In this podcast, Motley Fool senior analyst Asit Sharma and host Dylan Lewis discuss:
- Twitter's decision to rate-limit tweets and Reddit's move to begin charging for API access.
- What those moves say about AI, online intellectual property, and the next era of the internet.
- Meta Platforms' new Twitter challenger, Threads.
Motley Fool analyst Nick Sciple joins host Ricky Mulvey to share three stocks that he recently bought.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on July 05, 2023.
Dylan Lewis: AI is changing the Internet. Get ready for more walled gardens. Motley Fool Money starts now. I'm Dylan Lewis and I'm joined over the airwaves by Motley Fool Analyst Asit Sharma. Asit, thank you so much for joining me today.
Asit Sharma: Dylan, I appreciate you having me.
Dylan Lewis: Well we are kicking off the second half of 2023, talking about social media properties and the state of the Internet. Asit, part of the reason for that is over the holiday weekend, Twitter made some adjustments. Users were seeing that they had to be logged in in order to see tweets and the company was also limiting the number of posts that users could view in a day. This rate limiting that we're seeing is supposed to be temporary, but it seems to be in direct response to increased data scraping that we're seeing from AI companies.
Asit Sharma: Yeah Dylan, this is something that Elon Musk has talked about. He's concerned that companies can take Twitter's valuable public data for free and repurpose it, commercialize it. Now, we don't know exactly why Twitter kicked this stuff in over a holiday weekend. There are bunch of theories around one being that maybe they didn't pay their cloud bills. They haven't paid rent on their San Francisco properties. Maybe they have by now, but they didn't for months after Elon Musk took over. Other theories are abounded over the weekend. But on a more serious level, generally what you're saying is a concern of Twitter's the management team. I think this is something that has larger implications for use in the internet. We become quite used to being able to freely move around, post information, grab information as a society. What works in this type of world has also worked in terms of business monetization that may be changing.
Dylan Lewis: Something that's interesting with this asset is Twitter was the outlier in social media for a while with how open and accessible a lot of its content was. This seems like a big step if they didn't want going in this direction of making it a little bit more difficult or having to be logged in and the sticks. But this is something that Instagram has done. This is something that Facebook has done. It's just, we've used Twitter as this global town square for such a long time that to see anything interrupt that is, is a little bit of a surprise I think for people.
Asit Sharma: I think it makes us realize that this coming wave of AI content has more serious implications. It's coming faster than we expected. I myself, as you do Dylan spend a lot of time studying the impact of AI on business and society. But these moves are accelerating and they're making us rethink what the nature of content is. I'll give you just one example, it's come to my mind. We use memes all the time as a society. There's a content somebody puts out there, maybe from a film or a commercial, we grab it, we make a meme out of that. We pass that around. We repurpose that in platforms like TikTok, which then make money off of memes that are incorporated into short-form content. It's been a freewheeling space for some time, Twitter has been, as you point out one of the platforms that has enabled us to have this freewheeling of exchange of ideas, content, some of it commercial, some is just silly. What is it going to look like in the future?
Dylan Lewis: I think Musk also pointed out that frankly, Twitter has to foot the bill for bandwidth that is driven by some of the scraping activity and bot activity that's happening. He doesn't really want to do that anymore. We're seeing a similar dynamic play out with Reddit. This isn't really a platform that we talk about all that much because they're not publicly traded yet, but they are colloquially known as the front page of the internet. They aggregate news, content, community posts, and they announced plans to charge for their API access earlier this year. Those changes are slated to go into effect this summer. This dynamic is similar where there are a lot of third party Reddit apps that access the company's API. Leadership from the company has said, we have a lot of value here in what we're providing and frankly, we're not too keen on giving it away to some of the world's largest companies, Asit.
Asit Sharma: So strange because Reddit at one time, felt very much like this renegade source of information. As it's matured, it also has to look at these same issues. How do we make a profit? How do we keep the lights on here? The solution that Steve Huffman has as CEO is to go public. There's been a lot of friction between some of these third parties and Reddit and users of the platform. Those who supply information to the platform. I read in something you shared with me Dylan, that users are like, OK, we get that, but how did you get all this content? Someone provided that? Do we get paid as well, when you guys go public? The questions keep abounding.
