Chit Chat Stocks - Coupang (CPNG) with 7investing

Episode Date: February 3, 2022

Coupang is an e-commerce company based in South Korea. The company sells products and services across various categories. Listen as Brett and Ryan ask 7investing questions about the company, its business model, and valuation. Enjoy the show! This episode is sponsored by Quartr, the new way of doing company research. Access conference calls, presentations, transcripts, and more for FREE on your mobile device. Download Quartr on the App Store here: https://apps.apple.com/us/app/quartr-investor-relations/id1552412128  Download Quartr on the Google Play Store here: https://play.google.com/store/apps/details?id=se.quartr.android Subscribe to 7investing with the code "CCM" and get $10 off: https://7investing.com/subscribe/aff/4/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested in more of John's work? Follow him on Twitter here: https://twitter.com/JRogrow?s=20 Contact us: [e-mail]  Timestamps Coupang | (3:35) Investment Landscape | (31:05) 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 Thursday and we have a discussion. I guess you could call this a deep dive, but it's sort of like a, I'd say like a shallow dive. Slightly different format. We don't go through any of the numbers in a lot of detail, but we give more of the qualitative overview, but we discuss it with a lot of people. So I think it was a fun moving conversation. We had Simon Erickson and Steve Symington from 7investing on the show. So great mix of people. We talked Coupang. Coupang. Yeah, I didn't know if you mentioned it. It's Coupang, South Korean e-commerce company. Great discussion. We talked about what we like, dislike, potential tailwinds, headwinds, all that good stuff. Yeah. And then we also go kind of like a broad discussion towards the end. We talk a little bit about gaming and the acquisition, the Microsoft Activision deal with Simon, and then Steve had to hop off.

But anyway, before we get to the show, we want to talk about our friends, our sponsor quarter. So for those that don't know, quarter is basically an investor relations app for your phone. You can listen to conference calls. You can read transcripts. There's presentations all on all of your mobile device, and you can do it while you're walking, driving. I personally like to do it in the car.

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Without further ado, let's get to 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 guest is not

formal advice or recommendation. Now, please enjoy this episode. Okay, welcome to Chit Chat Money. Today, we are welcomed by Simon Erickson and Steve. It's Simonton. I think we've confirmed that now. That is correct. And they've been on the show multiple times.

We're trying to do sort of this, I guess, monthly roundtable, if you will. And today we are talking Coupang, and it's a sort of a Korean e-commerce company. We'll get into that. But before we do, Simon, Steve, I guess, Steve, have you heard of this company before? I've heard of it. And, you know, I'm aware South Korean e-commerce, kind of an interesting, I've seen Amazon of Korea comparisons. but apart from a passing awareness, I'm along for the ride and I get to learn with you guys today.

Okay. And Simon, I know you're pretty familiar with it, right? I think it's a very intriguing opportunity, Ryan. You know, one of the themes I like to invest in is kind of regional e-commerce leaders. I think it's really hard to catch up with the leaders in these markets. And this is one, like you just mentioned, it's the top dog out there in South Korea. Okay. Before we kind of get into some of the discussion questions that I have, Brett, do you want to give an explainer of what Coupang does? Yeah. So Coupang is a South Korean e-commerce company. They're the largest e-commerce company in South Korea by market share right now. I believe the number is 15.7% market share as of the end of 2021. And it's actually doubled over the last

five years. So it's quite impressive the growth they've been putting in. If you want to compare them to any other company, JD.com might be very similar. So instead of just a marketplace like say eBay or C limited shoppy, which is popular in Asia as well. Coupang actually has its own fulfillment network and its own delivery drivers where in South Korea, when they started up this company, there wasn't a presence of say, like in America, a UPS or FedEx or someone like that Coupang actually had to build it out themselves. So they own the fulfillment. They have the infrastructure with all that. And on top of it, they have their employee delivery drivers. So they have tens of thousands of people working with that.

And I think that is kind of one of the most interesting things here. On top of it, they're adding a lot of different products to the online marketplace. So they have kind of the standard one, everything store of you might want to call it. But on top of it, they have stuff called Coupang Eats, which is food delivery. They have Rocket Fresh, which is grocery delivery. They have advertising and they have fulfillment by Coupang. And a few other things, Simon, you are someone that knows them as well. Am I missing anything? Give me the brief overview of what Coupang does.

No, totally nailed it, Brad. I mean, this is one that I think has got some structural competitive advantages. We were chatting about the e-commerce leaders. I mean, South Korea has a population that's pretty densely packed, right? They said that 75% of their population is within seven miles of one of those fulfillment centers. And so they've got this thing called Dawn Delivery, where you can place an order by midnight and have it delivered by 7am to your doorstep the very next day. I mean, that's something that is really hard to displace. All that logistical infrastructure, CapEx they put to work for years now is rewarding them. Like you said, there's getting more and more orders that

they're getting placed from people. They're increasing their market share. But I just think it's hard to, once you get a leader like that, that just has perfected the logistics, optimized it, built the brand with consumers, and it's become part of their daily habit. You can try to get in there and it's still their share, but it's likely they're going to continue winning and getting even bigger over time. Right. And if anything, you're going to have to hop on Coupang's logistics network, which is basically saying, all right, we can't deliver as fast as you at all. So we're going to have to hop on your network. And basically, we're going to have to give a lot of your margin to you anyways. And I think a lot of people might be like, oh,

