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The Future of Streaming with Hedgeye’s Andrew Freedman

In an exclusive interview with 7investing, Hedgeye's Andrew Freedman sat down with our very own Matthew Cochrane to discusses the impact cord cutting has had on how consumers watch their digital content.

September 24, 2020 – By Samantha Bailey

The media industry is in the midst of a great transition. From an industry that was dominated by the cable bundle for decades to the fragmented world of different apps and platforms, the way people watch and consume content is rapidly shifting. Of course, there are still songs, TV shows, and movies, like always, no one is suggesting that the content itself is going away. But, at this rate, pretty soon it almost seems like we’ll need 9-10 apps just to watch every show we want to. Can this keep up?

Here to help us make sense of all this and, more importantly, who the winners and losers might be as the media world changes, is Hedgeye’s Andrew Freedman, a CFA charter holder and the Managing Director and Communications Sector Head at Hedgeye.

In his exclusive interview with 7investing, Freedman tackled the changes the industry was seeing, saying:

“…About cord cutting, I think there was a debate on whether it would actually happen four or five years ago. And clearly, with the declines that we’ve seen year over year in excess of 10% cable TV subscriber losses for the likes of AT&T and others, it’s clearly kind of reached a tipping point. I think what people need to understand is that these trends are very long term and durable, it takes time to change consumer behavior, and it’s very content driven.”

In a wide-ranging conversation, Freedman gave his thoughts on the biggest industry names, including the many challenges facing both The Walt Disney Company (NYSE:DIS) and Netflix (NASDAQ:NFLX). A company that might just find itself in the right place at the right time, however, is Roku (NASDAQ:ROKU). Freedman also offers opinions on legacy media companies that were built around the cable bundle business model and are now struggling to find their way, including Discovery (NASDAQ:DISC), Fox Corp (NASDAQ:FOX), and ViacomCBS (NASDAQ:VIAC). Before leaving, he also gives his thoughts on a possible TikTok IPO and whether he would be a buyer of the Chinese viral video social media phenomena.

Interview Timestamps

0:00 – Introduction

4:15 – Overview of the media and streaming platform landscape; implications of cord cutting

9:55 – How is Disney positioned for the future?

22:10 – The challenges facing Netflix

29:50 – Why Roku is misunderstood

35:55 – Which legacy media companies are (and are not) well-positioned for the future

42:15 – Bullish or bearish on a possible TikTok IPO?

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Matthew Cochrane: Greetings fellow investors, I’m Matthew Cochrane, a lead advisor at 7investing, where it is our mission to empower you to invest in your future. We do that by providing monthly stock recommendations to our premium members and educational content that is freely available to everyone.

Listeners, today I am very excited to introduce Andrew Freedman. He is a CFA charter holder and the Managing Director and Communications Sector Head at Hedgeye. If you’re interested at all in the some of the market’s most exciting industries, like entertainment and telecommunications, he is a must follow on fintwit, where he can be found @hedgeyecomm. Today he is going to walk us through these industries and how they’re changing through cord-cutting and streaming and who some of the winners and losers in this space might be.

Andrew, welcome to the show.

Andrew Freedman: Thanks for having me excited to be here.


Matthew Cochrane: Andrew, why don’t you start off by telling us how you first got into investing and what led to your current position at Hedgeye and what you do there?


Andrew Freedman: Yeah, it’s a fun story. I’m kind of a underdog and maybe you could say, you know, at Hedgeye they call me a mutt, because a lot of the folks here have Yale backgrounds and Ivy League backgrounds and I don’t. So, I’ve always, kind of going back to, you know, even when I was in high school have always had a passion for investing, very interested in it. And it’s kind of had an interesting path back then that led me to going to school in the Midwest. 


So, I went to Marquette University, went through their finance program there, got into one of those investing management groups that was very focused around the CFA. And we would pitch stocks, you know, we managed about, I think, a quarter million dollars of the university’s endowment and we would have alumni come in and grill us on the stock ideas. And it was something that I’ve always really enjoyed doing. But you know coming out of school from the Midwest, even though Marquette has a great program and my background being on the East Coast, there was always, you know, limitations. It’s a very competitive industry. It’s hard to get on the buy side or the sell side. I didn’t want to go to banking, that just wasn’t what I wanted to do. So I was fortunate enough to get a job as school for a couple years at an institutional consulting firm, which gave me a really great macro perspective. Doing investment due diligence on money managers, speaking with PMs, doing asset allocation and I think that gave me a great perspective in terms of what doesn’t work and what does work for a lot of investing strategies by speaking with some of the smartest people that manage billions of dollars. And then also just understanding how asset allocation works and the types of decision making that occurs from a pension fund to an endowment foundation. 


You know, during that time, I just always was kind of a stock junkie. And so I did a lot of, you know, my own investment due diligence and my own investing both for our high net worth clients back then, but also I would post my stuff on like Seeking Alpha to try to get feedback. 


