Chit Chat Stocks - CrowdStrike In Turmoil; Earnings Galore (GOOG, SPOT, TSLA); What Stock Was The Fattest Pitch?

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 the weekly investing power hour episode. This is our 121st investing power hour. Not that that number has any significance, but we've been doing it for more than two years now and people seem to enjoy it. We do these shows live on YouTube on Wednesdays. The time has moved around a little bit, but 1030 Pacific time,

Starting point is 00:00:55 1 30 eastern time and we talk all things finance on these episodes and it's earnings season so we'll probably get to a number of the big earnings reports for this week including google that was kind of the headliner tesla visa spotify reported as well um i've got my small cap of the week and it's one that i would say for the first time brett this is one you know in advance So that'll be exciting. And we've got plenty of other news as well. We're going to be talking about the largest global IT outage ever, I think. Largest internet outage. It's still impacting a lot of businesses. We'll talk about that as well. But I guess, Brett, how are you doing? How is earnings season treating you so far? How many companies have reported for you?

Starting point is 00:01:48 A couple have reported. Sorry, I'm having that light issue as always. But I am going to to fix my background, actually, as a note, make it a little bit lighter. That's on my to-do list for my long-term to-do list. But yeah, I've had a couple that I actually own, quite a few psychological shorts, quite a few psychological longs. So a lot of stuff that I enjoy watching and either not really necessarily rooting for, against, or hoping that the stock goes up or down or something like that. But a lot of stuff I'm interested in. Obviously, there's some things out there, you know, companies I don't like, companies I like a lot, but just a couple that i've reported in my portfolio along with you we run concentrated as younger investors but not

Starting point is 00:02:30 giant diversified yeah we're not we don't have a ton of assets so yeah that's really it pretty boring so far but excited to talk about the stuff that we don't own such as tesla visa google spotify um the ai bubble may be over as we're recording right now nasdaq's down three percent but TBD on that one. It's just been a few days. Before we get to things though, I do want to mention our friends, Public. If you trade options, you've got to ask yourself, why wouldn't you choose an options trading platform that puts investors first at public.com? There are no commissions or per contract fees. And more importantly, it's the only platform where you can earn a rebate on every single contract traded. That means you can save on your options

Starting point is 00:03:14 trading costs and keep more of your capital in play. Whenever you trade options on Public, your savings are automatically applied. So don't change your strategy, change your platform and see the difference in your bottom line. That's no commissions, no per contract fees. And it's the only options trading platform where you can earn a rebate on every single contract traded public.com. This is paid for by public investing options are not suitable for all investors and carry significant risk. Full disclosures are in the podcast description. Where do you want to kick things off brett let's say how about the largest sorry i said how about the largest internet outage of all time sure what do you i don't know too much about it i guess i'm just

Starting point is 00:03:56 a headline reader on that one but what do you what do you know what can you tell for the listeners well yeah i don't know much either but from what i understand crowd strike which powers the cloud environments for a lot of companies and most notably uh microsoft because it mainly impacted microsoft which had repercussions to everyone else they pushed a software update that had some sort of a bug in it that brought all of microsoft's systems down um or maybe not all their systems but it brought their systems down so that the customers could no longer access the internet function properly access any of their systems, airlines stopped flying, like literally flights,

Starting point is 00:04:49 if you if you look at the global map of flights, during that time, they were ground basically to a halt. TVs, TV networks were non operating. I mean, there are a number of industries that were impacted by this. And we're still seeing the repercussions actually of it today. Delta has been having huge issues with customers not being able to find their bags, customers that had important medicine in those bags that weren't able to get them, flights that weren't taking off, wrong flights, stuff like that. So it's disrupted a lot of company systems and initially i guess the moral of the story it outage bad and when it's your fault

Starting point is 00:05:38 that's bad but i saw a lot of investors with the thinking and it's natural to think this wow you know what this actually shows how critical they are but and and they almost you try to put a positive spin on this. Like, okay, yes, obviously bad, but now everyone's aware of how important they are. So it's going to get bid up by other shareholders. No, this is bad. A lot of customers will likely look for alternative vendors. I would not be surprised if there were some large penalties, fines for the company. And now it really exposes the need to have multiple vendors in these situations, or at least not rely too heavily on CrowdStrike. And then of course, Elon Musk had to find a way to make this situation about

Starting point is 00:06:29 himself. He said, we are removing CrowdStrike from all our companies today. So he got rid of them. I don't know if that was meant to provoke other companies to do the same, but difficult week for CrowdStrike. I've also been told you never push product updates on a Friday. People tend to try to skate by things quickly on Fridays maybe. But I thought, wow, you know what? Down 30%. I think – I don't know if it's down 30% since this incident, but the stock dropped a lot. Maybe this is cheap and it's still north of 20 times sales.

Starting point is 00:07:09 So it's still a premium valuation. Yeah, I was just about to butt in there, Ryan, and say that we're at a 33% drawdown. essentially from where before the outage happened but i will mention it is still let me confirm this up year to date up seven percent year to date so it had quite a run before this trailing ev to sales of 19 forward ev to sales which remember are based on estimates that might get revised down now is 14.75. So essentially 15, clearly they're not going to earn a hundred percent margins. So it's a pretty expensive multiple. You have to expect, I mean, probably, what would you say a 20X multiple implies for a company that you think can have

Starting point is 00:07:59 general software margins, kind of like a 3X, 4X guaranteed revenue growth, like, or sorry, like from the current basis you need to expect like 3x or 4x growth just to maintain the current valuation something like that that's what's implied yeah the other thing here and i i know very little about crowd strike in general but if you look at their subscription revenue growth it is like just a staircase literally just very gradual incremental improvements every single quarter and it's almost too linear that it feels a little suspicious maybe maybe maybe they're they're pulling an under armor you think they're massaging that revenue growth to make it look turning that into 20 and then turning that 22 into 20 or yeah into 20 as you pulled up we

