Streaming services dominated the Emmy Awards. Amazon's (NASDAQ:AMZN) rise in the digital ad market is fueled by an increase in sponsored links atop search results. In this episode of MarketFoolery, Motley Fool analyst Jason Moser, with host Chris Hill, analyzes those stories and shares his thoughts on playing with house money.
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This video was recorded on September 20, 2021.
Chris Hill: It's Monday, September 20th. Welcome to MarketFoolery. I'm Chris Hill. With me today, Jason Moser. Good to see you.
Jason Moser: Hey, I love the enthusiasm.
Hill: It's the start of the week. I know it's not a great start to the week for investors because the market's down 2% across-the-board, we'll get to that in a second. We're also going to dig into the business of advertising and discuss one of the best problems an investor can have. Let's hit the market real quick. This is not a great day, and to be fair, September, not a great month so far for investors. It's one of those things where when I look at what's happening I go, "It's a good thing we are long-term investors," because if we were short-term, this would suck.
Moser: Well, you're right. There, I would argue that, "Hey, maybe today is a great day," because when you take that longer-term perspective, when you play the long game, I think that it helps you look at days like this and frame them up as potential opportunities. I'm not saying that this is OK; the market right now, as we tape, it's 2:00 PM and the market is dead down something like 800 points. It's obviously something that's gaining a little bit of steam here. S&P is down 2.1%. You got to look at these as just the cost of participating in this massive wealth creation machine that is the market. It's another example of obviously why we play the long game.
Honestly, I think about these days and you're right, September it's been a tough month so far this year. September historically, I think, is generally not that great of a month for investors. I don't know about you but I feel very thankful that I don't have to try to find a story everyday as to why the market may be doing what it's doing. If you remember at the beginning of the morning, it was something in regard to a Chinese property fund or something like that. I've read the story and thought huh well, they found something that perhaps could be concerning some people. It's not to say there's nothing to it, maybe there's something to it, but generally speaking this is the psychology of the market and sometimes these sell-offs gain steam. You could argue that the market has been very richly valued and we are living in a time right now where 30 times sales is the new normal, which just doesn't feel right to a lot of us. Granted, those multiples are being assigned to some very special companies that are doing a lot of great things, particularly at this point in time as we see so many companies making this pivot to digital. But generally speaking, you know that you've been around for a little while when you look at days like these and you can either just completely brush it off or you can actually view and say, "I wonder what out there is maybe worth considering buying today." I would encourage everybody to try to take that perspective because when you play the long game, you're able to do that.
Hill: One more reason to have a watch list.
Hill: The 73rd Primetime Emmy Awards on Sunday night, speaking of digital, showed once again how dominant streaming services are. On Sunday night, Netflix (NASDAQ:NFLX) took home 10 awards, HBO and HBO Max took home nine, Apple+ (NASDAQ:AAPL) won four Emmys for Ted Lasso. When you broaden it to include the creative arts Emmy Awards, here's how the totals breakdown: Netflix; 44, HBO, HBO Max; 19, Disney+ (NYSE: DIS); 14, Apple+; 10. You will notice none of those are traditional broadcast networks. It just seems like when it comes to creating award-winning programming, broadcast television is on the outside looking in.
Moser: Yeah, I agree. I don't know if that's really poised to change. Much like advertisers go where the eyeballs are, these awards go where the content is. It's just the evolution of the space. If you are not offering a streaming service or if you're not a streaming native service, yeah like you said, you're on the outside looking in. Netflix has been at it for a long time now, of course HBO has as well. Really need to see all of the original content that's coming from those platforms, whether it's Netflix or HBO, Disney+ has got some great stuff I tell you. Hulu and that acquisition of Fox, I think bringing FX into their universe is tremendous. Hulu has just such a wide variety of great original content as well. Apple+, it's great to see those investments paying off for them. I think for Apple it means more of a retention game, at least right now. It's certainly not something that's meant to drive the topline there. If you put it in the context, Netflix over the last 12 months, brought in $27.5 billion in revenue; that's a lot, but when you put it in the context of what Apple's making, Apple over the same time period had around $350 billion. So even if they had just the most successful of all successful launches, they're not going to really get anywhere close to what Netflix is doing for a long time, if ever. Right again, I don't know that this is something that's necessarily meant for Apple to drive the topline.
Over time, it can certainly become more meaningful, but given Apple's presence in the hardware space, this is really about keeping people in the university, makes a lot of sense. When you're big like that and you can afford to make those investments. I could imagine from a creator's perspective, you're coming into a platform where they want to catch a lot of attention, get some new viewers that's going to maybe make them a little bit more open-minded to bringing original content out there that pushes the envelope, so to speak. Again, these awards go where the content is and all of the content is on the services, so it makes perfect sense.
Hill: To anyone who is listening and thinking or maybe even saying out loud, "Well, why are you talking about awards? Who cares? These are voted on. What is this matter?" I will simply point out that there are more scripted television shows right now than at any point in history, and one way you cut through the clutter, one way you get attention for your show and therefore for your subscription service is through award-winning content.
