1. Disney (DIS) -- Discounts, Pricing Power & India
a) Discounts
Disney is offering special children’s discounts for 1-day tickets. They’ll go on sale for $50 starting later in the month for January through March 10th. Tickets usually cost $110-$150. Considering all of the negative sentiment surrounding Disney’s stock, some assume that an abnormal lack of demand is driving this decision. But this isn’t anything new.
Disney has a history of running first quarter promotions like this one. Furthermore, Parks and Experiences head Josh D’Amaro has explicitly told us in recent interviews that Disney is not raising promotional intensity. Conversely, per D’Amaro, Disney has gotten more selective with discounting thanks to better data collection and analytics at its parks since 2020.
b) Pricing Power
Discovery+ is hiking its pricing and Netflix plans to do the same once the actor strikes end. Talks with actors just resumed this week (as expected) following the writer strike resolutions.
Why does this news matter for Disney? Streaming is becoming less promotional and moving away from price-based competition. The arms race for subscribers has morphed into a margin race for Disney and its counterparts. All of these hikes make Disney look less expensive on a relative basis and should support its own pricing power IF (big if) its content warrants loyalty. Especially with Disney’s pivot from general entertainment to nurturing its core franchises, it should find real price elasticity of demand. It successfully hiked pricing in 2022 and by another whopping 30% this year. The 2022 hike was met with very minimal churn while we haven’t yet heard how the 2023 move was received.
Streaming must become profitable and the leverage there must continue for the narrative on Disney to turn. Its dying linear business needs to be replaced with another stable cash cow. While streaming cannot fully supplant linear overnight, signs of that happening will be cheered by investors. Its streaming EBIT profit trend is encouraging, bolstered by several cost-cutting moves.
Disney+ could be creating another meaningful pricing power driver internationally. The company is reportedly planning to launch some of its live sports rights on that service outside of the USA. This is all part of its slow journey to create a more unified streaming app experience. It will never remove the ESPN brand (unless it sells it to Apple or Amazon), but it will infuse that brand into Disney+ like it has done with Hulu already. Sports drives eyeballs, loyalty and again, pricing power. This also feeds into Disney’s aim to extract as much value as it can from its asset base. . If there’s a cohort of international Disney+ subscribers that doesn’t have ESPN or ESPN+ (like there surely is), then why not make this move to fortify Disney+?
c) India
A few weeks ago, I talked about Disney exploring a sale of its Indian linear (Disney Star) and streaming (Hotstar+) assets to Reliance. This week, Bloomberg reported preliminary talks with 2 billionaires: Gautam Adani and Kalanithi Maran. Both are massive business moguls in the nation with Adani owning New Delhi TV and Maran owning the popular Sun TV Network. Disney is also talking with private equity firms for a cost-sharing partner like Reliance and Paramount do in that nation. That would likely resemble a potential ESPN partnership with Apple or Amazon to share content and distribution costs.
The Indian TV and streaming business is a complicated one. Reliance and Paramount are fierce cricket rights competition, and they also offer those secured rights for free to juice ad revenue. Star lost some of its India Premier League (IPL) cricket rights to that duo, but still has the Cricket World Cup. For Disney, the market was wonderful for propping up its subscriber numbers when that’s what investors wanted throughout 2020-2021. Conversely, the revenue per subscriber there is minuscule and the EBIT contribution is negative. So? In a world where interest rates aren’t at 0% anymore and investors now care about profits over flashy subscriber additions, selling this business makes all the sense in the world. It will be a sizable cash infusion without any profit hit. The revenue hit would also be very small. Make it happen.
Liquidating this business and ABC/domestic linear assets to Byron Allen is something I strongly support. This could easily free up well over $10 billion in fresh cash while allowing Disney to redirect forgone expenses to other uses. Disney’s differentiation comes from its core intellectual property. Activating those brands on the big screen and in its parks is how it drives unparalleled fandom, loyalty and lifetime value. Neither its India business nor ABC’s general entertainment niche support this core differentiator. It’s time for Disney to focus exclusively on the things that do support it. It’s clear Iger is doing just that.
