Motley Fool Hidden Gems Investing - Paramount Has a Buyer

Episode Date: July 9, 2024

A couple of weeks ago, Skydance Media’s offer to buy Paramount looked like it was dead. Now, both companies have a joint press release announcing the deal. (00:21) Jason Moser and Ricky Mulvey discuss: - What Skydance Media is getting in the Paramount deal. - Why Netflix is winning the streaming wars. - Questions that investors should ask before putting money in a turnaround story. Then, (15:58) Alison Southwick and Brian Feroldi kick off their summer school series with a history class on markets. Companies discussed: PARA, NFLX, DIS, PYPL Learn more about the Range Rover Sport at www.landroverusa.com Host: Ricky Mulvey Guests: Jason Moser, Alison Southwick, Brian Feroldi Engineers: Dan Boyd, Desiree Jones David Ellison interview on “The Town”: https://podcasts.apple.com/us/podcast/skydances-david-ellison-on-his-plans-for-paramount/id1612131897?i=1000661591016 Brian Feroldi’s newsletter: https://longtermmindset.co/newsletter/ Learn more about your ad choices. Visit megaphone.fm/adchoices

The Paramount deal is done. Pretty much. You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Jason Moser. Jason, thanks for being here. Hey, Ricky. Thanks for having me. so uh about a week ago i thought the paramount deal was dead in the water and in fact i talked about it with uh puck co-founder bill cohan on the show and uh you know a couple of days ago it turns out skydance media's uh buyout of paramount is happening we got a joint press release and it's a little complex so i'm going to go through some of the details and then get your reaction to it but they're paying 2.4 billion in cash to acquire national amusements which is the controlling

shareholder of paramount and also owns a bunch of movie theaters they're spending 4.5 billion for publicly traded stock 1.5 billion to shore up the balance sheet and de-lever the company this is important because over the past 12 months paramount's interest expense was about double its operating income hollywood right now is pretty much celebrating the deal because david ellison is is genuinely interested in movies and this is not a deal with sony in a private equity company which was was feared to sort of you know buy out the assets and maybe strip it for parts and ellison is getting some crown jewel assets in cbs he's got a movie studio nickelodeon mtv but jamo he's also getting a company that is bleeding money in a movie theater chain at a

time where movie theaters are not doing so well that's that's the uh it's i was gonna say a plate but that's really the buffet of the deal. Is Ellison and Skydance getting a good deal here? Well, I mean, it is a complicated one, as you mentioned. I mean, there are a lot of moving parts. It does seem, it feels like this is an unavoidable deal. And I just mean that from the sense of consolidation in the media space, right? I mean, we're just seeing that play out here over over the last several years. And so, to see some additional consolidation, not terribly surprising. But I mean, I'm glad you made the point of the crown jewel assets, because I think there's a lot to it. I think on the surface, it's very easy to look at this as just a streaming deal, right?

Oh, that's a streaming deal. Well, no, it's clearly not. It's a lot more. There are movie theaters that come into play here. There's a lot of IP, right? There's a lot of action. There's a library of content that comes with this as well, and some legacy channels that may or may not have as bright a future as we once thought they might, but absolutely getting some valuable properties. If you think about it just from a film perspective, I think you get the Mission Impossible films, you get the Star Trek franchise, Terminator, Transformers. I think there's a lot of stuff there that they can do a lot with. I think the key is going to be not pulling Disney. Ultimately, I just mean by that, just exhausting your fan base. If we don't have another Marvel movie,

I think the world will be just fine. It does feel like they have probably taken the Star Wars franchise in some strange directions and lost some of that fan base as well. So, I think part of it, really, with these legacy franchises, it's going to be making sure they do things that attract the younger generations, the newer audiences. And I think there's a lot of potential things like MTV and Nickelodeon and whatnot. I certainly understand the concerns in regard to the movie theaters. That's probably a big question, Mark, right now, is will we get back to a point where people are going to movie theaters like they used to? No. I don't know.

There's no way. It doesn't feel like to me that we will. And I think part of that is just because we have so many more options now. And I think people just consume their content different ways. And, you know, it's not the same world that I grew up in. We have more than three channels on the TV now, Ricky. So I do wonder from the movie theater side how that investment will pay off. But clearly, Ellison has a lot of experience in the space.

