Chris Hill: Hey, everyone! Thanks for watching!
We’re coming to you from Fool Global Headquarters in Alexandria, Virginia. I’m Chris Hill, joined
by senior analyst Aaron Bush. Thanks for being here! Aaron Bush: Thanks for having me, Chris! Hill: We got a lot to get to. We’re going
to be taking your questions on all kinds of stocks. But we’re going to start with the
future of entertainment. You can’t talk entertainment without talking about Netflix. Netflix has
done more for streaming video over the past decade than pretty much any company out there.
We’re big fans of Netflix, both the business and the stock. It’s been recommended in a
bunch of different services here at The Motley Fool. But ironically, the world that Netflix
has helped to create has opened the door to all these other companies, Aaron. You and
your colleagues have been studying an entire industry that is gearing up to take
over the next generation of entertainment. By the way, if you are not a member of our
Rule Breakers service, you’re getting a sneak peek today. We’re going to be talking about
two stocks in particular on this broadcast. We’ve got a full report laying out that,
as well as a few other stocks that play into this trend. You can find that by going to
fool.com/yt. Go ahead and give us your e-mail address, and we will send you that report.
If you’re already a member of Rule Breakers, just click the link below this video,
it’s in the description there. Click the link for members. Let’s get to the stocks. We’re going to start with Take-Two Interactive, which is a name
that I think maybe people don’t know, Take-Two Interactive, but they certainly know the
brands underneath it. I’ll just start with Grand Theft Auto. Bush: Yeah. Take-Two Interactive, I think they’re about a $10 billion company.
Grand Theft Auto is their biggest franchise. More recently, some people might be familiar with
Red Dead Redemption 2, the latest blockbuster game that they published. And when you think
about the past of video games and how things have changed, in the past, maybe 10 years ago,
there were lots of different types of games, but it was pretty narrow in what you
would get. It was a basic story, maybe 10 hours, some sports games. And over time, the
spectrum of video games has expanded. On one side, you have mobile and these free-to-play games.
On the other side, you have these major blockbuster games, almost 40 hours,
almost like a movie. People pay $60 for it, it’s a massive world. Red Dead Redemption 2 is
probably the most impressive game like that that we’ve seen in a while. There’s really
no surprise when you put it in that context that this game broke entertainment records.
In its first weekend, it made something like $725 million. And that’s just one game.
Grand Theft Auto was also a record holder in the past. Take-Two has some
really impressive franchises. They also have NBA2K, WWE, lots of other brands.
It’s a $10 billion company, which is still smaller than a lot of the other publishers
in the U.S., but working on some interesting stuff. Hill: You look at Take-Two Interactive’s stock, it’s basically flat over the past year.
But, widen that out, look over the past five years, this thing’s up more than 500%.
Bush: Yeah. They’ve been underestimated for a really long time. Part of that is just video
game companies being underestimated. The industry has changed so much. If you think about five
years ago to today, another thing that has changed is digital. These video game companies
are selling more and more digital products, which is higher margin, so more money goes
to the bottom line; but also, it opens up the opportunity for recurring purchases. Instead
of just buying a game once, people can continue to buy across many weeks, many months of playing
the same game. Take-Two has benefited from that as well lately.
Hill: Another stock I want to talk about is Tencent Holdings. A little harder to wrap
your head around, maybe in part because of the size of the company and all the things
they have going on. But when it comes to the video game space,
Tencent is absolutely a player. Bush: They are the largest video game company
in the world, which is crazy because that’s just one piece of their business. They’re just
casually the largest video gaming company in the world. The reason why is,
they started publishing lots of games in China. Because they also own WeChat, which is the most
dominant social media network in China as well, that has been a good source of low customer
acquisition costs for promoting tons of their games. When you have that to your advantage, your games
start getting popular, you start producing tons of money. What they’ve been able to do
is start acquiring, making deals left and right for all these different video game companies.
If you think about some other big names out there like Activision, Ubisoft, Tencent has
stake in it. They own League of Legends, which is the biggest e-sport in the world.
More recently, in the past year or so, they bought into like 50% of Epic Games, which is the
company behind Fortnite. How can you not mention Fortnite, which has over 200 million registered
players now? Tencent is a monster. Also, for any company that wants to operate in video
games in China, you have to partner, and Tencent is the No. 1 partner.
They’re looking very strong. Hill: As you said, Tencent is this massive
company with all these different parts to it. Within the last six months or so, Tencent
spun out their music business. As someone who looks at the video game industry,
do you look at Tencent’s video business and think to yourself, “I wish they would do the same
with their video business”? Or do you like it where it is right now, as part of the umbrella?
