Coca-Cola (NYSE: KO) is testing out some new drinks in Japan, with varying levels of alcohol. In today’s episode of Market Foolery, host Chris Hill and Motley Fool contributor Jason Moser talk about the beverage industry and what Coca-Cola is probably looking to gain from this experiment.
Also, Universal Display (NASDAQ: OLED) saw a little pop on the news that Apple (NASDAQ: AAPL) is considering high-end OLED screens for its 2019 iPhones, which speaks to some shifting dynamics in the smartphone market. Comcast‘s (NASDAQ: CMCSA) flashy new bid for Fox (NASDAQ: FOX) (NASDAQ: FOXA) is going to complicate the acquisition game for Disney (NYSE: DIS), which is likely Comcast’s primary goal. Disney’s Solo didn’t rocket out of the box office this weekend, but fans of Star Wars and investors of Disney shouldn’t sweat it too much. Click “play” to find out more.
A full transcript follows the video.
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This video was recorded on May 29, 2018.
Chris Hill: It’s Tuesday, May 29th. Welcome to Market Foolery! I’m Chris Hill. Joining me in studio, it’s Jason Moser. Happy Tuesday!
Jason Moser: Well, it feels like Monday at least, right?
Hill: It does, but it’s not Monday.
Moser: I was glad, last night, I was about to go to bed, and I remembered right before I shut everything off, I was like, “Oh, I have to wheel out the trash and the recycling, because it’s Monday, not Sunday, and that stuff has to be out there first thing Tuesday morning.” It’s just difficult, trying to get in this mindset when you have these holidays. I mean, I’m not saying I don’t want holidays —
Hill: Are you complaining about having a holiday?
Moser: No! I’m complaining, I don’t want to come across like that! I’m complaining about getting old, Chris. That’s really what I’m complaining about. My mind is just not quite what it used to be.
Hill: We’re going to talk entertainment, we’re going to talk beverages. We’re going to start with tech. Actually, what we’re going to start with is a reminder that it’s a short week for us. We have FoolFest, which is our annual two-day investing conference, later this week. Market Foolery episodes on Tuesday and on Wednesday, not Thursday, which gives you a great chance to check out The Motley Fool’s other podcasts, which you can find on Apple Podcasts, Stitcher, Spotify, or podcasts.fool.com.
Let’s start with some tech news. We’ll go with Universal Display, which is a key supplier of tech used to make organic light-emitting diode displays. Shares of Universal Display up 7% this morning on reports that Apple is considering using high-end OLED screens in all of its 2019 iPhone models. [laughs] I mean, that’s all you want if you’re Universal Display or one of their shareholders, right?
Moser: Christmas came a little bit early, Christmas and every holiday where people feel like giving you gifts. All of those holidays really come early for Universal Display. We’ve talked about this before, we talk about the pros and cons of working with Apple and being a key supplier to Apple and having a lot of your business hinge on that relationship. It’s good in the sense that you’re dealing with Apple and you’re probably going to be able to unload a lot of product that way.
The flip side is that Apple is going to command some of the pricing there, and then, you have to wonder what life exists beyond that relationship with Apple. It can really crimp that growth prospect and profitability as well. With Universal Display, this is good news. I don’t think you’d be complaining if you were a shareholder today. It’s been a very bad year for Universal Display shareholders to this point. The stock was down more than 40% year-to-date before the open this morning and this news hit. It’s up a little bit on the news, obviously.
I think we’re reaching a ceiling in regard to how much people are going to pay for smartphones. I think we’re starting to see that smartphones can’t just continue to be priced to the sky. Apple’s iPhone X, I think, is a first shot there, a first warning that people are only going to pay so much. You have to bring improvements to smartphones that matter for the masses. I think this makes sense from a number of perspectives. But, by the same token, I think we’re hitting a point where people are only going to pay so much for smartphones, and that’s going to be a problem for Apple, given Android’s global dominance as the operating system.
Hill: Do you think we see, in the smartphone industry, what we saw, let’s go back, six, eight, ten years or so, with the computer industry? Where, the story in the computer industry was that computers got to be so good and so reliable that for businesses, the refresh cycle got stretched out. So, you had companies saying, “We actually don’t need a brand-new set of computers for the hundred employees that we have or 5,000 employees that we have. We’re going to push that refresh cycle out a couple of years.”
Moser: Yeah. I mean, I think it only makes sense. As technology improves, as things get better, logically, this hardware should have a better lifespan. As humans have evolved, for the most part, we’re living longer. I think hardware is sort of the same thing, really. It’s less about the hardware and more about the software and what it can do, now, understanding, the hardware has to be able to hold that software, it has to be able to support that software.
