Chit Chat Stocks - Can We Talk About AI Capex? Ryan Is Buying Google Stock; Philip Morris Hits New Highs (GOOG, PM)

Starting point is 00:00:00 Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Welcome to Chit Chat Stocks. This is our weekly Power Hour episode. I'm one of your hosts, Ryan Henderson, and I am joined, as always, by the one and only Brett Schaefer. On this show, we talk all things financial markets, anything that's in the news, finance-related, stocks, anything we're finding interesting. And we've got plenty to talk about this week because there

Starting point is 00:00:53 were a lot of earnings reports, a lot of news. Netflix is getting into podcasting. I'll say right now. Netflix, if you want to send us a check, we are very available. We've got Zillow earnings, which a little foreshadowing here, I hated them. I'm buying Google. So that's the, I guess the big news for me this week. And then Brett's going to be talking through the Philip Morris earnings. We're going to talk a little bit of Crocs, which some people seem to really love both as a consumer and on the investing side. So we'll talk about that. And then really, I think the biggest topic this week is going to be capital expenditures. We got a lot of news last week, so we're going to get into all of that. But I guess I should introduce Brett here.

Starting point is 00:01:39 Brett, how are you? I'm doing well, Ryan. I'm on vacation, I guess, work vacation in the great country of Mexico. So the background here is not as ideal as usual. Hopefully the live stream works here but getting a little anecdotal evidence helping out some of our airport operators in this great country uh get some better traffic and yeah gonna talk yeah how's the little bubble watch or yeah you got a question about a little boots on the ground boots on the ground research going i need i need you to check out a domino's there and tell me whether all set is worth it well we had someone go to starbucks so i guess that's helping them there's not many dominoes where i am for some reason i don't know why but there's starbucks

Starting point is 00:02:31 pizza hut i mean look they like the american brands but there's probably some room to grow they're not as popular as in the united states yeah yeah hey you know what that sounds like to me addressable market is still large they can add locations uh but yeah i would love a little bit of update there maybe we can do some anecdotal evidence segments where you uh maybe describe the monitor it's monterey right that you're in no that's uh that's the biggest city in the center of the country by texas it's in mazatlan starts with one okay similar all right but before we get to the topics for this week i do want to mention our friends at public if you are serious about investing you need to know about public.com that is where you can invest in everything stocks

Starting point is 00:03:22 options bonds crypto they even offer some of the highest yields in the industry like the bond account six percent or higher yield that remains locked in even if the fed cuts rates what sets public apart is how they give you the tools you need to make informed investment decisions their built-in ai tool called alpha doesn't just tell you if an asset is moving it tells you why the asset is moving. So you can actually understand what's driving your portfolio's performance. Public is a FINRA registered SIPC insured US-based company with a customer support team that actually cares. Bottom line, your investments deserve a platform that take them as seriously as you do. Fund your account in five minutes or less at public.com slash chitchatstocks and get up to

Starting point is 00:04:02 $10,000 when you transfer your old portfolio. That's public.com slash chitchatstocks. Paid for buy public investing full disclosures in the podcast description before we move on i also want to say public is a pretty sweet tool and i personally keep a high yield cash account there and they have a great high yield cash savings rate or apy so if you have a high yield cash account anywhere or maybe you just have money sit in your bank in no or low interest check it out It's worth checking out. I guess, where do we want to start, Brett? Let's start data centers, AI, CapEx. I think that's a fun one. I don't think we're going to be talking about the proposed offer from Elon Musk to Sam. I think that was just a whole

Starting point is 00:04:54 nonsense thing, but we are going to be talking about, and Ryan has some fantastic data for the listeners, after the Q4 earnings, well, some of it wasn't Q4 for them, whatever, Q4 calendar year, we have all of the CapEx guidance for the big four hyperscalers, Meta, Microsoft, Amazon, and Alphabet. And I think given what analysts were expecting, this was even larger than what everyone thought. And it essentially makes the bet bigger and bigger and bigger. But that's a good enough tease. Ryan, what's the skinny here? What data do you have? Yeah, you wrote an interesting article. I love the title. It says, can we talk about CapEx? Because I think everyone is kind of talking about it. It might be a little bit of a played topic, but it's worth spending

Starting point is 00:05:46 some time on because it affects a lot of, it affects the market broadly. It affects the indices in a huge way and it's just i mean kind of fun so let me give some i guess quotes this is a quote for myself so i'm quoting myself but i wrote this earlier last week i said this year the hyperscalers and i'm just including amazon microsoft alphabet and meta meta does not offer a public cloud all the cloud services are for its own business which is just how large their business needs are those four businesses together spent a combined $228 billion on capital expenditures over in 2024. That is 55% more than they spent last year. If that sounds like a lot, then buckle up. During each company's quarterly conference calls, they all announced plans to significantly increase

Starting point is 00:06:39 their CapEx next year. Combined, these companies now expect to spend more than $320 billion in total CapEx for 2025. Let's put some context on this number. Well, important caveat, Amazon's number, some of that CapEx is going to go to e-commerce, but the majority is going to AI and data center build out and cloud computing infrastructure. That's what they said on the call. But $320 billion, you mentioned this stat in your write-up, it's basically equal to the total capex for those companies from, I think, 2012 all the way through 2020. Is that correct? Yes. Something along those lines. Almost a full decade of spending is going to occur if this guidance happens within one single year. I think the chart you have will show it for the listeners.

