Chit Chat Stocks - Are We Buying Alphabet Stock On The Dip? (AAPL, GOOG, GOOGL, UBER, DG)

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 am one of your hosts, Ryan Henderson, and I am joined as always by the one and only Brett Schaefer. And on this episode, on these episodes, we talk all things financial markets. We do these live once a week on Wednesdays at 10.30 a.m. Pacific time, 1.30 p.m. Eastern time. And if you want to get any

Starting point is 00:00:57 questions in, you can go on over to YouTube, look up Chit Chat Stocks, and you'll be able to see our live videos. And you can also just send them to us throughout the week, and we'll try to touch on those as well. We've got plenty of topics this week. Markets in turmoil, maybe? I don't think so. I think you might just be looking at Google or Alphabet's stock price. Alphabet, apparently, they've been winning in AI. They've been losing in AI. They've been winning in AI. Maybe they're losing again according to mr market lots of volatility with that stock and i think another fun update for them could be fun to discuss i maybe a spoiler alert i have no idea why the stock is down but it's in a 20 drawdown and hey if you like the company could be a buying

Starting point is 00:01:42 opportunity banks brett recession fears are looming there now i we joke around about oh recession here recession there because it seems like people are concerned about it 24 7 there was some concerning language that came out of a specific conference call that sent pretty much the entire banking sector down for the day um and i'll talk about what that is in a sec brett's also got a couple other topics here as well so we're going to be talking google iphone event uh the apple event was out as well and then i've got seven industry leaders that just hit 52 week lows. So that one should be, some of these are pretty interesting. I'll just little tease here. And I know there's one company that you've been interested in in the past. So we'll

Starting point is 00:02:31 definitely get to that as well. But before we get to the show, we want to talk about our friends at Public. If you want to earn a 6.9% yield for the next four years or more, you need to check out the bond account at public.com. It's a new way to invest in a diversified portfolio of bonds and receive monthly interest payments. The best part, if you act now, you can potentially lock in a 6.9% yield until 2028. In other words, no need to worry about the Fed's upcoming rate cuts.

Starting point is 00:02:59 With a bond account at public.com, you can earn a 6.9% yield even as rates fall. It only takes a couple of minutes to get started, but you have to act fast if you wanna take advantage of some of the highest bond yields in years. Discover how you can lock in a 6.9% yield until 2028 with a new bond account only at public.com forward slash chitchat stocks. With that said, Brett, where do you want to kick things off?

Starting point is 00:03:25 Let's do recession back on. Recession's been off. Recession's been on, I think, ever since 2022. Do you remember when the conference calls in 2022 when every CEO, when they had a bad quarter, just said, well, I mean, these economists have said that we're heading into a recession and that it never happened. and their businesses just weren't that good. Well, maybe you have some input for us

Starting point is 00:03:48 that there is some actual slowdown within consumer spending, consumer paybacks on loans. What has you concerned, Ryan, our macroeconomist at Chitchat Stocks? Yeah, I am the chief Chitchat Stocks economist. Last – no, the – last week, we said something along the lines of – one of the – one of our listeners in the comments said, are we concerned at all about some of the reports coming out from consumer discretionary type businesses? And I basically said, no, I don't think less people going to Starbucks is a bad sign for the economy. me. However, I'm starting to maybe eat my words here because I'm wondering if that is maybe a

Starting point is 00:04:39 leading indicator. And it's not just less people going to Starbucks. That's not the issue. But a lot of these discretionary businesses or not discretionary businesses, but the retailers, Lululemon, Nike, Starbucks, McDonald's, stuff like that, as well as discretionary items at the grocery stores. We're seeing this with most of the retailers, the big retailers in the US reporting weak numbers. So I kind of – at first, I glanced it off. Now, this week, we have Ally Financial's CFO coming on to one of the sell-side conferences and he came out and said, we – in July and August, we saw delinquencies up about 20 basis points versus our expectations and we saw net charge-offs up about 10 basis points versus our expectations.

Starting point is 00:05:32 It goes on to say, we are clearly dealing with a cohort of borrowers who have been struggling with cost of living and now are struggling with an employment picture that's worse than unemployment. I think that maybe got misquoted here. That's worse. Unemployment is up approximately 50 basis points since the beginning of the year. Basically, for context here, Ally Financial is one of the largest used car lenders in America.

Starting point is 00:05:57 So automotive loans in general tend to have some of the lowest delinquency rates among lending categories. It's one of the first things people pay back because if you need – it's something you don't want to default on because you really need your car, right? You need your car to get to work, to make money, to afford all your other loans. So a bunch of banks sold off on this. JP Morgan I think was actually down 7% on the day. i obviously i think i think that might have been because of an update on the the basil 3 end game which is the most hilarious name for banking regulations that might have been it for jp morgan but for ally it was down around 20 right i gotta say 10 10 basis points 20 basis

Starting point is 00:06:44 points increases from their models which weren't that like aggressive for what they were expecting for losses did that deserve a 20 drawdown i'm not so sure but clearly not great you'd obviously want it to move in the opposite direction if possible yeah i think they're still trending above historical delinquency rates like pre-covid delinquency rates so it's i'll check on that in a second, but I guess the commentary was somewhat concerning. So, I mean, it's, they are, it's not like some niche case where they're lending to something really specific. It's a lot of Americans that are, you know, have ally automotive loans. So maybe, I don't know, is this more concerning to you to now see discretionary spending pulling in a bit and now delinquency rates starting to

