We also chat with William Cohan from Puck about what’s going on with Paramount Global.
When this podcast was recorded on June 27, Chewy stock was up about 60% for the month. By the time we wrote this description, Roaring Kitty — who is described in a Wikipedia entry as “an American financial marketer and educator and individual investor known for his posts on the subreddit r/wallstreetbets and the subreddit r/SuperStonk” — had posted a picture of a dog, and the stock was briefly up more than 80% on the month.
Motley Fool host Ricky Mulvey and analyst Tim Beyers discuss what’s behind Chewy’s surge, Amazon‘s new retail plan and journey to being a multitrillion-dollar company.
Then, William Cohan from Puck joins Ricky to discuss his reporting on Paramount Global and its future after it turned down a buyout deal from Skydance Media.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on June 27, 2024.
Ricky Mulvey: A pet retailer got 60% more valuable over just the last month. You’re listening to Motley Fool Money. I’m Ricky Mulvey, joined today by Tim Beyers. Tim, how are we doing?
Tim Beyers: Fully caffeinated, ready to go.
Ricky Mulvey: We got some stories that you are ready to go on. One of them is a fully caffeinated pet retailer in Chewy. It’s up by about two-thirds since literally May. Tim, I am seeing no news on this. I am holding on to my Chewy stock and I’m wondering what the heck is going on. Did everyone just get bullish on vet care clinics or the international expansion, what is going on with Chewy right now?
Tim Beyers: Well, it’s probably a short squeeze and we’ll define what that means. But let’s talk about what happened when there was an impressive earnings report in May. I’m going to make sure I have my facts straight here. I want to give you this to you, Ricky, the exact date. It was May 29th, 2024. The average volume of trading in Chewy stock was under 10 million shares on a given day. On May 29th, it was 66.6 million. Ricky, that is outrageous and some of that has to do with an extraordinary amount of buying. This is what happens when you see institutions, funds pour a bunch of money into a stock at one time. A lot of that initial surge was due to just money flooding into the stock on good news from the earnings report. Since then, the short interest in Chewy has drawn down dramatically. But you may want to talk about what a short squeeze means here.
Ricky Mulvey: Let’s do it.
Tim Beyers: Well, then the idea here is there was a fair amount of short interest. It was over 5% of the shares outstanding. It’s closer to 5.5, now it’s down to 4.5. The net effect of what happened here is you’d almost think of it as the tide coming out a little bit. Lots of institutions had said, you know what? I believe that this stock is going to fall and so they’d taken short positions. They had borrowed stock on the belief that it would go down so that when they want to close their position, they buy it back at a lower price and they take the difference. They take the profit that they’ve earned. That’s short-selling in a nutshell. What ends up happening is Chewy reports an extraordinarily good quarter and a big fat planned share buyback also good for existing shareholders and that leads institutions to say, oh, hang on, this stock is not going to go down. These were better results than we thought they were going to be. What ends up happening is they close those positions. Remember, they borrowed the shares if they want to close the position, they got to buy it back. Then you get a flood of buying all at one time, and everybody is racing to exit the position. That is the squeeze. That’s what leads to, on a given day, a stock that trades for much lower volume suddenly is trading for over 6 times the volume. The prevailing wisdom on where Chewy is has changed. The winds are blowing a little friendlier.
Ricky Mulvey: What should investors do during a short squeeze? As you said, there’s a lot of forced buying. Sometimes if you have someone that has to buy the thing that you own, you can get a pretty good price for it because they have to buy it.
Tim Beyers: Sure. I prefer, and I am a shareholder. I prefer to, when everything is going bonkers around you, I prefer to let the bonkers people go bonkers, while I can sit and drink my coffee and let those people do their bonkers things, while I just sip and enjoy. I think nothing is an underrated move, particularly when everybody is running around screaming about things happening.
Ricky Mulvey: Any mindset advice, because it’s not just going to happen with Chewy. We saw it. We’ve seen it with a lot of stocks this year, where they’re just whipping upward or downward, even in the past few years, what’s become what I would describe as a more violent market. Like, how does a rule-breaking investor handle this?