Bush: The video business? The music business? I guess I like all of these businesses.
So, the music business is tough. It’s hard to make as much money in music because you have
to pay for every single time a song is played. Video games is a great business because it
can be very high-margin. A lot of these games still are free to play, but people are spending
tons of money just on character skins or new weapons or whatever the case. I think Tencent
has an opportunity to take its learnings about what has worked in other mediums and carry
it forward, and also what has worked on the regulatory side. In China, there are a lot
of issues in that. And with video games over the past year, there have been some tough
hurdles for Tencent to overcome. They’re pulling through, though, and I think it’ll continue
to get better. But a lot of those learnings can translate to other realms.
Hill: It’s pretty interesting, when you look at shares of Tencent Holdings, kind of a similar
story to what we saw with Take-Two Interactive. Basically flat over the past year. But over
the past years, this thing is up roughly 400%. Do you look at what’s happened with these
two stocks over the past year, and think yourself, “Boy, this represents a nice buying opportunity”?
Bush: Yeah. Over the past year, I’ve bought shares of both of these companies, I’m pretty sure.
I like them both right now for different reasons. Tencent is just a titan of industry.
I don’t see anything right now that can easily take them down, in all of their realms — video
games, social networks. They pour a lot of those earnings into investing and lots of
startups around the world. I see them getting stronger across all of those lines.
Take-Two is investing in creating even more games, creating even better games. The whole video
game industry turning digital, e-sports, there’s just a lot of value to unlock there.
I like them both quite a bit. Hill: One of the things we like to look at
at The Motley Fool, whether it’s a given business or given industry, is the investment that’s
being made into it, and, obviously, what kind of return on investment they get. You look
at the investment in the video game industry. Yes, including these two companies, but also
as well, as you mentioned, some of the others. Activision Blizzard, you could throw
Electronic Arts in there as well. It’s funny because movies will sometimes get attention for the
budgets of the movie. But you look at a game like Red Dead Redemption 2, some of these
other games, Grand Theft Auto, are you surprised at all at the investment in these games?
Some of these companies are spending hundreds of millions of dollars on a single game.
Bush: Not really, because it pays off. When you can make $700 million in one weekend,
you really are competing with the biggest movies out there. But what’s different with
this industry from movies is, once you’ve seen a movie, you’ve seen it. Once you start
playing these video games, maybe you paid your $60 upfront, but if you liked it,
then you’ll go back and pay even more going forward. It makes a lot of sense for these companies
to be investing and getting as many people in the door as possible, because it pays off
more than it ever has in the past, keeping them around.
Hill: Alright, we’re going to get to some questions from the viewers. Thank you for
your patience. Let’s go with a question that I think plays into what we’ve been talking about.
I kicked things off talking about Netflix. We’ve got a few people who are asking,
to what extent are video game companies going to eat into Netflix’s opportunity here?
Bush: In one of the past shareholder reports Reed Hastings, CEO of Netflix, he said that
their largest competitor isn’t HBO, it’s Fortnite. In this world of entertainment, in the future
of entertainment, in terms of where people spend their times, yeah, there definitely
is more competition between these industries. When you look at what Twitch is doing,
YouTube is doing, converting people into viewers of video games just as much as players, it definitely
is competition to the Netflixes and Hulus of the world. But, there are a lot of people
in the world who have a lot of free time. A lot of these companies can be
winners side by side, I think. Hill: One more reason I think we like Netflix
is because of the leadership of Reed Hastings, his evolution as a leader, but also his recognition
of things like Fortnite. That’s the sort of thing that you could say tongue in cheek,
but he’s not kidding when he says that. Bush: Yeah. If you even think about what
Netflix is doing now, they’re starting to publish interactive shows and movies.
I could totally see that in the future becoming a much bigger thing, where people play a more
active role in what they watch. In some ways, you can see the merging of gaming and normal
video content. It’s interesting to think about. Hill: Question from Lance, who asked,
“What are your thoughts on iQiyi? It seems like they belong in this conversation, too.”
For those unfamiliar, iQiyi, sometimes referred to as the Netflix of China. They’re in the video
streaming business. What are your thoughts on iQiyi? Bush: They’re an interesting company. They’re definitely an edgier company in terms
of what their business is. You mentioned a lot of people consider them the Netflix of China.
They kind of are that, but they’re also kind of the YouTube of China. They also do some
live streaming stuff. They’re a mix of a lot of different things mixed with quality of
content. What’s really impressive about iQiyi is how quickly they’ve been able to scale
their subscribers. I forget the number off the top of my head, but it’s actually pretty
insane how quickly they’ve been able to grow their subscriber count.
