Chit Chat Stocks - Google Is a Monopoly; Starbucks Steals Chipotle's Top Dog; 6 Stocks With Insider Buys (GOOG, CMG)

Starting point is 00:00:00 Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. welcome to chit chat stocks this is our weekly power hour episode i am one of your hosts ryan henderson and i am joined as always by the one and only brett schaefer on these episodes we go live on youtube and we talk about all things financial markets and we got a ton of news this week google potentially to be broken up we'll see i'm not sure there's any really concrete plans

Starting point is 00:00:58 there. But there was also a poaching of a CEO, Starbucks pulled in a new CEO and Chipotle lost one. We're going to talk about that as well. But I guess I should introduce you, Brett. How are you this morning? How is the tail end of earnings season treating you? Yeah, welcome in everyone. I'm doing well. Earnings are done for me. I guess the portfolio companies I own, just I think seven or eight as of this moment. So it's been a fun one. Nelna had an interesting one, GoGo, Portillo's, Philip Morris International. And there was some fun ones last week. I kind of want to get into Bumble, which I think was a nice indicator on the state of the dating app industry and where that's going. And then we also have, as you

Starting point is 00:01:49 mention some really good news items this week, specifically Starbucks and Chipotle. And then Google had its Pixel event. And then at the same time, we saw the Department of Justice. It seems like every quarter there's a new announcement around this, but then Alphabet as a company never actually changes. It just keeps getting delayed and delayed and delayed. But I'm excited to talk about it. But before we do, do you want to talk about our friends and our presenting sponsor. Yes, our sponsor is Public. If you trade options, you've got to ask yourself, why wouldn't you choose an options trading platform that puts investors first? At Public.com, there are no commissions or per contract fees. And more importantly,

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Starting point is 00:03:11 is maybe the place to begin would you agree okay okay yeah that's fun why don't you go through some of the notes on that so yeah it feels like there's basically antitrust litigation ongoing for the last like i don't know five years with big tech at any given time like i'm sure there's probably outstanding lawsuits at this moment that we're not even discussing but for this one google i guess was declared to have it was a it was a very long response i did not read i read a bunch of the article summaries i did not read the primary documents in this case but google i guess was declared to have an illegal monopoly on search and it their argument was that there are other competitors in search like tiktok and amazon and you know the the apps where people are using it

Starting point is 00:04:10 to search, but not necessarily general purpose search. And the court declared that as no, those are not general purpose search engines. And you do have, I guess, an illegal monopoly and you're paying whatever it is, $20 billion a year to maintain that on Apple. And that was, I believe, sort of the focus of it was that they can no longer, or coming out of this, they should no longer be able to pay to be the default search engine here's the thing i find interesting in the hearings the senior vice president of services at apple said in court i don't believe there's a price in the world that microsoft could offer us to replace google as the default search So there have been some proposals, I believe. I'm not sure. I don't think they've strayed any particular way. But one of the proposals was that they end up breaking up parts of Google, including Android.

Starting point is 00:05:16 um that was one of the ones that was offered there was also you know maybe break off google chrome maybe break off uh the browser or uh yeah the browser nothing's concrete right now but i guess i want to get your take on this too first of all i'm not sure breaking them up would do a whole lot. After reading through this, it kind of made me think if Google stops paying $20 billion a year to Apple, Apple made it sound like, look, we didn't choose Google because we have some contract in place where we have to. We weren't going to choose anyone else because they are far and away the leader in mobile search. And if they lose $20 billion a year for one, I would be concerned as the – if you're looking at Apple as a shareholder, that services revenue could disappear.

Starting point is 00:06:17 Maybe it could become more of a competitive bid but I don't think – I think even in Apple's case, they just said it, right? Like if Bing bids $30 billion, they might still take Google. So to me, it's a testament to the moat. It's a testament to the platform for Google, the search engine. and it seems like there could be more operating leverage for search here because if they're not paying 20 billion dollars a year to apple that is pretty much directly going to the bottom line assuming that they continue to be the default search browser yeah it seems like in the short run at least it would lead to alphabet's earnings going up now there are some concerns potentially

Starting point is 00:07:01 over the long run if they can't own android if they can't own i don't know how they would get rid of google chrome that one doesn't make too much sense to me but if they had to get rid of android that could potentially hurt the moat over the long run same as google cloud right because that's the backbone of all their services but i don't know if that would take effect right away like android is very very important to maintaining the google search market share because it is the default, like every single Google service, every single Google app, everything on Android is default to Google. So essentially 70% of the smartphones in the world, you're going to be using Google search. It's really not a debate. So if they had to separate that out,

