Chit Chat Stocks - 4 Quality Stocks We'd Buy On a 20% Drop (ABNB, AMZN, GOOG, DHI)

Episode Date: October 23, 2024

On this episode of Chit Chat Stocks, we go through 4 quality stocks we'd consider buying if they fell in price by 20% or more. We discuss: (04:03) Defining Quality Stocks (07:23) [Stock 1] Competitive Advantage (13:21) [Stock 1] Growth Drivers (20:19) Valuation and Price Target for [Stock 1] (26:17) Ryan's Stock Pick 2 (38:41) [Stock 2] Market Position and Future Outlook (40:39) Evaluating Competitive Advantages in Business (42:21) [Stock 3]: A Deep Dive into AI (57:53) [Stock 4] The Largest Home Builder's Strategy ***************************************************** Subscribe to our YouTube channel: https://www.youtube.com/@ChitChatStocks  Follow us on Twitter/X: ⁠https://twitter.com/chitchatstocks  Follow us on Substack: ⁠https://chitchatstocks.substack.com/  ********************************************************************* Sign-up for a bond account at Public.com/chitchatstocks  A Bond Account is a self-directed brokerage account with Public Investing, member FINRA/SIPC. Deposits into this account are used to purchase 10 investment-grade and high-yield bonds. As of 9/26/24, the average, annualized yield to worst (YTW) across the Bond Account is greater than 6%. A bond’s yield is a function of its market price, which can fluctuate; therefore, a bond’s YTW is not “locked in” until the bond is purchased, and your yield at time of purchase may be different from the yield shown here. The “locked in” YTW is not guaranteed; you may receive less than the YTW of the bonds in the Bond Account if you sell any of the bonds before maturity or if the issuer defaults on the bond. Public Investing charges a markup on each bond trade. See our Fee Schedule. Bond Accounts are not recommendations of individual bonds or default allocations. The bonds in the Bond Account have not been selected based on your needs or risk profile. See https://public.com/disclosures/bond-account to learn more. ********************************************************************* FinChat.io is The Complete Stock Research Platform for fundamental investors. With its beautiful design and institutional-quality data, FinChat is incredibly powerful and easy to use. Use our LINK and get 15% off any premium plan: ⁠finchat.io/chitchat  ********************************************************************* Sign up for YellowBrick Investing to track the best investing pitches across the internet: joinyellowbrick.com/chitchat ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Stocks. Before we get into this episode, we want to talk about our friends at Public. Heads up, folks. Interest rates are falling, but you can still lock in a 6% or higher yield with a bond account at Public.com. That's a pretty big deal because when rates drop, so can the interest you earn on your investment. A bond account allows you to lock in a 6% or higher yield with a diversified portfolio of high-yield and investment-grade corporate bonds. So while other people are watching their returns shrink, you can sit back with regular interest payments, but you might want to act fast because your yield is not locked in until you invest. The good news, it only takes a couple of minutes to sign up at public.com, lock in a 6% or higher yield with a bond account only at public.com forward slash chitchat stocks.

welcome to chit chat stocks on this show host ryan henderson and brett shaper analyze businesses and riff on the world of investing as a quick reminder chit chat stocks is a ccm media group podcast anything discussed on chit chat stocks by ryan brett or any other podcast guest is not formal advice or recommendation now please enjoy this episode Welcome in. This is another edition of Chit Chat Stocks, a podcast talking about all things investing, all things stocks, trying to cover as many high-quality businesses, small caps, large caps, anything an investor would like to study. I'm going to do that in audio format. My name is Brett Schaefer, and I'm joined as always by Ryan Henderson, and we have a title

for you today. We're working hard on this one so we can get as many people searching and finding the episode as possible. Four quality stocks we'd buy on a 20% drop. Ryan, what does a quality stock mean to you? Because I think it's hard for, it's something that's hard to describe, wouldn't you say? Yeah, it is. I'm trying to think of an answer here. I probably wouldn't put any numbers on it. I'd probably just say it's a business that can – that's very defensible, one that's hard to disrupt and one that has the ability to generate – the ability to invest a lot into the future. So runway for reinvestment with good returns on the investments that it does employ. So yeah, all that's to say wide moat and can grow. That's a good way to put it too.

I'd also say, and this maybe has a little bit of, you know, it's not necessarily the business, but it is a part of it because they're the people that run it. It comes with a good management team or one you can trust. And we'll maybe debate on some of these if they have a good management team or not, or if some of them are a little bit testy. But what are we going to do this episode? We have four stocks, two each. We're going to alternate. We think are high quality businesses that we would buy at the right price. So these are stocks on our watch list, stocks we've covered before, stocks. We think the businesses are good, but they're not in the portfolio today, except for one due to valuation concerns. I think we'll go through all that. And obviously we do the full

disclosure as usual. It is important to keep tabs on stocks like these because you want to have your research done if an opportunity presents itself. I think that's a lesson we want to learn from Adyen in September of 2023. It was cheap for about a month. We didn't really get around to having the conviction of buying, but if we had done all the research we did later, maybe we would have bought then and it's probably doubled since then. So for each of these stocks, we're going to give a reason why it has a competitive advantage, long-term tailwinds, i.e. why it is a high quality business, and then do some valuation work and give a price that we'd want to buy. The anonymous Thunderdome Capital on Twitter had this quote about what the best stock theses look like.

Here's a quote. The best investment ideas are fairly simple to articulate with a few major drivers, an easy to articulate valuation case, and direct evidence the drivers are playing out. At the same time, the best ideas also have multiple occurrences driving tailwinds at the same time. This is essentially what we're looking for. I, and I think Ryan as well, want to find something we can buy and hopefully hold forever. That means we need a good price, good management, and a good business. Before we kick things off, Ryan, anything else?

you want to add no i like that it's i know this title is kind of broad for quality stocks we buy in a 20 drop because there's probably a lot of quality stocks out there initially it was for quality stocks we buy at the right price but the list is kind of endless there so this is ones that are close to being included in the portfolio because of course there are companies out there like a Costco or something like that, where we think it's ultra high quality, but it's going to take a little more than a 20% drop for us to be interested. So these are ones that are kind of right on the cusp, but ones that we deem really high quality. So with that, let's kick things off. Brett, what is your first stock? All right. So back in July of last year,

we did a detailed show titled Why We Don't Own Airbnb. And really during the episode, we covered why we liked the business but didn't like the stock at that price. The stock was around $130 then and remains around that level today. So it's about $136, I think, as of this recording. And well, neither of us owns the stock today either. But I think the thesis around the business and how it's growing hasn't changed much. And I think by the end of this, you'll hopefully agree with me. But actually, you don't need to. I know there's a lot of people that, if you remember the Airbnb bust, the Airbnb apocalypse, the short-term rental apocalypse when that was going to happen two years ago, that didn't really happen. Business seems to

be doing quite well. And yeah, let's get right into it. So we want to talk about the competitive advantage of Airbnb, but I think the way you describe the business model and just going through it can help you understand, and then it helps you measure the moat. So they really have a simple business, but it's one that is hard to perfect for every customer. They operate a marketplace where hosts offer lodging and sometimes experiences that people can buy. And in exchange for matching up a host and a guest on the marketplace, Airbnb takes a cut of the dollar spent. This is known as their take rate. I like a few things about Airbnb. First is the customer value proposition is easy to understand.