Dylan Lewis: It's the nature of being a user-generated platform, is you're not paying the people who are providing it. At what point does there need to be profit-sharing there as well. All to say Asit, we are seeing a lot of challenging of conventional wisdom when it comes to the way that the Internet and in a lot of Internet properties have operated over the last 10-15 years. It seems to me that one of the biggest reasons for it is we see so much scraping activity and so much bought activity tied to artificial intelligence. The future of how these platforms will monetize is probably going to be very highly influenced by companies like OpenAI and developments and artificial intelligence.
Asit Sharma: Dylan, you are sharing with me your thoughts on OpenAI's, the owner of ChatGPT's, exposure to lawsuits. They're having some class action lawsuits that they're facing now because they've scraped data. But it's so interesting, we should point out that this didn't start from a mercenary point at all. These large language models are largely self-taught, their architecture. In 2017 research paper, Google pointed out there was a different way to utilize neural networks to be able to start making connections in a much more rapid fashion than the current existing neural networks made. Since that time those models have been shown to get better the more data you feed them, the more context you give what's called the transformer model, the better it can make different relationships, and the better it is at being conversational, at making lists, at roasting you, if you ask it to roast you on a topic. That all comes from a good place. The massive amounts of data that needed or were needed for us to make this seminal leap that brought ChatGPT, and other models onto the scene. Now that we're here though, what about that data? Whose data is it? Did you pay for it? Do you have rights to it? We see some companies like Adobe for example, openly saying, look we're just going to use our database of images that we've paid for and built over our existence as a public company, so if you use our services for, let's say, generative AI based art, you're not going to have to worry if you're a company that we're not going to be exposed to lawsuits because we're using our own stuff. This is where it starts to get complicated for businesses who want to use these large language models. But our worrying about the ground they're trading on, are they going to have exposure later on if they're using ChatGPT because the lawsuits go past OpenAI to these enterprise businesses?
Dylan Lewis: Asit, as you're looking at exposure companies may have to this, you talked a little bit about IP there and it seems to me like companies that own IP, whether it's their own or user-generated on their platform which they then owned too, they are in a position to be fairly OK. We have for a very long time looked at companies and said they're able to drive a lot of organic traffic by way of ACO or they're able to maintain really good paid marketing channels on places like Facebook and Instagram. How are you thinking about exposure with AI for companies? Also, the way that it may affect how people are able to drive users to their sites or business, to e-commerce platforms?
Asit Sharma: Dylan, it might have something to do in the way you kicked us off. Maybe the walled gardens gets stronger. As a consumer. I hate to see that. Even Wikipedia is starting to wonder, how are we going to keep moderating our contents? We are inevitably going to start getting AI generated submissions. How do we deal with that? Now that's not a site that's monetized, but it does hit you up. If you use Wikipedia, as I do, we'll hit you up for donations. They need money to survive too. That's an example of a company, a non-profit that's going to struggle to understand how it can deal with this. But let's look at the other side of it. A monetized company that is a walled garden like Meta. They have their own ecosystem. They've developed a lot of IP internally. They've got content that users generate and they can draw advertisers. Does that mean that those walls get thicker and thicker? Those few of us who are out there in the real-world McLee searching for information, it gets harder and harder for us to find information that we don't have to pay for. I will say, I've seen more and more sites throwing up paywalls over the last few years, but it seems to have almost accelerated a bit since ChatGPT burst onto the scene. I don't know if that's been your experience as you browse around?
Dylan Lewis: Yeah, I've been seeing the same thing, especially with a lot of news and information sites. I wasn't sure if that was just the pinch of, we're seeing advertisers spend go down and they're looking to drive up the subscriber numbers or if that was AI-driven, I could see a little bit of both there, Asit. They would both make sense to me as explanations. You mentioned Meta there, Asit and one thing that may affect the trajectory of some of these decisions is their recent entrance into the microblogging space. Tomorrow, July 6th, Meta is set to unveil its Twitter competitor Threads. This is something that is not all that surprising if you followed Meta, the company, they have a long history of taking things that work at other Internet properties and deciding to adopt it and try their own version of it. Given everything that's going on and the unrest right now in social media, do you think that this new offering, as an extension of Instagram maybe something that can take a bite out of some of Twitter's business?