Starting point is 00:07:39 tick up? Do you feel like there's maybe a little more concern that we should have from a macro standpoint? I would say if that impacted my investing decisions, yes. But given I have a long time horizon, I'm young, I don't have to worry about something like this. I don't have to worry about bond allocations. It's not concerning for me personally, but clearly Ally is a good barometer on consumer health and if their charge-offs and what was it delinquencies they're going up that means a higher percentage of their borrowers are getting desperate and that's not a good thing but who knows though whether this is going to revert back in two quarters. I think two months don't make a trend. We've seen stuff, even the thing about

Starting point is 00:08:39 inflation came out today. No one cares about it anymore because it's back down, going to get back down to 2%. It's about 3% maybe, or it's in between 2% and 3%. Remember when there's some months when it was slightly higher than expected, some months it's slightly lower. Now it's been multiple quarters, I think probably five or six quarters where we've seen it move generally in the right direction. And we've seen hourly wages growing faster than inflation for that same time period now. And if that happens with Ally, I'd call it a trend and be something that's clearly concerning. Now, if you're going to make a short term bid on a portfolio, yeah, maybe, hey, this is a big red flag but does this mean allies businesses in shambles no i agree

Starting point is 00:09:26 it's definitely not the direction as an ally shareholder it's not the direction i wanted things to head so what chart are you showing here this here is the net charge up the quarterly net charge off rates so you can see kind of pre-covid it was slightly lower than what it is today um or what it was last quarter um so it's slightly above where they were um and they just said it's starting to tick up again so yeah net interest margins are likely gonna compress that's why ally stock sold off on the news but i don't know how far out i would extrapolate this i wouldn't be all the banks the one thing i do find funny is if one bank reports goes to a sell-side conference and they say a couple

Starting point is 00:10:18 concerning things about their cohort and basis points right they're lending yeah if they say anything about the cohort they're lending to it seems like a lot of people extrapolated to every single company with credit risk we saw this with the um collapse of silicon valley bank and first republic where it's like oh if you you know if you have any credit risk this is danger time or any treasuries on your balance sheet or any mortgages on your balance sheet it's over now there was some that were actually you should be concerned about like charles schwab and it's been a headwind for them for a long time and given the mistakes they made with that balance sheet it's going to be a headwind with them for years but most of the banks it wasn't

Starting point is 00:11:01 a huge concern we have a question here in the comments says what banks do you guys think would have the lowest losses if we get a small recession or credit losses ramp a little, it might be interesting to hunt for the banks, which are the quote baby with the bathwater. First one I said was American Express, although I usually like to push back on that, even though I'm using them as an example, because people talk about how American Express deserves a lower multiple versus Visa and MasterCard, and maybe they do. But the reason they give, I think, is wrong because they say, well, Visa and MasterCard don't take credit risk. But over half of American Express's business comes from the same thing that Visa and MasterCard make, which is how they make money, which is

Starting point is 00:11:46 the payment fees. And then another huge chunk are the credit card annual fees for the high premium cards. That's not credit risk. A small part of their business is credit risk. And will they be affected yes if you know if their losses go up yeah they'll be affected and i think they would probably be more insulated uh in a recession maybe back in the day i would have said first republic because they cater to wealthier clients they supposedly had a good culture but i'm not so sure i don't follow the sector that closely so you have any ideas ryan people with student loans or companies with student loans because that's something that's hard to default on

Starting point is 00:12:29 and a lot of it's guaranteed by the government. So I know I'm talking my book here, but if you are a lender to the student loan category, which it's kind of legacy companies at this point because they aren't able to actively do so as much anymore, I think you're probably insulated from any sort of credit pressure, but that's kind of a small cohort of banks. So yeah, I think if you're catering to the highest, most affluent customers, you're probably fine. I would be curious, who has performed better, American Express or Visa and MasterCard over the last, let's do five years?

Starting point is 00:13:18 Five years, it's definitely American Express. Yeah, here, I'm just, I think I checked this like last week. So that's not some great memory thing by me. But let's maybe as you're checking that we can talk another topic here. And that's Google. We even had a question here on Twitter. I'll read it out. what do you two think is the best bear case for Google? And what are your thoughts on why people are selling Google? The bear case, I think is pretty clear. And that's good if you're a shareholder, because you can understand why people are bearish the company. And I think it's because they believe market share is going to be disrupted. And the dominant 80% plus on desktop 95 plus on mobile all that stuff is going to get destroyed but ryan maybe an update before we go american express or or visa five years american express 10 years visa mastercard have

Starting point is 00:14:20 crushed american express but that i guess at this point it's not that bad of a starting base for visa and mastercard it's not like they were on unheard of 10 years ago so uh i know when they came public in what like i think the 2000s yeah like oh four maybe was visa really one of the biggest ipos ever yeah what about mastercard do you remember don't know do not know anyways um yeah so american express has outperformed over the last five years regards to google i let's go through some of the numbers i don't know if i'm really that tempted the one thing i will say i don't buy the hype that google's core cash flow machine and well i guess they have a couple of those now google search is in decline i just i don't buy it um and i'm still yet to see

Starting point is 00:15:21 any credible i'm yet to see anything that has really proven otherwise yeah would you agree i agree i agree so you're saying i mean can you repeat that what are you trying to say if people are concerned that google is going to lose share on desktop i just don't buy it and i'm yet to see anything that's really indicated that they are losing share Maybe like the tiny – I think you've shown that chart before where it's like Google's market share on desktop and it's like the slightest decline. Yeah, and there's some estimates out there. I saw a chart that showed them moving in the wrong direction and picking up some share. But a lot of people say that it's hard to trust those fully.