When I say customers, I mean two sets. There's the host, the people that put their lodgings up on them are on Airbnb. And then the guests, the hosts want to make money by consistently having guests at their place. And the guests want to find the right place to stay for their specific occasion. They want the right location. They want the right duration. They want the right size and they want a quality host. Airbnb can work hard to facilitate this for both stakeholders. So the more guests on the platform looking to stay where the hosts are, the better value proposition there is for the hosts. And the more hosts on the platform, the better value proposition is for the guess. Ryan, what kind of competitive advantage is this? This is what you would call a network

effect, Brett. Yep. Yep. Yeah. We talk about this time and time again. It's one that is perhaps overplayed, would you say, after some of the big, you know, successful businesses of the 21st century? I guess maybe Facebook put it into the lexicon and there could be some people that have trying to replicate that to not much success, but Airbnb is one that has taken this model of matching up an online marketplace and making it a core way where you lock in these hosts to your platform because that's where tens of millions of people looking to stay places are searching and beginning their searches. So with this business and why I like it is because it's easy to measure whether this network effect is shrinking or expanding. You ask, are there more

more hosts on the platform every year? Are more guests spending more money with Airbnb this year? If yes to both of them, then the mode is widening. Over the last 12 months, guests have spent $77.9 billion on Airbnb. And this has grown at a 33.3% annual rate since September 2020. And it grew 12% year over year, foreign currency neutral last quarter. Now you might be saying, hey, this is a large slowdown. But remember, in September 2020, that was during the pandemic bottom, kind of right around that. And actually, if you look at the chart that Ryan shared there, it bottomed in December 2020. So kind of the full year 2020 for their gross booking value, all the dollars spent across the platform around the world. And since then, it's grown at a very

strong pace and it's still growing 12% year over year at a much larger size. And as this figure grows, the opportunity for hosts to earn more money grows, which drives more hosts to sign up for Airbnb. And last quarter, it hit 8 million active listings around the world while trimming bad locations to also improve quality for guests. This is up from around 5 million at the start of the COVID-19 pandemic and has grown every single year except 2020. If I asked you, Ryan, or said in 2035, Airbnb had 20 million active listings, would that be something that surprised you? You said 2035? 20, 35, or 15 to 20 million.

Say 15 or 20. 20 might be a little high. Yeah, especially with the global expansion, it seems doable. Basically a little over a double from here. I think that's achievable. It might run into some limitations just in terms of listing size if it's purely in the U.S. because I don't know how many people are really in a situation where they either need to list or want to list. So yeah, if they have success globally, I imagine 20 million is achievable.

Yeah, that is a fair point. And they, I think, are going to be excluding China from here on out. So that's also something that is going to limit the amount of listings that are out there. Here's a quote from the recent conference call to highlight the focus on expanding the active listings, which again, expands the value proposition for a guest. Because if I'm looking at what's a place, Hawaii, and there's one listing on one of the islands, that's not a very good value proposition. But if there's a thousand, then you have all the options and you can find something that fits your needs. So here's the quote. Last year, we shared our commitment to make hosting just as popular as traveling on Airbnb. We've been focused on raising awareness

around the benefits of hosting and providing better tools for hosts. In Q2 2024, we surpassed 8 million active listings driven by continued growth across all regions and market types. We're not just growing supply, we're committed to ensuring its high quality. As part of this commitment, since we launched our updated hosting quality system in April 2023, we've removed over 200,000 listings that failed to meet our guests' expectations to ensure we consistently deliver high quality stays. And this is the two things that matter for a guest. You have a lot of supply that you can look through and find something that fits for you. And you don't want to have a bad experience. I think Airbnb is working and focusing on the right things there. And if we even look

more granularly, which is what I even like more about Airbnb is they're doing a lot to reduce friction and make the platform better for both the host or the guests. There are hundreds of small improvements they make every year in order to get it incrementally better than the competition. In 2024, for example, they perfected the messaging function. They added auto replies, personalized recommendations for guests, and built a co-hosting network where existing hosts help onboard new hosts in kind of a partnership, which I like. I mean, none of these are game-changing, but it adds up. And I can attest to this. I'm curious Ryan's opinion here even if I don't solely use Airbnb for my travel needs because

you know they don't have every listing they don't have hotels or they have only a tiny amount of hotels you know they're on rental cars they're not flights I find the platform the easiest to use by far I never get frustrated with it they have the search function that works with the maps and all that all that stuff they have the best messaging with the host the layout is the best i would rather book through airbnb because it is the most intuitive all l sequel it is where i turn to first for a vacation stay most of the time what are your thoughts about that ryan and have you had any experience with that or or not much of an opinion it's yeah i think a lot of people get turned off to airbnb because they have a bad stay or something like that but it's or maybe they

have some horror story that a stay didn't go so well. But I think it will – the more and more hosts, the more and more listings that end up on the platform, it's going to be a site that's hard to stray away from, especially if you're looking for a longer-term stay. If you're going for a short-term stay, personally, I prefer hotels just for the quality assurance. But it's kind of personal preference and it reminds me of uber went through some of these same struggles where there was like some quality issues you weren't sure what the ride was going to be like you weren't sure who the driver was going to be and there's little tweaks that the platform can make to make it more secure make you know the kind of trip you're going to get it's things like

uh i don't know if they've done this already but wi-fi speeds or um little tweaks with uber i'm thinking of like the the star rating system on your driver the star rating system on your rider the um all the subtle improvements it's just something that the marketplace will have to adjust to over time so i think even with the little rough horror stays that people might have that turn them off from airbnb i think those will be kind of a blip in the long term yeah and those bear cases always pop up, right? And it's been the same one for 15 years and the gross booking value keeps growing. And I do agree that, you know, they're not going to have every single travel stay. That's just not going to happen. There's, you know, the direct consumer things

with Hilton and Marriott and other places booking and Expedia have their own niches. But when I use each application, which I actually have used all three Expedia booking and Airbnb relatively recently. Expedia and booking are annoying to use. And Airbnb is just so intuitive. I can't understate that from someone that's trying to search for things. It doesn't waste your time and you come away not frustrated, I would say. Even if sometimes at the end result, you may have had a bad stay, but it is kind of the give and take of that marketplace where people are self-reviewing each other. Yeah. I'm not sure if Europe has just gotten adjusted to a clunky user interface but booking seems from a user interface perspective

way worse than airbnb but i mean it just goes to show the listings and having the supply is really a big competitive advantage because you can lack in other areas and still attract guests yep all right let's keep moving in here we have uh let's see so to close out this section on a competitive advantage. Their value proposition grows for both hosts and guests as the gross booking value on the platform grows and the amount of listings grow. So I think as it grows, they're going to be able to extract more value from the marketplace each year. And we're actually already seeing that with slight increases in the take rate every year. I don't know if we'll have this in the newsletter, which again, people should sign up for free. I should say that as a note,

