Analyst Notes, The Black Art of Price Targeting, and Twitter with guest Aman Verjee

Will Page: Welcome to Bubble Trouble conversations between the economist and author, Will Page that's myself and the independent analyst, Richard Kramer, where we lay out some inconvenient truths about how the financial markets really work. Today we target those analyst notes that tell us what they think the price should be and how much faith we should put in that moving target that seems to be increasingly off target, and there's no target that's been moving faster than Twitter in the past month.

We have Aman Verjee who served as a VP of PayPal from 2002 to 2010, who was first to call out the price target fiasco behind Twitter's defense of Elon's hostile takeover, a takeover that's now taken over. More in a moment. Tech stocks climb to unimaginable highs during the pandemic, more than doubling in less than two years, but now they've slid down the slope of hoop. Is this an adjustment waiting to happen? Fine. But what about the analyst? How do they adjust their price targets? And what are we targeting anyway?

To get to this, we're joined by Aman Verjee. So let's toss him the mic and let the man introduce himself, his work, his first time knowledge of the PayPal story and most importantly, Aman, where can the audience follow you?

Aman Verjee: Absolutely. Thank you for having me. So just by way of background, my very first job was on Wall Street where I worked at Lehman Brothers as a fixed income trader. And so I was intimately familiar with all the, uh, the price targets, I was working with all the equity analysts trying to figure out, you know, what part of their narrative was story, how much of it was analytics, how much of it was thought in fact, versus just what they wanted the answer to be.

And we covered all the major names back in those days. And then from that, I went to law school where again, they're supposed to teach you about fact and uh, and logical conclusion, but I went to Harvard. So, you know, I, I had a, uh, good education in storytelling as well. And then I went to work for PayPal and I was there for 10 years among other things, ran finance. So Elon was the chairman of the board when I joined. But Peter Thiel was the CEO. We took that company through an IPO and through the whole public offering where again, the storytelling and the, uh, the target setting and the financial can sometimes take on a life of its own.

I've been a several times chief financial officer now in public and, and private companies. Today I run my own venture capital firm here on, uh, here in Palo Alto. And, uh, you can follow me at my firm, Practical Venture Capital.

Will Page: Fantastic, very grateful to have you on. On this show, we have a rule which is we start at the beginning and we assume no prior knowledge for our audience. So it's the best way to make sure everybody comes along with us for the, the podcast. And if you think about it this way, on the eighth day, God did not create [inaudible 00:02:32], on the ninth day he did not invent price targets. So I just wanna be the dumb kid in the classroom and ask my two professors, Aman and Richard here, what are our price targets? How do they get established? And how do you even try to establish intrinsic value? Who wants to take a first stab at that?

Richard Kramer: Um, I'll take a quick crack at it, Will. And, and as someone who's been an equity analyst now for almost 30 years, price targets evolved in the sense of trying to figure out what should a company be worth? There's always the could have, should have, woulda, but in that theoretical, you have a lot to factor in. It's not just the intrinsic value calculation that you can come up with a lot of very clever quantifiable metrics to, to justify. But it's also something about the market dynamics and the environment. We've been through multiple market cycles, including several crashes and bubbles before that. Aptly, our podcast is named Bubble Trouble.

And indeed in those bubbles, we change our perception of what value means. So those price targets are always going to be a movable feast and that's not to speak in defense of the analysts who are often setting price targets for entirely other reasons. And then using those clever quantifiable metrics to fit the target to their case.

Will Page: Aman.

Aman Verjee: Great. Yeah. The way that I think about price targets is it's typically a way for an investment bank or a brokerage to communicate to their investors, what should you buy, and what's a reasonable price? So if you're my, my mom or someone who wasn't particularly financially sophisticated, and she's not, she's a, a daycare teacher and a wonderful person, but not a finance expert.

Will Page: Sure.

Aman Verjee: She's gonna wanna know, "Hey, what do I, if... Should I buy a Facebook or Google or Apple or, you know, should I buy General Motors? And, and if so, what is the, what's the reasonable price that I should be buying in at and why is this the right investment?" And so the price targets are basically a way of communicating what is the reasonable price that I, the analysts think make sense?

And there are a couple of ways that you're trained to do that in finance. One is a discounted cash flow methodology, which means, hey, the company's reporting profits. Let's figure out what we think the profits will be in the future, and let's come up with a, a value of those profits and cash flows. Somewhere in the mid '90s and late '90s, the profits weren't as, as necessary to go public as they, as they used to be back in the '80s and before.

And so we came up with alternative metrics like price to sales. Well, the company's making revenue. It's not profitable, but if I multiply the revenue by some metric, then that seems like a reasonable price target. And usually that's a little bit of, uh, you know, analytics and rigor, looking at comparables, looking at other companies that have similar dynamics around cash flows or potential profitability. And they're just coming up with a story that, you know, that makes sense. And I think especially in the tech market today where a lot of profits are distant and speculative, just the use of alternative metrics to set price targets based on things that make sense.

Richard Kramer: I wanna step in here and just raise one very important point, which is back to our previous podcast where we've talked about Kahneman Tversky and the sort of bias in price targets. It's always nicer to say something is going to go up and even more interesting to say, it's going to go up by a lot than to predict it's going down. And we've talked many times before about how analysts praise and not a praise and, uh, and how they're predisposed for conflicts of interest reasons to have a positive view, but what your mother or any of our mothers might wanna know is how much money am I going to make? We're always more eager to seek out the gains than to protect ourselves versus the losses.

Will Page: So I'm already feeling that a price target is as much an art, as opposed to science. And I'm supposed to be the professional economist whose tied to objectivity. And if I go back to being a, a lonely government economist working in the treasury, Gordon Brown, Brown our Scottish chancellor at the time-

Richard Kramer: [laughs].

