In this podcast, Motley Fool analyst Jason Moser and host Ricky Mulvey discuss:
- How more than a hundred million dollars can go missing.
- The impact of weight loss drugs on junk food manufacturers.
- Some advice for investors looking for artificial intelligence pick-and-shovel plays.
Then, Bloomberg's Lucas Shaw to check in on Netflix, and the company's strategy on live events.
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This video was recorded on Nov. 25, 2024.
Ricky Mulvey: How do you hide more than $100 million? You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by wicked superfan. He's got a magic wand in hand and a coffee on the desk. It's Jason Moser, Jason, how are you doing?
Jason Moser: Hey, doing great Ricky. How about you?
Ricky Mulvey: I'm doing pretty well. Are you more of an Elphaba or a Glenda guy?
Jason Moser: Elphaba.
Ricky Mulvey: Elphaba?
Jason Moser: Come on, listen, I saw the musical on Broadway. I've got some really great memories there. I don't know that I really play sides there. I thought the juxtaposition was very well done, and the music was tremendous. It was a great experience. We took our daughters up to New York City several years back and saw it on Broadway. It was pretty awesome.
Ricky Mulvey: It's wicked week, but it's also a week for Macy's. You'd think we'd be talking about the Macy's Thanksgiving Day parade this week, but Macy's has a problem going on at the corporate office, Jason. Macy's reporting preliminary results this morning a little weaker than the analysts were expecting. But here's the real story. Macy's had something to say in a section titled Other corporate developments. I'm going to steal that title when I have something I need to tell people. The company identified that a single employee with responsibility for small package delivery made an erroneous accounting accrual of approximately $132 to about $150 million of cumulative delivery expenses 2021 to 2024. There was an erroneous accounting accrual of more than $100 million. What's the translation here?
Jason Moser: Yeah, it's just numbers. I think looking at this on the surface, I think the initial reaction would be, well, this is embezzlement. However, the thing is here, in this case, the individual responsible actually didn't pocket the amounts in question. It's very odd situation. It's really interesting to think that it went undetected for as long as it did. It's strange that the auditors didn't catch it as well. But, yeah, it feels like it could have been one of those things where it was like somebody forgot to carry the two or something or missed a decimal point like four or five years ago. Then it just snowballed. They tried to fix it, and in trying to fix it, the problem got worse and worse and worse. But, yeah, it's a lot of money for an accounting error.
Ricky Mulvey: That's the thing that's surprising to me is that it appears that the money was hidden but not stolen. I thought we had like an office space situation on our hands, where they were taking a percentage of a cent off every transaction and pocketing the change. But here's what Macy's is saying is, "there's no indication that the erroneous accounting accrual entries had any impact on the company's cash management activities or vendor payments." That's where I'm confused. You misplaced $100 million, more than $100 million, but it didn't affect how anyone got paid or how the company was managing its cash.
Jason Moser: Right. Well, and I think it's worth remembering. Number 1, Macy's is obviously a very big company, and when you look at their income statement, you can start to put that into context. If we think about this money that was hidden. This was something that was in regard to small package delivery expense. If you look at Macy's 10K, delivery expense is not a component of merchandise margin, so rather it's part of what companies list out as SG&A. Sales general administrative costs. If you look at that SG&A line, that's an expense line on the income statement. Their SG&A over the last 12 months, was $8.3 billion, so when you put that into context, it isn't really that big of a financial hit. It's noteworthy. Let's not split hairs, $150 million is a lot of money. But in the context of Macy's overall business, I at least understand how they missed this because it's not something that's just totally in your face.
Ricky Mulvey: We'd normally ask, like what your shareholder reaction is. We're going to do a different thought exercise. If you had to make $100 million disappear from any company, we're not stealing it. We're just hiding it. We're making it disappear. Which company would you pick and how would you do it? I have an answer as well.
Jason Moser: Yeah, I feel like I'm going to get myself in trouble for saying this. Sure, I know this is not a company, but the US government seems just really set for something like this. There's a lot you can do with that. In regard to a company. I think I would look for a company that did a lot of transactions, probably dealt with a lot of inventory, and probably mentioned shrink a lot in their earnings calls over the last couple of years. I'm a shareholder in Home Depot, so I don't want to go too far with this. But something like that might make sense because they're so big, you could probably do this without it ever being noticed. But I'm never going that route, regardless.