I forgot to say that at the beginning, that at the end of 2023, Finchat estimates that the take rate is at 13.5% and that has steadily gone up since 2017 when it was 12.2% if we exclude the COVID pandemic. If this grew to 15% over the next five to 10 to 15 years, I don't think hosts or guests would bat much of an eye. They're providing a ton of value for these hosts and the guests that 15% seems reasonable to me, even 20% over time wouldn't seem that crazy. um yeah when you think about some of the hosts that have tried to go off platform it's really really difficult to do i mean airbnb aggregates the demand would you rather have that that extra 15 or a guarantee that you're going to have your spot filled 25 days out of

the month i think you'd rather have the guarantee of people at least being there i agree i agree all right we're going to move on to the multiple tailwinds but yes I want to mention, sign up for the Chit Chat Stocks newsletter to get the free notes along with this episode. I have a ton of charts to help you out, analyze all four of these companies. But yeah, let's keep moving. Multiple tailwinds. So I believe there are a lot of factors working together that can drive what I would say 10%, maybe higher annual revenue growth for Airbnb over the next five years. First one, let's get it out of the way, inflation protection. Airbnb earns a percentage of the dollars flowing through its platform, so they're inflation protected.

If inflation is 3% annually for 10 years, Airbnb's bookings will grow at 3% a year, all else equal. Now, I guess you're not making any money in real terms, but better than other businesses. Now, the second one is travel growing as percentage of GDP. So as people get richer and have more disposable income, they spend more on travel and spending on travel expenses has grown as a percentage of GDP for decades, which is nice because real GDP globally has been growing as well. And I see no reason to stop over the next decade.

If you get real GDP growing at 3% for the next five years, I think travel may grow at 6%, maybe 5%, maybe 7%. Who knows? Either way, I think it will be higher. And it makes a lot of sense to me because once you get over that threshold of you're not going to be spending 10 times as much as you were on food when you're making $25,000 a year versus $150,000 a year, a lot of that money is going to go to travel. I think Airbnb can ride this wave, and they have been.

along with Booking, along with Expedia, along with Hilton over the last decade. Second one, or excuse me, third one, I won't read the full quote here because it's quite long, but for the newsletter, people can read it. It's expanding to new countries. I think this is perhaps the most important and has been a little underfollowed by the investment community. They're expanding its product and tailoring it to new markets. These are really a lot more than you think. They have, I believe their number is five markets that they have close to United States penetration in. It's US, Canada, United Kingdom, France, and perhaps Australia. Either way, there's a ton of other places to go to. This includes most of Asia, a lot more of Europe, a lot of India,

japan germany what they're doing here is tailoring the product to the local market so there are nuances for the travel market in each area that people will need you know languages stuff like that they're spending on marketing and they're going to try to build up that flywheel and flywheel in all these areas what i like about it is that it not only reinforces or tries to build the competitive advantage say uh in brazil for the brazilian market but it increases the competitive advantage for guests coming from other countries and i think that can slowly grow the mode over time and the fourth one which is more uh speculative is what they keep calling expanding beyond the core and i'll say expand its new categories i think it is unclear exactly what

this will be because they're they've been teasing this for like three years now ryan right uh but i I think a lot of it will be centered around experiences, which is an Airbnb fancy word for tours. They're not planning to invest a lot in this over the next few years, or excuse me, they are planning to invest a lot in this over the next few years, but I have no clue or not whether it'll work. And it's not going to be that material financially for at least two to three years. Curious what you think about these growth drivers. What one are you optimistic on? And what one would you be maybe pessimistic on expanding into new markets is probably the biggest one because it it bolsters the network effect right so like if you are traveling in the u.s you know

you can get a good airbnb you start traveling abroad like to markets like brazil you can stick around with airbnb it just becomes kind of another proof point and anytime you travel you can at least have that be your default search for a new place expanding to new categories do you think it's fair to say this has not been at all what they were hoping yeah at least so far and i think the glass half full would would argue well they're keeping things under wraps and they're trying to prepare and perfect the product and then launch it and then pour marketing into it and the glass half empty is well why are these startups like viator or expedia and booking kind of inching into this when you launched it like eight years ago and i don't know what to think yet but either

way it's not going to be material financially for at least a long while and maybe ever yeah i agree the uh let's talk about the price because we are kind of bumping up on time here we got a few to get through what price i guess anything else in the moat and then what price would you buy the stock well just to close things out there if you have those three things Inflation protection, travel is at expense of GDP, and then expanding to new categories – excuse me, new countries, not the new categories where I think Airbnb will take market share. I think that leads to 10% revenue growth. That's all I would say, and that's what I'm assuming for my model, which I did air quotes there. A simple model that is just doing revenue growth and profit margins.

Yeah, that's all you need. All right. That's all you need for a good model. Exactly, exactly. So what price would I buy it at? The valuation right now is kind of a tough nut to crack. If you look at the stated numbers, free cash flow is always wonky because they collect a lot of cash up front.

And there's currently a lot of one-time items that are screwing up the income statement. But I'm going to keep my numbers simple. I think over the long run, I believe Airbnb can reasonably hit a 25% operating margin. This may prove conservative because booking does have a 29% margin and Airbnb has had to spend less on performance marketing. But that margin is real at booking and Airbnb has not proven that yet. So I want to be conservative. I know a 25% margin might not sound conservative to some people, but I think it is conservative. But there is some uncertainty here. And I think, honestly, I wouldn't be surprised if it's 35%. But on $10.5 billion in trailing revenue,

you have a 25% margin that's $2.6 billion in earnings. Today's market cap is $86 billion. so it trades at 33 times earnings if we're using my steady state margin assumptions if we grow revenue at 10 for five years which i think is reasonable so that's 10 each year for the next five years this earnings figure gets to 4.23 billion that is 20 times the current market cap i don't really think that's cheap but what is i like i think 13 times my five-year ford earnings estimate is cheap. Maybe, maybe 14, 12, 15. I don't know. Something closer to there makes a lot more sense to me. And that is a $55 billion market cap or a share price of roughly $90. I think the stock will be valued at more than 13 times earnings in five years, which will

lead to adequate returns. And that's really all the model. We don't have anything complex to go here. And plus at the cheaper price, the buyback will do wonders. Management is spending close to $1 billion a quarter on share repurchases. And I would say, think of what will happen if the market cap is at $55 million and the buyback keeps growing. I think that leads to some downside protection, although it's not something trading at five times earnings doing a buyback. Something bad though needs to happen for the stock to fall to 90. I want to prepare in advance as much as possible for the negative headlines and how that can drive sentiment. There's going to be people with shaking confidence about the management team. There's going to be people

saying, is booking crushing them? Is the Airbnb bust happening? But I am confident in this competitive advantage over the long term. And I would take the plunge into the stock around $90, even if the numbers look ugly. And I would hope it becomes a buy and hold forever type of position. Before we move on to the next one, discussion question, Ryan, what is the pushback here? And I guess we probably don't have time to discuss management because that could open up a whole can of worms. No, I don't know if I have any pushback. You raise a good point, which is like, how do you know what a good price is on something like this? You're confident that it'll grow. All else equal, yes, 13 times is better than 15 times. 15 times is better than

