In this episode of Industry Focus: Tech, analyst Dylan Lewis and contributor Evan Niu survey the social media landscape today. Pinterest (NYSE:PINS) has been rising since its IPO, and it has huge potential if it can crack into some more demographics. Snap (NYSE:SNAP) seems to be recovering from its rough start on the public markets a few years ago. Facebook (NASDAQ:FB) seems unconcerned with TikTok's explosive growth, and that could be to its detriment. Unlike Instagram or WhatsApp, TikTok is one competitor that can't just be acquired, and so far, Facebook's attempts to copy the short video platform have failed to take off. Tune in to hear more.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Jan. 17, 2020.
Dylan Lewis: It's Friday, January 17th, and we're talking social media. I'm your host, Dylan Lewis and I'm joined by fool.com's Evan Niu. Evan, what's going on man?
Evan Niu: Not too much. Going to go gamble in the mountains again this weekend at a casino.
Lewis: [laughs] Gambling in the mountain sounds like this really romantic idea. Conjures up the riverboat gambler motif.
Niu: Yeah, except there's not a great view. It's just a cluster of casinos in the middle of the mountains, but it's not a particularly scenic part of the mountains. It's just a little niche of gambling.
Lewis: What's your go-to game there, Evan?
Niu: My wife likes to play craps. I play poker. I used to play tons of poker back when I was younger. I don't play as much anymore, but it's always been one of my big hobbies.
Lewis: That lines up with everything that I know about you. You're a deeply analytical person and you like some action. That totally makes sense to me.
The reason I'm having you on, Evan, is you are one of our go-to folks for all things social media. And we have some data from eMarketer on the social media landscape, and some data from App Annie, two authorities on what's going on mostly in digital trends, but specifically in social media. I don't want to bury the lede too much here. The headline, at least, if you're looking at the U.S. markets for what we're seeing from this report is that Pinterest has passed Snapchat to become the third-largest social media network in the United States. Maybe not a headline that people were expecting to see.
Niu: Right. These are third-party estimates. Right now, eMarketer estimates that Pinterest has around 82.4 million users in the U.S., and Snap has around 80.2 million. In comparison, in 2018, Snap was a tiny bit higher than Pinterest. But now that's shifted a little bit so that Pinterest is now No. 3. Of course, Facebook's No. 1, Twitter's No. 2.
Lewis: I think we need to remind ourselves that we're looking at U.S. figures here. Everyone slices things a little bit differently. Some companies state things on a North America basis, some state things on a U.S. basis. We lean on some of these third-party estimates to get a sense of what's going on specifically in the United States because the U.S. is the most lucrative market if you're looking at ad-based businesses, and that really goes in lockstep with consumer spending and available money. If you look at Snap, for example, the North American revenue per user is 3X what they make per user in Europe and the rest of the world. Within that, the United States is a very large part. So, that's why we're specifically honing in on this market.
Niu: Right. it's also interesting to note because Snap saw a pretty big resurgence in user growth throughout all of 2019, which was the big narrative for Snap last year, and really helped drive some of the stock's gains. But almost all of that user growth was coming from emerging markets like India and these other international regions where Android is the dominant mobile platform. Snapchat put out a revamped version of the Android app. So, that's been driving growth. But as far as back in the U.S., North America, that's pretty mature. They're not really growing there. So, their official number is that North American users are about 84 million, which is also another way of saying it's not that popular in Canada, they have less than 4 million users there.
Lewis: And the reason we're specifically looking at these platforms in the United States is, on a surface level for both of them, you look at their user accounts, and you say, well, theoretically, there's a lot of room for them to grow if they can gain traction outside of their core markets in the U.S. When you look at Pinterest, it is primarily a female-dominated platform. I think about 70% to 75% of their regular users are women. And you look at Snapchat, and primarily, it slants younger. They're very popular with that 15 to 25 market. The trouble for them has been breaking out of that younger market and getting into the older millennials and some of the baby boomers, where you can really start to see some powerful growth in your user numbers. So, with both of these businesses, there's the possibility of getting quite a bit larger, and any inclination that they are doing so is something that we're going to be paying attention to.
Niu: Right. All these companies, their first goal is always to build the user base, and then worry about the money later. That's why user numbers are always so important when it comes to these social media companies. So, Pinterest becoming No. 3 is actually pretty meaningful in that sense.