What’s risky about this business, though, is how expensive content is to produce. Unlike
Netflix here, which I forget, I don’t know how much it costs now, maybe $12 or
something like that. iQiyi is more like $4, so you’re not getting that same leverage on your margin
that you see with Netflix today. They’re burning a lot of money. They’re investing in content.
But it definitely is an edgier bet, I think. Hill: Diego asks, “Tencent Holdings,
already a huge company. Is it too big already to put up big returns?”
Bush: I doubt it will put up as big of returns as it has in the past because, being a $450
billion business or something like that, it’s harder to be a 10-bagger from there. But yeah,
I can totally see this company one day being a trillion-dollar company, which is more than
a double from here. When you think about just how dominant they are in social media,
and if you really look at it, you can recognize that they have a lot of room to run in growing
the average revenue per user in their social media sphere and as they expand into all these
other areas. Out of the companies they invested in, 16 of them IPO-ed last year. I have a
feeling the amount of money that we’re going to see in their investments is only going
to grow as well. They’re still putting out really impressive growth. They’re investing
for the future. This can definitely be a much bigger company.
Hill: Alright, keep the questions coming. We love them! Thanks so much! By the way,
click the subscribe button. It’s free. We do these live Q&As every once in a while.
We love it when you join us. So go ahead and click the button.
A few people asking about Pinterest, which reported earnings just before we started.
They’re going to open lower tomorrow morning. It’s their first report as a public company.
Is Pinterest a business that’s on your radar at all? Bush: It is on my radar. When I was reading through their filings when they were about
to IPO, I was pretty impressed. I think as time goes on, Pinterest is going to be
a good business. My main issue with Pinterest is just how slow they’ve been in monetizing a
lot of their opportunity. When you think about, people go to Pinterest, and it’s a natural
thing for them to click through and buy something. Well, now Instagram is implementing a lot
of that same technology. You saw what Instagram did to Snap with Stories. I’m a little paranoid that
they could do a similar thing to Pinterest. We’ll see. Hill: It’s also a nice reminder that in general, I think, at The Motley Fool, we like to wait
and see how companies do in the public markets before jumping in. You weren’t the only analyst
here at the company who was pleasantly surprised by the S-1 filing on Pinterest, looked at
the business and thought, “OK, this might be interesting here.” But certainly, Pinterest is
not the first, nor will it be the last company, to have a good IPO, and then their
first quarterly report as a public company is a rough one.
Bush: Yeah. I think in general, it’s good to take a little bit of a step back when you
see that happen. Companies should be prepared, when they go public, to nail their first couple
of quarters. If they miss in some meaningful way — and I haven’t dug into these results yet —
then it is a bit concerning, if they thought they had things together. But you
also saw Facebook, a similar type of company, when they IPO-ed, they had a tough time for
a while, but it turns out that was a great buying opportunity. Really, just keeping in
mind the fundamentals, making sure that even though this quarter might not be up to expectations,
that they still are on track for the long term. Hill: Question from Linda, who asks, “What do you think of the Beyond Meat craze?”
Speaking of IPOs, the biggest IPO of 2019 so far, at least in terms of the opening day performance,
I think Beyond Meat closed up somewhere in the neighborhood of 165% higher. That means
someone on their investment banking team wasn’t really placing the stock correctly. To Linda’s
question, what do you think of this industry that is burgeoning now?
Bush: Well, I think craze might be the right word. It’s obviously a really interesting
company, this whole idea of vegetarian burgers that people actually like, and they’re striking
deals with lots of different partners. I do think there is absolutely something there.
The growth opportunity is there. But this isn’t a best of the best business. Food is
a lower-margin business. So, for us to see this company be priced at something like 40X
sales when it has very thin margins… when it goes profitable, if it’s 40X sales, it’s
like 400X earnings. A lot of that growth opportunity is priced in. You probably should take it
a bit careful. But you never know. There could be some amazing, massive partnership you
could see, maybe some acquisition is possible. But personally, I’m not that
interested in it right now. Hill: I’m glad you mentioned the key thing there —
Beyond Meat is still not a profitable company. One of its competitors, Impossible
Foods, is still a private company. This week, they announced they’ve raised
another $300 million in venture financing. Bush: Don’t blame them.
Hill: Yeah, don’t blame them at all. But to your point, we’ll see where all of this goes.
There’s definitely an opportunity here. There’s definitely an industry here. But like you,
there’s a price at which I would buy shares of Beyond Meat, and it’s not 40X sales.