Starting point is 00:08:55 have a note here did you guys see the analyst note on crowd strike where he was bullish but they didn't couldn't publish due to the crowd strike outage so then they turned bearish yeah i mean that makes sense like when an outage like this seems to have huge financial repercussions if you just look at delta which is clearly going to be one of their largest customers and does i don't know how much in revenue each day but maybe a billion in revenue each day actually that might be way too high. But either way, a lot of revenue each day. There is probably a huge earnings hit just from that one company on this thing, probably the biggest one in the headlines here. And I mean, like, what was the repercussions on that going to be? Are they going to have to pay Delta

Starting point is 00:09:44 $100 million, something like that? Or is it going to be higher? Is it going to be nothing? What are these contracts look like? I even saw when looking at Visa's earnings today, they said that moving into the third quarter of calendar year. So basically quarter to date through July. So the first three weeks of July, there were a few things that slowed down their growth from the second quarter. And one of the things they mentioned

Starting point is 00:10:10 was the CrowdStrike outage. And Visa, for one, isn't even that tied to Delta because Delta is more tied to AMX. But even so, so that's excluding Delta. you have Visa, which is one of the lifeblood of consumer payments, a little bit on B2B as well. But really, the lifeblood of consumer payments in the United States is saying this was a material slowdown. And it's due to, I mean, this one outage. Look, I don't think I know much about cloud cybersecurity, but the stock is way too expensive. And price always matters. That gives

Starting point is 00:10:52 you that margin of safety. Buying something at 25 times sales does not give you any sort of margin of safety. And that's why you're seeing this show up today with CrowdStrike. I wouldn't be surprised if this is a Chipotle style event where they're going to have to execute over multiple years to fix things. And I wouldn't be surprised if they go through an extreme drawdown where you have to have high conviction on the product quality and the new management team that'll probably come in and stuff like that if the fallout is as bad as people are saying.

Starting point is 00:11:21 Yeah, the difficulty is that... Go ahead. Because part of my thought was like, okay, this obviously exposes some flaws in the system for a lot of these customers for CrowdStrikes. Maybe you want to explore some alternative vendors. But on the flip side, maybe it's really difficult to replace

Starting point is 00:11:40 and it does highlight just how important and critical CrowdStrike is. And so I was like – I think everyone has kind of gone through this where they think, oh, this actually does expose how critical they are. Maybe it's time to buy on the dip. The dip is not that attractive. That's the issue. With the Chipotle, you got it at trough earnings and on probably some extremely low multiple.

Starting point is 00:12:08 I'm not sure what Ackman was really buying at, but I'm guessing it was quite a low multiple. This is still 20 times sales. Yeah, I agree on that. I would say I wouldn't be surprised if from here, if the fallout is, I would call this a salmonella outbreak of the cybersecurity world, maybe. It could probably be similar.

Starting point is 00:12:25 And the reputational damage could be big, but it took Chipotle, I mean, honestly, five years or longer to recover from that, to regain that reputation among consumers of being healthy and safe. Yeah, it's definitely not the same right now. But if you look at Chipotle's chart, I believe they went through at least a 50% drawdown, if not more. Don't really have much else to say on it, though.

Starting point is 00:12:48 It seems like it's going to be an interesting story. But maybe as a segue to earnings season with Google, it seems to me like a lot of things this year are coming up Alphabet slash Google and going against Microsoft. because Microsoft and CrowdStrike were a power to this outage. That was bad for them. OpenAI has been maybe stagnating versus Alphabet slash Google. I mean, OpenAI is still quite popular, but they seem to say that they're burning money. I just saw a headline today that they need to raise more money already,

Starting point is 00:13:26 that they're looking to raise $5 billion. Microsoft hasn't gained any share on Google Search, as we'll get into here. But Ryan, I guess I've been talking a little bit. Do you want to go through some of the headline numbers on Alphabet? because they were quite impressive. Yeah, let me pull them up. I guess I'll give my big takeaway here

Starting point is 00:13:45 and then maybe you can pull up the specific numbers here. But I listened to the conference call, read the report, looked at a lot of the numbers. Really strength across the board for Google. Search is still doing quite well. YouTube is doing well. And the results there are almost masked by – because we only get the reported advertising revenue for YouTube, which was I believe – I

Starting point is 00:14:14 think they're at $33 billion over the last 12 months and it grew 13% this year over year, this quarter. But the other thing that's important to remember with YouTube is they are pushing people to the ad-free product. So when they report advertising revenue, that's also coming at a time when users are churning off of the advertising platform. Second part here is they're kind of cannibalizing their own business with the YouTube shorts. There's still a bit of a monetization gap there. So even though advertising revenue is growing 13% year over year, engagement and time spent on YouTube is outpacing that drastically.

Starting point is 00:14:54 So as that monetization gap continues to close, which is something they talked about a lot on the call, you should probably expect to see that advertising revenue continue to grow as well. They are the leading platform in terms of time spent for streaming TV as well. So strength across the board for YouTube, Google search continues to do well. Google cloud had a particularly strong quarter. They crossed $10 billion in revenue, crossed a billion dollars in operating income, and the operating margins at Google cloud have been one of the most steady progressions I've maybe ever seen in turning the corner to profitability. Yeah. Brett's pulling it up here. They have just slowly and slowly picked what they want their profitability to be.

