Magic Lost At Disney? And Has AI Come Too Far, Too Fast? 5/7/24

0:03Live from the NASDAQ market site in the heart of New York City's Times Square. This is Fast Money. Here's what's on tap tonight. A Disney downer. The stock seeing its worst day since 2022 after warning that two major pillars of its business are under pressure. The news fully erasing three months worth of gains. Can the entertainment giant get its magic back or should investors just let it go? Plus, the apple of our eye, the tech giant unveiling a new slate of iPads this afternoon. But it's a stock chart that caught the attention of our traders. Is the company back on track and heading toward new records.

0:34We'll debate that. Plus, Tim is flexing his blyceps after Lyft earnings. Starbucks still struggling, now down 18 percent since earnings last week. And why someone, not naming names, thinks now may be the perfect time to short Tesla. I'm Melissa Lee coming to you live from CDOB at the NASDAQ on the desk tonight. Tim Seymour, Karen Feynerman, Guy Adami, and Dan Nathan from the Milken Conference in Los Angeles. We start off with a 9.5 percent drop in Disney after earnings this morning, Even as the entertainment giant streaming business gets closer to profitability, a slight revenue miss and lower than expected guidance weighing on the stock.

1:08It had been the best performing Dow component this year up until today's plunge. It's now dropped to number four. Leadership alluding to trouble in two tentpoles of Disney's business on the earnings call. First, there was CFO Hugh Johnston warning about the consumer, saying that while travel and demand still appear healthy, the company is seeing, quote, some evidence of a global moderation from peak post-COVID travel. Then there was CEO Bob Iger addressing future bumps in the road for streaming, admitting the path to profitability, quote, will not be linear. Disney expecting to post another streaming loss in the current quarter, but does expect to turn a profit in fiscal Q4.

1:44So with challenges facing two of the most critical parts of Disney's media empire, is this a sign that the magic has left the kingdom? Guy. Well, you got some joke. What was it? Was that a Frozen thing? Let it go. That's what Elsa's saying. The jokes around here are funny and clever, and I usually laugh. And you giggled. You're a participant and sometimes a viewer as well. The magic was never really back. The cost-cutting got the magic back in terms of the stock, but they never really addressed the core issues that they were having. And we said it last night or we said it a week or so ago that the two quarters of cost-cutting their way to profitability, they no longer would get a pass.

2:24It was going to be very hard to build upon the gains that the stock saw. And it actually went to levels that I thought. Five times normal volume, that's a good sign. But there's probably a little more downside here. But I don't think you're looking for a place to sell it. You're trying to figure out, like, what's the right level. Again, it's probably another 6%, 7 % from where we are, but we're not that far away, I don't think. Heavy volume meaning good sign because it's going to be flush. I believe it's a good sign. Yeah. Karen. I can't help but wonder the timing of this release relative to the proxy fight, right?

2:52They had such a strong quarter going into the proxy fight, and now that it's over, not such a strong quarter. So I don't know. I find that, I mean, maybe that's just me being overly, you know, conspiracy theorist or something. I find it a little, I don't know. I'm surprised I actually haven't heard from Nelson Peltz. Never shy, right? So I don't know. You know, I doubt he's coming back to do anything aggressive. There's nothing to do. The meeting's over. But it's just sort of interesting to me. So then we just get back to, all right, well, what is the right price for this company, right? Clearly, they have some issues, but they obviously have three tremendous businesses.

3:29Sometimes they don't all operate on all cylinders at all times. But I do think that the valuation here is it's OK. It's not great. I feel like there could be some more downside here. If you're a believer that the consumer is going to continue to be increasingly strained as the year progresses, then that's not a great thing for Disney. I mean, 52 percent of its operating profit is experiences, which is mostly theme park. Yeah, I don't think we've priced that into Disney. I don't think we've priced a slower consumer. I don't think we've priced cyclicality in essentially the media business overall.

4:02I think what I hear Guy and Karen saying is that this is as much about a tough comp as, you know, you can talk about whether the proxy fight was a reason to throw a lot of stuff in there. That last quarter really had something in it for everybody. And that's part of what I think is hurting the stock right now. I think the content costs came in. You know, there was a loss. There was a big loss on content. I think that was a big deal. I think that was something people didn't expect. I think studio has been slower. I think the summer box office is not expected to be very strong. And I think they came out of a gangbusters period in terms of parks that is going to be tough to duplicate anytime soon.

