Chit Chat Stocks - 5 Stocks At Their Lowest Valuations Ever; Google's Big Bet on Wiz; Ryan's Michael Saylor Experience (GOOG, NVDA, MSTR, + More)

Starting point is 00:00:00 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. welcome to chit chat stocks this is our weekly power hour episode i'm one of your hosts ryan henderson and i am joined as always by the one and only brett schaefer we've got plenty of topics to discuss this week one major acquisition uh we got some bubble watch topics my voice might be a little bit uh hoarse i've been at a conference which actually gave me quite a bit of anecdotal

Starting point is 00:00:58 evidence and also bubble watch topics. So apologies if I start to lose my voice throughout this episode, but we have plenty to discuss. I've got a nice small cap of the week, one that I've been researching for quite some time, or I guess eager to research for some time. And I'll leave it at that. Brett, welcome in. How is everything? It's going well, Ryan. You were at a conference last week future proof and i did notice while seeing some of the clips online that our favorite bitcoin advocate michael saylor was talking did you do the mark bomb from the big short and ask him a question and then just storm out of the out of the conference you know hold up a zero no yeah it's quite what are the chances you default on your bitcoin loans and he goes well

Starting point is 00:01:47 Well, we've seen some volatility, but there's a 0% – or we've seen minimal disruptions to our long-term strategy and you just get up and start yelling, zero. You know, it made me realize that – because it was a kind of – it's definitely an intimidating atmosphere to do that kind of thing. That Mark Baum guy must have had zero regard for what anybody thinks of him. So kudos to him. No, the conference was good. uh a lot of people in the financial media space tons of advisors yes michael saylor was there as well bit of a bizarre keynote that he gave uh but it definitely attracted the biggest crowd what bizarre i'm shocked ryan it's it's interesting that he's such a champion of

Starting point is 00:02:36 bitcoin because he kind of lacks a little bit of charisma like it's not like he's it wasn't particularly well spoken i didn't think but it tons of people turned out for it uh same with what's his name tom lee i think from fun strat was there he got a quite a big crowd as well anyways there's plenty to discuss from it and we can i will talk partly about the bubble watch i'll talk about the michael saylor uh live event but before we do any of that i want to talk about our friends at public if you are serious about investing you need to know about public.com that is where you can invest in everything stocks options bonds crypto they even offer some of the highest yields in the industry like the bond accounts six percent or higher yield that remains

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Starting point is 00:04:02 now brett the other thing i was going to mention from this conference it is a little is a little funny because they bring like they make a concert out of it and all i can think is these bands have probably like to be a fly on the wall in the room before they actually come on stage they're like all right guys corporate event here we go uh yeah they didn't seem too fanatic to be there but i want to start with google and their i guess major acquisition here do you want to maybe dig into some of it sure ryan all right let's talk about this alphabet buying whiz it makes me think of one of those seinfeld episodes for some reason where there's the guy named the whiz people you might not remember that one but for some reason that came to mind a lot of listeners

Starting point is 00:04:58 is asking us to talk about this one. It's not, in all reality, it's not going to be material to Alphabet's business, but I think it's interesting because it's one of their largest acquisitions ever. And I think by dollar value, the largest acquisition ever. So they must see some promise within this division,

Starting point is 00:05:14 within this or within the startup. It's an all cash transaction for $32 billion. I don't, I'm far from an expert on the cybersecurity space. So I pulled some quotes from the press release. And then it kind of helps understand what their motivation is here. Quote, this acquisition represents an investment by Google Cloud to accelerate two large and growing trends in the AI era. Improved cloud security and the ability to use multiple clouds. Quote, Wiz delivers an easy to use security platform that connects all major clouds and code environments to help prevent cybersecurity incidents.

Starting point is 00:05:51 Apparently, this is for around 30 times forward revenue. So they're about to, well, the projections are for them to hit a billion dollars in revenue in 2025. This startup, I think, was founded only back in 2020. So it's an incredibly fast grower. It's from some seasoned technology and software and cybersecurity people. So it was not their first venture out of it. It's not like they started small. they had big backing, they had the relationships within the industry to get started. And it looks

Starting point is 00:06:26 like this product just caught fire. And Google thinks they can supercharge it by adding it to their portfolio within Google Cloud. Two questions I have, though. Can you not build this yourself? And I think probably not because you have to have that multi cloud strategy. I guess maybe I have three questions. And the second one is, is the fact that you're going to be owned by Google cloud going to ruin this multi-cloud strategy with working with the fortune 1000 companies and then second or sorry third doesn't rev with this multiple i mean doesn't revenue need to 10x from here to really make this one worthwhile the the what acquisition at 30 times sales ever makes sense ryan

Starting point is 00:07:13 some of their previous ones probably youtube oh yeah uh yeah double click i mean pretty much every huge acquisition that's been a success for them do you think double click was that 30 times sales i don't know i think it was in its infancy when i bought it right i i don't think so but what was the one they bought where it was really small there was one that they bought that was tiny and ended up being a huge deal the i mean with google there's obviously a major distribution advantage so but we talk about it all the time i mean for one they control seven properties that have more than a billion users so they can certainly get in front of people a lot easier they obviously have more uh enterprise uh relationships more business relationships

Starting point is 00:08:07 that they can uh kind of leverage as well so i i know it's kind of a weak point i guess and people always say this is like well it can you know they can supercharge growth once they're under the umbrella but i think google has shown time and again that having massive distribution is like a huge advantage when they end up acquiring a company i do agree with you on the second point Which is like, will customers be, I guess I need to get a better understanding of the product, but will they be concerned about going multi-cloud when it's under Google's umbrella? There's a quote, I think they had a presentation on the Wiz acquisition, maybe this morning. And there's a quote that says, together, we believe this and Google Cloud can accelerate the ability of organizations to improve their security, lower the cost to do so, and ultimately spur the adoption of multi-cloud and cloud computing for customers, partners, and the industry as a whole. It sounds like – I imagine it doesn't totally disrupt people from going multi-cloud just because it's under Google's umbrella.