Tim Beyers: It’s a great question because you will see these movements and especially if you’re a newer investor and you’re not used to this, you might feel like the market is telling you something. This is where from a mindset perspective, you have to get used to this idea, Ricky, that violent moves in the market are telling you something important. Here’s the Judo throw in your mind. What if this is not even remotely important? That is the question you have to start asking if you’re going to get used to this, because I will tell you, there’s many times where a violent move in the market is not even remotely important, and it’s driven by just cash suddenly moving into a stock for reasons that are technical or are driven by something like a short squeeze or an error or a weird news report, it’s very often that these violent swings are telling you absolutely zero. If you can judo throw these violent swings and say, you know what? This is probably nothing and then 48 hours later, you can come back to it, look and see what’s happening, look and see if there’s anything actually material happening, and you’ll know if it’s material if a company has filed what’s called an 8K. They’ve come out with something, said, like, hey, you know what? We had to sharply reduce guidance because something in our business is compromised. But in lieu of that, it’s probably nothing. I’m going to channel my inner Steven Seagal during martial arts demonstrations.
Ricky Mulvey: Yes. Let’s move to Amazon. There’s a couple stories out about Amazon. One of which is that Amazon is planning to launch a service focused on cheap clothing and household goods. This is reported by The Information, essentially selling directly from warehouses in China. This seems to be in direct response to pressure from Temu and Shein. What do you think of this?
Tim Beyers: This feels like sound and fury signifying nothing. It feels like just the thing that it’s a checkbox move. Ricky, I call these things a checkbox move. Amazon feels like it has to do this. It feels like it has to offer the option. Is it value-generating or value-accretive for Amazon? As an investor, that’s what I want to know. Is it value accretive such that Amazon is a more valuable company by virtue of this deal? My argument would be probably not. If it is, then I’m not going to find out about that probably for at least six months. I am not buying that this is significant.
Ricky Mulvey: Well, we’ll see. I think there may be some risk, especially if they’re showing these mark-up storefronts of facial, massaging tools, mugs, phone cases, and the companies that they’re trying to compete with have quality issues. Often with the things they send. I think to your point is, there is a case this could be value-destructive to the retail business of Amazon.
Tim Beyers: No question, here’s something, are you angering existing partners who are using your platform to sell their goods by you introducing a Chinese competitor who’s selling for half the price, but with a lower quality product? That is a potential danger here, but more importantly, what if you are importing product that has safety concerns? Does that have any legal liability attached to it? I think you’re right that the odds of this being more value-destructive than it is value-creating are greater. To me, it’s probably a net even. There’s nothing really happening here. Again, sound and fury signifying nothing, but I think the odds of it being more value-destroying are greater.
Ricky Mulvey: Speaking of value accretive, yesterday, Amazon joined the $2 trillion club. It’s up there with a lot of those big tech giants. You know who they are, Nvidia, Apple, Microsoft. Any reflections on this milestone of now Amazon having a couple trillion dollars under its market cap belt?
Tim Beyers: I’m going to use the David Gardner test here. This is something that he introduced with the market cap game show, where we would guess the market caps of different companies, and I am notoriously bad at that game as frequent listeners of the RBI podcast will testify to. But here’s the thing: the indicator that David would often use is, if the guess was too high for the market cap, that’s a signal. I have to tell you, Ricky, I’m surprised that Amazon wasn’t already in the $2 trillion club. That’s my reflection. I thought it was already there. I’m surprised that it wasn’t there. I feel like I should have known that it wasn’t there, but I don’t pay that much close attention to market caps, so I’m surprised that it wasn’t already bigger, which says something about the market power of Amazon.
Ricky Mulvey: Well, you probably know the retail side. I’m not talking to you, Tim, I’m talking to you, the listener. You’re very familiar with the retail side, you may be less familiar or have less interaction with Amazon Web Services, the Cloud Division. How important is this part of the business to Amazon being a multi-trillion dollar company now?
