In this podcast, Motley Fool analysts Deidre Woollard and Tim Beyers discuss:
- Where Pinterest (PINS -0.49%) has room to grow.
- How stock investors should react to a CEO change.
- Nike‘s (NKE 1.30%) move to a direct-to-consumer strategy.
Motley Fool contributor Rachel Warren interviews Ali Parsa, CEO of Babylon Holdings (BBLN -0.60%), a digital-first health service provider. They discuss the company’s journey going public and the exciting frontiers of genetic research.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on June 29, 2022.
Deidre Woollard: We’ve got CEO shake-ups at Pinterest and Bed Bath & Beyond, and also a major back-office change for Nike. You’re listening to Motley Fool Money. Welcome to Motley Fool Money. Today we’re looking at CEO shake-ups, I’m Deidre Woollard sitting in for Chris Hill, and I’m joined by Motley Fool Senior Analyst Tim Beyers. Hey Tim.
Tim Beyers: Hey Deidre, fully caffeinated, ready to go here.
Deidre Woollard: Awesome. Yesterday we heard that Pinterest CEO, Ben Silbermann is stepping down. Why now?
Tim Beyers: That’s a really interesting question because I think he’s been under fire for quite some time. Pinterest has sort of been figuring itself out and growing into a somewhat different company. There have also been some personnel challenges here. There have been discrimination lawsuits. There’s been some cultural upheaval at Pinterest, I think is fair to say. The business has been in transition for some time. I’m not sure but to hear the official explanation it is that the upheaval that Pinterest has been going through has reached an inflection point. Now Pinterest needs a new leadership team to move into the next phase of its growth, so no longer will this be primarily an advertising company. This is going to be a commerce company or more specifically an e-commerce/social commerce company. The new CEO, Bill Ready, coming in from [Alphabet‘s] Google and formerly the COO at PayPal, is going to take the commerce experience he has, apply it to Pinterest and figure this out.
It’ll be really interesting to see what the model looks like from here because, and I know we’ve talked about this Deidre, there are some things that Pinterest has done well in this space, and I don’t know exactly how you build on it, but shoppable ads have been something that Pinterest has been working on for a while. This idea that you could have pins that exist inside the Pinterest network that may be revealed to you as something you might find interesting, and you would click on that pin and it would be an ad that was shoppable, it would take you literally inside the Pinterest environment to a place where you could make a purchase. There are others that are doing this like this is new but not new in the sense that we’re seeing that on Instagram. It’s clear we’re going to see that other places. Getting this more deeply embedded into the Pinterest environment where you essentially have, I know I’m dating myself when I say this, Deidre, but it feels like a digital version of the Sears catalogue except when you point at the picture, [laughs] the picture is like, you want to buy this? Yes, click and I bought it.
Deidre Woollard: Well, yes but Walmart is doing something similar. I thought this move was interesting because Pinterest has said recently that they were going to work on having more women in leadership and then they made this move, which they put another man at the helm. Their audience is mostly female, but the financial background here really interests me and especially because there was that rumour a few months ago that PayPal might even acquire them.
Tim Beyers: Might acquire them, yes.
Deidre Woollard: Yes, so conspiracy theory hat on, do you think that has anything to do with it?
Tim Beyers: That’s really good. I should fit my tin foil hat for this one. I don’t. The reason I don’t think so is that Ready’s coming over from Google, but I do think the board may have seen the opportunity here, and leadership may have seen the opportunity here. There’s a bit of writing on the wall that says, the audience we’ve got, where like Pinterest doesn’t have what I would consider an audience that’s built primarily for an advertising type model. Because there seems to be a gate around the size of the audience. The audience is not growing at the same rate as say, some of the bigger social networks are, so it’s not really built for that. It’s more of a niche audience, and so how do you serve that niche audience? You pointed out that it’s mostly women, that’s absolutely right, and they are collecting areas of interest and pining those areas of interest visually into boards. How do you create more value for that audience that maybe it’s not at its ceiling like as big as it’s ever going to get, maybe it can still get bigger, but the audience growth is not what it used to be, Deidre.