Asit Sharma: I think it can Dylan, maybe over time, won't be overnight, that Twitter's users abandoned the platform in droves. They have been abandoning the platform, but it's been incremental at this point, Twitter users are a very loyal lot. They like the platform. They wish that all of the instability that Elon Musk brought about when we bought the platform. Just didn't exist. They want the old stable user experience back, but we see they're willing to try. They've jumped onto other smaller platforms. I feel that the larger active user base that Instagram has is going to be a key factor. Now, there are different ways to look at traffic. I'm going to a site one source, this is Similarweb. You can go check out Similarweb when you want to see how traffic is climbing or rising on different sites. For the last report I read, I think this is stats for April, Instagram had 889 million monthly active users versus about 213 million for Twitter. Now we know Twitter users can be more active in a given month, but you see the difference in these platforms, the sizes. Similarweb says that Twitter lost about 7.6 percent of its traffic year-over-year. That's because of all the uncertainty. You don't know when you open up Twitter, if you're going to have to log on to see views. This is something that makes me think there's an opening here for a company like Meta.
Also, the early stuff we've seen on Threads, for those of you who go out on tech sites, indicates that this project might be part of something called the Fediverse, which means that they're going to be inter-operable between sites like Mastodon or Bluesky. You can have an identity on Threads and message with people who are on these other platforms. I don't know about Twitter. That's going to attract users as well. When you put all this together, if you think of advertisers where they want to be, they want to be on stable platforms where they don't have to worry if someone can log on to view the content, they're already spending money on Meta's properties, meaning they're already there on Instagram. This is maybe a natural opening that seems like it could be an also run, but it could end up being one of these properties that Meta trots out and make stronger in a short period of time.
Dylan Lewis: Asit, as we potentially move to spot where we're a little bit less open with the internet and we're looking at a little bit more of walled garden type properties, do you think that that tends to benefit larger companies that already have these installed bases and can roll look alike apps out there, maybe making it a little bit harder for some people to start as an upstart in those spaces?
Asit Sharma: Unfortunately, it certainly looks like that especially we'll stay on the case of Meta. They've got experienced with this. They've done this with several look-alike platforms. They know how to adapt platform so they don't get sued for the look and feel of it. They already have experience in creating a back-end that fits into their existing infrastructure, your back-end servers. It's not that difficult for Meta to create a Threads in a short amount of time. When you've got capital, when you've got a lot of Cloud access, when you've got teams of engineers, and you already have policies in place for content moderation is an important distinction here. Meta hasn't done the best job of content moderation over the years. When you think about Facebook's struggles with privacy, but they do have infrastructure there. Elon Musk got rid of most of his content moderation that existed over at Twitter and they're suffering for it. When you've got the parts and pieces ready to roll in cookie-cutter fashion, yeah, you can spend a few hundred million to create a competitor and that benefits those companies with the means. It makes it harder, then in turn, for smaller start-ups with a beautiful idea to give users an alternative to a service like Twitter.
Dylan Lewis: Threads might wind up being cheaper than the Meta-verse ambitions at a couple of hundred million dollars [laughs] which I think a lot of Meta shareholders would be happy to see. Asit, thanks so much for hopping on today and talking through this internet stuff with me.
Asit Sharma: It's a lot of fun, Dylan, thanks a lot.
Dylan Lewis: Coming up. We're putting our money where our mouth is. Nick Sciple joins Ricky Mulvey to share three stocks he recently bought.
Ricky Mulvey: Nick Sciple, this is a pretty simple segment. It's just called stocks we recently bought. Can we talk about some stocks that we recently bought? The first one you sent over was one that I hadn't heard of before. I wanted to make sure we got to it. It's called Evolus, which is a multi-product aesthetics company. They got products that can maybe help you look a little bit younger. But first, let's set the table of what medical aesthetics is and maybe the market opportunity for Evolus.
Nick Sciple: Sure, medical aesthetics, as it sounds, these are medical products that help make your appearance improve. Smooth lines and freckles, plump up your lips, all the great things that make us look younger, prettier, and better on Instagram. This is a $9 billion market and the biggest chunks of that market are injectable neurotoxins. Think about your Botox out there in the world and also dermal fillers, those make up about half of the value of the market. That market is growing at a mid-teens rate and is expected to continue growing at a similar rate far into the future. Again, I mentioned the Instagram effect. Lots more interest in some of these products among the millennial generation than there have been among prior generations. This is a category that's really only about 20 years old. Botox as a drug for things like migraines and things like that had been around for decades beforehand. But as an aesthetic application, really only been around since the early 2000s. Where does Evolus stand out. Their lead product is known as Jeuveau, it's a competitor for Botox and an aesthetic neurotoxin product. Interesting for a couple of reasons.
