Chit Chat Stocks - 7 Best Share Cannibals

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Starting point is 00:00:37 advice or recommendation. Now please enjoy this episode. Okay, welcome in everyone. This is Chitchat Stocks. I believe we are live on the old YouTube channel. Go check that out. We do these live every week. We're having a little issue with the live stream connecting every time. So that's why I'm saying that. But my name is Brett Schaefer. And as always, I am joined by my good friend, Ryan Henderson. We're talking stocks, talking

Starting point is 00:01:14 investing. We're talking the financial markets. I'd say the end of the quarter is always the most boring part of the year, but we're going to have some fun topics. I got a good one that I think will probably be in the title here. Or excuse me, Ryan has a good one that I think will probably be in the title for any new listeners. Seven best share cannibals. Won't tease them out there, but I'm interested to see what Ryan's thoughts are for some of these large share cannibals out there. I have, well, there was an interesting exchange on the old financial TV from the Palantir CEO. I have some stuff on Addion versus Stripe. And then the potential business and financial implications of the TikTok ban. I'm not going to talk whether we believe it's right or

Starting point is 00:01:58 wrong, or maybe we will, but the key point will be what the impact could be on some of those large advertising businesses and social media companies. But before we get started, Ryan, did you listen to the latest episode of The J-Rose Show? Because I thought it was quite fantastic. I have not yet. It's in the queue. I've heard a lot of people imploring me to go listen. So So I'm moving it up to the front of the queue, but I have not listened yet. You enjoyed it? I did. It was with Portfolio Manager at Poland Capital.

Starting point is 00:02:28 I actually, how do I say it? Dan something, right? Yeah, I forgot his name, but go check it out, Jay Rosho. I thought it was quite good for finding a way to invest that makes sense from a valuation perspective in uh you know finding what some might call growthier stuff higher quality stuff and having that connection back to valuation i thought it was you know a fantastic conversation okay well we've got some share cannibals that would maybe uh be included in the the quality value camp everything in there so that was kind of my horrible way of moving into the share

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Starting point is 00:04:13 shall we talk about my share cannibal list we can we have one comment first says seems brett forgot to change the clocks for daylight savings uh that could yeah that that might have been the reason why i went an hour late but that's actually not i was traveling and we wanted to make sure i got in on time and ryan didn't have to wait around until until i arrived but yes we give an update to the listeners our yeah our resident traveler is in costa rica yeah so you know investable market maybe they seem more relaxed than but you know a leisure economy yeah the guy that drove me down said that they don't have an army so the the united states basically protects them and i was like okay maybe you know the defense contractors i don't know i've only been here for less than a

Starting point is 00:05:02 day so i don't have any takes so far but maybe maybe uh in a couple weeks something like that we can give some insights for the listeners all right what do you got for us ryan yeah let's talk share cannibals so i put together a list of and i've been doing this a lot lately i've really been enjoying using screeners um i don't know i think it's just fun to generate potential ideas and If I'm ever bored, want to look at a new company, I basically just put in a bunch of criteria that I think I would like. Obviously, it doesn't capture everything, and it doesn't capture every company, but it gives me some new ideas. So this – I use basically a buyback share repurchasing screener to come up with a list of companies and I'm not going to get into the – every single parameter because it's not that important. This list is not – there are no specific criteria. It is subjective.

Starting point is 00:06:03 It is my personal opinion on the seven best shared handables over the last decade. And it's not just whoever bought back the most because, by the way, a lot of the companies that bought back the most shares are either insolvent or they bought themselves back and they should have been investing in the business and they didn't really generate good returns and it doesn't look that promising from here. So I have avoided those and I'm trying to pick the seven companies that have had the most intelligent buyback programs and the companies who have been able to marry repurchases with investments back into their business. And so I'll go through my seven. They're in no particular order, but this is my list of seven good share cannibals that not only have been good repurchasers, but should continue to be good repurchasers moving forward. So I'm going to start with the first one. This is really, I lumped them together. I don't know if I should do this because it's kind of cheating, but O'Reilly Automotive and AutoZone, I lumped together. They have very similar total returns over the last decade. They have similar philosophies and they have a lot of the same, well, similar business models and similar tailwinds. There are some nuances. O'Reilly has actually grown a little bit quicker in terms of earnings, and they've done a little bit better with, I believe, the professionals segment and getting into like auto body shops and being a resource for them than AutoZone has. So they've grown a little quicker. It seems like their performance has been a little better over the last decade. But in general, the margins are similar. The business model is similar. The reason customers come to them is always similar. They are – a lot of this is things people need pretty quickly.

Starting point is 00:07:58 They're willing to pay a pretty premium for some of these products because they're asking for the advice of the O'Reilly or the AutoZone employees. And so it's just a really good business and the number of cars on the road continues to grow every year. So it's helpful and they've got a lot of tailwinds. The way I kind of structured this is I'm going to go through a couple of metrics. The total return, so we can get an idea of how well these companies have performed, how much they've reduced share count, whether or not they're growing, and then how much of their earnings have they used to buy back stock. So I don't know if this is already a term, but I'm calling it the buyback coverage ratio. So it's basically just the money spent on repurchases as a percentage of the net income. So if it's above 100%, that means they're adding some leverage in order to buy back stock, which can be appropriate for the right business.

