In this episode of Industry Focus: Tech, we check in on three companies that at various points over the past few years were down 80% from highs, but roared back to give investors multibagger returns. Listen for breakdowns of how Upwork (UPWK -0.71%), Snap (SNAP 0.68%), and Twitter (TWTR) transformed, and the lessons we've taken away from each company's rise.

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This video was recorded on May 21, 2021.

Dylan Lewis: It's Friday, May 21st, and we're talking about three stocks that came back. I'm your host, Dylan Lewis. I'm joined by's best boy of big bounty bouncebacks, Brian Feroldi. Brian, how are you doing?

Brian Feroldi: Dylan, I am doing great and we are having an exciting day in the Feroldi household because we are heading to Orlando tomorrow, but none of my kids know that. So when they get off the school bus today, we're going to be surprising them with: "Hey, guess what. Anyone want to go on vacation tomorrow?" It should be a fun day.

Lewis: I'm not a parent and I think maybe some of our listeners have figured that out over time. I didn't realize that this was a thing, the surprise vacation for kids, until one of our other co-workers, Brian Tighe who works in tech for The Fool, said that they had a Disney vacation planned for the family, except the kids had no idea until the night before.

Feroldi: Yeah. That's exactly what we're going with, and we don't know because we've heard from other people, sometimes it can go really well, sometimes the kids are so confused and disoriented, they don't know what to think. Fingers crossed they're excited.

Lewis: Brian, before we get into talking about tech stocks, and listeners, I promise we will, is the logic there that you want to keep the kids from asking you all the time about Disney World and going to Florida? Is that the idea?

Feroldi: The logic was, my wife wanted to do it, so I said OK.

Lewis: There you go, that's simple enough. That's fun. That's a nice little tidbit for me to put in my pocket if I ever have kids, Brian. I will be checking in and seeing how that worked out for you.

Feroldi: Yeah. I'll let you know. 

Lewis: Speaking about checking in, today on the show, we're going to be looking at three different companies that were kind of written off in different ways by investors, certainly by us. Not all of them, but I think we had each picked and chose our moments with these businesses. We were like, I don't know what really makes sense. Of course, all of these businesses that we're going to be talking about have gone on to put up incredible returns for some of the more patient investors out there or folks that were willing to buy into the businesses when they were going through some of those more tumultuous periods, Brian.

Feroldi: If you want a textbook case of why we always say give a company a little bit of time to be on the public markets before you buy in, the companies we're going to talk about today are three classic examples of why. All three of these companies came public with a lot of fanfare. All three of them were priced pretty high, and peak to trough, early investors at one point on all three of these stocks were down more than 80% on their investment. I know that I wrote off all three of these companies as uninvestable. That was a bit of a mistake and an oversight because they have come roaring back to life, and as you said, Dylan, not only multibaggers from the low, in at least two of the cases are now beating the market since coming public.

Lewis: I think for us, a really good moment to take a step back, look at our own notebooks a little bit on how we've been assessing companies. There are a lot of really good teachable moments here. One of the reminders for me when I was preparing this show, Brian, is also, we tend to think of success as up into the right, we see that line steadily moving in the same direction. Success actually looks like massive swings down, massive growth and acceleration afterwards. Generally, the trendline is up to the right, but there are a lot of hiccups and a lot of speed bumps along the way.

Feroldi: Take any successful investment. Anyone. Name any of the biggest winners of all time. Every single one of them is down a gut-wrenching amount at some point in its life. Amazon was down peak to trough like 92%. But if you had the ability to hold through that, wow, have you been rewarded. So, yes, on the outside, it always looks like things are smooth and up into the right. If you are a shareholder of any great business, you have to prepare yourself for Huge volatility in both directions.

Lewis: Great companies will occasionally test your mettle. If it's an innovative business and a disruptive company, they're probably not necessarily doing things the way that the rest of the industry is, or maybe the way the incumbents are, and with that comes some volatility. Brian, we're going to be talking about three names that I think people generally know in today's show. We're going to be talking about Upwork, we're going to be talking about Snap, and we're going to be talking about Twitter. Let's start with Upwork, I think probably one of the ones that most Fools are most familiar with.

Feroldi: Upwork is a leading platform for freelancers. If you are an employer and you want to hire a freelancer, you can sign up on Upwork and get access to hundreds of thousands of skilled freelancers from around the world. If you're a freelancer, it's a great platform to go to to showcase your skills and pick up extra work or even make it turn into a full-time gig. When this company came public in October of 2018, before they came public, we did a detailed breakdown on the show, and there was a lot to like about this business. 