Will Page: ... he always trained the economist when he was at the treasury by saying, "You should strive for evidence based policy making and avoid a temptation of policy based evidence making." So work those words through, and you can see where he's coming from. So, you know, how does that rub here in the world of price targets? Do you just set the target to fit the wish as it were?

Richard Kramer: In multiple instances, you can see the behavior of conflicted investment banks and their analysts, setting price targets to support the case of a company to attract investment capital. And Aman, I'm, I'm curious how you, as a VC, who's gotta deploy that capital in those companies-

Aman Verjee: Yeah.

Richard Kramer: ... before they get to that public stage, how much greater scrutiny you can offer than an analyst who's naturally predisposed to tell the story of the company for them?

Aman Verjee: Yeah, I, in my experience, it's, uh, it is a lot of storytelling. I think the, my, my training and my bias is also for evidence based policy making. So I-

Richard Kramer: Woo. [laughs]

Aman Verjee: ... I cheer on the Gordon Brown's world. And you know, when I was at PayPal, we-

Will Page: Oh, I just have to quickly interject there. When you went to number 10, Downing Street became prime minister. He bankrupted the country, but number 11-

Aman Verjee: Yes. [laughs]

Will Page: .... he was a damn good chancellor. [laughs]

Aman Verjee: Yes. The, uh, skillsets don't translate-

Will Page: [laughs].

Aman Verjee: ... you know, at CFO to being a CEO. You know, we, we see that in-

Will Page: [laughs].

Aman Verjee: ... in, in private companies and public companies as well. Now, I think the challenge with doing it, you know, purely just based on the, uh, the facts is that you can take a company that has a complex set of financial statements, and you can look at facts around that set of financial statements, but there'll be conflicts within the facts. And you have to figure out which ones mattered, which ones don't. I'll give you a perfect example of where this happened in my experience was at, at PayPal working with, you know, with, with Peter Thiel and Elon.

By the time we were, we went public in 2002, we had a very good, very profitable business that was based on the eBay platform. We were only transacting eBay goods that were being sold in, uh, bought and sold in the platform. And that business was doing well, and growing at a relatively predictable rate would give you one valuation. But there was a lot of potential growth in the non-eBay business and personal payments and remittances and stuff like that.

And all those were speculative and there was not enough history, not enough revenue, not enough profit to really make a sensible valuation based on traditional metrics. So we had to tell the story, this is the business, this is what the business is worth based on what we know, here's what it could be worth based on, you know, based on what we don't know, but what we believe and analysts would either discount that entirely or give it a full credit. And they're all over the map and everywhere in between. And depending on which set of facts you choose to believe and apply, you can end up with two very reasonable, different answers to what this company is worth. And that's where I think it becomes just as much art as science.

Richard Kramer: Well, yeah. And, and I think that the reality is that price targets are equal measures art and science. There is a science to it, but that science like all science is not hard and fast. I mean, yes, there are Newton's laws of thermodynamics and other elements of the science that we know are fixed, but there's a lot of other science that's open to interpretation. When we invent, uh, medicines, we test their efficacy and the efficacy is always on a scale. And so when you back test price targets for analysts, you can find there are long periods of biases towards-

Will Page: Mm-hmm.

Richard Kramer: ... optimism. And certainly in the trough after the .com bust, there was long periods of skepticism, which after a while were simply no longer warranted. And so the science part of it is dressed up in a lot of arcane language. It's like the economics profession, Will. It's fallen into a, a bit of a rabbit hole because it speaks a language that most of our parents wouldn't be able to understand, but it, that really needs to be boiled down to a few simple storylines, and that's the art of it.

So communicating the potential of an early stage company like PayPal and getting investors to buy into the imagination that you have about what the company could be is never gonna be justified by the science. It's always going to be relying in part on the art and marrying that blend of art and science is what good analysts do. Um, unfortunately many of them don't even try that because their job is to sell banking services or represent the companies, uh, to investors. And aren't really looking to, to unearth the science underneath those numbers.

Will Page: Right. Right. So Aman, Richard on this podcast has been at pains to point out that if half the stocks go up and the other half go down-

Aman Verjee: Right.

Will Page: ... why is it that 18, 19, 95% of analyst notes have got a price target with a big word, buy slapped next to it? Do you-

Aman Verjee: Yeah.

Will Page: ... get the impression that there is an endemic problem of price target inflation in the market? Like the, the skew towards buy, because buy sales trades, buy sales clients, buy sales new business. Do you feel as like this, the skills or tips?

Aman Verjee: Yeah, absolutely. I think the, the dynamic of a company when it goes public, is it selects bankers in part based on who the bankers are, but in part, based on who the analysts are. That's what I did when I've worked on the initial public offerings I've done. And we interviewed with the analyst and we wanted to make sure that they were predisposed to favor our company. That was, that was part of the game.

And there was a commercial imperative. There's a commercial desire for investment banks to, to put, you know, this is the sell side now, the street, this is, there's a commercial reason for them to want to be positive and tell people the so, the valu- valuations are gonna go up. So they set the price targets higher. And that makes the companies wanna work with them and issue more securities. And that's where the buy side, hedge funds and mutual funds can take a more critical eye.

So there are independent analysts who will issue reports, and they will say, "We think, you know, for these reasons, these companies are, are better positioned than these other companies." And so I think if you just rely on the sell side, you're gonna get a, a tremendous bias. But I think if you look at the buy side or independent research, or you get a, uh, just a broader view of how these company's being evaluated, that's, I think where you can get a better story. So as an investor, that's simply what I do, is I have a large grain of salt that I'll, I'll now-

Will Page: [laughs].

Aman Verjee: [inaudible 00:12:35] recommendations with, but then we will pay attention to what the buy side, but the existing investors tell us in their research and then their behavior, are they actually buying?

Will Page: This was a cookbook, and you're talking about ingredients, how large that grain of salt be? Is it a pinch? Is it a kilo? Are we talking metric tonnage?

