How Strong Is the Bull Case for Bitcoin?

By Chris Hill and Simon Erickson Markets Fool.com

In this episode of Market Foolery, Chris Hill and Simon Erickson review Discovery Communications (NASDAQ: DISCA)after its solid quarter; talk about where bitcoin is headed -- possibly into an ETF; and reflect on the rumors that Burger King's parent has been testing the waters for an acquisition of spicy fried chicken specialist Popeyes(NASDAQ: PLKI).

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A full transcript follows the video.

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This podcast was recorded on Feb. 14, 2017.

Chris Hill: We've gotearnings to get to. We're going to follow up on yesterday's storythat we did onRestaurant Brands(NYSE: QSR),because the news continues there, and we'regoing to share some Market Foolery newsat the end of this episode. We've got a little bit of an announcement. But let's start with fourth-quarter profits fromDiscovery Communications, whichcame in a little higher than expected. When you'relooking at media companies,I think it's safe to say that the thesis for Discovery Communications,as much as anything, is this is a global play. If youlive in the United States and you have cable, you'refamiliar with at least some of their networks --Animal Planet, TLC, theDiscovery Channel, that sort of thing. But when you look at the global footprint of whereDiscovery Communications operates,I think that's part of the thesis, isn't it?

Simon Erickson: Absolutely,it is. I think that's probably whatinvestors are looking at for this company right now. Like you said,there's some definitely established channels here in the United States. We actually saw aslight decline in U.S.subscribers. So the real story here is that international growth. The one thatreally sticks out for me, Chris, it's actually in Europe of all places. Discovery Communications hasEurosport,which is kind of broadcasting live events. They have done Wimbledon. They've done Formula 1. They've donea variety of other events. Typically not soccer, because that's expensive, but otherlive sports in Europe. And they've got theexclusive rights for the Winter Olympics of 2018, tobroadcast nearly 740 million peopleacross in Europe. Great, right?

Hill: Yeah.

Erickson: Butthe other thing that's really interesting to me is,there's various ways that you can reach people. They're going to,of course, do the free network TV. They'regoing to do some other paid TV events like that. But the thing that's interesting to me is the over-the-top offering, thedigital streaming that they're going to be doingin the next few years. They're usingBAMtechtechnology to create this. We know BAMtech becauseDisney is also working with them for live sports here in the U.S.Discovery is using them in Europe. They have the guy fromDirecTV. They built out theNFL Sunday Ticket,incredibly successful here in this country.

Hill: I was going to say...that's a nice thing to have on your resume.

Erickson: Yeah,the right guy on the right project. I think that more and more,you and I talk quite a bit aboutwhere the media industry is heading. It's not just that linear free TV anymore, butstuff you could watch at any timeover computer andhave it streamed directly to youfor a certain price.

Hill: I want to go back to the first point you hit, which is decliningsubscriber ship in the U.S. Nice reminder that, for all of the headlines that Disney hasgotten over the last 18 months aboutthe following subscribership of ESPN,this is a nice reminder thatit's not just ESPN. Whenpeople are cutting the cord, it's also affecting companies likeDiscovery Communications.

Erickson: Absolutely. The subscriber numberis only one piece of this puzzle. As thatcontinues to evolve over time,you can't just look at that and that's the only thing that you're following as aninvestor, there's a lot of other things going on, too. Andlet's not forget currency, too. A lot of this is revenue that's generated overseas. When youtranslate that back to a strong dollar in U.S. dollar,it doesn't look, sometimes, as strong as it really is out there.

Hill: Where is this stockin terms of its valuation? This is a good quarter,but I think the declining cable subscriber numbermight be a little bit of why we'reseeing the stock fall 2.5% today. That'snot a big drop, and this is a stock that was trading near a 52-week high. But it's really been in the 20s for a year now,and I'm just wondering if it's pricey,if that has anything to do with the drop today,or if it's really all just about the cable subscribers?

