Zoom and Peloton: The Annus Horribilis

After a year of runaway success, 2021 has proven to be a little more difficult for pandemic-darlings like Zoom and Peloton. Join the MyWallSt analyst team as we discuss the things that we learned from recent earnings calls and where we think the future lies for both of these companies. In this episode, we also:

• Discuss why TikTok and Shopify are forming an e-commerce supergroup.
• Figure out how you know whether to add more stocks to your portfolio or reinvest in companies you already hold

… and Rory and Anne Marie pitch me two stocks they’re researching at the moment — Dexcom and Weber. 

You can listen to the full episode and access the full transcript below.

James

Hi there and welcome to the Stock Club podcast. I’m James, and joining me on today’s show is Anne Marie and Rory from the MyWallSt investing team. Today we’re talking about Shopify and TikTok teaming up to form an e-commerce supergroup; why Peloton and Zoom have had such tough earnings calls recently; and Anne Marie and Rory both give me their 30-second pitches for companies they’re researching at the moment: Dexcom and Weber.

So we were actually supposed to start recording this podcast about 30 minutes ago. But, Rory, you sent a frantic message into our Slack channel before we started saying that you had been delayed at the vets, and we had to push the recording out by half an hour. What happened? And has it been resolved?

Rory

Yeah, I supposed it’s been resolved. All I will say is never agree to cat-sit. That’s the lesson I’ve learned over the last 24 hours.

James

I think we need to hear more than that. I think the listeners on this show deserve more than “never agree to cat-sit.”

Rory

Well, my sister’s on holidays at the moment, so I’m minding her two cats, one of which decided to get a bit ill yesterday. So the last 24 hours have been me both minding and paying for a sick cat who is now better, by the looks of things, fingers crossed.

James

That’s a nice end to the story. I bet you were frantically researching publicly-listed cat-sitting companies. Or even Lemonade, they do pet insurance, don’t they?

Rory

At one point, there was talk of a cat X-ray happening I was like “God who sells cat x-rays, that is a serious business.

James

That is a niche industry. But cats love to get into a small places, so it’s probably not that hard to put them into an x-ray.

Rory

It sounded like it was more expensive than a human X-ray. I don’t know where they come up with these figures, but anyway, we didn’t have to an X-ray in the end.

James

You could just imagine the vet being like, “how much for a cat X-ray?” That sounds like something someone will pay. So let’s get into, I suppose, more serious topics. Then on this first story, when I was writing the notes for it earlier, it kind of reminded me of a joke. I don’t know if anyone has heard of the Irish comedian David O’Doherty before, but he used to make a joke in his set a few years ago that he was writing an autobiography. But in order to sell more units, he was going to call is ‘Harry Potter and the DaVinci Book of Sudoku’.

This story is a TikTok and Shopify; probably two of the most talked-about companies in recent years, and definitely two companies that make people’s ears prick up when they hear them. So last week, the social media company announced it was expanding his partnership with Shopify. Soon it will start allowing its content creators to add new shopping tabs to their TikTok profiles and essentially create mini storefronts on their profiles. Another new feature that’s also been trialed by the two companies is allowing products to be tagged with product links in TikTok videos.

This means that if a viewer clicks on one of these links, they’ll be brought straight through to the merchant storefront for checkout. Anne Marie, TikTok and Shopify have actually been working together for almost a year, but these new announcements seems like a major ramping up of their e-commerce ambitions on what is arguably the world’s most popular social network right now. What are your thoughts on this initially?

Anne Marie 

I think it’s a real smart move by both players, by both TikTok and Shopify. I mean, studies predict that sales via social media apps are going to hit $50 billion by 2023. It’s a huge industry. If TikTok is the leading social media platform right now, it has to have some sort of e-commerce ability. But it is also a reminder that TikTok is very much in the early days of its monetization journey. It only began allowing advertisements on the platform last summer, and this was kind of controversial at the time because TikTok is kind of known as kind of an entertainment platform, and people were worried that it was going to somehow disrupt the For You page, which kind of naturally scrolls.