So it doesn't seem like he's out for just a quick buck. And I think that's what has the market excited about this deal. definitely not out for a quick buck and also he had worked with uh paramount for years before and uh top gun maverick was a movie that his company financed and one of the points that he made on uh matt bellini's podcast the town is that now instead of just financing these properties these are properties that he has full control over uh jamo i will say you're sounding a little like bob eiger these days blaming bob chape yeah yeah disney has exhausted the properties you need to slow down and get back to basics.

Well, I mean, I don't think JPEG necessarily was the one. I mean, that stuff started well before JPEG took over. I would say Iger and JPEG contributed to that problem. But yeah, I mean, it's one of those things where you have to be very thoughtful with that content. I mean, you've got this valuable library of ideas and IP. You just have to be very thoughtful and careful how you roll it out. And yeah, I mean, time will tell. but i suspect we'll probably see disney trying to make some some some acquisition or at some

point to bring some more more content into their fold so ellison hoping to bring in some disney magic he has uh john lassiter the pixar co-founder main creative guy is the head of uh head of animation there had a um bit of an unceremonious exit i'll call it from from disney after some uh sexual harassment complaints but now he's at skydance ellison on the town basically trying to compare this deal to Pixar going into Disney, a legacy media company being reinvigorated by tech innovation, not just focusing on the past, but thinking about these different video game concepts, different delivery points for a lot of this content. Do you think this is a fair comparison? That's a pretty high bar to compare yourself to Pixar going into Disney.

Yeah. I think it's fair to a degree. Maybe he's just trying to paint the big picture there in in saying, well, you've got that legacy company that's going to help get itself reinvented. I think that's at least, yeah, it's fair to an extent. Now, how this ultimately turns out, time will tell. But there's no question, when you think about Paramount today, that just sort of your legacy, old, stale sort of brand, right? That doesn't seem to have really been as forward thinking or keeping up with the times. And so sometimes it takes a little shot in the arm like this to really get things going back in the right direction. One potential change or one big decision point is what do you do with Paramount Plus?

It's a streaming service that is adding millions of subscribers every quarter, which is something that wall street wanted back in uh let's say 2019 2020 yeah but it's losing hundreds of millions of dollars per quarter which is something that wall street does not like in 2024 jamo what do you what do you do with this do you try to make this thing profitable it's slowly losing less money or maybe do you become an arms dealer you know sell survivors streaming rights to netflix or do you think you do a little bit of both how would you handle this is if you're CEO? They definitely have to have a presence in the streaming world. How they ultimately go about that is going to be their call.

They relate to the game in developing this. I think for all of the success that they've had with Paramount+, they've done a tremendous job building this out in a short period of time, and they've got a lot of content. But they launched it right as we started hitting that exhaustion front, the streaming exhaustion. There are too many apps now. I'm not looking to have to deal with seven or eight different apps in order to get the content that I want. It goes back to that consolidation. With Paramount+, being a part of this larger entity, When you compare that to something like Netflix, it reminds me, and I want to give Jim Gillies credit for this. I think it was yesterday we were talking about this. It was in regard

to Netflix vs. other streaming companies. Paramount is a good example here. It's what he called the breakfast problem. You have a bacon and eggs breakfast. Well, the chicken's involved, but the pig is committed. In this case, Netflix is committed. They are the streaming company. But all of these other ancillary streamers out there, they're still kind of just involved. They have other ways they can go about it. Disney, I think, companies that make their money a little number of different ways. With Paramount, they are still involved. When it comes to streaming, if you want to be one of the leaders in streaming, it feels like you really got to be committed. With Paramount, again, it feels to me like more of the value

is in the quality of the IP and the library of the content that they have. I think I would be looking to monetize that as well as I possibly could, and then perhaps create relationships with other streamers to offer some sort of a bundle. It seems to me, at least, that we are going back toward that bundle right we're pivoting back over towards that bundle um that that uh that we moved so quickly away from just just a short while ago that's something they've hinted at and to your point where the what is it the chicken is involved and the pig is fully yeah the chicken is involved and the pig is committed it's hard to see a lot of winners in the streaming space or really any besides netflix right now which netflix not only is

is committed, but also makes money. It makes a profit on the streaming business, it does. Well, there's a number of reasons why. Clearly, they started so early. This was the company that led the way. They've had a lot of time to grow that subscriber base, to grow that content library, to make those investments. Even still, you have to remember, if you're going to be a leader in the streaming space, it's going to require a ton of capital investment on an ongoing basis i mean you can really never let your guard down your business is always it's coming up with the latest and greatest content and that costs a lot of money and you know what makes a lot of money is oracle and we're getting some of that oracle money for uh

for mr ellison here so i don't own i don't own paramount stock but it's it's on my watch list i love a turnaround story and ellison right now in my view he's saying all the right things he's in a good spot. And it reminds me a little bit of that first conference call when Alex Chris went into PayPal. We're getting focused. I got a real determined plan. But turnarounds are also really hard. They're extraordinarily difficult. What should retail investors, you know, only invest in a couple hundred bucks in the stock market every month. And so I got to be disciplined about where I'm putting those dollars. And turnaround stories are tough. What should we think about is we're getting excited about these turnaround stories.