And then one day a coffee maker got delivered to our office that had the label Hedgeye on it. It came to our office and we’re like Hedgeye? What’s this Hedgie? Hedgeye? And so, turned out that back in 2013, Hedgeye was just growing rapidly and moving into the offices that where we are now, that you see behind me in Stamford. And I did some research on the company that had lots of the investment philosophy and what they were doing really resonated with what my passion was. And so, I kind of bullied my way in there. I went through the interview process, started off in healthcare, cut my teeth, doing a lot of stuff in managed care hospitals, but really focusing a lot of my time on healthcare IT. So I’ve done a ton of work historically on like the Teledocs of the world, Cerner, Athena Health when it was public getting involved in that controversy, And then, a couple years ago, had this opportunity to take over the Internet, Media, and Telecom sector and take a lot of what I learned from my days of healthcare IT and apply it to this space. So, it’s been a wild ride. It’s been a lot of fun. But I wouldn’t want to be anywhere else. It’s a great culture, great teammates that we have. And, you know, what we’re building is just, it’s a lot of fun. It’s very exciting. So that’s pretty much my background.


Matthew Cochrane: That’s great. So I can’t wait to dive into our conversation today. This is a fun industry to talk about because so many of us use and love these companies. Let’s just start off with … Well, the media and entertainment world is rapidly changing. Now, there are still songs, TV shows, and movies, like always, I don’t mean to suggest that the content itself is changing. But how people are consuming this content is most definitely changing. As streaming apps gain in popularity, the cord cutting phenomena only seems to gain momentum. At this rate, pretty soon it almost seems like I’ll need 9-10 apps just to watch every show I want to. Can this keep up? Is the cable bundle doomed? Where is the industry headed?



Andrew Freedman: Yeah, I mean, it’s like you kind of described it perfectly, right? We’re undergoing a massive change in the landscape for content distribution from linear legacy models primarily distributed through cable where, you know, the cable companies pay the media companies and affiliate fee or recurring subscription fee per month, based on the number of subscribers that they have and which is very, very high margin business for the studios and you know the entertainment companies. And now we’re going over the top. It’s going over the internet and that’s been pioneered by the Netflix model, which has been wildly successful and, you know, Netflix’s success today’s largely due to the fact that, you know, the studios were willing to license all their content out to Netflix early on. But today, it is changing. And, you know, to your point about cord cutting, I think there was a debate on whether it would actually happen four or five years ago. And clearly, with the declines that we’ve seen year over year in excess of 10% cable TV subscriber losses for the likes of, you know, AT&T and others, you know, it’s clearly kind of reached a tipping point. 


I think what people need to understand is that these trends are very long term and durable, and it takes time to change consumer behavior, and it’s very content driven. So, the fact that, you know, Netflix rose to its dominance and the pay TV bundle finally was was whole. But eventually, you know, you start spending, you know, engagement leads everything. So people start spending more time on Netflix and then they can cut the cord. More recently, you know, I think two years ago, people thought that it was just going to be Netflix. 100% Netflix. All the studios were going to license their content to that, all the media companies are going to go bankrupt, cable is going to go away. But that’s clearly not the case at least today. What we’ve seen is a lot of these companies clawing back a lot of their content, putting it on their own services.


Launch of HBO Max, which is the expanded HBO offering, and Comcast’s Peacock, which is always in the news, especially as it relates to distribution with Roku, which we can touch on that maybe because that’s a little timely. But yeah, I think what we’re going to is a world where that looks kind of similar to the old world of linear channels, but over the top where you subscribe to, you know, Netflix, Amazon Prime. And then you also subscribe to a lot of these other services on the margin. I mean, Disney+ was a wild success. But that means that the audience is fragmenting, right? And so I think from an investing standpoint, there’s ways that you can play this theme over the next three to five years. And this is kind of what we’ve, you know, put our flag in the ground here where, you know, Netflix is still the 800 pound gorilla, but we think that on the margin, they’re going to lose out on their share of incremental engagement. And the future growth in OTT is really going to be driven by these new and emerging services. Now, it’s not a zero-sum game here, but I do think that if you give consumers more options that churn does increase on the margin. 


And so that’s to the benefit of, I think, Roku, right? Because Roku and Amazon Fire TV are the feature over the top platforms. These are your future cable companies. They’re the one to many. There’s no geographical barriers. And so, if I’m thinking about growth investing and secular trends over the next three to five years, I’d much rather be long Roku, that benefits in theory from all these stream launches, also benefits from advertising trends and then, you know, on a relative basis, you know, be short or bet against kind of the incumbent here which is Netflix. Where I think you know their content costs are going to continue to rise exponentially and then absent, you know, this COVID bump, I think their subscriber trends are going to be very slow and continue to slow here and the multiple compresses.


