(Ep.95) The Acquirers Podcast: Elliot Turner – Low Turner: Low-Turnover Compounding And Valuing Twitter And PayPal

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In this episode of The Acquirers Podcast Tobias chats with Elliot Turner, Managing Partner at RGA Investment Advisors. He is the Twitter guru. During the interview Elliot provided some great insights into:

  • Low-Turnover Compounding
  • Valuing $TWTR
  • Valuing $PYPL
  • Why $TWTR Is More Sticky
  • Kant’s Categorical Imperative
  • $TWTR Doesn’t Compete With Other Social Media
  • Honey. on $SPOT
  • Buy When Its GARP, Hold When Its Growth
  • The Catalyst For Change At $TWTR
  • Day Trading Keyboard Monkey
  • Blogging About Your Stock Picks & Research
  • Common Law & Investing
  • Find A Strategy That Fits Your Personality

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Full Transcript

Tobias: Hi, I’m Tobias Carlisle. This is The Acquirer’s Podcast. My special guest today is Elliot Turner of RGA Investment Advisors. He is the Twitter guru. We’re going to talk to him about valuing Twitter where he sees the PayPal opportunity and his investment style right after this.

I don’t know how long I’ve been aware of you. I was definitely aware of you before we met on Twitter, possibly because you’re writing that blog. You’re writing something. When did you start writing?

Elliot: Yeah. Writing was one of those things. I never actually planned to do it per se. When I started in– Geez, I had blogs as basically projects while I was in law school. I actually started a podcast in law school with a couple friends. We had 20,000 downloads, one of my friends,–

Tobias: What?

Elliot: –who now is working at Google was building– At the time, he was just working for one of the large agencies, and he had heard about podcasts. He heard you could build RSS feeds for distribution. He wanted to play around with the technology. He wasn’t one of my Phish friends. Bunch of us were really passionate about the band, Phish, and we would follow them around, go to a lot of concerts, and etc. We created a podcast called Trapped in Time that you could find on the internet archive after Phish had retired at the time. They’re now back, thankfully.

This podcast was huge and blew up. I was writing alongside it on that. I had a personal blog where I would write about just anything that was interesting to me. I had connected with other people who were writers. I never had a specific plan, but, yeah, I think one of the beauties of the early internet was you could do whatever the hell you wanted, and there was a lot of whitespace. It was really the second prop trading firm I was at, and we could talk a little more about my origin in this business formally. They had a pretty robust online presence. They were building out their own blog, and they basically said to me, like, “You can do whatever you want with this.” So, I started writing daily posts.

After I left that firm, I was writing for the Wall Street Cheat Sheet every day pushing stuff to Seeking Alpha. Then I started my own blog called Compounding My Interests, which is something I really wish I could keep up with again. I reserved the Substack domain for that, and I have these ambitions to start writing again. I feel I have an interesting story to tell to get it launched. I was going to do that before the whole COVID period started. We then had no daycare and school for our kids, and that consumed some of the time I was going to commit to that. One thing I’m sure of is, I’m definitely going to get back to it. Always been doing writing here and there and been interested in that.

Tobias: What did you do? Would you share your research as you do it? Is that too proprietary, or you just share something else more broad?

Blogging About Your Stock Picks & Research

Elliot: Well, I mean, at the time when I was doing it, it would be generous to call it research. It was more like my explorations as someone who is interested in markets and who wanted to learn. So, I was sharing a combination of what I found interesting and the pieces that I was learning and throwing my ideas out there. I think one of the things that people underestimate in this all is they think I need to blog– or I need to do this and have a plan to get something out of it. First and foremost, it forces you to center and anchor on your own thoughts. There’s a very big difference between having an idea in your head, and having something that you could put on paper and actually make airtight and let it stand up on its own.

So, forces you to think and think clearer than you would if you were just aggregating and compiling ideas in your head. It’s something that’s a history. So, you could reflect on your past and hold yourself accountable and make sure you’re improving and moving forward. And then, so much serendipity happens from it.

The fact that I was blogging and putting out these ideas, and I’d reflect back on it and say like, wow, I’d hardly call myself an investor, but there are people out there who are like, “Hey, I kind of like what you’re doing here.” We’re talking about 2007 to 2009. These people have been burnt in the financial crisis and they’re like, “I got absolutely annihilated. I didn’t like the people who are managing my money. I’d love for you to find a way to be able to manage my money.” Obviously, friends and family are some of the first readers, but when you throw things out on the internet, it gets a lot farther than you’d ever imagine.

So, it was fun. I met so many great people through it. I got into interesting conferences, because they’re like, “Oh, you have a blog? Why don’t you come and just write about it?” All kinds of things that you never imagined. I never had a plan, never had ideas. Basically, all I had was a promise to myself that I’d try to get better every day, and I wanted to look at myself yesterday and say, “Wow, I got better today,” and look at myself five years ago and be like, “That guy was so clueless.”

Tobias: He didn’t know what he was doing.

Elliot: I think that’s the one– Exactly. And that’s really how I feel. Hopefully, I keep thinking that about myself, though coming from a much higher plateau today, than when I was starting.

Tobias: It is one of the really nice things about this business in particular, that you really don’t ever get to a point where you know everything. This is one of the things that I’ve discovered. The more I understand about value investing, the more I understand what a phenomenon Buffett is, for example. Then, the weirdest thing when you go back and read the letters again, I think I have a new insight and I go back and read the letters, I’m like, “Oh, my God, he was talking about this in 1983.” He covered this years ago and dismissed it immediately. Just thought about it, dismissed it, and moved on.

