Chit Chat Stocks - EARNINGS BONANZA: Amazon's Cloud Dominance; Celsius Inventory Flush; Nintendo Update (AMZN, CELH, NTDOY + More)

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 another episode of our weekly Power Hours. I am joined, as always, by Brett Schaefer. My name is Ryan Henderson, and on these episodes, we talk all things financial markets.

Starting point is 00:00:46 We do these shows live on YouTube on Wednesdays at 10.30 Pacific Time, 1.30 Eastern Time. So if you have any questions, feel free to get them into the chat. Just look up Chit Chat Stocks at that time on Wednesdays, and you will find us. or I'm sure you can hit subscribe or whatever, and it'll give you the notification as well. But we are, I guess, not maybe the heart of earnings season, but the second week, kind of the, I'd say these are the two biggest weeks. And we've got a little bit of the smaller companies reporting. Although last week was Amazon, last week was Apple, and we weren't able to get to those on the power hour last week. So we'll be talking about those as well.

Starting point is 00:01:26 plus a couple other uh intriguing stories for the week any headlines for you brett yeah i think i'm going to do an hour on full election trades uh now we got lots of things to talk about this week nintendo update they had earnings which are boring but they had some interesting updates along the lines of their new console i have coupon earnings which is a company i follow very closely as well as the Perplexity AI Funding Round at an interesting sales multiple. Let's just leave it at that. But yeah, we're recording this, let's say, on Wednesday midday. So I know maybe not that many people are going to join us live.

Starting point is 00:02:08 There's some other stuff that you might be worried about, but we got important things to talk about. And they are small and mid-cap, large-cap earnings and our thoughts on those. Yeah, there actually are. there's one company i'm going to be talking about today that has been affected by the election results at least as far as the stock price goes we'll see if the business is affected and that's a little tease for my small cap of the week but before we get to that i do want to talk about our friends at public heads up folks interest rates are falling but you can still

Starting point is 00:02:38 lock in a six percent or higher yield with a bond account at public.com that's a pretty big deal because when rates drop so can the interest you earn on your investment a bond account allows you to lock in a 6% or higher yield with a diversified portfolio of high yield and investment grade corporate bonds. So while other people are watching their returns shrink, you can sit back with regular interest payments, but you might want to act fast because your yield is not locked in until you invest. The good news, it only takes a couple of minutes to sign up at public.com. Lock in a 6% or higher yield with a bond account only at public.com forward slash chit chat stocks all right where do we want to kick things off brett amazon obviously

Starting point is 00:03:21 headline that's kind of one of the most known companies probably the biggest one that reported i guess apple as well which apple i'll say boring report so boring slightly better than expected but still boring not really growing that much um when your expectations are that revenue is not going to grow and then it grows a little bit hey that's positive i was pleasantly surprised but yeah nothing to talk about hey we sold more iphones okay none of our new products are working all right yeah i think there's i read headlines about them basically shutting down the what's it ar glasses yeah vr goggles yeah that's not surprising at all and you know what kudos to us because we called that a flop when they announced it and everyone's like this is game

Starting point is 00:04:06 changing and it was a flop so i'm gonna give myself a little pat on the back there you were right i believe your words were if you wear this in public you will look like a dunce i think i don't know if i use that words i think it was a uh an anti-chick magnet or something like that for guys but i thought what those people were walking around with those that was some funny stuff yeah you look like a bug uh basically it's anyways needless to say it doesn't seem to have caught on. Also, Reality Labs is still hemorrhaging money. So it doesn't seem like there's been a whole lot of success in that realm in general. But let's go, maybe we kick things off with Amazon's earnings here. Pretty strong report across the board. I don't think anything

Starting point is 00:04:53 surprised, I'd say. It was pretty much in line with what analysts were expecting. AWS was a little more profitable than hit record profit margins, and it continued to grow. It actually grew 19% on the top line, and they crossed more than $100 billion in last 12-month AWS revenue, so kind of a massive milestone there. Retail's still growing, not quite as fast as the cloud business, given the size of that retail business for them overall. And then they talked a ton about AI, as you might expect, CodeWhisperer, Bedrock, SageMaker. I'll be honest, a lot of the products, I'm not sure exactly what the fit is or who they're going after. It seems primarily to be developer-first AI products, as opposed to ChatGPT. you maybe think that's kind of more focused in the public so that's kind of where amazon's angle is but it seems like it the ai investments from amazon side have been really geared towards helping uh developer productivity you don't like rufus have you seen that i have not seen rufus go if

Starting point is 00:06:08 you go on amazon.com right now they have their apparently helpful chat bot is called like ask rufus which i think is a terrible name it's kind of funny like i'm not asking my dog about questions yeah it's it's hilarious to see people come up with like all these different names for their yeah tons of meetings a lot of consultants it's basically clippy all over again but whatever um advertising was solid again they continue to grow their advertising services business at double-digit percentage. I think it was around 20% this quarter. I don't actually have that number in front of me,

Starting point is 00:06:50 but growing faster than the overall retail business, which means margins are growing. Operating margin for the business overall. Last 12 months basically hit 10%, a record high, and a record high by a long shot. And I think there's still tons of room to grow that operating margin, Especially as AWS grows as an overall piece of the pie, it's naturally going to raise operating margins.

Starting point is 00:07:20 But, I mean, they have a lot of higher margin initiatives. They've basically been ironing out the logistics questions that were raised from two years ago. And part of that was there was just a bunch of temporary costs that had risen. I would not be too surprised to see AWS – or sorry, Amazon overall with 15% operating margins in three to five years. Yeah, I was actually going to ask you, we're on the same wavelength there. I was going to say in three years, do we hit 15% margins? Because that was kind of my target as well. I think there is a clear path to that.