Starting point is 00:07:47 I think that would be a concern over the long run in the short run, probably not so much. I think reading through the case, you see that, I think a clear thing when what Apple's saying here is that it's not a $20 billion payment. It's $20 billion from a revenue share. So even if Microsoft offered 100% revenue share, they're not exactly sure they would be able to match it just because of the dominance of Google Chrome, just because of the dominance of Google search and how people would go from that default, especially if we see it on Windows here. You know, the default on Windows is Internet Explorer and then Bing, but Google still has 85% market share. I think they are concerned around that it makes sense to me that google shouldn't be allowed to do this

Starting point is 00:08:30 make these payments and maintain its monopoly because if you look at the history yeah they acquired android but they really bought and then built it they really built their monopoly in search organically for the most part they did it through skill but then trying to i guess pay to maintain that monopoly probably isn't that fair and what the funny thing is is google probably can say that it's risky for them but it's probably more risky in the short term for apple at least does it from a shareholder perspective yeah i mean from a consumer's perspective like i don't mind at all that google is the default browser on safari for ios i bet for android users it's probably the same i bet they're glad they don't use bing um so if they were to split off android my guess is they

Starting point is 00:09:29 would just sign a separate company deal or that says like it's pre-installed or if they're not allowed to do that people would just ultimately end up downloading it anyways would be my guess because people want a search browser so um yeah i think you're probably right maybe it isn't fair that this deal exists but i would be more concerned if i'm an apple shareholder here than if i were a google shareholder and maybe i guess maybe i'd be concerned if i were a microsoft shareholder as well because they really had no chance to quote unquote make Google dance, like Satya Nadella said, like Apple said it, there is no price in the world they could have paid on a revenue share agreement that they would have switched. So I do think

Starting point is 00:10:22 that's a testament to the moat. Now, I want to give you a theoretical. Let's say for some reason, the court was like, you know what? No, it's a monopoly in its entirety. You have to split up all your divisions, Google, what division would you be most excited to own? Well, it depends what is in each division, I think, because if it's simply Google search, maybe not, but if it's Google search plus every other Google product, I think that one's highly attractive. Now, Google cloud could be interesting, but I think they need to be well capitalized. They probably need to load them up with some cash and then put debt at the Google search business subsidiary. I think that would make sense. But YouTube, I'd like to see those financials first. I think they are

Starting point is 00:11:09 maybe less profitable than people think given all the revenue share and the cloud requirements and all that stuff. I like all three of those. If we're thinking YouTube, Google Cloud, or Google Search. But if I'm going to go number one, it's probably Google Cloud. They've executed extremely well over the past few years um yeah what about you yeah yeah probably gcp google cloud or uh if you can get if you can include in youtube the subscription business so youtube premium and even youtube tv because even though it's probably kind of running that at cost i think through probably generating a lot of ad revenue. I think that is a wonderful business that if I'm looking at Google, the Google complex, I know this is hard to say because Google search has

Starting point is 00:12:09 been so dominant, but I have so much trust in YouTube's durability because of the network effect there and the user generated content. I really don't think at this point there's any video library that can replace them over the next 10 years and they've just done such a good job solidifying that so i would suspect that they're going to be that business will continue to grow for probably the next 20 years yeah i agree with that one uh we have a comment here that says i want whoever doesn't get the moonshots division yeah that's probably better put under a parent company uh it'd be very hard to run a business like that because as of today waymo the one that generates the most revenue, I think, is likely highly unprofitable and probably on a five to

Starting point is 00:12:59 10 year runway until they get to profitability. We have, let's see, the one thing I want to finish up this segment on is say that it really depends what the final remedies are for Alphabet before I have any take on whether it's good or bad for the business. Now, a spinoff under its current form and under the current regulations make a lot of sense, at least for owning the company. YouTube would get a premium multiple. Google Cloud would get a premium multiple. And Google Search would, I think, maintain its monopoly status, probably get a boost by not having to make these revenue share payments, which I should note, they also make revenue share payments to the likes of Samsung. So it's not just the $20 billion, it's probably

Starting point is 00:13:44 $25 to $30 billion in total. But we have to see what the remedies are, because if they make them And there are a lot of things that I believe maintain the monopoly that I think are underrated. For example, it's just for me, it's all the services that are free around Google Search, Gmail, Google Drive, Google Chrome, Android. If that gets messed up, I think there is mode deterioration risk. So we'll see. But that's kind of my final thoughts there. Yeah, we should move on. We did get a question in the comments that I think is worth addressing, at least just to discuss the mechanics of what's happened.

