It's a busy week for consumer goods news, and Industry Focus is here with a rundown. With Amazon (AMZN -1.02%) eyeing the movie industry and ramping up the turnaround time from theater to streaming release, should Netflix (NFLX -3.23%) -- or Hollywood, or AMC (AMCX -3.17%) -- be concerned?
Motley Fool Analyst Sean O'Reilly has never had a Shake Shack (NYSE: SHAK) burger, but he's got some thoughts on the company's upcoming IPO and how it compares to others in the fast casual dining world.
Finally, T-Mobile (TMUS -2.17%) is working hard to catch up with industry leaders Verizon (VZ -1.41%) and AT&T (T -1.29%). The third-place provider has poached plenty of customers from the frontrunners, but will it be able to keep pace with the big dogs, and is there even room at the top for a third contender?
A full transcript follows the video.
Nathan Hamilton: Amazon goes Hollywood; all that and more on the consumer goods edition of Industry Focus.
Welcome to the show, Fools. I'm Nathan Hamilton. Today we are talking consumer goods with Sean O'Reilly.
Sean O'Reilly: Hi everybody.
Hamilton: We're talking a little bit about Amazon, Shake Shack ... everything's happening this week.
O'Reilly: Yes, and the first item we're going to talk about is Amazon's announcement from yesterday that they are going to start making feature films that will actually be released in thousands of theaters nationwide, and then get uploaded to Amazon Prime in six to eight weeks after they're released in theaters; really quick turnaround time.
This just confirms my theory that Jeff Bezos wants to be the next Steven Spielberg.
Hamilton: Am I correct that in last week's show you did predict that Bezos would be a Hollywood bigwig?
O'Reilly: Yes, that was his goal all along.
Hamilton: Maybe we could make some money off that, instead of investing in the stock!
O'Reilly: Yes. How would we ... open up a movie theater? I don't know.
Hamilton: I guess so, or be a content producer of some sort.
O'Reilly: Also good.
Hamilton: Yes. Like Woody Allen; he got in (unclear).
O'Reilly: Perfect, yes. This actually comes on the heels of that announcement, that they're teaming up with the one and only Woody Allen to make a TV series on Amazon. I don't know if you're a Prime member or not, but I hopped on over there because I unfortunately love the show "Alpha House" on there.
They're letting people pick the next series that they back. There's one about a Virginia family at the turn of the Civil War, there's one ... it was a British-themed "Downton Abbey" spinoff or something. So, not only are they trying to get into feature films, but they're literally just pandering to, "Okay, what do you want to see? We'll make it, then you'll love us."
Hamilton: Looking bigger picture, Amazon's had some big wins. What was it, the Emmys? Won some Emmys there, Woody Allen, moving into now movie theaters and so forth. What does this mean for competition as a whole? Should Netflix be worried about it?
O'Reilly: I don't know, I think Netflix is probably going to follow suit someday. Now, make no mistake, Michael Bay is not going to be making things for Amazon. There will be no $150 million "Transformers 8."
Hamilton: "Transformers 21."
O'Reilly: Oh! Optimus Prime and Amazon Prime. They could do a thing there!
These will be more indie-type movies. They'll have budgets of like $5-25 million. An episode, we talked about last time, of "House of Cards" costs $4 million, so these movies will not be "Planet of the Apes," "Transformers" type, big-budget "Titanic" things. They will be targeted, they'll be lean and mean.
The big thing pointed out to me was the turnaround time. I mentioned this before, but this will be in movie theaters. You'll see a little Amazon Studios logo, and then you'll go watch your movie at the AMC theater up the road here -- and you'll also be able to watch the same movie eight weeks later on your Amazon Prime.
The immediate thing I thought of was this trend toward instant gratification.
Hamilton: It's out in the theater and then on Prime, streaming.
O'Reilly: Yes, turnaround like that.
I immediately made the connection between that and this trend toward instant gratification with our phones and our TVs and our movies and everything. Kevin Spacey was asked why he thought the "House of Cards" Netflix type model is working so well, just with being able to binge-watch something -- which I must confess I did.