4:36So I just think that the streaming losses dynamic is still the most important part of the story. And while we got good news over the last two quarters and last quarter again, we were given this bright light at the end of the tunnel. And I just think that that's the issue here. I think it's an opportunity for the stock. I think I've also heard other people say that. Is it an opportunity, Dan, or is that bright light dimmed for the foreseeable future? Probably not. I mean, I think Guy kind of highlighted some of the levels there. That gap from last quarter is going to get filled in. It's on its way to doing that.

5:09And just listening to the guys and gals talk about how they perceive the quarter and the guidance, you can go back a quarter when the stock broke out to new 52-week highs, and you say to yourself, that was very company and stock specific. why that stock rallied that way. Now if you look at this quarter and this guidance, and what Tim just said, difficult comps, right? And now you can extrapolate it a little bit more to the consumer, right? And basically the environment that they are starting to see. So unless they are basically trying to blame this poor performance after such a great quarter that had a lot more to do with what they were doing on the cost side and streaming, so three months out, to me that's not a great story.

5:48And then I want to move it out to the consumer discretionary. Look at a Home Depot. We're going to get a lot of retail earnings over the next couple of weeks or so. That stock does not act particularly well. It's down 15 % from its recent highs here. And I think if you want to start piecing some of this stuff together on the consumer front, it's probably setting up for a more challenging second half, I think, for a lot of these consumer discretionary companies. I just wanted to add one more thing about this. This was the results for the quarter ending March 30th, right? The annual meeting was April 2nd or so.

6:21So they had to have some sense of how this current quarter was going. You would think. Right. Yeah. I don't know. Just adding that to the, it's a little odd. Well, again, I think Guy loves to play this game. And, you know, we don't play games without Melissa's consent. But you were about to do it, though. But I'll describe the game you like to play sometimes with consent. Please. Because you don't act on your own. But but is that if you told me the news, could I tell you what the stock price was going to do? Yes. And if you told me that Disney, who has a plus 25 percent year over year EPS growth, guides up on the year and shows, you know, it tells you that their linear business sucks.

7:01We knew that. Like, sorry for that. But I look at the softer linear biz and I know what's going on with linear TV. The most important thing here really is streaming and DTC. And those numbers were not terrible. I guess, you know, earnings are sort of in the eye of the beholder, right? I mean, when I looked at Disney's earnings this morning, I thought, oh, consumer looks soft. Consumer, you depend on the consumer for most of your business when it comes to the theme parks. And streaming also. And streaming too. And then also streaming, it's going to be a winding path to profitability. So you've got the cash generator under pressure.

7:40You've got the growth business with an uncertain path. And what do you have? stock that's down 10 percent. Karen, you're spot on with that. But maybe they thought that this was a pretty benign quarter and you weren't going to get the move because, listen, EPS beat revenue, slight miss. I mean, subscription numbers, not great, but not a disaster. I mean, they probably thought, you know, given the way the stock had been trading, this was not going to happen, which might be one of the reasons they didn't address it. With that said, they should know it's their business to know. Right. So I think a lot of it was given the run that the stock had.

8:09Clearly, a lot of it was the fact that the Netflix quarter by itself was very good. It wasn't the quarter that scared everybody in Netflix. It was all the things they said subsequent to the quarter. So when you compare those two things, I think it makes a little sense. But I do think there's a level to buy it. And the level is that gap that was created back in February. And if I'm not mistaken, comes right in around 98.5, 99, which is basically what we said earlier in the show. The other backdrop, though, and we were discussing this before the show, is that Disney earnings don't happen in a vacuum.

8:35And we're hearing these cautious comments about the consumer at Disney specifically, not in a vacuum. And we heard similar thoughts from Starbucks. We heard a little bit from Nike. We heard it from McDonald's. All these consumers are under pressure. A wide swath of consumers are looking at how they spend money. They're reducing their ticket sizes. And that's a worry. I think it's an interesting look up at the horizon and see some of the most iconic companies in America who in the past have been very defensive in some of these periods. And if you think about the consumer, really, for a lot of Disney, absolutely for Starbucks.