Starting point is 00:15:40 It seems in that division, it's just gone from like minus 30% to minus 25, minus 20, fit minus 15. And now they're basically sat at roughly 10% operating margins in that division. And I would suspect it could be a lot higher on that note too. Alphabet is reportedly exploring an acquisition of wiz which for i think it's like 23 24 billion dollars it's an israeli tech company which would make make it their largest uh acquisition ever roughly twice the size of what they paid for motorola back in 20 was that 2012 2013 somewhere around there so that could be that could be lumped into that cloud segment as well and apparently the head have google cloud is the person who's really been pushing that acquisition the in february of 2023

Starting point is 00:16:31 satin adela said we want people to know that we made google dance and if you just look at the google search revenue there hasn't been a whole lot of the dance so to speak isn't really showing up the search revenue has just steadily grown despite already coming off of being one of the largest businesses to begin with so the results continue to be impressive a year ago google was being knocked for being behind in ai and it was hurting their valuation shockingly and now today people seem to be wary that google is going to spend too much on ai and the stock is down four on what looked like a pretty solid report. So people are always kind of frustrated with Google's report. And the same thing happens every time. They come out, they beat expectations,

Starting point is 00:17:27 and then Sundar Pichai and the rest of the management team comes onto the conference call and says, we're spending in all these different divisions and it's not going to slow down. And then people get wary and they sell off the stock again. This continues to be, in my opinion, when I look at big tech, probably the most attractive opportunity. Yeah, that's a great summary. I might argue Amazon over them, but I'd say those are my two for sure. We have a question here. Why do you guys think Google trades at a lower multiple than the S&P 500?

Starting point is 00:18:00 I pulled up the chart here. It's at about, say, 28 today, maybe 27, depending on if it's updated strong enough. That's a slight discount to the S&P. And if you're a comparative investor, I guess, and if you're really just caring about beating the index. Maybe I like that a lot better than the index, but I think that's not something we really look at too much. If Google's trading at 27, the S&P is trading at 29. I mean, yeah, I think Google's going to grow its earnings per share quicker, but that doesn't necessarily mean it's a bad business. Comment here that says, I heard Wiz prefers to dump their shares to the

Starting point is 00:18:40 public and an IPO at 100 times sales. Yeah, I'm actually a little bit happy that they didn't make this acquisition because it seemed quite expensive. I'd rather have Wiz just pay cloud credits on Google Cloud maybe because I heard that they're closing in on like a $500 million in revenue. So it'd be something like 50, 60 times sales, but they're projected. I mean, they're growing extremely quickly. It's $500 million in revenue after a couple of years and there's a clear line of sight if they execute um to you know maybe 10x that revenue growth or 10x that revenue and google would obviously help them do that there's also i just don't know that that's that those expectations are implied on 50 60 times sales though so we'll see yeah i think they google

Starting point is 00:19:30 kind of has the luxury to be able to pay premiums and still make it worthwhile just because the upsells instant and you can instantly integrate this into google cloud and then why not just do a partnership because you can own the economics if if they think and google's not that acquisitive so like their biggest acquisition was like a while back for motorola and if any company has been exceptional at what seemed like premium acquisitions it's been them so i think they tend to be they tend to get them right i wouldn't be that upset 23 23 billion is a big number but i think i'd rather keep in mind these are still just rumors but there was also a rumor that they were going to buy hubspot i think it's better that they would i don't know

Starting point is 00:20:26 that much about wiz but i imagine that'll integrate better yeah hubspot yeah i guess i've never really known the point of that company but i'm sure it provides value it's a big company it would be great to be the person at hubspot or whatever these target acquisitions are that's just leaking this yeah there's been rumors you know but the rumor associated with the company have to have said there are rumors yeah and for to be clear for the listeners the latest update is that whiz is backing out of the deal because of concerns that there's going to be a whole multi-year process on antitrust stuff that they don't want to deal with in the united states and europe which is fine i mean you know it makes sense it's probably healthy that they're independent

Starting point is 00:21:09 either way um let's see the current head of gcp relocators or go ahead ryan in general what do you think of companies in this case in the middle east being wary of getting acquired by an american company because europe doesn't like it yeah that's weird that is weird why did why do they butt in on every acquisition europe yeah and the uk yeah remember the activision blizzard one that wasn't going to hold up in court that one was wild i was going to i was going to mention though this would definitely be a little more enticing than Microsoft buying Activision Blizzard or I guess TBD on the outcome of this one, but I'd be a little bit more optimistic on this versus giving OpenAI $15 billion for Azure credits. That seemed

Starting point is 00:22:07 to be going into a, I don't know, I don't want to call it a black hole. I feel like I'm being too pessimistic on open ai but a really really really aggressive operating expense line here's my yeah i think with open ai the value there and maybe it's going to get competed away as people like or platforms like gemini grow as well but the value there is that they power they're the backbone of a lot of these more targeted offerings so finchat for example is powered by open ai but then you layer on very specific use cases with very specific data and you teach it to speak in a way that it targets a specific audience think about like ai for legal offices or law offices stuff like that where you have to get there's certain terminology you want

Starting point is 00:23:05 have in every response it's more of a i think it could be a good b2b business but i don't know if it warrants the valuation that they have well i think it's i understand the the use case there but it's the profitability aspect that makes me cautious because right now it seems like they're selling a dollar for, what would it be? 50 cents, like given the losses they're at. I don't know if I'm using that analogy correct, but they're doing like two, three billion dollars in revenue, but they're burning just so much money. That'd be a concern for me. Other news on Alphabet. I'm curious your take here, Ryan. They're pouring $5 billion more into Waymo, positive return here or negative return?