Starting point is 00:09:18 there's probably products that they offer that just make it easier even even if it's in google i don't think they're going to stop the they're not going to deter people from also using aws and azure just because it's under google i think the product here is intended to help people use multiple clouds and if that's the case google being the smallest cloud provider of the big three hyperscalers is most poised to benefit yeah that makes sense one thing that doesn't make sense to me is why does this help with wiz's distribution is aren't they already selling through google cloud what what changes i'm not totally sure i don't know the business well enough to be yeah i just there's no i think any business would gain a distribution advantage being under

Starting point is 00:10:10 google so in what capacity though and with a google cloud it's not like they're going to be within google search and youtube that that's irrelevant here they're already selling a google cloud apparently it's a very hot product so google cloud has been pushing it hard what changes oh you can get preferential ad treatment across the rest of the ecosystem but and that might be potentially illegal but the uh you could get i mean google cloud has other they have relationships that whiz probably doesn't i mean part of it is probably there's a shake hand shake element to this which is google cloud has worked with the tons and tons of customers and now they can offer this beyond how they were already offering it um i assume it was

Starting point is 00:10:55 part of like maybe a app marketplace or something yeah that's what i'm saying is google cloud is already working to sell whiz or whiz in the other hand is working to sell google like through google cloud like they're already just in like an app marketplace or well i'm just like okay if they're if they're a multi-cloud company if they're supposed to sell through google cloud they're already working together i just don't know why the google cloud sales team is gonna suddenly go oh this super hot product that everyone wants now we'll start selling it because it's under our umbrella aren't they already trying to sell it they're not getting commissions on wiz i i bet they are because they might be getting some sort of a referral fee but

Starting point is 00:11:40 they're not getting true commissions i i think there's it there has to be some sort of a distribution advantage here and there must be some way that they believe they can extrapolate growth a lot further a better a also better work better work it's at 30 times sales there's Just given base rates, I know that's a term that people use to try to sound smart, but in this case, 30 times forward, I think it's 60 times trailing sales. My hunch is that it doesn't work. And it would just buy back the stock instead and build its own, build it yourself. Or, I don't know, it just seems it would be frustrating as a potential Alphabet shareholder.

Starting point is 00:12:25 I did look up DoubleClick, reportedly about 10 times revenue, maybe slightly less, maybe nine times revenue. so pretty pricey but not 60 they could have paid 60 and they would have been just fine the yeah but it hit okay it would have been worth it to build yourself again you just have to think of capital allocation decisions i think it's a lot easier for us to say why can't you build it yourself because we just kind of take this picture of google has unlimited employees and resources and they could just build anything but i think it's more complicated than that and building the tech isn't as easy as just

Starting point is 00:13:05 allocating resources to it my suspicion my hunch is that 10 years from now we look back on this and we say yeah it probably worked out fine we probably won't even get the exact numbers on it because it'll just get lumped into google cloud but i just think i know a lot of people tossed around that chart of like best acquisitions of all time and google being up there with like four of the top 10 i do think there is some like the proof is in the pudding here they've done a really good job in the past integrating these and supercharging them i kind of want to give them the benefit of the doubt yeah sure you can also say that about fitbit i don't know they're not perfect true you know i can yeah i assume they've missed on some other stuff too i just

Starting point is 00:13:56 i don't know it does frustrate me that they're doing this when they at a time when maybe they should be buying back instead that i that i understand because i think if it were trading at 25 times earnings instead of 15 or 16 whatever it is that might be a time to kind of get more acquisitive is it but this was an all-cash deal wasn't it too yeah it's an all-cash deal the the way i look at it is this look the google cloud numbers are going to continue to be great if you add on wiz here that probably supercharged it a little bit maybe if the acquisition works out by a lot but adding again just think about this like 30 more billion dollars in capital expenditures

Starting point is 00:14:43 it's more to what you've put into this business and the growth needs to and the earnings potential and whatever 10 5 10 years down the line the earnings need to be that much higher because of this. And I would be curious to know, we're not going to know for a long time and how fast Google Cloud's revenue growth is going to be and how fast their earnings growth will be with or without this company under the umbrella. Because regardless of Google's acquisition track record, which I agree with you, is undisputed. Take this type of acquisition in a vacuum, a strategic acquisition, synergies and sales at 60 times uh trailing revenue quote-unquote 30 times forward which may or may not actually materialize most of the time these are dumb most of the time these don't

Starting point is 00:15:36 work yeah yeah it's possible we'll see and i i mean i would be curious to hear from someone And that's – I'd like to get a better understanding of what Wiz truly does and listen to, I don't know, maybe some sort of an industry expert that has a sense of whether or not this benefits Google Cloud more so by – if the whole world – if multi-cloud becomes more and more popular over time, you assume Google Cloud is one of the companies that benefits there. is it better to have it under google's umbrella i'd kind of want to hear that from someone that maybe understands the industry better right yeah we're not gonna we're not gonna have that we have a comment here that says what if the ceo of whiz replaces sundar is that worth 32 billion dollars then look the ceo uh the founder of whiz was uh the his previous startup got acquired from microsoft and he just left two years later when he could so i would maybe expect that the same thing happens the founder aspect is yeah for sure i mean these okay he's you just