Starting point is 00:14:25 So we got a comment that says, could you guys give an update on Harbor Diversified? For any of the listeners here that don't know what Harbor Diversified is, it's a company I believe, Brett, both you and I own separately. And it was a holding company for Air Wisconsin, which was a regional airline. It was small. Basically, the kind of thesis. It still is. Yeah. Yeah. It's still very small. Very illiquid now too. And I'll explain why that is.

Starting point is 00:14:54 It still owns Air Wisconsin. The business is the same. Yes. Correct. And it kind of came public through a weird situation. And it kind of seemed like the management team didn't really want to be public. So anyway, all this is to say, we thought it was kind of this very illiquid value play. So we both own shares. And then And I want to say about a month, two months ago, their listing got moved to the expert market. So they stopped filing. They were not timely on their SEC filings anymore. Part of that may have been an accounting issue.

Starting point is 00:15:34 Part of that may have been that they just – I'm not sure what the repercussions are here, but they just wanted to stop filing so that they could get moved off and maybe eventually go private again. Anyway, so it's on the expert market. And what that means is if you own shares through Schwab or through IBKR or wherever, you can sell your stock, but you cannot buy stock, which makes it so the stock is very likely to decline, which is exactly what's happened. The stock basically got cut in half a little more than that. So unless you have really like a broker and you're a high net worth individual and that broker is able to buy shares on the expert market, it's going to be hard to accumulate shares. I guess for Brett and I, or at least for myself, we're kind of just sitting in limbo right now waiting to see what happens and hoping they start to refile again. Yeah, look, this is microcaps. The business is the same.

Starting point is 00:16:36 the company is the same the stock isn't any different any shareholder owns the same rights as they did they just haven't filed and the sec or the nasdaq or whoever it wasn't well maybe it was the otc markets whoever was regulating them kind of put them on that watch list and then it was pretty clear like there's just a format of the rules that are followed on a timeline of when you stop filing then you get the like prevented from trading i guess is the best way to put about it and you're just going to be stuck with it so that's how it you know that's how it goes and if they start filing again they'll be able to be traded and you just got to watch out for the sec filings of what happens if management tries to take

Starting point is 00:17:24 themselves private or or whatnot and that's really it i mean the business is the same so yeah hopefully that helps, gives a little more context. But I do want to talk about Starbucks poaching Brian Nichol, the CEO of Chipotle, the active CEO of Chipotle, as he was. First of all, have you ever seen this, where an active CEO gets poached from one company to another, pretty much in the same, I guess you could say, industry? I'm guessing it has occurred. It doesn't seem too crazy to me. they want they were a much larger company and they went for the the guy with the highest reputation in the industry i know i just never i've never actually seen usually you see some sort of an interim period where like yeah they resign it was quick yeah i mean this was just

Starting point is 00:18:14 straight up all right i'm switching companies so yeah brian nickel he's been the ceo of chipotle for i believe he was helped helped appointed by bill ackman when they started pershing square started taking their stake after the E. coli incident. And he's done a phenomenal job with the business. They've grown store count rapidly. Maybe you can pull up the charts on Finch out here, Brett. Comp store sales have been consistently high. I'm guessing over the last eight to 10 years, I'd say probably double digits, maybe high single digits, which is phenomenal for a quick service restaurant. And on the flip side, Starbucks has been struggling. Starbucks, they've had two quarters now, maybe four quarters actually in a row of negative

Starting point is 00:19:02 traffic numbers. So less people coming through the stores, concerns all over the business with succession planning because the new CEO, this has been twice now that Howard Schultz named his successor and they said, no, you know what? I don't like what you're doing. I'm going to come back and so yep brett's showing the chipotle comp store sales here yeah you can hit the average there right on the little gear icon so i can see where is it the gear yeah graphing lines first one median or no average yep average yeah so they've averaged 5.2 percent if you strip out 2016 with the ecoli incident i would guess it's probably in the ballpark of well i mean the comp sales come back so i i wouldn't strip that out no because you're comping off a low base there so maybe if