Moser: It's subjective to a degree, but you're right. Once you can put that label on it, people are going to discover it more quickly. I think that's the one big challenge for viewers today. I know I feel that anytime I log onto my TV or turn on my phone, finding something is becoming more and more challenging because there is so much stuff out there. You go by basically two things; you go by word-of-mouth, what your friends are watching, and you go by awards, what's gaining all the buzz. Oftentimes the two are one of the same, but generally speaking, I think that makes a lot of sense.
Hill: We've talked over the past couple of years about how Amazon has increased their market share in the digital ad space. They are obviously still far behind Google [Alphabet] and Facebook, but Amazon is solidly in third place when it comes to the amount of money they're taking in for digital advertising. I think we're all used to seeing a couple of ads at the top of search results, but now comes a report that Amazon is putting as many as six sponsored products ahead of organic search results. So maybe not surprising when we see their ad revenue climbing quarter-over-quarter year-after-year. What did you think when you first saw this story? Because there are a couple of key parts to it, but I'm curious what stands out to you.
Moser: First and foremost, it just made me feel really good to know that I've remained patient and held onto my Amazon shares for so long; very happy shareholder here. Thanks a lot folks over there at Amazon, you're doing a great job. Keep it up. A few things; this is certainly Amazon flexing its muscle. Whether physical or virtual, when space becomes limited, that creates demand. It's been this dilemma or at least this question is to how different organizations, different firms would approach the problem when you have mobile being this primary method, this primary way of getting stuff when we're using our phones, that space becomes far more limited. That simply creates demand. The nature of Amazon's business is such that, we've talked about this before, people are going straight to Amazon and they know they need something they are just not sure specifically what. They may say, "Well, I need batteries, but I'm not sure," so they search for batteries. Well, immediately then those search results come up. I think it only makes sense to try to exploit this and maximize the potential there, because when you look at the opportunity overall, it's just phenomenal.
Total digital ad spend is slated to hit $455 billion this year according to eMarketer. The majority of that goes to display, the other half of that essentially goes toward search. But generally speaking when you look at what Amazon is doing today with this advertising; $8 billion in that other category, I know that other category is other stuff, but really mostly is advertising. You annualize that out just for simplicity sake and you have a $32+ billion advertising business. For investors, any time you can see a business where they can use their scale to essentially produce a whole new business, you have to own those businesses. With Amazon, it's not just retail and it's not just cloud, it's advertising as well. There's a lot of different stuff and it's entertainment, it's content. That to me just reiterates the power of Amazon's scale. It represents their ability to recognize a large market opportunity in a way for them to then participate in it, and it is clearly paying off.
Hill: One of the things, this is reminding me of Brad Stone's book that came out earlier this year, Amazon Unbound. When I talked with him for Motley Fool Money, one of the things we talked about was, I think it was 2016, Jeff Bezos approving the move to say, "We're going to put these ads on top of the organic search results." With that move that cuts against the thing that Bezos had said for years, which is, "We're obsessed with our customers. I wake up in fear of our customers," and it's like, "Okay, you're obsessed with your customers, but clearly there is a price at which you are willing to be a little less obsessed."
Moser: I mean, maybe so. I guess it just depends on how you view that from a customer's perspective. I mean, someone who uses Amazon a decent bit. I like being able to search and find something and having those recommendations coming up to the very top. It does make it a little bit easier and somebody like, for example, I went in there earlier today just to just test it out and source batteries. The interesting thing I think is because you get there, you get your normal battery players, Duracell and Energizer and whatnot. But the nice thing about Amazon's business, they can create the sense of false scarcity when they want to with certain product lines, take batteries for example, because Amazon basics now. I mean the early Amazon basics and they basically can place that wherever they want to search results because of the Amazons. Amazon basic shows up there in the top three and that's just by virtue of them putting it there. But it can create a little bit of a sense of false scarcity with the other advertisers who want to compete in [...] batteries are batteries for the most part and are on basics, we get them they work well with your Energizers and Duracells and the world are still going to want to compete with that. They're going to pay up a little bit for that placement. They can afford to do so, nothing wrong with that. It's actually resulting in what is turning out to be a robust business you're framing.
Remember how we talked about Google for so long when Google was making the shift from desktop to mobile. We would see that the cost per click kept on coming down because the value of the click on mobile just wasn't worth as much as it was on desktop at the time. Well, Amazon's witnessing this unique scenario here with the cost-per-click is actually going up. The cost-per-click for Amazon search advertising was $1.27 in August, which was up from $0.86 a year ago. That cost-per-click, that's what their customers, that's what the brands when they pay for that placement. I mean, when you see that go up, that means Amazon is realizing more of that advertising. I think it just goes to show No. 1, the value of their platform is so big and reaches so many people. It just goes to show you that Amazon, the investments they've made into this business while sometimes it may not make so much sense immediately, sometimes a little bit further down the road, it starts to make more and more sense. People could sit there and question Amazon basics all they want. But the fact of the matter is they can place those things wherever they want their prices right and it's convenient and easy and so having the ability to participate in that. I think that's pretty neat.
