- Snap was first to report earnings in the online advertising space, and, more importantly, the first to share what's going on so far in Q2.
- The market liked the optimism and the narrative. Good news for shareholders and SNAP peers?
- We dissect what happened and what might make SNAP stand out, both for good and for ill.
Editors' Note: This is the transcript of the podcast we posted last Wednesday. Please note that due to time and audio constraints, transcription may not be perfect. We encourage you to listen to the podcast, embedded below, if you need any clarification. We hope you enjoy.
Daniel Shvartsman: Welcome to The Razor's Edge. Daniel Shvartsman, I’m joined by Seeking Alpha author Akram's Razor as always. The Razor's Edge features ideas that Akram has been following for his investing, for his Seeking Alpha Marketplace service also called The Razor's Edge. I bring my perspective as more of a generalist investors and we get into sectors.
We get into a lot of tech names, not always tech names and we look at how they may play out. We look at any research that goes into the thesis. If you’re interested in more of these ideas, I encourage you to check out The Razor's Edge on the Seeking Alpha Marketplace. You can do that by typing in Razor's anywhere on Seeking Alpha search bars, it will pop up or Akram is a good service for just ongoing flow and ideas.
This week we’re talking about Snap. The social media messaging company reported earnings this week and the stock popped, no crackle involved here I think. But the company posted pretty solid growth for Q1 and additionally said that they've been growing year-over-year so far in Q2. We’ve got a constellation of reports or news bits coming out of the Internet advertising space.
Pinterest pre-reported a decent Q1, but also pulled their guidance for the rest of the year. Facebook and Twitter both made some noise in March about how they’re getting into lot more usage, but that they expect to affect their sales growth, the coronavirus surge of interest, but also the hits to the advertising economy. And so, we’ve got an interesting set of dots on the sector. The question is how do they all connect.
We’ll get into that, but before we begin, our usual disclaimer and disclosure. The Razor's Edge is a podcast in Seeking Alpha’s The Investing Edge channel. You can subscribe to The Investing Edge by the way wherever you get your podcast. The views discussed belong to either Akram or me respectively. Nothing on this podcast should be taken as investment advice for any stock. We'll disclose any positions in any stocks discussed at the end of the podcast that we don’t get to hear, but I will say, I’m long a little bit of Pinterest and Google. Akram is long Facebook.
Listen to or subscribe to The Investing Edge on these podcast platforms:
So, Akram, good morning.
Akram's Razor: Good morning.
DS: So Snap, it seems like a pretty good report. I mean the market pops, but you have to give the context that they still lose a lot of money. They still have high share-based compensation. They also don't know how much money they’re going to make. But it seems like a pretty good report as a starting point.
AR: It was their first, I think, cash flow positive quarter ever, right?
DS: Okay, okay. So they – yes, so that’s in the context…
AR: You got that going for them.
DS: Which is nice.
AR: Which is nice, but, yes, I mean that was obviously a knock before. Structurally costs are improving. Those are getting around that. It’s 70 and 100 basis points and they talked about that on the call, focused on I think [700 to 800] total driving cost down $0.70 or so I think. So that's notable, but, yes – no I mean on the surface, you don’t like to say that a stock goes up 36% in a day and you’re like okay, it's great, but – this is obviously a confusing one. Let’s just be honest, those – I've been on the bears camp on it. You got to stay open-minded, and it's hard to look at it the way it traded and not be like well, I mean what is part of the just craziness that is in these markets lately. You know it’s just liquidity. They’re just – it is driving so many things.
People don't think much about really – I mean if you – I mean, we don’t really need to get into it, but I mean the Federal balance sheet has gone from $3.7 trillion to $6.5 trillion, and since September 1 and like 80% of that is in the last four weeks. I mean put perspective it's – the balance sheet has grown more in the last four or five weeks than it did from when it first started moving after – during the financial crisis through the time up till now. I mean forget the fact that –it's the same amount as the last 50 years, but generally speaking, [indiscernible] the financial crisis all the way through the recession in Europe, the panic there and everything you were thinking about in 2008 to 2015 [indiscernible] taper tantrum, everything that went between just smudged that into four weeks. That's what’s the Fed’s done.
So, it's obviously been a big driver and stocks just stop liquidation, and when you have good news or bad news, it seems like particularly lately on good news more extreme price action in tech, this is just insane, but, yes, I mean let’s look at the cadence and went through this already. You had – the first person to drop it and use in the Internet advertising universe was Twitter and then Pinterest and then we got some news out of Facebook. Google hasn’t said anything about their business. Then you officially got Snapchat reporting. So, we’ve had data points from everybody and I mean obviously this space is interesting because engagement is so high, everyone’s at home; they’re online. I mean I’m amazed at how much time I spend on Twitter right now. I feel like someone with an addiction problem.
DS: Well, and that’s the – we talked about this within the context of, for example, Zoom last time, but it's more…
AR: Another 50%. I wrote something up on Zoom for the subscribers over the weekend. Look, I mean I went through the exercise of actually trying to freaking model this thing. Where do I see revenue coming out of that, what's paid, what's not paid, how much is – it's actually a fun game to play because you can look at Zoom and be like what will Zoom be in two years? What does it have to be revenue wise for me to say buy? And I was just of the view I was actually having this show with my little brother who’s like everyone else in America trading expert all of a sudden and he’s just like, bro, Zoom is going to give an update. That update is going to be crazy. It's going to be huge and when it does it will pop, and [indiscernible] happen yesterday, and he’s like told you.
DS: He should launch his own service.
AR: He should launch his own service. He’s too busy doing influencer marketing, building out sales teams, but his – I mean, if you saw his returns since like the beginning of February, you’ll just be like what the hell? How is this possible?
DS: But – so if we go back to the Internet advertising, the point is that they’re seeing a lot. I assume their cost structure is probably less per – I would imagine Zoom server cost or whatever else, a little bit more intensive than…
AR: Yes, let’s just start – we could do a – if we want to do Zoom [indiscernible] maybe we’ll do that later, let’s just say we have…
DS: No, what I’m saying is I'm saying is that with the Internet advertising, there is some of that increased utilization without actually – it's not monetizable because I – somebody made this point on Twitter, I can't remember who to credit them, but the hard spot is you have, for example, travel companies who are huge advertisers, but there’s no demand for them, so why would they bother advertise?
AR: Travel, auto, hotels, [oh, that’s travel].
DS: Or you have consumer goods or something where you don't need to advertise because everybody wants you, so it’s either there's so much demand that you don't need to advertise or there's not enough demand for advertising to make sense. And so, that would in theory seem to squeeze and to advertise. I’m hesitating because I know I saw in a report that there was a ton of interest in advertising for the Draft last night, the NFL draft, so there's some huger to advertise, but I guess what I’m say is that until the Snap report everything what we were seeing was a lot of usage, the revenue didn’t [indiscernible] good. So does that – does this change your mind about the sector at all or do you think? Do you still more chalk it up to just the weirdness going out in the markets the fact that Snap had that pop?
AR: Well, I mean Snapchat – there's a very good case to be made that Snapchat without a doubt of all of them kind of sits in that spot where video gaming, media in a demographic targeted that right now is set up nicely for them. They made a case on the call, which I did find interesting because I’ve been following this space a lot and just movies moving around in the windows to digital – all digital release windows and their ability to provide an ad product for studios is more targeted. I know some people in this video space pretty well on the marketing side and I’ll occasionally have chats with them on spend and what's going on in the industry, and right now, there’s no industry that’s more shaken up by what's happened than Hollywood, particularly budget wise and marketing spent.
So, I mean if you just were to think about different studios there was actually the news out yesterday on – I mean, we love talking Disney and the whole Marvel complex. I was talking to a friend of mine and he was explaining that nobody in the industry right now wants to be first to release a tentpole and I mean if you’ve seen, for example, Ghostbusters: Afterlife, it was supposed to be released in June, that's been pushed to March 2021. The first real major tentpole was going to be Venom, Sony and that was slated for end of October. I think they’d pushed it, they made an announcement pushing it to November. Now, they came out like two days ago and said Venom is going to June of 2021 and now what else does Sony have coming up, Spidey? So, you just have…
DS: [Indiscernible] which is…
AR: …which is their – I mean Venom and Spidey is the whole game for them, that's the viability of the Sony Studio. Otherwise, the business model hasn’t completely changed. And Spidey hasn’t even, I don’t think have started production yet, and they’ve got Tom Holland under contract for this other that – what’s that videogame series Uncharted. It was Nathan Drake. Production on that is also tied to finishing Spiderman. So – and Spiderman is slated for – it’s a summer blockbuster for next summer. So, they haven’t said anything yet on Spidey, but if they’re moving venom to late June, Spidey is supposed to be a of July 4 or on release as Spidey is in MCU and Disney has said that the whole MCU slated is shifting [indiscernible].