Starting point is 00:07:54 And when we had, oh, why am I forgetting his name? I'm sorry. He's a great guest we've had that did a fantastic research report interview on Amazon, I think at the beginning of 2023 or late 2022, either way. Ed Chang. Ed Chang. Yeah, thank you. And he said there was a path to 15% operating margins.

Starting point is 00:08:16 And at that time, it's really a disquint if you look at the consolidated numbers, because the consolidated numbers were two and a half percent. And a lot of people are saying, well, they're never going to be profitable at retail. Now we're seeing a ton of progress there. And it's no surprise the stock's up about 100% since then. Yeah, it's been quite a good performer. I will say – and I kind of go through different periods. I feel differently in different quarters, but sometimes I think, wow, these are the best businesses in the world.

Starting point is 00:08:46 I should just own these. And then some other quarters, I think, man, these are the most boring stocks to own. Like they seem – everyone follows them. How could there be like – I don't know. it's not as fun of a journey as i think investing in companies where the moat is not already super evident where it isn't a two trillion three trillion dollar market cap and you believe that there's i don't know there's at least the allure of potentially much larger upside i agree now we don't have the numbers in front of us i know you as well as me haven't looked at

Starting point is 00:09:27 the valuation work on a lot of these companies because i don't think we own all of them but if we go for the mag 7 excluding tesla because tesla's the absolute wild card so nvidia meta alphabet microsoft apple amazon i think that's all of them gut check what one's the best to own over the next five years oh next five i'd say google or amazon google or amazon most likely i got alphabet or google yeah yeah it's probably google the thing with amazon is i i think there might be more margin inflection than people are expecting with some of the recent i can't say layoffs but layoffs like i'm sure a lot of engineers are going to be looking for other roles where they can work remote and i think it might have a more like a larger impact

Starting point is 00:10:24 on headcount than people expect um it sounds like and i know it's always anecdotal and it's usually overblown but people at least locally in our area a lot of people have been affected by it in one way or another and might be exploring alternatives in terms of work so if that is the case yeah i think there's a good chance that uh operating margins inflect a little higher and maybe it beats out google but as far as just pure yeah if i had to pick one i think i'd probably go google as well all right you want to talk nintendo because this was a very one of the i don't know why i find these funny but there was a absolutely hilarious announcement unless you have anything else on these big the big tech companies we can talk nintendo in a second but i want to show you

Starting point is 00:11:14 this chart uh let me just make sure i've got the chart right here um all right sharing my screen here is aws revenue microsoft cloud revenue which isn't really i mean it's not it the majority there is not infrastructure and services like infrastructure services i don't think the majority is infrastructure majority is but they also have sass right yeah they have the biggest percentage of non-infrastructure services in their cloud revenue division relative to AWS and GCP. So it's a little distorted, but all this is to say, basically all these businesses are growing at 20% or higher.

Starting point is 00:11:56 They are, AWS was at 19% this quarter, but it's the highest or it's the largest cloud provider. Have you ever seen an industry – and I guess you could – I don't know if you can call these three specifically an industry in themselves, but I think you probably can. Have you ever seen them – seen one at this scale growing this quickly? Online advertising. Back 10 years ago. I think they're probably similar size if you add up the – well, no, maybe not. I was going to say Meta's revenue plus Google search, plus YouTube, plus AWS revenue.

Starting point is 00:12:39 It's probably, they're almost probably nearly the same size. And you said AWS, you mean Amazon advertising? Sorry, Amazon ads. Yeah. Yeah. Yeah. It is an interesting chart. It's a great chart.

Starting point is 00:12:49 It's for anyone who wants to check it out. Thank you for everyone that signs up with our link, finchat.io. Check it out. These are some of the custom charts you can make over there and help us out along the way by using our link in the show notes. But what what I would be interested in seeing in relation to that chart is operating income and free cash flow, because I'm always curious, given how much capital expenditures they're putting up, what the cash flow conversion looks like at various points in the investment cycle. Are they not going to generate that much free cash flow until revenue growth slows down a bit? And. Yeah, I'd just be really curious to see the full P&L for these divisions.

Starting point is 00:13:30 Yeah. I mean, Amazon talked about their CapEx being poured in here and I think they're expecting $75 billion for this year and potentially – they said they expect more next year if you're looking at – if we assume half of that is for cloud, which I believe was around the ballpark that they said. It was, I think, a couple quarters ago, they said like 50% goes to cloud services. Are you saying Amazon? I think it's higher now, right? It's going to increase in the percentage. So maybe call it, if they do $80 billion next year in CapEx, overall, let's say $40 to $50 billion of that goes to AWS. That is a huge sum of CapEx. Right now, they're doing – over the last 12 months, they've been $100 billion in AWS revenue.

Starting point is 00:14:29 So – and the CapEx, from what I understand, is generally forward-looking. It's like when they have the demand – I mean they can forecast the demand with a lot of it. Hopefully. Well, they do have long-term deals. Yeah. It's got to be. It's got to be pretty profitable, and yeah, I mean, obviously if they're growing quicker, they're going to put more money into the CapEx, but I suspect it's still quite profitable, and if it did ever slow down, you'd see inflated or inflected margins. Yeah, I agree.