Starting point is 00:08:57 But if it's below 100%, that means they've been using less than all their earnings to buy back stock. So going through this is a little harder. Or they could have a very strong cash flow conversion. Correct. That could be helpful if they want. Exactly. Exactly. So O'Reilly, total returns over the last 10 years, 634%. That, I believe, is double a market. AutoZone has actually outperformed that, 698%. AutoZone has bought back a little

Starting point is 00:09:29 bit more stock. So O'Reilly has reduced their share count by 42% over the last 10 years. AutoZone has reduced it by 46%. But on the growth side of things, O'Reilly's grown operating income at 11% and AutoZone has grown at 8%. So like I said, and that is nominal operating income. So that's not operating income per share, not earnings per share. That is something I look for in a great share cannibal is a business that if you exclude the buyback, are they growing at a decent pace? Then the buyback is kind of cherries on top, which I like. The buyback coverage ratio, They are both more than 100%. Now, O'Reilly's looks a little worse. They've spent 130% of their net income on buybacks, but it's kind of reverted over the last five years. It's changed. AutoZone is starting to spend more of their earnings on buybacks, whereas O'Reilly's kind of brought theirs down a little bit, but both more than 100%. Not too bad, not too crazy. I would say when looking or thinking about a share cannibal, O'Reilly and AutoZone are

Starting point is 00:10:39 always top of my list. They have the characteristics that I would want to identify in any potential future share cannibals. Yeah, where permanently undervalued or I wouldn't say permanently undervalued. It's more of the sector they're in never really gets the, what you might call the sexy premium, where they're not going to be the Palantirs, the SaaS, the whatever you have it that is the AI right now that just gets super hot from a valuation perspective. perspective. And the industry itself is durable somewhat. I mean, I'm sure there is some seasonality and perhaps some cyclicality with these businesses, but you have that where it's consistent cashflow coming in. And then, yeah, if the stock's permanently undervalued, well,

Starting point is 00:11:35 that's a great combination if you consistently repurchase stock. As a little tease for next week, we're covering one of the best investors. Well, I guess we'll determine. He doesn't really care if we call him one of the best investors, but one of the most famous investors from the United Kingdom that does a lot of writing named Terry Smith. And one of his key tenants is looking for strong cashflow conversion when finding a high quality company and not like strong high, excuse me, high cashflow conversion is indicative of like a quality company. And I think these two probably exemplify that as well. Yeah, absolutely. And I mean, they just really check the box across the board in everything I look for. It's like the market is growing. They're gaining share

Starting point is 00:12:26 within the market. They have economies of scale and cost advantages, and they're intelligent with capital at their disposable or disposal so i really like it um the second one here or yeah maybe go through them all and then tyler has a comment here and we can discuss yeah and i'll go a little quicker through the rest of these so we don't do this we're not here for our second one is lows total return was 506 they've reduced share count by 40 they've spent 128 of their earnings on buybacks. This is one that has levered up progressively over the last, I guess, five or 10 years, probably encouraged by Bill Ackman, who's been not an activist investor, but a big investor in the company for a while. The operating income has grown, but revenue growth has

Starting point is 00:13:15 not been really that crazy. I think it's been about like four and a half percent annually over the last 10 years. So nothing too crazy, but their operating margins have expanded. They've done a good job returning cash to shareholders. If you look purely at the businesses, we're going to talk about Home Depot here in a second. They have returned way more cash to shareholders while growing at a slower pace. And they actually have, as of yesterday, identical total returns. So it's a bit of a kind of just worse growth, not even better capital allocation because Home Depot does a good job too. But because they trade at a discount, they haven't had to have as good of results as Home Depot in order to generate good returns for shareholders. So kind of interesting.

Starting point is 00:14:04 Third one here, the biggest company on the list and one of the best returns, Apple. They have grown tenfold over the last year in terms of total return. And they've spent less than 100% of their net income on buybacks only 99 they are probably one of the most efficient companies uh in terms of big tech they don't seem to be quite as wasteful as a lot of the big tech companies that's a low bar though so we should be fair it is but what's that stat or that uh that anecdote about like their treasury department is like six people and it manages 100 billion small yeah it's much smaller than maybe other large companies they run efficient in that regard which is great because probably more people is worse for a company like that or excuse me for that section

Starting point is 00:15:00 of a company but they do spend a lot of r&d what do they estimate 10 billion or more on the on that car that just got scrapped so yeah yeah there's maybe some wasteful bets but they've and this actually surprised me revenue growth for apple over the last 10 years has not been too crazy uh i believe i actually saw this the other day and i want to make sure to pull it up and make sure i'm not just getting it wrong but the okay so revenue over the last 10 years has grown at 8% annually, 8.4. The multiple EV to EBIT has grown at 12% annually. Their multiple has grown faster on an annual basis

Starting point is 00:15:53 than their actual revenue, which is pretty insane. Yeah, it's a good combination for good trailing returns, but I'm not sure it's the recipe for what someone should expect on forward returns. It does come back to, I mentioned for my intro question, that latest episode of the J-Row show, the guy he interviewed said that basically when they're making any assumptions for a high quality business, even if they think that it deserves a higher multiple, they want to make sure they can have adequate returns without multiple expansion. And then it's just a nice cherry on top because you can't control the multiple. But I guess in Apple's case, they were able to benefit from both

Starting point is 00:16:38 growth and multiple expansion. Yeah. And they have had slight margin expansion as well as there's been the mix shift to services revenue instead of just hardware. But anyway, the fourth one here is going to be rh previously restoration hardware i'll also say big pet peeve for me that they renamed it rh i don't know i don't like it it's frustrating to like it's the same as the ticker i kind of don't like when they have that whatever it doesn't matter anyway uh but they have bought back i think either the most out of this list second most on this list and it's been the most random, I guess, is maybe the way to put it. A lot of these companies, you look at the buyback, it's fairly consistent. There'll be years where they think they need capital, especially COVID.

