Motley Fool Hidden Gems Investing - Musk being Musky

Episode Date: April 11, 2022

Twitter’s board was going to look a little different. Not so much anymore. (0:22) Tim Beyers joins Deidre Woollard to discuss: - The potential reasons why Elon Musk is jumping off Twitter’s board. - Warner Bros. Discovery’s first day as a publicly traded company. - A potential seller’s strike at Etsy. (20:05) Matt Argersinger joins Deidre in a discussion on how rising interest rates could impact Zillow and Redfin, and what those companies are doing differently from each other. Stocks discussed: WBD, T, DIS, TWTR, ETSY, ABNB, RDFN, ZG   Host: Deidre Woollard Guests: Tim Beyers, Matt Argersinger Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl, Annie Franks Learn more about your ad choices. Visit megaphone.fm/adchoices

In Toronto, every arrival is a statement, and nothing says it better than this. Cadillac Optic was the number one selling luxury EV in Canada for 2025. Find your rhythm across a seamless 33-inch display and an immersive 19-speaker AKG surround audio system. This city demands agility, and Optic delivers with precision to make every drive extraordinary. Let's take the Cadillac. Find out more at cadillaccanada.ca. Luxury sales claim based on S&P Global Mobility Canadian New Vehicle Total Registrations for calendar year 2025 for the Cadillac definition of luxury. Welcome to Motley Fool Money. Today, we're looking at the debut of Warner Brothers' discovery on the market, Elon Musk and his

relationship with Twitter's board, and a potential seller revolt on Etsy. I'm Deidre Ward, sitting in for Chris Hill, and I'm joined by Motley Fool senior analyst, Tim Byers. Hi, Tim. Welcome to the show. Good to see you again, Deidre. Nice to see you too. So today's the first day that Warner Brothers Discovery trades on the market as ticker WBD. So this is after the $43 billion takeover of Warner Brothers from AT&T. It's an interesting mix of brands that it brings together because this new company brings together HBO, CNN, TBS, and the Warner Brothers Studio. And then on the other side with Discovery, you've got Food Network, HGTV, Magnolia, a whole bunch of things. So, I think this is really

interesting when you start thinking about the streaming wars, the potential for streaming fatigue. HBO has HBO Max, CNN's got CNN Plus, there's Discovery Plus. What are you thinking about all of this and this new company? Well, I think it's interesting and I think it's necessary. I think what's the most interesting thing about it is it pulls together a lot of discrete and different content into a bundle of content that I think at least these executives are hoping they get some scale out of, because you've been trying to sell HBO Max separately, and they'll probably continue to do that, or maybe there will be a bunch of different bundles. As we get more and more niche as consumers, because this is happening, we have

a bunch of niche bundles that are available, and then some of those niche bundles are coming together. Probably the best maybe packaging of a niche bundle that I can think of is on the Disney side of things, where you have Disney+, and then if you want to, you upgrade and you get Hulu, which is a little bit of maybe dramatic, regular, programmatic TV, you can have ESPN Plus with that. You get sports ball, plus Marvel, plus serial drama. I think this is happening more and more. There is, I think, an argument to be made that in a world where the streaming wars aren't zero-sum, Deidre, but there are only so many subscribers in the world, there's a bit of a content overload. To the degree that you can create a package bundle

that is attractive to a limited set of consumers, you really have something. I think we're entering the phase of the market where there's going to be some natural crowding out of some niche bundles, and Warner Brothers Discovery doesn't want to be crowded out. Yeah, that's very true, but they're very different types of content. You think about about HBO and that sort of thing. That is very different. You want to be streaming that. There's things that are talked about, things that are buzzy. On the other side, Discovery seems to me something like HGTV or the Food Network, sometimes you just let it run. It's not necessarily appointment television. If you're trying to run those two brands together,

what are the challenges you might face? Well, I think the biggest challenge might face is if you are running a lot of your revenue through the advertising channel, you're going to have a pretty large operation because you are going to be running discrete types of advertising and it's going to be very different across those brands, as you point out, Deidre. You have to run a pretty data-driven, pretty well-organized, well-orchestrated, and pretty diverse organization to capture all of your revenue across all of that. If you're running more of a subscription-driven brand, I think it's a little bit different. It's probably going to be a mix of both. CNN is not going to stop running ads and CNN Plus looks a little different. I think

there can be real value if a holding company, in this case, that's what really we're talking about here, we're talking about a holding company that has a lot of different brands. You could almost think of that holding company as having a lot of different specific content companies underneath it. CNN being materially different from the Discovery Channel, being materially different from HBO and so forth. How they orchestrate this, I think will be interesting, particularly from the advertising side of things. But if it were me, I would be looking at different subscription tiers and actually getting really granular with how you could offer very distinct subscription tiers to the various customers who could sign up. Like, do I just want, for example,

various HBO properties with a little bit of CNN thrown in? There ought to be a subscription tier for that to make my subscription fit me. That's the world we're moving towards. You want my subscription to fit me and so then I can get to a place where my budget dollars match what my content desire is. Because the alternative is all of these things come together and you're back to cable. That is going to lead to a huge amount of frustration for consumers. If you can be the one that helps lead in this area, which I think they can because they do have a lot of data and they do have a lot of desirable properties. If you can be the one that gives me the my size fits me bundle. I think you've really got something, Deidre.

Interesting. If you're an investor in this company, you'll probably be looking at advertising revenue, you'll be looking at subscriber count. What other metrics should investors be thinking about to judge how well this company is going to be doing in the future? Well, you certainly want engagement metrics. Number of hours, content consumption is important because it is harder to do ratings when you're talking about just internet delivered TV. I'm not sure about most people, but I think I'm seeing this a lot more where less buying of TVs and more of buying big computer screens and your computer becomes the delivery device for a lot of your entertainment. I think that's happening at an increasing scale.

And if that's true, then the metrics that these companies deliver to us to show things like engagement, it's probably going to even be things like social engagement, that'll be interesting to watch. Then at the end of the day, it does all come down to cash flow. So to the degree that free cash flow margins start to increase will, I think, dictate success for a company like this, but we'll see. We really will see. Engagement should follow stickiness and subscriptions, which should follow cash flow, but it's a little bit of a shrug emoji at this point, Deidre. Indeed. Well, speaking of shrug emojis, let's move on to our next story, which is we're going to be talking about Elon Musk

again. He keeps taking over the news. Yeah, I know. This week, he announced that he's not joining the board of Twitter after he took a 9.2% stake in the company. He's Twitter's biggest shareholder. The news came out after a weekend in which Elon, who has 81.3 million followers on Twitter, questioned whether or not Twitter is dying, even pointing out that Taylor Swift and Justin Bieber hadn't tweeted in a while. Really thinking about why have we had the back and forth here? When we were talking before the show, you mentioned that he filed two separate SEC filings. My goodness, he's had his time with the SEC. I'm sure they're not thrilled with this. Right. The first one on April 4th was,

this through his lawyer, I believe, 9.2 percent stake in the company. There's a letter of agreement with Twitter in which he'll be participating on the board, and there are conditions in that letter, and he won't acquire more than 14.9% of the shares outstanding. So that was thing number one. That was April 4th. Then April 11th, effective today, essentially, saying, yeah, you know what? What we said last week? Ignore that. That didn't happen. I'm not going to be on the board anymore. And there's been a whole lot of fuzziness around his actual filings. The first one was a 13G filing, and I believe that was back in March. And a 13G filing, for those who don't know, is for a passive stake. In other words,

I'm not going to be an activist investor. I'm just holding this because I want to invest in this company. If you file the 13D, which is the last two, you are making a statement about wanting to get involved with the company. I'm taking an active stake because I'm going to be an activist investor. It's all really strange and weird. Deidre, I think it's probably better that he does the Homer Simpson backing into the Bush's type of emoji reaction like, forget I was here. I think that's probably the best way for him to be a Twitter investor because he's going to stay engaged with the platform. He's probably going to hold a meaningful stake. what I bet will happen from this point on, even if he's not on the board, he's going

to start throwing Twitter bombs into his feed saying, we need to do this and we need to do that. You know what? If he's not on the board, he can do that. That is really Musk at his muskiest. You know what I mean? I do. I think we could also see the other option, though, where instead of being on the board, he wants the freedom to get more than that 14.9% stake that was in that agreement. He could completely go the other way. And he's already been quite musky on Twitter talking about the edit button, which of course Twitter has been working on for over a year and quickly had to say, no, no, we've been working on this. It's not the result of a poll that someone put up. So I think it's really fascinating. The other thing

though, if I'm a Tesla shareholder, maybe I'm a little worried that Elon is spreading himself too thin. I mean, he's a fascinating person. He's a very smart guy, but my goodness, he does like to be in a lot of different businesses and going in a lot of different directions. And his core company, Tesla, has some concerns. There's some things happening right now. You know, there's issues in Shanghai that could affect Tesla. So does this become a distraction? And if you're Tesla shareholder, do you wonder like, hey, maybe just stick to the thing that's most important? I want to say yes to that, but let's at least lay out what is factually true. Is it not true that Elon Musk, by any normal standard, has always been distracted? I mean, is that not true?

Oh, yeah. Very true. He's had SpaceX. He's had Tesla. He's had the Boring Company. He's had a million things, a million distractions. This is a man, I think we can fairly say, has a multi-threaded brain. In other words, what I mean by that is he's carrying a lot of thoughts in his brain at exactly the same time. And what he's doing is trying to get it all out. And it looks really scattershot and strange, and yet he finds a way to make it work. For you and I, I think the answer is, yeah, this is really distracting. But for Elon Musk, I don't know if we have hit the point of red alert yet because he's always been like this. Now, let me take the other side of my own

argument, which is that if he's not going to have control over Twitter, and what it does appear is that he won't have control over Twitter, then is it anything more than a source of frustration for him to get fixated on things he actually can't control while taking time away from things he can control, which is SpaceX, Tesla, the boring company. What has been true up to this point is the things that are distractions for him are things that he can control, by and large. Twitter is a thing he can't control, and that may be different and more dangerous. Yeah, I do think it's a little bit concerning. However, again, using the framing Musk being musky, this has always been him. He has always been a multi-threaded thinker. Or you could also call him the patron

saint of the side hustle because it's almost like a hobby for him. Right. So that gives us a nice transition to talk about side hustles. I want to talk about Etsy and the news out of there with this temporary seller strike happening right now. Really, really interesting thing that's happening inside that platform. About 15,000 sellers have signed a petition that they're sort of taking a vacation from selling. This is all to protest the charges on transactions that are going up to 6.5%, up from 5%. Not a huge percentage of sellers are doing this, but enough that it's definitely causing some attention. And it's interesting, it's happening sort of right now, Mother's Day, I think, is coming up soon. That's always a big Etsy moment. So,

do you think that this is enough of a seller pause that consumers are even going to notice? I mean, here's another one where I want to say yes, but we need to be clear that strikes or organization around strikes have happened in the past, and they haven't had a material impact on Etsy's business. This has happened many, many times. Sellers do get angry. They do protest. And then there are big organizations, usually around Reddit. And then the people that decide to go through with it are not as many as before. So how big is the commitment here to the sellers speaking up? I don't have a fundamental disagreement with the sellers here. I don't feel like I could comment on that. I will say, Deidre, what I did was organize just some,