Starting point is 00:15:07 All right, Nintendo, do you want to hit this? Go for it. So they had their earnings, kind of boring. They didn't have that many games. um profits were still strong which is a good indicator that the cyclical cyclicality of the console is more muted given their nintendo switch online stuff software sales and continuous games they're pumping out because previously this would be close to the trough of the earning cycle because they're about to release the next game or excuse me not the next game the next console sometime in

Starting point is 00:15:44 2025. But the best part about the report was, and I, as I said before, I don't know why I find these so funny, but they take over the Nintendo corporate account on Twitter. I just imagine it like one of those PSAs, emergency alerts, where they have that blaring noise. You know, it's not someone's personal account, but they just take it over and this is the president. They go, this is Furukawa. At today's corporate management policy briefing, we announced that Nintendo Switch software will also be playable on the successor to nintendo switch nintendo switch online will be available on the successor to nintendo switch as well further information about the successor to nintendo switch including its compatibility with nintendo switch will be announced at a later

Starting point is 00:16:29 date and then he just disappears it's like he's a wizard and he just disappears into the night but i just love how he goes this is furukawa well they need to know that it's coming from the man himself yeah this is actually what we talked about recently i believe and not to uh not to victory lap you but you did say that would make no sense for them to have backwards compatibility because it would hurt hardware sales so well i'd say on the new games oh you're saying oh so this is on the games that are out right now so i guess forwards compatibility it would go against all yeah it would go against all the other gaming companies if they said our new games could be played on the old console

Starting point is 00:17:13 because then eventually you're like, well, it's way too technically difficult. It's like the newest Call of Duty getting played on a Game Boy. Okay. So, I don't know. What's my takeaway on this? They pretty much already kind of have it, right? I mean, they retrofitted old games for the new Switch.

Starting point is 00:17:34 Yeah, and I think, well, so you're going to be able to play, once you buy your new hardware, You're going to be able to play all your old games on that hardware. And I don't know how much it's going to mix and match because we've seen that with the, for example, some of the sports games from Electronic Arts. Sometimes they're only available on the new console.

Starting point is 00:17:56 Sometimes they mix and match, but it depends how old it is. I think what's important here, though, is that they care about bringing over the Nintendo accounts, bringing over the existing player base, and saying that Nintendo Switch Online is going to just be rolled through to the new system so we're not starting at zero again it confirms a lot of the thesis i think does it make you more bullish or bearish on nintendo probably about the same i do appreciate that there is this they clearly

Starting point is 00:18:29 are don't want to go through a deep cycle again like they have in the past and they're taking They have taken steps to make that the case, but if the idea is that you basically get like new hardware announcement, revenue accelerates, revenue – like whatever. Maybe it jumps 50 percent and then it's flat for five to six years and then you go through the same process again. It doesn't – I don't know. It isn't that enticing to me. I feel like it's Groundhog Day for us here because we've done this like for four or five years. No, I'd say three years now where we've seen the earnings. It's been okay.

Starting point is 00:19:14 Honestly, probably bad relative to what our expectations were when we underwrote the investment. Well, not this quarter. I mean there's no games that came out. No, but if you – Last year was very strong. If I showed you the revenue chart for 2024 in 2021, that would not – there's no way that's what we were expecting, flat revenue, flat to declining revenue for three years. Yeah, but we also would have said did the new console come out because, again, since the – within the last year, they haven't released anything new. Sorry.

Starting point is 00:19:49 No, but we can say that every quarter. but it's like well last year it's been like it's the end of this year next year like for the last three or four years and it just hasn't really well yeah because now for this like the last

Starting point is 00:20:06 few quarters they haven't released anything last fiscal year they released a huge blockbuster game and I think too you know the Zelda teaser the kingdom one and profits went up a lot now the yen is getting destroyed so that doesn't help but i would love to be wrong here but

Starting point is 00:20:27 i just if you take this over two decades what do i think grows earnings faster nintendo or i don't know google i'm probably gonna go google on average yeah but who generates more cash flow versus their current enterprise value like as a percentage of the current enterprise value i'd say nintendo what's the what are they at oh well it's kind of hard to calculate sometimes because of the once they monetize that pokemon stick yeah once they sell their ownership in the mariners yeah that doesn't matter but it's hard because sometimes you had to convert to yen i don't know how well i can do this live i think the enterprise value let's try to get it on finchette here would be 50 billion probably

Starting point is 00:21:23 yeah i just gotta pull up that one table where you can convert it from yen to the dollar and i think sometimes the enterprise value isn't necessarily correct just because the way that it's calculated might be different depending on different areas so if i want to go to ratios on the chart load that up i'm guessing it's gonna be what 50 billion ev in net cash 10 in net cash I think they were probably close to $20 billion in net cash. Let's see. Total enterprise value, and then let's do USD. All right.

Starting point is 00:21:56 I think I got to load it up here. And how much have they earned? $44 billion. $44 billion for the enterprise value. How much have they earned over the last 12 months? Oh, the last 12 months, not very much. But over the next two decades? Average over the last three years, the annual average.

Starting point is 00:22:15 Let's see. operating income is that fine with fine with you sure i'll take it okay we'll go let's see we'll start with the say covid year then it just goes down from there uh 5.8 billion 4.9 billion 3.8 billion 3.5 billion 2.6 billion over the last 12 months i didn't realize it was they had i guess covid was quite elevated but yeah yeah and the yen and this is usd so call it 10 times earnings a trough earnings no no no call it oh normalize yeah yeah it's probably 15 times roughly uh last 12 month but yeah i don't know just i mean is goo is alphabet gonna generate 250% of its

Starting point is 00:23:12 enterprise value in the next two decades, maybe. But I think it's closer than you're thinking. Maybe I just don't have that much confidence. I would be more confident that in Google's earnings growth than Nintendo's. I don't know.