Tim Beyers: Gave you some numbers. This is over the trailing 12 months, 94.4 billion in revenue for Amazon Web Services. Let’s call that under 20% of the business. I think in the latest quarter, it was 17% of the business, over the same period, 28.9 billion in operating profit. That is 61% of Amazon’s operating profit over that same period. It is vitally important to this business. I’d almost argue that it is the business. Here’s a way to think about the value of AWS. Let’s say, because AWS’s earnings before interest and taxes, which is a rough approximation of operating profit. Over the last five years, on an average basis has grown over 25% annualized, so let’s say we applied a 25X multiple to those operating profits. That’s roughly a $750 billion company on one unit; that’s one unit, just AWS. Another way to think about it is, if AWS is responsible for 61% of operating profit, should it be responsible for 61% or over half of the market cap? In other words, should it be valued at at least a trillion or maybe 1.2 trillion? I would argue, Ricky, that the majority of value in Amazon today is due to AWS. It is the economic driver. I know this is a retail business but in terms of what allows Amazon to take things that are its expenses, its infrastructure. That’s its expenses to serve that e-commerce business and turn it into operating profit. That’s the business; that’s the genius of Amazon.
Ricky Mulvey: Then looking ahead, you have AWS in the AI plan, which for Amazon is basically having the AI models run on Amazon Web Services. Companies pay for that, creating some business-focused products, they got a chatbot. They can do some coding, copywriting, co-piloting for you. It’s called Q, it’s also puts billions of dollars in anthropic, which makes the foundation models for large language models and also making some AI chips. It’s also a fabulous semiconductor company. I think NVIDIA does that too. You think Amazon’s in a good place for the AI gold rush being in that picks and shovels area.
Tim Beyers: What you’re telling me is that Amazon is buzzword-compliant. Is this what you’re saying here?
Ricky Mulvey: Is it more than buzzword? Is it doing real stuff or is it buzzword-compliant?
Tim Beyers: It is buzzword-compliant. It’s doing real stuff as well. I think, really, what’s going on here is that Amazon is building out some tools to make itself more efficient. I don’t think we’re going to look to AWS as a provider of the world’s great AI tools. However, I do think Amazon is going to be a massive and important consumer of AI for improving its underlying operations.
I also think that includes silicon that helps it run AI-intensive workloads really fast and really efficiently. It doesn’t surprise me that they’re going to build their own AI chips, and some of their own software. They’ve been building their own chips and servers for years so that isn’t really news. I love that they’re trying to get a bit of AI buzzword boost in their stock price here, but this doesn’t feel very new. But you know what? I am going to suspend my disbelief and try to give Q a try. Maybe there’s something there.
Ricky Mulvey: He’s caffeinated and level-headed. Tim Beyers, thanks for your time and your insight. Appreciate you being here.
Tim Beyers: Thanks, Ricky.
Ricky Mulvey: Today’s show is sponsored by public.com. That’s where you can earn a 5.1% APY with a high-yield cash account. While we can’t say for certain it’s the highest interest rate there is, we can say this. It’s a higher rate than SoFi, a higher rate than Marcus, a higher rate than Wealthfront, a higher rate than Betterment, frankly, a higher rate than Capital One, a higher rate than Ally, a higher rate than Barclays, a way higher rate than Bank of America and Chase, a higher rate than Citi, Wells Fargo, Discover, and it’s a higher rate than American Express too. If you want to get started earning 5.1% APY on your cash, check out public.com. We can’t say it’s the highest interest rate for your cash, but it’s up there. This is a paid endorsement for public investing 5.1% APY as of March 26, 2024, and is subject to change. Full disclosures and terms and conditions can be found in the podcast description. US Members only.
Up next, William Cohan, a financial journalist and a founding partner of Puck, joins me to discuss what’s going on at Paramount Global, now that the most viable offer to buy it out is off the table. Bill’s been writing about the saga in his newsletter, Dry Powder. Paramount is in a mess. Over the past few months, a trio of executives has replaced its singular CEO Bob Bakish. Four board members have announced that they are leaving the company, and at the same time, its controlling shareholder, Shari Redstone, has been allegedly trying to sell the company. The deal that seemed most likely to go through was an offer with Skydance Media, which produced and financed movies like Top Gun: Maverick, last year’s Transformers movie. It’s run by David Ellison, which is Larry Ellison’s son. It seemed like the pieces were in place for this deal to go through, and then it was just taken off the table by Redstone. I guess a fundamental question, Bill, does Shari Redstone want to sell paramount?