Starting point is 00:16:52 gave the experience here typically people that like to build companies and get acquired you know that's their exit whatever that they like the startup atmosphere they like building a company from the ground up they don't like being a part of a massive conglomerate and building for some for the benefit of somebody else um so yeah my suspicion is that he stays on as long as it needs as long as he's contractually required to be on and then he's gone i think that happens with most acquisitions yeah yeah or you have to incentivize them to stay on i do love the deals where you have earn out plans over like a five-year period where you have to hit these goals like look you're not just going to leave us holding the bag here and ruin this subsidiary when you leave i do like

Starting point is 00:17:40 those type of deals a lot more than this one where it seems like within this industry software technology in general they go we're going to acquire you for a huge price but there's no contingency plan which i don't like too much yeah i would suspect a lot of these i suspect this will have certain earnouts because they didn't say i didn't see it in the press release but who knows Maybe it will be in some sort of proxy filing or whatever filing it is. Yeah, I feel like most buyouts have some sort of an earn-out clause. It could be wrong. But anyway, yeah, well, we'll see.

Starting point is 00:18:15 It would be great if they continue to provide clarity on the actual numbers here. This will also be a good gauge of what the sentiment is like within the regulatory world as to whether or not these acquisitions can go through again. because it might kind of open the floodgates for another barrage of big tech acquisitions. We'll see. It would be better for everyone. Sorry, my hot take is it would be better for everyone if they weren't allowed to acquire them

Starting point is 00:18:45 and then this company was forced to go public and make the market that much more competitive. Yeah. Yeah, potentially. You wonder why the IPO market is closed, Ryan. You can sell at 60 type sales to a big tech company. Oh, wow. why do we go public yeah i mean there's like there's some validity to that like you you have

Starting point is 00:19:07 there's a lot of baggage to going public that a lot of people just don't want to deal with you and there's you can either stay private and just kind of get perpetual vc funding although at some point they're looking for an exit you can sell to big i mean the the ways founders like to exit is either acquisition ipo some people consider that i think a lot of founders consider that an exit uh which is kind of rough to rough to hear for public shareholders don't don't buy uh don't buy an ipo that all this all says don't buy an ipo just wait just wait the price will likely go down 50 to 70 percent yeah all right let's uh let's shift gears a bit um i'm sure there's some other exit strategies for founders but i think acquisition is probably the

Starting point is 00:20:05 preferred one for a lot of these people because it allows them to relinquish their hold on the company too like they can go start something new run and have a new life not have to work at the company anymore but clean break not complicated sorry next segment five stocks trading at their lowest valuations ever. I'm curious if you're interested in any of these. I know you already kind of know you are, but I'm just going to rip through them and you can kind of use whatever multiple you want. I tried to find ones that were like consistent over time and didn't change too much depending on the company. So first one is Amazon. They are trading at a current EV to EBIT of 30.6 uh their historical average is like 85 because it's always understated

Starting point is 00:20:53 uh second one here is adobe current ebit 21 historical average 42 third one is salesforce trading right around it's the lowest free cash flow multiple ever uh fourth airbnb i used operating cash flow now it's a little inflated uh the actual operating cash flow figure because of some of the working capital dynamics there but it is trading at i believe its lowest ev to operating cash flow ever and then the last one is uber so those are the five amazon adobe salesforce airbnb and uber all the amazon one do you have the notes here flipped yeah okay yeah yeah the and you can if you use ebitda amazon is like 17 times but don't that's flawed math the out of those five which those interests you the most let me just go top of the noggin here one

Starting point is 00:21:56 through five one airbnb two amazon three uber four adobe five salesforce yeah what do you i agree with that i feel like adobe a little higher potentially although i like i like amazon a lot and they that's the widest moat on this list i might swap uber and airbnb potentially from your list there i think uber is just on the current valuation i think it looks a little more attractive than airbnb but uh there is the waymo risk and it seems like they're starting to kind of move past the waymo risk a little bit in that that partnership seems very amicable like or mutually beneficial people apparently i'd love to get some stats on this but apparently a lot of people are booking the way most through uber and maybe not in silicon valley but i believe

Starting point is 00:23:01 even phoenix they are exclusively on uber that's not true uh i was in phoenix i didn't take a waymo but i tested it out and uh there's a specific waymo app it seems quite easy didn't use it but funny enough it was actually cheaper i think they're selling it at a loss right now for sure but it was cheaper than the human driver on uber that's what i would think is the case i would think they're the low-cost provider but yeah most of the time they're not right well uh the cars cost about 250 000 to make so even including the human driver aspect of it i don't think most cars driving around on the uber x are that expensive so i think there's a little bit of a different cost structure there

Starting point is 00:23:50 When I look at Salesforce, Ryan, that one is, it's kind of an enigma. As we followed before, Benioff, unique figure, loves touting his friendships with celebrities. They have a partnership with Matthew McConaughey. There was a quote from, or excuse me, a tweet about how many employees tech companies have. And the first two here make sense, but then we'll compare it to Salesforce. so microsoft 228 000 employees google 180 000 you want to guess how many salesforce has i think it was like 75 right 75 000 i think if we just want to grow earnings we cut that by two three thousand a year for the next 10 years and you still won't have a shortage of supply of

Starting point is 00:24:38 employees for this company i mean think about how much smaller salesforce is than these tech giants yeah but they've wanted to be big tech for a long time they've wanted to be in the big tech conversation for a long time thus the salesforce tower the tower dream force uh thus basically having zero percent operating margins forever because they try to pay their employees as much as possible um and want to be known for their compensation the it's i don't like benny off and this is one where i think sean wang was right we had a conversation with him on who would be the biggest losers from the proliferation of ai and ai applications and he said basically legacy tech and some of those some of the quote-unquote legacy tech i don't agree with like i don't