Starting point is 00:23:30 We go back and forth on this all the time. Are you a shareholder today? I am. I'm currently a shareholder. Thinking of adding. Just because this election results the foreign currency stuff is getting hit. And it was right when they just confirmed all this stuff that basically we're hoping with the company is correct. All right, we had a comment here that says thoughts on Uber, $2 billion in free cash for the last quarter. My thoughts are the same, I would say. Good business. And there's Waymo risk that people are underrating. And it's turning

Starting point is 00:24:03 going to do a battleground stock around a waymo and uber but i i still would not underrate the waymo risk over a decade time period because i want to hold something for five years or longer and i don't know what waymo is going to materialize to in 2030 2035 yeah i'd say developing moat for sure that moat could be potentially challenged by Waymo, but I definitely prefer what they've done with Waymo so far in terms of the partnerships, as opposed to just no partnerships at all with them. It at least gives them potentially some synergies there. The other, or not synergies, but some maybe integrations and some goodwill between the two companies. The other concern is that the valuation

Starting point is 00:24:55 is just high it's it really is quite a steep valuation today if i remember one i got the number i got the page loaded up what what do you want me to look at for them definitely don't do adjusted ebitda or segment level adjusted ebitda i would just take i don't know ebit it's probably fine i don't think they have too much interest it says 59 i don't think that's wrong really actually yeah i'm seeing 11 times gross profit and if they aren't putting customer support in gross profit that's their true gross profit is probably higher or sorry gross profit multiple is probably higher so 11 times gross profit is pretty expensive yeah they have like 30 000 engineers right yeah they have like as many engineers as some companies

Starting point is 00:25:47 that are significantly larger than them um so the opex line is going to be pretty high it it's just there is still the from silicon valley kind of more willy-nilly about spending than maybe some other companies it's just to me yes it was attractive two to three years ago didn't end up buying which fault to us because we actually did look at them but i just don't think cash flow is going to grow at the rate that everyone is hoping here and especially if they decide to pursue that expedia acquisition i would be concerned yeah the expedia one let's not do that so are you saying you flip you're flipping on the direction of our perpetual airbnb uber bet short term that was a timely bet that was a timely bet uh and i'm closing that bet now

Starting point is 00:26:44 yes not re-upping it no double down no we'll see how airbnb's numbers come out i think they report tomorrow actually yeah tomorrow or today i heard uh and well i guess we try not to swear on the show but i heard that thursday is the shit co day i saw some concerning names that we're really worried about these results coming out this week there are some concerning numbers yeah um i don't love uber just to be honest i do think it's got a good advantage especially relative to lyft yeah it's good business but it's just priced like it's going to grow i think quicker than it really can in terms of earnings um yeah i don't know not too much i don't spend a lot of time on uber or lyft actually we visited them last week i haven't

Starting point is 00:27:43 spent a lot of time on them either it just kind of is like a tough equation for lyft if they are constantly price competing with uber for me are you saying in relation to lyft being a bad investment or uber being a bad investment lyft yeah if they're the price taker and i mean they have people that are still kind of loyal to the service but just where's the differentiation like what's going to if everyone's going to price shop each time are they going to be able to get to like sustainable double-digit profit margins no that maybe they don't need to but it seems unlikely i'll sound like a broken record, but you should look at some of the stories coming out of San Francisco and how

Starting point is 00:28:37 they fell in love, fallen in love with Waymo. Now that's a tech forward city, but don't discount that. People say there are plenty of advantages for one. Uh, if you're a group in a car, you don't have a driver talking to you, which some people might say, well, why don't you want to talk to someone else? Because sometimes they are maybe a little bit loco. Uh, and then two, the driving is always safe because there are those bad experiences people have where the driver goes crazy trying to complete the drive as quickly as they can yeah yeah exactly like a roller coaster so just think about that risk in north america yeah i'd say there are some benefits to not having a driver i do want to talk about the fast food fall off term i coined uh patting myself on the back here

Starting point is 00:29:29 a couple of times throughout the show. No, I was trying to think of something that would be catchy for it. But basically, shout out to Finchout because they track comp sales for basically every quick service restaurant, every fast food brand. And every single one I've looked at

Starting point is 00:29:46 has had sequential declines in their comp store sales growth. McDonald's, sequential declines are actually having negative comp sales. Burger King, KFC, Taco Bell, Pizza Hut, Tim Hortons, Popeyes, Starbucks, Chipotle, Wendy's, Domino's, every single one has had sequential declines in their comp store sales growth. That's just meaning the year-over-year comp sales growth was higher last quarter than it was this quarter. And here are some quotes that I found from the conference calls. So from McDonald's, it says, the industry environment remains challenging.

Starting point is 00:30:19 There's no doubt about that. I mean, I think consumers are under pressure. The industry is contracting in a number of our largest markets. And in fact, that contraction worsened in the third quarter. Domino's says, we knew consumer – and they actually had positive comp sales. It was a decline from last quarter, but they had positive comps. He says, we knew consumer spending would be pressured in 2024 and that the quick service restaurants that offered the strongest value would win. That proved to be right.

Starting point is 00:30:46 Restaurant Brands International says – and Popeyes in particular had just a huge drop in comp sales – says, in a more value-sensitive environment this quarter, Popeyes' calendar was missing some of the offers consumers were looking for, and this resulted in softer comps. So my question to you, first of all, does this make you feel maybe – if you were a Starbucks shareholder, does this make you feel a little better that it's not Starbucks exclusively? I think it does. I think it does. Starbucks is not something I want to own. It's too big for me. But depending on the price, it could be something people are interested in. This new management team, especially with the track record at Chipotle, seems to be doing the right things where we're not doing this weird consulting strategy mumbo jumbo.

Starting point is 00:31:41 It's like we're going to get back to just providing the best quality we can. Yeah, I agree. I've kind of flipped a little bit on Starbucks with some of the changes they made. I saw those ads that you talked about where it just looks like really delicious coffee for like 20 seconds. Yeah, that's good. They got rid of the upcharge on non-dairy alternatives. That's definitely going to work with so many people that do that because I saw personally, anecdotally, tons of people talking to each other about that. I've heard that in conversation quite a lot. The forced tipping stuff. I believe they switched that or maybe not. I don't know if I've seen that pulled back. Maybe that was another company. But my other discussion question here is all the comp sales declines. Do you see this as kind of a healthy pullback? Because prices – a lot of companies push price following COVID or an early indicator of a weakening consumer.

