AI transcript
0:00:04 There’s over 500,000 small businesses in B.C. and no two are alike.
0:00:05 I’m a carpenter.
0:00:06 I’m a graphic designer.
0:00:09 I sell dog socks online.
0:00:12 That’s why B.C.A.A. created one size doesn’t fit all insurance.
0:00:15 It’s customizable, based on your unique needs.
0:00:19 So whether you manage rental properties or paint pet portraits,
0:00:23 you can protect your small business with B.C.’s most trusted insurance brand.
0:00:29 Visit bcaa.com/smallbusiness and use promo code radio to receive $50 off.
0:00:31 Conditions applied.
0:00:33 Support for Prop G is brought to you by Viori.
0:00:35 Are you sick and tired of traditional old workout gear?
0:00:38 Viori wants to provide you with a new perspective on performance apparel.
0:00:43 Everything is designed to work out in, but also look and feel great outside the gym as well.
0:00:45 Viori’s products are incredibly versatile.
0:00:49 You can wear them running, training, stretching, or just lounging around.
0:00:53 Viori sent me the Elevate Core Shorts and Stratotec tee.
0:00:55 And I like the way they feel that form-fitting.
0:00:55 I feel strong in them.
0:00:56 I feel sleek in them.
0:00:58 I feel like a jungle cat.
0:01:01 Viori is an investment in your happiness.
0:01:04 For our listeners, they are offering 20% off your first purchase.
0:01:09 Get yourself some of the most comfortable and versatile clothing on the planet at viori.com/PropG.
0:01:13 That’s V-U-O-R-I.com/Prop G.
0:01:19 An experimental procedure that is giving hope to…
0:01:23 To get a heart transplant from a genetically modified pig.
0:01:27 There’s over 100,000 people on the organ transplant weight list.
0:01:31 And some scientists think the answer might be pigs.
0:01:37 Nobody in the world knew how a human would react to a pig heart, right?
0:01:39 The next day when we asked him, you know, “How are you feeling?”
0:01:41 He said, “Oink, oink.”
0:01:47 This week on Unexplainable, are pig hearts really the answer?
0:01:50 Follow Unexplainable for new episodes every Wednesday.
0:01:56 I’m Scott Galloway, and this is No Mercy, No Malice.
0:02:03 Some of the most iconic brands in history have seen their businesses crash.
0:02:06 Fallen Angels, as read by George Hahn.
0:02:24 The stock market is touching highs, but some corporate icons have seen valuations crash.
0:02:28 I believe dispersion, China, and a changing of the guard
0:02:31 are key to understanding these Fallen Angels.
0:02:36 In 1996, at the height of the brand era,
0:02:42 I was asked to address the board of Levi Strausen Company on the future of brands and retail.
0:02:46 The title of my presentation was The Death of Distance.
0:02:53 The rap was that brands need to establish direct relationships with consumers,
0:02:58 e-commerce, as digital technology would disperse products and services
0:03:01 without regard for existing distribution channels.
0:03:02 This happened.
0:03:07 Amazon dispersed retail to desktop, to mobile, to voice.
0:03:15 Netflix dispersed DVDs to the mailbox, then to every screen as net neutrality enabled them
0:03:20 to replicate tens of billions in cable infrastructure at near zero cost,
0:03:24 freeing up billions that resulted in a content price ratio
0:03:26 traditional players could not match.
0:03:30 The pandemic accelerated dispersion of the office,
0:03:36 remote work, healthcare, telemedicine, and education, online learning.
0:03:43 What I didn’t see, however, is that AI would be steroids for dispersion,
0:03:47 enabling anyone to leapfrog everyone.
0:03:49 Intel.
0:03:55 Moore’s Law, named for Intel co-founder Gordon Moore,
0:04:01 is an observation that the number of transistors on a microchip doubles every two years.
0:04:07 It’s a meme that encapsulates the relentless pace of technological progress.
0:04:10 When I graduated from the Haas School of Business,
0:04:16 Intel was the job everyone wanted, as the firm was surfing Moore’s Wave,
0:04:19 which was doubling in size every two years.
0:04:27 The Intel phenomenon could now be described as the ability to shed the majority of your value
0:04:30 despite being the leader in a booming industry.
0:04:36 Few firms have fallen so far, so steadily, as Intel.