Elliot: It’s truly unbelievable. I’d imagine from your seat too. You get to speak to an interesting person every week, you get to pick their brain. I’d imagine that provokes a lot of questions in your head and a lot of reflection and like, what can I do to? What lessons do I want to take from this conversation? What can I internalize myself? You also have basically effectively a journal that’s out there of your own thinking and your own evolution. By the way, your book, Quantitative Value, was incredibly influential on me early on, and I’m like, “Wow, look what Toby’s doing. This is amazing.” Putting these ideas down on paper, and it really stands up.

One of the things that actually got me stopping writing was, I started putting this pressure on myself that I didn’t want to write it if I didn’t feel that it could withstand the test of time. At first, I was writing these ephemeral things like, “Oh, look at what this stock did today.” And it’s like, that’s junk. I don’t really want to be doing that. I don’t want to be a keyboard monkey like that. I want everything to be thoughtful. So, then it turned from a daily cadence, to a weekly cadence, to, “Oh, my God, I’m holding myself to way too high bar, I can’t write again.” And then it’s three months, and I’m like, “Well my first one back has to be good. What could I write that’s good?” Then, more time transpires and now it’s been a couple years.

That said, I do write a quarterly letter now. Every quarter, I do actually put pen to paper, and formulate my thoughts, but that’s a very different exercise than blogging. I’d view blogging more journaling. Like you said with Buffett and his letters, I think one of the coolest things I’ve ever read, I don’t think enough value investors read, George Soros. If you read Alchemy of Finance, the journal in the– [crosstalk]

Tobias: The Reflexivity?

Elliot: Yeah. Reflexivity is an amazing concept. What’s cool, I think, is he has this actual, where so not only does he introduce you to the concept, but you could see his ideas evolving from one day to the next. He’ll tell you the day that his back is aching, and you can get a contextual understanding for why he felt certain ways about different positions. I think that’s important for each of us to do for ourselves too, in one way, shape, or form, at least periodically. It doesn’t necessarily have to be every day, but periodically to jot down our thoughts and our thoughts about our own thoughts, and really reflect on that. It’s one of the most important things.

Common Law & Investing

Tobias: You went to law school, and then you are going to become a sports agent in the NFL. Did you practice as a lawyer at any point there?

Elliot: Never and I never intended to.

Tobias: Yeah, that’s smart. It’s still a useful framework for thinking through ideas. Do you still use that framework at all, as you’re investing?

Elliot: I was actually talking about this with my wife the other night. I’ve long said, “The best thing I got out of law school was a beautiful wife.” We met in our 3L year at law school. Interestingly, I’ve long asserted that I had to rewire my brain to think differently than lawyers are trained to think because lawyers are taught to understand where their confines are, and work within those in maybe a creative way, but not necessarily very creative.

Focus on semantics and find their angle, but very rigid structures within which lawyers work. On the flip side of things– so I’ve long asserted I had to rewire my brain, but then the more you think about it, one of the interesting concepts from law that I’ve really started to appreciate is this idea of common law, where you start with ideas and principles, and you keep refining and pushing forward those ideas and principles based on actions that happen that are nuanced from where the origin was established, and you keep advancing this thing forward.

It’s not like there are specific laws that are written in stone. There are different perspectives that you could take to it. I really liked this idea of common law as being this dance in an evolutionary process, where it adapts to the reality of your culture, and time, and the realities of your culture and time push it. It’s this feedback loop and symbiosis and evolving toward a higher place. I’ve reconsidered my– I had to rewire my brain to like, “Actually, I should have been thinking about it from this angle.”

Tobias: There’s two elements to it. There’s the idea that you’re bound by the– you’re bound by a previous decision, and so your new decision has to be consistent with that previous decision, but then you have additional facts. So, it’s a slightly different circumstance and then you have to apply that same sort of consistency to the new circumstance and it evolves in that way. It’s this very organic evolution of it and probably useful for that reason.

Elliot: You have law on your background, too, right?

Tobias: I practiced sadly, as an M&A lawyer in Australia, in the US for eight and a half years before I was able to escape.

Elliot: Amazing. What’s interesting with your phrasing, when you set it like that, it’s like, wow, it’s actually a Bayesian framework. You start with your anchor, and you give a lot more weight to your starting point than your incremental information, except your incremental information could keep moving you. Thinking probabilistically in that way is one of the most important things we could do as investors, like we’re trying to build this mosaic based on whole pool of information we have.

We know that it’s imperfect, and we know that the future is going to be different than the past. And we’re inherently flawed as forecasters, we can’t make very good predictions. It’s about balancing like how much weight do we give to what we know in the past? How do we weight incremental new information? That’s the way you phrase common law. That’s what it is, right?

Tobias: You spend a little bit of time as a sports agency.

Elliot: I was working for them between my 2L and 3L year, and I was going to work, that was what I was hoping to do on the way out.

Tobias: But then, you transition to– you become a prop trader.

Elliot: Yeah. Transition sounds a little too smooth. It was really a mess. When I inevitably put pen to paper on that Substack I’m talking about, I’ll write about the intervening event or events, however you want to speak of it. That led me into a really back into the finance world.

I, instead of actually working in the sports agent world, had someone who aggressively tried to hire me, and offered me a whole lot of flexibility that otherwise I wouldn’t have had. I worked for that person for about six months formally. It was just a terrible nightmarish experience. When I was fired on the day before Thanksgiving in 2007, I was like, “What the hell do I do now?” I don’t really want to work in that world. I was so jaded from what I’d seen, being exposed to really strong personality in the sports world, that I was like, I really need to do something different.

Day Trading Keyboard Monkey

I had a passion for the stock market since I was lucky in the fourth grade, Mrs. Burdick was my teacher. She taught me– she gave everyone in our class an enrollment in the Newsday Stock Market Game, gave each of us the Berkshire annual report, told us who Warren Buffett was, and introduced us to this idea of investing. I’d always known that no matter what I did, I wanted to be involved in the stock market. I could talk a little more about what I’d done, messing around and getting caught up in the dotcom bubble. I knew I wanted to do something in investing.

