Chit Chat Stocks - 4 Top Stocks On Our Watchlist This Earnings Season (GOOG, SPOT, NFLX, AXP)

Episode Date: July 31, 2024

On this episode of Chit Chat Stocks, Brett and Ryan each pick two stocks they are following closely this earnings season. Find out what price they would buy shares: (02:26) Netflix: Challenges, Resilience, and Growth Prospects (21:17) Alphabet: Strong Performance in Google Search, YouTube, and Google Cloud (38:06) American Express: Leading Credit Card Issuer and Payments Network (42:14) Spotify: Global Leader in Audio Streaming (46:46) Ranking the Stocks Tickers discussed: NFLX, GOOG, GOOGL, SPOT, AXP ***************************************************** 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/  ********************************************************************* Options are not suitable for all investors and carry significant risk.  Option investors can rapidly lose the value of their investment in a short period of time and incur permanent loss by expiration date.  Certain complex options strategies carry additional risk.  There are additional costs associated with option strategies that call for multiple purchases and sales of options, such as spreads, straddles, among others, as compared with a single option trade. Prior to buying or selling an option, investors must read and understand the “Characteristics and Risks of Standardized Options”, also known as the options disclosure document (ODD) which can be found at: www.theocc.com/company-information/documents-and-archives/options-disclosure-document Supporting documentation for any claims will be furnished upon request. If you are enrolled in our Options Order Flow Rebate Program, The exact rebate will depend on the specifics of each transaction and will be previewed for you prior to submitting each trade. This rebate will be deducted from your cost to place the trade and will be reflected on your trade confirmation. Order flow rebates are not available for non-options transactions. To learn more, see our Fee Schedule, Order Flow Rebate FAQ, and Order Flow Rebate Program Terms & Conditions. Options can be risky and are not suitable for all investors. See the Characteristics and Risks of Standardized Options to learn more. All investing involves the risk of loss, including loss of principal. Brokerage services for US-listed, registered securities, options and bonds in a self-directed account are offered by Open to the Public Investing, Inc., member FINRA & SIPC. See public.com/#disclosures-main for more information. ********************************************************************* 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 to this episode, we want to talk about our friends at Public. If you trade options, you've got to ask yourself, why wouldn't you choose an options trading platform that puts investors first? At Public.com, there are no commissions or per contract fees, and more importantly, it's the only platform where you can earn a rebate on every single contract traded. That means you can save on your options trading costs and keep more of your capital in play. Whenever you trade options on Public, your savings are automatically applied. So don't change your strategy, change your platform and see the difference in your bottom line. That's no commissions, no per contract fees. And it's the only options trading platform where you can earn a rebate on every contract traded. Public.com. This is paid for by public

investing. Options are not suitable for all investors and carry significant risk. Full disclosures are in the podcast description. Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer 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. All right, everyone. Welcome in. This is another edition of the Chit Chat Stocks Podcast. My name is Brett Schaefer and joined as always by Ryan Henderson. We are doing one of our quarterly,

as we'll call them, earnings updates, watch list updates, kind of going through stocks that are in our watch list or portfolios. You can see from the title today, it is four top stocks on our watch list for this earning season. So this is what we did. We looked at two stocks each, two that are on our watch list, two that we may have owned in the past or have liked in the past. We like these business models, but right now we don't own them. They're on the watch list. We're keeping updated on the company. We want to update the listeners as well. And then we're going to kind of debate with each other on what's a reasonable price that we like to buy, what we think are four high quality businesses that have strong growth prospects over the next however

many years or have a durable moat. We'll get right into it. Ryan, you're first up. Any other intro and then get right into it. We got our first one for you, Netflix. No, I think the good thing about all four of these stocks is that Brett and I both know them well. It's not situations where one of us is pitching it to the other person. So it'll make for easy discussion. And the first one we're talking about is Netflix. Not a very hidden gem by any means, but quite a good business. We've spoken about Netflix a number of times on this show. We've done interviews on Netflix as well. And frankly, this for me was an error of omission. There was a point when the stock got very cheap. It was one we were looking at pretty closely. And I think we understood the business

well, but we just, for one reason or another, didn't decide to buy. There are a couple other notable people that did the same thing, which I'll talk about in a second. But before digging into the recent developments and why the stock has absolutely soared over the last year, year and a half, I think it's important to take a look at what's transpired over the last three years, because it's been quite a whirlwind for shareholders. So in 2020, there was a major pull forward in demand for netflix i think a lot of people understood how this worked people were stuck at homes more subscribers uh that joined netflix in that period there was a 12 month period there where they added more than 40 million subscribers in 2020 they added roughly seven

or sorry 37 million but there was a little trailing 12 month period in there where it got a little higher. That was very much a pull forward in demand, and it was their largest amount of net additions ever. And by quite a wide margin, although they are getting close to it again. However, following COVID, that new subscriber demand started to wither away. So at the start of 2022, these slowing demand concerns started to set in. Additionally, there was also a bit of a slowdown in new content production. It wasn't quite as noticeable at netflix because they did a good job kind of um not protein i'm trying to think of the word here rolling rolling out shows on a little bit of a slower cadence than they were projecting to do so

because if you remember during covid there was this giant pause in content production which doesn't actually affect the content releases for a couple years so they started to have to deal with that a bit. And so a little bit of a slowdown in terms of content releases. And so from Q4 2021 to Q2 2022, Netflix actually saw two quarters in a row of sequential declines in subscribers. So at that point, you're kind of concerned. Is this a business that's stagnating? Have they hit maturity this quickly? Are they going to be able to grow? Is the competition too high in general for streaming TV, there were a lot of questions raised. And this was also the period where Bill Ackman bought a large stake in Netflix and then immediately sold it following the second

quarter earnings. So from November 2021 to May 2022, which is a little over six months, Netflix's stock dropped by more than 75% from its highs, which is kind of astounding to look back on given that this is such a large business? It's happened a number of times in the past when it was less mature, but it's such a developed, understood business. Did it surprise you that it had this large of a drawdown? I guess it's not surprising to a point if people were really, really worried that they extrapolated the COVID gains too much and then you actually had to pull back and that had hit some sort of maturity level, especially in their developed markets that are the ones that generate all the profits. And at that time, they hadn't proven that they could generate consistent

free cash flow. So people are saying, okay, have we hit maturity and this business can't hit free cash flow positive, they had overspent, or maybe not overspent, but did spend a ton on content that people may or may not have been watching. During this time period, they've kind of flatlined that growth from what I've seen. And yeah, when you have a big investor being vocal about that, that can drive a lot of noise in the stock. And when the subscriber number, which is the number, the top metric that investors are looking at, when it goes down for two quarters in a row, yeah, you're going to question the thesis. And what's interesting is it was a perfect moat test or a perfect conviction test for the investor, moat test for the business,