0:04:42 At its peak in 2000, Intel’s market cap was $500 billion.
0:04:50 Since then, the S&P is up 243% and Intel down 80%.
0:04:58 If Intel had kept pace with the S&P, the firm would be worth 16 times what it’s worth today.
0:05:07 A stark reminder of this fall from grace, Jensen Huang, CEO of NVIDIA, is worth more than Intel.
0:05:15 The firm is at risk of being dropped from the Dow. Many icons disappear as everything
0:05:23 everywhere ends. However, this fall is extraordinary, as leading firms usually experience this type of
0:05:27 value destruction when they are helpless in the face of a sector’s decline.
0:05:36 This is on Intel as its market has boomed, with semiconductor sales increasing 18% globally year
0:05:46 over year and 21% in China. Intel’s brand and enduring legacy of Andy Grove mask what is arguably
0:05:55 the worst managed firm of the last 20 years. At the beginning of 2021, Intel and NVIDIA commanded
0:06:04 the same market capitalization. Today, the wizard behind the AI curtain is worth 30 Intel’s.
0:06:12 Intel missed dispersion, i.e. failed to capitalize on mobile and AI. While it remains the biggest
0:06:18 maker of processors for PCs and laptops, Intel no longer has the power to predict the future
0:06:25 by making it. The future belongs to NVIDIA. Five years ago, NVIDIA was a second tier
0:06:31 semiconductor firm best known for giving call of duty better resolution. Today, it’s the third
0:06:41 most valuable company on earth, with between 70% and 95% of the AI chip market. With a P/E ratio of
0:06:50 99, Intel is still likely overvalued, but the game’s not over. Intel is shifting its business
0:06:56 model to serve as a manufacturer for other chip companies, including NVIDIA and Apple,
0:07:00 that outsource the part of the supply chain that was supposed to be the ultimate moat
0:07:08 manufacturing. It ends up there are a lot of moats, slack supply, that can be rented.
0:07:16 In some, Intel aspires to become the picks and shovels of a market they once dominated.
0:07:26 TSMC, which has 60% of the foundry market, reported gross margins of 53%,
0:07:32 compared with NVIDIA, the leading pure play chip maker, which reported margins of 75%.
0:07:41 The front end branded chip has higher margins and is a much better business. However, at $100
0:07:49 billion in a market where CapEx rivals nations, Intel just needs to show a pulse to substantially
0:07:55 increase its valuation. Their key advantage is not their brand or IP, but that they have lost
0:08:03 so much value that they have much less to lose. Leveraging their brand and IP to be the best
0:08:10 house in a bad neighborhood could result in a dramatic increase in value. From here, Disney.
0:08:19 Hollywood is becoming a fair-weather Detroit. Less than 50% of all TV usage is attributed
0:08:26 to linear as streaming now dominates. Domestic film and TV production is down 40%.
0:08:34 The year before GM and Chrysler declared bankruptcy, their auto sales were off 23%
0:08:42 and 30% respectively. It would be convenient and more dramatic to claim this is because of AI.
0:08:49 It isn’t. The root cause is more pedestrian. Content budgets are up 3% this year,
0:08:59 but studios can find people to do the same thing for less money elsewhere. Half of Netflix’s $15
0:09:07 billion annual content budget is now spent overseas. Note, Los Angeles will not register
0:09:16 similar urban blight as, you know, weather. Disney, unlike Intel, can blame the weather,
0:09:24 or at least the atmospherics. Despite having 10,000 screens, AMC is not known as the largest
0:09:29 theatrical distributor, but a meme stock. In the past three years, Paramount Global
0:09:37 market cap dropped from $43 billion to $7.5 billion. Warner Brothers Discovery lost
0:09:45 two-thirds of its value in two years. YouTube, which spends zero on content as it splits revenue
0:09:55 with creators, accounts for 10% of TV viewership. Netflix is second, with 7.6%. But even the
0:10:00 streamers that leapfrog legacy media should worry about TikTok, which provides quick,
0:10:05 perfectly calibrated Dopa hits for two plus hours per day.
0:10:12 Amid all the wreckage of Hollywood is the once seemingly impenetrable Disney castle,
0:10:21 which has shed half its value as its P/E ratio dropped from 283 to 36 over the past three years.