So that’s the landscape. And it’s all content driven, you know? The name of the game here is content. Disney was successful. Despite everybody thinking that they weren’t going to be, because of the content that they have. And it’s also from an ROI perspective, the name of the game is getting the most I possibly can for the least amount. And what we saw was because of the brand power of Disney that they were able to launch their direct to consumer service by leveraging their library and also only coming out with a handful of originals. And over time, all these companies are going to be investing more and more in the original content, these services get better. So, I think it’s a great time to be a consumer of entertainment services. That’s where the value is accruing in the media landscape. And as an investor, there’s a ton of landmines and value traps out there, but I think we’ve identified where the opportunities are and which ones we think that people should avoid.


Matthew Cochrane: Alright, so you touched on … That’s a great overview of the landscape. You touched on a lot of companies. If you don’t mind, let’s just go through them one by one. So, I know last year, well I’m almost certain, I saw a video of you and you were very bullish on Disney. This might have been about a year ago. But that was before COVID-19 hit, you know, it just ground like park revenue and a lot of live sporting events where it has ESPN ties, it like ground those revenue streams almost to a halt. So how does Disney look right now? What does its future look like?


Andrew Freedman: Yeah, I mean, our thesis, right, when we were first bullish on Disney was that Disney+ is going to be more successful and get more subscribers than anyone else thinks, right? And that clearly played out. And the market wasn’t appreciating that. The other part too, was that the legacy business had to just be status quo. Right? So we needed everything, like ESPN, the theatrical, to just kind of stay constant while they built this emerging streaming service on top of it and scale that. Then eventually be able to successfully have their, you know, foot in both boats and then eventually take the other foot and put it in one boat, which is streaming. 


And so when COVID hit early on, we quickly took that idea off of our list, I think in early March, because it was clear that the theme parks were going to take a hit. And this wasn’t even a typical recession, right? We’re talking outright closure. And so, you know, Disney for us today as a relative pair, you know, I think there’s better ways to allocate your capital than buying Disney, you know, at $130, $135 a share. 


So, now, there’s two things right. The theme parks are going to recover. Now how long it takes for them to recover? It’s probably going to take longer because you not only have to deal with a changing consumer behavior, capacity restrictions due to COVID, but also I think we’re going to see from a macro perspective, a larger impact to the consumer once all the stimulus money kind of goes away. So, it’s really hard to see how Disney gets back to anywhere close to its kind of 2019, pre-COVID margin structure as well as growth trajectory. 


So, let’s just put that there. Right? But that’s cyclical, right? And I would argue that a lot of that bad news was probably priced in earlier this year. The other issue though is around ESPN and the other assets. Because ESPN is the most profitable business and that’s been seeing declining margins because they’ve been faced with rising programming costs and declining subscribers that are tied to the bundle. Now, they’re going to have a really hard time navigating that trend. They were having a hard time navigating that trend before and there was hope with streaming. Now, with COVID, it’s accelerated that track, right? We’ve seen, you know, acceleration with live sports going away, we start to see the value proposition of the bundle come on down even further. And so now the real question is can they monetize streaming at the same rate that they were able to do, you know, pre-COVID and, you know, the way that compared to the profitability these businesses are today with these existing distribution structures. And I just don’t think that’s going to be possible.


You know, it was one case where we could see the business being stable and then the rise of streaming on top of that. That’s great. But today, I think that’s very, it’s much more challenged. Now that could provide an opportunity. And so, I think you had a really interesting tweet that we engaged on and your question was, and I don’t mean to steal your thunder now.


Matthew Cochrane: Yeah, let’s go. Let’s do it.


Andrew Freedman: But you ask, you know, would you be, like if you had to invest in one company the next decade, would it be Comcast or Disney or Netflix. And the thing that I struggle with, with Disney, is that is such a huge bet on management. As an investor, you have to have so much confidence that they can basically just blow up their business model. Take advantage of COVID and take all their content as fast as they can off these existing legacy distribution models and provide enough value over to the streaming side fast enough and monetize it in an equivalent way. And it’s possible, you know, but there’s a lot of rights agreements and existing contracts in place that make that very difficult to do. But it’s a really great story if they can actually make it work, but it’s going to be very hard. So, I think you have to have a lot of confidence in Chapek and that management team, Iger’s still operating in the background. I think we’re going to continue to see success with the Mandalorian coming out in October and as some of these other original content pieces get released. But at this valuation, because valuation’s still important in my opinion, I think it’s a really tough bet to make, you know, for the long term. 


Now, could I be wrong? 100%. But I just think I would much rather be long today, something like a Comcast that has a very profitable cable business, that I think is undervalued dramatically as an investment for the next call it 12 months and then, you know, see how Disney progresses. They’re having an investor day coming up in Q4, they’ll probably raise their subscriber numbers, and that could be a positive catalyst for the stock. 