Ricky Mulvey: Well, here's the way I'll flip it is, I'm thinking of what is the company that I would be least likely to steal from and get away with it? I think of a company like Amazon, where you're like, they're going to notice it. They're on it, and it gives me a little bit more faith in the management team and the company itself and how long it's going to stick around. I'll pick, even though they're dealing with a lot of inventory. I'm going to pick a company that's maybe dealing with a lot of cryptocurrency transactions and raising a lot of debt in order to buy a lot of Bitcoin. There's so much going on with the block chain and so many intermediaries going on there. I think I would go with MicroStrategy. Not that I'm ever stealing from a publicly traded company.
Jason Moser: No, I like that. That makes sense.
Ricky Mulvey: Let's move on to another story. There's a good article in the New York Times, I'll link it in the show notes by Thomas Weber, it's about how the junk food industry is trying to adapt to wider spread GLP one drug use. I thought there was a story in here that encapsulates what's going on. They talk to Kathleen Kenny, who's a 54-year-old who runs a sword fighting school. She told the New York Times that, "a hoho no longer seems like food. It tastes plasticky," she said, "or it feels plasticky in my mouth." What the article is getting at is how people who are taking weight loss drugs have changed relationships with process and ultra processed foods, and then how the food makers are responding. A more overall question as we start out to set the table. Do you think food demand for these food manufacturers and companies like Walmart that sell it, do you think that's going to fundamentally change over the next few years?
Jason Moser: I'm definitely not going to sit here and bash hohos or any of those delightful Hostess snacks. They are a lot of childhood memories there, Ricky. A lot of childhood memories. But I think that the operative or there is childhood. As we grow up as we get older, our tastes change a little bit. Yes, I think there's no question to me, at least the people are starting to care more and more about the food that they eat. I think even furthermore, that new generations will be raised with a different mindset for sure. I certainly already see it with our kids, for example, and their freshmen and sophomores in college now. I absolutely think this is going to be something that changes the way these companies determine what they want to go ahead and bring to market. It's probably going to impact a lot of those delightful snacks that we remember from our childhood days.
Ricky Mulvey: Yeah, you think of companies like PepsiCo that are making Cheetos, these types of big snacking companies are trying to respond to it. There's a separate company, it's a private company that does food innovation. It's called Matson, and it's trying to develop food for GLP 1 users, thinking like chicken sticks wrapped in mozzarella or brownie bite cubes with way protein in them. When I first read this article, I shook it off. I'm like, here are these companies flailing and trying to fight a losing battle. But then you have the flip side. Bob Nolan, who's a senior vice president at Conagra Brands, told the writer, "you're probably not going to want to be in the kitchen prepping an elaborate meal just to have a few bites." I know you like to cook GMO, but do you think the big food manufacturers have a point here?
Jason Moser: Well, yeah, I think the word processed is becoming a bad word in food. Going back to the way people are thinking a little bit differently about how they eat. I certainly fall into that category as well. I'm more of a live to eat guy, Ricky, not an eat to live. But I don't know that they're fighting a losing battle, but I do think it brings to question the growth actually in the industry. I think companies are just going to need to evolve and rethink how they make their food. Or they absolutely will risk becoming marginalized. Then I think finally, there's clearly going to be a marketing in all of this. Most people probably don't spend all that much time researching so in depth what they're eating. They will take things at face value. I'll be interested to see how the marketing campaigns for this at large take shape over the next decade and beyond.
Ricky Mulvey: Living to eat a little bit of a better existence than the alternative GMO. I think this trend and the reason I want to talk about it is because I really do think this is going to be one of the biggest economic trends over, if not the next few years, over the next decade or so, which is the impact of these weight loss drugs. I've got a little bit of Eli Lilly stock just to be invested a little bit. Morgan Stanley points out that while seven million Americans are taking these drugs right now, by 2035 that could expand to 24 million people, so going from 7 to 24 more than tripling it. That number would more than double the number of vegetarians and vegans in America. Still room to grow by 2035, if they get there to that 24 million mark. But is this weight loss drug trend? Is this something that you're directly investing in or watching?
Jason Moser: Well, I would say I'm watching it more than anything. I'm not directly invested in it today, at least in regard to drug makers. It's a little bit questionable, at least, there's always a pill for that. But in this case, there is a lot that we still don't know in regard to the longer term implications of these GLP drugs. That will be information that comes out of the course of the next 5, 10 years and beyond. Hopefully, that is good news. I can't say whether it will be or not. But I think owning healthcare companies is always something worth considering, I think, for investors. I still own shares in Teladoc Health, for example. I've owned those ever since they IPOed. Given the Livongo acquisition and everything that they're doing to try to address chronic conditions and whatnot. I guess I am invested in a way in a company that will at least be trying to address this to some extent. But they're clearly approaching it from a different angle. They're approaching it more from an angle healthy lifestyle and keeping track of what you're doing as opposed to just always having a pill to take care of that for you.
