Motley Fool Money - AI Gives and AI Takes

Episode Date: March 15, 2024

AI has been a boon for Oracle’s cloud business, but it’s also creating a lot of questions for Adobe. (00:21) Andy Cross and Matt Argersinger discuss: - The National Association of Realtors agreeing to over $400M in fines and to eliminate its commission rules. - Why AI is pushing Oracle up and Adobe down after earnings. - The numbers behind Williams-Sonoma’s 18% spike, Kevin Plank’s return to Under Armour, and Ulta’s wild shrink story,  (19:11) Motley Fool Money’s Ricky Mulvey catches up with Bloomberg entertainment reporter Lucas Shaw, for a look into the business of streaming, the power of incentives, and corporate infighting at Paramount.. (34:01) Andy and Matt break down two stocks on their radar: Equity Commonwealth and Landstar Systems. Stocks discussed: RDFN, Z, ADBE, ORCL, WSM, UA, UAA, ULTA, LSTR, EQC Host: Dylan Lewis Guests: Andy Cross, Matt Argersinger, Ricky Mulvey, Lucas Shaw Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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We're entering a new era in real estate. Motley Fool Money starts now. That's why they call it money. The best thing. Cool global headquarters. This is Motley Fool Money. It's the Motley Fool Money Radio show. I'm Dylan Lewis. Joining me in the studio, Motley Fool's senior analysts, Matt Argersinger, and Andy Cross. Gentlemen, great to have you both here. Hey, Dylan.

We've got a rundown on retail, the state of things at Paramount, and of course, stocks on our radar. But we're kicking off with real estate news. Matt, after several years and lawsuits related to excessive fees and antitrust activity, we might be looking at a new real estate market. We might be, Dylan. If you've ever sold a home, it's always been confounding, or at least for me, that in addition to paying a commission to your agent, in that case, the seller's agent or the listing agent, you'd also have to pay a two and a half, three percent commission to the buyer's agent.

And this was essentially, for decades, a mandate of the National Association of Realtors, and AR, of which the vast majority of agents in the U.S. are members of. And it's why commissions on transacting home have traditionally been set in this 5 to 6% range, split evenly, usually by the seller's agent and the buyer's agent. So instantaneously, on every transaction, in addition to other closing costs, repair expenses, five to 6% of your home's equity would instantly, that had been built up maybe for over many years and could be worth tens of thousands of dollars would instantly go away, for these commissions. It always seemed like one of the final areas of the market that had yet to be

disrupted, because if you think about what's happened to travel agents, what's happened to brokerage commissions, certainly, transacting in almost everything in the country has gotten cheaper over time, except transacting a house. And if you look at the median price of a home in the U.S., right around $400,000, that's $20,000 or more in commissions just to sell a house. But here we are. The NAR has essentially settled, which means they aren't. not contesting any more of these lawsuits, these civil action suits against them. They're paying a fee, and the idea is that they're going to lose their monopoly position on the marketplace. So now agents won't be required to be members of the NAR. They won't be forced, for example,

to subscribe to MLS listings in order to get paid. It essentially makes real estate agents, free agents, that can set their own commissions. And if you're a home seller or home buyer, it gives you far more negotiating power. You can pay a commission to a buyer that you want to pay, It's no longer quasi-mandate to pay a commission to the other side of the transaction. Matt, and looking at this news, I was trying to process both the news itself and then the follow-on impacts that it would have. And I feel like for buyers and sellers, we're probably looking at lower fees and a little bit more flexibility. Beyond that, in the business landscape of real estate, I feel like it's really hard to nail down

what it means for companies like Zillow, Redfin, and other operators. Right. I think clearly for the publicly traded agencies, this is a really hard. not going to be great news. I mean, those fees are coming down. Their margins have to come down. The business is going to change. There's going to be less agents in the marketplace. For companies like Redfin and Zillow, it is a little cloudy for me, because, for one, Redfin who is already trying to disrupt the whole transaction fee of this marketplace anyway. And with Zillow, Zillow really depends. The vast majority of its revenue still comes from agents who pay Zillow for leads on their marketplace. They need agents, and they kind of depend

on the traditional model. So for Zillow, it's also could be disruptive, although a little confusing. I would just say this. Good real estate agents do deserve you get paid. I don't want to make it seem like these commissions were being paid out the door for nothing. I mean, many work really hard. I've worked with agents that have been great. They spend a lot of time working with buyers or sellers, and they deal with a lot of paperwork. There's a lot of value to what they do. So I feel like it's still, in a way, it makes the marketplace better for them because I think good agents will thrive, good agents will still get paid, and a lot of agents who were just kind of living off these richly undeserved agent commissions will not thrive.