0:10:29 If Hollywood is Detroit, Disney is Ford. Theatrical is in structural decline,
0:10:37 but Disney accounted for 42% of the global box office with only three films, Deadpool and Wolverine,
0:10:47 Inside Out 2 and Alien Romulus. Cable is dying, but Disney owns so much content, Hulu, ABC, FX,
0:10:54 ESPN, Marvel Studios, Lucasfilm, Pixar, 20th Century Studios, and National Geographic,
0:11:01 that its streaming services are becoming the new cable bundle. But even with price hikes,
0:11:10 access to the entire Disney streaming ecosystem without ads costs $159.99 annually.
0:11:22 A mid-tier cable package costs $1,380 per year. At the parks, operating profit dropped 3%
0:11:29 as attendance slowed industry-wide. Disney and Comcast, which owns Universal Studios,
0:11:35 blamed competition with international travel. At the low end, a three-night Disney World
0:11:45 vacation for a family of four costs $2,783. According to a recent survey, 45% of parents
0:11:53 take on debt for a Disney vacation. My take? Disney parks, similar to a Santa Monica producer of
0:12:02 reality TV content, cost too much for not enough. Disney recognizes this and announced a $60 billion
0:12:10 investment to improve the value prop. Pro tip? Deadpool ride. Nike.
0:12:19 Wearing Nike makes me feel stronger. I love Nike, especially the unapologetic brand positioning.
0:12:28 You don’t win silver, you lose gold. But after losing 50% of its value in three years,
0:12:34 Nike is nowhere near the metal podium. During the pandemic, running clubs boomed.
0:12:40 This should have been great news for Nike. Instead, it was a shot of adrenaline for Nike
0:12:49 competitors. Hoka sales were up 27% last quarter, while Q3 sales for on were up 46%.
0:12:55 Meanwhile, Nike’s former CEO, John Donahoe, blamed remote work for the firm’s innovation slowdown.
0:13:03 Donahoe represented a pivot to digital and direct to consumer. When Nike was my client,
0:13:08 I advocated for this strategy as dispersion would neutralize Nike’s best weapon,
0:13:14 broadcast advertising. But the fuel band never gained traction.
0:13:21 DTC revenue was down 13% last quarter, and ultimately Donahoe confirmed that Nike leaned
0:13:29 into digital and DTC at the expense of retail partners. A decision that hurt Nike as retail
0:13:35 returned stronger than expected post pandemic, and Nike lost touch with cutting edge smaller
0:13:45 retailers. And then China sneezed, and Nike caught full blown pneumonia. Fourth quarter
0:13:54 sales in China dropped 19%, and Nike warned investors to expect more bad news. This quarter,
0:14:00 Nike sales were down 10% year over year, and down 4% in China.
0:14:06 Still, there’s nothing wrong with Nike that can’t be fixed by what’s right with Nike.
0:14:11 Their new CEO, Elliot Hill, represents a return to the brand’s roots.
0:14:18 The stock popped 7% on news of his hiring, and then gave it back, see above sales down 10%.
0:14:27 And while this is an investment advice, Nike’s PE ratio has dropped from a 2020 high of 73
0:14:36 to 23, suggesting that the stock is undervalued. It’s going to take time, as this may be a board
0:14:41 problem. Nike, after shitting the bed on its earnings call this week, announced they would
0:14:48 no longer be providing guidance. This is just plain stupid and a rookie move from a great company.
0:14:55 When things are bad, you over communicate, and if Nike’s management team is so thin,
0:15:02 the board lets them punt on key information flows to investors, then they shouldn’t be in the S&P 500.
0:15:10 Estee Lauder At first blush, it’s easy to blame China for Estee Lauder’s
0:15:19 75% drop in market cap over three years. But Estee Lauder used that explanation pre-pandemic,
0:15:26 during lockdowns, and post-pandemic. Meanwhile, the global beauty market has been relatively strong,
0:15:35 growing 10% from 2022 to 2023, while China’s beauty market lagged, growing by only 3% amid
0:15:42 heavy price discounting. Estee Lauder, L’Oreal, and Shiseido have all struggled in China recently,
0:15:49 although Estee Lauder has struggled the most. But a bad economy isn’t automatically bad news
0:15:55 for luxury brands. The lipstick effect is a theory that says during economic downturns,
0:16:01 consumers on tight budgets still splurge on small, affordable luxuries, as such purchases give people
0:16:08 a sense of indulgence without breaking the bank. The question isn’t whether budget conscious Chinese
0:16:14 consumers have soured on luxury, but whether they’ve soured on Estee Lauder. According to Vogue,
0:16:22 it’s the latter. Proya is set to become the first Chinese beauty brand to hit $1 billion in revenue.
