The Case Against Google

In this episode of Industry Focus: Tech, Dylan Lewis and Motley Fool contributor Brian Feroldi bring you the details of the government's antitrust lawsuit against Alphabet's (GOOG 0.56%) (GOOGL 0.69%) Google and also how Snap (SNAP 4.71%) became a market-beater.

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This video was recorded on October 23, 2020.

Dylan Lewis: It is Friday, October 23rd, and we are talking about Google's antitrust case, and Snap's big quarter. I'm your host Dylan Lewis, and I'm joined by Fool.com's sensational straight-shooter of so-so snapshots, Brian Feroldi.

I like that you worked the company name into that one, Brian.

Brian Feroldi: I think I should do that more often, don't you?

Lewis: I think that's a fun bit. Yeah. And I think our listeners are waiting for the day that you trip me up. And if they ever have a suggestion for something, something that is so tongue-twister-y that I won't be able to get through it, you are @Brian Feroldi on Twitter and you are happy to get those suggestions.

Feroldi: Please, I would love naming suggestions, we have to trip-up Dylan. It is a mission that all of us should be on.

Lewis: [laughs] Pretty big story this week in tech, Brian, kind of an unavoidable story, it doesn't even matter if you really follow the industry or the stock market. The fact that the Department of Justice along with 11 state Attorneys General are filing a civil antitrust lawsuit at Google, it kind of dominated headlines and became one of the major stories of the week.

Feroldi: I mean, this certainly isn't our first time that we've seen governments take legal action against companies like Facebook (META -1.12%), Google, Microsoft, etc., fill-in-the-blank tech company there. This one definitely caught my attention. As you pointed out, this has been in 11 different states, and when I see the name Attorney General and antitrust concerns, I always take a look.

Lewis: Yeah, this has been building for a while. And I don't think anyone is surprised by this, it's more that we, kind of, formally know that this is something that's happening now. And this is, kind of, it's long-ly been speculated, I mean, big tech, I think on both sides of the aisle, has been a target, and so it was really just a matter of time before we saw some movement. And we're going to talk a little bit about what the impacts of some of this might be, but I think just to get some of the details down here. The Department of Justice, in this claim, is repeatedly referring to Google as, kind of, the gatekeeper of the internet in this release, and what they're doing is trying to draw comparisons to how Google is acting and the past enforcement of some of the Sherman Act with AT&T in 1974 and Microsoft in 1998.

And, Brian, normally I would not read a bunch of legalese on the podcast, [laughs] because I think it could be dry, but I think in this case it's important, because you and I are not going to summarize this any better than the DoJ wind up stating it, they chose their words very carefully. And they allege, that Google has entered into a series of exclusionary agreements that collectively lock up primary avenues through which users access search engines, and thus the internet, by requiring that Google be set as the preset default general search engine on billions of mobile devices and computers worldwide, and in many cases prohibiting preinstallation of a competitor.

And they itemized a couple of things there, they're really looking at the exclusivity agreements that Google has with folks that are in the smartphone space which basically prevent other preinstalled search apps or services from competing. They also look at some of the arrangements of preinstallation with the specific mobile devices that maybe make them undeletable, as well as, some specific long-term agreements with Apple, and of course all of that bundling up into something where this company making a ton of money there are "monopoly profits," according to what they filed, and they use that money to continue to buy preferential treatment for search engine placement on web browsers and in mobile apps.

So, I think the big thing here is how Google is using contracts to lock-in default status. And this shouldn't be a surprise to anyone that has used a smartphone in the last, like, 10 years.

Feroldi: Yeah, Google, I mean, completely dominates search, it also is the search engine, its Android search engine is the default search engine on about 90% of smartphones that exist in the world. No surprise to see that the default search engine on those systems are Google, that is how Google monetizes its platform, and the reason that it can give its operating system away for free, it makes it all up on the backend on search. This is an interesting angle that they're taking here, because it doesn't seem like they're going after the fact that Google is so dominant, what they're alleging here is that Google is signing contracts that forbid other competitors to be able to be used. Not surprisingly, Google shot back against that.