Don and Same Day Delivery, how many percentage of orders is that? It's over 99%. So their customer service is fantastic. I think a lot of the times people can order upwards of 12 AM or basically midnight and they can get their food or whatever it is for the day at 7 AM. And the reason they can do that is because they have the employee delivery drivers. And another thing I like about it is instead of contracting these delivery drivers, where a lot of people have the worries with someone like DoorDash, Instacart, even Amazon with some of the contract workers they use, they're not employees. With Coupang, everyone's an employee. They have health insurance. They get paid really well, at least for the markets they're in. And they all got RSUs, which is

basically a form of stock options at the IPO. So they're really taking care of their employees. I think that's a great way to create that flywheel of customer service. Yeah. When I first read their S1 and saw that Dawn delivery, like you can order at midnight and get your breakfast in the morning, I was kind of blown away. And then I guess the more I studied Yeah. Well, I think the figure that Brett was alluding to is 99% of deliveries are in one way or less. So I guess one of the questions that I have in mind is that I know South Korea is sort of a good landscape to do this. I remember reading that they have very dense populations. A lot of people live in the cities. So I'm curious, do you think this is a model that expands well internationally, like beyond South Korea?

do you think this is something that could work? Simon, do you want to go with that? I think that is a question that's asked a lot of these kind of e-commerce giants that are out there, right? Everyone's talking about C-limited right now. It's like, hey, look, C's got Shopee going to Brazil and then they're also going to India. And then, oh yeah, by the way, they've also in their core markets of Southeast Asia got all this. But first of all, the internet of the world isn't the same, right? There's regulations that are different in Europe and America than there is in China or Southeast Asia or India. And so if you're doing that, you're going to expose yourself to regulators, no matter where you are, data centers, where the data is being

held, all that kind of stuff. Secondly, just the landmass and the population is much more difficult in a lot of different areas too, right? We've looked at Latin America, who's got 660 million people, 72% internet penetration. The US has got 330 million people, about 97, 98% penetration. And in South Korea, about that same internet penetration, but only 50 million people. And so you're in a developed economy that's buying a lot. I think there's structurally a lot to like when you've got so much of the population that's close, they've got purchasing power, they know how to place orders on mobile phones. And like you guys were mentioning, I mean, you can just put something right out on your

doorstep, free returns, zero cost for shipping for that if it's not what you wanted. So ultimate customer service, plus a logistical network, plus a market that's conducive to this. I would rather, as an investor, invest in Coupang and that model that they have than somebody like C, which I think might be trying to bite off a little more than it can chew right now. Yeah. The one thing to add on that too, if people are like, oh, I love Coupang and I'd love to have that in my home market, they actually offer, since everything is vertically integrated, I think the number was 75%. I don't have the exact number in front of me, but 75% of their delivery packages are reusable because basically everything's in the ecosystem.

They're not cardboard boxes. I don't know the exact structure they are, but basically they can be used for multiple times and it's not just dropped off in your house. And then you can use those to use that frictionless delivery. You tap it, leave it outside your door as one of their employee contractors are driving to buy, they pick it up. It sounds like, and what's their motto? is it i want no gosh simon do you know do you know the the motto they have i can't believe i i live i lived in a world without coupon yeah it's a funny motto um but maybe we add in steve do you have anything else or any questions about coupons no i mean i mean i think some perspective is in order for um people who are looking at this this company um that you know a founded in 2010 you know

i was trying to just kind of figure out okay what's what's coupang all about founded and founded 12 years ago uh just held its ipo it was last march right and and it's it's down it's been cut in half uh since the ipo um you know what are kind of the apart from just macroeconomic concerns and you know having an ipo while the pandemic is still kind of raging for an e-commerce company um you know my my questions are kind of related to okay why the drop uh if if anything more than that. What kind of scalability? We already talked a little bit about international expansion. I'm thinking Japan, Singapore, Malaysia, but there's also pretty well-entrenched competitors in those other countries. Is South Korea, which is the world's 10th largest economy, as measured by GDP

anyway, is that the ceiling for this or are they going to be able to expand globally and compete with some of these other e-commerce juggernauts? That's my question for a company with a $33 billion market cap, just glancing over right now. That's kind of the way I'm thinking of it. Is South Korea its ceiling? Will it be able to scale?