Starting point is 00:24:06 Thoughts? I guess you're not a shareholder, but if you were a shareholder, would you be happy? I think I'm okay with this. I mean, this is how Google's operated for a long time, where it's like they dabble, they put smaller investments in, they see the progress, they see the need to invest, they invest more. And we're already seeing the progress with Waymo,

Starting point is 00:24:31 In San Francisco, they've talked about it, all the rides that they've already provided, the driverless rides. The economics here at scale make a ton of sense, even if they're operating in five or ten cities. And I know they're already planning to expand within Silicon Valley or just the general San Francisco area. I like this. I don't mind this at all. You know they're going to do some of this. When you become a shareholder of Google, you know they're not just going to juice everything for free cash flow per share. They are going to spend money on these big bets, and a lot of these big bets pay off.

Starting point is 00:25:11 I suspect Waymo will be one that actually does pay off. I agree. It seems to be paying off right now. I would hope, using the baseball analogy that everyone uses way too much, it seems like we're really, really in the early innings here. We could still be in the first inning of the, what do they call it? the robo taxi network the waymo network development you're only in a few cities san francisco phoenix and los angeles i believe i mean just in the united states you could 10x 100x the amount of cities you're in over the next few years as long as you you know get through the regulation it's going to be a slow build but i still enjoy that plenty next topic ryan what do you want to hit

Starting point is 00:25:52 because i feel like tesla earnings are boring it's just they're kind of stagnating right now there's nothing much to say. People are still going to be bullish. People are still going to be bearish. I think it could be fun to talk either Spotify or your small cap of the week. But those were two really interesting earnings to me. Or sorry, Spotify is more interesting earnings. And we obviously have to do your small cap stock. Yeah, I guess a couple other earnings we should maybe just mention before we get to the small cap stock. Netflix, good report. They continue to extend their leadership in streaming them in youtube really and you can just see the economics continuing to accrue not to mention word came out last week that apple tv is cutting back

Starting point is 00:26:40 on some of their stuff and i thought apple tv was actually really doing a good job content wise but they're having to cut back because they're spending egregious amounts i think it's 20 million per episode on, I can't remember what the show's called, but just outrageous amounts on each episode. It seems like they just continue to extend their lead. Second one that I do want to mention, housing appears to be okay. And we have gone back and forth on the housing market in the united states for probably two years now and i've kind of switched it seems like houses aren't they're obviously less affordable than they used to be and i was kind of along i was kind of in the camp of maybe there's sort of a housing market bubble

Starting point is 00:27:34 but or maybe not a bubble but prices would have to come down now i think after reading these home builder reports it seems to me that supply is just about where it needs to be for the amount of people that can afford a home right now like it seems well balanced dr horton for example their home closings haven't declined at all despite one of the quickest rises in interest rates in what i don't know probably one of the longest time is it the quickest rise in interest rates ever well not told i mean they stopped a while back but it was the i believe the fastest but it's hard to it's hard to say because you're going from zero to five is that that big of a difference between five and ten you know in the early 80s and stuff like that people kind of

Starting point is 00:28:32 quantified in different ways either way one of the fastest of the last of the post world war ii era anyway you would think it affects housing one way or another and a lot of people myself included thought okay maybe it doesn't affect it now but there's going to be a lagging effect where people eventually have to move it just isn't materializing like there is not enough homes there's not enough inventory to impact the home builders it might it might still impact some houses or some home prices but it's not impacting the home builders dr horton and i think some of the other home builders as well are going to probably prove to be really good investments over the next decade You're buying them at basically – a lot of these are at 8 to 10 times earnings, and people thought that was going to be peak earnings, and it just doesn't seem to be the case.

Starting point is 00:29:23 So anyway, that's kind of a pat on my own back for being a DR Horton shareholder. How's the stock done? I haven't looked. It's up after the report, and it's up just I think gradually over the last couple of years. Yeah, pretty steady. Yeah, not bad there. I'd say yeah I mean the home builders seem to be set up to do fine because even if there's like if affordability increases there's going to be more of a demand so there's going to be more of a need for supply and they'll be able to fill that but I don't know if I'd call the housing market okay when way less people can't afford it like in a general like an investment sense for the home

Starting point is 00:30:01 builders I understand the thesis but from a our country sense it doesn't make sense to me or I would say there's a lot of room for improvement to make it so housing doesn't cost 50 of your income in a lot of ways i think okay you know decrease in general like decreasing that as a percentage of your income is probably what we want to do as a society but as a home builder you're going to be fine either way yeah the reality is the it's not 50 of the income of the people that are actually buying them right now well yeah but it's 50 of the average earner in america but yeah do you want the average earner to be able to afford a house is it bad to have rent the percentage of people in america

Starting point is 00:30:52 that are renting growing yes you think so because everyone's really bad at investing and that's the best way to form a nest egg for 90 percent of people is to buy a house at a reasonable level and have that be your savings vehicle. And you won't be able to have the choice. Renting has positives. Home ownership has positives. Both have negatives. Yeah.