Richard Kramer: Salt lake for a deer in, in-

Will Page: [laughs].

Richard Kramer: ... in the forest.

Aman Verjee: It's a generally accepted accounting term, which is about this much salt, which I went forward under the sell side analyst recommendations.

Richard Kramer: Yeah. Back to this arcane language. And it's very easy to understand for any investor or any average, you know, whether our parents or professional investors, very easy to understand the language of it's going up, the price target is higher. And the way that's justified is the same way that Will your profession of the economists justify what they do, which is to have some arcane language and most average investors, I'm talking average investors, don't have a clue what adjusted EBITDA is.

Will Page: Yeah.

Richard Kramer: Don't have a clue with what these metrics on which the valuation, which derives the price target is based, but this language has been invented to justify the idea that don't worry, buy it. It's going to go up.

Will Page: Now, we're coming to the end of part one here, and this is all just a preamble, a prelude to what we really wanna do is to get inside your head and let you get our audience inside Elon's head and get into the, the teeth of Twitter. But before that, could you just take us to the break with, you know, part Twitter for a second, but any horror stories of price targets gone wrong that you've got from your career? Like, we love those stories of, you know, where things went more than just a little belly up. [laughs]

Aman Verjee: [laughs] Yeah. I've got, you know, I've got a few scars in a few battles. The-

Will Page: A three strike veteran of the game, so.

Richard Kramer: [laughs].

Aman Verjee: Yeah. You know, sometimes this there's, uh, the, that active communication that, that Bridget is talking about is, uh, is a big challenge. I think the most challenging one was probably around 2008, 2009 when I was at eBay. I was running the North America eBay marketplace business. And the analyst didn't quite know what to make of the, the stock and the company. It was eBay, it was PayPal. We just bought Skype. So there was a lot of different businesses kind of merged into one.

Will Page: Mm-hmm.

Aman Verjee: The recession was hitting. It was, we could see the metrics that they were hitting us in the teeth, in the Q3 of 2008. And the analyst... And we can't say anything to the outside world, because one of the rules, when you're a public company is you have to say things within specific windows in which you have to, we just say to one person, you have to say it to everybody.

So we had to keep quiet about the metrics, but we saw the analyst covering this in Q3, giving us a, um, a pretty rosy picture about how Q3 and Q4, and then, you know, the next year we're gonna go. And we, I, I remember sitting down with the analysts and trying to have a plain conversation like, hey, here's the metrics you should be looking at as an analyst. There are-

Will Page: [laughs].

Aman Verjee: ... there are people coming to our website. You should be tracking that. If you're not, here's how to do that. If you are not tracking how people are buying and selling things on our site, these are certain, these are certain things that you should, you should be paying attention to right now. And I would... You know, and of course, you can't exactly tell them, hey, take the price target down for the love of God. You're about to be wrong by 25%. Your reputation in mind are now in the line.

What I had to say to them is, are you sure you're paying attention to these three or four metrics and the, the progress that they've making quarter to quarter, and in particular, how they're doing in this particular quarter? I'd say half of them got 'em right, and, and about half of them got it wrong. But it is sometimes very challenging to explain, you know, just to the point I think Richard was making, and I guess this thought of evidence based policy making.

If I sit down with somebody who's got that story in their head and I lay out all the three or four metrics and do it three or four times, half of them still will get it wrong because they have their own, you know, their own story. And it's very hard for them to shake it off until they actually, um, have to do a reset in their head. And unfortunately, you know, that's the game that you have to play sometimes as a public company, CFO.

Will Page: And maybe you've invested too much political capital in that original story that you just can't do a U-turn, and you can't find another route.

Richard Kramer: Well, I think there, there one other phrase I think we've talked about at several other times in Bubble Trouble is this notion of anchoring.

Aman Verjee: Mm-hmm, yeah.

Richard Kramer: And so we get it in our mind that this stock is worth a hundred bucks and it's at 80 and you think, okay, that's great. There's 25% upside in it. And then it falls to 60, but it's worth 100. The natural tendency in behavioral psychology, even though this is the worst possible thing to do is to dig your heels in and to say it's worth 100. And then it goes to-

Aman Verjee: Yeah.

Richard Kramer: ... 40. And Will, you know, there's a couple of companies that we've seen this example recently, which are now dropped well below their IPO price. And yet the managements of these companies still believe that they're still drinking the Kool-Aid they were drinking a year ago when their stock price was 60 or 70% above that, and they're anchored on it. And so it's very hard to fight your own entrenched cognitive biases that, hey, our stock is worth 100. And if-

Aman Verjee: Yeah.

Richard Kramer: ... the market is telling us now that it's worth 80 or 60 or 40, well, I have to really revise my whole worldview to think that they're right and I'm wrong.

Will Page: The way that we stumbled into each other was not on Twitter Ironically. Is on LinkedIn, were you flagged exhibit number one for Elon's takeover, which was a-

Aman Verjee: [laughs].

Will Page: ... hilarious moment of a price target gone wrong and off target as it were. So-

Aman Verjee: Right.

Will Page: ... Morgan Stanley were hired by Elon to lead the prosecution, uh, with an aggressive view of the why this price target made sense. I think Goldman Sachs were hired to lead the defense on behalf of Twitter to say that price isn't high enough. You quickly-

Aman Verjee: That's right.

Will Page: ... pointed something out. And I remember for our broad church audience here, just explain what you pointed out 'cause I think it's the most hilarious post I've seen on social media in years.

Aman Verjee: Oh, thank you. I, I, I did think it was funny. So basically in, in any acquisition, the bidder, Elon Musk hires an investment banker, and instead of lawyers, and he hired us instead Morgan Stanley. And his goal is to pay 54.20 'cause that's his bid. That's what he thinks it's worth. Um, now Twitter has a, an objective. They can say, yes, agree on 54.20, or they can fight. And there are [inaudible 00:18:30] should be more than 5420.

