Nick Sciple (2:35)

So for me personally, I do tend to agree with them. I think the uncertainty around tariffs and other public policy have led to fears, a negative vibe shift, if you will. But I think the underlying economy really hasn't changed nearly as much as people's emotions around the state of the economy. The state of public policy has changed. And I think for an investor who's going to buy and hold stocks for the long term, I really don't think this type of thing is worth paying attention to. You know, the folks that are there sussing out between, hey, they changed this word in the statement. You know, they added this word over here. I think it's a recipe to put a lot of work in and get very little results, especially for an area of the market that's among the most paid attention to events that you'll see, you know, come down the pike. I think in these situations it's better to look for opportunities to take advantage of the market's myopia. The markets focus on kind of today's headlines rather than trying to predict where that, where those, where the market's gonna look next. And I think there are some opportunities out there in the market today.

Ricky Mulvey (3:31)

Yeah. And you can find a lot of major investors calling for recessions basically on a every month timescale going back almost as long as you want. And occasionally they get it right. Story I want to talk about with you is what's going on at Netflix because this past weekend Netflix released the Electric State and at $320 million, it is one of the priciest movies ever, theaters included, and the most expensive direct to movie streaming release ever. I watched it the way Ted Sarandos intended, which is on my phone while I was walking on a treadmill and then a little bit at home while I was looking at my phone and then having it as a second screen experience just so I could, you know, really take it in the way that I think Netflix wanted me to watch it.

Carl Thiel (4:16)

This movie.

Ricky Mulvey (4:17)

I could. I did it for about an hour, Nick, before I eventually tapped out, said no. Moss, is this a movie you plan on seeing? Is this going to go on in Disciple Household in between March Madness games?

Nick Sciple (4:28)

We'll see. We'll see if it's at the top of Netflix and there's nothing else that's out there for us to watch. Maybe we'll check it out, but really hasn't necessarily been on my radar, but it's certainly been on the radar of lots of Netflix viewers. Reportedly did 25 million views over its first weekend, which pretty good, but by Netflix standards, maybe not quite up to snuff.

Ricky Mulvey (4:49)

Yeah, that's quite a bit for a movie that costs more than 300 million. I also wonder if we're sort of getting to an end of an era with the way Netflix is spending on movies. And granted they have a few big budget releases coming up. You have a Greta Gerwig Narnia movie coming out next year that's importantly going to have a few weeks on IMAX screens. You also have, I believe, a Guillermo del Toro Frankenstein movie coming out on the service, which I'm sure is expensive, though probably not as expensive as the Electric State. Do you think we're sort of at the end of an era of Netflix spending hundreds of millions of dollars on these like, you know, single tile movies that they've seemed to have had little success with?

Nick Sciple (5:32)

You know, I don't, I think Netflix is playing a completely different game than everyone else. They're really focused on getting viewers to watch and keep watching. And Electric State did that 25 million views in its first weekend. And you know, for Netflix style streaming, these costs are going to, you know, be inflated relative to what you'd expect from a traditional theatrical release because there is no back end deal to compensate the actor, director or producer based on the share of theatrical profits. Netflix has to pay a cost plus model where they pay everybody up front. And as you say, they have started experimenting with some back end models, limited theatrical releases. The big one will be, you know, the Narnia movie coming in in 2026. But I don't think that's something that we should expect to be a wholesale shift of Netflix's model. Maybe you see it for some of these potential franchise movies, which Narnia could be. And that's an area where Netflix really has struggled to create franchises like you see, you know, other big media companies able to create. You know, if you think about, you know, Marvel or Star wars, that sort of thing, you know, maybe as they try to create those types of franchises, you see more, more kind of theatrical releases and that sort of thing. But I don't expect long term Netflix to wholesale change its model. I think there is a role for Netflix movies that, that agreement with, with Adam Sandler. Right. Those types of movies I don't think are going to go away anytime soon.