conviction test for the investor. We saw management, as you're probably going to get into here, make some great choices. They've had to innovate a little bit on their business model. And for anyone that saw that chart that we shared there, well, their trending 12-month subscriber growth was quite high over the last 12 months. Yeah. And during this kind of tumultuous time, if you logged onto the conference calls and they do video calls, you would have had no idea what was happening to the stock. Because there was a point, I think they had just missed their subscriber guidance by, I don't know, a couple hundred thousand or something like that. And it opens and it's Reed Hastings back when he was still, I don't know if he's still doing the calls or not,

but I don't believe he is. He was on the call and he's like laughing that they would even ask a question about missing guidance when it was such a small miss. But it just kind of goes to show how focused they are in the long term. When we look at 2022, 2023, they started to make a couple of changes that have helped the business re-accelerate subscribers. So for starters, they instituted a couple, this didn't help grow subscribers, but it helped grow revenue. They instituted a couple of price increases, which has helped kind of buoy that growth at a time when subscribers weren't growing that quickly. But then they also cracked down on password sharing which everyone thought was going to be the death of them it totally was not uh they

limited how many people were allowed on an account per household and it was based on like what wi-fi your device was on so they were able to kind of regulate the amount of people that were able to use certain password and they introduced an ad supported tier both of these helped drive further user growth especially in the international markets apac has been the fastest growing segment for them over the last four years. So that was kind of some of the business tweaks they made. And then they've also shifted a little bit more to live events as well, which we'll talk about. It's hard to parse through how much that's impacted the P&L or subscriber additions, but they've had some success with live events.

So where do we stand today? Netflix just reported really strong second quarter results. They significantly outpaced their subscriber guidance and they raised their full year revenue and profit guidance. Here's a quote from our friend Alex Morris. He says, Netflix's first half fiscal year 24 performance and full year guidance speaks to a well-oiled machine that continues to make steady forward progress in a large and growing global market, both in terms of financial results as well as its competitive standing. So they're producing these stellar results. They're expecting 15% revenue growth for the full year, which will put them at $39 billion in revenue, and they're estimating 26% operating margins, which is well ahead of what they

were expecting at the beginning of the year, they're producing these awesome results at a time when a lot of the other streaming companies, other than YouTube and YouTube TV, are struggling. And you can see, basically, they've really done a good job managing their content costs and their profitability is climbing quickly. I think Alex estimated the incremental margins at around 40%. So it looks like they're going to continue to kind of march upwards in terms of profitability. I think they've done a really good job. However, the valuation, when we look at it today – I'm just going to steal this from Alex Morris.

So I'll just give a shameless plug here. He's a friend of ours. He's been on the show. He writes The Science of Hitting Substack and he covers Netflix really well. He says, if we assume – and keep in mind, he bought Netflix basically at the bottom, if I remember correctly. If we assume 10% annualized revenue growth over the next five years, that gets you to $62 billion in 2029, along with 100 to 150 basis points of annual EBIT margin expansion. That gets you to 32% margins at 2029, so roughly $20 billion, a little over $20 billion in earnings before interest and taxes. He says at Friday's close, Netflix's valuation basically assumes it's 14 times fiscal year

2029 EV to EBIT. So that's quite different. And he says that's quite different than in April 2022 when he argued that it traded at a similar multiple on next year's EBIT. So people's, I don't know if you want to say the time horizons have just expanded or maybe people are more optimistic on the business in general. But the assumptions here are very, I think, aggressive. You're betting that they're going to be able to grow revenue at 10% a year annually, and EBIT margins are going to continue to expand unencumbered by any competition.

And it's 14 times 2029 numbers, even if they do that well. I guess this kind of leads to my conclusion. I love the management team and I think the execution has been exceptional, but it's probably going to remain on my watch list. Yeah, I do think the time in 2022 when the stock, in hindsight, was a fantastic buying opportunity for a high quality business, you look back then and that was definitely a time when you had to have trusted management. And I think it's another lesson that we talk about all the time when you have something

that's a, maybe it was a, probably a battleground stock then maybe that's the wrong term for it. But when you have something like that, where people are debating whether they can actually generate positive free cashflow on a consistent basis, all that good stuff, you have to have a trust in the management team. And I think maybe looking back, the mistake we made was we were nervous about some of the KPIs, right? We didn't know how successful advertising would be. We didn't know how successful password crackdowns would be. We didn't know how successful they would be in response to YouTube. Also, they're a little bit behind on sports and they said they were going to maybe dip their toe into it as we're going to get into here. And these were reversals

of what they said in the past. But again, maybe we should have bought because we like this management team so much and you have to kind of look through the sticky situation and that's where the opportunities are going to be. I think today people are way more optimistic because they've proven the advertising tiers can drive growth they've proven that and also i'm sorry growth and subscribers and then hopefully you know three to five years from now it really drives growth and revenue as well we can also look at the live events stuff that seems to have worked um so i think the business is high quality i wouldn't be surprised if they grow revenue at a durable basis and they've maintained that cost consciousness even with the content stuff now which they were

aggressively spending for a long while. And when you have that, and you've proven to the market that, hey, look, I don't know what their number is, but we're not really growing the amount we spend each year across the globe, even though we have localized studios in places like India, South Korea, and Japan, and we're still growing our top line. Well, that's going to have fantastic incremental margins. So there's a good thesis there today, though. I agree with you. It's a bit expensive especially for a large cap such as this but i would love to buy it well maybe we'll say that for the end what's our discussion question here ryan before we get to the final what price are we looking to what do we be interested in yeah what do we think their new

initiative so we talked a little bit about live events and sports is kind of a part of that but there's also gaming as well so i guess maybe you can give your take first and i'll save mine the The live events such as the roast of Tom Brady that they said was really, really popular from an hour's watch perspective, that seems to work. They've done also, I think, like a golfing competition between some F1 drivers and some golfers, stuff like that. You also have the documentaries with all the sports that are almost a hybrid of working into the sports arena, stuff like that. I think those can work as a content side of things. But if we look at their sports strategy, they're doing the Christmas Day NFL games and then the gaming stuff where they

just have some mobile games out there i don't think that moves the needle right now unlike say an amazon who is investing in actual huge leagues rights and that's going to be a big test for them for netflix those are mainly a sideshow and it seems like they're exploring a lot of live events and doing stuff live even with non-sports things for example i think they do that for their their dating reality shows which are quite popular so that would be my take it can help they're going to innovate on this a lot of things they said they wouldn't do in the past such as advertising sports and live they're doing now but i think they just want to probably compete and make sure they're not losing to the amazons and the youtubes of the world i would think is kind of what they're what