Ricky Mulvey: To round us out, there's a story in Bloomberg about West Texas Energy and this company called the Texas Pacific Land Corporation. There's an AI angle we're getting to here Jason. [laughs] But have you heard of this? I heard one person mention it to me about a month ago, but have you heard about this company before this morning?
Jason Moser: I absolutely had heard of it. I didn't know anything about it. It's just not a company in a space that I really follow closely, but I had heard of it before.
Ricky Mulvey: There's a lot of investor hype around it, because this company owns 873,000 acres in West Texas. For the context of that, that's about the size of Rhode Island that this company just owns the oil rights to in West Texas. The stock is up more than 200% this year, as investors are hoping that big tech companies will build data centers in this area where natural gas is cheap. What's changed is not just the money that they've made from these data centers being built, but valuation and investor expectations, where this company went from about 40 times free cash flow earlier this year to more than 100 times. But when you think about these investors getting really excited for these literal picks and shovels plays, do you think the hope and hype here is warranted?
Jason Moser: I certainly understand the hype. There are a lot of conversations out there in regard to data centers and the opportunity there. We know that data centers are going up at a very rapid pace. If you look at McKenzie research for example, they're looking at current trends. Global demand for data center capacity should rise annually around 20% from 2023 to 2030. That is a pretty long stretch of sustained growth there. You go through an Nvidia earnings call. Obviously, they talk a lot about data centers. That's the bread and butter of their business, really. I definitely get the enthusiasm, but I think you make a very good point. That enthusiasm however warranted it may be, valuation does always matter, and there's a lot of enthusiasm in some of these AI names today.
Ricky Mulvey: This is a business that is also fundamentally sound. There's a real business there that has an extraordinary advantage, and that I was watching Square Bird earlier on the Motley Fool Live Premium feed. I think it was Tyler Crowe pointing out that these 870,000 acres have a carrying value of just $100 million or $95 million. There's a tremendous amount of value here, and a lot of people are going to want to get to that oil, and this company is able to collect the royalties of it. But there is a lot of excitement. What would your advice to investors who are looking for these picks and shovels plays in AI be?
Jason Moser: Well, I think just make sure you can connect the dots. Understand how this individual company is ultimately benefiting from the trend. Don't just go by what the headlines tell you. Like I mentioned, valuation always matters, and a lot of enthusiasm and headlines tends to push interest in buying and therefore, valuations up. You mentioned it fundamentals, I think, making sure these companies have fundamentals in place, good financials, a business model that makes sense, strong leadership that knows what they're doing. Those are some key things to focus on if you want to pursue this trend.
Ricky Mulvey: Jason, if you end up going to Wicked this afternoon, that's three hours, if we're including previews where you got to get your butt in that seat for three hours. I want to be very mindful of your time as we let you go here.
Jason Moser: Well, I appreciate that.
Ricky Mulvey: Thanks for joining us on Motley Fool Money.
Jason Moser: Thank you.
Ricky Mulvey: Up next, Bloomberg's Lucas Shaw joins me to chat about Netflix and the company's pivot to live events. Lucas also writes the informative and entertaining screen time newsletter. I recommend you check it out. The creators of the popular science show with millions of YouTube subscribers comes the Minute Earth podcast. Every episode of the show dives deep into a science question you might not even know you had, but once you hear the answer, you'll want to share it with everyone you know. Why do rivers curve? Why did the T-rex have such tiny arms? Why do so many more kids need glasses now than they used to? Spoiler alert, it isn't screen time. Our team of scientists digs into the research and breaks it down into a short, entertaining explanation, jam packed with science facts and terrible puns. Subscribe to Minute Earth wherever you like to listen. Netflix spends 17 billion on content a year, and that's actually up from last year. I think it was 13 billion. Is there looking at these big live events? Do you think there's a trade off from other programming or is the pie just getting bigger for Netflix here?
Lucas Shaw: It's definitely a trade off because actually the 17 billion figure has been pretty steady for probably two or three years now, and the money for live comes out of the larger unscripted budget because it all folds up under this executive Brandon Reg. If he spends half a billion dollars or a billion dollars on live programming, that's money he can't spend elsewhere on unscripted. Now for now, the amount of money they're spending on live is small enough that I think the total unscripted budget has probably grown because of how much they're doing there, but he can also reduce in some places. I believe their CFO made some comments in the last call, suggesting that they would increase their programming budget in the future. I think if they do more live, the total programming budget will grow. But for now, yeah, it comes from other parts.
Ricky Mulvey: I would imagine that for Netflix executives, not that they're making these direct trade offs, they may be thinking maybe it was better to pay Mike Tyson and Jake Paul a collective 60 million for 15 minutes of work versus getting the Russo brothers to make another original action movie, but for the unscripted stuff, is this reality shows? Is this documentaries? What's the pie being taken from there?
Lucas Shaw: Yeah, Netflix's unscripted division includes documentary series. It includes dating programs like 'Love Is Blind.' It includes music competition programs. Netflix at this point releases dozens of unscripted programs every year. It's been one of their more successful new "programming areas."
Ricky Mulvey: I want to talk a little bit about the movie side, where there's another strategic shift you've reported on this. Originally, there was this spray and prey strategy where they were releasing as many movies as they possibly could, and you rightly point out that Netflix doesn't make a lot of good movies. There's been a few exceptions to the rule. I liked the Irishman and Roma got a best picture nod. But from an outsider perspective, I would expect, like, hey, if you just give filmmakers blank checks and make a bunch of stuff, there's going to be a lot of good stuff that rises to the top. Why didn't that work out for Netflix as much?
Lucas Shaw: You're asking why I don't think they have made more good movies?
Ricky Mulvey: Yeah, if you're just giving a director $5 million and you let them go do whatever they want, I would expect that to create some cult classic or A24 -esque type successes where you get a lot of people like cult followings for more movies versus just TV in the background.
Lucas Shaw: Part of it is they're just doing too much. It's very hard to have any quality control when you're making more than one movie a week or releasing more than one movie a week, I should say. Also, people underestimate or don't appreciate that feedback from other people makes your work better. Getting notes from a studio or getting some guidance from a producer and all these things that a lot of filmmakers weren't getting at Netflix can help the product, and Netflix film suffered because they were trying to do too much and as a result, couldn't give that feedback or didn't want to or whatever it may have been. Netflix also just puts out so many movies so quickly that they feel pretty disposable, so they might not even have that chance to become a cult classic. It's possible that five, seven years from now, maybe people will rediscover some of these movies and decide that they really liked them.
But in the moment, I just think it was too much in the case where they worked with a lot of talented filmmakers, they were giving those people too much money to make a not fully developed idea. It wasn't like you had some film maker who'd spent years trying to get this thing made and just couldn't get the money and did. Oftentimes, it was like, Alfonso Crone, you want to make this personal story. Here's more money than you need to go do it. Now, Roma is an example of a good movie that they made, but it was a lot of that.
Ricky Mulvey: On Netflix's film strategy, along with Thomas Buckley, you reported that now they're talking to IMAX to get Greta Gerwig's Narnia on very large screens. Do you really think this is a one off, like Netflix leadership would tell you or are we seeing a change in strategy here?
Lucas Shaw: For now, I believe it is, if not a one off. I don't believe it is a sign of a strategy change. If you go back to the earliest days of Netflix's film strategy, they actually tried this with one or two of their early movies. I forget if it was Crouching Tiger, something like that they put on IMAX screens because the matrix theater chains wouldn't play their movie. I think they're doing what they have to do to satisfy Greta Gerwig. She's attached to the project, she wants to make it. It doesn't seem like she's trying to get out of it, but she does want it to be on theaters. Because it's going to be this big movie, it makes a lot of sense for people to see it on those types of screens. I think Netflix is probably able to say Greta is a unique filmmaker, and we're doing what we need to do to make her happy, but we're not going to do this with everyone. Also, keep in mind that that movie hasn't even entered production, so it's not coming out for two years at a minimum. I don't think you're going to see between now and then, suddenly a bunch of filmmakers get to put their movies in theaters whenever they want, so no, I haven't gotten any sense from the folks at Netflix that their strategy is changing in any material way.
I think they have a track record of tweaking what they're doing to appease filmmakers, and this is another example of it. That's not to say that strategy won't change. There are all sorts of things Netflix has said that they don't want to do, and then they end up doing for one reason or another. But I don't think we're there with the film business yet. Because at the same time that this was going, they lost out on another project involving Margo Rabbi in large part because they didn't want to put it in theaters. The Wuthering Heights project.
Ricky Mulvey: The Wuthering Heights project. The other thing that Netflix has changed on was ads. For a while, the ad business was just getting started, and I've heard on the town with Matt Belony, I believe it was you who said that it 40 million basically ad members, it's not super scalable.
Lucas Shaw: Right.
Ricky Mulvey: What about 60 million? When does this get scalable? Because now Netflix is at 60 million. It's 70, excuse me. At what point is the ad business really impactful for Netflix, do you think?
