What We’re Doing (or Not Doing) as the Market Drops

18:29Travis Hoium:Was that the gift cards that they handed out?

18:32Emily Flippen:Effectively. What they allowed their customers to do was kind of add these add-ons and not charge them for them, right? So, they're basically having a lot of customers that are underpaying the market rate for these cybersecurity offerings that they're going to, over the course of the next year or so, start to lapse. I think investors are assuming, and CrowdStrike is assuming, that these customers are going to come in and start paying full price for these modules. And I actually don't necessarily know if we have data to back that up. As important and mission critical as cybersecurity is, this is the industry that I'm probably watching most closely because we need evidence of dollar-based that retention rate for these customers that are turning through the ecosystem are actually going to renew at the higher rates needed to make the AI investments worth it.

19:14Lou Whiteman:It's really funny because I do wonder just kind of generally if the greatest tool corporations have right now is even if they have no desire to replace CrowdStrike or something to when they get their annual renewal and it's a what, I don't know, 3 % increase say, this is great, thanks. We have to talk to OpenAI and then we'll get back to you. And if that sort of just neuters the price increase, even if they don't want to go. So, I mean, I think that that scares me more than, yeah, people ripping out the systems. Bigger threat here is that cybersecurity has been notorious, like, as the threats change, the companies change.

19:48Lou Whiteman:I'm not saying CrowdStrike can't be the most relevant provider in five years in a world of AI, but I at least have to leave myself open to the fact that if history is a guide, as things evolve. So do the winners. So they have a lot of work to do. Not that they can't be a long-term winner, but I think I'd be surprised if in five years, the incumbents are still the incumbents.

20:08Travis Hoium:When we come back, we're going to talk about Disney. You're listening to Motley Fool Money.

20:18Lou Whiteman:Support for the show comes from Fundrise. For the past 70 years, there's been a room in finance most people couldn't enter. A room where you could have invested in some of the biggest names in tech, companies like Airbnb and Uber before their multi-billion dollar IPOs. I'm talking about venture capital. Fundrise recently took a sledgehammer to those closed doors by launching a venture capital product that's available to anyone. Their mission is to give everyone the chance to invest in the best tech and AI companies before they go public. You can visit fundrise.com slash fool to check out Fundrise's venture portfolio and get in early today.

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21:04Emily Flippen:It's supercalifragilisticexpialidocious, even though the sound of it is something quite atrocious.

21:09Travis Hoium:Welcome back to Motley Fool Money. In this section, we like to have a little fun and actually want to do a deep dive. I've been talking with Emily about doing a deep dive on Disney for a while. So I'm going to lead in with some questions for you guys. See how well you know Disney, and then we'll talk about their businesses. Let's start with the studios business. This is Disney Animation, Marvel, Star Wars, Pixar. Of the top five movies in the past three years, so 15 movies total, how many of them were made by Disney, Emily?

21:40Emily Flippen:Of the top five movies in the last three years.

21:44Travis Hoium:Each of the past three years, so 15 total options. I would say nine out of the 15.

21:52Lou Whiteman:All right, Lou. I think, so this is Price is Right, I'm going with 10. Because I think, because yeah.

21:59Travis Hoium:So you think two thirds of the movies, the top movies come from Disney.

22:03Emily Flippen:Travis was like, this is not the direction I thought you got. No, it's high, but it's seven.

22:07Travis Hoium:So it's about half of the movies. But the thing that I think is interesting with that stat, and specifically is the movie business has become a blockbuster business. and Disney is, I think, the best at making blockbusters. Emily, do you think that's the case or is this the best studio in Hollywood or a conglomeration of studios or is there a better player out there?

22:30Emily Flippen:No, I actually wholeheartedly disagree. And I actually think that their studio business is in desperate need of a leadership overhaul. I think it's a depleting asset or I should say depreciating asset really because of franchise fatigue. And Disney has been hitting customers, consumers, even Disney enthusiasts over the head so often with reboots of the same franchise over and over again that it actually, in my opinion, doesn't necessarily matter if they are doing well, quote, at the box office, right? If the biggest hits, because they spend so much money to make them. They end up being not that big of a profit driver for Disney as a whole.

23:14Emily Flippen:And I actually think the company, the more they kind of overuse the IP in the studio business, the worse it gets for Disney as a franchise as a whole, because what they're doing is they're devaluing the value of that IP. If they were focusing on quality over quantity, I actually think that'd be better for their company.

23:30Travis Hoium:What IP do you think they're over utilizing here?

23:33Emily Flippen:That's a great question. If I actually knew any Disney movies, I probably would answer you. My concern is this is the narrative that I hear from the big Disney fans. You are not talking to a big Disney fan. But I assume it's all of the same. I mean, think about every major blockbuster. Name off the big blockbusters from Disney. They're all reboots of the same franchises.

23:55Lou Whiteman:I'm just going to guess here, and I don't know either because I'm not really a movie person, but I'm going to guess that the Normals like it a lot more than the people who are loud about it, but I have no idea. The thing I can't figure out here is, yes, they have leaned in on franchises, but some of the movies that I'm guessing that weren't Disney movies that were on the top were like Despicable Me, I don't know, 30? Four. Dune. Dune 2. Seven or whatever, so it's not like they only do that. Best is so subjective. Certainly, Disney isn't the place that you're even going to get, I don't see why Oppenheimer or something was like, a creative arts film, but yet Disney isn't going to lean in there.

24:34Lou Whiteman:But they have won the global box office not in the last 10 years. Creativity really isn't the moneymaker. I think these franchises are great for other parts of the business. So, I don't think this is a weakness or an Achilles heel. I think they know what they're doing. And they may not win a lot of Critics' Choice Awards with some of this, but I think as a business, it is at least okay when you

24:58Travis Hoium:look at the sum of the parts it's so interesting that you guys have generally negative views because i have little kids and disney is the like we will go see every single disney movie every you know pixar movie disney plus is the one that they have basically complete access to because i can trust disney as a studio to make movies that they're gonna they're they're gonna enjoy and are also not you know gonna be appropriate for kids um so i this is always one of those, I may know the fan that you're talking about, Emily, who is so negative on overusing Star Wars in particular. Star Wars. That's what it is.

25:35Emily Flippen:You know, I star something.

25:37Travis Hoium:But that group of fans is so intense. And then you get the people who actually go to movies who are kids with their families. And guess what? Zootopia 2 was great. It was great.

25:49Emily Flippen:And actually, I think Zootopia 2, to your point, outperformed virtually all of the Frozen franchises. So you're right. Maybe I am. Maybe I'm being overly dogmatic here by focusing on only a couple of the big franchises that they seem to reboot every other year. And to your point, Travis, too, also, I am not the target audience for a lot of these movies. I don't have kids and I am not going to go see Zootopia 2, although I have, to your point, heard great things.

26:15Lou Whiteman:Shouts out, by the way, to one other franchise that I think was Disney, Inside Out. Go see both of those if you haven't. Another great one.

26:22Travis Hoium:All right. Speaking of where, where do these movies end up? Well, they end up at the parks and they end up driving the parks. If you look at, we're actually going to go to Disney here in a month or two. And the amount of upgrades that they're, they're making in Disney world and all the parks around the world is, is crazy right now. And it's all based on, most of it is based on this new, newer IP. And so in the last 10 to 20 years, instead of the old IP. But since 2017, my question for you is how much has Disney's experiences revenue grown? So almost a decade, they changed the way that they reported.

26:56Travis Hoium:So that was the furthest it went back. So 2017, how much bigger is that business today, Lou?

27:02Lou Whiteman:I couldn't even tell you. 10 years. I'm just going to show my ignorance and say it's up like, I don't know. It's up big. It hasn't doubled. I'll say doubled just to move on.

27:16Emily Flippen:Gosh, I just lost my breath there just realizing that 2017 was almost 10 years ago. Goodness gracious. I actually think that Lou's probably not far off. The parks is my favorite part of Disney's business. And I think they're probably close to a double, maybe a bit below that. Let's say 80 % growth. Yeah, you guys are right.

