A Deep Dive Into Tesla Earnings
April 28, 2021
Tesla reported record first-quarter results with vehicle sales climbing despite a delay in its revised Model S and chip shortages. The numbers, however, may not be as good as they seem when you look at the special circumstances that led to the company being profitable. Steve Symington joins Dan Kline on Wednesday’s “7investing Now to break down the numbers and look at what’s next for the visionary automaker.
Sam Bailey 0:16
Welcome to 7Investing Now, a show that teaches you how to take a long term view on investing by better understanding what’s happening in the market now.
Dan Kline 0:26
Good afternoon 7Investors and welcome to the Friday edition of seven investing. Now my name, of course, is Daniel Brooks Kline, I’m being joined today joined just barely by Steve Symington. Steve was having camera problems, had to switch out his camera. I would say Steve clicked in at 11:59 and 59 seconds. Thank you to Sam Bailey, who was going to sit in and sort of chat with me on the show until you could figure it out. But Steve, welcome to the program.
Steve Symington 0:56
Well, thanks for having me. And to clarify, we’re not doing the Friday edition on a Wednesday, we’re doing the Wednesday edition on a Wednesday,
Dan Kline 1:03
We are doing the Wednesday edition of 7Investing Now. In fact, I almost said the last one of April. And that’s not true, either. There’s one more in April, I am all messed up with time, Steve. The world has seen both moving really quickly and standing still. I’m picking my mother up at the airport tomorrow. And it doesn’t feel like I haven’t seen her since last January. But here’s the reality. I haven’t seen my mother in 14 months. I don’t know that I’ve ever previously gone a month not having seen my mother.
So time is very strange. I’m very much looking forward to the summer. Steve, do you have any like sort of normal summer plans? Vacations, trips travel?
Steve Symington 1:44
Yeah we’re actually moving my mother in law down to Arizona in a little over a month here. And then actually later this summer, we’re going to try to go to Mexico, but we’ll see how that goes. We’ve tried a couple of times. We had a trip planned, kind of in the middle of the pandemic and obviously had to cancel that. So we’ll see if we can reshoot for that the end of the summer.
Dan Kline 2:05
Steve, before we start the show. Have you told your mother in law? You’re moving her to Arizona?
Steve Symington 2:10
No, she’ll figure it out.
Dan Kline 2:13
That of course is a joke. Yeah, I’m looking forward to travel. I will briefly be in Mexico in the middle of August doing a stop in Cozumel. on a cruise ship. I’ve heard some great things about Mexico all inclusives, even during the pandemic. A lot of them doing testing, and things like that. A ton of travel on my plate, we will talk about that. You’re going to see the background behind me on many future shows is going to be hotel rooms. And then eventually when the world opens up, it will be beaches and public places. And probably Starbucks more often than not given internet connections.
But we’ve got a jam packed show, we of course would like you to say hello, we’d love your questions. We’d love your comments. We’re going to open up with a really interesting quarter by Tesla, then we’re going to talk about something that happens in the stock market that makes no sense. We’re gonna talk Pinterest earnings, the numbers are good. And of course, shares are down by quite a lot. Then in the homestretch we’re gonna talk Apple’s big privacy change. Now the interesting thing on that one, well, not the interesting thing is, it clicks in with the new version of iOS. I have an iPhone, it hasn’t even asked me to do that update. So that’s going live, but I’m not exactly sure who it’s going live for.
Let’s kick the show off with something that always gets me in trouble because I am. I call myself a Tesla owl. I can’t bring myself to buy it. I know it’s a good company. But I just don’t like Elon Musk. I’m one of those people. I don’t want to see him host Saturday Night Live. It’s a pandering move, but their numbers were good-ish. Steve, why don’t you explain some of the top line numbers here?
Steve Symington 3:48
They were good question mark? Tesla was really interesting. In that it wasn’t sort of this blowout quarter that everybody had kind of hoped for, right? We saw quarterly revenue up 75% year over year to about $9 billion. And they produced a gap profit, in the process about 4 to 38 million. I think their net income on an adjusted basis, excluding stock based compensation was like 1.1 billion. But there’s some caveats to that.
Dan Kline 4:25
And we’ll get to those a little bit later
Steve Symington 4:28
We’ll touch on those. But it was an all right quarter, I guess nothing crazy, but it was a very busy quarter. And both from an operational and just a numbers cluttering things up standpoint.
Dan Kline 4:42
Their vehicle delivery number was really strong. But Steve, their forecasts are incredibly strong. Do you believe them?
Steve Symington 4:51
Yes, I guess longer term. I think I would take some of their forecasts with a grain of salt but they’re looking at more than 50% vehicle delivery growth in 2021. Overall, based on their guidance, that means minimum deliveries around 750,000 vehicles this year. So people always kind of take these numbers with a grain of salt because Tesla has a long history of over promising and under delivering, but that you could also arguably say, that’s part of the reason why they’ve been able to achieve what they’ve been able to achieve is setting lofty goals. And nobody’s particularly shocked when they fall short of these exorbitant numbers that they hope they would achieve. So we’ll call that a line in the sand and just see if they cross it when the time comes.