Starting point is 00:19:50 we go from post e coli when they brought him in but again that's you know it's comping at a low base since he has been there i would guess the comp sales have been really strong but yes coming off of quite a low base uh one yeah six or 7.3 7.3 it's a little higher anyway really strong for a quick service restaurant. So he's kind of, I think, regarded as a phenomenal business leader in this industry. And Starbucks, who recently attracted an activist investor in Elliott Investment Management, founded by Paul Singer, who's kind of this iconic, scary looking activist and has a history of replacing management teams, came in, bought a stake in starbucks and very quickly replaced the ceo since since they announced

Starting point is 00:20:43 their stake uh i would guess it's probably been like two or three weeks and the ceo is gone so and starboard came into unless you already mentioned that too starboard as well starboard value another sort of activist fund so all this is to say brian nichols has hopped to starbucks Starbucks stock was up 22% on the day. Chipotle stock was down 13%. This was a $30 billion market cap swing in value. What are your thoughts there? First of all, it's got to feel pretty cool if you're Brian Nichols to see a $30 billion market cap swing when you switch companies.

Starting point is 00:21:20 But what does this – I don't know. What do you think of both companies having such big swings purely because the CEO joins? Well, the old Starbucks CEO looked like a McKinsey robot or sorry, didn't look like a talk like one. So there was a huge concern there and they seem to be doing really, really badly, at least with a high quality business like that or perceived high quality business like that. So you bring that out. It's probably a good thing. Nickel has a great reputation. Starbucks stock has kind of been beaten down, so not surprising whatsoever.

Starting point is 00:21:58 I think another interesting thing is that Nickel was at, I think this is right, but I just saw this on Twitter, so I'm not sure the exact details. I think he was at Yum Brands when they spun out to Yum Brands and then Yum Brands China. So there could be some ideas that he's going to do the same thing because Starbucks China is getting hurt by Luckin, And it'd probably be better to spin that out and have yourself, you know, it's just better to operate a China only business that follows their rules, follows the regulations, just because it's so different from everywhere else. And there have been times when it's a global brand that for H&M, for example, where the Chinese government just decides to eliminate your business, which is not a fun operating environment to be had. so that could be bullish, maybe spinoff or separating the two businesses. And he seems

Starting point is 00:22:53 to have a good reputation. I mean, the comm sales at Chipotle have been strong and better than the overall industry. Chipotle itself, though, also not surprising. But I think that's because, look, this is not a cheap stock. PE is still, I'm seeing 51. look if they slow down at all this thing is going down another 50 percent so it was really risky to own chipotle at 60 70 times earnings and i think this just shows why you want a margin of safety with the stock you own stocks you own yeah i'm sharing my screen here on the transactions for starbucks lately uh it's since the last two quarters same store transactions have declined six percent then declined five percent this quarter it's maybe it was mismanaged but

Starting point is 00:23:48 i don't know we've talked about some like other issues at starbucks that are maybe more like structural for the business uh for example this shift away from the in-store experience to purely pick up kind of maybe maybe commoditizes the service a little bit in my opinion um there was at one point a interview with laxman narisaman i believe is how you say it sorry if i'm getting that wrong um and it was jim kramer and jim kramer everyone's got their opinions on jim kramer and he is lately he's kind of been the laughingstock of the financial community but for what it's worth he is very entertaining and he put this guy uh he may have put him out of a job to be honest. The interview, he pressed him hard about the transactions declined.

Starting point is 00:24:42 And at one point, he was kind of going back on something he said earlier. And Kramer just came out and said, this is a horrible quarter. It's really uncomfortable to watch. But when you watch it, you instantly lose confidence in the CEO or in Laxman at the time. So yeah, people were saying that interview may have killed his career it very well might have but i think elliot probably had this planned for a while same with starboard value they probably talked about it bringing in brian nickel do you have any interest in either stock right now no no starbucks looks cheap but it's too big i don't know why i would own that over other things chipola is just too expensive I think there's a lot of risk on that, a lot of risk to owning that right now.

Starting point is 00:25:37 I wonder what the general, if he has anything to do with this, Bill Ackman, for those that don't know his nickname, he owns Chipotle, knows the CEO, has been involved, I think has been involved with Starbucks before. I don't know if they currently own it. I wonder if on the 13F, it's going to show up that he owns Starbucks. That's a clickbait headline right there. Yeah, that would be interesting. I kind of doubt it, but we'll see. The other thing that I'm thinking here is if you like Starbucks, we just had an interview where we talked about Alsea. Like if you believe that Starbucks is going to kind of reinvigorate growth here, I feel like Alsea is kind of the way to go. They've become the franchisor in Latin America mostly for Starbucks locations that were granted that license by Starbucks.