Hill: They ought to be careful though because I just think back to Jim Sinegal when he was running Costco and Sinegal, I asked him about the Kirkland brand and how successful that was and continues to be. I asked them like, hey, how big can this get and he basically said, no, we can't get too big. We can allow Kirkland to become so dominant. I think it's, I want to say it was somewhere in the neighborhood of like 15% of sales or something like that, don't quote me on the exact number. But the more important point with Sinegal saying, no, this is good for us and this is more profitable for us because it's a Costco product with the Kirkland brand. But we know there is a point at which if we pushed this too much. It's going to backfire for us.
Moser: I couldn't agree with you more. I'm glad you brought that up because we're at a point now. 10 years ago, this dynamic didn't necessarily exist so much, but now I mean, so much of Amazon's revenue on that retail operation comes from those third-party providers. They cannot afford to, pardon the expression, piss those providers off. I mean, they are responsible for a lot of the stuff that gets sold on Amazon's platform but it's not just what they sell. I mean, Amazon's providing the services and the logistics for all of these third-party providers as well. It is a very delicate balance now versus a decade ago. Those third-party providers, they have more options, they have more avenues. Shopify wasn't really a thing like it is now. But all of a sudden, they're more options now as a retailer than there were 10 years ago. So it's a very good point, it's something they can capitalize on but it is a very delicate balance. They have to handle it very diplomatically for sure.
Hill: Our email address is firstname.lastname@example.org. We got a note from Brad in St. Louis. "My question is about handling big gains. Thanks in part to your discussion of Teladoc Health, I was in early, with recent pullbacks of that and other high fliers, what are your thoughts on playing with house money? For example, on a 3-bagger, I would sell my initial stake for new or different ideas and then let the rest run." Great question. Thank you for that, Brad. This is something I know for people, this is their way to invest. They say, if I get something and I double my money, I'm going to take half of it and I'm going to go look for other investment ideas. Then there are other people who are much more in the David Gardner school of thinking, which is to let your winners run.
Moser: Yeah. I mean, I absolutely have used the house money myself, I mean, before. It's not something I employ regularly. But certainly some situations make it a bit more attractive than others. I think if you are earlier in your investing life, if you're just getting started and one of your goals is to build a diversified portfolio, that's one way that you can do it. If you've witnessed some really fast gain, some nice wins in a short period of time and you're lacking the diversification in your portfolio that you really want, using that house money concept is a nice way to be able to consider doing that. You essentially just recoup your initial investment and then you are able to diversify along the caveat there. It really is all about that next idea. It's about whether you are allocating that money to and have a good, if not better idea. That's difficult to tell in the near-term, no question. I mean, that's part of our job every day, analyzing these businesses to try to figure out which ones are the ones we want to invest in versus not. Obviously, we don't get them right all the time.
It is a little bit hindsight for 2020, but I do like the concept because I think it gives you the opportunity, particularly if younger and particularly if you're having a tougher time raising money. A lot of people run into a situation where they don't have the money to invest. Using that house money strategy is a way to be able to broaden your reach, diversify that portfolio. It really just does boil down to making sure that you understand. It's all about the next ideas. You want to just make sure you're allocating that money into other good ideas because if you're spending into future losers, then you start kicking yourself, particularly if you invest in a loser and then there's the shares that you saw that just keeps on winning. It is difficult. Some people, I think, just a lot of people feel like investing. You can always be doing something. Oftentimes the best action is inaction. But in certain cases, if the valuation makes you feel uncomfortable, if you're over-allocated to a particular stock, if you're looking to diversify, journey trouble raising funds, that house money concept can be a nice solution.
Hill: That last point, I think is an important one because there are some people where it's like no, this is my strategy that I have decided on that works for me in terms of funding additional investments.
Moser: I mean, it really does work coming out like I will say, I did that with Amazon for example, years back. I sold whatever I needed to sell basically to recoup my initial investment in Amazon and then I said you don't want to get to keep the rest of these shares and I own them outright. I essentially got them for free. I will say that frees you up. Now, in hindsight, I mean, Amazon's obviously done terrific. It's been a wonderful investment. Did I leave gains on the table? I don't know actually, because that did give me the chance to take that money and allocate it into other ideas. Teladoc, for example, is one of them. I think that's done pretty well. Again, it goes back to making sure that that next idea is always going to be one that works out for you. I think it's always something worth considering. Everybody's going to get their own way of doing it. Then that's the beautiful thing about investing is there's just not a one-size-fits-all thing. I do like that. The raising money thing is a tricky one for a lot of folks, particularly younger investors. We've seen a lot of gains in a short period of time here over the last several years with a lot of these companies. It's certainly understandable that folks might feel a little bit uncomfortable with some of the valuations. If it's something that's causing you to lose sleep at night, I think it's a terrific option.
Hill: Jason Moser, great talking to you. Thanks for being here.
Moser: Yes, sir. Thank you.
Hill: As always, people on the program may have interest in the stocks we 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 Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.