YouSaid · the spoken record

Pat Dorsey

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67
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2018-02-20
most recent
2018-02-20
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1
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  1. “If user engagement went down, engagement is the sine qua non of a network effect business, right? And what you've seen with Facebook is management being willing to take actions might be harmful in the short run but are beneficial in the long run, such as moderating ad load. Most of Facebook's growth over the past year has come from increasing ad prices. They've actually brought ad load down, which is good for you or aught, right? Because you don't want too many ads. That's what killed MySpace. Just way too many ads. So if the experience, the user experience became spammier for lack of a better word. If they weren't continuing to innovate the platform with tools like Facebook Live and other things that keep people coming back, if they weren't innovating on advertiser tools, you know, I mean, if the toolkit for advertisers was today the same as it was four or five years ago, or if that slowed, that would be a concern because that's how it gets monetized. Those would all be concerns. Capital misallocation, Zuckerberg is fairly young. The acquisition so far, Instagram, has worked out really well.”

    2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source

  2. “Top line growth was pretty not easy to forecast, but I think that wasn't our real variant perception. We've kind of been in line with consensus on revenue. We've been somewhat ahead, but not massively. It was really on the operating leverage front because when in late 15 we began looking at Facebook, they had bought WhatsApp not too long ago. And a lot of the purchase price for WhatsApp had been allocated to R&D. And so R&D spend as a percentage of revenue really jumped up. So if you were looking just linearly and just looking at the gap numbers, you said, wow, this business isn't scaling. There's no operating leverage here. But then if you pick it apart and just think, well, gee, the marginal cost of you or I contributing content is nothing. It really should scale. Hmm, why hasn't? Hmm. Oh, it's the WhatsApp allocation. Hmm. That means that number of thirty percent margin they printed in 2015 is probably not representative of what the future will be. Hmm, that means we can forecast some operating leverage. Wow, that's a big number that you kind of go from there.”

    2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source

  3. “And it's rare that you do primary research and the work comes back 95% positive. And that's kind of what we got. I mean, representative quote, if God invented an advertising platform, it would be called Facebook. All right, well, let's rather strong. And that kind of makes you sit up and take notice because we know that advertising, digital advertising offers kind of the holy grail that's been sought for decades, which is measurement, measuring the return. You know, it's the old quote of, I know half my ad budget is wasted, I don't know which half. And Facebook, because of its ability, it actually knows things about you, Google can intuit things about you based on where you have been or a search term you put in, but it's intuiting that, right? It doesn't actually know things about you that you have told, that you have voluntarily told it, I think it's a Facebook. And so that information was resoundingly positive. And so we felt fairly comfortable thinking about the growth rate, continuing out.”

    2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source

  4. “So, our starting point with Facebook was going to a bunch of digital ad conferences, frankly. And starting with not the user as an URI, but the user as in the person who actually generates their revenue. Yeah, we are the product, exactly, exactly. We are monetized the money comes from the advertiser. So we went to a bunch of digital ad conferences, frankly, and just asked people and just said, you know, what value do you get out of Facebook that you can't get out of Google? What's your return on ad spent? Do you feel like they're targeting has improved? By how much? Just really trying to understand from a granular perspective.”

    2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source

  5. “Better. Very smart, right? And so this formally unassailable business suddenly loses 15, 20 points of share in the US because the founder does something dumb and because the products are fungible. If MasterCard tomorrow had a massive data breach, you could go on using your Visa card. You wouldn't care. They're fungible. Facebook less so. I mean, if you decided I don't want to use Facebook, there's not at the moment it could occur, but there's not at the moment... An analogous platform for you to connect with people on”

    2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source

  6. “The key that people don't realize is that a network effect has to be cared and fed for and fed. They don't just sort of exist and perpetuate without anything. Look at OpenTable. Open table's market share as a restaurant reservation platform has really declined because Priceline didn't really invest in it very much. They did not innovate on tools that are used by reserve and talk and other types of ticketing platforms that you may have seen restaurants use. I mean, just anecdotally in Chicago, I'd say easily have the restaurants that I go to don't use OpenTable. They use reserve. And that's because it was not invested in. And they were extracting too many rents from the user. But also, and this is a critical point, it's because for me as the user, it's a fungible experience. Reserving it through open table, reserving it through exactly the same. Uber versus Lyft. It's a car. You don't care. And so in the headlines get ugly for Uber and it turns out Travis is a pretty nasty dude. People's app and spreads. It lifts campaign is wrong.”

    2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source

  7. “Three GPA, whatever it might be, or passing a certain class that's required for their major. The marginal benefit of paying $14.95 a month for Chegg and knowing it's the right answer because all your friends have used it and it's helped them versus just crowdsourcing it on Reddit, it's a good cost benefit.”

    2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source

  8. “I mean, the best thing is you monetize content, you don't pay to create. That would be Facebook. Now, Chegg has to pay money, good money, big money for those licenses to get that content. And so to some extent, the publishers, Pearson McGraw-Hill, do have a bit of a lever over check in that respect. We think that those relationships are good. They recently renewed one of their licenses at a similar cost to what it was a few years ago, largely because the publishers themselves are struggling, and this is a very high margin source of income for them. And most college students, they've never heard of Pearson. That name means nothing to them. So if Pearson were to take all their textbooks and try to do this themselves, I think the marketing costs would be enormous. But that's certainly a less attractive zero marginal cost business than, say, a Facebook one. You do have some crowdsourced competitors to check where students basically post their own answers. But here's the thing when you think about the value to a student of getting a 3.5 instead of”

    2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source

  9. “And if you didn't, you probably won't do so well in the test. What they've done is gotten exclusive licenses for 27,000 ISBNs and answered every single question and indexed it on Google, that being pretty important because the modal college student today copies and pastes. They copy the question and then they put it in Google and search on it. Chegg comes up as the first organic result, which is how their user base has gone up 2.5x in three years with marketing costs being the same as they were three years ago.”