Two of my close friends from college ended up working at this firm, Chimera Capital, in New York. I was really looking for jobs, the job market wasn’t where ideally you wanted to be as 2007 was turning into 2008. Not long before Bear Stearns actually collapsed. I was thinking about, like, what do I want to do? My friends love their job. I love the stock market. I’d already been messing around with some of my own money there. This firm was hiring aggressively from Emory University in Michigan, which they had great success with. I went to Emory, I’m a natural fit. It was really good setup. I took a seat on a prop desk. Now prop desk sounds glorious, but it was really like day trading keyboard monkey.

Tobias: How does it work? What do they do? They give you a million dollars of the firm’s money to trade or how does it work?

Elliot: [crosstalk] –business model and their approach to word training and trading is a lot better than any other that I’ve since learned about. But effectively, what they do is there’s a robust training program. You start paper trading. You have to prove that you’re not going to blow up on paper. They start you with like, $100,000 of prop capital, I think they’re levered something like 20 to 1. The actual pool of capital is really small, can’t hold any positions overnight, and you’re really just a keyboard monkey. It’s not too different than playing like a video game. At the time, it was really–

Tobias: How do you make money, if you can’t hold overnight? What do you do? You’re trading the lines on the screen.

Elliot: With there, it actually wasn’t even the lines in the beginning, it was far more focused on you could actually see depth in the order book, and you’d see where like bids and asks where, and it was in effect to just speak bluntly about it, you’re trying to front-run large orders that you see. You get in front of them, and you try to scrape with 1000 shares, you call it like 30 cents in a stock and do it over and over and over, and you’re really turning through a whole lot of commissions to try to make money. There’s some people who, especially at that time, were absolutely phenomenal at it, they could do incredibly well. I never liked it. It never struck me intellectually at all. A lot of it is really behavioral though.

Find A Strategy That Fits Your Personality

One of the things I love and respect about Chimera deeply is that they empower people to think and to indoctrinate people that there’s no one right way to make money in markets. Making money in markets is about finding a strategy that fits your personality. It doesn’t have to be the any one right way, everything’s about the quest for conviction behind your ideas. You have to get yourself in position to have these ideas, have conviction behind it, and manage risk in an appropriate framework.

One of the things I’ve said to a lot of people, I’ve seen people who, especially as you get better, and they do like you take overnight risk and you could start swing trading and doing things that are get closer to investing, but not quite investing, I’ve seen people risk manage their way to fantastic returns. They don’t know a single thing about the instruments they were trading.

They didn’t know a single thing about companies or business analysis. They just really understood and internalized risk management. I think that’s left a strong impression on me, as I’ve developed my own trading strategy, that it has to fit my personality, that there’s no one true answer. So, explore and learn about all that everyone comes out this from. Always be disciplined and rigid with risk management.

Low Turnover Compounding

Tobias: How do you characterize what you do now? How would you describe an optimal opportunity or your process for getting to that optimal opportunity?

Elliot: Yeah. There are two things that I’d say are important to me. I started in this professionally in the day trading world, except I’m what you call low turnover now. This is the first year we’ll have exceeded 20% turnover in the portfolio. Once again, rewiring my brain, from hitting buttons like that, to holding things for a long time. 20% turnover means a couple things to me. One is, it means that you really only need to come up with a handful of ideas in a year, if you have an average position size of about 5%. Slow things down, be methodical, take a slow approach toward it.

The other means when you have a 20% turnover, roughly speaking, you’re talking about holding a position on average five years. So, I’m really looking for long-term investment opportunities. I’m looking for businesses who– like my return is going to be driven far more by the business itself, than it will be by a rerating of the multiple or anything of that sort.

When I describe myself, I hate labels, I hate having to categorize myself, but one of the beauties, I think like a label, like GARP, which I fully subscribe to. I mean, depending on the market environment, I could end up more on the value side of the GARP-y spectrum, or the growthier side of the spectrum. I don’t have to be beholden to one or the other, but I do have to, at all times, anchor myself to valuation, that’s a religion. I’m indoctrinated there.

I can’t just say like, this business is qualitatively awesome, and I’m willing to buy it at any price. On the other end of the spectrum, on the other hand, I also do have to say like, “Okay, I’m not willing to purely by a melting ice cube that doesn’t fit my setup. I have to have some sort of structural growth in this business, some sort of opportunity for them to be a little bigger tomorrow and thereafter than they are today.” I think that’s really important to me.

The Catalyst For Change At $TWTR

Tobias: Well, let’s talk a little bit about some of the positions. We’ve had a conversation yesterday about a couple of positions that I love your insight something that– Twitter’s one that you’ll well known for being quite bullish on Twitter, it’s how we met. I think that you’re one of the first people to that I’ve ever interacted with on Twitter. I’m almost certain that’s the case.

Elliot: Really amazing.

Tobias: I’d have to go back and have a look at it, but that would be like 2009. I think that’s probably not right, because I think I signed up in like 2009, but then I didn’t use it for a couple of years. I think that you pointed out, it was around the time that Google really killed itself. Google killed the Reader, and then everybody had to go and find another. They killed the homepage, and they killed the Reader. All of a sudden, Twitter became the homepage than the Reader, which is I think that’s exactly what happened to me.

Elliot: Yeah. One of the funny things is that when I was telling you about my start in the podcast world, way back in 2004–

Tobias: You could be a podcast billionaire now.

Elliot: Right. I know, I had a huge following.

Tobias: That’s before Joe Rogan.

