Chit Chat Stocks - Francisco Olivera & TSOH | Spotify

Episode Date: March 9, 2021

This week on Chit Chat Money we bring on The Science of Hitting and Francisco Olivera to discuss Spotify. As many of you may know, Spotify is an audio streaming platform. Before the discussion, Brett and Ryan share their favorite stories from the week. Stay tuned after the discussion to hear this week's hot water, buy-sell-hold, and anecdotal evidence. Let's go! Follow Francisco Olivera on Twitter: https://twitter.com/FrancoOlivera?s=20 Follow The Science of Hitting on Twitter: https://twitter.com/TSOH_Investing?s=20 Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Subscribe to our YouTube channel: https://www.youtube.com/c/ChitChatMoney Follow us on Twitter: https://twitter.com/chitchatmoney Visit our website to see more from your hosts Ryan and Brett: https://www.chitchatmoney.com Email us: [e-mail] Timestamps Stories | (2:50) Fintwit | (22:33) Interview | (29:36) Hot Water | (1:50:04) Buy-Sell-Hold | (2:00:01) Anecdotal Evidence | (2:01:38) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. Today is Tuesday, March 9th, and today we have a discussion with Francisco and Alex, otherwise known as the Science of Hitting. And we are just talking Spotify, basically kind of trying to break down the entire thesis, break down the business. We haven't recorded it yet. Right. Yeah. So both bull and bear case. But we're going we're recording this right now before the discussion. So it can go poorly, but I'm assuming it went really well. Yeah, we hope so. But before we get to the discussion, what's your story for the week? Mine is going to be Square buying Tidal. A lot of hullabaloo on Twitter of this. People make fun of them for acquiring a music streamer. They don't know how it works in the financial services company, but Dorsey was doing some tweets and it makes a little bit of sense

and we can kind of go over how this could either work out for Square or how it could be a total write-off. Okay, and I actually have a pretty long story today. It's what happened to Wirecard. One of the most interesting stories I've come across in a long time. I know people have heard about the fraud, but they don't exactly know what happened. So it's juicy. I just see all the bears on Twitter tweet it, and then there's like court documents.

And I'm like, guys, you know I'm not reading this 20-page document. Just give me a headline to read. But then we have our current state of FinTwit, hot water, buy, sell, hold, anecdotal evidence. But before we move on, we've got our sales pitch. So seven investing, use code CCM. You want to maybe give a little sales pitch here? If you want market-beating returns and seven picks each month, I mean, it's the place to go. I was looking at their March and February recommendations,

and I've already been doing a deeper dive into one of their recommendations. Really liked it a lot. Is it Matt's? I will not spill the beans. It is Matt's. I know you like that one, yeah. Yeah, I've been doing some research on them. So if you want seven new stock picks each month with a long-term time horizon

and at a very reasonable cost, $10 off with our code CCM, there's nothing else to say. Okay, here you go. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast.

Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or a recommendation. Now please enjoy this episode. All right. Welcome in. I'm going to kick things off. My story, the title of my story this week is What Really Happened to Wirecard? So it's less discussion and more me sort of just detailing the story, but bear with me because it's pretty interesting. So I think everyone's heard a little bit about the Wirecard fraud. But if you don't know, Wirecard was a fintech company based in germany and so they were a payments processor at one point they were valued at like 26 billion

they were sort of i mean the german economy is really it's built on sort of the auto business and so that's kind of what they've been known for and so this was sort of their path into the technology uh that like the western world was kind of thriving on okay um and they actually got admitted to the dax which is the index for the 30 largest german companies so it's similar to the dow so this company was huge like it was a pretty big deal it was kind of a darling like the germans wanted to back it like they wanted it to be sort of that big tech company that they could have anyway uh so they were started around 2000 and it started out as a payments for the adult film industry and gambling industries which is kind of i mean that's maybe a red flag to begin

but over time it evolved away from that no it's good culture it's a good corporate culture and the founder was the same so there was no change there the the ceo and the founder was an austrian by the name of marcus braun but the ceo was someone named jan marsalek and marsalek was sort of an it nerd growing up apparently uh but he worked his way up the ranks in the wire card company and so uh apparently around 2010 wirecard started showing basically absurd profit growth and a lot of this came from what they called their third party provider business and so they had partners in the philippines dubai singapore and some other places where they never actually had any operations but these businesses or their these partners would print these fake profit and

revenue statements and just send them over and it was literally i mean it's just fake money totally fake uh ernst and young was the auditor and they began to cite a few concerns and so by this time it was i think i was around like maybe i'm getting the time frame wrong i think it was like so the auditor is actually kind of raising some questions right but they're not totally it wasn't they were signing off on it so they were fine with it uh and i mean that's kind of a blemish on their report card, if you will, over time or the resume. And Chanos was against it.

I think Chanos was outspoken. But they started to say there are some weird accounting anomalies going on with their Asian operations because they didn't have operations in Asia or they didn't operate there. Anyway, finally,

they had, well, there would always be these concerns. So Financial Times had a write-up about it kind of citing the concerns. And then the CEO would come out or management would come out and deny it. They'd do an interview on CNBC or something like that. There was one with Andrew Ross Sorkin and Marcus Braun. And he's like, I don't pay attention to that stuff.

And then they'd always up their forecasts as soon as that happened. Oh, yeah. That reminds me of so many other companies. Don't listen to the what? What do they always say? Don't listen to the FUD, the fear, insecurity, and doubt. When someone says that, anyone totally throws up my antenna of like, all right, this is a giant red flag. Stay away.

And anyway, so you should – so remember, Marcus Braun is the CEO. Jan Marsalek is the COO, and he's kind of worked his way up the ranks in the company. And I recommend everyone go look up Jan Marsalek pictures. At one point, he had like this beard and kind of long, shaggy hair. And then out of nowhere, he cleaned up, wore a suit, like extravagant tastes, and he was the COO, like out of nowhere. And it kind of – now it makes sense. But I'll keep going. So they had supposed banks in the Philippines that would print fake balance sheet confirmations claiming they had $2 billion in cash there.

And Marcellek was sort of in charge of those banks. He's the one that kind of printed those fake balance sheet statements. And then finally, around 2019 to 2020, KPMG, who's another auditor, was called in to do a special audit on these banks. And it wasn't necessarily like, OK, this is fraudulent. We got to check it out. It was, do they have access? Can they access this liquidity if they needed to? Which, obviously, with it not being there, it didn't exist.

So, no, they could not access it. But on June 18th, this is when it was sort of figured out, 2020, the stock dropped. yeah so whatever uh nine months ago i guess yeah um the stock dropped from about 104 to 29 in a day so uh yes if you owned it which uh i think the one of the arc etfs owned it which is unfortunate they won't own anything that's fucking but anyway um marcellic he you know he's kind of scrambling at this point he's worried uh but he was suspended from the company and an employee at the company he said he had one last meeting with marcus braun and they were like yelling at each other and then he left and they rate so the police the authorities raided his house found a dresser full

of like uppers downers drugs and they kept looking for him they couldn't find him marcus braun was arrested uh and he's in jail now he is he was the ceo um and it's reported that jan marcelic funneled out 1.5 billion dollars of the company so he was able to funnel on 1.5 billion dollars out by using company money to lend to these mysterious businesses that he had abroad he owned the businesses abroad and he'd lend them money and so he just took it um anyway so they owed lenders and creditors 12 billion dollars braun the ceo was the largest shareholder so while he is in jail He was also the one that was gypped by Marseille the most. And they can't find Marseille.

So apparently he took a private plane from Austria to Belarus as soon as they started cracking down on this. It is alleged that he was helped by an Austrian Secret Service member and far-right politician. Apparently, like this guy was connected with the Secret Service when he entered Wirecard. and then he started to work his way up the ranks which is so it sounds like a it's a movie like an action movie yeah the uh someone needs to definitely write a book on this i bet someone is um it reminds me of the billion dollar whale guy the was it malaysia the malaysian one mdb thing that goldman sachs was tied into and now that guy's hiding out in china uh reminds me exactly that guy yeah they they have no idea where he is there's like if you there's like wanted signs

all over germany with his face plastered on it um or at least that's what this video made it look like what are the big lessons for you in this first of all my big one is all management make sure that they have a significant stake in the business yeah yeah yeah true that's all that's all that's a good thing to check on always um validating customers asking if someone's putting up numbers does it like you have to kind of just put the it's similar to like a looking coffee where you just go all right do these numbers just make logical sense in this economic environment with these operating margins with whatever they're saying like does this business model like gut check does it does it make sense to you and investigating customers like all right if you

look at another payments processor in europe uh adyen who's kind of like a stripe competitor but they got a bunch of business with you know like spotify legit companies right uh and you can be like all right well yeah they're probably legit maybe they're you know every company you could assume there could be some number fudging but yeah i think that's kind of the biggest takeaway you got to know who their customers are does the business model make sense and then management too like you were saying yeah and the so remember this marcellic guy is like a fugitive so go look up a picture of marcellic uh and it's hilarious it's uh he's looking rough he looks like he was made in a fast and furious movie but uh it's i don't think the story might not be delver seems like

there's these connections that might turn into a whole geopolitical thing yeah but the other thing i would say for like sort of vetting to make sure you don't invest in a business like this is if things look too good so if profits are and we saw this with like the under armor stuff how they would it would sales would tick up like 20 exactly every year or right around there just beating earnings like if someone's beating earnings by a penny each quarter that's a giant red flag yeah and then how do like the if something comes out about the company and the management instantly goes and does public relations crap that's also red flag for me because yeah you look at like reed hastings or you look at bezos like those companies were sold short and they

never they don't acknowledge it no they acknowledge it but they don't they don't spend too much time on it the only reason reed hastings did was because that guy that sold short was like a donor to one of his like uh charity projects and he didn't want him to lose money and he didn't like target him he mentioned who it was but he basically said look i understand the concerns with our business here's the bull case here's what we're doing it's working and like he just made it public he didn't want to target the short sellers he didn't call them evil i mean if someone's targeting short sellers and focusing all their time on it again you can think of that you can think of the companies uh that we'd like to not like on the show right uh that this is just

a giant red flag why why invest in it just stay away like there's plenty of other companies out there and the other thing is you know i'd watch some of the interviews with uh the wire card ceo And be wary, I know people say this all the time, of people that say a lot of words but mean nothing. Yes. Because, well, he would just like, he'd go on and on, but there was nothing really material that you could take away. It's like the same thing with Elizabeth Holmes. Oh, yeah. When you watch those interviews, she would go on for like 10 minutes and not say anything.

