celsius before we wrap up? I need to go on a walk. I'm buzzing right now from 200 milligrams of caffeine. I'm with you. I'm going to run a 1K. can't do a 5K, so I'll settle for a 1K. But yeah, I think an important thing, especially with Celsius, is that because it's growing so quickly, and again, I always love stocks where companies are just basically hitting it out of the water with better-than-expected earnings, and that's a statistic that's easily defined. But I want to look back at the past year of revenue versus

analyst expectations. This is at the last four quarters. In the second quarter of last year, so basically four quarters ago, $65.1 million in revenue, analysts were expecting $53.47 million. In the third quarter, $94.9 million in revenue, Celsius came up with $74.96, so almost $75 million analysts were expecting. In the fourth quarter, the holiday quarter of last year, $104.3 million in revenue, $92.09 million was the consensus estimate. In this latest quarter, basically reported in May over the quarter that ended in March, $133.4 million in revenue. Consensus was $114.05 million. Not only am I talking about revenue that has basically grown sequentially at an impressive clip, there doesn't seem to be any seasonality to this right now.

Analysts just can't keep up with the company. When you see that, I like to see that and I think that's a good trait in a company. The risks are there. Again, this is a stock trading at 14 times trailing revenue. Earnings have been minuscule so far as it's ramping up and it's paying to get distribution reached everywhere near you, so you're not too far away from a Celsius can. I'm pretty sure there's about three places within a mile of where all of you live where you can buy a Celsius can. That does not come cheap. There's that part. The bottom-line valuation is attractive. I think the growth versus the revenue multiple is very compelling at this point. Rick Munarriz, analyst for The Motley Fool. Thanks for joining.

Thank you. 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.