But, yeah, we’re getting to a point, I think, where smartphones are fairly ubiquitous. Most people out there who are connected have one. Now, it’s less about that piece of hardware and more about what that hardware can do for you, which then boils down to the software. And Apple has been criticized for that for a number of years, and pushing these updates that perhaps you don’t really need, pushing updates that render your older phone kind of useless. Then, lo and behold, we come to find there’s a bit of a battery controversy there, and people are figuring out ways to lengthen the lives of their hardware. I know I’m working that way as well. I don’t want to go spend $800 on a smartphone every two or three years, I just don’t find it to be that necessary.
We still haven’t been able to take that next step beyond the smartphone. There’s still not that compelling technology that makes you say, “Wow, smartphones are kind of yesterday’s news.” They’re really still very central to everything we’re doing today.
Hill: Let’s move on to Disney. There are really two stories with Disney today. The first is, in some ways, the more important one, and that is this battle for the assets at Fox. The last time we talked about this story, it was that Comcast was reportedly looking to make an all-cash offer for the Fox assets, the headline of which are those movie assets that Fox has. Disney has a stock deal worth around $52 billion. The reported number from Comcast is $60 billion in cash. And now, this morning, CNBC is reporting that Disney is looking to sure up some cash. I mean, isn’t the betting now that Disney has to sweeten the offer that they have on the table?
Moser: More than likely, I think that’s going to happen. I don’t know that necessarily. It’s very possible that the folks at Comcast think they can present a compelling enough offer to win this. I think they’re probably just trying to push the price up a little bit and really force Disney’s hand here. And that’s fine. It makes sense. Disney’s obviously very successful, a company with a lot of resources at its disposal.
Hill: Didn’t Amazon just do that in India with Flipkart? They were like, “Yeah, we might pay more than Walmart,” and whether they were serious or not, they drove up the price for Walmart.
Moser: Yeah, make them work for it. We’ve seen this before. It wasn’t all that long ago where Marriott was making that acquisition bid for Starwood Hotels. A Chinese insurer, Anbang Insurance Group, came in there and decided to try to push up the offer a little bit with an all-cash offer, and that forced Marriott to go back to the table and sweeten their offer a little bit. I suspect that’s probably what we will end up seeing here.
I think, at the end of the day, the Murdoch family would much prefer to be a part of the Disney family as opposed to the Comcast family. I think Disney tends to elicit more sorts of sunshine and lollipops images as opposed to Comcast, which is frustrated consumers sitting there at their homes twiddling their thumbs in that five or six-hour customer service window that ultimately doesn’t solve their problem anyway. Yeah, I think at the end of the day, Disney is going to end up getting the assets from this deal it wants the most. I think it only makes sense.
Hill: Let’s move on to the other story with Disney, which is the weekend box office. Memorial Day weekend is the official start of summer —
Moser: Is it the official start of summer? My daughter was asking me this morning. Is it officially summer?
Hill: Well, I mean…is it official or is it unofficial?
Moser: It’s OK to say, “I don’t know!” Because I said, “I don’t think so, but maybe it is?” Truth be told, I just didn’t know. Is it technically summer now?
Hill: No, technically, I think it comes in June. Isn’t it with the summer solstice?
Moser: You’re speaking words that I just…
Hill: [laughs] As far as you know, I’m making stuff up.
Moser: Sure. [laughs]
Hill: So, the unofficial start of summer. The Star Wars movie, the spin-off movie Solo, opened this weekend. And if making $100 million at the box office domestically can be a disappointment, this, apparently, is a disappointment. And you know what? I get why it’s considered a disappointment, because the price tag for this movie, minus the marketing, it looks like Disney spent somewhere in the neighborhood of $200-250 million on this Solo movie. And, $100 million domestically, $65 million international. On the one hand, the Star Wars movies, for all of the success that they have had, haven’t had nearly the success internationally that — whenever anyone asks, “Why do they keep making Transformers movies?” My answer is always, “International box office.” For whatever you think of the actual stories that are happening in the Transformers movies, those things make a lot of money internationally.
Moser: Mark Wahlberg and robots really translate globally.
Hill: Yes! So, the Solo box office, not great domestically, even worse internationally. I haven’t seen the movie. I plan to see it in the theater. I wasn’t so compelled that I wanted to see it this weekend. I’m curious what you think about the business headlines regarding this. Not so much the, “Hey, this didn’t make as much money as people were expecting,” but more along the lines of, “Did Disney make a mistake with their movie release strategy?” Because this movie was released about five months after the last Star Wars movie. And when I read through some of the things that I’ve been reading through this morning, I look at it and I think, “Yeah, I think, in hindsight, they probably did make a mistake.”