Gig economy is growing. Upwork was the largest player in the market by far. It had over 375,000 freelancers at the time, almost half a million businesses including 30% of the Fortune 500 and 85,000 of what it calls core clients, which are really its highest value repeat-purchase customers. The platform did over $1.5 billion in transactions, which is a big number in absolute terms but just a tiny, tiny sliver of the total addressable market opportunity. The financials were looking pretty good. Revenue has grown 20%. Gross margins were over 70%. it was losing money, but the net loss for the full year was about $14 million. Very manageable number. I said at the time, this looks like a top dog and a first mover in an important emerging industry, so I was really interested in the business.

Lewis: Yeah. I think what's interesting about Upwork in particular is that we did that show and I was interested. I got that first position. I didn't really wind up building it out too much because I needed to see more from the company. But I think sometime after, it was maybe the first six or nine months after it was publicly traded, I wound up buying in for the first time. The thesis was pretty simple. You broke down the numbers here, but basically, leader in freelancing. Freelancing is only becoming a more and more relevant part of the employment conversation. You're seeing a lot of very particular skills be outsourced as businesses figure out whether they need to be internal or they belong more as projects. There are a lot of benefits to being able to do things around the clock, which a platform like Upwork allows you to do with people in different time zones. There's so much to like here. It didn't really turn into a market-beating stock anytime soon though.

Feroldi: No, this is a company that when it came public, it priced appropriately. I would think the price-to-sales ratio was completely reasonable by today's standards, around seven or eight times trailing sales. I mean, if something became public like that, we'd be like, "Wow, why is this so cheap" today. But investors clearly bought into the idea this company are early. The stock price jumped to about $25 right away, so there was a significant one-day pop, and that was pretty much as good as it was going to get for this company. Over the next year and a half, the stock fell peak-to-trough 80%, and if you look at why, the platform was really slowing down. This company was growing in the 20%-ish range prior to coming public. That's slowed to the high 'teens range. Expenses were growing much faster than revenue, so while it was nearing in on profitability prior to coming public, it reversed that and its net losses were growing, and the company missed on its first two earnings reports on the bottom line within investors. This is something that David Gardner has taught me to do. He says, "When a company comes public, that first earnings report really sets the tone for the business moving forward. If they miss and they start out with excuses, you can bet that there are more excuses to come."

Lewis: I think that's exactly right. There's a lot of fanfare around the IPO and people are really excited, but at the end of the day, you got to go run a business after the party. We can get so excited about those things, but that's where the real work begins and that's where everything that you do is going to be publicly scrutinized because the books are available. I will say, thankfully, I did not wind up one of those folks that were down 80% in my position with Upwork. My basis wasn't quite that high, but I think I was still sitting at like 40% losses at one point and it sat collecting red in my portfolio for a long time.

Feroldi: At the time, I just remember scratching my head saying this investment thesis makes so much sense. Why isn't it working? Why is it just not working? I think the honest answer there was it was a management issue. If you look at the company that took this company public, the CEO's name was Stephane Kasriel. He was the head of this company for several years, and got them through the IPO process. I just don't think he was getting the job done, and it just shows how important management is. In December of 2019, the Board agreed and essentially showed him the door, and they promoted the chief product officer to the CEO role. Her name is Hayden Brown and I have nothing but positive things to say about this new CEO. She has done a remarkable job at reigniting this company back into a growth business.

Lewis: There's certainly a lot of growth for them there if they were able to channel all the tailwinds that are pushing this industry forward. There's so much to like. There's so much talk about side hustles right now. You have so many creatives that are taking advantage of being out of major cities. Upwork is one of those businesses that's at the nexus of that. It's nice to see that the results for them have started to turn around a little bit because you just want to see them succeed. There's a lot to love.

Feroldi: If you look at the most recent quarter results, they are much more than what you would expect to see from a high growth company. In the last quarter, their number of core clients they have in the platform grew 46% to 152,000. As a reminder, when they came public, this number was about 86,000 or so. Gross service volume, which is just a measure of all the commerce that takes place on the platform, grew 41%. As a result, revenue grew 37%, gross margin ticked up a little bit to 73%, and this company reported an adjusted net profit of $4.2 million. That's a pretty remarkable turnaround. When you combine that with the fact that 2020 was definitely going to be a tailwind year for this business, it's understandable why investors have re-rated this company higher.

Lewis: Brian, let's pause for a second and talk a little bit about some of the teachable moments here with this business. I think all three of the companies we're going to be talking about offer something here both in terms of not just how to look at businesses, but also from an investing process standpoint. I will say it's been wonderful to see my shares appreciate in value and for it to become something that has basically doubled and a little bit more in the time that I've owned it. That said, I don't really feel like I should have put more into it when I made that first buy. It can be tempting to think that way sometimes. We're like, if only I had put an extra couple thousand dollars into this stock that multibagged. But I look at this and I say, it took a while for this business to really show that it deserved more of my money.