So, if you think about that, for example, you had marketing spend for Ghostbusters tied to the NBA playoffs, that's out of the door and you got to look at like a lot of this advertising and the production around Hollywood is so meticulously planned in advance that this essentially losing a year has disrupted it massively. So – I mean, I know one studio is spending around $500 million a year and that’s essentially been cut in half. So, when you look at that and you think about it and you look at a Snapchat making the case that their making, it's an understandable case because they’re saying, we’re –we’re over 50% direct response to advertising and if you’re one of these studios who had been buying billboards and buses and the up-fronts and stuff tied to sports, and you're now releasing things digitally, well, what's the most valuable place to shift whatever marketing spend dollars you’re going to leave allocating around is something like a Snapchat. Where do you reach that audience? They’re not on Twitter. I mean they maybe on and Instagram to a degree, but it’s definitely a good place.
DS: [Multiple speakers]
AR: Yes, if you’re these and video gaming without question as well and they reported data regarding how up gaming is. So, you do look at it and you’re like yes, maybe, maybe it’s good. And what’s really surprising is the usage data for international because I kind of look at – I mean, look I’m someone who’s lived outside the United States for over a decade up until being back here recently and I look at data and I’m like is [indiscernible] one of these where the international success just so big and you’re kind of ignoring that when you're back in the US. You’re kind of downplaying it because they’re growing so quickly outside the United States still, and that's actually a much more viable peace to them.
I mean the last time I went through something like was research in motion, literally 2009 where Apple was growing like crazy in the U.S., but BlackBerry was crushing it in Indonesia, Malaysia, and the stock was super cheap as the market had rebounded and I’d had some Apple, but living abroad at the time, particularly you see people using their BlackBerry’s crazy still before the Apple wave had really hit and you’re like yes, this is Apple thing. It's not – they’re not – it’s not going anywhere. They’re not going to kill BlackBerry and Nokia at the same time and that's kind of like a prospectively you’re just like, I mean how many people are there in America, 300 million, but it’s a different ballgame when you’re looking at it from a perspective of social because well, I mean it's where the bodies are and for some reason with a Snapchat it's continued to do extremely well outside the United States.
I mean it’s doing well in the U.S., but extremely well outside the United States where I look at those numbers, I’m just like [indiscernible] 45% use of growth year-over-year how is – how are you doing that versus 9%, 10% was it in the U.S. on the DAUs.
DS: Overall, DAUs were up 20% and rest of world was – yes, North America 10%, rest of world 45%, Europe 14%.
AR: There you go.
DS: So, yes, and that's – rest of world has caught up to – and it's – in Pinterest's case, for example, that growth rate is a big split, but it's still – I mean I guess the – there its more that their ARPU is really low or whatever their term is [multiple speakers].
AR: Yes, look, same problem everybody has in advertising outside of the developed world without question, but in Snapchat's case, it's more BDS, so they’re on a hot – they’re definitely higher than something like Pinterest or Twitter would see in those markets because you've got a very engaged user.
DS: Yes. I mean and that's when you're –and in their script, they talked about the importance of connecting with your friends and you can see – I mean you can sort of talk yourself into those effects to the fact that is – even as a counter to video conferencing fatigue or whatever else just the ability to send messages quick, quick hits and just be in touch with people. I mean I think that's probably what’s [multiple speakers].
AR: Look, that’s the value prop, they’ve always had that.
DS: Yes, but it's comes into focus when you're not –you think of teenagers who are not in school and not even allowed to leave the house in a lot of place, and all of a sudden that is just the only way to be in touch or that sort of thing, so that's where it becomes – you can tag yourself into that being part of where Snapchat also gets that boost and that if there's still enough reason to advertise, as you’re saying in the Hollywood case, than that kind of keeps them – keeps their growth rates afloat to a certain degree.
AR: Without question, but it's – look there’s a – I mean going back to the growth rates actually, I mean that's part of the debate here on Snapchat. There's no denying that it’s been growing faster. There are two things to consider here, Snap is still in this 12-month window where they re-boosted user growth. That started when they kicked in these new lens filters on the camera in Q1 literally of last year. That's what flipped this around for them. I think it was late February of last year when they launched this and when they really started seeing the effect of this, it was Q2 last year.
So they actually did mention that too as well which is a reminder because when I was short Snap, we would have this conversation, I've discussed this with a couple of other short seller buddies in terms of the idea of whether it's worth picking on them in more detail and focusing on it and making it a more focused short versus a hedge against Pinterest as it was and it was like look, is it really that easy? They released these filters. They got a huge engagement boost and by Q2, those numbers slowed down and you just want to be essentially sorted into that. At the time when the stock was 17, you want to be short ahead of that before all this madness happened and when it fell down to the single digits and then back to 17, which has been happening with a ton of stocks in tech, but they did talk about their cadence on the call, and they went through the same thing as everybody who's been talking in the sense where January, February were great, best performance ever, amazing numbers then the invisible enemy came, but it’s – their cadence on that was January, February like 53% and then March drops to 25%, April so far 14% and the week into this earnings, 11%. I mean that's a huge, going from 55% to 11% in three months tells you what you're dealing with and you got a lot of these guys who are reporting who will be like this is how we did in Q1 and we’re pulling guidance and not like that –Pinterest gave you advertising. It was impacted end of March. They didn't say anything when they gave that update, but I'm sure we'll hear more, but there’s a universal consensus that Q2 is going to be really bad.
The brunt of the pain is April and then is a question of where do you go from there. So, when you look at it, it's – there's two parts I think with this one, which – because I was to – the call was a very – it's a very good conference call. I think they did a good job and its one of those conference calls where they could convince you almost that there’s a case here that Snap was in a one-trick pony on the filters driving people back into Snapchat on a temporary basis. That’s essentially an argument; that's I think they’re making some progress on shooting down, but when you consider the fact that they have that tough comp in Q2 and the first underperforming lappage quarter wise would have been Q2, you kind of now have this coronavirus thing that gets in the way of how much of this drastic slowdown can be blamed coronavirus and how much of it is also part of your business in terms of – because March, January and February should have been huge positive compares for them year-over-year without anything going on.
That’s not exactly super shocking. March should have been when they slowed down because those filters did come out and had that huge boost in March of last year. It started at the end of February and that’s when you were able start to see a measurement was March and into April, May, June, etcetera. So, they are lapping that and that's one way you look at it and one more quarter to kind of see although what they gave you engagement wise is still pretty positive year-over-year, but you definitely have a headwind to go with the overall advertising environment.
DS: But does that – is that something where on the – you could see it both ways, you could see it two negative sort of makeup not a positive but it wipes out the scrutiny literally because everybody is so quick and you’ve talked before in different –you’ve talked in the context of longs you have and context of shorts you have that even a sell-side doesn't always pay attention to these sort of overlapping things. They kind of – it just goes into the background of the narrative without paying attention to that that the comp is going to be tougher. So, now they get a – get out of jail free to some degree because Q2 is just going to be a wasteland anyway and then they come out of it clean.
DS: So is that – that almost sets them up nicely you can argue.
AR: Look, part of problem with Snapchat is they’re in this kind of no man's land as far as a stock investment because they're so expensive compared to everybody else in that space, I mean in online advertising. Where are they now? I mean they got up to 17 again, when you think about that that's – what is that $22 billion or what's the math EV to sales? Almost…
DS: We have them at 10, 11…
AR: …toward 13, 13.5x trailing?
DS: We have them at 12, but I'm not sure if that's the updated.
AR: It’s $22 billion enterprise value.
AR: At $17.00 basically and they did what, 1.6 in revenue the previous year? Yes, it’s over 13. Put it this way, what’s Twitter? Twitter right now is just a hair under five. I mean I had some people already asking me again, what have you [indiscernible] I’m not going to lie again, I was thinking about it again because when we did that Twitter podcast, it went through this element of the fact that Twitter was at a premium then. Twitter was, what $33, $34 and I actually shorted Twitter for the first time and I actually made some money on it and it's today the cheapest name in this space again by far. 4.9 times, okay. So, that’s the Twitter, 4.90 EV to sales, Snap 13.4, Facebook 6.6, Pinterest is what, nine?
