Crypto Enthusiasm Continues

In this podcast, Motley Fool analyst Tim Beyers and host Dylan Lewis discuss:

• Bitcoin blowing past $80,000 and setting fresh all-time highs.
• How investors should manage the expectations being built into crypto and companies like Robinhood and Coinbase.
• Axon feeling the euphoria, and why the company’s recurring revenue and potential new businesses help it live up to its big valuation.

Motley Fool analyst Sanmeet Deo joins host Ricky Mulvey to check in on another 2024 highflier — Reddit — and why the company’s data is a treasure trove for large language models.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our beginner’s guide to investing in stocks. A full transcript follows the video.

This video was recorded on Nov. 11, 2024.

Dylan Lewis: Crypto showing no signs of slowing down. Motley Fool Money starts now. I’m Dylan Lewis, and I’m doing over the airwaves by Motley Fool Analyst Tim Beyers. Tim, has the train left the caffeination station?

Tim Beyers: It has not. I am uncaffeinated today, Dylan, so we’re going to see how this goes. Mondays and Fridays are uncaffeinated days now.

Dylan Lewis: But you know what? I sense you are still ready to go, and that’s the important part. That’s all I need from you.

Tim Beyers: Since we’re talking crypto, I am always ready to go. I get a little wound up about this stuff. That’s not surprising in anybody, is it?

Dylan Lewis: No, it’s a controversial topic, and it’s one that I think almost everyone has opinions on. Yes, we’re going to be talking crypto today we’re going to be talking Bitcoin. We’re also going to be revisiting some earnings that didn’t get quite enough coverage last week. I’m excited about that. Let’s kick off with the crypto rally.

The post election crypto enthusiasm continues. Over the last couple of days, Bitcoin blew past 80K, as we tape currently near all time highs at $84,000, also seeing a lot of interest in Ethereum, Solana, some of the major exchanges and brokerages that give people access to crypto, Robinhood coinbase. Tim, this feels like it is all very much on the expectation that the Trump administration will be a little bit more friendly to the cryptospace when it comes to the regulatory environment, things like self custody, all that stuff.

Tim Beyers: I think that’s right. I think that I saw a video where President elect Trump had, I think he was speaking in front of an audience of crypto enthusiasts and talking about just getting rid of regulations, and I think he may have actually said he was going to fire the head of the SEC, which got a rounding, just a rousing round of applause. There is a feeling it does appear inside the industry. I’m talking about the crypto industry that this set of digital assets, Bitcoin in particular, needs to be unlocked. If we believe that’s true and we believe that this administration is going to be a bit more deregulatory as it relates to Bitcoin and all digital assets, then I can understand the rally, Dylan, and I have a story about this, but I’ll pause for a second here. This is the moment where I really take stock. I don’t look at this and say, wow, amazing. I don’t necessarily do the opposite, either, but I find moments like these to be like, let’s maybe tap the brakes for a sec.

Dylan Lewis: I want to hear that story, Tim, because I imagine there’s a dose of mindset coming our way here.

Tim Beyers: Well, the story is this when, so Alicia Alfieri and I were working at a co-working space. We were doing some work on a recent Rule Breakers pick. It turned out now that the pick has been made, I can reveal to listeners that this company was Warby Parker, and so it’s a recent Rule Breakers tick. I was doing some work, and I was sitting right next to Alicia, and I was like, I found something that I thought was really fascinating. I said, no. Oh, man. This is great. I hadn’t realized that this was going on and so I started to get really excited, and I said, no. Then I turned to Alicia and I said, this is the moment of maximum danger. Do you understand why? She gave me an answer, which wasn’t a bad answer. But what I said was, like, now I am convinced and because I am convinced, that is the moment of maximum danger. I feel like what we’re seeing in the crypto market is a lot of people who’s like, see? Great. I am convinced this is the future, and to me, either, boy, this is the moment of maximum danger because you’ve been convinced, and the regulatory environment has not changed yet, Dylan.