It was marvelous. But, I mean, it was kind of impressive that you'd go around and around and not actually get to the point. But anyway. I think that is a good point of even someone, okay, even if you have the ability to have access to a management team, honestly, I do not like listening to, like, CEO videos unless they're someone. I do like listening to, like, or watching, like, videos of maybe, you know, tutorials of how a business works if it's a little complicated. But I do not like watching CEOs basically pitch their companies. is I hate listening to the conference calls where the CEOs are trying to basically like say how good they did I just kind of I like to read the transcript with that and I don't even I don't

like watching if a CEO goes on like CNBC or something it's not like I don't know what's that gonna help you're just getting you're just kind of uh inviting like bias into your thing you're inviting you know if it's like they've shown and i guess there's been studies so it's not like confirmed or anything but that if like a ceo is really good looking guy or girl even if you're like attracted to that sex then you're gonna have a bias towards them and i don't want that at all i mean if you look at like even warren buffett with apple he's not calling up tin cook every day and he's not telling him how to run the business he's not like all right convince me to own apple he just let him do their thing and uh he'll deal with it you know another interesting

note at the end they were asked uh they asked ernst and young for comment on like the story and ernst and young was like we were deceived then by this criminal network it was so intricate i'm like this is why you're hired is to figure it out like don't play victim here like it's your job yeah whatever all right what's your story okay this will be short it's a simpler story not as complex but square is acquiring uh well i said jzn title because it seems like they're acquiring title but everyone's just focusing on jay-z joining the company he's an expert in fintech as we know but no sorry he's a great he's a great businessman i don't want to poke fun at that but yeah they announced they're intending to buy a majority stake in title for 297 million dollars with a

mix of cash and stock details are not finalized uh the only reason they're not requiring or acquiring the whole thing is because some of the artists that own title are going to keep their stake which is probably good jay-z will also be joining square's board of directors if you're wondering what title is it's a music streaming service that focused on high quality they had some exclusive stuff music videos like they would do things where it's released on this one first so you have like a month of it's only on title say like a new album or something and then it goes to spotify apple google amazon uh and it was owned by jay-z and other artists but he kind of was the him and i think there was a few other people they kind of they started it like they were he was kind

of he wasn't the ceo necessarily but he was he had the inspiration to start initially well it helps to have his face plastered to the company but uh initially it was supposed to be like a big spotify competitor and maybe it maybe you could consider that consider it that now but like spotify when they're getting all the scrutiny for not being artist friendly or whatever this they were really leaning into that like well we'll be artist friendly because we're made by artists they were trying to introduce ownership into music streaming um the business did a promise a few years ago but it is reportedly losing around 50 million dollars a year with stalled growth so there's no reason to think that that will turn around unless square can really change things up

um the reasoning for the acquisition so dorsey ceo of square and twitter uh in his own way he always tweets about stuff you know talking his book but he had a thread outlining what their plans were with title a few things were one just mainly trying to find new ways for artists to support their work think of it like a you know they have like square for restaurants but now they're going to have a square for artists um they mentioned merch sales complimentary revenue streams now those ideas sound good but what maybe we'll do this first what's the bear case here and then we'll go what's the bull case how could it work well first of all it feels like he's pretending the labels don't exist like he's not going to get pushed back there like true building

a uh title for artists or a square you know like the square for restaurants square for artists type thing you're going to get pushed back from the labels immediately uh i think spotify's witnessed that remember when spotify tried to do the spotify for artists thing direct upload and it crashed within six months i think it's a little different though because they might be wanting to just do it where it's easier for them to make money but that could it's still anything where the artists are making money without the labels getting a chunk of it while they're still under contract with the labels that's dicey and it always gets complicated i mean i i like dorsey but this i tend to like dorsey but this felt random yeah and it felt out of his circle of competence we'll see we'll see

well yeah so the bear case i think for me is that do you want a single title user oh no i mean no no no i don't know a single one yeah what yeah i mean it's obviously a bad business they're going to be losing $50 million a year. That's just a hole in Square's pocket. They're acquiring it for about, it's less than 1% of Square's market cap. So even if it's a total write-off, it's not like it'll kill the company, but that's not how you should think as a business person or as an investor. I don't understand why you need to acquire Tidal to do this. One, you could offer Jay-Z a seat on the board and do a partnership either way. And you could just build, you know, You could build Square for artists or whatever without acquiring title, I think.

It feels like the only bull thesis is the whole like you can – people are talking about the cash app synergies between listeners and artists. Yeah, because cash app is big with hip hop and rap and maybe that just locks them in with that and the whole benefit could be there, but I don't know. People are overestimating how many voluntary contributions they would get just because they have access to the artist through Cash App. And they already do. They already have access to the Cash App. They did a partnership with Spotify this spring, and I believe both companies mentioned that it did really well. So I don't know. Also, it felt like everyone at Square started bragging that they had a meeting with Jay-Z or they had a Zoom video with Jay-Z.

That's usually a bad sign if you're doing it for like the face of an acquisition. And he has a great track record of starting and whatever, helping with businesses. But it feels a bit to me like the executive producer role. You know what I mean? Where they're like executive producer, blank, blank, blank, executive producer, Barack Obama. And it's like, wow. I know that I don't need – I'm not a square shareholder anymore. And so maybe it's easier for me to give backlash to it.

But even if I was, I'm not happy about the acquisition. I don't think there's that. Everyone, there were a lot of people that were bullish about it, and it doesn't make any sense to me. I mean, they don't, did they report a user number on Tidal? I imagine they avoided doing that for a reason. Oh, yeah. The highest estimates were that it's 5% of music streaming in the U.S.,

which is tiny, and I don't think it's nearly that high. um i mean the okay i tweeted out something like what's the bull case i got a bunch of jokes uh thank you i think nick siple thunderdome capital for some great jokes there but there was some good points like uh some i think kermit capital was giving me some good threads of what people were thinking and that does that stuff makes sense i just don't see why title is relevant again to building this stuff out you could build it out i think without title yeah uh but other people were talking about nfts oh god and that i hope okay well i guess that'll end the conversation but yeah

didn't spotify used to partner i thought spotify and cash app were planning some kind of partnership no i just mentioned that yeah so they did it this spring to help so basically you put it into your spotify page your cash app and then it can help you either have an artist donate to a cause or it's more of like it could be similar to a patreon a bit okay where you could help support a small artist and they said it went well but they didn't give any real numbers so whenever a company gives you know whenever a company says well progress went pretty well on that but they never gave any hard numbers uh i usually just disregard it okay current state of fin twit uh unless you got anything else on there nope okay mine i didn't have much most of it just got dumped into hot

water so uh we are looking at another down day uh for a lot of the big growthier names so is the de-arkening happening uh that everyone has rumored or everyone's talked about the i mean there's been a lot of articles about the liquidity problems raiders of the lost art stay on that from someone But, yeah, I don't know how ETFs work, so I'm not going to say what's going to happen. But as someone that's invested in long, we don't short, so it's not like we're trying to be predatory. But, again, I think I talked about it last week how there's no way long-short funds aren't looking at this. I'm looking at it again. It's down 5% again today.

Still up 117% on the year. So, I mean, you can't complain about the performance of the long term. But I don't – again, sorry, bring it back to we only are long stocks. So the only thing that I would look at is if they have any forced selling and there's companies you like, maybe there's going to be an opportunity to buy. But a lot of the companies they own that we like, I won't say any names, but you can think of one we don't. Obviously, it's Tesla. We bash on them every week. But it's just they're all very, very – most of them are still – even with this downtick, I mean, it would take, what, a longer – way bigger haircut for things to get interesting.

I know everyone invests with different time horizons, and everyone's more comfortable with more of a premium valuation. But, yeah, I mean, it could be some – There are – we bash on ARK sometimes, but there are companies within that ETF that I own or would like to own at the right price. So, you know, feasting on those carcasses would be – I wouldn't – yeah, the companies are not carcasses. I don't even know what will happen. Maybe nothing will happen, but I would say just be prepared if it does. It could give me some opportunities.

Who knows? We could be just talking out of our ass here. All right. What do you have? uh okay so our guy chamath is not gosh he stole it stole it from me okay well let's just talk about it now or maybe well let's just save it for the second half thing let's get to the discussion first yeah uh okay there was a tweet from the mysterious account called quantian quantum yes and he said uh what do you think about this not this isn't really a joke at all he said a family

a four making the median income would receive roughly twelve thousand dollars in aid under the new plan or twenty percent of their income the u.s economy is going to look like the 50s very soon this rules hope everyone's ready for five percent annual gdp growth for the rest of the biden administration what are your thoughts on that stimulus we're definitely uh overheating the economy it's gonna be interesting did you see pomp's take on it uh mute mute him dude mute him sorry just that's what i do people were like yeah you know we're getting stimulus checks but inflation it's actually worse for them i was like what that doesn't well you so no zero dollars is better than 1400 no he just ignore that the uh but it's kind of the opposite so you know how

ever since like the 80s or late 70s 80s there's been the talk about you know trickle-down economics or whatever that was the theory and uh it worked for the overall economy it seems like i could be wrong if an economist is listening but it didn't really work for like the bottom 90 percent um and growing their real uh what would it be called income per capita or whatever their you know their average income or median income but this seems to be the opposite it's almost like trickle up economics and maybe the opposite will work pull little george costanza see if that works for the economy yeah yeah i'm sure if the opposite is wrong or sorry if every thought you have is wrong then the opposite must be correct give everyone a bunch of money okay all right so

next we have our discussion with alex and francisco wait i have a oh you have another one sorry yeah the dorsey dorsey is selling his uh first tweet as an nft you saw that i don't even understand the nfts i get it whatever it's a moment captured on the blockchain i guess No, we don't get it. But what are your odds? What odds do you put of this going down in history when they write the books on this era about the poster – NFTs being the poster child for the froth or the mini bubble? I think it's almost a lock.

It's almost a lock. I mean, it feels like pure – I think I saw a tweet about this where it's like it feels like the purest form of speculation. Bitcoin is, though. I guess Bitcoin is. It's just like it. it just doesn't make any i thought you got the copyrights i thought you got the copyrights when you bought it yeah which would make sense to me but you don't and then there was comments to it that were like because yeah i saw that you don't get the copyrights to it and then people are like

so what do you get and then they're like well beauty's in the eye of the beholder it's like that's okay that's not i feel like that's a way of saying it's worth whatever you want it to be worth yeah beauty i mean this reminds me of uh well spax reminded me of the south sea bubble back in the 1700s oh you know it's there no but uh reading about the south sea bubble and stuff like that uh it's a great endeavor for stuff that's going to be exciting oh this is new oh this is cool you have ownership of this code or something i don't know all right let's get to the door she always plays into that stuff but uh what are you most looking forward to since we haven't talked since we haven't done the discussion yet okay i

am very okay i'm very bullish on spotify if people know yeah so again before we talk this is not investment advice at this time clients on our uh fund hold spotify but i'm interested to see the bear case i know alex has some good thoughts about the concerns about the business model and i'm really interested to see what they think about the podcast opportunity yeah great because we kind of has a podcast alex has one too right yeah they actually those two do some good discussions on disney on there which are really insightful um yeah like because we always kind of think it's hard to quantify we are like well the podcast opportunity is huge and we think spotify will capture the most of it but it's hard to decide all right is it going to be a five billion dollar

industry or is it going to be a 25 billion dollar industry hard to tell yeah agreed i'd say the podcasting conversation is probably what i'm most looking forward to but uh without further ado here you go cox panoramic wi-fi includes advanced security to help protect all your connected devices you'll get real-time alerts oh like this one so you don't have to worry about malware Or when your kid downloads a song from a shady link. And now all your computer can play is... Red color, red color, where are you? All blocked, thanks to Advanced Security, included with Cox Panoramic Wi-Fi.

