Social Media Outperformed, but It's Old Media That Impressed Investors

On this episode of Market Foolery, Chris Hill is joined by Motley Fool Explorer's Simon Erickson as they talk about Facebook's (META -0.13%) strong quarter, The New York Times' (NYT 0.39%) online growth, and Tesla's (TSLA -0.72%) future. They also discuss Simon's recent trip to Silicon Valley and what he learned there. 

A full transcript follows the video.

This video was recorded on May 4, 2017.

Chris Hill: It's Thursday, May 4th. Welcome to Market Foolery, and may the 4th be with you. I'm Chris Hill. Joining me in studio today, from Motley Fool Explorer, back from Silicon Valley, Simon Erickson in the house. Thanks for being here!

Simon Erickson: Thanks for having me, Chris. And happy pre-Cinco de Mayo.

Hill: Yes. The Star Wars fans are all excited today, and anyone who enjoys a margarita is probably excited about Cinco de Mayo coming out on a Friday, boy. We talk about this, where lots of companies, when they come out with the quarterly earnings, particularly in the spring, they're not shy about using weather as an excuse, like, "Well, the weather really hurt us." And sometimes that's real, sometimes that's warranted. But sometimes that's just a lame excuse. Nobody ever flips it, nobody ever says, "Boy, you know why we crushed it this quarter? Because the weather." Same thing with alcohol companies. Whenever they're reporting, no one is going to be like, "You know what really helped us? Cinco de Mayo being on a Friday."

Erickson: And it's kind of the perfect season for a holiday. It's nice out, it's springtime, the temperature is nice, perfect holiday.

Hill: You need something to wash away the pollen, good lord. We are going to talk about your trip to Silicon Valley, and we're going to talk Tesla. We have old media stocks, but let's start with social media. Facebook's first-quarter profits and revenue came in higher than expected, more than $8 billion in revenue. They're closing in on 2 billion users. And the market kind of shrugged. It's just like, "Well, they're one of the biggest public companies." This was an expectation-beating quarter, and yet the market shrugged.

Erickson: And Facebook is no longer a start-up. They have grown up. This is a huge company. It's amazing that at this size, they're still growing revenue at almost 50% year over year. There's that much digital advertising that Facebook -- and Alphabet, to be fair -- are attracting that's still in the market right now, which is amazing to me. I think that you're going to have to start looking at what Mark Zuckerberg is positioning as his three, five and ten year plans out. He's laying out for the market, what are we going to be doing as far as building out these global communities, that's the next step, and then building out these global technologies as the step after that. That's going to be something I have my eye on as an investor, to see if Facebook can grow from here. 

Hill: And they need to do that because, as they acknowledge, the ad growth is slowing a little bit. And as much as anything, that might be why the stock is off 1% or whatever it is today. I have two questions about their business. One has to do with WhatsApp and the other has to do with payments. It's actually the same question, which is, where are we now with both of them? In the case of WhatsApp, the fact that Facebook every single quarter is crushing it in terms of mobile advertising, that has pushed off further and further tough questions about, what are you doing with WhatsApp, what are you doing to turn that into a cash machine? Because you paid so much more for it than you did for Instagram. The success in mobile advertising, the success with Instagram, has earned Zuckerberg and his team the right. Those are big wins that they have there, so it's earned them the right to push those questions out. But where is WhatsApp right now?

Erickson: WhatsApp right now is feeding the existing business that Facebook has, which is an advertising company. WhatsApp as an acquisition was to get people onto the Facebook platform, more or less. It's how you see now 2 billion monthly active users. That's amazing, it's still continuing to grow quarter after quarter, year after year. The next step, which I think is more Messenger than WhatsApp, for Facebook, I personally believe, is going to be in payments and transactions. This is an advertising company today where people are paying to put their advertisements to attract users through targeted search on Facebook today. But even more valuable to an advertising company is if that person actually buys something, if they actually facilitate a transaction over Messenger and actually buy something that they did over Facebook. You're already got 1.2 billion people using Messenger every month. You have the guy from PayPal, their president David Marcus, that joined a couple of years ago. They're putting a lot of work into this that is still a very small part of the business compared to advertising today. That's what I have my eye on for the next three years, is the increase in transaction revenue that Facebook is going to catch.