0:16:30 Chinese beauty brand Florasses will open its first counter in Paris. Direct to consumer brand
0:16:39 Uniskin launched its first brick-and-mortar store in Shanghai. The HBO show’s succession
0:16:45 was a modern-day Shakespearean drama that captured the essence of power, wealth, and family dysfunction.
0:16:51 Ostensibly, it was about Rupert Murdoch, but it also could have been about Sumner Redstone,
0:16:58 or the Estee Lauder family, which owns 35% of the company and controls 80% of the voting power.
0:17:05 Ultimately, this isn’t about China or navigating dispersion. It’s about the frailty of family
0:17:13 dynasties. Such dynamics make for good TV drama, but they’re lousy for shareholder value.
0:17:21 Similar to Nike, Estee has missed key trends and finds long-tail brands nipping at every appendage.
0:17:31 Dispersion and the rise of China both began in the 1990s. Three decades later, China is the world’s
0:17:37 second-largest economy, and it has more middle-class households than the U.S.
0:17:44 Dispersion is no longer coming. It’s here, and AI will take it in new directions.
0:17:50 Similar to Congress, there are just too many old people in corporate America clinging to power.
0:17:57 One of the key problems in America is lack of churn. Politicians, CEOs,
0:18:03 and tenured faculty refuse to leave, creating a stasis that is bad for the economy,
0:18:08 as our country is run by people who are out of touch, and reduces opportunity for young people.
0:18:16 If that sounds agist, trust your instincts. I am an agist, and so is biology.
0:18:24 At 73, Bob Iger is the oldest CEO of the Fallen Angels I discussed here.
0:18:30 His first, second, and third priorities need to be picking a successor.
0:18:38 At 60, Nike CEO Elliot Hill is the youngest Fallen Angel boss, and like Iger,
0:18:41 he came out of retirement to turn an iconic company around.
0:18:50 Pat Gelsinger, 63, started his career at Intel at 18. His mentor was Andy Grove,
0:18:58 a leading gangster CEO of the last century. Estee Lauder CEO Fabrizio Freida is 67.
0:19:04 He’s retiring after 16 years at the helm. Maybe it’s a vibe, as my kids say,
0:19:07 but a changing of the guard is upon us.
0:19:14 In January of 2011, Netflix was worth $11 billion.
0:19:22 By November, the company’s market cap was just over $3 billion. The reason?
0:19:27 As Netflix pivoted to streaming, it tried to spin off its DVD business.
0:19:34 The quickster backlash cost Netflix one million subscribers. As it turned out,
0:19:40 Netflix was right but early, as they ultimately closed their DVD business in 2023.
0:19:48 In 2012, Best Buy was on the brink of bankruptcy, and the big box sector looked doomed.
0:19:57 A year later, Best Buy’s market cap increased 3x as a new CEO led one of the biggest turnarounds
0:20:03 in retail history. And then there’s the turnaround story everyone knows. Apple.
0:20:12 We’re wired to overestimate the impact of negative events, a phenomenon known as the
0:20:19 negativity bias. It’s a cognitive distortion that makes us believe that failures have a greater
0:20:26 impact than they actually do. At some point, every business experiences a crisis, i.e.,
0:20:35 an opportunity. As a professor of brand strategy, I can’t help but wax nostalgic and believe these
0:20:43 firms are ripe for a comeback. They all boast global brands, talented workforces, and robust
0:20:51 supply chains. However, the most attractive thing about these firms is just how badly they’ve been
0:20:59 beaten down. In the first four weeks of 2024, Nvidia added the value of all four of these firms.
0:21:06 And that’s the bull case, as at some point every stock, unless it’s going to zero,
0:21:15 is just too expensive or cheap. These angels have fallen so far, redemption is overdue.
0:21:30 Life is so rich.
0:21:39 [BLANK_AUDIO]
0:00:05 I’m a carpenter.