Dan Kline 5:47
I don’t actually think these numbers are exorbitant, so they’re predicting 50% vehicle growth, they’ll have the revamped Model S, they’ll have the Model X online, they’ll have more production capability, they’ll also have a world coming out of a pandemic, I gotta admit, I am shocked that people are buying Tesla’s during a pandemic, that seems to me like an incredibly indulgent thing to do in a time of uncertainty. But as that uncertainty goes away, Steve, I’m actually pretty confident that 50% I actually think, is them setting setting the bar a little bit low. Am I wrong?
Steve Symington 6:21
No, you’re not. And I guess longer term when we look at these numbers Elon Musk said, hey, there’s a chance the Model Y in 2022, could be the world’s best selling vehicle. Oh, okay. You know, maybe that’s quite possible. But the thing that I think we need to keep in mind is that the growth that they just achieve, the 75% year over year was on vehicle deliveries more than doubling year over year. So we saw average selling prices decline a little bit, but that’s largely due to the fact that growth was achieved without the help of Model S and Model X sales, which were down like 83%, because Tesla essentially pause them because they’re going through design refresh for those two very popular models.
So the Model S and Model X are much more expensive than your model 3’s and Y’s. The Y is the lower cost SUV that they have high hopes for. And they’re also working on new plants in Texas and Berlin and they need to roll out. So there’s a lot of focus on I think the Berlin plant was the end of this year, they hope to ramp it up. But the model Y sale should kind of ramp as well in May. So there’s a lot of work being done and a lot has to go right for them to meet all those those goals. But I think they they do have a history of effectively ramping production in that sense. And demand is definitely not the issue. So that’s what I’m really kind of impressed by.
I wouldn’t say shocking that people are still buying Tesla’s but look at vehicle sales overall. You have Lithia accelerating acquisition efforts because vehicle sales are through the roof. And that’s part of the reason we have chip shortages and etc. But yeah, vehicle sales are strong, people are buying Tesla’s.
Dan Kline 8:04
So this is one of those, let’s call it red flags. We’ll get to the caveats in a second. But they grew vehicle sales by 100% in the past year, but they only grew their service ability by 28%. This is a company with incredible brand loyalty. But when our very own Anirban Mahanti dropped off his Tesla to get it serviced. It didn’t actually take that long, but it was possible it was going to take weeks. Now they did loan him a Tesla while he was in service. This does seem to be like one of those scenarios where if they get backed up in service, they really run the risk of sort of bleeding off some of that loyalty.
Steve Symington 8:45
Mhm. Yes. And no. I think there’s a couple things to note here. Yes we did have this significant ramp in vehicle deliveries and sales, and less significant ramp in service centers. So you think, okay, what’s the delta here, but one thing that is really important to notice is test loyalty that I think is a lot stronger than most people realize. It’s sort of that adage that, for example the more you love someone, the more you’re willing to put up with their crap. It feels weird to say that in that sense, but it definitely applies to Tesla where people love the brand so much that they’re willing to say I understand that there’s a little delay here, because you guys are in growth mode, etc. So people can handle that.
But at the same time you look at Tesla included just a little paragraph in their investor deck that talks about that they use Tesla’s business this growing and volume and improving financially and kind of as a function of increased new car deliveries, but they’re also focused on expanding their global service capacity. So I think that’s something you’re going to see them sort of pay more attention to as they grow, so it should improve their customer wait times and operational efficiency.
Dan Kline 10:10
I do worry about this because Steve for about six months, I decided I’d be a BMW guy. I usually drive like the cheapest car that’s functional I can get. But I bought a used, a very used BMW, and it needed some servicing. And I brought it to the service center. And the service center basically has a Starbucks inside it. There’s all sorts of opportunities and things to do while you’re waiting if you’re just getting like your oil changed or something. And when it turned out, I needed something that they had to get a part, they sent me home in a car nicer, by a lot than the one. I didn’t want them to finish my repair because I was in a much nicer car.
The standard when you get to the price you’re paying for a Tesla is pretty high. And I do think they will have to get there. And I’ll give the example my aunt and uncle live in Vero Beach. That’s over an hour from here and they had to drive to West Palm to get their car serviced. We are going to get to your questions and comments. So if you want to talk about Tesla, you got another couple of minutes to get your questions and comments in. But Steve, let’s talk about those red flags or the caveats because they’re very Sears like. Sears in the past decade had one or two quarters when they reported a profit. And they were all excited at the time. Oh, we had a profitable quarter. We’ve turned it around. No, they sold diehard batteries. And that was a one time sale.
And sometimes it happened with real estate sales and other things where not from operations, they were profitable. So here’s what happened with Tesla. They still had $518 million in revenue. More than their profit amount from sales of regulatory credits during the period. They also recorded $101 million from, let’s call it manipulating Bitcoin because that’s clearly what Elon Musk has been doing. Now, I’ll give the argument our own Maxx Chatsko made in our slack. He basically said this is shrewd taking advantage of using the government to pay for your growth. But when these regulatory credits go away, is Tesla profitable on 50% more sales? This has been a company that said it’s profitable for I think it’s now six straight quarters. It really isn’t. As a shareholder as a shareholder do you think they can achieve actual profitability?