Dylan Lewis: But might.

Tim Beyers: But it might. When you hit that area of maximum enthusiasm, recognize that as the moment of maximum danger, you don’t have to do that, but I think it’s a good mindset practice to say, hang on. What actually needs to happen here? What am I betting on? In the case of crypto, I think there’s an argument to be made that the new administration will be friendlier. There will be changes. It will make this a bit more maybe free flowing in the markets, a little easier to access, so fair enough. Let’s say that that does happen. You could still take advantage of that, in my opinion, Dylan, and not overbed. I think the wrong move is to overbed. If you were going to try to take advantage of it, you still have other options.

Dylan Lewis: If I were to offer up a why this time is different or slightly different or maybe how the landscape has changed, there is the tailwind of the expectation that the Trump administration will be more crypto friendly. But I would say that there’s probably a second mini force at play here in that this is one of the first times we have seen a lot of excitement around crypto in a period where we’ve had widespread Bitcoin ETFs and funds and that is something that was not the case up until January of this year. Prior to that, it was a lot of the more industry specific ways that you’d have access or more traditional ways you’d have access. This is a period that is a little unprecedented when it comes to most investors, especially older investors or institutional investors, being able to buy into crypto relatively easily.

Tim Beyers: I think lean into that. If I’m probably not going to add crypto exposure so you know where I’m at. But if you’re going to do it, if you are convinced, something alike, Bitcoin ETFs give you that exposure without taking you way out over your skis. I would say that is important, but hysteria knows no bounds. If it does really get hyperbolic, be very careful. But I agree with you if you were going to do it, ETFs are a great way to give yourself a maximum amount of exposure while broadening your risk. You get some immediate diversification in there, which is good. I would prefer that for most members if they’re going to go down this path with crypto.

Then if you start to get more excited about it and you get more interested in, you’re not me, but if you’re going to do that, then I would say, try to build out the widest array of assets you can and keep your exposure as limited as you can, so I often will buy stocks, particularly on the way up, Dylan, if I’m buying stocks at premium valuations, I think the same thing applies for digital assets here. I’ll buy just really small amounts, and then buy multiple times and multiple times and multiple times because I just know that volatility is going to come into the equation. I just know what’s happening. Even though I’m buying on the way up, the volatility guarantees that the thing I bought last month is probably down 30%. When I’m buying again, it’s a little bit better now. I want to create mechanisms that allow me to diversify my way in strategically. I know I sound like such an old man, like be patient, son, but.

Dylan Lewis: We need that note, at the point of exuberance, we need that note, Tim.

Tim Beyers: I think we do, Dylan.

Dylan Lewis: One of my questions on this is for people that are following businesses like Coinbase or Robinhood, who probably have seen some version of this story before, if you go back to 2021, 2022, with those businesses, there’s a lot of excitement. There’s a lot of activity on those platforms. We go through a period where a lot of that excitement goes away, and the business results for those companies tend to lag pretty dramatically. Any message for people that are following those businesses, just knowing crypto is such a large part of the activity that can be on the platform for them.

Tim Beyers: Yes, when you’re studying businesses like that, I would go through, if you’re really interested in digging into them, what does normal look like? What do normalized earnings look like? What does normalized revenue growth look like? What you don’t want to do is take the latest period where things happen to just have gone absolutely hyperbolic and then apply that out into the future and presume that it’s just going to be that way. That’s probably not right. Give yourself the benefit of understanding what does normal look like, and then compare that to where they are now. You know what reverting to the mean actually looks like if things don’t go the way that you want it. Understanding what the genuine growth looks like in a normal period, I think is just useful because these businesses, boy, they have been subjected to just so much crazy, just so many crazy periods that have pushed them back and forth and up and down and all over the place, so get a sense of what normal looks like. I may need you to revisit that note as we switch gears and talk about a company that reported last week that is also going through a bit of a euphoria.

