On this Market Foolery podcast, host Chris Hill, Million Dollar Portfolio‘s Jason Moser, and Stock Advisor Canada‘s Taylor Muckerman try to parse who is getting the better end of the deal in Discovery Communications‘ (NASDAQ:DISCA) buyout of fellow niche cable channel player Scripps Interactive (NASDAQ:SNI). They also ponder the future of Snap Inc. (NYSE:SNAP) on the day its post-IPO lockup period ends, allowing insiders to sell — and it looks as if some did — and they answer a listener’s question about the meaning behind an unusual Costco (NASDAQ:COST) marketing promotion.
A full transcript follows the video.
This video was recorded on July 31, 2017.
Chris Hill: It’s Monday, July 31. Welcome to Market Foolery! I’m Chris Hill. Joining me in studio today, from Million Dollar Portfolio, Jason Moser; and back after a little bit of an absence, but we’re happy to have him back in the studio, from Stock Advisor Canada, Taylor Muckerman. Good to see you!
Taylor Muckerman: It’s good to be back. I’ve missed it.
Jason Moser: I’m feeling a little less pressure now.
Muckerman: [laughs] I’m sorry. I really do apologize.
Moser: Mondays were more like, it could go one of two ways, now we have …
Hill: The last couple of Mondays, Jason was like, “Is Taylor back?”
Moser: People really don’t want to hear me droning on for 30 minutes.
Muckerman: [laughs] I have tuned in. That was admirable.
Hill: We’re going to dip into the Fool mailbag. We have to start with the deal of the day, and that is Discovery Communications buying Scripps Interactive in a deal valued at $14.5 billion. This is a cash-and-stock deal. This is one that was well telegraphed, and because of that, the buyout price for Scripps Interactive was $90 a share. The stock had been in the mid-$60s not too long ago, and once these reports started to come out, then the stock was getting bid up. So that’s why you’re not seeing any kind of a pop today.
I am a little surprised, though, Jason, that Discovery Communications is down more than 7%, because, again, this was pretty well telegraphed. So I’m just wondering if the sell-off in Discovery Communications is people think the buyout price is too high. People were hoping it was going to be all stock and no cash whatsoever? But other than the price tag, there’s nothing new about this deal.
Moser: No. I wouldn’t say it’s a valuation thing. This deal values Scripps at a little bit less than 10 times EV to EBITDA, which is basically in line with Discovery’s valuation today before the market opened. Generally, the perception of this deal, at least the way I see it, is that this is a much more important deal for Discovery than it is for Scripps. I think Scripps is the more compelling part of this deal. It has more compelling properties that they’ve demonstrated, perhaps, a bit more long-term success, certainly here domestically, at least. They are both companies with big audiences, but also big challenges as the media space starts to change.
So I think the advantage here in this day and age, there should be a lot of good viewer data that these guys can go on to really whittle down the best offerings that they can then bring out to the market. And as the skinny bundle evolves and these over-the-top live streaming deals start to evolve, I think Scripps is a big deal here. I think that’s going to be that no-brainer content that virtually everyone is going to want to have on their plate in some capacity.
Hill: Food Network, HGTV.
Moser: Yeah, all of that good stuff. It’s just relatable content, particularly here domestically. I think it just has a very wide audience ranging in age. I know they like to say that it’s primarily a female audience. Maybe the math bears that out. But it’s content that really caters to both male and female audiences. At the end of the day, we always talk about content being king. There’s a lot of great content that both of these companies get out there. With Discovery, it’s going to add a decent chunk of debt to the company’s balance sheet.
Muckerman: I think over $2.5 billion.
Moser: Yeah. It’s not like they can’t handle it. They both have very strong cash flow-generating models. But, again, this is something that makes you wonder a little bit about Discovery. Clearly, over the past five years or so, Scripps has been a better performer, and I think that mainly speaks to the content offering, and how it’s gained more traction over time.
Muckerman: You mentioned international. That’s where a lot of people say this could probably be the biggest gain for Discovery. Fifty percent of their business is international, while Scripps isn’t quite there yet. So maybe they have the channels, the deals that they’ve worked out with international partners, to then get Scripps TV shows exposed to a more international audience. But they are very similar companies in terms of their distribution. So I’m wondering how they’re going to come of age.