Starting point is 00:25:37 think adobe is that up for disruption i could be wrong but on the enterprise side i don't think they are salesforce deeply embedded but i think that's a product that's easier to replicate than creative software and with ai you're saying with these new tools with this new paradigm we're in yeah just ai making it so much easier to build applications quickly i think salesforce is bound to have a lot of competition, especially I'm seeing it at the startup level. There are a lot of CRMs that are, well, I mean, there's just a ton of CRMs in general, but Salesforce is kind of one of the more expensive players, if I'm not mistaken. And so it just makes more sense to start with something smaller or something lower cost. And then once you are starting on that,

Starting point is 00:26:29 switching CRMs is a pain in the butt. So maybe for these big tech companies, Salesforce is going to be able to continue raising prices, and I've heard it's extremely sticky from a lot of sales reps, but I suspect kind of like Adobe, they're going to be – and you're seeing this in the growth rates actually at both companies. Salesforce is now growing single-digit pace for the first time ever in its history, and Adobe I think is actually kind of right on the fence as well. it strikes me as just the individuals, the creator, like the freelancers, all that startups are shifting more and more away from these products. I think you can still make money as an investor in Salesforce, Adobe, quote unquote, legacy software, purely from enterprise growth. But my suspicion is that the growth rate is a much smaller over the next 10 years than the last time. Now, you can even add Uber in there if you're talking about AI disruption risk. That's

Starting point is 00:27:33 what people are talking about, really, if you count the self-driving cars as disruption. When I look at this list, Adobe, Salesforce, and Uber, there are risks here that I'm not comfortable making a decision on. It really reduces my conviction in these businesses. Now, if you're someone that likes these companies and has some sort of differentiated view, you have some different information than I have. You just come to a different conclusion. You say these risks are totally overblown. Well, these are buying opportunities. But when I look at Airbnb and Amazon, now specifically Amazon is attractive. Well, Airbnb as well, because it's not that expensive at the moment. But Amazon, I think they can grow their profit margin, their EBIT margin

Starting point is 00:28:19 can go up by 50% over the next few years. And when you combine that with revenue growth, this EBITDA EBIT of 30 is going to go down to 10 to 15 really quick. Yeah. It's amazing how much more fragile, I guess you could say, a digital moat is versus a physical moat. And Amazon has one of the biggest physical moats in the world, probably the biggest.

Starting point is 00:28:48 Airbnb, you could make the case, does as well because it's housing supply that is a physical advantage, housing supply on the market. And you would have said, I think Uber has physical supply on its marketplace too, but those cars I guess have been more or less turned into computers and now you're competing with literal computers in Waymo. I'm not going to get AI disruption to homes, I don't think. No. I'm not going to get AI disruption from homes, and I don't think Amazon logistics infrastructure – obviously, AI is deeply embedded in all of that, but the physical footprint is – you can't replicate it with AI. Yeah. If anything, you could argue that both these businesses, Amazon and Airbnb, had the potential to play offense and further widen their moat if they use these AI tools smartly. sticking on what would you rather buy here i had a similar question and we'll play it maybe hit this quickly i'm looking at the four hyperscalers if we include meta in their

Starting point is 00:29:51 meta amazon alphabet microsoft all as of this right or as i wrote it yesterday in a 20 drawdown give or take gut check what ones which one are you buying so okay i like amazon in the long run the most feels like the most the whitest moat i guess but the i worry about the next two years and earnings looking not quite as good as this last year like we saw insane margin expansion at aws i think it was up a thousand basis points or 10 percentage points for anyone who doesn't talk talk basis points right that so that can normalize as your fear and people aren't expecting that i think in an ai slowdown they would be a you'd get slower aws revenue growth but you'd also have you're seeing increasing costs because

Starting point is 00:30:55 they've talked about all the capex that they're spending on data centers um if you're seeing a slowdown in conjunction with the big data center spending there's going to be some margin contraction at some point so yes i would be a long term i think amazon's margins are higher but over the next two to three years i'm a little worried in an ai slowdown world but yeah i like amazon that is a little too expensive for me i like that business probably the second most but then it'd probably go for me amazon google meta microsoft i think i would go alphabet google i was looking up the earnings multiple here it's 20 trailing uh 17 and a half forward not dirt cheap but cheaper than these other ones i'd go amazon second and then meta then microsoft i think

Starting point is 00:31:44 microsoft maybe that valuation has come down because of this drawdown but i always look at it and go okay yeah 10 something 10 plus revenue growth but we're at what 40 times earnings it just doesn't do it for me better than apple which would be you know those uh jokes that people do like one two three four and then a huge gap and then five that would be apple for me but i think and we had a comment here that someone said meta they would have meta as their number one i think meta again in a bull market in times like these people i think underrate sometimes just or don't consider as deeply the difference between oh wow meta's valuation has come down maybe i'm wrong here okay but in general i think if something's trying to get 35 times 30 versus 15

Starting point is 00:32:38 that gap doesn't feel as wide when stocks are just going up but maybe meta is not that high So it says the trailing valuation is a PE of 25 forward is 23. Huh? All right. Revising all your tips. Revising that. Yeah. I haven't looked at them closely in a while.

Starting point is 00:32:56 So, yeah, I don't know. The big tech, I, I think you, other than Apple, I think you'd probably get okay.