But in some ways, I think their use of advertisement has been kind of brilliant. And this partnership with Shopify really reminds me of the partnership Shopify has with Pinterest. TikTok and Pinterest aren’t exactly completely comparable. Pinterest has such a leg up when it comes to e-commerce and marketing because people go there basically to make an aesthetic wish list of stuff they want to buy, so what a great person to advertise to. But TikTok and Pinterest have this similar thing where they kind of have this aesthetic of authenticity or this aura of authenticity.

And they’re really, really careful to kind of curate this. When it launched this business program last summer, they’ve said to advertisers don’t make ads, make TikToks. And they basically told businesses to embrace the humor, the authenticity, the kind of imperfect type of marketing that could take place on TikTok. And I think it’s been really interesting to watch companies try and wade into this and try and kind of position themselves as being cool to a younger audience. One company that’s actually excelled at this type of marketing is Ryanair, which is an Irish budget airline for people from the United States.

They fly very cheap flights kind of between European countries, and they’re kind of famous on TikTok at a minute, whoever is running their TikTok channel is brilliant. They’ve kind of leaned into the self deprecating humor where they’re like, yeah, it is annoying to walk to the plane. And yeah, it is annoying that the food on board you have to pay for. And it is annoying, like the color scheme that we use. But you know what? We can get you to Italy for EUR40. So it’s kind of great.

James

Yeah. I was just about to say it’s very rich of Ryanair to be pointing out all the annoying parts of flying, seeing that they are usually the cause of every problem you have when you fly.

Anne Marie 

Yeah. But people really, really like it. And now you have all these massive airlines like United and Delta trying to replicate this, and it just kind of isn’t the same because it’s a little bit fake. Like Ryanair got there first. And Ryanair now has 2 million followers on TikTok, and they have 27 million likes, which is insane for an airline. But the reason it kind of works is because according to TikTok’s global business marketing, companies like this are successful because what happens on TikTok is completely unique.

Every day, people participating in campaigns build alongside them and even create their own TikToks for brands and products that they love. We frequently hear people say, “I didn’t even realize that was an ad,” and that’s the goal of TikTok. The work is so good, it fits right in. And this is the kind of opportunity that we’re talking about with e-commerce. It’s like Pinterest. If the advertising on TikTok is so good, if the e-commerce on TikTok can be so good, you don’t even notice it. I think it has huge potential.

James

And the other thing that strikes me quite at odds of the other main social player and probably the first kind of company to bring advertising into social media, which is obviously Facebook. And, you know, from a personal perspective, the advertising on Facebook’s platform particularly is so awful and so clunky. And then you look at something like Twitter as well, where their ad strategy has not worked out for them in however many years they’ve been trying it. It seems like this new breed of social companies like Pinterest and like TikTok have really learned what not to do and how to kind of make ads and advertising more enjoyable experience for the people being advertised, too.

Anne Marie 

Yeah, definitely. And I think a lot of that has really been driven by younger generations. Gen Z is the most difficult generation to market and sell products to. This is known. Surveys have shown that they’re the most likely to avoid ads. They skip them, they use ad blockers. They’re less susceptible to influence or marketing when compared to millennials. And they prefer companies that are transparent and that are kind of upfront with their marketing. And I think because Gen-Z has grown up with technology, they’ve grown up with social media, they’re aware of the fact that part and parcel of social media is e-commerce and is advertising. But I think they’re just a bit more immune to it because they’ve seen it now so much that they’re like, oh, that’s whatever that just comes with this.

And I think that’s a really big concern for companies that are heavily reliant on digital channels for new customers and business. But I think if you can get a business that can master this kind of TikTok marketing, if you can get a couple more Ryanairs that are maybe selling products or services, I think the potential on TikTok is huge. And this is because it’s kind of already working for the music industry.

James

Yeah.

Anne Marie 

So 80% of TikTok users say that they discover new music on the platform, and that is the number one place that they discover music. It’s more than any other digital platform, any other streaming service, and any of their friends. And over half of that discovery happens naturally on the For You page, which is really important because it means that these teenagers and these young people, they’re not following these artists. They’re coming up naturally on their For You page. And once they’ve met these artists, a little under half of them will end up adding their song to their favorites or viewing the artist’s profile or even following the artists on TikTok, which is huge.

That is considerable engagement. Imagine if we put out an ad and half of people who saw it ended up buying a product. And I know that, like listening to a song or going to Spotify and streaming someone is not exactly comparable to buying a product, but that engagement is considerable. And you see this type of engagement converted outside of TikTok.