We talked about over the top, the skinny bundles. I saw somewhere that people suggested they could throw a bundle together for $5 a month. Personally, I wouldn’t pay $5 a month for it, but it’s slightly more than they get an affiliate fees combined. So that’s certainly an option. I think it’s a no-brainer if you continue to see cable subscribers cut the cord.
Then you talk about Amazon and Netflix, combined for over $10 billion in spending in original content this year, that’s almost the price of this deal. So the competition there is worrisome, if I’m these two companies. And when I first saw it, I was like, didn’t this already happen? Because they’ve talked about this twice, and now it seems like it’s finally going to happen.
Hill: And I know this is not the impetus for a deal like this, but when you think about advertising — because that is still a meaningful amount of revenue for these networks — you think about HGTV, you think about the Food Network. If you are a major company in those two spaces, you’re advertising on those networks.
Moser: There’s no question about it. You watch any of those channels, and you see those ads over and over and over again. Wayfair is one that advertises a lot on those channels. Again, they’ve been doing what they’ve been doing for a while. I think both companies on their own have some pretty neat, compelling content. Together, this will help them maximize efficiencies. They really should have a lot of good data to be able to go on, and being able to whittle down the most compelling content on both sides of the coin there.
And then, I think internationally, Discovery has done a great job trying to build that business out internationally. It’s been, I guess, not quite as well received as maybe they had hoped. There’s some opportunity there for Scripps as well. And you can’t dismiss the potential for additional shows. This really neat content, because it’s real life, it’s stuff that changes every day. You don’t have to get too terribly creative with it. I’m not saying they’re not creative, but it is kind of stuff that just happens. It’s based on real life.
Muckerman: Yeah, it’s not as scripted as most other cable companies. It’s a lot of unscripted content.
Moser: I mean, people are going to be buying houses 20 years from now, and they’re going to be jumping through the same sorts of hoops, and science isn’t going anywhere. Discovery really shines brightly on that front, and Scripps shines very brightly on the homeowner front, the food front. It’s all very relatable content for households in general.
Hill: Have you guys ever used, when you travel domestically, the Food Network website, the restaurant finder they have?
Muckerman: No, I have not.
Hill: You can go on there and it’s basically like, “I’m going to this city,” and you type that in, and any restaurant or food vendor that has ever been featured on the Food Network will pop up, and then you can be like, “Now I’m going to check out this restaurant.” Yeah, it’s a neat little tool.
Muckerman: Can you click over to an episode? A clip?
Hill: Yeah. A lot of times they have video.
Moser: You have a guilty pleasure, a show on Scripps or Discovery that you’re like, “I probably wouldn’t go broadcast this,” but I’m going to ask you to broadcast it today. Guilty pleasure?
Hill: Oh, Diners Drive-Ins, and Dives.
Moser: I would say the same thing, yeah. Triple D!
Muckerman: [laughs] That’s why they bought it.
Hill: I’m not saying I want to be on a cross-country flight and sit next to Guy Fieri.
Muckerman: I wouldn’t turn it down, either.
Hill: But some of those places are really great.
Muckerman: I wonder what his cut from this deal is.
Moser: I really enjoy that show.
Hill: Guy’s probably doing well, don’t you think?
Muckerman: [laughs] Yeah, he’s doing all right.
Hill: So I’m not sure what the headline on this next story is, but it probably falls under the umbrella of “not nearly as terrible as I thought it was going to be,” which is that today is the day that the lockup period for Snap insiders expires. So Snap went public recently. Big IPO right out of the gate in terms of tech industry IPOs. The stock has gone down from there, obviously.
Muckerman: Forty-three percent or so. [laughs]
Hill: But who’s counting? And July 31 was the day that insiders could actually sell their shares. There was an expectation among many — and I will include myself in that group — who thought this is going to be another bad day for Snap. And the stock is basically flat right now, although you look at the volume of trading, and in a typical day, about 14 million shares of Snap will be traded. It is almost 12 noon as we are taping right now, so we’re not even halfway through the trading day, and already more than 26 million shares have traded hands. I’m surprised by this. What about you, Jason?
Moser: I’m not, honestly. The main reason why is, it’s no secret. We knew this was coming. Today is the unlocking of, I think, 400 million shares or so. There’s another big slug of shares coming up in the middle of August that will become available to sell as well. So at the end of the day, economics rule and supply and demand do whatever they’re going to do. But I think the main thing here is that it wasn’t a secret. We all knew this was coming. So I do think there was something priced into this in advance. Yeah, you could see it either way. Would I have been surprised if the stock was down 10%? No. Would I have been surprised if it was up 10%? Probably so. That it’s flat doesn’t really tell me one thing or another.
