Motley Fool Hidden Gems Investing - The End of the Mickey Mouse Moat?

Episode Date: January 3, 2024

After 95 years of copyright protection, Steamboat Willie enters the public domain.   (00:21) Asit Sharma and Dylan Lewis discuss: - Why early versions of Disney’s Mickey and Minnie Mouse characters are now appearing in horror slasher films. - Tesla once again being the king of EVs, and what to make of BYD coming up on its heels. - A digital entertainment stock to watch in 2024. (15:47) It’s been a great run for growth stocks – and it might not be over! Deidre Woollard caught up with Motley Fool Analyst Kirsten Guerra for a look at some recent winners that could keep winning in 2024. Companies discussed: DIS, TSLA, SONO, DUOL Catch the original Steamboat Willie cartoon, in all its public domain glory here. Host: Dylan Lewis Guests: Asit Sharma, Deidre Woollard, Kirsten Guerra Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

You've got to try breakfast at A&W. You've got to try breakfast at A&W. And what better way than with the delicious Pret Organic Coffee? Starting with just one dollar, all day, every day, now until December 31st. You've got to try breakfast at A&W. At participating A&W locations in Ontario. Dylan Lewis. I'm joined over the airwaves by Motley Fool analyst Asit Sharma. Asit, thanks for joining me for the first time in 2024.

Dylan, so great to be with you and start the new year together. We've got some updates on Tesla's delivery numbers, a stock to watch in 2024 as well. But we're going to kick off our new year, as shows go, with a curious piece of news. January 1st marked the beginning of a lot of things. In Disney's case in particular, Asit, it marked the end of their copyright on Steamboat Willie. And if that is not a name that you recognize, maybe you'll recognize Disney's Mickey and Minnie Mouse characters, which make their appearance there in their first forms. Now, because this copyright is expiring, Asit, now anyone can make use of that character.

It is not the fully-fledged, white-glove Mickey Mouse character we all know, but it seems like a bit of a blow to the magical kingdom. Totally, Dylan. Copyright law in the U.S. has really evolved over the last century. It now strikes a great balance, I think, between protecting the original artist's right to earn and just be compensated for his or her creativity and the public's need to further creative exercises and be able to use ideas and art, forms of expression, and take them one step further. Now, we should mention here that Disney, the company which we all have known since childhood, has been a major proponent of extending copyright for decades. They were critical in the Copyright Act of 1976.

And Dylan, the Copyright Term Extension Act of 1998 is actually popularly nicknamed the Mickey Mouse Protection Act. But alas, after 95 years, here comes the day, and this is a ritual every January 1st, some Copyright expires on different characters. Here we have this early version of Mickey Mouse available for you and I to go out and make something of it. As you might expect, the internet is absolutely undefeated, as always. There are already a ton of projects out there incorporating this character, including Mickey's Mousetrap, a slasher horror movie which incorporates the Steamboat Willie version of Mickey Mouse.

I think this is an interesting, it's a little bit of a silly topic, but it's an interesting one because we so often think about copyrights, trademarks, as part of this very impenetrable moat that companies have. We don't really run into IP rolling off all that often for these really famous characters. Disney has tried to delay this as long as possible. Asit, when you see this news and you start seeing some of these off-brand Mickey-type things coming out there. What do you think about this with respect to Disney's brand? I think that it has limited impact on Disney's brand. In fact, it's always good

to get a push like this to extend your own IP universe a bit further. The original Steamboat Willie, it's a short, you can watch this. The characters of Mickey and Minnie Mouse are interesting. Mickey is a really rough-edged, rogue-type character compared to the Mickey Mouse that we all know today as it evolved over time. I think Disney has become a little bit protective of that image and doesn't take as much risk with the character of Mickey Mouse anymore. It's good to see this early version roll off. By the internet, Dylan, you and I include AI-generated ideas come into play, let them do what they will. Some of that, none of us are going to waste time watching. But some of this stuff will get passed around as memes

that we'll laugh at. I think it's actually good for the creative process and to keep a big company like Disney on its toes and realize that you have to keep creating that IP. You can't rest on your laurels in business. This is the way things should be. Asit, let's switch over from the House of Mouse to the king of EVs. We got an update on the latest delivery numbers from Tesla. With 1.8 million deliveries in 2023, Tesla remains at the top of the charts for EVs. Not all that surprising given the lead that it had, but I think a strong sign of where it is, especially with respect to the U.S. market. Dylan, let's do our ritual removal here of Elon Musk from the conversation.

