Motley Fool Money - Twitter Faces Threats from AI and Meta

Episode Date: July 5, 2023

AI is changing the open internet landscape, and Meta’s new Threads app is looking to take a bite of Twitter’s audience. (00:21) Asit Sharma and 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’s new Twitter challenger Threads. (16:01) Nick Sciple joins Ricky Mulvey to share three stocks that he recently bought. Companies discussed: META, EOLS, GOLF, PM, DIS Host: Dylan Lewis Guests: Asit Sharma, Rickey Mulvey, Nick Sciple Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone, I'm Charlie Cox. Join us on Disney Plus as we talk with the cast and crew of Marvel Television's Daredevil Born Again. What haven't you gotten to do as Daredevil? Being the Avengers. Charlie and Vincent came to play. I get emotional when I think about it. One of the great finale of any episode we've ever done. We are going to play Truth or Daredevil.

What? Oh boy. Fantastic. You guys go hard. Daredevil Born Again official podcast Tuesdays and stream Season 2 of Marvel Television's Daredevil Born Again on Disney Plus. AI is changing the internet. Get ready for more walled gardens. Mottley Fool money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst Asset Sharma. Asit, thank you so much for joining me today.

Dylan, I appreciate you having me. Well, we are kicking off the second half of 2023 talking about social media properties and the state of the internet. And, Asset, 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 increase data scraping that we're seeing from AI companies. 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 a bunch of theories around, one being that maybe they didn't pay their cloud bills. I mean, 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 abounded over the weekend, but on a more serious level, generally what you're saying is a concern of Twitter's the management team And 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. So what works in this type of world has also worked in terms of business monetization. That may be changing. Something that's kind of interesting with this, Asset, is Twitter was kind of 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 do wind up going in this direction of making it a little bit more difficult or having to be logged in and this sticks. But this is something that Instagram has done. This is something that Facebook has done. It's just we've kind of used Twitter as this global

town square for such a long time that to see anything interrupt that is a little bit of a surprise, I think, for people. 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, you know, as you do, Dylan, spend a lot of time studying the impact of AI on business and society. But these moves are sort of accelerating and they're making us rethink, you know, what the nature of content is. I'll give you just one example. You know, this comes 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 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. So 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 sort of freewheeling of exchange of ideas, content, some of it commercial, some of it just silly. What is it going to look like in the future? 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. And 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 kind of colloquially known as the front page of the Internet. And they aggregate news, content, community posts, and they announce plans to charge. 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. And 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, Osset. So strange because Reddit at one time felt very much. much like this sort of 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, the CEO, is to go public. And 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, okay,

we sort of get that, but how did you get all this content? Someone provided that. Do we get paid as well when you guys go public? So the questions keep abounding. Yeah, it's the nature of being a user-generated platform, right? As 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, Asset, we are seeing kind of a lot of challenging of conventional wisdom when it comes through the way that the internet and a lot of internet properties have operated over the last 10 to 15 years. And it seems to me like one of the biggest reasons for it is we see so much scraping activity and so much bot activity tied to artificial intelligence. And the future of how these platforms

will monetize is probably going to be very highly influenced by companies like OpenAI and developments in artificial intelligence. Yeah, Dylan, you were sharing with me your thoughts on Open AIs, the owner of Chatchip T'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 in their architecture. So in 2017, research paper at Google pointed out there was a different language. 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 Chat GPT and other models onto the scene. Now that we're here, though, what about that data?

I mean, 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 data. 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. 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 are worrying about the ground they're treading on. Are they going to have exposure later on if they're using chat GPT because the lawsuits go past

open AI to these enterprise businesses? As it, 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 kind of own too, they are in a position to be fairly okay. We have for a very long time looked at companies and said, you know, they're able to drive a lot of organic traffic by way of SEO, 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

and also the way that it may affect how people are able to drive users to their sites or business to e-commerce platforms? Yeah, Dylan, it might have something to do in the way you kicked us off. I mean, maybe the Wald Gardens get stronger. As a consumer, I sort of hate to that. Even Wikipedia is starting to wonder, how are we going to keep moderating our contents? We're 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 nonprofit, that's going to sort of struggle to understand.