Hill: When it comes to the payments, who else is involved in that? They're not going down the road of opening the Bank of Facebook.

Erickson: Right. And you've always had these giant networks, the Visas, the MasterCards, controlling the global payments space. But now you have a lot more peer-to-peer payments. PayPal has Venmo, which is up 114% year over year in the number of transactions, because people are wanting to post to a social media type app that PayPal now has, where you can see what your friends are spending money on, what they're splitting, the cost of pizza or whatever it is they're doing transactions for. It's not just the same old plastic swipe your credit card when you're at the store anymore. The world is paying for things in new ways. More of that is going through apps on smartphones, and Facebook is definitely one of those.

Hill: All right, let's move on to Tesla. Their first quarter report was one of those Rorschach test type of reports, because if you're bullish on Tesla, you look at the fact that they shipped 25,000 vehicles, a record number for a quarter, and their revenue more than doubled a year ago. If you're bearish, you look at the fact that they posted not just a loss, but a loss that was, I'm going to use the word significantly bigger than expected. What did you see in their report?

Erickson: Let me start, if I may, with what the market sees in Tesla right now. 

Hill: It sees it as a slightly smaller company, because the stock is down about 6%.

Erickson: But the stock is out of touch with present fundamentals. Any one of our analysts -- well, maybe not all of them -- the majority of our Foolish analysts believe that when you're comparing the fact that Tesla is 10% of the size of the larger automakers, they've never had a year of GAAP profits, they're now larger market cap than almost all of the automakers, it's out of touch. You can't look at this fundamentally and say, "We're going to slap on a valuation multiple and value this thing." It's all in anticipation of the Model 3, which is coming out later this year for the first shipment they're going to have, and then continue through next year. The premium that the market is placing on Tesla's stock right now is in anticipation of those 400,000 pre-orders they have for the Model 3. Tesla actually being able to fulfill those orders, and continuing at a run rate of nearly 500,000 vehicles a year. If that's the case, if they hit that and everything goes as planned, I can make the case that Tesla can still be a multi-bagger from here.

Hill: So, if they hit that, you look at the stock right now and say, this is maybe not cheap but cheap-ish?

Erickson: Yeah. Let's look at the numbers. 500,000 cars a year, that's what Elon's predicting. Now, you have to have some faith in that. That's a lot. That puts it in --

Hill: If you're going to buy the stock, you have to have some faith in that.

Erickson: Yes. Elon, of course, has faith in his own company, no surprise there. But, 500,000 cars. Say $40,000 a car when you consider upgrades and everything. That's $20 billion of revenue that Tesla can be doing. Considering that they're only at about $10 billion today with the Model S and the Model X, that's basically a $30 billion a year business that they can be, and that's triple where they're looking at right now. You throw on, ballparking, maybe $15 billion of costs, operating and capital costs that they're putting into the business right now, and you could be a business that's churning out $15 billion of cash flow a year. Compared to the company being worth $50 billion today, if things go right, I'm not saying it's going to be an easy road to get there, but there is a case to be made that Tesla still has plenty of upside.

Hill: All right, we have a couple of old media stocks to look at. Two companies going into different directions. We'll start with The New York Times. Shares of The New York Times are hitting a three-year high today, because they added more than 300,000 digital subscribers in the first quarter. The stock is up nearly 50% in the past six months. I know this is a stock you looked at for Motley Fool Explorer earlier this year. They're kind of getting it done. I have to believe -- I didn't go through their conference calls, so maybe they were asked this question and maybe they spoke to it, but I have to believe the president of the United States is inadvertently helping The New York Times with their subscribers.

Erickson: [laughs] The Trump Effect.

Hill: I think so, yes. Don't you think?

Erickson: Yes, absolutely, I completely agree with that. Chris, I believe you were actually the guest star on that Explorer mission in January.

Hill: That's right.

