Disney-Gov. Desantis enters new front 5/18/23

0:01Right now on Fast Florida Feud, Disney vs DeSantis taking a new nasty turn. Bob Iger scrapping plans for a new campus in the sunshine state that would have thousands of employees. We'll get the latest on this developing story. Plus, full stream ahead, Netflix soaring as its ad-supported platform adds over 5 million users. The stock jumping nearly 10%. Then later, Walmart's grocery gains. The retail giant saying consumers are cutting back on pricey purchases but still spending on essentials. We'll go inside the numbers. All that and the chart master is here with an industrial stock he says is so good it's bad.

0:34The reveal just minutes away. I'm Melissa Lee. This is Fast Money. We're live at the Nasdaq MarketSite. On the desk tonight, Tim Seymour, Karen Feinerman, Carter Wirth, and Dan Nathan. And we begin with a developing story on the fight between Disney's Bob Iger and Florida Governor Ron DeSantis. Disney now ditching plans to build a new Florida employee campus and not asking thousands of California-based employees to relocate to the Sunshine State. CNBC's senior media and tech correspondent Julia Borsten is here on set with the latest in the story. Julia. Well, Melissa, this has all just gone down this afternoon.

1:04Disney announcing that it is canceling plans to build a new campus in Central Florida. This was estimated to cost nearly$1 billion. Disney is also no longer asking about 2 ,000 employees in its Parks Experiences and Products division, which it had previously asked them to relocate to Florida to do so. Disney Parks Chief Josh DeMauro announcing this in a memo sent to employees. We obtained this memo. He said that this was due to new leadership and changing business conditions. He also said that he, quote, remains optimistic about the direction of the Disney World business and the plans that they already have to invest$17 billion to create 13 ,000 jobs over the next 10 years.

1:43He said, quote, I hope we're able to do so. This, of course, all comes amid Disney's battle with Florida Governor Ron DeSantis. On Disney's earnings call just last week, CEO Bob Iger reiterated his frustration with the state being anti-business. Now, we reached out to Governor DeSantis' office. They told us, quote, given the company's financial straits, falling market cap and declining stock price, it is unsurprising that they would restructure their business operations and cancel unsuccessful ventures. Now, just to fact check that a bit, Disney did purchase that land and they did already move a few hundred people.

2:21Now they're talking about moving them back. But what they didn't do is break ground on that one billion dollar complex. Yeah, obviously DeSantis' office does not watch CNBC. It feels like this is a moment where Iger's basically sticking it to DeSantis, saying, you know what, we've been playing this game and we mean it. We can pull things and you won't like it. Well, that's the thing. They can't move Disney World. But you know what they can do? They can say, we're not going to move 2 ,000 employees all the way to Florida. And what was so interesting about this when it originally was announced under Bob Chapek is that there was a lot of backlash.

2:54People have their families and their lives in California. It's a big deal to move. And so this is a reversal of that plan. And and this is one of those levers he could pull. So it's interesting, you know, right now this is a huge to do and Iger's likes probably getting it from all sides. But if I think back to a number of sort of big corporate issues like this, there was one where Delta said we can't give discounts to the NRA anymore. And then Georgia said, you know what, we're taking away your tax break. And Delta said, fine. You know, this is our values that we need to. So that was a 40 million dollar tax break.

3:25This is obviously bigger, but we've seen it again and again. Nike, when they did the Colin Kaepernick, you know, and then you had people burning shoes. Nike seems to be doing absolutely fine. And then we saw it with North Carolina with the bathroom and the NBA said we got to move. And the NBA seems to be doing just fine. So I don't think this will be a permanent issue for Disney, which is huge. Right. I mean, they do have other battles to face. They should do. And look, cost reductions at Disney are part of the story. I mean, that was the story. I mean, it's really about where parks were fantastic.

3:58DTC was coming up short. We're actually worried about the second half on where some of those subs might not meet acceleration, at least for fiscal 4Q. So I'm not surprised to hear this. This is part of the soap opera, but this is part of the story at Disney right now. I mean, look, I think shareholders, first of all, Disney is a stock that historically was a free cash flow generating company that was paying a dividend. And that was part of the franchise. So I, you know, I think these are great headlines. that are still going to play out. But this doesn't change Disney as a stock, doesn't change in terms of their business model.