Erickson: Well,I mean, a $13 billion valuation for a media company -- that's asmaller media company than the juggernauts -- but obviously larger than a smaller regional one would be oranything like that. So, Istill think it has room to run, Chris. I think a lot of that over-the-top anddigital streaming stuff really isn't priced into the stock at this point, but we stillneed to continue to see them gain traction on that,especially with that Eurosport in Europe.

Hill: All right. Here'ssomething we haven't talked about in...I don't even remember the last time wetalked about bitcoin,but we're going to talk about bitcoin.

I feel like, if he's listening over in Germany,Matt Koppenheffer is smiling, if not outright laughing at me, because I've been bearish on bitcoin from the start, and over the past year, the price of bitcoin has quadrupled. It broke the $1,000 mark last week, and it's dipped back down. But you're someone, likeMatt Koppenheffer, who's beenpretty bullish on bitcoin. First, before we diginto the news with bitcoin, tell me why. Why the bull case for bitcoin? Because, to me, it just seems likeMonopoly money, it seems like a made-up currency, andas I have admitted before,the fact that the Winklevoss twins wereinvolved in this doesn'thelp the bull case, in my opinion.

Erickson: Right. This iskind of an ethereal discussion here, Chris. There's a lot ofspeculation in bitcoin right now. Wedon't have any stocks tied to this --

Hill: Not yet. We'll get to that.

Erickson: Yes,exactly. But it is a very interesting story. Just, generally,my personal thesis,disclaimer, I own one bitcoin, have had quite a year with that.[laughs]

Hill: Congratulations, that's worked out well for you.

Erickson: But,I think there's just a lot of transactionalfriction in the way that we buy and sell things today. Think about it, we'rebuild off of a financing infrastructure. You have a bank account thatyou have a credit card that ties into, youpay your statement at the end of the month, andevery step along the way, somebody is taking a small piece of this. Butit's the way that we built it out over the last several decades. And if you build adigital infrastructurecorrectly, as bitcoin did andBlockchain is trying to do, you don't needa lot of those steps. It's basically digital cash. I always think about it as, you'rehanding a digital dollar to somebody, and that's it. There'sno statements. There's no financing. There's no APR at the end of the year, anything like that. But to do that, there's a lot ofregulators who don't like thatbecause you can do bad things with that. Youcan't track the person giving you the cash at the end of the day and various other things. That's hadbitcoin held back on what its true potential, possibly, could be. Butat the end of the day, you'restarting to see more and more transactions using bitcoin allacross the globe, not just in the United States, but in China andJapan and a bunch of different places. Because bitcoin isgoing to tap out at 21 million bitcoins, once they're mined, you have a fixed supply and increasing demand, and that's pushing the value of each one bitcoin up over the years.

Hill: We've seen this run up over the past 12 months,and you look at the fact that the SEC is considering threeseparate potential bitcoin ETFs. Considering approval of any one of the three. Let's say one of them gets approved -- what kind of run-up are we going to see then? Becauseif we're seeing this run-up now...this actually gets me,I don't want to say bullish on bitcoin,but it gets me slightly less bearish as an investor, because ETFs are a way that a lot of people investif they're looking to get exposure to something without really having the concentrated upside and, therefore, downside of a single stock.I'm not looking to buy a bitcoin, but I'mslightly more interestedin a bitcoin ETF. What happens if they actually approve one of these things?

Erickson: Sure. On thecontinuum of uncertainty, it goes down a notch. If the SEC is going to say, "This is alright, to create bitcoin ETFs," andthey have until March 11th, I believe, to approve of this, but the people who said, "No way, this is too early, I haveso many questions about this even being possible,"those people will start saying, "You know,this still sounds speculative to me, but I think it's interesting now that the SEC is behind it." Basically, anything new, almost all of innovation has got a zillionquestions when it first gets introduced that, over time, as it grows and getsmore and more approvals or people behind it, the questions tend to either linger or go away. And I thinkthat's what you're seeing with bitcoin. That's what the SEC decisionis going to have an impact on this.