they're doing here and with gaming well they see that it's growing market share among young people so i guess they'd want to test it in there but there's a lot of uncertainty with that one yeah i don't think much of their gaming initiatives i just hope they keep the content production costs low there for the games um or licensing or license yeah um with the live events i think they've been pretty thoughtful in the way they've gone about them so they talked about this on the conference call as well they're not keen to just commit to a whole league and just buy all the games or you know like we've seen with I think basically Amazon kind of just did this with the NBA games and Apple TV did it with

major league soccer. You're not really seeing that with Netflix. And they said, we don't want to be beholden to the leagues when it comes time for renewal. So they're kind of, I know the live events have been really successful and they're treating it more as, okay, we'll do a game here or there, but it's more just going to be as a value add to our content for subscribers it's not going to be some big commitment where they end up taking a huge risk on the economics of it and then ending up like we said beholden to the the sports league so i think every time the industry has shifted or they've changed their minds they've done a good job executing so it really does give me a lot of trust in management it's kind of there's a quote

from a guy i'm not like the biggest fan of but it doesn't really matter he had a good quote he said great management teams always find a way to expand their addressable market and i think you've seen netflix do that um and shift where they've needed to so really good business but yeah just it's remaining on the watch list given the price yeah i agree on that i would say that they have shown time and time again with their culture whatever they've built they've out executed even the YouTube's in the Amazon's of the world. I mean, yeah, Amazon is much smaller from a Prime Video basis,

but still like they're competing with Timeshare for YouTube. That's the only one really on par with them and versus the legacy content studios, which would be a Disney, a Comcast that owns NBC and Universal. You have the Paramounts, the Warner Brothers Discoveries.

They've just run circles around them and they've out executed them quite easily. So Ryan, what price do you think you would buy this at? Eight to nine times 14 or 2029 earnings? How do you look at it right now? Well, I think they could surprise investors with how profitable they can be as they grow. Because they've really kind of put the brakes on in terms of content costs. And right now, they are spending, I don't know what the figure is, but let's say it's $25 billion a year. in content production. They can continue to spend that much money and be spending more than their

competitors and continue to steal market share without ever really needing to grow that figure that much more or that fast. Right. Every $10 billion in revenue they get, maybe they're spending two to three billion more on content costs, something like that. That would lead to fantastic incremental margins. Yeah. I wouldn't be surprised to see those profit margins get in the range of 30 to 35 percent somewhere in there um it would probably have to trade at more of like uh i don't i don't like valuing things based on 2029 estimated ebit just because it's feel so far away but i would say if it's trading at a low teens multiple on like three years out earnings i'd feel comfortable potentially buying that times yeah yeah that makes sense to me as

well i think so what are they at revenue right now 39 you mentioned there i should have probably looked at some of these numbers but for the full for this year they're expecting 39 okay about 39 so they get to 50 sometime soon and let's say they can get that within three years and on that they can do 35 margins what was that maybe i can do some math right now my calculator what's 50 times 0.35 17 and a half billion so maybe like a 200 billion dollar market cap or enterprise value would be reasonable i think that makes sense to me and there's a lot of buybacks now where that would be help with your returns especially given how durable and steady a recurring revenue business like this can be, but we're going a little long, over 15 minutes. So anything else

on that, Ryan, and we're going to move on to the next stock. No, I think that covers it. Let's talk about Alphabet, aka Google, which I think might be maybe a little foreshadowing here, a little more actionable at this time, given just the valuation in general. And I know some of the numbers already, but why don't you go through any of your updates on the search giant? Yep. So this one's going to be mine. I'm going to lead this discussion, Alphabet and Google, On February 7th, 2023, we posted an episode titled Why We Own Alphabet and Google that went through our thesis on the stock. I'll link in the newsletter or you can search on your podcast player to find that if you

want a full hour-long, hour-length discussion that I think is still pretty relevant today. There are four segments that we outlined in this episode and that I'll outline today that matter to me. Google Search and any ancillary Google products, YouTube, Google Cloud, and then Other Bets. And in other bets, I include kind of these AI, artificial intelligence labs. So here's what we had to say about YouTube at the beginning of 2023. I think I'll read part of this quote. It says, perhaps the most exciting part about YouTube, in my opinion, I think this is maybe

you, Ryan, or me, I guess I kind of forget who it is. Let's just say it's us, is the growth in streaming TV. In 2017, YouTube launched a live streaming service called YouTube TV, which today costs about $64 a month. some estimates have the service at a little over 5 million subs but it's difficult to tell since they don't give out the app number regularly this has been a major success and paired with the core youtube ctv app youtube claims more streaming time than any other connected tv service according to nielsen and this will give them a perfect say lead in the new ctv advertising market 10 or excuse me

40% of all TV viewing at the time in the United States was streaming, but only around 10% of TV advertising was on CTV. So about, you know, tens of billions of dollars are going to shift over there. And if we look at the second quarter of 2024, and fast forward to today, YouTube advertising revenue grew 13% a year over year and hit $34 billion over the last 12 months. If you add in the subscription revenue, you probably get to $50 billion in annual revenue. And they shared on the conference call that CTV watching on YouTube has grown by 130% in the last three years. I think given what we outlined in that episode and what has happened with viewing habits on CTV and YouTube's growing lead in the category, I think they have a clear path to double their

sales to $100 billion over the next year, or excuse me, next five years. And at a 20% profit margin, that is $20 billion in annual earnings from YouTube. I see really no reason to change this thesis, unlike Google Cloud, which surprised to the upside. I think we were kind of right down the middle on YouTube, and they've executed as you'd expect, although growth slowed a little bit from last quarter. But Ryan, what do you think? 20% profit margin, $20 billion in earnings. Is that too optimistic, too pessimistic five years from now for YouTube? No, it seems reasonable. And just in terms of connected TV, it's just another medium where they can dominate as the premium uh app and collect more and more ad revenue with youtube

specifically the ad revenue is a bit understated in my opinion because one there's the ad free tier with youtube premium but as uh as shorts continues to grow the there's the monetization gap so advertisers aren't paying quite as much for a ad placement on in between youtube shorts videos but as they would for a typical youtube video as that monetization gap continues to close which it is uh it should start ad revenue in general should start to trend more in line with engagement which has been from what i understand a little bit higher so um i think you can expect durable ad revenue growth at YouTube for quite a while. Yeah. And to simplify it, usage on phones for YouTube is growing. Usage on TV is growing.

