How Advertisers Leaving Impacts Facebook

In this episode of MarketFoolery, Chris Hill chats with Motley Fool Analyst Jason Moser about the latest headlines from Wall Street. The guys discuss the latest acquisition in the fitness space and also bring an update on companies leaving Facebook (META -4.13%) and further discuss its implications. Finally, they answer listeners' questions on the best strategy to liquidate a part of your portfolio in order to increase your cash position and much 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 June 30, 2020.

Chris Hill: It's Tuesday, June 30^th. Welcome to MarketFoolery. I'm Chris Hill, with me today, the one and only, Jason Moser. Good to see you, my friend.

Jason Moser: Good to see you. I think I'm the one and only, I guess we could do a Google search later and try to figure that out, but at least I'm the one that counts for our purposes.

Hill: You know what's, in the eyes of MarketFoolery and Motley Fool Money and Industry Focus, you are the one and only. We're going to dip into the Fool mailbag today. We're going to talk about Facebook again, because a lot has happened in the last [laughs] 24 hours, but we're going to start with the deal of the day, which is, Lululemon Athletica (LULU 1.43%) buying Mirror, which is an at-home fitness company.

Lululemon is going to pay $500 million. Mirror sells a tech-enabled mirror with a camera and speakers so you can take part in live fitness classes in your home. And this must be a great deal at a great price or a great deal at a good price, because shares of Lululemon are up 7% today, Jason.

Moser: Yeah, I mean, the stock itself is having a good year; it's up 70% or so. So, I mean, hey, why not take a chance? And you have the Disney Channel with The Suite Life, Lululemon has "the sweat life," and that's what this really all revolves around, is creating this sort of, this sweat life identity, right? And I mean, it's what we've known Lululemon for so long, is obviously their apparel. There was always a question as to how big that market opportunity was, but they've done a very good job of taking it beyond, I think, just that core yoga market, and I think the typically stereotypical female demographic, right? They have really grown that offering for men. And so, this is a way to take the business in a new direction, and I think a direction that is here to stay. I don't think that this is just a one-off pandemic-type thing where people are feeling more comfortable about, you know, working out in their home.

I mean, we've seen with Peloton and certainly with Mirror as well, they are real businesses and the nice part about them is that they have a hardware dynamic along with a subscription dynamic. Mirror definitely has that same type of model. They are calling for around $100 million or a little bit more in revenues expected for 2020 for Mirror, so there is a business there. If you do the math, you can see that Lululemon is paying around 5X sales. We don't know how profitable it is, but there is a relationship between these two that has existed from the start, right? The Founder of Mirror, Brynn Putnam, who's actually a Lululemon ambassador in New York, Lululemon had an early investment in this company. So, there's a familiarity there that I think will help them.

And, you know, there's also a blueprint for how not to do this, Chris, right? Under Armour tried something like this a little while back, it seemed on the surface a little bit odd and it didn't work out so well. This on the surface, actually seems like it makes a little bit more sense, but perhaps that's because there's a bit more of a tangible business there in Mirror. So, I think you have to be cautiously optimistic, this is a pretty good move.

Hill: Yeah. And we've talked a lot about Peloton and the rise of Peloton over the last few months; and you know, they sell expensive equipment. I mean, this device that Mirror sells goes for $1,500. Lululemon says they're on track to do 100 million in sales in 2020 alone. So, it'll be interesting to see what this does, not just in terms of that underlying business, but you know, Lululemon is going to be outfitting the instructors with Lululemon gear, you know, so there's potentially some ancillary sales they get out of that as well. So, I don't know, it'll be interesting to see, sort of, the extent to which they decide to try and bundle offerings. And maybe sort of beef up a membership model for Lululemon in a way that they don't really have right now.

Moser: I think it's got to be something there at least entertaining, right? There's about a 50% overlap right now in the customer base between Mirror customers and Lululemon active customers; you know, there's about a 50% overlap. So, there is some familiarity there, but there's also that opportunity to grow that part that's not overlapping, and they'll do that via, obviously, the membership model that comes with the Mirror, the subscription model that comes with the Mirror. But I mean it's going to give them the opportunity to parse a lot of data. It will give them the opportunity to cross market and build the customer base on both sides.

