Mastercard (MA +0.04%) enters the world of "buy now, pay later." Spotify (SPOT +1.16%) launches its first global campaign to win over advertisers. In this episode of MarketFoolery, Motley Fool analyst Jason Moser analyzes those stories and answers a listener's question about buying more shares of a stock after its fallen.
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This video was recorded on September 28, 2021.
Chris Hill: It's Tuesday, September 28th. Welcome to MarketFoolery, I'm Chris Hill. With me today, Mr. Jason Moser. Good to see you.
Jason Moser: Good to see you.
Hill: We have the business of entertainment. We have a really good version of the when-to-buy question, but we're going to start with the latest from the war on cash. MasterCard is getting into the 'buy now, pay later' industry. MasterCard Installments is a program that we'll be launching next quarter in the U.S, Australia, and the U.K. We're not surprised, aren't we? Given how much attention this nascent industry has gotten and all the different businesses plowing into it, wasn't it just going to be a matter of time before MasterCard jumped in?
Moser: Yeah, absolutely. There was language in previous earnings calls that suggested they were making some investments in this space. You know, Chris, Ricky Bobby's father once to hold him if you ain't first you're last. What I think we're seeing here in the 'buy now, pay later' space is that's not necessarily the case, it don't really matter who is first to this space because now we're seeing just this influx of all sorts of companies wanting to participate and I think that in MasterCard's case, this shows the power of such a massive network and how difficult it is to disrupt. All they have to do is see where the puck is going and then start making those investments and then they plug it into this massive network and boom, you've got a whole new feature and that's ultimately what BNPL is, 'buy now pay later' is a feature. I don't mean to take anything away from a business like Affirm because I do think Affirm is a good business, but it struck me in thinking about Affirm.
Going back to, I think it was maybe it was last week's Motley Fool Money when we were talking with Emily about Stitch Fix and you had noted, I thought it was a good way of looking at it. There's a floor and there is a ceiling. It's not a business that's going to zero, Affirm will get business, but I think given where Affirm is today, maybe there is a ceiling if you're just going to be a 'buy now, pay later' company. For something like Affirm, you want to see them branch out and do other things whereas MasterCard has already branched out and done a bunch of other things and this is just going to be one more thing they do. I think it makes perfect sense. It's a very little bet like this on their part. Because you remember MasterCard, they don't lend, this is not something where they are actually putting up money, they're essentially just creating the tool, the technology for other participants to be able to plug it into their systems. You've got Barclays, U.S. consumer banks, SoFi, Synchrony, Marqeta. These are all companies that are going to be using this MasterCard technology to incorporate 'buy now, pay later' into their models. I think it makes perfect sense. It's not a surprise, I'm glad to see them doing it. Hey, you know what? They didn't have to acquire Afterpay for $29 billion to do it, Chris.
Hill: I want to go back to something you touched on early in your answer, which is the idea of first-mover advantage.
Moser: Yeah.
Hill: I'm not belittling first-mover advantage, but I would use this instead as an opportunity to caution investors if you are making up a list of reasons why you are buying a business, and somewhere on that list is this company has first-mover advantage, you should stop for just a minute and ask yourself, "How sustainable is that advantage?" Because there are some times in history where first-mover advantage is real and meaningful.
Moser: Yeah.
Hill: This seems like one of those industries where the shelf life of first-mover advantage isn't that long.
Moser: Yeah. I think it really just boils down to how replicable is the advantage. With something like this, BNPL is 100% replicable. That's why you've seen so many companies jump into space because it's essentially easy enough for them to do. The more difficult it gets, the more IP that is involved, oftentimes it becomes a little bit more difficult to replicate and that's where a first-mover advantage can certainly play a greater role. But yeah, I think that's a great point. First-mover, you love to see it, it's not always something that means you've immediately got a great investment on your hands there. I think it's so interesting to look at how this 'buy now ,pay later' space is evolving and to see how different participants can win in different ways because if we just assume for a second that MasterCard never even did this, if we just say to MasterCard's, "You know what? We don't even want to bother, we don't think it's that big of a deal, we'll pass." Well, if you look at Affirm's website and you look at the ways that you can pay for your installments and this is a straight quote from Affirm's website. You can pay with your debit card or checking account for all the firm purchases on farm.com, you can also may also check for some purchases, you can also pay by credit card for the down payment and installments.