And if we walk away from 54.20, then you know, we wanna be legally covered in case anyone sues us and say, "Why don't you take the 54.20? They just, the prices can go $39 a share. Take 54.20. That's a violation of your fiduciary obligation to walk away from 54.20." They wanna have a bank or a lawyer to basically, uh, tell them that, no, it's worth a lot more than 54 therefore, you don't have to sell at 54.

So they hired Goldman Sachs and a number of lawyers. It turns out if we look at what Goldman Sachs and their equity analysts think that those shares are worth right now based on their most recent analyst report, they have a sell on the stock and it turns out we have-

Will Page: [laughs].

Aman Verjee: ... they get $35 a share. So I just thought it was a comical and, and just interesting in the world of, uh, you know, finance and investment banks, that Goldman would be, the one time saying it's worth 35 bucks a share you should sell. But now they're hired by Twitter to say it's worth more than 54 and you shouldn't sell.

Will Page: And Richard, what's the art of pivoting your way out of that one. How do you... A squeaky bond time, how do you get out of that tight corner?

Richard Kramer: Well, I'm sure the Goldman equity analyst would stand by his view and the Goldman bankers would say, "Well, you know, if it was a private company, we could do all of these things that we are obliged to do and cost money as a public company. We could do away with them." And while that may or may not be nonsense, that you wouldn't have to do all this financial planning and analysis, uh, and reporting and you wouldn't need, uh, all of this programs and stock based compensation, costs would go away because you wouldn't be paying employees in stock options and you'd have all of this... And, and maybe you could do things with the debt structure of the company that would allow you to gear up or again, borrow to buy the company, which is what the current proposal is, um, that you would have more degrees of freedom.

So you can, to some degree justify a higher valuation for a private asset than you might be able to in the public markets where the company has to report regularly and is held to account by analysts. So there is some moderate justification there, but probably not the kind of two X gap that was being put down in this situation.

Will Page: Well, with that comical and costly observation, we'll be back in part two to dive deep into Twitter using more than 140 characters to work out how do we get to next? Back in a moment.

Will here with a special request for you, our valued Bubble Trouble listener. First off, thank you for listening. Every time we put out an episode, we are so excited to see you and join them. Now we'd like to ask you to help grow the show. We'd like to ask you to tell just one person about Bubble Trouble, who you think would enjoy the show. Perhaps you write a tweet or send a text or an email or post about it in this episode. It doesn't matter, it just all helps. Just tell one person and your work is done. Myself and Richard, we would be so grateful. Thank you.

Richard Kramer: Welcome back to part two of Bubble Trouble. We've been talking about price targets and how they get set. The black art of setting them between art and science, but we're gonna move on to a, something that's very topical and sort of something that's very well known by most people out there, but not well understood, which is Twitter and its intrinsic value. Now, Aman, you have some experience with Mr. Musk, and we can talk a little bit about maybe the design for what might happen with Twitter, but this is a stock I have covered since IPO.

Aman Verjee: Mm-hmm.

Richard Kramer: It IPO to 26 bucks. Very quickly went to $44, so if you weren't one of the precious few who got your allocation on the IPO, you were-

Aman Verjee: [laughs].

Richard Kramer: ... you were likely to be sitting on a long term loss in the company. It's had many ups and downs, almost like a roller coaster. And you know, we have made many critical comments about Twitter over the past years, which I'm, I'm happy to recite at length, but we'll rather throw it over to you. Um, you know, one of the things Jack Dorsey said about three or four years ago that you may recall, he said, "Well, the world needs a healthy Twitter." And as an analyst and a just general skeptic and falsification about everything, I said, "Well, actually-

Aman Verjee: Right.

Richard Kramer: ... no, the world doesn't need a healthy [inaudible 00:22:43]." [laughs]

Aman Verjee: [laughs].

Richard Kramer: You may think... That's, that's a bit of a fantasy, but you may think that, but not everybody else in the world wakes up in the morning and says, "We really mean to hav- make Twitter more healthy," but now you have the possibility and let's see what happens with this deal and whether it proceeds and closes and all that. But you have the possibility that one man is going to get to decide the fate of whether this company will be healthy and what sort of company it's going to be.

And so does the Twitter need to exist for the world? And if so, what is the right sort of Twitter that you think Elon Musk might bring to us, that if we accept the fact that the previous in incarnation of Twitter has not been a knockout success as a business, or even as an investment?

Aman Verjee: Yeah, I think it might been an overstatement to say the world needs a healthy Twitter. I do personally think it can benefits from-

Richard Kramer: That was, that was Jack's words, not mine by the way.

Aman Verjee: Yeah, no, totally.

Richard Kramer: [laughs].

Aman Verjee: I've met Jack and spent some time. He's a wonderful guy. I think he's made some mistakes around Twitter that he would, you know, he would acknowledge. But I think, I think the world would benefit from having a healthy social media communication platform, you know, where people can, can express themselves, can gather followers, can communicate. I, I'm sympathetic to that argument. I don't know. Um, the problem is we have, we have a lot of them. You know, there's already, we've got Facebook and YouTube and we've got WhatsApp and Instagram and WeChat and TikTok and you know, and then the, the QQ and it just goes on and on.

And a lot of them are, are great. A lot of them are moderated around certain types of content. Instagram and like reels and TikTok have these short form, you know, media, um, formats that are very engaging much more so than 140 characters.

Richard Kramer: Mm-hmm.

Aman Verjee: So I think the question is, why do we need another, you know, why do we need another moderated platform? And is, is there anything special or unique about Twitter? And I think over the last few years, they've just been trying to, they've been trying to fight to figure out what exactly they are that's different. Why are they different? Why are they necessary now versus 2005? And I don't know that the world needs another one, unless they can really do something special and unique.