Yeah, I think it's really just understanding what success actually looks like. And so, I mean, a good example with PayPal, I'm glad you brought that up, because with PayPal, you look at that and you say, OK, well, I'm willing to bet on the way that money is going to be moving around in the near future. I mean, it seems like digital is kind of a thing, and there are a lot of tailwinds there, right? Those overarching tailwinds are pretty obvious, and it seems like that's going to be the direction that we're headed for the foreseeable future. And so, competent leadership can go in there and set up a business to fundamentally succeed

in that type of an environment. Now, with Paramount, I mean, yeah, they have a pretty impressive library of content, and I think a number of different ways they can make money. But on the flip side of the coin, I mean, we go back to that theaters question, right? will theaters be a meaningful driver again one day? Is this deal going to result in ultimately fewer productions? If so, and theaters aren't really the way of the world, will those productions be as profitable? Can Paramount grow its streaming platform ultimately to compete and be a meaningful contributor to the bottom line there? I mean, there are a lot of questions. I'm not saying

they can't, but what I'm saying is, those are the questions that you would ask in regard to a turnaround so in in this turnaround case it just there are more questions that need to be answered which i think just elevates the risk profile and it still takes it's going to take a little bit for this this deal to go through sherry redstone who has walked away from this deal before has an out in terms of a um you know there there is a wait and see period if anyone wants to introduce a different buyout deal shop around and that's going to cost i think it's a it's like a 400 million dollar breakup fee so there is a uh there's a cost associated if they take that option. But I think in this case, it is, uh, you know, wait a couple of years,

see what they do. And, uh, that might, that might tell us a little bit more than the first interviews after the deal. Um, after the press release of the deal. Absolutely. Got to get through that honeymoon phase. So we got full fest next week. Yes, we do. That's coming up. I'm looking forward to it. Can be going to be chatting with members. We're going to be doing some live, uh, Motley Fool money shows there on Monday and Tuesday. I think it's going to be a good time you you've got some you've got some presentations you actually have to do a lot of work for it jmo so uh have have fun um thanks but i'm gonna be getting some i think we've got a big team that's doing a lot of work for it so i think yeah it's uh this is full fest is always one of

those uh just great examples of a whole team effort yeah you know it takes a lot no we're going to get 16 hours of of jmo on on different uh stock picks i don't think so anyway one of the questions i'm going to be asking uh members and hopefully getting some some audio for the show for a segment is what's your headline from 2029 what's your headline five years from now um so far i talked to acid about this on the show last week his was amazon at four trillion dollars trading only at four times revenue mine was a local jc penny to be converted into pickleball entertainment center so i'll ask you as we get the ideas flowing from from the members coming to fool fest what is your headline jason moser from 2029 yeah well that's it's basically five

years from now and closing in uh on on the beginning of a of a new decade and what comes with a new decade, Ricky, a new G, a new G, right? You remember all the hyperbole of just a few years ago, 5G is gonna change the world, right? Well, I think that 2029 to headline is a 6G is poised to open up a world we never knew existed. Yeah, all right, that's a good place to leave it. Yeah.

All right, Jason Moser, thank you for your time and your insight. Appreciate you being here. Thank you. 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. All right, up next, Alison Southwick kicks off her summer school series with Brian Feroldi, starting out with a history lesson about stock market exchanges and the lessons for investors today. Okay, okay, everyone pipe down. Summer school is now in session. Over the course of the next few weeks, we're going to cover the history, science, arithmetic, and language arts

of investing with the help of Brian Feroldi. He's a contributing analyst and writer here at The Motley Fool. Hello, Professor Brian. Hello, Alison. Great to be here. So we're starting with history class. And today we're going to talk about the history and highlights of the New York Stock Exchange, the Dow Jones Industrial Average, the S&P 500, and the NASDAQ. So, Brian, let's start with the New York Stock Exchange. How did it all begin? Yeah, I actually love learning about the history of markets. And I think it's actually really critical that stock investors learn about not only the history of booms and busts that have happened in the past, but also the history of the market itself. I think that you can learn a lot