All right, this week we've also got updates in AI, sending tech companies in two different directions. We're going to kick off looking at Adobe here, Andy. Company reported earlier this week, results were good, but it seemed like the guidance and the general outlook on how AI might be affecting the business, kind of has the market concerned. Yeah, Dylan, it's kind of like that sort of Domenclays hanging over Adobe AI is, just waiting for that string to catch to end up doing some serious damage to this company. Yet, this is a company that's been investing in AI for a long time. Their Firefly solution, since it launched now has more than $6.5 billion images created.

So they're investing in this space, and they talk a lot about this. However, even though that quarter was really quite good, revenues up 11%, adjusted earnings per share, up 18%. They did have to pay a billion dollar fee for the Figma. transaction getting canceled. Their digital media revenue was up 12%. Their ending annual recurring revenue, which is very important when you think about this business, up 14%. The document cloud business, which is a lot of their part of their solutions and part of this package, was up 23%. So that's really impressive. Their digital experience revenue, that's the new marketing business. They've been growing. That was up 10% with remaining performance obligations, up 16%. So the quarter was all really

positive, very good. However, it was all in the conversation about the guide in their future revenues, thinking about the bookings, and how artificial intelligence is or is not impacting their business, especially it's things like Open AI SOAR, which is their text of video creating device and how much that's impacting, not just creating videos and imaging, but also giving clients the ability to edit those. So lots of conversations around what that means, for their business. And they didn't come out very enthusiastic about the guide going forward. Lots of conversations around with the analysts about what this means. At the minutia, at the timings at this quarter, next quarter, a lot of concerns that so much of the growth for the

year is going to be back-ended into the second half. And so clearly you see the stock reacting, gosh, more down 13 percent as we were going to tape this. So the market clearly having some discussions and some hesitations about Adobe, which is the leader in this space. And by the the stock has done very well over the last year. So I think the multiple got maybe a little ahead of itself, and this is some of the pullback we're seeing. Kind of a different story with AI over at Oracle. This is a company that is catching the tailwinds of AI. Matt shares up 10% this week following the company's fiscal Q3 report. Thanks in large part to demand for the company's cloud offerings. Absolutely. I mean, if you look at the headlines,

revenue up 7%, adjusted EPS up 16%, both better than expected. But the two likely reasons, and you hit one of them, the stock has been up so much. First, Oracle's remaining performance obligation, RPO, and you mentioned this for Adobe as well. This is basically sales that Oracle is contractually obligating to fulfill, but hasn't you recognized as revenue? Or if you're a simple investor like me, it's called Backlog. That's up to $80 billion, 29% year-over-year. So that's just revenue growth is going to continue to be fairly robust going forward for Oracle. But the cloud revenue for Oracle, 25% year-over-year, cloud infrastructure business, 49% increase year-over-year. That's the piece that really competes with the bigger cloud providers like

ADWS, Google Cloud, Microsoft's Azure. So you can conclude right there that Oracle is gaining market share. And the big reason for that is CEO's Stafford Cat's demand for Oracle's artificial intelligence, cloud capabilities, far exceeding supply. So to address this, Oracle actually signed a new agreement with Nvidia in the quarter, investing heavily in opening and expanding its data center network. So the AI plug-in here for Oracle is very real, very robust, and it's got investors a lot, really excited about the business, obviously. Matt, right there, you name-checked a lot of the big companies and brands that we associate with cloud discussion. Microsoft, Alphabet, Amazon, we have generally left Oracle out of the

conversation for the big cloud players. Do you feel like we need to start bringing them into that group? I think so. This might eventually become a big four with Oracle, because if you think about Oracle, all the other three companies that you mentioned all have big leads, big market chairs, but they're also doing very different things in a lot of different markets. Amazon in particular, Alphabet, of course, with advertising and YouTube. Oracle, this is Oracle's business. I mean, database networking, cloud infrastructure is their business. It's their focus.