20 times. But ultimately, they could all end up being a better investment than you might get elsewhere so i do think having some safeguards like maybe you just build yourself a rule that says i'm not going to buy anything at more than 25 times forward earnings like yeah this might help you more than your ear yeah it's gonna for me i'd maybe i don't know my thing with airbnb And I do think it's a high-quality business. I think margins have a lot of room to grow. But I think it might be closer to – especially in America – saturation than people think in terms of listings. It's already very well known. A lot of people have already built businesses around Airbnb. It's not a novel concept. So maybe there's some risk that the top line isn't able to grow enough to warrant the current valuation. Yep. And I think that is what will cause the stock to fall to $90. And $90 is not some sort of guarantee. It could be 95, could be 85, could be lower. But in that scenario,

you have a little protection versus a maturing business where I think you make a lot of money where if revenue growth is 10% plus over an extended time period, but you don't necessarily lose money if it's a lot lower. All right. What is your stock, your first stock, Ryan, and why do you like it? This episode is brought to you by our friends at Yellow Brick Investing. Yellow Brick is an aggregator of the best stock pitches across the internet. By tracking thousands of blogs, newsletters, fund letters, podcasts, and more, they collect and summarize the best stock pitches and bring them to you in a single place.

If you're a regular listener, you know that we use Yellow Brick every single week here on the podcast to discover new investments or just find reports on companies we've already heard of. Try it for yourself. Simply go to joinyellowbrick.com slash chitchat and search a company or ticker you are interested in. You are bound to find a great report on just about any company. That's joinyellowbrick.com slash chitchat. Listen up, folks. Time could be running out to lock in a 6% or higher yield at public.com, but you can lock in a 6% or higher yield with a bond account, but your yield isn't locked in until the time of purchase. So you might want to act fast. Lock in a 6% or higher yield with a diversified portfolio of high yield and investment

grade corporate bonds only at public.com forward slash chitchat stocks. Yeah, this one might be a little boring for people that know it, but it's Amazon. It's already kind of seen probably as one of the best businesses in the world, but I'm going to go through why I like it and the kind of price where I would really make this a big position. So let's talk some brief history first, because I think it's important to talk about what's happened over the last few years and the absolute whirlwind of a ride for shareholders that it's been. So at the very end of 2022, and I think the stock bottomed, I want to say on December 28th or something like that, Amazon entered its worst drawdown in more than 10 years. It had dropped

just over 55% from highs and was trading at $84 per share. Fast forward to today and it currently trades and we're talking about this on October 21st, 2024. So less than two years later, currently trades at $187 per share. So this has generated plenty of great returns since then, but obviously we're valuing it today, not based on what it was, but let's talk about why that happened. So we took notes on it when it was basically at its bottom. And here's the notes I have. So in the first quarter of 2020, COVID hit. People probably remember this. Unsurprisingly, this spurred a ton of demand for online shopping. In fact, in 2020, Amazon's retail sales grew by 39% off of a $245 billion base. Keep in mind, the year before, on a lower base,

they were only growing 18%. Management even said that their fulfillment centers were working as close to 100% capacity as they could. And Andy Jassy said in an interview at the time, they were forced to either drastically expand capacity or fail to serve many customers. They chose to expand. They knew this would be costly in the short term. And they even said that, but shareholders or investors in the market generally didn't seem to care. in the following two years after COVID, they doubled the size of their fulfillment network that they had built over 25 years before that and developed a transportation network that they were expecting to build over six to 10 years. So keep in mind, it takes longer than 18 months or longer

to get a fulfillment center up and running. So they had to guess what sales would look like two years out. And during this period, customers were receiving stimulus checks as well. So it really exacerbated demand. Demand looked really, really strong. However, at the end of 2021 to the start of 2022, shopping trends started to revert. People were spending less and shopping more in person. This led to excess capacity across their fulfillment network. And at the same time, I don't know if anyone remembers inflation from two years ago, because it seems like it's kind of dwindled away, but there was pretty much every major variable cost that they had were skyrocketing. So ocean freight, air freight, trucking, line haul expenses, fuel costs,

all contributed to a rising cost of revenue. And they were over-employed at their fulfillment centers because they had to double hire to fill roles during Omicron. And you can't fire someone because they got Omicron. So their expenses were super elevated and all of this led to diminished income in 2022. Brett's sharing a chart there. And this is just their North America and their international businesses. So it doesn't include the cloud business. It went from positive, basically $14 billion in operating income at kind of the height of 2021 to negative 11 billion. And at the time, a lot of people were saying Amazon is structurally unprofitable despite But having been profitable in the retail segments, they said the e-commerce just can't be profitable for them, which is kind of ironic because since that time, all those variable costs have come down, which I guess you probably should have seen coming.

A lot of that was just a supply issue, and typically in commodity markets, when something costs a lot of money, supply tends to come online, and that's exactly what happened for a lot of these big variable costs for them, and they were able to reduce headcount pretty substantially. So operating margins are looking really solid, both in North America. They have even gotten to positive operating margins internationally as well. So strong results there. At the same time, AWS was in the midst of a quote-unquote slowdown. They kept using the word customer optimizations, also known as customers just trying to produce their cloud bill however they could during that time. However, that too has reverted. So revenue growth at AWS bottomed at about 12% growth, I think roughly a year ago. And the reason that this coincided was because they forecasted it. They were telling them, hey, there's some slowdowns going on at AWS, some optimizations. We expect AWS to slow down.

And people thought, this is the end of cloud. And I believe the market cap was, the overall market cap, and Brett, maybe you can fact check me on this, was somewhere around $800 billion. Yeah, that's around correct, but I'll give the real number. I think a lot of people would have bought purely just AWS for that price because it was generating, I want to say, $25 to $30 billion in operating income. So maybe 20 times AWS earnings or a little more than that. But anyways, that's all what has happened since margins have recovered, AWS has recovered, it's reaccelerated, and people seem to be spending more and more money on the cloud every quarter. And the stock has improved, obviously, since we've already mentioned that. And I think anyone

that's followed the markets knows that big tech seems to have performed really well over the last two years. But why do I like it? The answer is probably pretty simple. It's just infrastructure and the ability to spend more than other companies. So Amazon has consistently entered industries where the addressable market is massive, but there's a massive barrier to entry, which is capital requirements. So think about retail fulfillment in the US, international retail, being able to be a vertically integrated e-commerce provider in a lot of international countries. It's very expensive. Cloud computing, obviously very expensive because you have to build up all those data centers all over the world. And then now we'll see what this emerges to,

But Project Kuiper, that's not the kind of thing most startups will go after because of the capital requirements to do it. Brett, I see you smirking there. Yeah, I was going to say, what's your price target for Project Kuiper? I don't have one, but – It's just to say that they go after things that are very costly. Yeah. And they have the ability to do it. And you can just look at like the CapEx for Amazon retail versus the CapEx for probably

their next closest competitor, which is Shopify. It's like, I think they were probably spending, I don't know if they break out CapEx, they maybe mentioned it on the conference calls, but somewhere around $30 billion on retail CapEx, Shopify spends like $500 million. Yeah. What about Timu? The Timu threat. Timu's coming, Ryan.