What's the potential for it to continue growing at scale from here? Yeah, those are two good questions. Right, sorry, go. I have another question kind of touching on Steve's point, which is, I spent a lot of time like kind of thinking about this last night, what's the end state of this business? What does it look like? Is it kind of multinational

operating in multiple different places? And then on top of it, what else is it doing? Because I know they have other things as well, like the food delivery, right? Yeah. And then there's the advertising segment, which I believe is sort of a portion of their revenue as well. That's growing. So I guess to Simon, Steve, Brett, what do you think? are there other avenues uh for optionality that can be more margin accretive like yeah let's hit let's hit the the let's hit steve's question though the geography stuff um simon do you want to start with that about home market and then an expansion and then we'll move on to optionality yeah i'd love to but can you remind me again what that number was you said about the market share

was it 15 of the south korea e-commerce market share right now 15.7 that's just from an aggregator statista uh so i'm assuming that range is right around so right okay so i mean they still got plenty of growth i mean and even just in their home market they're only at a sixth of the market today i mean just to put this into context the number of uh vendors that they have and the selection from vendors from small and medium enterprises increased 276 percent year over year right almost quadrupled um from from the starting so there's still i think plenty of growth that i would actually prefer them to focus on that first. The other thing is this is scaling. Revenue grew 48% year over year, but gross profits grew 62% year over year. So you love when you got an

infrastructure heavy company like this, you don't want to see them just lighting your money on fire and spending all this money on stuff if you don't get the ROI for it. But it is showing that not only the customers are happy with this, but the vendors are happy with this. And Coupang is able to put more money into its own pocket because of those investments it's made. And then the one last comment I'd like to make is about the IPO. People might think of that as a failed IPO. It was $60 billion when it went public last March, and now it's only $30 billion. You say, oh, wait, your investors just lost half their money, right? But from the company's perspective, they kind of did it perfect. Where they raised last March was almost, I think that was kind of

hitting the market's highs, Steve, at least for the NASDAQ. They raised $4 billion, and that's mostly sitting in cash on the balance sheet right now at a time where I think it's going to be much more challenging in 2022 to raise money. And they're going through about $500 million over the last nine months in CapEx. So if you pull that off, I mean, you've got almost, what is that, call it six years worth of operating CapEx budget funded right when the market was kind of peaking. So I would say it's even more attractive as an investment today where you're getting shares for half off where they raised it. But of course, you still got the benefit of all the infrastructure they put in place here. Yeah, those are great points. Let me give a number on the market

opportunity because I know Steve made a great point. It's just South Korea or something like that. $33 billion market cap. What's the real opportunity here? The projections are that the Korean e-commerce market is going to, sorry, not e-commerce, commerce as a whole. So kind of really wide ranging is expected to go north of $500 billion a year by 2024. So Coupang is a subset of that e-commerce. But if e-commerce is growing market share overall and Coupang is growing market share within e-commerce, I don't think there is that much of a limitation, at least from a growth perspective, for revenue, at least for them within South Korea. Now, international expansion would be great. But right now, they're only going to do around $20 billion in revenue in 2021.

So I don't think the saturation stuff is a big deal. Now, at an $80 billion market cap at the IPO, that was probably more of a concern. And then speaking on the international expansion, they've talked about Singapore. They've mentioned that they're experimenting internationally. I think they've talked about Singapore, Malaysia, Japan, and Taiwan. The ones that seem attractive to me are the big cities that are similar to Seoul, South Korea, where they can replicate this model. And that'd be Singapore and Taiwan and Tokyo. Um, I think those are nice cherries on top. There's kind of like, uh, you know, if they can replicate that model there, that's great. And that would make, give them an even longer runway to grow kind of like Mercado Libre maybe

in South America. But I don't think it's something you need for this business to succeed. And they said they wouldn't be making heavy investments. I think they mentioned it on the conference call Now, things can change, but they said they wouldn't be making heavy investments for at least a few years because the South Korean opportunity is still, you know, still large. OK, I mean, you brought up a couple of other good points, I think, now that I'm kind of thinking about like e-commerce and, you know, retail as a whole. Last I looked, I believe e-commerce in the United States represented around 13 percent of overall retail sales. right so that's people you know if you ask somebody how you know how much retail is e-commerce now and i think a lot of people would say well i i it's got to be right half you know 50 40 no it's way lower i think it's higher in south korea i think they're a very highly connected country

it's something like 99.9 of their their citizens have access um to the internet and uh so i think it's more than a quarter of people in south korea have uh or i think more than a quarter of retail sales are e-commerce there so a little bit more connected uh higher e-commerce adoption which is i guess good for a company like this but the other thing i think we need to bring um keep in mind is if we're gonna bring up comparisons with his his coupon the next amazon we also have to remember that amazon has aws right um does are there any plans for an aws-esque service for coupon um and that's i mean it wouldn't surprise me right because that's i think last quarter for amazon it was like 12 of revenue was aws but like 57 of their operating income was aws um so that could

be a massive incremental driver if they decided to adopt some sort of cloud services thing for south korea but i don't know what the competition looks like over there for that that was kind of I guess that was one of my sort of concerns in my mind is if this is just an e-commerce business and say it is, I guess, multinational, is there a way that they can get to enough free cash flow to sort of warrant the $30 billion price tag that they have now? Are there other ways that they can maybe generate cash beyond the e-commerce business if it's successful? That goes right into your optionality question that we paused on. Do you want to start with what you think maybe ryan you looked at and said you thought maybe had the most promise or what you

thought was interesting from reading the conference call and then we can go to everyone else i'm i'm not overly fond of the the food delivery services domestically so i have a hard time being that optimistic about it for them i guess the advertising would probably be the biggest one but the the eats it is the most downloaded app in south korea minus one covid uh like covid vaccine app on android so really the number one so it is really the number one um but i just don't know how i don't know how much cash that's going to generate i think it's losing money right now i remember them talking about that yeah that is a concern for me the one pushback on that i give that maybe it's different than the united states is one geography in seoul which is basically the

majority of their market everything's a lot more dense what is it one percent of the geographic uh of land mass in the united states i think it'll be a little bit easier for that and two they're trying to make it as instead of the contractors, which say a DoorDash has, and we all know the concerns with that. This company has everything, I believe, or at least maybe not everything now, but they're working towards having everything being employee owned. If you're adding it on top of this fulfillment network, I know food delivery is a bit different because you got to go to the restaurant and you wouldn't have a big truck going to the restaurant or anything like that. But I think that will hopefully give them a margin advantage that