Starting point is 00:07:34 It encapsulates how aggressive this acceleration is because when you look at this chart, you can see, and it makes sense. You have steady growth from cloud demand. So each year, as these businesses get larger and larger, they're steadily going to be spending more on capital expenditures. And there was a slight increase during COVID that you saw a little bit of a bullwhip effect, normalization. Some of that was Amazon's e-commerce stuff. And then we saw growth again. But the last few quarters have seen huge step changes in capital expenditures for these big four companies. And we're apparently going to see

Starting point is 00:08:15 even more of an acceleration in 2025. I think the analogy I have is we're adding a lot of water to the boat and we don't want it to capsize. We want to make sure there is enough AI demand. There's going to be spending. There's going to be productivity gains. There's going to be whatever, what have you,

Starting point is 00:08:37 where we're actually going to get a good return on this investment. And when we get to my bubble watch, we have even more stuff that I think is just aggressive. I don't want to say that it's... I don't know. How would I describe it? It's not like it's guaranteed that it's a bubble, but it's just adding more and more expectations for what the earnings are going to be. Yeah, I think there's some natural uncertainty around the roi here there's probably a lot of like confusion around what actually all this spending is as well as so people might not know exactly what's being spent here some of that might be just expanding pure cloud computing infrastructure so adding more data centers that

Starting point is 00:09:32 their customers can then leverage and that's been kind of the capex blueprint for i'd say probably the last, well, better part of a decade for Amazon and GCP, as well as Azure. I've got a quote that kind of stands out here from Amazon's CFO during the conference call. He says, the way the AWS business works, the way the cash cycle works is that the faster we grow, the more CapEx we end up spending because we have to procure data center and hardware and chips and networking gear ahead of when we're able to monetize it. We don't procure it unless we see significant signals of demand. And so when AWS is expanding its CapEx, particularly in what we think is one of these once-in-a-lifetime type of business

Starting point is 00:10:19 opportunities like AI represents, I think it's actually quite a good sign, medium to long-term for the AWS business. Now, for me, I think I might be more optimistic than some on this spending. I think a lot of people, especially a lot of the traditional type value investors where these have been capital-like compounders for as long as I can remember, kind of look at this and just think it's malinvestment. They're almost certain that there's going to be this oversupply. But forget LLMs for a second. Forget conversational AI, which does require a lot of compute. And so that is probably certainly helping the cloud businesses right now. If we just think about AI in terms of solving mundane tasks in the workplace,

Starting point is 00:11:18 Whether that's like data retrieval, customer support queries, standard email response templates. Like there is, I think that's what they mean when they say like AI agents is basically AI being applied across mundane tasks in the workplace. There is tons of room for that to grow over the next 10 years. And I would be very surprised if any business of relevance in 10 years does not have some level of this in their business, or at least more than they're currently using. So I do think, and obviously they're seeing signals of demand to increase the CapEx. Now, all the LLM, all the conversational AI investments, those are maybe a little more concerning.

Starting point is 00:12:01 And I guess the part that probably causes concern for a lot of investors is that they don't know what percentage is dedicated to just helping customers expand their data center needs versus like their the company's own llm and conversational ai type initiatives my thing here is that remember when remember what happened last time amazon ramped capex this was 2020 there was a whole bunch of concern now part of more of this at the time was dedicated to e-commerce But they ramped CapEx for AWS as well. And they overbuilt. They closed a bunch of warehouses on the e-commerce.

Starting point is 00:12:46 Yeah, they overbuilt. Yeah, on the e-commerce side, they overbuilt. But they ramped CapEx for data center infrastructure as well during that time period. Now, that was COVID, so it was kind of this spur and demand. And there was actually a dip in demand following COVID. If everyone remembers, everyone was paranoid that AWS growth rates dropped to like 13% year over year and that cloud was saturated. They have since recovered, and they built that in anticipation of more demand, and they got it. I just think they have a pretty good finger on the pulse when it comes to what data center demand is going to look like in a few years.

Starting point is 00:13:25 and yes of course there is the risk of overbuilding but i would think this is probably a good sign for future growth for those cloud divisions yeah at least for the next few quarters but this smells like it smells like a bubble doesn't mean it's a bubble it smells like it though it's as all of the characteristics of a bubble and okay if if anyone tells you anyone's saying they know what demand is going to be is not being honest there might be a probability but 300 billion dollars let's say chop up 20 billion for e-commerce 300 billion dollars you know these people know that the demand is going to be there that the revenue is going to show up that there's going to be adequate returns i mean people were quoting stats left and right

Starting point is 00:14:20 during the internet bubble about how growth is whatever blah blah blah blah blah we and they would say things about the telecom infrastructure whatever the pipes the cisco stuff the fiber the cables all that stuff that just had again a classic bubble uh trajectory where they overbuilt for 10 years plus in demand, they essentially said, we're seeing so many signs. The whole time we're seeing so many signs of demand increasing. There's no signs of slowing down. We're just going to build, build, build, build, build. And if you have that mentality, whether it's in 2025, I mean, eventually it's going to matter. Eventually you will overbuild. Now, maybe it's not this year but if you start increasing capex at this rate again there's only so much

Starting point is 00:15:11 capital in the world there's only so much out there that you can utilize right like eventually the number is so big that it has to be yeah i get that by that logic like oh we should just spend two trillion dollars no i mean there's i don't think they're just throwing like i don't think they're picking this number just for like competitive purposes like i imagine this capex figure got they came to this figure because project after project after project they realized it within the complex overarching subsidiaries that amazon microsoft all these businesses are every one of them probably said we need more capacity and i get that yes demand can change