Ricky Mulvey (6:51)

Happy go. More to come. Coming soon. I was getting some previews for that. I need you to watch the Electric State and say, and come back to me and say that no one is revisiting this strategy though. I, I heard how bad the movie was and then I started, I'm like, you know, maybe it's not so bad. And then as we continued on, it almost felt like Chris Pratt is playing a prank on me and the rest of viewers with his sort of lack of interest in the movie. We'll do the movie review podcast later. A report from Ampere found that Netflix's original films have a quicker decay rate. So this goes into what you're saying with their difficulty creating, franchises will set Squid Games and Stranger Things aside. And they found that basically the original movies start with an average of about 30 million views, but then average about 9 million views one year later. The acquired hits, on the other hand, they start at 20 million, but average 12 million a year on. So you're looking at a decay rate to basically a third and then a little more than half. Netflix right now has licensing deals with Universal, Sony, Warner Brothers, and Paramount. And, you know, after my trash talk for this movie that, you know, I couldn't make a better movie, but that made me sad watching it. Do these critical misfires sort of just not matter if Netflix is the clear winner in streaming, where all of the other hit makers are selling their goods to?

Nick Sciple (8:13)

Yeah, well, listen, I think part of the reason these acquired titles perform better again comes back to the difference between Netflix's marketing strategy, kind of distribution strategy, and what you see from kind of traditional movie making. So when you release a movie in theaters, about 50% of the production's cost tends to go towards marketing. So, say that $300 million movie we talked about earlier, with Electric State, you would have spent $150 million on marketing for kind of the traditional movie release. And that obviously creates a halo effect where people are seeing this everywhere. Seeing commercials about the next Sonic movie. I don't know about you, I never saw a commercial for Electric State. So that kind of marketing halo creates a, I guess, perception by the viewer that I think allows those licensed titles to have a little bit more, I guess, heft on the platform than the Netflix titles, where the promotion really is. Let's put it at the top of the queue. Let's put your favorite actor's face in the thumbnail and try to get you to click. Now, that's super successful for the business. It's able to get Electric State to be number one on the platform. But I think it also means once it's no longer at the top of the Netflix queue, you're just not getting that same engagement. At this point, Netflix is able to get the benefit of all that marketing spend without having to spend it they're able to just pay the licensing fees to these companies. So that's a benefit of Netflix's positioning in the market and they're able to generate more viewers for the same content than any of these other streamers are on their own platform. So I think Netflix is in a good spot playing a different game than other folks on the market. And I do think long term there is potential, as I mentioned earlier, for Netflix to begin experimenting with some of this more aggressive marketing and theatrical releases. And the first example we'll really see that is the Narnia movie in 2026. But again, I expect that to be limited, you know, and target it as opposed to a wholesale change in how Netflix sends its content out to viewers.

Ricky Mulvey (10:04)

Yeah, Netflix would carefully say this is not a change in strategy. It's sort of a one off thing. Filmmakers don't get any ideas. We don't want to really do these theatrical releases. However, this is a sort of a breaking of a rule that they have held for four years. Nick this is also a space that I'm sort of conflicted about as an investor because I love movies, I love going to the movies. I love box office watching, I love seeing what's going on in the entertainment business. And I was doing some comparisons with just like looking at companies and ChatGPT and I realized like the entire global box office in 2024 was $33 billion. That's, that's a lot of money. It was less revenue than an oil exploration company called Canadian Natural Resources Ltd. For the amount of attention we spend on box office versus Canadian Natural Resources Limited or the entire global box office revenue plus video streaming, what you spend on Netflix, Max, Disney plus, we'll throw prime in there. That's about as much revenue as Home Depot makes for as much attention we give Home Depot, we talk about them on the quarterly calls. But there's not the type of interest in what's going on with these companies. So one thing I'm trying to do as an investor is not just include the Lynchian thing, see what draws my eye, but also focus on where businesses, where people are really spending money, any parts of the economy for the vegetables portion of this show deserve more attention from investors even though they may be a little less fun to follow.

Nick Sciple (11:29)

Well, I mean, you mentioned Canadian Natural Resources. I think that's one of the highest quality oil and gas business out there in the market today. One of those companies that, because of the uncertainty around tariffs and trade and headlines, I think there were some opportunities to buy Canadian Natural Resources at a pretty attractive price the past couple months. I think Jim Gillies has been on here with you before talking about aircraft leasing and company air cap. It was just St. Patrick's Day on Monday. That's probably my favorite Irish company out there and I think really plays a critical role in the market. And I've talked about medical aesthetics as well. This is a multi billion dollar business that I think long term has got a lot of growth ahead of it. It's really easy to pay attention to these content media businesses because we're all, we're all consumers. But there's lots of areas of the market where there's potential for, for success as an investor. And I encourage folks to look, look all over the market.