Starting point is 00:26:27 And so I think given Starbucks saturation in North America, I'd be optimistic potentially about their international growth. But if that's the case, I'd probably prefer to own the local franchisor, which in that case would be Alsea. Yeah, I would listen to the interview and research the stock yourself, but I don't understand why someone would own Starbucks overall sale at these prices. It makes minimal sense to me. All right, maybe we have some comments here. Any questions? We talked about the HRBR stuff. Someone said, which stocks are highest on your watch list? Are there any that look like buys today? I would say for me, there are three that I've done this year that I've added to my portfolio and they are historical episodes and i bought them way earlier this year

Starting point is 00:27:14 and that is nintendo gogo ticker gogo and portillo so those would be the three on the highest on my watch list right now what about you ryan yeah i think most of the stuff that was highest on my watch list i've since bought or i am going to buy full disclosure two of the stocks that were up there on that watch list. We recorded an episode on and it should be out next Wednesday. So a week from today. And it'll be talking about two of those stocks. Not going to name them now so that you can hopefully go listen. But Amazon was pretty high up there. And I'm happy that I kind of got at least some of an opportunity to buy some after the recent earnings, which I thought were fine. um other ones that are up there there's a lot of companies that i think are really high quality

Starting point is 00:28:04 that are just really not an evaluation i want to own right now addy n is one s&p global is actually one that i would like to own but it just doesn't seem that attractive to me at the current price airbnb is one for me i think you're a little less bullish on it but But it had to be cheaper. I think we're still kind of in a limbo zone where it just doesn't feel like the risk-reward is that great. But I think that's a high-quality business that's underrated. So, yeah. I like Lowe's too.

Starting point is 00:28:37 You do like Lowe's. Yeah, we can talk about Home Depot had earnings this week. And it was a bit of a rough quarter, slightly better than expectations. But they've now had seven quarters in a row of negative comp sales. And a lot of that is just simply people are deferring big projects. A lot of big projects on their homes, people finance. They take out a loan to do a home project, maybe a HELOC or something like that. Yeah, freezing and the freezing of moving, right?

Starting point is 00:29:10 Yeah, that's the other part is you do a lot of projects when you move and there hasn't been nearly as much movement because of interest rates. So they've been kind of a loser due to the rapid rise in interest rates. However, Home Depot still trades at 23 times next 12-month earnings, and Lowe's continues to trade at a discount. I think those two businesses will probably have similar growth in earnings over the next 10 years, and Lowe's is, because they're valued cheaper, able to buy back way more stock, which is really nice. yeah brett's showing the revenues here they've got the sales on there as well if you want to yeah i'll do comp sales next um stagnating and what is it customer i'll find it it should just be at the bottom there yeah comp sales growth yeah that's tough but i mean look at how good it was in 2021 yeah i mean it's obviously lapping a difficult period the yeah tyler in the comment

Starting point is 00:30:15 says, is Home Depot's 4P really higher than Google's? Yes. If I'm a betting man, I think I'm taking Google there. The concern for me, for Home Depot, is not that it's a bad business or anything like that. They've actually done a phenomenal job executing. Dads seem to love that place. It's like Disneyland for dads. Great brand, really strong boat. I think we did an episode on Lowe's and that plays into the same thing with Home Depot and Lowe's. You might think, ah, it's just a retailer, but I think it is in the class of retailers like Walmart and Costco that have very, very strong loans. Yeah. Huge economies of scale here. They get way, both of them get way better rates from suppliers because on a per unit basis, it's far

Starting point is 00:31:06 cheaper than the local mom and pop shops. And they've just been continuing to cannibalize the home improvement industry, home improvement retail industry. Anyway, they're basically a victim of their own success. They've done a really good job increasing the efficiency in their stores. So they've gotten a premium valuation, but I look at Lowe's and I kind of like them a little better just given the discount. So I'd say that's another one that's kind of up on my watch list. But I feel like we also just did that episode where we talked about the stocks that were highest on our watch list what were the four companies again uh i don't remember let me let me pull them up maybe i don't know i'll find it i'm blanking on it but a lot of the ones that