Starting point is 00:32:41 Yeah, that's a great question, because you might say, all right, we've normalized these things could be biased depending on what the prices be. You know, you look at some of them like McDonald's and you go, well, why am I buying this at 25 times earnings? On the other hand, who knows where the bottom is on these comp sales, because if the consumer wallets are tight, that can happen. And I think they lean to it being just a period of normalization where they push price too much. Now they got to give a little bit back and then we're going to get back onto the normal trajectory. I'm going to show you this chart, though, Ryan. Company I follow and own, Portillo's, something that we did a full research report episode on. If anyone wants to go check that out. Here is the comp sales figures for them on FinChat. Another check line.

Starting point is 00:33:31 uh the last three quarters we've seen slight declines now given the context with the entire industry does this make you how would you feel as a portillo shareholder does this make you more comfortable seeing all that context or no i think for them it's a little messy because they aren't quite as mature and they're opening a lot of new stores relative to their existing size. So I'd probably be more focused on average unit volume or average unit values and store growth there because comp sales can be messy because you can do a lot of like discounting in the first year or, you know, the first year might be lighter than the second year.

Starting point is 00:34:23 or kind of vice versa, you might get sort of a honeymoon effect where a lot of people come in in that first year. So I just want to be too, I guess, focused on the comp sales figure. AUVs, especially commentary around AUVs in their expansion markets are probably the number one kind of KPI or value that I'm probably looking for. yeah that does make sense i agree and avs will come down a bit most likely if they don't well that's a tremendous result because the chicago area ones have very high unit volumes and the ones outside chicago are going to have lower ones but are still profitable okay we want to do small cap of the week ryan yeah in a second we do have a question too on coupon earnings before we hit

Starting point is 00:35:15 that i do want to mention our sponsor one more time public heads up folks interest rates are falling but you can still lock in a six percent or higher yield with a diversified portfolio of high yield and investment grade corporate bonds on public.com you might want to act fast because your yield is not locked in until the time of purchase lock in a six percent or higher yield with a bond account only at public.com forward slash chit chat stocks what about coupon earnings do you want to touch on these or do you want to wrap with that yeah it seems like every company I own reported in the last two days, kind of a weird thing to happen. But yeah, I can talk coupon earnings pretty easy. I would say that the stock going down today might be getting

Starting point is 00:35:55 exacerbated by the foreign currencies devaluing versus the dollar. So I don't know if that's having a huge impact, but it might be. If you look at the numbers, and this is all in US dollar figures, 45% total gross profit growth, 33% if you exclude inorganic growth from the Farfetch acquisition, developing offerings, which is international, fintech, coupon play, and I believe the food delivery business grew revenue 146% year over year, excluding Farfetch. They had stated profits that came down, but I'd say as a reminder to anyone following this company, they are not playing the quarterly game. They're actually anti-playing the quarterly game. They don't care if some stuff comes in lumpy. Analysts kept hounding them on this on the call

Starting point is 00:36:43 and it got quite annoying when they said, well, what's Q4 margin coming in as? And they said, literally, we don't care. And they kept asking it. So that can be frustrating, but just don't think like, oh, hey, profits are down a little bit. This whole business is destroyed. You have a look at what they say, they're pretty honest with the investing community on what's actually happening with the underlying business. And if you trust the unit economics, gross profit growth, and then eventually profitability over the long term is what you should be looking for. And if we look at all their cohorts, every cohort, which is just kind of the year, the year cohorts for all their shoppers is growing versus the prior year. So even people

Starting point is 00:37:25 that joined back in 2015. They're growing their spending in 2024 versus 2023. Total active customers keep growing. And just as a little figure here for you, Ryan, $8 billion in last 12-month gross profit, market caps $43 billion, which I believe that's about five times. Yeah, five times gross profit. What do you think? I don't know if I'm necessarily adding here the i thought the quarter looked good it's kind of a little frustrating that farfetch acquisition just muddles everything it kind of makes it hard to interpret they do give the excluding farfetch numbers which all look positive but i just i have my doubts around how that business will turn out for them what if i told you that farfetch is already profitable

Starting point is 00:38:20 i saw that i'd like to see what definition they're using for profitable that's fair because it's last quarter they they chose i think it was like we're aiming for adjusted EBITDA profitability by for farfetch by the end of the year so if it's that i don't really care too much i mean it's good indication that it's earlier than they expected but i guess i just don't know what the integration is going to look like there they talked about this rlux business curious how that works out it it seems like a diff if i'm not mistaken farfetch had a uh big presence in china like there was a big chinese customer base there for farfetch yeah perhaps i've got a feeling that business volume wise is not soaring at the moment but yeah but if there's one market that if there's

Starting point is 00:39:16 one market that likes fashion and luxury goods more than china it's south korea so this is a perfect market for a luxury online platform yeah i wonder if they already had some sort of presence in south korea it didn't really follow farfetch closely enough but it i thought the quarter was good maybe i'm anchoring to like old valuations but i just don't feel that inclined to add here it's already a pretty big position for me so good results like you said they don't really play the quarterly game so i don't care too much um really the biggest thing i'm looking at over time is gross margins on the core business and i guess overall over time um and then making sure that that flows through to free cash flow margin in the long run

Starting point is 00:40:05 yeah seeing the operating leverage there and it's nice that they are self-funding and they have a healthy balance sheet as well that can help them if there's any sort of downturn and i i agree with you i don't think i'm adding here but there's no reason to sell it's a buy and hold position i plan on holding this for many years and gonna keep doing that okay do you want to do small cap of the week let's do it small cap of the week and you always say presented by yellow brick investing in the notes but i would like i think it'd be fun if you kind of did it as like a separate segment you know i like it like i got a one of those traditional media or sports stuff not sure not sure i entirely follow but like the uh they always do like a big intro music and then

Starting point is 00:40:47 it's blank presented by coors light okay light drink i'll work on my commentator voice yeah small cap of the week presented by yellow brick investing exactly number one destination for stock pitches on the internet. Maybe just gave them a slogan. We'll see. But yeah, so I'm cheating this week. I'm changing the definition for small cap of the week. It used to be basically $2 billion market cap was the max.