Advanced Security must be enabled in the Panoramic Wi-Fi app. Restrictions apply. Today, we are welcomed by Alex, also known as TheScienceOfHitting on Twitter, and Francisco Oliveira. I believe you've both been on the show once. Francisco was here for 25 Stocks at Christmas, so less of a typical format. But today we're talking Spotify, just a full-blown deep dive on Spotify. We'll try to hit some of the bear points, some of the bull points. Before we get started, how are you guys? How's everything going? It's going well. Thanks for having me. Okay. All right.

Happy to be back. All right. Fantastic. I'll kick things off with the first question to Francisco. Alex, you can feel free to chime in as well. But first question is basically just pricing power. Francisco, do you think that Spotify could raise prices? I know right now ARPU continues to decline as they enter new markets, but do you think they have room to raise prices right now? i think ultimately they they do i think right now it really depends on the markets and on the and the type of product that they have so i think right now when they're experimenting they say it's experimenting but it's it's actually been pretty consistent is raising prices on the family plan because if you think about it this way if a family plan has three people or more and they're all using it they all have their own profiles playlists that they that they like um podcasts that they follow um and are fairly engaged with the with the product then it's fairly easy to to raise

price when you've got huge engagement for one kind of uh account right and then if you're talking about you know a new market where they're trying to grow and expand they have and they have a lot of individual subscribers um then those prices probably for now it's just a probably a whole stable especially in markets that are super competitive so they said that in the u the u.s pricing is probably not gonna be increased anytime soon but if you believe in what they're doing in their execution i think over time especially with family plans or duo plans if they if the engagement is continues to be very high i think that they will have that opportunity but i don't think um full disclosure i i own the stock but i don't think you you're buying the stock today

because you just think it's going to be year after year price increases overall right um alex any thoughts on the pricing power any maybe headwinds or tailwinds they could have there yeah i'd say i generally agree with those comments and obviously it depends on the market i think at a high level You know, they shared the stat that the average user consumes about 25 hours a month. So you think about on their premium ARPU, it's basically a quarter an hour. And even for a single plan at $9.99, that'd be, what, 40 cents. So I think it's still an incredibly cheap product. As they mentioned at the StreamOn event, I think they haven't basically raised prices in a decade.

um so even on a single plan i feel like they actually probably have more latent pricing power even in markets like the u.s then then they may uh recognize or at least want to state publicly at this point i don't think they need to pull that lever right now but i think it might actually be there and then as you think about things like duo plans family plans i think they've they've very smartly uh learned lessons from what netflix did uh 8 10 12 years ago and they're they're really following that same path and and recognize the importance of uh things like ltv so i think they're on in a very very good spot and actually then they probably have more pricing power in markets like the u.s and some people might right i think a lot of people look at you know apple

music uh amazon music and then whatever google's gotten i i never know what the name is uh for whatever their ideas are i think it's youtube music now they look at that and they think well they have ten dollars a month or whatever their plan is it's very similar to what spotify is offering but spotify is in over 100 markets around the world and i think in europe they have a you know at least in the near term a lot of potential to raise prices but in the u.s as well with the i think a lot of investors maybe underestimate the lock-in with all the discovery playlists whatever's saved on there it sounds simple but the i don't know ryan what do you think about i think they gave a retention number two like something like i might be getting this wrong but

like 50 or higher of the people that turned came back after a certain period yeah i forget what the exact number was but yeah all right what about uh the subscription side do you do you think there's ever going to be maybe a subscription that's pure to podcasts like uh would they be able to charge for that do you think i guess that one could go to alex yeah and then maybe also we get into the discussion how does that fit into the pricing power as well or if it does i'm a bit torn on it and i'll probably let francisco talk here pretty quickly because we actually were just talking about this today before the pod, but I've struggled with how they message the difference between a premium and an ad supported sub and how they're going to deal with the realities of the

podcast market, which for a number of reasons has primarily monetized through ads. And I think they're of two minds in terms of how even they're going to approach that. So I don't love the idea of them splitting it out. I really think it's nice, again, using the Netflix example to have a very clear offering, to have a bundled offering that meets a bunch of different but relatively similar needs at the end of the day and to focus on doing that very, very well. But I think talking with other investors like Francisco, I'm not an investor, but people who are invested in the company, I think he's convinced me more than I probably believe six to 12 months ago that there is a place for some of these other things. So maybe he can talk

to it more i think i think you know their their kind of overall goal is to capture the the audio market right and that's a very fragmented market even even music i mean in a way you can basically get any song for free if you want to on on youtube um or some way online and i think ideally you could live in this world where you could have a netflix-like service no ads one price we have everything or almost everything and let's go but music and audio is a little bit more complicated than that for the reasons i just said and you have also radio so capturing the incremental customer i think for spotify they recognize that they have to be super flexible they can have student plans they can have duo they can have family the family has the the kids app um if you

just want to listen for free you can have for free and they've talked a lot about a la carte which we really haven't seen what they what they want to do there in terms of tagging on a service or a basically paying for a podcast individually um as part of a larger subscription to spotify so in terms of adding a a podcasting service that has no ads it's complicated for for a couple of reasons i'm very skeptical of of anyone really doing this in the short term because think about any podcast think about your podcast alex's podcast uh you can read an ad if you wanted to right um you can negotiate your own ad with maybe it's someone local maybe it's a some uh something that's finance related or something that's geared towards your audience um spotify you can you upload your

your podcast on spotify spotify can't really go there and delete that ad right if people just if they decide to have have a subscription service that's ad free for podcasting so really do that right you have to control the ad inventory you have to be able to switch on and on on and off ads for for podcasting and i think they're trying to go there it's it's a long you know battle it's it'll take a lot of execution i think their acquisition of anchor and their acquisition of megaphone as megaphone in particular that deals with big podcasting networks and basically they sell ads and having the uh the spotify ad service at sai um integrated and then having more and more podcasting podcasts that leverage spotify's ad tech and and basically data so that

the cpms and in the value of ads can be really high to the creators and once you're there right If they're able to really control a huge portion of the ad inventory of the podcasts that are on Spotify, then you can think about having an on and off switch. Hey, pay three extra dollars and the vast majority of podcasts won't have ads. But they need to be able to do that. And they're far away from that. And frankly, everybody else is even more far away from that. Like it wouldn't need to be to go to New York times and be like, Hey, stop reading the ads on the daily. Right.

Because for two reasons, we'll pay you really well if subscribers are listening to you without ads and we'll be able to pay you extremely well. We'll be able to monetize your ad inventory even better than you can today. So I think the, the, the answer is they want to be very, very flexible in terms of the offerings that they have to the consumers, but they have to be extremely flexible in terms of how creators monetize in the platform and,

and controlling really the ad inventory inside of, and when I say ad inventory, I mean for basically you guys read an ad as well. Once they do that, they can offer that. So it would be very, very bullish if they're for, for investors,

if they're able to actually execute that in the highway. And I think if anybody can quite frankly, it's, it's them. yeah we use spot or we use megaphone for this podcast and we switched from anchor because anchor to be honest was doing pretty bad with their uh that might be a low light that that acquisition isn't going that well but their their advertising inventory was really not real it was just advertising itself or spotify um so yeah yeah and but to touch on your point we can

we also do our we have a partnership with seven investing where we do that sort of during our dialogue or conversation so it's not necessarily an ad slot where they can just use ad insertions and just put it in there um so i guess yeah that would be kind of tough to manage do you think there's ever a scenario and francisco you already kind of touched on it where it's almost like sub stack where you pay for access to one podcast something like that or is that kind of out there yeah well i think that's what they mean about a la carte um i think they i think anchor is going to begin to test that as well and i'm sure megaphone will get there i mean they just really acquired megaphone and now they're allowing all of the megaphone customers and i'm sure over time

it's not a click of a button to use um spotify's tech of of integrating ads so i think over time i think that might change with you on on megaphone and many of the podcasts that that spotify owns or basically or effectively control though it's kind of funny they'll talk like they'll kind of put in the ad break you know how there's like audio that kind of like switches and you know that ad is coming where you listen to that but there's no ad um and i think that's what's starting to happen is that that won't last for long right i think if they're starting to kind of get up and running in terms of how they execute this um so i i suspect um like for example the the wall street journal has this really good podcast called the journal it's a partnership with gimlet and spotify

owns gimlet and it's basically like the daily the new york times daily but more for wall street journal business stories i think their podcast today was basically about the stimulus bill that just passed but you know when the weak work situation scandal happened they had a big one it's very big news uh story that their reporters dig on we'll touch on that but a lot the that podcast has those ad breaks sound it's never has an ad and recently i'm starting to see that actually the spotify sa ad sai ads are are being added so i think it's something that's it takes time and they're they're getting you know putting the the rails down to to be able to execute but i think it'll be interesting to see how megaphone over time and you'll be able

to see it real time how that you know placing ads and dealing with spotify changes because i suspect it will change yeah that's what they've been saying i mean yeah it takes a while to integrate them but are you kind of thinking that that first you gotta look at all right are people on spotify actually listening to podcasts because i know that number they throw out every quarter um i think last quarter was 25 of maus uh engaged with podcast content i don't know how they're defining that i think it is a little loose like you it's anyone that listens to more than zero seconds so that could be a little bit higher than who was actually listening but you have to get those people on and then it's all about anchor and megaphone if they can be the engine powering a

lot of the creators then they got a lot of tools to play with to work with either you know adding a lot of podcasts to their subscription service that or whatever any subscription service that they make or they make money more on you know it's free but that ad technology can scale to any user around the globe and be fairly targeted and yeah i i think over time a lot of those sort of radio advertisers or that kind i think it'll be a little bit like the seat the transition from of advertisers to ctv kind of in that market um i could see it being similar to that but yeah you're right there are right now with the lack of supply sometimes you'll hear the transitions like four times in a row because we, because the supply is low, but I, I feel like that'll go