Steve Symington 12:32
Yes. Don’t even need to pause there. To Maxx’s point. And actually Anirban our colleague wrote maybe one of the best Tesla takes I’ve ever read on this quarter and his longer term model. Checkout 7Investing.com, his advisor updates, called would Dr. Box approve of my model? That’s a reference to a statistician, right?But check out the Tesla Model article that Anirban wrote. So to Maxx’s point, yes, these these credits are transitory in nature, right? But it’s also non dilutive capital that’s available to Tesla to use however it sees fit andwhy not take advantage of that.
The other thing to note is this quarter also included if we’re gonna count positive catalysts for net income, we also need to include some of the negative catalysts. So we also had 299 million in stock based compensation to Elon Musk alone, due to achieving market capitalization and operational milestones. So they would have actually excluding Elon Musk’s stock based compensation expense this quarter, which will kind of be a one off for next several quarters, so we’re gonna have those, but they will go away eventually. But it’s sort of like without that as well, they would have been profitable even without regulatory credits.
Once these things sort of level out, and Tesla is actually enjoying operational leverage at scale. Right now, as they continue to grow. I think they are solidly profitable. And there are other things we can talk about the minute that can help juice that profitability further. So yes.
Dan Kline 14:14
After a couple more questions to Steve, we’re going to take a comment from Max Lucas, the first comment from Zulfiqar and a comment from Gregory. That’s sort of an in house programming note so I can let Sam know what we’re doing. So let me go through a couple of final questions. Are you a little bit worried about the volatility of the fact that Tesla’s sitting on $2.5 billion in Bitcoin?
Steve Symington 14:37
No, no, I’m not. I mean, you look at their cash equivalents. I think they had a $2.2 billion decline in cash equivalents this quarter. But they bought 1.5 billion in Bitcoin, which is now worth 2.5 billion, I think they sold 101 million in Bitcoin sales that they sort of sold, but you’re also talking about a company that has like 17 billion in cash equivalents on their balance sheet. Still, this is a small fraction of what they have. I’m not worried about volatility from a bit Bitcoin standpoint. And I think neither are they for good reason.
Dan Kline 15:11
Tesla has done a really good job with its balance sheet. So my question a year ago, was basically like, is Tesla gonna run out of money? Are they going to keep having to raise money? Now, the reality is, if I was a shareholder, I’d actually encouraged them to raise money, I actually think they should be sitting on more cash at a time where their stock is so high. The problem there is you do have a CEO, who is paid entirely in stock based compensation. So he actually has a lot of incentive to not do things that lower the stock price, which is partially why I prefer to see a mix of how CEOs get paid, I don’t want short term stock price and short term numbers to be the driving factor. But Tesla has always been a this quarters numbersa nd if we don’t make it Oh, it’s next quarter that matters.
So we’re gonna take a bunch of your questions. We’ll start with Max Lucas. And Steve, if you wouldn’t mind, I’ll read this one, actually. “What do you think will be the largest part of Tesla’s business in 10 years?” Steve, I’m going to go with flame throwers and boxer shorts. No, I’m kidding. What do you actually think it’ll be cars, right? It’s not gonna be solar power.
Steve Symington 16:23
It’ll be vehicle sales. And actually, I like this part of Anirban’s take on the quarter, when He kind of looks forward, he was kind of assuming maybe 10 to 20% might be energy. At that point going forward, I don’t think energy is going to over time, you know, Musk says he’d like energy to kind of rival the size of their automotive business. But in the next 10 years, as Max suggests, I think it’s going to be still automotive, like vehicle sales.
Dan Kline 16:52
Solar Power is also a commodity. And I understand that Tesla has been very, very innovative with batteries and other things. But I tried to do a solar roof on our other house, we weren’t allowed to our HOA just doesn’t allow it, which is idiotic, because we don’t live there. So we would be making money by just generating power, it would be good for the community. That being said, in most markets in Florida, where you have a roof, solar is just a commodity, and you don’t really have a choice, like you either find a company that’s willing to finance it for you at 0%. Or your electric company will finance it for you. And you don’t get to pick who does it. So it’s whoever’s partnered with it, or you can do it yourself, which I can’t, but some people could, you know, and you hire an electrician to do the last piece of it.
So I don’t think anybody’s gonna make a lot of money in solar, I think it might be an interesting customer loyalty tool for Tesla. I think the idea of being able to power your Tesla, by plugging into your own solar grid is really, really interesting. But I don’t think that’s going to be a material part of the business. Let’s take the first comment from Zulfiqar. Sam, if you could, “Another would be interesting to see is will Tesla be a leader in producing the cheapest electric cars? My question is will the profits keep increase based on volume?” Steve, I don’t think Tesla wants to sell the cheapest car. Am I reading that wrong?
Steve Symington 18:09
No, I don’t know. They want to sell a car that pressures traditional automakers, right? I wouldn’t be surprised if we eventually see maybe a model two right? Years from now coming out. They’ve talked about wanting to produce a $25,000 electric vehicle. And I think that’ll happen. Will it be the cheapest car, I don’t particularly care. I care as long as it’s affordable relative to a comparatively priced sedan, in the internal combustion engine realm,
Dan Kline 18:39
right, I think they’re gonna hit Buick 300 prices or a loaded Toyota Corolla prices. But I think you’re gonna see Nissan and Ford and who knows whoever with $17,000 electric cars, I think you’re already seeing short range ones, you can pick up a Nissan LEAF, a used one, you can pick one up for four grand like we’ve thought about it, because it’s a great short range vehicle, the only negative is I don’t own where I live. So installing 220 to charge it quickly, is not super efficient. And when you only have an 80 mile range, and the regular charge gives you five miles per hour of charge. It’s not a great delta in terms of my son going back and forth to school.