I think they're going to continue to gain market share. All right. Coming up after the break, over at Under Armour, it's Meet the New Boss, same as the old boss. Stay right here. This is Motley Full Money. Welcome back to Motley Full Money. I'm Dylan Lewis, joined in studio with Matt Argusinger and Andy Cross. We've got a rundown on retail and apparel, and we're going to start things off with William Sonoma.

A huge week for them, Andy. He shares up 18% following the company's earnings release, even though net income declined year-over-year and revenue is basically flat. Andy, what's going on here? Well, on the earnings per share, because they buy back so much stock, it was actually up a little bit, just 3%, but far ahead of analyst estimates. And the sales, while down 7%, again, ahead of estimates, was much better than how management had guided. Laura Alba has been leading Williamsona for so many years so successfully is, I think, very conservative when she thinks about running this company, she and her team. So been talking about the challenging market. We're having comp sales down almost 7%.

That was better than two years ago, but worse than a year ago. The four-year comp, when you go back four years, Williamsona likes to focus on that pre-term. pandemic, they were up almost 30%. I mentioned the earnings per share. Gross margins where they won, Dylan, this quarter. Higher merchandise margins, lower supply costs. William Sonoma has been really effective

at managing their supply costs, being very efficient as how they are taking out more and more costs from their supply chain, how the pricing is starting to impact that. And they've been talking about that for the past year, which is one reason why the stock has done so well. That allows them to get more efficient when it comes to gross margin up

at 46%, sorry, at 40, per 6% versus 41% a year ago. Merchandise, the inventories were down 14%. So again, they're just managing this business, blocking and tackling very well. Operating cash flow was up 60% for the year, but because they've been so efficient on their capital expenditure, free cash flow more than doubled, that allowed them to announce a 26% increase in the dividend certainly helps with the stock price performing so well. Even though comps, really for the year, were basically down across the board.

and for the quarter. Andy, this is probably not a company that a lot of people necessarily have on their radar, and it is to their detriment. Shares up 140% over the last 12 months. It's been an incredible performer. The stock is currently at all-time highs. For people that maybe haven't been following this business, do you feel like the valuation is in a good spot, or do you think it's getting a little rich? So here's just some context behind that. And I'm a fan of William Sonoma and a shareholder. I've recommended the stop. We recommended the stock in lots of different spots here at the Mali-Foula. So the market cap is more than $18 billion. It sells at around an earnings multiple of around 20 times. Historically, their earnings multiple is kind of more in the

kind of low double digits. So call it like the 12, 13, 15 times range. When it got so cheap, it got down a single digits, which is one reason why the stock has done so well. So I think maybe don't, if you want to nibble, fine. Don't go all rush in. But put it on your watch list, certainly if you don't have it as one to keep an eye on. We have a less glamorous story going on over at Under Armour News out this week that founder Kevin Plank will be stepping back into the CEO role. And Matt, the market did not seem too excited about it. Not at all, Dylan.

The stock sold off pretty hard. And I think there's a few reasons for this, which we'll get into. One, you know, it's interesting. The current, or now former CEO, Stephanie Linnertz, she was only on the job for about a year, and she was in the first year of what she thought was going to be a three-year turnaround for the business. So, clearly, that turnaround is not happening to the satisfaction of the board and probably to a lot of investors. But I just found the press release from Under Armour, very short, very vague.

I felt like this needed a letter. This needed a letter from Kevin Plank saying why he's coming back, why he thinks it's important for him to step back into the CEO role. We didn't get that. We just got a pretty short press release. That's interesting. And if you look at Under Armour stock, I mean, it's been stuck in the low single digits for what seems like forever.

And so maybe there's a little bit of a desperation here. but you have to remember how Plank left the CEO spot in 2019. I mean, putting aside his various personal scandals, he didn't leave the company in exactly a great state. I mean, revenue growth had already flatlined for a few years. He made several poor acquisitions to try to digitize the brand. Inventory hadn't been managed well. They failed to gain traction in the at-leisure market,

which is, I feel like they basically invented it, yet they ceded that to kind of Lula Lemon and Nike and others. So this isn't Steve Jobs coming back through the door. This is not Howard Schultz coming in or Michael Dell coming back, a founder that's going to come back and lead the company to glory. I think that's why the market has taken a very cautious look here, saying this is a CEO with a pretty tumultuous tenure at the end. Coming back, can the turnaround really happen now? Yeah, Matt, I have not sold very many stocks that I've owned.