Elliot: Could have made it huge and had a big audience and all that sort of stuff. That same friend was like, “This Twitter thing is awesome, don’t really know what it’s going to be, but you should check it out.” I created an account. It’s only function was like, when I’d write a blog post, it would send an automatic blast to Twitter saying, “Read this.” I didn’t actually like tweet or engage with people. In Google Reader at the time, and I understand you did the exact same thing as me. I had this social circle of my friends who were interested in the same things, like a slightly different group in finance than I did and call it fantasy baseball, and music. We’d share things through Reader, and we’d each read each other’s things. I really was very into RSS and thought it was the best thing ever, because this was how I curated my own reading list. I religiously read it morning, middle of the day and evening.

When Google killed Reader, I was like, “Oh, my God, what do I do now?” I don’t know, call it intellectual development was built on this one platform, and now it’s gone. What do I do? I was like, “Okay, maybe now’s the time that I explore this quirky thing called Twitter.” I started engaging on Twitter, started talking to people, started connecting to people. There wasn’t exactly FinTwit. There were certain cliques at the time. Really, for me, it was an exploration of learning how to invest, following what’s interesting. Back then, I definitely spoke a lot more macro than I did business analysis, though there were shades of both that were mixed in along the way.

I’m so grateful, thank you Google for killing Reader. I was so devastated at the time, but it’s like one of the best things that’s ever happened to me. It’s opened so much serendipity, being involved in Twitter has been huge. Early on in Twitter, I think, in the grand scheme of things, I was very early to Twitter and to appreciate Twitter. Now, when Twitter was IPOing and you could see my tweet history, I really felt that it was overvalued, and the expectation of this platform was just way too much for what it was. I wrote down on paper at the time, take notice of this thing when it gets to a $10 billion market cap.

That’s what I thought would be interesting. It was a little too much at that time, expectations were too high. I mean, I didn’t even know like a lot of what I ended up knowing by the time I invested in it, but it was a little bit of a mess– $10 billion seemed like the right spot. If I recall, it was something like, I don’t know, 40, 50 billion in the early days when it came public.

See, one of the things in my process that I’ve always done is, I started- I think one of the things I internalized that Buffett said is, there no called strikes. There’s no situation that you have to be involved in. It doesn’t mean it’s not worth paying attention to things that are expensive, but interesting. Learn about them, when they’re new, learn about them when things are going well.

Then one day, there might be an opportunity where, “Well, Mr. Market gets a little less sanguine,” and you could step in, having understood it this whole time, and having applied a Bayesian framework, updating your understanding of the business as time goes on. When Twitter hit their problems, I was really paying attention, and I was really interested and digging in deep there.

Tobias: Let’s talk a little bit about it because I absolutely love the product. I think it’s incredibly powerful across a number of different– from a research perspective, from getting news, from a marketing perspective. It’s a great tool for all those things.

The problem has always been at the business hasn’t been great. Mark Zuckerberg famously described it as a clown car that fell into a gold mine. And it’s had this part-time CEO who seemed to be running the more fun business that was doing quite well. It’s got all of these ongoing issues. But suddenly something seems to have changed since, maybe I’m wrong, maybe it was always this way. When Elliot popped on board–

Elliot: Not me Elliot, the–[crosstalk]

Tobias: Sorry, Elliott Management, Elliot posing as Elliott because that’s got to be the toughest guy out there, and he’s a very, very shrewd investor. So, if Elliot’s on Twitter’s board, then you have to think something very interesting potentially could happen there. How important are they to what Twitter was doing? What do you think that even without those guys, and maybe just talk a little bit about what they are doing?

Elliot: Sure, yeah. Here’s a funny thing. Someone on Twitter thought I was the Elliot, the Elliot that wedged their way onto the board? God, I could– [crosstalk]

Tobias: That’s pretty cool.

Elliot: –the tweet. It was hilarious. I think it’s because I’m basically like the only person in FinTwit who’s actually bullish on Twitter.

Tobias: I mean, what are the chances that someone who knows really about Twitter and has the same name– [crosstalk]

Elliot: There you go. I think there are a few things that are going on. I actually deeply respect Jack, I think he’s one of the ultimate product innovators of our time, how many people have come up with like, effectively, three separate businesses that each make a billion dollars. So, I’m counting twice in Square because there’s Square itself for a Merchant and Cash App. I think some of the flak he gets is justified on the one hand, but I think it’s a little unfair, perhaps their biggest problem is they don’t have a COO.

I think they had a pretty ineffective board. I had a position in Twitter, but I didn’t get really big until this March, and after Elliot and Silverlake each got board seats. More importantly, I think there’s another key sign in there, which is that Patrick Pichette had been on the board for about a year or so, it could be– I know I’m roughly right there. Omid Kordestani was removed as independent chair and Patrick Pichette became the independent chairman of the board.

Now, I don’t know if all of you would know the name, Patrick Pichette, but interestingly, he was the CFO of Google during some of their most important years. If you talk about a guy who really knows the financial side, and understanding how to make money on a web-based advertising business, I mean, this is someone whose insights are priceless. In April, shortly after this reconstituted board was released to us publicly. Jack Dorsey accidentally Periscoped publicly and was talking about how like– it was supposed to be an inner team meeting with his team.

He’s like, “Oh, yeah, now my board–” In his Jack kind of like mumbly sort of way is like, “Now, my board’s actually paying attention. And I have to talk to them regularly.” Then, he’s like, “Oh, my God, this is public,” and he shut it off. You could still find the video. I think BuzzFeed posted it somewhere.

But to me, that was really, really important. Thank God, we got that little preview there because they have an engaged board. They have a board who like– when I think about Elliott and Silver Lake, I think of it as a good cop, bad cop kind of setup, where Elliott is– they wanted Jack’s head. That was the headline that came out there publicly.