Exxon‘s earnings out last week. We talked about it a little bit on Friday’s radio show, but it was a quick discussion and it turns out the market was not quite done reacting to those results. All told after earnings, company’s up about 40%. The earnings were good, Tim. I’m a shareholder, and I love to see that. But were they that good?

Tim Beyers: Probably not. I’ll tell you some things that really stood out to me from this report, Dylan. The overall, what we’re looking at here is their revenue guidance was 30%. That’s impressive for Q4, 2.07 billion in full year revenue, so that’s 32% growth. They’re just growing really quickly. But I’ll tell you the thing that may have gotten the market more excited. What they said was that when you take the bookings from Q3, and then you add in what they anticipate bookings for Q4, just that half year, that’s going to be more than the entirety of their bookings from 2023. That’s the statement that gets investors going, It’s a new world. Everything is amazing, and we should all pile in right now. You know what I mean? That’s an incredible statement for them to make.

Dylan Lewis: It’s led to the stock being pushed up to 160 times earnings, shares up 140% year to date. I think we may have to ask ourselves, at some point, what does normal look like for a company like Exxon?

Tim Beyers: Yes.

Dylan Lewis: Management saying normal looks pretty awesome for the foreseeable future. I like following the business because it is a tech company that has unbelievably predictable revenue, and their recurring revenue is incredibly strong and that, even given the nosebleed valuation, gives me some comfort as a major shareholder.

Tim Beyers: Yes, and I can back that up and say, when you look at what Exxon has contracted, it is over three years of revenue, Dylan, just let that sink in for a second. Over three years of revenue is contracted right now. What they said was specifically this, future contract revenue is approximately 7.7 billion, so remember what we said. This year, they’re supposed to end at 2.07 billion. Again, over 3X is future and contracted, and that was up 33% year over year, so their future contracts, that backlog is growing faster than overall revenue is growing. The commitment to Exxon for the long term, to your point is absolutely there. The question is, and they are working to answer this. I know we’ll talk about this in a second, but the question is, will they stick with Exxon, and how much future growth are we going to get, because for goodness sake, Dylan, how many tasers can you sell? How many cartridges can you sell? How much evidence.com data is there? That it’s a fair question, isn’t it?

Dylan Lewis: Well, as if the team over there needed another tailwind, I feel like they are a company where you have a very tangible benefit of AI that they are able to talk about with their customers. They mention their auto transcribe services. They mentioned draft one, they mention license plate reading, and they talk about how for all these law enforcement departments, these are things that wind up reducing the amount of time that needs to be working on a task, winds up reducing costs. They also have things like drone detection in the works. It feels like they are able to tell a very clear story to the market and to shareholders about a lot of things that’s in the zikas right now.

Tim Beyers: Sure. Because in law enforcement and particularly in investigations, anything that you investigate, this is true in investing, too. You are investigating a story, and so you’re going through process lines. One process at a time, I need to identify a pool of suspects, and I need to rule out that pool of suspects. If I can, for example, pull from camera data, and I can rule out somebody because they were in their car. I can identify that license plate, and they were driving on the other side of town when some crime happened, now I’ve done something here. Sure, they have a compelling story here and they want more data. One of the ways they’re going to get it is by employing drones. This is another fascinating thing here. This started back in May. They acquired a drone defense company called D drone. I don’t know if I’m sure or maybe it’s dead drone. I don’t know. I don’t know how to pronounce it.

Dylan Lewis: I’ll take your word for it, Tim.

Tim Beyers: Whatever. It’s one of those. They help enable, they said this in the call. There was a local police department to gain the first FA approval waiver for a drone as a first responder, that sounds bonkers. That sounds completely Robocop to me. Dylan, so I don’t even know how to process that. But what we’ll do is if Exxon is putting a fleet of drones in the air, and now they are adding to their database, aerial data to go with what they have in body cam data, car camera data, they will have one of the largest and most important datasets in the United States objectively.

What do you do with that? That’s a big question and you might end up asking does your valuation, 160 times earnings account for just how big and valuable that data set can get?