27:37Travis Hoium:86%. My other fun stat is the cruise business doesn't get a lot of attention from investors because it's just, it's a volatile business if you look at the cruise lines. But Disney has seven cruise ships and is actually launching another one next week. And that is an area of huge investment for them. That's one of the bigger drivers of the parks business. But Emily, when you look at Disney's business overall, how much does the parks business play into your thesis on the company?

28:05Emily Flippen:it's virtually everything to me. And I, not to say that I think that Disney could just get rid of everything else and only be parks. And I'd be happy with that. I really do love the other aspects of Disney's business too. And I do think the IP that they're building with their studio business and streaming business is critically important to maintaining the demand for the parks. So it all works together in one big ecosystem, but the parks, in my opinion, it's the bread and butter. I love the fact that Disney's new CEO is somebody who was formerly the head of parks, which is, I guess, the name is...

28:34Travis Hoium:That didn't go well last time, though.

28:37Emily Flippen:Okay. I have a bone to pick, actually, about this with JPEC, but we can get to that. I presume you're going to ask us about the streaming business, and I'll give my spiel then. But I do think that having somebody who understands the core value of the parks is absolutely critical. Because if you overinvest into less profitable areas, then the reason why people are buying Disney shares starts to lose focus. And that's exactly what happened over the course of the whole Disney+. I think that was like the 2019-ish era when JPEG came into power. And I think any money that the business chooses to reinvest into the parks, and I recognize that a lot of the investments they're having here are not necessarily going to just content build up, a good portion is, but a lot of it is maintenance of infrastructure.

29:19Emily Flippen:I mean, these are expensive, large beasts to run and manage, but I think it's money well spent here. I mean, this generates the lion's share of Disney's operating income. It's more than 70 % of total operating income from Disney just comes from the parks. The one red flag that exists for me, or actually I should say it's two. One is I hate the fact that they don't break out the cruise revenue as a different segment within parks because cruise ships are so expensive, hundreds of millions of dollars, and I'm sure they're very profitable, but I don't know what the margin looks like.

29:48Travis Hoium:I think they don't do it because they're so profitable. Everything that I've seen about the pricing of their... They have such pricing power in that market specifically, that they're charging 50 % more than other cruise lines. And so I think they want to hide that. I think that would be my theory.

30:03Lou Whiteman:I hope that's the reason. I wish I knew. Look, let's be honest here, though. The whole parent criticism is that they lock you inside the park and then charge whatever you want for food, water, stuff like that. Imagine sending you out into sea and the pricing power they have then. So of course it is. Well, people do it voluntarily. Yeah, I know. Everything Emily said is correct, so I don't know what I can say more to that, other than just see from our discussion above. This is what justifies the movie franchises, too, obviously. Look, Parks is a great business, and it's a better business for them than it is for anyone.

30:44Lou Whiteman:Are they better at it? Yeah, I think they're pretty good at execution when they think about it. But how much of it is just all of that IP that, you know, I mean, I don't think you want billions and billions of loss leaders feeding in. But to me, this is what justifies everything else going on. Everything just, you know, those parks, those are just where everything flows to that and it ends up it's a big pile of money.

31:06Travis Hoium:Well, it seems like this is also the one that has the biggest moat. You know, you can't just Netflix can't just go out and build a whole bunch of parks to compete with Disney. All right, let's talk about that streaming business that Emily mentioned earlier. My question for you is how many subs does Disney Plus and Hulu have as of at least the last time they reported this? And I'm just combining those two because those are kind of the biggest thing. They had ESPN Plus. They're not, they split off that app, but that's a little bit wonky. So we'll just go with Hulu and Disney Plus streaming. What is, if you add those two together, what do you get to, Emily?

31:40Emily Flippen:Oh, I was really hoping to go to Lou first so I could have something to gauge my answer off of because I actually have no idea and it's embarrassing. I don't. I'm going to guesstimate 50 million.

