Returns as of 10/05/2021
Returns as of 10/05/2021
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In the wake of recent revelations published in The Wall Street Journal, Facebook (NASDAQ:FB) hits the pause button on “Instagram for Kids.” Electric carmaker Polestar nears a $21 billion deal to go public via a special purpose acquisition company. In this episode of MarketFoolery, Motley Fool analyst Maria Gallagher analyzes those stories and the potential for Best Buy‘s (NYSE:BBY) new “Total Tech” membership program.
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 September 27, 2021.
Chris Hill: It’s Monday, September 27th. Welcome to MarketFoolery. I’m Chris Hill. With me today, it’s not who you think, it’s actually Maria Gallagher. Good to see you.
Maria Gallagher: Nice to see you too.
Hill: Thanks for being here. It’s another day, so therefore, we have another SPAC. We’re going to get to that. We’re going to get to a retailer getting an upgrade, but we’re going to start today with the social network. Instagram CEO, Adam Mosseri, says that they are pausing a planned version of Instagram for kids under the age of 13. I suppose technically that’s true that they are pausing it, although they are still very much working on this, they’re just not releasing it now, I think in part because of the recent stories in The Wall Street Journal. I think if they launched it now, they would not get the reception they want. But when you see this story, and we’ll get to the ripple effects for Facebook and therefore the stock, but when you saw this story, what went through your mind?
Gallagher: Well, at first, just the idea of social media for kids under 13, I think most people have the same reaction, which is that it seems unnecessary and there’s still a lot more negative than there are positives. It’s interesting, Facebook has been trying to claim that these findings from The Wall Street Journal series aren’t telling the whole story and that on the whole, more people say that Instagram and Facebook make them feel better or neutral about themselves but this will be obviously apparent. But some of the claims, just to refresh everyone’s memories, 32% of teen girls say that when they feel bad about their bodies, Instagram makes them feel worse. One in five teens say that Instagram makes them feel worse about themselves, 14% of boys in the U.S. say Instagram makes them feel worse about themselves, 40% of teen boys experience negative social comparison. It’s harrowing for lots of reasons, especially since there are so many young people that spend their time on these apps and it is such a huge source of growth for Facebook. Over 40% of Instagram users are 22 and younger, 22 million teens log into Instagram each day, and so they see that as a growth driver. They’re seeing that we can extend that, we can make that even younger. These statistics, I just think, the younger you are and you’re using this app, the harder it will be to have the wherewithal to not have these types of impacts, these negative impacts that we’re seeing. I think the younger users are, the more you see these negative impacts.
Hill: I get why they’re doing it. I don’t begrudge Facebook for looking at what they’re offering right now and saying, if you need to be 13 years old to be on Instagram, let’s see if we can get just a little bit younger. Not toddlers, at least not yet, but the 10-12 range. But Facebook is a company and Instagram is a company. They make their money off of advertising. One of the things that went through my mind when I was reading all this stuff was, if you are someone with a marketing budget, you have more choices in terms of where and how you can spend your money. Why in the world would you leap at this? What is the upside to being one of the first advertisers on Instagram for kids?
Gallagher: It would probably work.
Gallagher: I just think that their advertising model, it’s proven to be successful. We can debate the ethics of it, but it is good at getting people what they want and I think they see, if we get them at 12 and wear a product that they can use for their whole lifetime, the earlier you can get them and the closer that point-of-contact could be with those kids, I think that it would be successful for the advertisers. I’m not saying that that means I think they should do it or I think it is ethical to do it, but I do think as a business, I could see the appeal of saying, this is this wide user base. Facebook is saying that part of the reason that they’re thinking of starting this is that so many people on Instagram are younger than 13 and are just lying about being 13. They are trying to make it a space where you won’t be lying about your age and you can have more parental restriction, so it’s supposed to be better for these kids that are probably already going to be on it anyway. But I don’t know how true that is and if kids will still just use Instagram and still lie about their age, or if it would even want to use a separate Instagram for kids. I feel like when you’re 12 and 13, your whole personality is saying that you’re not a kid and trying to convince your parents you’re not a kid anymore. I think that’s also interesting. I would be curious if a lot of people will just be like, “I’m just going to sign up for regular Instagram because I’m not a kid, don’t put me on the kid one.”