And when I have, almost without exception, it has been the wrong decision. The exception to that is underwent. I sold my shares, I think, when it was in the mid-teens. And this business has not managed to get back on track. It's down about 50% from then. Recently, shares are at their lowest level in almost a decade. What does the return to normal even look like for this business? I don't know, Dylan.

Unfortunately, I am still a shareholder and Underarmouth throughout. And you say the stock's a 10-year low. I looked at it. It's about a 17-year low in the stock price. But, you know, this is a situation where I step back and I say, okay, wait a second. How much worse can this actually get? Because if you look at Under Armour's stock,

It's trading for about 0.6 times revenue. For comparison, Nike trades at three times revenue. Yeah, the stocks at a 17-year low. This is a company that still generates healthy cash from operations. I mean, we were talking about before the show. The brand, I think, has to have some equity value, right? That's probably greater or somewhere in the vicinity of $3 billion, which is its market cap.

So maybe it can't get worse, and maybe, just maybe, Kevin Plank finds a little bit of that entrepreneurial magic he had early on in Under Armour, and three years from now, four years from now, we're looking at Under Armored. It's a $25 stock. Six dangerous words in investing. How much lower can this go? Just be mindful of that. You're pumping the brakes there a little bit there, Andy. Be cautious there. All right, we're going to wrap the company updates with a look at ALTA. Andy shares the cosmetic company down 5% after earnings. What's the story here? Yeah, it's interesting. The quarter was actually pretty good.

It wasn't anything to really crow about. Revenues were up almost temperate. percent earnings at $8.8. Ahead of estimates, so that was actually quite strong. Their comp sales were at 2.5 percent, but that was versus 16 percent a year ago. So a pretty good deceleration and a little bit lower than the estimates, which I think is what has the stock lower. Transactions up 4.5 percent, but pricing or average cost of the goods that someone buys down almost 2 percent. The gross margin was up a little bit, lower shipping, better supply chain costs, same thing as we saw with William Sonoma. I don't think quite as effective at Alta, but a little bit better, but lower on the merchandise margin, which was different than what we saw at William Sonoma.

Sales gross and operating margin with down the cost down at 23.1% versus 23.6%. So they're doing a pretty good job of managing the cost that boosted the operating margin to 14.5% versus 13.9%. A lot of numbers there, but ultimately they've done a pretty good job managing the cost in a well, the kind of like slower growth business, skincare very much. One interesting little tidbit there, they talked about the sales for the makeup category, decreased in low single-digit range. They saw softness in prestige cosmetics was partially offset by growth in mass makeup. And they pointed to Elf Beauty as one of the ones that are doing pretty well at Alda.

You know, it's interesting. I haven't taken a look at the quarter, but I'm wondering if they said anything about shrink or anything like that, Andy, because there was a, you know, I don't know if you guys caught it. I only caught a little bit of it, but CNBC did this pretty large report this past week about, you know, retail theft. And Ulta, I can't remember the exact story, but I guess there was a ring of, you know, resellers who had stolen, I mean, millions of dollars. And Alta, they named Alta as one of the big, you know, victims here of just, you know, stealing this high margin makeup, reselling it, you know, pocketing the difference. And I know they made some arrests in it, but it was a remarkable story. Yeah, it was a huge enterprise.

actually a criminal enterprise. Now, I think this quarter didn't get nearly the attention, as we've seen in the past. So I think you've seen to see that might, there's starting a peak a little bit in there in their talking about shrink, I think. But it still continues to be an issue. The guidance, by the way, just very quickly, is the comp sales at 4 to 5% versus 5.7% that's for the full year guided ahead. So comp sales for this year ahead, not quite as good as last year.