Feroldi: I think that's completely fair and I don't blame you at all for overlooking this business. But when you look at the business results, the thesis for owning this thing was, it's the top dog, it's the first mover, it's going to grow as the gig economy grows. Yet, its growth rate was slowing down. We've seen lots of companies come public and that's a massive marketing event for them, and many of them are using it as a tailwind to actually reaccelerate their growth. The fact that this company's strategy wasn't really working, even though it had all those tailwinds in place, shows you that the stock price was following the way that the business was going. That's one reason why I don't add to businesses that their business results are slowing down or failing, because if they're trending in that direction, things can always continue to get worse, and they usually tend to.

Lewis: Things can always get worse and I think we talk about it all the time. There's no shortage of interesting ideas out there. There are so many businesses that are worth your money because of the results that they're putting up, whether it's their top line, whether it's their margins. We want things to generally be as easy as possible, and it's OK sometimes to look at a business and say, "You know what? This should be easier than it is and I'm having a hard time understanding why it's not coming together for them."

Feroldi: Capital is precious. You want to invest your money in the highest-quality companies that you can find, and if a company is struggling to execute against a seemingly no-brainer idea, there's a reason for that. So there's no shame with taking a pass on it.

Lewis: Brian, the second stock we're going to talk about is one that, for a long time, I just couldn't understand, couldn't wrap my head around the thesis. Honestly, I talked about it pretty harshly on the show, and the company has gone on to put up incredible results that proved me wrong. It took them a little while to figure things out, but that's Snap. I went back and listened to some of the old shows that I did 2016, 2017 for this business, and I saw the notes that I had. Basically, the hang-ups for me was, does this thing have mainstream appeal? Are we going to hit the audience level of a Facebook or something like that? Or is it going to be one of those more niche social media platforms? How big is that user base going to get? 

The insistence that the company had on being a camera company rather than a social media company, and really focusing on the ephemeral messaging app and the ad part of their business, that's where all the sales were coming from, that was a head scratcher for me. One of the lesser discussed things with the business was, are they going to be able to enjoy operating leverage? For people who maybe haven't followed the company as closely, they made a very interesting choice early on to not own all of their own infrastructure. They instead partnered up with the likes of AWS in order to basically have a variable cost rather than have the fixed cost of their own infrastructure buildout. What was that going to do for their financials? 

Lastly, another thing I think they got criticized for pretty fairly is they issued nonvoting shares to the public. So basically, as a retail investor, you didn't really have any say in what was going to be going on with that business and you had to trust Evan Spiegel and Bobby Murphy, the co-founders. With all of that, Brian, I looked at these businesses and said, man, they're going to have an uphill battle trying to go in and convince advertisers that they should spend their money there instead of Facebook, YouTube, Instagram.

Feroldi: My big hang-up with Snap, in addition to everything that you just said, was I have a hard time seeing this as a monetizable platform just because of the very nature of the product. People go on there, they send a message, and it disappears. That was this company's shtick in the beginning. That's what made it the alternative to Facebook. I had a really hard time saying, how did they take that and turn that into advertising? If you look at Facebook, one of the reasons that Facebook works so well is: It knows everything about you. It has all of your history right there that it keeps for itself. I figured that Snap was never going to be able to match that advantage, and also being a niche product, I also didn't see the potential, to say nothing of the fact that this company has done nothing but set money on fire since it came public. I mean, burning billions of dollars every single year. You add all those things together and I just gave this a complete no as well.

Lewis: To your note on the messaging side of things, even if you were to look at an absolutely topnotch-run social media company like Facebook, the money is coming from Facebook and from Instagram. Those are fee-based products. You're scrolling through. Within that feed, you have organic content and paid content. We've seen, for as good as Facebook has been in monetizing their core platform, they've had a hard time getting messaging apps to something that contributes to the top line. It's a totally different user experience and it's a totally different business to monetize.

Feroldi: That's correct. That's one thing that you have to think through as an investor, or at least I do think for an investor. What is the platform? What is the way that you go from having this popular platform to monetizing it? I just didn't see it for Snap. But they've done a good job of proving me wrong.

Lewis: They have. They've put up multibagger returns for a lot of investors, especially folks that bought in 2018 or so. But they went public in 2017, and around that time, to check in on what their audience growth looks like, they had 166 million DAUs, daily actives globally, 75 million in North America, and with these ad-based businesses, the North American market is always going to punch above its weight class in terms of average revenue per user. Today, 280 million DAUs, 93 million in North America. There has been some growth in that. But really, there's a core audience here that is being monetized, and a lot of that growth is coming internationally, which is great in terms of audience expansion, but we know that those are less lucrative markets, Brian.