If the audience growth is not worth what it used to be, then you either have to get really creative with ads, or either get much higher value ads or scrap the ad model altogether, and since they are not scrapping the ad model altogether, you have to find some other way to compound growth of that audience, and so commerce seems to make a lot of sense. Like how can you get more commercial engagement inside an audience that really does love this platform, is deeply engaged in the platform, it’s just not growing at a really compounded rate that would lead to, here’s our ad rate card and boy, is it expensive cause look at how big our audience is getting. That’s not the story anymore, so you have to do something different.
Deidre Woollard: Yes, I think that’s really true. I think what Pinterest started doing was revolutionary at the time but now even moving into shoppable ads that don’t strike me as inherently different from other platforms that are growing. Something like you said, like an Instagram or a TikTok. If you could talk to Bill Ready, what one piece of advice would you give him?
Tim Beyers: I would say invest slowly and experiment. If I were him coming in, I would listen to all the smartest people on that team. No matter where they are, particularly lower down in the organization, like what’s working? What data have we got? What have we not mind and what do we not see? There’s a great podcast by the way, that I recommend. You could go back and find this in previous episodes of Motley Fool Money where Chris interviewed Michael Lewis about his against the rules podcast, there was one episode they talked about during that interview called six levels down. It talks about the intelligence that exists in the expert that six levels down in the organization, I think Bill Ready should go find that six-level down expert that has data about commerce operations or commerce experiments inside Pinterest and start mining that data.
Figure out who really knows what commerce can be at Pinterest and start leveraging that expertise to build something new here. Because the temptation would be to look at the financial position of Pinterest, and start making big bets early and I don’t think you should do that. I mean, let’s be clear here. This is a company that has a very rich balance sheet. Well, I think it’s about $1.6 billion in net cash on the balance sheet, Deidre, which is crazy. If you look at the free cash flow numbers, even if you strip out all the artificial sweetener like stock-based compensation, this is still generating, company is still generating over $200 million in real, genuine free cash flow every year. There’s a lot of capital to put to work. Don’t be quick to put that capital to work, find the expertise first and then start running experiments off of that.
Deidre Woollard: I love that six levels down advice and it makes me think of some of the other CEOs shifts that we have and maybe those incoming CEOs might take that advice as well. We’ve got DocuSign CEO Dan Springer. He’s resigning, just today we heard that Bed Bath & Beyond CEO Mark Tritton is also leaving his post. It seems like we’re going to see some more of these moves and how should investors be thinking about this? I mean the stock market has been very reactive with excitement in the short-term when this happens but if you’re an investor you are in it for the long haul, so how should you think about it?
Tim Beyers: I think you should think about it in terms of what the actual competitive advantage is here. A good CEO can do a lot, but there is only so much that even a great CEO can do if the strategy is bad, and if the competitive advantage is weak. If the competitive advantages is weak like if customers don’t really value the product, then you either have to as a new CEO coming in, you have to either change the product completely and blow up the company and do something entirely different, which is inherently difficult, or you have to start from scratch, or you may just have to throw up your hands and say, go to the board and say, you know what, this is not really salvageable. Let’s start talking about how we can sell the company. A CEO may come in for very different reasons. A CEO may come in and be like the person who’s in a transitional period to help find a banker who will help sell the company. That is a strategy that sometimes happens.
Other times a CEO comes in, has some really good raw material to work with and can make some meaningful changes and turn things around. I think there’s a good material to work with at DocuSign, but they have not really busted out of the paper bag that is the e-signature business. They talk a really good game about the agreement cloud, but the agreement cloud isn’t driving massive amounts of revenue for them, it’s still an e-signature business at its core. If a new CEO comes in and figures out how to monetize this big vision of the agreement cloud, build a lot of things around it, great. It’s a lot to work with there, so maybe there’s a good CEO can figure that out. Tritton leaving Bed Bath & Beyond, that to me, Deidre, feels like the next person coming in is the one who says, OK, what assets have we got? What can we sell? Take this to who’s a good buyer? Who’s a good match for us? If a merchandising expert like Tritton can’t figure it out, then what is there? I don’t know.