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? And those few of us who are out there in the real world, meekly searching for information.

It gets harder and harder for us to find information that we don't have to pay for. I will say it. 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 on the scene. I don't know if that's been your experience as you browse around. Yeah, I've been seeing the same thing, especially with a lot of news and information sites. And I wasn't sure if that was just the pinch of, you know, 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 their ASEIT. They would kind of both make sense to me as explanations. You mentioned meta, their asset. And one thing that may affect the trajectory of some of these decisions is their recent entrance into the micro-blocking space. Tomorrow, July 6th, Meta is set to unveil its Twitter competitor threads. And 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 kind of 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? I think it can, Dylan. Maybe over time, it won't be overnight that Twitter's users abandoned the platform in droves. I mean, 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 he bought the platform just didn't exist. They want the old sort of stable user experience back, but we see they're willing to try. They've jumped on to 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.

So I'm going to just cite one source. This is similar web. You can go check out similar web 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.

And similar web says that Twitter lost about 7.6% 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, right? So 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 interoperable between sites like Mastodon or Blue Sky. You could 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. I mean, they're already there on Instagram. So this is maybe a natural opening that seems like it could be an also ran, but it could

end up being one of these properties that Meta trots out and makes stronger in a short period of time. Asid, as we potentially move to a spot where we're a little bit less open with the internet, and we're looking at a little bit more of Waldgarden type properties, do you think that that tends to benefit larger companies that already have these installed bases and can roll kind of look-alike apps out there, maybe making it a little bit harder for some people to start as an upstart in those spaces? Unfortunately, it certainly looks like that, especially we'll stay on the case of meta.

They've got experience with this, right? They've done this with several look-like platforms. They know how to adapt a 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, their backend servers. So 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.

It's 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. So when you've got the parts and pieces sort of 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 than in turn for smaller startups with a beautiful idea to give users an alternative to a service like Twitter. Well, threads might wind up being cheaper than the Metaverse ambitions. I had a couple hundred million dollars, Osset.

Wow. Which I think a lot of meta shareholders would be happy to see. Asset, thanks so much for hopping on today and talking through this internet stuff with me. That's a lot of fun, Dylan. Thanks a lot. Coming up, we're putting our money, where our mouth is. Nick Seiple joins Ricky Mulvey to share three stocks he recently bought. Nick Seiple, this is a pretty simple segment. It's just called stocks we recently bought, and we talk about some stocks that we recently bought. The first one you sent over was one that I

hadn't heard of before, so I wanted to make sure we got to it. It's called Evelis, which is a multi-product aesthetics company. They got a 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 Evelas. Sure. Medical aesthetics, as it sounds, these are our medical products that help make your appearance improve. So smooth lines and fringles, 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 of the market. That market is growing at a mid-teens rate and is expected to continue growing it 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 2000. Where does Juvaux? Excuse me, where does Evelace stand out? Their lead product is known as Juvaux.

It's a competitor for Botox and an aesthetic neurotoxin product. Interesting for a couple reasons. One, as in terms of the size of the molecule, pretty much identical to the Botox product. There's 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 very similar, applied in a very similar way, has been tested one-for-one against Botox. It also has a different go-to-market approach than other folks on the market, whereas everybody else on the market has both a medical application. So, again, think things like migraines and things like that, and also use the same drug for an aesthetic application.

Evelace 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 Avelis, I think, to grow at a faster rate than a market that, again, is already growing at a mid-teens rate, that the product posts some of those litigation issues, has gone back out in the market over the past couple of years, has surged to 10% market share, and I think they can go even higher. So they can lean into that Instagram effect 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 Evelis to get there? Yeah, I think the story is, continuing to reach scale and gain share in the existing market. Again, Juveau, I think they're over 1 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 Juveau and now plan to enter into the dermal filler market over the next several years, they signed an agreement with Cymetys, which has been an effective manufacturer

of fillers in the past, have a product on the markets today, known as Restelaine. There's one of the top two competitors in the market. They're going to have a co-branded product with Avalis called Evelis that they expect to get onto the market in 2025. So you look at their long-term guidance, which 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 break-even here in the next couple years, and then smooth sailing from there. What's the current offering is Javeau, and the next one is a dermal filler.