Feroldi: Yes, definitely less lucrative markets, which is why to your point, the U.S. and North America is really the key market to focus on here. With any social media company, there's two metrics that really matter. With any ad-based business, there's two metrics that really matter. One, user growth. You talked about the numbers. They're trending in the right direction, not as fast as some other platforms, but that is less niche of a product than I thought it was going to be. More importantly is average revenue per user. This is called ARPU. They have made tremendous progress there. In 2017, their ARPU, average revenue per user, was about $0.90. Last quarter, that jumped to $2.74. That's more than a 3x growth in their revenue per user. When you combine that with the growth in their daily average users, it's understandable why this company's revenue has grown at a 45% compounded growth rate over the last four years.

Lewis: Yeah, that's huge. And I think for them, what you want to see is that there's monetizable activity on the user's side. What they did, and this is pretty classic for the evolution of a social media platform or, really, anything that's trying to serve up ads in a scalable way, is they had to make the decision to go from being a direct-sold platform to being programmatic, which means that they're opening themselves up, they're creating scale, they're allowing far more advertisers to hop into the mix. It also can wreak havoc on the actual cost for those ads. You're opening things up. That means that there's a lot more available inventory and prices tend to plummet. You wind up finding growth based on volume, and this is going to become a familiar story as we're talking about Twitter later as well. But when that happens, it can be a little difficult to suss out how valuable are these ads to advertisers, because you see the cost of the ads generally go down. In their case, they've been able to translate it into pretty wonderful ARPU expansion and pretty compelling top-line growth, Brian.

Feroldi: Even more impressive than the top-line growth is what you've keyed up previously. This company chose to outsource a lot of its infrastructure to a third party, in this case, Amazon. At the time, I thought that that was a terrible decision because we saw Facebook building out these infrastructures everywhere, and if you want to be a global ad company, why wouldn't you want to turn that into a fixed cost that you can leverage and capture margin upside. I thought this company's gross margin was going to be fixed, and again, it was pretty low. When they came public in 2017, their gross margin was 18%. That is not impressive at all. However, they've done a pretty good job of leveraging their cost structure, and if you look at their gross margin now, given all that revenue growth that they've had, it actually sits in the low 50% range. That's a massive difference over a few years.

Lewis: It is, that's a huge difference, and it opens up a lot of things. When you get that kind of growth, you get people excited. It gives you the opportunity to invest a little bit differently. People have caught on to the operating leverage story, the revenue growth story, and that CAGR is going to catch eyes. It's just going to. It's impressive. They are about a triple from where they were pre-pandemic. If you get down to the depths of 2020, they're a five-bagger, which is darn impressive for a company that was, I think, trading down around $5 a share at some point in the last couple of years. I think a lot of people had written them off as an also-ran social media business. A big, big part of this is, on top of all of these things that we're talking about where they've been able to continue engaging the core people that really like the platform, they have seen ad prices work in their favor. I'm going to pull this from company management. "For the first time as a public company, we observed Verizon overall eCPM in Q3 driven by a combination of mix shift toward higher eCPM products such as commercials as well as the rapid rise in overall demand. Average eCPMs increased 20% year over year. However, we believe eCPMs remained well below market rates for our audiences and our ad units." 

I think one of the hard things about the digital ad market, Brian, is the narrative can kind of be twisted to however the company wants to position it. Because if ad rates are low, they're able to tell the story of we're offering advertisers excellent ROI opportunities. The cost for beginning a relationship with us as an advertiser is so cheap, it's low-risk, it's accessible. That's wonderful. It also means that perhaps the ads aren't that effective. So you want to see prices increasing over time because it means that when people are making their advertising decisions out there in the digital media landscape, they're seeing compelling offerings across platforms, and that whatever you are giving them in terms of audience exposure is worth their dollar, because those are zero-sum dollars.

Feroldi: It's a tightrope that the company has to walk. To your point, they're trying to serve their own interests as well as the interests of their advertising partners. But the fact that management says that they believe that their rates are still dramatically under what they could be charging, that is a really bullish side for this company moving forward. Again, this isn't going to be a perfect comparison, but it's going to be an OK one. In the first quarter, Facebook's worldwide average revenue per user was $9.27. There's a lot of room between $2.90 and $9.30. Also, Facebook's ARPU is still rising. They've really mastered that art of giving advertisers a tremendous ROI while they're increasing their ARPU. Can Snapchat do the same thing? I don't know.

Lewis: It's encouraging to see them moving in the right direction. Then that quote was from earlier in 2020, which is when we really start to see liftoff with that business and with the share price. That's huge because you have two levers, Brian, as an ad-based business. You have the number of ads you can show, and that's generally going to be a function of the number of users you have and the amount of time they spend on the platform. Then you're going to have the amount you charge for your ads. If you put those two together in terms of their growth movement, that's basically going to give you your top line of +90% of your revenue is coming from ads. You can achieve growth if one of those is growing. But like we say with our software-as-a-service players, it's great if you can get your existing customers to spend more and bring new customers in. If you find two levers for growth, it can really magnify what you're doing, and that's what we want to see with the best ad-based businesses. Let's see impression growth and then let's also see prices move so that you get that multiplier effect.