DS: Yes, I was going to say it’s still high single, I think.
AR: Okay, so there you go. I mean Twitter is now, they’ve gone to a point where Facebook was cheaper than Twitter. We had that period it seems like a millennium ago, but it was three weeks ago, four weeks ago because Twitter came out with the Elliott update and then rallied in the face of [indiscernible] which actually set that up where I was like how is this happening? And then it went as low as 21, 22. I mean, I think covered at 24, but it was a crazy swing in a couple days. Pinterest came down to what 9, 10, almost to 20. Pinterest and Snapchat have done basically the same thing.
They both dropped significantly to real extreme points and then have had like almost say equivalent of short covering rebounds that you would typically attribute to short, but it's more this liquidity dynamic in this market, but, yes, I mean it's hard to not – to look at Snapchat and be like well, what’s priced into it? It's double essentially the next closest name on EV to sales. So, I'm going to go valuation kind of trumps everything else here, and so makes its uninvestable. I don’t know, I mean what's your take?
DS: I mean I think, yes, that's always –– I struggle to get too far [on a limb] valuation wise. I guess what I'm trying to ascertain are these – you made the point Snap is more media, for example, as compared to Pinterest and I think that's what’s going to be interested see is how does the actual – who actually benefits from – does this actually mean the same thing for all of these other companies or is the story different? Is it – you could – this is not a name we’ve mentioned yet, but Amazon also has quite a bit of an advertising business now. Do they have – because Amazon’s getting so much of traffic for everything else, dose their advertising get more important because you still have to buy stuff and that makes it – you want a game that more. And so, I guess that's question.
AR: It’s obviously from that standpoint, Amazon is valuable real estate. I got into this to someone online where they were trying to make the case that Amazon’s advertising business is going to get hit in this environment and I was just like well, wouldn’t that be the one ad business that's hit the least. So, what are you doing? Why making that argument?
DS: Right. I mean it’s just – it really…
AR: I don’t want to talk about that stock, I think you would have sold it and it’s ridiculous.
DS: Okay, nice [indiscernible] but it really is a perfect storm. It just…
AR: It tortured me. Last year, I couldn’t make money long Amazon. For two months Apple, Microsoft went up every day and Amazon did nothing and all I owned was Amazon calls crazy aggressively and I would just be like why is nobody buying this thing. Everything is going up, literally everything and this stock doesn't move and what is it, the entire economy [tipped] these days to people.
DS: It’s the [indiscernible].
AR: And it was literally up. I looked at it at one point last week, it was up 20% on the week. Amazon added half of Facebook in three days.
DS: It’s up almost – it's up about 25% to 33% this year. Pretty close to 33%.
AR: Why wouldn’t it be. Twitch is crushing it. Everybody has to scale up that on computer has some – spend more on AWS. It's pretty much all the shopping that anyone is doing. You’re sitting at home and buying stuff that in many cases you don't necessarily even need, just tuff on top of the essential business, and I mean it’s got –its video and core businesses –every single one of their businesses is well positioned right now.
DS: I mean, it really does feel like a perfect storm. I mean, obviously lots of political, economic concerns around them, but it just seems like – and if you want you can throw it in. By the way, Washington Post is getting tons of attention in traffic too.
AR: Well, I mean that’s personal, but yes, correct.
DS: Right, right. I know it's not part of the business, but it’s just different thinking [indiscernible].
AR: Yes, and he’s supposedly back involved in day-to-day.
DS: That’s not bad [indiscernible].
AR: He’s not on his yard and his house – a $160 million houses or whatever. It's kind of – you know it’s flipped. It’s like Amazon back in its prime so to speak.
DS: I mean yes. It’s – there's probably a blue origin joke in here somewhere, but maybe we can skip that, but I guess so do you think – what are you expecting from the other advertisers I guess? As we – what do you – do you think…
AR: Well, I mean you would think that Google is going to see some – based on travel, a lot of – I mean let's go back, Pinterest was like hey, we don’t have much exposure to small restaurants and travel. I would imagine Yelp is the worst case scenario or just what the fuck is going on there and that's got to be Armageddon, as far as advertising for them because that's actually drawn to around, hotels and restaurants, but Facebook is a lot of SMB. They should definitely see a hit as well. I mean, and it's such a huge business. This goes back to the fact that if you’re going to from spending $500 million to $250 million in terms of let’s say a major studio marketing budget for the year, that’s – could impact so much.
I mean this was my rational behind shorting some trade desk and three days later, it’s up 25%. I’m closing the position. It’s that we can get into the market element yet, but I’m just like alright, I mean I can't short Omnicom and Publicis, these things have been absolutely hammered there and rebounded, but Trade Desk from 142 to 210, I’ll shorts some Trade Desk, I mean before you know it is 260. But Trade Desk is a business where you can make a case that they’re benefiting because spend comes out of a certain place, it’s still got to go into an area; you’re repurposing the way money is being spent. Roku is another one we haven’t even discussed.
I mean that thing got done to the 50s and I’m – I don't like my Roku at all as a stock. It's doubled in the last three weeks and that's one where, again, streaming hours is up huge, but the advertising spend, I know from some checks, not nearly as good, but they didn't give any guidance on the next quarter, so they just kind of came in and okay, this is where we came in at the end of the year and for the January, February, March, March did see some slowing, but not going to get too much of the detail and the stock has brought back to life. I do think you kind of have to, when you look at these, break it down into who is kind of unique?
I do think Snap does still make a case like they were making as – regarding video gaming and TV, film, etcetera, being a target audience right now that has an advantage over others, but I mean if you look at – there was some sell-side dispute over – this is a – the younger demographic is going to be hit hard by the recession, where are you on that? Basically these guys – if I’m an advertiser, I mean why would are we spending money here going forward because their disposable income is going down.
DS: Yes, that's – because that’s also so –again not to…
AR: The internships are being canceled. People are coming out of school or whether they’re going to get jobs, what’s the dynamic? Young guys not exactly as confident as before about their prospects and that means that they have less money to spend and you're better off spending on the seasoned – the Twitter demographic for example.
DS: Yes, I guess to me it seems more not to go into economic theory, but it seems more of a class thing in the sense of the – it does feel the same way that the largest companies feels like they're the most well set up to survive something like this. It feels like if you're somebody who is in an upper-middle-class situation and you can work from home and you're not – your income hasn't really changed, you've got a lot of extra money on your hands as compared to normal. We – I don't know that we can point to numbers, but Seeking Alpha’s audiences out but also you can sort of – you get the perception that you brought up your brother, for example, you get the result from the people with some time on their hands. Some of them are dipping into the market, for example, just because that's where the action is.
AR: Some? Everybody.
DS: Yes. So that’s that is the entertainment that [multiple speakers].
AR: People who have never traded and forget my – there's at least half a dozen. I get people like yo, bro. I’m doing this with the Snapchat, Zoom. What’s your take on the Slack and [indiscernible]. Bought some Tesla last week, I’m up 40%. Everyone is a trader.
DS: And so, if your take is that there is enough people in Snap who are either kids from families where they have…
AR: It will be nice to see what percentage of Snapchat users have Robin Hood accounts, but, yes, continue.
DS: Yes. So – but you have the spending money to do this to – for example the stimulus checks are not being used to just cover rent or whatever, but are being used while we can’t go to the restaurants?
AR: Rents? Who pays rents anymore?
DS: Some. I guess I still pay mortgage, mortgage payments, but yes.
AR: Sucker, seriously.
DS: Well, I think that's to me – you can see the case young people are relatively resilient emotionally and relatively sort of a second or third level effects. I mean, I remember being 23 when the – in 2008 and I was just – and I was working not a very – I was working at the school, I was making – I think I got housing and maybe $1,000 bucks a month, so it wasn’t like I was making a lot of money or whatever it was. It was enough to get buy, but I was totally just out to lunch about the crisis that was happening around me. And so, you could make the case that if you have enough kids who are coming from middle-class, upper-middle-class wealthy families on Snapchat who just aren't thinking about it, they’re still looking for stuff to buy and they still are able to do it.