9:11products. You know, this is a case for Nike. I mean, this this is not necessarily the low end consumer. I mean, this is a consumer that typically has discretionary income. And we're hearing that there's still a lot of discretionary income. We know what the job report told us. So, yeah, that's fascinating. I think what we have heard from lower end continues to be the story. And this is this is really isn't this the conversation we thought we were going to have a year ago when we really thought that the economy was going to be facing significant headwinds in 24. It's now 24. It's all playing out a lot slower.

9:43And it gets to this place where are the multiple on the S &P, which is 21 forward, does it deserve it in this backdrop? So the consumers in the spotlight, Dan, questions around the consumer. We have NVIDIA on deck. We've got a lot ahead here in terms of potential, you know, headwinds, tape bombs, whatever you want to call it for the markets in the next couple of weeks. Yeah, you know, there's a certain sense of irony that, you know, all this inflation is likely the thing that causes the slowdown. Right. So we know that companies have been able to pass through a lot of those increased costs that they're facing, those input costs.

10:19But now it does seem to feel like the long, invariable lags that we heard so much about with this higher rate environment to kind of combat the inflation might be the very thing that slows us down. And so, like, to me, I just feel like you've got to listen to each one of these conference calls and you've got to hear what these companies have to say and you've got to attach the dots here. But I also feel like now that we're through the bulk of S &P 500 earnings, to your point about, like, NVIDIA, so much of this market, at least the stock market, in my opinion, is relying on this generative AI trade.

10:52You know, Google, Amazon, good results. Meta got hit because of the spending there. People are optimistic about what Apple might do. So it goes back to some of these larger components of the S &P 500. And now here we are. We have this date. It's May 22nd. It feels like deja vu all over again. We were doing this in February, right, coming out of earnings season. And it really feels like if the data, the economic data, just stays where it is, it feels like the entire rally that we have here today is going to be predicated on how investors perceive the guidance from NVIDIA. All right, let's bring in Julia Borson for more color on Disney's quarter and specifically the streaming strategy.

11:30Julia, I'm just curious, you know, when you listen to the conference call, these comments that sort of put the markets into, not the markets, but the stock into a tailspin, seemed a little bit even off the cuff, not totally serious. They were sort of mentioned and there was like only one follow-up question regarding the consumer and the return to post-COVID spending when it comes to the theme parks. the comment about the path to profitability on streaming not being linear. That didn't seem all too surprising either. What was your what was your take on on how that was handled? Yeah, I mean, look, I think that Disney has been very clear that they expect to hit full streaming profitability by the end of their fiscal year.

12:09That means the entertainment, which is Disney Plus and Hulu division and also ESPN Plus. It was a positive surprise that they hit streaming profitability with$47 million in revenue for the entertainment piece of that, which is Hulu and Disney+. They did say that they're going to drop out of profitability in this next quarter, the fiscal third quarter, before returning to full year profitability in Q4. So despite the upside surprise this quarter, they acknowledged the lumpiness, and it was really a warning about Q3. I think it's notable that there was also warning about the fiscal third quarter when it came to the parks also, that they expect a flat operating income in the fiscal third quarter.

12:48So you have these warnings about the fiscal third quarter and then the reassurance from, in this case, when it came to the parks from CFO Hugh Johnson, that you're going to have a rebound in terms of profitability in the fiscal fourth quarter. So what this is really about here is lumpiness and the fact that we're no longer in this post-pandemic, everyone has all this pent-up demand for the theme parks phase. It's now a little bit less even. And then I think the same thing holds true for the streaming business. They're on this path to profitability. They're going to hit their targets, but it's not going to be sort of all unfettered growth.

13:24One thing that I think is really, really important to hit in the streaming business here is that Bob Iger overtly praised Netflix. They pointed out, he pointed out how long Netflix has been at this. And he said, Netflix has had a lot of success with its crackdown on password sharing. We are going to do the same thing. He talked about rolling out that password sharing crackdown. And I think that he sees the opportunity here to follow in Netflix's footsteps. It's not often that you hear a CEO praising a rival like that. But I think it's a sort of proof of concept for him that that same kind of approach is going to work for Disney+.