I could, you know, Coupang Eats may not be that profitable, at least from a margin perspective, but I think it'll help them insulate from the competition and offer a better customer experience than someone just trying to start up that sort of marketplace with a bunch of people driving their own cars. Simon or Steve, do you have any thoughts on the Eats business or anything like that? I really don't like it. Personally, I hate the unit economics for food delivery, but I never have. And part of maybe that's just me being skewed for domestic food delivery and just looking at the economics come, but like anytime someone brings that up, it's like, yeah, they've got this too. I'm like, like, I'd rather, I'd prefer not to, but that's just me. I don't

know. I I've never enjoyed those economics. I mean, what do you think? I agree with you actually, Steve, mostly because I delivered food back in high school to make some extra money. And the economics are pretty terrible. I mean, you can't charge anything. It's totally capped, but I mean, the more important piece is that you want to have the customer satisfaction, I actually don't want Coupang to go out and try to do too many things at once. They'd have to fund that. They'd have to figure out how different markets operate, all that kind of stuff. I would rather them just nail this $500 billion market that Brett just described, which is

huge. That's still a massive market for them to grow into. And just be like, keep your customers completely satisfied. Keep that same day delivery and find ways to expand upon that and get some data that might be useful later on. Yeah. And Simon, Ryan mentioned his. Is there anything kind of, you know, everyone uses the word optionality a lot, but I think

with this company, it actually makes sense. Is there anything they're adding on top of the core coupon marketplace that gets you the most excited? We'll see what Bom Kim wants to do. I mean, their founder was a Harvard Business School guy that kind of dropped out of business school and went back to start this company. And he knows that he's got a lot of optionality out there. He's gotten approached by other e-commerce retailers that have said, hey, we want to

buy you rather than compete against you out there. So maybe the optionality is just that he nails his little sphere of what they're doing really well and lets somebody else come in and try to have that as a piece of a bigger umbrella. Again, e-commerce is brutally competitive. What is it? Grab holdings down there. You've got Shopee and Sea Limited in Southeast Asia. You've got Alibaba and JD.com in China. You're kind of seeing these giants, but you've got to have a ton of capital if you want to do

everything right. And so for me, optionality is more of like, if you've got a happy group of local population, that's the most important piece of all in terms of where this business can go next. Okay. So I have a question then, or maybe call it a concern, which is in this most recent quarter, their active customers declined quarter over quarter for, I think, the first time that I've seen. Is that cause for concern? I know there was maybe some logistics hiccups. Is that a worry for you guys? Yeah. So I'll hit that first. Yeah, definitely if it continues, it's a concern because they do say there's a little bit less than 40 million potential customers out there. And I think they're at about 17 million right now. So they should have a lot of room to run.

There's probably some overlap between like family accounts or something like that. So maybe it's not as big as we're thinking, but they did say that, uh, and this was kind of a good thing that they were supply constrained and that they actually declined, um, getting on some new customers in the conference call. I'm not sure exactly how they do that and whether they pulled back on marketing or something like that, but they said they sacrificed five percentage points of their revenue growth that they could have gotten, but they wouldn't have been able to fulfill with Don and same day delivery.

So they're catching up on the capex spend worth that acceleration from COVID. I think over time, as this evens out and as their core customers don't start spending as much as possible, which is, I guess, a good problem to have, they'll be able to expand to new customers. But they're being deliberate about it right now. But again, over the next few years, core customer count is a metric to watch out for. If that stalls, it's a bit of a red flag. uh simon steve you have anything on that i would agree with brett on that one i mean that's kind of two of the metrics that we we keep a pretty close eye on right as the active customer growth it's been at least 20 year-over-year for 15 straight quarters and then the spend growing 25 year-over-year

for each of the annual customer cohort groups if you start seeing that plateauing and slowing down maybe we're a little bit farther along in that adoption curve than we thought we were i agree that as an investor, you probably should be keeping an eye on that. I did see on their cashflow statement, there was a line item that said it was a $285 million inventory and asset loss due to a fire at one of their facilities. So that may have played into the whole supply constraints. Yes, they did say that was because of it. Yeah. So I guess maybe it's temporary. I guess just pay attention to management and what they say on that. on that note what do you guys think of management um is this someone is it i guess crucial to