I think investors generally want Disney to blow up their model. They want them to come out and be like, “Look our p&l has gone to zero. Our earnings power today is very minimal. But we at least have the cost cuts in place to generate some free cash flow.” So, it’s not like some of these other out-of-home entertainment companies that are just basically burning cash and, you know, could potentially go to zero. They have these high quality brands and assets, but they need to come up with an a very aggressive plan how to position themselves. And with crisis and recession, comes opportunity. And so that’s going to be Chapek’s legacy. He has to fundamentally transform the Disney Company and put it on an accelerated timeline, where they may have thought they would be five, six years, seven years, and now they have to make that happen tomorrow. And I’m just not sure I have the confidence, relative to the current price, to say let’s be long Walt Disney Company here. So that’s kind of what I think about Disney today.


Matthew Cochrane: Sure, I mean, they do they have an incredible balancing act, they must do, right? And it’s just like, it’ll be hard to pull off. At the same time, that intellectual property … like there’s very few companies that I look at and say, well, they can’t be disrupted. Even like some of the companies I love, whether they’re tech giants or whatever, there’s a path where, well, they could be disrupted. That intellectual property that Disney has though, with the Marvel Cinematic Universe, Star Wars, Pixar. I mean, I have four children, so I’m well aware how sticky this content can be, you know? My 14-year-old son, like the day the Mandalorian trailer came out or the season two trailer came out, which was just like this week, you know, like as soon as I got home, “Dad, did you see the trailer. Did you see the trailer?” You know, so I feel like there might be missteps along the way but, long term – and I’m not saying we won’t see better prices at some point either – but long term, I feel like because of that intellectual property they have time to figure it out.


Andrew Freedman: Yeah, look, the assets that they have, I mean that’s one of the reasons why we’re so bullish on it last year and that was why we thought direct to consumer was going to be a huge success. Look, I was talking about them having 30 million subs in year one, and I was speaking with very sophisticated hedge fund buy side clients and internet investors and they say to me, “Has anything like that ever happened in the history of the internet before?” Because everyone was thinking 4 to 5 million subs. “Let’s look at Netflix as a proxy.” But the reality is that Netflix had to build and invest and establish their brand.


I’ve been on the record, saying multiple times, that Netflix is trying to do in two or in five years, what the rest of the media industry has built in 100 years. And it takes a very long time to build up those types of brands, that intellectual property. And Disney has a lock on it. And so, yeah, the barriers to entry or the ability to disrupt Disney? It’s, it’s, you know, Netflix is trying, right? Reed Hastings came out and said, “We’re just going to spend more.” We’re going to look at, you know, Ted Sarandos is saying we’re going to explore various universes. Because they know that the way streaming is today, that the barriers to entry, at least from the major tech guys and media companies is not that high. And so, therefore, the only way they can differentiate themselves is by having these big tentpole brands, which they have to build. 


And they have some of them. Stranger Things, Orange is the New Black, although they don’t really own the rights to those, you know, they’ve had Money Heist, which has been huge. And they need to continue to do that to be successful and also generate high incremental returns on capital. And Disney has that. And that’s why they were so successful. 


Taking a step back, though, when we were talking about this transition. It’s all about monetization, right? And so, we can talk about what ARPU looks like, which is average revenue per user for Disney+, Hulu, ESPN. But really what you have to think about is all the people that buy something from Disney: the theme parks, home video, TV, streaming services. And what does ARPU and monetization look like on a corporate basis, right? And then the question is, in the future state, is Disney going to be able to monetize those users at the equivalent weight across all assets, all their properties? Not just streaming – streaming is an incredibly important part of it – but, you know, are they going to go –  I’m just going to make up numbers here, right? – but let’s say $1,000 a year for every consumer that touches Disney in 2019. Let’s say that goes down to $500 this year. If they transform their business model. Are they still going to be able to get back to that thousand? And maybe they don’t. Maybe they don’t need to get back to that $1,000, maybe it’s $750 but it’s a much higher margin business on the backside because they can strip out all these costs and use COVID’s ability to transform the company and get rid of all the baggage. And again, that is, I think that’s a very interesting thought experiment. And it’s possible. And your point on the brands. They’re in a unique position to do that because they have the assets. They have the IP. So I wouldn’t want to say I would bet against Disney. But, you know, Chapek has his work cut out for him.


Matthew Cochrane: They do. They do.


Andrew Freedman: You know, hopefully, I think, you know, they can figure it out. I’m not saying Disney goes away, obviously not. But I think, you know, the question becomes, what’s the earnings power of this company and how much are you willing to pay for that? Because you can have the best assets but market but if you’ve been over earning in an environment where it’s been essentially inflated by the pay TV bundle for years, what does it look like on the other side? So that’s a very hard question to answer for anybody, even Disney management. So, it’s going to be interesting to see what they’re going to say at their Investor Day.


Matthew Cochrane: Sure. At this point, I think we could make the whole show about Disney, but let’s move on.


Andrew Freedman: Let’s go.


Matthew Cochrane: Netflix, right. So this was a pioneer in the streaming space and longtime shareholders have certainly been richly rewarded for it. But, as you alluded to earlier, they launched quickly because they were able to get all this content from traditional media companies and put it on the platform, and now it’s just having to pour more and more money to launch original content to gain subscribers and keep subscribers. So how is Netflix positioned for the future?