William Cohan: I think that she does. She’s torn too because, on the one hand, I think she likes going to the Allen and Company conference. She likes being able to say that she owns CBS and owns Paramount Studio, and owns MTV or Comedy Central. I think she likes all of that, but I think she’s also clinical about it. She understands that Paramount is a bit player at this point in the whole big media ball game, and that she also probably understands on some level that she has squandered the family fortune, and that if there’s any hope to provide for her and her children and the beneficiaries of the family trust that she’s going to have to monetize this 77% voting stake in Paramount Global. As I say, I think to some extent, she likes being able to say she owns these assets, but on the other hand she knows that she’s not been the greatest steward of them and that she’s going to have to sell it to monetize.
Ricky Mulvey: It seems a common theme of the Paramount story is the company not selling assets when there have been deals on the table, which now previously seem like good deals. The one from Skydance was a little bit complicated, but it got to a place where essentially, Redstone would sell the controlling company, National Amusements, for a couple billion in cash, and the non-voting shares, which was one of the big arguments, would be bought at a premium. Skydance was also going to inject a billion-and-a-half into Paramount’s balance sheet, which has a lot of debt on it, bleeding the company, if you will. It seems like there was negotiation on both sides. It got to a place that seemed viable. What killed the deal?
William Cohan: I agree with you completely. It was a creative, but complicated deal. I thought it was clever. They were going to bring in new management. They had a new business plan. They were going to inject some excitement and enthusiasm into the company, which has been badly needing something like that. What killed it? First of all, the killing of it happened literally at the 11th hour. In fact, the special committee of the board thought they were meeting to approve the deal, and then the call came from Shari saying that she was killing it, which she can do, of course, unilaterally, without explanation. I don’t think she necessarily has explained it. What I’ve been able to glean from my reporting is that there were a number of things. I think as we were talking about before she and David Ellison has stopped talking in the last few weeks before this which is never a good sign. I think she was a little peeved that through the course of the transaction, the special committee, which was formed to represent the interests of the non-voting shareholders to sweeten the deal for them, which basically had nothing in it, to begin with. The consideration was coming out of Shari’s hide. I don’t think she liked that because obviously to begin with, she probably feels like she’s not getting what she hoped she would get for her stake. Certainly, it’s a lot less than the family’s fortune used to be, so she didn’t like that. I think she was also concerned and rightly so about shareholder lawsuits and wanted there to be some vote, even a non-binding vote to hopefully ratify the deal with David Ellison. Ellison and RedBird Capital didn’t want to do that, which I also understand. She also wanted them to provide some indemnity to her for these lawsuits that were going to be inevitable because she was going to get so much more consideration than the rest of the shareholders. That was more than likely to lead to shareholder lawsuits, and I can understand they wouldn’t want to do that, either. I think it just seemed surprisingly doomed by that point in the transaction. What it started out fairly promising, although complicated, and the special committee did a lot of negotiating to get more out of David Ellison and RedBird than they had offered originally. There was a separate negotiation going on with Shari and NAI that the special committee wasn’t really privy to involving the NAI acquisition, and so it blindsided everybody at that last moment there when the special committee thought they were about to approve the deal.
Ricky Mulvey: Skydance and Paramount, they work on producing movies together, Top Gun: Maverick mentioned earlier. I would imagine that there’s some tension now between David Ellison and Shari Redstone. What does this mean for Paramount’s movie business moving forward if these two may not be working together on this deal? Do they go back to business as usual?
William Cohan: Look, I think that there’s definitely a difference, generally speaking, between deal heat and deal dynamics, and just day-to-day business dealings. It’s probably too early to tell if this is going to damage the relationship between Skydance and Paramount. I suspect it won’t. I think everybody is smart enough to figure that out, and I doubt Shari is involved in green-lighting movies at Paramount. I think there has been some fallout already from Paramount’s predicament generally. As you mentioned at the top, the firing of Bob Bakish, the bringing on of the three co-CEOs, the board members leaving. There’s been the fact that the company was for sale for six months, and then nothing happens, and the company is struggling financially as well and has a lot of debt. I think a lot of talent has left. I think this failed M&A process or this part of the failed M&A process, I don’t think it’s quite over yet. There are still other potential parties who might be able to pull something off. But I think this has really hurt morale throughout the companies. On Tuesday, there was a town hall, and from what I’m told where the three co-CEOs announced that they had hired bankers to sell assets. There were going to be more cuts. My sense from talking to people who attended, employees, was that morale is not great, and people are scared and still wondering what the heck is going to happen here. A failed M&A process is definitely not good for the rank and file at a company and the morale of the company and people’s spirits. I don’t know whether these three guys who on Wall Street are referred to as the Pep Boys, Manny, Moe, and Jack can pull this off and make people feel better about being at Paramount Global. But that’s a big part of the job they have in front of them, especially if the company doesn’t get sold.