How is that different? Yeah, so I mentioned the two biggest categories in aesthetic, medical aesthetics, are neurotoxins, which, again, is Botox-like products and then dermal fillers, Whereas neurotoxins will kind of relax your skin and remove wrinkles, dermal fillers, go in and kind of fill in areas. So 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.

Okay, got it. Let's move on to golf. Last month, you caught up with Jason Moser to talk about Callaway and a Cushnet, but you actually put your money where your mouth was with a Cushnet. For folks who didn't tune into that segment, can you give a quick refresher on a Cushnet and maybe what makes them different from Top Golf Callaway? Sure. Cushnet is a leading provider of golf equipment, some of the biggest brands in the game, Titleist, both clubs and balls, also on Scotty Cameron and putters, Vokey Wedges, also control the number one shoe in golf with Footjoy, differentiated from Topgolf Callaway

in that a Cushnet is exclusively focused on their golf equipment business, as opposed to TopGolf Callaway, which has diversified their business over the past couple years, acquiring the Top Golf brand add-on to the Callaway business, which was the existing golf equipment. Also a different focus. Cushnet more focused on the dedicated, on course golfer, the guy who goes to the country club on a regular basis. Top Golf Calloway focused on the modern golfer. They actually changed their Tigger to Mod G 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 Top Golf Callaway to build out new Top Golf locations as opposed to a Cushnet, which really is returning significant capital to

shareholders in the form of dividends and buybacks. Yeah, we talk a lot about pandemic tailwinds, and 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 shut down besides a lot of local golf courses. That's right. You saw a little bit of weakness in some of these stocks in May with Cali, 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 U.S., and 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. So 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 kind of on that side of the argument. Any balance sheet concerns with this company looking at a Cushnet? 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. 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'll 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'd expect. And 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? Yeah, so 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 and other folks who observe this as well, if you take into account things like vaping, nicotine pouches,

your Zens 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 the 2007 level. And, you know, 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 mattresses of the parent company of Zen in the past year or so. That company has dominant market share in nicotine pouches in the U.S. Philip Morris also is one of the leaders.

in Heat.Burn products. Their product ICA is really dominant in European markets as well as in Japan. And so if you think we're in this transition period, we're removing from cigarettes as the primary form of nicotine consumption into these other new forms. Philip Morris is a leader in that market. Some concerns, lots of smaller Chinese competitors, some 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, Laxinfant has not allowed the same type of profitability profile as we've

seen in the past. However, if things normalize, I think you'll see these products be actually more profitable than cigarettes in the long term. 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 sort of minefield? Well, it's a question of what the regulatory environment is today. Currently, the ADFDA pre-market tobacco application process, you'll see PMTA through it 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 companies aren't able to get through the finish line, aren't able to be marketed over the long term, which appears to be more likely you've seen enforcement ramp up. Then we're only going to see a handful of folks really playing in this market. And 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. I'll also throw in a quick plug for a stock that I recently bought, Nick. Picked up a few shares at Disney. I think there's a lot of reasons to be pessimistic about this company.

Park margins are down. Tough to find a profit in streaming. Pixar's had a few flops lately. The succession plan has had some issues between Bob Iger and Bob Chepec 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. And I guess it's also a bet that Iger can clean up some of Chaypex mess. Yeah, listen, if my wife is any indication, she is like the biggest Disney diehard 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 some of the struggles they've faced, but you can't argue with the type of brand loyalty that folks have to that company. And I think they'll be given every opportunity to figure things out. Let's hope they do. Next cycle, appreciate your time and your insight. Great to be here with you, Rick. 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.