They wanted him out as CEO. I don’t doubt for a second that that’s what they wanted. They are really disciplined when it comes to expenses in businesses and technology businesses, they’ve done a great job reining in some other companies. They’ve broken up some other companies. They’ve forced sales. They really get what they want at the end of the day. And then in come Silverlake, who buys this billion-dollar converted with 41 and a quarter strike price, which at the time the stock was in the mid to low 30s. So, they’re saying, “We want some upside– We think there’s going to be some upside.”

Silverlake comes in, they’ve got a little more history in venture capital than they do in actual public activism. I’m not sure if there’s any other case where they’ve truly gone activist. I think that they’re good cop insofar as– they have a history of helping businesses monetize. They have a history of growing businesses. They come in here and you have Elliot and Silverlake, and they each bring their respective disciplines.

Now, the interesting thing about the good cop and the bad cop is that while they are seemingly diametrically opposed to one another, they’re actually on the same team. When you think about it, the good cop and the bad cop are working together, and who are they working for? They’re working for us shareholders. It’s the first time you can truly feel conviction that everyone is geared toward looking out for and answering to the interest of shareholders at Twitter. I think that was a really, really meaningful change. I don’t think people appreciate the magnitude of that enough.

Valuing $TWTR

Tobias: Can you break down how you think about the valuation of Twitter for us? What the drivers that we should be looking at as we think about that, too?

Elliot: Yeah. One other point that I want to make on the structure of Twitter and coming out of this big mess before, like going to exact monetization, because I think it’s important for one of the most important KPIs in the business is that when Twitter was built, Twitter was this big heaping mess. There literally was no twitter.com. It was an API, and it started with over text message, but then there were these various gateways that other people built accessing the API.

There was no Twitter. It wasn’t built as a site, and that’s really different than a lot of these other companies that are out there in web land. It’s got its pluses and minuses, but for Twitter thus far, it has had way more minuses.

When twitter.com became an actual site, that process was really messy. It was this group behind TweetDeck, that was actually rolling up these other gateways, and access points to Twitter. Twitter eventually ended up buying TweetDeck and building their own Twitter.com. It was like a really haphazard, messy process, and they had a lot of code debt, and they didn’t have an actual underlying, way to build product, to push new product, to market to experiment. They were encumbered by their past in a big way. I think that had a lot to do with what went wrong.

So, when you’re thinking about valuing Twitter, how this all relates to valuing Twitter is the first re-foundational piece of rebuilding Twitter when Jack Dorsey came in, was rebuilding their user experience, the whole user side of the platform. That involved things that were not just code related, it involved making really hard choices about what safety looks like, about what it means to be– make a forum where people could actually engage. They had to make a lot of hard choices, had to face a lot of challenging questions, were put in certain positions where they could– where some of these hard choices made sure that no one was happy. It’s a really hard place to be, but they did it.

They just recently rebuilt their ad tech stack. In rebuilding the user side of things, you really started seeing the progress about a year and a half ago that user growth actually started again on the platform, they had stagnated for nearly a handful of years without being able to add any new users on the platform. When you think about valuing Twitter, they give us two KPIs to work with basically. They don’t even really give it to you, you have to figure out the ARPU side of things, but you have ARPU, and you have how many [unintelligible [00:32:52] you have, and you have to think about how each of them are growing or not because ARPU in particular had taken a meaningful drop this year after flatlining, the prior two years.

Tobias: Why was that?

Elliot: Okay, so in 2019, ARPU was trending upward nicely in the first half of the year.

Tobias: That’s average revenue per user for the folks– [crosstalk]

Elliot: Exactly.

Tobias: Sorry, I cut you out. It’s $25 per user.

Elliot: They are $25 per user, well, in 2018, and 2019. 2019 was looking like it was going to be better than 2018, but then in the second half of the year, they had these big problems with one of their revenue products called Map. If you know those little tweets are– really on any platform, any ad that’s asking you to install an app, that is Map.

In certain markets for Twitter, especially Japan, really, really meaningful revenue product. In Japan, if you figure out ARPU, they don’t disclose it. Roughly speaking, they were down somewhere by the order of 20% ARPU in Japan. Now Japan’s a really important market for Twitter. It’s their second-biggest market in the world, after the US. Losing 20% of your revenue per user, that’s a pretty big hit. Interestingly-

Tobias: Material, yeah.

Elliot: -ARPU was up in the US in 2019, but in aggregate, their ARPU was down fractionally overall. Then obviously, with COVID, ARPU took a really meaningful drop. That had to do with the fact that Twitter itself is something around 80% of all advertising on Twitter is what you’d call top of funnel brand advertising. It’s like the Procter & Gambles of the world who try to raise awareness about a brand as opposed to direct response, which is what you see far more on Facebook.

When COVID happened, brand budget stopped, and all of a sudden, the floor fell out. It’s really come back in a big way and it’s gotten stronger. But Twitter has to do a lot of work to improve their revenue product to broaden the kinds of opportunities to give advertisers. It really required rebuilding their entire tech stack from scratch. There’s some great blog posts on the Twitter infrastructure blog, that explain why they were in this problem, what it meant and how they could fix it. Now that the new ad tech stack was launched in the second half of this year, they could iterate on things much quicker.

So, you starting to see things like carousel ads. Just yesterday, they announced that they’re finally doing frequency caps. And a lot of people are like, “Ugh, this is so Twitter. There’s so much low hanging fruit, why haven’t they tackled this sooner?” Clown car, blah, blah, blah. Actually, I mean, I get why they hadn’t done it. They weren’t able to. They were encumbered by their past and they had to re-platform and build this foundational stuff.