So, I can see it. I guess it to me that's what it boils down to more. I would assume that, yes, and so, then your argument is if you – that’s your population [indiscernible] that people who are super plugs into the apps are slightly –there's correlation between people who are tech savvy and people who are well off to some degree, and so, you start to work that out. I guess you could get there. I wouldn’t say, I'm skeptical of the argument you started with from whoever made it that kids are worse off. I just – I think that's…
AR: Will be worse off. Remember there’s two phases to this thing. At the end of the day, what's going on right now is almost farcical in the sense of its connection to the reality. I mean, there's a lot of these articles for example, the last couple days about unemployment insurance and the fact that for some people it makes more sense to stay home and not work. A restaurant, for example, in Oregon, there was an article on CNBC that should we start. She wanted to reopen because deliveries kind of been a little bit stronger than she expected and she laid up people at the beginning. The employees were like, no. Now, I’m good. I’m getting $600 extra a week. I don't want to come back to work right now type of thing. And that's an element because look, unemployment insurance is designed to cover in the U.S., the replacement rate average nationally is somewhere between 25 and 50, the lowest states like Mississippi, Louisiana, Alabama, you end up replacing about somewhere between 25% and 30% of the wage for whether it's 13 or 26 weeks [varies]. But nobody goes over 50 and when you – when the $600 that they’ve added for four months through August 1, is targeted to bring the national average up to 100%.
So, the national average gets to 100% and the argument had been that there's going to be some people – they try – I don’t remember if you remember this, but McConnell and Graham raised some issues and tried to block it initially when they were passing CARES being like oh! We can’t have people making more than 100% of their previous salary because you have many – if you do the math, $600 a week on a 40-hour work week is $15 an hour. So, everybody's getting $15 an hour at least and then the minimums in the states vary, but if you do a base on the maximums, you're really talking $20 an hour is kind of what anyone who’s getting the combination of the CARES boost and the typical unemployment is going to be getting for at least through August 1.
So, there’s tons of workers today, grocery stores, big box, the essential workers, making far less than that and the focus has been hey! Well – you’ve got some people – and states with really high replacement rates like Oregon and Washington, for example, Arizona that added $600, so there is people in those states who literally are making significantly more money to not work. It had been laid off for those four months. If you really believe that this one of these dynamics because this isn’t like you're talking about financial crisis earlier, and kind of being out to lunch on it. The financial crisis was my joint. That was to me – I was this bear. What's going on here, but – the world is going to end and I've been saying it since 2007 and short countrywide, Fannie Mae, Freddie Mac, and all this [indiscernible].
The bottom line on financial crisis was everyone in America for that matter worldwide could – one thing is unraveled and unraveled over almost three years really looking the mirror and be like, I – it was my fault as well. I bought too many houses. I got too overleveraged. It wasn't something you – Wall Street was doing what they were doing with derivatives and the housing market and the financialization and CDOs and CDO squared and the overall aggressive nature of things and NINJA loans and all that crap and in terms of the sub-prime lending, but everyone was out of control with housing. I mean whether you’re talking about Spain or Ireland or London or America or Dubai, I mean you had housing mania all over the planet and it was a crazy real estate market and everybody thought that their first, second and third property, they were getting rich and they were all kind of levers around it. So, when it crashed, you couldn't just point the finger. You couldn’t say hey, someone else’s fault.
DS: Well, I…
AR: What’s complicated about this is everyone feels blameless even though that's not true, but you have this kind of dynamic here where when you get into the situation with the worker and he’s sitting at home [quoting] unemployment, if you offer him to come back to work, well, I mean he's not eligible for unemployment. By the letter of the law, that's the whole purpose of unemployment insurance, but you’re going to get this debate here whereas hey, that person is making 120% or 150% of what they were making beforehand. So, what are we dealing here with socialism, incentivizing people sit on their ass, but where I take issue with that is that if I'm making 80%, okay, of my previous working salary, I'm still incentivized to stay home. Forget 110% or 112%, I don’t care. My free time is not free. I mean it's worth money.
So, if you’re going to tell me I’m going to get 80% of my salary for four months, I think there's a lot of workers out there who are like that's good enough for me as wel. Once you cross 50%, it’s no longer insurance. It starts functioning more like stimulus and that or to an essence even like a level of basic income temporarily. So, when you think of it that way, the fact that the replacement rates with this extra $600 are between 90% and 120% or so 130% for all 50 states, everybody essentially who's been laid off and is eligible for unemployment that would have been making less than, let's call it, $40,000 a year is incentivized not to work.
DS: Well, but that’s…
AR: That’s part of the dynamic here. So, when people are talking about opening up the economy again, I mean you cut in them the checks right now. When you open it and back up, for some people that's when the dynamic really changes.
DS: Well, yes, I mean, and that’s part of your public health play to make it so to reduce the pressure on opening preemptively and all that's –we can get into the debate around that, but that…
AR: But it's not like when I was laid off or something in 2008, if I’m in that category and I lost my job because housing crashed and there was a lot of layoffs and general less spending in the economy and I'm on employment for 13 to 26 week –this is a different dynamic. You’re getting paid 100% or 90%, that is – I’m covering your salary.
DS: Right, but…
AR: You haven’t lost a job effectively yet. You’ve got four months where you really haven’t a lost a job at all.
DS: Right, but that's because the government essentially said you – this job can't exist for an indefinite period of time while we figure out the hell is going on. So…
AR: Okay. But what about if you work at Kroger or Walmart and you’re make $11 an hour, shouldn’t you be getting the equipment of hazard pay here?
DS: Yes, absolutely, yes.
AR: You should be getting – [indiscernible] you be getting to work, 150%, 160%?
DS: I mean no…
AR: Because you’re staying in your job and…
DS: You are risking your health.
AR: …everybody who's been laid off from a restaurant or hotel or whatever is making at least $20 an hour. You put a floor on the minimum wage essentially speaking.
AR: That’s what’s going to till August 1. I mean all 50 states – if you take the minimum and you add the $600 you’re looking at nobody should be making less than $17.50, $18 an hour.
DS: It’s – maybe it's one way to –minimum wage, national minimum wage at 15 was, I think, the campaign platform.
AR: Okay. But I’m saying if you’re an Amazon employee, if you’re a Walmart employee, and these are private employers that – again, you have to be laid off to be eligible for employment, okay. And the point here is you’ve been laid off and now your employer is back at – I mean, maybe a way to resolve this is to grant bonuses for these essential workers classify what is essential and say that, after August 1, we’ll cut them a check that makes sure they get equal to the national – or for the state, you know, the minimum that the – they would have got under being unemployed. So, the $600 plus the unemployment insurance – you did not make less by continuing to work, but like I said is that even enough? You should be getting a premium.
DS: Well, but – so setting aside the economic issues for the advertisers, what you're describing is extraordinarily bullish actually when you think about it because what you're describing is…
AR: It’s inflationary. I don’t necessarily know if it’s bullish because that’s my point.
DS: Fine, it’s inflationary.
AR: You’ve got a segment of people that are sitting at home and have – not only do they have money in their pocket they’re spending less, they are not driving to work, okay. So, the gas tank money has come out, okay. I'm not traveling at all compared to what I used to. I'm not going the restaurants compared to…
DS: You don’t eat out as much.
AR: So, I've taken a bucket of consumption, cut it to zero and put it – kept it in your pocket and you’re sitting at home and you now have more discretionary income for a certain subset of places spent.
DS: Right, which is where – I mean if you have enough people who have goods to sell I mean, I posed that quandary earlier where if I already have enough demand, I don't need to advertise further, but if you have something – if you have a reason to advertise to get out – get the word out for a movie, for example, if you were to try to do some direct consumer release whatever like there are…
AR: I mean like…
DS: …times they are straight.
AR: Without question. So, there’s that argument clearly in terms of if you're in the gaming demo or if you're in the streaming media demo this is a place where you can take advantage because they do have money to spend and you can take advantage of it. I mean I just think about – that's when you look at Walmart and Costco and Amazon stock, I mean, I bought a tripod for videotaping cooking, right. I mean talk about a random purchase. Sitting around the internet…
DS: To film yourself cooking. Like to…
AR: To be able to film – yes, to get a perfect overhead angle on my food.
DS: This is production on Zoom or production for Instagram?
AR: I’m doing – I use InShot…
AR: …which is an app that lets you do editing on the fly I’m getting – look, I’m just setting up for the inevitable pivot dude. So…
DS: I can see.
AR: Everybody right now is a stock analyst. So my skillset is essentially useless. Video editing though that's the future.