Andrew Freedman: I think, look, Netflix isn’t going away. I think they run a very high risk business model, but one that’s, you know, necessary in order for them to compete, keep what they have, and grow on the margin. I do wonder, I do think that Netflix’s role in the bundle … So, so let me give you some stats that just popped up. Okay, Netflix has about 65 million subscribers in the U.S., right? There’s about 100 million or so pay TV households. So, Netflix is approximately 65% penetrated in the US market, right? The surveys we run suggest that actual SVOD penetration of all that streaming video on demand services in the US is actually closer to 90%. So the streaming video on demand market for subscription and OTT services is mature. 


Now, the question becomes, okay if Netflix has 65%, about 65 million subscribers, right? And then you have 90 million of the total subscribers in market. So where’s the 25 million? And what we find is that as Amazon Prime Video and all these other services start to scale, you’re starting to see a cohort of the market start to adopt other streaming services as their core. And that demographic tends to be more price sensitive. For Amazon Prime, it tends to be consumers that are self-described as not really content connoisseurs, right? They’re not just ferociously, you know, going after and consuming content. But that’s the point. 


So I think the market is slowly starting to fragment and Amazon and Apple TV and all these services are going to continue to invest, continue to grow and grow and get more content, which provides an alternative. A substitute to Netflix to some extent. And I think that Netflix’s share of engagement, share of voice, and time spent is going to diminish. And so, what does that mean? That means that Netflix is hitting maturity in the US as well as in a lot of the developed markets, which are the highest ARPU countries. At the same time, competition is increasing. They’re going to be losing out on the share of engagement. If Netflix wants to maintain their current share or grow their share where they’re already, you know, basically the dominant player today against all these services, they’re going to have to spend much more money, increase the output, increase the quality of output in order to just keep what they have. Or they risk essentially losing out in the market fragmenting, which I think is inevitably what’s going to happen. 


So, we already know that they have an adoption issue in terms of number of subscribers and potential … Which, by the way, I’m convinced, you know, I know the bulls out there say that they’re going to get to like 500 million subs by 2030. I just don’t think that’s going to happen. And they’re also facing and that’s just math. That’s just looking at adoption rates in developed countries and U.S. Now there’s opportunities in developing countries like India, and Southeast Asia, but the problem there is that the revenue per users come in at a much lower price point of $2 to $4, and so, you have a negative mix shift on the ARPU side. 


And they’re also coming off of what’s a pretty been a pretty good run in pricing power, where they had a big price increase last year. And I still think that there’s more room to go. But the question becomes revenue maximization, right? Elasticity of demand. So, can they continue to raise prices while also bringing on subscribers? And all the pricing analysis that we’ve done, especially with more competition coming into place – Disney+ launching at $6.99 a month, the whole bundle coming in, HBO Max trying to get trying to work a little bit downstream, the rise of AVOD (advertising video on demand), with Comcast providing a ton of great content that’s ad supported – You know it does, I think, limit Netflix’s pricing power.


And what we’ve seen is that $10 a month is the line in the sand and then price sensitivity really starts to become greater once a service prices above $10. And that’s where Netflix is. They’re facing market saturation. I think they’re coming up on the upper end of what they can actually afford to price their service without risking a bigger increase in subscriber churn. At the same time. competitions is coming. You know, people are going to subscribe to multiple services. But that means that they’re also going to probably bounce around and churn more. And it’s tough. I mean, especially about the free cash flow profile so I…


Matthew Cochrane: That’s something that I’ve actually already done. Like yeah – sorry to interrupt –  but it’s like we went Disney+. I mean we try to be a little frugal. You know, I should be more frugal. But as a family, like with four kids when Disney+ came out, you know, we cut Netflix for six months. And we’re back on Netflix now, but like we cut it for six months. Then in the future, if we’re like, “Well, we want to watch this or this” like, you know, like I could see cutting it again for six months.


Andrew Freedman: Yeah.


Matthew Cochrane: And we’ve been on Netflix’s platform forever, but with competition, it’s like, well, it’s not hard to say let’s catch up on all our shows on Netflix. We’re going to cut it for six months or whatever. And we’ll be back later. So now instead of getting like 12 months from me, they’re getting six months.


Andrew Freedman: Yeah, and I think you’re what you just described is a very underappreciated point of the churn model. Because one of the points of pushback I get when I talk about churn is like, “Well, these users just are going to come back.” And it’s like, of course, they’re going to come back. Or maybe they won’t, maybe they’ll turn off forever, but like, odds are, they’re going to come back. But when you think about a subscription business and churn math right, churn is churn, you know. It’s like you can subscribe on and off, you know, three times throughout the year. I’ve done that. I’ve subscribed off because there’s not something I always want to watch on Netflix. Or there’s another show. Like, I mean, between some of the stuff that we’re watching, anecdotally from my household, and like HBO Max and Comcast. With these new services, I’ve cancelled my Netflix subscription, because why am I going to pay $12.99, you know, $15.99 a month, if I’m not going to use it. Will I come back? Sure, or maybe I’ll just borrow someone else’s password, God forbid, and just watch this show I want for a couple months. So, but it’s a tough, it’s a really tough market. It’s a really tough market. But, you know, Netflix is the leader, they have the best churn numbers. So it’s not that I think that it’s a bad company on an absolute basis or that they don’t have a brand. I just think that on the margin, if I think about where we’re going over the next three to five years, it’s just things are going to be working against them more so than working for them.