31:52Lou Whiteman:All right, I'm going much higher, but now Emily scared me because, again, I'm afraid I'm going to show me. I was, I'll go 150.

32:01Travis Hoium:195.7 million subscribers. Oh, my gosh. Disney Plus alone is 131.6 million. To put that into a little bit of context, The last time that Netflix reported, they don't report their total numbers now, but they've said that they're over 300 million. So they're not quite the same, but you're kind of getting into that territory. Emily, I'm going to lean on you here first again. How do you think about the streaming business? Because this is a business that, you know, you mentioned JPEG. When he came in, that was basically the pandemic started. Iger said, I'm out of here. JPEG saw the growth going on at Disney Plus and was like, I'm going to lean into that.

32:38Travis Hoium:didn't necessarily work out super well when Iger came back. He got the streaming business back to profitability. But as an investor, how do you think about that business? Is it just a tack-on? Is it a profit driver? Where are we going with this in the future?

32:52Emily Flippen:Yeah, you can tell how little I care about the streaming business based off my answer there. Great for Disney+. Again, clearly not the target audience here, although I do subscribe to Hulu, so maybe I should have factored that into my equation here. I will say, I rewind back to when Disney Plus was initially launched. And what happened at the time was Bob Iger set up the expectations for what Disney Plus could be in terms of Disney getting into the streaming service. And I was, being my classic self, very skeptical at the time because we saw the decades, the many, many years of Netflix and other big streamers who burned cash trying to make the content game work.

33:29Emily Flippen:And yes, of course, Disney was sitting on a bunch of very valuable IP, but we know how expensive it is to make valuable content. And there was a lot of price compression for streaming at the time as well. And Disney Plus was being launched and sold well below the price of the need to be to be profitable, of course. Now, Iger...

33:45Travis Hoium:They were practically giving it away in those days.

33:47Emily Flippen:They were practically giving it away for free. Exactly. Iger did all this. Let's be very clear about this. Iger set up the strategy and then he left and he said, I'm going to put Bob Chapek in charge. Chapek, the guy who ran parks, the guy who has all the experience with the biggest profit driver at the company, but very little experience with, say, streaming and content management. And then, of course, when Disney Plus proceeded to destroy Disney's financial performance over the next couple of years, they struggled to make that business profitable. Iger then comes in and says, wow, JPEG did a terrible job executing my plan that I set out.

34:22Emily Flippen:I'm going to come in and fix it. So I have a little bit of a bone to pick. I think that JPEG was the right person to lead Disney as a company, but not the right person to be launching Disney Plus, to be using that as a corporate strategy. Now, since then, obviously, Disney has gotten its act together, raised prices on Disney Plus, managed its content library. I think a lot of this, by the way, has come from Hulu and price increases with Hulu and benefits from ESPN, of course, massively underappreciated properties.

34:49Travis Hoium:Well, they've been there bundling these now too. They didn't own all of Hulu when JPEG took over. Yes. So there's advantages that they have owning

34:56Emily Flippen:Exactly. But I think all of that is the reason why the streaming service now is more profitable. And this now is, it's not quite making up, if I'm not mistaken, for the legacy networks business in terms of total profits being driven to the company, but it's well on its way to making up for it. And in my opinion, that's all the streaming business needs to do for Disney. All it needs to do is make up for that nominal portion of sales that was being generated by the networks business, make up for that capital there, and then continue to build the IP so that people want to go to the parks. That's all I need.

35:26Yeah.

35:27Travis Hoium:Spot on. Spot on. Lou, I'm going to go to you first with this legacy question. Do you care about the legacy business? ABC, ESPN is part of this. They've got FX. If you have cable, you're paying a lot of money to Disney. Is that a business that you value at all when you're looking at their company?

35:48Lou Whiteman:There is value, but it is the least important thing. I mean, there's some IP here too. So, you know, you do have some of that. I think that if any part of this business goes, it's this one. In fact, if you want to take a look, there are so many of these kind of orphan businesses out there. I don't see Disney buying and adding scale here. It's not important enough. But it seems like you just spin this out. Maybe Disney holds on to 5%, 10 % of a merged networks business with the ComCats network business, has a sweetheart licensing deal. But yeah, this is the afterthought of the company.