2. Meta Platforms (META) -- AI, Subscriptions & Chips
a) Generative AI
One of the best parts of Meta’s advertising stack is how easy it is to get started as a buyer. We do a bit of Facebook and Instagram marketing for Stock Market Nerd; it takes minutes to design a campaign with no coding necessary. That wonderful simplicity just got a powerful capability upgrade.
Meta is infusing all of its Gen AI model prowess (through EMU2 and others) to make campaign design easier. With a single click, advertisers can generate different backgrounds, texts and designs while easily fitting images to ad copies. Of the beta testing businesses that Meta surveyed, more than 50% expect this to save them a full 5 hours per week in creative design work. This essentially makes split testing and campaign perfection a fully serviced and automated process… and this is only step one.
The potential of what Meta can do with generative AI for its core ads business is exciting. Design is one example, but there are two other, arguably more notable perks. First, chatbots and other discovery tools emanating from GenAI will juice engagement and access to data to sharpen algorithms. Secondly, GenAI will enhance campaign measurement and reporting tools. Meta can pull from its models to aggregate and organize all previous campaign history. Using this data, the models can literally tell advertisers exactly what works best and take the guesswork out of creation. Not only will this make impressions more valuable, but it will make Meta a more user-friendly ad partner for buyers too. Simply put, generative AI will make all of Meta’s existing products better while allowing it to automate more processes internally (i.e. lower support costs).
b) Paid Subscriptions
Meta is toying with offering a $10.49/month ad-free subscription for app users in the EU on web (30% more for mobile due to app store take rates). Through the Digital Services Act (DSA), regulatory bodies such as Ireland's Data Protection Commission have consistently fined Meta for personalized ads. More broadly, there’s a threat looming on personalized ads being more heavily restricted.
The EU is nearly ¼ of Meta’s business with personalized ads driving virtually all of that revenue. This is how the EU can continue to contribute to overall results if regulatory threats become real. In an ideal world, Meta would not have to do this and could continue to rely on advertising to keep its products free and accessible. Still, this would be an effective plug to the gap regulation could create. It could also make Meta’s business there less cyclical as monthly subscriptions are less prone to macro volatility vs. advertising demand.
c) Chips
Meta seems to be pulling back on internal semiconductor development. It fired Reality Labs employees within its Silicon Unit on Wednesday. I guess it’s happy with the quality of Qualcomm’s Snapdragon chips.
3. Uber (UBER) -- Partners and Products
a) JetBlue
Uber for Business was named as JetBlue’s exclusive rideshare partner. Uber for Business is the firm’s set of enterprise-facing tools to help large clients handle stakeholder travel and meal programs. The product frees clients to do so without needing to maintain a costly, full-time network. Outsourcing transportation to Uber for Business consistently saves enterprises 10%+ on costs and is trusted by giants like Coke and Samsung. It’s no wonder why the roster of brands using this is explosively growing and why 90%+ of these customers recommend it to others. For this specific piece of news, Jetblue will use Uber to offer travel vouchers to fliers enduring certain delays or cancellations. This will start in the USA and expand globally into 2024.
b) Another Tool
Uber stands out in its unmatched driver supply, consumer demand and product breadth. It uses supply scale to offer best-in-class service and pricing. It uses demand scale (and its verb) to fuel word-of-mouth growth and hefty profits despite low margins. It uses product breadth to foster lower customer acquisition cost, higher retention and better lifetime value. That is the recipe for success that motivated me to make this a core position. It’s running a baby Amazon playbook… but actually doing so successfully (unlike countless others).
Uber is leveraging all three of these strengths yet again with a new package return tool. Starting this week, Uber App users can schedule up to 5 packages to be picked up by a driver and sent to a local post office or FedEx/UPS store. It launched Uber Connect 3 years ago to send items to other consumers and this takes that a step further. The service costs $5 for non-UberOne members and $3 for members.
Uber is using its driver scale to make these returns more local and cost effective. It’s using leading demand to give drivers enough volume here to make it worthwhile. It’s deepening its product breadth to enhance the health and value of its consumer base. Another tool… another small differentiator.