But there’s going to be innovations there. I think Tesla will get cheaper, it will get affordable to the point that someone like me who considered the model three, and then one I didn’t have an outlet to plug it into and two the model three wasn’t really $35,000 it was closer to $45,000. So 35,000 was a lot to spend for a car but with the resale ability and the used market it’s an asset more than most cars. I thought about it. At 25,000 I might do it. We’re gonna take Gregory’s comments, which might hit a little bit of areas we’ve already touched, “Discuss the future of Tesla’s Software as a Service If you want to hit on robotics or AI” they’re gonna make a lot of money selling you software but Steve talk about it.
Steve Symington 20:07
Right so um, so discuss future Tesla SaaS Software as a Service, energy storage, solar robotics AI. So let’s, let’s take them one by one, right. So solar deployments are actually kind of skyrocketing right now. I think I looked at megawatts of solar deployments, megawatt hours of energy storage solutions. They were up 76% and 163%, respectively, over the last quarter, so they’re kind of soaring even though Okay, commod ity, right. But solar deployments will, I think they will be material to Tesla’s top line, and will sort of be part of this broader kind of broader ecosystem of Tesla products, right?
And they were talking about making the solar roof and their power pack kind of part of it, this is a combined deal no matter what. So they’re going to take advantage of the internal battery development program. So that’s gonna be a big deal. Battery development innovations are not only going to extend range for the cars, but also provide storage and power that you can return back to the grid maybe. And power for your house, software subscription is going to be a huge deal, right? So at the moment, you can buy the full self driving, add-on for like, 10 grand, and not everybody ops for that, you know, they’ll do sort of the standard self driving package, but the full self driving package, you’re gonna fork out a moderately priced use vehicle extra, on top of your new vehicle, Tesla price, right?
So they have talked about, in this quarters conference call, they talked about rolling out a full self driving subscription service that might make it more accessible to everybody. And a lot more people might be interested in paying for things as a subscription, rather than forking out 10 grand up front, and this is sort of the same thing you saw in the software world. You know, with Adobe, for example, you know, pay you paid $700 for Adobe, or do you pay $29 a month for for their cloud program, you know, so, yes, that’s gonna be a big deal as well.
Dan Kline 22:15
And there’s so many interesting models they can do because they could do the Peloton model where you just pay monthly, they could also do the I don’t care about self driving when I drive around town, but hey, I’m driving a 10 hour trip. Can you can you set up the self driving and I pay it might cost me $300? or whatever it is. There’s a lot of optionality there. We’re gonna take one more question from Daniel Kern, and then we’re gonna close out with one last question from me. Thank you to everyone who’s been asking questions, we appreciate it. “I joined late and maybe missed it. But did you guys discuss China’s rub with Elon?” No, we didn’t actually talk about this. I don’t actually think this is that big a deal. But Steve, are you worried about China and Elon? Basically, the Chinese government isn’t ordering Tesla’s they’re ordering, you know, homegrown brands. I don’t think that’s that big a deal.
Steve Symington 23:00
So there were some allegations last month that, you know, is Tesla spying on us in China and and they were calling sort of Tesla an arrogant brand and they’re sort of favoring that. I’m not too concerned. I think people still, you know, kind of want Tesla we’ve seen similar concerns with China boycotting American brands elsewhere as well. Just because of broader geopolitical.
Dan Kline 23:26
Yeah we saw some pushback on Disney’s Mulan. Starbucks, this has popped up from time to time but here’s the reality. The emerging upper middle class in China wants their Starbucks and they want their Tesla’s obviously, those are two very different price points. You could buy at least three frappuccinos for the price of a Tesla. So I hate when people make Starbucks is expensive joke. So I can’t believe I just did that. Steve, one last question. And then we will take your questions on Pinterest, or anything else you might want to talk about. Are you worried about Elon Musk hosting Saturday Night Live? I feel like he could go out there and go on like an anti vax, you know, right? Or he could like insult his workforce. Is it something that worries you?
Steve Symington 24:11
No I mean, it doesn’t worry me. I think there could be some fireworks. They’ve talked about several members of SNL cast sort of being annoyed that he’s going to host and they talked about how he shouldn’t do it because this was a blowout quarter. Why should Why should you do that? I don’t really particularly care.
Dan Kline 24:30
He’s a media personality. That’s gonna bring different eyeballs to Saturday Night Live.
Steve Symington 24:34
Everyone will watch that episode like that no matter what and I mean, whether a cast member decides to go rogue and and check him like live or whether he decides to do something crazy live. I don’t know, I’m not particularly concerned about SNL.