Starting point is 00:31:48 i feel most inclined to add to are probably companies already in my portfolio yeah oh yeah four top stocks on our watch list oh well yeah these are all over not overpriced ones but ones that we're trading at a valuation we didn't really find attractive right now and that was netflix google spotify and american express i personally and you might disagree on spotify but i personally think all four high quality businesses but they're all trading at a premium valuation at the moment just got a comment here uh from lucas he says i've been listening for one year already on spotify pleasure thank you for joining us we're happy to have you recently i have been enjoying you talking about random small caps very much please keep doing that famous investor episodes are also

Starting point is 00:32:30 great uh thanks guys hey new ideas go ahead go ahead i've got a small cap of the week today that might entice you lucas so i appreciate the comment yep and i was going to say those are two of our new ideas for 2024 so i'm glad that the listeners are enjoying them all right we're about halfway through we're about a little over halfway through ryan so you want to talk about maybe your friends at FinChat, friends at Public before getting into your next topic, potentially the small cap of the week, but we'll definitely be hitting that. And I saw a question we have on Nelnet. We'll hit that as well. Okay. Yeah. So for FinChat, we use it all the time on the show. If you actually watch the

Starting point is 00:33:13 episodes, we're screen sharing frequently. It's literally so fast to get financial data and it's saved us so much time. So complete research terminal and it's accessible for the individual investor as well. The price points are certainly not out of the budget for an individual investor. So quick and easy financials, finchat.io slash chitchat. You get 15% off. Tons of people have been using that code. So we appreciate you using it and I hope you're enjoying the service. And earlier in the show, you heard us talk about the investing platform, public.com. That is where you can trade options with no commissions or per contract fees. And you get a rebate of up to 18 cents per contract traded. NerdWallet recently gave public five

Starting point is 00:33:54 out of five stars for options trading. If you want to see why, go to public.com and start getting a rebate of up to 18 cents per contract traded. This is paid for by public investing. Options are not suitable for all investors and carry significant risk. Full disclosures in the podcast description, US members only. All right. I'm going to show you a future small cap of the week, Ryan, or maybe one that's going to hit micro cap here soon. And I'm going to show you a chart here of Bumble's stock price. You see this? Is that a new segment we should do?

Starting point is 00:34:26 Future small caps of the week? Just companies that are going down the drain. Market cap, $750 million, Ryan. So I think it's within the general range there. But I know you like to go smaller and undiscovered stuff for that segment, which people seem to like. Down, let's do the drawdown metric. Down 93%. So if you thought Match Group was bad, Bumble, I guess, is even worse.

Starting point is 00:34:52 I'll go through some of the numbers. They had their earnings last week, I think, after we did our live recording. It didn't seem that bad to me, but I guess their guidance was pretty weak. They had a huge revenue growth slowdown, which I thought could have been, people could have predicted that with the slowdown at Match Group as well, but they grew revenue just 3.4% last quarter. Paying users were up, but ARPU was down, average revenue per user. And they are guiding for more of a slowdown.

Starting point is 00:35:21 So for barely any revenue growth in 2024. On a positive note, quarterly profit margins keep marching higher. I'm seeing operating margin of about 20%. Forward PE is now just 8%, although they do have a lot of debt. I think they have one of those annoying tax receivable agreements with Blackstone. which can be frustrating and i think should actually be illegal i i think they should be illegal that's i'm gonna run for president that's gonna be my one uh one item on on the ticket but the question i have is are you done to your head are you buying here or is this another sign of

Starting point is 00:36:03 the dating app apocalypse and it's just gonna get worse and worse no i don't like bumble um Not the app. I'm not on the apps anymore. But I don't like the way it's run. I have some concerns with management. We actually talked about Bumble when it filed its S1, and we had concerns with management then. So it's nice to see that those have kind of come to fruition. It doesn't seem – I think Whitney Wolfe Hurd did a good job creating a vision for the company, very much female empowerment. Bumble actually has done a fairly good job expanding into Bumble for Friends, like diversifying away from purely just the dating app. um you know the product is pretty solid but i worry that maybe they're not that she's not best suited to be running a public company well she's gone ryan are you sure yeah she's been gone for a while i think it's because of those concerns okay she's just executive chair now She left and is in November of 2023 and will be replaced by Lydianne Jones, the chief executive of Slack.