Lewis: [laughs] They did. They certainly have their own opinion. And they will easily point to the fact that there are other players in that space. So, Google pays Apple for relatively prominent placement in Apple devices. And that paycheck varies depending on the year, it's about $8 billion to $12 billion. That is a sizable amount of money, and if you're Apple, that's very high margin revenue. You don't really [laughs] have to do much to fulfill that revenue. And it's a big deal for both of those businesses. But importantly, they say, well, if you pull up a Safari window, you can easily search via Bing, you can easily change your default; which I think is true to some extent. But defaults are so powerful, regardless of whether they are tech or not, but I think particularly with tech, because it's work. Getting outside of whatever your core use is and actually taking the time to adjust settings, it's more than most people are going to do. And it seems like DoJ is really focusing on that, because it creates behavior automatically.

Feroldi: It does, and Google knows that, of course. The reason they pay Apple [laughs] billions of dollars is because they know most consumers won't take the time to switch their default search engine, especially if they're happy with that default setting that's in there. Google points back that they essentially view this as the shelf space of the internet, the same way that when you go to a grocery store the big brands like Kellogg's and General Mills, pay a premium to the grocery stores to have their products be on the most visible shelves, and their competitors are on the lower shelves. Google is alleging the same thing here, and it's hard not to agree with that, because as you just said, any user, at any time can really change these. I mean, myself, while I use Google Chrome as my web browser, my default search engine Ecosia, which is a search engine that plants trees every time I perform a search. So, me as the consumer, I don't see how I am [laughs] harmed by having that option because, again, I'm using a Google product to do searches on something else.

Lewis: Yeah. Do you think you're representative though, Brian?

Feroldi: No, I don't think that I'm representative, and that's shown by Google's extreme dominance and their 90% market share. One other thing that they point out, which I think is a good point on their behalf, is if you look at mobile, I mean, there's no doubt that Google is the dominant platform there and they pay companies like Apple for that positioning and then there's their Android operating system. If you look at desktop, who dominates there, it's Microsoft. Microsoft really does not want Google to be used. They have all of their default search engine traffic pointed at Bing. Even with that, though, it's pretty clear if you look at the top searches on Bing for what consumers actually want; I actually have them here, and three of the four most popular searches on Bing are YouTube, Google and Gmail. That is [laughs] consumers purposely typing into Bing and saying I want Google products immediately. If that doesn't tell you something about consumer preferences, I don't know what does.

Lewis: Yeah, I think Bing's tag line could be, "a way to get to Google." [laughs] But I think that that's, kind of, the messy part of this from an antitrust standpoint, is Google will very quickly point to the fact that they have products that people love, and they are kind of playing this tack of, you're punishing us for being successful and creating things that people enjoy, and I think that's true.

That said, I don't think that people fully grasp some of the other elements that happened with this business that they're able to do because they have such a massive position. And so, they are able to be quite benevolent, [laughs] and, you know, basically give away most of their products, but at the same time we don't have a ton of insight into the data side and the privacy side of the business and I think we're increasingly becoming more and more aware of that. But without really strong competition, and you could argue that a lot of these things inhibit competition, that doesn't have to become a selling point for them, and it puts them in a position of power to basically dictate what the terms of privacy and data are.

Feroldi: It really does, and what's interesting to me, I mean, this is definitely going to be a lawsuit for us to watch, but what's the outcome here? Let's say the DoJ wins, what do they win? Is it that Apple has to make Bing its default search engine or does the government get a piece of the revenue or...? I don't know, if it's like, yes, we can prove all this, what is the outcome aside from Google just cutting the government a multibillion-dollar check like it does [laughs] on a regular basis already. So, that to me is a big question that I don't know the answer to.

And the other thing that I found interesting about this, I mean, this is always worth noting, but the market really seems to shrug this off completely. Again, when I first saw the headline, my first reaction was, this can't be good, but Google stock is up 3.5% this week, so it's very clear [laughs] that the market is basically taking this news with a big yawn.