Starting point is 00:16:11 So I'm not exactly sure on that. i mean even with that one that showed them losing a little bit of market share they were still at 80 i would say that microsoft is investing tens of billions of dollars in both open ai and their internal investments and then also within desktop has a lot of cases for windows users to have a competitive advantage to make the edge browser which for people i don't know because it's not very popular making it the default browser and within that they make bing the default search search engine even with that google still has 80 share i think people may be concerned that that could fall a bit but remember that mobile is more important and more important every year

Starting point is 00:17:00 i think the actual concern and it's the obvious one it's the ai threat it's the 100 ai startups not just open ai trying to attack google finally after 10 years of never getting attacked and maybe people are worried about an ai slowdown and not much innovation coming out the last few quarters i don't know maybe it's because sergey brin was the special guest at the all-in summit people got spooked by that you missed it ryan were you spooked by that i did not see anything except that he was going to be a special guest and i think tickets cost closer to ten thousand dollars than a thousand dollars for that so not a bad business they got running over there no not bad at all i i agree the so i'm looking ev to ebit here for google alphabet excuse me

Starting point is 00:17:54 17.4 that's actually uh let's go forward ev to ebit here uh Obviously, consensus could be wrong, but forward EBIT 15.3. Okay, I was wrong. I might be interested in this. I think Google – a couple of quotes that stood out to me. I heard a quote one time that said, if Google doesn't have a moat, no digital company does. And I think that's true. They – I think they have as solid of a digital moat as you can find.

Starting point is 00:18:32 Maybe Visa as well. The other quote that stood out to me was Apple's – was it the VP of devices or something like that, the VP of services that in the court filings for the antitrust stuff said there's no price Bing could have paid. There's no price Microsoft could have paid to make – to become our default browser. Yeah, the product wasn't very good. It's not going to – they don't have the revenue. They don't have the backbone. And, you know, it's not just about the search results, even it's about the advertising back on as part of that, because when you're doing revenue share, well, you'd like your partner to make as much money as possible because then you make more money. Yeah, it's it's tough.

Starting point is 00:19:16 and what's interesting is that microsoft may be in a standoff that hurts both them and alphabet if they take market share because they have to spend they're gonna have to spend i mean the open ai round is coming like they're gonna need billions and tens of billions of more dollars and someone's gonna have to give it to them microsoft seems like the most likely candidate Although I think they're being hesitant because they're investing in a lot more startups now and acquiring a lot more AI talent that's not in the open AI ecosystem. But if you look at internal plus open AI investments plus the acquisitions, Microsoft is going to have to spend definitely over $100 billion. And if they take a little market share from Alphabet, well, the ROIC is going to be quite negative. And Alphabet might just lose some revenue.

Starting point is 00:20:11 So it would be a lose-lose situation except for maybe it all just goes to NVIDIA. Yeah, full case for NVIDIA there. It's just a crapshoot. I don't – how many variables? Who knows? Who knows? Yeah. Yeah, I really – I agree.

Starting point is 00:20:33 It's so difficult to tell because on the one hand, I think I'm not really changing my habits all that much in terms of how I search things. I don't use that many – I mean FinChat is where I work. It's powered – the co-pilot is powered by OpenAI and I still use that frequently, but I'm not – I think it might be complimentary. it's not like i'm like taking what i would have searched on google and putting it into fin chat like it's just kind of different so it's like it's more for more detailed research things and it's more for specialized niches i get yeah i get that where what i come back to is what disrupts the vacations destined or hotels in cancun that i don't think there's ways building an ai yeah i don't know if there's ways to improve on

Starting point is 00:21:33 that from a full blown like we're changing you know and there's ways to optimize it but i i don't know if that needs much improvement and that's where the cash cow comes from not not what was microsoft's return on invested capital in 1997 yeah yeah i agree the what Okay, EV to EBIT, I know it's just a number and trailing doesn't matter and it's all about the future cash flows, but gut check, what EV to EBIT, we're at 17.5 right now. What EV to EBIT are you saying Alphabet belongs in my portfolio? I should probably just own some now, to be honest. Because every quarter – I remember in like 2018, we had this discussion with Nick Seipel, I think. It was like – we're like basically why don't we own big tech?

Starting point is 00:22:30 It's like it's so – and basically our conclusion was it's more or less it's too mainstream. It's – trees can't grow to the sky. At some point, they're going to run out of room to grow, and it's just not materialized at all. And every single quarter, it seems like it'd be so fun to just own big tech, honestly. The conference calls are just like celebrations of how many people use their products and how much people are willing to pay. Yeah, got a comment here that says, nobody looks smart owning big tech, but they sure do get rich. yeah and i think there's some hesitancy from people about being worried about being the last person at the table and i think you that's probably a bias you gotta try to get out of your head

Starting point is 00:23:19 i i would say given the risks with google because of all the competition attacking them and now i'm pretty confident that they'll retain their mode but again it is a mode attack i think i like it at 17 times earnings But I don't love it. I love it closer to 13. Sure. Yeah. I think we've done this dance before where it's like, I like it at 15. I like it at 17, but I'd like it a lot more at 10. And the further down you go, the more you'd like it. I think what scared us off initially, if I remember correctly, was we saw those tables of the top stocks by market cap by decade. And if you go back and you look at like the 70s, the 80s, the 90s, it was never – the top ones didn't stick. But now for two decades in a row, it's been relatively close, relatively similar.