If that is maintained or extended, there's going to be advertisers that are going to come by. And there's always, or I shouldn't say always, given how the video advertising market works and how TV advertising has worked, it's kind of been a slow transition. And there's always been a three year or so gap transitioning from that legacy model to this new one. So even if they just maintain their market share, which I'd be pretty confident it will grow, given the historical trends of the last two to three years where they've grown their market share, not only of all TV, but streaming TV and more advertising dollars should show up because that's where the eyeballs are. Let's move on to the second category as we're going to do. I don't know,

cover your ears if you don't like this term. We're going to do a bit of a sum of the parts because this is such a widespread conglomerate. But the second part I want to look at is Google Cloud, which here's what we had to say in early 2023. While it looks like late 2022 and early 2023 will be a slower period for cloud growth, given what all the major CEOs have said, we still believe there's an easy path for the industry to grow by about 10% to 15% each year on average this decade as almost all of it spent around the globe adopts the cloud due to its flexibility and cost savings as the big three achieve further economies of scale furthermore if google cloud retains a 10 market share we think it is likely this segment eventually hits

100 billion dollars annual revenue on 20 operating margins that is 20 billion dollars annual profits well this looks conservative so far well i guess we didn't predict the ai boom which potentially it could be a bubble. I guess we're still in the uncertain mode there or uncertain period. But Google Cloud has gained market share, is growing revenue at 29% year over year right now, and just hit 10% operating margins for the first time after having negative 75% in 2018. So that division looks astounding. I don't know if I would revise my estimate to 10% to 15% revenue growth to make it higher because I think as these businesses scale, there's only so much spend and the expectations make it a little bit easier now given what growth has been the

last few quarters. But over the long term, I think 10% to 15% still makes sense and is probably a little bit optimistic, honestly. But Ryan, what do you think about Google Cloud? What do you see about the value there? Any differing opinions from me on the value of the segment for Alphabet? No, it seems really well run and really well... How do I describe this? It seems like they can almost just pick their profit margins because they have just grown their operating margin

by two percentage points, it seems, every quarter for the last 20 quarters and basically gone from negative 40% operating margins to 10% over a matter of four or five years. So very impressive growth. From a customer perspective, I don't necessarily understand why GCP over AWS, why GCP over Azure, anything like that. I don't understand the market share dynamics in which direction they might head, but it's $37 billion in revenue. And it commands a decent chunk of the market. I imagine there's use cases for GCP

that fit better than AWS because they've been able to drive this much growth thus far. And as far as cloud spending goes, it's hard to imagine it slowing down or not slowing down, declining over the next 10 years. So yeah, I think this is a really

well-run business, becomes increasingly profitable. There's other things that are encapsulated in Google Cloud too, if I'm not mistaken. I think Google Workspace is bundled in there also, which they said actually drove a lot of growth for this business or was growing fast in its own right. Yeah, I think it's hard to argue with the numbers here. It's pretty impressive results at Google Cloud. I agree. I'd say they're firing on all cylinders now the most interesting segment and the largest one over the last year or two has been google search back then which was a little about say a year and a half ago we had some interesting takes that may not look too relevant now there was a lot of talk about apple relationships

there was a lot of talk about uh you know apple's distribution payment apple launching its own search engine which people had speculated a year ago and then we had a tiny follow-up on open ai and Microsoft, but you didn't give it too much thought. Now, today, as we sit here in the summer of 2024, well, that open AI narrative has gone gangbusters. And there's been a whole, I call it maybe a full circle story of Alphabet's losing in AI. They put out some products. They're a little bit behind open AI. But now today, they seem to have caught up and maintained market share from the usage perspective, which given the global economy is growing and usage on the internet is growing. They are seeing no signs of slowing down at Google search revenue. It has grown at around

10% year over year since the end of 2021. And management says now that these new AI overviews that they're doing on Google search are driving engagement and ad revenue. Market share looks stable versus Bing. OpenAI has actually come out now and started to copy them with their own search product, which I think shows that there wasn't going to be a revolutionary change over to Google search. And over the last 12 months, they've done $187 billion in revenue. If I guesstimate a 40% profit margin on that segment, which excludes Google network, excludes these other bets costs, right? And I think they've had much, much higher incremental margins on this. So maybe I'm even being conservative on Google search and Google services, but they're a little bit opaque in some

of the reporting. So if we have a 40% margin, that's $75 billion in earnings strictly from Google search and the Google ancillary products like Google Maps. If we grow that to $250 billion within five years, that's $100 billion in earnings. And I would probably bet that margins would expand, but I'm going to be conservative on that because I know these AI services that might drive incremental growth are so capital intensive right now. Maybe we roll right into discussion question here ryan are you more less or the same amount of worried about google search's durability this decade compared to early 2023 when we recorded that podcast well it's kind of hard to remember how i was i was feeling then um i felt like we kind of shrugged

off open ai uh as a threat and if i remember correctly it seemed like we thought google the search was going to be pretty durable. So I would say I pretty much feel the same way. I don't think that many queries lend themselves to a conversational AI as much as a search bar. And I think OpenAI came to that realization. That's why they launched this search product. And the other thing that I constantly think about is, what's his name? Sam Altman, when they launched this said i think there's tons of room for improvement on search how like i when i used google there are very few cases where i think well that was a horrible experience like especially the the overviews now that they're adding so many different functions

where depending on what type of search you do they're gonna make it i don't know they got a lot of options they got a lot of data you can combine youtube google maps all this good stuff that they have. We're even seeing that a lot of companies trained on YouTube's data when they weren't technically allowed to, and there could be some lawsuits there. I think that's an example where Apple does have an advantage because they own all these assets. I think I'm in a similar camp on the Google search where back then and even today, there's all these, say, tech investors, growth investors, venture capitalists who are calling for the death of Google, the death of google search i think that narrative was overhyped i still think it's overhyped today but with the

stock up so much the market has realized that i should say full disclosure we owned it then we did have for any new listener we did have a uh investment fund that we ran and that's where we ran it that's where we owned the stock through we did close the fund and that's what we sold the stock in our personal accounts and you can confirm this too ryan we don't own it today so that's why we wrote that podcast like we did. But let me go through the valuation. We add YouTube, Google Cloud, and Google Search together. I think we could get three business units doing $140 billion in combined earnings five years from now. This doesn't include any value from Waymo, Google Hardware, the Google Network, and other businesses that may or may not drive significant value over

the next three to five years, or they could be a huge cash strike. So I'm going to give them maybe a neutral there. Alphabet today has a $2.07 trillion market cap. Net cash is about $87 billion. So Enterprise Valley comes down to about $2 trillion. That is a 14x multiple on a five-year forward earnings. I don't think that is crazy. Like we discussed with Netflix, I wouldn't really fault anyone for buying it here. But I think the stock is probably higher in five years is what I'm saying, but I don't think I would buy it. I like maybe more 10 times on that five-year forward earnings. If I want to be greedy, there are still competitive threats out there. There are a lot of people trying to dethrone search. There's a lot of competition, even if Google

search technically has 90% market share, I would say that's not necessarily the way to look at it because a lot of younger people are searching on places like Instagram and TikTok now that don't get included into that market share. And I want more of a margin of safety because if you're going to buy something on 15, 20 times five-year forward earnings, I just don't think you can do that with a mature business like this. And look, yeah, I think that makes sense to me. So that'd be about $1.5 trillion market cap, EV about 1.4. They do consistent buyback, so it started working a lot better there. But I'll finish up. Ryan, what are your thoughts and the valuation at Alphabet slash Google.