0:00:06 I’m a graphic designer.
0:00:09 I sell dog socks online.
0:00:12 That’s why B.C.A.A. created one size doesn’t fit all insurance.
0:00:15 It’s customizable, based on your unique needs.
0:00:19 So whether you manage rental properties or paint pet portraits,
0:00:23 you can protect your small business with B.C.’s most trusted insurance brand.
0:00:29 Visit bcaa.com/smallbusiness and use promo code radio to receive $50 off.
0:00:31 Conditions applied.
0:00:33 Support for Prop G is brought to you by Viori.
0:00:35 Are you sick and tired of traditional old workout gear?
0:00:38 Viori wants to provide you with a new perspective on performance apparel.
0:00:43 Everything is designed to work out in, but also look and feel great outside the gym as well.
0:00:45 Viori’s products are incredibly versatile.
0:00:49 You can wear them running, training, stretching, or just lounging around.
0:00:53 Viori sent me the Elevate Core Shorts and Stratotec tee.
0:00:55 And I like the way they feel that form-fitting.
0:00:55 I feel strong in them.
0:00:56 I feel sleek in them.
0:00:58 I feel like a jungle cat.
0:01:01 Viori is an investment in your happiness.
0:01:04 For our listeners, they are offering 20% off your first purchase.
0:01:09 Get yourself some of the most comfortable and versatile clothing on the planet at viori.com/PropG.
0:01:13 That’s V-U-O-R-I.com/Prop G.
0:01:19 An experimental procedure that is giving hope to…
0:01:23 To get a heart transplant from a genetically modified pig.
0:01:27 There’s over 100,000 people on the organ transplant weight list.
0:01:31 And some scientists think the answer might be pigs.
0:01:37 Nobody in the world knew how a human would react to a pig heart, right?
0:01:39 The next day when we asked him, you know, “How are you feeling?”
0:01:41 He said, “Oink, oink.”
0:01:47 This week on Unexplainable, are pig hearts really the answer?
0:01:50 Follow Unexplainable for new episodes every Wednesday.
0:01:56 I’m Scott Galloway, and this is No Mercy, No Malice.
0:02:03 Some of the most iconic brands in history have seen their businesses crash.
0:02:06 Fallen Angels, as read by George Hahn.
0:02:24 The stock market is touching highs, but some corporate icons have seen valuations crash.
0:02:28 I believe dispersion, China, and a changing of the guard
0:02:31 are key to understanding these Fallen Angels.
0:02:36 In 1996, at the height of the brand era,
0:02:42 I was asked to address the board of Levi Strausen Company on the future of brands and retail.
0:02:46 The title of my presentation was The Death of Distance.
0:02:53 The rap was that brands need to establish direct relationships with consumers,
0:02:58 e-commerce, as digital technology would disperse products and services
0:03:01 without regard for existing distribution channels.
0:03:02 This happened.
0:03:07 Amazon dispersed retail to desktop, to mobile, to voice.
0:03:15 Netflix dispersed DVDs to the mailbox, then to every screen as net neutrality enabled them
0:03:20 to replicate tens of billions in cable infrastructure at near zero cost,
0:03:24 freeing up billions that resulted in a content price ratio
0:03:26 traditional players could not match.
0:03:30 The pandemic accelerated dispersion of the office,
0:03:36 remote work, healthcare, telemedicine, and education, online learning.
0:03:43 What I didn’t see, however, is that AI would be steroids for dispersion,
0:03:47 enabling anyone to leapfrog everyone.
0:03:49 Intel.
0:03:55 Moore’s Law, named for Intel co-founder Gordon Moore,
0:04:01 is an observation that the number of transistors on a microchip doubles every two years.
0:04:07 It’s a meme that encapsulates the relentless pace of technological progress.
0:04:10 When I graduated from the Haas School of Business,
0:04:16 Intel was the job everyone wanted, as the firm was surfing Moore’s Wave,
0:04:19 which was doubling in size every two years.
0:04:27 The Intel phenomenon could now be described as the ability to shed the majority of your value
0:04:30 despite being the leader in a booming industry.
0:04:36 Few firms have fallen so far, so steadily, as Intel.
0:04:42 At its peak in 2000, Intel’s market cap was $500 billion.
