In this podcast, Motley Fool analyst Dylan Lewis discusses:
- The shuttering of BuzzFeed News, the award-winning journalism part of BuzzFeed's business.
- What the ripple effects are for all investors (not just BuzzFeed shareholders).
- Why he's looking forward to hearing from Meta Platforms' management this earnings season.
Motley Fool senior analyst Bill Mann talks about Softbank's early investment in Alibaba and the takeaway for investors.
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.
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This video was recorded on April 20, 2023.
Chris Hill: Sometimes a single company can hold a lot of investing lessons when it's struggling. Motley Fool money starts now. I'm Chris Hill joining me today podcast host, programming guru, and investor at-large, Dylan Lewis. Thanks for being here.
Dylan Lewis: What an introduction, Chris. Thanks for having me, it's nice to be on the other side of the microphone.
Chris Hill: I wanted to talk to you about BuzzFeed because shares of BuzzFeed are down 20%, and this is one of those stories that the more you dig into it, the more you realize that this is a story that has ramifications beyond just this one company, and I actually think it has implications for investors throughout earnings season. But let's get to what's actually happening today. Stock is down 20%, CEO Jonah Peretti announced the company is going to be shutting down its BuzzFeed news division, which is about 15% of employees. When I first saw this, I was confused. You pointed out to me BuzzFeed, there's BuzzFeed which I think a lot of people are familiar with, just having lists and slide shows and that sort of thing and as you pointed out to me earlier today, BuzzFeed news. There's an actual newsroom and an award-winning newsroom.
Dylan Lewis: Yeah, it's important to separate the BuzzFeed Internet candy portion of the Internet property from BuzzFeed News which is a bonafide news operation. They've won Pulitzers, they've gotten nominations, they've had some really highly regarded reporting and that is a loss in the Internet community and news-consuming community sense. They had folks in the White House press corps. This is not just your listicles and celebrity gossip coverage. We're going to see that go away. Some of those folks will move to other portions of BuzzFeed's properties, but a lot of them won't and I think that in a lot of ways, what we're seeing with BuzzFeed is a sign of the times any business that is caught in the crosshairs of a lot of different things that are going on right now. I mean, pick an angle with this one. We have ads and ad spend, we have SPACs, we have an adjustment in growth expectations. There's a lot of different ways that we can dive into the story, Chris. But what I think is fascinating about it is it's at the intersection of so many different things.
Chris Hill: Let's hit the SPAC point first because they did go public via SPAC in late 2021, and like a lot of businesses that went public via SPAC struggled for a while. But it seems like the more you dig into the numbers, it's even worse.
Dylan Lewis: I think the natural question that some folks were asking during the SPAC boom was, does it make sense that this business is coming public this way? When you look at BuzzFeed, I think especially with post announcement, how things played out, it was very reasonable to have some questions. In the case of BuzzFeed, they did not wind up really pocketing very much from the SPAC process, in large part because a very high percentage of eligible investors redeemed their shares, which are able to do in a SPAC before the company went public. Which dramatically depleted the amount of cash that the holding company had, and so I think they only wound up with about $16 million in cash from the SPAC process. They wind up adding some cash to their coffers because they had a convertible note as well. But you think about a business that generally has had a hard time being profitable, and you put them public with not very much more cash than they already had on their balance sheet. That's not exactly a recipe for success and you add to that just the general downturn we've seen in SPACs and there's not a lot of support for them, and people are just generally spooked by the category.
Chris Hill: Jonah Peretti, the CEO, put out the word to employees and part of that announcement was to reassure them that look, as painful as this decision was and as much as we try to look for other ways to cut costs, so we could avoid doing this, BuzzFeed news is the most unprofitable part of our business. We have other parts of the business that are profitable and I don't know Peretti, but if I were in his shoes, I would look to be sending a signal not just to employees but to investors with a document like that to say, "Hey, look, we're shutting down the worst part of our business from a financial standpoint, much brighter days are ahead." It's clear from the reaction to the stock Dylan, that nobody on Wall Street believes him, that investors as a group are just looking at this business, looking at Peretti's statement and saying, we don't believe you. I think this is where the ripple effects come into effect for this earnings season because I think this is going to be one of those earnings periods, where management is going to be evaluated on a case-by-case basis. This isn't going to be like a couple of years ago where everything was going up regardless of the results, and it's not going to be like early 2022 where no matter how good your results were, and what your guidance was, the stock was getting punished.