away over time. Um, all right. I would just add a couple of points real quick, just two seconds. I was on the numbers of the engagement numbers. I don't know if they've given a great definition. So I think it's a fair point you make, but I would add that, you know, they throw out these numbers like 25% a year ago, it was 16%. It doesn't really mean anything. So I just pulled the actual user numbers. For last year, that works out to about 44 million people. And for this year, it works out to about 88 million people. So they are seeing, you know, obviously the metrics only as good as the definition of the metric, but assuming it's actually a real metric, they've had pretty significant growth. And they also said on the call that podcast consumption total hours

nearly doubled year over year, which, you know, obviously on a per user basis kind of implies that was about flat um you know you consider the fact that we had the pandemic and overall consumptions obviously been under pressure and you also account for the fact that the incremental 44 million are obviously not like your power users have been doing it for a while so um i think it's probably a better metric than it sounds like at first at first glance and then also they gave the metric on um on the podcasts that are now on there they have 2.2 million up about 3x from last year and i think they said the vast majority now are powered by anchor essentially is that the right way to frame it francisco yeah i think so yeah i think i i can't remember the exact number but i

think 80 of new podcasts on spotify i think that are powered by anchor uh which i mean that's a great sign i also saw that something like they're in india 80 like they saw 80 times growth uh which could obviously go off a low base but again the they're really trying to push anchor worldwide i think uh but that's a little more down the line and the one other point i'd add there too is when you listen to a podcast now where it's read in you know i listen to a couple comedians and the funny thing is to note that they clearly just get an agreement with someone for like a month or two months of episodes so if you're a regular listener i'm just getting hit with the same thing over and over and over again, which is fine in some ways. It's what happens in a lot of

advertising, but it also has a breaking point. And I think you hear companies like Roku talk about this more and more where, hey, we're not going to hit somebody with the same ad 25 times. We have the technology to make sure that doesn't happen. So in some ways, I think what they're doing will obviously take time to iron out. But I think there also is somewhat of a low bar in terms of what they have to do better than. So I think they might actually be able to get there over time right right that makes sense all right francisco what are your thoughts on the uh the new hi-fi uh thing that they are they announced on the stream on event just kind of a title competitor they're talking about i think well they haven't set a price but people are

thinking it's probably going to be 20 bucks a month or at least higher than a family plan um yeah i think or go ahead yeah i mean the way i think about it is i mean they'll always be you know very very particular people in terms of that like to listen to to their music or content in the best most high quality way possible um i don't think look is it going to be this this kind of massive moment where they bring in a lot of revenue because of it and acquire so many more subscribers i don't think so but what i think it allows is you know think about they always talk about two-sided marketplace and they want to make they want to give you flexibility as a user so if you are very very picky in terms of how you

listen to music or content yes you you might pay for that twenty dollars or fifteen dollars or more uh service uh the the hi-fi um subscription service with with spotify you might be someone who who doesn't care listening to a bunch of ads and the free the free spotify service but they want to capture everyone in in in that spectrum and as a creators you know so we talked about right now from the anchor uh you know recording a podcast on your your speakerphone on your cell phone using Anchor to go to the megaphone, huge network

and very high quality studios with the best monetization way possible. That's how I view the Hi5 service. It's just more flexibility, just another toolkit

into acquiring subscribers. Any thoughts on that, Alex? No, I think that's right. I mean, I think management continues to be pretty clear that above all else, their focus is market share and ensuring they have scale. And I think they're going to go after everything they can essentially, which will go from the high end to with stuff like this, and then all the way to the low end, potentially with all the card offerings.

Right, right. Okay. And then, oh, go ahead. I was going to say, do either of you know how that plays out with the labels, the hi-fi offering like is it sort of the same kind of royalty distribution payments or does it change at all i mean those are typically black boxes you can kind of um i i don't think it i think the labels would love to see them release that product because it has a higher art pool and they'll probably get the same economics so all else being evil higher price labels take more in dollar uh terms so you know i think the labels and you and you can tell from listening to to the conference calls reading the releases of warner music group which is public

it does seem like they really want spotify to raise prices this is another way of raising prices it obviously has higher costs because it's a it's a you know very hd type of audio but i don't think it'll be like super more expensive for spotify labels to do this so i think labels would love to to have it because it has a higher ARP. Okay. Okay. And then Alex, we'll start with you on this one. When you're looking at a company like Spotify, what is more important for you? Do you track, I guess, you know, the MAU growth, which is just the monthly active users that includes the, the free tier or the premium subscriber growth? Yeah. I mean, naturally, naturally I keep an eye on both and, you know, I'd start here by saying just so we can put numbers on it. If you go back

four years, they had 36 million premium subs. Now they have 155 million and they had 70 million ad supported monthly actives. Now they're right around 200 million. So they've done a really good job on both sides of the equation. I think the premium mix, it was at about 35%. It ran up to about 45% and it's been flat here for the last handful of quarters at least. And it's funny, Like most things in investing, you can look at something like that and go, uh-oh, there's a problem here. They're not being able to convince their free users that they should pay for the service because they're using it enough and they should be willing to pay and not have ads. I think in this case, it's probably more of just a geographical mix issue as they continue to grow in markets that are obviously not like the United States or Western Europe, somewhere like that. So just as an example, you know, they show that rest of the world is about 19% of their business now versus about 12% two years ago.

So I think it's important to keep an eye on that because that obviously has to do with pricing power and whether or not people are really perceiving that they're getting good value for their money. So I'd keep an eye on those metrics, but I think you obviously want to watch both and hope that free continues to funnel into paid. right francisco any thoughts on that no i think uh i i agree with alex you just want to continue to see the growth there and and maybe even faster growth at at uh in terms of the free subscribers the ad supporter subscriber because that like alex said it's it's a funnel right i think if you are a ad support subscriber that has huge engagement right the probability that you'll become a paid subscriber is fairly high according to management so um so i think especially in a way it's even more encouraging in the ad supported subscriber growth continues to be faster

yeah i think i think they saw or said that somewhere around 44 percent of free users over time on average will transition to premium so it's now again with new geographic mixes um and they are expanding to those uh to 80 new geographies so that might in the short run we might see more mau growth at least that's kind of my thought and then there might be a little hit on the pricing power but in the long run it is all about that funnel if they can keep it even close to you know that 44 conversion rate if it drops down to a lower rate if they're still converting at a relatively high percentage i mean the business should be doing fine yeah i think um you just wanted to chime in quickly because right before the investor day um they were in like i believe

it was 92 markets a little bit over 90 markets and then in the investor day the stream on event they announced that they were basically going to 170 total markets right so they were adding approximately 80 markets in in a day right and obviously a lot of those um are markets that that probably need a more ad supported base to get the growth kicking and it'll be it'll take time for them to also increase our poo there um but um to basically get those subscribers going and then get the engagement i mean the engagement and like i said the engagement increasing very rapidly ad support at least a premium and huge engagement premium at least a consumers being able to pay a higher price so i definitely would want the ad support

base to grow as fast as possible right do you think the billion user goal i guess is realistic i know they just launched into all those markets and alex feel free to chime in here as well but we can start with francisco i think it's super realistic i think when they first mentioned the billion number might have been like two years ago um and i thought to myself like whoa yeah that's gonna take a long time i'm not sure if it's even real but then you take a step back and you know right now they're at uh 345 they're they're growing at 20 a year i don't think they they anticipate that growth to to decline like i said earlier they're they announced just they're to be 80 new markets that you know has like a billion uh internet users or more if you think

about global internet household broadband households there are a lot of estimates but i've seen it excluding china which they're not in um i've seen estimates like 700 million broadband households and then trending towards a billion over time and households can have two three more people right so you're talking about a a huge base of of internet users of smartphone users of high speed and quality internet usage that's just going to grow over time so i think a billion is is super doable um the question is from from there how big thing can they really get long long term but i think a billion a billion users is super i think i think are going to do it um and and maybe a lot faster than where what people when people think they'll

they'll be able to achieve it if at all right i was looking at the the populations and it's it's rough i know like it's it's a little bit speculative but you know they're going into nigeria pakistan and bangladesh and all those populations have more than either 200 million people now or will have more than 200 million people in 2025 will a lot more of those be m Like ad-supported MAUs, maybe, but I think over time, I mean, that seems really reasonable, especially, I don't know, if they can, I think what they estimate, again, is like something where the global streaming market could have upwards of $3 billion spread over all the different properties, like maybe including YouTube, maybe as well. If they can keep their market share, which seems very reasonable to me, they can get to a billion as well. But Alex, I'll let you, if you have anything else to add on that. No, I think that's all right. And again, like Netflix, and I think Spotify has announced their own offerings as well. You can kind of break down some of the paid offerings to get them into bite-sized chunks that are more digestible in markets around the world where incomes are obviously lower.

So I think as they go around the world, this is a product that would basically have universal appeal. So, you know, obviously keeping 35, 40 percent, maybe more market share is a big part of getting there. And we'll see how effectively some of these behemoths that they compete with can compete in the future. I think what you've seen so far would lead you to believe that Spotify will continue to have a dominant position. And if that's the case, then, yeah, I think a billion is a reasonable number. right have you seen uh sorry i'll let you know but they uh have you seen the numbers out of india at all is that where i believe that they are close to or if not the number one player in india after less than two years of launch does that get you optimistic about what they can do

in other markets um maybe francisco if you want to go first on that i don't know um of numbers uh specifically towards india i've read recent articles in terms of that they're expanding there quickly i think initially they had you know big minimum guarantees for the labels that uh put pressure initially but they they were able to grow beyond that and they're they're investing a lot in podcasting in india but in terms of number of subscribers in india specifically i don't know if alex have seen figures but i haven't honestly i haven't seen anything in particular, but I'd make another point that's kind of tangential to this, which I think they said, this doesn't seem like it can be right, but I'm pretty sure this was the quote that 80%

of consumption or 80% of listeners are outside of the market from the person who created that content. I believe they're referring to music. I don't know if that stat rings a bell with any of y'all, but my point being, I'm bringing it up that if this becomes more of a global market, i and i don't have data to support this but my sense would be that that is uh less less advantageous for the labels and it's partly in the data that you guys have shared previously which shows you know uh i think it was 84 of the music streams were the top four two years ago and now it's down to 76 something along those lines yeah um yeah i think it's 85 and 78 but yeah there you go so that's the music as well so you know obviously podcasts are increasing their share of

on the service so i think it's one of those dynamics that as this becomes more of a global business it might in some ways play into into spotify's hands in terms of negotiating key suppliers well i i agree with that i mean i buy the the the stat from the company alex because like for example i mean uh 20 i think 24 of maus are are north america right so something you obviously got some of the biggest superstars in the united states um that are global stars right so and not only that i mean you look at the most popular artist in on spotify last year was bad bunny uh singer he's puerto rican obviously super super popular in puerto rico but he's the number one artist on spotify and um obviously puerto rico is a fairly small market so i think a lot