I'm glad you brought up the shrink story there, Matt, because I remember looking at Target's results earlier this earning season, And I think it was two quarters ago. Shrink was the narrative. They made that statement. I think it was a $500 million adjustment to some of the numbers that they were looking out for the year, saying that shrink was the culprit. And we didn't see a lot of headlines on that. We didn't see a lot of discussion of that with the most recent earnings release. But if you actually dig into management's calls, it came up 12 times.

So it is still a story for some of these retailers, and we're still hearing management talk about it. But it seems like one of those things that has kind of crested as a wave already when it comes to financial media. Well, I guess that's, you know, when you read, when CNBC does a special report or, you know, a special documentary and something, it usually is, as Andy alluded to, it's kind of like the peak. But, you know, it might be one of those situations where hopefully companies are figuring it out and moving on. All right, Matt Argusinger, Andy Cross, fellas, we're going to see you guys a little bit later in the show. Up next, we dig into the turmoil at Paramount and the possible paths forward for the entertainment giant. Stay right here. You're listening to Motley Full Money.

Back to Motley Full Money. I'm Dylan Lewis. Award season is over, but there's still plenty of drama unfolds. in Hollywood. Motley Full Money's Ricky Mulvey caught up with Bloomberg Entertainment reporter Lucas Shaw for a look at the business of streaming, the power of incentives, and corporate infighting at Paramount. It's a tough time to be a movie company, but do you think there's starting to be a greater willingness to go for those singles and doubles now that, I mean, there's some adult dramas that are doing poorly. Ferrari did not make money, but what is it, anyone but you, which was a romantic comedy made more than $200 million at the box office. Like A-20,

84 eeked out a profit with Ironclaw. So, like, is that door continuing to open a little bit for those adult dramas that used to just go to streaming? I get very mixed signals on this, and I think it's hard to answer that holistically. You know, I don't think that these companies are giving up the tent pole strategy, which is, let's have a handful of really expensive, really big movies, because when those hit, they make so much money that it, pays for everything else. And they can't really move away from that for that reason. But you do see certain studios, I think Universal, Sony and Warner Brothers, foremost among them, making a wide range of movies, believing that there is value in having, to use your metaphor, a single or a double,

in addition to the home run. And if you look at the types of programming that Netflix is going to do, I think they are going to take fewer really big swings and make more movies that cost in the kind of $20, $200 million range, which is, I don't know, they're just going to be a bunch of dramas. I think it's going to be, you know, comedy and thriller and action and things like that. But I do think you'll see a good number of movies made that are sort of in that middle that the big studios have really have really forsaken over the last several years. Yeah, and I want to move to Paramount, which you covered in a story called How Paramount became a cautionary tale of the streaming wars. And it seems like their only option right now is to make, or the only thing on their upcoming slate seems to be those big tent pole films after the Bob Marley movie and they did Mean Girls, but then upcoming, it seems that they have, it's just, it's like a Transformers movie, they're going to do a Paw Patrol movie, and it's not these small movies.

They might have trouble attracting creators right now to, get those smaller to mid-sized movies for their studio. Yeah, I mean, the problems at Paramount have made it very hard for that studio to do deals. I have spoken with executives there who've been very, I've been pleasantly surprised, I should say, at some of the talent who've re-uped their relationships with the studio, including John Krasinski, the filmmaker of A Quiet Place. But you talk to a lot of producers, and they're pretty clear that Paramount would be their last choice, both because it's a company that just hasn't made that many movies,

and other than basically Top Gun, hasn't delivered a lot of huge hits, but I think more than anything, because of the uncertainty at the corporate level, where you have a controlling shareholder in Sherry Redstone who pretty clearly would like to sell the business, is looking for buyers, is kind of struggling to find buyers, and she's looking to exit, not because this is a great time to sell,

and you can get a great deal, but because the business has been declining, and she wants to kind of get out while she still can. Yeah, can you take us into the informal auction sort of going on for Paramount right now? Where's that sit? Right now, they have been talking to, actually, you know what, let's take it back a step. I think Sherry decided that she wanted to sell at some point last year. Some people say over the summer, some people say in the fall. Either way, she had gotten, she had been approached over the,