Dylan Lewis: I think that's dead on and in Peretti's case, he owned that he probably let BuzzFeed news run a little bit longer, and have more resources put into it, than it should have because he was happy with the product and really proud of the work that was being done there as can often be the case when times get tight. I think this is a case where the casualty is good content and original reporting, which is often incredibly expensive. But the broader takeaway, if you haven't been following BuzzFeed story, is, yeah, management teams have a much harsher eye on the way that they are running things and prioritizing things right now. This is a story that's going to show up repeatedly in our earnings process here, and as we look at results from different companies. I think it's going to be something where if you are putting a vision out to the Street, it better be aggressively prioritized with the resources being in all the right places, with your spending in all the right places. I think critically, the street has to believe you, like you said and we've been hearing, in the case of BuzzFeed, this song of profitability coming for quite some time. You look at the quarterly results for businesses like that, generally, the profitability has come because they've had big Q4s with the ad market shrinking a little bit. That's not going to happen. It's not going to bail them out in quite the same way. We have to get into the aggressive prioritization.
Chris Hill: As you said, this is a story that sits at the intersection of a number of things. One of them, as you mentioned, the cost of quality content. In the case of BuzzFeed news, it's journalism. We've heard the CEO of Warner Brothers Discovery recently talking repeatedly about the cost of producing movies and premier television shows. This is not new and this is not just for BuzzFeed and also, as you said, the ad market, which has been stable but soft for at least six months now. Insider, a private company, formerly Business Insider, laying off 10% of their staff, and the ad picture is part of that and you have to wonder as we really start to gear up with earnings season next week, what we're going to be hearing out of major players like Alphabet.
Dylan Lewis: Yeah, I think one company that this narrative really applies to in addition to Alphabet is company like Meta. Where the story that we were pitched two years ago from Mark Zuckerberg and team, was very next chapter of our business. We haven't seen any of that materialize quickly enough, to make up for the fact that there's a lot of money being spent in the metaverse, and a lot of employees focused on the metaverse. Now, in the case of Meta, it's a company that's laid off thousands of people. I think even just this week, we've seen more of that. They've also had a recent settlement announced related to privacy issues. There are a lot of reasons to be concerned about the direction of that business. I think Zuckerberg, someone who needs to come out with a clear vision for people to really believe in the direction of the company and feel like we're past this phase, that we are really focusing on the next chapter and instead, we're aggressively prioritizing the resources that are going to get us through the next couple of years.
Chris Hill: BuzzFeed as you and I are talking, is a smaller company. It seems like there's some value there though, like a year from now, do you think this is still a stand-alone company or does a larger entity look at the stronger parts of the business and say, we'd like to buy that at a lower price?
Dylan Lewis: It's interesting, Chris, because they are now trading around $100 million market cap, and as a lot of the SPAC stuff is heating up, they were talking about making a deal and combining with complex for $300 million. How far we've come, the debut is putting them somewhere around a billion dollars, and we're looking at a fraction of that now. I think there is probably some value in the brand, and the properties with everything that they've announced here with BuzzFeed news, they're maintaining their archives and to the extent that there's traffic to BuzzFeed news. I think there could be something there. I do think, especially if we head into a period where money gets a little bit easier, and budgets open up a little bit, there might be someone that says, that looks appetizing at $100 million or were to fall more tens of millions of dollars. I wouldn't be surprised by that.
Chris Hill: Dylan Lewis, really appreciate your time. Thanks for being here.
Dylan Lewis: Thanks for having me, Chris.
Chris Hill: Dylan is actually sticking around because earlier in the week he caught up with Bill Mann, to talk about one of the biggest tech investments ever and the takeaway for investors like you and me who don't necessarily have tens of billions of dollars to play with.
Dylan Lewis: SoftBank's stake in Alibaba is arguably one of the most fabled tech investments of all time. But the telecom giant is unwinding it in a massive way. To help understand why I'm joined by Bill Mann. Bill, I think if you were to put the Mount Rushmore together of great tech investments, the $20 million that SoftBank put into Alibaba back in the dotcom boom would have to be honored.