And I have some ideas around that, and I think I know what Elon wants to do with it, but you know, clearly the world would benefit from a, uh, another healthy communication platform. Just a matter how do you find the audience and how do you be relevant to them in a unique way? And I don't think Twitter's figured that out.

Richard Kramer: And I think there's, you know, we, we can kind of conflate two separate ideas of health. One idea-

Aman Verjee: Yeah.

Richard Kramer: ...is the opposite of what I think, as I've described Twitter myself for many years. It's the ID of Western civilization. It's all the things that you mutter under your breath, but you'd never say in polite company. People say on Twitter-

Aman Verjee: [laughs].

Richard Kramer: ... all the time and it's, and you know, you can ask... Uh, Will, you can ask Nichola Sturgeon who was featured heavily in Amnesty International's toxic Twitter report about all of the rape threats and abuse she's received as first minister of Scotland for, you know, how many years. It's just horrible. And so there's the health of the conversation, which Jack has talked a lot about, but never really come to grips with. And then-

Will Page: Yeah.

Richard Kramer: ... there's a whole separate set of health, which is as a business and as a business, Twitter, whether it's see, saw advertising as a necessary evil or not, it never really came to grips with becoming a healthy growing digital advertising business the way some of its peers in the valley have. So which health is more important to Twitter? Do you have to get the health of the conversation right first before it can be a healthy business? Or is there another business model-

Aman Verjee: Mm-hmm.

Richard Kramer: ... that might-

Aman Verjee: Mm-hmm.

Richard Kramer: ... profit from all the unhealthiness of Twitter?

Aman Verjee: Yeah, that's a great question. I would be predisposed to the argument that at least in this case it has, you have to have the fundamental health of the company, of the, the business, the cash flows and all that. You're talking about the business model, all that's predicated on customers that are engaged in a positive. It's possible to build a business that is unhealthy for customers. And that is the, you know, the equivalent you're drawing between Twitter. And I guess, you know, the, just the mindset around the anger and expressing stuff on Twitter that nobody wants to say just to respite for racism and, and homophobia and negative energy.

Possible to build a business that way, but I think it's gonna be, you know, it's extremely challenging to keep those customers engaged and monetized. Advertisers don't wanna deal with it. You'll find it. You'll find all kinds of obstacles in charging customers when we've... We've lived through this at eBay and PayPal, where I was at before. Um, making money on advertising and making money on, on e-commerce is all predicated on healthy growing engagement, where-

Richard Kramer: Mm-hmm.

Aman Verjee: ... people come back for more, they wanna talk to their friends, they wanna bring their friends to be part of that community. If, if Twitter is just the Soto vote, I don't wanna say this in public-

Richard Kramer: [laughs].

Aman Verjee: So therefore, I will say it on Twitter. That's not a healthy company and I don't think it's gonna be healthy or, or easy as a business because it's, it's hard to monetize that kind of sentiment in the internet context.

Richard Kramer: Mm-hmm.

Will Page: As somebody who doesn't really use Twitter, I've tried to adopt as a books come out as way of promoting the book. But just there's two descriptions I wanted to throw at you. One is from a friend and neighbor know, Amy Drew, who once said that Twitter is the ability to eaves drop into all the private conversations happening around a long table at a dinner party. I always like that one. For somebody who is on the outside looking in-

Aman Verjee: Yeah.

Will Page: ... is that what we're trying to do? You guys are having a private conversation. I wanna eavesdrop to find out whether I agree with it or not. It's a private conversation. The other one was more operational. And this is where I wanna throw a question at you. It's Bennett Devins, I put it this way. He said, "Twitter is where good people were unable to get good work done." You just hinted that you had some ideas of what Elon could do. So if you all was a good person, what would good work look like if you could get it done at Twitter? What does good look like here?

Aman Verjee: Yeah, I think there are a number of ways that you could take Twitter in this. In a very crowded marketplace where you have these different social networks, but different networks can solve different needs. And how you connect with somebody on Facebook is very different with how they connected them on LinkedIn. My persona is different. My interests are gonna be a little bit different.

Will Page: Mm-hmm.

Aman Verjee: My communities are different. So, you know, does the world need more than [inaudible 00:28:22] platform? Yes, it probably needs several. And I think it does need them to be healthy, but you have to find your, you have to find out your, your angle. With Elon, it's always about the mission first. Like if the, when you think about what is, you know, what's his answer to the question? Why does the world need Twitter? It's gonna start with the mission. And at SpaceX for him, it was, we're gonna get people to Mars. That's what the mission statement is. And that's basically what they're doing.

At Tesla it's like, we're gonna accelerate the transition to sustainable energy. So he starts with the mission and then he kind of works to how do I build a business around that? Putting people on Mars what seemed to be like a hugely unprofitable venture. Full disclosure, I've an investor in SpaceX and have been a very happy one. He's figured out a business around the way with space shuttle launches and, you know, satellites that could be really great businesses, but there's, their mission is really what he is doing it for. And he's told us what he thinks Twitter's mission is. He basically thinks that...

I mean, his words are not, his words are not mine, as he thinks the restoration of Twitter as a global digital town square. So it's a marketplace of ideas where communications can be had without these kinds of restrictions and, and censorship. And that's what he wants to do. And I think he, you know, knowing Elon a little bit, I think he, I personally agree with him that I think that is a valuable mission and outcome, and I think he can develop a great business to walk away and he'll figure out how to do that between advertising and, uh, and coming up with ways to charge for content.

Richard Kramer: Hmm. I wanna lay out a couple points on Twitter that I think make it very simple to understand its business model and what might need to be done to rectify some of the failings of its business model. So I characterize Twitter as if you see two people chatting quietly, amiably walking down the street, you don't really pay them much attention. If those two people are screaming at each other, you stop and watch. And there's a lot of that on Twitter. And it, the kind of, the platform itself encourages kind of a contentious screaming at one another, um, partly because of one specific issue, which is the majority of the traffic on Twitter is automated by bots. And-

Aman Verjee: Yeah.