Dylan Lewis: Can we really be surprised that a business like Exxon has some of these other lines of business waiting there for them, because we don’t have to go too far back to remember this was not Exxon several years ago this was Taser. But the reality is their Exxon business their body camera and evidence.com business became so compelling and useful that they rebranded and perhaps they have another major growth over there with the drones business.

Tim Beyers: We don’t know but it doesn’t surprise me because once you start employing fleets of drones, you’re going to have drones with cameras on them and there may be a temptation to say, how do these play out? How do they supplement law enforcement unit on the ground. I think it’s simpler than that which may sound cynical it’s like you fly these things in the air you’re going to be just collecting mountains upon mountains of data that you’re going to try to use for your profitable benefit and you know what? I would guess that the data collection that these things kick off is going to be extraordinary and it’s going to be hard to really value just how important that date is going to be. It’s gone parabolic, maybe for good reason probably be cautious right now. [laughs]

Dylan Lewis: If you’re buying into Exxon maybe do it in small bursts over the course of a foreseeable future?

Tim Beyers: I would say so. Be careful.

Dylan Lewis: Tim, appreciate you hop on with me today and give me that reminder about what is normal. Thanks for joining me.

Tim Beyers: Thanks, Dylan.

Dylan Lewis: Fools coming up on the show. Motley Fool analyst Sanmeet Deo joins Ricky Mulvey to double click on Reddit the social networking platform that owns a lot of data that large language models want to use.

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Ricky Mulvey: Sanmeet, Reddit is a fairly mature social networking platform. It’s not a social media platform quite because most people are anonymous on there but it’s easily my favorite is a user in terms of time spent don’t want to admit how much time I spend on Reddit. The company, though, it’s been around for a while it’s new to public markets and recently reported some blowout numbers so for a fairly mature social networking ish platform they did an increase of 50% in terms of just daily unique users year over year. Increase of half that’s at about 100 million folks. Let’s start with a fundamental question. This is basically a message board for people to gather based on similar interests you can find main subreddit like news, pictures, videos, that kind of thing, all the way down to specific subreddits for local sports team, local food, hobbies, that kind of thing television shows. How does Reddit is a social message board make money?

Sanmeet Deo: Well, it’s pretty simple actually they make over 90% of the revenue from advertising. Revenue is recognized on cost per click, cost per thousand impressions, cost per view or fixed fee basis, depending on the contract they have with the advertiser. That’s 90% the remaining portion comes from data licensing and subscriptions. Subscription are very small data licensing is the bigger portion of that smaller portion there and one of the more intriguing growth opportunities for them.

Ricky Mulvey: Bill Mann brought this up on Friday, and it was easy on a Friday show I think it was a couple of weeks ago. It was easy to look at Reddit as Twitter 2.0 when I’m talking about Twitter I’m talking about Ye old Twitter, not its current private incarnation is X. But what has Reddit been able to figure out about advertising that Twitter was not able to figure out when it was a public company and for the most part a relative underperformer.

Sanmeet Deo: What I noticed while I was prepping for the show is that, like you said Reddit it’s been around for a long time. They haven’t been public for a long time they just came public recently but they’ve been around for over 20 years and just recently in the past maybe three years their user base has just really started to accelerate. It’s a community based platform, it involves real humans engaging in meaningful long form conversations about anything and everything. The interactions include up voting, popular conversations, which gets your conversation moved up to the top. There’s replies and testimonials. It gives an advertiser very highly targeted high intent audience. The platform claims it’s the number 1 in the Internet for discussing purchasing products and with 51% of purchase related conversations happening on Reddit.

In addition to this like I said it’s grown rapidly. It’s user base over recent years due to international expansion, improved user experience pandemic really up their user base there. Things like the GameStop short squeeze Saga on Wall Street Bets was a big thing that drove awareness and users to the platform. This rapid user growth combined with they have a much more cost effective ad product and more of an innovative ad product which they’ve revamped more recently about in 2018, 2019 has made it more of an attractive platform versus Twitter.