For example, 18-year-old singer Olivia Rodrigo, who is this huge viral sensation. When she was putting out her debut single, she used TikTok because she had already had an established presence on it. She was a little bit famous from a Disney Channel show, and she basically was trying to get people to creatively use the song. So she put out a couple of videos of her dancing. She asked her fans to do the same. Within its first week of release, videos featuring her song had more than 1 billion views. And that same week, she broke the Spotify record for the song with the most streams in a single day. Not once, but twice.

James

That is incredible. I was just so happy to actually know who you were talking about there. I felt like giving myself a pat in the back.

Anne Marie 

And it’s not even reserved for huge viral young stars, because if you guys remember last year, there was that viral video of that guy skateboarding to ‘Dreams’ by Fleetwood Mac. When that went viral, it ended up in the top ten most-streamed songs of the week on Spotify, which is crazy to think that young people are hearing this song and like it’s so much that they’re willing to go to a secondary app to listen to it. And so I think if that engagement can be translated even just a little bit into e-commerce, and I would expect the impact to maybe be a little bit easier because you don’t even have to push them now to a secondary app.

You just need to get them to go to the shopping cart that will now be embedded in Tik Tok. I think it could have a huge potential. And I think it’s a great move for TikTok. And I think it’s a great move for Shopify.

James

Yeah, absolutely. Let’s look at the other side then. So you spoke quite expansively about TikTok there. Unfortunately, they’re a private company, so we can’t really get a slice of that yet. But for Shopify, this is one of multiple deals like this that Shopify has struck. You mentioned Pinterest, they’ve worked with Facebook on their Facebook Shop platform before. How much of a big deal is this for Shopify, and is this really the future for them, continuing to pair up with third parties like this?

Anne Marie 

Yeah. I definitely think it’s the future for Shopify. I think this is now the cutting edge of social media e-commerce. I think from an investor viewpoint, maybe some people will prefer Facebook because they’ve essentially built a closed ecosystem in the sense that in theory, a shop could be running a Facebook Shop front, be using their ads and their analytics. And then Facebook also will handle the payment if the person buys that thing on Facebook. And then in theory, like a shopper could be using a Facebook wallet.

So then kind of every part of that shopping experience and that payment is controlled by Facebook. That’s a tremendous amount of revenue potential if you can control the entire thing. But that’s not really taking into consideration that kind of the fickle kind of way that people interact with social media where, like Facebook is now very much the social media of your parents or your grandparents and the customers and the people willing to buy and the people who are excited are on TikTok. While Facebook might be attractive because it controls every aspect of a customer journey, I would much prefer Shopify because they have the flexibility to be partnered up with TikTok today.

Well, our next social media or entertainment company might pop up in five years. Well, then Shopify can partner up with them. So, yeah, I definitely like it. I think it’s a great opportunity.

James

And it seems to me it’s very much a case of you might question, why don’t TikTok just develop this capability themselves? But it just seems to me that Shopify are the best in class for doing this. So rather than spend all that money on developing this e-commerce arm themselves, they may as well just go to the guys who do it best.

Anne Marie 

Yeah. And it’s definitely probably also a thing of speed. I think TikTok has probably noticed that they have momentum, and I think that people looking for products on TikTok, I think already happens. I mean, I’m on TikTok sometimes, and I do see artists or small stores that are advertising their products by putting up cool TikToks. And then they just have a link to their Etsy shop in their profile. Well, think of how much better their engagement could be with every viral TikTok of their products, they can just link the product directly to that video, and you can just check out immediately. I think it cuts out a lot of middlemen and yeah, I think it’s a great move for Shopify.

James

Yeah, absolutely. A really, really interesting story and want to definitely keep an eye on going forward. So just earlier this week, it was actually announced here in Ireland that virtually all of our pandemic restrictions will be lifted by the end of October. So while we all might be celebrating these new freedoms we’re getting back, there are a couple of companies in our shortlist that are probably wishing we’d go back to more lockdowns. I’m speaking, of course, about the likes of Zoom and Peloton, who have both been having a really, really rough time of it recently.