Erickson: Yeah, this was one of the companies up 20% since we covered it. Our thesis on The New York Times was a simple one -- that you're going to convert these papers subscribers to digital subscribers. If you have a digital subscriber going on the Internet to read the news, you don't have to put the ink and the paper and the delivery behind it. It's pretty simple. Pulled up a statistic that, when we looked at them in January, they had about 1.5 million digital subscribers, and that's grown to 2.2 million. Here we are, only about 3.5 months later.

Hill: Wait, they've doubled digital subscribers in the last --

Erickson: About 50% growth, yeah, exactly. In just three or four months. So, they're really, like you said, getting it done. You compare that to the business, print advertising is down 18% year over year. Digital advertising up 15% year over year. And you have a $0.05 per share loss last year, and $0.08 per share profit this year. The thesis worked, and it's resulted in the Street being very happy.

Hill: That's the thing. If you think about, what are the costs associated with not just The New York Times but any print newspaper? If all of the sudden, they decided to flip the switch and say, "We're going to stop printing the actual newspaper, it's going to be digital," if you take those costs away, then all of the sudden the margins get a whole lot fatter.

Erickson: Absolutely.

Hill: On the flip side, I don't know if we've ever talked about this radio company before, but we've talked about Sirius XM. There are a lot of publicly traded radio companies. If you drive around in your car and you're listening to a radio station, and certainly if you're a Sirius XM subscriber, you know who they are, but you'll hear iHeartMedia, Salem Media, Cumulus Media, and you'll hear, once they do the call letters and that sort of thing, they'll say, "WXYZ, a Cumulus Media station." Cumulus is the one I want to talk about because this is one of the biggest radio companies in America. They own more than 450 stations. Robert Feder is a guy who has covered the media in Chicago for decades, and he wrote about something earlier this week that caught my attention, which was, Cumulus was laying off some people in Chicago. WLS is a huge station there, and they have others as well, but that's the big, heritage, best-known station. I thought, "That's odd, why are they laying people off?" I'm pretty sure their CEO recently got a bonus. And I looked it up, and this is something I tweeted earlier in the week, and I felt like ... I'll get to why we're talking about it in a second. Here's the deal with Cumulus Media. CEO Mary Berner earlier this year got a seven-figure bonus. Shares of Cumulus media down 89% in the last 12 months. Not really sure why she got that bonus. It's certainly not based on stock performance. Speaking of the stock, shares of Cumulus Media today trading for $0.27 a share. Not $27, $0.27.

Our colleague Matt Argersinger pointed out that just a few years ago, Cumulus stock was trading around $60 a share. Today, $0.27. I bring this up, because we get asked this question as frequently if not more frequently than any other, in terms of, "What do you think about _____ industry stocks?" Over the last year, I would say the question we get more often than others is marijuana. What do you think about marijuana stocks? And our answer is frequently, stay away for now, because there's nothing legal on a federal level, and oh, by the way, they're penny stocks pretty much across the board. I just wanted to remind people that there are other penny stocks out there that are, on the surface, appear to be large, stable companies. You'd absolutely be forgiven for thinking Cumulus Media, with all of its stations, all of its assets, is a really stable business. $0.27 a share. How much money do you have in your pocket?

Erickson: A couple shares worth, at least.

Hill: Apparently. Yeah. I wrote on Twitter, I think this might be -- just my two cents -- the most financially irresponsible radio company in the industry. I might have to broaden that to, this might be the most financially irresponsible company in all of media.

Erickson: Quite a statement, Chris.

Hill: [laughs] I didn't ask any questions to you, other than what you have in your pocket. Yeah, we talk about marijuana stocks, we get that question all the time. We love when people look around and see trends and start that investor part of their brain working. And it's a great question to ask. But I just wanted to remind people, there are other penny stocks out there.

Erickson: I think that's reinforcing why we always look at the long-term. It's not enough to just say, "There's a hot new industry, the marijuana penny stock industry, we're going to make a ton of money." You have to find a business that executes well and has a viable business behind it that's going to carry you to long-term returns. There's no doubt about that. We continue to stress that. It's the same thing we've always said for the Motley Fool, perfect example right there.