13:57Is there any aspect of seasonality about the fiscal third quarter, Julia? I'm just curious, since both of those businesses are going to see softness in that specific quarter. Yeah, I mean, look, the fiscal third quarter is the spring. And then the fiscal fourth quarter is sort of the most important summer quarter where you get a lot of benefit from the theme parks and also in terms of the box office. And I think they have some films they expect to be big hits this summer, including a Deadpool sequel. So there are all sorts of reasons why they may anticipate that also in terms of comparisons as well.

14:31But what's so interesting for me, having seen Iger's efforts to really transform the company, is that he really laid out the plan to address a lot of concerns raised by Nelson Peltz, but also to kind of accelerate things he probably would have done anyways. And now he's put all these changes into place, whether it's, you know, you know, getting to profitability with streaming and launching a joint venture around sports streaming and having this ESPN flagship streaming service launch a year from now. But it takes a while for these changes to actually come to fruition. And I think we're in that kind of in-between period right now.

15:05Hey, Julie, it's Tim. Fascinating to hear where maybe, you know, going after multiple subscribers is something that could be a catalyst for Disney. Do you get the sense that that Disney's average revenue per user or ARPU is significantly below Netflix? And that's that's an issue. They're less profitable, at least in terms of what their their core subscriber is paying in terms of what that feeds through to the system. I almost get that sense. We see all these numbers. But when you break it down, they are bringing in, you know, Disney Plus is bringing in, I don't know, seven bucks ahead. ESPN Plus is bringing in six bucks ahead and change.

15:39So any thoughts on that? Well, I think what's really interesting, Tim, here is you're alluding to the fact that Disney has all these different services, right? They have Disney Plus, they have Hulu, they have ESPN Plus. Combined, that's a service that's really a competitor to what Netflix is. Disney Plus alone is more niche than what Netflix offers. One other thing that Iger teased to during this call is the fact that they're going to start introducing ESPN content within your Disney Plus app. And they want to sort of introduce those subscribers to Disney Plus to the ESPN Plus content with the idea then it'll be easier to sell to them this additional subscription of the flagship ESPN product if people want to subscribe to that outside of a traditional TV bundle.

16:21So Iger's increasingly thinking about Disney Plus as a cohesive streaming platform for all of their content. And the changes they've made to really incorporate Hulu into that, I think, are part of it. Julia, thanks. Julia Borsten. on Disney. And just quickly, it's Netflix's world, I guess, still, even according to Bob Iger. No question. I mean, again, the Netflix... And put up a Netflix chart. I mean, look at the little stealth rally Netflix had since that cascade down to 540 or so. It's come back almost the entire move, which is a pretty good thing. And listen, I'm going to be watching a Ranger game tonight in case you care.

16:54But there will be cable shows. She cares? No, she doesn't. Not really. She really doesn't care. You care. She doesn't want to show her emotion, and I don't blame her. That's a poker player. Yeah. But there will be shows that lead about, you know, go woke, go broke. One of the largest drawdowns in the history of Disney stock. And so Disney and I'm not interested in either side of the equation, but they've become a bit of a political football as well. That obviously does not help them in this environment. Coming up, earnings season rolls on. We've got a bunch of after hours action to bring you Rivian, Lyft, EA, Wynn, Occidental, all in the move.

17:25The details of the quarters next. Plus, Starbucks still dripping lower. shares down more than 18 percent. That was a burst of laughter, Tim Seymour. Down 18 percent since last week's big earnings roast. Why there doesn't seem to be any bounce in this brew when Fast Money returns. This is Fast Money with Melissa Lee right here on CNBC.

17:55Welcome back to Fast Money. We've got a news alert out of the UK border force system seeing a nationwide issue. Sadia Chowdhury is live at Heathrow Airport with all the details. Sadia. Well, yeah, we don't know what has caused this issue, but we know that it's causing massive disruption at the border force. And we've had videos coming in to us from passengers who have said that some of them have had to wait three hours already. Lengthy queues at some of the biggest airports in the UK. Beecro, Gatwick, Manchester and Stansted all being affected. And the issue that the Home Office has confirmed to us is with the e-gates.