Starting point is 00:17:29 A lot of companies pulled back on their buyback program and they'll draw it in. But generally, they're allocating whatever it is, all their net income to share repurchases. RH will have years where they don't buy back any, where they buy back a tiny amount. And then they'll lever up and buy back $2 billion in stock. And their buyback coverage ratio is two times their net earnings over the last 10 years. But it's just so sporadic and so random. And the CEO is pretty forthright about this. It's not coincidence. He says, I'm going to buy back when I think it's the best use of capital, and they'll do it really aggressively. They took down share count, I want to say it was like 50% in a matter of two years, or maybe it wasn't that much,

Starting point is 00:18:17 30 or something like that they did a they had a huge drop in share count uh in like 2017 time frame yep and i believe financed by convertible notes so taking on while they're convertible notes taking on some leverage to do do so all right um this share count is down 53 percent over the last 10 years total returns 356 percent all these stocks have beaten the market over the last 10 years. Growth has actually been pretty solid, 13% growth in operating income. Although this is a business that it's a little lumpier just in terms of earnings. So they might've had kind of a deeper starting point so that it makes it look better. Fifth one here, love this company, Domino's Pizza. I think it's one that has sort of the scale economy shared principle of they're

Starting point is 00:19:10 driving lower because of the scale because they have the uniform processes throughout similar layouts they manage all the marketing they're able to deliver pizzas at a lower cost same pieces everywhere yeah yep they push them through in lower prices lower prices you get in that positive feedback loop with customers all that anyway great returns here it's grown a little over six-fold in the last 10 years. They have spent well north of 176% of their earnings on buybacks, but they've reduced the share count by 37%. I did not know. This was the biggest surprise on my list. I did not know they were such a share cannibal. I didn't realize that's what they were doing with their capital. This is, by the way, people think of it as a pizza

Starting point is 00:19:58 restaurant pizza franchisor very capital light they are not putting out most of the capital it's mostly the franchisees which i guess that's a typical franchisee model but they've done just an absolutely awesome job executing over the last 10 years any thoughts on dominoes good business and when they changed or i think they brought a new management not an expert on the company's history but it was right around the great financial crisis i don't think they were in a crisis. But they decided to change up the food quality, make it more consistent. There's just big complaints about how bad the quality was. And they did so and they focused on the customer efficiency, low prices, all these deals, the app, the owning their delivery. And it just seems to

Starting point is 00:20:45 work. It's a pretty easy model. And the franchisee model is going to be, as you mentioned, capital efficient. So it's going to have that cashflow conversion as opposed to maybe a Chipotle who owns all their restaurants. That could be the right move in the long run, but the downside is it's more capital intensive. Yeah, absolutely. All right. Number six, this one has not been really that much of a share cannibal, but I think they've been intelligent about the way they've rolled it out. So Home Depot, one of, I think they're the biggest retailer in the US actually, if I'm not mistaken, by market cap. I think they're bigger than Costco. They've had sixfold returns over the last 10 years. Share count's only down 24% over 10 years.

Starting point is 00:21:36 So nothing crazy here, but they haven't spent a ton of their earnings on the buyback. They also have a dividend in place, but they've only spent 72% of their net income on buybacks and they've really done a good job relative to Lowe's of growing the per store productivity levels. Their retail sales per square foot, if I pull it up here, let me just grab this real quick. sales per retail square foot has grown at 6% a year. They've improved operating margins, especially at the per store level as well. And they've done a really good job optimizing the stores for pros. So good returns. They've been methodical about the buyback. They haven't juiced it too much and they're actually increasing it now. The multiples come down a bit

Starting point is 00:22:30 and they've actually started to juice the buyback a little more now. Last one here, Murphy's USA, gas station chain. This has actually had the best returns of all the stocks on this list. They've had better returns than Apple. They are up 12-fold over the last 10 years. They've reduced their share count by more than half and their operating earnings have grown at 9.5% annually. And they've spent less than 100% of their earnings on buyback.

Starting point is 00:22:59 so they haven't had to lever up to do it. I think this is probably the most impressive business on the list and the one that is maybe the most surprising in terms of total return. I agree. Well, I don't know if you should be surprised anymore because we had the interview with the guys from Capital Mindset discussing this stock and it was shocking how good this business is. But I think the key when looking at a share cannibal is there has to be doubt from Mr. Market. O'Reilly and AutoZone, there was doubt. Lowe's, Home Depot, there was doubt after the great financial crisis because of the collapse in home building demand and all that stuff and just real estate. Apple, there's been doubts for years or I'd say maybe the last couple

Starting point is 00:23:44 of years, there hasn't been as much doubts if we're going to go on the earnings multiple, but it traded at about 10, 15 times earnings for a long, long time. RH, there's been doubts. Domino's, there was a lot of doubts and it's why it's, I think, a hundred beggar coming out of the gfc or if not really really strong returns or vusa same thing there and yeah i i think if you're looking at because we have some questions here in the comments what are um like the best share cannibals for the next 10 years i think you have to look at that on sort of a broader mindset of okay what are some companies i think are one in a durable industry which have good cash flow conversion um are going to end trade at a low multiple and are going to be pouring stuff into

Starting point is 00:24:32 buybacks cash into buybacks yeah here's a good example of one that i call an honorable mention that's not i didn't call it a best share cannibal because i don't think it's that great of a business but this really surprised me and it just goes to show how much of having a good repurchase program comes down to what the market thinks of you. Dick's Sporting Goods has outperformed the S&P 500 over the last 10 years. I thought this business was screwed. I thought they were insolvent. I think we have the Seattle lens because I actually had a friend that worked there for a little while. And it's just that the theft issues make it seem like the business is terrible, but I think that might've just been a Seattle.