Bush: Yeah, I’m on board with that. Hill: A couple of people asking, what are
your thoughts about cannabis stocks? Are they a no-brainer? I don’t know
that they’re a no-brainer. Bush: [laughs] Yeah, I don’t know if I’d
agree with the “no-brainer” point. I definitely think there is opportunity here. But it’s
very important to separate what is already very hyped and what is more under-the-radar.
I think you can look at a lot of these big, multi-billion-dollar marijuana companies that
are striking these hundreds of million dollar deals, when they still aren’t delivering that
much yet in terms of revenue. Those are the companies where I’m a little more skeptical.
These types of things, legalization and really building the infrastructure for an industry,
it takes time to play out. For people who are super optimistic, I think the that the
hype cycle will start to hit, and people have to reset expectations.
But just because this is a brand-new industry that is going to be massive in a legal way,
there absolutely will be new companies that come about and will become winners in ways
a lot of people aren’t expecting. You just have to be careful.
Hill: In a situation like this, some people like to think in terms of investing in an
ETF rather than try and pick an individual marijuana company. There are marijuana ETFs
out there. It’s arguably a way to reduce your risk. Is that something that
is of interest to you? Bush: That isn’t really interesting to me.
I’ve had similar questions about that with crypto currencies, too. I think when there
is so much hype in an industry, buying into everything, you’re buying into more hype than
not, so it actually is worth the time to pick and choose so that you can avoid
a lot of the hurt that’s going to come later. Hill: One of the things I love about doing
YouTube Live is, you get questions from people, and they give their names. And then you get
questions from people, and they have a screen name. Here’s a question from
The Most Interesting Man. Bush: Love it!
Hill: He asks, “Do you guys have any ways to play blockchain right now?” Boy,
did The Most Interesting Man pick the right YouTube Live to attend.
Bush: There is a way, believe it or not. I run a service called Crypto Society.
Every month, we publish a new report digging into the industry, oftentimes looking deep
at an interesting cryptocurrency, just taking scope of the industry. We also have stock
recommendations of companies that are playing into the blockchain movement in various ways.
So far, our scorecard is looking good. I’m really proud of the results we’ve put up.
If you’re interested in that, I would reach out to our Member Services team. You can find
that on our website. Ask them about Crypto Society. Hill: You can go to fool.com to find out how to get in touch with our Member Services
team. You can also go to fool.com/yt to get the free report that I mentioned earlier.
Jeffrey asks, “What do you guys think of the upcoming Slack IPO?” I will say, from a business
standpoint, we use Slack here at The Motley Fool. We’ve used it for years and generally
enjoy that platform quite nicely. Bush: Yeah. I would just say, from my perspective,
it depends on the price. I think Slack is a great company. The fundamentals are
pretty solid. You can see how this company is going to be much bigger and much more profitable
in the future. I’m not really worried about it from a business standpoint. But as we’ve
seen with Beyond Meat, for example, how a company like that can start trading at
ridiculously high multiples — Zoom is another company that’s now like a $20 billion business,
trading at high multiples — I have a feeling we’ll see a similar type of situation with Slack.
It’ll still be worth being careful and being considerate about. But, it absolutely
is a company worth considering. Hill: Are you surprised by the multiple at
which Zoom is trading? I remember we talked before they went public, and you
were really impressed by their S-1. Bush: I am very impressed with what Zoom
is doing. I’m not surprised that the company is trading at a premium. I am a little surprised
by the magnitude at which they’re trading at a premium. I feel like, just with lots
of big IPOs coming out lately, there is more general hype around new companies getting in.
More people are interested. When a company comes out, unlike something like Uber or Lyft
that’s burning tons of money, but comes out already a really great business, that people
are starting to use and are more familiar with, it makes sense to me that people would
cling to that extra hard. I don’t know. I hope the price goes down and it becomes
more realistic for some of us to buy into it. But, not that surprising.
Hill: A few people asking, “Are you guys worried at all about the trade war right now and how
it might impact stocks?” Certainly, if you think back to Monday, there’s no question
that it was impacting stocks on Monday. It seems like, on any given day, depending on
what’s the news coming out of China, what’s the news coming out of the White
House here in the United States, it definitely has an impact on stocks. I can’t say that personally
it has impacted how I look at my own portfolio. Bush: Yeah, I would really only be worried
about it if I were over-allocated to stocks that are reliant on their own trading and
exports to China. In the context of most of the companies that we talk about,
they’re not that impacted by the trade war. Even if you look in China, a lot of these interesting
companies, they’re also not that impacted by the trade war. I do think it is important,
and it’s worth considering in the context of building your portfolio. But in the big
scheme of things, and over time, I have a feeling these headlines will start to fade,
and we’ll be onto the next thing. Hill: Mike asks, “How will streaming video
services from Apple and Google impact companies like Take-Two Interactive and other game publishers?”