Ricky Mulvey (12:22)

And with that, let's get to this story about the acquisition of a roofing supply company. Brad Jacobs has a new venture, qxo. He's been in waste management, logistics, that kind of thing. Now he's doing a building products distributor. They've acquired Beacon roofing supply for $7.7 billion. 11 billion if you want to throw the debt in there. Nick, when we were shooting around stories this morning, you said this was one that caught your attention. Why is that? Why do you want to keep an eye on what Brad Jacobs is doing?

Nick Sciple (12:51)

Yeah, Brad Jacobs is the roll up guy and he is, you know, making the first step into his next big roll up. As you mentioned, he's, he's been involved in the early 90s, started rolling up the, the garbage industry that the waste industry with United Waste Services left that business and from 1997 to 2007 started rolling up the equipment rental industry. Built United Rentals into the largest rental equipment company in the US in the 2010s, rolled up the logistics industry with XPO and now has multiple multibillion dollar spun off businesses, RXO and GXO. And now here in the 2000s taking on the $800 billion building products distribution industry here with, with QXL now making its first acquisition of Beacon Roofing Supply. This is a man who has created billions of dollars by rolling up industries. And I wouldn't bet against him doing again. Neither would lots of investors already when this is just a shell company before they've even made their first acquisition. Have raised about $6 billion in the public market. So lots of folks behind, behind Mr. Jacobs willing to back him. He said he plans to expand the business to more than $50 billion annual sales with this acquisition of Beacon roofing is about 20% of the way there. Beacon does about $10 billion in annual revenue. The first step in what could be another multi billion dollar value creation story for Brad Jacobs.

Ricky Mulvey (14:05)

There is some drama in here, perhaps more interesting than the drama between Chris Pratt and Mr. Peanut in the Electric State. But here, Beacon Roofing did not want to be acquired and even adopted a poison pill strategy when it got one public offer from Jacob's friend qxo. A poison pill strategy is when a company sees that it's about to be required and then releases a bunch of shares to dilute everyone and become more difficult to be acquired. That can devalue your stock. Hence the poison pill part. Okay, what changed here? They went from we really don't want to be bought to yeah, sure, we'll have a new owner.

Nick Sciple (14:41)

Well, I don't think it's that QXO increased its tender offer by $0.10, although I think that is something. The big thing is the uncertainty in the market that we really alluded to off the top of the show. Increased tariffs and potential concerns around maybe where the building products industry might go. If you're the management of Beacon, perhaps you look at that and say, man, it'd really be nice to have an office cash offer here today. And I think that's probably made them more willing to come to the table than they had been at the start of the year.

Ricky Mulvey (15:07)

And then as we wrap up the show, anything else on this deal that you want to hit?

Nick Sciple (15:10)

Yeah, so to fund the acquisition, earlier this week, qxo raised about $800 million in stock in a private placement. That private placement was funded at $12.30 per share today post the acquisition, last I looked, were about $13.40 or so. With the official announcement out there in the market, you know, for me, I think the shares probably are going to trade down into that $12 range closer to the private, private placement level before we start kind of marching up closing the deal. So for me, if I was interested in this, in this QXO story and potentially opening up a starter position, I would wait for shares to get a little bit closer to that 1230 private placement that we had earlier this week. That that probably gives you a fair idea of what reasonable value would be for the company today.

Ricky Mulvey (16:02)

Nick Cyber, appreciate you being here. Thank you for your time and you're Insight.

Nick Sciple (16:05)

Happy to be here as always, Ricky. Until next time.

Ricky Mulvey (16:10)

This episode is brought to you by. Indeed. When your computer breaks, you don't wait for it to magically start working again. You fix the problem. So why wait to hire the people your company desperately needs. Use indeed sponsored jobs to hire top talent fast. And even better, you only pay for results. There's no need to wait. Speed up your hiring with a $75 sponsored job credit@ Indeed.com podcast. Terms and conditions apply. Up next, we're taking on some of the questions you emailed us about industrial stocks, quantum computing and biotech. If you've got a question for the show about investing, personal finance or companies, send us an email@podcastsool.com that is podcasts with an S@fool.com.

Lou Whiteman (17:09)

It'S mailbag week on Motley Fool Money and to wrap us up, we've got a bunch of questions about the less discussed parts of the market. Where aren't others looking? Where is there potential for great as of yet untapped opportunities? We rounded up a number of our analysts to answer your questions about some lesser known sectors in the stock market. First up, we got a question from nkap80 who wrote in from X. They say even though this sector is rarely discussed on the podcast, I would be interested in listening to your thoughts on the elongated slump in the biotech world. With even the large pharma companies like Pfizer, Merck and GSK struggling to hold their ground. Will this ship ever turn? To find the answer, we turn to Motley Fool Senior Analyst Carl Thiel.