years by a few parties. And she really started late last year talking to David Ellison, who runs a company called Skydance, whose father is Larry Ellison, one of the richest men in the world. And they've already do a lot of business together, Larry L. Excuse me, David Ellison's company is a co-financer and producer of Top Gun, of the Mission Impossible movies, of Star Trek movies of all Paramount's biggest franchises. And David Ellison would like to buy Sherry Redstone out of National Amusements, which is the family holding company, a movie theater shame that controls, that has the stake in Paramount, and then merge his company with Paramount. The challenge with this is that while that deals great for Sherry Redstone, it's not necessarily

great for Paramount. I think there's some people who are skeptical about why it would want to merge with Skydance other than because David Ellison wants them to, and there would certainly be a dispute overvaluation. So you've got Sherry Ellison, excuse me, Sherry Ellison, she's got Sherry Redstone and her camp looking to see. if there are other bidders, because anytime you're trying to sell, you want to have multiple bidders so you can drive up the price. So she's talked to David Zazlab, the CEO of Warner Brothers Discovery. She's talked to Apollo, the private equity firm, and she's talked to some other potential buyers. At the same time, you've got the company of Paramount with advisors looking to see

if there are other offers because they don't necessarily love this David Ellison idea. And that's kind of the state of play. We know that David Ellison is interested and has at least made a preliminary offer. We know there have been conversations with a couple of other parties, but it's not clear that there is another tangible offer or real buyer on the table right now for the company. And so it's sort of an open question as to whether they're going to get a deal done. Yeah. In the past, Netflix was a part of the conversation. Warner Brothers Discovery looked at it briefly. It should be noted, just on that point, that yes, Netflix has been part of the conversation, But Netflix was part of the conversation so much as it wanted to buy just the studio, Paramount Pictures.

And I think there are a lot of entities that would be happy to buy just the studio because it's got a good library that they could exploit in film and television. It's honestly great real estate that a lot in Hollywood alone is worth billions of dollars. The problem is that if you're Sherry Redstone, you don't want to sell just a studio because it's your most valuable asset. And so then you're left with a bunch of stuff nobody wants. And if you're a buyer, it's the stuff nobody wants, right? don't necessarily want to take these declining cable networks. And so it's going to be interesting to see they're kind of going to share in Redstone is probably going to have to sell at a discount to unload the stuff that nobody wants so that she can,

because in order to unload the whole company. And it seems that there's been a little bit of pride when they've had offers on the table. VET was one of them where the deal is off by a billion dollars, so everybody walks away. And now Paramount may get to a point where there's no option other than the buyer that's willing to take on the company. Yeah. I mean, it's kind of crazy that they almost sold. They could have sold BET and they could have sold Showtime. That would have raised enough money between the two of them. If they did the deals, they probably could have gotten $4.5, $5 billion, that would have solved a lot of problems. They could have paid off a lot of debt. They could have funded a bunch of stuff for the

streaming service. And yeah, they just didn't want to do it. Is the Cardinal misstep that Paramount made with streaming, which is their main loser of money, just that they relate to the party? or were there other mistakes along the way? Look, they were definitely late, but that was not Cardinal Sin because, one, every, well, I guess you could, every company was late. And every company that went in is facing the same conundrum right now, whether it's Paramount or Warner Brothers Discovery or Disney or in a lesser way Comcast because they're a more diversified enterprise.

But entities that have a bunch of cable networks are just watching as they fall into the sea and their streaming service is not rising fast enough. So should they have moved faster? Yes, Disney moved a little bit faster, having a lot of the same problems. I think the issue is that, look, this was always going to be painful. You have this incredibly lucrative business that was going away. And entities that made a lot of money from that business were not going to rush to kill it, right? It's kind of the classic innovators dilemma that people talk about. Netflix was able to come in as a new player and disrupt this business, and none of the competition moved fast or moved quickly enough to respond. I do think that Paramount has made some

specific missteps. I mean, you look at it and it's just, it took two, I should also say, Paramount was hamstrung by kind of the corporate infighting. You know, there were two separate entities, CBS and Biacom that the Redstone's controlled, and Sherry Redstone had to spend many years fighting, to cement family control over them in disputes with management of both companies. When you did actually put it together, that then took a while to make happen. So there were a lot of hurdles to making it work. And then they spent a lot of money really quickly. They didn't think about it.