Lewis: I think we've known it was coming for a while, and I think maybe that's part of this reaction. What I think is a little curious, Brian, is this has been very focused on distribution and defaults, that's basically DoJ's case, we're looking at how users put these things into their daily life and basically how they make sense of these products, what their choices appear to be when they're using browsers or when they're using phones.

They could have taken a different tack and said, you own Google and YouTube, you own all of these internet properties that effectively give, you know, X percentage of people's online time. And that would seem like something where they're going to start hiving off different business segments, and saying, you know, you can't operate these two different properties, it seems anticompetitive that you own them both. That's not really what I got from reading DoJ's, at least initial release on this.

Feroldi: Yeah. I mean, who knows where this will lead in time, this could be completely nothing or it could turn into, it could lead down the road to Google getting split up, as we've heard numerous times before, and it's been kind of a risk for investing in any of these big tech companies. When I view news like this, I always take note of it and I always track and follow how these things go, but as investors, there's not much that we know today other than this is in the news, and there's not really much that we can do other than sell our shares. I certainly am not [laughs] going to be selling my Google shares based on this news. And it's also worth remembering that, even if the worst does happen and Google has to pay billions of dollars in fines and get broken up, that might unlock shareholder value, [laughs] as crazy as that is. So, to me, this is a news story that's worth watching, but for right now doing nothing is the thing to do.

Lewis: Yeah. I think what's kind of fascinating about this is, all of the reasons that are being cited for why this is anticompetitive are precisely the reasons why people buy Alphabet stock. You know, you have this property that is massive, it prints money. They are able to bring in so much in ad revenue and they're able to give people a really great product for free. There are catches with that, and I think those catches are at the data and privacy side. But all of the things that make it great and investable are exactly what are, kind of, the points that DoJ is trying to make as an issue.

I think, if there's anyone who maybe isn't happy with the status quo, it's folks that are buying ads on the other side. And so, we think of ourselves as the users of these products and the customers of these products, the reality is, the advertisers are really the customer for a company like Google. And one of the points that's made by DoJ here is, basically with reduced competition Google has pretty much monopolistic control when it comes to what they charge advertisers and what they're willing to offer advertisers in terms of innovation, and that could be construed as anticompetitive. So, this might be something where the financial harm element of the case looks a lot more at the advertisers' side of the business than the consumer side of the business, it's hard to make that case when you are giving away a product for free.

Feroldi: Yeah. And it's also worth pointing out that when the antitrust laws were written, Geesh! I think almost 90 years ago at this point, tech companies like this didn't exist. I mean, how could they foresee that there would be companies out there that would be giving away their products for free to consumers, like, that would be like something that they couldn't even imagine. I could see the government having a hard time using laws that were written 90 years ago against companies like this. So, it might be the case that noise like this keeps coming up, which necessitates the need for more updated antitrust laws, but again, that's all speculation, who knows what's going to happen.

Lewis: Yeah. It's not the conventional price gouging vertical integration, we own all the distribution so you have to pay it type antitrust thing, which is difficult. And, Brian, I think we often look at news and we say, we don't really know what to do with this. We like the thesis of this business and it's hard to really understand how this is going to impact it, you know, we're going to hold onto our shares. If you want a historical example of why that's a helpful way to look at these things look at the last major antitrust case, you know, look at Microsoft. They were firmly in DoJ's crosshairs and wound up being a landmark case in the late '90s, early 2000s, that company has performed just fine over the last 20 years. There's a period where the stock didn't really do a lot, that wasn't really because of the antitrust case, that was because of management. If you bought at the peak, right before a lot of the antitrust stuff came to roost, you would still be sitting on some pretty great gains.

Feroldi: And the amazing thing about this is, there's an argument to be made that this antitrust suit, if it goes through, could directly help Microsoft's [laughs] product to become more powerful in the search market. So, yeah, history loves irony apparently.

Lewis: [laughs] All right. We're going to take story No. 2, also staying in the internet property realm with this one, Brian, and that is Snap's earnings release. I think, if people have listened to the show and haven't really been following Snap, they would think that this business is not doing particularly well. We have not touched on it very much, but early on, went through their prospectus and some of their early earnings releases, we're pretty unimpressed. And very quietly this has become [laughs] a very good performing company.