Tim Byers (17:51)

Yeah, it has been a really, really difficult few years to be an investor in this sector, and I think it's a story almost of a perfect storm of things coming together that unfortunately has not abated yet. You can say that things got too high back in 2021 when the biotech market peaked. What you had was a long period of essentially zero interest rates, putting all kinds of money towards risk. When your money basically earns you nothing in a bank account or a CD or something like that, and you want some returns, you have to turn to something riskier. And so that favored tech and it certainly favored biotech. And there was a period where it seemed like over half of all IPOs were biotech related, often companies that were coming out with nothing other than pre clinical information and they definitely did not deserve to be public company. There was just a lot of trash basically soaking up a lot of capital. It was no surprise to see things correct from there. Now have things gone too far in the other direction? That sort of remains to be seen. I mean there's still some, some difficulties. I mean certainly interest rates have gone way up. That's been a huge headwind to the sector. And I'm not just talking about the aforementioned trashy companies. I'm talking about companies that are well, well along in their research and development of some very innovative products, but are having a hard time raising money that they need. That's just how the sector works. It takes a really long time and it takes a ton of money. There was some hope when it looked like interest rates were going to go down, or, you know, they did go down slightly, but when they were going to go down more substantially. Now that is certainly uncertain at this point. And then on top of that, now we've more recently thrown in a lot of other factors. So we have factors like significant cuts in research funding to things like nih, which just to pick an example of something that I think a lot of people know about, a lot of people who follow the sector at least know Vertex Pharmaceuticals. It's a company that's famous for its cystic fibrosis drugs. Well, the only reason that we even know that cystic fibrosis derives from the CFTR receptor and could target drugs to it is because of NIH research. That's where that came out of. So with major, major cuts to NIH funding that, that's certainly a damper on things. You could, you could say that that takes a while to play out, but you're already seeing people being cautious about grants and what kind of things they write. On top of that, I think there's a lot of questions about how things are going to get paid for, whether there's going to be cuts to Medicare and Medicaid. So there's a fair number of headwinds going on right now. The way I look at it at this point is there's a decision to be made about whether we want medical innovation or we don't. I think we do. I do think that capital will flow back into it. It's never really dried up completely. You know, the very best ideas do still attract capital, stuff does still advance. And so all of that is good. I think it will get better. But it's really hard to put a timeline on it. So if you are an investor in the sector, I would say to probably lean towards pharmaceutical companies like you mentioned, where I think there are some pretty attractive values. And obviously those tend to be profitable and they're not going anywhere. In more of the biotech space, I would say think about companies that have already launched products or that are going to imminently or that have an absolute ton of capital. And I think if you look at those sort of categories, there are some really attractive names out there. There are probably some fantastic returns to be made among riskier companies that are still kind of going through the clinical process and don't necessarily have as much cash. But it gets a lot more uncertain from there.

Lou Whiteman (21:45)

A similar question came in from another user on X who wrote Huge fan of the show. I listen every week. I'd love to hear about some of your favorite industrial or manufacturing stocks, especially ones that aren't often mentioned. Which businesses are quietly doing great? I love these types of stocks. Thanks for the answer. We turned to full contributor Lou Whiteman.

Mike McDowell (22:05)

So the challenge with industrial stocks is they are by their nature cyclical. So you want to find stocks that have a proven track record of performing through multiple business cycles. One of my favorites is transdigm group ticker TDG. TransDigm is an aerospace component supplier that is up more than 5,600% over the past decade and shows no sign of slowing down. And here's the thing about Transdigm. Despite being mostly just a spare parts business, it has a long track record of generating software like 50% plus gross margins. How's that possible? Simply pricing power. If you are Delta Air Lines and you need one part in order to fly 300 people from Seattle to Atlanta, you are not price sensitive when you need to get that part. For nearly 20 years now, TransDigm has been buying up great businesses, generating cash with those businesses, and then using that cash to acquire similarly positioned businesses. It's a great, quiet, under the radar performer that's been a huge market beater. Another company a little more speculative but I like a lot, is GXO Logistics Ticker gxo. They're in the business of automating and managing warehouses and supply chains for big companies like Apple, Nike and Boeing. All customers. We saw during the pandemic how important proper supply chain management is and GXO should be a beneficiary as more commerce moves online and creates new shipping and return management problems for big retailers to deal with. They're still in their early days, it hasn't really taken off yet, but I think there's a lot of potential to grow from there. Just in response to how the Economy.