Starting point is 00:31:19 No, it's a way different topic than are the home builders good stocks. But, yeah. It was interesting listening to a recent interview with Mark Rubenstein and how the mortgage system works in like the UK. It's incredible. I don't think most, myself included, I don't think most Americans appreciate how unique a 30-year fixed rate mortgage is. It's nice. Yeah. It's one of the best forms of debt you could really get. It's all in your favor

Starting point is 00:31:57 too. You can refinance when things go down. You don't have to refinance when things go up it's great um anyway it's a separate discussion should we do my small cap of the week well let's do it little nicotine pouch play i've seen in your notes uh for any teas for any listeners might be able to predict this one yeah so the company is called hape group i found this on yellow brick actually it's not the first time that i've seen hape group but i saw a recent write-up on hape group on yellow brick and for anyone that doesn't know a little shameless plug here. If you use code joinyellowbrick.com slash chitchat, you get a discount as well as access to the service. And Yellowbrick is just an aggregator of great stock pitches across the

Starting point is 00:32:45 internet and it's bringing them all into one place. You can either do it on the website or you can get it in your email through a sub stack. Anyway, I saw hate group on there and it's a name I'm familiar with. I'll go through some of the quotes from the write-up that I saw. It says, HAPE is an online retailer and distributor of nicotine pouches and snus. The company was started by a couple of Swedish teenagers in 2009, and through mergers and acquisitions, they no longer are in charge of the company as the current CEO joined in 2017-2018. The company bought Nikokik and Northerner.com. Northerner owns 9% of stock, which are now both their main american brands they switched from snus to nicotine pouches six years ago and haven't

Starting point is 00:33:27 looked back the moral of the story here they own a number of online retailers that distribute primarily oral nicotine products um and this push towards oral nicotine pouches like zen on rogue has been a huge category, a huge tailwind for this business, but also it's just been a secular growth category and replaced a lot of traditional tobacco. And so he kind of goes into some of the advantages that Hape Group has. He says, so how do they have such a grasp on what would obviously be a hyper-competitive online industry? He says the main reason for their hyper-success in the online market is that they have a death grip on the SEO landscape. Their mastery of SEO allows them to spend almost nothing on marketing and to keep pushing out their distribution system,

Starting point is 00:34:22 which continues to drive costs down for them and consumers. This creates a positive feedback loop as they become even cheaper than their competitors, allowing them to lock in customers. Now, we were pitched on Hape Group by Spencer Sibeli a little over a year ago, I believe. Should have listened. Stock's doing well. Definitely should have listened. But great pitch. And I came away thinking my only concern was that Zin owns a ton of the oral nicotine market. I think they dominated like 75% market share in the US. This quarter, partly because there was a Zin shortage, Philip Morris just reported their quarter. Zin market share declined a bit. And it kind of inspired me to relook at this

Starting point is 00:35:09 In a world where On and Rogue and Zin have a little more diversified market share where it's like not one brand that's completely dominating, I think HAPE benefits that much more. And maybe Zin will have to make some concessions to kind of sell more on HAPE and maybe get more discounts there and rely on some of those retailers. a bit of the numbers here they've got a 253 million dollar market cap in the u.s u.s dollar terms they're based in sweden but in usd it's 250 million dollar market cap over the last 12 months they generated 38 million dollars in operating income brett was sharing some charts there the revenue growth has just been very consistent it seems like are you sure that number is correct i'm seeing 3.5 million usd 38 million switch oh shoot the it's then you're right i forgot to switch it to switch corona but

Starting point is 00:36:05 i think they're just kind of inflecting to profitability at the moment um i mean you have to believe that the inflection continues in terms of growing their margins but i certainly see the top line continuing to grow and it feels like one this is kind of similar to fit life brands i pitched that a couple weeks ago it feels like one of the few small caps that could have lasting growth. Yeah, I agree. I should remind the listeners that when we talk about a small cap each week, we rarely own them. We are not recommending any of these. These are more of exploratory discussions and you should really make your own decisions. If we talk about one positively or

Starting point is 00:36:54 negatively, do not just go buy it without doing your own research. That being said, I think HAPE Group is interesting. It's definitely one to follow. I saw 18% revenue growth. I think that was in Switched Corona. So maybe USD is a little bit different over the last few years. Pretty solid growth. I think if you look underlying too, the US is growing even faster. They are reinvesting a lot. So again, you have to be confident in that. But I do like the idea that the market will get a little bit more diversified. i don't like that they're really focused only on nicotine pouches where i like a little bit more diversification i think they probably do have a little bit of that um and i don't like

Starting point is 00:37:37 that zin really dominates this one maybe they'll benefit from the zin shortage that we saw has kind of pushed some market share to the other players i mean at the right price i like this but i'm not i like philip morris international at the right price more than this because i believe with a lot more certainty in that earnings power and the dividend payments and just it's just an all-around locked in return at the right price you know compared to this one but obviously this one has a lot more upside do you want to go through philip morris's numbers actually and before we get sure why don't you talk about yellow brick the ad first and then we'll go through philip morris yeah i just mentioned it but

Starting point is 00:38:26 yellow brick is an aggregator of stock pitches from all across the internet so blogs podcasts twitter you name it they use ai to aggregate them and present them in one place um and they direct you right to the, wherever the blog or the post came from. And I really just recommend checking it out. It's kind of like a modern value investors club and it doesn't require applications. So it has way more volume in terms of pitches. So if you're a finder, if you're one of those people that likes reading investment pitches on a Sunday, Saturday morning, whatever it is, and you just want to peruse through some quickly, I really recommend just checking out yellow brick. If you use join yellow brick.com slash chit chat, you can get a discount as well.