Lewis: Yeah. And part of the narrative for them was, we're going to get more men on the platform, because that's a big growth opportunity for us. There's nothing gendered about the platform. It's very DIY-oriented. There's a lot of really awesome content on there. I think they just need to convince people to give them a shot. They're an older social media brand. What I think they really benefited from, if you look back over the last couple quarters, is going public. We talk about going public in a lot of different ways; how it's a capital-raising event, it's a liquidity event. I think in Pinterest's case, it was a reminder that this platform still exists. It really reinvigorated user growth for them.
Niu: Yeah, and I'll be honest, I don't follow Pinterest too closely, but it is interesting how it doesn't seem to be that popular among men, like you mentioned, because at the end of the day, it's a highly visual platform, which is kind of like Instagram, right? And Instagram is obviously super popular among lots of demographics. So, I'm curious what the difference is. Why is it that Instagram is still so popular among everyone, whereas Pinterest is still limited to women, like you mentioned?
Lewis: We haven't seen that growth story materialize, where they've been able to fully break out of that market and appeal a little bit more to the male demographic. I think it's something it's similar to what lululemon is trying to do. There's a nice parallel there, where their main market is female, but they can possibly break out of that down the road. They've enjoyed some nice user growth, like I mentioned, around the time they went public. They were actually able to reaccelerate some of the user growth they were seeing. A lot of that was coming from the rest of the world, though they were seeing some user growth in the United States as well. It's a more mature market for them there.
Evan, you mentioned that Snap was able to reinvigorate a little bit with the redesign of its app and building out its functionality and its performance for Android. There are some other growth markets for them, though.
Lewis: That's all Snap the platform. I think it's worth also looking at Snap the business briefly. While they have experienced some slowdown in their user growth, and they've found some stimulus for that recently, some of the core business stuff for Snap is actually looking pretty good. Shares of it shot up over the last two years or so. They found bottom and then were able to deploy some new ad technology, this rollout with the new platform, bringing in some users. A lot of that looks really great. They've been able to grow their revenue 50% year over year in the most recent quarter, which was an acceleration. The thing that I am most impressed with this business at this point, though, is they've expanded their gross margins to about 50%. That was something that we long worried about with them.
Niu: Right, particularly with their unique approach to infrastructure, just completely outsourcing all of it to third-party cloud platforms like Amazon Web Services, or Google Cloud. But to their credit, they have done a good job in renegotiating those contracts, making sure the costs aren't eating up all of the business, to the point where margins are actually expanding.
Lewis: That's on the gross margin side. Of course, if you look at how their actual bottom line looks, they are still losing money. The big reason for that is their selling, general, and administrative expenses, their R&D spend. Each of those line items are about the company's gross profit. So, it doesn't really matter how much margins improve if you're spending that much. They have ambition of doing a lot of AR-related things. They're still interested in consumer hardware. That's going to drain any of the money that you have coming in on the top line and not leave you with too much on the bottom line.
Niu: Right. I've been pretty hard on Snap over the years, but I have to admit that the top-line numbers that they've been putting up over the past year have been pretty solid. To be clear, I still think their corporate governance is a joke, and I would never touch the stock. But I do feel like I owe them some credit after being so hard on them.
Lewis: I think it's really hard to argue with that growth rate that they posted. Fifty percent is nothing to sneeze at when you consider how mature they are. A big part of that is then moving to programmatic advertising. But what we're seeing with them is kind of what you saw with Twitter a couple years ago, where instead of it becoming a massive growth story with the user base, the company had to start making money and really optimizing for the user base that it had. And that's the decision that all these platforms have to make once they reach maturity.
Niu: Right, exactly. That's what they're doing in the U.S. while they're trying to grow the international users. Later on, they'll try to make more money on the international front. But right now, North American users are pretty stable. They're actually starting to monetize them better with some of these improvements on the ad side, like the programmatic stuff, the self-serve platform. But yeah, they're coming around.
Lewis: All right, Evan, I never asked you, what is your New Year's resolution?
Niu: We don't do anything super formal, and nothing exciting. It's pretty generic stuff for us. We want to get in better shape, exercise more. We're thinking about getting another treadmill. I'm kind of lazy, so I don't make it to the gym very often. But other than that, pay down some debt, improve some of our finances, work on that front a little bit. Pretty generic stuff.
Lewis: Well, that's all good stuff to be thinking about in the new year. Some people are also focused on maybe reducing some of the screen time, spending a little bit less time on their phones. As it turns out, looking at some of the data releases that we have, people are only spending more time on their phones Evan. The App Annie release on mobile is showing that no matter where you look, no matter the geography, people are spending more time on mobile.