Starting point is 00:37:24 Wow. Ignore everything I just said. I don't know much about this other CEO, but I don't know. Whitney Wilford is still a fairly large shareholder and co-founder of the business, I guess. I guess I need to form a new tick, and maybe I need to re-look at this business. I like dating apps, but I don't like concentration risk with a dating app. And I guess Match Group had that to some degree. It seems like an industry that changes a lot, and we've seen that with Hinge's kind of growth at Match Group.

Starting point is 00:38:04 So I don't know if I'd be betting on a single app. The same reason I want to own Grindr is it's very much single app concentration. I like having a basket approach. Yeah, and maybe the basket approach is just owning all three companies. But I think my summation of what is happening at Bumble is they are, one, seeding share to Hinge, which is owned by Match Group. And two, the industry is not growing anymore. now maybe that's a pandemic overhang where we saw multi-year growth and now we're kind of getting another bullwhip effect here but we're getting pretty far up from the pandemic so i think there's

Starting point is 00:38:45 more and more concerns that this is a structural ceiling on the industry but like if you look pre-pandemic the industry was just growing year after year after year and if that if that returns bumble's probably fine now i don't know the balance sheet that well anymore and i know that it is a bit sticky uh or not sticky it's annoying when it was owned by private equity they load them up with debt and have these tax receivable agreements that are essentially i think stealing but stock probably works if the industry gets back to growth it doesn't look like the app is doing that bad because paying users are up but that number can be manipulated i'd love to know monthly and daily active users which they don't disclose i don't think and that's pretty much it

Starting point is 00:39:33 i don't i would like to know where grinder's trading too but having those three as a basket match group bumble and grinder i think it's an interesting bet right now seems like you get a good risk reward but i'm worried i'm worried about the industry maybe it's the bottom but a 95 million dollars in operating income over the last 12 months market cap is quite low yeah if they start buying back stock this thing can reduce shares outstanding pretty quickly yeah i'd be curious what the debt agreement is here because it says the enterprise value is 1.7 billion and the market cap is like 700 million so maybe they're calculating it a little differently here on FinChat. But yeah, those debt agreements, the tax receivables, and it looks like they have

Starting point is 00:40:27 $400 million roughly in straight up net debt. So if a lot of it's just going to be going to paying down debt, I'd pay close attention to the balance sheet with this one. Let's talk about another small cap, micro cap, actually, if we want to call it that. And I'm characterizing everything below $500 million is micro cap land. This one was recommended to us by a listener of the show and he actually gave it a pretty good elevator pitch on Twitter. So if you ever want me to talk about a stock or you want me to look at one, feel free to just send them either to our email chitchatmoneypodcast.gmail.com. Please include a little elevator pitch, not just a name or hit us up on Twitter. We'll definitely talk about them. I like getting recommendations.

Starting point is 00:41:15 So first thing I did, which this is a shameless plug, I looked up the ticker P-E-R-I on Yellowbrick Investing and found a great write-up on them, which that's kind of my sales pitch for Yellowbrick is it's kind of like a value investors club. If you want to find high quality write-ups on literally any stocks, you can just type in the ticker and more than likely you're going to find a write-up because they're scouring the internet to compile them. Um, but Perion Network is the name of the company. Here's a quote. Perion is an advertising technology company offering brands, agencies, and publishers a way to reach customers across multiple platforms and channels. It is focused on three areas within digital advertising, search, social media ads, and display slash video slash connected TV advertising.

Starting point is 00:42:05 however four years ago bing accounted for 45 percent of revenue on june 10th of this year parion put out a release stating the company said the relationship or sorry it said basically bing was essentially dead after being notified them which was they were one of several publishers they were going to start being excluded from its search distribution marketplace so they have gone from 45% of revenue coming from Bing to an immaterial amount. I think they're projecting less than 5% of revenue for the rest of the year coming from Bing. So kind of a good example actually in the risks involved with customer concentration, especially in one with like search advertising where little shifts can change everything if you're like a derivative

Starting point is 00:43:03 off their marketplace right and i think what microsoft has a market cap 1000 times bigger than parion i think that's how you say it yeah so they don't have much negotiating leverage with them yeah but when parion became public they were kind of for like a while they're in the bubble a bit of a market darling they actually raised a bunch of equity and they made some acquisitions that were like, fine, I think. And they were mostly in the display video advertising and CTV advertising segments. And so that's kind of the rest of the business along with social media advertising. And so if you, according to some projections here, it says pro form looks like they will be run rating 40 to, this is once you strip out the Bing business, looks like they will

Starting point is 00:43:54 be run rating $40 to $50 million of EBITDA down from peak EBITDA of $230 million. Free cash flow, likely 80 to 90% of that. Stock-based compensation is like half. So call it run rate free cash flow minus stock-based comp of $20 to $30 million a year. For reference, the market cap of Parion right now at $8.45 per share is $400 million roughly. They have $400 million in net cash on the balance sheet. So enterprise value here is basically zero, maybe 10 to 20 million, depending on how you net it out, because there's whatever, it depends what debt you want to include. And this is probably the most exciting part. They just authorized a share repurchase program for $75 million, which is roughly equivalent to like 20% of the current market cap.