Bush: That’s a good question. I think what matters most when you’re a game company is
just making games that people love. As I mentioned at the beginning of this stream, the whole
spectrum of what gaming is, from mobile to sports games to these incredible blockbuster-type
games, that spectrum is wider than ever before. There is a market across that spectrum.
If you make a great game anywhere along those lines, you will find an audience.
There’s more than a billion gamers in this world, and that’s a lot of people to work with.
Now, for Apple, those companies have a big opportunity, just owning a platform. For them
building bundles, that type of thing, it’s more of a way for them to increase their Services
business, get a cut, pressure the developers, working even more closely with them.
So, they’ll be successful, but I don’t think that will have a huge effect on the
best gaming publishers out there. Hill: Lucas asks, “What do you guys make
of Alphabet? It’s a recommended stock by The Motley Fool. What has you excited about it?”
I mean, we talked before about Tencent Holdings, how massive that company is, all the different
things they have, all the different parts of the business. Obviously, here in the U.S.,
Alphabet is our version of that. Bush: Yeah. I still like Alphabet a lot.
I own shares. I’m not planning on selling anytime soon. If you think about their core business,
which is search — and also YouTube, which we are on right now — there’s not a close
No. 2 to competing with them. They’re just that dominant. I don’t see that changing anytime soon.
They’ll do an even better job monetizing search, monetizing video. They’re investing
in machine learning to improve the tools and the results of all of these things. They make
a lot of money, which they can then reinvest in things like Waymo, which could be the next
potential wave of creating great value for the business. It’s another titan, but it doesn’t
mean that they can’t get bigger. They’ll still be around and dominant for a long time.
Hill: We were talking earlier about Reed Hastings, CEO of Netflix. So often, and rightly
so, we focus on the CEO of any given company. I think it’s fair to say, though, that in
terms of Alphabet, the hiring a couple of years back of Ruth Porat, the most respected
woman on Wall Street at the time, when she was at Morgan Stanley,
they hired her to be the CFO. Bush: It was a good call!
Hill: It was an amazing hire by them! It’s one of the few times where we look
at the hiring of a CFO and think, that’s a great move, and that is going to pay
dividends for that company. Bush: Yeah, I think so. My one issue right
now, though, and it is somewhat her fault, is that Alphabet does a terrible job of clarifying
or breaking down the different businesses. They don’t break apart YouTube from search.
As an investor, it’s really tough to get a sense of how these businesses are doing individually.
It’s on her more than anyone to fix that for us individual investors out here. But, yeah,
I mean, she’s done a good job tightening cost controls and such.
Hill: If you were the CFO of Alphabet, would you be going out of your way to make things
more transparent for individual investors? I’m going to say no.
Bush: If I were proud of my results, then yes. Maybe there’s something
to worry about a little bit there. Probably not. Hill: That’s true. We say this in sports,
and it’s true in business as well, the best-run organizations don’t air
their dirty laundry in public. Bush: It’s true. And you can see that their
growth did slow last quarter. Maybe the mix of things, there is something that they do
want to improve. I’m still not that worried. They’re just so dominant and
so good at what they do. Hill: Alright, last question before we wrap up.
Bringing it back to the video game industry. MJ asks, “Is there a picks-and-shovels play
on the video game industry?” Bush: Kind of. There are a couple of ways
you can think about this. One would just be a company like Nvidia, which makes graphics
cards for PCs, lots of other devices that power the constant improvement of graphics and
that gameplay experience. They’re one consideration. Also another, as we think about
the future of video games, and as you see a company like Alphabet and their Stadia service,
which is a streaming service, Microsoft is going to do the same thing with Xbox. I think
they’re really well positioned just by owning content, owning a console. They have Azure,
which is a huge cloud computing platform, which is a huge advantage
in a realm of streaming. Maybe that’s picks-and-shovels.
It feels picks-and-shovels to me. There’s a lot of money to be made in
a lot of different areas in video games. Hill: Alright, senior analyst Aaron Bush,
thanks so much for being here! Bush: Absolutely!
Hill: Thank you for watching! Please click the subscribe button on our YouTube channel.
It is free. And, check out our free report at fool.com/yt. I’m Chris Hill. Thanks again
for watching! We’ll see you next time!