Motley Fool Hidden Gems Investing - CEO Shakeups

Episode Date: June 29, 2022

CEOs at Pinterest and Bed, Bath, and Beyond are heading for the exits. And that may be just the beginning. (0:31) Deidre Woollard and Tim Beyers discuss: - Where Pinterest has room to grow. - How stock investors should react to a CEO change. - Nike’s move to a direct-to-consumer strategy. Rachel Warren interviews Ali Parsa, CEO of Babylon Health, a digital-first health service provider. (17:40) They discuss the company’s journey going public and the exciting frontiers of genetic research. Stocks mentioned: PINS, DOCU, BBBY, PYPL, NKE, SAP, BBLN Host: Deidre Woollard Guests: Tim Beyers, Rachel Warren, Ali Parsa Producer: Ricky Mulvey Engineers: Rick Engdahl, Brandon Gentry Learn more about your ad choices. Visit megaphone.fm/adchoices

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and also a major back office change for Nike. You're listening to Motley Fool Money. Welcome to Motley Fool Money. Today, we are looking at CEO shakeups. I'm Deidre Willard, sitting in for Chris Hill, and I'm joined by Motley Fool Senior Analyst, Tim Byers. Hey, Tim. Hey, Deidre. Fully caffeinated, ready to go here. Awesome. So, yesterday we heard that Pinterest CEO Ben Silberman is stepping down. Why now? That's a really interesting question because I think he's been under fire for quite some time. Pinterest has sort of been figuring itself out and growing into a somewhat different company. There have also been some personnel challenges here. There have been discrimination lawsuits.

There's been some cultural upheaval at Pinterest, I think is fair to say. The business has been in transition for some time. I'm not sure, but to hear the official explanation, it is that the upheaval that Pinterest has been going through has reached an inflection point. Now, Pinterest needs a new leadership team to move into the next phase of its growth. So no longer will this be primarily an advertising company. This is going to be a commerce company, or more specifically, an e-commerce slash social commerce company. And so the new CEO, Bill Reddy, coming in from Google and formerly the COO at PayPal, is going to take the commerce experience he has, apply it to Pinterest, and figure this out.

It'll be really interesting to see what the model looks like from here. I know we've talked about this, Deidre. There are some things that Pinterest has done well in this space, and I don't know exactly how you build on it, but shoppable ads have been something that Pinterest has been working on for a while, this idea that you could have pins that exist inside the Pinterest network that may be revealed to you as something you might find interesting and you would click on that pin and it would be an ad that was shoppable. It would take you literally inside the Pinterest environment to a place where you could make a purchase. And there are others that are doing this. This is new, but not new in the sense that we're seeing that on Instagram. It's clear we're

going to see that other places. Getting this more deeply embedded into the Pinterest environment where you essentially have, I mean, I know I'm dating myself when I say this, Deidre, but it feels like a digital version of the Sears catalog, except when you point at the picture, the picture is like, you want to buy this? Yes. Click. And I've bought it. Well, yes, but we've had Walmart is doing something similar. I thought this move was interesting because Pinterest has said recently that they were going to work on having more women in leadership. And then they made this move, which they put another man at the helm. Their audience is mostly female. But the financial background here really, really interests me. And especially because there was that rumor a few

months ago that PayPal might even acquire them. Yeah. So conspiracy theory hat on. Do you think that has anything to do with it? Boy, that's really good. I should fit my tinfoil hat for this one. I don't. The reason I don't think so is because Reddy's coming over from Google. But I do think the board may have seen the opportunity here and leadership may have seen the opportunity here. And there's a bit of writing on the wall that says the audience we've got, like Pinterest doesn't have what I would consider an audience that's built primarily for an advertising type model. because there seems to be a gate around the size of the audience. The audience is not growing at the same rate as, say, some of the bigger social networks are. It's not really built for that. It's more of a niche audience. How do you serve that niche audience? You pointed out that it's

mostly women. That's absolutely right. They are collecting areas of interest and pinning those areas of interest visually into boards. So how do you create more value for that audience that maybe it's not at its ceiling, like as big as it's ever going to get, maybe it can still get bigger, but the audience growth is not what it used to be, Deidre. And if the audience growth is not what it used to be, then you either have to get really creative with ads or either get much higher value ads or scrap the ad model altogether. And since they're not scrapping the ad model altogether, you have to find some other way to compound growth of that audience. And so commerce seems to make a lot of sense. How can you get more commercial engagement

inside an audience that really does love this platform, is deeply engaged in the platform, it's just not growing at a really compounded rate that would lead to, here's our ad rate card, and boy, is it expensive because look at how big our audience is getting. That's not the story anymore. So you have to do something different. Yeah, I think that's really true. I think what Pinterest started doing was revolutionary at the time, but now even moving into shoppable ads, That doesn't strike me as inherently different from other platforms that are growing, you know, something like you said, like an Instagram or a tech talk. If you could talk to Bill Reddy, what one piece of advice would you give him? I would say be and invest slowly and experiment.