One is in terms of the size of the molecule. Pretty much identical to the Botox product. There was actually some litigation around that a couple of years ago that was settled now, company moving forward today also differentiated in the market. In addition to being a product applied in a very similar way, has been tested one for one against Botox. Also has a different go-to-market approach than other folks on the market, whereas everybody else on the market has both a medical applications. Again, things like migraines and things like that. Also, use the same drug for anesthetic application. Evolus is a cash-pay aesthetic only company which allows them significantly more flexibility in pricing and marketing relative to other folks that take insurance payments. That's going to allow Evolus, I think, to grow at a faster rate than a market, that again, is already growing at a mid teens rate that the product post some of those litigation issues has gone back out in the market over the past couple of years has surged to 10 percent market share and I think they can go even higher.
Ricky Mulvey: So they can lean into that Instagram effects marketing maybe a little bit more than their competitors. This company is not profitable on an operating basis though. What needs to go right for Evolus to get there?
Nick Sciple: Yeah, I think the story is continuing to reach scale and gain share in the existing market. Again, Jeuveau, they're over one million members in their loyalty program. Again, need to continue to see the company reach scale in order to reach profitability. Another thing that's worth noting for the company is just in the last month or so, they've expanded beyond their single product focus with Jeuveau and now plan to enter into the dermal filler markets over the next several years. They signed an agreement with Symatese, which has been an effective manufacturer of fillers in the past, have a product on the market today known as Restylane and is one of the top two competitors in the market. They're going to have a co-branded product with Evolus called Evolysse that they expect to get onto the market in 2025. You look at their long-term guidance which they put out. They put out back in May. They expect their revenue to reach $700 million by the year 2028, which would be a 29% compound annual growth rate. If they're able to execute on that, management expects that they should reach cash-flow breakeven here in the next couple of years and then smooth sailing from there.
Ricky Mulvey: The current offering is Jeuveau, and the next one is dermal filler. How's that different?
Nick Sciple: I mentioned the two biggest categories in medical aesthetics, are neurotoxins which again is Botox like products and then dermal fillers. Whereas neurotoxins will relax your skin and remove wrinkles, dermal fillers go in and fill in areas. If you don't think your lips are as plump and kissable as you would like them to be you can get some dermal fillers to help solve that problem for you. That's just one example. Whereas Botox would remove a wrinkle on your forehead.
Ricky Mulvey: Got it. Let's move on to golf. Last month, you caught up with Jason Moser to talk about Callaway and Acushnet. But you actually put your money where your mouth was with a Acushnet. For folks who didn't tune into that segment, can you give a quick refresher on a Acushnet and maybe what makes them different from Topgolf Callaway?
Nick Sciple: Sure. Acushnet is a leading provider of golf equipment. Some of the biggest brands in the game, Titleist, both clubs and balls also own Scotty Cameron and Putters, Vokey Wedges also control the No. 1 shoe in golf with FootJoy differentiated from Topgolf Callaway in that Acushnet is exclusively focused on their golf equipment business as opposed to Topgolf Callaway, which has diversified their business over the past couple of years, acquiring the Topgolf brand add onto the Callaway business, which was the existing golf equipment also a different focus. Acushnet more focused on the dedicated on-course golf or the guy who goes through the country club on a regular basis. Topgolf Callaway focused on the modern golfer. They actually changed their ticker to MODG to reflect that different profile of customer they're targeting, also would say a different capital allocation approach. You're seeing significant cash being spent by Topgolf Callaway to build out new Topgolf locations as opposed to a Acushnet, which really is returning significant capital to shareholders in the form of dividends and buybacks.
Ricky Mulvey: We've talked a lot about pandemic tailwinds. It seems like this surprisingly isn't a problem for the golf industry, which had a pretty key advantage over a lot of other places when everything was shutdown besides a lot of local golf courses.