Starting point is 00:16:08 but i just think if you look out to 2030 which sounds a long ways away but that's saying five years out you sound like a telecom analyst in 2001 i mean yeah but it's not i guess the companies will be fine yes yes these are well there was more telecom needs in 2006 than there was in 2000 right uh yeah but they had businesses will were levered purely to telecom yes exactly if they build out they're not going to die same with google right i mean let's say this does let's say it's a total waste of money okay google will probably do more than 200 billion dollars in earnings in 2030 maybe 20 in the 2030s at some point the 60 billion they spend next year is it going to

Starting point is 00:17:00 make or break the thesis probably not now the telecom companies and dot com yeah that was their core business but i just think like 2030 will there be more or less need for cloud computing will more or less workloads be run on cloud now that doesn't mean there's great roi and all the spending today but it's just i think that bezos quote that you mentioned was like so ahead of its time and i actually went back because i didn't even realize i went back and tried to find the quote and i read the interview with wired magazine and it was like first of all the question was 2008 and the question was condescending it was like how much money are you willing to lose on aws and basically lost money for a long time yeah it was it did and

Starting point is 00:18:00 bezo said like look we have uh we're fortunate to be able to folk to think long term here and we are quite optimistic about this business in the long run and i mean yes obviously that was 17 years ago a lot of that demand has probably been fulfilled but i just wonder if we're like it feels like we're in inning six inning seven of cloud computing everything's shifted over I wonder if it's a lot earlier. Maybe, yeah. Over the long term, I clearly agree. It doesn't mean the stock, like, we're not talking about that.

Starting point is 00:18:39 We're talking about whether the stocks are going to work. I think, well, maybe not. Meh. Amazon, Google, I'm quite confident those stocks will work. Even if this is a giant bubble today? Yeah. But then the earnings are going to deteriorate because you depreciate all these assets against no earnings or against no revenue. Okay.

Starting point is 00:19:05 So the margins are going to collapse. Look at – yeah, temporarily. Is Google Search going to be a worse business? Like is it going to make less money in 10 years? I guess, yeah. Just because they depreciated servers for two years or whatever? Like, no. Five or six, but –

Starting point is 00:19:22 It's 100 – what did they have? 120 billion dollars in operating income this year they spend what are they expecting google i think that like expecting like 60 or something like that it's just they're not going to do it forever if the demand disappears yeah but then stocks will come down i'm just it'll hurt the forward returns a bit for sure but i still think they work i think people are forgetting in 2021 there was all this talk about how the semiconductor cycle was over they're like we're seeing infinite demand we can't even bring any supply online and that immediately marked the top immediately marked the top and then went through one of the sharpest downturns in the

Starting point is 00:20:13 semiconductor sector's history in 2022 that still hasn't recovered and the only reason these companies are doing well and some of them aren't even doing that well is because of this ai boom so when people have let's just say i don't know what's going to happen but it smells exactly like a cyclical industry and how these man how the management teams are talking or how all the other cyclical industries that go through a huge super cycle do and eventually you spend too much money again so i agree with you 2030 bubble what so it's a gpu bubble 2020 was a cpu bubble this is a gpu bubble like i guess i guess what i'm just saying it's a separate industry i'm just saying the the same

Starting point is 00:21:07 commentary from all the executives you could just repurpose it for this sector And they're like, we can't even find a way that demand is going to slow down and mark the exact top. We're all these analysts that we're saying, are semiconductors not sickle anymore? Mark the exact top. True. Yeah. I do think the quotes around demand is unlimited. I think directionally demand will be higher. I've already said that.

Starting point is 00:21:40 it could certainly slow down quickly i am curious like these gpus that are used for a lot of the ai compute in within a lot of the data centers which makes up the vast majority of nvidia's revenue is these big hyperscaler orders those are i believe it was the sean wang quote of the fastest depreciating asset in human history because of the development that's going on there doesn't sound great for profits i gotta say that is the one difference where i would say like look if you overbuild on the e-commerce side like amazon did in 2020 and ultimately it didn't really matter that much look you probably own a lot of the physical assets you can get some value out of it there's like warehouse lasts for 30 years yeah yeah it doesn't depreciate as quickly

Starting point is 00:22:36 whereas when one of the biggest expenses with the data centers is the quickest depreciating asset in history and you literally are depreciating it over like a five to six year life i think it's uh yeah i do think there's some risk of quickly deteriorating margins let me give you a good poll. And I don't know if we can just do... Whenever we have a competition or some sort of bet, we never actually do it for anything, but it's more for the podcast. So they're guiding for $320 billion this year. Do you think that number will be higher or lower in 2027? Will the big four spend more than $320 billion in capital expenditures in 2027? So that's two years out.

Starting point is 00:23:31 I'm going to take the under. I'll take the under. Well, I think part of it is too, like if they build it now, they might not have to build as much in a year. But I thought these depreciated immediately. Yeah, but I mean, they've gone through the cycle before. like if you look at that cap x chart that we share there was like a plateau period after 2020 part of that was cosplay amazon's e-commerce stuff but all right i think we've kind of maybe gone too long on the discussion no that was good huge numbers and

Starting point is 00:24:10 i mean should people care i would think yes like this is going to dictate some of the returns that average index holder gets over the next three or four years probably a good chunk of it really is basically where where does this demand go i have a lot of topics i want to get to today one that was flagged for us actually uh is match group's new ceo put out a tweet this week Brett, I want to get your thoughts here. I did get tagged in this, yeah. Yeah, thank you for tagging us for this because I did not see it. I'm sorry if I'm blanking on the name, but someone tagged us.

