The Prof G Pod with Scott Galloway - Prof G Markets: Snap Layoffs, the IPO Drought, and Options Trading

Episode Date: September 5, 2022

This week on Prof G Markets, Scott weighs in on what Snap’s restructuring means for the rest of the social media space, and explains why the IPO market is on pace for its worst year in decades. Then, we take a deep dive into the asymmetric upsides and downsides of options trading (pro tip: don’t try this at home). Snap IPO Market Options Trading Learn more about your ad choices. Visit podcastchoices.com/adchoices

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Welcome to Prop G Markets. Today, after a quick look at the headlines, we're discussing Snap, in other words, TikTok's latest victim, the IPO dry spell, and finally, the popularity and perils of options trading. Oh, my God. How to tease a show. You know what I want, and I got what you need. Here to take us through the news is Caroline Shagrin, our producer for the Prop G Pod. Caroline, other than just returning from Italy, what is going on? Let's start off with our weekly review of some market vitals. The S&P 500 declined last week. Meanwhile, the dollar remains strong.

Bitcoin has been hovering around $20,000 for weeks now, but appears to be settling below that threshold. The yield on 10-year U.S. treasuries rose again to more than 3.2%. And consumer confidence improved for the first time in three months in August. Now let's take a look at some international news. European energy prices dropped the most in months last week for two reasons. First, the EU announced it would set price limits on gas and electricity. And second, Europe has already achieved its gas storage goal of 80% capacity, which it aimed to reach by November. Still, energy prices are up significantly since three months ago, when Russia began restricting supply. Over in China, things aren't looking too hot. The Chinese yuan fell to a two-year low compared to the dollar last week.

The currency is now down 7% year over year. This is partly driven by the dollar's continued rise, but it also reflects China's weakening economy. China's GDP contracted last quarter due to slowdowns in consumer spending, real estate investment, and factory output. And finally, the International Monetary Fund loaned Pakistan $1.1 billion to help the country avoid defaulting on sovereign debt. With food and gas prices up 45% year over year and mass floods destroying crops and killing more than 1,000 people, this bailout will provide much-needed relief to Pakistan. Scott, any reactions? The IMF has been, I think, a very effective organization,

and they essentially show up when an economy is on a collapse and say, we will loan you money on behalf of the world, but we're going to ask you to stop printing money, increase interest rates, slow down the economy, experience real pain, and get your shit together, so to speak. When consumers default, it's bad, but when a nation defaults, it's very bad, and everyone else starts defaulting, or specifically all the citizens of that country kind of effectively experience the default with them. No one will lend to that country anymore. You have to cut spending and increase taxes. There's runs on banks, living standards decline, riots, political unrest. I think these institutions matter, Caroline. We need the UN, we need the World Bank,

NATO, et cetera. And I don't think they get nearly the respect they deserve. And Jonathan Haidt would tell you that one of the problems with our society is that we've lost respect for our institutions because if you think about it sort of existentially, our institutions are us. And when we don't respect our institutions, we kind of have lost faith in each other. What else is going on, Caroline? Gen Z darling Snap is laying off 20% of its global workforce, or about 1,200 employees. Snap claims the layoffs will save half a million dollars in annual costs, and the social platform is restructuring to focus on community and revenue growth plus augmented reality. Meanwhile, it's killed several projects, including original shows, in-app games, and the recently announced Pixie Drone. The market reacted positively, with the stock closing up around 9% the day of the layoff announcement.

Scott, what do you think is going on here? I think two things are going on here. The first is tick, and the second is talk. all of these companies, whether it's Twitter or Meta or Pinterest and now Snap, have seen a serious decline in their monthly active users or a slowdown in their growth. And I just don't think there's any getting around it. Netflix did to Hollywood what Amazon did to retail. TikTok is doing to the rest of social media or what social media did to traditional media. TikTok is now doing to social media. The stock of Snap is down 70% year to date. Their Q2 revenues were 1.1 billion. Year-on-year user growth was 18%. That's still pretty good,

but it's not kind of the 30% or 40% year we're used to from social media. Twitter's Q2 revenue was 1.2 billion. Its year-on-year revenue growth was flat at 3%. Its user growth up 17%. What's interesting there is that if your user growth is up 17% and your revenue growth is only up 3%, it means their ability to monetize those users has declined, which is a negative forward-looking indicator. And Meta's Q2 revenue was $28.8 billion down from $29 billion in Q2-21. So you have sort of the iconic stalwart in the space. Their revenues are actually down, I believe, for the first time ever. I was even looking at the stock.