Richard Kramer: ... the one other thing I'll throw out there, and I think it's a very interesting development for Europe and maybe an interesting potential development in the US, even though there's some big differences there is that Europe's just passed the Digital Services Act, which says, what is illegal offline, walking up to the leader of an elected country and telling them you're going to kill them, should be illegal online.

And while the US has a different view of hate speech, for example, with regards to Nazis than Germany does, there might be that sort of standard applied to Twitter where-

Aman Verjee: Yeah.

Richard Kramer: ... if it's something is illegal offline to threaten someone in the street that you're going to kill them or rape them or do something unspeakable to them, well, it-

Aman Verjee: Yeah.

Richard Kramer: ... shouldn't be protected speech online. That standard has never been appropriately applied specifically to humans only-

Aman Verjee: Yeah.

Richard Kramer: ... and get rid of all these automated bots that are clearly there to pile on. Use registered accounts, but, but act in ways which are clearly inauthentic.

Aman Verjee: Yeah. That strikes me as something that I, I think Elon would agree with that and is gonna take that head on. Like, if I look at the things that he, he said about the Twitter acquisition, I think number one was freedom important to democracy. Number two, digital town square. And then number three was like, man, I hate these bots. Like maybe we should be authenticating every human. And that, that is a better interaction and that's gonna cost money. They are overs overseeing the number of active accounts right now.

So there's gonna be some cleanup and there's gonna be some reduction in like user accounts and that effect ads that effect their money. But I think that's a much healthier business to build. I think these things only work when you have healthy, positive interactions between customers who wanna refer their friends and it's a, that's a viral network business. And I think that's what I think Elon's gonna take that on, uh, as priority number one.

Richard Kramer: Mm-hmm.

Will Page: And of those three things that you raised, there's a fourth as well, which was to open up the algorithm too. And I had a-

Aman Verjee: Yes.

Will Page: ... business lunch with one of the leading politicians in Britain who leads the DCMS culture committee-

Aman Verjee: Yes.

Will Page: ... and he did make a point, which is that offer to governments of opening up the algorithm is a bigger offer than has been seen in many years. So in terms of governmental relations, he's doing something that hasn't been done before. And that's something which is preempted in many ways, what regulators have been trying to figure out, which is let's just open it up and look inside. I haven't seen that from other tech platforms.

Aman Verjee: Yeah. I, I, that, to me, that makes a ton of sense. I know at like at eBay and PayPal, we would not publish our fraud algorithms. It's [inaudible 00:32:53], that's, uh, trade secret. And so it's proprietary information. So how we identify fraud, how we decide to kick users off the platform, how we think that they are or why we think they're engaged in fraudulent commerce or activity would not be something that we would open up to regulators. I think in the case of Twitter, I think one of the challenges they're overcoming with government, but also just with the consumers is just a, a trust factor.

So if they could be very clear about here's why we are kicking you off the platform, here are the algorithms we're gonna use to identify.... You know, Richard just said, there's a number of categories of speech that are not protected at least by the US constitution. So if the, if Elon were to take the position that I just wanna make this a first amendment friendly platform, I don't have to, I'm a private company. I can really do whatever I want to. But the first amendment has been working pretty well for 200 years. Let me follow the lead from the Supreme Court on, uh, fraud, defamation, hate speech. If these things aren't protected categories, we can exclude them from our platform, but let's do that in a predictable way, in a way that every user understands why they've violated the terms and conditions.

I used this word, I said this, I was warned about it, and then it got kicked off. So it becomes very transparent and very clean. The more transparency that he can bring to Twitter government and consumers, the higher, the trust factor. And I think the more credible that platform will be.

Will Page: I think I sort of stumbled upon where we had the Spotify, Joe Rogan podcast follow out with Neil Young-

Aman Verjee: Yeah.

Will Page: ... which was, I was quoted in The Economist and the Financial Times pointing out that software firm valuations have long been driven by the notion that there's no marginal cost. Back to price targets part one, that's what boots source price targets are. Content moderation might be their first. And I know of tech companies where one in four staff are in content moderation.

Aman Verjee: Yeah.

Will Page: I always make the observation that when, uh, Mark Zuckerberg announced the number of headcount involved in content moderation at Facebook, the stock price fell. I always think that's a-

Aman Verjee: [laughs]

Will Page: .... a fascinating observation, like you employ that many people taking content moderation seriously? Sell the stock. And it wasn't seen as a good thing. That may change. Ethics may change that, but there is a cost to all of this. And I'm just wondering about-

Aman Verjee: Yes.

Will Page: ... the forces of gravity that take those tech utopian dreams back down to earth. Do you think content moderation could be one of them?

Aman Verjee: Yeah, I, I think so. The marginal cost of this network, it sure isn't zero. Now it may be, it may be that it's low and that it may be that the gross margin on this incremental business is high. If they can generate 50 to 80% gross margins on this, you know, at the, at the margin, I think that's still great. I think the messiness with content mar- and I looked at this at, at PayPal and, and fought a bit of a battle when, when eBay bought us PayPal at the, in the early days.

So this is the Elon Musk Peter Thiel version of PayPal, was basically like anything goes, whatever you wanna use PayPal for, we're actually gonna collect very little data on the transactions. And so if you're using it to, you know, to buy some, a dinette set online, or you're using it to settle up adult transactions or online gaming or buy cigarettes, we were just basically following the local ordinances in the local laws. And we were not imposing any other restrictions.

And then we began following local laws and payment processor rules. And then after eBay bought us, we began putting in additional policies and they were at nightmare to figure out like, as an example, adults. So the card processors will let you categorize adult transactions and run them. eBay said, "We don't wanna do adult on eBay." So what does that mean? What about like, you know, like toys that are used in the adults category? Well, you know, if it's part of an e-commerce business, maybe it's-

Will Page: Interesting.