Hill: Couple housekeeping notes before we get to your trip. This weekend is Berkshire Hathaway annual meeting. If you would like a preview of that meeting, check out the most recent episode of Motley Fool Money. Becky Quick from CNBC was our guest, and she provided a great preview, because she's going to be one of the moderators at the big Q&A session on Saturday with Warren Buffett and Charlie Munger. You can check that out. You can also check out the coverage. We're sending some people here from Fool HQ to Omaha, Nebraska, so we're going to have coverage of the Berkshire Hathaway annual meeting on fool.com. If you follow the Motley Fool on Twitter, and it's just @TheMotleyFool, they'll be tweeting it out, stuff on Facebook as well. Secondly, I wanted to mention, if you haven't checked out the Industry Focus podcast this week, this is a great week to check it out, because they've been doing a game all week, essentially a puzzle. Every episode provides a puzzle you can solve that puzzle and you put them all together and there's Fool swag. They can explain it much better than I can. Check out this week's episodes of Industry Focus. Really fun, what those guys are doing over there. 

All right. Silicon Valley, you just got back. I waited all of three minutes after I saw you walk in the door to be like, "Hey, when can I get you in the studio to talk about your trip?" Why did you go, first of all?

Erickson: We looked at, who are some of the stock market's biggest winners of the past decade. We're trying to pick apart, what did they do? What do they have in common? And some of them that we looked at Chris, were Apple, Netflix, and Tesla. Ten years ago, Apple released its first iPhone in January 2007. They've now sold over 1 billion iPhones, the stock is up 1,000% percent since then. The same month, as amazing as this might be, Netflix introduces that they're going to begin digital streaming. If you remember, this was very controversial at the time. Ten years later, they are now streaming to 100 million people across the globe. The stock is up almost 5,000%. And even Tesla, five years later releases the Model S, electric vehicle. Of course, this is a huge deal, because it has an autopilot feature, it has a screen interface, it has over the air updates. This is redefining what an automotive can be. It's up almost 850% since then. So, we said, what are these companies doing? This doesn't happen in a straight line, where those kind of returns are slow-moving, predictable graph that's going up into the right every quarter. There's breakthroughs that those three products are examples of that they're hitting, that are very quickly creating the value of these companies in a very short period of time.

So, we went out to seek, what are those innovations going on today in Silicon Valley, in the age of artificial intelligence, in the age of cloud-based software, in the age of all these cool things that the internet is bringing to these companies to make smarter business models. We went to find what is the next wave of winners, and what are they doing, and let's bring them back to Explorer.

Hill: Nice. When are you going to be sharing all this?

Erickson: Next week, we're going to reopen Motley Fool Explorer to new members. We're very excited about that. As part of it, we're going to be sharing our five biggest trends that we see happening in Silicon Valley right now, and the eight companies that we believe are the best-positioned to benefit from these trends. They are actual Motley Fool recommendations. We'll be taking a closer look at every one of those companies.

Hill: Nice. We're going to have a micro-site set up, we'll have the details for this early next week on Market Foolery so folks can access that. One of the things I was thinking about when you were talking about Apple and Netflix -- this is something that we love to see in any company, in any leadership team, and it's a tough thing to find. If you think about those companies at that point in time, part of what was so revolutionary, particularly in the case of Netflix, was that both Apple and Netflix had really great, stable businesses. The DVD by mail business was such a great business. And I'm sure there were people -- I know there were people outside Netflix, but I'm sure there were a couple people inside Netflix who, maybe to his face, said to Reed Hastings, "What are you doing? What do you mean, streaming video? We have this cash cow right here, why wouldn't we just double down on this?" And he had the vision to be like, "No, you're going to have to trust me on this one." And, obviously, with the iPhone, such a tremendous game changer.

Erickson: Yeah. We should mention, too, Chris, that we're looking for smaller, under the radar companies right now. We're not going out and rerecommending Apple and Netflix and Tesla again. Those have had a great run over the last 10 years. We're looking for companies that are a little smaller, that aren't even household names yet for most people, but I think that five, 10 years out, they definitely have the potential to be.

Hill: All right. Looking forward to that. Simon Erickson from Motley Fool Explorer, thanks for being here, man!

Erickson: Thanks, Chris.

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Austin Morgan. I'm Chris Hill, thanks for listening! We'll see you on Monday!