Feroldi: It really has. I mean, this stock is up 159% year-to-date, it has rallied sharply off of its 2019 lows, and earlier this week it reported earnings and jumped 30%. I was shocked to see this, but this, Snap, is actually beating the market since it came public. As you said, I specifically remember the episode that you and Evan Niu did, diving deep into this company. And I was also thoroughly unimpressed with this business, especially compared to the alternative social networks, like Pinterest, like Facebook, so I just completely wrote this company off. Well, apparently, we shouldn't do that, because this business is now a market-beater.

Lewis: Yeah, I was shocked to hear that, because I was like, OK, well, you know, they're up, but they at one point were trading in the single digits; I think, their shares were around $5 or $6. So, you know, they're probably on some decent gains, but there's no way they're back well above their IPO price or at the point where they're beating the S&P, but that's really how successful this business has been. Why don't we unpack some of the numbers then we can, kind of, get into what we expected with this company versus what we've seen?

Feroldi: So, the big takeaway here is daily active users; that's the metric that most investors look at and pay attention to. In the most recent quarter that figure grew 18% to $249 million; and that number was growth across the world, North America is their most mature market and the growth there was about 7% in Europe, it was growth of about 10%.

The big one here is the international news, we saw the rest of the world, which that's just all called, it's called the rest of the world, but users grew 43% everywhere else in the world to 87 million. One thing that they noted on the call was that TikTok was actually banned in India in June, and they saw that they saw a particularly strong growth in India in June. But the big headline there is 18% growth in users; that's impressive.

Lewis: Yeah, the interesting thing with this business has been, like, what do they do and what does their North American segment look like long-term, because as you mentioned before, it's one of their more mature markets. They're not really enjoying blistering user growth there. And for folks that have heard us talk about any of the social media companies, the North American segment is so priced for all of these companies, because that's where the Average Revenue Per User is going to be the highest. It's the most dominant market in terms of ad spend, consumer spending is high and there's just a lot of disposable income, and so that drives high ad spend. Quarter-over-quarter they didn't grow that number in North America. They're growing in the low-single-digits mid-single-digits year-over-year. I've always wondered if Snap is going to be able to make that jump that Facebook did from being something that kids like, you know, college kids like, to being something that literally everyone is on. It doesn't seem like that's coming together, but they've proven that [laughs] they can make a lot of money even without going from what we call like that sub-millennial group; is that Gen Z, Brian, is that what that group is?

Feroldi: Yeah, I believe so. And yeah, that was my big question with this company too. Snap seems to have done a really good job with teenagers who, I guess, now at this point are in their young 20s, and they really seem to dominate in that market, but that's not where a lot of the spending is. So, to me, it always seemed like a really niche product and they struggle to grow outside that number. As you pointed out, they're still not really growing that fast in North America, but it's clear that this platform resonates with age groups all across the world. If you were to tell me that this business could have 250 million monthly active users by now, I probably wouldn't believe you.

Lewis: Yeah. And another part of the story that I think we are skeptical of early on was their monetization efforts, knowing that they were going to be, you know, generally appealing to a younger audience. I don't know that their ARPU stacks up to some of the other major social media players in an impressive way right now, but they've been able to meaningfully grow their topline, and some of that has been, they switched over to programmatic and had some ugly results related to that, but then that gave them the scale with their platform that allowed them to post some really impressive revenue growth. And in this most recent quarter, revenue up over 50% to almost $700 million, and that is their fastest growth in two years. So, they're clearly doing something right with the platform and the way that they've introduced monetization.

Feroldi: Yeah. So, 52% revenue growth. They absolutely crushed Wall Street's estimates by over $100 million. And that 52% growth was actually a really strong acceleration from the prior quarter, which only showed 17% revenue growth. Now, the delta between that 52% revenue growth and 18% growth in users is, what you just said, ARPU, Average Revenue Per User, that figure jumped 28% worldwide to $2.73; that's a key metric for investors to watch with social media platforms like this. And clearly, they're able to squeeze more revenue out of each of their users, while at the same time they're growing their user base.