I think it's fair to say that – Do you like $20 drills that break after your third use? Yeah, I think it's fair to say that Alibaba and Timu and all the discount competitors have not had a big impact on Amazon. Wish. Wish is not coming back either. Context logic. Yeah, there we go. Yeah, I wrote this two years ago and I think it still holds up.

I just said the physical footprint and logistics network enables Amazon to offer prices and services that others simply cannot compete with. I think that's still true today and if anything is probably amplified because they continue to invest in their infrastructure and it's just an absolutely massive advantage. And it's one of those things where it's like – Yeah, remember people, it's not just price. I would rather pay 10% more for some commodity good that I know it's the exact same because I know Amazon will get it to me the next day. Yeah, exactly. It's one of those things where we can put all the numbers on it, but I'm sure people have had this epiphany where maybe they're landing at an airport and they see 10 Amazon planes right next to each other. Or maybe they're driving by and they see an absolutely massive fulfillment center located right next to an airport that Amazon is operating. And you just – you can see the investment firsthand and that's all over the world.

And they're continuously investing and reducing the times, the fulfillment times as well. So I'm going a little long-winded here, but they've done a really good job reducing costs and becoming profitable in their retail business at an unprecedented scale. And then they've also reduced their total employee headcount by nearly 100,000 people over the last two years, and I think just become a little more efficient with their corporate expenses. now some of the pushback would be they have a ton of sprawling initiatives that are like alexa or any of the devices and some of the stuff that maybe hasn't turned out so well but they've reined them in it seems like a little bit over the last year and they're also making this push to five days in office which will probably reduce the headcount even further i think they're becoming a little more lean, maybe than some of the other big tech players. This has all helped

them expand their operating margins from 2% a little over two years ago to, or sorry, basically two years ago to 9% over the last 12 months. And I imagine the more of these higher margin initiatives like advertising, AWS, Prime, maybe, I'm not sure if the subscription businesses, they don't break out the profits on that. But as those continue to grow faster than the overall marketplace growth, they'll see margins continue to expand. So I think 15% operating margin range is doable for them, which is about 50% higher than they're currently generating. So what price would I pay? I know we're supposed to do stocks I don't own. I'm become a fan of tracker positions now. So I do have some shares in Amazon. I think it's like two. So it literally

is a tracker position, but I'd probably need to see a pretty sizable drop to feel compelled to add here. Right now it's trading on EV to EBIT of 38 times, forward EV to EBIT of 30 times. I am quite confident it might not be linear. It might not be steady, but I think they can grow earnings. And I don't think this is a hot take at all, but they can grow earnings probably in the mid double digit as in like teens percentage range on a per share basis for the next decade annually. Yeah. I mean, and a lot of that's from that margin expansion, which I think that 15% is very reasonable and it's not some Herculean thing like some of these other tech companies where we're going to do this next stock I have here, I don't even know if there's room for margin

expansion. That's a big difference, especially when you're starting out at such a low margin like Amazon is. Yeah. So I would say I'd be probably willing to pay 20 times forward EV to EBIT or 25 times trailing. So that's about a 30% haircut from today's prices. I know that sounds drastic but keep in mind these it happens it has happened happened two years ago i bet 30 percent dry down has probably happened i don't know 15 times in amazon's history the moment the time there will come times when shareholders once again say retail cannot be profitable for amazon or AWS is slowing, it's maturing, whatever. Yeah.

So it's just, I think it's doable, but it's going to take a little bit of a drawdown for me here. This is another one that seems to have big overreactions on earnings as well. So I picked up that startup position after the last earnings call when it dropped like 15% in a day, and it just recovered in the week following. So lots of overreactions here. I think this is probably one of the widest moat businesses in the world, maybe the

widest moat business in the world. So yeah, certainly high quality. Checks that box. Just got to, I don't know, wait for the right price, which for me is in that 25 times EBIT range. I think that all makes sense. And the one, it's not a pushback to you because I think you agree with this you would hope they focus a bit more on just reinforcing the core competitive advantage similar to how costco does not doing any of these nonsense initiatives that don't ever seem to to work they they've been riding high on the fact that aws was uh an incubator company for the last 20 years and everything else has been a huge net negative that they've done in these things so yeah yeah i mean project kuiper does not you know it's currently not generating revenue and

alexa self-driving or yeah uh self-checkout the automated checkout thing is a lot of ridiculous this stuff. Yeah. All right. Let's talk your second stock for today. What is it? It is a little known company called Alphabet. And people are going to be like, all right, these are stocks that people cover a lot. It's mag seven. But again, I want to talk what Ryan just mentioned. There comes opportunities when people, the sentiment can shift in some of these things. It might not be for five or 10 years for Alphabet from here, but it can happen and you need to have your research maybe not done every quarter, but maybe once a year, kind of stay updated on it and be ready to strike if that opportunity presents itself. So that being said, Alphabet,

parent company of Google, we all know Google, they're the company losing in AI, or I guess maybe not so much anymore. The market maybe said that at the start of this year or would have been, yeah the start of this year or would have been the start of last year i think it was the start of last year started 2023 i'm getting my years mixed up i yeah i would say alphabet selling off like 25 on the launch of chat gbt was maybe one of the easiest buys in the last 10 years for big tech yeah would you say 2020 but yes i agree uh but even in the moment And then it was, it seemed like some pretty outlandish takes that Google was over. Yeah.

Yeah. People are still saying Google is dead. You see this kind of clickbait things. What's the point of Google anymore? I'm like, well, let's get into it. But yeah, I believe this is a high quality business. It can be a permanent holding for you at the right price. I price I was comfortable with came in late 2022, which is why we own the stock then at

around 16 to 18 times earnings. And before we get into things, this is a non-comprehensive list of everything Alphabet owns, because I don't think everyone knows this. First, they own Google Search. They also own anything else with the Google name on it, which could be Google Drive. You have Gmail, Google Maps, Google Chrome, and others. You have Google Computer Hardware, which would be those Pixel phones, watches, laptops. You have the Android operating system. You have Google Cloud, which is an AWS and Azure competitor. You have Google Semiconductors, which is not their real name, but I will call that the kind of the tensor processing unit and computer chip division.