Niu: Right. The mobile revolution, we're going on year 12 or 13 since the first iPhone kicked off everything. It's still booming. People are still loving their phones. People are changing how they use their phones. People are starting to put more personal finance stuff on their phones, get more health data. The revolution is not over.
Lewis: I saw in this App Annie report that in the United States, average usage per day is up about 10%, which sounds impressive, and then you look at some of the other geographies and it's even bigger. I think the average number is about three hours per day in the United States. But if you look at some of the developing markets, they dwarf that.
Niu: Right. Indonesia and China, some of those emerging markets in Asia, people are spending around four hours a day. A lot of users in those countries are very mobile-centric in the sense that their first internet-connected device might have been a smartphone, and that might still be their primary computing device. That's a lot of why mobile device usage in these emerging markets is so high, and it's really important, and particularly a big opportunity for companies that are mobile-dominant.
Lewis: That's why I like looking at these kinds of reports. We have our own habits. We have our own biases here in the United States and in North America. I think it's really good if we can step outside of them and get a bigger-picture look at what's going on. If you do that, and you start looking at not just the habits but also the platforms that people are spending more time on, the first half of the show, we talked a little bit about Facebook, Twitter, Pinterest, and Snap. The name we left out that I think is the it name in social media right now is TikTok.
Niu: Right, TikTok is exploding. For people that aren't as familiar with it, it's basically a short form video app merged with Musical.ly, a year or two ago, and it's owned by ByteDance, which is a Chinese company. It's pretty comparable with Vine, which was a start-up that many years ago, Twitter had acquired that would show these six-second looped videos. But, it's blowing up among specifically younger demographics, not unlike Snapchat. For example, I have an 11-year-old daughter, and all her friends at her school are all on it. She used to be on it, but she got off of it, in part because we talked to her about some of the concerns about social media. Obviously, I'm pretty aware of all the risks when it comes to the younger people getting their minds warped by social media. But, yeah, it's just everywhere, particularly among younger kids.
Lewis: To put some numbers to what it looks like globally, global time spent in TikTok grew 210% year over year in 2019 to over 68 billion hours. That's a mix of people spending more time on the platform and them growing their user base and really becoming a global phenomenon in 2019. This is maybe the year that it becomes more mainstream. I think 2019 was when it started to bloom a little bit. 2020 might become the year of TikTok. For the most part, you mentioned it's a Chinese company, a lot of the use, a lot of the users are in China. Eight out of every 10 minutes spent on TikTok were users in China. But it's not limited to that geography. You look at other regions, and it was considered the breakout app of 2019.
Niu: Right. In India and Canada, it was No. 1. In the U.S. and UK, it was No. 2. But, yeah, it has historically been pretty concentrated in China, which has also presented some...regulators and lawmakers have some security concerns around all this time being spent and user data going to, basically, a Chinese company. So, there are some concerns there. But, obviously, that's not slowing down their user growth.
Lewis: We're talking about TikTok here, and it is not something that is immediately investable for people because it's not available. It's not on the public markets in that sense. But, we need to talk about it because when you think about the social media landscape, and the amount of time that people are spending on mobile, what we're really doing is spending time on entertainment. And while there's no zero sum to having these different apps on your phone, there is a zero-sum game to how you spend your time. And so, if people find value in one platform, what you tend to see is that they start spending less and less time on the others. It seems like TikTok is the big existential threat to the likes of Facebook and maybe Instagram in particular.
Niu: Right. Facebook has been dismissing TikTok and the threat that it represents for the most part. Mark Zuckerberg has basically argued that TikTok's growth is very dependent on them spending heavily on ads, promotions to get people to install the app and raise awareness of the platform. And he's suggested that if they stopped spending on ads, then their user growth will suffer. And there is some third-party data that kind of supports that notion. But at the same time, I think that's also oversimplifying it, because now that they have grown to this critical mass, they could probably pull back on their ad spending a little bit and turn toward monetizing their existing user base. I mean, they have over a billion users worldwide. We don't get detailed breakdowns because they're a privately held company. But the point is that they're so big at this point that they're starting to need less of that promotional activity to bring users in. So, I think it's silly to dismiss them. Facebook has tried to copy them, mostly unsuccessfully, to date. And also, on top of that, due to a lot of these geopolitical factors, this is one competitor that Facebook can't just go out and buy like they've done in the past. So, they're going to have to compete, and their main way to compete has always been to copy.