Starting point is 00:25:21 west coast issue i see what i mean there that's what i that's what i've heard is like oh they have terrible theft issues just like the targets and the west coast just like the cvs's and i was like man this business has got to be bad but if you look at the performance i mean wow like they really found their niche there and i wonder why be an interesting one to look at because i wonder why they seem to be the only maybe not the only but there's a lot of those old physical sports retailers that went out of the box yeah yeah yeah a lot of i wonder why they've succeeded and everyone else has failed yeah i don't know they've bought back 34 of their stock and earnings per share have grown at 16 a year it's if you just asked me what do you think dick

Starting point is 00:26:11 sporting goods has done over the last 10 years i would have guessed they were down 50 or more and struggling and i would be dead wrong so pretty impressive there uh that's the doubt though that's where the opportunity lies yeah and it constantly trades at like 10 times earnings so it allows you to be it allows you to do more positive things for your shareholders when you get that discount question here for you and for me as well what are the qualities you look for in a potential share cannibal, one that you think this could take down a lot of stock and generate good returns for me in the coming years? Okay. I'm going to take away the management part because obviously management has to be with you in returning that cash. And we've already talked about some of it

Starting point is 00:27:03 where the key is starting low valuation. And I guess your ability to be a share cannibal kind of goes away if you start trading instead of 10 times cashflow to 40 times cashflow. But I don't think you're going to complain as a shareholder if you get a 4X from multiple expansion. But I think you have some notes here about the ability to add cheap leverage. But I think consistent cashflow conversion is key for me. I mean, one company that's probably not going to be a share cannibal unless we get a huge narrative shift because they traded a premium valuation is Airbnb, but that's one where the cash flow characteristics of the business make it extremely attractive from a buyback perspective. You have booking here as one of your honorable

Starting point is 00:27:54 mentions as well. I think they probably have the same stuff there where you're collecting a lot more. The cash is just coming in at such an attractive rate versus even what your gap earnings are that if you trade at a low multiple, I mean, you can just take down the share count so aggressively um other characteristics i don't know i'll go through a couple of mine here yeah you go ahead a lot of it's the discount the other part i like to find businesses that are growing to begin with because it's just more sustainable when you look at some of the like if you just screen for biggest buyback programs you get a lot of underperformers People that were buying back that shouldn't have been or people were buying back that maybe they should have been because the business was so bad there was nowhere for them to invest, but they were buying back shares on a business that was failing.

Starting point is 00:28:50 So there's a lot of those situations. I like to find businesses where there is some level of durable growth, either revenue or share, whatever it is. The second one for me, and I saw this a lot with the list today, companies that have used leverage or levered up over the last 10 years to buy back more stock, that's okay, first of all, because rates have been low over the last 10 years. But ideally, I want a company where they haven't levered up in the past to do it because Lowe's, for example, has been able to buy back a lot more stock because they've increased the leverage. I think you want one where they either aren't levered up yet – Sprouts Farmer's Market was an example of one we were looking at over the last five years – where they really didn't have a whole lot of leverage and you knew they could have to juice more buybacks or they already have some leverage but you think they can continue to lever up more. So I want ones where I don't feel like the low-hanging fruit and the increased debt is in the past. And the last one is just consistency. I know the RH approach can work, but we've seen it go wrong as well, like Bed Bath & Beyond, for example.

Starting point is 00:30:06 So I prefer ones where they're constantly buying back and they can kind of moderate it or turn it down as the valuation creeps up. So I don't really want the ones where it's sporadic. buybacks. I really don't like that. Yeah, it makes sense. I think I agree with that. Consistency just makes things simpler. All right. We have a comment here that says ZZZZ. So I think that means that we're going long on this topic. We have a few questions here. What do you guys think are the best share cannibals over the next year, Google, or excuse me, the next 10 years, Google and Meta question mark, match group, maybe questionable terminal risk and a low valuation with no real reinvestment needs um and the criteria from tyler is you know terminal risk

Starting point is 00:30:54 but accompanying low relative valuation and there's something on here about home builders for ryan but i guess that's separate yeah i think match is a good candidate but again it is risky because one there has to be that risk like if you look at some of the good companies on this list at the time there was a the narrative was a lot different on i don't know what their growth prospects were how high quality the business was i made a key one was dominoes where people were like they're just one of the worst brands out there and they took it took 10 to 15 years to change it but they did and at the same time they had a low valuation bought back stock used leverage uh smartly match group makes sense i think alphabet would make sense if management maybe

Starting point is 00:31:42 if they had apple's finance department or you know budgeting team right um i don't know if they have that combination of the management team that makes sense but they have been decent so far uh over the last few years at pouring money into buyback so i think if the valuation comes down to an attractive level of 10 times cash flow or something like that yes they can be one of those but management's not as ideal yeah i mean this is a good example of it it's hard to be a great share cannibal because you not only need a discount in your valuation but you need a discount for a while where like match group right now if you just modeled it out yeah they could buy back a lot of stock because it's trading at a discount but if they really start to buy back a lot of stock i