Hill: Last thing and then we’ll move on. People have lost a lot of money betting against Facebook over the years and people have been wrong many times in terms of a story that comes out about Facebook and it looks really bad. The headline risk is there, but it doesn’t materially affect the underlying business of Facebook. To realize that, all you have to do is look at the performance of this stock over the past decade. All of that said, do you think this raises the bar in terms of how good this thing needs to be when they launch it? I agree with you, what Facebook has done, the way they have delivered for advertisers is what has made them such a potent force in advertising. I’m not betting against that. I guess I just looked at it more from the standpoint of why would you need to be the first advertiser when this thing launches? I’m wondering if you think the bar is higher in terms of when they eventually launched this and they almost certainly will, is the bar a little higher?
Gallagher: I think that’s a fair claim. I would say it probably will be higher and you’re right. I hate to say the phrase too-big-to-fail because obviously that’s been proven to not be true in certain situations, but I do think that Facebook is a giant and there’s a lot of cognitive dismiss from people who maybe we’ll say, and I’ll say this about myself, I don’t want to actively buy the stock, but I still use Instagram. I’m still a user on Instagram and I bought things from targeted ads on Instagram, and so I think that it exists in this cognitive dissonance zone in people’s brains where they can say, I don’t like this company and I don’t like what they stand for, but it’s convenient, all my friends are on it, and there’s lots of ands and I think it falls into a similar idea as Amazon where people say, “I do want to shop small and local, but it’s so much cheaper on Amazon or it’s so much more convenient, so I might as well do it anyway,” and you will see these stocks, even though there might be some ethical questions continuing to do well. I think that when they launch it, it will have to be a solid product. I think they’ll have to do a lot of PR around it and how it’s going to be safer and how it’s going to be more private and how they’re putting all of these roadblocks in place to help these kids. But I do think that it will probably launch and it will probably be pretty successful.
Hill: Polestar is nearing a deal to go public via SPAC. Polestar is in the business of high performance electric cars and the deal, reportedly, would value Polestar at $21 billion. Interesting line of business to go in to say, “We are looking at Tesla and we think we can compete with them.” Is Polestar a stock you’re going to be putting on your watch list?
Gallagher: I can talk a little bit about Polestar specifically and then the bigger trends in EVs with SPAC. Polestar has two models of EVs with very unoriginal and not cool names, Polestar 1 and Polestar 2. They’re currently on the road in Europe, North America, and Asia. They delivered 10,000 vehicles last year and their growth expectations are that they are expecting to sell 290,000 vehicles per year by 2025. Going from 10,000 in 2020 to 290,000 in the next five years. That’s just the fat growth is, I would say optimistic would be a generous term for that growth, those growth prospects. But I think it’s also interesting, there’s this broader trend that’s this back in popularity within the EV market. Since 2020, there have been 15 EV start-ups that have gone public via SPAC and so 14 out of 15 have seen stock price declines of over 10%, and eight out of 15 have suffered declines of over 40%, obviously, an example that comes to everyone’s mind is Nikola with the stock down about 80%. Only one in the past year that has debuted, or in the past year and a half, has increased their stock price. Just statistically, I don’t know what that intense growth that’s baked in and just the amount of these deals that has not really generated profits the way investors thought they would. I don’t know that that would be something that I would be interested in, unless they have proof that they can grow that way, they have an ability to do. I do think it’s interesting, they are backed by Volvo, so that could be interesting to see, how they work with Volvo. But I do think that it’s a popular trend in the past year and a half to go public via SPAC if you are an EV manufacturer.