the investment thesis if you're buying coupon uh i i mean always important right uh you know we're looking at harvard dropout a la you know zuckerberg and facebook right and i don't know that he was uh um i don't know that much about him i know he's faced some um some criticism for worker treatment and you know very similar to amazon you know along those lines right where you have workers complaining that of harsh work conditions and everything and and i think that's something that you're inevitably going to run into uh but i don't know much personally about uh the ceo or the management team but i should i presume he yields a pretty hefty stake in the company as well like bezos with amazon yep they uh it's like 75

of the voting power or something like that yeah yeah they have the vote yeah he has the voting power this is kind of uh yeah it's uh it's not a democracy here as uh some companies are yeah uh nowadays it's more of a one-person show and i mean i like him it's hard to tell recently entered to the public markets you kind of got to see over a few years how they react to stuff sounds seems like everything is good so far they're kind of just focusing on keeping their head down and working but i do like how they focus on long-term cash flow he does highlight that a a lot. A lot of companies can say that, but I think they're, um, they're focusing on the right things. We don't see them hyping up adjusted EBITDA. We don't see them hyping up, um, you know,

like, I don't know, revenue opportunity. Like they're, they're actually a little bit more secretive than I would like about giving out the true numbers of some of their things where they didn't even say about anything about international expansion, or they're very secretive about that. They don't even talk much about advertising or logistics, the actual numbers of that but they do say look we're focusing on long-term cash flow i like that and especially with international company where i don't have boots on the ground in south korea management is going to be really important simon do you have anything to add on that i think that this is a very u.s friendly company you know we've talked a lot about china's tech

companies and how trepidatious it might be to invest in something like alibaba or jd.com right now because of the regulators the censorship of the government i mean obviously you see jack ma being kind of silenced when he's saying that he wants alipay and uh ant financial to do things one way the chinese government says nope you're not we're gonna do this way instead i mean you've always got an overhang from a country like china south korea i mean this is a guy that understands the american markets you know he's going to business school for a little while over here um it's the largest ipo on an american exchange for a for an asian tech company since alibaba i I mean, it's kind of when you hear the conversations with him and knowing that South Korea is a

very different market than China is, it's something that they understand things like profits and shareholders and shareholder friendliness and buybacks and maybe even dividends in the future, things like this. I mean, that's not what you're getting all the time. You're investing in a lot of Asian companies. And as an American investor, I'm much more drawn to a company like this than something like an Alibaba or JP right now, especially with everything that's happened this last six months.

I agree. That's a good point. I forgot about that stuff. Yeah. Okay. I think unless you guys have any more points on Coupang, I think we've covered it well. I mean, we didn't really highlight the competitive advantages. We kind of glossed over that at the beginning.

Simon, do you want to talk about, because I think that's kind of the core part of the thesis. Simon, do you want to talk about any that you think gives them a structural advantage and maybe more detail? Yeah. Structurally, just to recap a couple of the things. I mean, like you said, the market share is already there. They've already got great customer satisfaction.

We've seen that the number of vendors that are coming on is flocking small businesses up almost 4x year over year. You see that the number of purchases per customer increasing 20-25% a year. I mean, those are kind of the things that you look for in an e-commerce, providing the infrastructure. Of course, same-day infrastructure is very, very hard to mimic. I mean, yes, if you're a competitor, you could come in and try to build that yourself and woo away their customers.

But if you're a customer of Coupang already, why switch? Why mess up something that you're already super happy with and you can get in your front doorstep immediately. It's like when we talked about retail before e-commerce, you would talk about companies like Tractor Supply serving a small population that was right there and they always went to them. Lowe's wouldn't go and build a location because it didn't make economical sense to just try to take the half of the population they might eventually get from the smaller community. That's like a structural competitive advantage when you think about what Coupang is doing in South Korea. I'm a big fan of a lot of the things we already mentioned, Brad.

Yeah, that one, I agree with that as well. And I think they also have another one that might be a decent network effect. I think a lot of people know this about the e-commerce marketplaces, but if you have all the customers on there, 17 million, and you have, I don't know if it's a million, but a lot of sellers on there, the more sellers, it's better for the customers, the more customers, it's better for the sellers. We all know how that works in tandem. It's very hard for another marketplace to start up there and get both sides to convince to go to that other one. Because if you're a seller, you'd much rather sell on maybe one to two marketplaces instead of a few dozen. If all the demand is coming from coupon, I think there's a

bit of a momentum effect where we've seen it with companies that do these e-commerce marketplaces. You can have maybe not accelerating revenue growth, but above market rates of revenue growth for a long, long time because that momentum builds and that network effect and competitive advantage solidifies each and every year. I know we sound bullish here. So everyone take it with the greatest salt, do your own research. And there are some downsides. Maybe e-commerce is pulled forward. Maybe that revenue growth is a little quicker than it will be. And it is a recent IPO. They've been out for less than a year, but good opportunity out there. Anything else, guys, before we move on to any other topics? Let's talk more broad questions. But before

Before we get to them, let's take a quick break. This episode is brought to you by La Quinta by Wyndham. Here you are miles from home and ready to start your vacation. Good thing you're staying at La Quinta by Wyndham. They have free high-speed Wi-Fi to stream all your favorite movies. And in the morning, get fresh waffles with their free bright side breakfast. Or squeeze in a workout at their fitness center. Either way, you're ready to conquer the day.