Dan Kline 24:51
I think the reality is when they put a non actor on, they tend to put the person in very safe situations. So I doubt he’s coming out and doing an eight minute Chris Rock monologue like one of those monologues where he takes questions from the audience that are planned or there’s a song so they’re not going to expect Elon Musk to be an actor. Look, I worry about him on Twitter, I, he’s definitely done some things that could alienate large segments of the audience that I think would be the biggest Tesla concern, as a shareholder. D wants to make sure that we talk to Anirban about Tesla. I’m actually gonna record something tonight with Anirban for a show probably next week. And that’s not our core topic. But I will make sure we do three or four minutes for a show next week with Anirban talking on Tesla, because it is his biggest position.
We invited him to this show, but it’s something like 230 in the morning. He actually said like, if I happen to be up, I’ll join you. And we’re not going to press him too often to be doing this. But Steve, before we move to what we’re watching, we are rapidly approaching the first of the month, we’ve put the finishing touches on our picks for next month. If you’re a member of 7Investing on May 1, you’ll be sent a shiny new email, Steve, what’s in that email?
Steve Symington 26:13
The shiny new email on the first will contain our 7 new recommendations. So we task each of our lead advisors including you and I, Dan, with answering the question, what’s our best stock idea every single month, and what’s the best idea we have in the market and that’s what we release on the first. So that’s what what everybody kind of looks forward to on the first of the month. And later in the month. We have subscriber calls. We have most intriguing ideas from all of our past recs. We have lots of different stuff. But if you want to join us just go to 7investing.com/subscribe. Pretty easy.
Dan Kline 26:48
$17 a month $170 per year many of you watching our members. As members, you get an affiliate code, this is a great time to tweet out that affiliate code for every person who signs up, you get a free month, if you tweet out @7investing and if you tag us in those or if you tag @worstideas7 or @7InvestingSteve we’ll retweet those because some of the best members we get are friends of our members. You’re the best advocates for why it makes sense to join the service.
You were sitting here at noon on a Thursday afternoon on a Wednesday watching this show. Many of you are members, not all of you are members and we appreciate that. But that being said, Steve, let’s move to Pinterest. The numbers were really, really good. And of course the stock is down. We’ll talk about that in a second. But why don’t you give us the overview of the numbers.
Steve Symington 27:41
Right? This is sort of that that classic like Yeah, it’s great! Stock selling off like that just seems silly. Down 12% right now, despite technically exceeding Wall Street’s expectations. Revenue was up 78% year over year to I think 485 million. Adjusted earnings of 11 cents per share those both beat expectations were 474 million and 7 cents per share, respectively. There was some talk, however, that Pinterest monthly active users climbed only 30%. year over year to 478 million I think Wall Street was looking for closer to 480. Kind of a silly criticism. But one nonetheless.
Dan Kline 28:22
Let me jump in. Pinterest isn’t Facebook, it isn’t even Twitter in terms of its total addressable market. I find Pinterest awful. It’s never a format I ever want to engage with information in. I understand if I cared about home design or looking at different shirts or whatever, like maybe it would appeal to me. But do you think it’s possible that they’re hitting the end of their US runway? I know, there’s a lot of global growth still out there?
Steve Symington 28:50
I don’t think they’re hitting the end of it. I think they saw some acceleration during the pandemic that, that maybe, you know, we’re gonna see a deceleration in user growth. And I think that’s the concern. The other thing we need to keep in mind is the stock had nearly quadrupled over the last year leading up to this earnings release. And even now, it’s still up more than triple where it was this time one year ago. So I mean, its outlook was solid, its calling for second quarter revenue to more than double. But it’s also calling for global, monthly active user growth to decelerate to the mid teens percent range. And to be about flat in the US. I think it will grow steadily.
But I think this is sort of an expected deceleration, sort of as the world reopens, and people spend less time on Pinterest looking for recipes or home projects or whatever. But this is a case where you know you’ve got a stock that’s more than tripled even after today’s drop. It’s trading at 27 times trailing 12 months sales, a little bit steep. People just wanted it to crush every metric. It didn’t quite do that. It wasn’t the blowout quarter that everybody wanted for it to continue rallying and that happens. These kinds of pull backs are healthy, when stocks rally up hard like this, and as much as everybody wants to see their stocks only go up. That’s not how the market works.And I’m not particularly concerned for the health of the business, call it a healthy pullback for a stock that’s rallied hard.
Dan Kline 30:16
And I do think in a post pandemic world, people are going to be posting less DIY projects, but more vacation photos and more here’s how I set up my tent or whatever it is. The number I found most encouraging, but I think you have to take it with a grain of salt. Is they’re forecasting that while international growth will slow to the mid teens, the revenue will go up 105% next year, that’s their forecast. Why is this important? Because Pinterest generally is making pennies compared to dollars on its overseas users. They have not monetized these well. But when I say grain of salt, I don’t have the numbers in front of me. But if I was making 13 cents per 1000, versus you know, two and a quarter in the US, and now we’re making 26 cents per 1000. There’s a long way to go in terms of international monetization, not a Pinterest only problem. A problem for all of social media.
Steve Symington 31:08
Yeah, yeah. And that’s great.
Dan Kline 31:11
iOS users will now have to, and this is when you download the next version of iOS, which has not been available for me yet. So you must give explicit permission for apps to track their behavior and sell their personal data such as age, location, spending habits and health information to advertisers. I don’t think it’s as big a deal for Pinterest, because most of what you’re posting on Pinterest is self selecting you for advertising, and they’re still allowed to do that. But Steve, do you think this will be a little bit of a drag at least on Pinterest?