Well, you know what? MasterCard does credit cards and debit cards and that's part of the idea behind this as they saw a lot of data that was telling them that people were using their MasterCard's already to either make down payments or the installment payments. They were already a beneficiary of this industry to an extent. This expands that opportunity for them for sure, but it just goes to show that even though they weren't really participating, they were and they were benefiting from all of that data from this massive network, it helps them just make very informed and educated decisions which is one of the reasons why I remain a MasterCard shareholder and extremely bullish on the stock for the long term.
Hill: Spotify has launched its first global brand campaign in an effort to win over advertisers. Part of the effort is changing the name of its advertising business from Spotify advertising to Spotify for brands. I know, Jason marketing spend is a lever that companies can control and we've seen examples over the years of companies pulling back on their marketing spend to save money, make their quarterly report look a little bit more profitable. I think if you're a Spotify shareholder, you've got to feel good about this effort. You have to like this effort because this is a stock that's basically been flat for the past 12 months when the S&P 500 is up about 25% or 30%. This is to me, Spotify looking at their business and saying, "We can and should be doing a better job here."
Moser: Yeah, I agree totally. I think many probably see Spotify as a music streaming service first and foremost, and I know that they're ultimately trying to present themselves as an audio company. It's not just music, it's podcasts as well. Going back to that size of the network thing that we were talking about with MasterCard, Spotify is getting to a point where their network is so big, they're going to be able to try a lot of new things and really push new features out to a lot of folks. They have a meaningful audience and so this makes perfect sense. I think what we're seeing ultimately is the evolution of Spotify.
To me, this is a straight-up entertainment company. I think it transcends just music and podcasts. They are incorporating more video into the app, there are going to be a lot of different things they could do, a lot of potential avenues they can pursue with this user base. The user base itself is just tremendous. If you look at the way these numbers breakdown, so total users now at 365 million, that's versus 299 million a year ago and if you break that down, premium subscribers make up about 165 million, and that grew for 138 million just a year ago, but ad-supported monthly active users now stand at 210 million. They have more ad-supported users than they do premium subscribers. The flip side of that is that the premium subscribers account for 88% of total revenue for the company, for the business. They are very much still reliant on that subscriber base. But we're seeing a trend in their advertising business gaining some traction, advertising still makes them a very small percentage of the overall revenue, but it's now 12%, that was versus 7% a year ago. They're seeing that they're gaining some traction in this ad space and a lot of that has been with these big brands that can afford to jump on a platform, they can be a little bit more difficult to measure at times. If you have a Twitter or Facebook or something like that where you're measuring clicks, Google, those clicks are a bit more tangible, so to speak, is a bit more obvious the measurement there versus something like listening and you can't quite fully understand the return you might be getting on investments.
I think that one of the hurdles is going to have to clear, is coming up with the tools for those marketers to really be able to measure. But it absolutely makes sense to pursue this big market opportunity. Because when you look at the overall amount of money that is flowing into podcasts, for example, U.S. ad revenue from podcasts grew to $842 million in 2020, it's set to top $1 billion this year and it's forecast to reach $2 billion by 2023. That's a lot of opportunity, and not just for Spotify but for all of those podcasters out there on Spotify. It's an opportunity for you to monetize your show or your content in a meaningful way. If you're producing good stuff, you've got to expand that audience to do it and it sounds like that's what they're going to try to tackle.
Hill: Our Twitter handle, speaking of Twitter, is @MarketFoolery. You can tweet at us, as Colin did when he asked, "How do you know when to quit buying? I bought AppHarvest at $14 a share. I mean, for the long game and I bought more when it dropped to $8. My desired position size is full. I'm currently down over 40%, but I want more at a lower-price. How do you decide to quit monitor and when to buy it again?" Thank you for that, Colin. He's asking about AppHarvest. He could be asking about any stock. We've gotten a version of this question about so many different companies over the years and I think you and I both identify with this situation. We've both been in this position before where you bought a stock, it dropped. Then it's like, well now I can lower my cost, but nothing has changed with the business. All of the reasons that I bought this business are still there for me. I'm in it for the long haul. Why wouldn't I buy at a lower price although I will just say before I hand it over to you, I have contemplated that third bite at the apple. I've never done that before. To me, it's just like I bought it at a lower price. I'm only going to do that once, but that's just me.