Zoom is down close to 50% from its all-time highs reached last October. While Peloton has dropped closer to 40%. Rory, I can see itching there to talk about Peloton, but I’m gonna go to Zoom first. Is this just a case of tough comps year-on-year after the great year Zoom had last year?

Rory

It’s an earnings season of difficult comps, definitely. And we’re seeing it across the board, not just with these two companies. Just as you were talking there, I just saw Veeva Systems’ results came out and they just smashed everything away. And I think the stock is down like 10%.

James

Yeah.

Rory

But going back to last year to these, I suppose the stay at home plays, both these companies were, you know, in hyper-growth mode. This time last year, Zoom’s revenue was up 366%. Peloton’s revenue was up 232%. So of course, you know, the law of large numbers can kick in pretty severely when you’re following kind of numbers like that. For Zoom, I thought it was a really strong quarter.

James

Yeah.

Rory

Their revenue was up 54%, it topped $1 billion for the first time ever. You know, reading past the kind of headline figures, you definitely saw a little bit of a divergence between their kind of smaller customer base and their kind of larger enterprise customers. So with large enterprise customers, customers over $100,000K a year in ARR, was up 131%. Fantastic. They have over half a million customers now, with ten employees are more. In that category, their net dollar attention was about 130%.

James

And sorry to interrupt but it would strike me that going forward, that’s the important category to focus on; small customers. People joining Zoom quizzes and stuff like that. Probably never made much revenue, but they made the figures look quite good over the past year. So going forward, obviously, Zoom’s major area of opportunity is these big business clients in work from home work places or hybrid work models or whatever you might call it.

Rory

Yeah. So we saw in the report as well, they kind of admitted to seeing some kind of heightened churn levels around those smaller customers. And I think that’s probably expected with the economy opening up, some businesses were returning to the office already and perhaps thought they could kind of survive going forward without using the free version. Or maybe they’ve cut down the paid accounts to a couple of key employees that were working remotely. But on the flip side, as you said, the larger customers are the ones that really are going to drive this business forward.

We saw some really positive upselling related to the Zoom Phone, which now has 2 million seats too, a product that was only launched 2 years ago. Zoom Rooms was another kind of side of the business that is growing. And I can kind of understand investor hesitation here because we know Zoom is not going to continue to grow at triple-digit rates that there was in the lockdown environment. But I do think that’s kind of very short thinking.

We added Zoom to MyWallSt way before the Pandemic ever existed. And back then we saw a huge opportunity for the business because of these kind of secular tailwinds that were already in place, digital transformation and more flexible office environment, companies kind of cutting down their carbon footprint by reducing business travel. All those tailwinds do continue to exist today. In fact, they’ve been pulled forward, no doubt, by the pandemic. But if you look at the larger picture, you see a business here which has great management, that has been able to scale unlike any business I’ve ever seen before in such a small time frame. And they’re expanding from what is a real singular product and function into this kind of communications platform, and winning these kind of really big contracts from legacy vendors. So I think they’re still plenty to be excited about with this business. This reopening here, I think, actually could be an opportunity for investors.

James

Yeah, absolutely. Well, let’s move on to Peloton on then. And they’ve been in the news recently over product recalls. Is that the major issue we’ve seen at their recent earning scall or is there more to it?

Rory

I think the product recalls — yeah look, they had a bit of a few growing pains this year after what was a very successful first year as a public company. Like I said this time last year, their revenues were up by 233%. This year wasn’t as good. It was never going to be as good, we knew that. But they still grew Digital Fitness subscribers subscriptions in this quarter 114%. Sorry, that was Connected Fitness, that’s the ones that are connected to the actual machines. Their digital subscriptions, which is just the app that people use on their phone for kind of yoga training, strength training, things like that, that was up 176%. Workouts were up 75% from this time last year, with the average of about 19.9 workouts a month. Now, admittedly, that was slightly down on last year’s figure, which I think was like 26 workouts per month. But again, you would expect that, there’s a pent of demand for people to get back out, go see their friends again, go on a vacation that they probably missed this time last year. So you can kind of see that.

And what I saw with Peloton’s earnings was they’re starting to kind of guide for seasonality, right? So the guidance for their upcoming quarter was a little soft, it was $800 million. I think a lot of people were expecting closer to a billion dollars for the quarter. But looking forward, their full-year guidance of $5.4 billion was above pretty much everyone’s expectations.