Now, one of the things that I thought before was that they were a niche player, that they weren't going to grow that much and their financials, when they first came public, were dreadful. I mean, gross margin was low, the net loss on this business was horrific, stock-based compensation was really high, they had a huge dependence on Amazon Web Services, so their platform wasn't scalable. I mean, pick a metric and I was like, no, this is not what you want to see. Their recent numbers prove that they're starting to overcome all of that. So, not only did revenue grow 52%, but gross margin expanded from 51% to 58% this quarter; given their dependence on AWS, I didn't think that that was possible, so kudos for them for getting it done.

Lewis: Yeah, I'm surprised by that. And for folks that maybe need a quick refresher, they don't own their infrastructure, they wind up, basically, outsourcing their cloud stuff to AWS. And what that does is it puts them in, kind of, an asset-light model, where they don't have to put all of these upfront costs into making sure that they can deliver to their users. What it also means is that they don't control the costs and really enjoy leverage in the same way. And so, they pay for usage and it turns what would be an upfront fixed cost into a variable cost. And so, you don't enjoy leverage in the same way. But I guess that they've gotten to the point where they're using enough, they're a big enough contract, that they're able to go back to AWS, which is impressive, and say, you know, we want slightly better terms on this contract.

Feroldi: Yeah, that's the benefit of scale, you can do that. Now, is this ever going to get to Facebook's level of margins? Probably not. But even if you can make a business out of 60% or 58%, low 60%s, grow margin for sure. What was also impressive here, is that, if you squint and looked very carefully, you actually saw that the company was "profitable" on a non-GAAP basis. So, they actually reported a non-GAAP net income of $0.01/share, that was better than the $0.04/share loss that was brought in last year, but it was much better than the $0.05 net loss that analysts were expecting.

Now, that's a very low quality profitability number, because free cash flow here was still -$72 million, they had $192 million in quarterly stock-based compensation quarterly, so they continue to dole out shares like crazy, but they also have $2.7 billion in cash, so they can continue to fund these losses. And if they can continue to grow at this rate and expand margins, they could be legitimately profitable in the not too distant future.

Lewis: Yeah, there are some interesting things with this company's financials for as many things [laughs] as are moving in the right direction, you know, over 50% margins, you would think that that winds up creating a profitable business fairly soon. And yet, you look at their spend and it raises some eyebrows. So, they did over $1 billion in gross profit over the last 12 months, Brian. They wound up posting an operating income loss of over $900 million. And you dig into the individual expenses there, over $1 billion in SG&A and over $1 billion in R&D. That's a lot of money to be spending in R&D. And I don't know that we've seen anything that is necessarily worthy of that spend from this company yet.

Feroldi: Well, clearly, the management team here believes that their platform isn't just a niche player and they're really going after -- they think that they can go after -- an even larger opportunity, that is the story as it's coming today. I mean, given this company's valuation today, they're trading at something like 25X, about 26X sales at this point, you are still betting on not only will the user base grow but they're going to squeeze more and more revenue out of each of their customers. Can they do it? I mean, we'll just have to see.

Lewis: [laughs] I think that there is definitely room for them to expand and grow by basically getting more juice for their squeeze, by making that ARPU number rise over time, there are variety of ways to do that, some of that's going to be ad load, some of that is going to be proving to advertisers that the spend is worthwhile and it's effective and that should cause ad prices to rise over time if that's true. What does become hard though is, I think a lot of that R&D is them looking beyond their current scope. And I've never really been convinced that they have a good vision for that, you know. They continue to be this camera company, and that's the line that they come back to a lot, they focus on it on their earnings release.

They do a lot in AR. I haven't really been convinced that the spend that they've done with spectacles and these kinds of things is money well spent. And I think to buy this company at this valuation, you really have to believe in Evan Spiegel.