Hill: I like to imagine that they’ve gotten their room, and when they were doing their growth projections, they said, “We’re going to go from 10,000-300,000” and someone said, “You know what, let’s just dial it back a little bit. We’re not going to 30x by 2025, we’ll be 29x.”
Gallagher: Yeah, that’s more reasonable.
Gallagher: If you put three in front of it, that’s too much. People will start to talk. 290? Totally fine. For context, Tesla last year did a little less than 500,000, so that’s what they’re saying their gross profits are going to be in the next four years is 200,000 less than Tesla.
Hill: Shares of Best Buy up 5% today after the electronics retailer was listed as a top idea by the analysts at Piper Sandler. Upgrades and downgrades interest me, not on the surface, although a lot of the attention they get is just on the surface. Anytime we see an upgrade or a downgrade, I think, well what’s the why? Tell me why this is being upgraded and in this case, it’s because Best Buy is about to rollout a new membership program called Best Buy Total Tech, $200 a year and the Tech Team at Best Buy, the Geek Squad will support all the devices in your home. I don’t know. On the surface, there seems like there is a genuine market opportunity here for them, in part because over the last five-years in particular, Best Buy has done a really good job monetizing the Geek Squad.
Gallagher: Yeah, so what’s really fascinating about Best Buy is the Geek Squad and so you have people who, if you’re buying something from Amazon as an example, it comes to your home, you don’t know what to do with it, you don’t know how to set it up. I’m hopeless with things like that and so I don’t know if you’ve used Geek Squad, but Best Buy’s Geek Squad, they’re so kind, they’re so helpful. I think that monetizing that is really interesting. So they had a program in April called Best Buy Beta that was $200 a year membership and $180 a year if you have a Best Buy Gift Card, and so that had all of these different perks associated with it, like free standard shipping, exclusive member pricing. I think that they are thrusting out all of these different ways to be really integrated with people and I think really hammering home the Geek Squad aspects of all of these aspects is really smart for them. I’d be interested to see how it goes and how many people think, “You know what? Geek Squad is worth this.”
Hill: It also seems like this program, as we’ve seen with other businesses, that have membership programs, they’re probably not going to share a lot of details in terms of numbers for the analyst community or for shareholders at the beginning. But if this starts to ramp up, if they start to get out, if they start to get literally millions of people who are members of this program, you better believe Best Buy is going to be playing that up.
Gallagher: Yeah, absolutely. I think it will be interesting to see how many people use it versus if you go into the store, have people come to your home, how it’s going to be rolled out, where it’s going to be rolled out and which states and how it’s adopted in cities versus rural areas. I always think going into the weeds and those types of rollouts is really interesting.
Hill: I’m like you. I have used the Geek Squad a number of times. They’ve been great and whatever money I have paid them is totally worth it just for the peace of mind, which is probably a big part of this program. You’re just buying technical peace of mind.
Gallagher: Yeah, and I think that’s worth it. I think that question of saying, if I just paid this lump sum right now, then will I feel better and just know just having that knowledge that if something goes wrong I have someone who can fix it, that I’m not going to be on hold for six hours yelling at someone or calling all of my friends who might be technically savvy or having my mom call me and then have me call somebody? I think that with peace of mind, I think that you can’t underestimate how much people will pay for that.
Hill: Oh, my God. I’d never thought of it until you just said it, but just the whole idea of the older generations as technology gets more complicated. This could be a thing that people buy their parents for Christmas, they’re just like, “Hey.”
Gallagher: That was my first thought. I could send it to my mom, just email it to her and say, “I bought this for you.”
Hill: Merry Christmas for both of us really.
Gallagher: Yeah, exactly.
Hill: Maria Gallagher, great talking to you. Thanks for being here.
Gallagher: Thanks so much for having me.
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. This show is mixed by Dan Boyd. I’m Chris Hill. Thanks for listening. We’ll see you tomorrow.
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