Feroldi: That's a magic combination. I'm looking at the revenue estimates for this company over the next couple of years. From what it seems like, Wall Street buys that narrative. They're expecting essentially 55% revenue growth this year followed by 48% revenue growth next year. That is some high expectations, but Wall Street believes that ad prices and ad impressions are both heading higher.

Lewis: What's really interesting about that is, I was doing some reading, and CEO Evan Spiegel said that the 50% annual top-line growth rate that they're throwing out there is not predicated on further user growth or engagement growth. So this is them saying, we're going to be able to grow dramatically based on ad dynamics, inventory, and pricing. If we're able to get anything else, if we see a step change in adoption because we cross over into a new demographic or new audience, that's just gravy.

Feroldi: That's incredible if that's true. If again that's true, it makes sense why the stock has bounced back from the doldrums and is currently trading at 28 times sales. Clearly, he's done a good job about getting that messaging across to Wall Street, and Wall Street believes it.

Lewis: I do think one thing that I don't know if I'd buy it with this business is the camera ambitions. It has been something that I think plagued me and tainted the company for a while. Actually, they're in the news again today with updates related to their focus here. Reports came out that Snap is buying WaveOptics, which is the supplier of their AR [augmented reality] displays for their next-gen spectacles glasses. They're paying $500 million for this acquisition. I think the hardware ambitions for Snap have been a very polarizing part of this company's story for a long time, Brian, because we spent a lot of time talking about the tech space and interesting investments. Very, very rarely do we spend time talking about hardware manufacturers.

Feroldi: It's just not a great business to be in, unless you're Apple essentially. It's really hard to sell hardware products well and come up with one that consumers really want to buy and then create lock-in for them. All of Snap's attempts to enter that market so far have been lackluster, I guess we could say it at best. However, I actually give this company credit for really sticking to that vision, because I for one believe that eventually, someone is going to nail the AR angle, and it's possible that if those glasses do go mainstream, they could be the replacement for the phone. They could be the next computing platform the same way that the smartphone took over the dumbphone industry. If that happens, if you can become the brand name in that market, that gives you an incredibly strong competitive position. Now, Snap is going to have plenty of competitors, and right now to my eyes, Facebook is actually the leader here with its Oculus products. But it's still so early that if somebody does come out with a killer product, they could be the leader.

Lewis: I think where we're at now with Snap and their journey with hardware, it's a little bit clearer to me what management is trying to do and maybe how it might be viable down the road. Because you go back a couple of years and the way that people tend to think about the hardware business for them was the consumer-facing spectacles, which looked an awful lot like brightly colored plastic glasses, kind of cheap-o glasses that have been upgraded with a camera and some tech gadgetry. Those were consumer-facing. They were really splashily sold in these vending machines. It was really wonderful consumer branding, but I think a lot of people were like, how many people are going to pay $150, $200 for these things? It doesn't seem like there's a big market here. Why are we spending so much time with this? What we're seeing them do this time around is fix their strategy and do something a little bit different. They're not selling these 4.0 spectacles. They're instead giving them to AR effects creators, and it's a different way to I think engage in the ecosystem. 

I think the idea is they want people to create a lot of stuff for a space and then possibly get it in front of consumers down the line. Snap CEO Evan Spiegel has said it will take roughly a decade before AR glasses become compelling enough for mass adoption like the way they are currently for mobile phones, that style of adoption that we see. That to me says this is a longer-term bet. I'm still not necessarily sold on it, but I think it makes way more sense to position any efforts that way than it does for it to be what feels like a cheaply made mass-consumer product with pretty limited functionality.

Feroldi: That strategy seems to make sense to me, too. He would know better than me, but a decade seems like a really long time. The nice thing for investors is that we can wait for the company to prove that out before we jump in. If you got interested in Apple five years after the iPhone was clearly the dominant platform, you still made a ton of money. It's still so early that we can really let these companies jock it out, wait until one of them wins, and then buy it.

Lewis: Yeah, and like we say all the time, you trade upside for certainty and there are a lot of times where you're happy to do that because it's nicer to have a little bit more conviction here. I'm pretty darn impressed with what we've seen from Snap. Honestly, it reminds me a little bit of the narrative with Pinterest. It's hard not to compare the two because I think both platforms were in spots, Brian, where they had an audience and it was really just a matter of, are they going to be able to monetize it? Both of them, for how big their audiences really were when they started monetization efforts, they were pretty late to the game in making a lot of money off of the people that were using the platform.