4:30I mean, streaming ESPN might have an impact, Julia. And we have that news today as well. And of course, there have been all these headlines about Disney moving forward with its plans to bring ESPN direct to consumers. Bob Iger has talked about this. He has said he knows it's an inevitability, but that you have to be really careful about the timing and the pricing and what it is that you offer. And they have to work out the deals with the paid TV bundles, with all the cable providers, such as CNBC's parent company, Comcast, and also with the league. So this is going to take a while to figure out, but it does seem like it'll happen eventually.

4:59Yeah, and I couldn't think of a better guy to kind of help that transition, Julia. I remember at the Code Conference back in September, remember Bob Iger was up there with Kara Swisher. That was back when he wasn't CEO. That's back when he wasn't CEO. But he hinted to this. He hinted that this was the course in which he was going. And I think for a whole host of reasons, it makes sense that he is here to usher in this massive sort of change. And I'll just say one other point. I know you're going to look at the charts here. I mean, the stock is actually trading right back at where it was when Bob Iger was announced to be the CEO.

5:26If you think of all the volatility that we've seen in the market, especially in a lot of the media names and such, I mean, they're probably putting their flag in the ground in the right spots right now under the new old CEO to make some of these transformative changes. Speaking of the chart, I mean, sometimes, right, you can just leave something alone. We know it had a heavy volume drop in gap in response to its earnings, 60 million shares worth. and typically a re-rating like that is not something to embrace. Just stay away. All right. Julia, thank you. It's great to see you here in person. It's so great to be on set.

5:57Julia Borstein. Let's bring in for more on this story, CNBC contributor Jim Stewart. Jim is the New York Times columnist known for writing the book Disney Wars. Jim, great to see you. Thanks for joining us today. Nice to see you. Good to see you, Melissa. What do you make of this whole thing? I mean, it's DeSantis' move next, right? Yeah, I mean, Disney just escalated this battle in a pretty significant way. I mean, it had pretty much before, I think, been political theater. But now we're talking real money. We're talking real people's lives. We're saying they're not pushing forward with this big expansion in Florida.

6:30They're kind of sending a message to the rest of corporate America that we do not see this as a state that is pro-business and friendly and a place where we want to expand. And I mean, it's not going to cost Disney, you know, save a little money in the short term. But it was one of Chapek's cost saving measures to get these people out of high cost Southern California into lower cost Florida. The Imagineers were very hostile and demoralized by it. They'll be thrilled that this has been canceled. But there weren't that many of them. The thousands, other thousands of employees and the billion investment is not going.

7:07So this is going to hurt Florida. I've said all along, DeSantis and Disney have every reason to align their interests. And yet they're pursuing this apparently ever hotter war against each other. And like you said, it's DeSantis' move next. Is he going to call a truce here or is something even more self-destructive going to happen? What do you make of the move or the potential move to offer ESPN as a standalone streaming service? Well, I think this is a watershed moment in the history of broadcast, certainly in cable, of streaming emerging. I mean, Disney has been modeling a streaming model for ESPN for many years now.

7:50But I don't think people thought it would happen quite this fast because the cable model for ESPN, you know, ESPN was getting close to$10 a subscriber when, you know, the average cable channel was getting 50 cents. I mean, it was the most powerful profit driver, a business model that I've ever encountered. But it's eroding fast. And I think the earnings last week made that very clear. It didn't get quite as much attention as I thought it would. But with that linear profit, linear broadcasting profit going down was mostly ESPN. And that was down 35 percent. I mean, it was kind of going down single digits for a while and creeping up more.

8:28That's a sudden plunge. So they've been modeling these lines. the cost of the sports rights, the revenues they're getting from the cable subscribers against what they could potentially get through streaming. And those lines are now starting to cross. And I think that's why we're seeing a renewed effort to move to streaming. You said this is a major moment in broadcasting. And so I'm wondering, Jim, because sports had traditionally been the one thing that you would never drop cable for. You've got to watch it on TV. And there are other types of programming and channels that have the same sort of thing.

