Motley Fool Money - 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

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Mickey is now the people's mouse. Motleyful money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motleyful analyst, Asset Sharma. Asset, 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 kind of a curious piece of news. January 1st marked the beginning of a lot of things, and in Disney's case, in particular,

Osset, 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, Osset, 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. Yeah, and 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. And, you know, 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. And 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 sort of interesting. Mickey is a really sort of rough, edged, roke type character compared to 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. So it's good to see this early version roll off and let the internet, and by the internet, Dylan, you know, 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 will 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. Asset, 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. 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, There's something like 477,000 deliveries in the last quarter of the year. And 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, so Tesla's been discounting models, then retracting some of those discounts. They've been leaning heavily into price promotions. They 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 US, into Germany, China, Mexico production plant is, 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.

And that's maybe not a competitive mode, 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. and they're planning and extend it out their times to move from their current production states to EV production states. And why is that?

This stuff is hard. So Tesla still has an edge. Say what you will, about the company, its margins, its prospects, Elon Musk. This is sort of 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. And certainly in our home market here in the United States, it is Tesla by a mile. 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 20203 in deliveries. Now, we don't have BYD cars out here on the roads. They're not really for sale in the United States. But how do you process another upstart EV maker starting to kind of catch up to Tesla and nip out of Teals? B.D, 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 and 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. And we've discussed those on Motley Fool Money over the last year. But the just 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. So, 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. So you're going to see less of the subsidy piece push vehicle sales in China, but BYD pulled a Tesla last year. I mean, 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 US a lot of regulatory skepticism after seeing what happened with the semiconductor landscape, the solar landscape over the last few decades, and in the context of this sort of trade war and geopolitical power match between the US, 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 B.D, NEO, some other auto manufacturers, only hold 8% share in the EU just now.

And the EU is actively investigating the subsidy piece of the Chinese market to see if that's unfair competition in China. So I think, you know, 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. All right, Asit, as we mentioned at the top of the show, it is both of our first times on the air in 2024. And the beginning of the year is not just when we see copyright protections roll off. It's also kind of 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. So 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 super high end, but it certainly is a premium product. Sonos hit a wall in 2022, late 2022 and throughout 2023, because they are a performance.

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 to slow down. The company is now looking to introduce the next wave of its multi-year product cycle in 2024, and 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. So it's sort of cheap if sales pick up, if earnings pick up.

This market is widely acknowledged to be the headphone market. 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 why I'd love your advice. The headphone market is really filled with great players, from Apple to Bose to Sony to Bowers and Wilkins.

So even though this is pretty high quality stuff, the question in my mind is, you know, 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? So tell me about your experience, Dylan, and crush my thesis, please. Well, I was going to say, I mean, you're dead on there. Yeah, I'm a customer, and this company for a long time has lived in the space of, for me, great product. I'm not 100% sure on the business.

And the reason for that is they are a little bit of a little bit of a very good. 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 audio files, maybe not the market. I do wonder, though, if they are looking to get into headphones and that kinds of things, if there is a real opportunity for them, or particularly in the United States, where we see, you know, iPhone and iOS adoption so high, people may go for more seamless, integrated products like Apple's AirPods that kind of play into an ecosystem they're already a part of. So I'm someone who has AirPods and a Sonos, so I am 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. I mean, Sonos has run into issues with Google. They have sued Alphabet a few years ago because they claimed that Google was infringed. with its own speakers on their technology. So they're up against very, very robust competition with huge balance sheets. And they're a small niche player, 2 billion buck players. So 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. And in the meantime, I'll just be catching you on the episodes that I don't host on my son-house here at home, Asset. Awesome. Thanks, man. Some of the best lessons don't come from a classroom. They come from experience. On The Power of Advice, a new podcast series from Capital Group, you'll hear from CEOs, investors, and founders about how they built careers, took risks, and reinvented themselves. If you're starting your own journey, this is the kind of advice you won't want to miss.

Available wherever you get your podcast, published by Capital Client Group, Inc. We've got more Stock Talk ahead, but first, listeners, a reminder that by day analysts like Asset are part of a team, making stocks and providing coverage for the Motley Fool suite of premium investing services. If you're looking for investing ideas, we're offering Motley Fool money listeners a discount on our flagship service, Stock Advisor. The Stock Advisor, you get two stock recommendations per month, access to analysts like Asset Sharma, and our members-only live stream Motley Fool Live, as well as Stock Advisor's full scorecard

of stocks, generating market-beating returns. To learn more, head to Fool.com slash MFM 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 Wollard caught up with Motley Fool analyst, Kirsten Gera, for a look at some recent winners that could keep winning in 2024. I'm Deidre Wollard here with Motleyful analyst, Kirsten Gera, and we're going to talk about some of the ways to consider winners in your portfolio. Kristen, how are you doing today? I'm doing great. So, 2023 brought a new phrase to our investing lexicon.

We had the Fang before, then we got the Monomina, and now we have the Magnificent Seven, which is Apple, Amazon, Alphabet, Meta, Microsoft, Invidia, 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. So, Kirsten, how are you considering the role of the Magnificent Seven in a portfolio? I think sometimes investors get caught up in the newer story.

there's an inclination to want something exciting, something kind of 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, it 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. So there may be more exciting than some people think. A great defense, after all, can sometimes return it all the way for a touchdown. And so they serve multiple purposes there. So there's a lot of reliability. of reliability and steady returns to be expected from the Magnificent 7. But when you've got

resources and influence like these massive companies do, there's a lot of room for upside as well. So with the Magnificent 7, 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. And 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 kind of 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. So it was far bigger than anyone really expected. So 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 kind of 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 durable advantage. Because when you're investing for the long term, as we all are, right, 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 sort of ran directly into a green field 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 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 had, you started off with, we're 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's 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, 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. So that's a really great thing. But with the consumer side, it's always a little tricky. The consumer is so fickle. So trends do end. So what could potentially go wrong with Duolingo as you watch it? Yeah, I'm one of those fickle users, too. Duo 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. So 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 mind share 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. that does make it harder to unseat. Yeah, yeah, absolutely. I think the social aspect of the business is a surprising part of it.

I know you've talked before about Spotify, too, 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 the business itself, but it definitely contributes to the thesis. Yeah, absolutely. It's not the strongest network in the world. It's not a Facebook, for example, but it's certainly there. Yeah, absolutely. Well, in 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? 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, hmm, 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. So 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.