Starting point is 00:41:16 I'll be totally honest. My iPad broke last week and I haven't been able to do as much reading as I'd like. So I wasn't able to find one below $2 billion because I just didn't dedicate as much time to it. But I saw someone reach out to us recently about Yeti. And they said they listened to our episode, which was two years ago. They said the takes were actually okay and they've aged all right.

Starting point is 00:41:39 So that's nice to know because sometimes I kind of cringe when people say they listened to an episode from two years ago. But anyways, looked at the market cap, $2.9 billion. So changing the definition here to anything below $3 billion market cap, I'm going to call it a small cap. So Yeti, it's kind of a business we already know. And I will say we looked at it two years ago, thought it was richly valued, thought it was a little bit of brand risk. The stock is down nearly 70% from its highs, so I'm glad we kind of passed that away. And it's down 8% today on the election results due to increased tariff risk. This has been talked about a lot by, I think, Trump leading up to the election, just about raising the tariffs, especially coming in from China.

Starting point is 00:42:26 and uh yeti imports or manufactures a lot of the products in china brings them in so yeah it could theoretically have a big impact on them but as far as the business overall two biggest revenue drivers are coolers and equipment and drinkware uh drinkware is the largest for them that includes all the what do they call them rumblers tumblers all that stuff basically coffee mugs um and other water bottles of sorts 1.7 billion dollars in sales over the last 12 months the business has shifted more especially since last we spoke the business has shifted towards direct to consumer more over the last few years um now a lot of that has come from them adding stores which kind of i don't know it affects margins because you got to run

Starting point is 00:43:16 the stores. So there's like gross margins will expand, but there can be more employees in your operating expense line there. And coming into this year, there was a ton of concern that consumers were going to trade down and it was going to affect Yeti. I don't think that's really materialized too much the what about the stanley risk there was yeah the the it uh seems like it so stanley tumblers which have been extremely popular it's the actually they lead in terms of market share with the gen z consumer has jumped to 15 market share in the drinkware category um from like two in a matter of a few years so that is kind of a risk i'd say um now yeti is a little more diversified which is nice so it gives them insulates them a little bit but it also kind of

Starting point is 00:44:14 points to the risk inherent in this category overall which is is their brand so good that no one can replicate them or is this a business where it's really kind of impossible slash just difficult to establish a moat. I think Yeti certainly has a lot of brand value, but I don't know if I'd say they have a massive moat. If we look at the numbers, they've generated $253 million in operating income over the last 12 months, $162 million in free cash flow. I told you earlier, $2.9 billion market cap, a little bit of net cash, not too much. Basically, I think it's like less than a hundred million. So enterprise value is similar.

Starting point is 00:45:01 EV to free cashflow is about 17 times. I will say it feels like they're kind of under earning. I guess I haven't gone through all the numbers, but they were, they had significantly higher free cashflow last year. So there's the potential that they had just a big under earning this year, 17 times free cashflow. They started a bit of a buyback. They do it in a weird way.

Starting point is 00:45:24 They kind of do $100 million in buybacks all at once, and then they don't do anything for a few quarters, and then they do it all over again. But they do have $200 million remaining on the buyback program. I guess my question to you, any interest here, and then do you think this is a bigger business in five years, at least in terms of revenue? I don't have any interest because I don't know if they're going to be bigger in terms of revenue in five years. I think it is a good brand, but brand is tough, and there's nothing else here that attaches you besides the brand. I mean, hunters, fishermen, they love this brand. People like it. You have this stainless steel stuff.

Starting point is 00:46:02 I think, yeah, you said the 17 times free cash flow, but on an earnings basis, they're about 10 times almost or maybe like 12. That feels like fair value to me because earnings could go down. I have no clue. So when you don't have that confidence in the durability, yeah, I don't think 10 times earnings is that cheap for them. What do you think about cookware as a potential growth vector? Yeah, they did start that, right? They're really touting their new skillet. Yeah, isn't it like a $400 skillet?

Starting point is 00:46:42 What are those? The cast iron skillet? Let's look up how much it is. i'm having the old machine right now 250 bucks cast iron skillet 12 inches you're gonna get that i can't say that that is really the kind of thing i like to spend up on yeah me neither yeah so probably not but you know what look people hunters fishermen them they might need some certain cookware i it makes sense as like an ancillary category to go into yeah i agree it does make sense i think yeti's brand makes sense under a parent company

Starting point is 00:47:28 but betting on this brand as itself i don't know doesn't doesn't really appeal to me like what what sort of bet am i making like i have any foresight on how strong yeti's brand is going be in 10 years i don't know stanley came out of nowhere yeah yeah i mean exactly there are so many brands that could pop up yeti popped up and has probably replaced someone before them so it's yeah i just worry that about the moat here um celsius on the other hand talk about brands yeah wait do you want to do our ad read for yellow brick tell people where they can find them before we move on? Oh, yeah. Joinyellowbrick.com slash chitchat. For anyone that doesn't know, a lot of that research I just found on Yeti, aside from having researched the business before,