18:31So these are the automated gates that people use when they're arriving in the UK. So this is for British passport holders, but also travellers from the EU and other countries like America. And this comes just two weeks after staff at Border Force held a four-day strike here at Heathrow Airport, causing massive disruption then. And under a year since the last time that we had problems with the e-gates. And that time, officers had to be deployed to check passports by hand so those gates were all not in use. And that was for an entire almost 24 hours it took for the queues to resolve that time. And so this time again, passengers facing lengthy queues and no signs of when this might get resolved.

19:09Sadia, thank you. Sadia Chowdhury. And, of course, I'll keep you all posted on any developments out of the U.K. there. Meantime, Lyft shares higher after earnings but well off their best levels at the after-hour session. The ride-share company posting better-than-expected earnings. A revenue jump also of 28 % from a year ago. The conference call is underway right now. Deirdre Bosa is listening in. She's got the very latest. Deebo. Hey, Mel. That conference call is underway, and they're just getting to the first question from the analysts. But so far, investors pleased with those results that beat on the top and bottom line and had a better than expected second quarter outlook.

19:42CEO David Risher, he kicked off the call. He talked a lot about his strategy of customer obsession and driving profitable growth to that point. Lift is narrowing losses, and it was the second straight quarter that it has generated free cash flow. Still no timeline on GAAP profitability, but it's now expecting at least 70 % of adjusted EBITDA to convert to free cash flow for the full year 2024. I spoke to David Richard just ahead of the results, and I asked him if he is seeing any signs of softness in the Lyft consumer. He said no, and in fact, looking at the ride mix, he says that premium modes are actually growing faster than the average.

20:20And this past quarter, they got an eclipse and an event bump in bookings. that helping those results. Lastly, Mel, Lyft's quarter, we got Uber tomorrow morning, so it may raise the stakes for its larger rival. Though, of course, Uber has a food delivery business, and that has been a more competitive space as of late with Dash, with Instacart, even Amazon in the mix there. All right. Deidre, thanks. Keep us posted. Deidre Bosa covering Lyft for us tonight. It's the L in Tim's blicep, of course. It's very generous. It really is. Just slip in an L in my acronym. When I've been so critical of Karen not playing The acronym game.

20:56Right. It's fair enough. So let's talk about the company and let's talk about these numbers. I think it continues to be a story of normalization. I think it's a story where if you look at the gross bookings, they came in, you know, 4.05, I think, versus 3.96 is where the street was. If you look at the adjusted EBITDA, I mean, this is a story of improved profitability. So the backdrop for Lyft was so much more in terms of the headwinds of COVID were things that hit Lyft significantly harder than they did Uber for all the obvious reasons, because they are not as diversified and they are not a super app.

21:27I think this story continues to get better. I think management has still a long way to go with the investment community in terms of credibility, in terms of their ability to predict their numbers and actually deliver on them. Dan, Morgan Stanley just put out a note today saying that it likes the fact that Uber is multi-platform and it trades at a better multiple, the multiple that they use, which is free cash flow for adjusted growth, than Lyft or Instacart. Well, it's interesting, Mel. You know, Uber, their profitability is really inflecting right now. Expected gap EPS growth of like 50 % a year for the next couple of years.

22:03The problem right there is the sales growth. They expect to be mid-teens. But when I look at an Uber and I say to myself, and I know they're reporting tomorrow morning, if they can get their gross margins moving back towards those pre-COVID levels above 50%, then this stock could look pretty cheap in the not-so-distant future. You saw the deal that they just cut with Instacart today for delivery. They have about 25 % market share. DoorDash has about 70 % or so. So to me, I mean, Dara, the CEO of Uber, seems to be doing all of the right things in this post-COVID world. But I'm kind of with Tim in a way.

22:38I think that Lyft has a lot of optionality. And just so you know, the L was whatever my acronym was last year. It was in there. I just didn't stick with it this year. So good on you, Tim, with the Blysep. Yeah, there's not going to be a Z-Brawl or a Zellbro. No, there's no more adjustments now at this point to our acronym. Can I ask Tim a question? You're Kevin Feinermann. Would you change it to Busep if you could, you for Uber, or you like the Ellen Blysep better? Oh, I definitely like the Ellen Blysep. I mean, Busep sounds silly, but Blysep sounds so unsilly, right? No, I think to me, Lyft is a story where they have significant ground to gain in terms of relative value.