Hill: Yesterday,we talked about the latest earnings from Restaurant Brands,which is the parent company of Burger King andTim Hortons. After we taped the episode, Restaurant Brands wasback in the news reportedly talking toPopeyes Louisiana Kitchenabout apotential acquisition, andas a result of those reports,shares of Popeyes are up 14% at one point yesterday. They have sincecome back down to earth, so they are basically flat day to day. This isinteresting to me, though. We were talking about this earlier this morning --it seems like, in the restaurant business, anyway, that if you're good atmanaging one type of restaurant,keeping in the category of quick-serve restaurants, if you're good at that, thenthat's a skill that translates to others.

So, without knowing what they were looking to buyPopeyes for, just on the surface of it,assuming they got the right price, I saw that news and I thought, "You know what? That could work out well for Restaurant Brands." Ultimately, theywalked away because they didn't want to pay the price, becausePopeyes is a stock that has done wellrecently, and as a result of that,the company is more expensive. I guess, the larger question for me is, when you think aboutacquisitions, when you just see, "Company X is thinking about acquiring Company Y," what goes through your mind? Do you have any gut feeling in terms of "That makes sense" or "I need to see the terms first?" What'sthe first thing that you think of?

Erickson: Sure. First of all, to step back,there's definitely different types of acquisitions going on. Themost speculative, if you will, ofacquisitions is technology acquisitions,especially softwareacquisitions, because things change so quickly. There'sa lot of unknowns ofwhat's going to happen five years from now. It'svery difficult to tell. And maybeHPis the poster child of making bad acquisitions, very large, $10 billion acquisitions that they write downsignificantly in a couple of years.

Hill:[laughs] Ifthey're not the poster child, they're onMount Rushmore.

Erickson: [laughs] So manyuncertainties for that. But then you have more predictablebusinesses like we're talking aboutin the restaurant industry. Restaurantsare not software companies, they'remuch more predictableas far as the traffic andhow the business looks. At that point, the acquisition ismuch more predictable for the acquirer, and if they'relarger and can scale the business, and be moreefficient than they were previously, thenyou can drop a lot more moneyto the bottom line to your shareholders and your investors. AndI think that's what Restaurant Brands,who was actually majority-owned by3G Capitalin Brazil, is after in this. They want thepredictable, steady cash flows of a restaurant, but they want to be a little bit more creative, I think, on how they're raising financing and taking what I would call non-strategic costs out of this business to drop more down to the bottom line.

Hill: I don't think this is over, in terms of theirpursuit of Popeyes. I think,at the right price, and today is clearly not the right price because,again, this is a stock that has done very well over the last few years, I think ifthere was some sort of short-term hit the stock took,I could see Restaurant Brands going back to them. In the meantime, they clearly seem like they are looking for,Warren Buffett talks about the elephant gun,I don't know if they have an elephant gun,because they don't have that amount of cash on hand thatBerkshire Hathawaydoes. But they clearly seem like they are looking toexpand their portfolio.

Erickson: I'm glad you mentioned Warren Buffett,because Berkshire Hathaway is kind of partners with 3G Capital. Theygo after and make big deals like these together,which is kind of interesting because I think 3G isclearly a leader in the food spaceand the restaurant space, and that'sdirecting a lot of Warren Buffett's,the greatest investor we have in theUnited States, capital. And they'relooking to build an empire here,and they got creative in doingdeals in the past. If you look at theacquisition of Tim Hortons,people were calling that a taxinversion deal, you're avoiding a lot of U.S.-based taxes byacquiring and moving the company to Canada. The Popeyes one isgoing to be interesting because that's based here in the U.S. That'snot something you have to worry about, the inversions. But,there's a reason that they're looking at it for doing this. Theyhave a price and their mind. Yousee them walking away now as Popeyesstock price has increased significantlyover the last four or five months or so. But,it'll be interesting to see what they're going after on this one. It'snot as obvious to me, but they see something they like.