Steve Symington 32:10
Yes, and no, I think people are assuming that almost nobody’s going to opt in, you know, it’s like, “well, of course, you can sell my personal data.” People don’t always want that. I don’t think it’s as big a deal as people are making it out to be, you know, for Pinterest and other kind of social media companies that rely on advertising to fund their otherwise free products. You’ll see fewer personalized ads, but I think digital advertising will still kind of find a way to use artificial intelligence and machine learning, in particular, to present relevant ads to you and get these products, I think digital advertising is still the sort of wave of the future.
Dan Kline 33:02
I really like what Apple’s doing. But I will probably opt in. What I would prefer, though, and Google does a little bit of this, but Facebook doesn’t do much of this. I would like the ability to say, I know I looked for couches, but now I bought a couch, stop selling me couch ads. That should be implicit and easy. I’d like to be able to say I don’t want political ads or, you know what, I prioritize local restaurant ads, please give me local restaurant ads, or concerts or, or whatever it is, I think there can be a lot more opt in. That being said, and this is a lesson for us at 7Investing as we build out our website as well.
The history of people being willing to make those choices is actually really low. My friends at Microsoft, who all no longer work at Microsoft, went through three or four iterations of an MSN homepage, where you could really set and pick your content and no one did it. So the reality is, we actually do need algorithms to do this for us. I want the best, most focused social media experience possible. Now on Facebook, I do think that means opting in to letting it serve me ads based on my choices. The problem with that being is Facebook has been explicitly evil with what it does with some of its data. But um, do you think this is going to be a big deal? I think it will be a noticeable deal for Facebook, but I don’t think it’s going to be a giant deal. Do you do disagree?
Steve Symington 34:29
Yeah, noticeable but not giants a good descriptor for the current situation. They are large enough and innovative enough and have enough smart software engineers where they’ll find ways around the way they’re handling this. And I think this is part of a broader shift in less intrusive, digital advertising in general. And that’s something that Google, your Magnite’s and even your Criteos of the world, your digital advertising retargeting all these companies have expected is on the way, right. And they’ve been sort of hedging their businesses as a result and the way that they actually target ads. So I don’t think that this is a huge deal. In the long term for the viability of mobile advertising and online advertising.
Dan Kline 35:22
I would agree, I think we’re in kind of the second inning of the digital advertising game, and I pointed this out on on Monday’s show. Companies have to think about experience. So I’m a Hulu customer. And Hulu shows you three four 30-second commercials when you’re watching a show, if it’s an hour show, maybe three times, the problem is it might show you the same commercial three times in a row, it might show you only two different commercials, the entire thing, it is way more effective to show me a 30-second commercial once, or if it’s the same brand show me three different commercials for that brand, than it is to get me tired and angry at the brand. Because I’ve literally seen the same commercial eight or nine times in an hour.
I think we see that repetition everywhere, I’ve seen the same problem, you know, on services like Pluto and the and the the TiVo channel, and the Roku channel. So I do think we have to get better, we have to get smarter, we need to have that little ‘Hey, I don’t want to see this ad’ box. And maybe I’m not changing my insurance company, I don’t need to see insurance ads. It doesn’t. It doesn’t help if I if I ever do change my insurance company, I’ll try Lemonade. I want my ads to be content. I’ve bought things on Facebook, which almost always never works out.
But I’ve bought things on Facebook, because Facebook realized that I’m a sucker for coffee makers. So they kept sending me different coffee makers. And I purchased at least two: my cold brew maker I bought through Facebook, and my like pod machine that makes espresso which is excellent, Son of a barista. It’s a really, really good product comes with like 100 pods, it was like 90 bucks. Like it was a really good deal. Facebook showed me those often enough that I kept looking at it going “maybe, maybe” and I finally did. If they could do more of that where it feels like content. That would be great.
I’ve got just one more question on this here. Really, maybe two. So Facebook did something evil genius on this, their objection to Apple doing this. And it’s hard to find an objection to more privacy or opt ins. But Facebook basically said, this is going to hurt our ability to target ads for small business. I actually think there’s some truth to that, like, do you think that’s a viable objection? It’s a tough one to make, but it’s probably the only one you can make.
Steve Symington 37:45
Yeah, I think it is, it’s sort of like Facebook is is like, ‘think of the children,’ kind of scenario is what they’re what they’re doing. And I think it’s true, you know, as much as Facebook ends up being the enormous beneficiary, similar to how Google does the same thing with Google ads. This is something that can hurt the ability for small businesses in particular, to target people in their area, and to be able to actually drive business, especially if they’re local. My wife runs a preschool and she’s run Facebook ads that you can really, really narrow down to people in certain areas with certain interests. And she’s gotten several students that way. And this could make it a lot harder for Facebook to to actually provide the best bang for small businesses buck in the process. So yeah, I think that the evil genius move is a valid one.
Dan Kline 38:48
Steve, is Apple making this the standard? is Google gonna have to follow in the Android store. Are we going to see more companies making this level of control over your information?