DS: Well, it’s funny not be too on the nose, but I was in a meeting yesterday where it was with provider to us of a service, not at Seeking Alpha, and they – we were joking about the virtual backgrounds where we used GyPSy for our call rather than Zoom, and so, we were talking about that and the security and then the lack of virtual backgrounds and the guy said, yes, but do you know, Snaps’ camera can give you a lot of VR stuff and a lot of…
AR: [Indiscernible] they were talking about that on the call they’re actually downloading the camera as equipment is very popular.
DS: So, there you go. So, maybe Snap is secretly the videoconferencing play as well.
AR: I mean, everybody is on it – videoconferencing is so hot right now.
DS: So hot.
AR: Talk about technological breakthroughs? You can video over the Internet, wow!
DS: I mean it’s really like, the David Foster Wallace – infinite jest from the 90s, where all of a sudden where just plugging right in and talking to each other and meanwhile the world is fracturing.
AR: So that’s the point. That’s where you’re having an issue here, because once this stimulus goes away you’re going to have these distortions correcting themselves. You’re going to actually – this what happens when you mess with something like the economy like this on this level whether it's the Fed as – you essentially have prevented liquidation.
Everybody's kind of just got money – it’s like – it's a summer camp for a lot of people. I mean, if you didn't get sick and you don’t have someone close to you yet who’s sick and you’re social distancing, that's what it is and there's an element there where you're looking for ways to entertain yourself. I mean that goes back to our conversation on Pinterest. Pinterest should have also kind of like Snap, a bit of a – they didn’t make that case and it was only a PR. We didn’t get into this long conference call, sit and see what they had to say, but they did talk about the fact that we don't – we have less exposure to these verticals and you got to think, okay, you got housewives sitting at home planning.
Home improvement projects. I mean Home Depot, if you think about it and Lowe's, these are not bad ideas. My neighbor is a medical director at a nursing home, all he does – I mean just call – talk about ground zero and all he’s dealing with is Zoom calls of people who can't see, you know, their loved ones who are in these nursing homes and everyone has COVID in the nursing homes, essentially speaking. I mean let’s not make a blanket statement to that level, but, you don't, his level of cases is super high. He hasn’t always been to a nursing home physically in weeks, but inside, they’re stopped testing in some of these places because the presumption is if you have the case, if you have the symptoms, you’re COVID positive and the hospitals won’t take you. They want to bring their nurses.
So like the – you’ve got this kind of black hole where you’ve got these nursing home patients and they can’t be transferred to a hospital, you can't come and see them, you don't want to come pick them up and bring them home to you even if you could and the rare case is that a lot of this stuff is going on Zoom virtually and whatnot. So, he is not going into the office or what's he doing when he is not on really depressing Zoom calls, every single home improvement project you could think of. I mean, the guy is watching him building stuff every day and that's kind of the dynamic you got to be thinking is something where a lot of people for a Pinterest sitting around looking for things or ways to spend money, those are places that would benefit.
If you believe this thing is going to be something that lasts for over a year and some – in some cases, maybe longer in terms of its overall impact, if you're not to go back to traveling consistently and not talking about from a vacation standpoint, going somewhere notable, and you’re going to be doing something more localized then barbecues, people making stuff, camping these types of things, this is an interesting place for the – even though the overall consumer discretionary pipe may shrink to a certain degree where spend is repurposed.
If you’re not going to be doing these activities where kids go to the movies, or some indoor park that's physical adventurer or game rooms or whatever you call them, escape rooms, money has got to be re-spent somewhere, so outdoor local could be one of them and that’s – I think that’s one way look at a Pinterest on the other end of a Snap, which is totally digital in terms of gaming and streaming and connecting to that demographic. You got another one that’s connecting with the housewives and the do-it-yourself, home improvement [indiscernible] projects.
DS: There is an article on The Atlantic about that idea. Maybe you saw it about planning your next Pinterest trip.
AR: The Atlantic, what a liberal.
DS: I’ve been outed…
AR: I’ve actually – I’ve literally been – I’m is giving you shit about that because I got – I posted some article and literally somebody on Facebook, on Twitter said stop bashing Trump and read The Atlantic, how is your Shopify short…
DS: I saw that.
AR: That was the trolling I got. I was like how – what am I really been trolled on this topic? Because I read The Atlantic. I mean I watch a lot of Fox News as well.
DS: So – but, yes, but that concept of, planning ahead for your next trip. I should also say I’ve thought about that…
AR: Yes, virtual travel.
DS: Virtual travel and then I’ve also thought about I own shares in Thor Industries, which is along with Forest River, which the Berkshire Hathaway company also long Berkshire Hathaway, but the leading RV maker in the U.S. and also has bought – went into Europe. They bought a company in Europe, and so, that's…
AR: What’s it called, again, somebody pitched that as a long on Twitter.
DS: Thor Industries. I think…
AR: Yes, you know who pitched it, Marc Cohodes, very notable short seller.
DS: Okay, on the same side.
AR: Everybody talking about the boom and camping that’s coming.
DS: It’s an interesting – they’re – I think they're pretty well-run company. They’re [indiscernible] seen, they’re cyclical. They – I should have sold – I bought – they’re basically back to where I started with them. I should have sold shares when they got up – they got ahead of themselves and were already up in the 80s, but I wanted to hold on for a year for tax gain reasons, which I’ve learned that – I made this point on Twitter, I’ve – that's one of my lessons learned from this is don't get too cute about that stuff. But, yes, its – I think it's – do I think it makes sense that is price where it is now, I'm not sure.
They've – they were just recovering from an inventory – dealer inventory correction and now this they’ll definitely going to take on the noise, but it’s a pretty well-run company and they pay down their debt pretty quickly. They do have that recent acquisition. So, when you think about how travel might change, yes, you can see – I mean – and we haven't talked about the fact that the price of oil is – and gas is low. I mean, gas is – I don't know what it is where you are. My dad was saying it was under $2 in Massachusetts, which it hasn't been in a long time, so…
AR: And I used to pay $0.79 a gallon in Atlanta when I was in college. So, I mean Trump was like it's never been this cheap, at least not since you guys have been live and I was like actually no.
DS: I tried to remind – I reminded my dad that it – when I was in high school, which [indiscernible] I might be a tide younger than you, it was 1998 or 1999, I remember under $1 in Massachusetts and New Hampshire. So, yes, I mean it’s – so, but anyway…
AR: $0.79, $0.79. It was probably 1997.
DS: Okay. So, you can see tag yourself into that. So when you’re trying to think through what’s changing and what’s going to get more emphasis than other things on the margins and what margins gaming off, that's interesting. And I think that's to tie it back to where we are, it's interesting to think about these – how that benefits different – the different social media companies and how – yes, what I might take away from this conversation is just thinking about the different user bases in different sort of ways to reach Snap users versus Pinterest users versus Twitter users. Facebook is sort of all encompassing, I think, and Google of course and Amazon are both different stories as well, but it seems with these three at least there's a little bit different of a reason to be there, a mindset and an audience and that it might affect each of those companies differently.
AR: Yes, right. So, it’s like Pinterest has got do-it-yourselfer and housewives bored at home trying to figure something about cooking. Cooking is so big right now. I mean…
DS: Everybody is cooking.
DS: People got to eat.
AR: If this ends, you’re going to be talking about great chefs are coming out of this on the other side.
DS: I made a pretty good chicken soup last week, so…
AR: There you go, there you go. Who isn't working of their cooking skills right now? So, that's definitely the Pinterest and then on the other end, like you said, video gaming and streaming and the millennial generation, that's Snapchat. And then the two giants kind of have a mix of everything, Facebook and Google, a way you’re definitely going to see a more pronounced hit.
I think twitter is just that –I'm really tempted to go long it again, I mean just based on the way Snapchat had traded and now where the valuation is. This is the annoying thing about this market. I mean things are just swinging around so wildly. We just had this when talking about all this craft and we started with the Snapchat focus here. But I mean, at the end of the day Snapchat is trading at 13, 14x. Yes, it’s the fastest growing of all those names, and it’s making the most improvement relatively speaking to where its narrative have been, like it had been burning a lot of cash, it’s getting cash flow positive, positive revenue growth in this environment. Everybody else is likely to be in the negative side or have taken a major hit. I mean, Twitter already told you that they’re going to be flat to slightly down. And…
DS: And that was for Q1, not…
AR: That’s Q1 March, a couple weeks. So think about how bad the hit they got. But Twitter has got a lot of advertising tied to live spending. They’ve kind of tied themselves into that. Events-oriented, like conferences and sports, these are things that Twitter makes money off of. You take away live and that’s, I mean, as much as finance and politics is – has got a very, super intense and user base. It’s not where advertisers want to be.