Aman Verjee: ... minority or business, maybe I'm like, "Ugh." Now, you know, I was running strategies. So I'm like, how do I explain this to my customers that you may or may not be flagged based on, you know, your SIC code and the nature. It's all facts and circumstances. This is like Chief Justice, Brandeis. I don't know pornography, but I'll know it when I see it. I can't define it, but I'll know it when I see it. This is the, the version of, uh, terms and editions that we kind of have on Twitter. Like what is hate speech? What is the prohibited category?

Well, we'll kind of tell you when we, you know, when we get there without any warning, and that becomes a nightmare to enforce. It's costly. I think the opportunity with content moderation just to be really clear about the rules, be very specific about what can or cannot be said. And that becomes a lot easier to administrate. It's better for the customers and it doesn't take as many people to do.

Richard Kramer: And there's a couple things to understand alongside that. The idea of opensourcing the algorithms. As you said, Aman, about PayPal, if you'd open sourced your fraud algorithms, you would've had a biblical amount of fraud.

Aman Verjee: [laughs].

Richard Kramer: If you open source the algorithm, you are inviting people to game it. And a lot of the bots right now are gaming Twitter's algorithm successfully.

Aman Verjee: Yeah.

Richard Kramer: And while Twitter has policies and procedures to try to block them or stop them, they, they work around them. They learn those policies and procedures by testing them, and then they get around them.

Will Page: Fascinating [inaudible 00:37:32].

Richard Kramer: So it, it, it, a major unintended consequence of opening up that algorithm could be that it gets worse and not better. Now, as to the issue of content moderation, it is something that in the town square you expect everyone to behave with a certain level of decorum. You don't expect someone to come into the middle of the town square, pull down their trousers and take a crap.

Will Page: [laughs].

Richard Kramer: May have this sort of unspoken contract with the users that they behave in a certain way. And I, I think Twitter has clearly just let the genie outta the bottle. The genie's [laughs] flown around and like a bowl in a China shop that they, they can't put that genie back in the bottle. They can't get people back to behaving with a certain level of decorum easily on Twitter.

Will Page: It does raise questions about unintended consequences. Opening up could be the deemed the good thing from an optics perspective, from a political perspective, but make better to worse. And equally back to marginal costs, you could have two marginal costs. So one I've gotta hire 5,000 lawyers and philosophers to work out what content moderation is. And then I've gotta hire-

Richard Kramer: [laughs].

Will Page: ... 50,000 through the actual content moderating.

Richard Kramer: Yeah.

Will Page: So all of a sudden those fat gross margins and software techs start to get a little bit squeezed. We are closing in on the home street here, and I'm gonna stress, the final question we're gonna ask you is to bring it full circle, Aman, which is give me a place-

Aman Verjee: Yeah.

Will Page: ... tag on Twitter. I'll give you a moment to think about that.

Aman Verjee: No, no.

Will Page: But the first question I wanna ask is by the time this podcast goes out, there will be a new CEO of Twitter. I wonder-

Aman Verjee: Yeah.

Will Page: ... if it's you, maybe.

Aman Verjee: No. [laughs]

Will Page: But still, if it was you, if it-

Aman Verjee: Yes.

Will Page: ... was you hypothetically speaking, what would you do? You come into the office day one. What's your first, what's your first tweet, first of all, but what are you actually gonna do to the company? Let's just put you in those shoes.

Aman Verjee: Well, I'll tell you when I would, you know, I'll tell you what I think I would do, and then we can talk about how to communicate it. I think the first thing that we've hit on is I would definitely, I, I agree with Elon's mission. So let's start there. He, I do think that the world benefits from a platform that is fundamentally about free speech. I do think free speech is an important, better rocket of democracy. And I think a well, a, a well functioning Twitter is gonna make society healthier.

So, um, now part of that means being very clear about what can or cannot be done on the platform. So replace Twitter's vague guidelines and long list of terms and conditions now with just some specific rules around what you can or cannot do.

Will Page: [inaudible 00:39:58].

Aman Verjee: Like as an example, you may not threaten violence against another user. Clean, simple, full stop. You may not publish someone's physical address. That's, that strikes me as a good rule. You may not use Twitter in the commission of a crime as determined by a court. I think that seems to be, that's a really good one, but if your terms and conditions are around protecting dignity and upholding equality and keeping people safe and preventing misinformation, and every time I wanna post something about a COVID case, there's gonna be some kind of a fact check or some kind of a disclaimer, you know, on my post that says, here's, go here to get the real facts about COVID. That I think is, is gonna drive users nuts. And that's creating a lot of the disengagement on the platform.

So I'll just be very clear about what can and cannot be done, clean up the vague guidelines and be very explicit about it. I think Elon's gonna have to take a hard look at the cost structure of the company. It is a good business. It is making money, but it does seem to me like there are a lot of people running around. There's 8,000 employees at that company. And if I were to benchmark like revenue per employee at, at Twitter, it's below Snapchat, it's below Pinterest. It's probably one half of Meta and Facebook. It's one half of Alphabet. Like there's a lot of fat in that organization. I don't know what people are doing, so I haven't seen the latest org chart and I can't... You know, as I'm not their CFO yet. So I can't figure out what everyone's doing-

Will Page: Yeah, [laughs].

Aman Verjee: ... but I would definitely guide, you know, Elon and the team. Like we ought to be able to run this company with about 3000 employees, not 8,000. So let's figure out to make this scalable and, and more profitable. And frankly, the, you know, the debt that he's, he's taken on in order to buy the company means that he's gotta pay some interest. And so he's gonna want Twitter to kick off enough EBIDA to cover those interest payments. And so he's gotta make sure that the financials work 'cause I think ultimately he does wanna make money on this. I don't think it's just about charity or making the world a better place. Although, I do think that's part of the motivation.