Starting point is 00:32:25 think the valuation would probably re-rate and because it would show the market that management is able to take advantage of it so it's really kind of a weird you have to be in a weird position where the market consistently thinks poorly of you yeah well i don't know if it's that or if the narrative could shift quickly if it's proven that there's durability you know in the in the sector um and with some of these other ones it's just not sexy enough and that's actually the benefit you're going to get murphy usa perfect with that in that regard let's move on to some other topics uh we don't want to take i think we took about half half the time there we want to do some some other stuff on this episode i have some won some winners and losers from the week uh i

Starting point is 00:33:18 I know you were tentative to talk about this one, but it was in the financial news on the financial TV. So I think it should be approved to talk on a no-name podcast. But did you see and or listen to the Palantir CEO? Yeah, I heard it. This is probably the most unhinged CEO interview I've seen in the last three or four years. Maybe there are some others. the ones where the ev company ceos are wearing hard hats were pretty hilarious but this is more just bizarre is maybe the word to describe it yeah are you gonna try to share this or i

Starting point is 00:34:00 no i i'm gonna figure out how to do that because the audio is really great and it's short it's i think it's perfect for for a podcast but we have this new software i knew how to do it on zoom um you want to describe what it is let me yeah for anyone that doesn't know you can probably find it either on Twitter X or search it on Google. You'll find that it's like a 30 second clip. Basically they were asking something and the founder CEO of Palantir responded essentially saying that short sellers are going with that classic line that short sellers are a bane on society. They're holding society back. All they want to do is see good companies fail and essentially saying they're profiting off of the companies failing. And then he tosses in

Starting point is 00:34:45 some like 20 second anecdote about uh the failing financing their cocaine habits which i thought was bizarre because if you spent any time with the investment community you'll realize that i mean go to the berkshire weekend like it's all we're all a bunch of nerds like no one's you know what i mean like it's weak it's i'm sure there are some of that right like in any any group of people but i think everyone embraces being almost like losers in that regard just kind of nerds uh and so i'd say it's the complete opposite first off maybe it was in a hilarious interview and you know we don't i think the more fun topic is how much okay let's say you ryan are invested in palantir because i think when we when people listen to that we know palantir

Starting point is 00:35:37 a popular company, especially among the retail crowd, especially among the online communities that might listen to this show. And I'd say like, Ryan, if you were one of those people and you saw this interview, what would be your thoughts as someone who's not trying to be on the right team, but trying to make money with your portfolio? Yeah. Well, I would think it's concerning. The reality is with a lot of these companies where the shareholders kind of band together in a way they feel like a group like uh it's even berkshire to some extent you're gonna back what they say no matter what like you almost give them the benefit of the doubt and your filters for okay is what he's saying does it make any sense at all like even with munger a

Starting point is 00:36:28 lot of munger in china a lot of people were like no i mean it's munger so it's i think he he probably knows more and it's like the same same thing with the volunteer ceo the amc ceo where you're sitting there and you're like well you know i guess we got to trust him he's our leader so the problem is in this case and in almost all the cases it's more of a watch what they do not what they say and someone brought this up today it's like you talk about the evil short sellers how about the evil long sellers and he has just been no the long sellers he has just been selling stock over and over while like criticizing the short sellers and it's like it's the same thing no yeah he just needs the premium it's the synthetic uh yeah ladder attacks i don't know it's it's crazy okay

Starting point is 00:37:23 we got a comment here would you guys ever do a podcast where you discuss the qualities of your winning investments and the quality super losing investments like a post-mortem to figure out where your circle of competence is yeah i think that's good maybe you know i guess we're a long ways from the end of the year but that could be like an end of the year type deal where we go through post-mortems on some stuff uh other comments people either think alex carp is a fraud or visionary palantir has been growing like a weed but spc is also a problem spc is written a few molly fool articles on this company given it's so popular you know it does quite well with the reads and the qualifying for some bonuses.

Starting point is 00:38:00 So I'm not opposed to writing a, is this stock the next Magnificent 7 company that you need to own? And then if you go through the numbers though, their SBC is, yeah, very high. It's like a 20%. It might be lower now. But you contrast that with,

Starting point is 00:38:21 common sense seems to perform quite well, wins a ton of customers from the government. commercial customers are growing quite quickly. And when you read their stuff, even from the CEO, Alex Karp here, you're like, wow, they're kind of sharp. They know what they're doing. They seem like they're focused on winning customers, generating sales. But then when you see this type of thing, I think if I owned Palantir and I saw this clip, I would sell right away. Well, I think this is just a good example of, and I'm not sure if they, I think they might have moved their headquarters, but it's a good example of the Silicon Valley culture being

Starting point is 00:38:59 embedded in your company, right? It's employees first, shareholders second, and they reward the people in the business first. Salesforce had it for a long time. You can go down the line and just tick off every single, a lot of tech companies that are from the Silicon Valley area. when you get to public markets it's like your exit it's your and all your employees exit and it becomes this constant financier for your life so and especially when they're willing to give you a premium valuation i think here's part of i think the pushback i think from people would be is salesforce is pretty close to being a hunter beggar yep so it's like it worked i mean it can work the business the business is so damn good but what i would say is just for anyone that

Starting point is 00:40:01 loves balance here any stock like this i'm not trying to hate on your stock i i don't i don't care if the company succeeds or fails i don't have any vendetta against any companies um like if if their share count is going up by 20 a year and that might be extreme but let's say it's going up by 10 a year and revenue is growing by 10 a year your revenue per share that you own is not going up so it matters and they tout like a 30 40 free cash flow i could be getting this number wrong but they're touting a high free cash flow number but it is with a high high valuation and high level of SBC. And I'm sure their share count's not going up by that much