Bill Mann: It would be very near the top. Yes, SoftBank, which was run by a very young guy at the time named Masayoshi Son, is Japanese company and had traditionally been in tech as a tech investor. It was a telecom company as much as anything and they made this small investment into Alibaba and turned $20 million into 60 billion, which I here is pretty good.
Dylan Lewis: Yeah, I can't quite do the math in real-time, but I think that beats most other people's investments.
Bill Mann: Yeah, exactly. The thing about it is that when they made the investment, it was quite literally an investment into the talent of the CEO of Alibaba at the time, which is Jack Ma.
Dylan Lewis: It was an entire lead founder-run thesis.
Bill Mann: That's right. Exactly. That is something that Masayoshi Son has done pretty much his entire career.
Dylan Lewis: He's unique in his investing style. I think we can talk a little bit about the risk friendliness that he has. But the reason we're talking about it now is SoftBank sold nearly $30 billion of its stake in this business in 2022, I think so far in 2023, they've sold another 7 billion. This is a massive unwinding for a company that used to have, I believe up to a third of the stake of Alibaba.
Bill Mann: That's about right.
Dylan Lewis: They are now in single digits.
Bill Mann: Yes, exactly. Maybe this is boring, but I think it's also a little bit important. What SoftBank has done is that they've put together what's called a forward agreement. They have sold the shares to an intermediary. There's going to go out and sell the shares either in the open market or to other investors. Because it turns out that if you want to sell $7 billion of something that limits the audience of the people on the other side of the transaction. That's how they're doing it. It is possible, though unlikely, that SoftBank will take that stake back. But really, when they announced that they are making the sale because it was such a large component of their remaining shares of Alibaba. Alibaba shares fell pretty sharply, but I don't think that this is all that much of an indictment of Alibaba, as it is really the stress that SoftBank has been under over the last two years.
Dylan Lewis: I wanted to ask you about that. Who does this say more about? You're leading there with SoftBank. They've had some pretty high-profile blow-ups. I think WeWork is probably one of the ones that people are most familiar with. But this was a business that for a very long time was bankability profitable. Then you go back to the last couple of years and that story changes pretty dramatically. We start seeing some major losses and a lot of that is tied to investment losses.
Bill Mann: You made the point earlier that Masayoshi Son and SoftBank were very risk friendly. I think that's really important to pay attention to because they have not really at any point made any real effort to diversify themselves by industry. In the mid-2000s, they wanted to be involved in. They bought Hong Kong Telecom, for example, and they were very much in the area of telecommunications. In the last decade, they've gone very heavily into Cloud. They've gone heavily into some very bleeding-edge consumer technology companies, some app companies. They didn't have much in the way of diversification so that when you get to a period of time in which that segment of the market has dropped all at once, which I don't know if you know this.
Dylan Lewis: A little bit of that going on.
Bill Mann: That happened. Yes, exactly. What they ended up with from SoftBank's standpoint is a company that was a $60 billion market cap company with about 30 billion of that being in the form of shares of Alibaba which whatever else it is, you think about Alibaba. Alibaba shares are right now down about 70% from their all-time high. Whatever it is that you think about Alibaba, you have to keep in mind that that is probably too large of a stake for a company like SoftBank to have under the stress that it has been under with the poor performance of its other investments.
Dylan Lewis: One of the reasons I wanted to talk about the story is because I think there are countless lessons here that you can port over to the individual investor.
Bill Mann: That is one, don't do that.
Dylan Lewis: To a certain extent, I think what's interesting about it is there is a little bit of that. Winners can really cover losses. You don't need too many of them and I think this is an example where this one winner, I mean, we're talking about it in this very legendary sense earlier, really floated a lot of what we saw from SoftBank over the last 20 years.
Bill Mann: Absolutely. There is another important element that you need to pay attention to with SoftBank is that for the longest time, again, Masayoshi Son, very risk friendly, maybe the only other really prominent businessman who has as much appetite for risk, I would say is Elon Musk. There probably others, but Elon Musk get one point at 95% of his net worth in a rocket that he was trying to send into space, that someone who has a level of risk appetite that most of us cannot approach.