of people globally uh obviously listen to him and so i i do think that's that's it's right interesting it would be even more interesting if that stack can happen with uh podcasting but i think that's a little bit more difficult to deport you know a u.s based investing podcast that's extremely popular in in latin america europe but i guess it could be i don't know um hey we were number three in the cayman islands yeah yeah but we i mean we we uh it's anecdotal but we do i mean it's kind of fascinating to look at that little chart like uh that they put up for the globe for all the shows and i mean surprisingly we have like a weird listener base in sweden so if you guys listen right now it's because we're spotify shareholders yeah yeah they're all but uh i do

think yeah the podcast will be a little more difficult because of the cross language it's tough i mean we're not going to get many listeners in india if our show gets popular there just because uh you know the language barrier but ryan i think you have the next question yeah alex and francisco feel free to chime in as well what are you guys's timelines for evaluating the podcast investments that they've made i mean how i guess how quickly do you guys see these investments materializing or at least being a substantial part of the business i think it's a pretty difficult question to answer um one because i don't know how easy it is to parcel out that one component's contribution to the value chain or even its

cost honestly and number two would play into that second comment i don't know if management's going to give you the data to do it to the extent that it even does exist um so i would mostly look at It's funny, when I wrote an article about Spotify, I essentially said, what would you have told me about Netflix five or 10 years ago that, in hindsight, I should have used as kind of a guide to consider it more seriously as an investment? And the data point is user engagement and subscriber growth, basically. So I think about comments like, hey, Spotify said we have two to three XE per sub engagement of our scale competitors, stuff like that. so my point being as they keep releasing podcast data if we see a continued increase in the number of users we see you know higher per sub user stuff like that if they give those data points for me that would be sufficient and then obviously you gotta you gotta have trust and management to

to intelligently allocate funds around that but i i would definitely start getting skeptical if they started pooling data points like that okay that makes sense i think francisco i think i agree absolutely with with alex i think judging you know i think there's there's two ways i think about this um and i agree it's really hard to partial out the data even if we'll see if management really gives detailed uh data on podcasting but the way i would think about it is i mean the the holy grail for all these services and any streaming service right is super high engagement so i think from one end podcasts have to add to your engagement um big time for for in order to add users but keep the users that you have uh better over time and you want to open

podcasting to in the morning to listen to a podcast in the car and then switch to music and you want you know you want users to be using the spotify app all day in terms of date The clearest sign to me, and obviously engagement is really hard to read as an investor, the trend is probably more towards just continued strong growth in MAUs and premium subscribers. I think another clear way to see that they're really monetizing ads, but I think this will take much longer. We'll easily be able to see, hey, MAUs are growing 20%, 20%, 25%. And you can sort of understand that, hey, podcasting has to be working in some way. But in the clearest way is really that the ad business is growing for the podcasting business and that it's monetizing very, very well.

and not only is it recouping the cost of paying a joe rogan for the obamas or for the all the new um podcasting deals that they're signing that are some of them are expensive um or some are very very expensive that basically the advertising is paying for that not only paying for that it's creating huge operating leverage right because you're you're monetizing the base of podcasts um that you own and controlling the imagery for more podcasts that maybe that they don't own and monetizing that via ads is gonna should at least in theory expand margins in a huge way but i think that's going to take time so it's not something we're going to see in the next two years um to alex's point i mean they've done a lot in two years since they

announced their big podcasting investments so so in terms of the data i mean the mau growth has to continue and i think that's it's hard to know hey is it really being fueled by by podcasting is it being fueled by new markets it's being fueled by you know other engagement tools improvements in the app um partnerships marketing but i mean it's some evidence that we have but ultimately really i think it's it's uh that operating leverage being being starting to really kick in and because they put their costs their podcasting costs they put it under the the gross margin for ads that'll be the clearest sign that's going to take time right okay and then i guess we were gonna we've talked about the ad network already so i'll stick on the studios and exclusive shows how do you think about

them using that uh you know you mentioned the joe rogan experience which i guess is another one well another tangent because they do have the video offering with that which we could maybe talk about a bit but they seem to be using these shows to try to pull in new users um i know they have that what's the new one the barack obama bruce springsteen one uh that renegades renegades yeah so it seems like okay when you're investing this money in the show it's not like they're really going to recoup all of it from the listeners i kind of think of it as a customer acquisition cost um but overall what are your guys's thoughts i guess we'll start with maybe alex uh on the studios and exclusives um and how they're using that yeah i'm i'm of a couple minds

here um i i think to the extent that they wanted to go after this opportunity it makes sense to best aggressively as they probably have done so far. That being said, it's still early, so it might not be showing up in the P&L yet, but I've been surprised that gross margins have held on as well as they have so far. Maybe that'll change next year. We'll see. I'm not too sure. Why don't you talk for a minute, Francisco, and think about it some more. All right. Yeah. So I think two ways. i think they want to have an ultimately a differentiated service right so initially like take the ringer for example right the the most popular podcast there is probably you know obviously bill simmons podcast the bs pod and they're not going to take that down right from

apple podcasts or amazon music or all the other podcasts that's distributed because it would just kind of kill the show right but what they want to do is that incremental investments that they're making with new shows and there's one called 10 questions that actually has video on the spotify app it's exclusive to to spotify um the the podcast binge mode which they go to like go through all the marvel movies all the harry potter movies you know binge fandom and have like two hour discussions on every movie those they'll release them to all services but once they cover like a subject like marvel or star wars or whatever it goes into library and the library is only available on spotify but the current season is available everywhere so they're just beginning

to kind of test new ways to have the creators work for spotify like make the spotify service differentiated right so they want their creators to be highly incentivized to have listeners on the spotify platform versus hey i'm on bill simmons and i'm having my podcast show right now um but you're listening to me on apple they really want it to be on on spotify so and those shows cross promote each other that's kind of one way right i think joe rogan is clearly a different direction hey this is the most popular podcast in the world right and if we have it exclusively then obviously uh we're going to be able to to get a huge chunk of podcasting listeners from all services um to come to our to come to our platform i think that one of the stats that

they said that the joe rogan podcast it wasn't on spotify before but apparently it was the most search for podcast on the on the spotify app and it wasn't even available so that's super huge uh demand the other way right is um they they see the the podcasting space and the first thing that they think about right it's obviously adding a a different toolkit for for listeners right music and other type of audio they want all audio but the other way is like they see a super fragmented industry super super messy interest monetization you know creators don't have data or a way to target target people and and advertisers don't have that either right so it's a way that once you have your own content and a lot of content before they have like a

couple creators in-house and i think now it's hundreds and hundreds of creators that they own in-house basically having that right and having that huge huge content production capabilities in terms of audio we'll allow them to test different type of ad formats and really integrate have like a true vertical integration of having the user creator ads um and that's we'll get them over time to be able to offer advertising opportunities to all podcasts which is something that will take time so right it's it's little by little adding different steps that over time will will help them be able to monetize the industry better so i think you know some things you'll see very very quickly right they bought the ringer bill simmons company i think

right before the pandemic um and and now you're seeing signs of like hey all of a sudden bill simmons pod has the transition sound but doesn't have the ads the new incremental shows that they're launching are are exclusive to to spotify so they're not like you know kind of a disney that buys this company and all of a sudden just makes that company work the disney way right um plug it into their system they're basically you know they're new here right they're trying to do things little by little like you guys are on megaphone they just bought that asset i'm not surprised that you're not really seeing how it's integrated with SAI. But let's see what happens over the next two years, right?

Yeah, I guess, yeah, it does. Integrations don't happen overnight, but I do like that point of the exclusives kind of becoming the end, like kickstarting that engine. If they're going to get that advertising going, because you got to get the supply and the demand. You have to have both if that advertising network's going to work. and that i mean if they have like a thousand shows that they can really use it's like all right well

we'll start you out with this but then once i don't know once then we can get you to every show on anchor but alex did you have any thoughts i know you've tweeted or mentioned before about the video experience with the joe rogan uh any thoughts on that on what spotify could do there that's what i was just about to add that was funny funny thought of that yeah i i i think you know people like joe rogan and i've heard other it's funny i've heard other uh podcasters mentioned this, that they, you know, when they travel, they still have to do the setup for video because so many customers want that. So I think when, when Joe Rogan came to Spotify, I think he's publicly said that obviously having video capabilities was part of what they would need

or want. And then also they want the ability to kind of show clips and smaller videos. So I just think it's funny how they're converging a bit with, with YouTube and some of these other platforms. And I think even talking about, you guys can correct me if I'm wrong, talking about artists, like on the music side, they mentioned the idea that now they'll have, sounds almost like a landing page of sorts, and you can see an artist, you know, it's basically like a small interview or introduce a song or something. So they're kind of getting into these other areas that, you know, definitely blur the lines between audio, video, long form, and smaller clips. I just think it's interesting to see how it's developing. yeah i'd agree in the uh the advertising side i was going to ask you if you think it can be kind of like youtube but i think we've gotten into that with the targeted yeah the sai type stuff so i guess do you think the future uh or what do you think would be more important to podcast

advertising that format of ads whether it's like streaming ads kind of like youtube where it just gets plugged in or ones where the podcaster the creator is doing like an ad read for a totally exclusive sponsor what do you think would be more what would you like to hear more i guess as a customer or listen i mean i'm sure that a lot of the rationale for sai and things like this is that it's going to make sense for the creator and that it's going to obviously monetize better which is kind of funny as Francisco was talking before success with SAI and Spotify basically owning the landscape is kind of a necessary precursor to having a non-ad supported podcasting product so you need them to succeed in ads in order to get podcasts without ads so I mean I think from

both perspectives I don't like listening I mean obviously for comedians they make it funny but I don't want to listen to somebody read the same ad 10 times in a month if it's literally the same thing word for word. So I think SAI, like most advertising on the internet, to the extent it actually reflects your needs and desires, it's a little creepy, but at least they know what you want to buy. So I personally prefer that. And what do you guys think about, or go ahead, Francisco, and then I'll go to the next question. Well, I agree with Alex. And look, I think if you close your eyes and what's the ideal format, is that right? You can have ad-free at a click of the button or have ads at a click of the button. And the only way to do that effectively is to

have targeted ads and that can be slid in and i think so podcasters reading as in an ideal world i think for everybody just wear an app right for that to read you know to get there it will take a long time uh but i think ideally you know that's what what will you see right and what are your thoughts on the cpm uh or just the rates of what ads are going at like right now i think the standard is about 20 per thousand listens um and a lot of people do any sort of analysis where that's a lot lower than traditional radio but if they can get that targeting up people think and there's a little bit speculative that could get up to you know the 50 to 60 range any thoughts on that um helping them grow you know in terms of a specific price right i think i would just be

guessing honestly if i told you hey 50 or 100 or or 10 but i mean you know why is facebook so valuable why facebook ads so valuable or google ads so valuable i think what you want what spotify wants to do here is that you know an advertiser just doesn't even have to talk to anybody that go on their platform hey males that are 18 to 25 interested in finance globally bam yeah and and targets all those people and i think that is obviously very very valuable and probably more valuable than 20 or females uh age 40 to 55 in a specific product in a specific geography bam and this amount of people only people in north carolina you know and that are looking for specific retail i don't know that's obviously the i think what daniel is wants to accomplish

and um if he does accomplish that i think they are worth a lot more than 20 but we'll see it also makes it it makes life easier on our end or like the podcasters and because they can kind of manage their ad inventory like we can just set our rates lower if we're not getting a lot of supply and we don't have to read ads. And like Alex said, we don't have to have our listeners listen to our same ad read on repeat. I mean, I think Megaphone had like a 50% take rate

on our ad revenue and we're willing to do it just so it was easier for us. I mean, I think people are going to expect that to lower over time, but the value proposition is very strong. For Alex, did you have anything on that before we go to the last?