Starting point is 00:24:23 I don't know. I wouldn't say three decades. I think Microsoft and Apple maybe, but probably just them. Yeah, so I get that that – I don't want to say it's different this time, but I think these businesses are so high quality, have so many levers to pull in order to grow. And we're about to talk about one, which – a little spoiler alert, Waymo. I think they are much, much higher quality than the IBMs of the 70s or whatever the top stock was then. sears i guess maybe sears definitely had a moat though in that day but the internet disrupted it is open ai the the internet in this case i don't know i don't know i i what i do know is that

Starting point is 00:25:17 alphabet is not a company that is riskless i think it has a wide moat but i don't think it's riskless and I would like especially hearing these quotes about how Sundar Pichai said I'm not worried about returns, I'm worried about over I'm worried about under-investing, I want to spend as much as possible on the anecdotes of people saying that Larry Page and Sergey Brin would rather spend all of Google's money to win in AI versus

Starting point is 00:25:50 lose in under-spend I just don't know if this is the best time to be buying but yeah i don't but hey zuckerberg was saying the same stuff at the right a lot of narrative right like we're gonna invest we're gonna invest we're gonna invest here's what i do know i know i spend a ridiculous amount of you amount of my time on youtube and google products every single day i know that cloud gcp is turning into a quite a wonderful business for the looks of it the it's it feels like i'd be kicking myself for not buying this at 15 times forward earnings yeah remember meta though was training at about six times forward earnings though

Starting point is 00:26:35 a little not the same thing not not the same thing at all i agree it like not not the same opportunity here but i think you can get better than a market return because i don't see multiple compression as a big risk at 15 times forward earnings for google yeah and they got the buyback machine pretty consistent so now that can be even more attractive probably reduce share count by about three four percent a year at this rate if if they decide to i guess they have the dividend now but all right that's enough on that topic let's give an update on waymo i want to hear about this oh okay okay this was a jp morgan report i will pull her up spoiler alert they said they were bullish and they made some very precise measurements

Starting point is 00:27:25 it's essentially the question is waymo finally inflecting here is something oh excuse me those were morgan stanley maybe i didn't say morgan stanley either way investment bankers putting out some memos here's what they say too long don't read waymo is a real business worth modeling uber and lyft are quickly losing share so they better partner up and they have these summaries let me just zoom in so i can read it key takeaways while we think broad autonomous vehicle solutions are still multiple years away waymo data release offers look into autonomous path ahead as we introduce city by city waymo model that's got to be fun to model city by city for that investment beggars it's a lot of it's a lot of trips to the 25 chipotle in manhattan are they just going

Starting point is 00:28:09 like here's the population here's the person i think they give some good data but who knows? Waymo is seeing a 10x increase in weekly trips versus May of last year, while geographic and use case expansion opportunities support continued growth across all markets. We estimate, here's the key one I saw. We estimate that Waymo can make up a low to mid single digit percentage share of the Phoenix and San Francisco ride share markets by 2025. Waymo pace of expansion accelerating other cities. So the thought is here in some of these big cities that Waymo has begun in, it's going to become and it has become a decent percent of the market where if they grow at the same rate or even slow it out a bit by 2025, Uber and Lyft will be

Starting point is 00:28:59 impacted in those cities. Now, it's only a few cities, but that's got to be a concern. I think for me it puts uber for me in the too hard pile right now i need to see what this industry will look like post i would i would rather buy uber if they get through this because then there's not going to be another thing on top of autonomous vehicles right yeah then the industry is solved and if they retain their share and their network effect and whatever all the moat stuff that people talk about that i'd be interested in but right now there's just such a huge disruption risk that's my take what's your take i'll let you talk i think it's hard at least for me and probably for a lot of other investors to think about waymo as anything other than theoretical but in these

Starting point is 00:29:49 cities like in a number of the cities it's here like they are giving rides it's a revenue generating business like it's it's working i i have all the optimism in the world that i think waymo can work and i think it could be a very profitable business for them um and certainly disrupt i it's hard for me to see how this is not a clear disruption to uber and lyft assuming that google decides to undercut them on costs which they certainly could if they don't have drivers right Like that's the biggest cost and it's out of the whatever P&L, I guess. It's no longer a part of their – how their business works. It's a huge problem and at worst, maybe Uber and Lyft license the technology or something.

Starting point is 00:30:36 They become a customer in some way in certain cities. But I think it's going to work. I think it's going to be a really profitable business for them. I think Uber and Lyft will have difficulties in the cities where they operate. what is your over under on when waymo gets split out in the financials if it's let's go 2028 over under under really because i think well there's a lot i know i like to say this but there's a lot of variables because of antitrust and we could see you know i could i could love if they start gaining a lot of market share and then you know lena khan we have to stock big robo tax you know

Starting point is 00:31:20 classic classic stuff but i think there's a runway there for them to be profitable and they would still have you know i think they probably still use tpus they probably still use a lot of the alphabet tech and they probably are still run on the google cloud so that that would be the same you could just have you know toss them 10 20 billion dollars and let them operate on their own it'd probably be better for them too because then you're not caught up in all the bureaucracy of alphabet which you got 200 000 employees that's it's got to slow you down yeah the difficulty here is that it doesn't like i guess i'm not an engineer uh and i'm certainly not certainly don't understand the technology that's going on here but i imagine it's not like okay

Starting point is 00:32:07 you've solved it it scales everywhere it's probably slower because they're taking this city by city approach and each city has like nuances so it's not like the growth is going to be i imagine it's not going to be like exponential like it's going to be probably a little more i mean obviously it'll still grow fast if it's having a big impact in these cities but uh maybe it doesn't get split out quite as early i'd say they're going to try to hold out splitting it off as long as they possibly can yeah i guess 28 2028 is not as far as people think we have a comment here that says have heard some quality thinking about end state of waymo and uber hybrid fixed capacity of waymo and flex capacity of uber with driver revenue share with rides