Steve Symington 38:58
Yeah, Google, actually, I think just a couple of months ago, I’d need to dig up the the blog post that they posted in their Google ads. It’s part of the the Google Ads blog site. But yeah, Google talked about how they’re doing something in this sense. Yeah, it’s going to be kind of the way the world functions going forward, because people want a more private internet. But there are ways where you’re still going to get those sort of like, you know, they generalize. So you’re going to have big groups of people, that they can say, well, this group tends to be interested in this stuff, and they can be pretty darn smart. And you may not notice a significant difference in the effectiveness of some of these ads as a result. So it may not be that big of a deal, kind of a moot point. When all said and done. You end up getting a more private internet where they’re not targeting you as an individual. They’re targeting you as a maybe demographic. So I That’s just yeah, that’s the way forward. And yeah, like you said, we’re still in the early innings. Yeah.
Dan Kline 40:07
So as a 47 year old male who grew up in the 80s, I’m going to be seeing a lot more aggregate ads for Stranger Things. I don’t want to watch it like, please, just stop. Our own Sam Bailey points out that this might be difficult for companies like ours that use targeted ads on social media and in search. And I don’t think it will be for the reasons Steve just said, I think there is a identifiable profile through AI. For people who would be interested in investing, I actually think it’s possible that it might do a better job, because I’m sure sometimes our ads are being seen by people that are very much day traders, and are not necessarily long term investors, the AI might do a better job, Steve, to close this out. Do you think this opens the door for any regulation? Like I actually think this should be the standard from a legal point of view?
Steve Symington 40:59
Right. Yeah, I think, if anything, it kind of softens some of the arguments that more strict regulation is required. It’s not an entirely selfless move on Apple’s part, right, sort of takes part of the target off of their back. And same thing with with Google, and Facebook, you know, they’ve all said they’re open to regulation, as long as it’s the right kind of regulation that sort of understands how the internet works, right. And I think on the surface, the optics of moving in this direction are good from a regulation standpoint. But I think it needs to happen anyway. I guess the bigger challeng is having a congress that understands how the internet works. That’s the problem where you have someone talking to the CEO of Google, asking him why Apple showed him an ad, you know, on his iPhone, or whatever. Or asking Facebook, how they can remain free? There’s so many of those where you’re like, come on guys.
Dan Kline 42:11
So I actually talk about this a lot. I think we need an OSHA for the tech industry. I think we did the tech industry to get together and self regulate, because I don’t think we’ve seen this with the FCC. The FCC doesn’t understand how TV works. So they’ve passed all sorts of hard and fast regulation, that have made it difficult to talk about, you know, not now but when these laws first came out, it might be difficult for say, like a 10am talk show to talk about women getting a mammogram like or men getting a colonoscopy, because you might have to use words or terms that are not necessarily available in that time slot.
So it’s one of those cases where I don’t think old man government is capable of doing this. I’m sure there’s some young Congress people that fully get this, but I think the regulation is going to have to come from elsewhere. Sam Bailey if you want to pop on with audio, our very own Simon Erickson did a podcast that goes much more into the future of digital advertising. Sam if you want to jump on in and promote that you are welcome to do so.
Sam Bailey 43:17
I was actually just trying to find a link for that. We will post it on Twitter afterwards. We can link it to the after show article about this because it was great about the future of avdertising.
Dan Kline 43:28
So stay on for a second Sam here a lot of people don’t watch 7Investing Now, as a television show. I wish you did I spend time putting a shirt on and making some effort to I don’t know look presentable. Steve does the same. We didn’t tell her she was going to be on. But a lot of people listen to this as a podcast and we are not offended. If you want to and this helps us quite a bit. If you are a regular fan of this show. Wherever you get your podcasts, we would love for you to subscribe and when you’re not at home when you can’t watch us listen to the show that way. The other thing you could do is, and Sam jump in if I’m wrong, if you go to wherever you get your podcast and it’s not easy to find the show message us at email@example.com. It could be very hit or miss on some of these services. Sam, give some examples. Where can you subscribe to our podcast? I’m gonna say Apple. That’s probably one.
Sam Bailey 44:23
Anywhere where you can get a podcast. Tune in, Google, Spotify, Apple. Watch all of them. Those are the main ones though where our listeners listen.
Dan Kline 44:33
Listen if you are listening at Spotify, you threw $100 million at Joe Rogan. You don’t have an investing show. So Meadowlark media you just made a huge deal with DraftKings for Dan le Betard I forget if it was DraftKings or FanDuel, one of the two of those. There are some big media companies out there. We are not opposed to being on those platforms. Sam, thank you for joining us on short notice. Sam knows always to at least be somewhat presentable, because you never know. You did great. I appreciate it.
Sam, it is now time to hit our finisher. Steve, this one really surprised me. But if the graphic is there, which of these companies will have the highest market cap in five years? Uber, Grubhub, Skillz, or Lyft? Steve, I don’t think three of these companies exist in five years without a merger. I don’t think Uber and Lyft are viable companies. Grubhub is waiting for some magical pivot to either self driving cars or all of its competition going out. It’s just a very crowded space. Skillz I use it every day, I play Solitaire, but it’s kind of a crummy platform. But I think they have the ability to pivot a little bit. And I don’t think it’s a homerun. But I do think they’ll, they’ll exist. Uber and Lyft, I think will probably merge at some point. But Steve, your thoughts here?