Starting point is 00:39:10 I've been using it. I mean, you get an email every day. I think there's at least 10 new ones added every day. So the database grows, grows, grows really quickly. It is probably the best new way to turn over rocks. All right. Want to talk Phil Morris or do you want to talk public again? I'll just, yes. Mention earlier in the show, you heard us talk about the investing platform, public.com. That is where you can trade options with no commissions or per contract fees and you get a rebate of up to $0.18 per contract traded. NerdWallet recently gave public five out of five stars for options trading. If you want to see why, go to public.com

Starting point is 00:39:45 and start getting a rebate of up to $0.18 per contract traded. This is paid for by public investing. Options are not suitable for all investors and carry significant risk. Full disclosures are in the podcast description. U.S. members only. Brett, Philip Morris' numbers. You want to go through them? Yeah. So I think the big takeaways for me are that, and I'll probably share the screen here

Starting point is 00:40:07 on FinChat, we saw, and this is excluding oral tobacco, so excluding chewing tobacco and excluding nicotine patches. This is their cigarette and then heated tobacco risk-free products, or excuse me, reduced risk products. I guess they're not risk-free. That continues to grow so again this is smokable stuff stuff that you inhale vapings type stuff the heat not burn stuff and cigarettes volumes are growing they bottomed in december of 2020 at about 700 i think it's 700 million and we've grown ever since then up to 750 million that could be billion but either way there's been growth there and then on the same thing uh oral nicotine pouches after the acquisition from of swedish match have grown quickly as well so that's growing even faster

Starting point is 00:41:03 so i'm seeing overall volume growth continue to be consistently high i think overall is something like two percent i would expect that to continue where even if they're cannibalizing in a lot of markets like Japan and Europe to these Icos products. And now in the United States, if smokers are getting cannibalized to send nicotine pouches and vaping and stuff like that, they are picking up a lot of these customers. I think they have over 35 million, what they call new categories customers or what you, you know, non-smokers that are using one of their nicotine products, people not on cigarettes. I think that is extremely valuable over the long term. They said that nicotine pouches are starting to grow in new markets, although it's not nearly as valuable

Starting point is 00:41:47 from a dollar perspective right now. You have places like Pakistan and stuff like that that are growing pouches at a quick rate. Those have high populations. Those can be consistent customers. And then if we look at the earnings, margins have come down. It's been for quite a few factors. You have foreign exchange stuff. You have the fact that they're reinvesting a ton right now to grow these new categories and operating margins have dipped to about 34 percent, something around those lines. Let's just say low 30s, closer to 30 percent. But historically, and if we look at the unit economics on these things, we could see 40 percent or higher in U.S. dollar terms at maturity. And when I look at the company's revenue, I think it's pretty easy to see them push

Starting point is 00:42:31 40 billion dollars in sales within, I don't know, three to five years pretty easily. They're at like $35, $36 billion right now. Just take $40 billion, multiply it by 0.4, multiply it by 40%. You get $16 billion. Current market cap's $170 billion. Don't think it's too expensive here. And we are 10% away from all-time highs. So I like what I saw. Kind of the same stuff there. Hope they start the buyback program again, but get a nice dividend. It's a grower. Yes, our Altria and british uh american tobacco cheaper sure do i think you do fine owning those yes probably a positive return but i like i think with this company it's my favorite in nicotine regardless of valuation because they are executing better than anyone in new age nicotine any any thoughts

Starting point is 00:43:26 from your growth business it's finally a growth business it's been a growth business for two to three years now and the market has i think started to realize that yeah this to me and i'll pose this question to you here in a sec but this to me seemed like one of the fattest pitches i've seen in recent years philip morris kind of trading at a low teens trough earnings multiple because margins were sort of temporarily compressed because of the push, the manufacturing push around Icos. You could read through that. Management even telegraphed and said, hey, margins will revert again, which they have. The new age products were continuing to make up a larger and larger percentage of the overall revenue. I think it's nearing 50%, probably

Starting point is 00:44:21 within the next year or two would be my guess and the cigarettes business doesn't isn't seeing the same weakness that the u.s cigarettes market has seen because so much of the exposure is international that they're actually seeing volume increases or at least some sort of stabilization in cigarette volumes globally um so you've got like an okay legacy business a wonderful new business, and it trades at a low teens trough multiple, it just really attracted me. So I guess, question to you, plus there was the 5% dividend yield roughly around then. Question to you, what do you think is the fattest pitch you have seen in the last, you know what, since you've started investing?

Starting point is 00:45:13 Good question. First thing that came to mind was Sprouts Farmer's Market back in I want to say late 2020 or either late 2021. I'd have to look at the data, but there was a time when the comp sales had started to recover and they were buying back a ton of stock at a greater than 10% free cashflow yield, something like that. And I think it was probably close to like 13% free cashflow yield.

Starting point is 00:45:42 And there was a clear line of sight to growing stuff and they were just retiring a ton of shares outstanding. That one seemed like a, and also the balance sheet was clean. That one seemed like a really good risk reward to me. I mean, Philip Morris as well seemed pretty easy from a low bar, like a one foot hurdle, low downside perspective where we have, and I'm showing the chart here for anyone watching the earnings yield back earlier this year was at 5.8%. And again, Ryan is talking about, and I've talked about as well, the trough margins,

Starting point is 00:46:14 the margins have come down where forward margins, if we kind of normalize their margins, we could have had an earnings yield of 7%, 8% for a company that can grow, I think, earnings per share at 10% for the next five to 10 years. That one seemed like a fat pitch as well. Not necessarily, you know, Philip Morris maybe is not as cheap as some of the other stuff, but maybe I'm not, you know, nothing else is coming to mind. I think honestly, in October of 2023 with American Express, that was one of the easiest investments to make. looking back on it i had very very high confidence in that over the long term even if we went through a credit crunch it was cheap coming out the other side and we didn't uh at least so far so what

Starting point is 00:46:57 about late 2022 amazon yeah to an extent i think that one yes yes i mean the balance sheet was clear i guess the hold up i mean maybe the narrative was the hold up and i i i was confident that the narrative was wrong but there were some things that could go wrong from a profitability standpoint uh for them i don't know if it was the fattest of pitches but if you have someone say all of big tech in late 2022 that's why i worry a little bit where there's some macro stuff that you know help them right um i guess what are your thoughts on the fat pitches in your career you you said philip morris earlier this year i guess it hasn't been my career what i love calling it my career yeah my my time investing uh i thought i was maybe over confident but i thought coupon