No, no, I agree with all that. All right. Well, we'll hit to wrap things up. We're going to talk about maybe the financial profile, the valuation a bit, because they have an interesting business model where the gross margins are a little low. So everyone seems to focus on that. And we'll hit that a bit. I guess first question at the new investor day, which was a few weeks ago, they talked about the new guidance is a range of 30 to 40% on the long-term gross margins. This is up from 30 to 35%. And they said the big factor in that was 20 of revenue coming from well it's a range they didn't give an exact number but they said around 20 of revenue coming from this advertising business in the long

run um does that i'll start with francisco does that seem realistic to you the 30 to 40 percent guidance for gross margins over the long term i think it does i think basically they only tweaked if i'm not mistaken um i think when they went public i think it was 30 to 35 yeah yep and i think they just said well now it's 30 to 40 um and i think is it realistic i think it is right because i think when they went public they were mostly thinking about a music business so gaining scale and and having huge growth over time will allow them to maybe take some negotiate with the labels to have a little bit more margin i think as you think about a you know an audio service right and um and they're able to execute on all the things that we talked about in

terms of you know podcasting content that they own the advertisements uh a la carte then i think there there is significant um significantly higher gross margins and operating leverage overall with those uh products so could definitely be in the high end or higher right over the long long term so i think it's reasonable okay uh alex do you have any yeah yeah no i think that makes i mean it makes sense they're they're relatively close to that position today i think as you think about things like sai or you know even even the tools they have uh on the music side of the business to kind of get labels slash artists to to basically be competing for placement and i think they've said previously about 30 of the consumption is stuff that they essentially place

for the user so i think as as they potentially build out these other sort of you know revenue lines that they can get that 500 basis points of margin at least right that two-sided marketplace yeah forgot about that as well yeah i mean we haven't even talked very much about we've talked a lot more about the podcast than the music side but alex how do you think about the negotiating leverage between spotify and the labels do you think it's shrinking for the labels over time or do you think if they they still have the ability to just be like all right we're taking our content off if we don't get the price we want i think it's still very difficult i mean the bigger spotify gets obviously the better i think it becomes their negotiating position the more

engaged their customers are the better it becomes um you know we'll we'll see how much of the global stats really impact that calculus i think in some ways it probably does in other ways i'm a little bit skeptical um so we'll see how it all plays out you know what's happening in south korea which i didn't really know about but i think one of you guys linked to it where they're they essentially went to market without access to you know a library from a from a label that has it's it's pretty important i mean it was 30 or 40 percent of of the top 100 songs in the country and they still went to market um without having that content it this will be an interesting test to see how this plays out and obviously that has unique circumstances with the the company

negotiating with has their own streaming service so it's kind of a unique uh little fight we're having here. But I still think over time that my kind of base assumption is that their position relative to the big four labels probably doesn't change very much. Maybe they negotiate slightly better deals. It'd be nice if as they generate incremental value for users and go to try to take price if labels didn't really participate in that as much as they will as of right now, as far as I know. Um, so I don't know if that's addressable in any sort of way. And again, the only other thing that comes to mind for me is finding ways where at the end of the day, you're really pitting them against one another to try to, to bid, or I guess as, as a, as a nicely worded

that you don't have to actually put money out. You just get a smaller royalty rate when we give you the recommended slot. So it's a nice little, nice little way to market it, but if they can get them to compete for those placements then that's another way to effectively get there um as long as you obviously don't abuse that and kind of ruin your recommendation engine in the process so it's a balance on all those things but i think their position is continuing to get stronger but i i still don't think it's a it's an assurance that in five years they're going to be able to walk into the building and demand whatever they want right yeah they need each other at the end of the so yeah um the bigger that they are right you know they can't afford to lose a huge label but

the label can't afford to lose them so i think they have to play nice with each other and i think that tells me i think they really get to the billion monthly active users just the label can't live without them right but they also you know can't let go of some of the most streamed content that's where the south korea example is also interesting again because you know it is kind of a fight about this one market and again that company has a streaming service in the market so they have a vested interest in continuing to maintain their presence there but they are also negotiating on a global basis so for spotify i think in some ways it will help them i don't know as as well about the uh the big four labels kind of geographic presence globally but it might help

them as they go in these markets say hey we're basically big everywhere um so you might have leverage against us in somewhere like the united states we have a lot of competition but we'll also be in other markets where we're the dominant player by far so again these are global agreements so we have to we have to make this work everywhere or else it won't work anywhere right and i think that idea of people made the comparison to like netflix where they're like they're going to break away from the labels entirely and i really don't think that's realistic but and then but the thing is you gotta uh it's hard to ask or even find a path to where they get that margin if it's not either a from just advertising the podcast or b from this two-sided marketplace stuff and

that is going to put us in the gross margins but right yeah that leads into my next question which is what do you think is the most viable way to sort of have less dependency on the labels is it uh growth in independent artists is it okay our listeners come to us for podcasts now more or is there one path or do you think it's going to be sort of a combination of both we'll start with francisco look i i don't think they'll ever be um will never be they'll always depend on labels right um the the labels will always need them and they will always need the labels and i think that's that's how i would think about it what what i would also think about is how i mean two ways how can they really add value to the user and the label right they add value to

the labels because they keep growing right i think if you look at the the labels income statement A lot of the revenue sources have come under significant pressure, but streaming is their highest or one of the highest or the highest revenue stream for the labels. And it's also a very, very high margin for the labels. So they add a lot of value to the labels. The labels add a lot of value to them. They keep outgrowing most of the competition globally and have the biggest market share. they said they want to have a third to 40 i guess some markets will be on the high end of that or even much more and some markets might be like a third um but if they continue to add that value

right to the labels and the labels depend on them right they have to play nice with each other um it's not going to be a situation i think that one is just going to crush the other anymore um i think if you if you're a new streaming service right and and you launch in the market labels are going to put an extremely high minimum guarantee for you for you to launch right i think that's hard for almost anybody to to accomplish but you know so this is a this is limited game for for for a few companies so the the way i think the way that spotify makes themselves indispensable it's just they add too much value to the labels right the labels need them because it's just spotify adds too much value to them and that's where they can kind of have a

meeting of the minds over time in terms of how you know they can both have good businesses but in terms of one crushing the other it's just too hard and to alex's point it's a good experiment was happening there in south korea because if they're able to kind of get to a place where actually the competitor label has to sit down with spotify then maybe you have a situation in certain markets that spotify can temporarily drop a label um in order you know kind of what happens a lot of the in the pay tv space at least it did has has over time where there's blackouts and things like that and somebody eventually wins i don't think spotify wants to get there or the labels right because the labels also got to pass money to their artists and their artists

also it's like hey why don't you want spotify are you you know this is like malpractice then as soon as they have a new deal coming up they'll leave to another label so it's complicated um it's complicated but i do think i feel confident that spotify does provide enormous value to labels um and artists and they're going to be the biggest player they are the biggest player by far globally will continue to to be so and i mean at some point it's just uh you know they just have to play nice yeah i think they yeah it is definitely sort of a complex uh solution to that problem and the other part is the most favored nations clause makes it that much stickier where you can't you can't like uh give a good rate to one of the labels or have different deals with each one so

well what do you guys do you guys have any thoughts on the independent artist stuff because i know a lot of you know investors and people just talking about how spotify made that one investment in or they had this it was a sneaky investment yeah it was like a minority investment they didn't it was thinly disclosed and they had a report of a spotify thing that got shut down do you think that was it seems like that was what spotify was talking about for a few years but they've kind of transitioned away do you know if there's any reasons why that happened or if they maybe just saw that that was never going to compete with the labels um i don't know any any of them either you can take it i think spotify realized that they were never going to be a label right

um i think that's a short answer and it was just gonna take too long and might have too many conflicts and i think that the the best way is just you know to to basically negotiate with labels over time um so i don't think um look i think what spotify does want right is that um more and more artists are are monetizing well so they don't what they don't want is like super mega concentration they want like you know the top you know they say like millions of of artists living off their art and you know billions of users uh being able to consume it but i think what they want is like hundreds of thousands of of artists and creators to be able to monetize more and more over time and i think they don't want it just to be like the bad bunnies and drakes

and and and the beatles back catalogs and that's it right they just want way more variety and diversity of content at a very very high level i think if they accomplish that over time right um and i think the internet naturally helps that um they'll be fine uh but they don't want it's like hey warner music has everything and you know what you just gotta deal with them it's actually better that there's three labels and then more independence and then breakout stars out of nowhere just more and more and more and more because when you have these two-sided markets you you want as much you know obviously as many users as possible but a ton of creators monetized so that's how i think about it yeah i say even one other point too even we talk about it we

talk about the labels as if they're one kind of company and it certainly feels that way they're almost kind of they almost they almost operate as one and i think again going back to these kind of new tools that they're introducing to to let people bid for placement essentially it's it puts it back in a place in my mind where they're kind of competing with each other again and then become competitors and hey if i'm an artist and one label can get me x number of streams and the other label can get me 2x that many streams you know i mean i think it starts to it starts to make it a little bit more of a competitive dynamic than maybe it was in a prior era so that will work to the benefit of spotify in a lot of ways i think right we saw like it seems that they're flipping it a tad into

their advantage uh there's that book out uh by the swedish reporter called the spotify play or something like that and they outlined in like the 2010 to 2015 era it there's no hard evidence but it seems there's a lot of circumstantial evidence that the labels were kind of colluding against spotify and now they're really not able to do that so i do think that point makes sense ryan kind of a random question we don't have it here on the tear sheet but what do you guys think of the title acquisition by square and do you think that will have any variance on spotify's future at all i'm gonna go first i like to do i mean i was just hoping that spotify would try to do a deal with wells fargo after that happened because my wells my wells fargo position needed some help

um no i don't i don't i don't really have any thoughts on it i don't totally understand it i mean i get this whole idea of of the creator economy and the and the idea of you know some of these platforms i think of twitter i'm not too sure why it fit into square versus twitter That's something for Jack to understand. You know, they went out and bought review. I also, I wonder in some ways it wouldn't have made more sense to do a big deal and go out and buy Substack. But I understand what they're trying to do in some of those places.