The stock is where it was five years ago. So if you're a Facebook shareholder, you have not experienced this kind of run up in technology stocks over the last several years. So I just don't think there's any getting around it. I think social media is getting hurt by the red wave, if you will. The red wave, I like that. That sounds like some sort of metaphor for a Southern college team. Bloomberg reported that TikTok brought in $4 billion in revenue last year and is on track for, get this, Caroline, get this, stick this in your trip to Italy, $12 billion. So while everyone is somewhere between minus 3% and 18%, TikTok is up 200%. So what we have here is the most ascendant technology firm of the last 10 years.

And it's simply put, it's kicking the shit out of American social media companies. I hear you'll be interviewing Snap CEO Evan Spiegel at the Code Conference this week. What are you going to ask him? What moisturizer he uses. I find him dreamy. I find him dreamy. That skin, that look. I just think he's a tall drink of water, Evan Spiegel. I'll also probably ask him, does he agree with me that TikTok is kicking the shit out of all of the platforms, including his own? How does he differentiate from the other video-based platforms, specifically TikTok? And also, they just laid off 1,200 people.

I would just love to get his view on best practices or worst practices around going through that type of layoff and the impact it has on a culture. What difference does it make? We'll be gone in a few weeks anyway. What? What?

You just said that we're going to be gone? Do I have any messages? Michael, what's going on? What did Jan say to you? What did she mean to you? Let's talk about the platforms. Let's talk about Snap, TikTok, Twitter. You use Twitter as an information source?

Yep. And I will say the funniest memes are on Twitter. You can find some very, very funny people on Twitter. The hardest I have laughed in a long time was today. There was a TikTok of this guy pretending to be blind. And he has this stuffed dog that's supposed to be, God, I'm cracking up just thinking about it, supposed to be his guide dog.

And he walks past people and he lurches the dog and he makes a barking sound as if the dog's attacking him and says, Shadow, stop. You gotta see it. It's literally the funniest fucking thing I've ever seen. I haven't laughed this hard in a while. Must be the hangover from the meth last night. I was just gonna say.

Have you ever heard me laugh? No, never once. It is the funniest thing. This guy scares the shit out of a woman. And he has this big dog attacker. It is so inappropriate and so hilarious. Okay, where are we? Bring me home.

What's up next, Caroline? Here at Profty Media, we keep a close eye on the U.S. IPO market, which, as you referenced earlier, is weathering its longest drought on records dating back to 1995. Scott, last year's IPO market was red hot. So why is this year's ice cold? Yeah, winter is here. 2022, year to date, we have 151 IPOs so far, which is about $5 billion. That's down 80% last year this time, at least in terms of numbers. There were 716 IPOs that raised $100 billion. So if you're looking at money raised, it's actually up 95%. So there's a lot of volatility in the market due to inflation, 8.5% year on year in July, which makes growthy companies, which usually go public, less valuable. Because typically,

companies going public are still growing, require capital. Higher interest rates means it costs more to finance that growth and their future cash flows we're all hoping for get discounted back at a higher interest rate, meaning that a growth company is just worth less. The companies themselves, the boards have said, we're not going to go public. I was on the board of Panera, the quick service restaurant, I think about a $5 or $7 billion company, a great company, well-managed, great product, growing. COVID actually put wind in their sails and with people getting out, I mean, all lights blinking green or like shiny green. But that's the kind of company we would probably not take public in this environment because we don't like the valuation we would get. Companies will wait for a better market to go public because that first print in the public market sets a pretty strong tone for the company.

It's a branding event. And also, to a certain extent, the next one or two years kind of anchor off that initial print on the day of the IPO. 120 companies have actually withdrawn their IPO filing so far this year, and that is they were planning to go public. And then when they saw the price they would get in this market, they said, we're going to wait. Last year, in the entire year, only 42 companies withdrew their IPO. Other companies that backed out of IPOs this year include Klarna, StockX, SeatGeek, and JustWorks. On top of all of that, the IPO market is on track to raise less money in 2022 than any other year on record. That's according to Dealogic. Scott,

with fewer new entrants into the public markets this year, what does this mean for investors? So a weak IPO market signals a couple things. One, just overall weakness in the economy and the public markets, less potential for, whose most recent funding round valued them at $15 billion, that's slashed from $24 billion. And Porsche, whose valuation is $85 billion. So they'll sort of be bellwethers for whether or not this is kind of the beginning of the end of the freeze or that things are beginning to thaw. The IPO market is cyclical. It will come back.