or we'll spend so much time just talking about Musk and his personality. Let's talk about Tesla, the company. I think this shows a lot of good things for Tesla. One, nice execution in being able to exceed what I think was a consensus estimate of something like 477,000 deliveries in the last quarter of the year. As you point out, within the year of 2023, they certainly were king. I think this is further evidence of supply chain straightening out. You can't produce and deliver the vehicles if you can't get the components and raw materials coming in. It's also a relationship of several parts of Tesla's business strategy. You've got the incentives piece. Tesla's been discounting models and retracting some of those discounts.

They've been leaning heavily into price promotions. They've started advertising a bit, which they were reluctant to do before, the culture at Tesla, which is to do everything to make those deliveries, the extension of production from what was years ago just the U.S. into Germany, China, Mexico production plant, that plant is coming up, maybe it'll be built in a couple of years. When you put this whole puzzle together, you see a company that's become really formidable at meeting its delivery targets. That's maybe not a competitive but it's a sustainable edge. We've seen other big automakers like Ford, GM, Toyota, Volvo, Mercedes, all back off of their big talk from just two years ago. They are still investing

very heavily in the EV space, but almost to the last of these companies I've mentioned has pulled back a little bit in their planning and extended out their times to move from their current production states to EV production states. Why is that? This stuff is hard. Tesla still has an edge, say what you will, about the company, its margins, its prospects, Elon Musk. This is evidence on the ground that you shouldn't count Tesla out just yet. You ran through a who's who of the American carmakers there. Certainly, in our home market here in the United States, it is Tesla by a mile. But if you broaden out the scope, and you look a bit more globally at EVs, it seems like the competition is starting

to creep up there, at least as we look at deliveries. China's BYD came in second for 2023. They had roughly 1.6 million EVs sold. But second place in 2023, they were ahead of Tesla in the fourth quarter of 2023 in deliveries. Now, we don't have BYD cars out here on the roads. They're not really for sale in the United States. How do you process another upstart EV maker starting to catch up to Tesla and nip at its heels? BYD, amazing story. This is a company that has a lot of manufacturing prowess. They remind me of Tesla in so many ways. But there are a couple of parts of this story which maybe should be a caution against, just assuming that BYD is going to leapfrog Tesla

on every other EV maker on the planet. First, the Chinese government has one major bright spot in their economic picture, which right now looks so bleak for so many reasons. We've discussed those on Motley Fool Money over the last year or so. But the drive to electrify the vehicle landscape in China is something the government is going to continue to put money in. But we should note they've rolled back most of the incentives for both the production side and the buyer side. The Chinese still enjoy some tax breaks on consumption tax when they buy electric vehicles, but the major vehicle subsidies on the consumer side are being phased out by the Chinese government and most of them have lapsed. You're going

to see less of the subsidy piece push vehicle sales in China, but BYD pulled a Tesla last year. They started promoting on price, working with price points, and they also sell a cheaper vehicle than Tesla does. Their top-selling models are actually more entry-level vehicles and that's what's allowed them to pump the volume numbers up. Now, how does BYD keep competing with China? It's got to expand out of China, but here you have both in the EU and the U.S. a lot of regulatory skepticism after seeing what happened with the semiconductor landscape, the solar landscape over over the last few decades. In the context of this trade war and geopolitical power match between the U.S., the EU, and China, I think it's going to be harder for Chinese vehicles