For our listeners that don't know, I watched both first seasons of "House of Cards," one and two, in about four and a half days. It was rough!
Anyway, he said that's what people want. They want to be able to watch what they want, when they want, for as long as they want.
These days of having to wait for -- a lot of shows that are on, typical broadcast shows right now -- they had a winter-long hiatus. I couldn't watch my favorite shows for like a month and a half. I was like, "What is this? This is unacceptable." And now Amazon's going to start pushing movie studios to do the same thing.
Hamilton: This affects movie studios, the theaters, cable providers, Netflix streamers. It really hits on a lot of different points.
O'Reilly: This is a modest shot at the bow of the movie studios, to where if people catch on and they start being like, "Well, I could go see it in the theater ..." Instant gratification with movies is kind of a big deal, so I'm starting to wonder. Will movie theaters be here in 30 years? I do like the big screen in IMAX, but anyway.
Hamilton: Here's one thing I hope. In the true Amazon fashion, I hope they go cheap with the movie tickets.
O'Reilly: Like $4 or something?
Hamilton: Exactly. Undercut everybody else.
O'Reilly: "We will pay you to come see our movie." No!
Hamilton: Almost sometimes, in Amazon's case.
O'Reilly: Almost, yes.
Hamilton: Moving on here to a completely different industry altogether ...
O'Reilly: But equally as important to our lives.
Hamilton: Yes. In fact, you switched over to T-Mobile recently.
O'Reilly: Yes. I don't like to name names, but here, fine. I was a Verizon Wireless customer and I just switched over to T-Mobile. Partially, I told my wife, "My boss is super tech-savvy. He's like, 'T-Mobile has really upped their network.'"
I read in Consumer Reports, did a little bit more research. They pointed out that T-Mobile's network, and the value, is second only to Verizon and AT&T and that's only because they're literally everywhere -- so it's actually really important to be on Verizon or AT&T in a rural area -- but I live in the nation's capital. It does not affect me.
So, I made the switch. I got my iPhone 6. I love it. So, I was actually surprised to read this news that came out today!
Hamilton: That you're not the only one that believes in the value proposition of T-Mobile.
O'Reilly: No. You called it a couple of months ago. Their member acquisition, they just keep sniping people. It's awesome. Anyway, sorry. Go ahead.
Hamilton: Deutsche Telekom's CEO came out and said ...
O'Reilly: Deutsche Telekom is, of course, a two-thirds owner of T-Mobile.
Hamilton: Yes, majority owner. They don't believe in T-Mobile, say, as much as maybe you and I do.
O'Reilly: Yes. Revenues ... they're basically having to invest in order to get this network to the quality to where they can snag the Verizon and the AT&T customers. They're going to invest $4-5 billion a year in this 4G network and expanding that to everybody.
They had revenues of -- forgive me, I don't know it off the top of my head -- but revenues of around $5 billion and they lost like $100 million last year. Deutsche Telekom is essentially like, "Show me the money. How long can we do this?" Competing with the market leaders of Verizon and AT&T, it takes a lot of money.
Hamilton: Yes, it's interesting. We talk about T-Mobile a lot, it seems like, but you mentioned a couple billion dollars just to keep pace with AT&T and Verizon.
O'Reilly: Right. Not only did they have to catch up, but now they've got to keep pace with bigger companies, with bigger balance sheets.
Hamilton: Yes, with strong free cash flow.
O'Reilly: Yes.
Hamilton: If you look at it, T-Mobile spent ... actually capex a few years back was around $2-3 million. The most recent trailing 12 months near $4 billion, maybe even north of that, and that's just to improve their network a little bit.
They're inching up as they go along to really get to that point where maybe you reach the scale of AT&T or Verizon.
O'Reilly: Right.
Hamilton: That's a huge investment, and Deutsche Telekom doesn't think that it's sustainable.
O'Reilly: Of course it also begs the question, between all the customers that are willing to pay the money that it takes to support these networks, is the United States able to support more than two awesome networks? Deutsche Telekom is wondering, maybe not.
I loved what you had to say about the CEO of T-Mobile, who thinks they can do it.
Hamilton: Yes. I think we actually touched upon this a few shows ago. There are concerns but also a lot of positives.