Moser: I think I agree with you. I also did not go see the movie. I was actually busy doing stuff, Chris. House work, yard work. You know? Real-life stuff. We can’t all just take off to go to the movies whenever we want, Chris. Let’s not get greedy here.
Hill: Wow, for someone who’s younger than me, you’re really channeling your inner old man right now.
Moser: I’m a curmudgeon. I think my wife would probably agree with that, too. I think, this is a nice problem to have. For Disney, let’s take a step back and look at the bigger picture. This is not about hitting a home run every time they get up to the plate. I guess, technically, they’d want to. Everybody would want to. But you know you’re not going to.
When you look at all of these films that are released — not just Star Wars, just movies in general — that $1 billion box office number, that global $1 billion box office number, is rarefied air. It’s not normal. It’s very much not normal at all. It’s very big deal. Not even Disney is going to crack it every time. If you look at Box Office Mojo’s list there of global box office receipts, all time, of the top 20, ten of those names are Disney films. 34 films that are $1 billion or more gross box office, and 17 of those 34 are Disney. It’s all this say that, yeah, maybe this isn’t as quick an opening as Disney wanted; but by the same token, it is a very small window of time, and there’s still plenty, plenty yet to go.
I think, for Disney, they need to be careful not to dilute the Star Wars brand. I think you’re right, you don’t release, probably, more than one of these a year. I don’t know that the Star Wars Universe carries the same sway as the Marvel Universe. It does seem like, if you don’t like Marvel movies, there’s not a lot out for you right now. Right? I was surfing the other night on TV, and I was like, man, every one of these movies of is…and if you don’t like those? And I’m indifferent to them, I don’t really care one way or the other. But, it’s just like, there are a lot of them out there. I don’t think they can do quite that same thing with Star Wars. I think they need to be a little bit more careful, a little but more thoughtful. But I’m sure they went into this thinking, “We’re going to try this and learn from it.” And that’s to be applauded.
Hill: I think, if there’s a silver lining for Disney, it’s that there’s a really good stretch of time between right now and the next Star Wars release. I mean, it’s going to be December of 2019 before the next movie comes out. I think, to the extent that they’re looking to build in some box office expectations, you can safely do that for what is — I’m pretty sure JJ Abrams is directing the final film of this current trilogy that they’re in.
You mentioned Marvel, I’m curious to see if Disney is going to do anything with Star Wars similar to what they’ve done with Marvel, in that, you look at Netflix and how they’ve licensed out to Netflix these original series based on Marvel intellectual property. Luke Cage, Jessica Jones, Daredevil, Iron Fist. Those are… [laughs] very different types of programming than the big-screen Marvel films. They are darker, they are grittier, they are certainly bloodier.
But I’m curious to see if that comes anywhere down the pike in the next couple of years, where they say, “You know what? Some of the Star Wars Universe, we think, actually would make for a good spin-off. Let’s make it a little grittier. We don’t think it’s going to have the mass appeal that we want to put it on a big screen. Let’s instead give it to some creative people, give them the license to take this where they want to go.
Moser: I think that makes perfect sense. I think they’d be failing if they didn’t try that. One of the big challenges with movies today is getting people out there to go see them. You just have so many ways that you can consume content these days that getting out to the theater is just not on the top of everybody’s list. There’s all sorts of stuff going on. And the movie has to be really good for you to want to go pay that kind of money and then go see it. That’s why we’re seeing things like MoviePass and whatnot trying to stoke that traffic.
The flip side of that coin, we’ve seen this golden age of television take hold. It’s not just Netflix. Hulu is doing a wonderful job. We just watched The Looming Tower, that Hulu original. They knocked it out of the park with that one. Amazon, Netflix, HBO, they’re all doing such great work with these serialized stories, where you don’t have to tell it all in one sitting. I guess YouTube now, they just released this Karate Kid Cobra Kai thing.
Hill: It got great reviews.
Moser: They’re like, “Hey, listen, we get to tell a five-hour movie, but we didn’t have to play it for five hours, we just broke it out into ten parts.” There are all sorts of stories, I think, in that Star Wars Universe where they could do that. I’ll tell you, I think one that would be a total no-brainer is Jabba the Hutt. I mean, man, there’s a story going on with that guy, right?! I mean, you don’t look like that and command respect! Interstellar gangster or not, right? Something happened there at some point in that guy’s life! And now he’s this big, fat, slovenly pile of goo. Why are people scared of him? I’ll bet you there’s a series just begging to be told there. Netflix, Amazon, someone — probably Hulu, given their relationship with Disney. There’s something there.