Dylan Lewis: Yeah, and if you are heavily concentrated, you can enjoy heavily outsized returns. But you slide to that downside and that volatility as well.
Bill Mann: That's right. Whatever that stock does or whatever that investment does, if it has covered that much of your gains, it even more so is that much of your loss. Again, when SoftBank is a publicly traded company and most of the capital in SoftBank was SoftBank's, it was all fine. They can be as risk-friendly, have as much of a risk appetite as they wanted. But a couple of years ago they spun up 100 billion-dollar venture capital fund called the vision fund, and they took in money from the Saudi government. They took in money from a bunch of different investors around the world and that fund was almost perfectly top tech to the market of the types of investments that it wanted to be in. They wanted to go out and buy a bunch of unicorns. You haven't heard the term unicorns in a while.
Dylan Lewis: No. We haven't really been talking with the private markets at all except for saying, things are not going well.
Bill Mann: Things are not going well and part of it is that so much money went into the private markets that a lot of those valuations were out-of-control as well and so what you've been seeing in that market is a real dialing back of those valuations as well. For a levered venture capital fund like the vision fund, that's a problem. You cannot guarantee that the holders of the vision fund have the same risk appetite that SoftBank has with its own capital.
Dylan Lewis: I do think that the story here says more about SoftBank, but I think there's some interesting angles here with Alibaba. One of them is, this is a business that has been really, I think at the cross-section of a lot of tailwinds over the last ten years and you'd say major e-commerce player, growing economy, the middle-class store in China, a lot of things that can drive this company forward and yet you look back at the performance over the last six or seven years. If you bought the stock during that period, you're either flat or down.
Bill Mann: Yeah.
Dylan Lewis: Depending on when you bought it, it has not been a runaway success. Do you think that that plays into any of this at all too?
Bill Mann: I think at least partially and I think it's probably important to note that the way that Masayoshi Son invests in companies has been to go and find a great founder and so Jack Ma is no longer involved with Alibaba. There are talks. It's an open secret that Alibaba is going to be split into five or six different companies. It will have its chat business, it will have its fintech, it will have its insurance business, it will have its e-commerce platform. These aren't necessarily the businesses anymore that SoftBank would be all that interested in having that much of its capital tied up into. I don't know that it is a huge indictment of what Alibaba might be for the average investor but for a company like SoftBank that has taken on the type of leverage that they have a slower-growing suite of companies that's not run by the guy that you decided you are going to ride or die with at the outset, that's probably not as attractive.
Dylan Lewis: I love that perspective there because I think there is this temptation and you can pick your famous investor, you can pick Buffett, you can pick Masa Son. There is this temptation when you see firms that are run by one of those legends to follow the trends of the legend. I think the thing you have to remember is that is reflective of their very specific investing style and that may or may not be your investing style if you're sitting there with Alibaba shares in your portfolio.
Bill Mann: Yes. It's almost impossible to say when you see something that's going really well. We can take Warren Buffett, we can take Masayoshi Son, Masayoshi Son has been called a genius at multiple periods of times and he's been called a fool or an idiot multiple periods of time and it's for doing the exact same thing. It's because he has a process that is formulated one way. You can say the same thing about Warren Buffett. There have been multiple times in which business magazines and business media outlets have said, has Warren Buffett lost it and yet this last week, there was an interview in which he figured out and sold all of his banks before we got into the recent banking crisis. Yes, you have to be very careful anthropomorphizing the companies that you hold. Because it can be that those companies become much larger or much different than the person who is sitting at the top.
Dylan Lewis: I like the idea that Masayoshi Son is either capital F Fool or lowercase f fool depending on when you're measuring the returns.
Bill Mann: You're a sage or an idiot depending on the day.
Dylan Lewis: Yes. The answer is yes. Bill, thank you so much for joining me.
Bill Mann: Thanks, Dylan.
Chris 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. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Bill Mann has positions in Alphabet. Chris Hill has positions in Alphabet. Dylan Lewis has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Warner Bros. Discovery. The Motley Fool has a disclosure policy.