I asked the questions of people here at The Motley Fool who are either sellers or buyers on Etsy and what they thought about it. And I'll give the general consensus of what I found. The general consensus was it feels a little lousy that Etsy is doing this and probably not all that justified because it's a captive audience and they're kind of sticking it to their captive audience a little bit. On the other side of it, basically nobody said they were going to stop buying from Etsy because it's the place where you get unique gifts. It does serve a real purpose. And then there was some really great data that one of our coworkers, Liv Sagan, sent to me who kind of described the value proposition for Etsy that I thought was really fascinating. Basically,

what it boils down to is, if you have a product that is not super well-known yet, but does have a little bit of an audience, then Etsy is incredible for you because they buy you traffic. But if you have a very popular product and you can get found distinctly already through just traditional search, you don't need Etsy. There's a distinct audience for Etsy where it provides real value. It's not necessarily at the top end. It's in that very broad middle, which is why Etsy overall financially has been a pretty good business. Yeah, I'm kind of with the sellers on this, but also a little bit empathetic to where Etsy is because they do provide some value, but you want the sellers to get the most out of this that they possibly can. So my net on this, Deidre,

is that it's probably not going to have a massive impact to Etsy because it does provide some very clear and distinct value to certain sellers, and they're not going to want to jeopardize that, but it is a little unseemly. I think it would be unfair to say anything else from my perspective. Well, I think about this from a broader perspective in terms of building your business on any platform. And we've seen this in the past, things like building your business on Facebook or Instagram and then having your account shut down or something like that. So I think that's something that small businesses are always keeping in mind. I like what you said there about it being that, that sort of like jumping off point. There are other things, you know, it's, it's funny

because we have these platforms that have sort of moved us away from individual selling on websites, but then we go back to websites if you're a small business owner, because that's the thing you can control. So really the end goal is once you build up an audience on some other platform, you kind of want to get them into your own ecosystem. I mean, we even see this on, on Airbnb that once you sort of capture some of those vacationers, you want to kind of get them into your own mailing list and have them refer and get out of the platform. So I think you've got something larger here, which I think is really interesting. I think the same thing. And so the question is, based on what you just said, I agree with you completely here. The question is,

so if Etsy is sort of serving as a staging area for some entrepreneurs, is that a good business or is it bad to be a staging area because people are naturally wanting to get off of your platform? Or is being the staging area a good permanent business idea because some creative entrepreneurs are always going to need the staging area? I think that is a legitimate question. I will tell you, I have thought about this and think, I think some businesses always need the staging area. And so two things can be true at the same time. The staging area is necessary and there's a cost to it. And then good for entrepreneurs, get yourself to the point where you get enough scale that you don't have to pay the Etsy tax anymore. I think those two things can be true at the same

time and Etsy can be great and we get more creative entrepreneurs as well. I think that's a good outcome. I think that is a good outcome. And I think it's also a likely outcome at this point. Same. Well, thank you so much for joining me today. Thanks, Deidre. So for the second half of the show, you're going to get a little bit more of me as I discuss Redfin and Zillow with Motley Fool real estate analyst Matt Argersinger. If you've got opinions on that, go ahead, tag Motley Fool Money on Twitter. We'd love to hear your thoughts and know which company you've got your eye on. I'm here with Matt Argersinger, the lead investor on our mogul and real estate winner services here

at The Motley Fool. We're going to talk today about two popular companies in the real estate industry, Redfin and Zillow. Zillow is probably more of a household name than Redfin, but a lot of people are curious about Redfin versus Zillow in the real estate space. But they're kind of two different companies, right, Matt? Yes and no, Deidre. And by the way, it's great to be with you today. I think both Redfin and Zillow are often characterized by investors as disruptors, as in they're disrupting the real estate industry. But in fact, at their core, both are simply attempting to optimize and monetize traditional home buying and selling, just in different ways. Zillow has built out this ecosystem that connects potential buyers