8:59Sports and the stock market is really what I'm thinking of. And I'm just wondering, Jim, what does this open the doors for? I mean, if Disney is going to go this route with ESPN, what else could happen? Well, I think it's the death knell for the cable model. And the cable model was incredibly lucrative for many years. And that's just really going to be over. And, you know, sports, I think you're right. Finances, business is another key driver of cable subscriptions. But sports is number one. And the streaming services, the rival ones, have figured this out. And they've realized that this is the way to lock in subscribers and to prevent churn.

9:39So these bidding wars are now breaking out. We just saw Parent NBC make a big bid for an NFL presence last week. And Apple's talking about it. Even Netflix, which said they would never go into sports, is apparently scrutinizing that and thinking about it. Amazon is moving in there. So ESPN does not have this field to itself anymore. And these costs are going to go up very dramatically because they are must-see destination TV, that if you're a sports fan, you've got to have it. And you can't just cut it off because it's a recurring event. Jim, thank you so much for joining us. James Stewart of The New York Times.

10:19Moving on to Netflix shares bringing the heat and rallying almost 10 percent, having their best day since October. In an upfront presentation, the streaming giant said it's recently launched ad supported tiers nearly five million global monthly active users. Over the last year, by the way, the stock has doubled. Dan, what do you think of this move? It's funny. I think all of us on this desk were fairly constructive. When they did that about face on adding this advertising model, in a way, if they were going to see the sort of churn that they were seeing, the competition that they were seeing, it made sense to try to do this.

10:50And when you think of just the margin that advertising could add if they were going to lose these sort of subs anyway. It made a whole heck of a lot of sense, especially with all the focus that we've had for 10 years on the free cash flow or the negative free cash flow it took to create all the original content. So today is kind of payback in some ways for that. I think probably the trade gets harder from here as they probably, you know, they have very easy comparisons right now. And the valuation looks kind of reasonable. I know that you guys have been in and out of the name for a whole host of reasons over the last year or so.

11:19I mean, it gets harder up here at these 52-week highs, in my opinion. Well, it does, except for the fact that are you starting to pay a growth multiple for the company, whatever that means today. But if you pay 26 times the$14 a share, it's a$380 stock, right about where the stock is now. It's had a good run. What's key is, though, analysts are able to do stuff like, say, well,$5 million on paid is equal to$2.5 million on the former metric. And so you're getting that sub-growth. There's no denying that Netflix is the only streaming company that has free cash flow. There's no denying. And this is a quote I'm quoting from J.P.

11:56Morgan, who I think is quoting Nielsen. Basically, Netflix has the engagement of three times all the other competitors combined in 22. And their closest competitor, they're five times the engagement. So they're so far ahead. The fact that they're showing growth again, you should be paying up for the one that's actually making money. And does this mean that the others are really losing, Karen? If five million monthly active users are out there for Netflix's ad supported tier, what does that mean for the others? Well, I think we I mean, we've seen we've seen growth stall, right? I think that I don't know when the reckoning is coming, but it has to be somewhat soon when you've got, you know, I don't know, half a dozen all vying for if it's sports or whatever.

12:40So and Netflix is clearly, clearly in the poll position. It has been for a really long time. That being said, though, stock up$16 billion today-ish on, I don't even know exactly what the math means for this. They didn't really go through it. We just know that it's an ad-supported tier, but we don't know what the ad revenue is, right? And we don't know what kind of cannibalization that, so that's a lot of, I think your point, Dan, was just, it's a lot of things that were priced in today. Today was the day for whatever the reason. I'm long. I'm staying long, but I'm nervous. Well, I mean, if you think about it, it's the equal and opposite circumstance of Disney.