When I think about Twitter, when I think about valuation, when I start, the first thing you could do is simply back of napkin say, “Well, okay, they’ve had huge growth in their user network,” the last year, nearly 30%, year over year. You take that growth in the user network and say, “Okay, I’m going to slap on my 2018 or 2019 ARPU of 25 bucks and I’ll say, “Okay, look, they’ve given me long-term guidance on what their EBITDA margin range would look like.” They said, 40% to 45% EBITDA margin range. They’ve delivered within that range in the past, though they had been below it last year.

Let’s say, they end up at 35%, instead of hitting the low end of the range. You take that the 186 million users multiply by $25 ARPU, apply that 35% margin. That’s $2 billion in EBITDA on a mid $30 million market cap with $4 billion of net cash, which should be growing just if the user base keeps growing, even if it slips to the mid-double digits from 20%.

That’s pretty nice in this market for a platform that has, I think, still a whole lot of low hanging fruit and a lot of optionality, and a lot of interesting things they could try to capitalize on. Then, if you come at it from a DCF, the way I do it is I take them up to that 2019 ARPU by 2024, get them by 20– I’m like, unfair in it, because I had to, like temper myself, get them to the low end of their margin range by 2028 and apply my terminal multiple, then you’re talking about a stock that should be in the mid $60.

One of the beauties of it all is I think the best business model for Twitter might be one that they’ve yet to even explore. They’re finally truly dropping hints that they’re going to do it. I think some sort of premium offering, which is built around– I originally was like– when I would talk to the company, I’d be like, “Are you going to do premium feeds? Are you going to do subscriptions?” Blah, blah, blah. And then they’re like– I feel like that phrasing rubbed people the wrong way.

So, I’ve started calling it creative empowerment. When are you going to do some sort of creative empowerment, and I think it matters because to me, creative empowerment means more than just creating a business model. It means you’re giving creatives tools, and you’re giving them an opportunity to make revenue.

You’re giving them tools to enhance their creativity and enhance their ability to reach audience with their creativeness and you’re giving them an actual way to make money. In exchange, you take a little bit of a cut. I think that would be something that could be a billion-dollar revenue line for Twitter down the line.

Tobias: When you think about Twitter– I don’t know how to resolve it, but there seems to be this ongoing censorship issue with it. It’s meant that there have been some competitors, like gab.ai and Parler have popped up. It’s still in an ecosystem where– we’ve discussed previously, it’s not necessarily a social network in the way that Facebook is a social network, or the way that Instagram perhaps is a social network, but it’s still sort of thought of as in that kind of category of things, that sort of thing. How do you see it, resolving these issues and competing with the new and the incumbents and whatever else comes along? TikTok?

Elliot: Yeah. This is like one of the biggest, I think, challenges for Twitter. Say what you will about the president, he has put Twitter in a corner where no matter what decision they make, they’re going to have people that are really angry at them. If they don’t– censor might be too strong a word because I think they really just like added context to certain things that it actually censor.

Let’s leave semantics aside. If you don’t censor, you’re going to have a whole lot of people that are angry at you for letting them violate like very– not even grey area rules on their platform, black and white rules. Why is this guy above the rules of your platform?

On the other hand, if you actually do moderate or censor, then you’re going to have a whole lot of people that are like, “He’s our president! How could you moderate or censor him!? He should be able to say whatever he wants.” They were in a lose-lose situation. But the fact of the matter is there are a lot of people who say things, and I think this is one of the most mistaken impressions, that Twitter needs the President because he gives them engagement.

If you actually went around and spoke to a lot of advertisers, he is the worst thing that’s ever happened for the platform because no one wants their copy to be run alongside engagement that’s based around things that get people angry. No one is worse to market to than an angry person. An angry person is literally– they’re factually putting up an emotional wall to being swayed on anything.

Tobias: I need to buy that gun now, Elliot. I need the gun immediately. I don’t need the waiting time.

Elliot: Exactly. Yeah, that’s about all you can market. People aren’t amenable to being swayed by marketing in those kinds of moments. A lot of advertisers actually shut off entirely. Say what you will about engagement, I mean, that engagement is worth, I’d say actually negative value, because advertisers will shut off in other areas. Now, the interesting thing about Twitter is politics is just one niche on Twitter.

Tobias: It’s best avoided, in my humble opinion.

Elliot: Absolutely. There’s FinTwit, which I think is one of the most amazing communities in the world. There’s basketball Twitter, there’s music Twitter, and within every broad label, there are very niche Twitters. During COVID, I really learned a whole lot about the science Twitter community. There’s a really big community around there. I’m blanking on the guy’s first name, his last name [unintelligible [00:41:39] wrote a great substack about Twitter as the new peer review, and how a lot of science in general has been moving faster because of these communities that are built around Twitter, where you can share your research and get real-time feedback, real good, critical, smart feedback that helps you refine your own research process.

And who needs peer review, when you could do it in real-time and iterate your process and move it along that way? That could literally only happen on Twitter. You’re not going to do that on Instagram, where you’re sharing kitten pictures of yourself with your kids and your family on the ski slopes or something like that. It’s just not the right format. It’s not the right platform for it.

$TWTR Doesn’t Compete With TikTok

Now, like TikTok, you mentioned TikTok, I don’t think Twitter competes with TikTok at all. Obviously, it would have been nice had Vine still been in existence, and they could try to create some sort of short-form video. But I totally understand why they deprecated that product at the time. Twitter had thrown a lot of shit against the wall to see what would stick in their early days, trying to be something more glorious than they actually were. They had to focus on their core essence, they had to redefine their core essence. I think they didn’t have the core essence, which was one of the big problems.

Everything in early Twitter was defined vis-à-vis Facebook, like in their S1, they talked about wanting to get a billion users. I don’t think that was the right north star. They should have been redefining themselves around what Jack Dorsey inevitably understood was, Twitter is about interest. It’s about what you’re interested in, they have an interest graph. That’s a big part of why like– their advertising didn’t work, doesn’t work the same way for DR as Facebook does.