to really penetrate these markets. The Chinese EV power group, so this is BYD, NIO, some other auto manufacturers, only hold 8% share in the EU just now. The EU is actively investigating the subsidy piece of the Chinese market to see if that's unfair competition in China. So, I think we have to admire what BYD has achieved, but not assume that it's suddenly going to be this super brand that takes over the planet. Alright, Asit, as we mentioned at the top of the show, it is both of our first times on the air in 2024. The beginning of the year is not just when we see copyright protections roll off, it's also that magic time of the year when people are particularly

excited for new stock ideas. What's a company that you're paying attention to and interested in in 2024? I'm excited to talk about this company, not just because I'm enthusiastic about its prospects over five years, but I understand that you are a user of its products. Maybe you can give me some feedback on my thesis here. But I want to talk about a consumer-facing company called Sonos, which I think most members have probably heard of. They make audio equipment that is, I would call it upmarket. I wouldn't call it a super high-end, but it certainly is a premium product. Sonos hit a wall in late 2022 and throughout 2023 because they are a preferred audio component of choice for

home installers, those who are dependent on that home market expanding. The company also has a pretty good retail presence as well, but sales have been flattish as interest rates have spiked and the pace of new homes being built has slowed down. The company is now looking to introduce the next wave of its multi-year product cycle in 2024. They have promised entry into a multi-billion dollar market in the second half of 2024, which management says should bring about instant additional revenue. The stock is trading at around 12 times its next 12 months free cash flow. It's cheap if sales pick up, if earnings pick up. This market is widely acknowledged to be the headphone market. On one hand, I think Sonos has demonstrated that they have really

great products. They have repeat buyers in spades. The company is able to raise its price points over time. But I wonder about this, Dylan, and here's where I'd love your advice. The headphone market is really filled with great players from Apple to Bose to Sony to Bowers and Wilkins. Even though this is pretty high-quality stuff, the question in my mind is, is Sonos going to be able to find its niche, or will it discover that this is a pretty tough place to play even though it is a very respected brand among audiophiles? Tell me about your experience, Dylan, and crush my thesis, please. Dylan Lewis I was going to say, you're dead on there. I'm a customer. This company for a long time

has lived in the space of, for me, great product, I'm not 100% sure on the business. The reason for that is, they are a little bit of a specialist, and they are in a market that I worry sometimes big tech will continue to creep into, or that allegiances to certain ecosystems like Apple may eat into the customer opportunity for them. But just from my own perspective as a user, I really like the sound quality. You're right, they're a little bit upmarket for people that want something that is Bluetooth or wireless in their homes. For the true, true audiophiles, maybe not the market. I do wonder, though, if they are looking to get into headphones and that kind of thing, if there is a real opportunity for them, or particularly in the United States,

where we see iPhone and iOS adoption so high, people may go for more seamless, integrated products like Apple's AirPods that play into an ecosystem they're already a part of. I'm someone who has AirPods and a Sonos, so I'm living that reality right now. I would say I am a big bull on the home market for them. I have some big questions when it comes to the wireless market and the headphone market. Yeah, that's such a great analysis. I'm looking at this as potentially an interesting company for a five-year hold. I think over time that brand power will continue to manifest, but you're so right, Dylan. Sonos has

run into issues with Google. They have sued Alphabet a few years ago because they claimed that Google was infringing with its own speakers on their technology. They're up against very, very robust competition with huge balance sheets, and they're a small niche player, $2 billion players. Maybe we can revisit this company I'm interested in a little later this year, maybe in the summer after they release these new products, we'll see where they stand. I love it. In the meantime, I'll just be catching you on the episodes that I don't host on my Sonos here at home, Asit. Awesome. Thanks, man. Since it's built on your real-time people and business data,