Feroldi: Yeah, that's a similar narrative. By the way, the exact same narrative came out when Facebook came public. Remember how people were saying, "This is a desktop product. It will never make the leap to mobile," and Facebook stock fell probably 75% after it came public. Pinterest, in the depths of March of 2020, that stock was down probably 70%. A lot of these companies really get beaten down by the narrative out of the gate, but if they can prove that they can do what they say they're going to do, that can actually prove to be a pretty great time to get in.

Lewis: The last company we're going to be talking about is Twitter, and I think there are probably a lot of parallels here with the Snap story, particularly as we get into ad dynamics; another social media company, ad-based in terms of how almost all the revenue comes in. They've got a licensing business, but that's not really what's driving the ship. My take on this business, Brian, is basically given a core group of dedicated users, how big can this be? I think at a certain point, you're going to be trying to juice the same fruit over and over again. How much is really going to be there, and is that something that can sustainably grow over time? That's really what you want for business. What we had with Twitter was a really in-depth picture of their ad rates and the ad dynamics that played into their revenue, and it was pretty rough. The business was the poster child for making it up on volume because they were posting triple-digit year-over-year growth in the engagements, but massive double-digit declines in the cost per engagement on their ads.

Feroldi: Yeah. To your point, we have a great table here that we're looking at showing that in Q1 2016, they more than tripled the number of ads that they showed on their platform, but the cost that they got per ad dropped 56%. When you combine [laughs] those things together, it actually shook out to revenue only growing 37%. Now, revenue growth of 37% isn't bad, that's not bad in absolute terms, but wouldn't it be wonderful if their ad impressions were just staying flat and they were able to triple the number of impressions? It's tough to grow when the ad costs are swimming so hard against you.

Lewis: It is, and even in a quarter where they posted 139% engagement growth, they posted 63% declines in the price for those engagements. That translated [laughs] into a loss of 10% year-over-year, which just shows you how important advertisers finding the platform valuable and bidding up your ad prices really are for the space.

Feroldi: Given what you just said that the number of ad impressions were essentially up triple digit, yet the total revenue of this company was down year over year, it makes complete sense why investors were caught off guard about this business and why shareholders just gave up. Another thing that was really working against this company was devaluation. This IPO received the same fanfare as Facebook. It was on that level because the platform is so ubiquitous and so many people at the time were saying, "This has got to be the next Facebook." When they came public, they priced at 40 times sales, and that was in 2013. That was an extremely high valuation that was pricing in a tremendous amount of growth. Believe it or not, just a few months later, the stock was actually a winner right out of the gate and they were trading at over 60 times sales. When you are trading that high, Wall Street is clearly pricing in +50% revenue growth. If you can't produce that, look out below, and that's exactly what happened.

Lewis: Yeah, we just didn't see it. By the time we got toward the tail end of 2016, we were down in the single digits in year-over-year growth and things turned negative at the end of that year and into early 2017, and that's going to change the narrative around high-growth stocks. It just is. If they're paying a premium for shares, they want to see those growth rates. That's a big part of the story, and when you factor in that at a certain point, they're running into those user issues that we talked about a little bit earlier, you don't have that same potential growth in the future. You're stuck working with what you currently have and people are going to focus a lot more on that.

Feroldi: Yeah, for sure. Now, the situation got so bad, Dylan, that a few years after this company coming public, its CEO who at the time of the IPO was Dick Costolo, he was actually shown the door in 2015, and I know that with the stock price down that much, a lot of the employees at Twitter were unbelievably far underwater with their options. That's not a great thing when you are trying to recruit talent and keep talent that you have happy, because this company is located in the heart of Silicon Valley. If you're an engineer that's good enough to work at Twitter, you can pretty much pick a job anywhere you want. So options are a major way that a lot of employees look to monetize their career, so that was a huge problem. After Costolo was shown the door, Jack Dorsey, the founder, came back in and he made a number of moves right out of the gate that really flipped that narrative around. First, he focused on cutting costs because at the time Twitter was losing tremendous amounts of money. The other notable thing that he did was Jack Dorsey actually took a third of the personal stock that he owned in Twitter and he gave that to the employees. That was actually about 1% of the business at the time. I can't think of any other CEO ever that has taken their personal stock in a company and given it to employees. That is an impressive move.

Lewis: I like that right there, that last two minutes, Brian, because it's a couple of things that we don't spend a lot of time talking about when it comes to the success of a business, the valuation of a business over time and the effects that it has, but brain drain is real. If you are in a highly competitive space, and I think anyone would say that social media is a highly competitive space, engineering talent is at a premium. Folks that are really talented have a lot of options, potential landing spots. You've got to have a pretty sweet deal in order [laughs] to be attractive for that talent, and it immediately makes you look weaker if you're giving people underwater options or underwater grants. They're just not going to be interested in it. That story about Dorsey, the incredible buy-in that must have been created from Twitter employees. We talk about skin in the game being owning the stock. I think that giving your stock away to employees might be the ultimate skin-in-the-game move.