Because Twitter built their entire ad process. They can’t identify– I shouldn’t say can’t because this is changing fast. They couldn’t identify what I was interested in. They could infer based on who I followed what I might be interested in, but they have now with machine learning started learning what I’m interested in directly, they’ve started labeling things and topics, and people say like, “Oh, come on, it’s so easy.” It’s not. When I say, “Skate to where the puck is going,” because I’m a hockey guy and I always talk about hockey, I might be talking about Twitter, the business. Am I talking business? Because Warren Buffet used that quote, or am I talking hockey? How do you know how to categorize that? These are really challenging questions.

There are a lot of grey areas, but now that they’re able to have topics, that I’m able to subscribe to topics that once they infuse that in onboarding, I’ll be able to onboard and instead of having this whitespace where– I knew a lot of people who I thought should find Twitter interesting, I’d manually onboard them being like, “I know you so well, these are the people you should follow.” They now love Twitter, and they’re way too addicted. I know some of them are inevitably going to listen to this, you know who you are.

I think having that capability to actually know my interest, instead of inferring my interest will make Twitter a better experience for me. It’ll make Twitter more accessible to people who don’t use it yet and can onboard. By the way, there are a lot of people who had been registered as users and churned pretty fast because they didn’t know what to do. So, they’ll reengage those people. And then, they’ll also have a way better product for advertisers. What advertisers want is to actually know interest, they don’t want to infer interest, you get way better results when you actually know what you’re there for.

Why $TWTR Is More Sticky

Tobias: Yeah. I think I said this to you yesterday. All the other platforms have the problem when they get very hot. The issue is that it’s great for the moment that it happens to you, but if you get very hot, then at some point, the next generation that comes through doesn’t want to be on the same platform. I think is the older generation, which is what happened to Facebook.

They got lucky that they got Instagram or smart, that they got Instagram. It’s sort of happening to Instagram a little bit with TikTok, they’re trying to recreate the same capability. But I don’t even know if it’s going to matter because you just don’t want to be on the same thing that your parents or older siblings or older people are on.

Twitter has sort of never been really cool and it’s much harder to use. But once you’re in it, it’s much more useful, I think. It sort of self-selects for people who are going to be very sticky, which might mean that it grows a little bit more slowly, but it’s also going to be a little bit more resilient.

Elliot: 100% agree. I think there’s a trade-off between slow growth and resilience. That’s an awesome point because I really think there’s some truth to that. I wrote my last commentary about that very notion, and I didn’t even apply it to Twitter. My God, I wish I could go back. But I think that’s really freaking important. I think that actually matters. Twitter has an appeal that’s very different.

These other platforms are on a treadmill competing with one another over who’s got the best new feature and who’s a little more interesting, and where can I make sure that my grandparents and parents don’t see me tweeting or pushing out content that’s not appropriate for their eyes. Twitter is about engaging in your interests.

I think one of the realities that billion-user aspirational number they threw out in the beginning, didn’t grasp was that Twitter shouldn’t be for everyone, it should be for people who are really interested in things and really want to indulge in those interests. I think that’s really good because when you actually get that sort of platform, it’s way more sticky and it’s much harder to compete with. I’ve called it the funnel for anything interesting in life because I’ve had so much serendipity from like– we basically met over Twitter.

I’ve met so many interesting people over Twitter. I talk to investors in the Nordic countries who I met over sports gambling investment that we otherwise in the prior world could have never gotten to know one another. So, it’s global, it’s communal, it’s a way that you actually meet people. It’s so many different things that I don’t think the other platforms are really geared toward. Those other platforms are more based on– I mean, TikTok is a little different, but Facebook, it’s purely based on who you know as friends and family. You love those people, but you don’t necessarily want to talk stocks with them all day. I would much rather do that on Twitter.

Valuing $PYPL

Tobias: Right. I want to change gears a little bit because we’re going to run out of time, but I really wanted to talk to you about PayPal as well, because it’s one of the stocks that– I said yesterday, it’s optically expensive. It’s trading at less than a point of free cash flow. I just wanted to– you had a very thoughtful approach to valuing it. And I just wanted to– if you could do that again for me, please.

Elliot: Yeah. One of the things I do in my process is I build– reverse engineer DCF. I’m trying to look at what is embedded in today’s stock price. I’m going to go all the way up to the KPIs that lead to revenue growth. So, what drives revenue growth? The first thing I’m obviously trying to understand is, what margins does the market expect this business to have? What sort of revenue growth do they need to achieve today’s stock price? But the next thing I’m going to do, once I have an understanding of that is I’m going to test the sensitivity of each of the key lines and each of the key assumptions.

In PayPal from the very beginning, I got involved in PayPal with eBay before the split. So, I’ve been involved for a while. PayPal was once a really frustrating stock, much like Twitter is today, where seemingly nothing could go right.

They similarly had a whole lot of code debt, and they had to like re-platform everything to be able to achieve some of their growth ambitions today. And then the other thing that they really needed was they needed Square to come along– Jack Dorsey, well done– and create Cash App and start doing things with a much broader mandate and much faster. God, Jack moves fast. He’s not the one holding them back. He’s moved really fast here, and do things that are interesting and different. They really shook PayPal up and PayPal realized that they had a much bigger different opportunity than they had been pursuing at first.

Now, one more step back is that Dan Schulman when he came in as CEO, he had to work within an ecosystem in a really challenging way. When he came on as CEO, Charlie Scharf at the time was the CEO of Visa. Now, he’s at Wells Fargo, but at the time he was at Visa, and he was saying things. I think his literal quote was, “We view PayPal as our frenemy, and we will go nuclear against them if they don’t play nice with us.”