Deidre Woollard: Yeah. There’s been some talk about selling things. That they already sold the Christmas tree shops and I believe part of what they want to do is spin off the baby aspect of Bed Bath & Beyond. That seems to be the more successful part of things but, hard to know with that one. Well, let’s pivot and talk about a company that’s led by another relatively new CEO, which is John Donahoe, the President and CEO of Nike. So Nike had their earnings this week. Relatively strong, although the stock market didn’t like some of their forward-looking stuff. But the thing that I want to zero in on was they talked about the role of their ERP and Nike’s transformation from being something sold in stores to really all-in on direct-to-consumer. So they’re launching their ERP in China first, then deploying to the US. Tim, what is an ERP?
Tim Beyers: [laughs] This is one of those techie terms that feels very confusing and sophisticated, and it is confusing and sophisticated software, but what it stands for is enterprise resource planning. Enterprise resource planning software is classically understood as a software suite that has a bunch of different components to it, and it’s built to manage what’s called back-office operations. Here is the difference between back-office and front-office operations. Front-office means everything that faces the customer. If I’m interacting with the customer, customer-facing, that’s front-office. The things that I need to do to manage the business and customers give me orders, now I need to figure out how to get the inventory to meet that demand, to build new stuff, fulfil orders, manage all my accounting, and do all of the things that actually let money flow through the business, back into building new products, back into getting things out the door. The stuff that the customer doesn’t see, that’s the back-office and that’s what an ERP is built for.
So it’s structural under the hood type business processes that allow a company to actually make money and put it in the bank, and an ERP is supposed to be designed to manage all that. So Nike’s had this for years. This is not really new, but they did have a blow up back in, I think it’s either 2000 or 2001, where they had some software, a company that has bounced around under the purview of other companies for years. It was bought out by JDA and then moved to IBM. It was called the I2 technologies, and that was called supply chain management software. There was a point at which that software that Nike was using sort of fudge the demand forecast. Really got that wrong. It led to some real problems where Nike had to write-off, I think it was about a $100 million worth of excess inventory. And since that time, all the way back then, going back to like 2014 they have had SAP as a provider, to provide their ERP. Now, this latest thing that they’re doing is, I guess really the newest version of SAP, what’s called the S/4HANA, and they’re going to essentially integrate everything that they can around demand forecasting, managing their supply chain, managing their inventory, figuring out fulfilment, and running all of that through SAP. So it’s kind of like the single source of truth about how they’re going to balance demand from stores, but also direct-to-consumer and fulfill that globally. I think it is smart Deidre to start in China.
That’s a big area of demand for them and just sort of see how this goes; experiment, fine-tune, experiment and fine-tune, instead of doing a massive global rollout. Because it’s really complicated software, it generally takes a long time to customize it because everybody’s business has different business processes and it’s got to be customized for those very specific business processes. So experimenting in one territory makes a lot of sense to me, but I wouldn’t over hype it. I don’t think this is something that’s going to dramatically transform Nike because they’ve been using SAP for a really long period of time. So I would say good on Nike for getting smart about integrating it’s back-office operations under one banner in this case SAP. But it’s not so new that we should expect it to have a material impact on the business. That would be surprising if it does have a material impact.
Deidre Woollard: Well, Tim, this was fantastic. Thank you so much for your time.
Tim Beyers: Thanks Deidre.
Deidre Woollard: Up next, Ali Parsa, CEO of Babylon Health joins Rachel Warren for a conversation about changing sick care into healthcare, their journey going public, and the exciting frontiers of genetic research.
Rachel Warren: Explain to our audience, how does the platform work and what is the business model? How does AI form the foundation of the business itself?