Moser: Well, so you've exercised some willpower as what you are saying?
Hill: Well, in terms of buying a third time, yeah, I have.
Moser: I don't want to simplify the answer because I think it's a really good question, Colin. Thankfully, for you at least I can speak to this one with just the exact direct experience because I essentially did the same thing. I bought AppHarvest for around $14 and after the earnings release, this restructuring or evolution of the business and the stock took a big hit. I added a little bit more to fill out my position so I'm right there with you. I can feel your pain right now, in that you're down 40%. But let me back to the question, knowing when to quit. It does require willpower. You have to be able to focus on your process and not the outcome. It's very easy as investors to get ahead of ourselves to see that finish line and taste almost the riches from these great ideas. But you do have to stay focused on the process and understand that it takes time. Something like AppHarvest, for example, because that's what you targeted in the question there. AppHarvest is I would put that up there with one of the riskier ideas today. Just in that it is a brand-new company in the public markets. It is literally just now starting to generate revenue. It is trying to disrupt an industry that is sorely in need of disruption in utilizing technology to improve our food supply chain.
You have to be able to look at something like AppHarvest, as I've told this to our members before, I've said you've got to just commit to being able to own the stock for five-years. In ignoring those 20% drops being down 40%, you have to be able to go ahead and just understand that's going to happen. I think that diversification helps. I think that when you know that you have other businesses in your portfolio that you can pay attention to and follow and you're seeing some winners maybe that are helping to offset some of those losers. I think that can help the strike. You can help take your mind elsewhere. But it's also really, I think, just about setting up expectations from the get-go. Setting the appropriate expectations upfront when you invest in a given company. Understanding what type of business it is, where it falls on the risk spectrum, how much you're willing to invest in it and then being able to say you know what? That's where I draw the line. Know when to say when. It's not easy. I'm not saying it is. I think it gets easier the more that you do it. It's always tempting to want to add on the dip, but you also have to recognize, this is a business that falls on the higher-end of that risk spectrum so you need to account for that and position size accordingly.
Hill: You don't want this to be the way you are investing all the time. This, to me, is one of those situations for investors that you want to be rare. If you're an investor, you don't want to be habitually in this situation.
Moser: You look at something like AppHarvest and you go into this when I say setting those appropriate expectations, you invest in a business like this expecting that in five-year's time, it's going to look like a much different company. It's just going to be different from what we see today. I mean that in a good way and we saw signs of that most recent earnings report where they are reorganizing the business in such a way to I think open up more windows of opportunity. But yes, you just don't want to put yourself in a position where you feel like you have to keep averaging down just to get back to even. I know some people love to do that and then that's really not the point. It does get easier the more you do it. But I really do believe that diversification helps that a lot. I think that when you have more companies in your portfolio and you can focus on other winners, that can help take your attention off of some of those other companies, it may not be doing so well in the near-term. Then understanding that this is truly going to be a minimum five-year story, hopefully much longer, but understanding that from the get-go and then you just have to have a little bit of willpower to be able to tell yourself not to click that buy button again.
Hill: Keep the tweets coming, keep the emails coming to [email protected] before we wrap up, one programming note, but not our program. Tonight at 7:00 o'clock on ESPN. There's going to be a one-hour E60 special documentary on the 20-year anniversary of Pardon the Interruption. I know I'm going to be sitting in front of my television watching that at 7:00 o'clock. I wanted to give a quick shout out to Eric Rydholm, Matt Keller, the whole crew at PTI, 20-years, over 5,000 episodes. Earlier this year, we had our 2,000 on this show. Industry Focus just had it's 2,000, we know what it takes to do 2,000 episodes, 5000+. Just incredible.
Moser: It is, it really is. We've been able to benefit from a lot of Eric's guidance along the way too. What a friendly guy and what a tremendous guy to have in your corner.
Hill: Jason Moser, great talking to you and thanks for being here.
Moser: Yeah, thank you.
Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