4. SoFi (SOFI) -- Galileo & Liquidity
a) Galileo
SoFi’s Galileo added buy now, pay later functionality for smaller businesses. SoFi’s aim is to be a consumer’s one-stop banking shop. This, however, does point to its willingness to tailor some products and offerings for business banking clients. To start, this will be for Galileo’s enterprise customers. It’s easy to see, however, SoFi using tools like this and its existing personal lending product to expand into business banking over time. Businesses are much easier to underwrite than individuals and SoFi has already demonstrated a talent for the latter. For now, the focus will remain fully on consumer banking.
b) Liquidity
The new SoFi investor concern going around social media is its finite access to capital. Investors fear that as its capital ratios become more constrained, growth will slow as it originates less credit. CFO Chris LaPointe gives us his quarterly “we have excess liquidity” on every call which I expect to be the case later this month. Still, while that’s nice to hear, concrete data supporting that idea is better. So let’s dig in.
The Ratios:
Starting with capital ratios. SoFi’s metrics (for the bank and the overall company) are in great shape. Its bank’s Common Equity Tier-1 (CET1) ratio sits at a robust 15.8% vs. a 7% minimum. Its total risk-based capital ratio is similarly strong at 16.1% vs. 10.5% required and its Tier 1 leverage ratio is 16.1% vs. 4% required. Cushions vs. required minimums have grown in recent quarters for the bank and remain robust for the overall company.
Access to Markets:
If SoFi was becoming capital constrained, which it isn’t, access to capital markets is another outlet it could explore. Both the whole loan and asset-backed securitization markets have reopened for this company. It’s often compared to Upstart and Pagaya here in terms of that access being a risk, but that isn’t fair. SoFi’s borrowers are much more affluent and of higher quality. The company has also religiously stuck to strict borrower parameters which is why loss ratios and delinquencies remain below 2019 levels. That isn’t the case for most other fintechs.
Some point to its accounting methods as covering up these losses, but that’s an argument that I’ve addressed previously and vehemently disagree with. “At Cost” (AC) accounting requires MORE FREQUENT markings and income statement cost recognition vs. current expected credit loss (CECL) accounting. Furthermore, SoFi uses a 3rd party auditor to make these markings. Finally, the assumptions embedded in markings include overly pessimistic GDP and employment forecasts which haven’t come close to fruition. Its markings are overly conservative if anything, but I digress.
Appetite for higher quality credit is less volatile across macro cycles and that’s why SoFi symbolically sold a bit of credit to those markets last quarter at improving spreads. It wanted to show investors that it could. It also comfortably had the liquidity to hold all of the credit for more overall value (via net interest income) which is why it chose to do so.
With capital ratios as comfortably above minimums as they are today, this will continue. If SoFi were to eventually bump up against those minimums, it has proven an ability to access buyers in quite chaotic times to offload lower return loans. That’s important and unique.
Liquidity Growth Bottleneck:
The clearest sign of excess liquidity can be found in SoFi’s warehouse capacity usage trend. The company continues to use less than 50% of its current capacity which is slowly falling. Warehouse credit is more expensive than its own equity and deposits (which it can use to fund because its leverage ratios are in such good shape). If SoFi were struggling at all with liquidity, this flexibility wouldn’t exist and the trend in usage wouldn’t be lower. It has the luxury of choosing lower cost funding supply as a byproduct of its strong ratios, rapid deposit growth and comfortable liquidity position.
Simply put, liquidity is in great shape. As long as SoFi’s market share gains and rapid member growth continue, lending growth will continue. If rates start to fall, the personal lending growth will slow while home and student lending accelerate… & vice versa. That’s the beauty of being a one-stop shop. Furthermore, financial services growth remains rapid while unit economics for the segment briskly improve; the tech segment is also poised for growth to bottom and re-accelerate. Growth is not going to suddenly grind to a halt like some bears seem to think. Management, which has a fantastic track record of under-promise, over-deliver, sees 20%-30% demand compounding for years and years to come.