Hill: You had me at “slovenly pile of goo.” For the first time in the 132 years of its history, The Coca-Cola Company has begun selling an alcoholic beverage. It’s called Lemon-Do. It is a lemon-flavored carbonated beverage with varying alcohol contents. This is not being sold in Japan, this is being sold on a single island in Japan.
Moser: Kyushu, I think.
Hill: Kyushu, yes. First, I’m curious what your take is on — not just the fact that they’re doing this, we’ll get to that in a second. The thing that I’m curious about is the varying levels of alcohol content here.
Moser: [laughs] That was a bit of a “…what?”
Hill: And, look, when you’re testing something, sure, you want to test a few different versions of it. Usually, it takes the form of flavors. Have you seen this before? I mean, put Coca-Cola and this beverage side. Have you seen this before in the beer market, where beer makers have come out with a new product — not a twist on an old product, a new product — and saying, “Here are three different versions of it and they vary by alcohol content”?
Moser: I guess the easiest comparable here would be something like an IPA, where you’ll have IPAs, then double IPAs and triple and quadruple. And generally speaking, the higher you go, the higher the alcohol count. But it’s a flavor profile thing, too. I don’t know with this product if that’s — I mean, it seems like it would probably affect the flavor. I mean, if you have a higher alcohol content, you’re going to tend to taste that. So, I, too, was a bit fascinated by that.
This is also a very niche cultural offering that is not going to be available to, obviously, most of the world. For Coca-Cola, it’s just a small bet, so to speak, a way to stay relevant, in what’s still a pretty meaningful market. When you look at the numbers, actually, the United States in 2017 was responsible for 19% of Coca-Cola’s unit case volume. Beyond that, you look at the largest markets in Mexico, China, Brazil, and Japan. All together, they accounted for 31% of worldwide unit case volume. So, Japan is a fairly meaningful market for Coca-Cola. But, I mean, you’re not going to see something like this — I don’t think they would have any chance of any kind of success doing something like this here in the United States because there’s already so much competition out there in so many different arenas. We’re seeing companies all over trying to introduce new profiles beyond just beer. You see hard cider, whatever it may be, seltzer, all this stuff.
It’s an interesting way for them to keep relevant, maybe, in a very small market. Kyushu apparently has 13 million people, so it’s not necessarily the biggest market in the world. But, it’s a place where Coca-Cola still has a presence, and I imagine this will be something they learn a lot from.
Hill: But, could you see Coca-Cola making an acquisition in this direction, in the same way that they first bought a minority stake in Honest Tea, then a majority stake? Could you see them doing that? And, related to that — I’m not even going to let you answer that question, I’m going to ask a second one — could you see a company like National Beverage, could you see an existing carbonated beverage company testing alcohol?
Moser: I mean, yes, I could. I certainly wouldn’t say they won’t. To me, I feel like, probably, if you’re looking at a developed market like ours here, I think the bigger opportunity would be in marijuana, to be quite honest with you. I think, because we have this new market that’s just starting to gain some steam, I mean, it’s just on the very cusp of getting started here, where I think all sorts of companies are out there trying to figure out how they might be able to play into what they might be able to offer. Constellation, I think, is the obvious company out there right now. If you’re looking for a way to play into the legalization movement, there are plenty of pump-and-dump penny stocks out there. I’d be thinking far beyond that, think longer-term, and think about doing something that maybe is not being done right now.
I think, big beverage companies — Coca-Cola being one of them — they have this tremendous distribution model and a great brand and a phenomenal ability to try new things and push them out there immediately, or even make little bolt-on acquisitions, if they see fit. And I don’t know that they’re necessarily married to the wholesome image. I don’t think they need to always necessarily communicate this wholesome image. Figuring out ways to pivot to new offerings is going to be, really, the way to growth for companies like Coca-Cola, Pepsi. I mean, I could see possibly trying these derivative alcoholic beverages. But, to me, that’s backwards thinking. It would be a lot more difficult to gain traction in a market where there are already a lot of credible competitors out there today.
Hill: Thanks for being here!
Moser: Thank you!
Hill: As always, people on the program may have interests 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. That’s going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I’m Chris Hill. Thanks for listening! We’ll see you tomorrow!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Chris Hill owns shares of AMZN and Walt Disney. Jason Moser owns shares of Apple and Walt Disney. The Motley Fool owns shares of and recommends AMZN, Apple, NFLX, Universal Display, and Walt Disney. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends MAR. The Motley Fool has a disclosure policy.