Ali Parsa: So we have a fundamental belief that what you and I call healthcare, it really isn’t healthcare, it’s sick care. When was the last time you had an interaction with a doctor? You waited until you got sick and you went and fixed it. Now I’m old enough and angry enough to remember that there was a time when I used to drive my car until it broke down, I took it to a garage that fixed it and then drove it again until it broke down. That’s what we do with healthcare. Today, however, we bury too many sensors in my car, and it collects so much data in real-time and analyzes it and warns me if something’s going wrong, and that prediction means that I can prevent or intervene. That’s the fundamental for also which we built Babylon. If you’d look after you really well upfront. If you collect your data, we can monitor you, and manage you. We could avoid that crisis and emergencies that are both expensive and unwanted. Think of a root canal in your teeth, nobody needs it, it’s hugely painful, massively expensive and yet if somebody monitors you teeth continuously, it will never happen. Why don’t we do that with healthcare? So that’s the premise on which that we’re building for Babylon.
Of course, you need artificial intelligence in order to be able to take the data you take and analyze it in real-time. You need to build the infrastructure necessary for that. Just like Tesla, when they build the electric vehicle, it wasn’t just the vehicle they had to build. They had to build the entire infrastructure, the software, the mechanism which it rode, that’s what we’re doing in our journey and you asked me, how does the business model works? Our favorite business model is to take the money out of the equation because this industry pays for sick care. Every hospital get’s paid when you’re sick, the doctors get paid. So what we try to do is take your budget from your insurers or your government and say now that we control the budget, you could invest heavily on keeping you healthy, rather than worrying what happens when you get sick. Therefore we take the medical losses that insurance companies believe they’re going to have, and by taking that over, we can then invest heavily on avoiding your crisis, and by avoiding your crisis, we make money. Because there are savings and we take that.
Rachel Warren: I’d love to also talk a bit about the company’s decision to go public. The company, as I mentioned earlier in its merger to go public last October. Can you walk me through the timeline that led you to that process and the decision to go public at this stage in your business’s journey?
Ali Parsa: We went public because at the time public markets were doing very well, like every other fast-growing company you need further capital, although we’re not bit wasteful in capital. If you think about that this is one of the largest industries in the world and the amount of capital in totality that Babylon has consumed so far, because we came from a very frugal system, we are very frugal with the use of capital, and in any case you still need a lot of capital, and therefore going public made sense. Now, if there wasn’t a war, for the worst time going public event in the planet, I should win that award, because [laughs] we did it exactly as the public markets were falling apart. We did it through a SPAC system, and the reason we did the SPACs was very simple. If you do an IPO you can only share your previous year’s performance. Now, if you’re growing as we are, fourfold a year, that’s 400 percent a year, then your last year’s numbers are almost irrelevant. Like in 2020, we did shy of $80 million of revenue. In ’21, we did $320 million of revenue. This year we’re already selling ’22, we will do over a billion dollars of revenue. If you’re going at that trajectory, SPACs were good because you could share your future projections. Unfortunately, what happened was that most of the companies who did the SPACs, unlike other SPAC sponsors who did a great good job in due diligence, didn’t do such a good job in due diligence. Most of these companies missed their numbers, didn’t deliver their promises, and the whole SPAC name got tarnished, we got burdened with that, then the market completely fail, and so on and so forth. The public journey has been the only part of Babylon’s [laughs] history that has not been as successful. [inaudible 00:22:38]
Rachel Warren: It’s certainly exciting to think about how the healthcare industry could evolve in the coming years. I’m curious, given your insights and comments on what the healthcare industry is and what it could be, what is your vision for what the future of healthcare could look like? How does one build a more efficient, equitable, and accessible healthcare ecosystem?