Starting point is 00:40:44 because they're trading at like 20, 25 times sales, which is probably an issue in its own regard. But I think the biggest red flag for the stock isn't the high valuation. It isn't that SBC. It's the fact that management, I don't care what they're doing as a company. it's whether i think they this guy has a rational level you know level-headedness yeah it's also

Starting point is 00:41:13 worth mentioning that salesforce built a cloud force or a cloud-based crm before anyone else and i think the space is a little more crowded so i wouldn't just anchor to salesforce's returns for any software business that you you own um but i mean it can work if your employees are heavily incentivized and the software itself is really powerful and wins customers, then more power to you. The only issue for me with Palantir is that it's a black box and I think they want it that way. They don't love to explain the depth of their products and the nitty gritty. I know that I've seen some YouTube tutorials where they talk about it, but I think you kind of just have to trust that they're winning customers and the customers are paying more and the

Starting point is 00:42:06 proof is in the pudding in that case. Yeah. I wouldn't say that's a huge issue, especially because some of it's classified since it's military-based, but you can talk, you're not going to make money. It's like the Bezos thing. He did that interview with Lex Friedman and in it, he mentions that a lot of management teams today honestly don't know the metrics that matter to them, or they use metrics that really don't matter to measure the success of their job and the operation as a whole.

Starting point is 00:42:40 I think this is a good example where if internally Palantir is using cash flow margins to measure it and they're kind of being lackadaisical about stock-based compensation, then yeah, that's obviously not great for shareholders. okay i'm gonna go to a winner of the week company that we followed uh a long time i think we've had some good podcasts out on it so if you want to search in the historical archives we have go check it out uh it's a company that we don't own though given the valuation unfortunately and it is adyen good tweet from mostly borrowed ideas on the nice newsletter service we've had him on the show before give him a follow he says since stripe just published their annual letter

Starting point is 00:43:24 i just updated this chart both add-in and stripe are now growing at pretty similar rates but add-in has a way used a lot of wise here you know whatever you gotta get the uh people to read online uh way higher margin than stripe and it's neutralized for any sort of exchange rates i think um maybe i'll share the screen here actually so anyone watching can see it but ryan did you see this at all and if not i will show it to you right now i did see it i did say this is another example of the different ideologies between companies built in silicon valley and company well i guess it was technically built in ireland but really grew in silicon valley oh no it's irish our stripe was yeah yeah okay uh built in silicon valley versus being built elsewhere

Starting point is 00:44:20 it's just a different level of expenses they pay employees more because that's what you have to pay to get certain employees but then it is a good example if you don't need that many sometimes more people hurts you more than helps you and i think that's kind of a big difference between add-in and stripe here yeah and let me for the listeners so we have basically total payment volume, which is pretty much going to translate to revenue for these payment companies that run very similar models from 2018 to 2023. In 2018, Add-In had $173 billion in USD. Excuse me, 2018, they had $173 billion USD. 2023, $1.057 trillion. Stripe, extremely similar, 170 billion 2018 and then 1.021 trillion in 2023 what's interesting is in 2019 adian had higher

Starting point is 00:45:24 levels 2020 2021 stripe had higher levels which i think is probably the pandemic benefit to ecom especially in the united states north america and then adian re-accelerated and started beating them in 2022 and 2023 although i'm sure they're not just focused on you know beating stripe that's probably not the priority um where are you at the rent okay any thoughts there because i think it doesn't look that different because you'd say okay both companies are doing well but stripe basically doesn't make any money and add-in has 50 margins so it's so much more impressive to me that you can 10x revenue doing that and yeah sure maybe stripe has a great consumer surplus because they're helping publish the updated charlie munger book which i appreciate but should you really be

Starting point is 00:46:20 doing that as a payments processor i'm not so sure yeah it it really i used to think like well i'm sure every employee helps a little bit in terms of driving revenue but no some can hurt I don't, joining, yeah, joining FinChat, which we should probably talk about now, by the way, joining FinChat has been an interesting experience because I could see how, and we haven't like done, we're not super acquisitive or anything like that, but I could see how if you were acquiring a different payment company, if you're a payments company, you acquire another famous company. There is a different setup on the back end. You've disrupted the flow that you might have with existing employees because now you have to

Starting point is 00:47:12 work with the employees that have come over. You have to relearn a whole bunch of systems. It slows everything down. And now there's a product that you haven't helped build. So it's harder to address the pain points and address any issues that come up. It's harder to ship products faster. For Adyen, they've built everything from the ground up. So they can move so much faster. And it's one, I tweeted this out this morning, but it feels like one of the businesses where it's the clearest example of the impact that a company's culture can really have on the outcome. Because every company talks about whatever our culture, but this one, you see how much more customers they can win. You can see the higher authorization

Starting point is 00:47:57 rates because they have a company that they built from the ground up. They do everything organically. It's really impressive. Stripes obviously built a really good product as well. They've just hired more and earned no money in the process. Yeah. And I actually haven't read their 2023 numbers. So if they made a little money, I take that back. But historically, they've been much less efficient and I'm sure that their margin was not at Adyen's level. But why don't you talk about our friends

Starting point is 00:48:24 at FinChat, Ryan, and where you can get, I know you mentioned like retail sales per square foot, you know, where can listeners find some of that high quality KPI data in an instant, you know, easy to use platform?