Starting point is 00:33:04 Returns with all of these Amazon. I think you get Amazon and Google would be the ones that I think you'd get the best, but. Nvidia is a wild card. yeah it's total wild card because i mean who knows what the growth rate looks like and i'm seeing a lot of people referencing the trailing multiple and thinking well look at the trailing like the trailing multiple and the trailing growth rate

Starting point is 00:33:31 that you know if this continues it's like there's just yeah it's like that so unlikely it's the meme with the guy about to get hung first time, you know, that's what we did when we first started out investing. Okay. I want to talk about some sponsors real quick. Blue Chippers Club, huge shout out to these guys. The club is totally free. I, someone reminded me to mention that it's free right at the start of the sponsorship. It is it. And it, for anyone that doesn't know, it's a tight knit community of stock focused investors. They have weekly calls. You can pitch stocks on there. You can put your portfolio on there. It's just a nice online forum to have deep conversations with other investors. I recently put my notes up for our portfolio

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Starting point is 00:34:46 Public is a FINRA-registered, SIPC-insured platform that takes your investments as seriously as you do. Fund your account in five minutes or less at public.com slash chitchatstocks and get up to $10,000 when you transfer your old portfolio. that's public.com slash chit chat stocks paid for by public investing full disclosures in the podcast description where how about small cap of the week you want to talk small cap i was about to ask the same thing looks like we got herk holdings interesting name for a company ryan i've never heard of this one before but you seem excited to talk about this one

Starting point is 00:35:21 so what is it yeah weird name it sounds like something related to hercules but no it's it is the third largest equipment rental company in north america um this wasn't a listener recommendation or anything we've been getting a lot of those lately and i appreciate that but this is just what i've been interested in for a while it's a 3.8 billion dollar market cap although they use a lot of debt so the enterprise value is substantially more and i've already taken a brief look at the two largest players so the two largest are united rentals and ashtead group now ashtead just owns sunbelt which makes them the second largest player but i think they're uk listed if i'm not mistaken so it's a uk company that owns

Starting point is 00:36:09 a sunbelt which operates in the u.s i don't know kind of right i've seen those yeah i've seen that name before yeah anyway the so the market share of the industry is basically 17 percent largest player is united rentals second largest player sunbelt 13 third largest herk rentals four percent and then most of the industry more than 50 is just smaller players small small equipment rental players really you can kind of specialize by industry is that uh within the equipment rentals as well and there's just there's something to like about this industry overall at least i think so where you there's a lot of economies of scale by if you have a lot of branch locations in certain regions you can get uh you're able to deliver quicker which means you're able to deliver at

Starting point is 00:37:04 lower cost you can share resources across those locations you can have big multi like national accounts. And you can service those national accounts because you have different branches and different spots. And so there's just kind of these continuous small advantages of being the big player when you're competing against majority smaller niche focused players. So it's a lot like the home improvement sector with Home Depot and Lowe's. And so they've got 451 total branches in the US and Canada. It's a bit smaller than United Rentals on the branch side, actually significantly smaller. So United Rentals for context has 1,700. And the business model is fairly straightforward. Basically,

Starting point is 00:37:49 Herc owns a bunch of equipment and then rents that equipment out on an hourly, daily, weekly, or monthly basis. In addition to rent, the company charges for equipment delivery and pickup, liability protection fuel environmental costs there a whole bunch of ways they can kind of charge depends on the deal um but they tend to get i'm trying to remember the exact number but they tend to get back a hundred percent of the equipment's cost in rent within like four years i believe and the lifetime the estimated lifetime value of these is typically around 10 years. So the way it kind of goes is you, and I could, four years could actually be wrong, but they tend to get the rental income to pay off the cost really quickly in terms of the overall

Starting point is 00:38:42 lifetime of each piece of equipment. So you think about it, it's like you pay $100,000 to buy some industrial machine. Then over the next, call it two or three years, you're renting it out on hourly weekly monthly basis to general contractors and you make your money back uh through rental income plus all the other income sources that i mentioned there and then from there on top it's basically all uh profit right other than like servicing it as well but most of the capex is more growth capex and then they sell it around year seven or eight each machine typically they try to keep their uh fleet at around 48 months like lifetime fleet age average average age yeah yeah and then they're able to get usually i think it's like 50

Starting point is 00:39:37 percent of the equipment cost in year seven or eight when they sell it which is nice so there's good economics um herc is quite profitable so they do about 3.6 billion in revenue and they generated $743 million in operating income. So now keep in mind, there's a lot of interest expense because they're taking this levered strategy. But the EV to EBIT, which takes into account the debt load, stands at about 12 times in a period when there's been a bit of a construction slowdown. So I think you're getting potentially reasonable multiple in sort of a construction trough, if you will. Now, it's kind of hard to predict the cycle, but we know that construction is not surging because of the recent hike in interest expenses – or sorry, interest rates. So it's like slowed a lot of projects.