0:04:50 Since then, the S&P is up 243% and Intel down 80%.
0:04:58 If Intel had kept pace with the S&P, the firm would be worth 16 times what it’s worth today.
0:05:07 A stark reminder of this fall from grace, Jensen Huang, CEO of NVIDIA, is worth more than Intel.
0:05:15 The firm is at risk of being dropped from the Dow. Many icons disappear as everything
0:05:23 everywhere ends. However, this fall is extraordinary, as leading firms usually experience this type of
0:05:27 value destruction when they are helpless in the face of a sector’s decline.
0:05:36 This is on Intel as its market has boomed, with semiconductor sales increasing 18% globally year
0:05:46 over year and 21% in China. Intel’s brand and enduring legacy of Andy Grove mask what is arguably
0:05:55 the worst managed firm of the last 20 years. At the beginning of 2021, Intel and NVIDIA commanded
0:06:04 the same market capitalization. Today, the wizard behind the AI curtain is worth 30 Intel’s.
0:06:12 Intel missed dispersion, i.e. failed to capitalize on mobile and AI. While it remains the biggest
0:06:18 maker of processors for PCs and laptops, Intel no longer has the power to predict the future
0:06:25 by making it. The future belongs to NVIDIA. Five years ago, NVIDIA was a second tier
0:06:31 semiconductor firm best known for giving call of duty better resolution. Today, it’s the third
0:06:41 most valuable company on earth, with between 70% and 95% of the AI chip market. With a P/E ratio of
0:06:50 99, Intel is still likely overvalued, but the game’s not over. Intel is shifting its business
0:06:56 model to serve as a manufacturer for other chip companies, including NVIDIA and Apple,
0:07:00 that outsource the part of the supply chain that was supposed to be the ultimate moat
0:07:08 manufacturing. It ends up there are a lot of moats, slack supply, that can be rented.
0:07:16 In some, Intel aspires to become the picks and shovels of a market they once dominated.
0:07:26 TSMC, which has 60% of the foundry market, reported gross margins of 53%,
0:07:32 compared with NVIDIA, the leading pure play chip maker, which reported margins of 75%.
0:07:41 The front end branded chip has higher margins and is a much better business. However, at $100
0:07:49 billion in a market where CapEx rivals nations, Intel just needs to show a pulse to substantially
0:07:55 increase its valuation. Their key advantage is not their brand or IP, but that they have lost
0:08:03 so much value that they have much less to lose. Leveraging their brand and IP to be the best
0:08:10 house in a bad neighborhood could result in a dramatic increase in value. From here, Disney.
0:08:19 Hollywood is becoming a fair-weather Detroit. Less than 50% of all TV usage is attributed
0:08:26 to linear as streaming now dominates. Domestic film and TV production is down 40%.
0:08:34 The year before GM and Chrysler declared bankruptcy, their auto sales were off 23%
0:08:42 and 30% respectively. It would be convenient and more dramatic to claim this is because of AI.
0:08:49 It isn’t. The root cause is more pedestrian. Content budgets are up 3% this year,
0:08:59 but studios can find people to do the same thing for less money elsewhere. Half of Netflix’s $15
0:09:07 billion annual content budget is now spent overseas. Note, Los Angeles will not register
0:09:16 similar urban blight as, you know, weather. Disney, unlike Intel, can blame the weather,
0:09:24 or at least the atmospherics. Despite having 10,000 screens, AMC is not known as the largest
0:09:29 theatrical distributor, but a meme stock. In the past three years, Paramount Global
0:09:37 market cap dropped from $43 billion to $7.5 billion. Warner Brothers Discovery lost
0:09:45 two-thirds of its value in two years. YouTube, which spends zero on content as it splits revenue
0:09:55 with creators, accounts for 10% of TV viewership. Netflix is second, with 7.6%. But even the
0:10:00 streamers that leapfrog legacy media should worry about TikTok, which provides quick,
0:10:05 perfectly calibrated Dopa hits for two plus hours per day.
0:10:12 Amid all the wreckage of Hollywood is the once seemingly impenetrable Disney castle,
0:10:21 which has shed half its value as its P/E ratio dropped from 283 to 36 over the past three years.