James

Yeah.

Rory

So they’re building in that seaonality back into their projections. And seasonality just went out the window in 2020. There wasn’t any seasonality. I was like, just give me one of those bikes as soon as you can get it.

James

It was one long season that lasted 16 months.

Rory

Very much like the missing year.

James

But then I suppose another big headline from Peloton’s earnings was the fact they’re initiating this 20% price cut n their flagship bike. There was also kind of reports, and Peloton didn’t say it exactly, but marketing costs are rising as well. And to me, this kind of sounds like the perfect storm for a big bat squeeze margin. What’s your thoughts on this? Are you worried about this price cut?

Rory

Ever since the I first started looking at this company, I’ve always considered it a subscription play. And the best way to increase your subscriptions is to get those bikes into people’s homes. If you are building a razor and blade model, your number one goal is to get the razor as cheap as possible so you can keep selling the blades, and that’s exactly what they’re doing. Also, this happens all the time with hardware businesses. The price of a product always decreases as time goes by, and the company’s releasing more premium products on the top end of the line.

It’s perfectly natural that they would be reducing the cost of these bikes in order to expand their serviceable market. And I don’t see it as a problem at all. I I didn’t think it was gonna happen quite as soon because they had a price reduction a couple of quarters ago, but absolutely no problem on my end. I think I’d like to see them getting the price down and getting it into more homes.

James

Still no announcement of them coming to Ireland yet.

Rory

There’s a couple of Irish investors on financial Twitter all asking, when in the hell are they gonna bring these bikes here? We’re tired of looking at the charts we want to use the things.

James

Yeah, absolutely. You live in hope, Roy, you live in hope. Before we move on to this week’s mailbag, let’s just check in on some of the other things going on MyWallSt at the moment. So far this week, we have an exclusive insight into the reality of Apple’s new changes to the App Store. Rory, you wrote that in MyWallSt. We have a First Look that researches PowerSchool holdings as a good investment, Anne Marie, that came from you. We also have an updated report from Mike on the reasons why we like Atlassian. 

Rory, we have a brand new Stock of the Month coming on Monday, dare I ask for a preview, or do you want to keep your cards close to your chest?

Rory

No, no previews.

James

You just use have to tune in for the full show.

Rory

We are not — Anne Marie gave everything away last time, we have to keep some stuff…

James

Anne Marie ruined it for everyone.

Rory

She’s just giving out all the information.

James

Okay, cool. Let’s move on to mailbag then. So this week’s question we got in is definitely one we’ve answered a couple of times before on Stock Club, but it’s asked so frequently, I think it’s worth revisiting again.

So Mark wrote into us via email and he asked:

When you have some cash in your brokerage account ready to deploy, how do you know whether to add new stocks to your portfolio or simply reinvest in positions you currently hold?

I suppose this is a kind of question that’s different for every investor Rory. But to you, how do you tackle this problem in your own personal portfolio I suppose?

Rory

Yeah. I’ve given the straight answer to this a couple of times, so maybe I’m going to go a bit off-piste this time. I was thinking about it last night while I was cooking and I love cooking. It’s my second passion after investing and during the pandemic, I certainly got into a bit of bad habit of disordering cookbooks. Amazon Prime didn’t help matters either. I was reading one last night. It’s by a guy called Fergus Henderson.

Fergus Henderson is a UK chef who’s very famous, not in the kind of Ramsey way. He’s kind of got this kind of cult following because he trained as an architect and then ended up opening a restaurant with no formal training whatsoever and won a Michelin star. And he’s big into the nose-to-tail movement, he kind of used offcuts that most restauranteurs wouldn’t use. But I was reading through this book and it’s a brilliant book. It’s the weirdest cookbook I’ve ever read because even though it’s got loads of recipes, it’s kind of much more about philosophy. It’s for cooking and his kind of philosophy of cooking.

And to that end, there’s not really any measurements in his recipes, like he doesn’t tell you how much of certain things to use. There’s no real exact cooking times. There’s not even real any kind of like oven temperature settings. He kind of says gently cook until you feel like it’s good. And I suppose it kind of pre-supposes a little bit of knowledge on the cook’s part. But what I found interesting that that book is that there’s no real right way of cooking.