Matthew Cochrane: Sure. So let’s talk about another company now, and one of my colleagues, Austin Lieberman, is very bullish on this company and I think you are as well. And its Roku. Many investors still think of Roku as a quote unquote device company because the devices are very popular in the streaming industry, but is that the right way to think of this company?


Andrew Freedman: No, so it’s like similar to Peloton and, you know, where you have like an underappreciated business transformation, right? And sometimes those are the best longs, because that’s when the multiple rerates. And when, you know, Roku went public it was a 90% hardware business making no money, right? So, what do you pay for that? You pay like two times sales? And what Roku’s successfully managed to do so far is transform their business from a hardware business to a platform business. And the platform business has structurally higher operating margins and gross margins. And it’s also growing much, much faster. And so, the hardware business is essentially customer acquisition costs to drive growth for the platform side, which is growing like a weed. It did hit a little bit of a bump due to COVID. 


But, you know, the future of this company five years from now, it’s going to be a platform business, not unlike any of these other internet platforms. It’s going to be advertising driven through connected TV. It’s going to be the platform where you manage all your subscriptions on and rent movies and it’s going to be a great place for brands to reach their consumers that have cut the cord, right? That unduplicated audience, I think, is going to be incredibly valuable. Because, right now, the big issue – when we began this conversation, we were talking about transitions – is that, yes, you have like one of the issues with pay TV and the cord cutting is advertisers are still spending $70 billion a year on TV ads and it’s getting more and more expensive to do so. And it was only until 2-3  years ago where you actually had a viable CTV platform for advertisers to spend on, you know, with Hulu and Roku. And so I think we’re very early days there and there’s a long runway ahead for Roku to transform its business into one of the largest connected TV platform models. Doesn’t mean that it’s not without its risks and volatility, but it is one of my favorite growth names in my space, at least, and I’ve done a lot of work there and have a lot of conviction on the long side, even though it’s been a rough road. But we were long since early 2019 so our cost basis there is pretty low.


Matthew Cochrane: Right, right. So, like, what would you say to the objection or if somebody objected, well, what’s the stop like Samsung and LG and all the other TV makers to just kind of like make their own, for a lack of a better term, their own platform.


Andrew Freedman: Well, I mean, so like the bull case, and I’m not. It’s funny people call like Roku, the operating system for TV and it is at its core. It’s like, you know, very similar to this market, similar to kind of, you know, smartphones and the App Store and Google and how eventually everyone just kind of migrated around two major players when, you know, it used to be Research in Motion (RIM), with Microsoft, etc. But the reality is that Roku has been competing against these large companies forever. 


I mean, Samsung has Tizen, which is their operating system. LG has their Web OS. What else? We’ve seen these other platforms just, you know, they require a lot of very high costs to build, they’re memory intensive platforms. I have a Samsung TV and I don’t use it. So I use, I mean, I use the TV, because I think it’s great hardware, but I use a Roku app. I have Roku HD that I plug into And that’s just a function of the fact that my Smart Hub in my Smart Samsung TV, I had to reset all my passwords every two months, and then I was on support with Samsung, it was just a terrible experience. It was awful. And then when they would update, it would be the hardware wasn’t compliant or wasn’t good enough. And so everything would just start to lag and slow down. And it was just a nightmare. And so I bought a Roku Ultra HD and it’s great. And actually, the survey work we’ve done suggests that 65% of Smart TV households are actually not using the operating system that came built in with the TV, like in my Samsung example. They are using a Roku. 


So what was like the big point of pushback, you know, for it’s a platform company? So it’s all about and disintermediation. And I think that there’s a lot of structural reasons, especially on the cost side and consumer experience that gives Roku a leg up there, especially with the contracts they have with TCL and some of the major Chinese OEMs. You know, there is the risk always that Google, you know, is getting more aggressive and so will they pay the manufacturers to get Android installed in their TVs? And I think that’s certainly a possibility. But still does that come down to, at the end of the day, what’s a better experience? 


And so TCL went from no market share to 35% market share of smart TVs in the U.S. riding Roku and they’re going to do the same thing in North America or, sorry, in Europe and Latin America. And we’re still early on there so, you know, I think they’re much stickier in the supply chain and embedded there than what I think a lot of people give them credit for. 