Starting point is 00:32:53 hailed through unified app etc yeah i guess waymo does have fixed capacity because they can't just onboard a bunch of these. There's some fixed costs to getting these uploaded. You can't have a lot of inventory just sitting there. I think, yes, you're right that it doesn't just scale to another city right away, but within the city. So right now, let's say they've geofenced and can operate fully in all of Phoenix. Well, when you're at, say, 5% market share, it doesn't take the variable costs of going from 5% to 20% market share are not as high as that first 5%. And you already have the fixed costs, which would be one, your software development. Those AI engineers are expensive. Two, a lot of the upfront cloud training costs. And three, the upfront costs

Starting point is 00:33:47 for, which I think are a very expensive part of autonomous vehicles from what I've read, is the sensors and all the stuff that sit on the vehicle. yeah so here's who's the picks and shovel provider here once again nvidia yeah or google cloud yeah it's nice to have such vertical integration if you're alphabet i would say and the tpus that they invested in 10 years ago once again they are have been ahead of the pack and that's why i think man should i just buy it should just buy them they've always shown their culture has been we're way ahead of the game on technological stuff. And they are the ones snapping up every single AI engineer 10 years ago. Okay. Real quick, before we get to the rest of the topics for the show,

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Starting point is 00:35:14 product i gotta say i checked out some of the details but ryan i know you're going to do some of your listicle stuff that people love and your small cap of the week but i gotta ask first are you buying the ai iphone so i actually have no idea what this is you putting it in into the notes here is the first time i've seen this did you not know there was an iphone event this week i mean i saw i saw it but i might i don't know if i'm the only one but i just simply do not care at all like i've i never watched one of these i i don't get intrigued by them like maybe back in the day when it was a very new product even with the vr i was like the i was a little more interested with that the the goggles but just like 12th 12th iterations or

Starting point is 00:36:02 15th iterations on the same product it doesn't really draw my attention what if i told you it comes in pink or rose gold okay now you've got my attention honestly people make fun of that i make fun of that but hey women love it so that's going to drive some of your what is the ai iphone i did hear they mentioned apple intelligence a number yeah exactly they're just going to have some sort of apple intelligence what's interesting is i think it's powered by open ai and i don't want my data share with OpenAI, but that's a topic for another time. This was another interesting chart though, Ryan. Kind of confirms, I'm sure the people that have access to all these data and third-party intelligence and banking reports knew this, and people talk about this all the time.

Starting point is 00:36:51 It's a chart here going back to first quarter of 2010 that has the post-pids, basically just the upgrade rate for the iPhone for all the three big carriers in the United States, AT&T, T-Mobile, and verizon essentially started about nine percent in 2010 so that's the upgrade rate each year and it has fallen i think well what would you say that's about 3.5 percent something like that three and a half percent and it's been fairly linear for the last 15 years do you think what do you think this stems from just like longer upgrade cycles because the phones are getting better or yeah there's just none there's just the improvements aren't that much that they've solved the problem of the phone okay yeah i mean it's more and more

Starting point is 00:37:45 more and more the revenue seems to be coming from services as not only a uh at first it seemed like that was the opportunity but now if you have longer upgrade cycles it maybe seems like they have to generate more and more revenue from the services business too yeah my question is whether this bottoms that's a huge question it doesn't show any signs of doing that now there's a little bump during the pandemic probably just can be explained by the stimmies but i wonder if this ever bottoms because i see no reason why when they do the battery upgrade things can you tell the difference between the last five and so far it hasn't hurt the stock i'd say it probably has the business because we haven't seen revenue it's been stagnating for a while now tbd when it hurts

Starting point is 00:38:33 the stock yeah there has it there really has not been a time where i have felt like i wanted to upgrade my phone because of a really awesome feature that was launched on a new phone like my significant other literally a week ago went and got like the newest version because she had to it doesn't seem that different than mine the only time i'm going to upgrade is when i absolutely have to because my phone's no longer working or it's you know for a hundred dollar battery upgrade keep that right in the back of your head really i'll do that for you i did not know that i think it's because they got caught ruining their business but yeah no they it's i think that they're they've been forced they may have been forced to offer this or they did this

Starting point is 00:39:16 to not get in trouble with those remember the conspiracy theories about how they lowered the battery life that that was proven to be true so i do remember that yeah uh sometimes that's a fun conspiracy no one gets in trouble over that except for apple but all right we're let's get to your listicles uh what do you got for us yeah i'll go quickly quickly through these because most of them frankly just don't interest me but could be wrong here maybe these all end up being good but seven industry leaders at new 52-week lows so just look through the 52-week lows list found companies that i consider industry leaders and maybe it's just like they're just big companies for the most part uh but number one chevron i they're a leader i guess

Starting point is 00:40:10 in upstream and downstream production of crude oil trades at 11 times forward earnings i'll just right off the bat here say i'm not really interested commodities are kind of outside my circle of competence i'm gonna just ignore it buff dog likes it though yeah i'm just not the buff dog he probably is he is for sure a lot better at analyzing these things than i am so uh yeah it's just not gonna happen for me number two boeing uh obviously a leader in aerospace design and manufacturing kind of run that duopoly with airbus 122 times forward earnings obviously they're under well marcia kept yeah they're under earning purely based on the fact that they uh they have been having production issues so they haven't been able to fulfill all the demand

Starting point is 00:41:02 they have i mean the market cap is 100 billion dollars i believe i'm going to confirm this right now in fin chat maybe share a quick chart i believe they've done over 10 billion dollars in free cash flow a year so is this is there a price you'd buy this up this is a local business for us it's one that employs a lot of people in the state of washington it's where we're from support your local businesses ryan uh i don't know i think it if management if i get no updates on management i get no changes in my opinion on management and the management culture that has been the 21st century boeing no but if we get any indications that that's going to change or has changed maybe i mean it's it's a very wide moat business uh let