Starting point is 00:40:32 But the biggest risk here is just industry slowdown. I think their debt is well covered and they should continue to gain share. I don't think they'll ever get to the United Rentals market share, but they should continue to kind of gobble up a lot of the smaller players. So there's a lot of consolidation in this industry as well. It seems just well positioned for a solid return. That's a great introductory overview. I would have a few questions. I'm not sure you'll be able to answer them because, again, that's just introductory research

Starting point is 00:41:05 on this company. But the ones that come to mind that I would want to research further on first, and this kind of comes up right at the end here, how exposed are they to Florida and Texas, which I think is maybe a place with more oversupply compared to somewhere else that might have potentially undersupply and a potential for more of a construction boom. Although, again, through the cycle, it's not going to matter too much. The second one I would have is what is their plan with the debt? Are they going to pay it down? Are they going to specifically try to consistently have three, four, five times leverage? Is that part of their strategy? And then second is, and I'm going to share the screen here, or sorry, third, last question, most important is we're going to use the chart from FinChat that I pulled up here. it's operating income versus free cash flow. And besides the 2020 pandemic period where free cash

Starting point is 00:42:01 flow was above operating income, it looks like free cash flow has trailed operating earnings every year. I think that income as well would still be within that even if you include that interest expense. It's lower every year. I think I know the reason for that is because they're investing in new equipment but does this change at all as they scale does this hold back the business model because you might call me a stickler ryan i almost have a hard rule to not invest in these type of businesses where i just remember the munger quote we don't want companies where the profits are stuck in inventory sitting on a lot yeah it's i'm not exactly sure what happen in 2022 2023 maybe that's just like a bullwhip from covid but i think i'd guess for

Starting point is 00:42:51 that yeah as well if you look at united rentals they tend to have pretty good conversion uh real free cash flow conversion relative to their operating income so if the if you kind of believe hurt can turn into or mature in terms of its unit economics more like united rentals that'd be a good sign yeah i think there's the potential for that the two questions here these would be other ones that i would ask is why hasn't private equity bought her that is either a concerning question like will they see something wrong with this business or the potential for some solid returns over a short time period and then second are they expanding locations and rolling up smaller players did you see that at all or again just something something to look out for

Starting point is 00:43:38 They have been acquisitive. I haven't looked at their entire acquisition history. I believe they've done some big ones actually. They maybe did a pretty big one like last month. So yes, pretty acquisitive. I'm not sure on why private equity hasn't bought them. The – they were spun out of some company I think around 2014, 2015. So I don't know if like private equity wants to buy a new spinout. They were probably loaded with quite a bit of debt from that as well. I know this has been a big Bill Ackman holding for quite some time. They may have – Ackman might have sold recently, which may have contributed to – there's been a big sell-off. I think it's down like 40% or something like that in the last two months. It looks cheap-ish, potentially cheap.

Starting point is 00:44:33 Yeah. The other thing you mentioned, the Texas-Florida concern, commercial and residential construction is like mid-30% of their business. So they have a lot of chemical-type end markets. There's pretty diverse end markets for all this construction equipment. um there's like disposal systems it's really quite kind of all over the place which kind of helps smooth it out in case there is a slowdown in residential or commercial construction but yeah or never say never but a slowdown in data center buildouts that would never happen yeah which actually has been a growth market for a lot of these guys uh so yeah i could certainly

Starting point is 00:45:17 see that potentially hurting them a bit taiwan semiconductors helping all yeah they are a blessing to the reshoring of the united states let's do bubble watch because i want to talk about this uh michael saylor speech yes let's let's do that well let's highlight though ryan i use that fin chat chart let me just tease the listeners or tell them that they can use our link which is in the show notes, or just the URL is fairly easy to memorize. Thinchat.io slash chitchat, get 15% off any paid plan. It's well worth it. You can easily research products.

Starting point is 00:45:54 There's tons of things that you've seen us talk about all around the show, and they're adding new stuff every single quarter, like the customizable metrics to make charts and graphs to help your research. If you are an individual investor that has a sizable portfolio, you're someone that loves fundamental research or if you work in a professional capacity it is well worth the money so go try it out finchat.io slash chit chat get 15 off any paid plan yes ryan bubble watch so yeah michael saylor uh to paint let's let's paint a picture here so miami beach miami beach future proof it's like it's literally on the beach you're watching the

Starting point is 00:46:38 fray right wasn't there yes but they were like a late night event kind of thing it pretty well run event actually i i really enjoyed it and i think uh sometimes it's worth it if you just want to expensive tickets but if you're in the industry it's worth it just to kind of meet people and connect so it's on the beach and it's kind of fenced in you've got this area you got to have like admission passes that kind of thing and sailor pulls up in a tinted window blacked out escalade gets out in a full just uh black slacks black suit jacket and a bitcoin shirt like which he sells i guess um and then they're gonna be their future business model he actually looked very hungover but that's beside the point and he kind of got up there

Starting point is 00:47:33 for this conversation and i tuned out i don't know i didn't listen to the whole thing and it was kind of it was packed and you know when you're like listening to something where you don't agree with a lot of it and it's like just kind of hard to hear that was sort of me most of the time but there was definitely a lot of points where he was kind of losing people like people that agree with them liked him we're so excited to hear him talk we're like oh i don't they give they give their friend the elbow and i go yeah you know to the to the people next to him like okay where's he going with this yeah it what i realized is that he's kind of in this difficult predicament that he's put himself in so micro strategy trades or strategy now they've changed their name

Starting point is 00:48:26 trades at a significant premium to their bitcoin holdings which doesn't make a whole lot of sense and it's not something that like if you want exposure if you're saying well bitcoin's got upside that's what's priced then just own bitcoin and there is a software business here as well but that just doesn't matter it's in in the grand scheme of things it's so small it does not affect micro strategies overall valuation so people just seem to invest in this purely because they like michael saylor and he's getting asked at these conferences to basically explain why is your stock still undervalued like why why does it still have upside from here and it's i mean what does he even say like we buy bitcoin okay it was it was actually just a word salad that made no

Starting point is 00:49:18 sense to me um and i think that's where he lost a lot of people but it's it makes me realize he has to say more and more outlandish things to it's an impossible question right you're like if i just bought 100 bitcoin and someone said well you're worth 200 bitcoin now like and and then someone asked me why are you worth even more than that there's no right answer right like so you have to just like make up claims or try to come up with some sort of rationale and so it just kind of made me realize like the worst place to be and i think for a company is to have that to have an overvaluation it makes it the hardest to run the organization because you're going to get you know that there's kind of going to be pain at some point in the stock price ahead so