Starting point is 00:24:49 I really appreciate that. Spencer Raskoff, the new CEO of Match Group, said, he tweeted out, Putting my money where my mouth is. Bought $2 million worth of Match Group stock in the open market in my first week on the job. Average price, $34.40. We have lots of hard work in front of us, but I am excited about our potential. i mean bragging about the average price yeah i bought that two years ago it's gone nowhere uh yeah i think it's good it's fine this isn't bad it's good i think it's a bit

Starting point is 00:25:21 of a red flag to be honest why can't you just why do you need to tweet it why do you need to tweet it yeah i think he understands that in the narrative in the investment community around match group is so bad and i think it's not it's not a terrible thing to try to change the narrative a bit now you're buying two million dollars worth i'm curious what his net worth is and how material this is and you have a note here i'm just gonna read it off here that he has 29 million dollars of palantir stock because he's on the board of directors i don't know if he's if that's locked up but i would be much more enthused if he sold a bunch of that and said look i'm probably gonna have to leave this board um my time is fully dedicated to match group and i bought 20 million

Starting point is 00:26:11 dollars worth basically with most of the proceeds here that would be more um i'd say attractive this is kind of a neutral to me i i don't know some guy tagged it to me that it was a red flag i don't find it as that big of a red flag i think it's good to have executives with skin in the game but it doesn't guarantee that they're going to do well i like executives with skin in the game that have skin in the game because they believe the business will perform well in the future which means you don't need to pump your books like he could have just bought this and if he saw material improvement in the business guess what he'll be rewarded does he need to four has to be filed yeah so like people are going to find it we're going to know

Starting point is 00:26:58 about it this feels to me like pumping kind of trying to pump the stock trying to reinvigorate investors and it's like you know what reinvigorate investors if tinder users stop declining for like a year that would reinvigorate the user base um but whatever yeah i guess it's not that bad but yes he could have done better not buying any i guess hey at least he didn't just they just didn't gift him a bunch of rsus this is better than that true okay there's some other stuff i want to talk about here uh where do we want to begin we've got a lot of earnings from this week you've got philip morris earnings that's kind of interesting place to start why don't we go there yeah let's let's go there uh i should say a company that both of us own i think probably the best performer

Starting point is 00:27:49 in each of our portfolios of the last six months, give or take. And it was another solid quarter. Really nothing to complain about whatsoever. Yeah, you get foreign exchange and stuff like that that can toss things in there. They put out a chart. I don't have it in here, but their smoke-free business, which is essentially everything that's not cigarettes or cigars, has close to $15 billion in revenue in 2024 and is growing at a double-digit rate. I think that shows. And when we say, and I think we, I can't remember when we did the episode on Philip Morris. It's been a while now, but we highlighted in that episode, part of our thesis is we think compared to all of the other tobacco businesses, they have the chance to put up probably

Starting point is 00:28:37 $10 billion in earnings from the smoke-free business, which is not in terminal decline over, let's say within the next few years, probably not at least three years from now, depending on the growth rates, but maybe within five years, they can hit that figure. And that's huge compared to what their market cap is. And yes, it's a lot more elevated today. I don't have the number in front of me, but for when you could buy the stock at about 10 to 13 times trailing EV to EBIT when the earnings were suppressed. Yeah, I like that. And then if you look at their cigarette volumes in 2024, it was flat. It was actually up like 0.5%. Compare that to Altria Group, compare that to the other ones that have much more exposure to

Starting point is 00:29:25 the United States, and they're seeing huge declines. And yeah, they're making it up with in price hikes. But Phil Morris can also increase their revenue through price hikes. So I think they have a lot of good things going for them there. And if you look at the oral business, which is like the Zinn nicotine patches and some of the other legacy stuff, along with the Icos heated tobacco units, they're both growing volumes in the double digits, or at least revenue in the double digits. And Zinn in the United States is still holding market share, even with a supply shortage out there, and that's likely to alleviate sometime in 2025, which would see another boost to revenue growth. The stock has soared. As we're recording here, I think it broke through $150

Starting point is 00:30:10 for the first time. The EV to EBIT is now about 20. I think it's in between 19 and 20 on a trailing basis. I know obviously we like talking about this one because it's done well for us. Hopefully anyone that listened to our episode and agreed with it did well as well but do you think it's still a buy here a buy no but i'm definitely not selling yeah it the quarter was good it seems like they have a lot of momentum pretty much around all elements of the business And the other part here is EBIT should – the margins should expand next year because they did go partly through sort of that ICOS investment cycle. So there's going to be – trailing EBIT is a little understated than what forward EBIT should look like. I would expect the forward EBIT multiple is very different or at least a little bit lower.

Starting point is 00:31:15 so i think 19 times trailing probably i'm guessing 15 to 16 times forward i think that's a very fair price for a business that i believe can generate double digit per share earnings growth for 10 plus years so yeah i'm very comfortable holding at this price i probably want to buy part of that because it's just my largest position. I don't really want to. But yeah, I think it's still attractive. I think the returns from here are better than what you will get with the index. Yeah, I agree.