Starting point is 00:41:52 me yeah let me share the screen show you this free cash flow chart what are your thoughts would you buy it i don't think so also it's worth mentioning that the enterprise value has changed like the net debt has changed a lot even though the market cap has come down quite a bit the net debt is uh certainly different because they had to take on a ton of debt to get through some of the issues they had um the other thing that i think is important to keep in mind there are everything's going to be a little slower now the faas i think it's the faa right their involvement and the check boxes and having kind of the regulators over your shoulder slows a lot of things down um maybe and that might be for the best but um every little decision it's going to

Starting point is 00:42:44 take a little bit longer so ramping up to production i suspect it's going to continuously take longer than management projects and it already has yeah and you would have even said before the faa was is it too harsh to say bought by boeing when they just staffed ex-employers there uh you could argue that they were moving quite slow and haven't really innovated much besides the 787 that was delayed multiple years and way over budget so yeah yeah i don't great i don't love it i think the next one this one's spicy though this one feels like close your eyes and buy all right uh number three is intel they are still a leader market share leader in cpu production globally um trades at forward pe of 53 times i have not really looked into intel that

Starting point is 00:43:33 much but it seems like one of the most hotly debated stocks out there because everyone's like no they're they're no longer innovative than other people are like yeah but they are still a leader so where do you sit you're more of our chief engineer the chief chat stocks engineer Yeah, I will say I do maybe know a little bit more than Ryan about the semiconductor market, but I would not say I'm an expert analyst whatsoever. I'm going to show you this chart. This might surprise you because we're supposedly in a semiconductor boom right now. But I think this shows that it's really only a boom if you're tied to AI and Intel's been losing in that. Check out this revenue.

Starting point is 00:44:15 2021 uh basically 80 billion dollars 79 billion dollars last 12 months 55 billion dollars ryan i'm gonna show you the free cash flow too a bit bit concerning yeah now oops let me click that free cash flow there we go is it well unsurprising surprisingly negative now you could argue you can look at the fabs the facilities yeah they're building it yeah i heard one person argue in my mentions that they're building out a lot of manufacturing but if you look at that revenue line item and you say well they're increasing supply greatly and then everyone just still sticks with tsmc and sans well that could be really really bad news but on the one point you could argue here look december 2020 21 billion

Starting point is 00:45:13 dollars in free cash flow basically all six years before that over 10 billion dollars in free cash flow we're at a market cap of i think 100 billion dollars 80 billion dollars ev 110 but did you see the ceo was praying on twitter yeah yeah let him do his thing it's fine no i know i saw i saw someone like stock dropped after i think the most recent quarter and i saw someone's like i'm new to investing is it bad that you to have your ceo praying he does no he likes to post that type of stuff i fall yeah that's not abnormal he does it like he does it all the time kind of like a russell wilson for you know which might not be a good thing but anyway all right so i think i don't know that that one the u.s government isn't going to let

Starting point is 00:46:08 the business die because they've basically said they won't but does that mean the stock does well i don't think that has to match up okay number four here stelantis they are a leading automotive manufacturer globally their home brands like dodge jeep fiat chrysler and a lot more get this forward earnings multiple is three times any interest no why just put put automotive in the apparel category just yeah you'll be better off not to buy any of the stocks no matter how cheap they look yeah i think they're earnings multiples the forward earnings is i feel like it can vary quite widely and analysts can easily be wrong with automotive since there's so much costs involved number five este lauder they are a

Starting point is 00:47:07 leader in the cosmetic space they're home to brands like clinique avida este lauder itself uh 29 times forward earnings really yeah i think they might have had a lot of these companies have had deterioration in their earnings or their margins okay right yeah low cycle earnings something like that i like these type of businesses don't necessarily love them they seem to be long-lasting brands the only hold up is you get a big exposure to china i don't know how much predictive power i have about that market all right number six dollar general they are the largest dollar store operator in the united states they have had a lot of pressure on their customers recently which has forced them to drop prices and

Starting point is 00:47:54 quote i love when they say we are focused on providing more value to our customers in in terms of our price points it's like you are dropping prices because you have to uh and your margins are going down i'm going to bring up that operating margin chart and share for you i mean operating margins i think have been cut in half so it's been difficult for them although forward earnings multiple 13.6 times this one i find honestly fairly interesting what interests you about it the sentiment on it like everyone seems to first of all forward earnings multiple 13.6 times earnings margins have been hurt in a big way if there's any room for them to get back to where they were at which maybe it's you know maybe this is this new steady state of things

Starting point is 00:48:45 i think they're in a good spot i mean it's dollar general still drives a lot of value to their customers. They're in a lot of the rural areas where there aren't that many competing stores. And it's sometimes a quick stop for a family that really needs it. So yeah, you can see their margins have been basically cut in half.

Starting point is 00:49:06 I think there's still some value in the brand. Tons of stores. Obviously, the operating performance hasn't been great. What about the Teemu alt data? i don't care about the team i i really doubt the family of five in rural arkansas is buying their groceries off timo yeah i would say definitely groceries maybe not knickknacks on the one hand yes there's no way timo can make a profit selling to rural america with their business model but on the other hand do they care and how long can they run

Starting point is 00:49:45 run like this yeah i mean the operating margin was eight percent let's say that's normalized say that's fine especially as they may have more as you mentioned you know improving that uh durable goods the the groceries the daily items uh that have a little bit lower margin today we're at five percent and there's been a lot of inventory markdowns as well yeah so if it reverts back up i mean you don't even need that much growth in the stock the stock's gonna work yeah all right let's let's keep flying through this because i do want to get to our small cap of the week as well um because i think it'll pique your interest specifically number seven though last one here topgolf calloway i believe they're down more than 70 from their highs i used to be

Starting point is 00:50:29 bullish on this one huh yeah luckily it remained on the watch list i almost bought it dangerous Yeah. Now, this is a company that I think has been somehow trading at an EBITDA or an adjusted EBITDA multiple in the single digits for like four years and it's never materialized. The cash flow doesn't seem to be there. However, the apparel business is bleh, it's fine. Equipment business is bleh, fine. I think Topgolf, I think it's still going to be a good business. And even though the performance hasn't been wonderful and there's been some dip in venue spending, if I'm not mistaken, especially with big groups, I still think it's going to be a fine business. I could be wrong on that, but I think the top tracer bays, those have got to be profitable when they sell to driving ranges. It's idiosyncratic.

Starting point is 00:51:36 It's very unique. I think not a ton of competition. So I don't know. Maybe I have to do a ton more work. I don't like Chip Brewer, the CFO or the CEO. Sorry. But still interesting. Down 75%.

Starting point is 00:51:52 yeah looking back it's something we both followed this since 2021 again luckily remained on the watch list the ceo and the management team definitely misled and i think a red flag should have been the fact that they were making mobile video games i think that that looking back on that that should have been hmm maybe they don't have the eye on the ball for return on invested capital here they are trading for less than they bought top bill for the consolidated business yeah i mean i saw those numbers it's it's ugly stuff this is another plug your nose and somehow it works out everyone hates this right now maybe it works my highest uh and you're gonna ask what one's your favorite i know everyone hates it but intel

Starting point is 00:52:39 it feels like if it works it's a they're gonna be as big as tsmc in like 10 15 20 years but there's also a chance that it's a zero. So it's not the way I invest. And the second one, I was shocked at that Dollar General that I saw it at below $80 a share there. That's quite cheap. Yeah, both Dollar Tree and Dollar General

Starting point is 00:53:01 are down more than 70%, I believe, from highs. So both those were considered durable compounders for a while. Anyway, still running up on time here. So I'm going to go ahead and talk about my small cap of the week, which people seem to be liking this segment. So we appreciate that commentary because it helps give us direction for future small caps or future segment launches as well.

Starting point is 00:53:24 Yeah. And before you do, I want to make sure we talk about one of our sponsors that everyone's well aware of. We just shared the charts, FinChat.io, all those charts, interactive tools. And Ryan mentioned AI Copilot. That is very useful for your investing research. Check it out. FinChat.io slash chitchat. Link in the show notes.

Starting point is 00:53:43 Just wanted to make sure we got that in there before time's up. Yep. So we got a way, we got a comment that says Intel will be a small cap of the week within a year or so. Maybe. Yeah, maybe, maybe we'll, maybe we'll, that's when it's finally a buy. All right. Well, this small cap of the week, which is presented by, I'm going to start doing that now. Small cap of the week presented by Yellow Brick Investing, which actually, if you go ahead and search this ticker, you can find a really high quality right up on there.

Starting point is 00:54:10 Grocery outlet bargain market. it's popular in our corner of the united states can you hear the advertisement in your head right now a little jingle yeah they've got a great jingle we had success investing in sprouts farmers market kind of a smaller grocer as well uh the kind of one-liner here is that grocery outlet is a discount grocer they operate just under 500 stores in the u.s and they offer items for super, super cheap. Here's how they keep their prices low according to their website.

Starting point is 00:54:45 It says, step one, when a brand has excess inventory from packaging changes or manufacturing overruns, they call us. We buy these excess products for pennies on the dollar, passing the savings on to you. Basically, they get a whole bunch of the excess inventory. It really is kind of a marketplace layout. Like it's not the prettiest grocery store

Starting point is 00:55:03 you'll ever walk into, but you'll notice that all the prices on everything is like incredibly cheap. And then from the write-up on Yellowbrick, it says, at the store level, the company operates on a franchise model with each store independently owned and operated by local entrepreneurs. This decentralized approach fosters a strong sense of community involvement and personalized customer service. That makes a lot of sense to me. If you're operating in a different area, this is not something you want all the inventory to be the same. You want localized buying based on the customer preferences.

Starting point is 00:55:35 It says the independent operators initially contribute capital to establish their business and share store-level gross profits with the parent company. It's a sort of a franchise – it's a franchising model. It says Grocery Outlet has meaningful white space for geographic expansion with visibility to 10-plus years of strong store growth ahead. Revenue growth has been really strong at this business, basically 12% CAGR since 2016. You can see they're really popular on the West Coast. They've got a couple of stores on the Northeast, a lot in Pennsylvania. I don't know. Any interest here?

Starting point is 00:56:16 So I guess there isn't – not a capital returns story here. The earnings multiple isn't that cheap. They trade at $1.9 billion roughly enterprise value. And at the peak, they were earning about $100 million I think a year or two ago. Yeah, I'll maybe share the chart. I had it loaded up. Do you know why operating income has been a bit cyclical? Is that just kind of COVID dynamics, the stuff that's hit a lot of these retailers?

Starting point is 00:56:42 Not sure. I'm really not sure. I remember them saying that there was a huge tech systems change. I can't remember. That cost them like $33 million to implement. It was like a CRM or something. Yeah, the SAP implementation. Yeah.

Starting point is 00:56:59 If it's like a point of sales or a checkout process, that's the kind of thing I think that can actually generate good returns on investment, like if you're building that out. Some of these businesses just have terrible – but yeah, look, hey, last 12 months, $83 million in operating income. If you think that's a short-term blip, it could be cheap. Let's try to learn from our Peter Lynch episode. But have they talked about the returns and traffic and whatever of stores that have gone on the East Coast versus the West Coast? Because if they've proven that, then we could have a nice runway for growth story. I haven't looked into it enough. I know a lot of the bears here talked about concerns that the new stores were struggling.

Starting point is 00:57:54 But in that write-up on Yellow Brick, it kind of – it refuted that a bit. Basically, like the independent operators can ask for loans from – like working capital loans from grocery outlet, like the corporate side, and they said it was like a whole bunch of the new struggling stores were – the new stores were really struggling. they were asking for more working capital loans but the whoever the author was here said it's well below their historical average in terms of loans per facility so it seems like maybe that's misleading um i don't know i'd be curious how some of those stores are doing the only thing is these aren't like these aren't landmark facilities it's not like you get a bunch of local news like whoa look how well grocery aisle it's doing like it's just your local discount grocer exactly exactly almost a dollar general type thing when yeah and you're

Starting point is 00:58:50 gonna have you know a store that's been 10 years in california is not gonna have it's gonna have way more volume than a store that's just open in pennsylvania but if they can prove similar returns on invested capital and i'm not sure what they're if they own the stores or whatever the model is, if they can prove similar things for Pennsylvania versus California, especially if it's even rural versus urban or whatever the strategy is, and they only have this many stores, hey, that's, again, people love Grocery Outlet in Washington. It's a good option when you're looking for some cheap groceries and, hey, I'm guessing they benefit from a recession.

Starting point is 00:59:32 so if you're right uh as our macroeconomist economist in chief or you know who knows whether we're in a recession but it could happen that could double they had double digit comp sales in 08 and 09 so yes i do think this is one that's kind of 100% counter cyclical the yeah they've got i remember the first time i walked in there and this doesn't really matter for the investment thesis but i thought this store looks pretty ugly the items are not like the best items in the world and then you see the price tag and you're like wow okay this actually isn't bad at all like unbelievable prices honestly so um and i think low prices tend to translate everywhere maybe not like the super affluent areas but yeah manhattan maybe not

Starting point is 01:00:20 manhattan yeah other areas i think great prices translate all over yeah exactly and i'm already trying to formulate any sort of competitive vantage thoughts if they run this model where it's almost based off of the excess inventory from everyone else well then a flagship retailer like a walmart or amazon you can't compete with that yeah i wonder who their suppliers are and maybe that like restricts the geographic expansion depending on if it's like local suppliers versus like the big chains kind of thing if it's big chains i don't see why they can't provide customer value and good price points everywhere so i would suspect yeah curious to see how this geographic expansion goes but small cap of the week i think market cap

Starting point is 01:01:11 give me a sec ticker go yeah i'm gonna do yeah the market cap ev check shares outstanding check margins check market cap is like 1.7 billion and the my new small cap of the week cutoff is going to be two billion dollars so if you have any ideas that's my cutoff all right way we can call it i know we've used this term before we can call them the not so small cap If you find something that's over $2 billion. But no, I think there's thousands under $2 billion. So we'll have plenty of inventory. Yeah.

Starting point is 01:01:47 So small cap of the week, grocery outlet, bargain market, future small cap of the week, Intel. Yeah. Yeah. That's going to be in another year once TSMC ladders them yet again. Do you think grocery outlets should be your next stock research episode? Potentially. I'm doing sales kids I know we're going long here but that

Starting point is 01:02:09 that other small cap of the week I did like two weeks ago the one with the wild insider buying did some digging that management team is competent they're good like they

Starting point is 01:02:25 passed the gut check they're probably good they feel good the CEO seems very passionate about the product he's got an investment banking background so he seems to understand the capital allocation side of things it like i don't know there's a lot of good vibes coming out of there all right well that could be one too yeah maybe if i think if you don't do grocery outlet

Starting point is 01:02:52 i'm doing celsius next which looks very fun stocks tanking could be a you know hey then after that i'll probably do grocery outlet as a little tease as we wrap things up here just released as we're recording this, an episode with Travis Hoyum from Asymmetric Investing on EVs, electric vehicles, Rivian, Tesla, China Supply, BYD, plug-in hybrids, a lot of stuff. I said something along a clickbait title of why most EV stocks are doomed to fail. So hey, check that out. I think it was really good analysis. He follows the automotive sector in general quite well. Next week, we're going to have an interview with simon erickson on rocket lab which i think is one of the most fascinating and maybe one of the only legitimate high growth hyper growth tech stocks and the innovative you

Starting point is 01:03:42 know all those sectors that kind of have a lot of mumbo jumbo this one is actually executing i think is a fascinating company i think that's kind of the the slate we got a lot of research so yeah oh we had also one comment that our mics were off we did notice that post-production last time there was an update on Microsoft on my end that reverted the settings. So we apologize. Didn't catch that. But hopefully we have a little checker thing that will make things more even from here on out. All right. Let's hit the disclosure. We are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan, I or any podcast guests may hold securities discussed in this podcast, may have held them in the past and may buy, sell and hold them in the

Starting point is 01:04:25 future. Thank you everyone for tuning in. We go live Wednesdays, 1 30 PM Eastern time on the YouTube page. You can join us then. If not listen on your podcast player of choice, and we'll see you next week.

Chit Chat Stocks - Are We Buying Alphabet Stock On The Dip? (AAPL, GOOG, GOOGL, UBER, DG)

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