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discount. That's fool.com slash MFM discount. Coming up, growth stocks have taken a breather to start the year, but the Nasdaq is still up over 40% over the past 12 months. Motley Fool Money's Deidre Willard caught up with Motley Fool analyst Kirsten Guerra for a look at some recent winners that could keep winning in 2024. I'm Deidre Willard here with Motley Fool analyst, Kirsten Guerra, and we're going to talk about some of the ways to consider winners in your portfolio. Kirsten, how are you doing today? I'm doing great. So 2023 brought a new phrase to our investing lexicon. We had the fang before it, then we

got the monomena, and now we have the magnificent seven, which is Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla. The acronyms change over time, the companies in the acronyms change, but as investors, we always know a small amount of stocks are going to drive a lot of our returns. We just don't always know which ones. Kirsten, how are you considering the role of the Magnificent Seven in a portfolio? I think sometimes investors get caught up in the newer stories. There's an inclination to want something exciting, something under the radar, and I totally get that. The idea of investing into the Magnificent Seven, which still not sure how I feel about that name, kind of sounds boring to me too. And yet I do have a couple of these in my portfolio. I actually hold

them in a category that in my head I kind of call defense. And honestly, I think about those as just like an NFL team defense. At the very least, I expect these kinds of companies to hold things down on the field to kind of preserve capital and reliably add to my returns through dividends or buybacks because these are mature companies. They have strong moats and they can absolutely do that. But honestly, some of them with all the cash flows that they generate, they have the potential to do considerably more than that. There may be more exciting than some people think. A great defense after all can sometimes return it all the way for a touchdown. They serve multiple purposes there. There's a lot of reliability and steady returns to be expected

from The Magnificent Seven, but when you've got resources and influence like these massive companies do, there's a lot of room for upside as well. With The Magnificent Seven, you've got some of them in your portfolio. I've got some of them in my portfolio. Luckily, I have other things in my portfolio that did well in 2023. One of our founders, David Gardner, he says, let your winners keep winning, let your winners run. It sounds easy, but my experience as an investor, and I don't know about yours, it's a little nerve-wracking. When I see a company, especially a company that suddenly goes on a tear, I get nervous because I know winning isn't infinite. So, what do you ask yourself when a stock that you've owned, all of a sudden,

it's skyrocketing? What do you do? What do you think about? Oh, I don't get nervous. Should I get nervous? No, I do, of course. And it's really hard to give a blanket answer of what exactly to look for. Every company is a unique snowflake, not to be confused with actual snowflake. Ideally, I think if you are invested into a company that's gone on to be a solid winner in your portfolio, you also wrote some sort of investing thesis at the time you invested that kind of outlined a little bit on why you think it's a great opportunity, metrics you think are important to watch for its success, and what you think are the biggest risks to watch out for. If you did that, then evaluating a winner should be as simple

as checking the current state of the company against that thesis and just see if it still holds up. If not, first, I would recommend doing that in the future. But if not, there are still some key things that you can ask yourself, like how much opportunity is left for this company? Does it still have a long runway or are there signs that the market is actually expanding around it. Sometimes big winners actually tap into some sort of latent demand, a kind of opportunity we couldn't even articulate today. Sort of what I was suggesting with Apple a minute ago, but it starts to become more evident as the company really takes off. You can think of an Uber for this concept and how it was originally valued based on the overall taxi market. But in

fact, we now know that the tech-enabled ease of ride hailing from anywhere that Uber introduced really generated far more interest than the taxi industry because it actually created a whole new use case. It was far bigger than anyone really expected. Look for that. If you do see evidence that a company's opportunity is continuing to grow or that they're exercising optionality in some complementary direction, that could be a really great sign that there's still plenty of growth ahead and it's worth hanging on to. Another thing that you'll want to check in on is whether the company is maintaining a a durable advantage because when you're investing for the long-term, as we all are, it's really

important to have some confidence that a company can continue to be top dog in its field for years to come. Sometimes the reason a company turns out to be a big winner in the near-term is just because it was first to market or it disrupted an industry with a far better way of doing things and it gained a lot of attention and ran directly into a greenfield opportunity. But that doesn't usually last forever or even very long. If your winning company proved the viability of a new market and made it that attractive, you should expect that there will be plenty of competitors on their tails and look a little deeper into whether your company has that customer connection that will allow it to continue to hold on to the lead or any other