Starting point is 00:31:53 All right, we had a comment here that my mic was a little bit louder than Ryan's. I'm not sure what's going on with the settings. Maybe the settings changed. But I turned it down a bit. I'm going to move it back. All right, and hopefully we'll normalize that for the podcast in post-production. but i agree with all you said there uh and maybe you can turn yours up a bit i think that that should help yeah yeah if i told you i had a company you know how they do those case studies

Starting point is 00:32:24 and i just said company a company b company a is trading at 16 times forward earnings 19 times trailing earnings earnings and you think you can grow earnings per share let's say depending on the buyback program uh earnings per share plus dividends at 15 for the next five years at a 15 annual rate for the next five years i might consider that a buy i'm not gonna right if you swap the name like if you put let me just describe the financial profile for you yeah everything brett just said 16 times forward earnings we expect 15 percent per share earnings growth over the next 10 years and i told you it's meta because i bet the financials would look fairly similar although the earnings multiple is probably higher if i told you that's meta would you think that's

Starting point is 00:33:18 a buy if i told you that's google would you think that's a buy i think people kind of get the ick from philip morris for ethical reasons and that's fair you know everyone's got their own reasons to do things but yeah i think financially they look sound and and i mean unless anything happens to their new divisions that are so far seem to be bulletproof i think they're in fine shape let's shift gears though before we move on i want to mention blue chippers they are one of our sponsors here on chit chat stocks blue chippers club was recently started by two friends of ours with the goal of building a tight-knit community of stock-focused investors. Inside this community, everyone gets to share and break down their portfolios,

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Starting point is 00:34:31 And then one more time, I want to mention our other sponsor here, Public. If you're serious about investing, you need to know about public.com. That is where you can invest in everything, stocks, options, bonds, crypto. You can even earn some of the highest yields in the industry, like the 6% or higher yield. You can lock in with a bond account. Public is a FINRA-registered SIPC-insured platform that takes your investments as seriously as you do. fund your account in five minutes or less at public.com slash chit chat stocks and get up

Starting point is 00:34:59 to $10,000 when you transfer your old portfolio. That's public.com slash chit chat stocks paid for by public investing. Full disclosures in the podcast description. We've got a comment here, Ryan. Yes. Oh, also thank you to the blue chippers people. Really nice to see people joining that because they're listeners of the show. I'll try to get on there and post more. I haven't been building the habit very well, but I want to post some of our write-ups, some of the same stuff we do on Substack and stuff like that and get a better discussion going on, for example, the OMAB Mexican airport thesis. We had a comment here though, Ryan. Someone said, Pat Gelsinger bought a lot of Intel stock a few years ago, dot, dot, dot, dot, dot. That is true. Doesn't necessarily

Starting point is 00:35:45 mean the stock's going to be a buy. Then we had someone, this is going to lead to the topic I want to get to next, which is why you are buying Alphabet. They said, hi, Brett and Ryan. Meta has gone up 18 days in a row, including today. What do you think about the upside from here? Thanks. And it says, it looks like Meta is the only true one making money through AI, unlike other cloud providers. But at the same time, I guess incremental algo breakthrough on advertising from here should diminish, which is basically optimizing the advertisements. you can't spend an infinite amount of money there. I don't like PE, but forward PE is at 28. Yeah, it's not dirt cheap. That's for sure. But I think this leads into why Ryan,

Starting point is 00:36:27 I think maybe you believe Alphabet is getting misunderstood at the moment and why at, what is it, 17 times earnings? It might be the best mag seven opportunity right now. yeah if i had to pick one of the magnificent seven to own it'd be google meta i don't think you can necessarily i don't think there's any issue in holding meta here i also probably need to do a little deeper work on it but i mean that the the growth rates over the last couple years came slightly off of a trough so if you actually go out and zoom out 10 years brett maybe you can do this with our friends at FinChat, go to Facebook's or Meta's EBIT and zoom out. The growth rate since like 2020, 2019 is okay. It looks really good over the last couple of years

Starting point is 00:37:24 because there's been this re-acceleration in advertising in my personal opinion. So there's- And the margins, right? Margin expansion. Also the efficiency, like there's been a ton of margin expansion as well, but it's either EBIT or revenue either one maybe if you pull up pull up both those numbers it looks good but i think there is maybe a little more top line growth risk with meta than you get with some of the other businesses so okay you've got operating income here still i mean it's 20 it's 2021 not 2020 but Yes, same idea still applies. Yeah, so if you pinch that timeline in from just 2021 to 2024, the growth rate's been solid.

Starting point is 00:38:14 I imagine it's probably been like, what? Yeah, 13% CAGR. That's not the numbers you probably think of when you look at the growth rate over the last few years. So I just think there's been sort of this re-acceleration. There is the risk that advertising slows down when an economy slows down. There is some cyclicality there. So you kind of got to be expecting, I think, 15% earnings growth for this business to warrant 28 times. And even then, you're probably getting an okay return.

Starting point is 00:38:49 I wouldn't expect great returns. So if you're comfortable with that bet, 28 times, no issue holding it. i don't know if i'd necessarily be a buyer here yeah i agree i agree i don't i seems like the returns will be fine going forward but it is does not come without risk and i disagree and again this can lead into your google thesis here that you're going to talk about just it's kind of an elevator pitch i think despite how maybe bearish i sounded on the potential of spending 300 billion dollars on capital expenditures. I think the cloud is a much more durable growth driver than anything Meta has internally. And that can be a huge, especially with the margin expansion,

Starting point is 00:39:35 a huge earnings per share driver for Alphabet over the next five years. Yeah. I mean, there are definitely the AI investments, quote unquote, from Meta, that's very broad so it's a little hard to like encapsulate everything that's in there but yes they've probably generated solid results for them especially with the advertising efficiencies but i mean you've gotten good like if you are building an ai powered type platform today like if you're a developer you want to use detection models to pull certain things from across different sites or whatever like if you're using ai throughout your business, somewhere in there, you're probably using Google Cloud or AWS, probably Azure as well.