like i if if i were him coming in i would listen to all the smartest people on on that team you know no matter where they are particularly lower down in the organization like what's working what data have we got what do we not mind and what do we not see and um there's a great podcast by the way that i recommend you could go back and find this in previous episodes of Motley Fool Money, where Chris interviewed Michael Lewis about his Against the Rules podcast. And there was one episode they talked about during that interview called Six Levels Down. And it talks about the intelligence that exists in the expert that's six levels down in the organization. I think Bill Reddy should go find that six level down expert that has data about

commerce operations or commerce experiments inside Pinterest and start mining that data, figure out who really knows what commerce can be at Pinterest and start leveraging that expertise to build something new here. Because the temptation would be to look at the financial position of Pinterest and start making big bets early. And I don't think you should do that. Let's be clear here. This is a company that has a very rich balance sheet. I think it's about $1.6 billion in net cash on the balance sheet, Deidre, which is crazy. If you look at the free cash flow numbers, even if you strip out all the artificial sweetener like stock-based compensation, this company is still generating over $200 million in real genuine free cash flow every year

there's a lot of capital to put to work. Don't be quick to put that capital to work. Find the expertise first, and then start running experiments off of that. I love that six levels down advice, and it makes me think of some of the other CEO shifts that we have, and maybe those incoming CEOs might take that advice as well. We've got DocuSign's CEO, Dan Springer. He's resigning just today. We heard that Bed Bath & Beyond CEO Mark Tretton is also leaving his post. It seems like we're going to see some more of these moves. How should investors be thinking about this? The stock market has been very reactive with excitement in the short term when this happens. But if you're an investor, you're in it for the long haul. How

should you think about it? I think you should think about it in terms of what the actual competitive advantage is here. A good CEO can do a lot, but there is only so much that even a great CEO can do if the strategy is bad and if the competitive advantage is weak. If the competitive advantage is weak like if customers don't really value the product then you you either have to as a new ceo coming in you have to either change the product completely and blow up the company and do something entirely different which is inherently difficult or you you have to start from you know you have to start from scratch or you may just have to, you know, throw up your hands and say, go to the board and say, you know what, this is not really salvageable. Let's start talking about

how we can sell the company. So a CEO may come in for very different reasons. A CEO may come in and be like the person who's in a transitional period to help find a banker who will help sell the company. That is a strategy that sometimes happens. Other times, a CEO comes in, has some really good raw material to work with, and can make some meaningful changes and turn things around. I think there's good material to work with at DocuSign, but they have not really busted out of the paper bag that is the e-signature business. They talk a really good game about the agreement cloud, but the agreement cloud isn't driving massive amounts of revenue. It's still an e-signature business at its core. So if a new CEO comes in and figures out how to monetize this big

vision of the agreement cloud, build a lot of things around it, great. There's a lot to work with there. So maybe there's a good CEO can figure that out. Tritton leaving Bed Bath & Beyond, that to me, Deidre, feels like the next person coming in is the one who says, okay, what assets have we got? What can we sell? And take this to who's a good buyer? Who's a good match for us. Because if a merchandising expert like Tritton can't figure it out, then what is there? I don't know. Yeah. There's been some talk about selling things. They already sold the Christmas tree shops. And I believe part of what they want to do is spin off the baby aspect of Bed Bath & Beyond. That seems to be the more successful part of things. But hard to know

with that one. Well, let's pivot and talk about a company that's led by another relatively new CEO, which is John Donahoe, the president and CEO of Nike. So, Nike had their earnings this week relatively strong, although the stock market didn't like some of their forward-looking stuff. But the thing that I wanted to zero in on was they talked about the role of their ERP in Nike's transformation from being something sold in stores to really all in on direct to consumer. They're launching their ERP in China first, then deploying to the U.S. Tim, what is an ERP? Right. This is one of those techie terms that feels very confusing and sophisticated. It is confusing and sophisticated software, but what it stands for is enterprise

resource planning. Enterprise resource planning software is classically understood as a software suite that has a bunch of different components to it. And it's built to manage what's called back office operations. And the only way to, here's the difference between back office and front office operations. Front office means everything that faces the customer, right? If I'm interacting with the customer, customer facing, that's front office. The things that I need to do to manage the business. Customers give me orders. Now I need to figure out how to get the inventory, to meet that demand, to build new stuff, to fulfill orders, to manage all my accounting, and do all of the things that actually let money flow through the business back into

building new product back into getting things out the door. The stuff that the customer doesn't see, that's the back office and that's what an ERP is built for. It's the structural under the hood type business processes that allow a company to actually make money and put it in the bank. An ERP is supposed to be designed to manage all that. Nike's had this for years. This is not really new, but they did have a blow-up back in, I think it's either 2000 or 2001, where they had some software, a company that has bounced around under the purview of other companies for years. It was bought out by JDA and then moved to IBM. It was called i2 Technologies. And that was called supply chain software, supply chain management software.