I kind of think the same. It's obviously not attractive as it was late 2022, but you could certainly make a case for owning it here. And Google search, it's still a toll road for businesses on the internet. You've got to pay your dues and pay for those keyword ads Because if you don't, your competitors will. And that hasn't changed. In fact, more and more companies are doing it today. So I think they'll continue to – it's going to always be valuable digital real estate, those first few links after a search. And they can probably generate more and more revenue from that business. I don't know if I'm clamoring to own it here purely because I think there's better opportunities

around. But yeah, like you said, I wouldn't fault anyone for buying it. I agree. All right. Let's move on to the next one. Ryan, it's your turn again. American Express, one that I called one of the fattest pitches I've seen back in October 2023 in hindsight. you know hindsight's 2020 i should say we don't neither of us own it now but as you're right here on the top of your watch list so why don't you take the listeners on an up three through american express's journey and why it's i think pretty close to all-time heights right now all right new sponsor alert 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, fun letters, podcasts, and more. They collect and summarize the best stock pitches and bring them to you in a single place. Think of it like a modern value investors club. I genuinely use Yellowbrick every single week here to try and discover new small cap ideas for the weekly power hour episodes that we do. And the best part is you get tons of features for free. Try it for yourself. Simply go to joinyellowbrick.com and search a company or ticker that you're interested in, you are bound to find a great report on just about any company. That is joinyellowbrick.com. Yeah, they've been at the top of my watch list for a while, so I am excited to revisit them a bit. Before we talk about what's happening to them recently, I think

it'd be good to just kind of rehash what the business actually does because it's a little bit confusing for anyone who doesn't understand it. But American Express is one of the largest credit card issuers and payments networks in the world. They earn revenue primarily from three sources. So the first one is discount revenue. This is just their merchant transaction fees. On each transaction where a customer uses an American Express card to pay, the merchant is charged a small fee that gets paid out to Amex, similar to Visa and MasterCard, but a little higher. It's estimated that Amex's fees are on average 50% higher than Visa and MasterCard. However, in the US today, 99% of merchants accept American Express, likely because the attractiveness of American Express's cardholder base and the unlikelihood of them having a faulty payment or it not getting approved or whatever.

So chances are, these are good customers that they want to please. Card fees. This one is pretty unique to American Express in that other card issuers, a lot of card issuers have a credit card that you can pay for that has like extra benefits. But a lot of them just want you, what's that? I was going to say, or a low fee, maybe $100 compared to what you're going to talk about here, Amex, closer to $1,000 a year. Yeah. I mean, most cardholders just want you using their card, spending on it. Amex actually charges customers each year in order to use one of their cards, and the rates are pretty high.

They vary depending on the market, but here in the US, it costs $695 a year for a platinum card and $250 a year for the gold card. the average fee per card is at $101 per quarter. That is tracked using FinChat. We've got a chart here. Brett might be able to share it here in a second. And it just continues to grow. So people spend roughly on average $400 a year to be a cardholder with American Express. And then the last one is just interest income. American Express charges customers an interest rate on carried balances in their accounts, similar to a lot of credit card issuers. And they also originate simple loans to their cardholders. That includes individuals in corporations. So that's an overview of American Express, kind of a specialty finance company,

credit card issuer that is a closed loop network and really covers a lot of the different segments of the transaction process. What's happening today? So throughout 2022 and 2023, American Express's stock pretty much just treaded water. There were a couple of things that I think were affecting the business. There might've been some other ones as well, but these are the ones that I remember. So for starters, competing card issuers had some pretty aggressive offerings like JP Morgan's Chase Sapphire Rewards card. So they were going after a lot of the same target customers. And I think investors were uncertain whether or not American Express's brand was going to resonate with younger audiences. Additionally, there was the rapid

rise in interest rates and that little mini banking panic that happened in early 2023. And I think that just steered away a lot of investors from any companies that had credit risk. I remember American Express sold off on Silicon Valley's bank, the Silicon Valley banking collapse and they could not be more different businesses. So I think investors were just a little wary of anything that took on credit risk. So a bunch of different things happened, but it seemed like the valuation had compressed for a couple of reasons. And that makes sense because we saw with Discover, Ally Financial, and plenty of other stocks that people had similar concerns over, the stocks had really underperformed over trading at.

what I guess people can look at today is potentially very cheap valuations. Exactly. So since that time, American Express has been producing really strong results. And since the start of 2020, total cards in force, which is just their cardholder base, has grown by more than 5% annually. And the average fee per card has grown by roughly 12% annually. Pricing power. Yeah, lots of pricing power there. I think the most encouraging part for me looking at Amex is that the growth is being driven primarily by those younger customers. So here's a quote from their Q4 2023 conference call. I believe this was the CEO. It says, over 70% of new proprietary card accounts added in the last two years came from millennials and Gen Z. And in this quarter, they said millennial and Gen Z customers grew their spending by 13%

and continue to drive the highest billed business within the U.S. consumer segment. These younger card members transact over 25% more on average than older customers. When we look at the specific numbers for the latest earnings, revenue grew 8%. Earnings per share grew 21%. If you exclude, they sold a business that made it look a little more elevated than it was. And customers that are 30 days past due is remaining steady at 1.2%. And that's lower than the pre-COVID numbers. So strong results across the credit portfolio and on kind of the top of the funnel. They did say on the conference call that they're seeing a bit of a slowdown in the overall economy, which can affect the merchant fees. But they continue to see strong returns on

their marketing spend and that top of the funnel growth where a lot more cardholders are adopting and resonating with the American Express brand. So they said they're going to ramp up their marketing spend, I believe, by 15% year over year. They're adding an additional $800 million in marketing expenses this year to I think it's like $6.8 billion for the full year is what they expect. And they tend to be pretty conservative with how they manage expenses. So when they see that level of... I think when you see American Express choosing to grow their marketing spend aggressively, it's because they see the kind of return coming in. I think when we just zoom out here, this is a consistent earning stream. It's a management team that returns a lot of capital