Starting point is 00:40:22 So the cloud providers have been big beneficiaries from AI. That's very clear. Just look at the cloud provider growth rates since this AI sort of hype cycle, if we want to call it that, has started and they've very much re-accelerated. So they're big beneficiaries there too. So yeah, I guess elevator pitch, I'm buying Google. Well, I should say I bought some shares of Google. It's still a pretty small position after the last earnings. I don't think it's very complex. Like we can talk about CapEx all day, but I think Google is one of, if not the best

Starting point is 00:41:02 business in the world, best digital business, one of the widest digital moats. I think it can grow earnings per share of more than 10% per year for a long time. It can grow faster if the multiple continues to contract because they do have some buyback – some buybacks as a part of their capital allocation philosophy. And it trades at a forward EV to EBIT multiple of 17 times. I don't think that's very demanding. Got a nice buyback. There are things I hate about Google. For one, the Super Bowl ad they ran was one of the dumbest things I've ever seen.

Starting point is 00:41:39 It was – I don't – did you see this, Brett? I didn't. We didn't get the opportunity to watch Super Bowl ads down here because, I guess, foreign country, what have you. But I guess I was disappointed because I like looking at my Super Bowl advertising indicator. Remember the Timu one a few years ago or the FDX and other crypto ones a few years ago. I'm curious, maybe we can talk about this after this, how your Super Bowl advertisement indicator or monitor happened. But this Google one, unexpectedly, I think like 80 to 90% of their commercials, it hurts them more than it helps them. Yeah, this was actually almost so bad that it probably caught people's attention how pointless it was and then maybe started creating some talk around it.

Starting point is 00:42:31 At the end of this commercial, my brother, who has pretty little interest in finance and doesn't care about the Google thesis at all, looked at me like, what was the point of that? And it was just some guy, to paint a picture, it was some guy talking into his Google Pixel, describing his career experience. and then it turns into this like sentimental family thing and then it's like google pixel has ai it's just totally arbitrary like ai had nothing to do with it there was it was pointless it's a nice family moment and this ai tool can be there with you uh it's not going to change anything about the moment but it will be there listening would you like that would you like that guys yeah buy our phone yeah anyway they're martin they're marketing buying google yeah i think part of the issue when you get to be a business of that size is your marketing has to you have to try as

Starting point is 00:43:31 hard as you can to not piss off anybody and by doing that you create the blandest commercials possible that like target no one it targets everyone but also targets no one well these might not be yeah i don't know what's worse this one or the new apple gen moji ones i think both apple's marketing has lost its uh allure think about the didn't they do the super bowl ad with that 1984 one they're smashing the window and that was smart good it was fantastic advertisement now it's just music's playing and we have gen moji great yeah do we want to do brett's bubble watch? Sure. Yes. I think this will be fun. I think this is where you'll probably agree with me that there is precarious spending not backed by a Fortress balance sheet like you have at Amazon,

Starting point is 00:44:27 Meta, Alphabet, and Microsoft. So this one is a bit more serious. I know sometimes I bring in some jokes on this one. My second one, which we can just talk about briefly, is more of a sign of the crypto nonsense that we've been going through, but we've heard the commitments, the announcement from SoftBank with Masa Sun, Sam Altman, Larry Ellison, and President Trump at the White House, I think a couple of weeks ago. It's kind of hard to tell at this point. Yeah, here it is in the quote in the article about the project's target, the $500 billion data commitment. We got some updates given their earnings or some sort of presentation that SoftBank did on how they're going to finance this. Here's a quote from the

Starting point is 00:45:09 article. I think it was in the Japan Times. A few weeks ago, SoftBank Group founder Masa Son stood alongside US President Donald Trump to unveil the Stargate project, an artificial intelligence venture with open AI that could cost $500 billion or more. Now, Son is figuring out how to pay for it. I would do that first, but we know he talks first, acts second, figures it out later. Here's the second part of the quote. SoftBank is exploring ways to incorporate some aspects of that funding structure in Stargate, which would span multiple data centers and power generation projects, said the people, blah, blah, blah. One scenario under discussion would have SoftBank, OpenAI, and partners Oracle and Abu Dhabi's MGX contribute in equity about 10% of the overall

Starting point is 00:45:55 cost and tap debt markets for much of the rest, said two of the people. Only 10% of this is going to be equity 90 of it is going to be debt this to me reminds me of the telecom bubble because if you're you need the demand to show up or else this thing would just completely collapse yeah absolutely it's this is kind of mind-blowing committing 500 billion dollars to anything as like kind of a sign of wealth and then borrowing it all is an interesting strategy because i guess it's not really yours but i it is tell you what masa sun has some courage confidence i should say well apparently according to a tyler in the comments here he said did you guys see the quote that masa sun said bill gates and mark

Starting point is 00:46:55 zuckerberg are one trick ponies while he's building an empire i don't know if i would call either of those guys one trick ponies but he is confident that's for sure i mean yeah technically their businesses are maybe a little more concentrated with great wonderful products that benefit society uh but does that make i mean it's not his money is any asset manager building more of an empire than bill gates and zuckerberg like if you have investors and you invest in a lot of different things does that mean you have more of an empire anyway but softbank honestly it's on one of those things that i just don't dedicate a lot of time to care about like you might ryan talking about capex spending talking about your 2027

Starting point is 00:47:56 prediction talking about the cloud providers demand showing up if they spend 500 billion dollars that's competition yeah yeah that's fair i don't think that i don't think it's actually going to happen though yeah i agree how about this other uh bubble watch yeah this one's very important especially for the people interested in keeping up with the meme coins like brett coin which i should say full disclosure i never bought i was saying it as a complete joke uh i just found my friend told me there's one called that just because it was my name and the price not so great down about 60 in the last month but we have another meme coin here called jail stool let me just read the quote here. I think half of the listeners are going to have no idea what these