13:16Disney is a stock that's making relative lows to the market back to 09. I mean, that's a disaster. Whereas this is momentum, it's bullish price fine correlation. All it's done is return to its February high, still off 50 percent from its all time high. I think it's a textbook example of a bearish to bullish reversal. How does that make you feel about Disney versus Netflix, Tim, since You are the one. I'm on both. And I look, I feel pretty comfortable owning Disney here. I feel pretty comfortable that Disney is on a place to the cost rationalization that will get this company back to some reasons why I think a lot of people will hold it.

13:50The profitability on streaming is something it's a big question. But I think they will slowly fall in line as well. It took Netflix a long time. We started here from Warner Brothers Discovery that they're actually maybe going to be there faster. I started nibbling on that, just to be clear. So I don't love Disney. I don't like what's going on. But they're a different company. I mean, they're a company with great assets. And I think a lot of levers to pull in this whole ESPN dynamic is something to me, if anything, it's only a positive catalyst. We know linear TV is dead. And that's been well-priced.

14:20All right. Coming up, we've got some earnings action on deck. Shares of raw stores on the move after reporting results and numbers from the quarter next. And speaking of retail, Walmart out with an earnings beat this morning but flagging a major issue facing consumers. what you need to know when Fast Money returns.

14:41Welcome back to Fast Money. Earnings alert on Ross Store. Shares of the retailer volatile after hours on a mixed report. Earnings topping estimates while revenues coming in slightly below. Ross Store is also issuing weaker guidance for both the current quarter and full year. Courtney Reagan is here to break that down. Court. Hi, Melissa. So the off-price retailer did report comparable sales in line with expectations up about a percent, but predicts it won't see growth there in this current quarter, despite saying on the call that sales improved throughout the quarter with April actually the strongest month.

15:10That's the opposite of what Walmart saw when you're talking about the cadence in the quarter. CEO Barbara Rentler says, quote, there remains a high level of uncertainty in today's macroeconomic and geopolitical environments and prolonged inflationary pressures continue to negatively impact our low to moderate income consumers discretionary spend. Accessories and cosmetics were best-selling categories. Apparel was challenged. Transactions were up, but average unit retail was down as shoppers sought out the best bargains at Ross stores. On the call, Ross executives said Bed Bath & Beyond's bankruptcy will open up store location possibilities and noted that shrink was a little higher, but not meaningfully so.

15:49So that very different from what we heard from Target yesterday. Melissa. So is her average consumer, Courtney, different from the average TJX consumer shopper? Yes, I would say that Ross Store's consumer is slightly lower income, and they also have a banner called DD's Discounts, which also skews even slightly lower income. So they're a little bit different than a lot of the TJX shoppers, which is, of course, the TJ Maxx, the Marshalls, and the HomeGoods. But it is still that off-price category retailer. All right, Court, thanks. Courtney Reagan. Again, Karen, put this together with the Walmart results.

16:23What do you make? Very consistent, right? That we're seeing, you know, the consumer is still there. They do have money to spend. They do seem to be a little bit cautious. Although raw stores, it sounds like maybe a little sandbagging there. Because Target had talked about May not really being much better than April and March was bad. But we're seeing this sort of, you know, trade down value oriented, which when you're Walmart and you've got that scale and you get that offering of groceries, you can do it. So the consumer is still there. I'd like to see us get out of what happened in March. So it will be next quarter before we really get a sense, I think, of are we is the debt ceiling issue solved?

17:01Do people feel better about banks? Do they feel better about the Fed? And there not being a recession. So I think the consumer is still there. But definitely more, you know, this is better for Walmart than I think that it is for Target. I mean, look, I think the extreme moves within consumer continue. We know that home builders are at record highs and restaurant stocks in general. As all of these look at the reaction from Target, Home Depot, terrible. Walmart barely moved. It's not a good space to be. You want to favor those other areas of the market. And I figured you would say that this chart's done nothing in two years.

17:35Right. I mean, and I love Walmart. I'm long Walmart. But I acknowledge that there's a lot of great news. I would push back on the people that said this is all grocery. What's the big deal? This isn't a great number. The consumer might be dead. Like it's not it's not hooray consumer. Well, they're managing this margin mix and they're managing the mix and how that translates to margin a lot better than people are expecting them to. And I realize part of the benefit here is they've lapped really difficult freight comps. But I think, you know, Walmart management, as they were beaten up heavily a couple of quarters, about five quarters ago, I think deserves a lot of credit.

