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Written by the Mackenzie Global Equity & Income Team
Portfolio Changes
We first purchased Walt Disney shares on March 13, 2020. This was the day after they closed their theme parks around the world in response to the global pandemic. Our average cost at the time was around $90. Almost exactly one year later (March 8, 2021) Disney stock hit $201.91. This was driven in part by the excitement surrounding the (phased) reopening of their theme parks beginning in July 2020, the company’s announced DTC (direct-to-consumer) strategy and focus on their Disney+ streaming service that fall, and – probably the most important of all - the discovery of the COVID vaccine in November of 2020.
From that point on it was pretty much all downhill for CEO Bob Chapek, who had taken over from the legendary Bob Iger about a month before the world went on lockdown. Throughout 2021 and into 2022, the financial targets Chapek laid out specifically for their streaming services were missed. In February 2022 Chapek became embroiled in a battle with Florida Governor Ron DeSantis after the state passed its Parental Rights in Education Act (aka the “Don’t Say Gay law”). It came out that Disney funded the legislators who wrote the bill, which conflicted with the company’s public pro-inclusion stance. Given the internal uproar this caused, Chapek then reversed his stance, which in turn put the company in the crosshairs of the Florida governor. But the nail in the coffin for Chapek’s CEO tenure was in November 2022 after the quarterly earnings report, where Disney fell short of profit expectations and warned that the Disney+ subscriber growth was about to dramatically slow.
On November 20th it was announced Bob Iger was returning as CEO and Chapek was out. The challenges facing Iger are myriad and formidable. A powerful activist is agitating for several board seats, talks are under way about selling off crown jewels including ABC and potentially even ESPN, a bitter legal battle over the future of its Florida theme park rumbles on, and its blockbuster film dominance is flatlining. And that’s apart from how he transforms a loss-making streaming service into the commercial key to Disney’s future. We began selling Disney shares in the summer and completed our exit during Q3. Disney remains on our Dream Team. We view the company as still having the best entertainment franchises and unmatched theme park assets, which together creates a unique “flywheel” that leverages their intellectual property better than any competitor. Our questions revolve around the economics, monetization, and ultimately returns of that IP over time given the significant changes facing the industry as it relates to distribution. We will continue to follow the business and if/when we have greater confidence in terms of answering those questions, we will happily revisit.
We reestablished a position in Meta Platforms, the company formerly known as Facebook. While it is often overlooked as a Generative Artificial Intelligence winner, META is reaping massive benefits from AI investments with materially increased engagement. META’s core property Facebook Blue is a particular beneficiary with users and engagement growing faster than Instagram and Snapchat combined. The company is also using AI to help advertisers make creative which is leading to better return on advertising spend and making the platform more valuable. While these features will undoubtedly translate to increased revenues, increased engagement also slightly lessons our fears on potential longer term platform obsolescence, the largest risk to the META investment thesis and one that we will continue to monitor.
In Q3 we initiated a position in Oracle. Oracle has been dominant in on-premises database management since the 1980s. Database management, particularly for the mission critical workloads, is a very sticky business owing to the time consuming, expensive and disruptive process required to rewrite the numerous applications that interface with databases. However, in recent years Oracle fell victim to the increasing shift from on-premises to Cloud hosting offered by companies like Amazon (AWS) and Microsoft (Azure). Without a Cloud offering, Oracle’s investors endured a period of no revenue growth from 2014 to 2020. However, we believe there is reason to be optimistic for renewed revenue growth behind Oracle Cloud Infrastructure Generation 2 (OCI 2) which was completely re-architected behind the leadership of former AWS product managers. Feedback on OCI 2 has been overwhelmingly positive with a smoother and faster interface and an increased ability to customize compared to first generation cloud infrastructure platforms. We have also been impressed with Oracle’s recent customer wins with OCI 2 including NVIDIA, Berkshire, TikTok and Zoom. Our thesis is predicated not on Oracle overtaking the current cloud behemoths, but continuing to carve out a profitable niche in what is still a massive addressable market.
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