You have Alphabet's AI Research Lab, which is the DeepMind team plus Google team. And you have Waymo, self-driving cars, which is turning into a commercial business, which we won't really cover today. And there's other things, but those are the ones that come to mind that are the most important to me. I think Alphabet had a monstrous competitive advantage before the rise of AI, which I'll call the old world. And I still think they can have a monstrous advantage in the age of AI, which is the new world. Google's old competitive advantage can be summed up as a distribution and switching cost advantage. They had almost all their profits came from Google search. Therefore, the company wanted to own important distribution points on

the internet and give them away for free to drive people back to Google search and make sure no one else could compete. This includes Android, Gmail, Google Chrome, Google Maps, et cetera, all the stuff we all know. Billions of people use these products, which drive a habit of using Google products, which leads people to go back to Google search. I mean, just as an example, it's obvious which is the default search engine on Chrome. That's probably the most important one, maybe Android as well. But those type of things drive people to use Google search to make them their default engine. And then what for what they don't own, they would license Google search to pay for default distribution, which is that deal with Apple. That is quite expensive, but I guess

probably has a positive ROIC given how profitable the business is. Google search generates close to $50 billion in high margin revenue every quarter. So Alphabet can afford to make it everything virtually free and pay billions to other hardware makers such as Apple to make this happen. Another company may be able to replicate Google search, but it is impossible to replicate the user base of Chrome, Maps, and Gmail, which connects everything together. And a startup cannot afford an Apple licensing deal. Microsoft couldn't even make it work. I had two exclamation points there. I should revise that down to one. We're not some, whatever, that's something else. All right. But what about the world of AI? This new world that apparently changed everything.

That's why, as Ryan mentioned, the stock went down a ton on the chat GPT launch. and maybe not even the launch, but the virality of it of when people there was like that thing where it got 100 million users in a couple months, which I should say we haven't got many updates on that. I'm not going to pretend here to be an expert on LLMs, frontier models, any of the data points that the cutting edge tech analysts seem to care about. Luckily, though, consumers don't care what your percent success rate or any of that stuff. They don't care.

They care about efficiency, convenience and a good product that provides some value. And here's what I do know. Alphabet has a built-in infrastructure advantage that it has been preparing for over a decade. And two, I think the AI startups are sketchier than people think. And it's not just open AI. So first, Alphabet and their infrastructure advantage. They're the only company in the world with all four of these assets. One, billions of users and data.

This is the proprietary data to train AI tools on and the billions of existing users who you can easily give the product out to. The only other company with this is Meta. Meta platforms, you know, Instagram, Facebook, WhatsApp. Second, cloud infrastructure. These are the data centers that AI runs on. The only other companies with this, Amazon, Microsoft, and Meta, once again. Three, AI semiconductors. Alphabetta has TPUs, which are AI-focused semiconductors that officially run its computationally

intensive AI stuff. AI stuff is a highly technical term. The latest TPU offered a 4.7% or excuse me, 4.7 times increase in computing performance. I don't know exactly what this means, but that seems good. I think that's good. And it seems like an advantage. Other companies are sprinting to catch up here. For example, you've seen Amazon, Microsoft, Meta all say they're investing in internal

chip stuff. But Alphabet has been investing in this for over a decade. The only other companies with this would be obviously NVIDIA and maybe AMD. I'm not sure. I'm not an expert on that market, but I do know that the companies that have the cloud infrastructure and the users do not have this advantage. And the fourth one would be AI research talent. Bringing everything together is their employee base, the DeepMind, the Google AI team that

they've amassed over the last decade. Plus, it is hard to say what other competitors do or don't have, but Alphabet is definitely in the lead. because I think they have the most. They said the largest amount of talent. It's very hard to say, all right, who's the most important? But they didn't invent the LLM. They have the guy that invented the LLM came back.

You have the founder coming back in Sergey Brin. And can you say OpenAI has the same lead today in that? I don't think so. Almost all their employees are leaving. And then the point that the AI startups are, i think the right term is sketchy or maybe uncertain you have the drama around open ai altman is not an honest person i think i'm can i say that is that fair to say and i think he perhaps without legal disclaimer i don't know this is happening but i think he's scamming people with

this non-profit stuff uh and then the perplexity ceo drives this car ryan thank you what do you think of this thing what do you got here for me i i was on the it's um for for anyone that is listening it's just a cyber truck that's like wrapped with perplexity logo i don't know if it's a cell signal on perplexity but it's all this is to say that like with all the noise and all the news and maybe all the innovation even that's going on in the world of AI, which is a very vast, broad category, and I think a lot of people just say AI and just mean like LLMs. Is it affecting the consumer proposition or the consumer value prop for the average Google customer?

I would say no. And if you look at it across all of the products, Android, Google search, YouTube, Google Cloud It's not really a consumer-facing product. I'd say it has had zero impact. You mean negative impact, right? Yeah. Negative impact on the business. If anything, it's helped enhance some of the answers, enhance some of the search capabilities.

Maybe it's been a nice supplement, but I just don't think it's going to have the material, the adverse impact that a lot of people forecast. yeah just look at this car ryan is is that guy gonna beat google no that's like an erlich bachman car it's hey yeah it should be they it's from that silicon valley show uh before i get to what price i would buy because we're going long my confidence level in alphabet business is growing given the execution they have have put in over the last two years how they've reacted to open AI and basically copied everything and are beating them now, given the distribution they have with Google search and doing these AI overviews and the fact that a lot of these startups are floundering or seem to be floundering and need to raise $10 billion, which Alphabet

does not need to do because they have $100 billion and $100 billion in earnings that come in every year. All right, what price would I buy the stock? Today, they trade around 23 to 24 times earnings with a general tailwind of its services still at its back. So what I mean here is that internet penetration will grow around the world. It is a take rate on GDP and YouTube and Google Cloud can grow at probably a healthy double digit rate for many years.

Yeah, I guess I forgot to put YouTube in that list, which is easy to do with so many things they own, but it can be an important one. I think can probably get to $100 billion in revenue over the next five, 10 years, probably five, but add everything together. I think 7% to 8% revenue growth for the next five years is reasonable. I don't think it can be much higher because unlike an Airbnb or even an Amazon, really, because Amazon is still taking share from offline retail, Google Search has basically 100% market share.

So you can't steal market share. You can just maintain it. So I wouldn't, you know, Google Cloud is definitely going to grow faster than this. I think that'll uplift everything, but I would not be comfortable forecasting more than 7% to 8% revenue growth. What do you think about that? On one hand, I think that's fair. On the other hand, there's a part of me that would not be surprised if they beat it. They have historically, yeah.

A lot of large numbers hasn't applied. And I think a lot of that comes from they have other businesses that do really well. youtube you can look at the advertising revenue and say yeah it hasn't grown that quickly but that's masquerading the subscription business in there as well and android's done a very good job internet penetration continues to grow globally which helps them that's kind of a buoy and And I would suspect earnings could outpace it, since they tend to just very gradually grow their operating margins. Yeah, that's fair. Yeah.

And I will say, the next part, profit margins here are a bit hard to forecast. I think, on the one hand, defending their position in AI can become expensive. Margins may come down. On the other hand, there's a lot of operating leverage in this business. google cloud's just turning to profitability and should help margins expand uh trailing 12 month margins over the last 10 years uh it's been around you know 20 to 30 they actually had an all-time high for the last 12 months at 31 percent uh i don't know i think maybe it'll be the same i'm comfortable saying i don't know but i think hey i wouldn't bet on any expansion

but I also think this business model is rock solid and it's clear why they have such high margins. And I don't think that's going away. So maybe margins stay the same. So that leaves us with 7% to 8% growth in earnings because revenue is going to grow that much at 24 times earnings. I don't think that's too appealing, but we do have the buyback. Alphabet is spending more and more each year on buybacks. I'm going to make this easy. I want a 15% annual return from owning them. So at 8% operating income growth or earnings growth, that means I need a 7% earnings yield that they're going to plow into buybacks. That, if you re-invert it or invert it or flip that equation around, that's a PE of around 14. Now, listeners, don't laugh. This could happen. It was close to

happening in 2022 uh and i will be patiently waiting for this to materialize if it does i think it might be low on the margins yeah could be right could be right but remember this the the capex is going uh crazy is the the next couple of years and that's going to run through that depreciation is going to run through the income statement yeah that's fair but all right what if That's all in anticipation of more cloud demand. That's true. That's true. Hey, if the margin expands, you know, maybe this opportunity never presents itself.