Well, there’s loads of wrong ways of cooking. We know that, there’s loads of rules of things you shouldn’t do. But in terms of getting to the end product, which is a tasty plate of food, people have loads of different ways of going about it and loads of different styles. And the question Mark asked there, I can’t answer for Mark, only he can answer that.

When it comes to me adding a stock, so let’s go back to the first principle rules. The things you need to do to build a good portfolio.

1. Know what companies you’re investing in. Okay.

2. Try and diversify, so you’re not over-reliant on one particular company. You’re not over reliant on one particular industry. So we say somewhere between six and ten stocks after that, you’re kind of free to do what you want. Don’t do too many, because then you kind of get into that index fund realm where everything just kind of averages out.

But when you want to add a new stock, if you see a company you like and you’ve done your due diligence and it’s going to work for your portfolio, buy it, and you don’t have to buy it all at once as well. You can buy a little bit, see how it goes for a bit, and build over time.

There’s no signal that says this month you should add to your portfolio, and this month you should add a new stock. I’ve gone through periods where it was like a year when I didn’t add a new stock. And then I added Peloton, Roku and Sea Limited all in one month, because I just decided I like those three companies at the time. I’ve done my research, and I wanted them on my portfolio.

So that’s the way it is. I can’t give you a firm answer or a particularly right answer. There’s really kind of no right answer there.

James

Yeah. Okay. Cool. Now, Mark, you asked the question about investing, you got a cooking lesson as well. I bet you didn’t expect that.

Thanks for that, Rory. So usually, well, for the last two episodes, we’ve been ending podcasts here, but back by popular demand, we’re gonna bring Elevator Pitches back into the end of the show. I’m gonna start getting more strict on them, though. So you guys each have 30 seconds, and that’s it to give your elevator pitch.

Anne Marie, Rory, the two companies you’re pitching today are just simply ones that you are currently researching as potential additions to the MyWallSt app. So Anne Marie, Rory’s been talking for a while. Let’s hear you for 30 seconds. What stock are you pitching us?

Anne Marie 

Okay, I’m pitching Dexcom, which is a medical device company specializing in constant glucose monitoring, or CGM. They’re vital for type one diabetics and becoming more and more common for type two diabetics. But I’m actually interested in them to see what other type of wearable medical tech they can make for people who don’t have diabetes. I think it could be a really nice long term play.

James

20 seconds. Finished with 10 seconds to spare. So, Rory, let’s see if you can beat that.

Rory

I’ll take those 10 seconds off her!

James

Nope, it doesn’t work that way.

Rory

The company I’m looking at is Weber. It is the market leader in outdoor grilling equipment, they’re a company that just recently IPOd, along with one of their chief competitors, Traeger. What I like about the business it it’s got a kind of global brand. They certainly had a very good 2020 and it looks like it’s going to be a very, very good 2021. So I’m kind of looking to see whether it is a kind of IPO opportunity or whether there’s kind of some long term value in this business. But I really like the brand. If you look on any review sites, Weber is the one that pretty much everyone points you towards. And they seem to have a good management team as well.

James

You want a few seconds over, but you were in your flow, so I said I’d let you. It seems to me that one of those companies might lead to the need for a barbecuing company and a glucose monitoring company. So some nice synergies there.

Rory

It’s a very food-heavy podcast.

James

Yeah. We should start a cooking podcast.

Rory

I would love a cooking podcast.

James

My advice is just no matter what it says in the packet, I’m putting it in the oven at 200 degrees, and that it.

Rory

Yeah, that’s the way you cook everything now.

James

So that’s it from this week’s Stock Club. Remember, if you have any investing questions you want answered or elevator pitches you’d like to hear, make sure to get in touch. You can find us on Twitter that’s @MyWallStHQ. On Ticktock that’s  @MyWallSt,  or simply just email us at [email protected]. If you’re a member of the MyWallSt community, don’t forget you can also contact us via to MyWallSt app. Don’t forget to subscribe to Stock Club if you’re enjoying the podcasts, and please leave a review or a rating for us on whatever platform you listen to us on.

That’s it for us here today. We’ll talk to you next week. Happy investing.

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