Starting point is 00:50:16 i don't know it i sort of felt like felt kind of bad for him a second for for just a little bit when when he was asked sort of this impossible question but then i realized that the reason they traded this is because of the claims he's made to begin with so yeah it's really i don't it was it was interesting that was certainly the most well attended if that gives you any sort of gauge on the sentiment oh boy oh boy i wonder when the crypto people are going to actually hang up their hats are we're going to be like 50 years from now just wait it's going to start meaning something and it's going to do something in the world and instead it's just patty's dollars just circle circle circle we're not doing anything yeah i wonder at what point it goes from

Starting point is 00:51:04 where people are no longer talking about the price as the primary reason to own it like if there's some sort of a utility then and you know what people tell me there's all these utilities i have yet to see a huge real world application where it's like made some part of my actual day-to-day life easier so i i'd be curious to see if that ever happens well ryan you just haven't done your 100 hours of research i guess but here's the thing even if you are optimistic about it why would you own own it through micro strategy yeah well they're just going to sell a lot of stock and buy some more bitcoin and that'll help you when you own it that price yeah it doesn't make any sense let's talk about some more bubble watch though ryan

Starting point is 00:52:00 and it is again in the crypto industry um we don't want to we can disregard some of the political stuff here but let's just say now there's maybe more of an opportunity to be free is the right turn to do what you want in the crypto industry with no regard for any backlash or any repercussions and crypto exchange kraken ryan which i don't know is it might be a sizable one but i don't think it's one even the biggest ones out there is buying a company called ninja trader for 1.5 billion dollars now here's some quotes from an article kraken founded in 2011 offers a platform through which users can buy and sell a range of digital digital assets including bitcoin and And Ethereum, the privately held company known officially as PayWord, has a family of brands, blah, blah, blah, blah, blah.

Starting point is 00:52:55 Quote, a deal would allow Kraken to offer crypto futures and derivatives in the U.S. thanks to Ninja Traders registration as a so-called futures commission merchant. Kraken will also step up Ninja Traders expansion into the United Kingdom, continental Europe and Australia. People familiar with the matter said. So the company. they said the these these exchanges ryan said we don't have risky enough products and we need to go offer even riskier ones if this if you usually i don't really care about crypto it's more of a fun thing to talk about it's a lot of nonsense it's entertaining but if this becomes large enough

Starting point is 00:53:37 and ruins the global economy i'm gonna be so mad at these people because it wasn't even worth it It's not like the housing bubble where you have a bunch of homes to live in. It's just all for nothing. Just for memes. Yeah, the – it is – just – the business model is risky. I know people are thinking, well, they're actually just a facilitator. It's – to them, it's cash flow, right? It's not like risky.

Starting point is 00:54:08 But when – like we've seen this before, so many brokerages ran into trouble when volume grounds to a halt. So when there is a slowdown, these are the things that see the biggest slowdown. So yeah, I don't know. I find this – who is buying futures on crypto beyond Simply Traders? I would say the crypto volatility isn't enough for me. Let's get even crazier. did you see it's insane nasdaq 24 7 or i think maybe it's 24 5 but 24 hours a day who cares shorten it just right we don't need it's not like we the reason was open for a long

Starting point is 00:54:55 time is because you didn't have the digital infrastructure i don't know you just give me an hour or two we'll get her done if you don't buy anything in a month so i actually don't see any issue with having this open on an ongoing basis if all the transactions are digital because like there are times yeah it makes really no difference to me there are times when i'm like i forget that it's past three o'clock or something and i want to buy three o'clock where i'm at it's past the end of market close i'm like oh great i gotta wait till tomorrow this would be kind of a nice convenience but yeah i think it makes very little difference in the grand scheme of things it's just to leech more money off of day traders

Starting point is 00:55:37 so that's why they're doing this to make more money off you if you're going to trade a bunch all right i have a serious bubble watch ryan we've been tracking the core weave ipo because we think it's kind of a good harbinger harbinger of the ai sentiment just kind of this boom we're in and we're watching, you know, it's bubble watch. We're seeing if it's going to turn to a bubble apparently. And this is, you know, their pre-trading price of what they're going to sell the IPO shares at. They're aiming for a $32 billion valuation. And you can't put an earnings multiple on that because they're burning $6 billion in free cashflow. Earnings aren't really much at all. Revenue, what was it? $1.9 billion, but growing extremely quickly and with a huge

Starting point is 00:56:21 backlog that should probably see revenue grow to $5, $10 billion over the next few years if that backlog materializes. I think, and any listeners who've heard us make our predictions about a $50 to $100 billion IPO price, you might think, oh, well, it's going to be lower than you guys thought. Maybe it's not as crazy, but this is, remember, what they're selling the IPO shares at, I forget the exact terms, but it's before it becomes traded. So this is what it's going to start trading at. And I would bet they're aiming for a bump here because they're just going to restrict the supply as it always goes.