Ricky Mulvey: It’s tough to make people feel better when you’re also explaining how you’re going to cut a lot of jobs. In the meantime, where can Paramount go from here? There’s a potential deal from Sony and Apollo. It seems to be unable over the next few years to continue with just business as usual as it’s losing a lot of money.
William Cohan: Yes, the streaming, Paramount Plus, is losing a lot of money. About a billion and seven last year. The linear TV business is still making a lot of money, but it’s less revenue, less profit than it used to be. They’re parts of the company that have been for sale and probably are struggling as well, whether that’s BET or Showtime. This is an unfortunate situation for a company and its employees, and it’s a company with a very proud and long history too. CBS used to be known as the Tiffany Network. This is a company with a very proud and important journalistic history, and now we’re down to 60 Minutes, Face the Nation, and CBS Sunday Morning, as far as that’s concerned. That’s just not a place you want to be. Furthermore, as we also alluded to, it’s really amino in this world of huge white sharks at the moment that are much bigger, much better capitalized, have many more resources than Paramount Global. I think it’s inevitable that Shari is going to have to sell this thing, she has to. I don’t know any other way for her to get out of it and get liquidity for her and her family. I thought that that was what was going to happen here. It looked like that’s what was going to happen, at the 11th hour, she pulls the football away, so that’s a big bummer. There’s been leaks about Edgar Bronfman. Obviously, Sony and Apollo is around. This is exactly the deal dynamic that Sony have that Apollo loves and is put on this Earth to exploit, so I would not count Sony and Apollo out, although there are major league regulatory issues regarding their potentially owning these assets. Obviously, Shari’s not going to make nearly as much money by selling to Sony and Apollo because they’re not even going to buy NAI, their offer would be for Paramount Global itself, so she would get the same as everybody else, which is good news on the shareholder lawsuit front, but is going to mean a lot less money for her. She must have known that unless she thinks that Edgar Bronfman Jr. and Bain Capital are somehow going to pay her $2.5 billion for NAI, which I absolutely don’t get because I don’t see how somebody just steps into her shoes without having a plan.
At least David Ellison and Gerry Cardinale at RedBird Capital had a plan, and it was clever, and it was creative, and it was interesting, and it was exciting. Edgar Bronfman Jr. and Bain Capital, just buying NAI and becoming the new Shari Redstone and keeping Manny, Moe, and Jack in place. I don’t get it. I don’t understand how you can get a return if you’re Bain Capital putting up all that money, so I don’t really see that, frankly. I think that’s just a way to let Sony and Apollo know that there might be other bidders. I think that’s a big-head fake, but we’ll have to wait and see. The deal dynamics are very good for Apollo. I’d expect them to take advantage of this at some point soon. I think the special committee is still impaneled and can still act on behalf of shareholders. But it’s going to be up to Shari, and once again, she and her unilateral right can just nicks it if she wants to or green light it if she wants to. Maybe we’ll have to wait until after the Allen and Company conference when she’s made the rounds, and everybody can see her hobnobbing with the rest of the big shots from Hollywood, maybe she’ll feel a little bit better about things. Maybe something will come out of there, because occasionally, things do spring out of the Allen and Company conference, not lately, but in the past, so maybe she’ll be feeling better about herself and her status in Hollywood, and we’ll go forward with the deal that she should have done long ago, to be honest.
Ricky Mulvey: Seems like a tough story for investors to play arbitrage games with.
William Cohan: The abs got burned when she pulled the plug on the Ellison deal.
Ricky Mulvey: Bill, I really appreciate the work that you and Matt Belony have done on this story in particular. Thanks for joining us again on Motley Fool Money.
William Cohan: Sure. Thank you, Ricky. Appreciate it.
Ricky Mulvey: I’ll throw a link to Puck’s newsletters in the show notes. They are excellent. I subscribe to several of them. 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 anything based solely on what you hear. I’m Ricky Mulvey. Thanks for listening. We’ll be back tomorrow.