Feroldi: Really does. If there's anything that says, "I'm here, I understand, I'm listening to you, here, have my personal..." Probably $1 billion at the time, maybe less, but nonetheless, a ton of money that he just gave out to people that already worked for him. Nothing says, "I am committed to you, I hear your complaints, and I'm here for the long term" like that.

Lewis: The business has turned it around. They are a much healthier-looking business than they were a little while ago. One grievance that I do have with them is we've moved away from getting the reporting on what's going on with their ad impressions and what's going on with their cost per engagement. Given that that was a trouble area for me for this business and one of the main concerns I had, I was frustrated to see them move away from reporting that in 2018. I felt like that was a mistake on their part and that killed my confidence in management, because if I see that this is a glaring issue and you're not [laughs] going to give me the inputs anymore, there's no called strikes. I don't need to be here. I'm not going to be buying shares. What they did instead was, they started focusing a lot more on monetizable daily active usage. Brian, I think this is interesting. It's more of an opportunity gauge for them because it's monetizable usage. It's not necessarily usage that has been monetized.

Feroldi: It's a different way to look at it, and when management starts to get creative by inventing their own metrics and saying, "Hey, look at this," your spidey senses should start to go up. In Jack Dorsey's case, I think he deserves the benefit of the doubt given what he has done to really turn around the business. More importantly, it's focusing on the things that really matter for investors. What's revenue done since he has taken over? The answer there is, it's done good things. Over the last couple of years, the company went from declining and negative revenue growth rates to accelerating revenue growth rates. It was negative 19% a few years ago, it was 28% last year. Margins have also been holding up pretty well. They're still in the 60-ish% range. But when you go off of a much higher revenue base, this company is much closer to profits on a GAAP basis, and on an adjusted basis, it's actually already there. That's a huge turnaround.

Lewis: Yeah. Brian, to your point on the spidey senses, this one where a lot of shareholders bought Twitter down in the 'teens and we're sitting pretty happy right now with where the stock is sitting on multibagger returns. This is one where I wasn't right, but I trusted my own process and I feel good about the check-in there that this doesn't make sense to me. I got to keep it in a spot where I'm maybe following it but following it more for information than I am, because I'm actively interested in investing in it. Those moments are OK. They happen, but I think what we're looking at is a healthier business now. We're still seeing revenue growth fluctuate a little bit. There have been periods even in the last year or so where, on a quarterly basis, we're seeing declines and some swings from them being in the 'teens and growth to be in the twenties for growth. Their margins are down a little bit from highs, but I think all in all, they've proven there's a viable business here.

Feroldi: Yeah, this is definitely a much stronger business today. As a Twitter addict myself, one frustrating thing about using this platform is it seems like this is the exact same platform today that it was eight years ago. I mean, what has been innovated on this platform? There's almost been nothing for many, many years. However, over the last six months to a year, they really seem to have beefed up their innovations. Just within the last six months, they've announced some potential new products, I guess I should say, including Super Following, which is when you give somebody with a big audience a chance to earn revenue from their followers. There's something called Twitter Blue in the works which has the ability to pay a few dollars per month and then you get extra Twitter features, including an edit button. So if you have a spelling mistake on your tweet, you can go and edit it after the fact. They have also rolled out things like Twitter Spaces which, if you've ever heard of Clubhouse, is very similar to that except for it's seamless to use because it operates right in Twitter. They've also bought and launched a newsletter business similar to Substack. So if you want to turn your Twitter following into a monetizable newsletter, you can do that easy. Those kinds of things potentially open up revenue opportunities that I can really see working out for this company much more so than the ad-based business that this is. If they can make that work, I think this company has a bright future ahead.

Lewis: Yeah. Brian, I think the digital natives that are listening to this podcast are like, "Yeah, this makes a ton of sense." If you spend any time online, you're noticing that there are a lot more, I'll say influencers, but also I think creatives and thought leaders, people that command an online following who are realizing, I can go solo on this if I want to and I can build a business that supports me be independent and be able to run my own newsletter that I monetize via whether it's affiliates or ads or upsells, that kinds of thing. Given that Twitter is one of the biggest platforms for those types of people, it only makes sense that they layer this stuff in. It's tough though that, at least from my perspective, it seems like they're catching up to where other people in the industry are going rather than leading that change themselves.

Feroldi: Yeah, these are innovations that you smack them in the head and say, "Why didn't you do this five years ago?" That would've been a great time to start to roll this out. I heard from people like Jason Moser say, "I'm not paying a penny to use Twitter because I just wouldn't get any kind of value out of it." I might be the wrong person to ask about that because I'm on Twitter so much. So it will be interesting to see, can they get their users who have been using this platform for free for years to consider spending on the platform? I don't know. We'll see.