about how to become a better investor by doing so. So, the founding of the New York Stock Exchange dates all the way back to the late 17th century, basically just a few decades after the United States of America was founded. So, believe it or not, but back then, there were publicly traded companies, companies that were financed through outside investors, and those companies were owned by the shareholders, which owned stock in the companies. And just like today, back then, the investors in those businesses did want a public way of selling their stock and buying their stock from each other. So, it just became known that in lower Manhattan, you could go and you could meet up with other people, other investors, other bankers, and it would be a

market that was created kind of naturally where you could buy and sell and exchange stocks with each other. Now, the NYSE in particular, the New York Stock Exchange, traces its origins to something called the Buttonwood Agreement. This was signed by 24 stockbrokers on May 17th, 1792 under a buttonwood tree on Wall Street. And this was the really foundation of what would become the New York Stock Exchange. Now, back then on the New York Stock Exchange, they really only traded five securities, but it has slowly grown and evolved to be the market that we all know and love today. All right. So from those securities under a tree, we probably needed a more permanent structure to do this under. Yeah, absolutely. So the NYSE slowly grew and it became known

through its reputation as the place that you would want to go to raise money and buy and sell security. So in 1865, so basically 70 years after the NYSE was really founded, it moved into its first permanent building on Broad Street in New York City. A few years after that, in 1867, they revolutionized the way that information was disseminated. That was the introduction of the telegraph and the stock ticker in the 1860s. That was a way to get information about stocks' prices to other investors around the country. Believe it or not, you had to fast forward 100 years into the 1970s before the New York Stock Exchange began to allow investors to trade electronically with each other. So it has really been a slow-moving evolution to be the

behemoth that it is today. So here's this market. It's doing things all day long. But how are you able to know what the market is actually doing? Hundreds of stocks. Is the market happy today? Is it sad? I don't know. Some stocks were happy, some were sad. Enter in the Dow Jones Industrial Average. Yeah, the history of the Dow Jones Industrial Average is really fascinating, because when I first learned about the Dow Jones Industrial Average, it almost sounded like four random words were put together, and somehow that represented the market itself. But the Dow Jones was actually invented to solve a big problem. So, back in 1896, an editor at the Wall Street Journal, this guy's name was Charles Dow. Now, he was frustrated because every day,

the Wall Street Journal would just be printing these tables of stock prices. And some stocks would be up, some stocks would be down. But there was no way that he could summarize for his readers what the quote-unquote stock market did that day. In 1896, he asked his business partner, a guy named Edward Jones, who was a statistician, for help. What the two of them came up with was that they would add up the stock prices of the 12 largest and most popular stocks of the day. Back then, all of those companies were industrial companies. They would add up those prices, and then they would divide by the number 12. And that is how we gave birth to the Dow for Charles Dow, Jones for Edward Jones, industrial because they were industrial companies, and average

because we were adding up the number of stocks and then dividing by the total number, which is called averaging. Suddenly, we had a single number that could be reported to the readers of the Wall Street Journal, and we could use that number as a benchmark to tell readers what happened in the market that day, that week, that month, and even that year. Let's talk a little bit about the math behind the Dow there. This was pre-calculators. Dow and Jones had to come up with a really simple way that the Dow Jones Industrial Average could be calculated by hand. The easiest way that they could do it was they added up the dollar price of each share in the Dow, and then they divided at. That makes the Dow a quote-unquote price-weighed index. Now, that is something that

gets a lot of flack from investors today because that is exactly how that calculation still comes along. And Allison, we both know that the dollar price of one share of stock doesn't tell you anything about the importance or the size of the business. So, this has been one big knock that the Dow has had against it since it was founded. So, I think what's most interesting to me about the Dow is that it's been around a really long time. And the companies that started on the Dow and then the companies who are, then I guess it was expanded to 30 companies then in 1928. These are companies that were the big movers and shakers of their day. But if you look at those, you know, initial companies, it's not the same companies that we necessarily are excited about

today? All original 12 companies, and like you said, in 1928, the Dow eventually expanded to 30 companies, which it is today. All 30 of those companies are no longer still a part of the Dow Jones Industrial Average. Every few years, a couple of stocks that are no longer relevant are removed from the Dow, and new ones are replaced. Today, you'll find companies like Apple and Microsoft and Home Depot and UnitedHealthcare. Those are the companies that make up the Dow, and they have since replaced all of the legacy companies. All right. So, the Dow is great. What a wonderful innovation at the time. But 30 companies, that feels like a very limited measure of really the temperature of the market. So,