It's just a matter of how long and whether companies will need to do future rounds. I'm on the board of another private company, OpenWeb, which is a SaaS company that helps moderate the comments section for publishers, including the New York Times, Yahoo, Wall Street Journal. And the company's on fire. And that's the kind of company that in this type of market or in the type of IPO markets we had in 2020 and 2021, we would probably be public. But because of the chill in the public markets, we just did a round in the private markets. So good companies are getting financing rounds done. They're just getting them done in the private markets. I do think you'll see the same sort of chill probably in the private markets. I think they lag public markets. We all look to public markets for benchmarks, and that'll snake back into the private markets. We'll be right back after this break with a deep dive on options trading. Support for this show comes from Constant Contact. You know what's not easy? Marketing. And when you're starting your small business,

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Published by Capital Client Group, Inc. We are back with Prof G Markets. Generally, when we discuss stock investments, we consider the price of a company's shares and whether we want to buy those shares. But there's another way to participate in the stock market, options. Options trading has exploded in recent years, up 35% from 2020 to 2021. Retail investors, aka individuals, largely drove that increase, accounting for more than a quarter of options trades. A decade ago, it was just 10%. For our deep dive this week, we're taking a look at options, what they are, how they work, and why they're appealing to some investors.

Here's Profchie's Editor-in-Chief, Jason Stavers. An option is a contract between two parties. The contract gives one party the option to buy or sell a security from the other party in the future at a specified price. There are options on all kinds of securities, including stocks, but also commodities and currencies. And there are two kinds of options. A put, which is an option to sell a security, and a call, which is an option to buy one. Typically, investors buy call options when they think a security will go up in price, and put options when they think the security will go down. Both kinds of options have what's called a strike price, which is the price the option holder can buy or sell the stock, and an exercise date, the

date the contract expires. Take Microsoft. Microsoft is trading at about $250. What if you think it's going to go up this month? You can buy a call option on Microsoft with a strike price of $260 and an expiration in late September. You pay a small amount of money now, perhaps $1 for that option, and now you have the right to buy Microsoft for $260 at the end of the month. Now,

that's not worth much to you today because Microsoft is trading at only $250. And if Microsoft finishes the month at $250 or anywhere below $260, the contract expires and you don't make any money. But if Microsoft goes over $260, you can exercise your option, buy the stock for just $260. Then you can keep it or you can sell it for the higher market price and pocket the difference. Now a put works the same way, except that you buy the right to sell Microsoft at let's, $240. So if the stock goes to $230, then you can buy a share on the market for $230. And then the person who you bought the put from has to buy it from you at $240. And so you pocket a $10 difference. But why would someone want to buy an option instead of just owning the stock itself? Options on commodities have been around for

thousands of years. The Greeks had an active market for olives futures. The Japanese had a commodities exchange based around the rice harvest. And farmers and merchants use these contracts to hedge their risk. A farmer, for example, could sell futures on his olive crop before he even harvests, which ensures that he's going to get a set amount of money, even if the demand for olives is soft that year. Now, he gives up some upside, but he gets security in return. Now, options contracts on stocks have a somewhat less noble history. They originated really as a way to gamble on stock prices without having to come up with the capital necessary to actually buy them. And like with most gambling, the people who made the real money were the middlemen, brokers who would facilitate the trading of options contracts with a large spread

between the buyer and seller's price, and then the broker could pocket the difference. There was also quite a lot of scams and illegal activity in the options market. Until the mid-20th century when options contracts started getting regulated and they turned into standardized contracts. So today, thanks to that level of regulation, large institutions use options on stocks kind of like the olive farmers used futures on their olive harvest to hedge their risk. And what these large institutions do is they put together these very complex combinations of puts and calls at different strike prices and different exercise

dates that altogether limit their exposure to risks of unusual, unexpected activity in the stocks that they hold. But options are also still being used for something that's a lot closer to gambling. Small investors like options because they can offer big returns on small investments. This description has focused on the person who buys the option, but who are they buying options from? That's a great question, and one that I suspect retail investors might not always think to ask. When you buy a stock, it's a simple transaction. Your payment goes to the owner and the stock goes to you. You don't have any ongoing relationship with the person or institution you bought the stock from. But options are contracts, not assets. And when you buy an option, you're in a contract with someone on the other side for the duration of the option. Now, you

don't ever actually meet that person. It's still facilitated through a broker, but there is a counterparty that could potentially be doing this future transaction with you. That person is known as the writer of the option contract because they write the contract that you then buy. So you and I can go buy options. We can go on Robinhood or Fidelity account, and there'll be options there for our $1 or $10 or whatever we can buy. It's unlikely, however, that a broker is going to allow us to write an option. But it turns out, here at Prof G, we have someone who does write options contracts. In fact, if you've bought options on some notable tech stocks in the past few months, it's possible that the investor on the other side of that trade has been Scott. This is our Perry Mason moment, I guess. No, Mr. Nichols,

you didn't kill Thompson, but you did, Mr. Wells. Yes, yes, I killed Nichols. I write options. I started doing it about 18 months ago. And the reason I started doing it was, one something I have learned or finally learned is the importance of diversification. In 1999, I was, or at least I thought I was financially secure. And then by March of 2000, I was no longer financially secure because of the dot-com implosion. In 2007, crawled my way back. By 2009, I again was no longer wealthy. And the reason why was I was way too concentrated in a small number of assets or asset types or type of stock. So when tech went down 80 or 90%,

