Motley Fool Hidden Gems Investing - Writers Strike & The Future of Streaming

Episode Date: May 10, 2023

The last writers strike lasted 100 days. How long will this one last and what will it mean for entertainment businesses? (00:21) Bill Barker discusses: - The latest inflation data putting a smile on Wall Street's face - Pricing data for gasoline and bacon - Axon Enterprise succeeding despite today's stock drop (8:48) What will the writers strike mean for streaming businesses? Dana Corl talks with Vulture television critic Jen Chaney about why the writers are striking and the ripple effects for companies like Netflix and Disney. Companies discussed: AXON, WBD, NFLX, DIS Host: Chris Hill Guests: Bill Barker, Dana Corl, Jen Chaney Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

This family is on the brink of civil war. On September 18th, Mobland, the hit original series, is back on Paramount+. We are the Hartigans. Don't know them yet? Then Google us. From the underworld of Guy Ritchie. Do you want to step up the ladder?

I want Comet dead. Starring Tom Hardy, Pierce Brosnan, and Helen Mirren. Do I have to do everything myself? You want more? I'll give you more! Mobland, new season hits September 18th Paramount+. We've got good news for carnivores and a look at how the writer's strike is affecting the business of entertainment. Motley Fool Money starts now. I'm Chris Hill. Joining me today,

backed by popular demand, Motley Fool Senior Analyst Bill Barker. Thanks for being here. Thanks for having me. We're going to start with the ever-sexy big macro. The consumer price index rose 4.9% in April. It is the smallest increase in two years, and this continues the downward trend that started last June. And am I wrong to think that this was well-received news on Wall Street. It really seemed like, you know, for people who are watching this more closely and looking for more evidence that the Fed is going to hit the pause button on interest rates, this seems like some fodder. It does. Yeah, I think it was largely expected. You've got the inflation now cast out of the Cleveland Fed basically hitting this number. And so, you know,

You can play along at home and see what the expected inflation is for each of, say, the four major measurements of it these days. And to the extent that there was good news here, it was just slightly under, I guess, like about a half of a tenth a point better on the annual rate. So, good and continuing to be better numbers than we've seen for almost two years. Does this factor into your investing at all when you're analyzing companies? Is it the sort of thing that it's a box that you check, or is it something that depending on the business, depending on the industry, this is one of those data points that you give more weight to? The inflation itself or the possibility that it will affect interest rates?

Both. Well, the inflation itself, certainly as I'm looking at the reports that come out, quarterly earnings reports and seeing what people are hitting, you know, 7%, 8%, 9% increased sales. When you subtract the inflation, you've got to know what the inflation is to know whether that's any good, really. I mean, if inflation has been 7% over the last year and a company's selling 6% more stuff than a year ago, then it's not really done anything you're going to be excited about as an investor. But if inflation starts getting down 4% or 5%, it's definitely more meaningful. So, I think that the integration of inflation expectations and, in particular, where interest rates are going to go is very important. The interest rate is the risk-free rate that you have to input into any real model of what future earnings are worth. So, I think future earnings get measured a little bit stronger, just like by a hair today,

because inflation looks like it's continuing on the right path. One of the things I like about the CPI report, speaking of things to get excited about, they break it down by different categories. And I don't know how closely you looked at this, but the price of gas is down 12% year over year. And more importantly, for people like you and me, the price of bacon is down nearly 10% over the past year. So, I mean, that's just a win. Yeah. It turns out, and this will surprise some people, that gas is a bigger part of the economy than bacon. Really, it was a shock to me as well. But you've raised the

of the headline number, the CPI, includes everything on an urban basis. And then PCE doesn't just focus on urban, but rural and urban. So there are different measurements. Core CPI excludes the, quote unquote, volatile food and energy costs. So that's a more meaningful number. And in May in particular, right now I'm looking at the now cast from the Cleveland Fed, which I mentioned. Core CPI for May is expected to be 5.3%. The headline CPI, 4.1%. So gas prices is the most meaningful thing there, has really come down in the last 12 months from the highs that it was at May and June of last year. That's good news, but the stickier part of inflation is still in the core part, the everything but food and gas. So, you've got inflation numbers

out there right now that are, some of them start with a three, some of them start with a five for what inflation is year-over-year. It's still too high, but very, very long way from the 9% that it peaked at last summer. Earnings season rolls on, we're going to get to Airbnb's latest results on Friday during the radio show, but I did want to talk to you about Axon Enterprises. This is the company formerly known as Taser. First quarter results were better than expected. Revenue was up 34% year over year. This is interesting to me because we've seen plenty of companies that have posted better than expected results and the stock sells off due to guidance that is soft or just weaker than Wall Street was hoping for.