Steve Symington 46:07
So I guess one thing we need to keep in mind is is Skillz has some catching up to do. You know, I guess it all depends. It would need to be a drastic kind of closing that gap. Because Skillz right now is like a $7.5 billion dollar market cap company. Uber is over $100 billion at the moment. I don’t like the economics of food delivery – Grubhub definitely not voting for that. Lyft I think just sold that self driving vehicle division to Toyota for like $550 million, right. But if I had to vote, assuming we don’t have a complete implosion, I guess I’d maybe go with Uber here. But there’s a chance you know, school Skillz becomes a 20 bagger.
Dan Kline 46:45
I’m actually not predicting Skillz will be a 20 bagger, I think Skillz will grow. I think they’ll improve that the issues. And I think the other ones are going in the other direction. Like I’ve talked about this many times before. I live now about three and a half miles from West Palm Beach airport, and a cab would cost me like 18 bucks. On Uber it would cost me like $6. That is not how Uber should have priced. Uber should have been 10% cheaper and 1,000% more convenient than a cab. That was the Uber play. But Uber and Lyft are racing to the bottom.
But I do think this is a Sirius XM situation. Satellite radio, at least for the last 10 years has been viable because of that merger. I forget exactly when that merger happened. But it’s been viable because of that merger. Had that merger not happened, it wouldn’t be viable. Now, that being said, I don’t know if satellite radio remains viable because I cancelled my subscription because there’s a million podcasts I want to listen to. And I have a music subscription. I miss some things, there’s some shows that I miss.
But I think there’s going to be a big change, I would not touch food delivery, ride sharing. Frankly, most of the gig economy I am very afraid of. I think there’s a reckoning coming I would go the same with with Fiverr. I think Etsy is different because Etsy is self directed. There’s some self directed on Fiverr. But a lot of Fiverr is like people who are professional graphic designers that are like racing to the bottom by using templates and charging very low, low amounts of money. And it’s very different to pay an artisan who hand made some Mickey Mouse ears or whatever it is, or or bedazzled a mask in a nice way. So I’ll separate Etsy out.
But I actually think a lot of this is not viable. And people think they want to gig and then they realize that, you don’t make any money driving for Uber or Lyft. And it’s a very difficult situation. Steve, I’ll give you the last word before we close out here.
Steve Symington 48:44
Yeah, Uber could go either direction for me – it’s tough. And I think we are going to be looking at a significantly different world in the gig economy 10 years from now, five years might be a little harder to tell whether these have gone the direction we think. But you know that you could see some optionality. But I just I’ve never liked the the unit economics of three of the companies on this list. Skillz could be interesting, given its current market cap, that’s kind of possible. But yeah, well, we’ll see.
Dan Kline 49:18
I think if you want a microcosm of how it’s going to go, remember when everyone was excited for electric scooters, to be rentable, everywhere, and every city had them. Our old haunt in Alexandria was full of them, despite the fact that the streets are cobblestone in a lot of places, which seems like a deathtrap. And you’ve actually found out that scooters are only viable in really limited areas. There’s an area in Orlando that has a whole lot of convention center and a whole lot of restaurants within like two or three miles and really flat wide sidewalks. So scooters are viable, those areas are going to be limited. That’s what we’re going to see with rideshare. It’s not going to work to have Uber pick you up in rural New Hampshire and take you to the airport or whatever.
There’s a reason in a livery cabs cost significant amounts of money, I just booked a van shuttle to take me from Charlotte to Columbia, South Carolina in July. It was $120 round trip. Uber would probably cost more, but I wouldn’t have to wait for other people. But that only makes sense because I’ll be in a van full of other people. That changes the economics. With that, we thank you all for watching 7Investing Now. We’re going to take each segment of this show and share it out as an article with a full transcript that usually gets done tomorrow morning might be a little later in the day tomorrow, because I have to take some time off to pick my mother up at the airport It could get done tonight.
If you’d like to get in touch with us. That is firstname.lastname@example.org. That’s where you ask us questions about our service about your membership about a possible membership. Somebody asked, D asked about Steve’s September pick and whether he would do an advisor update. I just updated all of my stocks. So I did an advisor update for members only on every stock I picked plus a few that I didn’t. A few that departed members of our family, our 7Investing family had picked that I had some interest in as well. So all sorts of stuff.
If you want to get in touch with us on social media, that one’s easy. It is @7Investing. We appreciate your social media interactions. We also appreciate if you see people impersonating us. I don’t know why this is so common, but it happens like three times a day. I reported a fake @7investing account that was actually using an old image of us, it only had like 22 followers, but what happens is they create these fake accounts and then all of a sudden, you know @SiveSteamington or whatever his name is or @worstideas17 or whatever like made up, sort of us, account is they switch out to our profile and they start recommending like crazy scammy cryptocurrency. Or Nigerian prince scams or who knows what it is. So if you see that, please report them on Twitter. We appreciate it. For Steve Symington. For Sam Bailey. Thank you for watching.
I’ll be back Friday, we’re going to be 7 on 7 with as much of the team as available. There’s a bunch of earnings happening today. So we will hit on seven different topics on Friday show. Always fun, always exhausting. I will perhaps have a live audience with my mom in the room, though she’d only be able to hear me so that’s probably not the greatest viewing experience. With that. We will see you Friday.
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