Feroldi: I think you do. And at least historically, they have been a pretty innovative company. I mean, whenever they come up with an innovation, Facebook pretty much copies it immediately and then makes a ton of money on it. But the thing that stood out to me here that I think is exciting to me about Snapchat is what you just said, they are investing heavily in augmented reality, they are really big believers in this. And just within this quarter they've rolled out a couple of features that I think are pretty interesting. So, they have partnered with a whole bunch of companies, like Champs Sports, Kohl's, Levi, the Jordan brand, that will enable those brands to have their users "try on" apparel and footwear features while they're wearing at home, that's a feature that we've seen work successfully at makeup companies, for example. And I could see, if I was in charge of the Jordan brand, using Snapchat to check out how Jordans looked on my feet, and then seamlessly going from there to buying them through Snapchat's platform. So, the AR investments are a longshot, but if AR can do what it could potentially do, that could be a major avenue for this company for the long term.

Lewis: I think that's particularly interesting given what we're dealing with right now, Brian. You know, we've, kind of, long speculated about what bringing digital into retail looks like. And you see some renderings of, like, fancy mirrors in stores where you can, kind of, digitally try on stuff without even having to try it on; by kind of having it just augmented reality, kind of, plant it onto you. The idea of being able to try fits from home in a position where you can't go to the store is a [laughs] pretty compelling offering beyond just the core advertising elements and I could see a lot of these bets paying off, they just seem like really, really big bets.

Feroldi: They certainly are. And kudos to Snap for having that conviction and investing there. Like I said, if AR takes off, the growth estimates for augmented reality technology are just absurdly big over the next 10 years. If Snapchat can be a leading provider of that backend technology, that could be a substantial business for this company. And let's turn to guidance for a second, because the company did actually offer some bullish guidance for the fourth quarter; that, I think, in part help to justify the rally this week, so management thinks that they're going to continue to grow their average users by another 18% in the upcoming quarter to get to 257 million, they didn't give specific revenue guidance but they said that 50% revenue growth year-over-year in the next quarter is attainable. And CFO also said that their goal is still to get to GAAP profitability and positive free cash flow. When you add up all of that I understand the enthusiasm for this company right now.

Lewis: I'm curious, Brian, because you are a Pinterest shareholder and I think a pretty strong bull on Pinterest. Is that a fair way to characterize it?

Feroldi: [laughs] Yes, a fair way to characterize it.

Lewis: [laughs] And I think in a lot of ways the story is pretty similar with these two companies, where they have a loyal base of users that's sizable, but it's not on the scale of, say, Facebook or Instagram in North America. A huge part of the thesis for both companies is, we are going to be able to monetize that group well, we're early on in our monetization efforts. Are you starting to see Snapchat look a little bit more like the Pinterest that you like, is this becoming a more investable idea to you?

Feroldi: It's definitely becoming a more investable idea. I will say, between Pinterest, Twitter, Snapchat and Facebook, Snapchat is still my least [laughs] favorite idea of those three, and I'm an investor in Facebook, I am also an investor in Pinterest, so I don't see the need to add Snapchat to my personal portfolio. To your point, the thesis for both Snapchat and Pinterest is pretty similar, the thesis is, these platforms are being discounted by the market, we think that they can grow bigger, and most importantly, we believe that they can grow their Average Revenue Per User much, much higher than it is today. We're seeing clear signs of that with both platforms, but if I was to bet on one for the long term, no doubt in my mind it would be Pinterest.

Lewis: And some of that, you know, just kind of comes down to what you use. Like, a big part of investing in this kind of space is, do you believe in the platform, do you like the platform? And you can hear someone talk about how something is great, but if it's not something that you can use and really wrap your head around, it's hard to get onboard with that thesis.

Feroldi: That's correct. And I just think that Pinterest's platform is much more monetizable than Snapchat's platform is. You go to Snapchat to communicate with your friends to send each other images, why do you go to Pinterest? You go to Pinterest to search for things visually. You go there because you have an idea, you don't know what it is, and when you see a certain picture you are inspired to take action, that to me, is far more monetizable, just the roots of the platform, than Snapchat is. So, for that reason alone I'll bet on it, never mind the fact that Pinterest is cash flow positive and reaches possibility and doesn't have obscene stock-based compensation.