And then Amazon, I don’t think is even a credible threat, frankly, for Fire TV as an operating system, not as a stick, but as licensing out, because it’s a poor version of Android and very expensive. And it can also be jail broken, too. And so because it can be jail broken, the question becomes, as a media company, do you want to distribute your content or platform that where people can just jailbreak and gain your content for free and steal it, but that’s kind of an aside.


Matthew Cochrane: Gotcha. Alright, so now last week or so I tweeted out a poll. And I was wondering what your take on this would be. I said, which of these legacy media companies will provide shareholders with the greatest total returns over the next 10 years. And the choices were Discovery, which operates the Discovery Channel – I mean, I know you know this – but the Discovery Channel, the Travel Channel, The Learning Channel. A bunch of other channels like that. Fox, which still has a lot of regional Fox Sports networks and Fox News obviously. The New York Times. And Viacom CBS.


Andrew Freedman: Oh boy.


Matthew Cochrane: How would you answer that question?


Andrew Freedman: Well, so first of all, for those who are listening, I had not seen that poll. So, there’s no bias here. So, I’m going to tell you exactly what I would think, in order, and it is hard. So, my go to when I think about legacy media, I tend to think that broadcast has a leg up still relative to traditional cable. So, with that being said, we immediately take Fox-A and Viacom and kind of put them to the top of the list. Then the second question becomes, what are their digital assets and what do their content assets look like? And so, Viacom has Pluto TV, which is growing like a weed. They also have Paramount, and the studio business, and CBS. Now there are issues around sports rights and what that’s going to impact what the margins look like for Viacom. And then, you know, Fox has Tubi, which they purchased, they actually were investors in Roku but sold that earlier this year to buy Tubi. So, and … what was the duration three to five years?


Matthew Cochrane: Ten years. Ten years. Yeah. Well, whatever. Just take five years, five years. Yeah, no, I mean, I don’t know. We’re all we’re all just playing. Yeah. I mean, what a


Andrew Freedman: Famous quote there. I would probably say


Matthew Cochrane: In 10 years, I’ll have you back to have your answer for this.


Andrew Freedman: No, for sure. Yeah hopefully we’re all on the beach somewhere.


Matthew Cochrane: Right.


Andrew Freedman: I would probably say ViacomCBS.


Matthew Cochrane: That won the poll, that won the poll. Okay. 


Andrew Freedman: Yeah, I would say, by, I would say Viacom, Fox, and then, you know, Discovery. Okay, so I mean Discovery has great assets, they do, but I just don’t know if they have the distribution in place and I don’t know if they can make that switch to OTT. 


Matthew Cochrane: Yeah, I’m not familiar with any of these names, but whenever I do a poll, after the results are in, I’ll just like go through real quickly, like a thread where like I just look at Ycharts for them on different metrics. And after I was done with that Discovery, right now…


Andrew Freedman: Super cheap.


Matthew Cochrane: looks the most interesting, right? Its margins were decent. Its valuation was super cheap.


Andrew Freedman: Yeah, you got like John Malone in there too, which is helpful. Yeah, and it’s very cheap on a free cash flow basis, but there is debt. I mean the issue and we saw this with like we were short AMCX, AMC Networks, which is like basically just The Walking Dead. And then we were also short ViacomCBS all last year. We shorted that thing all the way to like $12, so it worked. And then earlier, earlier this year, it was just like, eh, it’s not going to work. It’s not worth it anymore. Same thing AMCX. But you know the issue is just the cheap gets cheaper and, so, the question with Discovery is you have to ask yourself as an investor. Yeah, it looks cheap, but like, is free cash flow today going to be greater or smaller three years from now? Five years from now? Ten years from now? 


And I think you could probably make a strong argument that their free cash flow is declining, and that, you know, what is the value of Discovery as a standalone company or does it just get super cheap and does it get snatched up by a larger network or somebody that could take that content and monetize it better. But you know Viacom CBS has had a nice run, you know, and it’s still relatively attractive, but there’s challenges in legacy media, right?


Matthew Cochrane: Oh yeah, for sure. 


Andrew Freedman: So it’s hard. You have a lot of landmines you have to dodge.


Matthew Cochrane: Are there any other surprise winners or surprise losers that you see in this overall landscape that we haven’t touched on?


Andrew Freedman: Surprise winners or surprise losers? Um, no. I mean, I think we kind of hit on it. Nothing that’s like super gems that are undiscovered. I think that the themes are fairly straightforward. 


You know, I think that if anything, probably, people are just still too optimistic on Netflix which I think is going to, you know, probably show up in this quarter’s results and you know the next 6 to 12 months. Roku, I still think, you know, despite it being almost a $20 billion market cap now, still a lot of people don’t understand that company, which is great because I think that means that you know the more debates I have with people about it being a hardware business makes me more bullish, because that means that people just fundamentally just don’t understand this business. 