Ricky Mulvey: They were able to essentially get more intent to purchase up with advertisers looking to sell stuff to folks verses Twitter which back in the day was maybe a little bit all over the place and it’s not just the popularity I would recommend it, as well like a while back I was looking for a watch that wasn’t stupid expensive and you go on Reddit and you’re like here’s my price point and then a lot of the bots I think end up being driven out because you have a high intent community of people that are willing to call this is not actually legit this is bad you should not listen to this person and the cream rises to the top. You mentioned earlier that it has this business opportunity in terms of data licensing, and this is something that CEO Steve Huffman brought up to our colleague Dylan in their conversation when he interviewed him. Basically, Reddit has one of the largest corpuses of human information to feed these artificial intelligence training models. Well, think about that is a stockpile of firewood that these LLMs are just, I almost said eating, but eating firewood doesn’t really complete.

Sanmeet Deo: No, you don’t want to do that.

Ricky Mulvey: Burning the firewood in order to do a steam engine or whatever. Horrible metaphor.

Sanmeet Deo: Power that AI engine.

Ricky Mulvey: Power the AI engine, coal. It is the coal. These conversations are coal. Anyway, what does this large corpus of information of conversation mean for Reddits business is it license out data? Is it meaningful at this point?

Sanmeet Deo: They already even have a couple deals. They have a license deal with Google for about 203 millions or three years, a partnership deal with OpenAI, which is potentially 50 million annual we don’t know exactly about this. But not only the AI training data, which these big tech companies and these AI model companies are using but other potential customers for their data include like, financial institutions, investors, social listening services so it’s an intriguing aspect of the company that’s actually got me interested in what could be a significant high margin growth opportunity.

Ricky Mulvey: It seems like this is a tough game for publishers and Reddit is not technically a publisher they’re not paying the people writing or moderating subreddits. But this is a case where the New York Times is still suing at the time of this recording, OpenAI to find out what articles the nonprofit OpenAI was scraping for its training data. Who are the winners here? Any of the content publishers and providers winners in this, like AI training race?

Sanmeet Deo: I think the academic news publishers, book publishers, media companies, they’re all licensing their content to OpenAI, Microsoft, other training data, AI models and businesses. Some examples are like Newscorp, John Wiley & Sons, the Associated Press, IAC. Some of these publishers are benefiting from their content and reaping rewards from them.

Ricky Mulvey: But maybe the real winner and I’ll see if you agree with this. Are the real winner just the big dogs the ones you expect your Alphabet, your Google, which are the ones using the data. Right now, and it could change, Google has an agreement that if you want your articles to show up on Google Search you are then agreeing to using that data for Google’s AI training purposes. If you want your article to show up on the search engine you’ve also got to feed that into the AI learning machine. Is that true? You think the real winners are Google here?

Sanmeet Deo: I think in the long term they definitely could be the big winners but keep in mind many of these AI companies are just spending heavily on content infrastructure to really train the AI models, build AI models, huge amounts of spending we’ve been seeing it in earnings calls you hear Amazon, Google, OpenAI, Microsoft, all these companies and we’re looking for a return on that investment we haven’t seen that quite yet. In the short term, though I think, like we talked about the publishers are really the initial winners because they’re signing these contracts and just getting cash right away and they’re monetizing their content in the near term. But over the long term I think it could and hopefully it will create a lot of return on that investment for these bigger companies.

Ricky Mulvey: I like Reddit as a user I still have some questions about the stock. I still have some questions about the value of all of that data and Reddit is not cheap by traditional metrics it just started making a positive GAAP profit, the profit that is associated to accounting like the standard accounting principles so that price to earnings price tag is going to look real high so we’ll use the price to sales. The more difficult one to use that people don’t like as much we’ll use price to sales how much revenue has it made and what’s the market cap associated with? Right now that’s at about 19 times. Investors are willing to pay 19 times Reddit’s sales for its stock. This is still a mature company and that’s higher than Meta ever was, even when it was a young company. Revenue has grown real fast so what needs to be true about Reddit’s future for this price tag to make sense today?