On the surface, it's a little surprising to me to see Axon beat the expected results. They raised their guidance, and yet shares are down 15%. Yeah. On the surface, if you're just tuning in today, that seems contrary to what you would expect. Now, when I tell you that the stock, Axon stock, is up 158% in the last 12 months, then you have a little bit more of the story. The stock has already had rebounded to, I think, new all-time highs. It's sort of been up and down in the last year or two. Great, great, great track record for shareholders over any longer period of time, three, five, 10 years, just blowing away the market's returns. And so, this last year has been a phenomenal one for the stock.

It's still up about 15% for the year, even after being down 13%. So, this is really sort of stock getting a little bit ahead of itself. I'm sure there are other companies in this industry, I'm sure that Axon Enterprises has competitors. I just can't name a single one of them. It doesn't seem like there's an obvious Coke to their Pepsi. No, no, they are one of the, if not monopolies, may as well be a monopoly. I'm sure you're right that there's somebody who would like to be a competitor. But the first mover advantage here, the TASER device, is important. I think that where the competition more likely could be, but hard to gain traction because of TASER's integration with police forces already, is the body cam technology, the software

that is keeping all of the footage, the training that they're developing with their devices, the virtual reality. So they've got a very, very big cloud business. And of course, cloud businesses have been assigned very generous multiples over the last couple of years. Those multiples are calming down. So the fact that they still have a very nice 50% range growth in their cloud business is good news, but maybe you're not going to get quite as many dollars thrown onto the multiple today as you had hoped for a little while ago. Bill Barker, always great talking to you. Thanks for being here. Thanks for having me. Earlier this month, the Writers Guild of America went on strike, a move that immediately shut down the production of movies and television shows.

Dana Corll caught up with Jen Cheney, television critic for Vulture, to get the background on the strike and what the ripple effects could be for streaming businesses. Quick note, this conversation took place on Tuesday before the Directors Guild of America began their own set of negotiations. so jen can you spell out for us why are the writers striking you've probably heard the word existential being used a lot in relationship to the strike and i i really feel like that's actually an accurate term you know as we know the industry has changed a great deal because of the streaming revolution basically but the way in which the writers are paid has not been updated to reflect that. So as one example, I think most people know that normally in the world of network television, you work on a show, if it's a big hit, it gets syndicated and writers get residuals from

every time that episode airs. And that's really like the bread and butter for a lot of writers careers is that kind of security that comes from that. But with streaming, that residual thing has kind of gone away in a lot of instances. And you may have an incredibly successful show, but the amount of money you're getting back from that is not commensurate with how popular it is. So that's one of the major issues. But I also think in a broader sense, really what's happening is that you're seeing the people at the top of these entertainment companies who have these, you know, multimillion dollar salaries, and it's not trickling down to the people who are doing the work, the writers, you have nothing without the writers. And so it's not

trickling down to the people who are doing the work and especially people who are kind of quote unquote entry level. They're not getting the same kind of training. They're not getting the same kind of compensation. And this feels like a real moment to say like, this needs to change. And that's something that applies to so many industries, not just the entertainment industry or writers. I think a lot of people feel like there's a big divide between what people at the top of a company and the people who are actually doing the work are getting back financially. And how do you think a prolonged strike could impact these entertainment companies? Well, I think what's going to be interesting is the Directors Guild begins their contract

negotiations tomorrow on May 10th. And then the Screen Actors Guild, which represents the actors, is going to go through the same process. And I think a lot of them have the same concerns and issue. So there's a real possibility that all three of the major unions could be on strike. And in terms of what you're already seeing is impact. I mean, the late night shows have shut down. We've lost the entire end of the Saturday Night Live season, but you're also seeing a lot of picketing happening at production companies and, you know, Stranger Things has said they've shut down. So a lot of things are starting to shut down. And if the directors and the actors has also gone strike, then it's really like nothing is going to be able to get done because

every conceivable picket line you could cross will be out there in force. Do you think there's any companies that are well-positioned or not well-positioned? I'm thinking of the Disney Pluses versus the Peacocks, the more popular ones versus maybe some of the ones that we're just seeing pop up. Do you think there's any unique positioning with those companies that we should be keeping an eye on? Well, it's interesting. I mean, the broader organization that represents the studios and the producers consists of all these different companies that, to your point, like may have different needs or different kind of agendas. I mean, you know, for example, as we've seen, Netflix, they don't really care if anybody goes to the movie theaters