But as listeners, and I don't know if this is the bull market talking because we always get a little nervous about being bearish during the bull market because people complain. I think that's always a sign of the top. But we want a margin of safety here. We are maybe overly patient in waiting for that, but that's something we're willing to do. Yeah, I think that's fair. All right. All right. Last one, Ryan.

What is it? All right, listeners. If you're a regular listener to Chit Chat Stocks, then you know that we use FinChat.io daily. FinChat is the complete stock research platform for fundamental investors. They have a complete financial data on more than 100,000 stocks globally, including company-specific segment and KPI data. Want to see Starbucks' quarterly comp sales growth? FinChat's got it. Like to track ASML's net bookings?

They've got that too. And they recently added sell-side conferences and insider transactions to the platform. Best part is, it's completely free to sign up. However, if you want to get unlimited data, you can use our link, finchat.io slash chitchat, to get 15% off any paid plans. That is finchat.io slash chitchat to get 15% off any paid plan today. The link will be in the show notes. D.R. Horton. This is a business that, if you've been a listener to this show for a while, you've maybe heard me talk about it a couple of times.

But they are the largest home builder in the United States by volume. So for reference, over the last 12 months, they've closed 89,000 homes. I think total home closings for new homes was like one and a half million annually. That's kind of what it averages typically. I might be a little high on that number, but sometimes that's kind of off the top of my head. They have a decent chunk of the market share and they are the largest provider. So they sell primarily entry-level homes. So 70% of their homes are below $400,000 and they sell across 33 different states. So it's pretty broad, but 50% of their volume comes from the South Central and Southeast. So Texas to Florida, basically. And it's important to remember that because maybe you heard me say home builder and you were thinking about clicking out of this episode, pause.

These have become pretty good businesses and you probably thought about kind of being a real estate heavy model, but a lot of that has shifted over the last two decades. It's become more asset light and a lot of that is thanks to what they call the land option model. So for anyone who isn't familiar with this, it just means that instead of going the traditional route of acquiring large plots of land and holding that land on your balance sheet while you develop homes on it, you would instead purchase an quote-unquote option on that land. So this typically means that you pay 5% to 7% of the land value up front, and then you can exercise the right to pay the remainder once the lot is finished and you've found a buyer. It's called asset light because it keeps the inventory off of your balance sheet if you're the home builder, which helps during market downturns. You can forfeit the 5% to 7%. Say something goes wrong, you're not able to find a buyer, times get really tough, no

one's buying homes, whatever. You can forfeit the 5% to 7%, but you don't own the land, which is really nice in difficult periods. However, there is kind of one caveat. out, you have to have a land bank partner that's willing to do this. And a lot of the smaller providers aren't necessarily as able to find land banks. They're not able to get as good of pricing. So because D.R. Horton is so large, they're able to get good deals with land banks. Brett just showed a chart there, but 10 years ago, 12 years ago, I should say,

the majority of land that D.R. Horton owned, the majority of lots was, I shouldn't say owned, The majority of lots under D.R. Horton's control were owned, owned lots. It was 95,000 owned lots versus 58,000 controlled lots through option agreements. Today, it's completely switched. Now they have 480,000 roughly lots controlled through option agreements and just 150,000 owned lots. So it's become very, very asset light relative to what it once was. This has really helped juice the returns on equity. But why do I like D.R. Horton? There are a couple of reasons. So for starters, I mentioned this earlier, but the home building industry, a lot of people just think real estate when they hear home building or they think land.

They think it's kind of boring, slow moving. But it's really become sort of a manufacturing competition. So it's all about who can build and sell the homes the quickest and most cost effectively, which D.R. Horton has really proven that they can do. And they should be able to sustain that because there are some like – you think about Costco, you think about Home Depot, stuff like that, businesses like that. There's big economies of scale, right? You get the cheapest rates from suppliers. You're able to maintain your advantage. It's pretty similar in the home building industry.

So there's three big advantages that I can think of. First one, you're able to buy land cheaper slash better. So you can buy bigger plots and get bigger discounts for buying more plots. And you're probably more likely to have land bank partners that are willing to help you. You've established some credibility with land bank partners. So maybe you don't have to pay as much in interest or don't pay as high of a rate. That kind of helps. The second one is you get better rates from subcontractors.

Keep in mind, home builders is kind of a misnomer. You're more of like a home coordinator because you're really designating out all these roles to subcontractors for the building process. It's not actually that manufacturing intensive for the home builder. Your job is to create the designs, get subcontractors to build them. You're selling the homes in the process. If you think about it from the subcontractor's point of view, let's say you're doing the sinks or the electrical work in a bunch of these homes. you can go from house to house to house for DR Horton. You can go from house to house to house with little to no downtime because it's all, it's kind of done in bulk. So you can bring all your

materials to one place and it's basically just an assembly line. So you're getting cheaper rates from subcontractors as well. And then your materials are cheaper per unit. So one of DR Horton's board members went on a podcast and talked about this. He said, DR Horton buys its appliances from Whirlpool. They are now buying 90,000 dishwashers a year. They used to buy 30 or 40,000. They're getting a much better price on those appliances per unit. So some of those economies of scale, they really apply here. I guess I'll pause there. Any thoughts, Brett? All makes sense. It's a weird business because it's like, oh, why did they exist? But it's almost it's like they pull everything together they're the financier of the house sort of but they've

kind of cheated that a bit where they've tossed out that and to the the land option model but yeah i would say the tailwind for building is maybe something we don't cover here but we did do a longer show on dear horton uh when you did your home building episode earlier this year And there are some puts and takes to that, but it seems generally that at least for the next few years, the country's going to build a lot more homes. Yeah. Yeah. I'll talk about that here in a second.

Just the only other thing I'll add is the competitive advantages are really reflected in the numbers. So in 2014, DR Horton was selling 28,000 homes and they had 11% operating margins. Over the last 12 months, they delivered 90,000 homes and they've generated 17% operating margins. So it's a more profitable business at the scale and a lot of that is from those size advantages that we talked about. The last thing I'll mention, Brett talked about this, but I think the home building industry – and this is kind of a hotly debated topic, but I think it will be pretty resilient over the foreseeable future. They just passed a pretty big stress test, which is mortgage rates appreciated quicker than they ever have. They went from 3% to 8% in like a matter of a year.