So, that’s where you struggle with it. And you’ve got the Jack Dorsey. We were just talking about before we started the call, the vanity fair piece on him. While you’re like what’s going on there? He’s living his best life.
DS: God bless him. Man does it all.
AR: Seven minute ice baths in the morning.
DS: Hangs out with Kanye and Kim?
AR: Yes. He is in good shape. It’s – whether, I mean, you do look at what’s going on at Twitter. And you’re like, how, like, why is this thing not more robust as a business model from podcasting to disaster relief, monitoring, et cetera that there’s so many things, but let’s not get into that, because that’s going to be a whole waste another hour and we’ve already done that. But yes, I think Snapchat is, I’d say, I came away less bearish than I’ve been, but I can’t touch the stock legislation.
DS: Valuation is still crazy.
AR: I mean, it’s, look, they’re all advertising businesses, at the end of the day, and they’re not yelps in terms of where they’re getting hit the hardest. Let’s – you’re not, let’s say, a media agency that had some clients spending $15 million, $20 million a year who’s just chopped things in half and you’re taking that hit as far as the creative’s, but they do have some things going in their favor, relatively speaking, but is it $5 billion – is it worth $5 billion more than Twitter as a company today? Because if you do the math on them, the Q2 is probably going to come in around $400 million, maybe a little bit less.
So, it’s a sequential decline, probably. I mean, typically, it is – there’s a drop off, but of a little note. But you get that like, you can sit here and model this thing out and be like, “All right, what are they going to do? Like what’s this year look like for them? $1.8 billion, $1.9 billion, I don’t know, $2 billion, how high can they go, but the front half is looking like $860 million, something around there.
So, after the growth of Q1, pretty serious revenue drop off for the remainder of the year, even without COVID-19. I mean, that’s – that was going to be an element. And you’re paying minimum $2 multiple, essentially speaking as everybody else. Now granted, they’re still growing. Like I would assume, Twitter’s numbers for the last 10 days, as far as advertising got notably compared to where Snapchat is.
I don’t know where Facebook is going to be, but it’s going to be down probably. Question is just how much? And then Google, I mean, I would think Google – so I haven’t seen the breakdown, but I would say, Google App still has a lot of business driven around travel.
DS: Yes. I can’t remember, it’s something like 8%, because I follow the travel stocks closely.
AR: Expedia got that investment, another Silver Lake.
DS: Expedia and Airbnb, the – you may have – yes, Expedia, Airbnb booking, which I’m long still got – I was able to go to just the normal debt market and get much cheaper debt, but yes, but I feel like it’s 8% to 10% of Google’s advertising is travel. I could be don’t – listeners don’t hold me to that, but it’s a meaningful effect.
I mean, it’s interesting, maybe the last thing I’ve brought up my colleague, Mark Pentecost before covers our tech vertical for pro on Seeking Alpha and he did a little extrapolation based on Snapchat. And he did some estimations, essentially of how much sequential growth Snapchat usually sees Q1 to Q2, and the – and then compare that to that guidance that they provided on call of 11%, 15%, et cetera, year-over-year growth, and said that there’s a looks, he just came up with a number of 20% shortfall versus what you might have expected without COVID. And so then you sort of back it into some of these other companies Alphabet might be flat year-over-year. Roku and Trade Desk both see double-digit growth rates instead of, like low double-digit instead of the prodigious numbers they’ve been putting up.
So, it’s just interesting, that snap is ultimately the first one to go in the pile, and it was obviously better than people were expecting. But it’ll be interesting to see how – what is unique to them and what is common as we get to all these other companies when they actually give the floor…
AR: I mean, they did come off a little bit yesterday like 5%, 6% after the huge, what was it 36%?
DS: Yes. And it’s down, I mean, it’s back down actually to around $16 a share. So it has pulled back. You were used to had it at $17, but it got – it did get up to $17 and then yes, it came down about $0.5 yesterday and a little bit more today.
AR: [Indiscernible] 23,000 people attended the live streaming class. I mean, since that’s a whole another – that’s another one where you can sit there and talk about, well, what’s going to happen in the gym industry and repurposing spend there? You’re not paying your subscription fee for your gym. Where’s that money going to? It’s an interesting pie.
I mean, there’s an overall argument that this is just going to last a lot longer than I expected. And that’s where you get into this whole stock market and a macro part, which is so hard, because you don’t – you can’t sit here and be discussing what their Fed exits look like. What I see Snapchat move the way it has on the back of the news the other day.
You almost want to sit there and say, “Okay, maybe just wait, there’s way too much going on in this market that’s tied to the intervention we’ve seen, and that’s just the dominant factor in driving price in anything.” Because if we’re dealing with a dynamic where, like we’re at a point right now cadence-wise with anyone who reports where you’re looking at like two months of pre-coronavirus for most of them and two weeks maybe, or like, let’s call it a week of, at least in the U.S. of like, notable coronavirus impact and then into the guidance where like none of you want to give specific.
I mean, like Snapchat just did, for example, and say, hey 11% this week from a rate that was 55% in February, where you’re like, okay, this is – the next quarter is going to be a drop off, where you have April is the worst and maybe, like some degree – like, you’ll be looking at June. You’ll be looking at May in terms of like, let’s say, some sort of, let’s call it rebound stabilization. And then it was like June – by – you’re literally talking by June to kind of get a sense of like, where things are leveling around.
I mean, is this entire summer a write off for everybody? I don’t know. You got to think about that. I mean, we’re still in this debate of opening things up and back and forth, but talking to people in the medical community, it doesn’t seem like anything is getting resolved anytime soon. And that’s where you get into this dynamic with – if the Fed has stopped mass liquidation for now, well, okay, what we’ve seen is unattractive assets. They didn’t go bankrupt. They didn’t – you’re dealing with a scenario where it’s like I have enough liquidity to not be generating revenue and through for this many months based on right now. And that was the initial type of reaction.
But the – for the last week-and-a-half, we’ve seen the resilient businesses getting bid up to the point that you’ve got plenty of making new highs. Where the distortion that exists, let’s talk about it from like, if you were looking at these businesses pre-corona, forget the impact and trying to let think about how it works out for the longer-term. You’re now looking at them and you’re being like, “Wow, what should I be paying for any of these names?” So, does anybody have a clue? I mean, is it – like every relative value type of gap like is – are all software stocks insulated in terms of valuation?
DS: For valuation, you need to know what earnings are going to be and that’s just as hard as anything else.
AR: And essentially, what type of multiple are you willing to pay? Because I can look at companies like Disney and say, all right, what’s happening? So you saw Netflix. Netflix was an interesting example. They’re reporting at the same time as Snapchat. And they beat – the sub number came in 7 million bigger double on pay subs. And I thought they actually gave you an interesting argument, “Look, we’re essentially assuming that the back-half is a slowdown relative to what we expected, because there’s a lot of pull forward that goes with this.” Because that’s something what you think about with a Zoom. You’re like, “If things start to open back up, what does Zoom look like usage-wise next year, year-over-year?
And that’s where we get into a Snapchat. We had the filters. We had – like it’s – I – let’s just say for Snapchat, you got to put them in, like I think the overall conclusion based on this is, you got to put it in the unresolved bucket category. Some good, some still question marks, because when I think back to it and we haven’t even gotten into this, the thing that I focused on the most and a little scatterbrained here on my part, but was TikTok.
Part of when I was looking at this Pinterest, Snapchat trade when I put it on last summer, to me, it was just Snapchat was on like a temporary camera filter boost. And you had this new lion coming out of nowhere in TikTok as a competitor to add to the existing Facebook and Instagram, and standard universe of competition that we had. And I don’t really know if any of the question marks regarding that were resolved.
And that’s when we started this call and you pulled up those, the rest of the world number, that’s where I look at it. I’m just like “I don’t, I’m not connecting to whether or not this is just a much stronger phenomenon with the youth outside of North America to the point, where that can continue to carry it a lot farther than I would have expected. But I would have thought that TikTok at the rate it’s growing, is benefiting at Snapchat’s expense. And it is like is that how you see it? Like is TikTok winning at Snapchat’s expense, or is that winning at Instagram’s expense? Like whose times to talk eating?