anymore. So there are certain things that have to do with contracts related to theatrical that are not at all important to them. And so it'll be interesting to see if there is some kind of splintering off, if some studios start trying to make separate deals with people. I don't think we're there yet. I think the studios are waiting to see what happens when they pull levers with the DGA and SAG and then go from there. So it'll really depend on how much the directors and the actors also hold the line on this. So I was thinking a lot about the ripple effects of production shutting down. McAndrews and Forbes owns Panavision and Panavision rents cameras to productions. If there's no more renting, that's going to impact the company. What are your

thoughts on some of the bigger effects that if things shut down could impact beyond entertainment as we think about it? You know, we know that like when people shoot on location, that's great for the economies of a city. As one example, like Atlanta is a prime city where a lot of things are shot. Marvel movies, Stranger Things,

which I mentioned earlier, you shut that stuff down, you are preventing an influx of people coming into your community who are going to spend on hotels and restaurants and all these things. So there are definitely like ripple effects that I don't think people have totally maybe wrapped their minds around yet because we're

still in early days of this. And I do think this is going to go on for a while. But yeah, it absolutely will affect things that are sort of in those outer circles of how the entertainment industry works. So the last time there was a strike in 2007, 2008, it was holiday time. And things seemed to move very slowly. It was Thanksgiving. It was Christmas. It was New Year's, and now it's happening in what feels like a high time for production. How do you think that that's going to have an impact on how quickly negotiations can move forward? Well, you know, one would think that it would make it a little bit more urgent. One huge difference, just to your point, is that we're in the middle of Emmy season, which that was not the case in 2007, 2008. This is

normally a time when people are doing for your consideration events and really trying to promote their shows and the writers right now, for the most part are not participating in any of that. And again, you get the directors and the actors, if they start doing the same thing, then suddenly that whole little ecosystem shuts down. That's just one example. But I think, you know, I think some of the studio heads have been like, yeah, we've got library of content. This'll be fine for a while, but I think that's maybe underselling what effect this would have. I mean, certainly just as an example too, like the fall TV season, if things are delayed, that's going to delay the fall TV season. I don't think anybody at the networks wants that to happen, um, for all kinds

of reasons. So, um, yeah, I think this having it happen when it's happening, hopefully we'll make things move more quickly, but I, I don't know if that's going to happen or not. Yeah, I know all you can do is speculate, but I know last year we saw that streaming viewership surpassed cable TV. And I think you touched on this before, but how do you think that plays into the priority of wrapping things up? I mean, you know, we've seen in the past few days, like some major showrunners and creators have, have studios have been suspending their deals. HBO apparently suspended their deal with David Simon, which they've had to deal with him

for like 20 or 25 years, which is, I can't, I can't believe that they would do that. So I think it's going to create some difficulty in these relationships between the talent and the networks. And I mean, I think everybody understands that streaming is the future, but what has not happened, as I was suggesting earlier, is that there has not been the commensurate restructuring of how things work in a streaming universe to make it as fair as it was before. And I think that's the work that needs to be done. And it's hard and it's contentious.

right now they can't even really do that work because the studio is not even coming back to the table. I mean, their response on the, you know, the concerns about AI, which we haven't even talked about yet was we'll just meet about it once a year and let you know how it's going. And that's, that's not reassuring. I just want you to say, don't replace me with a robot. And they can't seem to do that. So are there any companies that you think we should be keeping an eye on? I mean, I personally am just very curious about what's going to be happening with Warner Brothers and HBO, because that was, things were already kind of tumultuous and difficult there before any of this happened. And I think this is just going to add more confusion to the

whole situation. You know, they're trying to launch, rebrand HBO Max as Max and do some things a little differently. And that to me, HBO is sort of the marquee television brand. Like that's where you go. If you know, you're going to get something good pretty much every time. And so I'm very curious to see how things play out there. But I mean, like every, every company that you talk about, every major studio has basically a streaming arm that they're going to be worried about. So as I said before, I'm just really curious to see if at some point they start to split ranks. Awesome. Well, Jen, thank you so much. This is so helpful, and I really appreciate you coming on and doing this with us. Oh, you're welcome. It was fun. 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. Thanks for watching!