competitive advantage that can keep it on top. Yeah, absolutely. I liked what you said there about Uber, too, because you think about total addressable market. And we've seen this with companies like NVIDIA or AMD sort of increasing their total addressable market. But with Uber, you started off with replacing taxis, then ride hailing, and then you got into Uber Eats. And all of a sudden, you have a whole new total addressable market. So that's a really good point in wanting to see a company see where they can grow, where they can expand, as well as deepen their original proposition. Let's talk about one of them that sort of definitely found a green field and that's Duolingo. It's been a tremendous run for that one. Recent earnings showed a really strong jump

in paid membership up to 5.8 million. What makes Duolingo a winner? Duolingo has just got great unit economics. It operates a freemium business model. So anyone can use the app for free, which is really important for building the kind of social network element that is inherent in this app. And then the dedicated users who want to and who want more advanced features can go premium for a monthly fee. So the pretty common model these days, but Duo is very, very efficient at upgrading those users. Whoever runs their marketing team, especially their TikTok, probably needs another raise because they are so, so good at generating new users, new premium users, and really just spreading brand awareness of the company in general

at relatively low customer acquisition costs. Well, and also, I think stickiness. I think for winners, a lot of it, you want to see stickiness, whether it's on the B2B side, where it's a software that a business can't live without, or whether it's on a consumer side with something that is just really addictive. I mean, I think the thing about Duolingo is people want to keep their streaks. You've got daily active users up to $24 million. That's a really great thing. But with the consumer side, it's always a little tricky. The consumer is so fickle. Trends do end. What could potentially go wrong with Duolingo as you watch it? Yeah, I'm one of those fickle users, too. Duolingo keeps getting upset at me. The icon

will actually start melting on my desktop. It's like this dramatic. Anyway, they're very good at bringing you back. But yeah, trends certainly end. But someone somewhere will always be learning a new language. A lot of someone's. It's estimated upward of a billion people at any given time are learning a language. And so that's not going away. Still, that doesn't mean that interest in language learning couldn't shift elsewhere. It's done that before. Before Duolingo, Rosetta Stone was the big name in computer-aided language learning. But Duo's mobile focus is really what helped it capture all the mindshare from that former powerhouse. So Duolingo definitely needs to stay alert and continue to be the innovator in this space so it's not disrupted from another

direction in the same way that it disrupted before. But it does have also the social element that Rosetta Stone never did. And so there are lots of friend networks that are on this app kind of learning together and celebrating each other. And that does make it harder to unseat. yeah yeah absolutely i think the social aspect of the business is is a surprising part of it i know you've uh talked before about spotify too and that and that has that social aspect as well i think that's one of the things that is sort of you can't really factor it into into the business itself but it definitely contributes to the thesis yeah absolutely it's not the the strongest network in the world it's it's not a facebook for example but it's certainly there yeah absolutely well and

thinking about these winners, one of the things I think about is looking forward, right? So one of the stories of the most recent quarter was that you would have a company that would come up with good, solid, great earnings, but then they had a modest forecast and the market was not happy. You saw things go down relatively quickly. I tend to be a fan of the realistic CEO with the modest forecast, but the market loves the bombastic CEO with the big prediction, especially when they pull it off but even sometimes when they don't so how do you think about forecasts in general especially as you're looking at your winners yeah on one hand leaders know their business far better than you or i ever will they spend a lot more time in that space and they also

even kind of have insider knowledge essentially of how well the active quarter is going even as they're publicly discussing the previous quarter so i certainly want to hear from leaders i want to know what they're thinking and what they expect, but I'm the same. I respect the more realistic forecasts. Although if you do see a big claim and you're curious, you can certainly dig into a leader's track record to see what you think. That's something that Tim and I did, Tim Byers, who I work with on a service here. We saw a leader make a claim and we thought, big if true. So we went back and did a deep dive of claims that the CEO had made over the last 10 years or so, and just noted how accurately each of them played out, and it turns out

really well. That definitely helped us feel more confident in that company's valuation at that point in time, based off his bombastic projections at that point. As always, people on the program may own stocks mentioned and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.