So, Schulman had to really navigate this complex mosaic of players in the payment ecosystem who each had important roles to play. What he did that was pretty brilliant was he struck partnerships with each of them in very constructive ways where he aligned PayPal’s mission of digitizing payments with each of these players, so all the players in the ecosystem now have incentive to participate in driving growth PayPal’s way.

One of the things that I observed when I was doing this reverse engineer DCF and toying around with the numbers, everyone was obsessed with take rate at PayPal. They’re like, “My God, take rate’s degrading. How could they ever drive incremental margin with take rate?”

It turns out there’s one other line that’s really important. It’s how many times users transact on PayPal per year, the engagement line. I think at the time of the split, it was about 17 times a year. So, you’re not even talking about once a week that people are using PayPal, you’re not even talking about twice a month. One and a half times a month, the average PayPal user would use the platform. I said– right then and there, I realized, there’s so much leverage to this line in so many different ways.

For example, if you bring in a new user, you have to spend customer acquisition cost against that user. It costs money to actually acquire a user and bring them in. If you bring a new person in to use it 17 times, I mean, that’s great. It’s got its core margin attached to it, though, but if you get someone who’s already a user, to go from 17 times engaged per year to 34 times per year, you have no customer acquisition cost against it, so that 17 times per year is worth a whole lot more than bringing in a new user.

Buy When Its GARP, Hold When Its Growth

Interestingly, now we’re nearing– we’re at about 30 times per year that the average person engages with PayPal. They’ve nearly doubled the amount of times people use the platform. One of the things I do when I structure a position, is I say, “Okay, I want to buy it when it’s GARP, but I want to hold it when it’s growth.” If I get it right, I’m really on hold it through their real growth period.

PayPal is definitely a little more expensive now, but the people that they’re bringing on are so much more valuable than the people in the past because they’re maintaining that higher engagement level. When you think about what they’ve done since COVID, COVID pulled forward like five years of growth. They added more users in the first half of this year than I think they did the prior three years combined. It’s just phenomenal what that does when you roll forward the economics of the business.

When you look at it on a trailing basis, the numbers don’t look quite as good as what they will look like when you roll things forward, as they continue to bring on new customers, as they get engagement of their new cohorts to be consistent with their older cohorts. Then, they’re doing way more creative things in terms of how they get you to use the app and how you engage.

One of the awesome things with bitcoin, and I had been involved in Square, I– no longer hold shares, I wish I held it a little longer. One of the interesting things in Square is that– I think it was through Square that I first encountered when they opened bitcoin trading, the average person who had bought bitcoin opened the app twice a day. PayPal was having a challenging time getting people to open their app, because you could engage with PayPal without opening the app at all.

You open it up to bitcoin trading, and now all of a sudden, you have people using it twice a day, and you have some valuable real estate. If you open the app right now, in the app, there’s a promo, “Get three free months of Spotify, if you click this button.” How much do you think Spotify pays for that? That’s really valuable. Next month, it’s going to be someone else, the month after that it’s going to be someone else.

So, there’s so many adjacencies and line extensions that they can now pursue that they didn’t have the capability before because their tech stack, because of what they were building toward, because they didn’t have this creative spark that Square’s actually given them. It’s pretty interesting.


Honey. on Spotify

Tobias: What’s Honey do for them?

Elliot: Yeah, Honey has a lot to do with that Spotify. I was really upset with Honey the day it happened. I was like, “Oh my God, these guys are blowing money. This thing doesn’t make sense to me.” I totally understand it now. It makes so much sense. It was really smart. You could quibble over the price. One of the interesting things, their CFO from– he came in on the spin-off, John Rainey, he came from the airline industry, and in the airlines, you have to pinch every penny. I do have some respect for the frugality that’s at their heart.

He made this commitment to acquire, I think, it was about $3 billion worth of acquisitions a year while moving their balance sheet from a way overcapitalized balance sheet. One of these more like– what you’d expect out of a payments company, like an optimized balance sheet. They probably even eventually, they should, gradually walk themselves to two terms net debt to EBITDA balance sheet.

Honey was an acquisition that checked all the boxes for them in terms of the size. I was like, “Oh, my God, this thing doesn’t really make a lot of money,” and made $100 million, and they paid I think $3 billion for it. What!? That’s pretty big. Interestingly, Honey gives them a lot of capabilities. Honey is an important way for them to get more information on purchase intent, and to move up the funnel with their customers.

Kant’s Categorical Imperative

One of the things I always said about the PayPal split off from eBay is had the company existed in an entirely different way, where it was PayPal that owned eBay, and eBay was a service for their merchants, in contrast to eBay owning PayPal, the essence of the company would have made sense, and it would have worked, but the actual existence was entirely backwards.

They couldn’t rejigger that internally. They existed to fulfill the wrong purpose. I actually presented it back in 2015 menu of ideas, and I related it to Kant’s Categorical Imperative, like treat everything as an end unto itself. They just weren’t really doing it. They weren’t pursuing the right end. There end should have been facilitating everything for merchants, like they should have been in the business of serving merchants, and Shopify is going there, and you see what that’s done to their market cap. Honey achieves that ambition from a different angle in a different way and let them actually start giving literally on a platter, consumer intent to their merchant base, and that’s something that they’ve never been able to do before.

Tobias: Yeah, so that was really a clever insight. It blew my mind when I first heard you say that. We’ve run out of time, unfortunately, as much as I’d like to just keep on going with this. If folks want to get in contact with you, what’s the best way of going about doing that?

Elliot: I’m going to say go for Twitter. I have open DMs,. Handle is @ElliotTurn. E-L-L-I-O-T-T-U-R-N. I’m always open to talking with people and you can email me elliot@rgaia.com.

Tobias: That’s perfect. Elliot Turner, RGA Investment Advisors. Thank you very much.

Elliot: Thank you so much, Toby.

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