the shareholders. Over the last 12 months, 55% of the net income has gone to repurchases. 19% of it has gone to dividends. The brand itself has a lot of momentum right now. As far as valuation goes, American Express trades at 18 times its trailing 12-month earnings, probably around 16 times forward earnings. Not too commanding of a multiple. If you think this business can grow at 10% on the top and bottom line for, I don't know, call it the next decade, which I really do. It seems attractive to me here. And the other thing is like, okay, they're seeing a lot of momentum with young generations right now. You could say, well, maybe that switches. Maybe some of these other credit card issuers start offering these aggressive deals and they're able to attract

him. But first of all, the cardholders themselves tend to be very sticky. Secondly, the spending is going to grow as these younger generations raise their income as well. So it seems like they're going to have kind of a long-term tailwind driving the increase in transaction volume. So I think they're in a really good position to just continue growing the overall revenue base and earnings should probably outpace it a little bit would be my guess. So I actually like it here. I would say this is at the top of my watch list

and probably something I'd be willing to buy if I got new money into my portfolio. Yeah, I hate to say I agree again. We hopefully disagree on something across this episode, but I think it is the most attractive of the four we're talking about here at current prices. I don't know if it's a better business than some of these other ones, but I do think it's a darn good business. It's not too expensive, but definitely given the forward multiples, maybe 10 to 13 times earnings on a one,

two or three year basis a few years ago, or not a few years ago, last year. And today it's not as attractive, but still plenty attractive versus a lot of other opportunities out there. And probably I'd say more attractive than Alphabet, Netflix, and for the fourth stock, Spotify that we're going to be discussing today. I think a few things for any listeners that are more interested in this, they do some investor days that are really good at highlighting some of the KPIs that will matter, which are card acquisitions. As Ryan mentioned, the lifetime value of a card, say the average 30-year-old person that they acquire in the United States, that lifetime value over just the next 10 years is quite high on average, I would say.

And second is, you know, when the moat is expanding, if discount revenue, which is spend is growing, and then they give out some more granular stuff at these investor days where they're talking about, you know, not just how many cards they have, but the growth of merchant acceptance around the globe. And I think in the US, there's not really that much runway to reinvest on the merchant side. They just have to maintain, you know, being at almost virtually every merchant in the US.

But there is a ton of runway to grow and reinvest in merchant acquisition in places like Japan, South Korea, and Europe, and Australia, and stuff like that over the next couple of decades, honestly. Well, maybe not that long, but for the foreseeable future, there's a long runway to grow there. And I don't think you need the international growth to have this stock work, but it would be nice. And that's part of the thesis that they've talked about long term of getting more merchants around the globe to accept American Express. Finchat.io is the complete stock research platform for fundamental investors. They have all the standard financial data on more than 100,000 stocks globally. But beyond that, they have company specific segment and KPI data on 1,800 stocks. Want to see NVIDIA's data set and revenue? Finchat's got it.

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go to FinChat.io slash chitchat. That is FinChat.io slash chitchat to get 15% off any paid plan today. The link is in the show notes. earlier in the show you heard us talk about the investing platform public.com that's where you can trade options with no commissions or per contract fees and you get a rebate of up to 18 cents per contract traded nerd wallet recently gave public five out of five stars for options trading if you want to see why go to public.com and start getting a rebate of up to 18 cents per

contract traded paid for by public investing options not suitable for all investors and carry significant risk. Full disclosures in podcast description, U.S. members only. Exactly. All right, let's talk Spotify here, the leader in audio streaming globally, one we used to own. So updated thoughts. Yeah, let me get some historical context on how we followed this one. I think it was maybe the first stock I started to follow was back in 2017. I really started getting interested in investing and then I saw that they were going public right at this time. So I thought, hey, this is a company that I wanted to... It was a product that even as a college student, I saw myself thinking it was a bargain. I thought everyone around me was buying

it, even though you're kind of broke in college. And it seemed like a no-brainer purchase. I didn't really do any other diligence on it. I probably would have seen that it came out at a decently premium valuation and was unprofitable. So today, I maybe would have just put it on the watch list. But if we give some more context to what happened to the company during the pandemic bubble, they did well. And there was a big narrative push on them for podcasts and stuff like that. And, you know, they were a COVID winner, quote unquote. During the bubble in 2021, they hit a high of around $350 a share. It subsequently lost 80% of its value.

And if I look at the drawdown chart here from FinChat, it still has not recovered. It's recovered most of it. Now we're only in, I think, at about a 10% drawdown, but the stock is still, I mean, if you owned it in 2021, it has not been a fun time. Even though the stock has been extremely volatile, the KPIs we look at have consistently grown. And what's surprising given that the stock is so shaky is that these are remarkably consistent. I mean, you have 626 million monthly active users as of Q2 2024, that's up from 271 million in December of 2019. 246 million premium subscribers as of Q2 2024, that is up from 124 million in

December 2019. Trailing 12-month gross profit has grown at a 22% rate since September of 2020, and has never gone down in any quarter since then. I will repeat that, they have never had a decrease in trailing 12 month gross profit since September of 2020. And I'm assuming long before that as well. If you asked us in 2021, what the bull case on Spotify was, I think we would have said a few things and maybe I'll go through each and then Ryan can give his takes on it as well. First, he would say globally, there is still a ton of room to grow streaming paid subscribers. I think this turned out to be correct. Looking back on it in 2024, premium subscriber growth has not slowed down materially. And Spotify continues to take market share even

versus Apple Music and Amazon. From here, which what do we get for premium subscribers? 246 million. I would argue there's room for Spotify to about double its paid subscriber base over the next decade, depending on its business model, because there is really room, especially in international markets, which I would call maybe non-North America, non-Europe, since they were first in europe uh to grow over the next decade but ryan what are your thoughts on the premium business and any thoughts on the company in general as we sit here in 2024 now it just reminds me how valuable it is to think long term because you're talking about buying looking at its ipo and i think it came out at like 150 a share or something like that and a couple months after

it dropped down to $105,000 or something like that. And I remember following it with you and thinking, yeah, this is a really good business. It does look like a premium valuation, but it's one of those where if you just held it for five years and it's something that continued to provide value to customers, you would have gotten a decent return. You wouldn't have seen all the rollercoaster that happened in between, but you would have gotten a decent return to today. And I think it goes to show that old saying of if a business grows, how does Munger say it? If a business generates return on equity of, what is it, 15% over a long term, they're probably going to get near 15%, something along those lines. It's hard for them to do that much better or worse over the long, long run.