I think the questions all still remain with Snap. The big question, at least, is, if the market is going to judge you first and foremost in this space on the number of users that you have, then Snap has its work cut out for it. I think they know that, too. That’s going to be something that a lot of people are paying attention to. This is something that is part and parcel of being a public company. You have lockup expirations that come into play. In a month, we won’t be talking about it. We’ll be talking more about the latest quarter that they announced, and the fundamentals of the business. But what happens today, it’s neither here nor there, I guess.
Muckerman: I wonder what would happen if the stock was up 40%.
Moser: Yeah, that would be surprising.
Muckerman: Since the IPO, maybe they’re trying to recoup some of their losses by holding on for a little longer.
Hill: That’s the thing for me. It’s not a surprise to me that insiders are selling their shares. The fact that there’s apparently an equal number of people on the other side of the equation saying, “Yeah, we feel like this is worth our dollars.” And maybe psychology is part of it, because if you’re buying shares of Snap today, one of the things going through your head is, “I’m not buying at the IPO price. I’m getting it at a discount to the IPO price.”
Moser: True. On Twitter today, a buddy of mine, one of the guys over at 106.7 The Fan — you guys know, maybe, Drab T-Shirt, Matt Cahill — was asking me this very question. He said, “Jason, my best friend is all in on Snap and wants the Drabber to join him.” And that’s where I have to look at that and say, “Listen, I’m not going to tell you whether to buy or sell, but here are some thoughts that I have on the matter.” Again, focusing on users, understanding that growth in that regard with Snapchat is certainly slowing down, based on the most recent numbers we saw. He asked, “Couldn’t the same be said for Twitter?” I said, yeah, they could say that. That’s the point, really, to be able to look at things that happened in the past and maybe learn some lessons from them so that we can look at some of these opportunities in the future and see how we should be judging them.
I think with Snap, all sorts of reasons to be concerned. There’s going to be a very long time until they’re profitable. I’m not convinced that it’s a platform for the masses. I think if they want to grow into this valuation that they have today — which, even at today’s price, and even if you take into account full-year revenue expectations, the stock is still somewhere in the neighborhood of 16, 17 times sales, which is a very premium multiple to Facebook, Zillow, TripAdvisor, Twitter, all those companies. There’s a lot of optimism still baked into this stock today, and until I see that little Snap ghost everywhere where I see the Facebook and Instagram and Twitter logos, then I don’t see how this works. They’re going to have to figure out a way to become something more, and this goal of being a camera company, I don’t know, is necessarily the right play, unless it’s a corner that no one else can see around except for Evan Spiegel. Maybe that’s the case; I don’t know. I guess time will tell how visionary he really is. But as it stands right now, I’ve read of some concern there at Snap headquarters about this lockup expiration and future lockup expirations and really where this company is headed.
Hill: Well, that was one of the nuggets buried in Facebook’s earnings report last week that I found interesting. Instagram has 15 million business accounts. The other thing is, you invoked Facebook, but not in the way that some in the financial media have, which is coming into this lockup period, there were some analysts out there who were saying, “You heard these same concerns when Facebook’s lockup period expired after their initial public offering. And if you had bought then … ” And that’s where I just want to say, please stop doing that.
Muckerman: That’s a tough comparison. [laughs]
Hill: Yeah. And to your point about the revenue, Facebook was actually making money hand over fist. They were serious questions, particularly around mobile advertising. Those questions have been answered in spades by Facebook, but come on!
Moser: The comparisons to Facebook are lazy. There’s no other way to put it. Facebook has far more users; it’s far more relevant. We said this on Motley Fool Money this past week. If you’re an advertiser, you’re an idiot for not advertising on Facebook. You have to, just because of the number of eyeballs that the garner on the Facebook platform and Instagram and all the properties that they have with all of those users. It’s not to say Snap can’t be successful. It very well may be. But they’re in a position right now where they basically have no room for error. And even then, they have a long way to go until they’re even profitable. And so rather than judge the stock and the company on a very short-term-style event, like a lockup expiration, let’s try to focus more on the fundamentals of the business. We’ll learn a lot more here in the beginning of August, when they announce their quarterly results. And I think we’re all looking forward to learning more about the business and seeing where they want to take it.