And there was a point at which that software that Nike was using sort of fudged the demand forecast. So really got that wrong. It led to some real problems where Nike had to write off, I think it was about $100 million worth of excess inventory. And since that time, all the way back then, going back to 2004, they've had SAP as a provider to provide their ERP. Now, this latest thing that they're doing is, I guess, really the newest version of SAP, what's called S4 HANA. And they're going to essentially integrate everything that they can around demand forecasting, managing their supply chain, managing their inventory, figuring out fulfillment, and running all of that through SAP.

So it's kind of like this single source of truth about how they're going to balance demand from stores, but also direct-to-consumer and fulfill that globally. I think it is smart, Deidre, to start in China. That's a big area of demand for them. Just see how this goes, experiment, fine-tune, experiment and fine-tune instead of doing a massive global rollout. Because it's really complicated software, it generally takes a long time to customize it because everybody's business has different business processes and it's got to be customized for those very specific business processes. So experimenting in one territory makes a lot of sense to me, but I wouldn't overhype it. I don't think this is something that's going to

dramatically transform Nike because they've been using SAP for a really long period of time. So I would say good on Nike for getting smart about integrating its back office operations under one banner, in this case, SAP. But it's not so new that we should expect it to have a material impact on the business. That would be surprising if it does have a material impact. Well, Tim, this was fantastic. Thank you so much for your time. Thanks, Deidre. Up next, Ali Parza, CEO of Babylon Health, joins Rachel Warren for a conversation about changing sick care into healthcare, their journey going public, and the exciting frontiers of genetic

research. Explain to our audience, you know, how does the platform work? What is the business model? How does AI form the foundation of the business itself? So we have a fundamental belief that what you and I call healthcare, it really isn't healthcare, it's sick care. When was the last time you had an interaction with healthcare? You waited until you got sick and you went and fixed it. Now I'm old enough and ugly enough to remember that there was a time that I used to drive my car until it broke down. I took it to a garage that fixed it and then drove it again until it broke down. That's what we do with healthcare.

Today, however, we buried so many sensors in my car, and it collects so much data in real time and analyzes it and warns me if something's going wrong. And that prediction means that I can prevent or intervene early. That's the fundamental philosophy in which we built Babylon. That if you look after you really well up front, if you collect your data, we can monitor you, manage you, we could avoid those crises and emergencies that are both expensive and unwanted. Think of a root canal in your teeth. Nobody needs it. It's hugely painful, massively expensive. And yet, and yet, if somebody monitors your teeth continuously, it will never happen.

Right. Why don't we do that with healthcare? So that's the premise on which that's what we're building for Babylon. And of course, you need artificial intelligence in order to be able to take the data you take and analyze it in real time. You need to build the infrastructure necessary for that. It's like Tesla, when they built the electric vehicle, it wasn't just the vehicle they had to build. They had to build the entire infrastructure, the software, the mechanism in which it worked. That's what we're doing in our journey.

and you asked me how does the business model works, our favorite business model is to take the money out of the equation because this industry pays for sick care. Every hospital gets paid when you're sick, the doctors get paid. So what we try to do is take your budget from your insurers or your government

and say, now that we control the budget, we're going to invest heavily on keeping you healthy rather than worrying what happens when you get sick. And therefore, we take the medical losses that insurance companies believe they're going to have. And by taking that over, we can then invest heavily on avoiding your crisis. And by avoiding your crisis, we make money because there is savings and we take that. I'd love to also talk a bit about the company's decision to go public. You know, the company, as I mentioned earlier, committed its merger to go public last October.

Or, you know, can you walk me through the timeline that led you to that process and the decision to go public at this stage in your business's journey? So we went public because at the time public markets were doing very well, like every other fast growing company, you need further capital, although we are not big wasteful in capital. I mean, if you think about that, this is one of the largest industries in the world and the amount of capital in totality that Babylon has consumed so far. Because we came from a very frugal system, we are very frugal with the use of capital. But in any case, you're still in the law of capital and therefore going public made sense. Now, if there was an award for the worst timed going public event in the planet, I should win that award because we did it exactly as the public markets were falling apart. We did it through a SPAC system. And the reason we did the SPACs was very simple.