Hill:Well,I think it's probably just the category. Yes, it's a quick-serverestaurant, but it's not burgers,it's not coffee and donuts. Quick-serve chicken makes upsomewhere in the neighborhood of 10-15% of quick-serverestaurants. And,as we were talking about with our man behind the glass, Dan Boyd, beforehand, yes, you can haveKFC. IfJason Moser were here,I'm sure he would be talking aboutBojangles. Give me Popeyes every day. Their biscuits. And the honey, oh!

Erickson: Theirbiscuits are great. So good.

Hill: AsChris Rock said, it's too good. It's too good! That was hiscomment to Jerry Seinfeld onSeinfeld's web series, that Popeyes is so good that you actually need one of those memory sticks from theMen in Black movies to erase your memory,because otherwise you would just go back every single day.

Erickson: Right. Now,do they do significantly more business today because it'sValentine's Day?

Hill: [laughs]I don't know. I don't knowif they're doing any sort of big promotion. Look,you could do a lot worsefor that special someone in your life thantake them to Popeyes. Dan,you're a Popeyes fan, aren't you?

Dan Boyd: I am, yes.

Hill:Any chance you're going to be thinkingValentine's Day or anything like that?

Boyd: Ifmy girlfriend was amenable to the idea, which,I'm sure she's not,I would love to go to Popeyes forValentine's Day.

Hill: Let'sflip this around. If she came to you and said, "Hey,here's what I'm thinking for Valentine's Day.I'm taking you to Popeyes," you'reeven more in love?

Boyd: We'd make a short stopon the way to Popeyes to a jewelry storeso I could buy her an engagement ring.

Hill: [laughs] All right. Before we wrap up,as I mentioned,a little something, apropos thatSimon is in the studio for this, becauseI'm happy to say that next month, we are going back toSouth by Southwest. If you're in theGreater Austin Texas area or you're going toSouth by Southwest, drop us an email, marketfoolery@fool.com, or hit us up on Twitter, because Simon, Dylan Lewis, who you may know from the Industry Focus podcast, Dan Boyd and I will be going. We'regoing to be recording from thebrand new podcast center that they have atSouth by Southwest. Excited to check that out. Simon, I know thatyou have only begun to look at --I mean, we're going to be doing a whole week's worth of Market Foolery there,but there are also breakout sessions,there are keynote speakers that you're going to be checking out. Do you have an early sense of what's going to be on your agenda?

Erickson: Absolutely, Chris. This isone of my favorite events in the entire year. It has such a window towhat the future is going to bring in, especially in the tech world.Kimbal Musk will be speaking about trust.I saw that on the agenda. I saw Ray Kurzweil, going to betalking about collaboration. And two topics that I'm very personally interested in isconnected health and the future of wearable technology. Those are both going to be tracks atSouth by Southwest in Austin.I'm super stoked about the event.

Hill: AndI should say,just as we did last year, we'regoing to try and put together a little meet and greet. Stay tuned formore details on that,but we did that last year, we went to Guero's.

Erickson: Guero's Taco Bar.

Hill: Abunch of listeners came out,a bunch of Motley Fool members. It was a great time, and we're looking to do that again. In terms of dates, we're lookingbroadly at March 11th through the 15th. Again,if you're going to South by Southwest,if you're in the Austin area,we would love to see you. More details to come. Dan Boyd, are there food truckson your agenda that you're looking to hit?

Boyd: Absolutely, Keith's Barbecue is the main one. Theyoperate out of an old school bus, and I think I ate there every single day last year in Austin, because it was amazing.

Hill: All right! Simon Erickson,thanks for being here!

Erickson: Thanks, Chris!

Hill: Asalways, people on the program may have interestsin the stocks that they talk about,and The Motley Fool may have formal recommendations for or against,so don't buy or sell stocks based solely on what you hear. That'sgoing to do it for this edition of Market Foolery. The show was mixed byDan Boyd. I'm Chris Hill. Thanks for listening. We'llsee you tomorrow!

Chris Hill has no position in any stocks mentioned. Simon Erickson owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Twitter. The Motley Fool recommends Popeyes Louisiana Kitchen. The Motley Fool has a disclosure policy.