And they delivered more homes than they did prior. And I think you can kind of pick – there are so many data points you can pick within the real estate and housing market that can support either a bearish or a bullish view. But from everything that I've looked at and everything I've heard listening to some real estate experts and we had one on our show not that long ago, the supply and demand balance actually seems fairly healthy. There is a quote-unquote shortage of houses in America, which sometimes those shortages disappear when supply starts to flood and you add more homes and maybe that's when rates start to come down or something like that. But it's kind of persisted for a while and I think that's a fairly healthy place to be and it's certainly a healthy place for home builders to be because that guarantees demand. And seeing the interest rate spike and demand still being there, I would say D.R. Horton is probably in a pretty good place. So I would say the tailwind of America needing more homes is going to be persistent over at least the next five to ten years, barring any massive change to the real estate market. Yeah, I agree.

Yeah, there's going to be a lot of puts and takes. But D.R. Horton, as you're about to talk to here, balance sheet can weather any temporary slowdowns. Yeah, I mean the one advantage is that they don't have that much land on the balance sheet. So that helps because theoretically, let's say all the lots they owned or all the lots they controlled were through pure ownership. If that land got marked down in a huge real estate bubble, it probably put them out of business. But for now, they just forfeit 5% to 7% for most of the properties, and they'd be fine. In fact, it seems like they just weathered a potential real estate downturn because you look at it, transactions – home buying transactions got cut in half during the interest rate spike. and they really did not have to forfeit that many deposits or that many options on their land. So they seem to still be in a really good place.

The other thing is they've reduced their leverage overall. So net debt to EBITDA has gone from 3.3 times to almost flat 0.4 times, which is giving them more cash to plow into their buyback program and that is exactly what they're doing. So over the last 12 months, they have put more money into their buyback than they ever have. $1.7 billion into their buyback. And Brett, maybe you can share this chart here, but it's just exploded over the last six years. They were spending about $500 million on buybacks three, four years ago. So it's tripled in that time. And then they have a sort of a

small dividend that they pay out as well, but it's kind of inconsequential. Yeah, Brett's sharing the chart here for anyone that's watching. The dividend, It's a little under 1% dividend yield. They do increase it about 10% every year, and I think I'd probably prefer them to just put it into buybacks at the current prices. But sometimes with businesses that have been around for a while, they have just a shareholder base that loves a dividend, and they don't want to piss them off for whatever reason, which I guess I'm okay with. Yeah, I'm a fan of the balance of buybacks and dividends. Too much buyback, you get a little aggressive. It's almost like there's – yeah, I think the incentives are more comfortable for everyone if you have both a buyback and a dividend.

Yeah. We've talked about this a couple times. I think a dividend prevents people from doing some – prevents management teams from doing stupid things because it forces them to pay out that certain amount. If they ever really want to special dividend money out, they can, but they don't have to get super aggressive with the buyback or they don't have to – they can't pull back on the buyback. They can't pull back on the dividend like they can with a buyback when maybe it's not the right time to do it. So, yeah, I agree. It's nice to have that little balance there. What price would I buy?

To be honest, I'd be comfortable buying it here. But I think at 10 times earnings, this is probably a home run where you can get at least a 15% annual return. It currently trades at 12.5 times earnings, so it would need a little over a 20% drawdown from here. um but the 10 times earnings like i said i think i would feel very comfortable making this a core position and a much larger position if it were trading at that and there's not really too much multiple compression risk the other thing with this business is it tends to trade home builders don't they rarely trade at like 20 30 times earnings like you see with like an airbnb a google or an amazon um even though they might grow earnings per share at the same rate they're just not seen as as durable or maybe the people see them as cyclical which i think dr horton has

become less cyclical over time but i guess that leads me to my biggest risk which is that i'm totally wrong i'm totally wrong about the housing cycle and that there may be this recent drop in interest rates creates a flood of supply and dr horton has a big collapse in earnings but it's kind of suspect i will the thing about buying a home builder if you're worried about the real estate market is it seems to me that there is it is always a it's always a time where you can be hesitant about the housing market like you could make a case at any point in history that oh the housing market could be in tough shape yeah yeah who knows who knows i don't want that that might age badly in two years who knows but it also they're fine even if the downturn

a downturn happens you know i just don't see how i might do that well but they're still gonna the balance sheet's not gonna implode and they're set up to succeed through all market cycles Yeah. My big thing is I just don't see how the housing market could weather mortgage rates going from three to eight, but it couldn't weather mortgage rates going from eight to six. Well, I would think the bare case is the existing supply gets unlocked. yeah but it's it's not all gonna happen like not every baby boomer is gonna sell their house at the same time and it's probably it's been probably progressively unlocked over the last 10 years it's i don't know i just that's what i mean is that like you can be pessimistic that the housing market is at highs constantly.

And in Seattle, it's very easy to do because it's really hard to afford a home here. But where they're selling $400,000 homes, I don't see that being in like a bubble. Right. And the mortgage rates comes down. It's more affordable for millennials aging into that. Yeah, makes sense. All right, let's wrap things up. I think this is a fun one.

You have four stocks, Airbnb. Oh, Ryan, one more thing. Pick one. One of your two. All of these? Which one of mine too? All right. 20% drop because that was the title of this episode.

All else equal, 20% drop. Which one would you be buying? Airbnb. I think there's a longer runway for growth just given the size of the business. I know it's already a large business, but compared to Google slash Alphabet, yeah. All right. What about you? I think a 20% drop for Alphabet from here is probably a home run.

Maybe not a home run, but you're going to get good returns. Of the two that I did, I'd say I'm probably more excited about D.R. Horton on a 20% drop just because Amazon is still fairly expensive, it seems. But Amazon has all the upside in the world because they're very durable, huge moat, and I think margins could be substantially higher in five years. yeah the margin question big for amazon okay let's wrap things up thank you everyone again that's airbnb dr horton alphabet amazon let us know if any of them are incredibly stupid we appreciate that give us some pushback just try to be fair about it and don't be uh hateful i guess we're all just trying to get some pushback on some ideas here and have some fun discussions but yeah you can watch these on youtube listen on spotify or apple podcast i would say

check pop open that phone click on our home page on spotify or apple and give us a nice little review this is the best way to support a free show such as this um more people that listen the higher quality this production can get although how high how much higher quality can it it. Now, it's a lot easier the more people that listen for us to keep doing this on a weekly basis. But let's hit the disclosure. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan, I, or any podcast guest may hold securities discussed in this podcast. I've held them in the past and may buy, sell, or hold them in the future. Thank you everyone for tuning in on this Wednesday episode. What do we got next week,

ryan a fun interview on a fun stock that's in a giant drawdown that used to be a fin twit favorite so stay tuned for that one yeah all right can i say the name so if you want i don't know if we want to tease it or say the ticker give a little give a little hint it's a swedish company right swedish company that yes used to be a fin twit darling yeah there we go and it has something to do with can i say casinos that might give it away for some people but i think people know what we're talking about at this point i think a good good amount of people know what we're talking about but if not tune in for new comedy to study we have a great guest that we'll have on wednesday so yes thank you everyone for tuning in and we'll see you next time

Bye.