O'Reilly: Right.
Hamilton: We'll see how it plays out.
O'Reilly: Including my bill!
Hamilton: Yes. Deutsche Telekom has a good viewpoint from which to gauge the market.
O'Reilly: For sure. Very good.
Hamilton: IPO news, not so much related to T-Mobile, but Shake Shack had an IPO.
O'Reilly: Yes. Full disclosure, I have not enjoyed one of their burgers, but having read the very long prospectus I now want to! Lots of pictures of burgers up front, so I definitely want to do that.
Hamilton: They are good. I will say that.
O'Reilly: You haven't taken any?
Okay, so Shake Shack IPO. They priced this morning at anywhere from $14-16 a share. Obviously we don't know where it will open up, but the high end of that range values the company at $568 million.
Now, that may seem like a lot of money but it is, in the world of IPOs, obviously not that large. Most IPOs we see are in the billions.
But I was curious to see where the Shake Shack IPO fell in terms of valuations, compared to the fast casual chains -- and that's essentially what Shake Shack is; they're the high-end fast casual burgers. What would you say a burger costs there?
Hamilton: Well, mine was actually in New York, at the original location. I can't recall, so they've probably bumped up the price quite a bit. It was probably $10-15.
O'Reilly: Right, so you're obviously getting a higher quality burger than, say McDonald's (MCD -1.28%), but you're obviously paying for it. The value proposition is very similar to a Chipotle (CMG -2.09%); locally sourced beef, all that good stuff.
Hamilton: What about the actual valuation?
O'Reilly: Right. They are going to be selling this thing for 5.4 times trailing revenues. They obviously didn't have, when the prospectus was filed, the results for the fourth quarter, but for the nine months ending September 24 of last year they had revenues of just $79 million.
If you annualize that, it comes to about $105 million. 5.4 times revenue, as I said before, but what was weird to me was that is exactly what Chipotle Mexican Gill is trading for right now.
Hamilton: It is in Chipotle territory.
O'Reilly: Literally exactly 5.4 times last year's revenues. I was like, "Hmm, seems kind of suspect."
Hamilton: Are they growing their store counts? I don't follow Shake Shack very closely.
O'Reilly: Yes. They have 52 stores, currently. 22 are actually international. Most of them -- in fact, I think 18-20, somewhere in there -- are in the Middle East. They've obviously got a Shake Shack at the crazy mall in Dubai and all that.
So, 52 stores worldwide. They're looking to open about 10 a year for the foreseeable future, with the goal ...
Hamilton: How many are existing, sorry?
O'Reilly: 52. So 10 a year, it's like 20%. This is not Chipotle-type growth, especially because Chipotle's revenues were growing at like 30-40% a year for 5-10 years.
Hamilton: Yes. They've got the comps boost and the store unit boost.
O'Reilly: Right. Shake Shack, in their prospectus, said that they think planet Earth can handle about 450 of their stores, so eight times ... at 10 a year, it's going to take a while to get there. Given the disappointment that investors saw with Potbelly's (PBPB 0.78%) IPO a year or year and a half ago, I'm not super optimistic, although the burgers sound amazing.
Hamilton: So it's somewhat richly valued, maybe, for an IPO? Compared to a tech IPO not so much, but in the fast food space, on the higher end?
O'Reilly: Yes, very much so. They're priced like a Chipotle and if they fall anywhere short of that growth -- which, if they open up 10 stores this year, their comparable store sales are going to have to go crazy to be worth it.
Hamilton: Appreciate it. I look forward to seeing what happens.
O'Reilly: You bet.
Hamilton: Not only trying out another burger, but with the IPO.
O'Reilly: Shake Shack later this week?
Hamilton: Exactly.
O'Reilly: Perfect.
Hamilton: Wait, there's one in D.C. isn't there?
O'Reilly: Yes, I would hope! Let's go.
Hamilton: Yes, there's one right in downtown.
O'Reilly: I think I know where we're going Friday.
Hamilton: Market research.
O'Reilly: Perfect! Market research.
Hamilton: Thanks for listening, Fools. Fool on!