Starting point is 00:48:49 words even mean, but I'm just going to read it to you and think about just the vibes and the mentality and the animal spirits out there at the moment and how that should maybe determine how to build your portfolio and whether to have a bunch of leverage. Okay, here's the quote. Jailstool, a meme coin created in reference to meme coin traders calling for Barstool founder and president dave portnoy to be jailed for pumping another meme coin you got that so far has skyrocketed over the weekend after portnoy got caught got behind the coin and promoted it to his social media followers the mania however has died down somewhat with the coin trading lower since surging to all-time highs on sunday shocking like every other meme coin out there

Starting point is 00:49:37 it rockets higher people sell and then it goes steadily to zero the golden age of fraud still applies yeah that's that's a good that's a good reference yeah yes it's i think we've talked about this it's been easy to talk about for months now but if you have some fame there has never been an easier time to monetize that than you know shilling a meme coin what is your reputation worth in this case and in the case of uh hook to a coin it doesn't you know you can get paid a lot and i it doesn't surprise me that some people choose this route it is a ton of money that they can make yeah but bummer it's unethical no i agree yeah it is unethical

Starting point is 00:50:35 we can get to another serious topic which would be your small cap of the week but speaking on the chips we had a good comment here any thoughts on potential tariffs on chips from taiwan i think generally our number one rule is to try to invest in stuff that's not going to be impacted too much by tariffs or can either weather the storm you know i remember back in the day i was excited because I was an idiot back then. Oh, iRobot, this is a great company, blah, blah, blah. And then one tariff hits and the business just collapses. You want a more robust business than that. But the second rule I think I have is even the chaos that seems like there's an announcement pullback, we're changing the rules, we're making this whole new thing. It seems like there's 10

Starting point is 00:51:13 new things announced every day and you can't keep up. My rule of thumb is that if the incentive is against what logic would be for fighting inflation or keeping the United States economy strong, regardless of if manufacturing actually comes back to the United States, you should say that they're not going to do that. That's why the Mexican tariffs aren't happening yet, and I doubt will happen. With this one, I also doubt the same thing. Are you going to kill the AI boom that's contributing a ton to growth and is a huge race versus other countries like China? I doubt that's going to actually happen yeah there's a lot of the political stuff and it's been in the news non-stop for the last couple weeks since uh trump took office but a lot of it's more noise than news

Starting point is 00:52:07 and a big reason for that is as as soon as it affects the indexes as soon as it affects people's 401 case and the stock market which trump does like to measure himself by it's another good rule yeah if it affects it you can expect that the rule probably will not be implemented there might be some exceptions yeah yeah yeah exactly exactly all right we got to get to the small cap of the week i think this is the listener's favorite segment so we don't want to miss it ever ryan what do you got and what's the company yeah this was a listener recommendation the company is crocs now i'm cheating here because it's a five million five billion dollar market cap so more like mid cap of the week instead of small cap of the week but still soon

Starting point is 00:52:57 to be small cap that's how isn't that what we should call it yeah future small cap of the week maybe small cap yeah so a little bit of background on crocs imagine if you're in the u.s you probably know the business fairly well the company was founded in 2002 and there apparently it was like very successful from the jump uh within two years of launch it broke 100 million dollars in sales for anyone that doesn't know they sell like basically plastic sandals um it's sort of is that how you would describe them to someone who's never seen them plastic sandals plastic sandals with holes in them and you can buy decorations mainly for kids but some adults wear them true um now the revenue chart is actually quite wild so from 2004 brett maybe you can pull this up this

Starting point is 00:53:49 is using our friends at fin chat i should mention if you want a unlimited data on all stocks around the globe finch has got you covered you can use our code finchat.io slash chit chat to get 15 off but yeah looking at the revenue from 2004 to 2024 it's gone from 14 million dollars to four billion dollars so 33 annual growth rate over 20 years now there's some nuance here they got up to 850 million in sales by 2007 and then for about a decade didn't really grow at all like from 2007 to 2018 they went from 847 million in sales to 1.1 billion basically in sales so negligible growth but then i guess from 2019 to 2024 they went from a billion in sales to 4 billion in sales there was an acquisition during that point too but apparently when

Starting point is 00:54:46 people got stuck at home they bought a whole bunch of crocs so here there's more to the story in 2021 crocs they were revenue was taking off they bought hey dude for two and a half billion dollars two and a half billion oh yeah hey dude was growing really quickly i think it was around 500 million in sales like growing triple digits year over year however it it's another shoe company it's like kind of like vans kind of looks like vans i guess um sales have turned around now sales are starting to decelerate they peaked in q3 i guess of now q4 2022 they were doing 280 million in quarterly revenue now it's down to 200 million so i spent two and a half billion dollars on a shoe company that does 200 million okay at the time 270 million

Starting point is 00:55:42 in quarterly revenue yeah that's ridiculously bad now here's here's the thing it's also extra bad when you put the context that they were supposed to give them a distribution advantage like crocs has all these inroads with wholesale partners so you should be super charging revenue growth once you're under the crocs corporate umbrella and revenue is literally declining now which shoes are not super profitable crocs probably are they actually they certainly are I think they've had 20% operating margins, and if you just think about the cost to build a plastic clog, it's not very high. Yeah, good margins, 25% right now. Yeah, they're very profitable.