Ali Parsa: I think we need to start with data. We need to create a model in which we can collect all the data from you, with your permission of course, and securely stream that data in real-time all the time. To be able to put models on that data, AI models on that data to constantly analyze what’s going on with you, and be able to reward you if you’re doing well, to alert you if something is about to go wrong, and to intervene if something has gone wrong. But do so super early. If we do that, we will actually save a huge amount of money by avoiding all the crisis and emergencies. Think about your home. Think about your car, it’s so much cheaper to service it than maintain it, than it is to deal with it when it’s broken. It’s not actually hard. It’s not rocket science, it’s not like SpaceX when you need to send the spaceship to the outside and then bring it back. It’s about doing with your body what we do with your car, what we do with the factory, what we do with everything else we got, but we have such a strong lobby in an industry that is all about sick care, and we got to just change, shift the gear. Leave that industry to do what it needs to do because you will get sick, you will have accidents, we will need to send you to a hospital, so that industry is an important industry to stay, but we need to actually create your alternative, a much more rational, reasonable way of doing things. I’m asking you what’s wrong with that? I can’t see why people wouldn’t think that’s just the right rational way of doing things.
Rachel Warren: Absolutely. In addition to AI, which you’ve mentioned all the potential ways this could revolutionize the healthcare space, we’ve heard a lot recently about how innovations like AR, VR, and even the metaverse could play a role in the future of healthcare. How do you personally see these technologies fitting in to the future of healthcare?
Ali Parsa: Technology is a tool. That’s all it is. AI is a tool, augmented reality is a different way of interacting with that tool and interacting with the physical world. Hopefully, today that quantum computing comes, again, it’s another tool that allows us to process that data significantly faster than I was talking about, so on and so forth. What matters is what do we do with these tools. We could use these tools in the old system and exasperate what we got that make even healthcare more expensive. Or we could use it in this preventive system that I just described, where we could actually put it to massive benefit. The question really is what we do. That’s why I just think that, when you buy your Tesla, you’re not thinking, does it use AI, augmented reality, sensors, this and the other, you’re just thinking that it’s a great car, it’s a smart car, it makes every other car look dumb, and it doesn’t destroy the planet like every other car does by burning petrol. You don’t care about the rest of this. Is my job, our job, to use all the tools necessary that technology gives us to make that experience as wonderful for you as possible.
Rachel Warren: I think the vision here is to integrate these kinds of technologies and innovation so much into the fiber of the healthcare system that is not even something that patients think about. It’s just a natural progression. Do I understand that right?
Ali Parsa: You’re absolutely right.
Rachel Warren: Looking back at the digital health space and the healthcare industry, what do you think has changed over the last five years to now? We know especially in the last couple of years during the pandemic, there have been so many changes in healthcare. But I’m wondering looking back, what do you identify as being some of the most prominent shifts in this space?
Ali Parsa: We all know about all the changes in people’s attitude toward telemedicine. We all know that. But actually, I think far more important changes have happened in last five years that we have not been really thought about. If the first half of the 20th century was about physics, atoms, so with Einstein and material relativity, and the second half of the previous century was all about bits, and technology. We’ve seen all the results of that technology and what it has done to revolutionize our work. I think we’re in the middle of technology on biology, on genetics, on cells. If you just think what is happening in that world, it’s insane. It’s insane what we’re doing. We managed to mix the gene of a bird with one of a mouse and make the mouse think like a bird, we’ve made a fish radiant by changing its genes a bit, we had more importantly, we had worms that can live significantly longer, two weeks ago we saw a paper being published by scientists that demonstrated they could make an old mouse young, we have got a tomato now that we stopped the process of telomeres deteriorating, therefore the tomato doesn’t age. When you look at what’s happening in the world of biology, I actually think that world we’re doing everything in healthcare.
Of course, that world will take a very long time to pay results. We are in the verge of being able to do with human body, things that we could have never dreamt of, and that’s super exciting. I’m significantly older than you, I think your generation has got a chance to live massively longer than the time span of the normal human beings’ life. I think we can do now so much that we could never dream of. That should come through fruition within the next half a century.
Deidre Woollard: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. I’m Deidre Woollard. Thanks for listening, we’ll see you tomorrow.