Starting point is 00:48:23 found high-quality write-ups on Yellowbrick investing. Literally, I highly, highly recommend just typing in joinyellowbrick.com. If it's a company you've never researched before, type in the ticker. You are bound to find a high-quality write-up from somewhere across the internet they compile thousands of blogs newsletters fund letters podcasts ours included uh all into one place so they make it really really easy and it is free but if you want to upgrade you can use our code join yellowbrook.com slash chit chat for a discount not blanking on the discount right now but the other thing i'll say he started uh he started another web page called uh i think it's like my application to vic got rejected.com so it's it's like

Starting point is 00:49:17 if you are an investor you like um trying to publish your research and you applied to value investors club and you didn't get in highly recommend at least just posting it there i guarantee you'll find a little bit of an audience that likes it gives you some feedback kind of a sounding board so um or maybe you can do it on both but yeah uh with that said you want to talk celsius earnings let's do it yeah and then after to close out i want to talk perplexity and their funding round okay uh as far as celsius headline numbers go revenue in north america declined by more than 30%. That is the biggest revenue decline in more than 10 years. However, this was kind of forecasted because last quarter they announced they had inventory issues with

Starting point is 00:50:11 Pepsi. It was kind of a he said, she said here with Pepsi saying – Celsius was saying Pepsi overordered. Pepsi said they had too much inventory. Maybe it was a Celsius problem. I don't now, ultimately it does end up being a Celsius problem because they sit there with a lot of – Pepsi doesn't need to order as much because they have all the inventory. On one hand, I say I don't think those drinks are going bad, so probably sort of a temporary problem, but it ended up being quite, like I said, quite the significant revenue drop. And analysts – I remember reading that, what analysts were expecting in terms of revenue, I thought that like no way it's going to be that big of a drop.

Starting point is 00:50:55 I think we talked about this on our Celsius episode. It was widespread. Yeah, fairly accurate. They are now basically in a 70% drawdown again, largest drawdown, kind of reaching the lows from two weeks ago. I don't know. Thoughts here? It seemed like they're still gaining share in the category, but the category overall is slowing down. Yeah, but they're also – their market share gain growth rate is slowing down, which should be, I think, a little bit of concern.

Starting point is 00:51:38 There's also C4 and Alani New that are growing. Market cap today is $6.8 billion. I think I get to the same conclusion I did on the episode. I think the brand's pretty durable. Like I would much rather bet on this than Yeti just because of the nature of the industry, but it's not as cheap as people were thinking then. And yeah,

Starting point is 00:52:05 I have the same thoughts today. It's pretty close to being where I'd say it's a buy, but we're not there yet. All right. Yeah. Stock was down like 6% or 7%, but I didn't think there was too much in this earnings report that surprised. They seem to be getting hit from the sides with competition, especially from brands that are not the one. It's not like it's this major comeback from Monster and Red Bull.

Starting point is 00:52:36 It's a push from Upstarts, which has hurt them for sure. no i think there's other there's easier investments to make out there yeah like my thought is it probably works but yeah i think my risk reward meter is not exactly in the buy zone yet if that makes if that's understandable i say the same thing about lvmh like yeah that's it's just a big company yeah probably works but i probably won't participate wow it keeps going down lbm inch how much did perplexity raise oh um 500 million dollars but you know what i'm going to tell you before we finish the episode about our friends at finchat that we've used throughout the episode finchat.io slash chit chat get 15 off any paid plan all those kpis all those charts

Starting point is 00:53:35 use them yourself and help us out by using that link all right perpexity 500 million dollars ryan in funding it is their fourth funding round this year wow valuation nine billion dollars now i'll get to what revenue they are but i thought in the wall street journal they had quite the funny photo of the ceo which it might be hard for you to see but they just had him uh definitely not staged him working at his laptop yeah just give me kind of in the zone you know all right just give me while i'm clicking away here like they're clearly coming in talking to you and then he's going oh no no just give me typing away we're working hard here we got a lot of work to do um my ehrlich bachman rating on this guy is quite high yeah

Starting point is 00:54:31 it's here's the the thing for me is growing that fast um raising that much money in four times in a year it's really hard to manage an organization with that much growth that quickly Oh, I bet, yeah. Hard to have a good sense of costs. It's just easy to get excessive. It's easy to hire too many people, and all of a sudden you become bigger than you want to be. You're hiring people to manage more people.

Starting point is 00:55:09 You end up creating a lot of problems. Now, it might supercharge growth or whatever, but I think it complicates running an organization to raise that much money. yeah peter lynch would appear lynch say in the episode we we discussed his investing philosophy i'd rather have something grow at 10 for a long time than 50 and then drop a lot because it just ruins the consistency of the business and it can screw up management teams and it's much harder to deal with now i said their revenue run and here's the quote from the journal last

Starting point is 00:55:40 month, Perplexity was on pace to generate, drumroll, $50 million in annual revenue. $9 billion in annual or revenue? Revenue. Or sorry, annual and monthly. Annual.