I think we can improve upon that. How about we invent something like the S&P 500? Yeah, let's do it. That is exactly what happened in the market itself. And again, S&P, standard and poor. That, again, sounds like two random words that were kind of jammed together to create this index. But again, a history lesson here is important. So, if we rewind the clock to 1923, so the Dow has been out for almost 30 years, and it has really caught on with investors at this time point. It is the gold standard that investors look to when figuring out what the market is. Well, we live in a capitalist society, so a company called Standard Statistics, they decided, we're going to launch a competitor to the Dow Jones Industrial Average.

Now, their competitor launched with 233 companies, which was far more than the Dow had at its time. And this index was actually weighed by market cap. So, the size of the business was actually more important than the dollar share price. So, these innovations were key things that distinguish it from the Dow Jones. Now, in 1941, this company, Standard Statistics, they merged with another company called Poors Publishing, and they became the Standard and Poors Company. And it wasn't until 1957 that they decided to update their index to what we now call today the Standard and Poors, or S&P 500. So they increased their index from those 233 companies to all 500 companies. And this

has since become the primary yardstick that professional money managers use to measure their returns. Some of our more, let's say, seasoned investors listening right now are going to perhaps have a good memory of what it was like to review your stocks, let's say, in the 70s and 80s and even maybe part of the 90s. And it was difficult. You'd have to wait for the newspaper to come out and then you'd read how your stocks performed. Or maybe you'd go hang out at your broker's office and wait for the ticker to come around until you saw your stocks. So thankfully, we don't live in that kind of world anymore. And I guess we have the NASDAQ to thank for that. Yeah. So what is the NASDAQ? It sounds like a very strange word to put together. Well,

NASDAQ is actually an acronym. NASDAQ stands for National Association of Securities Dealers and Automated Quotations. Automated Quotations, quotations being, aka, what is the price of a stock? What is a stock quote? The NASDAQ was the world's first electronic stock exchange, and it launched in 1971. Now, back in the 60s, the way that investors got information about stock prices was exactly what you just said, from looking at the newspaper or from going to their broker office. It was actually really hard to get up-to-date, accurate pricing information to all investors at all times. Computer technology had advanced enough in the 1970s that they launched the world's first electronic stock market exchange. No surprise, in order to

get this stock market exchange off the ground, it needed a whole lot of technology from the likes of Hewlett-Packard and Intel and companies like that. Those companies chose, when they came public, to list their stocks on the electronic stock exchange, the NASDAQ, instead of the stodgy old NYSE. Everything seems pretty great there for the NASDAQ, until a little thing called the dot-com bubble comes around and bursts. Yeah, that was a very interesting time to be an investor. I remember paying attention to the market or starting to pay attention to the in the late 90s, and the only thing that I knew was that for some reason, everything is going up, and there's all these companies like AOL and Cisco that are just becoming dominant and taking over

the world. So, yeah, that was a very big bubble for those investors that were living through it with technology valuations getting absolutely inflated. The NASDAQ actually crossed 5,000 points in early 2000 before the eventual bust came out, and that was a brutal bust for many technologies to actually live through. So, yeah, this is why studying market history is so important. When you can look back and learn about what has happened in the past at markets, it does give you an indication of what could happen in the future. So, $5,000 at the peak before the bubble burst, but where's the Nasdaq now? The Nasdaq is actually fully rebounded, and investors that bought even at those peak prices,

as long as they held, are actually doing decently well as investors. So, the Nasdaq actually surpassed 10,000 points for the first time in 2020. And as we record this, it is near or at all-time highs, thanks to our friends Microsoft, Nvidia, and Apple. But the Nasdaq continues to be a very attractive exchange for technology companies to list on. And those companies continue to do extremely well for investors. When you look back over the history of the markets and these indexes. What's your big takeaway? My big takeaway when it comes to investing in general is the importance of studying history. There's a saying that history never repeats, but man always does. Market prices will always be

controlled by humans, human-making decisions based on emotions like fear and greed. By looking back at history and what market prices have done, it can give us a glimmer as to what we can expect in the future. All right. You'll hear more from Brian in the coming weeks. You can also check out his newsletter at longtermmindset.co. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow. Thanks for watching!