And so I would start there and then I think if you could figure out the user community and the financial story, I do think this is a healthy growth business that he build around and that'll make the world, uh, a, a better place.

Will Page: I'm confident you could trim a lot of fat outside that company. I'm pretty sure there's a lot of resting, investing going on inside that business.

Aman Verjee: Yeah.

Will Page: Okay. So let's wrap it up with a price target currently trading at 49.54. Is it a buy and a sell or where do you see it going?

Aman Verjee: Well, you know, I guess the way to think about it is Elon's, he's bid 54.20. So I don't think the price goes higher than that. It's possible I guess that, you know, there's a negotiation and a, an increase in that price, but given the current market, I don't, I don't think so. So if it, if the deal doesn't happen, it probably falls back to 30 bucks a share or, you know, $35 a share. So I think the market is sort of telling us there's an 80% chance that this closes at 54.20. There's a 20% chance that it doesn't. And therefore it, you know, it kind of goes back to the mid 30s.

I fancy that Elon is serious and I'd probably bet on, you know, I'd probably, I'd probably think that something around 48, 49 is a reasonable price target, just given the mathematical probability of those two outcomes, 54.20 or mid 30s. At that price, I would probably be a buyer. Uh, full disclosure, I have bought Twitter shares in the last couple of days at 46 and 49, so that's, I'm putting my money where my mouth is.

I think he's serious. I think he'll pay 54.20. And, uh, and then he'll take it private. And then, you know, that's, that'll lead your cash out price. So that's kinda what you're playing for.

Will Page: Wow. Richard, do you wanna bring it to a wrap?

Richard Kramer: Sure. I mean, I, I, I think we started out discussing this notion of price targets and how they're part art and part science. And I think when you get into a situation like we have with Twitter, where there is a, an agreed bid and at least for the moment agreed or accepted financing package on the table, then you can fairly easily calculate the difference between the value of the share price today and how long it might take to get to the future slightly higher value.

So if Twitter is trading $5 below the bid, you think the value of holding that money and putting it at risk free rate or an equity risk premium might, you might get a certain amount of money if you deployed it elsewhere in the meantime, and that's kind of more science than art. I think there will be a considerable amount of art along with the science in figuring out how to reboot Twitter as a business. Once it has a new owner and all eyes are upon it as to how it might change its business model.

And certainly there is plenty of press about nervousness among advertisers and curiousness about users and, and expectations. And I think, you know, one of the more difficult things will be how Twitter navigates this period of, of everything expected to change on the day the deal closes. And I think Aman, you and I could probably violently agree in big organizations-

Aman Verjee: Yeah.

Richard Kramer: ... things don't move that quick.

Aman Verjee: No, [laughs]. In fact, that's really well said. And there's actually one, there's one question you asked me, well, I didn't fully answer, but it's what would my first tweet be? Let's concede that the mission is free speech is important and that Twitter is important to free speech. It's a digital town square. Just to the point that Richard made, it's really important and better if all of your employees are rowing in the same direction and they're all aligned and they're all on board with admission.

So I think my first question, my first tweet would be all the 8,000 employees, new co, new Twitter co is gonna be about free speech and being a digital account square.

Richard Kramer: Mm-hmm.

Aman Verjee: And if, if that bothers you, if free speech bothers you, that's okay. You know what? We'll give you a six month severance package and you can leave. But we need, we do need to get that from 8,000 down to like 3000 employees. You don't have to say that in a, you know, in a corporate communication, but that's what's going on in my head. It's far better to let people opt out. If they're not on board with the mission, let 'em opt out because there has to be some cost cutting. And 3000 aligned employees will be much more productive and effective-

Richard Kramer: Wow.

Aman Verjee: ... and cost effective than 8,000 misaligned employees. I know that from, you know, having to reorg eBay in 2008, 2009, having to reorg PayPal in 2003. Um, that is what I think that I think would make a huge difference in how this company operates going forward.

Will Page: My parents always said that the secret to a good marriage is you want all your horses pulling the same plow in the same direction.

Aman Verjee: [laughs].

Richard Kramer: Yeah.

Will Page: And I think there's a lot of horses not pulling any plows-

Richard Kramer: But the-

Will Page: in any directions [inaudible 00:45:55].

Richard Kramer: ... the only thing, the only thing you'll need to do beforehand is get your 5,000 philosophers together in a room to decide what the definition of free speech actually is-

Aman Verjee: [laughs].

Richard Kramer: ... because that is a... Beauty is in the eye of the beholder. And the definition of free speech is something that is contested terrain on all fronts. And certainly-

Will Page: [inaudible 00:46:15].

Richard Kramer: ... a free for all is not, uh, is not what a town square involves.

Will Page: Well, with-

Aman Verjee: Fair enough.

Will Page: ... Aman's first tweet when he takes over Twitter, uh, I wouldn't ask him if he's gonna edit it because that functionality currently isn't there yet-

Aman Verjee: [laughs].

Will Page: ... but I'm sure it will be. But Aman, on behalf of myself and Richard Kramer, thank you so much for coming on Bubble Trouble. These are exciting times. It gonna be an exciting seven days before this podcast goes out and we would love-

Aman Verjee: Thank you.

Will Page: ... to get you back on as well. And thank you again for your fantastic work on LinkedIn, uh, document in this story, better than any newspaper has, by the way, proving your point about where news can be found. So thank you, Aman and thank you, Richard. If you are new to Bubble Trouble, we hope that you'll follow the show wherever you listen to your podcasts. Bubble Trouble is produced by Eric Nuzum, Jesse Baker and Julia Nat at Magnificent Noise. You can learn more at bubbletroublepodcast.com. Until next time, I'm Will Page.