All these companies sort of made the same mistake. They had to try to compress 15 years of Netflix's building into a short time frame. And we can debate, is there any way in which that would have gone well? or was it just a function of going late? And I'm not sure the answer. I'm sure that there were sounder strategies to these companies. I also think that had they acted five years earlier, there's no guarantee it would have worked.

On Paramount, Sherry Redstone wants a buyer. What happens if Paramount doesn't find a buyer? You know, it's a good question. It's the one facing all of these enterprises. then Sherry faces a couple of options. She can stay the course and believe that we've sort of suffered maximum pain right now, and the streaming service is going to keep growing, we're going to manage costs, and we'll figure it out. I don't think Wall Street would be very happy to hear that because it isn't working right now.

There's a strategy where they resort to selling individual pieces again, or where they just sort of cut costs a bit more. And then there's a more dramatic one, which some have proposed, which I still don't see them doing, but this notion of them becoming a pure arms dealer, which means that they shut down the streaming service and just be a studio and sell to others. But considering that that company makes basically all of its money

from cable networks and to some extent from streaming, that's where most of the employees are. that would enable or that would require, I should say, you know, gutting the business. You'd fire 50 to 80 percent of the staff, which is why I see that as unlikely. But she'll have to make some big changes if she cuts it. Because if they come out and say, you know, they haven't, I guess they haven't officially said that they're for sale. But if there was a bunch of coverage basically saying that the deal talks were over, their stock's going to tank. Yeah. I think there's an also an interesting angle in this with the power of incentives. And I want to talk about David Zazlov in a sec.

But in this case, there was sort of an early misstep from this CEO, Philippe Damann, who this guy was making so much money in stock awards. So he was maybe incentivized to boost the stock price. And then in order to do so, he's buying back stock, which means they're not investing into content and maybe growing the business for the long term. Yeah. I mean, Philippe Daman, really one of the worst media CEOs of the last 20-plus years, I would say. Maybe, maybe ever. He took what was one of the most vibrant and great businesses in Viacom, drove it into the ground. He didn't understand Netflix. He didn't understand YouTube. And rather than invest a bunch of money in streaming, which he should have done because they had the

networks that were most exposed, right? MTV, Comedy Central, these speak to Nickelodeon. They speak to young people. So you could see the trends early. And instead of investing in streaming, he just bought back a bunch of stock. And he did whatever he could to prop up. the share price, and it was really destructive to the enterprise long term. And all the mistakes that Sherry Redstone and Bob Backish may or may not have made, Philippe de Mont, and Sumner Redstone, who was in charge of the company at the time, who was the owner, they deserve the largest share of the blame, no question. So I wonder if there's an incentive problem right now at Warner Brothers discovery with, and you've talked about it on the town, where David Zazlov has a, like, compensation

award tied to the free cash flow of the business. And I was talking to one of our investment analysts, Tim Byers, earlier. And basically, like, that's uncommon. That's an uncommon way to incentivize a CEO. And feel free to break down this theory. But now you have HBO or the company that's essentially shelved movies, one of which recently was the Wiley Coyote versus Acme movie. You get a tax loss on that, which is going to boost.

you get the immediate boost of free cash flow, but then you might be killing ideas, drawing away creators. Right. It's the question whether he's incentivized to just cut costs to make cash flow look good and get himself paid more rather than act in the best interest of the company. It's a tough press. You know, look, I don't think that David Zazov made free cash, and the board made free cash flow the most important metric for his pay just because they knew that they were going to cut costs. I think they wanted to set the target. We have all this debt, and we need to save money to pay it off. And so how are we going to incentivize people to do that?

We're going to incentivize them to generate free cash flow. And that's what they did. That being said, it's just a terrible look for this guy who's about to get paid a ton of money, even though his stock is in the toilet. Nobody thinks the company's performing very well. And, oh, by the way, that sort of free cash flow being the metric for performance and how people are paid, that doesn't apply to most of the employees of that company. It mostly applies to David Zazlev and maybe the inner circle.