Lucas Shaw: We're getting a little closer. The tricky part with it is, so that 70 million figure it's viewers, so they're counting people who maybe use an account, like multiple people per account. It also means that if people watch something, like the NFL game will have advertising. They'll be able to count those people as MAUs because they watched it one day of the month. But come January, they won't count because they're not on the ad tier. I'll be curious how that number changes, but they're getting there. They're slowly maturely getting the scale. It's spread across 12 countries. I don't think they're big enough in any market for them to really matter.
In terms of advertising, they say now, I think that next year, year after it is when people will start to see it be a meaningful contributor. As they add more live programming, as more people sign up for the ad tier as they direct more people to it, they'll get to a point where their ad business will be meaningful. I don't think it'll be meaningful compared to YouTube. YouTube's subscription business is much larger than Netflix's advertising business. But I think in the next two, three years, we'll start to see them be big enough that they'll make enough money that Wall Street will be paying attention.
Ricky Mulvey: It was Amazon Prime, where suddenly everybody gets ads for what they're watching. Another strategic shift that's come out of Netflix lately is with gaming. They closed a gaming studio, and this is something I've always been a bit confused about. What was Netflix hoping for with its gaming efforts or what is it hoping for?
Lucas Shaw: Well, I think Netflix, like all of these Hollywood companies, sees gaming as this very large entertainment business that is related to film and television. It's also storytelling. Some of the biggest properties are based on film and TV properties. Some of the biggest movies and TV shows are now based on gaming. There's a logical interchange, and a lot of entertainment companies have tried and largely failed at gaming, much as a lot of gaming studios have tried and largely failed at making film and television. I think Netflix was looking at this. If they wanted to plan for 20 years in the future, they needed to do something in gaming and that they wanted to have it be more than just licensing their titles to other people.
They wanted to make their own games and use their platform, which has hundreds of millions of people using it every month as a way to get people to play those games. If it weren't for certain App Store rules, I'm sure they'd love it to enable people to play the games within Netflix instead of needing to go to a separate app. They slowly built up this team to develop a bunch of in house games, some of it were based on Netflix Properties, and some of which weren't. I think they quickly realized that making games is a lot harder than most people realize, or most people think it will be, I should say. They've changed strategies a couple of times. They moved the head of gaming over to another part of the company. They seem to go back and forth about like, are we making mobile games? Are we making games for consoles? Are we making games for PC? Are we making small games, big games?
The studio that they closed made bigger games. It seems like maybe they're less interested in that. They could have a slightly less ambitious strategy. They've also been pretty clear that the games based on their titles generally do better than the ones that are not, which makes a lot of sense. I think Netflix's gaming efforts remain one of the big questions at that company and more broadly across media.
Ricky Mulvey: Then last question as we wrap up. This is something I don't understand in the industry really at all. Over the pandemic, these release windows for movies completely collapsed. Netflix, as we mentioned, famously, does not like putting movies in theaters that much. But for these other entertainment companies, they tried putting movies directly onto streaming and then realized they needed theaters. But the thing that's remained surprising to me is just how quickly movies go from theaters to video on demand to streaming. Why have those release windows stayed so tight? Why haven't they expanded?
Lucas Shaw: Well, they have expanded. It's funny, if you look back on it. Before the pandemic, these studios and feeders spent years arguing over it, and they didn't really change. Then the pandemic scrambled at all, and in some cases, the windows collapsed to zero. They've since expanded back out where for most movies there's at least a few weeks and usually a few months before it's available for rental or transaction at home, and then another couple of months before it's available to stream. Every company's a little different setting aside Netflix.
Universal has the most aggressive strategy where you can buy those movies at home, oftentimes, like 17 days after they're in theaters while they're still in theaters. Then they'll go to Peacock usually after three months. But I just had a conversation with the head of Paramount Pictures, who said we've slowly walked it back, where now usually their movies aren't available at home for two months, three months, four months, because they feel like that's better. We're still finding that happy medium where you can take advantage of the marketing that you do when a movie comes out on streaming, not need to do a whole secondary campaign. Some people believe that making a title available at home, depending on how it's available, it doesn't necessarily cannibalize the theatrical performance. Universal would point to The Wild Robot, this kids movie that has held up really well in theaters, even though it's available at home.
Ricky Mulvey: Lucas Shaw, appreciate your time and insight. Thanks for joining us on Motley Fool Money.
Lucas Shaw: Thanks for having me.
Ricky Mulvey: As always, people on the program may have interests in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. All personal finance content follow us at Motley Fool editorial standards and are not approved by advertisers. The Motley Fool only picks products that it would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.