And so that there’s actually a larger investor base out there for them to come to realize that this is a great growth story and start to invest. So that’s also where the opportunity is, you know, I do think you know Roku would be my horse to ride, 100%, you know, going forward. And then AVOD, generally, I think there’s a lot of skepticism around the Tubi and you know, which box, but like I said before. And like Pluto TV, because investors are largely like, “Who wants ads? You know, who wants ads?” And there’s a large portion of the population that will take ads for a subsidized price. There’s a market for it, so I think those assets are underappreciated. 


And we could see an interesting scenario where, for Fox and Viacom, which is why I picked those two, where it’s possible that those businesses that are growing very fast eventually become more than 50% of the business and therefore the consolidated growth rates flex and then we’re kind of off to the races. 


Matthew Cochrane: All right. One last question. Last night, I think it was last night, you tweeted something, it was you retweeted something. It was about the TikTok IPO and just tweeted, you quote tweeted, and said, “Yes!”. So, are you a buyer of the TikTok IPO.


Andrew Freedman: Look, I’ve looked at the numbers. I like what TikTok has been able to do from a virality standpoint and monetization standpoint, it’s just been remarkable. You know, it puts everyone to shame, except for Facebook because, you know, they’re kind of on a similar path. And it also makes you wonder what Twitter did wrong when it came to their purchase of Vine. But it was bad timing. But, you know, I don’t know, everything has a price. And I think it’s an interesting platform. And there’s the engagement metrics, like I said, on the data side from the app download stuff, and time spend is just exploding. So I think I am definitely bullish on TikTok from everything that I’ve seen on it. So now, the question always becomes, like if they file in the US and we get an S-1, and we go through our process and tear it down and do all of our channel checks and figure out what it’s worth. You know, if TikTok U.S. comes public and you know it goes public at like $100 and you know maybe prices at $50-$60 billion, and trades open at like $120 billion, $130 billion, $150 billion. I mean, we saw what happened with the Snowflake IPO. So, you know, then it’s like, well, you know, okay, it’s probably a short


Matthew Cochrane: Sure, sure, sure.


Andrew Freedman: But I do think that the growth is undeniable and you can’t ignore it. It’s top of mind for a lot of advertisers and engagement is fairly astounding, especially relative to Snap. So, you know, I’ve actually been thinking that maybe if that goes public it’s potentially more negative for like a Snapchat on the margin, right? From just an investor source of capital. But when I said yes, I mean, I’m just, you know, being a little bit selfish. You’re right, because analysts, being a public equity analyst that covers this space, I would love to be able to cover TikTok. You know, it had more market cap and interesting company. You know, rather than if it gets like carved up between U.S. and ex-U.S. and gets owned by Microsoft or Walmart or Oracle, like that’s not fun. That’s kind of sad. It’s kind of boring. So let’s get this thing public. Let’s break it open. Let’s keep it a global company. 


You know, Kevin Mayer, man, that guy was the former direct to consumer head at Disney and he launched Disney+, and everyone thought he was going to be the new CEO. Which ended up not being the case, but he went over to TikTok earlier this year to lead the global company. And, you know, and because of the policy and political dynamics that unfolded he then resigned. But man, would that be just bitter sweet. It turns out that they actually go public as a separate company in the U.S.  and he could have been the CEO.


Matthew Cochrane: It seems like he’s the real loser in all this. Because he went there, and then like all this stuff happened and he left, and now…


Andrew Freedman: Like ,what I think we’ve all kind of as investors gotten too caught up in the short term and trading, right? And so there’s a concept of getting whipsawed as a trader where you may be right in the long term, but then you just execute terribly. And so, you know, by the wrong time. So it’s a long time. I just kind of think about it like that.


Matthew Cochrane: Right.


Andrew Freedman: It’s just, he potentially he played himself that he just got himself whipsawed, maybe making decisions in haste with his ego getting the best of him. I don’t know, I’m just speculating. It’s not like I have him on the cell phone. Reading the tea leaves, it’s just one of those situations where it’s tough, but it’s going to be interesting to see how it plays out. Love to see a TikTok IPO, I think it would be a lot of fun.


Matthew Cochrane: For sure, for sure. Well, let’s wrap up our conversation there. Andrew, where can people find you if they’re interested in following you?


Andrew Freedman: Yeah, thanks. So we’re all over Twitter everyone at Hedgeye, but you can find me on Twitter @hedgeyecomm you can also find us @hedgeye. We have a large institutional business but we’re starting to get more into the middle market space for professional investors by launching some new products. So there’s you’ll see more from us on that, and we’re launching Communications Pro, which is going to be a lot of what we do on the institutional side. But, you know, breaking that open to more investors in a very hyperfocused, very deep format. So it’s going to be a lot of good data all focus on the internet telecom space. So I look forward to that happening in Q4, and I think To get guys subscribing and get feedback love to hear it.


Matthew Cochrane: That’s great. I Andrew Freedman, ladies and gentlemen, thank you so much for coming on today and discussing investing with us. Again, I’m Matthew Cochrane, lead advisor with 7investing, and we’re here to empower you to invest in your future. Have a great day everyone.


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