Sanmeet Deo: From 2018-2023 those few years Reddit grew their revenues at a 52% compound clip. It’s projected in the next years revenue could compound at almost like a 35% clip. I was looking at CAP IQ this morning and around the forward total enterprise value to total revenue multiple about a couple of years out is just under 10 and 9.8. I like to look at forward multiples, while this is still a high valuation on a sales basis in the context of that 35% growth that is projected, it’s somewhat reasonable in order for that price tag to make sense though the company needs to hit those growth numbers and 35% is no easy task for any company especially in a longer term basis. But even if you take a haircut off that revenue growth say, 15-20% in the out years that price to sales still doesn’t look too onerous.

Ricky Mulvey: In one quarter, it does about $3 in terms of revenue per active user. I estimated Meta at $12, four times that of Reddit which can make sense because you have I would say, more engaged users on there that are sharing more data with the platform so you’re getting more targeted ads. But does that mean that it has a lower ceiling than a lot of these bigger social media platforms?

Sanmeet Deo: I don’t think it necessarily has a smaller ceiling. With Meta, their monetization is very high. You mentioned a couple of things they have a very diverse and global user base and it seems like almost anyone and everyone is on one or more of metapperties including Facebook, Instagram, WhatsApp. There’s a lot of rich user data like you said, a lot of people give lots of personal information on the site voluntarily. Reddit most of the users are anonymous.

You don’t have specific personal data. You have what they talk about. There’s more frequent daily engagement on these meta properties or Reddit users, maybe except you. Sometimes engaged less frequently they might be like, hey, I find a topic that is interesting I’m going to go jump on Reddit and there’s a product I want to purchase I’ll go see what the reviews or what testimonies or what people think about it and then maybe I won’t be on it for a little while so not as frequent. With the social media meta platforms people tend to be on them. I don’t think they ever get off. Meta has a very mature app. They’ve been developing it over a very long period of time. A variety of ad formats, video, text, so forth. While I don’t think Reddit has a ceiling I don’t think they can get as big as Meta when comes to this area of their business. But they have a lot of growth opportunities ahead of them and they can create their own niche and purpose for the advertisers.

Ricky Mulvey: Are these growth opportunities interesting enough to you as an investor? Do you think Reddit’s stock is worthy of a place on our listeners watch lists?

Sanmeet Deo: Absolutely. It’s on my watch list. I still don’t know what to do if I want to buy it or not. They had a great earnings report recently so that definitely perked me up a little bit more I think the data licensing could be a rich source of future growth and it’s a unique platform with a unique business. It definitely worth keeping an eye out on.

Ricky Mulvey: As we close out, you got any favorite subreddits?

Sanmeet Deo: I just started using Reddit as I was started researching it, so mostly my favorite subreddits are sports teams, some health and fitness trends, like breathwork meditation. You have any good suggestions for me?

Ricky Mulvey: You’re in New York and I think New York City food. This goes for whatever city you’re in. The more hyper local interest, the better it is so I’m out in Denver and the Denver food subreddit has guided a lot of my purchase decisions and I really like it also would do sometimes you’ll get some cool stuff on there.

Sanmeet Deo: Very nice.

Dylan Lewis: Fools it’s Veterans Day, and we’re grateful for all those that served in the armed forces. We know a lot of businesses and schools in the US are closed today, but the stock market is open and so our doors are too. Listeners appreciate you taking your day off to spend time with us. As always people on the program may have interest in the stocks they talk about, and Motley Fool may have formal recommendations for or against. Buy, sell stocks based solely on what you hear. All personal finance content follows our editorial standards, it’s not approved by advertisers. Motley Fool only picks products that it would personally recommend to friends like you. I’m Dylan Lewis thanks for listening. We’ll be back tomorrow.