Lewis: You know, Brian, as someone who is currently planning some home renovations, I can tell you that's 100% correct. That is why people go to Pinterest, you create boards based on stuff that you want to buy and if you can put stuff in front of people when they're already in that attitude, it's very compelling. One of the other things that I've kind of wondered about with Snap and still haven't really gotten a good feel for is just, is this something that people will stick around with? I think with Pinterest, you build a board and you are coming back to ideas, and the recommendations within those probably get stronger the more that you use them. With Facebook, you have the strong network effect of people posting content there, and that content living there, being able to revisit that content, kind of the same thing with Twitter to some extent too.

A big part of Snap's story was the ephemeral messaging, and because something disappears there isn't the residue of, you know, being able to go back and revisit it. And so, I've always wondered whether, if something else comes along, that would be able to sustain their user base? It seems like even with Instagram and Facebook [laughs] shamelessly stealing some of their features, they've been able to keep their core audience happy, but maybe just not grow it.

Feroldi: Yeah, I think so. I think that's right. And by the way, we should also point out that the love that Snapchat received this week did spill over to Pinterest. Pinterest shareholders also had a really good week based on this. The thesis being, well, Snapchat [laughs] is doing this good in online advertising, Pinterest must be following suit. One other thing that I find interesting is, if you buy my thesis there that Pinterest is the more attractive platform than Snapchat, Pinterest market cap, $30 billion; Snapchat, $60 billion.

Lewis: Yeah, it's kind of wild. And I lost track of the stock for a while, because I, honestly, kind of, written it off and this is, kind of, a mea culpa episode, I think, for me where they've proven to do a lot of things very well, so much of the valuation still hinges on I think what they could be. I still have concerns with their financials. I think Pinterest is a safer bet in the space. But I wonder if those R&D bets pay off and that spend comes down, there's a profitable business here at some point. And that becomes pretty interesting, because we're seeing that we're not appropriately valuing the revenue per user potential for some of these platforms. And when you look at the likes of some of the more mature ones, there's a big number out there if you can reach it.

Feroldi: Yeah. And one other thing, I just want to double-click on something else you said before that was also a concern that I had about Snapchat in the first place. Snapchat's users tend to be teens and tweens and they have proven to be far more loyal to this platform than I thought they would be. I thought that they would have abandoned this already for the next kind of great thing. Almost the same way you look at, like, what's the latest teen clothing brand of the day and will it be the same popular brand five years from now. Snapchat has proven to be far more resilient in that respect than I thought it was going to be, and if they can continue to maintain that you could easily see this being a highly profitable business in time.

We also got some data this week from Piper Sandler, they did a research on talking stock with teens and asked them about their favorite platforms. Instagram came in at No. 3. TikTok came in at No. 2. No. 1, Snapchat; good for them.

Lewis: Good for them. [laughs] And you know, this is one where I'm like, I'm rooting for you guys, this is fun to watch. [laughs] You know, like, I think it's nice to just see it as a turnaround story and see a company really get traction. I think there are easier ideas out there and ones that aren't quite as precarious, but good on Snap for getting the story and really just to turn it around; I think they've done a fantastic job over the last couple of months.

Feroldi: Yep. This is a far more interesting and durable business and I think we first assumed, and good for you if you've bought Snap and believed in the story at all from the beginning, because you have definitely gotten market-beating returns today.

Lewis: Yeah. I think this emphasizes, Brian, we don't always get it right. In fact, we are probably right about half the time. [laughs]

Feroldi: And if we could be right exactly half the time, that's a great track record.

Lewis: [laughs] I like to think that -- maybe not with investing, Brian, but with a lot of other things, you're right more than half the time, and I'm always happy to have you on the show. Thanks for joining me today.

Feroldi: Always fun to be here, Dylan.

Lewis: 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 at [email protected], or tweet us @MFIndustryFocus. If you're looking for more stuff, subscribe on iTunes or wherever you get your podcasts.

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 Tim Sparks for all his work behind the glass today and thank you for listening. Until next time, Fool on!