Motley Fool Money Episode Summary: "Oops! $132 Million Disappeared"

Release Date: November 25, 2024
Hosts: Dylan Lewis, Ricky Mulvey, and Mary Long
Guest: Jason Moser

1. Introduction

In the episode titled "Oops! $132 Million Disappeared," hosts Ricky Mulvey and Jason Moser delve into significant financial discrepancies within major corporations, explore evolving consumer trends influenced by weight loss drugs, and analyze strategic shifts in the entertainment industry, particularly focusing on Netflix's multifaceted approach to content and technology.

2. Macy's Accounting Error: A $132 Million Oversight

Overview:
Ricky Mulvey initiates the discussion by highlighting a substantial accounting error reported by Macy's. The company disclosed an erroneous accounting accrual ranging from $132 million to $150 million related to small package delivery expenses spanning from 2021 to 2024.

Key Points:

• Nature of the Error:
  Ricky questions the nature of the discrepancy, pondering whether it was a case of embezzlement. However, Jason clarifies that the individual responsible did not misappropriate the funds.

  Jason Moser [01:47]: "It's very odd situation... it feels like it could have been one of those things where somebody forgot to carry the two or something or missed a decimal point."

• Detection Issues:
  The prolonged undetection raises concerns about internal controls, with Jason expressing surprise that neither the responsible employee nor the auditors identified the error earlier.

  Jason Moser [02:41]: "It's strange that the auditors didn't catch it as well... it's a lot of money for an accounting error."

• Financial Context:
  While $150 million is substantial, Jason contextualizes it within Macy's overall financials, noting that the company's Sales, General, and Administrative (SG&A) expenses amount to $8.3 billion annually. Thus, the error, while noteworthy, represents a relatively small fraction of total expenses.

  Jason Moser [03:17]: "In the context of Macy's overall business... Do I at least understand how they missed this?"

• Thought Experiment on Corporate Oversight:
  Ricky and Jason engage in a hypothetical discussion about hiding significant sums from companies. They explore which corporations might be more susceptible to such discrepancies based on their operational nature.

  Ricky Mulvey [04:23]: "If you had to make $100 million disappear from any company... which company would you pick?"

  Jason Moser [05:23]: "I would look for a company that did a lot of transactions, probably dealt with a lot of inventory..."

Insights:

• Importance of Robust Internal Controls:
  The Macy's incident underscores the necessity for stringent auditing and oversight mechanisms, especially in large corporations with extensive financial operations.

• Impact Assessment:
  Even significant errors can be manageable when viewed against the backdrop of a company's total financial ecosystem, but they still demand attention to prevent potential escalation.

3. The Junk Food Industry's Adaptation to GLP-1 Drugs

Overview:
The conversation shifts to how the widespread use of GLP-1 weight loss drugs is transforming consumer relationships with processed and ultra-processed foods. The segment examines how major food manufacturers are responding to these changes and the broader economic implications.

Key Points:

• Changing Consumer Tastes:
  Kathleen Kenney, a sword fighting school owner, shares her altered perception of traditional junk foods, describing them as "plasticky" in taste and texture.

  Kathleen Kenney (referenced) [06:02]: "A ho ho no longer seems like food. It tastes plasticky... feels plasticky in my mouth."

• Industry Response:
  Companies like PepsiCo and private firms such as Matson are innovating to create food products that cater to GLP-1 users, incorporating higher protein content and healthier ingredients.

  Ricky Mulvey [07:51]: "Companies are flailing and trying to fight a losing battle... developing food for GLP-1 users."

• Investment Implications:
  The hosts discuss the potential investment opportunities arising from this trend. Ricky mentions holding stocks like Eli Lilly, anticipating growth as more Americans adopt these weight loss drugs.

  Ricky Mulvey [09:34]: "I've got a little bit of Eli Lilly stock... Morgan Stanley points out that... by 2035, that could expand to 24 million people."

• Long-Term Trends:
  Jason emphasizes the shift towards healthier eating habits among newer generations, suggesting that food manufacturers must evolve or risk obsolescence.

  Jason Moser [08:40]: "Companies are just going to need to evolve and rethink how they make their food or they absolutely will risk becoming marginalized."

Insights:

• Market Transformation:
  The adoption of GLP-1 drugs is poised to create a significant shift in food demand, compelling manufacturers to innovate and adapt to emerging health-conscious consumer preferences.

• Investment Opportunities:
  Investors may find lucrative opportunities in companies that successfully pivot to meet the demands of this changing market landscape.

4. Netflix's Strategic Shifts in Content and Technology

Guest: Lucas Shaw from Bloomberg joins the discussion to provide an in-depth analysis of Netflix's evolving strategies in content creation, live events, advertising, and gaming.

a. Increased Spending on Live Events

Key Points:

• Budget Allocation:
  Netflix's annual content expenditure has risen from $13 billion to $17 billion. The introduction of live events means reallocating funds from unscripted programming.