And as people like us know, Twitter is a great place to, those social networks are a great way to really build your audience and to find customers, listeners, whatever it may be. So I understand it from that perspective, why some of these integrations are starting to happen but how square fits into that i don't entirely know or how it's not best solved through a partnership of some kind or a relationship versus you know outright ownership i a little too galaxy brain for me but yeah yeah i think here's what i would um thinking i'm gonna do some off-the-cuff um search in the uh the apple uh app store on on title their number look okay let's let's buy a theory right they uh have artists you know be able to

monetize their work better there's some kind of crypto angles there um artists also are our big owners of of title and obviously led by by jay-z and i think they'll be super influential there and but the fact of the matter is that they just have not been successful in acquiring users and as i look they're number 31 in the apple app store in the music category right uh you know know basically a random ringtone apps are like outranked them um i looked after they announced the deal they had three million subs in 2018 and as far as like i looked for a decent amount of time they haven't updated it ever since which tells you everything yeah and about how that's doing spotify is number one pandora's number two and pandora's you know listener bases is actually

going down um and they're number two and titles in the 30s and you know it's it's very you know we'll see maybe square has some interesting ideas they'll invest more money they'll they'll have artists kind of controlled and their monetization more closely potentially but at the end of the day they they have been have been successful in acquiring users and very skeptical whether they can even take that globally in a huge way and the biggest thing you know the biggest differentiator i think that they had from a user perspective was the the hi-fi type of audio and i think now you know amazon has that and and uh spotify is going to launch that in probably a matter of time before apple launches that so we'll see i mean it it's it's it's tough it's it's very

very competitive uh spotify updates their app with new features consistently consistently and works at you know every little single way to acquire um users and subscribers and they do a bunch of updates in terms of how to make it just a little better for artists and that takes time and so i don't you know i think square might bring more capital here but but I don't think they have anything to add in terms of how they can help Tidal make a huge boost. We'll see. I would honestly think TikTok would maybe be...

There was rumors that they were going to announce a streaming service, and that seems like way more of a threat to Spotify. But we'll wrap things up. We don't want to go this too long. uh we're going to wrap up with just kind of the free cash flow margins because i know a lot of people care about and rightfully so what spotify's actual profit margins will be at scale or even in the near term so we'll start out with alex uh what reasonably do you think they can what kind of free cash margins do you think they're going to reasonably achieve at scale yeah i would assume

i mean i would assume for this business that the free cash flow margins are going to be you know relatively comparable to the net margins after, you know, adjusting for stock-based comp and things like that. So I don't think there's any huge recurring dynamics there as far as I know, maybe some slight temporary changes in timing. But at, you know, at an income statement kind of level, I can't remember if they gave these numbers beforehand or if they just gave them with this, you know, the stream on event and things like that.

But I always assume this is kind of a low 30s gross margin business at scale. And if they could leverage operating expenses as seemed reasonable, once they get to five, six, 700 million subs, as soon as the kind of business that can get to low double-digit operating margins. And now they've kind of quantified it and landed in the same area. I think, again, as we see things like SAI, two-sided market, all that sort of stuff, If that starts to work, then you kind of have line of sight to this being mid-teens, potentially getting high teens if they can really drive gross margins up towards 40%. So I'd be watching those type of things because obviously it's a huge lever in terms of what the real earnings power will be at the end of the day. But I think it's at least 10%, 10% plus at maturity or at scale.

if you uh had to guess sort of a terminal multiple if it were like let's say 10 free cash flow margins was uh their scaled margins uh what multiple would you get it do you think or and obviously with the you know the business model the subscribers the the low churn it's kind of hard to tell but is it something where it's going to be similar to netflix or i don't know Or is that even not a game you like to play? Look, I mean, when is the terminal date, right? How big they are at that date. Look, but I think the fact of the matter is,

this is a very kind of captive audience type of business, recurring revenue nature type of business, especially if you have a huge user base and a huge part of that is premium. or a highly engaged user base that on a monthly basis that'll provide a lot of advertising revenue. So that type of business, right? It's not a business that has to win

their entire customer base every single year, right? So there is more of a recurring nature here. And I think those types of businesses deserve a higher revenue multiple than on average because it has a lot more certainty in terms of their revenue stream. so i don't like it's it depends on what date we're talking about here right i think if we're talking about a more normalized uh state it could be you know a lot higher than a than than a market

multiple could be more comparable to to you know kind of what a netflix is getting at but i think netflix is a difficult comp as well because they're not at their normalized revenue state but But if you look at maybe like a Microsoft, which I know Alex knows really well, has a very high multiple. It's a very, very valuable business and with a lot of recurring revenue. So maybe in the multiple like that, that probably might be in their 30s, high 30s or more on today. It's perfectly reasonable because if we sit here, we have 345 million monthly active users of revenue. And that's going to be over, the management is projecting that it's comfortably over 400 million MAUs by the end of this year. You're looking at around close to $11 billion USD in revenue this year.

If we're really, if you're buying this business, you trust and believe that the execution will lead them to a billion monthly active users. so we're talking about you know two two and a half times uh the user base that that they'll have by the end of this year um so maybe call it three times the the revenue base uh in the medium term i mean depends on you define each term and long term right so you're talking about potentially um you know mid 30 billions towards 40 billion in revenue that they could potentially have in five to seven years you know huge range right of possibilities here especially they really execute and i say i think you're really going to get to the higher end of that range and if we're talking about a 10 margin on that right and let's let's be optimistic right let's say they really

can get 40 billion dollars in revenue you're talking about you know a 40 a four billion dollar kind of uh operating you know uh income or or more of a uh unlevered free cash flow and you're sitting here i'm not sure where the market cap is given that it's falling falling down so much is so volatile recently but let's let's call it like approaching 50 billion that you know does not look uh insane right and if they do execute on this it'll be one of the most important media businesses in the world and they'll be the most important audio business in the world right um and that's certainly worth a lot much more than uh than uh you know oh oh t's are 10 times type multiple so okay we'll see yeah um alex did you have any on that and then we'll finish things up

yeah no i think i generally agree with those comments i mean in management kind of alluded to this but they're you know they kind of gave a long-term framework that can get you to similar numbers 40 to 50 billion in revenue and you know maybe the next seven eight nine years um you know if you if you apply a 10 15 margin on that you're at four four to seven and a half and operating income um and it's probably at 50 today so you apply appropriate discount rate yeah you're probably looking at the low end of that you're looking at paying 20 or 25 times um which doesn't sound crazy to me so again disclosure i don't own it right now but i think it's it's an interesting idea if you believe the story all right i think that's all yeah that's all our questions i think

yeah we agree with the i don't know those uh that multiple stuff all that all the margins there that seems very reasonable hopeful shareholders i guess yeah hopeful yeah yeah we got three optimists here one uh one guy that's pretty optimistic and uh plus i hadn't even considered the wells fargo partnership angle there you go that's probably optionality said look i think one thing i would add and i know uh we've been going in time you guys um but like how do you destroy this business right if if they're not able to get continuously higher engagement from the user base and grow it then you know it doesn't matter right it's going to be worth a lot less right um but what kind of optionality do they have if they are actually at a billion users right if

they're a billion users the ala carte model has infinite possibilities and and what are other types of optionality you have right you have two billion in cash not then they raise a billion three in in the exchangeable bonds which are kind of an interesting vehicle than alex and i uh instrument that alex and i have debated um yeah i'd love to hear well maybe i'll say that for another time but i'd love to hear um because we talk about that the the 1.3 it's it's convertible but it's zero percent rate it seems well it's not really convert it's exchangeable right so it's not a convertible bond so they don't it's at their option um and okay if they if the underwriters fully executed it which we don't know we'll know soon but let's say they did raise

a billion and a half right and they had like 2.2 billion right so gives you close to four billion dollars they have a two billion dollar stake in ten cent music you know my question is what why they want all that capital right because i don't think they just want to raise capitals for racing capital's sake and they had plenty of liquidity there's interesting possibilities in terms of how they can put that to work and um and i think if they continually do execute and grow and have engagement and the market cap goes down by half seems kind of crazy for for a big player or somebody not to take a ginormous stake in this but so i don't know i think i think that's kind of your margin of safety in in in my eyes it's really their execution so which might sound weird

as uh yeah the last thing i was going to say it actually dovetails perfectly to that and i i was going to say one thing i think i've learned from from watching spotify and researching the name is there's something interesting about a business that has completely undifferentiated supply or did for a long time. They offer the same product essentially as their competitors in terms of the songs you listen to on there. When you see a company like that, that is undifferentiated in a lot of ways, but still manages to have a meaningful share of the market and continues to do that for a long period of time, it's a really interesting situation that probably deserves a closer look and maybe either your assumptions that it's undifferentiated or

somewhat flawed, maybe in terms of the product that actually is differentiated or to Francisco's point, they could just be better at executing than some of their competitors. But either way, I think when you see a company like that, it probably deserves some, some attention. That's, that's a good way to wrap it up. Yeah. They, uh, we don't have any more questions. So thank you guys for coming on all right welcome back in thanks uh i guess in advance to uh alex and francisco for coming on so hot water let me go first go ahead yeah you're i this is the right well we can start with that yeah uh maybe we don't have the same one but virgin galactic shareholders are in hot water uh chamath apparently sold all of his shares uh he commented on it

in a bit of a strange tweet thread but he said he's selling them to work on a new big climate change investment do you think and first of all he i would say resoundingly he got a lot of flack from just about everyone so it wasn't like people were cheering him on for this um do you think people are starting to come around to the fact that maybe he isn't there for the little guy like he proclaims i will say yeah definitely i mean i'll look at this reddit thread where they talk about this guy it got so many upvotes on reddit uh who he's kind of i don't want to say he's been reddit champion he really hasn't uh oh it was deleted dang it had a lot of upvotes votes but it said chamath polyapatia due diligence snake oil says when it goes through all the kind of

shady things he did and then the first comment was uh he also skipped leg day and that got even more likes everyone knew the uh the selfie the old the old selfie did but there's also uh there's a lot of tweets and stuff that makes it seem like oh wait this guy might not know what he's doing because the outperformance the 56 difference thing i it's i hope this lasts for a few years like people are going to tweet that and uh it's a great uh it's a great format for uh funny tweets I know it's right up like a Michael Batnick or Miles Udland. Miles, if you're listening, we do appreciate those tweets. Yeah, I mean, yeah, I'm totally off this guy now.