I think you just kind of see that with businesses like this. Exactly. Exactly. And when you look back in 2017, the big narrative was the competition from places like Apple Music and Amazon. They've shown time and time again that they can out-execute those type of players, especially when Apple holds the distribution advantage. Now there's competition from YouTube Music, which does seem strong, but they're growing in spite of that as well. Now, the second thing we would have said is that there is a lot of untapped pricing power in developed markets. And the developed markets, I'd say, are generally places like North America

and Western Europe. Given the fact that Spotify never raised prices and was a bargain versus other media subscriptions, we believe Spotify had a ton of pricing power. This has proven to be correct, probably even more than I thought. I would not have been this optimistic on that, where they would raise prices on a lot of their subscriptions and see no changes in churn. Spotify's churn has not gone up at all, even though they've raised prices in places like the United States, which I think is great and shows and proved, and I think that's why the stock has gone up the last year or two, that even though people thought this was a commodity, a lot of the investors thought it was a commodity, we didn't see people change when they were a little more expensive than,

for example, Apple Music. We even saw, and I'll have a quote in the newsletter for the full quote here that Spotify is now going to go for not just a premium, but what, I don't know the name of it, a super premium tier. The next tier, they're making a more expensive tier that's going to have more features for listeners. And that's going to be priced, say, $5 above the typical one, so $17 or $18 price point. And I don't know how successful this is going to be. It seems like it's going to get launched within a year once they get all the stakeholders in place and the contracts with the labels and stuff like that. But let's say in developed markets, they get 10% of its subscribers to pay for this. That could be about 15 million or so new subscribers paying

another, or excuse me, 15 million or so existing subscribers paying another $5 per month, which is about $900 million more in annual recurring revenue. Not bad, and really was a huge part of the thesis a couple of years ago that people were underappreciating the amount of pricing power a company like Spotify could have. And I'd say, don't forget audiobooks either. They're bundling that into the service, which will give them even more flexibility to raise their ARPU, average revenue per user, across all sorts of markets. Ryan, any thoughts on that one? We've seen it with Netflix.

When you have a business that is sticky with consumers, it provides more value than what you're paying, which I would argue, given how much time is spent on Spotify on a daily basis, $10 a month, or maybe it's been upgraded to $12 a month here in the US for an individual plan. When you're providing that much value, there's a lot of things you can do. It doesn't have to be direct price increases, but ways to mix the price or the plans where it grows over time and you can just gradually increase that ARPU and probably not see that much impact to churn. I think they said it a couple calls ago, but they were like, we've increased prices on some of our plans. Of all our plans, they had increased prices like 42 times across the globe.

And part of that's they discount early on in certain markets. But for them to have done that many different pricing changes and still have, what was it, 2% maybe churn? I think that was maybe monthly. it's still look it's a very attractive business and and uh likelihood that people are going to switch continues to go down yep it's whatever the churn is it's been good it stayed good even though they've raised prices and you mentioned the breaking out of separate tiers if you have adding things like audiobooks to these bundles you can have a cheaper music only tier and then a more expensive expensive bundled audiobooks tier gives people the flexibility and it should

be able to help revenue keep climbing higher. Now, the third thing we would have said is that advertising revenue will boom due to vertical integration and monetization of podcasts. Well, not as good, I would say. We had a thesis that due to these acquisitions they made across the podcast supply chain, whether it be the distribution platforms like the one that we use, that got renamed to Spotify for Podcasters, which is called Anchor. You had some shows, you get some studios, all that stuff. They were poised to dominate advertising in the market and see booming advertising revenue. I'd say this has turned out to be about 25% correct, so mostly wrong. I think we were directionally correct. They've grown advertising revenue at a 30% rate

since 2016, which I was actually surprised to see. That was higher than I thought it would be because it slowed down in recent quarters, but they had to spend a lot to get this growth. it slowed down in recent quarters and it required a ton of content acquisitions if you guys remember the Joe Rogan experience which is still with them places like Call Her Daddy which is another popular show that did cost a lot each year to go exclusive on the platform and podcasting has not been profitable for them so far although it has been successful in them gaining market share for listeners versus a place like Apple Podcasts I think over the long run they can build a fine business model here, but I would definitely be more conservative about my projections on what

the size of this business can be and generate to the top line where this music and audio subscription that they're doing is driving for the next few years, at least the majority of the value here. Ryan, what are your thoughts? Yeah, I think this was a swing and a miss on our part in terms of projecting the size of their podcast business, or I overestimated it at least. the yeah you if you're spotify you can grow ad revenue as fast as you want by just acquiring existing podcasts that have advertising revenue that doesn't mean it's a good choice to deploy your capital especially good roi yeah yeah especially if you're paying extreme premiums or whatever i think we don't have to get into the technicalities of it but there are some

complications with podcasting that make it difficult to build a vertically integrated advertising network the tracking is hard so it's it it's a little bit for advertisers sometimes you're not going to get the same cpm you might elsewhere um and we i kind of thought well maybe spotify will be able to change that that that really hasn't been the case their cpms they offer for example to us are quite low compared to what we can get organically even though it takes us a lot more work to get some of the and i love our advertisers but we have to work with them and instead of spotify being the middleman they can give us a much lower rate and they take a cut and their fill rates which means like the percentage of ad slots that we put in for them

or used to put in we don't really use it anymore that actually get filled are quite low and to me That's an indicator that, well, there's still major problems here that we thought would be solved from 20. If we said in 2021 that Spotify would still have these problems in 2024, I would say they would have fixed them, but they haven't yet. Podcasting, it's just a tough market to try to be the leader in. And it's fragmented in terms of where listenership comes from. it's not like youtube where they were able to consolidate a lot of the video sharing because they were the leader and had most of the market for the last decade it allows them to kind of build everything in house and make it very easy for advertisers

i would not expect this to i would not expect podcast revenue directly to ever be a big chunk of spotify's revenue oh i don't think it'll ever be more than 30 or 40 percent oh well 30 or 40 percent yeah that's that's high you mean 34 of their advertising okay not their total revenue their advertising revenue i'm saying just in general direct revenue from podcasts i don't think it'll ever be more than 30 of spotify's business well yeah i i agree with that i was thinking you're going to say a much lower number there because it's definitely way way way lower 10 less less advertising revenue as a whole is quite low i guess we don't know the percentage of advertising revenue that comes from podcasts but it's definitely less than 10 okay i assumed

that a big chunk of the ad revenue was from podcasts they don't break it out explicitly but perhaps perhaps you're right yeah but i mean music they got a lot of free listeners too so yeah especially internationally okay yeah either way i don't see podcasts being a huge driver of the business for them i yeah i guess that's not really a hot take it would have been maybe a couple years ago while this momentum was supposedly building and that narrative was there I guess you disagree with your 2021 self. I think I disagree, but maybe a little bit less. I still think there's a chance, but definitely less optimistic as I was a few years ago.