Lou Whiteman (23:39)

Is changing, listener Mike McDowell wrote into our email with a question about how the AI boom might impact quantum computing. I was in a co working space with senior analyst Tim Byers when this one came in, so I grabbed him to answer part of Mike's question, which paraphrased was hello, I listened to your podcast and I'm curious about your thoughts on quantum computing stocks. I'm no expert in computing or data centers. But it seems to me that the recent run on quantum computing stocks was fueled because of the amount of data that can be processed through this technology. It's so much more efficient than what our data centers can currently do. A problem, though that was recently brought into perspective by Jensen Huang is that quantum computing is completely different from the system in which we operate today, and it's many years away from being widely used. So my question, what advice do you have for investors who are interested in quantum and itching to invest in the space? Any companies that are interesting, what's the next stock to be looking at in regards to the AI quantum boom? Thanks.

Carl Thiel (24:35)

So I'm afraid, Mike, that Jensen Huang is right, that we are a few years away. We're probably not as far away as Jensen makes it out to be. Having said that, he's not wrong. It's a completely different paradigm. There are completely different things that need to be put in place in order to seize quantum at scale. Having said that, there are companies that are investing in this and trying to make it a bit more accessible in the nearer term. The two biggest ones are companies, you know, one is Alphabet, the other is Microsoft. They won't be the only ones, by the way, but they are most likely to put serious effort. They have real reasons to want to do this, Mary. They have a lot of data center infrastructure, they have a big investment in AI, they do want to create efficiencies at scale and they benefit greatly when they do introduce efficiencies at scale because they are such scaled up companies. For each of them they are making real investments, two different types of investments in quantum. I hesitate to say if you don't own one of those two, you may want to consider owning one of those two. If you already own both, should you just be content with that or should you add a little more? It depends on what your strategy is, what position size you have. If you already have big positions in both those stocks, I'm not so sure I would add there, but those are two you'd really want to pay attention to. The one thing I wouldn't do, Mary, is try to add a specialist ETF in quantum because that's going to give you a lot of small cap companies. I'm not sure I would be investing in a bunch of very tiny quantum companies because they just don't have a lot of capital right now and they have a very long way to go. So maybe there's a home run in there. I'm not saying there isn't, but it's still super early. There's a lot of infrastructure that has to be put in place. To give you just one example, in order to do quantum at scale, you're going to have to operate a lot of the equipment at absolute zero, and I mean absolute zero temperatures. So how many companies do you know that have the infrastructure to be operating their data center or a significant portion of their data center at absolute zero temperatures? The answer is not that many. Not that many. It's just this is where Jensen Huang is right? The infrastructure around Quantum Compute is just going to be different. It's going to have to be built differently and executed differently. It's probably, for the moment, the domain of the biggest companies in the world. And the two biggest that have the most to gain right now are probably Alphabet, Microsoft.

Lou Whiteman (27:42)

Okay, Tim, while I have you, I'm going to ask a follow up on Mike's behalf. You talk about it being too early to invest in like smaller companies that are already in this industry. When do you know that it's no longer too early?

Carl Thiel (27:56)

So this is a super interesting question. One of the ways you might know that we're getting, we're getting traction is the overall cost. Like one way we'd know for sure that things are moving directionally towards mass adoption is we don't have to operate at absolute zero anymore. Maybe we don't need the same giant refrigeration units that we have needed in order to operate quantum at scale. Things like that. If the requirements in order to operate quantum start to change, like the physics of it start to change through different types of breakthroughs, that'll give us some indications. But right now I would probably, and I don't have firm numbers on this, Mary, so don't take this as gospel, but I would guess that the cost to implement a unit of quantum is very, very high. So what you want to see is the cost of a unit of quantum to come down materially. And one way that we'll know that's happening is when the requirements for the infrastructure to support Quantum to start changing to more common components. Like when data Center Compute became a lot more widely available is when things like open source came into the market. Common components off the shelf commodity hardware could be moved into data centers because we had common open source software that was orchestrating a lot of it. And so the cost of a unit of compute went through the floor. And so cloud computing became a lot more economical and we started adopting it at scale and we never stopped.

Ricky Mulvey (29:52)

As always, people on the show may have interests in the stocks they talk about. The Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and are not approved by advertisers. The Motley fool only picks products that it would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.