Starting point is 00:56:30 I found a good quote from a sub stack. This guy is pretty optimistic on it. He says, I think Crocs has a core franchise which stays stable in North America, grows steadily internationally, and continues to produce reliable cash flows. This cash flow funds international investments and occasional buybacks at sensible prices. Hey Dude is still an attractively priced option. It's profitable but has returned to earth after rapid pre- and post-acquisition growth. The question now is whether management can right the ship and generate an acceptable return on the significant investments in the brand. Now, I'm not going to write off Crocs entirely.

Starting point is 00:57:07 I do kind of have a no apparel policy with my portfolio. Never invest in apparel. I've said it a million times. EV to EBIT is six times. Now, back kind of two years ago, cash flow conversion was really good. Actually, more like three years ago. Cash flow conversion was really good. So the EV to free cash flow was very similar. CapEx has now ramped. I'm not sure what exactly the CapEx is all being invested in. So the eVita free cashflow is 12 times. Here are the things that for my research going forward, if I'm going to be interested. Number one, I have to figure out is Crocs recent success, a by-product of something changing at the business? Like have they unlocked maybe

Starting point is 00:57:57 really good marketing algorithm? Is there some sort of like more customer loyalty or are we at risk of going through another 2007 to 2018 period where they basically have flat revenues for a decade? Which honestly, if it's flat revenues for a decade, the valuation could still work assuming that they improve cash flow conversion. Second one I want to find out is, is HeyDude completely dead?

Starting point is 00:58:22 If it is completely dead, that's okay. Like you can still work on the valuation. At the current valuation, it can still work here. But as long as they don't just hemorrhage cash and keep investing in that business. So if you can figure out that cash flow is going to remain steady or at least grow in aggregate over the next five years, I think this can work assuming that they don't make another acquisition

Starting point is 00:58:48 like they did with HeyDude and instead redeploy it into buyback. So I find it interesting, but I think there are easier investments to make today. Yeah, I don't like it. I think it's another example. Don't invest in apparel. What do I know what this company is going to have demand for in 2030? I have no clue. I have no clue. I'd rather buy American Express at 23 times earnings. I'm serious. their success i think it is entirely unpredictable yeah like them getting to 800 million dollars in five years from launch of sales is like it blew everyone's minds and that's the whole point it's unpredictable you don't know what's going to resonate with consumers apparel wise uh and you can say the same thing going the other way right like i know people love crocs but people loved Reeboks. People loved Under Armour.

Starting point is 00:59:44 People loved a whole bunch of other apparel brands that are not popular anymore. I just think things can change quickly. I agree. I just still don't like it. It probably could work. If you catch the bottom of the cycle

Starting point is 01:00:00 and all that good stuff, yeah, it can work, but I don't know how to do that. Alright, as we wrap things up here, Ryan, we want to talk Netflix getting into podcasting. I saw you liked my tweet about how netflix spotify and youtube are all just trying to become like each other yeah this is kind of encroaching a bit on youtube's territory i think now okay yeah basically

Starting point is 01:00:27 they're they're they've been talking to podcast hosts popular podcast hosts about you know bringing their podcasts to netflix and making it sort of probably exclusive content i would guess maybe not not totally sure serious xm style kind of yeah it's definitely cheaper than building out a show in terms of engagement like you would certainly attract engagement at a lower cost i mean joe rogan's way more popular than whatever blockbuster things in tv shows that netflix is making yeah someone says future chit chat stocks netflix series are you looking for a mid-market Are you looking for a mid-market investing podcast that gets hosted on Zoom every day? We can put that on the Netflix app.

Starting point is 01:01:13 I think that will be great for your quality. Hey, we're on Riverside. We've upgraded. Yeah. I think, honestly, though, they're looking for probably just the biggest shows. And they're going to make them maybe exclusive or just licensed on there like they used to do for their other stuff. and it comes back to what they care about and why i think that youtube spotify and netflix eventually converge more and more and more over the next decades or years maybe not decades

Starting point is 01:01:42 is because they have at the end of the day they only care about time spent all three of these companies yeah i mean i think it's a good idea from netflix's perspective they have very rarely especially in recent history been wrong on like pivoting content or adding content just really gaming just gaming that's probably it yeah yeah i guess that was a bit of a mess the i think a lot of people watch especially on youtube they watch podcasts on their tv it's kind of a way to potentially eat some of the time spent on youtube for connected tvs if you're looking at it from netflix's perspective so and it's not like it shouldn't be a huge cost for them like it would like like live events would be potentially so yeah but here's where youtube

Starting point is 01:02:36 has the long-term advantage youtube never gets paid sorry sorry youtube never pays these people netflix is going to have to pay them true youtube is a wonderful business and i think that the netflix executives are looking at the nielsen market share and how youtube and netflix used to be kind of neck and neck just steadily taking market share for tv time spent in the united states now and youtube is growing much faster i think that's what they're seeing here and that's why they're acting like this unlike when they target other competitors this is a defensive move and it's the one area where they have a weakness which is youtube yeah i think that's going to do it we've kind of gone a little long here you want to take

Starting point is 01:03:25 us out yeah let's do it thank you for everyone that joins us on the live stream apologies for the bad background but i think the video and at least besides that one minute there with the microphone going very loud hopefully it wasn't too crazy and for the recording we will change that in post-production to normalize the audio let's hit the disclosure we are not financial advisors anything we say on this show is not formal advice or recommendation ryan i or any podcast guests may hold securities discussed in this podcast, may have held them in the past and may buy, sell, or hold them in the future. Thank you everyone once again, and we'll see you next week.

Chit Chat Stocks - Can We Talk About AI Capex? Ryan Is Buying Google Stock; Philip Morris Hits New Highs (GOOG, PM)

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