0:10:29 If Hollywood is Detroit, Disney is Ford. Theatrical is in structural decline,
0:10:37 but Disney accounted for 42% of the global box office with only three films, Deadpool and Wolverine,
0:10:47 Inside Out 2 and Alien Romulus. Cable is dying, but Disney owns so much content, Hulu, ABC, FX,
0:10:54 ESPN, Marvel Studios, Lucasfilm, Pixar, 20th Century Studios, and National Geographic,
0:11:01 that its streaming services are becoming the new cable bundle. But even with price hikes,
0:11:10 access to the entire Disney streaming ecosystem without ads costs $159.99 annually.
0:11:22 A mid-tier cable package costs $1,380 per year. At the parks, operating profit dropped 3%
0:11:29 as attendance slowed industry-wide. Disney and Comcast, which owns Universal Studios,
0:11:35 blamed competition with international travel. At the low end, a three-night Disney World
0:11:45 vacation for a family of four costs $2,783. According to a recent survey, 45% of parents
0:11:53 take on debt for a Disney vacation. My take? Disney parks, similar to a Santa Monica producer of
0:12:02 reality TV content, cost too much for not enough. Disney recognizes this and announced a $60 billion
0:12:10 investment to improve the value prop. Pro tip? Deadpool ride. Nike.
0:12:19 Wearing Nike makes me feel stronger. I love Nike, especially the unapologetic brand positioning.
0:12:28 You don’t win silver, you lose gold. But after losing 50% of its value in three years,
0:12:34 Nike is nowhere near the metal podium. During the pandemic, running clubs boomed.
0:12:40 This should have been great news for Nike. Instead, it was a shot of adrenaline for Nike
0:12:49 competitors. Hoka sales were up 27% last quarter, while Q3 sales for on were up 46%.
0:12:55 Meanwhile, Nike’s former CEO, John Donahoe, blamed remote work for the firm’s innovation slowdown.
0:13:03 Donahoe represented a pivot to digital and direct to consumer. When Nike was my client,
0:13:08 I advocated for this strategy as dispersion would neutralize Nike’s best weapon,
0:13:14 broadcast advertising. But the fuel band never gained traction.
0:13:21 DTC revenue was down 13% last quarter, and ultimately Donahoe confirmed that Nike leaned
0:13:29 into digital and DTC at the expense of retail partners. A decision that hurt Nike as retail
0:13:35 returned stronger than expected post pandemic, and Nike lost touch with cutting edge smaller
0:13:45 retailers. And then China sneezed, and Nike caught full blown pneumonia. Fourth quarter
0:13:54 sales in China dropped 19%, and Nike warned investors to expect more bad news. This quarter,
0:14:00 Nike sales were down 10% year over year, and down 4% in China.
0:14:06 Still, there’s nothing wrong with Nike that can’t be fixed by what’s right with Nike.
0:14:11 Their new CEO, Elliot Hill, represents a return to the brand’s roots.
0:14:18 The stock popped 7% on news of his hiring, and then gave it back, see above sales down 10%.
0:14:27 And while this is an investment advice, Nike’s PE ratio has dropped from a 2020 high of 73
0:14:36 to 23, suggesting that the stock is undervalued. It’s going to take time, as this may be a board
0:14:41 problem. Nike, after shitting the bed on its earnings call this week, announced they would
0:14:48 no longer be providing guidance. This is just plain stupid and a rookie move from a great company.
0:14:55 When things are bad, you over communicate, and if Nike’s management team is so thin,
0:15:02 the board lets them punt on key information flows to investors, then they shouldn’t be in the S&P 500.
0:15:10 Estee Lauder At first blush, it’s easy to blame China for Estee Lauder’s
0:15:19 75% drop in market cap over three years. But Estee Lauder used that explanation pre-pandemic,
0:15:26 during lockdowns, and post-pandemic. Meanwhile, the global beauty market has been relatively strong,
0:15:35 growing 10% from 2022 to 2023, while China’s beauty market lagged, growing by only 3% amid
0:15:42 heavy price discounting. Estee Lauder, L’Oreal, and Shiseido have all struggled in China recently,
0:15:49 although Estee Lauder has struggled the most. But a bad economy isn’t automatically bad news
0:15:55 for luxury brands. The lipstick effect is a theory that says during economic downturns,
0:16:01 consumers on tight budgets still splurge on small, affordable luxuries, as such purchases give people
0:16:08 a sense of indulgence without breaking the bank. The question isn’t whether budget conscious Chinese
0:16:14 consumers have soured on luxury, but whether they’ve soured on Estee Lauder. According to Vogue,
0:16:22 it’s the latter. Proya is set to become the first Chinese beauty brand to hit $1 billion in revenue.