Yeah, it's concerning. And if you're not sure what we were talking about, he basically said he's beating the S&P by 1%. But he divided the percents together, which that's not. Which then he's, which it was like 3% versus 2%. So he's like, we're beating it by 50%, which he's not wrong. Well, hopefully the S&P is flat for the year, so we can tell our clients we beat the S&P by infinity percent.

Yeah. Or trailing by infinity. You know who's even in probably worse hot water than him? Ross Gerber. So I think Ross Gerber and Chamath had some falling out. Not that they were ever great friends, because Chamath insulted him on Twitter, and now Ross has heard about it.

Whatever, it's petty things. But anyway, because Tremont sold his shares, Ross Gerber thought it was a good chance to dunk on him. And he's like, I know one SPAC that I would never touch that's not generating any revenue. And he's like, I'm not going to name names. And everyone knew that he was talking about Virgin Galactic, but he owns it through the ARK ETF that he owns.

Oh, man. Yeah, that's great. If you're a financial advisor, a wealth manager, or whatever and you're you're charging one percent he owns what he's saying he would never own like how do you let this guy run your money i'm just gonna say yeah it totally makes sense you're charging one percent you're getting charged one percent to hold money with this guy and then he's gonna take that money that isn't already get you know you're the 99 percent of your invested dollars each year and he's gonna put it into another strategy another active strategy

that the one percent is not controlling and then it's another is it basically another 0.75 percent given to ARK. That's a great use of capital. Bitcoin is also in hot water. Coinbase CEO Brian Armstrong has a compensation package that may grant him a million dollars per day every working day for the next three years. It's a million dollars, fiat dollars. Can you believe that? It's in fiat. That's something that should happen. It should be mandated that any Bitcoin exchange executives should be forced to be compensated in cryptocurrency well tell me how to do it they still don't know how to do it because remember when uh russell coombe was like i got paid my nfl salary in bitcoin and he got paid in dollars and then converted to bitcoin and then

people like it was a classic matt levine money stuff column he's like i got paid in salads i got paid in dollars and then converted my dollars to salad at the grocery store it's the same thing But either way, that's egregious. I don't know. It's egregious. Coinbase is going out at a million dollars a day. If you look at Coinbase, I understand their problem margins are great, but there's no way those don't get obliterated. You're telling me people are going to buy Coinbase's IPO at $100 billion?

Get out of here. Get out of here. Don't you think trading is kind of dependent on the price of their currencies? Maybe I'm wrong, but nothing changes sentiment. like price and the more the bitcoin goes up when bitcoin's doing well i had the same concern with the cash app like it's going to get more transaction volume but they actually have i mean cash up as a real business behind it well i want to yeah i want to say that but uh all right what do you have anything for current state or not or hot water yeah okay yeah i mean there's so many

right now 18t they're getting sued by the sec and they're getting investigated for misleading investors back in 2016 and i'm assuming constantly so executives went out to 20 analysts in 2016 to tell them to lower their earnings estimates so at&t could quote beat their estimates for the court the quarter fun fact the cfo that was there uh during this time is still there there's also these uh well i got some tweets life lesson always keep expectations low you'll be an overachiever so I got these tweets from Footnoted, who has some highlights from the legal documents. Quote, fearful of a revenue miss at the end of the quarter, AT&T's chief financial officer instructed AT&T's IR department to, quote, work the analysts who still have equipment revenue too high. Work.

Yikes. Work those analysts. Yeah. And then this one's even more damning. On April 25th, 2016, the day before AT&T reported its Q1 2016 earnings, the last of approximately 20 analyst revenue reductions brought the consensus estimate just below what AT&T knew it would ultimately report. AT&T's CFO emailed the IR director, we may just beat revenue consensus. The IR director replied, I think we will, smiley face emoji. And then they forwarded that to the CEO.

yeah i mean i can't touch 18s i mean it's bad i mean that balance sheet's crazy bad that's the thing is you take a good concept and you just douse it in leverage and bureaucracy and you've got a problem like or earnings estimates seems it's the same with auto companies they can have a terrible valuation but it's like still something i never want to own it feels too big too like something bad's bound to go on yeah and the earnings estimate stuff just don't pay attention to earnings estimates if anyone beats or misses just ignore it don't even look like it it really doesn't matter and also earnings i'll say don't matter cash flow is the only thing that matters uh but i will move on to my next one qqq is in hot water uh small

cap value is officially beating it over a one-year period uh dumb question and not how we like to invest and not really anyone invest but what horse would you choose over the next five-year period kind of a tough one what do you what do you think so what do you mean horse what the the etf qq large cap nasdaq you know large cap growth kind of tech companies uh small cap value etfs are the russell 2000 value i think i believe that's the index it's a tough question yeah i don't know maybe small cap value i guess i don't know ask the o'shaughnessy's give it just give it to the o'shaughnessy's or any of the quant managers to ask yeah okay last one sorry i'll make this quick but we'll get to the end of the show green silk capital i'm telling you there's so many people

in hot water this week this uk financier is going under they're bankrupt it's a supply chain financer, but really hard to tell what they do. It is important because they issued over $143 billion in 2020. So pretty important business. Again, I really don't know what they do, but they are going bankrupt. It'll be interesting to see how this story plays out. Fun fact, you might guess they were backed by SoftBank Vision Fund in 2019 with $1.5 billion. Ben Hunt had a good tweet about how there's a ton of self-dealing here. I don't know how this show turn into the self-dealing and fraud show but it's i guess kind of fun uh theme uh he said greensill made 1.1 billion dollars in quote loans to its two biggest investors softbank and general

atlantic then laundered the deals through a german banking sub and credit swiss buying a bank and having it lend money to you and your portfolio companies is a classic fraud but even better is co-sponsoring a spack and having it buy your portfolio companies so you can get a promote on both sides of the deal well that's uh interesting yes i i i don't know what it just it seems like so much of this stuff just goes down i don't know it's it's it's bad you can yeah check market sentiment by the amount of hot waters we have because if we have a whole bunch of them then maybe something's stuff's going down but uh is that all you have yeah okay uh buy sell hold the theme this week is companies that have had

large sell-offs, so companies that are actually good, kind of interesting. Unity, Roku, and Shopify. They're still... They still need a large haircut, in my opinion, but could be wrong. At their current price,

well, other than Unity, we said they needed a large haircut three or four months ago. Gosh. I'm going to rank the businesses I like the best. I'm just going to rank them i'm sorry i'm cheating i like roku one business seems so good yeah two unity really strong value proposition i don't understand it that well don't think i could ever invest in it

unless i understood it more the competitive positioning in that industry and then three shopify i just i think they're not going to grow that much i don't think everyone's going to be an entrepreneur i don't know maybe i've been wrong every time on shopify but man that's a yeah there are a lot of i guess some concerns i don't know unity would probably go down as my number three because the uh whatever they get so much mobile ad revenue and yeah idfa or what i don't know how that plays out so that's probably true third on my conviction list there roku's yeah roku's number one it's a business that i really really like it's still gosh i don't know what the haircut what haircut it needs but well i would love it started with 30 i think let's get let's get some

more let's just get some more okay um anecdotal evidence this week i don't really have that much uh i guess i watched a lot of netflix kind of solidified my thinking that i'll never get rid of it yeah seems very unlikely that i'll ever get rid of it uh but also i used lemonade for rent yeah for the whatever renter's insurance uh sleek i don't know i don't know if that warrants evaluation uh one little piece right there but i'll tell you my apartment the they had an insurance company wasn't lemonade partnering with renter's insurance and it's a two minutes as well how much minus five dollars a month no no i i think it cost yeah it costs a little more but it was embedded and like it was quicker so i i don't know okay all right what uh what do you have okay so dennis

hong had a good tweet uh light nice little graphic about what retail investors plan to do with their forthcoming stimulus check and a lot of stimmy yeah the sorry gotta get the term right uh a lot of people are planning to put it into the stock market now i don't know what reality will be whether you know people say they're going to do things all the time then don't do them but if we look here age 25 to 34 50 say they're going to put as part of their stimulus check in the stock market um income levels gme calls yeah it's where you ought to be a lot of the i mean most of the numbers here unless it's age the age group 55 and up or the income levels below 25 000 basically everyone here has in between 30 and 50 percent for different age groups

income levels and investing experience there's good i think there's going to be a lot of demand here but my thought is and this is again it doesn't it's not like i don't know i i okay if growth stocks continue to get a correction i think less of it if this money gets put into the market and if it has a nice comeback and stocks are gaining 10% a month like they have or some of those have been getting even more

then even more money will get put in but it'll be an interesting time I think the next 6 months are going to be kind of crazy it feels like there was a generational gap in financial literacy getting originally if someone told me that people were going to take their stimulus checks

and put them into the stock market, I'd be like, that's great, like financial participation, but I'm worried where that money's going and how much of it's being funneled through Robinhood. I hope, yeah, I mean, you hope it's not just on options because 98% of that money just gets lost, which would be disappointing. Got to put in some target date funds, get you up on a 60-40 or whatever. But I don't know. It'll be crazy.

Is that all you have? No, last thing. Sorry, we'll wrap things up. Arizona House of Representatives have just passed a bill that forces app stores to allow third-party payments. Now, I'm not sure exactly how this will play out internationally or nationally in the United States for Apple and Google, but does this excite you for any companies that are basically app-based that have been bogged down by the expenses from Apple and Google where basically 15% to 30% of their gross—or sorry, cost of goods sold? No, no, no.

Sorry, not 15%, 15% to 30% of their revenue gets taken and given to Apple and Google. My first thought is Match Group, if that got taken away, their operating margins would jump to like 50%. But I'm sure there's other examples of companies that could do a lot better if that got taken away. Yeah. Match Group is definitely a possibility. It's something to watch out for. I don't mind. And I am of the camp that Apple has sort of monopolized their service.

30% is high. I know that gets debated. Yeah. And it's like, oh, well, it's their platform. They get to charge whatever they want. Then don't have Apple Music. Yeah. But the 30%, that's high.

That's really high. It feels like it needs to be. It's a hefty take, right? It feels like 5% to 10% makes more sense. Yeah. All right. Well, I think that's going to do it. Thank you for listening.

Thank you, Alex and Francisco, for coming on. If we missed anything or you guys want to reach us, it's at chitchatmoney on Twitter. But we are not financial advisors. Anything we say or discuss here on chitchatmoney is not formal advice or recommendation. Brett and I are also general partners at Arch Capital. So clients or ourselves may have positions in the securities discussed on this podcast. Thank you guys for listening. We'll see you next time.

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