or sellers with agents via its premier agent business, or sometimes to home builders if the buyer is looking to buy a new construction home. It also connects borrowers to lenders or to its own mortgage origination service, Zillow Home Loans. It also helps renters find homes and apartments to rent and landlords find tenants. I'll have to say, my wife and I have used Zillow's rental platform quite a bit in the past to find tenants for our own rental units. So, that's Zillow. Redfin is also trying to connect buyers and sellers online or through a popular app. But at its core, Redfin is a deeply discounted brokerage. It employs agents and offers sellers and buyers big discounts and commission rebates. In that way, it's more labor

intensive than Zillow. But like Zillow, Redfin also connects buyers to agents outside its own network, and it has a mortgage origination business as well, Redfin Mortgage, and offers title services. In a way, both are continuing the age-old model of how we buy, sell, and finance homes in this country. I think they just have slightly different models. Yeah, absolutely. I like what you said about ecosystem, because I think that's an important thing to understand about both of these businesses. Zillow famously exited the iBuying business recently. They had to let go a bunch of employees. Instead, they've sort of pivoted their focus to what they're calling the super app. They talked about this on their last

earnings call. They want to bring together all of the different parts of the real estate buying process. We're seeing so many companies try to pull this off. Is Zillow the one that's going to be able to make it happen? Well, I think like you, Deidre, I'm a little skeptical. But let's not forget Zillow's popularity. It has 200 million monthly unique visitors to its sites. It's by far the No. 1 real estate app in the country. I think it still has 4 million-plus users a day, which is three times the next competitor. I think people are desirous of a one-stop shop for buying or renting a home. I think there's a lot of merit to what CEO Rich Barton is trying to do there. But I think execution

is going to be really challenging. Even with that massive lead in traffic, anytime you make big changes to what is already a popular app with so many people, I think you run the risk of damaging the user experience. I don't know what you think about that, Deidre. Yeah. The popularity is a big part of what makes Zillow Zillow. The fact that everybody refers to going on Zillow at night and looking at things, the fact that it was spoofed on SNL, all of that has made Zillow like Google. Anytime a company becomes a verb, that's always considered a good sign. I'm really wondering about the ways that Zillow can extract more value from the transaction though. And I'm really thinking about the move into mortgage that we're seeing both Zillow and

Redfin do. Zillow also bought Showing Time last year. It's a scheduling service for agents. They're just starting to integrate it now into their larger ecosystem, that word again. I still feel like their best success is when they're a partner to agents and brokerages. that's kind of what they've always done. Although agents and brokerages complain loudly about Zillow, selling leads is still the primary source of revenue. And I don't see that changing. I think one of the reasons they got into iBuying in the first place was to try to find that other revenue stream. It didn't work then. I don't want to see them put energy toward something else that might not work out the same way. And I'm thinking about that with Redfin, too,

because they recently bought a mortgage lender, equity home loans, that deal closed recently. They bought RentPath, which is a rental service. I'm wondering with Redfin if they're going to be able to integrate those new services and what it means for the company. Right. I mean, to me, these acquisitions are important pieces of the same, I think, greater puzzle that Zillow is trying to put together. So, Redfin, too, wants to become this more complete ecosystem, there's that word again, of solutions that touch on all aspects of real estate buying, selling, and renting, and lending as well. So, if these acquisitions are integrated successfully, then I think Redfin can meaningfully increase its total addressable market. I think

that's really what they're trying to do. And if they do that, then the overall business, I think, becomes stickier for users, and each user generates more long-term value to the company because they're using all these different services at the same time. And by the way, I have to say, I think the rental business overall is really underrated. The marketplace is so fragmented. We saw CoStar buy Apartments.com. I think that was last year. I think just like the online travel market came to be dominated by a few large platforms or portals over the past decade, I see that playing out in the rental market as well. I think Redfin's acquisition makes sense in that context. Yeah, I agree with that. Well, Matt,