I lost 80 or 90% of my wealth. So I'm not going to make that mistake again, A, because it was awful, and B, I just don't have the time to make the money back at my age. So diversification is kind of my, if I were going to have a tattoo, it would be diversification. But if you have a lot of my, you know, if I were going to have a tattoo, it would be diversification.

But if you have a lot of Airbnb, which I do, and it's gone up a lot, which is a really good problem, the question is, well, how do you diversify? What I do is I write calls out of the money. So if Airbnb is trading at $100, I'll write a call that expires in a month at $120. Now, I might get only one or two dollars from you in premium, and if it goes above $122, I've given up some upside. But because I own the underlying stock, I've given up upside, but I don't lose money. I just lose the potential gain if I had just held the stock. I get a small premium. I do it every month, and over the course of a year, I get $20 or $30 in premium.

Some will result in some months where I give up some upside, but I sort of hedge my downside. Now, what's happened in the markets? One, the new entrants into the markets are young people who like the idea of buying options, not riding them. Two, even if they like the idea of riding options, they usually don't have the margin capacity. What does that mean? Because there are black swan event potential here,

and that is, say you write an option, a call at 100 bucks, and the stock goes to 200, that means the writer of the option owes that person $100 for every contract that he or she sold. The person who writes the option has to have a lot of margin coverage, meaning they have to have a lot of stock or a lot of cash in an account. Most people do not. So again, that reduces the number of people who could potentially write options. In addition, in addition, a lot of institutional investors, specifically hedge fund managers, are prohibited in their investment documents from writing options because it is a very risky strategy. So what do we have here? We have an influx of demand

from new retail investors that love options, want to get rich quick. We have a risk profile that eliminates a lot of people or a margin profile that eliminates a lot of potential supply. And we have a lot of hedge fund investors that can't eliminates a lot of potential supply. And we have a lot of hedge fund investors that can't be in the market. I believe this creates asymmetry, where in order to get someone to write you an option, because there aren't that many people who can or are willing to do it, they have to offer a great deal of premium. Meaning that to be on the writing side of options, I believe, puts you on the right side of the trade, meaning you get an asymmetric amount of premium.

Now, now, don't try this at home. If you ride options, you should have economic security because a black swan event can happen and you can lose a lot of money. And if it's more than 5% of my net worth, I don't do it. So I plan and model out black swan events. The bottom line is the less sexiest strategy, the better the strategy. What's not that sexy? To invest in an ETF or an index fund that's low cost and then ignore it for 10 or 20 years. That usually has the best outcome. As a matter of fact, one of the best performing

set of investors, dead people. Specifically, there was research that showed the portfolios of people who had passed away outperformed the S&P. Why? Because dead people don't trade. They just hold stocks. Options are fun. Options are sexy. Options and trading are great ways to lose money. SPY till I die. There you go. All right, Caroline, what's the team focused on in the coming week? We're watching earnings from GameStop and Asana on Wednesday.

Then the European Central Bank is meeting on Thursday, September 8th. Economists are expecting a 75 basis point interest rate hike after inflation in the Eurozone reached a record 9.1% in August. Scott, any predictions? ECB is raising interest rates like crazy. I bought a home there. They only offer variable rate mortgages, or at least I was told that's the only mortgage I could get. And when I bought the home six months ago, it was 125 plus 150 basis points. So I was paying 275 mortgage. And before I even move in, I'm now paying a mortgage rate of 325, and it's likely I'll be up to 375 in the next couple months. Anyways, my prediction, I think Snap likely gets acquired in the next 12 months. I think at this valuation, I think it's a great product. It has a loyal following. The following are attractive consumers such as yourself in that they spend a lot of money. They're influencers. They buy high margin stupid products like coffee and cool shoes and go on expensive vacations to Italy. So I think Snap is a great product, a lot of innovation,

very strong consumer base. And I think someone with more capital can better scale it. So my prediction in the next 12 months, Snap is acquired. That's all for this episode. We will see you next week on Prof G Markets. Hello, I'm Esther Perel, psychotherapist and host of the podcast, Where Should We Begin?

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