Starting point is 00:48:39 Yeah, FinChat.io. We've had a lot of listeners already sign up using our code. I hope you're getting a lot of value out of the platform. For anyone that doesn't know, is a stock research terminal. So look up any stock you want. They've got 100,000 stocks in total on the platform. 50,000 are active. More than 50,000 are active. They've got some old

Starting point is 00:49:00 ones as well. They track that stuff. And then they've got segment and KPI data, like Brett mentioned, the retail sales per square foot, comp store sales. For Home Depot, they have tons that you can add, total store locations, lumber revenue. Basically, they segment everything out and they track really a lot of the metrics that matter beyond just the standard financial statements. There's a lot more to it. Check it out. It's FinChat.io. If you end up liking it, you want a paid plan, FinChat.io slash chitchat will get you 25% off. That's FinChat.io slash chitchat. So appreciate everyone that's already used the code and feel free to check it out. Yep. Link should be in the show notes to get that discount. If you can't figure

Starting point is 00:49:43 it out email us or email is in the show notes or find us on twitter or x and we'll help you out there all right next we got a comment that says who is the winner of the week for the tiktok ban and that's a great question because that is actually next on my list here for those maybe that aren't following i'll give some quick context the house of representatives in the united states passed uh which i should say is not a tiktok ban the company is throwing out a lot of i don't think i would call it it's not propaganda it's misleading info i'd say what the on what the bill is because it's the what it would force them to do is divest um any sort of relationship to the chinese communist party or stuff like that it would have to be if it's in the united states

Starting point is 00:50:33 be an american-owned company whether you agree or disagree with that uh i don't think that's the fun topic for this episode i think that's going to be talked about on every single news thing for the next week or even longer but what i was interested in thinking about is how it could potentially impact the magnificent seven and maybe some other companies out there where you have a company that takes up so much time of people's entertainment hours, especially under 30. And if that goes away, which it technically wouldn't be a ban, but I guess they're treating it as a ban because for whatever reason, they think if this bill passes, it's going to go in. And I guess it passed the House of Representatives. It hasn't passed the Senate yet, but the president of the

Starting point is 00:51:19 United States said that he would sign it into law if it got passed. So got quite a few boxes checked off here. But I had a tweet. And these are my thoughts. And I'm curious if you agree or disagree, who I think it positively helps if TikTok goes away. I think these are kind of indisputable. Amazon, Alphabet, Meta. I think it negatively could hurt, not directly, but indirectly, Apple, Nvidia, and Tesla, mainly from retaliation from the neutral ryan who do you think the band could help or hurt uh maybe even non-magnificent seven companies yeah i don't know non-mag seven i'm not 100 sure maybe snapchat in some way but probably not the i would think the time spent probably goes to instagram and youtube primarily would

Starting point is 00:52:18 be my guess so google and meta maybe netflix but yeah i mean definitely i'd be surprised i'd be surprised if if they were stealing that much share from like a netflix but i don't know potentially i i think a lot of the tiktok users would still be looking for a mobile-based app where they can get engagement or sorry, content really quickly and shortest bite-sized content. And the way to do that is really YouTube and Instagram and I guess Snapchat to some degree. I think they would benefit. The other part that I find interesting and I'm surprised they thought this would be a good idea, but they pushed a notification to all TikTok users in the u.s that said call your local uh call your local representative and tell them you don't want

Starting point is 00:53:19 the you don't want tiktok banned and they're doing something wrong and it was misleading too which is like part of the thing is like they could push stuff that's not true right and the basically all the representatives said all the calls we got just hardened our belief already it made it that much worse and i think trying to influence votes and decisions uh is probably not the right way to go to get the government to be in your favor so that's true if the whole point is that they can control the the uh you know what young people think yeah yeah so it's like oh you kind of proved our point uh we have a comment here that says imagine if amazon bought it and merged tiktok with their e-commerce store they would immediately have add inventory to fill tiktok and more demand

Starting point is 00:54:12 to utilize their logistics network i mean yeah i mean that's come on 10 trillion dollar company here we come like that's that would be incredible i don't think it would be allowed to happen i don't think amazon um would probably not do it but that would be incredible though yeah Yeah. But I think even if that doesn't happen, which seems unlikely, sneakily, Amazon might be just as benefited from a TikTok ban as an Alphabet or a Meta. Because one, TikTok... And I mean, look, Teemu is not a real threat. I mean, ask people what they're buying on there and whether they use them. It's just $5 knickknacks that fall apart in a week. Um, but TikTok has been really aggressive in e-comm and there's been a big narrative

Starting point is 00:55:07 around that. I guess it hasn't reflected in the stock price of Amazon recently, but they're growing quite quickly with their e-comm offering in North America. And TikTok takes a lot of the advertising inventory for e-commerce stuff that Amazon probably had to pay for originally. You know, Amazon has a giant advertising business that they're trying to build and keep growing. Right. and has extremely high margins i think they could benefit just as much

Starting point is 00:55:34 from even if they're not direct competitors with tiktok yeah i think that's fair we uh have got a question here is there a risk of china retaliating against tiktok ban yeah i think that's what i mean i think apple and tesla could be interesting and i mentioned those companies because there's been people in the chinese government that have said you know in retaliate basically they've there's been a lot of war awards from united states officials united states common commenters whoever that say that tiktok is a chinese spying app right that's kind of the thing that they're trying to use to convince uh everyone that it needs to be banned but then they come back and say in china and say well apple products and teslas are america

Starting point is 00:56:26 chinese or excuse me american spying products so i would think they would look at those and say well you're going to ban our quote-unquote spying product even if they're not we don't really know um and we're going to you know just go tit for tat there so that also happens to be your part of your psychological short book well yes i mean that would do quite well yeah i think that would make sense even if i didn't like either the companies i guess i don't really not apple i'm kind of neutral and just get frustrated with how much people like the the brand but tesla yeah i guess it's not not a big fan um yeah we do have a question here it says do you guys still own match group that's the video that popped out in my feed that led me to your live feed right now