36:24Travis Hoium:Emily, you agree?

36:25Emily Flippen:Yeah. If you thought I didn't know enough about, say, the studio portion of Disney's business, you're going to be appalled by how little I care about the networks part of Disney's business. In fact, I actually think the faster they do spin it off, the better. And now it does seem, given the benefits that we've seen from the Netflix, the attempted now Netflix deal with Warner Brothers and the spinoff of that studio business from the kind of legacy media business and the different content assets there, now might be the good time for Disney to be thinking about, okay, we see profitability picking up and streaming.

36:56Emily Flippen:Now is the chance for us to take this legacy networks business and find a buyer for it. Because I do think that the faster they get rid of it, the easier it is for this new management team, which by the way, we do have a new management team here to focus on what's most critically important for the company. But I recognize that it's much easier for me to sit here on a podcast and say this and much harder to turn this multi $300 billion business around at the drop of a hat.

37:19Travis Hoium:When we come back, we're going to get to the stocks on our radar. You're listening to Motley Fool Money. Robin Hood and Little John walking through the forest, laughing back and forth at what the other one has to say. Reminiscing this and that and having such a good time. Hoot-a-lolly, hoot-a-lolly, golly, what a day.

37:41Travis Hoium:Never, ever thinking there was danger in the water. They were drinking...

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38:11Travis Hoium:As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows The Motley Fool's editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. We'd like to end the show with stocks on our radar. Emily, what do you got this week?

38:34Emily Flippen:Stock on my radar this week is a company called Stantec. The ticker is STN. This is a Canadian design-focused engineering consultant. Don't let your eyes glaze over because I promise you this company is a lot more exciting than it seems. They have a diversified mix of clients across infrastructure, environmental services, water, buildings, and energy, lots of mission-critical projects. I really like this management team that's growing double digits on their top line. We'll also expand their bottom line through a combination of both organic growth and acquisitive growth and they have a track record that spans decades.

39:04Emily Flippen:I think it's trading at very reasonable valuations today as well. One of those babies with the bathwater that's been sold off with the broader stock market.

39:11Travis Hoium:Dan, what do you think about Stantec? Did y 'all know they have their own 66 story skyscraper in Edmonton called Stantec Tower? That's pretty cool.

39:22Emily Flippen:That seems now maybe a little excessive, Dan.

39:25Lou Whiteman:I hope all the locals call it the Stan, right? I hope they designed it themselves. All right, Lou, what's on your radar this week? Dan, I'm doubling down. I'm looking at Honeywell, ticker H-O-N, but I'll be honest, I'm thinking about GE. GE was an underperformer for years until it split. Now, two of those stubs are up 100 % and 500 % since. Honeywell is doing a similar breakup. I think it could do just as well. This week, we got details about the soon-to-be independent Honeywell Aerospace. Business split pretty evenly between commercial and defense with a huge spare parts business. That's great for margins, generating$3 billion plus free cash flow.

40:02Lou Whiteman:I'll note they're going to take on a lot of the parents' debt, so they do need to manage that. But post-split, I think Honeywell Aerospace could be a top choice to take advantage of the surge in demand. I'm very intrigued.

40:13Travis Hoium:Dan, does Honeywell have you intrigued? Honeywell is such an innocuous name. And it's like they're a giant company with a ton of diversified business. Their fingers are in a lot of different pies gang but then you hear honey well and you're like oh that sounds nice

40:31Lou Whiteman:you see dan you're making my point though imagine how simple it's going to be once it's three companies and we'll know exactly what they do i do like that all right dan which one's going on

40:40Travis Hoium:your radar on your watch list this week you know i like simplicity travis so uh i you know hopefully honeywell does get a little more simple with uh how they name things so let's go honeywell why not it's worked out for GE. For Emily Flippen, Lou Whiteman, I'm Travis Hoyam. That's it for us, folks. We'll see you here next time.