And when you look at the market opportunity, I mean, they like to quote this massive market opportunity. They quote it in the call, they compete in the $500 billion market for global physical activity, in a growing subset of the $3 trillion market for global wellness. When you see those types of numbers thrown around, you think, [laughs] oh, my God, the opportunity is just endless. Let's be clear, I mean, you got to take those with a grain of salt. We know, as analysts, whenever they quote the market opportunity, you need to go ahead and discount that before you even start basing any numbers around it. But I think the point is that regardless of those numbers, it is still a big market opportunity, and I think it's something that, again, even as the pandemic passes, I think that there is going to be the interest here for folks to continue with this type of subscription model. I mean, the convenience is there -- you know, I mean, people are going to be wanting to get out of their house and go do stuff and maybe some people are itching to get back to the gym, but I think there are a lot of people who are going to find the benefits of being able to do this stuff at home just like we're finding the benefits of being able to work at home, it takes a little bit of adjustment, but you can do it. And then you find a lot of benefits there. And I think that this has got some tailwinds to it.

So, yeah, I think that this is a sensible deal, it doesn't look like they're paying too terribly much for it. I think they can really get a lot out of it.

Hill: On yesterday's show, Maria Gallagher and I were talking about Facebook and the pushback they're getting from a number of advertisers saying, hey, we're going to take a break either for the rest of 2020 or just for the month of July. And since Maria and I recorded that show, the following companies [laughs] came out and said, yeah, we're not going to be doing it in July either: Microsoft, adidas, Reebok, Ford Motor, Best Buy, Clorox, Conagra and Puma. And for all I know, Jason, [laughs] by the time our conversation gets published and people start listening later today, even more companies [laughs] may come out.

Let me ask you the same question I asked Maria, if you're a Facebook shareholder, how worried should you be?

Moser: So, I'm not a Facebook shareholder. If I were a Facebook shareholder I would not be terribly concerned. And this is a really difficult one, because I think what we're seeing, I mean, this is all really bringing to light how difficult a problem this is to solve and the limitations of technology to actually solve it. I guess, maybe I'm naïve, perhaps I am, but it struck me as odd, the other day, that Facebook actually had to change their policies so that hate speech was not going to be permitted in ads. I kind of felt like that was just a given, but maybe it wasn't, I mean, maybe they needed to clarify a little bit more in their actual policies. I was glad to see they did that; I was just kind of surprised that they actually had to do it.

The problem is, and certainly Maria made note of this yesterday, that while these social networks are becoming more and more toxic, I mean, let's just face it, they really are, there are still 140 million small businesses that use Facebook's services to grow. And most of those are using just the free services, right? They're getting a lot of value out of it, and it's basically free. They have 8 million businesses who advertise with them. They reach, you know, 2.3 billion people around the world. I mean, the network effect here is so profound that if you're going to be a small business, and that's the business that really depends on Facebook, if you're going to be a small business, you really need to be plugged into that network. I think that Facebook knows their position of power here in that regard, and I also think that, generally speaking, they want to create a healthier environment for users. I don't think they're necessarily an evil company or bad people.

I do think what these social networks do is they bring out the worst [laughs] people oftentimes, and the political nature, it just continues to get worse. And I think it speaks to how polarized the world is, and even after the election this year, it's still going to be that way; I mean, that's just the way it is. It's going to take a lot of effort, money and manpower to be able to fix these types of issues. I mean, it's not something where you can just say I'm going to filter out these bad words and then just life goes on.

You know, Twitter, for example, I'm not a Facebook user, but I am a Twitter user. And the list of words that I mute, and accounts that I mute, just continues to grow by the day and that still doesn't fully take care of it, right? I mean, it's not something that's ever really going to go away. So, they are difficult places to be. It's one of those situations where if you are a small business because of this network, even though there is that toxicity in these networks, people are still using them every day, and you got to go where the eyeballs are. And so, for small businesses, I think, for the foreseeable future, they're going to be dependent on Facebook, I think that the businesses who do pay for those advertisements, this is going to be something that they will, you know, get right back in that platform, and, you know, money talks, as they say.

Hill: One of the thoughts I had in thinking about all these large companies, because you're right, when you just look at the raw numbers, 8 million advertisers, I mean, yes, these, you know, Microsoft, Ford Motor, Conagra, these are some very large companies, but just if we're thinking in terms of how many advertisers, it's a drop in the bucket.

I was however [laughs] thinking that, you know who probably is 100% in favor of this, in terms of the people at the company, the CFOs, the Chief Financial Officers at every one of these companies has to be thrilled that this line item that they had previously budgeted is now being freed up.