DS: I – this is out of my league. I would say, it is probably eating at both. I would say, Instagram’s audience probably tell us, it’s a little bit older, so is a little bit less affected than my impressions from TikTok and Snap is that, that’s both competing with roughly the same audience, whereas Instagram, I think, runs the gamut a little bit more.
AR: Okay. Fair enough. I mean, that’s a – that’s one way you look at it and say, I don’t know yet. I mean, I should have a better idea. I have a close relative, but TikTok, but I haven’t really bothered drilling her on it. But it’s something when – that from an investment thesis approach, what I’ve been looking at last year, if we didn’t have coronavirus, I would have really – I really would have been focused on whether or not after this quarter, I was going to ramp up going up like shorting a Snapchat, or covering it and just moving on, potentially even going along, but I couldn’t see that would depend on valuation, like relative to everybody else.
And I just don’t think, you don’t want to be shorting these, let’s call them resilient beneficiaries of COVID-19 till we get to the point that there’s some sort of incremental uptake in normalization, and we still haven’t seen that yet. And I think that’s like – that’s definitely a weighing factor if you – if you’ve seen a valuation benefit, because like you said, you own a bunch of, let’s call it, the hardest hit area travel – online travel stocks.
So, like what’s your thinking with online travel stocks? Because in theory, I mean, I remember, we discussed this last time and your rationale behind buying price line, but big picture, if you are in the camp that it’s going to be a big summer for camping and you’re in the camp that people aren’t going to be doing international travel, maybe they’re going to like the beach house close to them more, or like a getaway by the lake, then all these names still shape up for a better spending environment as things normalize a little bit.
But if you’re in the – if you’re of the view that there’s some sort of decent level of progress where people want to hop back on a plane again and move around the country, or go off to Manhattan and go to Broadway and going back to sporting events regularly, then you’re looking at the valuation of almost this whole bunch collectively and being like yes, this is not – like these are dangerous stocks, because the story narrative is less material to me than getting this whole timing of what’s happening, both in conjunction with liquidity in the market and like the – some sort of return to normalcy off of a base of zero in industries that are typically a critical part of day-to-day life.
DS: You’re saying that if we return to normal faster the – which stocks would be dangerous, the travel ones or?
AR: No, I’m saying, if you return to normal faster, getting excited about a Snapchat…
DS: Right, okay.
AR: …for example, here and be like what, video games and streaming great and stay away from all things tied to travel and X, Y and Z restaurants. But if people are going to – starting to dine out just 30% more than they have been for the last five weeks and that goes up again. 30% and like you’re – you don’t want to be in it. You don’t want to – the worst stock obviously is Zoom, if you believe in that.
DS: Well, so..
AR: But if you believe that there’s – but if you believe that it’s not a V-shaped type rebound in travel and leisure. And I’m not saying it’s going to be a V. I think, that’s definitely not happening, but something a step down from that. If we’re not even there, and we’re talking about an entire year of sub-activity like, let’s say, like if you don’t think schools are going to be in session physically next year, come fall September, the – all these stocks are probably long still.
DS: Right. Yes, I think …
AR:…everything stay-at-home media.
DS: And that’s – I guess, that’s and we should probably wrap after this. But I would say, my age, it’s hard for me to make a bet on any of those things. I don’t – I’m generally content to follow public health guidance into best experts. I could give you my sense. I would assume that we’re back in physical schools by September, I would assume we’re not – the NFL is probably not playing in front of full stadiums at the very least. So that’s sort of my…
AR: Yes. I like that. That’s a decent – it’s – I’d say, that’s a moderately bullish case on returning to normal.
DS: It’s – yes – and it’s a very – it’s not meant to be differentiated. I’m not trying to standout. And so – but what I – given that I don’t really know, I’m trying to just say, okay, let’s – I don’t want to be totally out of the market, because I just – I saw even in March, my inability to make manage everything to kind of stagger in. So, how do I try to give myself the best chance of having a chip in a chair in this market? And I just look at, all right, what company is going to be fine two years from now and the valuation is not ridiculous?
And so something like Snap is interesting on the one hand, because like all of these companies, I don’t know, actually, Twitter has plenty of cash, too, but they have plenty of cash. That’s not – I’m not worried about them or anything like that. But yes, they’re still burning money. They’re still – are they going to be profitable two years from now, for example? I’m not – even if we are at normal, I’m not sure. And so that makes it unless you’re expecting such an uptick.
And I guess that’s where the game here is, if you’re expecting such a change in their growth trajectory that it will make them their cost structure more appropriate and it’ll just make it easier to scale, which is not unreasonable, but…
AR: I mean, that’s kind of the argument they’re making. They’re crushing it beforehand. Everything we’ve been doing has been working well. Our costs are coming down, we’re cash flow positive. Our user growth was X, Y, and Z. And yes, there’s some things that are happening that are going to be more challenging. But we’re on a standalone basis outperforming.
And what we’ve – what we started doing a year ago, is working. And you couldn’t, on this call they provide a pretty decent evidence that that’s the case, because there’s also this kind of added benefit that they could sell to you in terms of – within the COVID-19 environment.
But you couldn’t come in and be like, wow, but what percentage is like your cameras, like from when you launched the filters last year and the Snap camera and all this and how much is that headwind? And like you said, like what kind of profitability are you going to get to? Because if you’re not turning into something notably greater than, than a Twitter, well, you’re already at $5 billion larger than – in market cap than them and look at the problems that they continue to have. And they’ve got Luke Skywalker leading them.
So it’s a hard – it’s definitely – I get your approach. Because you’re basically buying stocks at prices that they hadn’t been at in five, six years in industries like travel, and you’re buying the leading names. And you’re basically saying, I don’t know what’s going to happen for the rest of this year. I’m – whatever it is, it’s not going to be great.
But by next year, some level of normal is going to be returning, like I bought these things where I’m uncomfortable in a couple of years. And that – and that’s – there’s an element for what you’re doing, where – if liquidity dynamics change, like you said, it’s difficult to manage this shit. And I don’t think anyone really can.
And the dynamics change money does come out at the margin of your Amazon’s, Walmart, Costco, Zoom’s, all software, where’s it going to go? It’s got – it’s just like a discretionary pie repurposing just a little bit back to the way it was before this. It would have probably a disproportionate positive return impact on the types of names you’re owning, because nobody wants to buy them here. They were – people are predisposed to buying stuff with good news. And…
AR: …the actual, and like, that’s where you get the challenge of, like I said, like you look at it, I got into it. And the – by the time I looked at the value, I was like Jesus Christ, like Twitter’s the cheapest again and Snapchat’s 13 time’s sales. We were in the low single digits for almost everybody and like Snap was six times, like Snap was way our Facebook is two weeks ago and it’s doubled since then almost. Actually, it did double and then it came back down.
So that does – that is I think, yes, like you said, to wrap it up, like that’s the challenge here. I mean, like, I think we discussed that – you got different pies and everybody wants to get into the nitty-gritty. But you’re probably right now with these stocks, more exposed to variables that are out of your control, then maybe you are in the names that you’re in.
DS: Well, it’s – or it’s that there’s more steps to the process that you have to work through then do people travel or not, or do they travel – I mean, like you have to – and that’s where I – that’s what I think was interesting here was thinking through, well, what’s the audience and what does all that mean? But yes, I think there’s all these second, third fourth levels that you have to kind of think through.
AR: Yes. You want pure plays, typically, when we’re investing. It’s like, I want pure – pure play exposure is where you get excited about something and you’re – it’s a lever bet. And then if it goes wrong, you get hurt really hard.
I mean, I think that’s one thing to look at in terms of Amazon right now, where it’s – had all these businesses and it was like diversified in the sense, but people weren’t necessarily that excited about it versus Apple selling his iPhone and the services are tied to it a few months ago, or Microsoft with Azure and just enterprise, or something like hey, e-commerce and gaming, okay, and lot of competition and these. But all of a sudden the diversification of Amazon’s business has really come to light and the different pockets of the economy is exposed in almost each one of them looking like a positive pure play.
The ultimate pure play from work from home has been Zoom. And I don’t – I think even like the amateur hour investor right now, we’ll look at this and be like, if any really good news on the speed at which there’s a return to some level of normal is disastrous news for a Zoom stock investor. And you just kind of stepped down from there for other names. A lot of people were bitching about Netflix not beating by much.