Starting point is 00:48:09 was pretty cheap around i think it got to like the low teens per share um dollars in terms of the stock price sometime in 2023 yeah yeah 10 to 12 dollars and it just seemed like the business had a lot of momentum and there were some temporary headwinds there um this one might be a little premature but i do think dr horton will be will prove to be one of the fat pitches for me it's really well run it's increasingly asset light and the other part that was nice is right as i needed the push to like actually buy shares there was probably one of the best business breakdown episodes i've listened to maybe ever with this like 90 year old investor who is so sharp uh and i think he's on the board at dr horton so did an incredible job

Starting point is 00:49:03 breaking down the business and a lot of the inherent advantages there that they have i think that will ultimately prove to be them it's the ones where people think it's a cyclical and it just isn't or it can weather the cycles better and you're just willing to wait and so you're trading at like single digit earnings multiple and you have some some degree of confidence that the earnings will actually continue to grow i agree i agree it's when the fattest pitches come when you know the like the negative narrative is is wrong American Express, Amazon,

Starting point is 00:49:48 Filtmore's International, Sprouts Farmer's Market. You mentioned D.R. Horton there. A few others. I guess we have enough. We have Meta here at 8xEBIT. That is a perfect example, right? It's a perfect example of us being wrong. We're part of the negative narrative.

Starting point is 00:50:01 What? That's a perfect example of us being wrong. Yeah, yeah. And you're not going to be right on everything. That's for sure. But I did bring up, let me see, Coupang there. Yeah, you were right on the timing on that. actually was he got back down into the teens for a brief moment earlier this year so we'll see on

Starting point is 00:50:19 that one that could be that could be a fat pitch although i'd say it's more of a good risk reward and not necessarily a fat pitch because there's some execution risk there yeah yeah the yeah the fattest pitch i've missed probably meta i mean that is that is actually insane i was looking at that recently it was trough earnings margins because they had invested a ton into both metaverse and ai kind of simultaneously and if you took zuck at his word that he was going to be more efficient cut costs and there was also the advertising slowdown happening at the same time it traded at its lowest multiple ever on like some of the lowest margins it's had in probably the last 10 years so yeah that ended up being probably the biggest fat pitch that i missed

Starting point is 00:51:16 yep maybe amex i we did the work there and i just passed uh yeah i will say i i guess i didn't necessarily pass but miss some of the gains because that was the time period when we were transferring it from the professional account to the personal account. And that's the one that frustrates me the most because we saw that, I don't know. I don't know what happened, but then it shifted on that and I missed it. But I will say, you saw that KPI chart from Philip Morris International. That's from finchat.io. Use our link finchat.io slash chitchat in the show notes to get those. You see us use it throughout the episode. Here's what I have for you, Ryan. Speaking of big tech, Amazon had another article out, and I hope these are getting

Starting point is 00:52:04 leaked by Jassy and his team to give better excuses to shut down the entire thing. But there was, and this is someone who asked a question on Twitter for the show, says Amazon's cumulative losses between 2017 and 2021 in the devices business exceeded $25 billion. This is reporting from the Wall Street Journal. So remember, that's 27 to 2021. I guess from 2021 to 2024, it was equivalent or even higher. You have the opportunity to keep or kill these divisions within Amazon or hold, I guess. Amazon TV slash Firestick, Kindle, Alexa and Ring doorbell. I'll go through mine first and then you can answer. I'm sure you can predict these, but Amazon TV and Firestick, I'd say keep investing in. It seems to be doing well. You maybe should buy Roku

Starting point is 00:52:59 if you could buy Roku. You wouldn't be allowed to, but it's clearly doing well in the advertising business. They should be strong, and they should get a fine return on investment through the Prime Video spend. Second one, Kindle, I'd say maintain. There's nothing wrong with having a bare-bones book reader out there but you have been dominated by the tablet market you really didn't do much in that i'd say that's not going to be relevant to the business at all three alexa kill it shoot into the sun let's do a celebration and destroy this thing uh ring doorbell also kill it that smart home thing has it was a seems like it's gotten some traction but seems it compared to five ten years ago we can now say it was a bit of a fad it didn't take over everyone's house

Starting point is 00:53:46 no some of the in-home electronics do seem to have done pretty well at least just in terms of like adoption anecdotally and most of the people i know that have a home have either some sort of a ring doorbell some sort of a amazon device for like their lights or you know whatever there's a lot of different devices that they've got for the in-home stuff i i think probably a hold on the ring doorbell you know i think it's doing fine i don't really see the long-term opportunity there other than just having it be a piece of a broader hardware ecosystem integration with the delivery drivers it's a holistic thing ryan you would love reading this article i don't know um because of the way they gave excuses on the accounting is when they

Starting point is 00:54:35 were like well alexa's using is burning 10 billion dollars a year and then they were like but the holistic value to the company is there and then the people be like well where is the revenue and they'd be like no no you don't understand there's holistic value to our ecosystem it's like there's no holistic value here but whatever you continue if he meant that there's revenue showing up in other divisions because alexa's that's what they would say but it didn't but the data was wrong or sorry the data didn't show that yeah i'd be curious if there is anything like if there's some advertising revenue that shows up as amazon advertising revenue and not hardware or whatever but from everything i can see alexa seems more and more like a nice to have but not that useful