Starting point is 00:55:58 That's definitely smaller than I was expecting. Way smaller. But people just it doesn't surprise me though like vc's invested the tech before the referee they just do yeah so it doesn't necessarily surprise me but how do you even come up with a valuation then seven eight nine ten why don't we just make it a trillion dollars

Starting point is 00:56:24 yeah and then it becomes the akman thing where you're like we'll be the catalyst like we'll introduce them to all the corporations we'll introduce them to the rest of our portfolio our portfolio will have to start using perplexity it's like it's usually kind of not the cycle you like you know i got a little tease for you or not to use an anecdote for you i have access to perplexity for free i never use it have you have you ever used it at all no i try to use it and then it works like i can figure it out you just search but it doesn't give me anything that google doesn't now so interesting i haven't felt like oh i need to go back here because i can't figure out the answer to something yeah i think the llms for like just basic search is so overblown

Starting point is 00:57:17 i think that's probably where the biggest bubble is well there is there's one google yeah yeah and it's been two years now since the surge in chat gpt users and suffice to say people still use google search so uh i did want to do you want to talk about super micro at all i know we have like two minutes left but i built a timeline yeah let's victory lap just yeah i just went through and just kind of of went tried to find a timeline of what else happened to smci super microcomputer because it's fascinating um and it might be like there's a chance it's a good investment from here uh it seems unlikely but there's a chance yeah no 100 no it's a fraud i know i know i know but it's all

Starting point is 00:58:17 apparently the product is good apparently the product is best in class if they fix like they replace management if there's somehow i know that i think there's like a ton of internal control but um if they some sort of an activist and they changed all the reporting apparently i read a thread that it's really sort of a chinese company doing business in the u.s um a lot of the employees, most of the employees at the company speak Chinese. It's very much a Chinese culture. And someone was like, basically, you know, there's just cultural differences and like committing fraud, not caring. Oh, a lower regard for the law. Yes. Um, accounting law, um, especially in America. So I went through and I'll just try to go through this quickly,

Starting point is 00:59:11 But basically, Supermicrocomputer, founded in 1993 by a Taiwanese-American named Charles Liang. He – sorry, I've got my dog making noise in the background here. I'm sorry. So I apologize if you can hear it. Just a little here. Yeah. Not too much.

Starting point is 00:59:31 So he left a job where he was working at – I think it's called Microcenter Computer. He was an electrical engineer, had a couple of patents to his name. he from the jump there was some red flags here his the of like the founders it was him his wife and someone else he basically two years later outsourced some of the manufacturing to taiwan where his brothers were running the manufacturer so it's just kind of like very much using family relationships early on but apparently they had a leading product and some of the most energy efficient and high performing servers which it's been that way for a while so they had success there and come 2021 2022 when all the tech companies started rapidly expanding their

Starting point is 01:00:21 high performance computing infrastructure super micro was there to benefit and they're a big supplier to tesla and meta i believe as well um however you go through some of the company's history and there are some ugly truths so uh there was let's let's just go through all of it here first of all i mean this was all in the hindenburg report like people should have known this 2004 i believe there was a um some sort of a fraud charge but then it started to get really ugly kind of over the last six years i'm sure it's been a lot of this has gone on for a while But in 2018, I did not realize this. Supermicro was delisted from the NASDAQ for failing to file financial statements on time. In 2020, they were relisted, but then the SEC charged them for widespread accounting violations. Well, they weren't guilty, but they settled and it was a huge multimillion dollar fine. months later they rehired pretty much all the executives they let go due to their involvement

Starting point is 01:01:25 in the accounting scandal whole bunch of multiple or sorry a whole bunch of disclosed and undisclosed related party transactions are going on in the business most of which are uh are basically around charles liang's brother who's still the ceo um and the relationship we talked about with him having the manufacturing in taiwan which liang like also owns that company so he's kind of like just giving deals to himself in a way um and then uh last week ernst and young announced that they are resigning i went and checked they're getting paid four and a half million dollars in audit fees every year so they are um foregoing those four and a half million dollars in audit fees two uh because they don't want to be involved with the financial statements says and i think

Starting point is 01:02:20 you said this last week but i'll go ahead and say it again we are resigning due to information that has recently come to our attention which has led us to no longer be able to rely on management's and the audit committee's representations and to be unwilling to be associated with the financial statements prepared by management yeah it was an obvious fraud obvious yeah there was why don't own this it was the buffett is so right when he said we can't we don't short because we can't time it correctly but the ability to identify scammy companies scammy ceos and charlatans is pretty easy and this one was clear yeah if you could turn now on the flip side something we thought was scammy something we did think was scammy that has turned out great and this is what

Starting point is 01:03:07 kind of gave me the impetus for this which is say you've got a good product there's the chance that carvana okay carvana we thought they were screwed everyone there's more of just the business health as less of potential fraud yeah that's true but if you can get someone else in there if you can redo like you can keep the product change the company there's a lot of revenue fake revenue maybe yeah hey oracle did this but that's a better business model it's software not reselling servers i don't see a moat here why would you i would much rather own nvidia or amazon not you would rather middleman that's a much smaller company yeah i don't know if i'd rather own nvidia here but um well if nvidia if nvidia goes down

Starting point is 01:04:06 super my their business goes down so it's all connected true all right well yeah there's just a little part of me that's like what if but yeah chances are it's gonna be like luck and coffee yeah hey luck and coffee yeah i know i know they're working it's working uh yeah model yeah uh i just say listen to buffett that quote is very important where he said one you can't just short these because look super microcomputer went up a thousand percent but identifying them is not as hard as you think yeah no i mean there's there's red flags galore all right we're going a little long thank you for everyone for listening hopefully we gave you some other things to listen to or watch or think about during the election week.

Starting point is 01:04:59 Let's hit the disclosure. We are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan and I are any podcast guests. May hold securities discussed in this podcast. They've held them in the past and may buy, sell, or hold them in the future. If you listen to this full episode, if you enjoy our episodes, consider giving us a quick review on Spotify or Apple Podcasts. I've seen people do that. It really helps the show. And guess what?

Starting point is 01:05:24 We just entered the Spotify charts in Sweden, in the business charts. So thank you to the Swedish listeners. That's actually probably on a per person, per capita basis, probably our best country. So really appreciate that, everyone. And we'll see everyone next time. We'll be right back.

Chit Chat Stocks - EARNINGS BONANZA: Amazon's Cloud Dominance; Celsius Inventory Flush; Nintendo Update (AMZN, CELH, NTDOY + More)

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.