Motley Fool Money - Another SPAC Bites The Dust

Episode Date: April 20, 2023

Buzzfeed was in a rough spot even before the ad market softened. (00:21) 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 (10:55) Dylan talks with Bill Mann about Softbank's early investment in Alibaba and the takeaway for investors. Companies discussed: BZFD, META, BABA Host: Chris Hill Guests: Dylan Lewis, Bill Mann Producer: Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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I'm Chris Hill, joining me today, podcast hosts, programming guru, and investor at large, Dylan Lewis. Thanks for being here. What an introduction, Chris. Thanks for having me. It's nice to be on the other side of the microphone. I wanted to talk to you about BuzzFeed, because shares of BuzzFeed are down 20 percent. And this is one of those stories that the more you dig into it, the more you realize, 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 percent. CEO Jonah Peretti announced the company is going to be shutting down its BuzzFeed News Division, which is about 15 percent of employees. When I first saw this, I was confused. You pointed out to me, BuzzFeed, you know, there's BuzzFeed, which I think a lot of people are familiar with, with just sort of having lists and slideshows and that sort of thing. And as you pointed out to me earlier today, BuzzFeed News is an actual newsroom and an award-winning newsroom.

Yeah, it's important to separate the BuzzFeed Internet candy portion of the Internet property from BuzzFeed News, which is a pretty bona fide news operation. They've won Pulitzer's They've gotten nominations. They've had some really highly regarded reporting. That is a loss in the kind of internet community and news-consuming community sense. They had folks in the White House Press Corps. So 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 kind of 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. 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. 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 redeem 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 wound 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 in 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. I think there's not a lot of support for them, and people are just kind of generally

spooked by the category. 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 tried 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, and it's clear from the reaction of 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. And 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 20-22, where no matter how good your results were and what your guidance was the stock was getting punished.

I think that's dead on. And in Paredi'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 spend being in all the right places. And 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 a business like that. Generally, the profitability 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. And so we have to get into the aggressive prioritization. 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 premiere television shows. So, you know, 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. Yeah, I think one company that this, this narrative really applies to, in addition to alphabet, is a 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. And 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. So there are a lot of reasons, I think, to be concerned about the direction of that business. I think Zuckerberg is 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 are 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 years. BuzzFeed, as you and I are talking, is a smaller company. It seems like there's some value there, though. A year from now, do you think this is still a standalone 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? It's interesting, Chris, because they are now trading around $100 million market cap. As a lot of the SPAC stuff was heating up, they were talking about making a deal and combining with Complex for 300 million. And so, you know, how far we've come. The debut was 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, you know, that looks appetizing at $100 million or, you know, where to fall more, you know, tens of millions of dollars. I wouldn't be surprised by that. Dylan Lewis, really appreciate your time. Thanks for being here.

Thanks for having me, Chris. 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. Softbank steak 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 dot-com boom would have to be on it.

It would be very near the top. And, yeah, so SoftBank, which was run by a very young guy at the time named Maslioshi Son, is a 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 hear is pretty good. Yeah, I can't quite do the math in real time,

but I think that beats most other people's investments. Yeah, exactly. And 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 was Jack Ma. It was an entirely founder-run thesis. That's right. Exactly. Exactly.

And that is something that Masayoshi-San has done pretty much his entire career. And he's kind of 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 soft banks 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. That's about right. They're now in the single digits. Yes, exactly. Well, so when they announced it, so maybe this is boring, but I think it's also a little bit important. So what

SoftBank has done is that they've put together what's called a forward agreement. So they have sold the shares to an intermediary that's going to go out and sell the shares to 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. So that's how they're doing it. So it is possible, though unlikely, that SoftBank will take that stake back. But really, when they announced that,

they were making the sale because it was such a large component of their remaining shares of of Alibaba. Alibaba's 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. Yeah, I wanted to ask you about that. Who does this say more about? And you were leading there with SoftBank.

they have had some pretty high-profile blowups. 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 bankably profitable. And 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. Yeah, and you made the point earlier that Masayoshi-San 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. So in the mid-2000s, they wanted to be involved in, so they bought Hong Kong telecom, for example.

And they were very much in the area of telecommunications. In the last decade, they have gone very much. heavily into cloud. They've gone heavily into some, you know, very bleeding edge consumer technology companies, some app companies. And so 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. A little bit of that going on. That happened. Yes, exactly. So what they ended up. up with, from SoftBank's standpoint, is a company that was, you know, 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. And Alibaba's shares are right now down about 70% from their all-time high. So 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 soft bank to have under the stress that it has been under with the poor performance of its other investments. 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.

It's one, don't do that. To a certain extent, I think what's interesting about it is there is a little bit of that, you know, winners can really cover losses, and 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. Absolutely. Absolutely. And there is another important element that you need to pay attention to with SoftBank, is that for the longest time, again, Masioshi-San, very, very risk-friendly, maybe the only other really prominent businessman who has as much appetite for risk, I would say, is Alon Mosque.

There are probably others, but, you know, Alon Musk at one point, had 95% of his net worth in a rocket that he was trying to send into space. I mean, that's someone who has a level of risk appetite that most of us cannot approach. Yeah. And if you are heavily concentrated, you can enjoy heavily outsized returns, but you're subject to that downside and that volatility as well. 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. And again, when SoftBank is a publicly traded company and most of the capital in SoftBank was soft banks, it was all fine. They could be as risk-friendly, have as much of a risk appetite as they wanted. But a couple of years ago, they spun up a $100 billion 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-ticked 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. No, we haven't really been

talking about the private markets at all, except for saying things are not going well. Things are not going well. And part of it is that so much money went in. to 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. So for a levered venture capital fund like the Vision Fund, that's a problem. And you cannot guarantee that the holders of the Vision Fund have the same risk appetite that SoftBank has with that SoftBank has with its own capital. I do think that the story here says more about SoftBank, but I think there are some interesting angles here with Alibaba. And 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 10 years. And you would say major e-commerce player, growing economy, the middle-class story 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, 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? I think at least partially, and I think it's probably important to note that the way that Masayoshi-San 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 kind of an open secret that

Alibaba is going to be split into five or six different companies. You know, it'll have its chat business. It'll have its fintech. It'll have its insurance business. It'll have its e-commerce platform. So these aren't necessarily the businesses anymore that SoftBank would be all that interested in having that much of its capital tied up into. So 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 were going to ride or die with at the outset, that's probably not as attractive.

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 Massa Sun. There is this temptation when you see firms that are run by one of those legends to follow the trends of the legend. And I think the thing you have to remember is that is reflective of their very specific investing style. That may or may not be your investing style if you're sitting there with Alibaba shares in your portfolio. Yes, and it's almost impossible to say,

you know, when you see something that's going really well, right? And we could take Warren Buffett, we could take Masayoshi Son. Masayoshi's 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. So, yes, you have to be very careful anthropomorphizing the companies that you hold because it can be that those companies become much larger than or much different than the person who is sitting at the top. I like the idea that Masayoshi Sun is either capital F-Fool or lowercase F-Four. That's right. Depending on when you're measuring the returns.

You are a sage or an idiot. Depending on the day. Yes, the answer is yes. Bill, thank you so much for joining me. Hey, thanks, Dylan. 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 yourself stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.