Starting point is 00:57:09 here's another example side note of the value of youtube and how i wish there was a recommendation algorithm for podcasts like that on any other platform of choice but that's why i don't like apple is because they're so lackluster in that regard yeah we do still own met well i shouldn't speak for both of us but i i know brett does and i do as well we both own match group unfortunately Yeah. The stock that will never go up as it's known around my apartment. But yes, it is frustrating to watch. There was actually – I think they were at a conference recently, a Morgan Stanley conference. Bernard Kim, the CEO, was. So maybe I can read that transcript or something. But I like it. I think the business is going to generate a lot of cash. I don't think Tinder is dead, and I think Hinge is a really, really valuable product to a lot of people, and people will continue to spend more and more money to find dates online is my guess. That's my suspicion. So that's kind of my elevator take, elevator pitch.

Starting point is 00:58:18 They got some potential activists in there to keep the management team in line. When their KPIs will recover, I'm not sure. but you know good business good unit economics great cash flow conversion uh let's see eric says thanks for the episode guys yeah hey appreciate it we put one out this week over an hour long hopefully people enjoy that if you don't know what that company is go check it out we think it's quite interesting either listen or watch um anything else on tiktok ryan because we have a question here for you on home builders just kind of been a sector that you like no i i've never really been active on tiktok we tried to put our podcasts out there for a little

Starting point is 00:59:05 while and it's just slow and it's hard to track whether people are becoming long-time listeners so it was a little frustrating so i'm not missing anything by them being gone and i think it's better that there's no chance they can dictate decisions in the u.s by influencing what people see so i'd say i'm i'm probably for it yeah i'm for it big time especially since my psychological long and alphabet as i seem to just defend them i don't know for some reason i feel the need to defend them on twitter but it should it should help them and for the show hey we we put no time into tiktok we put a lot of time into youtube so come on you know hopefully it ends up being the right back come on u.s government okay question does ryan still have any thoughts

Starting point is 00:59:54 on home builders uh using more option land nowadays copying the nbr model and have you guys looked into different brookfield companies we've looked into brookfield companies and got lost in the maze unfortunately just not not putting in the time to understand those those businesses so the canadians out there you guys can make all the money owning them yeah right no thoughts on brookfield as for the home builders i was actually wrong there are less if i'm not mistaken there are less land plots being optioned today than purchased um relative to like i think it was 2013 was the last comp uh but there are certain businesses that have really shifted how they run things.

Starting point is 01:00:43 So there's more home builders today that have really leaned into the land option model. But as a total, like the pie as a whole, more people are buying the land outright instead of optioning it. I like the land option model. It makes a lot of sense to me. I'm not, I'm still, I think,

Starting point is 01:01:04 learning a bit about the home building business because there must be some reason that a lot of developers, a lot of home builders choose to purchase the land outright. Maybe they get better deals on the land because they're willing to hold it on their balance sheet. I don't know. But I'd like to know why home builders still decide to do that when there's such an advantage to being asset light and letting it be on the books of a land bank. Maybe it's hard to find partners that are willing to do that. That might be a part of it. So for the businesses that have those partners, that's, I think, a huge advantage. The companies

Starting point is 01:01:45 like NVR, DR Horton, DreamFinders Homes. I'm trying to think of some of the other asset-light ones. I think Pulte Group has slowly shifted to land options as well. There's so many home builders out there. Yeah. I like the home building space right now. And to me, it feels like a lot of the bigger ones have big cost advantages that should last for a while. And I would suspect that the DR Hortons, the NBRs, probably the Toll Brothers and Pulte Groups of the world end up having a pretty good decade, even if home prices come down a bit. I think the home shortage seems to be pretty real and they've got the ability to generate good returns on capital. All right. Well, I think that's going to do it. We're going over on time, but I should say we are recording. You are doing a either pitch or stock report type show on DreamFinders Homes coming up sometime soon, correct? So for anyone, yeah, is that correct or

Starting point is 01:02:48 know yes all right we'll see i'm a little torn actually there's a couple home builders i'm looking at so i think we'll title it the stock the stock i like the home building stock i like today or whatever the home building yeah it'll be something in that sector where i do have a lot of follow-ups i want to ask right now but we are running up on time i think that will be an interesting conversation because yeah some of these stocks have done quite well over the short term and the long term it's an interesting industry it's one we can all understand and i think it'll be a fascinating conversation especially with i guess maybe not dream finders homes but there's a couple interesting ones out there uh but yeah i think that's gonna do it thank you

Starting point is 01:03:33 everyone for tuning in if you are listening uh watching whatever for the first time give us a follow on spotify apple or youtube and give us a five-star review on either spotify or apple podcast. That is the number one way to support the show. We've gotten some nice ones that maybe we'll read off at some point here. And then subscribe to keep up with the show on either Substack or Twitter and X. That's the best way to make sure you don't miss an episode. Let's hit a disclosure. We are not financial advisors. Anything we say on Chit Chat Stocks is not formal advice or recommendation. Brian, I, or any podcast guests may hold securities discussed in this podcast. I may have held them in the past or may buy, sell, or hold them in

Starting point is 01:04:19 the future. Thank you everyone for tuning into the live stream, typically 9.30 a.m. Pacific time, 12.30 p.m. Eastern time on Thursdays on the YouTube channel. Link to that is in the show notes. We'll see you all next time. Bye.

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