I don't know if I would be surprised if in 10 years it was a sizable value driver for this business, but I think I wouldn't be surprised either way, as there's still, I think, a lot of uncertainty here on what the business model is, especially because they revised a lot of their business plans with acquiring all this content. Last one, unit economics. The fourth thing we would have said in 2021 is that the unit economics of the business are fine, which was the big debate back then. We believe that Spotify could achieve profitability at current gross margins if it pulled back, say, on hiring and other costs and other projects that they were doing across research and development, sales and marketing and all that good stuff. Well,

this happened and profit margins are getting guided to about 10% this quarter. And I think they should be able to comfortably stay in the 10 to 15% range, really depending on how much operating leverage they get with label negotiations and how successful or unsuccessful they are with this advertising business, which has switched. I guess we should be fair to that, has gotten a little bit more profitable on a gross profit basis, although it's still really not much of a contributor, but the gross margins on the premium business are still around 30%. And I think they can maintain that or make them higher. And even if they stay the same, you still get 10 to 15% operating margins. And they proved that. And I think anyone that was concerned about the

unit economics really shouldn't be anymore. No. Although, yeah, it's interesting because people used to say there's a cap to the gross margins on this business, which limits their profitability. And I used to think that was just the weakest bear argument. And there's all these little things they're doing under the hood. And now I kind of look at it and say, yeah, you know what? There is probably some cap, but I think they can be more efficient on the operating expenses than investors expected. And we're seeing that. Yeah. So maybe they don't need the crazy gross margin expansion that some of us were projecting, myself included. I was expecting more margin expansion than ultimately came. Maybe they don't need it to get to 15% operating margins.

Yeah. And you were saying expansion on the gross margin side to be clear, And then that could lead to what we saw, the bottom line margin expansion that has occurred. But now it's really been more of efficiency on their spending and pulling back and hiring and doing a lot of layoffs that did end up being smart. They definitely overhired during the pandemic. So as we close things out here, we're around the hour mark. The discussion question I have are what are my expectations with Spotify and when would I buy shares? I think this is an interesting one because their margins are changing. There's a lot of ARPU stuff with price increases.

There's a lot of stuff with the advertising. There's so many moving parts. But I don't, besides the advertising business, I don't think the thesis has changed that much. I expect more premium subscriber growth, which is going to slow down on a percentage basis, but can still grow nominally. I expect more ARPU growth in developed markets.

I think they have plenty of room to grow there. And I expect more advertising growth, but definitely more muted. And it's not really going to contribute that much. I expect margins to stay around 10% on a bottom line basis, unless they decide to reinvest again. They've shown they can do it, and I think they can. And I think they can generate really positive, just solid gap profit margins in the next few years. Now, over the last 12 months, they've generated around $15.5 billion in US dollars. I should say as a note for any listener,

they report in euros, so make sure to do the foreign currency stuff. And I think they can comfortably double revenue to $30 billion within five years. Given their historical growth rates, given the room to reinvest, given their execution, I would say that's a reasonable assumption. On a 10% profit margin, that's $3 billion in earnings. Again, that feels reasonable to me. So with all that being said, what multiple of five-year forward earnings would I buy Spotify at? I think 15 makes sense, but now that I say it out loud, I'd probably want a little bit lower. 15 times three, which would be, why am I saying that? 15 times, why am I doing that? Oh, three times, $3 billion in earnings. That's a $45 billion enterprise value,

if we're assuming $3 billion in earnings. So around $200 to $250 a share in that range. I think that's reasonable. I think the stock goes down there and I have more cash that would move up to the top of my watch list and I would definitely be, I would buy shares if someone said, do you want to buy this stuff now? Yes. Don't know if it would be at the top, top of my watch list, but I think I would definitely buy some. I think it has de-risked a ton. It has proved its pricing power. It's proved it can generate bottom line profits and it's still got a long runway to grow. I like the founders there. I like that he has led this business for the long term, seems to be focused on the mission, seems to have gotten religion on profitability, and has plenty of wealth where he's not really focused on hitting short-term compensation targets. He's in it to win it over the long term. I like being with founders like that. Same at Netflix, same with Google and Alphabet back in the day. I guess not at American Express. I would hope that would have been funny if it was all four of them, but I think that's it.

Ryan, what are your thoughts? What price would you buy Spotify at? I don't really know if I'm that inclined to get back involved with Spotify. I do like the business, and I like the app as a customer, and I think it provides a lot of value, but I have a hard time forecasting profitability. My biggest reason why is when interest rates got really low, They spent like crazy, and they let it go to their – they overinvested big time.

Spending it out of hand, yeah. I don't know. Maybe Daniel Ek found religion, and he's going to just maintain expenses and not ever over-employ or make all these huge acquisitions or investments into podcasts. But I don't necessarily trust that yet. I'd like to see them go through another time of euphoria and maintain some discipline. Because at this price, I'm nowhere near wanting to buy. And I'd say it would probably have to be back below $200 a share. I think it would have to be probably 15 times next year's earnings.

which is a ways away yeah yeah that's fair i could see that working out i think i disagree with you on that but on on just the concerns about the profitability but i can see it playing out i think this is one that does quite well if you're getting around 200 a share i really do but hey we're not going to agree on everything what any other concerns on spotify before we wrap things up or any final thoughts no what's number one on this list for you today right now Of the four stocks we discussed, what would be the most likely one you'd add shares to? At these prices, I'll rank them because I think they're all high-quality businesses, but it's mainly on valuation.

One, American Express. Two, Alphabet. Google. Three, Netflix, although pretty close to Spotify. I think they're both at a premium price. Then four, Spotify, maybe a tie where they're both pretty far away where I'd buy shares. uh what are your what are your final rankings yeah it's probably one one american express google i'd say is a close second third netflix and i'd say spotify's down there and forth

yeah i think american express is cheaper than people think although remember it can be a bit cyclical if loss rates go up but they got that premium customer base i was maybe a bit surprised to see how cheap American Express was when doing research for the show. But as I should maybe disclose, like I did at the beginning, we do not own shares of these four stocks right now. They are a little bit expensive for what we like,

and they're just ones that we follow. And hey, some of them are going to a 20, 30, 40% drawdown. We still think Thesis is intact. That's when we could maybe pick up some shares. Anything else, Ryan, before I sign us off? All right. That's going to do it. Yep.

Let me hit the disclosure. Thank you everyone for listening. We are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan, I, or any podcast guests may hold securities discussed in this podcast, may have held them in the past, and may buy, sell, or hold them in the future. Thank you everyone for tuning in, and we'll see you next time. You