So, yeah, they're really perverse, perverse incentives there. Listeners, you can catch Lucas Shaw on X. He is at Lucas underscore Shaw. Coming up after the break, Andy Cross and Matt Argersinger return with a couple stocks on their radar. Stay right here. You're listening to Motley Full Money. ride, my friend, but we didn't see no one. 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 Dylan Lewis, joined again by Matt Argusinger and Andy Cross. If you went all in on the Stanley Tumblr craze, you're going to have to make room in your cupboard for another weird household item that has caught fire. Andy, Grocer Trader Joe's began selling mini tote bags for $3 in March. They are now selling for hundreds of dollars online. What are you make of this new consumer craze?

How many is mini? On the per square inch of tote bags, this has got to be a record if they're like really, really small. I tell you, we just bought a Stanley for $35 at REI, and those things are some serious piece of hardware. So we're now part of the Stanley craze. Actually, I think we have two of them now at the house. So I can understand that. I mean, if it's min, I just don't know how small can you, I mean, when I go to Trader Joe's, I buy a lot of stuff. So, I'm bringing, like, tote bags, like hanging them on my shoulder, pulling them out of my jackets, all that stuff.

Like, minis are not really helping me very much. I think you timed the market well on that. I think you got in on the tumblers slightly after the peak and maybe you have a good cost basis there. Matt, what do you make of these consumer crazes? I can't speak to this. I mean, I'm a guy who, like, takes brown bags, used bags to the grocery store and reuses them. So I can't believe people are paying $100 for these tote bags. I cannot believe it.

You know, I'm just happy people are using reusable bags. That makes me happen. I'll take that. All right, let's get over to stocks on our radar. Our man behind the glass, Dan Boyd, is going to hit you with a question. Matt, you're up first this week. What are you looking at? Okay, weird special situation here.

Equity Commonwealth, the ticker is EQC. So Equity Commonwealth, it's a $2 billion real estate investment trust with $2.2 billion in net cash. So do the math there. Yes, it's trading below the cash on its balance sheet. Now, it does own four office buildings that are cash flowing, but materially, they're a very small part of the story here. Management is essentially sitting on $2.2 billion in cash, collecting 5%, you know, with treasuries, which is good, but waiting to make a transformative investment for the business.

The problem is they've been sitting on their hands for quite a while now. Investors are starting to get a little impatient, and now there's a hedge fund called Land and Buildings Investment Management LLC. That's a mouthful, but they own 3% of EQC shares, and they've submitted a letter demanding that EQC actually liquidate the business because under their model, liquidating the business would actually result in a net asset value about 20% above where EQC is trading in the public markets. So we'll have to see if this gets any traction, but I think it's a fascinating situation to watch

over the next few months. Dan, a special situation with Equity Commonwealth. What's your question? Special situation is code for it doesn't make any dang sense. So I'm sorry, are you trying to sell us on cash or off? office buildings, Maddie. I think cash, but it sounds like I'm actually trying to sell Dan a tote bag from Trader Joe's. All right, Andy, you're going to be able to beat that?

What's on your radar? I got Landstar guys, LSTR and Asset Light Logistics Company that generates more than $5 billion in sales, market cap about almost $7 billion, more cash than debt. It's an asset-light business, so it doesn't really own a lot of the assets. It uses technology to help clients, with more than 25,000 customers across 1,100 independent agents, basically get our goods from point A to point Z, mostly through intermodal trucking, van shipments, but also some air and freight. So they help the make sense of all the logistics challenges to be able to get all our stuff

from when we buy it to when we want to consume it. Now, it's been a tough two years post-pandemic because we're not buying as much stuff. inventories are going lower. Companies are trying to run down all those inventories. So you're just not seeing the volumes come across their networks. That's been a big hit to their sales and to their profits. But this is a very talented management team. They focus very heavily in returns on capital and free cash flow.

So ultimately, in a pretty good spot, I think, for Landstar. Dan, a question about Landstar. First off, absolutely gorgeous stock chart here for the maximum time since they came out like 1993 or whatever, just up and to the right. You love to see it. But this is one of those companies where you read about it and you've got to read four paragraphs to figure out that they make technology or make programming to help people do trucking. So, you know, not crazy about this company. But that's the magic behind it, Dan. Two tough businesses this week, Dan. Which one's going on your watch list? Well, I'm not going with whatever Mattie said. Come on.

I don't even know what he was talking about. Landstar wins. Matt, Andy, appreciate you being here. That's going to do it for us. We'll see you next time. Thank you.