Tonight, La Quinta. Tomorrow, you triumph. Book your stay at LQ.com. 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. Steve's got a duck out here pretty quick. So we're going to ask him the first few questions. And we don't really have, usually we have some notes in front of us in terms of questions, but this one, we're kind of just free balling it. So I guess portfolio for you, this last month's been a little crazy. So what's changed, if anything? How are you kind of looking at the investment landscape today? Oh, man, I've just kind of been keeping my head down doing what I

always do. Right. And we were talking a little bit before the the before we started recording here that this is, you know, make no mistake, historic volatility that we're seeing. I think I I saw someone point out on Twitter that there were only, this is the other day, a few days ago when the market crashed, I think the Dow was down more than a thousand points and then ended up closing in the green. I was down more than 4% at one point and then closed in the green. There were only six times in history that's ever happened. And that was one of them.

And then it almost did it the next day too. And each time it happened afterward, there was some pretty crazy either rallies or further pullbacks over the next several months. But I think the volatility is not going anywhere, at least in the near term, especially as people kind of digest, are we exiting the pandemic? What's the Fed going to do with interest rates? Is that going to decrease the present value of future cash flows for growth stocks? How are we going to value these things? I'm just keeping my head down and continuing to invest in great companies. And I've taken the advantage personally of pullbacks and some of my favorite companies. And I just continued to gradually add to them

month after month, like I always do. And, and, and over time that served me well for the past 15, you know, years or so that, that I've been doing this and, and yeah, it's, it's great. So I don't mind buying companies at a, at a cheaper price than we saw them six months ago. But I know that also kind of underscores the need for, for preaching, you know, keeping a level head. And there's a lot of stress out there. A lot of people freaking out that they look at their portfolio. It's down 50%. So is 40% of every stock listed on the NASDAQ. It's down at least 50% at this point, which is crazy because you look at the indexes that are only down only 15, 17% from their highs. But anyway, I'm doing what I always do and not stressing too much about it

because I'm a long-term investor and a net buyer. Yeah, it's a great point. The drawdown is going happen quickly. So I mean, usually it's not one day, but it could be just a few weeks or something like that. And that's the importance of doing the research beforehand now, like over the last few years, continually adding maybe companies on your watch list, stuff like that. So when this stuff happens, you already know, okay, these are the ones I like. This is a company that totally sold off like 30%. I really like it now. I mean, this is going to be the time to add, I guess the highlights now i'm doing an ad for seven investing and keeping that research uh but uh i don't know on that note feel free to use our code ccm and check out that's a yeah good point but uh um

sorry steve you have anything else on that or uh are we gonna let you sign off here no uh i mean yeah i i'm reminded uh several times over the last few weeks of something peter lynch said and you know a lot of the stocks you know these high growth stocks you might not be a huge fan of but he always said buying on the way down looks an awful lot like being wrong, you know, but it isn't. And, you know, I think there's a lot of really attractive opportunities out there. And that's not to say they can't fall further. But, you know, I've watched, you know, another thing that he pointed out, Lynch, going back to him, I've bought stocks at 30 that went or 15 that went down to $2 and back up to 30. He's like, I can't time the market and nobody can really

effectively time it. So, um, you know, sometimes this, this outsized volatility is the price of admission for exceptional long-term gains. And that's kind of the way we think about it at seven investing. That's a great point. Perfect. Simon, uh, I assume your approach is somewhat similar Steve signing off here. So we'll wave him goodbye. Uh, Simon, anything, I guess, to add to that, anything different? I mean, Steve really nails it. I think there's a lot of anxiety because we have emotional biases that work against us in times like this. Steve mentioned the Peter Lynch, kind of think long-term. We launched 7investing on March 1st, 2020, which was basically a couple of weeks before

the widespread outbreak of COVID. And so all of our very first recommendations, if you can believe this, on our inaugural voyage of launching our first recommendation, we see them fall. I mean, some of them fell 30% or 40% within a couple of weeks just because everybody was selling off the entire market, you know, throwing out a lot of babies with the bathwater. And we kept our conviction. And I mean, if you look at a lot of those March recommendations today, they have come right back up. I mean, even the ones that fell by half are now multi-baggers on the scorecard. And I think that it's frustrating and it makes you anxious when

you buy something and then you see it drop within a week, 5% or 10%, like Steve was mentioning. We are hardwired to hate losses and hate red that shows up in our portfolios. But unless you need that money to pay your mortgage that month, which by the way, you probably shouldn't have that money in the stock market anyway, if that's the case, but do you really care about what the one week or two week or one month return of your investment is? If you're looking at this three years later and said, oh yeah, gosh, I lost 15% right in those first couple of months, but now I'm sitting on 100% gain three years later. And that's when I wanted to invest with that timeframe in mind anyway. Don't beat yourself up too much over

what's going on in the short term. It doesn't matter. The market is not going to look like a straight line. If you want it to look like a straight line, buy a treasury note, buy bonds. That's what those are doing for people that are in retirement that need that money. But if you want the, like Steve described it, the price of admission for superior returns, and the stock market has shown us quantitatively that over five and 10-year periods, it always outperforms cash, bonds, any other major asset class out there, with the exception maybe of cryptocurrency, which we don't have enough information about yet to make those kinds of claims, but stocks are the best compounder of wealth that an individual investor has ever had