Starting point is 00:55:27 and definitely not a profit driver for the business i think amazon tv fire stick i think it's a good ecosystem have and it's also that is a place where you know if you have a fire stick in a consumer's homes they're probably still watching it every day at some point and so it's really good really valuable real estate for at least being able to offer something make make sure they're aware of prime day that kind of thing advertisements yeah yeah so i think that's uh you can probably keep investing more there kindle i'd say just whatever keep it the same limited investment alexa yeah that's probably my first kill on that list here's what i would also say maybe is a hot tick to kill because i don't think it

Starting point is 00:56:15 could be making much money audible amazon music amazon podcast amazon video games everything that's not prime video or video related seems to get minimal usage i know audible has been successful but i don't think given the economics of that industry it can't be and given the deals they're throwing out there they have to be like running numbers like spotify in 2022 at best from a margin perspective it audible is the biggest success that makes absolutely no sense to me the model there is so dumb you you pay 15 a month for one book credit per month yeah just just buy the books i know exactly i i'm pretty bullish on spotify disrupting them if they if they're given the opportunity. And if they focus on that, at least from a usage perspective,

Starting point is 00:57:08 I don't know what the unit economics industry will be. But I have one more question on this, Ryan. A little quiz for you in case you didn't read the article. How many employees do you think the devices division had at its peak? Full-time employees, not just contractors. So let's, sorry, let's go through them again. Devices includes Alexa, Kindle, Ring doorbell, fire stick are we missing any astro robot i think kindle's actually in the reading division but think alexa all those home things that they put out all those you know they had like even a smart watch at some point or any device any hardware device that they sell 50 000 15 000 so i guess a little bit better than you thought but that's more i just picture

Starting point is 00:57:58 There's so many people at these companies. It just doesn't – because Amazon employs what, like just under 2 million people? Yeah, but 90% of that's warehouse and delivery. So I think they have just probably a right around the amount is Google for corporate employees. Still though, for reference, and I know that the business model might be different because for Netflix, they have contractors and stuff like that. maybe a higher percentage of it as contractors there are more full-time employees at amazon's devices division than all of netflix well yeah netflix is well run very efficient that was maybe one of the fattest pitches when that started when they had like that one quarter of like

Starting point is 00:58:48 missed subscriber guidance yeah the general sold out general ackman yeah he he sold out that was yeah that was strange given he has been i believe generally a pretty long-term investor with a lot of the companies that he owns for him to just get shaken out like that after one quarter is surprising all right final question here ryan i have something on visa actually whoops yeah here it is okay after the earnings which knows you know it's pretty bland no surprises i guess people can go read it themselves it's about what you expect single digit grower on volume, earnings per share grown around 10%. Forward PE is now 23. Earnings yield is now 4.2%. And now maybe you can go and agree or disagree here. I said, I think it's definitely better

Starting point is 00:59:53 than the S&P 500 going forward, but not sure if it is better from the short-term treasury ETF on a risk-reward basis, which yields about 5.5% unprotected from inflation and obviously not growing. Yeah, it probably beats the S&P. My difficulty with Visa is they are so big. It's really going to be difficult for them to grow revenue anywhere above high single digits. it's mature yeah it i guess depends on inflation but yeah i think you're paying 20 times earnings for something that'll probably grow earnings 10 a year yeah and i'd say x inflation probably like six to seven percent per year now out of four percent earnings yield they do a lot of buybacks so maybe earnings per share gets a little higher eight nine percent x inflation but this is one

Starting point is 01:00:56 And maybe you can tell me if you disagree here, Ryan, if it gets to a high enough earnings yield, given that they're consistent buyback program, the numbers make a lot of sense, given what I believe to be a durable, uh, uh, durable business. Yeah. Hear me out. Visa buys wise thoughts. Well, I think they're starting to, uh, compete with them a little bit, but they're pushing remittances a lot. Yeah, Visa Direct, right? Is that what it is? I still can't figure out what Visa Direct is, but they talk about it on the conference call all the time. Their conference calls are the most hilarious thing. It's like just name dropping customers. We got this new customer that signed up with this product. And it's like, okay, give me some full context, please. we know everyone has to work with you of course but even though they can be a little bit redundant

Starting point is 01:01:52 i still think they're very valuable given how important they are to every industry in the world at least every consumer industry in the world we're going up on time here ryan hour minute hour and one minute in anything else before we close things out for this week no this week's the big week. Microsoft, Amazon, I believe, report in the next seven days. Same with Apple, probably, although Apple's reports kind of bore me. So big earnings week. We'll have plenty to talk about next week as well. Yeah, I agree. Let's see comments here on Visa. 4% yield plus 10% growth. I would say 10% growth might be a bit aggressive ex-inflation, but I can see that depending on what your inflation number is. If you get that 14% total, it's better than the market

Starting point is 01:02:38 as a duopoly. Yes, I agree. But remember, you don't take home relative S&P 500 returns. You take home the absolute returns you earn. I'd say that maybe as a little, I don't know, not a disclosure, but like a PSA as we sign things off here. But yes, thank you for joining, Ryan. Thank you for everyone else for the fun comments today. We go live on the Investing Power Hour every Wednesday now, 10.30 a.m. Pacific Coast time, 1.30 p.m. East Coast time. You can watch the replays on YouTube. You can listen to the replays on Apple Podcasts, Spotify, wherever you get your podcasts. Basically, we're everywhere. Even Twitter, we post the full videos there so you can watch them there as well. Thank you everyone for joining in. As a disclosure,

Starting point is 01:03:30 We are not financial advisors. Anything we say on the 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, and we'll see you next time. Bye.

Chit Chat Stocks - CrowdStrike In Turmoil; Earnings Galore (GOOG, SPOT, TSLA); What Stock Was The Fattest Pitch?

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