If you do an IPO, you can only share your previous year's performance. Now, if you're growing as we are fourfold a year, that's 400% a year. Then your last year's numbers are almost irrelevant, right? Like in 2020, we did shy of $80 million of revenue. In 21, we did $320 million of revenue. This year, we already said in 22, we will do over a billion dollars of revenue, right? So if you're going at that trajectory, SPACs were good because you could share your future projections. projections. Unfortunately, what happened was that most of the companies who did SPACs,

and like our SPAC sponsors, who did a great job in due diligence, didn't do such a good job in due diligence. And most of these companies missed their numbers, didn't deliver their promises, and the whole SPAC name got tarnished. We got burned with that. Then the market completely failed, and so on and so forth. So the public journey has been the only part of Babylon's history that has not been as successful, but it's our job to fix. It's certainly exciting to think about how the healthcare industry could evolve in the coming years. I'm curious, given your insights and comments on what the healthcare industry is and what it could be, what is your vision for what the future of healthcare could look like? How does one build a more efficient, equitable,

and accessible healthcare ecosystem? I think we need to start with data. We need to create a model in which we can collect all the data from you, right, with your permission, of course, and securely stream that data in real time all the time. To be able to put models on that data, AI models on that data, to constantly analyze what's going on with you, right, And be able to reward you if you're doing well, to alert you if something is about to go wrong, and to intervene if something has gone wrong, but do so super early.

If we do that, we will actually save a huge amount of money by avoiding all the crisis and emergencies. Think about your home. Think about your car. It's so much cheaper to service it and maintain it than it is to deal with it when it's broke, right? So that's it's not actually hard. It is not rocket science. It's not like SpaceX when you need to send a spaceship to the outside and then bring it back. It's about doing with your body what we do with your car, what we do with the factory, what we do with everything else we got. But we have such a strong lobby in an industry that is all about the sick care. And we got to just change, shift the gear,

leave that industry to do what it needs to do because you will get sick, you will have accidents, we will need to send you to a hospital. So that industry is an important industry to stay, but we need to actually create the alternative, a much more rational, reasonable way of doing things. And I can't see, I mean, I'm asking you, I mean, what's wrong with that? I mean, I can't see why people wouldn't think that's just the right rational way of doing things.

Absolutely. And in addition to AI, which you've mentioned all the potential ways this could revolutionize the health care space, we've heard a lot recently about how innovations like, you know, AR, VR and even the metaverse could play a role in the future of health care. How do you personally see these technologies fitting in to the future of health care? Technology is a tool. That's all it is. AI is a tool. Augmented reality is a different way of interacting with that tool and interacting with the physical world. You know, hopefully the day that quantum computing comes, It's another tool that allows us to process that data significantly faster than I was talking about, so on and so forth.

What matters is what do we do with these tools? We could use these tools in the old system and exasperate what we got and make even healthcare more expensive. Or we could use it in this preventive system that I just described, where we could actually put it to massive benefit. The question really is what we do. And that's why I just think that, you know, when you buy your Tesla, you're not thinking, does it use AI, augmented reality, sensors, this, that, the other. You're just thinking that it's a great car. It's a smart car.

It makes every other car look dumb. And it doesn't destroy the planet like every other car does, right, by burning petrol. I mean, you don't care about the rest of this. It's my job, our job, to use all the tools necessary that technology gives us to make that experience as wonderful for you as possible. So I think the vision here is to integrate these kinds of technologies and innovations so much into the fiber of the healthcare system that it's not even something that patients think about. It's just a natural progression. Do I understand that right? Absolutely. You know, looking back at the digital health space and the health care industry, what do you think has changed over the last five years to now?

We know, especially in the last couple of years during the pandemic, there have been so many changes in health care. But I'm wondering, you know, looking back, what do you identify as being some of the most prominent shifts in this space? So I'm going to. I mean, we all know about all the changes about people's attitude towards telemedicine. da, da, da. We all know that. But actually, I think far more important changes have happened in the last five years that we have not been really thought about, right? I think if the first half of the 20th century was about physics, atoms, right? So with Einstein and material relativity, and the second half of the previous century was all about bits, technology, right? And we've seen all the results of that technology and what it has done to revolutionize our world. I think we're

in the middle of a technology on biology, on genetics, on cells, right? And if you just think what is happening in that world, it's insane, right? It's insane what we're doing. We've created, we managed to mix the gene of a bird with one of a mouse and make the mouse sing like a bird we've made a fish radiant by changing his genes a bit right we had more importantly we had worms that can live significantly longer two weeks ago we saw a paper being published by scientists that demonstrated they could make an old mice young. We have got a tomato now that we stopped the process of telomeres deteriorating. Therefore, the tomato doesn't age.

When you look at what's happening in the world of biology, I actually think that while we're doing everything in healthcare, and of course that world will take a very long time to pay results, we are in the verge of being able to do with human body things that we could have never dreamt of and that is super exciting i think that's what is going to fundamentally i don't think your generation i'm significantly older than you i think your generation has got a chance to live massively longer than the time span of the normal human being's life i think we can do now so much that we could never dream of

that mood should come to fruition within the next half a century 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 Deidre Willard. Thanks for listening. We'll see you tomorrow.