I saw some stuff on Twitter where and I made a comment, but they’re like guys, when they doubled the net ads, yet they beat by a hair on revenue and like their guidance is like roughly in line with consensus. And I was like, “Look, bro, they beat by 7 million users. But that’s 3.8% of their user base now.” I mean, they’re pretty penetrated.
So when they tell you, because they didn’t make an argument on the call that they’re like, “Look currency headwinds is – was a drag for us. And currencies like a – Facebook is like a 60% non-U.S. – sorry, Netflix is a 60% non-U.S. revenue business. And you have like, let’s call it, 2%, 3% currency headwinds with $1 strengthening, and that 160% percent of your revenue versus, call it, like two weeks, two-and-a-half weeks above normal subscriber ads. So you’re getting like one-third of it you’re getting…
DS: Right, because it’s backloaded…
AR: …yes, it doesn’t even kick in, and the drag and if you get that benefit, and that’s a 4% beat. And then you’re talking about losing management’s coming out and saying, ”Hey, if things normalize faster, we’re going to sequentially see pressure from here, remainder of the year.” If they don’t, the pressure will be less and they gave you an estimate on sub-ads for Q2, and they said it’s complete guesswork, but we’re taking a shot.
And I think that’s kind of – I think we are in that – when you look at a Snapchat, it’s better and especially to be, but you’re just like, they’re totally guessing in terms of where things are going to be by, let’s call it, the end of Q2, because like the usage isn’t exactly going through the roof.
But the spend dynamics, I don’t think they’ve seen the – like I don’t think they have good perspective yet on where they’re normalizing and where the stock trades relative to everybody else, they’re getting a huge premium for that. It’s almost to a degree, Daniel, the opposite scenario of what we discussed with Twitter on when we did the Twitter call.
When a new Twitter was making some improvements, when you sort of things were going in their favor, but they still had certain monetization type of challenges. But it was no longer cheap. It was the most expensive in the whole space. And Snapchat is by far that player, again. I mean, yes, the revenue growth is probably going to be the best of all of them. But still the premium you’re paying, far greater.
DS: Yes. The market is happy with that, though. I mean, that’s what’s always funny what they…
AR: Yes, for a few seconds and then you get through these periods where, let’s say, valuations compress and all of a sudden, I mean, I was amazed at how far Snapchat and Pinterest and those names had fell in, let’s call it March, because what had made more sense to me when Disney and Home Depot and Nike and I did the – this too shall pass portfolio, which within a week was up 30% and stuff like ServiceNow and Salesforce and whatever wasn’t doing as well and the SaaS’ weren’t doing as well.
And then all of a sudden, that to me, had made some good sense. Then all of a sudden you get this last week-and-a-half, where Amazon goes up 25%, Shopify, I mean, I don’t remember the last time, I’ve had a move like that and it’s not that I’ve been short. I was up 30% on Shopify and then almost down 50%. That’s in a span of two weeks, and I’ve been short the stock on and off, since the beginning of January.
I mean, it’s a small position, relatively speaking, but still, you’re just like, what the [indiscernible] is this? Why is this thing moving so much? I mean, is that – but they come out with using, hey, our average traffic the last week-and-a-half is what it was on Black Friday. And that’s where you’re dealing with these things of usage pattern behavior changes and people started to extrapolate financial impacts around them that can be what can vary wildly. And that’s without digesting the Federal Reserve balance sheet that’s up what 80% in six months.
I don’t think anyone’s even bothered discussing that what was the Fed doing from September to February – mid-February before we even got into this craziness now? So there’s those variables where maybe what if they come back into focus that these stocks that have been stay-at-home defensive face that more of a headwind than your Pricelines and Expedia’s you’re doing or even Disney?
AR: Good old Disney.
DS: Disney still hanging around $100 a share. All right.
AR: It’s boring, but you got to feel better about them over the long-haul.
DS: Yes, yes, no…
AR: That’s what is it versus Netflix, which has surpassed it recently. I’m – what surprised me is a lot of that, I mean,– let’s not go any further, like you said, let’s wrap it up, but that – these companies aren’t issuing stock here.
DS: The Zooms and Netflix.
AR: I – Netflix did like a $1 billion in debt yesterday. I was just like, why don’t they issue any equity? It just don’t understand.
DS: I never understood. I – we should set that aside as a different discussion. But yes, Netflix…
AR:..or Zoom, how is it Zoom at $50 billion, tried to raise $3 billion in cash?
DS: But Netflix, specifically, they’ve – I mean, I remember, Whitney Tilson, is just one person, I remember being public, because he’s had exchanges with Hastings in the past, but why does Netflix always raise debt and not equity, it’s always been a strange?
AR: There has been a logical reason for them before. But I’m saying there’s points where you’re just – you’re a little bit surprised as because they do convertible. I mean, convert has both characteristics.
AR: But you’re just surprised that they don’t look at this at $20 billion and say, let’s raise $5 billion to dilute – with a dilutive pure equity raise here.
DS: Yes, yes.
AR: You just don’t think your stocks, Shopify did that. Shopify raised $2 billion. They did huge equity offerings in the last year at significantly lower than where the stock price is. Then you got these companies that recently have done equity offerings, at purely –just assumingly distress levels, and you’re like, why didn’t they just wait, why don’t they just wait two more weeks?
DS: Yes. It’s – I mean, and that’s timing and also just the – I forget what the phrases that people have used, but the fact that’s, if you take a step now, it actually changes your future path. It’s not – it’s path dependent to some degree. And so raising the money at one level and not another makes a big difference to how the story plays out. All right, that was good. There are lots of good stuff on Snap and on the Internet advertising with a lots of good stuff thrown in.
I think we disclosed as we went, but I just will wrap up, we mentioned Disney, Thor, Berkshire in addition to Pinterest and Google, those are longs for me I think you’ve – you’re still short shop you said and we mentioned Facebook.
AR: Trade Desk, I was a little bit…
AR: …Facebook long.
AR: …what else? We didn’t discuss anything else. No position in Snapchat, no position in Pinterest even, no, that’s just Facebook.
DS: And not [indiscernible] we’ll see.
AR: Yes, tempted, tempted, tempted to pull the trigger long on Twitter.
DS: Great management.
AR: But earnings are next week, let’s – maybe I’ll make a decision.
DS: Well, have you ever go on Twitter? We could try to get Galloway on, and then we can commiserate with him. Maybe we make that as a goal.
AR: Well, he is just going to tell you that Twitter is going to 60 and Jack’s with The Walking Dead and that…
DS:…he’s got the silver Lake…
AR:...private – they’ll take it private – silver, they’ll take it private. I don’t know why you would even try to do that here, unless you have a really good perspective on where things are going picture-wise. I just haven’t seen them doing, let’s not start with Twitter. I just haven’t seen them do anything where I think that they they’ve had a eureka moment and how they’re going to change the way the business is managed.
DS: Yes. So, I’m starting to see some minor tweaks that are kind of interesting with how the site works. But yes, I hear what you’re saying.
AR: No, a subscription service or, they should be hosting the content to every podcaster, who is nonstop promoting, I’ve discovered all this content on Twitter and forget your pivot and Kara, there’s just so much other stuff you’re listening to. And it’s all coming from them advertising it on Twitter. John Krasinski has some good news now, that, why is it not a Twitter show? What Internet-based platform could benefit more from a show called Some Good News Now?
DS: It’s very true.
AR: I couldn’t have thought of something – and when I saw him and I discovered it, the first episode out there, this is why I don’t own this stock right now, because it’s on YouTube and I found it on Twitter. How have they not cut him a check. I talked to my brother and he was the influencer marketing space and he is just like, these guys are [indiscernible], he’s already got 30 people lined up to want to work with him brand-wise. It’s a waitlist in terms of being able to get in the door.
So, that stuff, you look at Twitter, because it’s busy. And there’s so much going on, but I’m not I’m not engaging with any ads on tour. I’m more likely to engage with ads on just about any other place then on Twitter. It’s just free publicity. It’s a PR firm.
DS: Okay. I’m going to jump in, though, because I do think we could go, I hear what you’re saying. But I do think we can call them on Twitter.
AR: So, let’s call them that way.
DS: So, all right, good stuff, Akram. Thank you as always, and yes, good stuff on Snap and Internet advertising as a whole. So take care.
AR: Alright, bro. Take care.
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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Daniel Shvartsman is long PINS, THO, GOOG, BRK.B, BKNG, and DIS. Akram's Razor is long FB and short SHOP. Nothing on this podcast should be taken as investment advice.
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