    2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source

  10. “So the legacy business for Chag is textbook rental. They actually were kind of the first inventors to some extent of renting textbooks versus buying them. Of course, this is a business that's fairly easily replicated. There are very low barriers to entry. And so Amazon and Barnes& Noble essentially crushed them in the textbook rental business. The founders were fired by the venture capitalists who'd poured $220 million into the business. A new CEO was brought in. And he realized that essentially the only asset Chegg had at that point was a brand, that they were, I mean, they have 70%, maybe 60% unaided name recognition on college campuses. Well, that's an asset. We could probably do something with. And so he did a little bit of kind of basically investing in different types of businesses. And the one that's worked out really well for them is essentially building a digital library of step-by-step answers to end of chapter study questions. So if you took engineering or math or organic chemistry, there's going to be a series of questions at the end of the chapter so that you say, do you understand what you just read?”

    2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source

  11. “It just seems natural to me that that information should be more efficiently priced. And that's what we find too. And so we rarely find that if we look at historical financials and they look really clean and neat and you can linearly project the past into the future, usually the equity is not that mispriced because most people project linearly. It's when you get into non-linear things, whether it was like newspapers doing operating deleverage in the late 90s. They looked great until they didn't, you know, or whether it's operating leverage from business with the high fixed costs in the case of Facebook for us or CEG is a company we own right now where the historical data looks awful and it's because they just sold a business. And the performance of this asset intensive textbook rental, that's what's in the historical data. The performance of the asset light super high incremental margin Chegg study business has kind of buried the segment results.”

    2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source

  12. “So it kind of goes back to there's an old quote from Bill Miller of Leg Mason Vehn. Now I think he has his own shop that all of the data is in the past, but all the value is in the future. And that was kind of maybe the seed that got me thinking about this more. But especially as databases have become more robust over time, as you've had, more data sets have gotten cleaner. I've seen this just in my short investing career, how data sets have become”

    2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source

  13. “Wouldn't use a jackhammer to build a house. You'd use it to break up concrete. So just using the right tool for the job, I guess”

    2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source

  14. “Exactly So, we don't find it useful at all. And that's perhaps because we don't typically look at what I would call classic value companies, low PE, low PB, the things that would be kind of a Fama French framework. So it's not a framework that's valuable for us. But I think that as an investor, widening the scope a little bit here, I think it is valuable because you need to analyze business in the context of what you're analyzing. I mean, doing a DCF on a business that essentially has no terminal value because you're buying a cigar butt. Asinine in the same vein trying to say that Amazon is worthless because the PE is high when they're reinvesting every cent of cash flow at a high return on capital against a massive market opportunity, that's equally insane. And so you just, I mean, you wouldn't use a”

    2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source

  15. “That's a really great point. So, I used to have an analyst some years ago who his first instinct was always model the company before he really even knew much about it. And I had to sort of, you know, beat him up a little bit because if you try that, what's going to happen is you're going to put in just kind of, yeah, so what kind of inputs, but you're going to anchor on those. And so valuation is always the very last thing we do because no valuation output is worth squat unless the inputs are worthwhile. And we spend way more time at my firm arguing about the inputs, arguing about sort of what should margins be, what should growth be, what is working capital efficiency going to be. Then we do about the specific output. Because at the end of the day, that's what we as analysts are going to have some confidence in. We can have some confidence in how fast will they take share, what is operating leverage. Should the discount rate be 8 or 10? I mean, neither you nor I nor the good Lord himself knows what the correct cost of equity is.”

    2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source

  16. “Some scenario analysis with it. We marry that with a more less academic, more market-based framework, looking at our free cash flow and EBIT forecasts three and five years out, and then applying a multiple to those, what we think is reasonable, either higher or lower than today based on kind of where we think the business should be. Again, it's subjective, but the idea is that's kind of a more market-based approach, and it should triangulate with the DCF model. And we use a minimum 15% IRR hurdle for the EBIT free cash flow.”

    2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source

  17. “So, from a holistic perspective, we do not buy 60 cent dollars. And I think that if you view a business as a dynamic collection of projects, which is what any business is, you cannot look at it as a 60 cent dollar. I think that makes sense if you're looking at more static enterprises, if you're looking at businesses that perhaps have a lot of hard assets to them, real estate, oil and gas. But if you're looking at a business that is growing and producing cash via different projects, I think you have to take a more dynamic view. And so what we do from a technical tool perspective is we use both a DCF full three-statement model, as well as an IRR framework. And those two do two very different things. The DCF helps us unpack the cash economics of the business. DCFs are, as you know, very blunt tools. I mean, one change can swing it one way or the other. So we actually place very little confidence in our point estimate. What it helps us do, however, is frame what are the value drivers here? What are the things that move the needle? And you can also run...”

    2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source