Lewis: To your point, Evan, about the financial implications there. If you look at any software-as-a-service company that's early stage or even mid-stage, they're spending a lot of money on marketing to try to build things out, because they have a scalable business that down the road, at scale, will wind up printing money for them. This is also a digital business that they're able to roll ads into. You have to think that as it gets bigger and bigger, a lot of those unit economics start to take over for them. I don't have a problem with a company like that spending aggressively if the idea is that eventually, they'll scale and ramp that spend down, especially when you consider the fact that the network effect is so strong for these types of businesses. So, you don't need to spend to acquire every single user in a geography. You can spend to acquire some, particularly influencers and tastemakers, and once they're there, they attract a lot of other people to the platform.
Niu: Right, exactly. It's also kind of ironic, because Mark Zuckerberg has also paid lavishly for some of his platform. He paid $20 billion for WhatsApp. [laughs] It's like him criticizing TikTok for basically spending money to get big is ironic, and maybe a little hypocritical.
Lewis: So, TikTok is certainly the story for 2019, 2020. We talked about how these are third-party estimates, and that's what we're looking at for a lot of this stuff, Evan. We'll have a firmer sense of the trajectory for the likes of Pinterest and Snap. Both of them are due to put out some quarterly updates soon. This is, of course, a space that we love to watch.
Anything else before we wrap up and talk about some of the listener fun stuff for the show?
Niu: Last data point I think that's important here is in the App Annie report. They also estimate that mobile ad spending is expected to jump this year by over 25% to $240 billion. So, all these social media apps that we've been talking about, they're all predominantly monetized through advertising. The good news here is, there's plenty more money coming into the mobile ad spending market.
Lewis: Yeah. If you look at almost any estimate of where ad dollars are going, it's going to digital ads or streaming ads that wind up being popped into video or audio, because the control and the targeting is just so much stronger. The tailwinds there aren't going away. Google's built a really successful business on that. Facebook's built a wildly successful business on it. Others are taking note. And I think marketers really like the fact that they can get a little bit more granular with the audience that they're reaching.
Niu: Yeah, it's a big opportunity out there. I think it's over half of the entire mobile economy, just advertising. That's where the money's at.
Lewis: Where the money at? That's a throwback to the pre-Industry Focus days. That was the old name of this show, a couple years back. Folks that have been following us for a while might remember that.
For folks that are fairly new to the show, maybe you haven't followed along that long, anytime someone leaves us a five-star review over in iTunes, I check it out and make sure to give them a shout out on the show. We have a couple of new ones coming in this week. Finn Howie writes, "Great insight and expertise. Can't get enough." Thanks! That's awesome. That makes my day right there.
Then we have Mike from Atlanta reaching out. "Happy New Year to the entire team at Industry Focus! Just want to say I'm an everyday listener, and I think the in-depth conversations had on Industry Focus have really helped me develop my own personal portfolio in a way I feel comfortably weighted between industries. I would love an episode on a deep dive into the health insurance industry. I see a lot of discussion biotech, biopharma, but not so much on the insurance side." Then he goes in a little bit more specific detail about some of the stuff that he wants. Mike, thank you for the suggestion. I think we will hit that some point. We lost our Healthcare host, Shannon Jones. She is doing some more of our premium programming at the Fool. But, she's available to hop back on some episodes. And, we also have Todd Campbell, who's an excellent healthcare analyst. The beauty of this new "Wildcard Wednesday" format is that we can throw anything we want on there. So, we can do some cool S-1 stuff like we did this week with Casper, and we can also hop back and do some healthcare stuff, and just enjoy the flexibility that comes with that episode. Love the suggestion, and we'll make sure that we'll get it into the mix.
Evan, you are not my guy for healthcare, but you are my guy when it comes to tech and social media. Thanks for hopping on today's show!
Niu: Thanks for having me!
Lewis: Of course. Listeners, that's going to do it for this episode of Industry Focus. If you have any questions or you want to reach out and say, "Hey," shoot us an email over at firstname.lastname@example.org, or tweet us @MFIndustryFocus. If you want more stuff, not necessarily podcast stuff, but really awesome beginner investing content and breakdowns of how companies make money, head over to YouTube. We've got an awesome channel set up there with tons of supplemental information.
As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for all his work behind the glass today. For Evan Niu, I'm Dylan Lewis. Thanks for listening and Fool on!