18:08And again, nobody can push people around in terms of pricing more than Walmart can all the way through their chain. So, I mean, I think it's still a great place to be. I'm very happy owning the stock. I don't own it because I think it's a high growth company and it's not cheap, but it's going to be very defensive here. To go through or to whether the next phase of the economy, whatever it may be, it is going to be soft. How soft is the question? Do you want to be in a Walmart or do you want to be in a McDonald's? I mean, what sort of staple do you want to be exposed to, Karen? Walmart. Yeah, I do.

18:38And Amazon. Amazon. I mean, you obviously have the tail wagging the dog. with the AWS, but Amazon. Yeah. Tim? I think it's, I like the call on Amazon. I'm sure Carter's got a view on that chart, which has been breaking out to all kinds of fun stuff after underperforming the group. But McDonald's, be careful. I've been long. I like the story. But I've also been selling calls, and slowly that position is almost flat now. Similar to Walmart, Walmart over McDonald's. Agreed. And McDonald's is rich, full, steep, whatever word you want to use. So good it's bad. Getting into that category. Wait what that could be later in the show.

19:15But Amazon has all the elements of the opposite. Something that's been terrible. It's now emerging. Yeah. Terrible but emerging. Dan, can you get on board with that? He calls it a bearish to bullish reversal. I've been following his work for 15 years now. Yeah. No, I listen. I think the Amazon thing is interesting. I think it's interesting that that's where you went to in her like little would you rather. That was just like you just stuck that in there a little bit. That's OK. So would you rather rather? She's the only job, by the way. Yeah. No, but it's interesting that you went there because we spent so much time talking about the valuation of this company and how it's been associated with the high-growth, the high-margin aspects of their business, and the North American retail business has basically been left for dead or so.

19:49And at some point in a market like this, that might start to appreciate that sort of stuff. Maybe you start to get a little bit more evaluation support there. Right. Coming up, more after-hours action, this time in shares of applied materials that stock is on the move. After reporting results, we'll bring you the numbers next. Plus is a bottom in for biotech. Negative sentiment dragging on the space for some time now, but our next guest says the group could be about to turn around. The names he is seeing leading the pack ahead. You're watching Fast Money live from the Nasdaq market side in Times Square.

20:15Back right after this.

20:25Welcome back to Fast Money. Earnings alert on applied materials. Shares in the red despite a top and a bottom line beat. AMAT also issuing strong EPS guidance for the current quarter. Let's get some details from Christina Parsinevelis. Christina. Unlike other U.S. chip equipment suppliers, applied materials is more exposed to mature, what we call lagging chips, often used in car sensors and power stations. And that we saw for the drop in demand from consumer electronics and in turn memory chips. It's been the off, I guess, the saving grace for applied materials. With Gary Dickerson, the CEO, saying on the call, clearly the memory market is weak.

20:57He continued to say equipment spending from memory chip firms is tracking at its lowest level in more than a decade. Although the company didn't provide a full year outlook, They did say that Q3 guidance did their estimates, sorry, beat what was out there with CEO Gary Dickinson pointing to demand from clean energy, electric vehicles and industrial automation. However, China, for them, isn't going to be the fastest growing economy for their products. Instead, it's going to be Japan, Europe and the United States. Lastly, management on the call did warn their backlog of inventory would still remain elevated as customers delay orders.

21:30You can see shares are down almost 1.6 percent. Thank you, Christina. Christina Parts Nevelis. You know, for a stock that's moved about 12 percent for the week, it hit a 52 week high in today's session. It was up more than 3 percent today. That's not bad, Dan. Yeah, it's not bad. And it trades at a market multiple. But here's the problem right now for earnings and sales this year. They expect to be down mid single digits and about flat to down like low single digits next year. So like maybe that multiple is not appropriate. But there was a comment in the release that I thought was really interesting.