Lewis: Yeah. It gets to the original design of the Internet where we as consumers made the decision earlier that we weren't paying for stuff, and now we're figuring out, how do we support these things if we don't want to do ads? [laughs] Because someone's got to pay the bill at some point. It's nice to see that they're creating these options. It makes their offering so much stronger. And Brian, I think crucially with this type of stuff, it keeps people with large followings on the platform. Generally, if you're thinking about folks who have tens of thousands, or hundreds of thousands of followers on various platforms, they tend to be pretty ubiquitous in their omnichannel and how they approach things. But you also see a lot of platforms out there creating sweetheart deals for creators to bring them over. If you see that there is more activity, more engagement on some of the more nascent platforms out there, you could see people possibly losing interest in being on Twitter. That is a competitive risk for them.

Feroldi: It certainly is, and if they started to make Twitter monetizable, if you are someone again with a big following, that could really bring a lot of people to the platform and make the platform even better. I could also see them just rolling out a, "Hey, spend $0.99 a month, or a dollar, or a few dollars a month, and we'll remove ads from your feed and give you some extra features." That, I could see being a compelling offering the same way that people are used to watching YouTube videos for free, but some people do choose to upgrade to an ad-free model. I myself did that just over a year ago and I'm now kicking myself, like "Why didn't I do that earlier? [laughs] Because my wife and I have been watching so much YouTube, it's worth the few dollars a month we pay to just get the ads off the platform.

Lewis: Yeah. Just think about that. A couple of dollars a month, that would be one video rental 10 years ago. It's a no-brainer from a consumer standpoint.

Feroldi: While not every consumer can afford that and some don't use it enough to really get the usage out of it, but I could see, given that this company has hundreds of millions of users, even if a small percentage of them turned that into paying user, that could turn out to be a meaningful business for this company.

Lewis: Brian, as we wrap here, three companies, I think all of them have proven us at various points wrong, proven a lot of investors wrong, and gone on to put up some pretty great returns for people that bought into the thesis, stuck around, and maybe even added to the position during some of those dips. Which one of these three would you be most interested in owning?

Feroldi: At the start, before I really thought about things, I thought that my answer was going to be Twitter. Because again, I myself am a huge user of Twitter and I really see the appeal of the platform now much more so than even I did two years ago. Given all the potential that the business has, I think Twitter is going to be a market beater from here. But given these three choices, I got to go with Upwork if for no other reason than Twitter, market cap $45 billion, Upwork $5 billion. So, there is I think a lot of room for the gig economy to grow, and starting from a base of just $5 billion, even though the stock has already been a winner, I could easily see that being a multibagger from here. You?

Lewis: I have to agree with you in part because I own Upwork, and I don't own the other two, so it would really be an indictment of how quickly I move through my portfolio on whether the way I'm feeling is updated in what I own if I didn't say Upwork. I think a part of it for me is it is easiest for me to see them succeeding in the future. There are other players in that market for sure, they are maybe not the leader that they once were, but it's a market where I think multiple players can survive and thrive. I will say, I am darn impressed with what Snap's done. I think a lot of things still have to go right, but when I see them talking about 50% year-over-year growth for this year, possibly next year, and that's without a lot of base assumptions around audience growth and engagement, that starts to look really interesting. You pointed out, Brian, that there's a lot of room for that ARPU to grow over time. I have some hesitation because it's a little bit of a bigger company. I think it's about a $87 billion business at this point. But I'm pretty darn impressed with that team and I feel like I learned a lot following this company over the last couple of years.

Feroldi: They've done a fabulous job with the turnaround and the business is light-years ahead today where it was a few years ago. And if these growth rates are to be believed, I could also see Snap being a market beater from here. But to your point about what you just said, this is a $90 billion company. Twitter's a $45 billion company. Based on that alone, I would personally rather bet on Twitter.

Lewis: Yup. That's the beauty of it, Brian. We can agree to disagree, as we did when we first talked about Upwork, and you took DocuSign and I took Upwork [laughs].

Feroldi: Should we have another bet, Dylan, going off of today, Twitter versus Snap? I'm taking Twitter.

Lewis: I'll take Snap.

Feroldi: You're taking Snap? All right.

Lewis: What do you want to say? Three years?

Feroldi: Three years.

Lewis: Yeah. I'll take Snap on three years. I don't know if either of them are going to thump the market. We'll see. Because those are some big growth rates to live up to, but I like that bet. That's a good one.

Feroldi: It sounds good to me.

Lewis: All right, Brian. As always, it's fun to talk to you on Fridays. It's always the highlight of my week.

Feroldi: I'm always happy to be here, Dylan. Thanks for having me.

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 of our stuff, subscribe on iTunes, Spotify or wherever you get your podcast, that's where we are. 

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!