Nick Sciple: That's right. You saw a little bit of weakness in some of these stocks in May with Callaway putting out some weaker guidance concern that maybe the golf boom was over. However, if you look at results so far this year, golf hanging in nicely, year-to-date rounds are up 5.5% year over year in the US. That's continuing a trend that actually was intact pre-pandemic. You saw participation bottom-out in 2017, and we've still been on a growth path ever since. Worth noting though we're still about flat from where participation was in the early 2010s. You could argue there's more room to run. I'm on that side of the argument.
Ricky Mulvey: Any balance sheet concerns with this company looking at a Acushnet, it looks like their accounts receivable more than doubled over the previous quarter. Have to wonder if they're having issues getting paid by their customers.
Nick Sciple: That's it. For my perspective no concerns. If you think about the nature of the golf business, it's a seasonal business, not a lot of sales getting done in the winter months. You see that in the patterns of the company. Typically the first quarter you will see a big bump up in accounts receivable. Again getting those products out to folks and not seeing sell-through yet. You also see a big swing up in short-term borrowings during those quarters as well. But again, as participation swings up during the big golf season of the summer, this is a normal seasonality you expect.
Ricky Mulvey: Finally, you also picked up shares in tobacco company, Philip Morris. This is an industry where the story might be changing a little bit. Recent city report says that the tobacco industry is no longer in structural decline, even though fewer people are smoking cigarettes. What's going on here?
Nick Sciple: You could argue that we're moving from a tobacco business into a nicotine business. It is correct to say that consumption of cigarettes have declined over the past 15 plus years. But in that same city report, another folks who observe this, as well, if you take into account things like vaping, nicotine pouches, ZYN of the world that are out there in the market. You're seeing actually net consumption of nicotine remain flat to where we were in 2007 level. It was an argument to be made that you could see nicotine consumption swing up. Philip Morris, really the leader in these emerging reduced-risk products acquired. Swedish Match was the parent company of ZYN in the past year or so that company has dominant market share in nicotine pouches in the US. Philip Morris also is one of the leaders in Heat-Not-Burn products. Their product IQOS is really a dominant in European markets as well as in Japan. If you think we're in this transition period where we're moving from cigarettes as the primary form of nicotine consumption into these other new forums. Philip Morris as a leader in that market with some concerns, lots of smaller Chinese competitors and folks that haven't really complied with FDA regulations remaining on the market. If we see that enforcement take place, then I expect that you'll see a similar pricing structure in these future nicotine businesses as we've seen in the past. To date however, blacks infant has not allowed the same type of profitability profile as we've seen in the past. However, if things normalize, I think you will see these products be actually more profitable than cigarettes in the long term.
Ricky Mulvey: If there's more regulatory risks, there's more standardization in the ways that people consume nicotine. Does Philip Morris have pricing power in this minefield?
Nick Sciple: Well, it's a question of what the regulatory environment is today. Currently, the FDA premarket tobacco application process you'll see PMTA throwing around. Is so robust that only really the largest tobacco companies have been able to get through to the finish line. To the extent that the companies aren't able to get through to the finish line, aren't able to be marketed over the long term, which appears to be more likely you're seeing enforcement ramp up, then we're only going to see a handful of folks really play in this market. When you have a business where there's only a handful of folks selling a product where there's extreme brand loyalty that the history of this industry says that you'll have pricing power, and I expect to see that again.
Ricky Mulvey: I'll also throw in a quick plug for a stock that I recently bought. Nick picked up a few shares. Disney, I think there's a lot of reasons to be pessimistic about this company. Park margins are down, tough to find a profit and streaming, Pixar's had a few flops lately, the succession plan has had some issues between Bob Iger and Bob Chapek and then back to Bob Iger. I don't know. I think this is a company that's transformed itself before. I think it has a narrative problem that it can clean up maybe. I guess it's also a bet that Iger can clean up some of Chapek mess.
Nick Sciple: Listen, if my wife has any indication she is the biggest Disney Die Hard you've ever seen. There's so many customers out there that have that type of love for Disney, they're going to be given lots of opportunities to figure out a way to transition, probably more so than many other media companies out there. I'll admit I'm a little bit skeptical with the some of the struggles they face, but you can't argue with the type of brand loyalty that folks have to add to that company. I think they'll be given every opportunity to figure things out.
Ricky Mulvey: Let's hope they do. Nick Sciple, appreciate your time and your insights.
Nick Sciple: Great to be here with you.
Dylan Lewis: As always, people on the program may own stocks mentioned and The Motley Fool may have formal recommendations for or against so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow
