Chit Chat Stocks - Autodesk, Procore, and Avid Technology with Luis Sanchez

Episode Date: April 13, 2021

This week on Chit Chat Money we are joined by Luis Sanchez to discuss some incredibly exciting companies. During the interview we discuss Autodesk, Procore, and Avid Technology. Keep listening after the interview to hear Brett and Ryan's favorite stories from the week as well as other pressing news headlines. Let's go! Follow Luis Sanchez on Twitter: https://twitter.com/LuisVSanchez777?s=09 Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Subscribe to our YouTube channel: https://www.youtube.com/c/ChitChatMoney Follow us on Twitter: https://twitter.com/chitchatmoney Visit our website to see more from your hosts Ryan and Brett: https://www.chitchatmoney.com Email us: [e-mail] Timestamps Interview 1st Half | (2:48) Interview 2nd Half | (43:26) Microsoft, Alibaba, Binance & more | (1:08:24) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. Today is Tuesday, April 13th. Today we have an interview with Luis Sanchez. This is our first time talking with him in person. I've been exchanging DMs with him for a long time. Really detailed conversation on, I guess, three companies. But this one was a lot of fun and it's one of the companies we own. So it was nice to kind of use him as a sounding board. Any highlights from the interview that I'm missing for you? Yeah, so Autodesk and Procore are two companies that a lot of people know about. I thought we had a good discussion on that. Avid's interesting, too.

And then Avid Technology was its own one that I think very few investors know about. So two different ones. He has a compelling thesis for both. He has an interesting sort of strategy, too, capital allocation strategy, which we talk about briefly. Overall great interview. And then we'll hit sort of our show notes, our talking points after. So listen to the interview. Stick around for the banter.

But before we move to the interview, we have our sales pitch. It's 7investing today. That's right. And some big news came out today. So you want to talk about that? Yeah. So they just announced their seventh advisor. So the team is filled out.

I know they've had a little bit of a turnover, but they have the seven advisors now leading their recommendations. And it is Dana Abramovitz. A little bit tough on their last name there. But she has a PhD in biochemistry, a master's in management, and a postdoc fellowship. I'm reading this off of Simon's tweet. I'm sure there's more on Twitter. But she's a health care specialist, so a great addition to the team. That is an industry that a lot of people would love to have research on because it is very complicated for individual investors to know.

So I'm excited to learn about some of the health care picks and for her to add to the fantastic seven investing returns. 38%, or actually 38.8%, which is beating the market by 14% since their inception. Fantastic returns, and you can use our code CCM at checkout to get $10 off. I think that was a good one. Anything else? It's a great sales pitch. Yeah, no, I think that's it. Without further ado, here's the interview.

Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation.

Now, please enjoy this episode. Okay. Today we are welcomed by Louise Sanchez. I'm saying the first name right? Okay. Yep. So for anyone that doesn't know you or hasn't seen you on Twitter, why don't you give us a little bit about your background, how you got into the world of finance, and then what do you do now? Yeah, sure. How far back do you want me to go? When did you start? i mean like i i kind of fell in love with investing in college and um i mean i i didn't

actually know anything about investing when i when i got to college um i was originally like a pre-med major and figured i didn't really like that and then um i studied abroad in china so i i got really into that and i was actually a chinese language major and then i just kind of thought through like okay well maybe like doing business and chinese kind of kind of kind of make sense because they kind of go together international business and then um in my finance classes i learned about the stock market and i just became enamored with it um and from there on i did a bunch of internships and you know i knew in college like i wanted to be a professional investor based off of just all of like me nerding out on like you know reading all the investing books

and just learning about the industry and so you know i asked my mentors basically at the time like well how do i get to be like you know in that position how do i work at like you know a long short hedge fund that does like really good work and the answer that i was told was well you know you should really go do investment banking because they give you the right skills and then from investment banking you can go and recruit into private equity or hedge fund so that's what i did I spent the first part of my career in investment banking. Investment banking gets a really bad rap, especially today where people complain about like the terrible working conditions.

And like, yeah, it's true, you know, for like the better part of five years, I worked 100 hour weeks, but I got to work on some amazing projects. You know, I worked in M&A. I also worked in a couple of industry coverage areas and I learned a ton and it really gave me all the technical skills i needed and then from from the investment bank um i went and worked for a quantitative investment firm um and that was really interesting like to have that quant experience because i learned a lot about like base rates you know i learned a lot about well what kinds of stocks like if you look at over like 30 or 50 or 100 year history like what kinds of

stocks tend to perform this way versus that way and um i learned a lot about portfolio management too because you just tend to run all these you run all these simulations of all these different types of portfolios and you just you can learn a lot um and i i guess like i came to this realization that i was a lot more interested in the more qualitative side of of investing and so like this really interesting thing with quantitative investing is like if you look at like the deciles evaluation uh quantitatively the cheapest stocks tend to outperform right and if you look at like each decile the outperformance you know gets stronger the cheaper the stock you go to yeah but at the same time the stocks that have performed the best all come from like the worst

decile of performance and so and the reason is because some stocks screen terrible quantitatively but if you do the qualitative work they you can actually find some like real gems right so i i became really interested in that idea and like trying to find you know those kinds of really special stocks you know like the amazons or the starbuckses um and now you're yeah you started your own shop, right? Yeah, yeah, yeah. So about three years ago, I started LVS Advisory, which is my own investment advisory business to kind of pursue some of these ideas with qualitative investing. And I have like, I guess I have somewhat of a unique model in that I run two very different strategies i've read two strategies they're like polar opposites of each other

but because they're because they're so different they kind of work really well together so the first strategy is what i call a defensive strategy and it's essentially like a cash management strategy where the goal is basically to generate like a really steady rate of return um call it like five to ten percent a year and really not have very much volatility not have very much correlation to the stock market or to the bond market. And what you know, what we're essentially investing in is a diversified portfolio of different types of event driven situations and different types of defensive stocks. So like the biggest strategy I employ in that is merger arbitrage. But I also employ investing in like preferred stock, dividend stocks, and like a

variety of other uh special situations so like we got really big into SPACs as well last year I was gonna say that yeah yeah yeah yeah so like we the the the best the the most interesting and the most successful investment we made last year in our defensive portfolio was when the world was falling apart during the COVID crash um I observed that you know SPACs As an asset class, we're all trading below the value of their cash. And I knew something about SPACs because this is kind of in my wheelhouse. So we, you know, we loaded up, you know, I saw it as like buying dollars for 80 cents or, you know, sometimes buying dollars for, you know, 70 cents or 90 cents.

And then kind of the totally unexpected happened, which is like SPACs, they became really hot And they went from trading at 10 percent discounts to cash to all of a sudden, you know, come like end of last summer, even early this year. Some SPACs are trading at like 50 percent premiums. And it kind of makes sense. It kind of doesn't. Right. Because I did think that SPACs would be more valuable than ever in like the environment we had last year, because in an environment where capital is really scarce, these SPACs were a source of capital. and a lot of these SPACs had like really great capital allocators behind them so I really did think that some of these SPACs could end up buying like really really good businesses and some of them certainly did um I did not anticipate SPACs getting as you know as crazy

as they as they did and all the issuance we had but that's kind of another story um so the other strategy I run as I mentioned like the polar opposite it's essentially like a global growth strategy and it's a 20 stock portfolio of basically the 20 stocks that i think are going to just generate the strongest returns over the next 10 10 years 5 10 years and um basically um i'm just i'm trying to i'm taking more risk you know it's just 20 stock portfolio i invest in all sorts of things outside the u.s small caps in the u.s but we want to be compensated for more return and so these are just totally two different strategies right like one is we're trying to to not lose money and to make a decent return and the other one we're just trying to swing

for the fences and make as much money as possible and the reason why it works so well together is because um they tend to offset each other and like when you know when we're in like a bear market the defensive strategy tends to do pretty well when we're in a bull market the growth strategy really shines and i can like rebalance in between them right so if growth stocks are trading at a discount we could take some money out of our defensive strategy and like buy growth stocks and like vice versa yeah it's almost like the the active 60 40 almost is that what you're trying to go for to help not necessarily like solely smooth out returns but it gives you opportunities where you're not just tied to yeah yeah yes and no yeah like for sure that that's like part of the idea i

think these these two strategies are like compelling like on their own for their own separate reasons right so like the defensive strategy is annualized at about 10 per year but like the sharp ratio is really really high because it has very little volatility very few down months so some people really really like that you know um and like i i i i kind of pitch it as like a super super high yield uh savings account except with more risk right it kind of has like the risk reward profile of uh like a high yield bond fund but without the correlation to equity so it's it's a very specific product but i guess i i separate these two products or strategies right because some people they only want one or the other and for some people it makes sense to combine them

so yeah i view these as separate but also they can be combined and i think the most you know as a 60 40 i think it works really well on on that growth side um i guess call it growth uh do you hardline it at 20 companies like do you is that yes yeah you don't go above or you don't ever kind of try to yeah a lenient on it that's really important for me okay because yeah i i just it's like it's really hard to just have 20 companies in my opinion yeah uh and that's like a way for me to keep discipline and on the other side of that spectrum too by the way is i don't have starter positions if if something comes in my portfolio it needs to be compelling enough to where i'm willing to make it at least a four percent position at cost right so is it do you

equal weight it then or like is it uh or do you kind of bet heavier on that you're a higher conviction ideas yeah um like my default is to equal weight it but i let my winners run right so there are like there are stocks that i have that are like approaching 10 percent weight right just because they perform so well um the tendency like over time is i'll tend to steer more towards an equal weighting but i do give myself some like wiggle room like if i really like a stock and this is like a high bar for me if i really like a stock i'm willing to like give it like a 50 overweight at cost um and if a stock is is like underperforming i'm willing to uh you know add to it it significantly add to it at least once you know more than once i i probably don't want

to throw too much bad money good money after bad money but um yeah so instead of like uh and then instead of having like a cash buffer you just have sort of that other side of the barbell exactly yeah you nailed it yeah so exactly so like my philosophy is instead of carrying cash like i have this really good alternative for cash right right like and and like i like obviously i think people should have like cash for like personal purposes but in the context of a portfolio cash is cash is there's an opportunity cost right so i i tried to create something this is actually this is what the reason i created this is because i just i felt like this there was a really big hole in the market for something like this right because you know buying bonds that only yield two

percent or putting your money in a checking account that only earns like two or three percent it's not really that compelling um buying stocks may not make sense for everyone because it carries with it stock market risk so this is like an intermediate thing where like if we could earn you know like eight or nine or ten percent like last year we actually earned 15 which was great and a lot of that was because of how well spax did right but if we could earn like 10 percent per year um like that's definitely like that's significantly better than cash right and if we could do it without taking stock market risk then you know it doesn't have to be viewed in that same bucket yeah 10 10 percent's a decent yeah that's what i mean that that's a compelling

pitch right there um yeah i view it as like i view it as like it could be like a alternative to bonds but i really view it as like opportunistic capital right which is like a lot of people have cash that they're just waiting for an opportunity they don't necessarily want to buy the nasdaq after it's like doubled over two years right maybe part of that is like behavioral finance issue and maybe they should be buying the nasdaq i don't i don't know i don't try to be i don't try to predict where like the markets are going but if someone has a strong personal preference to have some opportunity to capital maybe they maybe they're waiting for like a real estate deal maybe they want to buy a house maybe you know maybe they just they they need to have

like an overweight to cash for a particular reason and i just i think this is a good home for maybe some of the cash no that makes perfect sense yeah okay well uh the the two topics for this show are on the other side of the barbell which is the growth side and uh the first one we wanted to talk about is something that brett and i weren't really familiar with until you put it on our radar um and it's avid and i guess we'll talk streaming as well but do you want to explain for anyone that doesn't know what is avid sort of what do they do for sure so avid technology the ticker is avid um i'll just say that uh i i am long avid i have a position in avid as do my clients so just to get that disclosure out of the way right um avid is the leader in high-end

video and audio editing software and so the key is high-end right and one of the reasons why i i suggested avid is because it actually dovetails really nicely with our conversation on autodesk and procore which is um avid is essentially the autodesk of like video and auto video and audio a high end um so essentially if you're if you're making like low-end content like something that goes on youtube or even like a corporate sales video that doesn't necessarily require like a super high level production you don't need to add it you're probably doing that on either final cut or adobe but if you're making if you're broadcasting march madness or if you're going to make the next game of thrones for netflix or if you're going to make

a movie for hollywood you're almost guaranteed to be making it on avid in one in one way or another and to kind of like draw the analogy to like autodesk right if you're just making like a single family house you don't need to subscribe to the full autodesk suite right but if you're making like a high-rise building almost for sure you're going to be using autodesk software for that right so that's kind of how i would contextualize it what so who are their customers than like netflix kind of the big production houses or uh sorry streaming companies exactly right so it all the big tv broadcasters all the big hollywood studios are for sure avid customers on the video side on the audio side they're also the leader in like studio like uh like recording

studios um so very similarly they're like you know when when you're making like a taylor swift album you're going to be using the avid software and hardware for that and then there's a variety of like in the mid-tier right so mid-tier we're talking about like regional um outfits maybe like a local tv station or um or maybe like the corporate video then then they have some market share there they're not necessarily like as dominant in the mid-tier um so but they're also like in the sound market they're also pretty good in the mid-tier so like you'll find avid equipment in like churches you'll find avid equipment at like live concerts you'll find avid equipment um you know live events is a big is a big market for them um but in the high end

they're dominant in the mid-tier they're competitive and in the low end they're not as big they there's actually more of an opportunity for them okay and is that because the equipment and the software is too say expensive for the lower end customers or is it just not something they target yeah so basically um at the high end you're talking about you're not talking about like just subscribing to like photoshop and like making a document or making a editing a picture and just emailing someone it's it's a it's an end-to-end like enterprise solution so you know they're making they're they're serving you on the back end right the front end is like a non an nle a non-linear editor so like uh like a photoshop like an application so they avid's avid's video

application is called media composer and adobe's is adobe premiere apple has one called final cut right there's all these NLEs right and so if you're at like the lower tier all you may need is like an NLE a video editing software but if you're an enterprise you actually need like you actually need like what's called an asset manager something that like is like a collaboration tool where you could like house the the different um files and like share them in like a very secure environment you also may need like the professional grade hardware for like storage or like other kinds of hardware solutions that you need it like if you're making like 4k you know video and like you know mixing sound that goes into a movie so like really high-end like dolby atmos right so

they're the only company that has like that end-to-end full solution but they do compete on the front end but no one has they compete with companies that that make hardware but the companies their competitors that make hardware don't also make nles and like the companies like adobe and apple they don't make any of like the hardware and they don't they're not really competitive and like collaboration tools and asset management right so that's why like um if you go to like any like major hollywood studio it's not just like a subscription to a service it's like an infrastructure right they have an avid infrastructure right they've built physical studios and editing bays that they put a lot of money into and not only that but avid's

been the industry standard for 30 years so there's a really high switching cost in terms of like retraining people in terms of you know reconfiguring it's basically reconfiguring your whole workflow right so it's really really hard you know to to compete with avid if you don't have the full solution okay i see where you kind of draw the autodesk comparison for sure yeah i think you hit on i think two points of your thesis i'm assuming are the switching costs and the end-to-end solution but can you give more of an overview on your thesis as this as an investment and i'm sure we'll have some some follow-ups yeah yeah i guess the other uh but we started briefly talking about it before uh before we started recording but what does what do you think the next few years look

Like I know you said there's a lot of growth that you think will come. Yeah, for sure. So let me just give you like my framework for how I think about like any growth investment, which is like, I basically have like three very simple filters. The first filter is I want to find a company that is experiencing a really healthy rate of growth for like at least five and preferably like 10 plus years. Right.

And the reason behind that is because I think that investors are really good at looking at the next two or three years. But stocks can get really mispriced if you start thinking about like five plus years. The second thing is I like to find companies that have strong competitive advantages, because if there's a lot of growth, you want to make sure it's not going to get competed away. And the last thing is just you want to find things that you can underwrite the valuation for. Right. So reasonable price. so you know avid basically on the on the growth point right now there's just a content creation boom okay and especially so we've already had like a content creation explosion and like the low end of the market for for many years right so like on youtube on tiktok social media and like

Adobe has really just dominated that because that's just what's really, it works really well for low end. And so the professional side of the market, you know, if you look at Avid hasn't really, they haven't really tracked the growth rate of like an Adobe. Because the professional side of the market for many years has been pretty like, pretty flat, like it's grown a little bit. But now as, as, as we move into like the last couple of years, you know, Netflix really led the way by pushing like 15 plus billion dollar content budgets and just, you know, creating this massive subscription business. And now you have basically every legacy media company creating their own subscription services. And the only, and the way the business model behind that is to basically outspend each other on content and there's basically a content war, right? So professional, high-end professional content creation, the market for that is, I don't have the exact numbers in front of me, but it's probably doubled, if not tripled over the last couple of years. And Avid is essentially, they're selling the picks and shovels to that industry.

So they're going to make, you know, they're going to be a huge beneficiary of the quote unquote, like streaming content wars. So on the competitive advantages, like we kind of hit on them, right? it's avid is the industry standard uh they are really ingrained in that high-end ecosystem super high switching costs um they're going to capture they're going to capture the growth right that's simple simple as that and then like on the valuation point um you know you don't really have to do that much work to just avid is just not expensive statistically it's it trades for about 17 times this year's expected cash flow, right? And if you look out just like three to five years, it's easily trading for less than 10 times cash flow. And frankly, I think that those

estimates could be conservative. I don't think the question on Avid is whether it's cheap or expensive. For me, the question is, well, how cheap is it, right? That's really what I'm trying to figure out. So it's not hard to underwrite Avid on like a valuation basis. Although it is hard to model and i'll get to this in a minute because they're in they're transitioning their business model to like the next generation of their um software and hardware suite which involves transitioning from a perpetual license model in the software to sass right so the financials are transitioning and it makes it a little bit tough to to model it precisely but if if you just kind of use like you don't really have to do that much work to figure out that average sheet if you

believe in the company it's the more and more you talk about it sounds a lot like autodesk because they just sort of finalized yeah or autodesk like five years ago potentially don't want to make any guarantees yeah and and let me let me say something else too i like i gave the disclosure i'm long avid i'm also long adobe i'm also long autodesk i know these these companies really really well I actually started following Adobe back in 2013 when they made their initial transition to, to SAS. It's actually like, it's a really interesting cheat code. And I'm really bullish on basically all these types of companies.

You know, they're all really high quality businesses. They have great unit economics and like, let's just think about what happens when you transition from a perpetual license to a SAS, right? You get a little bit of a hit on your revenue up front, right? Because people go from paying you like $1,000 day one for a software to paying you like $50 a month for a software, right? So there's a revenue hit up front. But what happens when people buy perpetual software, perpetual license software, is they only ever like rebuy it when there's a big enough upgrade in feature set.

So it's usually like every like, you know, usually like three, every three to five years. um but when when you have um when you have people on a subscription basis you basically double your customer ltv right because delivering software over sass is higher margin and your your subscriber churn goes down a lot right so you know even even if you just maintain your existing business you have to put like a multiplier on earnings at that same set of customer relationships it's going to generate so it's just a fantastic business model move and so when i mean when we first looked at it we saw the revenue decline from the i think it was the integrated solutions is that kind of what's happening is we're seeing that

transition to sas so actually integrated solutions isn't going to change as much it is going to change right so and if you want to talk about integrated solutions you have to think about the video and the audio side a little bit differently so the integrated solutions on the video side is primarily storage and what that means is like a broadcaster like cbs you know they have um on-site storage they can't it's not necessarily easy or you know maybe they just have this legacy model where they currently have things on an onsite storage um and if you're talking about a film set like think about like film right they're they're filming all over the place they're in remote locations they need to buy they need to buy physical uh storage for film that's just a

thing so what happened with covid um is film production shut down so people didn't need to people didn't need to buy the physical storage or and the broadcasters their business was hurt right because lower advertising rates and um they didn't necessarily upgrade to new storage as quickly as maybe they would have right so there's a little bit of pent-up demand there but there's also on the video side they're actually also offering so part of the staff solution is they're also offering cloud storage and they have they struck up a deal with microsoft desert so like they're like basically using avid uh as like the front end and using the azure back end um so the long term the storage business is going to kind of transition a bit i think they're still going

to account for the cloud business inside of like the integrated solutions bucket but yeah actually like if you look at the video side it does it will kind of transition to more of like a recurring model higher margin revenue you know they're not going to be making as many physical things so you're going to talk about like higher gross margin and then with covid uh all the broadcasters they still have all the broadcasters and tv companies they still had to edit stuff they still had to like produce a show and what kind of happened with like the broadcasters avid's been pushing like this transition to sass for a few years now but like the media companies especially the legacy media companies pretty slow to adapt they kind of dragged their feet because they

didn't necessarily want to mess up their existing you know they didn't want to change anything because it worked but covid forced them to basically buy the sas licenses because everyone had to work from home and avid was in a very fortunate situation where it already had all these all these products that it's been trying to push and finally it could push them and now that the media companies are using the new avid stuff they see that it works they understand how to use it they're probably going to stick with most of it um even when they come back um so that's kind of an interesting transition that covid has happened but at the same time there is a lot of pent-up demand right because as film as film production sets you know really gear up

again this year next year you're going to see a lot more you're going to see hardware sales pick back up now on the audio side there's even more pent-up demand right because what you're really talking about is like concerts live events churches um you know sound studios where people were not going to like uh record professional recording studios last year for a period of time um so what i'm reading about and what i'm what i'm hearing from people in the field is that the audio side has a lot of pent-up demand and on the audio hardware side um that's not so much going to a sass model that's probably going to be more um sticking to like the hardware way of doing things but the audio software has moved to a sass model and the really interesting

thing actually about the way avid is positioned in the audio market is their competitors in audio there's primarily like two other big competitors in audio it's a logic and ableton live their competitors are have not yet made that transition to sass so actually avid is potentially doing an audio right now what adobe did to it like 10 years ago by offering a subscription and stealing the low end of the market um so i'm actually really bullish on both sides of the business but for different reasons um so yeah it is really hard like you look at this company with an untrained eye and without having you know spent tens of hours i've probably spent maybe even a couple hundred hours thinking about avid and you don't really you can't really they don't really disclose

the what's disclosing the 10k isn't really enough to understand what's going on but it's yeah there's a lot there's a lot of interesting things that are they're moving and changing at the company well how what's the hardware mix is like a percentage of revenue what kind of margins are they getting on the hardware? Because I think that's something that investors might be concerned about. You know, hardware businesses tip with tough. I don't know if you have an exact number

on that or anything, but. Oh, you're going to have to, I'm going to have to open up a spreadsheet. But yeah, hardware is pretty small. I believe it's less than a third of revenue and the gross margins are, you know, much, much smaller. So as a percentage of earnings,

it's probably like less than 15, maybe about 15 percent of earnings um do they still is it still like is the hardware part still profitable i guess i'm trying to think it's not like a roku where they're kind of selling the hardware it's just at a loss it's like no the hardware the hardware is profitable okay okay yeah it's just it's yeah it's just not as profitable as selling software where there's no marginal cost to manufacture something right right right the key is the software yeah i mean they they manufacture the hardware out of like these third parties located in mexico right so there is like a lot of cost of goods sold you know they have to transport it um and look these

are really these are really sophisticated pieces of equipment you're talking about like you know spending in some cases tens of thousands of dollars to buy like to to outfit like a professional recording studio fully right um so it's not yeah and the way they tend to send the way they tend to sell the hardware by the way is they use like uh long-term agreements with um with like resellers or with sometimes they go directly to studios so like hbo for example they may have like they make like a five-year minimum purchase commitment where they say okay over the next five years we we're gonna commit to purchasing a minimum of like a million dollars a year of your hardware and if you if we purchase more you'll give it to us at like a five or ten percent discount right

so that there is a little bit of they they do and they they have like similar agreements with like resellers and like channel partners so there is a little bit of predictability with the hardware but i mean software is a much better business but but but the fact that they have the hardware right gives them this really unique position in the market right because they can attach the software to they could attach the software to the hardware or because a company like hbo is using all the hardware um it's an easier like cross sell right and obviously avid software is going to work best with avid hardware is it uh is it more video or more audio or is it kind of like a fair split yeah i think the company has disclosed in their earnings calls that the mix of of hardware

is about 70 on the audio side interesting interesting yeah you think maybe i'm reaching here but i know we cover we look a lot at spotify and the streams from spotify have uh less are coming from just the labels and so i'm curious if maybe how do you think that plays out for avid if individual artists start doing it kind of themselves or if they're able to do it without the label production yeah well if the artists go on tour they're still going to have to buy touring equipment right right and yeah and um yeah and i just i just i just looked it up uh uh hardware is like less than a third of revenue okay so yeah it's not it's not really the driver of earnings here it's it's more um it's more of like selling that integrated like really it's

called integrated solution because integrated what it implies is they're integrating it with software so it's kind of razor razor blade right they can they can use they can they do make up they do make money on on the the hardware it's just not you know it's just not really the scale the scale side of the business but then on the on the audio side right like pro tools is their software solution um pro tools has really high market share you could use it as a software only solution so they're actually like even even if an artist an independent artist is making music you know they could choose ableton they could choose uh pro tools they could choose logic in most cases and i've done a good amount of research on this the difference the different

softwares are kind of good for different things right so pro tools is said to have like the best mixing and ableton is said to have some like the most interesting um there's some like very specific use cases i think in like electronic music has like really good plugins but in a lot of cases like these artists they have they have multiple of these software they don't just have one right because they may use one for one thing and one for the other thing and one of the really interesting things that avid has done actually in the last couple of years is they offered a free tier of the software so it's actually a freemium model so if you want like the basic basic basic version of pro tools you can actually get it for free and same thing for media composer

and a lot of that is because they want to capture like students who are just learning right so they want to just have something that they give away for free but the upsell on going from like a free tier to like an amateur tier you know you're only i think i think uh pro tools is only priced at like $20 or $25 a month, it's still affordable, right? Whereas Ableton, they don't even offer a SaaS license version of it. So if you're going to pay for Ableton, you have to pay, I think their low end is like $500 and their premium tier of Ableton is like $700 or $800. So the pricing strategy is actually really, really smart. And this is kind of what I was alluding to with Adobe. They're actually taking market share and audio. It's really clear. If you look at their subscription

numbers their pro tool subscriptions are up more than 50 percent year over year right and it's primarily up because of the loan right and their media composer subscriptions are up too but it's not clear how much of the media composer subscription side is from low end versus high end the company says they're actually taking market share in the low end but um you know i think adobe is a lot more dominant in low end whereas audio is is much more of a game that i think avid could win in the low end so it's it's kind of an interesting story yeah that's you've piqued our interest yeah i mean any company that does the freemium with the sass that seems like a way better model app if you're doing a comparison just with the uh if their competitor has the

same exact product i mean it's just a way better product or sorry the freemium is just way better as a customer acquisition tool yeah yeah and i was actually i have a friend who's a musician i was actually texting with him this morning asking him like what he thought about like ableton versus um pro tools and he made a really interesting comment which is that like there's just certain plugins so so the way that plugins work is you can buy the basic pro tools right and you can pay the subscription and then you can buy like third-party plugins like give it like a platform with like api right so like ryan like you could make a pro tools plugin for like a cool instrument that you created and someone could buy it directly from you avid actually

doesn't get a slice of that maybe maybe they should change that in the future but they've created this ecosystem where like it's also about switching costs right so if if you if you have like all these like really great plugins in your pro tools and you figured out like what what you what you like and if on top of that you've integrated it with hardware like good luck trying to switch off of that right because there's certain pro tools there's certain plugins and pro tools that you just can't get in other things and vice versa like like i said like ableton has certain certain like plug-in packages that are really good but the net net of it is you know pro tools is really good at some things ableton's really good at other things

there's another company called logic is really good at other things um and it kind of depends what your needs are another kind of interesting angle to the pro tools thing is in video uh high end video you also need a high-end audio to like sync with your video and avid pretty much has a monopoly in high-end video audio so anytime that like netflix translates like like a spanish language show into like english 100 they're using pro tools for that okay well or like i shouldn't say 100 i should say like 90 plus percent right nothing's 100 i guess the uh the plugins is a good segue that well let's do a ad break first oh right yeah quick break and then we'll hit autodesk and pro core cox panoramic wi-fi includes advanced security to help protect

all your connected devices you'll get real-time alerts oh like this one so you don't have to worry about malware or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app Restrictions apply. All right, welcome back in. We just wrapped up with Avid and Streaming, if you forgot, but next we have Autodesk and Procore, which are similar business models. And for anyone that's unfamiliar with Procore, they're basically a construction workflow platform, and they're competing a little bit with Autodesk, so I'm kind of trying to paint the landscape.

but the the two have been pretty direct competitors here especially the last year the Venn diagram's closing yeah and Autodesk really making a push with their construction cloud so I'm just curious who you think will you've been doing a lot of calls I know with sort of industry experts so who do you think will end up being the leader in that category yeah it's it's a really interesting question um and i've been getting up to speed on pro core as i mentioned earlier like my firm is long um autodesk you know we're we're a really big believer and what they do overall they you know just like avid they're they're a really sticky high quality verticalized solution for professionals and the construction market is kind of like new

territory for them um in like the last couple of years they've they've really built their construction vertical through like uh acquisition they acquired plan grid they acquired building connected they acquired another company they've acquired a few other companies as well and what i've learned about the construction the software market for construction is that it really breaks up into like three verticals and in each vertical there's like different like companies that are like winning and losing so the first vertical that i would say is like more of like a bim related solutions vertical slash engineering and bim is like building um building information modeling yeah uh software um and basically this is like 3d models of like it shows you like

everything that's inside of a building that you can't really show on like a 2d drawing and in bim autodesk dominates that because they they basically own the bim market um they they have all the solutions that are used to create them you know with revit and then um they because of that and because these these bim files are so specialized they have the best solutions for like viewing and touring and manipulating the BIM files. So if you're a construction company and you absolutely need to work on something that's BIM related. So this is more like the high end market where you're talking like a little

bit more high acuity projects. You're probably going to be in some capacity paying for some kind of BIM related solution, whether it's BIM 360, Navisworks, Revit, you're going to have, you're going to be paying Autodesk for that. um the second vertical is project management so this is like managing like the order of operations you know managing like the procurement managing like um so what happens on a construction website or a construction site is uh an owner owns the project they hire a construction company to serve as like the general contractor and the the general contractor subcontracts out a lot of like the

specialized jobs on the site and so this is like obviously if you have software to organize that it's really helpful um and this is where pro core they they dominate project management um they they have like the best in class solution for managing for like tracking all the costs bidding off the project you know doing the compliance and billing um so they're really really strong here and then the last vertical of like construction software is what's called field management and this is actually a market where this is actually like a segment of the market where autodesk and trimble have the best solutions um procore has a solution it's not quite as good but autodesk really actually has a better solution for field management which is um i believe

plan grid is their solution and it works really well so this is like about when you're on the site and you know you're using like mobile phones or ipads to like look at look at the plans and kind of like you know see like what jobs need to be done um they have but procore does have a good solution for this and so it is kind of a fierce competition in that in that part of the market i think if to kind of like summarize everything i just said like actually project management which is what pro core owns is like the biggest market for this that's like the most essential piece of what you need to do on a construction site the bim related stuff is a little bit more niche you don't need a bim a bim reader for you know a majority of projects although bim is like

growing in importance right which is more of a threat to pro core and they're kind of working on some bim stuff it's just not quite there um and the field management stuff is is kind of a newer area not really that big yet okay is there any way for uh that you could see pro core stepping on autodesk shoes on the i don't know both markets are early on on the design side and then is there any way for autodesk to go more to the project management side or do you or is that just too tough of a question to answer or is it just going to stay fragmented i i i i can answer it based on my understanding and you know i'm still getting up to speed on procore i have spoken to like customers of procore i've actually spoken to like former sales reps at procore so i have a good

sense of how people kind of think about it and the sense that i get is that yeah autodesk really owns i mean they own bim there's no way around it uh they just already have the solution and everything that pro core has done so far with them it hasn't it just hasn't been up to snuff um you know i think that's probably more of an opportunity for pro core more so on like just using them files if you're talking about design like i don't think i don't think i think obviously autodesk is always going to own bim design but if you're talking about just like using it in the field like yeah i think pro core has a decent shot of getting into that but you know autodesk basically gives away a lot of its bim software in the field as part of its strategy to like get

market share in in this area so there's not really very there's not really much incentives for construction companies to use pro core solutions for bim because it it's not cost effective and it's also worse so that's kind of a sneaky thing that autodesk is doing on the other side of it right like autodesk is really aggressively investing in their um they have a they have a project management solution called BIM 360 um and they're really aggressively like trying to build out uh a lot of these project management solutions and um I don't I don't think they're going to have much much success actually in terms of like stealing market in terms of stealing customers who are already on Procore because a couple of things Procore is actually a lot better

because pro core has built everything from the ground up so everything like works really well in pro core whereas like autodesk has basically patched together a bunch of acquisitions so the autodesk software isn't yet as good as pro core it doesn't sync as well it's a little bit slower um it's just it's not perceived to be as good as pro core either and um kind of like hearkening back to like our avid discussion there's a lot of switching costs to get off of pro core right if you think about what's at risk you know of like moving off of Procore I think the biggest thing is retraining right because people just know how to use Procore and I've I spoke to a customer who said it took their it took their firm like two years to get everyone trained on Procore

they don't want to have to retrain people to get off Procore um right um so I think there's a lot of switching costs Procore also depending on like how many modules you use of Procore they have like a few different like modules within like the the solution right you could use a project management module you could use a field management module they have a module that basically does like financial reporting so like the more things the more pro core you're using the the more integrated you are the tougher it's going to be to switch off um so i yeah that's kind of how i would summarize that like i think that but where i do see the opportunity here is there's a this is a huge market and there's still a ton of white space so i think that there's still a lot of upside for

both companies like even if autodesk is like a distant number two right procore estimates the market today is like for software construction software is like a 10 billion dollar market and even if autodesk is like a distant second and it has like 10 market share that's still a billion dollars right like that's still that's still a big business and like i view these as like more complimentary solutions because a lot of construction companies they're already paying autodesk to to you know to use a lot of these bin files so i viewed it more as like both companies can win right there's there's room for both um in a similar way like like on the avid conversation companies will pay for both adobe and avid and there's certain

situations like adobe after effects is really really good for 3d graphics right so there's a there's an integration with avid where you know you do some graphics work in adobe after effects and you import it into avid you know you could kind of think of that similarly with like autodesk and procore which maybe do some 3d modeling with with autodesk stuff and you import it into procore right the uh okay so you think it'll kind of stay as like autodesk is the pre-build and Procore own sort of the build? I mean, I think just for like project management, like even pre-build, like pre-construction planning,

Procore is still winning in that. But if you're talking about design, if you're talking about design, yeah, Autodesk is, they're just a monopoly in design. Yeah, there's like, we know the company, it seems like it would be tough, very, very tough to dethrone them. But specifically, excuse me,

on the project management site or stage they do an interesting thing where like with a standard subscription service you kind of just you only need one person to use it but with construction there's always these people coming in and out of these projects the pay-per-seat model has how does that work i guess uh for people that aren't familiar and does that give an advantage for like pro core or is it just kind of how that that industry works yeah yeah it is it is interesting because most sas software is priced on a per seat basis which basically means that like if you have 10 people who are using like a software like uh autodesk then you're paying like 50 per person per month right and avid does sorry autodesk does price

it's been 360 on a per seat basis although like i just said they kind of just give it away for free right now because they're trying to take share they're just trying to get people Autodesk is really just trying to get people to use they're trying to get people hooked on their software it's a really interesting strategy by the way that Autodesk is also doing and like the manufacturing design market and you know I think the strategy has proven to work for them over time and although that's with Fusion 360 right exactly yeah yeah Fusion 360 um and that's a conversation for another day but with procore they have a unique pricing model they price on um i think they call it annual construction volume and basically what that means is um

they're pricing based on like the size of the project or like the revenue or the annual revenue of the construction company depending on if the license is a project is it spec'd out for a project or if it's spec'd out for an enterprise and there's like two levels of that by the way that are priced a little bit differently but the way that most pro core is priced is on a construction project by construction project basis and they typically price it like uh either like 10 or 20 bps of the of the value of the project so if um if the construction project's like a billion dollar project like let's say they're building a hospital or something then the pro core fee at 10 bps is going to be like a million dollars right okay and the way they do it is it's like a one year

term and the client typically pays the pro core fee up front but that's usually how they do it and then like you said the interesting thing about pro core is unlimited seats so people can come in come out they could have a thousand people working on the site they could have 500 people working on the site same price it's based on the the size of the project um there's an interesting thing about this though with this nuance in pricing which is that like people can play games with the pricing right because what if the construction company lies about the size of the project right like what if they're kind of incentivized to say they're kind of incentivized to underbid the size of the project um so if it's a billion dollar project they might say oh it's only 600

right so only only charge a 600k instead of a million right or a lot of times what happens is um the company will under budget it and then if it turns out to be higher then they'll just pay procore a little bit extra at the end of the project right that's something that some companies do um so and procore like if but the interesting thing about procore right is if you're fully integrated into Procore you have like all the modules Procore could just log into your account and see how much you build so they kind of know but only if you use all the modules so if you only use a project management module you can kind of play games with it but the downside of this model though is and this is actually something that happened last year is if if you're if your site

shuts off you're on the hook so a lot of companies they thought they were going to do like a billion dollars of construction revenue last year but because construction sites shut off for like half the year they only ended up doing 500 million but they prayed they paid procore up front so a lot of those companies got burned actually and like it'll be kind of interesting to see how procore um amends that with clients like i know that they're going to work things out with clients and that actually could be a headwind on like their near-term financial performance if they're still having to like make up for the what what they built last year but that is kind of an interesting dynamic of that model whereas like autodesk you just you just stop paying the monthly subscriptions right you

just turn it off right is autodesk leaning towards copying them because i've seen them mess around with different pricing models are they not copying pro 4 exactly yet they mentioned in the conference call that they are i believe they said they can be flexible with the pricing like they can do it that way but it sounded like they were reluctant to do it like they prefer to charge i don't i don't think it makes sense right uh because i mean the way that the way that autodesk is being used today right is only a only a small group of engineers who understand how to use bim files are needing to use BIM 360. So they might only be like five seats

on a billion dollar construction project, right? And then there's also the aspect of Autodesk isn't really charging for this right now anyway. So they don't really, they can say whatever they want about flexibility. They're not really charging for it. But should they, like, I suppose, like if they more fully build out

like the project management tools, like I don't see why, like I think pricing is very flexible, right? This is software. So you can price however the customer wants it to be price um yeah i i think they i think they could easily adapt to that right yeah it's something that yeah because i was kind of thinking if there's something within their business model that's going to prevent them from doing that but i guess i don't know we'll see we'll see if they

choose to just i guess it knows nothing stop just the accounting department yeah true i guess i was What's the incentive then? It sounds like the general contractors prefer a volume based on a per project pricing. Is that just because they don't know how many people are going to be on the project? They might hire subcontractors later on? I'm just curious why Procore decided to go about it that way. yeah you know i don't i don't exactly know why they've decided to do it that way i'm not yet an expert on pro core i haven't studied the history of it as much but just thinking through it though it is like a it is a fair model right like it scales with the size of the client and it scales on like the knee and i mean 10 bits um is not so the construction industry is interesting for a few reasons the first thing to know about it is like yeah a project might be like a billion dollars but profit margins in the construction industry are like three percent right so you can't charge like

you know you can't you can't really like yeah it sounds it sounds like like really appealing like oh maybe procore has like a lot of pricing power if they only taking like one percent of the price well actually but they're the customer's profit margins aren't big so the other thing too is um like depending on the nature of the job you could actually bill the uh the technology fee up to the owner right as part of the bidding process so it is kind of nice to have an estimate up front of like well here's what the pro core budget's going to be if we finish on time right and then you could just put that in the bid and so you don't really have to so you don't have to worry like well what if i need 10 more contractors i'm gonna have to go back and twist procore's arm

right yeah so it doesn't it doesn't if you think about like how these projects are like bid out and uh executed it does it does make sense it does seem pretty fair okay so let's say uh in let's say a three trillion dollar infrastructure bill gets passed what goes in the infrastructure build basket for you i will i mean not autodesk autodesk for sure yeah but is that do you think do you think that it is a uh sort of catalyst for some of these software providers uh i think yes but i don't think it matters because look last year was the worst year ever for construction i mean if you look at any measure of like the the architect tech billing index, or like any measure of construction spending, by all accounts last

year was the worst. Yet, right, Procore still grew its revenue over 30%. And Autodesk almost doubled its its earnings. I think that tells you everything you need to know about these businesses, right? They're super, super resilient. And so they're gonna they're gonna they're gonna benefit regardless, right? Because these companies, they need the software, they need the software to do the job for a lot of reasons that we could get into if you want there's a lot of technological there's a lot of problems that technology fixes uh at the construction site and in the in the design process so yeah of course like more spending on infrastructure is going to help in the near term but if you're if you think about like the long-term drivers you know even if we don't get

an infrastructure bill the long-term drivers are still going to be intact which is global population is growing right it's expected to grow global population is expected to grow like 30 over the next 30 years and we're gonna have to build a lot more you know infrastructure and a lot more housing a lot more stuff to accommodate that population growth even existing stuff that's already built still needs to be maintained you know building codes change over time things need to be retrofit whether it's because of like higher climate change standards or because maybe people want to reuse their buildings right like we're seeing that actually right now with covid which is like people's relationship to real estate can change right so with remote work and social

distancing maybe you need to redesign the way something the way like a conference center is built and you're going to need to design it in autodesk and you're probably going to need to manage the project with procore right so you know and then and then of course there's also the idea that like the construction industry overall has like one of the lowest penetration rates of technology. So not only is there like a really long tailwind for construction spending and aggregate, but there's also going to be a rising rate

of technological adoption. So I think, you know, if you think long-term, it's hard not to be like really bullish on the long-term growth. Yeah, I think I would be bullish either way. Wrap up question? Yeah, we'll have, yeah, just the one. What is one piece of advice you have for anyone considering a career in

investing or maybe broader? That's kind of what you have. Yeah. Yeah. So like, as, as like I mentioned up top, like I have a pretty somewhat non-traditional route to getting, or I've done things kind of my own way to a degree. And I think that every investor needs to find their own way and they just need to find, if you want to have a career in investing, you just need to find what works for you based on, you know, your relevant skills and your personality. Right. So like I mentioned, like I was working at a quantitative shop and I realized,

you know, like I think quantitative works for a lot of people, but my personality is probably more qualitative. You know, I do a lot of like research on international and small cap stocks. Some people may not be comfortable with that. Some people may prefer large cap. So, you know, I think every investor needs to like find their own way. And, you know, you could do that by like reading a bunch of books you know um if you don't if you don't know what your style is you know read read all the greats you know go work for an established shop where you could train and over time just try to like be very introspective and figure out what what works for you any book recommendations no just the

well the classics right so i've listened to a lot of your guys's shows so uh i don't want to be repetitive because I think a lot of people know that like Joel Greenblatt writes great books or, you know, anything like about Warren Buffett is obviously great. Um, you know, I'm, I'm more of like a growth investor and I think, you know, a really good book for, for growth investors to read is, uh, you know, anything written by Phil Fisher, right? So common stocks and uncommon profits is, this is a really interesting book, you know, even though it was written like 50 years ago um there's a lot in there that i actually applaud in my investing process today you know he really talks about scuttlebutt which i do a lot of you know scuttlebutt is essentially you know

talking to people who work in an industry and like truly try to get like a deeper level of understanding about an industry than you could just by reading like a 10k right so i think that's a really for a book recommendation that's a really interesting one okay a classic for sure and uh where can any any listeners that want to find you where's the place to do that oh yeah um so i'm active on twitter um at luis v sanchez 777 um i i post uh like a monthly like basically investment write-up or a monthly blog post i usually put it on twitter but i also put it on my website which is lvsadvisory.com okay perfect perfect yeah thank you for joining us louise thank you guys so much for having me i really enjoyed it okay thanks again to luis sanchez for coming on uh definitely

enjoyed it feel free to follow him on twitter uh he's got some good uh tweets i guess research no he does good research on follow definitely good follow yes yes uh but now we're going to talk about um sort of our show notes so if you remember we've kind of changed up the structure so it's interview first get the good stuff out of the way and then we just ramble on about nonsense Hey, don't downplay us. Have some confidence here. All right, well, my nonsense this week is Microsoft buying Nuance Communications. This was announced, I think, this morning.

It was rumored, yeah, rumored yesterday, officially announced this morning. So it's for $19.7 billion, a very small amount, obviously, for Microsoft. Have you heard of this company? I had, no, but I'm going to pretend that I have. So it's a 23% premium to Nuance's closing price on Friday. So it's apparently a decently big company. And Nuance, this is basically all from the press release, is a leading provider of conversational AI and ambient clinical intelligence for healthcare providers. So it's the way – I mean everyone on Twitter basically just said it's AI in the healthcare space.

Boom, automatic buy. 55% of physicians and 75% of radiologists in the U.S. use Nuance's solutions. 77% of U.S. hospitals use Nuance's solutions. A quote from Satya Nadella said, AI is technology's most important priority and healthcare is its most urgent application. Together with our partner ecosystem, we will put advanced AI solutions into the hands of professionals everywhere to drive better decision-making and create more meaningful connections as we accelerate growth of Microsoft Cloud for healthcare and Nuance.

So, I mean, that's been a big theme for them with Azure is this sort of industry-specific cloud offerings, which I find interesting. And so I guess the first question would be, are we underestimating the size of cloud? Because I know everyone already says, it feels like everyone just says like, oh, cloud's the future. I mean, I don't know. We don't own any of the cloud companies. I don't own any of the cloud companies personally. but I don't know, maybe in general people are underestimating it. I don't know, to me it seems like it's going to grow at a high rate for a long, long time.

Do you think most cloud offerings will just end up getting bottled down to Azure or AWS? No, Google too. Yeah, Google did $13 billion last year, so they're within it too. Okay. I mean, AWS is quite a bit larger, Azure's in the middle, but google is is doing quite well and they actually their first client was spotify and they kind of launched together it's a whole big story but yeah and it's a tough industry to understand at a deep level for a generalist like us but i think you can easily say yeah i mean

the growth is going to be strong for a long long time whether that's priced in is kind of tough to tell but there's giant economies of scale here too i don't know it seems like the best business you could have maybe imagined for the 21st century i i think about two years back we said if aws was on its own what valuation would you give it and i think at that time we said something like 250 or 300 billion which is probably yeah oh yeah well now it's whether oh it's definitely larger than that i don't know how i don't have a trillion dollars oh it might be valued at that i don't know what its revenue run rate is currently if it's around 50 billion dollars you could argue the market would value it at a trillion dollars potentially because it seems like companies like

that are getting 20 times sales multiples but i'm not sure what it what its true value is i i mean i don't know it would get a hefty multiple and it's probably the biggest part of amazon's business now? Profits-wise, yeah. Or Microsoft, sorry, I thought you were talking about Amazon. Did you say Amazon or Microsoft? I said AWS for Amazon. Azure, dual Microsoft,

it's different because Azure is going to be quite large, but it's still not the biggest part of the business, I don't think. And they don't, Azure's part of a different revenue segment, so they don't actually break it out all that often, but it is actually going quicker

than AWS at 50% last quarter. But who knows? I don't know. These things, there's people out there that are a lot smarter than us that know these a lot better. So I kind of just ignore it because there's so much intelligence

going into analyzing these industries that I'm like, well, what am I going to add? Microsoft was also recently rumored to be in talks with Discord for apparently a $10 billion acquisition. Do you think Microsoft gets the most acquisition freedom of all the big tech companies.

Oh, for sure, yeah. Like flexibility to acquire what they want. Yeah, I mean, it doesn't matter what I think. That's a fact. There's no way, and none of the other tech companies, big tech companies can acquire anyone. Which is a little ironic considering that Microsoft was sort of the first one

to see regulatory pressure of the big five now. Yeah, it's weird. Maybe they're just seeing this window is open and they're going to try to get some stuff in as fast as possible. acquire everything they can yeah the but discord makes sense because of the gaming aspect you know you can attach to xbox right yeah something something something synergies well i mean there's synergies i think microsoft could buy anything and you could claim their yeah they're

they're in some healthcare ai yeah how does that integrate with excel sheets that's that's that's correct that's correct uh i guess you could argue that for most things but i think discord actually makes sense um and linked it i guess didn't make sense although a lot of people bag on it but it makes a lot more sense than other social networks you know what i mean it made a lot more sense than tiktok which they're rumored to be acquiring sometime this summer right the tiktok america i think everyone was rumored to buy tiktok even oracle right walmart and oracle i think went in on a partner bid i if someone told you that headline you'd think it's a joke but yeah and You were gone, so I'm not joking.

Nah, that was all just kind of headlines, right? Nothing was substantiated. What's your next topic? Okay. Speaking of another cloud company, I guess we forgot about the Chinese ones. Right. Alibaba. So they're still in the cloud race with other companies out there.

But Alibaba was in the news again, fined $2.8 billion by the Chinese government's anti-monopoly probe. So this is the result of the government's investigation into Alibaba, which also coincided with that Jack Ma disappearance and financial IPO getting pulled back, I think. They're all happening at a similar time over the last few months or so. So whether they were saying they were, it seems like these things are connected. uh the china official i i didn't get their name uh said alibaba quote infringes on the businesses of merchants on the platforms and the legitimate rights and interests of consumers now a lot of people are saying this means alibaba is in quote in the clear and that you know this shows that their financials are legit because a lot of people question the validity of their financials um i've

kind of thought about that before any thoughts on that after this probe well for one 2.8 billion dollars is something they can easily digest yeah it's not a lot like the facebook sort of slap on the wrist they got whatever it was a year or two ago smaller actually yeah yeah i mean this is kind of yeah it feels a little validating that the uh that's all they could get out of this well who Who all could get what out of it? That this is all Alibaba could be fined. Well. I mean, what was the investigation into their financials?

No, no, it was just for an anti-monopoly thing. Like that quote said, they're infringing on the rights of consumers or whatever. But the concerning thing I have about that is that Alibaba has a dominant e-commerce market share in China for a decade or longer. So what made the government do this now? you know what i mean ma speaking out against the government you just said one thing that's crazy all right and what kind of concerns me is that and yeah you could argue all right say they based off of the revenue numbers so they're telling you it's legit and that's great but this also tells you that it is basically up to the whims of the the government right is that am i off base there

where this still shows that it's not pure capitalism. I know there's a lot of crony capitalism in the U.S. too, but... You know, I've been thinking about the avoidance of Chinese companies purely because of that. And I think it's maybe starting to go down. My concern for it. Well, that's when they say right before the next fraud drops. But no, that's just a joke.

But, I mean, I think Charlie Munger, his firm, what is it, the – Well, it's either the one – I think it's outside of Berkshire. Yeah, Wesco's inside Berkshire. Yeah. They bought some Alibaba, which – I don't know. I don't really care about it. But I have a down year, but I don't know.

I don't know. I feel like maybe we give it too much slack. and I feel like if Alibaba were a fraud and the financials were fake I think we're kind of past that now yeah but the thing is even if it was I still don't understand the business which is whatever that's just a personal thing

but I still can't get around the fact that it feels still like a state owned enterprise yeah I mean there's some of those in the US like Lockheed Martin or whatever but what's so bad about that? Monopoly! I know but the thing is

Monopoly's have good returns Well, the thing is, it seems like there's a lot of, you know, there's other companies like Pinduoduo. Why do you think that it's still government-owned or government-run? Well, it's not government-run, but I think you can, I mean, they control who's in charge. They can find them without, I mean, Alibaba's been a monopoly for a decade and they decide now? That doesn't seem like a coincidence. They told them they can't do their IPO with Ant Financial. When did the anti-monopoly probe start?

I have no idea. But it could have started, I mean, it started. I don't think that, I wonder, yeah, I mean, Moss spoke out and then there was the whole, oh, he disappeared stuff. But I think maybe that's U.S. investors blowing it out of proportion. Possibly. Well, that stuff, yeah, the disappearance stuff, yeah, there was a lot of it was headlines.

But behind the scenes, I mean, if the government can just tell you who's running the company or not, they can decide whether your subsidiary can IPO or not. I don't know. It kind of concerns me when a lot of the times the thesis is on management. Well, the U.S. has the same, I mean, you talk about, well, the government can fine you. Yeah, but you can't sue the government. You can sue the government back in the United States. There's a big difference.

I suppose. I think it's a huge difference. Any follow-up questions? I was going to ask if it makes you more uncomfortable or less uncomfortable. I think we covered that. I don't know. Maybe I want to adjust my framework for investing in companies, and I'd like to see them. Don't you think it's good, though, that the government takes action?

No. I don't know. I don't know. Look, the concern is they've been a monopoly forever, so why now? It seems like they're just deciding whenever it's in the government's best interest to do this because, what, they just let it go for 10 years? Alibaba has been losing market share for a decade. You don't know when that – we should look up when the probe started. Oh.

Because, I mean, the probe started like three years ago. They were losing – they've lost market share every year. I don't know. All right. Well, next topic for me, I saw a Richard Feynman quote on Twitter this week. I guess this would be called maybe current state of Fin12. I don't know. But he said, if it disagrees with the experiment, it's wrong.

It doesn't matter how beautiful your theory is or how smart you are. If it disagrees, you're wrong. And I think this – I mean there's clearly – it clearly applies to investing. A lot of stuff, yeah. Do you do this in investing? Do you ever find yourself sort of laying out a really detailed thesis and then kind of clinging to it? I know it's hard to – yeah i mean yeah definitely do that um you got to try to resist doing that i think the key is to

like identify at the start what you're looking at for it to go wrong and like either writing it down or logging in somewhere because if that happens you can't just adjust to what you're hoping for like hope as a thesis and yeah it is about the i mean the experiment analogy is crucial because it comes into like you have that mindset all right you're going to buy something and then never sell right that's a lot of people's mentalities that's kind of our mentalities but when if the experiment is not going like if the company's not performing of what your theory is you can't just be like no no i think this theory is still right it's like no they when the evidence shows and i think that's simple it's just an earnings reports and industry data if that happens you're wrong you have to and

you have to log it you have to identify what's going to go wrong beforehand or else you're going to convince yourself that you're still right so i guess yeah my my follow-up question was how do you apply the the experiment phase to investing because sometimes it isn't always you know we own spotify it's not always what's going on inside the business isn't always reflected in the financials like there's stuff that's kind of going on under the hood that maybe just hasn't been monetized yet so i guess how do you apply that phase to invest and how do you know uh when your theory isn't accurate is it like management commentary what's like the best way management commentary is tough because that can be a biased thing and if you're going to go for a scientific

method you want the oh gosh what are they called you know you only want the uncontrolled variables or the dependent variables or whatever. You don't want to just be – you know what I mean. The management commentary is obviously biased in favor of the company. It's a tough question though. I mean how would you frame that experiment part? I don't really have a good answer for it. I don't know.

It's tough because it's not as – like the thesis part is easy and it applies to both science or investing. But the experiment, it's not just one experiment. You're kind of watching this thing develop over years especially if your theory is never sell so i guess maybe it's the market share type of stuff pick a factor or pick to pick a metric and stick to it i think it's the way to go and usually comes down to you know three metrics maybe obviously sometimes it might be five it might be two um metrics whether it be financial or just user or whatever the three metrics typically drive a

company yeah there's a lot of other nuances to it but if those are doing well i mean for example an easy one spotify users and premium users i mean if that slows down because you know what part of our thesis is that they're going to hit over a billion monthly active users or however you want to define that in the next decade if that doesn't happen you have to like we identified that beforehand if that doesn't happen then it disagrees with your theory yeah then then uh then you're then you're wrong and you have to change how you how you're viewing the world okay all right uh what's your next topic all right this one's a fun one we got a buffet buffet excuse me buffet indicator alert um warren buffet is back as kathy wood of arcanvest tweeted and forgot the

second t in buffett honest mistake honest we all i mean everyone does it all the time so we all everyone does it yeah but well i've started getting i've i've typed the word buffett so much now that i'm starting to think i'm starting to get it the other way around that buffet is spelled with two t's yeah so that's not that's not the complaint here the real discussion which that's just funny and we all do it but the main topic was the buffett indicator which is why she said the word buffet, which is the S&P 500 total market cap divided by, I think it's U.S. GDP. Fun fact, Buffett says that this is not useful anymore, so really I think it's just nonsense. But the main fact posited by Wood was that the U.S. stock market to GDP ratio was two to three

times larger in the late 1800s and early 1900s than it is today. The problem is that it's just patently false and can be easily found with one google search and a few academic studies from our notes in the history of financial markets which easy plug we did the first season that you can search on whatever podcast platform history of financial markets when we were doing research for that the new york stock market from 1900 to 1925 never got above 0.3 on its ratio london was above one but still just slightly above one during that time and as chris bloomstrand noted who has been him and the arc analysts have been battling out on twitter it's very very fun to watch he noted that for the simple reason that more companies were private that you can just it's

kind of common sense that that indicator was going to be low as most companies were not trading on stock exchanges now yeah when you see this type of blatant poor analysis how do you weigh it with how clearly successful ARK has done and is doing. Well, so first of all, when Musk threw out that question at her. That was it. Whatever. We don't like Musk. That was a fun discussion, honestly.

When he threw out that question, it was like he was setting her up for, like she knew that she had to, like here's my turn to give my take and the whole world's watching. So I guarantee there was an analyst tasked with finding a response to that tweet or maybe a team of analysts. True, you could be right. I don't think that was just her just like shooting shit on Twitter. Yeah, you're right, you're right.

What about when there's a guy named Shrubbery Capital who said you've got to use world GDP and Musk was like, you've got to listen to the shrub. I thought that was pretty funny. Yeah, just using any data from before 1900 it's very loose measuring it against today's market is like a totally different world

less than 1% of the world were investors or less than 1% of the citizens in the US were investors at least the US yeah I mean the world was just completely different there was no the regulations to get on the exchange were really low

there was just so many different factors no information out there I mean the thing And also, that was the period of what's crazy to me is there's all this innovation going back then, too, like now. And it's like, one, there was more innovation going on back then that actually impacted the world, like air conditioning, automobiles, literally electricity, plumbing, just so many of those advances in medicine. Refrigerators. Refrigerators, just mechanical engineering and civil engineering in general. They're literally inventing thermodynamics and railroads.

But that's besides the point. The thing is, during that time, there was a clear pattern of bubbles leading up to the 1929 crash. So is she arguing that these growth stocks are going to lead to bubbly things? I don't know. I just found that, like, yeah, they've done so well, but the analysis is just consistently poor. But their performance is amazing. It's hard for me to see those things. Yeah, I do find it strange that that was not, like, run by someone before putting it out there because they knew the whole world was watching.

It's an easy Google search. That data, I don't know. If you're using any argument, I wouldn't use data, especially when it comes to the financial markets from before 1800, other than, like, mania types. Yeah, true, true. Yeah, I mean, the world is completely different. Human behavior is the same. The financial markets are so different. And, you know, there's a lot of academic studies going back that try to piece together some analysis.

Typically, you want to use a few different sources because a lot of them are different. Like the source I was using had like the ratio at 0.3. I'm sure other sources had it slightly higher or slightly lower. You just kind of know what kind of range it falls on. Obviously, you know, right now that ratio is like 2 to 1. It's like 2 or something. I think it was clearly it wasn't like 6 back in 1900. That is clear.

All right. Anecdotal evidence for me this week. I bought a one-month Disney Plus membership last week. Wow, huge. Buy signal. Yeah. Any Disney investors, congratulations. You should be thanking Ryan. Yes. If you guys have a good quarter, you know where that came from. Yeah, please tip Ryan. But I think the catalog is much better than Netflix right now. um and i'd also go ahead and argue that i don't think netflix's originals catalog is good enough

on its own for me to be a member right now i think they still have to continue renting out content well counterpoint i watch drive to survive and it is amazing formula one thing yeah i love it i don't like the sport on ferrari now oh they're one of the best them and mercedes they are I mean, they just do a bunch of drone shots of, I mean, they got all the money to win. They got the best engines. It's fun. I mean, I don't like the sport that much.

I don't watch it. Maybe I will now. I don't know. But the behind-the-scenes stuff was amazing. That's a Netflix original, but the documentaries seem to be good on there. I don't know. You know, the actual TV shows and movies. Disney Plus was nice.

It's just anecdotal. I don't know. says like netflix has you know deflected all their competitors in the past but i think i would not be surprised if disney plus had more members than netflix by 2025 yeah i think that i mean the pace is impressive for sure do you include hulu and alien hit 100 million members uh across espn plus and hulu as well i i believe so yeah i mean it's interesting i don't think it's a winner take all market it feels like the winners are going to be netflix disney and probably hbo max will do solid because because that that that's the best catalog yeah i mean that's that's they could just

they have they've had some bad branding but it seems like i keep the most mismanaged perfect content yeah so those three seem like the winners i would really be worried if i was peacock or whatever those ones they try to get you on uh paramount plus cbs what's your uh next topic Okay, this one is Complexity Investing, and I bring this up because this is the paper that John Rotonti on last week's interview mentioned. It was very good. I think it's like 40 pages. Read it all. Not to brag.

But some of the ideas on here, and I thought it was really good. Who was it? Is it NZS Capital? Something like that. I think so. Look up Complexity Investing. It'll show up. in the 21st century there are and this is kind of the easy one that i think a lot of people agree

with they say a lot of industries are winner take most and they wrote this in 2014 i think they proved to be correct on that yeah um netflix i guess is a good example netflix and disney now maybe um but some of the more interesting details they talked about is how good investments in the 21st century have two characteristics, resiliency and optionality. And this is how they think the moats or competitive advantages evolve to. So resiliency in their mind does not equal maximizing short-term profits, but optimizing the company to have the ability to evolve over the long term. And then optionality equals large potential payoffs from small investments. That optionality part the easiest example is all the experiments that amazon has done over the years where only

like five percent of them are so actually are successful but when they're successful they're they're right big uh do you agree with this can you think of any examples of maybe that resiliency stuff the resiliency part i mean square a little yeah square yeah that's something but square i I mean, part of that was just execution. Well, there was a lot of optionality, I guess, or the cash app seemed to be a good bet. But the resiliency part where it's like not maximizing short-term profits, I don't know if that was the default of the economics of their seller business or that was them sort of reinvesting. I think the seller business in and of itself isn't that great economically. Yeah, I'd say resiliency, you could argue some of these website platforms, Shopify is a well-known one that kind of went through that, I would argue has a lot of, or has built up a lot of resiliency where they're kind of basically whatever the customers want, they can just do, and they've added on the payments and stuff like that.

Wix, I think, is very resilient in that regard where they've evolved their business, and we know that one well, so that's kind of why. We're biased. yeah we're a little we're a little biased and we know that one well so it kind of always pops up i think autodesk and spotify also from from our links there's plenty of examples out there but those also popped up into my head um as a lot of resiliency where some man i mean i don't know you can change as the world sort of changes well you're setting up a business where you have you can be nimble to what your users or whoever wants i don't know but the thing is isn't one path track yeah and some you have to well it's different so like they were arguing that back in the day

the optimal way to do it was because there were such large barriers to entry in a lot of businesses like literally physical barriers to entry you couldn't get advertising except in a few spots there was you know all these gatekeepers and stuff like that what you wanted to do was to raise prices because no one was going to it might take a decade or longer for a competitor to come in and disrupt you but nowadays that's a lot easier so you have to set yourself up to be resilient and not just be just continually raising and raising and raising prices um i don't know that's interesting all right they also argue that you want to optimize your portfolio for resiliency and optionality um i guess it makes managers like like when you're making

your investments you want resilience companies and you want companies that are optional like have a lot of optionality which are sorry the way they are is to take some small bets that could be VC-like returns. Yeah. Yeah, it's a bit of the barbell strategy in a different form. I think there's a lot of ways to go about that. They also argue you want companies that play, quote, non-zero-sum games where the service they're providing,

the customers are paying for it, but they're providing more value in return. I think an example would be DoorDash versus Olo. That's how we were thinking about that on that deep dive show where Olo is providing more value. DoorDash might be extracting a bit too much value? What are your thoughts on that? Well, they're just, I mean, yeah.

I guess it's a good example where OLO does, I think, add value to multiple stakeholders. I think DoorDash is like... Well, they argue they're adding value. They're adding value to everyone because they just offload all the costs. Yeah, I guess the management... They are a cost. Yeah, so DoorDash themselves and investors and maybe people that like the company would argue that they are adding value. Some people see it in different lights.

We kind of see it as them extracting a lot of value. Yeah, I'd agree with that. All right, last thing they had on here. So they argue duration of growth is the most important factor. If you can be confident in duration of growth, that solves a lot of problems. And they also say if you're confident that you find a company in the middle of an S-curve. And I guess an example that comes up for me, we don't own this company as of listening, would be Avalara, where it seems like that's kind of at an inflection point

where you can see 20% growth. We were just looking at that one, so it kind of pops into my mind. I don't know, any other companies or examples come up with that? I don't have any in mind, but I understand what they're going for. I think too many times there are a lot of investors that are just extrapolating current growth rates out in perpetuity. But a lot of that growth, especially like that revenue growth, is being manufactured through huge spend on sales and marketing. So when you peel that back and try to grow organically, I assume a lot of that's going to come down. So you want someone who's able to do it for a long time and do so hopefully without spending more money in order to get it.

Yeah, you'd much rather have just durable 15% growth over a decade than two years of 60% growth or something like that. And I think, I guess another example of that S-curve hitting where you're able to identify, all right, this industry is changing. I mean, the easiest examples that everyone comes up with time and time again would be Netflix in 2011. If you could identify that, that's the easiest investment thesis. Ignore everything else, yeah, you might be resulting a little bit.

and also AWS and Azure in like 2015 era. Or now. Or potentially now we're still in the middle of the S-curve like we were talking about earlier. I don't know. All right, I have no more topics, so what's your last one here? Okay, one more fun one. This might rattle some people's feathers,

so we'll try to be respectful, but Binance, I thought those were just interesting. One of the world's largest crypto exchanges is allowing customers to buy tokens that go up in value in association with Tesla prices. They're going to do this. Price of the cars or price of the stock? Price.

This is stock. Stock. Yeah, it's all about the stock here. So they're going to do this with other companies soon. It feels to me like it's just total return swaps. That's kind of been in the news, right? But for the masses. I feel like it's just crypto evolving and saying,

yeah, we're just going to replace legacy financial products, but on the blockchain. This makes no sense. yeah i was gonna let you say something that tracks the stock just by the i know and it's not an eye it's not a time-weighted thing like an option that seems so pointless to me i don't well i mean it was a time i always just think i'm like an old-timer whenever i see any of this crypto news either i'm an old-timer or some of this stuff is delusional um yeah let me find both no i mean i like following it and yeah you don't want

to be um too but i i mean the john wb rich i'm not sure if this is the real one because there's thousands of them now but he responded to the tweet saying awesome there is no other way to bet on shares of tesla and i think that kind of just hammers on the point where it seems i mean what's what's unique about i mean this is better than call options or out of the money calls maybe yeah but the thing when the there's so much of this and i'm gonna call it i'm gonna call it dark money it's not like dark doesn't a negative connotation connotation when there's untracked bets off of like that people aren't aware of so say this gets huge right and there's so many people using this to bet on it that historically that is when

problems arise in financial markets when there's so much leverage because this is leverage it's also interesting that them buying this instead of the stock well there's binance just going by the stock i mean that's what i am because i don't understand no i didn't look up the details at all I was going to say, wouldn't that hurt the stock if people were using this as sort of a proxy or like a different instrument? I mean, unless Binance – Binance has to be – They have to own some sort of – they have to have exposure in some way. But I just don't understand how you can allow so much exposure onto one stock.

It seems – I don't know. I feel like a grandpa, but shouldn't you not – Get with the times. It's just how it's done these days. I don't know. I'd hope for someone to explain that to me. I wanted someone to explain BlockFi to me this weekend because... Mind-blowing.

Yeah, they're allowing you to earn 8.6% or whatever it is right now on your crypto. But crypto doesn't... It's not backed by any assets. Well, it's because they're doing a good DCF on the cash flow that Bitcoin will generate over the next few years. Yeah, I was trying to figure out how they make that work. you know trying to have an open mind here folks but it and there's other ones like uh what's it called defy well you assume a 10 growth rate of all crypto and you just out the 1.4 percent for yourself and give 8.6 to the customers yeah and then it's easy and then you lever up 10

times just like it just like a bond fund perfect easy stuff and then there's like the defy the defi stuff that also just way over my head they claim to let people earn 15 these i mean this is just why not 30 just just you know well i mean you get enough money here's what's happening either okay i honestly have no idea about the business model so maybe they're actually lending stuff yeah whatever either they are lending their own money at eight percent and losing it or i mean they have to be getting 8% of their hurdle rate. You need inflows. You need to be, because if you're lending,

or sorry, if you're giving out, like if a bank is paying out an interest rate at 8%, they need to be earning at a higher rate. Yeah, 8% is their hurdle rate, so I don't understand how that's even possible. Yeah, I'm not either. Well, obviously there's, you can assume enough risk to generate returns on that hurdle rate,

But you can't just arbitrage some other rate. Like you have to get money at 8% or 9% and then lend it out at 8%. That doesn't make any sense. I don't – dude, I don't know. I don't know. I honestly – it might be legit. I'm not saying it's nefarious or anything, but it just seems risky and it will be interesting to see how – see what happens. I just don't understand it yet.

How are they able to lend at these rates? It doesn't make any sense. And if someone can explain that to me without using – No, sorry, not lend. They are not lending. Oh, true, true. Sorry, sorry. They are giving 10%.

Yeah, yeah, yeah. So, sorry if I miss – Yeah, we don't have the – we're not good at analyzing banks. We don't have the actual – we're bad at it with the real terms. That's why it makes no sense. I don't know what the inflow is. All right, well, I think that's going to do it, right? Yep.

Okay, thank you guys for listening. Hope you enjoyed the interview with Luis. feel free to follow him on Twitter. Like I said, good content. We are general partners at Arch Capital, so anything we say, us or investors may have positions and securities discussed. We're also not financial advisors, so anything we say or discuss on Chit Chat Money is not formal advice or recommendation. Whatever Louis said was not formal advice or recommendation. Thank you guys for listening. We'll see you next time. do you wish you could just hit skip on the worst parts of your life you know the same way you can

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