0:16:30 Chinese beauty brand Florasses will open its first counter in Paris. Direct to consumer brand
0:16:39 Uniskin launched its first brick-and-mortar store in Shanghai. The HBO show’s succession
0:16:45 was a modern-day Shakespearean drama that captured the essence of power, wealth, and family dysfunction.
0:16:51 Ostensibly, it was about Rupert Murdoch, but it also could have been about Sumner Redstone,
0:16:58 or the Estee Lauder family, which owns 35% of the company and controls 80% of the voting power.
0:17:05 Ultimately, this isn’t about China or navigating dispersion. It’s about the frailty of family
0:17:13 dynasties. Such dynamics make for good TV drama, but they’re lousy for shareholder value.
0:17:21 Similar to Nike, Estee has missed key trends and finds long-tail brands nipping at every appendage.
0:17:31 Dispersion and the rise of China both began in the 1990s. Three decades later, China is the world’s
0:17:37 second-largest economy, and it has more middle-class households than the U.S.
0:17:44 Dispersion is no longer coming. It’s here, and AI will take it in new directions.
0:17:50 Similar to Congress, there are just too many old people in corporate America clinging to power.
0:17:57 One of the key problems in America is lack of churn. Politicians, CEOs,
0:18:03 and tenured faculty refuse to leave, creating a stasis that is bad for the economy,
0:18:08 as our country is run by people who are out of touch, and reduces opportunity for young people.
0:18:16 If that sounds agist, trust your instincts. I am an agist, and so is biology.
0:18:24 At 73, Bob Iger is the oldest CEO of the Fallen Angels I discussed here.
0:18:30 His first, second, and third priorities need to be picking a successor.
0:18:38 At 60, Nike CEO Elliot Hill is the youngest Fallen Angel boss, and like Iger,
0:18:41 he came out of retirement to turn an iconic company around.
0:18:50 Pat Gelsinger, 63, started his career at Intel at 18. His mentor was Andy Grove,
0:18:58 a leading gangster CEO of the last century. Estee Lauder CEO Fabrizio Freida is 67.
0:19:04 He’s retiring after 16 years at the helm. Maybe it’s a vibe, as my kids say,
0:19:07 but a changing of the guard is upon us.
0:19:14 In January of 2011, Netflix was worth $11 billion.
0:19:22 By November, the company’s market cap was just over $3 billion. The reason?
0:19:27 As Netflix pivoted to streaming, it tried to spin off its DVD business.
0:19:34 The quickster backlash cost Netflix one million subscribers. As it turned out,
0:19:40 Netflix was right but early, as they ultimately closed their DVD business in 2023.
0:19:48 In 2012, Best Buy was on the brink of bankruptcy, and the big box sector looked doomed.
0:19:57 A year later, Best Buy’s market cap increased 3x as a new CEO led one of the biggest turnarounds
0:20:03 in retail history. And then there’s the turnaround story everyone knows. Apple.
0:20:12 We’re wired to overestimate the impact of negative events, a phenomenon known as the
0:20:19 negativity bias. It’s a cognitive distortion that makes us believe that failures have a greater
0:20:26 impact than they actually do. At some point, every business experiences a crisis, i.e.,
0:20:35 an opportunity. As a professor of brand strategy, I can’t help but wax nostalgic and believe these
0:20:43 firms are ripe for a comeback. They all boast global brands, talented workforces, and robust
0:20:51 supply chains. However, the most attractive thing about these firms is just how badly they’ve been
0:20:59 beaten down. In the first four weeks of 2024, Nvidia added the value of all four of these firms.
0:21:06 And that’s the bull case, as at some point every stock, unless it’s going to zero,
0:21:15 is just too expensive or cheap. These angels have fallen so far, redemption is overdue.
0:21:30 Life is so rich.
0:21:39 [BLANK_AUDIO]
As read by George Hahn.
Fallen Angels
Learn more about your ad choices. Visit podcastchoices.com/adchoices