Starting point is 00:56:58 And then, you know, they're aiming for that huge bump on the first day. So I think that $50 to $100 billion valuation on the first day is within reach. It would be quite crazy, but you can just see it. Like anyone who's studied market history, you know that these things pop up. It's going to be on all the national news. it's going to go viral oh core we buy ai ipo 50 to 100 billion dollar debut pops 100 in its first trading day you know it's coming yeah what i'm realizing is they're doing this ipo not opportunistically but because they probably need the money like i bet the vcs are a little

Starting point is 00:57:36 reluctant at this point to start giving out the checks because they spent what nine billion on capex that's hard money to get from vcs i agree yeah maybe i'm not maybe i'm underestimating the vc market but i wonder how much money they're going to raise well and also a lot of the money they raised uh was a combination of equity and debt so they have a lot of debt on their balance sheet already who is lending for this it seems so risky no we'll just package her up package them up i guess ai ai back securities i think we're running out of time do you want to mention uh we have a we have a legend in the investing world that passed away do you want to mention him yeah i saw this this was a nice article in the wall street journal i think there's a

Starting point is 00:58:30 be a good, positive way to close things out for the episode today. The Fastenal founder and CEO died at 85. It's a fascinating article, one of the best, what I'd call frugal CEOs out there. If we look at Fastenal's stock, Ryan, it has generated 195,000% total return. So what is that? over it's over a thousand bagger I'm trying to do the math in my head I always forget on what zeros to subtract it's almost a two thousand bagger

Starting point is 00:59:04 almost a two thousand bagger since 1987 and they've only had one 50% drawdown in their total return I think with the price maybe get close to 50% and here are some maybe I won't read them all but there's some very very telling

Starting point is 00:59:21 quotes on his philosophy his culture and just his makeup within this article, I'd recommend reading it. The co-founder of Fastenal, an international seller of nuts, bolts, and other supplies for manufacturing and construction firms, took a salary of just $120,000 a year at its peak in the 1990s with no bonuses or stock options. That was less than some Fastenal store managers earned. He clipped grocery coupons and bought some of his suits secondhand for $60 a piece. On business trips, he stayed in discount motels and often shared a room with a colleague he paid for his own meals on the road

Starting point is 00:59:55 is any i mean there's no one close to this today well actually mark leonard mark leonard does everything on his own dime i'm not sure i don't know if i understand the pain from meals on your own so he's not the company's not paying for it no this doesn't really make that much sense to me on the road like it's just more because he's like more tax efficient right yeah well if you're thinking selfishly but he's thinking for the company we're saving the company money yeah but it's i guess like not it's just not really i mean it's not it's more of a not a mindset but more setting the example throughout the company and if you read the article it just shows that he really espoused this throughout everything um the warehouses or uh facilities that they run

Starting point is 01:00:47 not an expert on their business would have used desks, nothing fancy. You know, it's kind of similar to the Costco culture where we're like, look, we're not going to just have a bunch of pomp and circumstance here. What we care about is driving low prices for our customers. He didn't have a personal secretary. He didn't even have his own parking space outside of the drab core concrete office in his hometown of Winona, Minnesota. And what inspired him to start Fastenal was he graduated from, here's a quote from the article, graduated from roman catholic high school earned a mechanical engineering degree and mba degrees at university of minnesota served in the peace corps in venezuela then worked for ibm where he

Starting point is 01:01:26 analyzed manufacturing costs at ibm he disliked what he saw as a top-down management style and that inspired him to just similar to a mark leonard just distribute responsibility across the organization we're going to tell you look this is what our culture is this is what our values are but you're going to run it for them. I'm not going to be controlling at the head level. I want you to save on costs. You're not going to be spending willy-nilly, but just do what you think is right for the customers.

Starting point is 01:01:54 And I think it just shows, again, I'm talking about this not because it sounds like the best life to live, but look at the total return. These type of companies, Berkshire Hathaway, Constellation Software, Fastenal, all these type of companies with frugal CEOs, Costco is another example. They are some of the best performers ever.

Starting point is 01:02:14 And here's the final one that I thought was absolutely a gem. Rather than hiring a lawyer to write Fastenal's articles and incorporation, Kierlin studied state statutes and wrote the document himself using the blank sides of used paper. In the early days, he also saved money by collecting used candy boxes from nearby alley and using them to deliver goods to customers. If I read that, if someone told me that they did that, I would say I'm giving you, I'll invest in your stock right away. yeah you seem like someone that really cares about generating value for shareholders and is not gonna leech it for yourself what a legend this guy was and you know what that that approach is just so rare and it does i i have you you and i seem to have a working theory

Starting point is 01:03:01 that being a midwest company is minnesota considered the midwest it is yeah you know on the west side of the midwest but definitely midwest yeah it's a green flag there's just a frugality is kind of just embedded in the lifestyle out there and i uh midwest irish yeah definitely this is this is this guy yeah he sounded like the most irish guy ever he's like we didn't have much growing up what do i need this for i got my we're making we're making some potatoes at home why would i go to these fancy dealers dinners well you have 400 million dollars sir i like my potatoes all right we're going long ryan i think that's it anything you want to tease anything else before we get out of here

Starting point is 01:03:48 no we've got some good episodes coming up uh we've got mercato libre that just released which was a fun discussion on a business that i seems to have a widening and wide more and more widening moat and has just seen incredible uh growth over the last decade and probably will continue to see pretty impressive growth so i recommend checking that one out and i'll leave it at that do you want to take us out bro you want me to i can if you enjoyed this episode please consider giving us a five-star review on spotify or apple podcast you can listen or watch to any of the episodes on youtube spotify apple podcast or wherever you get your podcast we do these live, typically at 1.30 p.m. Eastern time on Wednesday. We recorded this one on Thursday

Starting point is 01:04:37 because of Ryan's schedule at that investment conference for his work. But besides that, I think that is it. As a disclosure, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan and I are any podcast guests who 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 once again, and we'll see you next week.

Chit Chat Stocks - 5 Stocks At Their Lowest Valuations Ever; Google's Big Bet on Wiz; Ryan's Michael Saylor Experience (GOOG, NVDA, MSTR, + More)

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