access to. And I just want to keep that perspective in people's minds. And yeah, there's a lot of headlines out there. Yeah. A lot of people are saying the sky is falling. If you're a long-term investor like we do, we don't really worry about that. Yeah. And if you look at it, we just had Microsoft's earnings report. Clearly the sky is not falling for them. One thing I note is that the thing that's happening is the Federal Reserve is going to raise rates. But the interesting thing is that whenever the Fed or okay, on average, when the Fed raises rates from the time they start raising rates, the stock market is usually up over the next 12 months. And you know why? People speculate,

oh, that doesn't make any sense. But the reason is, is when they telegraph when they're going to raise the rates, people price that in too much beforehand. It's speculation, but that could be what is happening right now. Typically, when the Fed is going to raise rates, that discounting effect actually comes in beforehand since the market is forward-looking. I'll just think about that for everyone that is maybe worried about that stuff. That can happen before. It can kind of be time-shifted forward in comparison. I will say it's getting more fun, I think, to research stocks because you don't get to the end and say, this is a price I can't make work with just mental math. And now we get, if we see a business we like, it's like, all right,

this, you know, this could generate good returns. And so it almost feels like my qualitative judgments mean more than they used to, whereas it used to be kind of like, yeah, you can get a decent rate of return, even if it's a really good business. Now it feels like you can almost buy, you can almost focus on quality more so than a year ago or two. I don't know. Is that a similar experience for you guys? I agree. So I think, oh, I'm sorry. Go ahead, Brett. No, no. I was just going to say, I agree. I had nothing else to add. Yeah. It's going to be an interesting case study for business schools to look back on 2021 and what the impact of the SPACs was, right? You had Chamath Palapati out there just saying, Hey, you know, we've got a new form for raising money as

efficiently as possible, but it doesn't follow the same rules and paperwork that you had to do for an IPO. And so all of a sudden, everybody is going into growth mode. Everybody's showing this hockey stick of financial projections that doesn't have to be quite as scrutinized as we've gotten used to in traditional IPOs that have underwriters and fiduciaries associated with it. So it's going to be, as we look back on SPACs, I do think there are good companies that have come public from SPACs. But I also think, I think to your point that you just made there, Ryan, that there's a lot of froth in the valuations last year that is maybe coming back to earth as we're kind of digesting, hey, wait a minute, money's not going to stay forever free from the

Fed and companies aren't going to have unlimited access to money from SPACs. There's going to be little bit more scrutiny i think on publicly traded companies this year yeah i wonder sometimes if i so i guess we're looking and like we look at a different company every week because we do the not so deep dive show and when i see the valuation i start to get more intrigued relative to what i was last year and so i wonder sometimes if it's just me anchoring to some of the valuations we've had in the past or are these really good valuations um if the growth is actually there for some of these businesses uh i kind of have a hard time uh distinguishing between the two yeah do we want to talk the activision blizzard microsoft deal or what did you have on that yeah i guess simon did

you look at that what do you think about that deal huge deal big big big acquisition yeah what's the total enterprise value something like 75 billion dollars wasn't it that uh yeah uh activision has a lot of cash so it's 68 billion out of out of their other cash but still quite right around there gotcha yeah perfect so i mean my take on this is um metaverse is going to be a really big deal and microsoft is is clearly showing that it's it's going to be a large player in this this is all about the ip this is all about the gaming talent and the developers and kind of the subscription model that you saw netflix make popular for entertainment it's going to now go from the movie the movie industry and the digital streaming that we've gotten used to for tv shows

and movies is going right over to gaming and they've already done this it's a much bigger deal now. I mean, just some statistics to kind of kick this off, I guess. 15 years ago, right around 2005, there were 200 million people playing games globally. And today, that's 2.7 billion people. Gaming last year was $180 billion total addressable market globally, whereas the global box office for movies was $20 billion. And the global box office, of course, suffered from COVID, but even at its highest peak was around $40 billion. And so this is just not only a huge market in comparison to the other entertainment forums that we've already validated from subscription formats like Netflix and others that are doing

digital streaming, but it's also just so much more interactive and engaging than being plopped in front of a couch that is watching a movie. I mean, you're interacting, you're looking at things. Now Metaverse has got a new form where you can actually see what people are looking at or interacting with. I mean, things like this are not only super important for the subscription side of the business, but also for the advertising side of the business. That's why you see so many companies saying, yes, we need to take Metaverse for real. And you see Microsoft really putting a big statement out there when you make an acquisition of $67 billion in that cash.

Yeah, I want to ask you about AR and VR because you're more in tune with that, researching that than we are. But I want to talk maybe just following up on the gaming stuff. It seems like now Nintendo is kind of its own bucket. So I kind of put them unique, but you have Sony and Microsoft, and it seems like those platforms, from my purview, are going to start having a lot of power if they can get say, I know cloud streaming is difficult, but if they can get these subscription businesses and Sony doesn't have yet, they're about to launch it.