Moser: They found a little money under the couch cushion, didn't they? And, yeah, I don't think that's what necessarily guides this, I think that's a nice little byproduct, I think you're right. In a very difficult time that they're able to save a little bit on the ad side there. You know, things will get back to normal. And I just think, this is going to be something that's going to require constant attention and to think otherwise I think is probably not really viewing it correctly. I think if you're going to be an investor in Facebook, there is going to be this, sort of, issue always, just the benefit they have is just this massive network. I mean, that size is a competitive advantage.

And even if there is a mass exodus of users. I mean, 100 million users leave the platform, so what? They still have [laughs] 2.2 billion. So, I mean, again, advertisers are going to go where the eyeballs are. That really speaks to the position that Google [Alphabet] has built to this point in their search platform. Facebook has built that almost unassailable position in the social media space as well.

I think, you know, the companies that really need to be worrying about this kind of stuff, you know, it's going to be your Twitters, and your Pinterests, and Snaps. I mean, they're the ones where they're smaller by every stretch. And those platforms, not Pinterest so much, but certainly Snap and Twitter, those platforms are just as toxic, really. I mean, there are a lot of mean people out there for whatever reason. And you see TikTok, golly! What, it's banned in India because of spying concerns, I mean, it's a really crazy world, the social media landscape. And I think all of these troubles, really, at the end of the day, only speak to the competitive position that Facebook has, like it or not.

Hill: Before we get to the mailbag question, you might have noticed a new look for MarketFoolery and Motley Fool podcast. If you've been to Fool.com in the last 24 hours, you might have seen the announcement of the new logo, a lot of work was put into it by our colleagues.

And, yes, we got a new look and the brand new, large, much more robust, Fool swag shop. The doors are now open, so you can go to Shop.Fool.com and kick the tires on all manner of products with our new logo on it and check it out when you get a chance.

Our email address is MarketFoolery@Fool.com. Email from Vince Granieri, who writes, "I'm 63 years old, 99% invested in Motley Fool recommendations and 99% invested in stocks. No one stock exceeds 5% of my portfolio."

Let me just pause right there. That's fantastic. That is enviable portfolio allocation work on Vince's part. So, just, you know, raising the coffee mug to Vince on that one.

Back to his email, "I would like to increase my cash position to about 10%, in anticipation of retirement. My question is, how is the best way to accomplish this? I know that selling my biggest winners is not The Foolish way, but what strategies should I consider? Thanks, and Fool on!"

A great question. Thank you for that Vince. Jason, I feel like this is a question, we get a version of this question more and more lately. The proverbial good problem to have, because it falls under the umbrella of, "Hey, my portfolios up, [laughs] I'm looking to free up some cash. I don't have other ways to do it, so my path to doing that is selling stocks. How should I be thinking about selling stocks?"

Moser: Yeah. I mean, there is no right way, right? I mean, there are all sorts of different ways to, but the right way is the way that works best for the individual. And it sounds like, in Vince's case, like you said, he is in a wonderful position from a portfolio management perspective. So, it doesn't sound like he has some heavy-weighted position that he really benefits from trimming back on.

So, personally for me, I like that he mentioned not selling winners, because that is something that you tend to try to avoid, if you can. I mean, those winners tend to keep on winning over the long-haul. For me, you know, thinking about Vincent's position here. I think I probably would be looking, first and foremost, at my underperformers, at my losers. And, you know, if he's invested in a lot of Foolish stocks, maybe then have that many losers, hopefully he doesn't, but I mean there are always going to be some in there that are underperforming. So, I think that's probably where I would go first. And understanding that, you know, if you're trimming losers or you're taking a loss there, then there's the potential tax benefit there.

And if you need to raise additional cash beyond that, you can look at some of your better performing companies and maybe harvest some of the gains across that space there. And, again, having that you've sold off losers and gains from the winners, I mean, you're not going to be in, really, too much of a bind from a tax perspective. But, yeah, I think that generally speaking, I like his belief that selling winners is probably not the first place to start; I would not start there either. It sounds like it may need to be a little bit of a combination effort there, so I would start with the underperformers, get rid of those first, and then whatever you have left to get to that 10%, maybe start looking at some of your winners and, you know, making some judgment there as to which ones you feel more comfortable harvesting some gains from. And then just remember the tax implications that come with it.

Hill: Jason Moser, always good talking to you. Thanks for being here.

Moser: Yes, Sir. Thank you.

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 MarketFoolery. The show is mixed by Austin Morgan, I'm Chris Hill, thanks for listening, we'll see you tomorrow.