you and I have talked a lot about bubble versus no bubble when it comes to the housing market. I think we're finally going to get a real sense of movement in the market happening right now. Just this week, mortgage rates hit their highest level in a decade. We're now over 5%. I'm starting to hear just a little bit of talk in the market of things staying on the market longer, even some price reductions, kind of amazing. That hasn't happened for a while. Based on the fact that Zillow and Redfin are in similar businesses, but slightly different, how is the slowing market going to impact each of them? Right. I think you and I were firmly in the no bubble camp for a long time, but now

with the rates going up, it tipped our hand a little bit. I think higher rates are starting to have an impact. You saw the Mortgage Bankers Association, I think it was last week, they came out with data that showed mortgage applications were down 41% from a year ago. That's a huge drop. We've seen slower sales of existing homes so far this year. I know some of that is related to this low supply that we've had going on for quite a while. But I think as for Zillow and Redfin, I think both suffer in a slow or at least a declining housing market. I mean, the fuel for these one-stop shop super apps, super app real estate businesses, it's home transactions. And if transactions decline, it cascades throughout

the business. Less eyeballs mean less lead generation. For agents and lenders, revenue growth will slow. Profits will fall. What do you think, Deidre? I think that that is true to some extent. I'm wondering if a slowing market is a little bit better for Zillow just because Zillow is lead-driven. And one of the things that Zillow has seen in recent months, they've still been getting plenty of profit from their lead business, but agents haven't needed it as much because the market has been so hot and the leads have sort of been beating a path to their door. They've more needed seller leads than buyer leads. Slowing market does mean more reliance from agents and brokers on lead generation.

The thing I think about, though, is that moment that we had at the start of the pandemic when buying froze, and Redfin had to cut their field agent staff by 41%, only briefly, because then all of a sudden, they needed more agents than ever. They had to rely on partner agents. They had to staff up again. But I'm wondering, depending on how this works out, it could really shock Redfin. And I think that's something to keep in mind as well. I agree. Redfin being, I think, the more asset-heavy or capital-heavy business, labor-intensive business, I guess is the right way to say it. I'm a shareholder in both Zillow and Redfin. Don't assign a lot of value to that because I own close to 100 stocks, as you know,

Jeter. But right now, I think if I know the housing market is slowing down and I had to decide between the two, I'd probably lean Zillow for this reason. I think it's far more popular. It's got so much more traffic, so many more eyeballs. As we talked about earlier, it's a bigger brand. There's more awareness. It has more mindshare for customers. It exited the iBuying business. And while that was painful, I think in the long run, it was probably the smart move. Redfin's sticking with it for now. But once they fully exit, I think Zillow's going to have close to $2 billion in net cash on the balance sheet. Like I said, it's more of an asset-light business, so its profit margins should be higher than Redfin's over time.

So, I think both companies have compelling futures. I just think Zillow looks a little brighter right now. Yeah, I think it's interesting. Zillow is obviously the much bigger company. And I think what you said there about asset-light is very interesting. And that $2 billion in net cash, that's nice. It gives them some room to play around a little bit, hopefully not too much playing around. But I like Redfin's chances because I feel like they're sort of sticking to their knitting on an existing tried-and-true business model. They're making it just a little bit better. I like the optionality a lot in the company. I feel like the approach to iBuying has been much more cautious, and I think that's really

smart. I just love the CEO, Glenn Kelman. And I really, like you, I see that tremendous potential in extracting value from rentals. So, that's really what I'm going to be looking for on the coming earnings call. I'm leaning a little bit toward Redfin just because I think it has so much more room. But really, I still love both of these companies. Well, Matt, this was awesome. I could talk to you about this subject all day, but I know we have to end it here. So, thanks for the conversation. You bet. And look how we ended, Redfin versus Zillow. The debate continues. Absolutely. Thanks, Deidre. 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 any stocks based solely on what you hear. I'm Deidre Ward. Thanks for listening. We'll see you tomorrow.