  Thomas Buckley [17:05]: "The money for Live comes out of the larger unscripted budget... they can reduce in some places."

• Future Projections:
  Netflix plans to grow its programming budget despite the increased spending on live content, indicating a possible overall expansion in content offerings.

Insights:

• Strategic Diversification:
  By investing in live events, Netflix aims to diversify its content portfolio, catering to a broader audience and enhancing user engagement.

b. Challenges in Netflix’s Film Strategy

Key Points:

• Quality Control Issues:
  Netflix's "spray and pray" approach—releasing a high volume of films—has led to inconsistent quality, with only a few standout successes like "The Irishman" and "Roma."

  Thomas Buckley [19:28]: "They're just doing too much. It's very hard to have any kind of quality control when you're making more than one movie a week."

• Lack of Collaborative Feedback:
  The absence of traditional studio feedback mechanisms may contribute to the diminished quality of Netflix's film offerings.

• Limited Cult Success:
  The rapid release rate makes it challenging for any single film to gain the cult following necessary for long-term acclaim.

Insights:

• Importance of Curated Content:
  Balancing quantity with quality is crucial for streaming platforms striving to maintain a reputation for high-caliber productions.

c. Shift Towards Theatrical Releases and IMAX Collaboration

Key Points:

• Greta Gerwig’s "Narnia":
  Netflix plans to release Greta Gerwig's "Narnia" on IMAX screens, a departure from its usual strategy of streaming releases.

  Thomas Buckley [21:30]: "Greta is attached to the project she wants to make it... we're doing what we have to do to satisfy Greta."

• Strategic Implications:
  This move appears tailored to high-profile projects rather than a broad strategy shift, indicating flexibility in Netflix's approach to cater to unique filmmaker requirements.

Insights:

• Balancing Streaming and Theatrical Releases:
  Collaborations with IMAX for select films suggest Netflix's willingness to adapt strategies for marquee projects without overhauling its overall distribution model.

d. Expansion into Advertising

Key Points:

• Subscriber Growth:
  Netflix's ad-supported tier has reached 60 million viewers, up from 40 million, signaling progress towards scalability.

  Thomas Buckley [23:30]: "In the next two, three years, we'll start to see [their ad business] be big enough that they'll make enough money that Wall Street will be paying attention."

• Comparative Impact:
  While anticipated to grow, Netflix's ad business is still expected to trail behind giants like YouTube.

Insights:

• Revenue Diversification:
  Introducing advertising allows Netflix to explore new revenue streams, potentially lowering subscription costs and increasing market penetration.

e. Foray into Gaming and Subsequent Retreat

Key Points:

• Initial Ambitions:
  Netflix pursued gaming to integrate storytelling across multiple entertainment mediums, leveraging its vast user base.

• Challenges Faced:
  The complexities of game development, including platform targeting and game size, led to strategic inconsistencies and the eventual closure of its gaming studio.

  Thomas Buckley [25:04]: "They quickly realized that making games is a lot harder than most people realize."

Insights:

• Cross-Industry Ventures:
  While the integration of gaming presents opportunities for immersive storytelling, it requires specialized expertise and consistent strategic focus to succeed.

f. Tight Movie Release Windows

Key Points:

• Pandemic-Induced Changes:
  The COVID-19 pandemic disrupted traditional release schedules, leading to accelerated timelines from theaters to streaming platforms.

• Industry Adjustments:
  Studios like Universal and Paramount have adjusted their release windows, balancing theatrical runs with streaming availability to optimize revenue and audience reach.

  Thomas Buckley [27:28]: "Similar companies are finding a happy medium where you can sort of take advantage of the marketing that you do when a movie comes out on streaming."

Insights:

• Evolving Distribution Models:
  The rapid transition from theaters to streaming reflects a broader industry shift towards flexible distribution strategies that accommodate changing consumer behaviors.

5. Conclusion

The "Oops! $132 Million Disappeared" episode of Motley Fool Money offers a comprehensive exploration of financial discrepancies within large corporations, the transformative impact of weight loss drugs on consumer behavior and the food industry, and strategic shifts within the entertainment sector, particularly Netflix's endeavors in content diversification and technological integration. The discussions provide valuable insights for investors and industry observers alike, highlighting the importance of adaptability and robust financial oversight in navigating complex market dynamics.

Notable Quotes Overview:

• Jason Moser [01:47]: Discusses the nature of Macy's accounting error and speculates on its possible causes.
• Ricky Mulvey [04:23]: Introduces a thought experiment about hiding significant sums from companies.
• Jason Moser [08:40]: Emphasizes the necessity for food companies to evolve in response to changing consumer preferences.
• Thomas Buckley [19:28]: Critiques Netflix's high-volume film strategy and its impact on quality control.
• Thomas Buckley [23:30]: Projects the future scalability and impact of Netflix's advertising business.

This summary encapsulates the key discussions, insights, and analyses presented in the episode, providing a detailed overview for those who did not have the opportunity to listen.