Hill: Our email address is firstname.lastname@example.org. From Matt Holzman, who forwarded an email and wrote, “I just saw this Groupon (NASDAQ:GRPN) and couldn’t help but wonder if discounting the Costco membership is a new signal of decline. Would love your thoughts.” As I said, he forwarded a Groupon email that he got, and the main promotion that was featured there was a one-year Costco Gold Star membership that comes with a $20 Costco Cash Card and exclusive coupons, and you can get all of this for $60. A Gold Star membership at Costco for one year on its own costs $55. This can cut both ways. You can look at this and say, if Costco gets a whole bunch of new members and gets people who wouldn’t otherwise consider a Costco membership, and it locks them in, because we know they’re so good at retention, then this is totally worth it.
Muckerman: That’s the way I’m looking at it.
Hill: Is that how you’re looking at it?
Muckerman: That’s how I’m looking at it, yeah.
Hill: Go on. [laughs] Please continue.
Muckerman: They’re doing well. I think this is a better deal for Groupon, because it’s actually a compelling offer. It’s a gift that keeps on giving, a Costco membership. You get in there, if you’ve never been in, and all of a sudden for $20 you get the chance to stroll in there and see what it’s all about. They have a very hard sell when you go in there. It’s easy to be completely blown away by the difference of the availability in there from your traditional store. And it’s doing well. I looked at the sell-off from the Amazon–Whole Foods deal as a potential entry point for myself. I don’t own the stock, but when I saw that stock sell off the way it did … I’ve been wanting some of it for myself for a little while now. I haven’t pulled the trigger yet, but it’s still selling at that reasonable price, compared to historical numbers. Yeah, this doesn’t worry me from a Costco perspective at all.
Moser: Yeah. I think the knee-jerk reaction for the skeptic would be, “This is the beginning of the end. We told you so; Costco is on the way out.” You can’t look at it that way at all.
Hill: I’ll just say, I didn’t think it was the beginning of the end, but I did make that, [groans].
Muckerman: I do like the thought process.
Moser: Like, “I don’t like that.”
Muckerman: You’re being associated with Groupon.
Moser: So this is marketing, plain and simple, for Costco. It’s a way for them to reach out to an audience they have yet to capture. And you both made the point — this really gives them a chance to bring new members in and then do what they do best in retaining them. Now, whether it works, that’s the question. It’s not going to cost them anything to try. But I do think this at least makes the question mark as to how attractive a model this is going forward for younger generations of shoppers. I think it makes that question mark the little bit more pronounced, because there are obviously plenty of different options out there today. You don’t necessarily need to be a member to do warehouse-style shopping. There are more convenient ways to do it.
So Costco is a very good, very customer-centric business that has done something well for a really long time, and I don’t expect that to change at all. But the growth prospects for the company going forward aren’t the most attractive in the world. If I have $1,000 to plunk down on Amazon or Costco, I’m going to take Amazon 10 times out of 10. But I think Costco has a place in the portfolio, if you’re looking for some sort of defensive play there, a little bit of a less volatile holding. They are a very customer-centric company. I really wish that … man, they buy back shares, and with a company like this, that share count needs to come down and it goes up. That’s just something I can’t get past for whatever reason.
Hill: That seems like you’re doing it wrong, if you’re buying back shares and the share count goes up.
Moser: You know, you can’t really tell that as shareholder-friendly.
Moser: And the fact that they took out $3 billion in debt to pay that dividend. I think that’s an acknowledgment from management that it’s going to be tough times in the days ahead for capital appreciation on the stock, so they are rewarding those shareholders today. But yeah, this is a way to reach out to an audience that they haven’t really been able to crack yet, and if it brings a few people in, that’s great. They’ll probably retain a lot of them.
Hill: And if you’re on Groupon’s mailing list, you’re going to know pretty quickly whether or not this is working for Costco, because if it is, you can probably expect to see a lot more of them.
Taylor Muckerman, Jason Moser, thanks for being here, guys!
Muckerman: Appreciate it.
Moser: Thank you.
Muckerman: 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 stocks based solely on what you hear. That’s going to do it for today’s edition of Market Foolery. The show is mixed by Dan Boyd. I’m Chris Hill. Thanks for listening. We’ll see you tomorrow!