But if Game Pass can really become the Netflix of gaming, I mean, it seems like that it can be a very lucrative opportunity. And you add on Activision's IP to some of that. They said they're not going to make Call of Duty exclusive, but maybe a lot of the Blizzard titles, they bring it over to Microsoft. That, I mean, it seemed, I don't know, the acquisition makes sense to me. And it seems like with the large opportunity here, it could actually be meaningful for Microsoft over the long term if they can get Game Pass. I think they're at like 30 million subscribers right now. That could be way off on that for Game Pass.

If they can get that up to 100 million. 25 million is what they said in the conference call. Okay. So if they can get that up to a hundred million as they build this out over the next decade, I mean, I think that can, it's something even Microsoft shareholders, I know the company's 2.4, $2.5 trillion. I think it can be really important for them over the longterm. So Ryan, do you have anything to add there? We were DMing with Matt Cochran, who's most of our listeners probably know him, but he's another advisor on the 7investing team. And he brought up a good point for all the other publishers, which is, and we saw it. So when Activision, when the news came out that there was going to be this acquisition, EAA, Take-Two, all these stocks jumped almost as if these are now huge acquisition targets. And Matt brought up the point that since the Activision deal is probably the biggest deal that could happen, aside from maybe Nintendo or maybe EA, if that passes, any other deal

that's smaller than that kind of has to pass with regulators as well. So if Facebook were thinking about buying a publisher, now is the time to do it. Or if Netflix was thinking about buying a publisher, it's a great time. I also saw this quote that I found was interesting. I guess we should mention that we are shareholders of Take-Two and Electronic Arts. So this might be us being a little biased. But Nadella, last night on the conference call, he said, the economics of gaming franchises is also radically becoming much more software-like.

i i feel like that doesn't get enough credit that the the margins on these businesses are there's tons of operating leverage because it's the no uh no cartridges or discs anymore that and the games are beyond it's it's uh you're getting a lot more live services revenue and not just purchasing the game and you know you can just iterate new seasons on top of apex legends and just, it's just basically software pushes and they just buy new skins and whatnot. Yeah. It's very, it feels like a software business.

Yeah. And maybe we should close this out. I want to ask you about the AR VR because Simon, you know more about that stuff as well. That's the big question of, you know, Microsoft has say the Xbox platform, but there's Facebook with Oculus. Rumors are Apple's doing it, Google's doing it

and Microsoft is doing it. I want to just have a broad question for you. Who do you think has the best chance of being the winner of that gaming specifically over the next decade. I mean, those are all the traditional publishers that are figuring this out. And you've got kind of these new platforms that are taking a completely different stance on it, right? It's almost like cloud native versus legacy software that has to adapt to the cloud, right?

The ones you mentioned are certainly going to be, you can see their business is going to be improved from this. But I mean, there's another breed, like the Robloxes of the world, right? The Unity softwares of the world, which are building ecosystems that are made for the metaverse, that are made for developers to create games that are going to be perfect for what is going on out there right now. It's not a transition of the business model that's traditional. So I tend to think that both of them are worth at least putting on your investing radar at

this time too. You've got the huge platforms like the Microsofts that are going to consolidate. They're going to go out and they're going to make more acquisitions too. And you saw Take-Two just acquire Zynga. I mean, there's gonna be more things like that that are going to happen because of the end game transactions being key. But then on the other hand, there's going to be kind of this, this, you don't have to build it all yourself.

You just have to build the platform and make it as easy as possible for developers to do their thing. And I think that that's kind of the second piece of this as well. Right. That's a good point. Any other questions or should we shut it down? No, I think that's good. That's probably, yeah, that's probably long enough.

hopefully everyone uh got a good overview of coupon um and if you have any questions i'm sure all of us listening are uh open books here happy to chat so yeah simon we should have you sign up you're the lead uh you're the founder of seven investing so for anyone that doesn't know i know a lot of listeners here are aware of seven investing what is it you know uh where can people find it oh yeah well thanks very much brad you know we really enjoyed the partnership with you guys. And like you mentioned, CCM will get you a promotional code for 7investing if you sign up at 7investing.com slash subscribe. But what we're trying to do is we pull together a very diverse team. We have advisors that are on three continents, kind of market experts and everything

from cloud computing to biotech to payments to gaming to whatever it might be. And we just kind of unleash them every month and say, okay, out of the entire stock market, all the thousands of ideas you have, what's your very, very best idea? And we kind of use this as an experiment when we launched it in March of 2020. It seems like such a long time ago. We're now in over 100 countries where we have subscribers. We're thankful for everybody who's kind of taken the leap of faith with us. And my goodness, man, we're having a good time. Even in the volatility of the market right now, I feel like right now is such a good time to be a long-term investor. Yeah, this is a perfect time. If you are a subscriber, go through some of maybe even

those older reports I've been following through, see if there's anything that is worth researching. And it's a great partner. Like you look at one of your reports, it gives you a great overview. It gets you up to speed a lot quicker on stuff that you're potentially going to buy. All right. Sorry, Ryan, you want to sign us off? Yeah, sure. So I guess remind listeners that Brett and I are not financial advisors.

Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital. So clients may have positions and securities discussed in this podcast. Thank you all for listening. Feel free to use our code for 7investing. and we will see you guys next time.