Starting point is 00:44:46 So in the last quarter, they bought $20 million worth of stock. So they bought back 5% of their stock in a single quarter. I don't love this business. I don't love the ad agencies. It kind of looks like they're not really profitable with these existing businesses. It seemed like Bing was a big profit driver for them. Maybe they can start to generate some profits. Last quarter was less profitable.

Starting point is 00:45:11 But if they're committed to doing this buyback, this could be a huge return for shareholders if it just basically remains a small business. However, here would be my one concern, my one caveat there. They also said in this press release they're up for doing buybacks or acquisitions that make sense. If you are a manager, put yourself in the executive's shoes. Let's say you thought your business was declining. that your remaining businesses, would you rather continue to buy back stock and maybe have the risk that your business isn't really that big in the future? Or would you rather continue to take a salary and acquire a bunch of companies so that you survive longer, but you

Starting point is 00:46:00 don't really drive value for shareholders? So I would be curious. I haven't looked at the management's incentives. I haven't looked at whether they're big shareholders or not. If they're big shareholders, maybe they're happy to buy back stock. I would love to see some sort of incentive alignment here um but yeah a bit of uh i don't want to call this a net net but not a wonderful business but potentially a wonderful price interesting tickers p e r i yeah and why i think it it's one that would interest me because in microcaps i do like ones with giant net cashes on the balance sheet. The thing is, the management teams can get prickly. So no matter what you're doing, and I'm guessing almost all the listeners here can't be

Starting point is 00:46:47 activist investors, always make it a small position. Yeah, for sure. All right. You mentioned Yellow Brick, always the co-sponsor of the small cap of the week. Do you want to highlight them? Yeah, they do really drive that segment for us. I mentioned it earlier, but they are kind of a modern value investors club. They scour the internet, podcasts, blogs, hedge fund letters, social medias of great accounts and great investors and compile the pitches, stock pitches all into one place. I've recently really been enjoying their newsletter.

Starting point is 00:47:24 It just like constantly gives you new stock pitches to look at. If you use joinyellowbrick.com slash chitchat, You get a discount there as well on any paid plans, which it's well worth at least checking out. Yep, and you can try it out for free. So don't think it's only paywalled stuff. Go check it out. Interesting website. Go browse around there.

Starting point is 00:47:46 You want to talk about Nelnet? Biggest hold on to each of us, as the title says in that podcast episode that we did, our bet on the next Berkshire Hathaway. We have a question here. And I think this is an interesting one, maybe to spur the discussion. There has been an acceleration of share repurchases at Nelnet since September of last year. Indication of intrinsic value outpacing share price or lack of reinvestment options? I think first one is yes. Second one is probably true.

Starting point is 00:48:18 So I think there is maybe a lack of reinvestment options that are higher than what they think they can get by repurchasing stock, which I think is a good value at these prices, even though it's well above $100 a share now. I think last year, and if you look at the chart, they paused buybacks for a bit. And that was because some of their business is extremely interest rate sensitive. And also, I think they were worried, well, not even think, they said this in their annual letter, they were worried about the banking crisis last year and how that could affect them. So I think while interest rates were soaring from the Federal Reserve. And then we had this banking crisis, they built capital on the balance sheet. Now that that's passed. And now that interest rates, I guess, never say never,

Starting point is 00:49:04 but inflations continue to come down. And the Fed has indicated that they've they've paused, they're going to pause or, you know, decline interest rates, drop interest rates, and that they've stagnated for a while their balance sheet is at a little less risk. And now they can buy that core stock. Yeah. I'm just working on pulling up a chart here. What from the quarter most stood out to you? What'd you like to see? I saw the servicing business got hit by the new contract a bit, but not a huge thing. I want to look at the numbers again, because there's a lot of things. I think they are accelerating a bit from a small base on the commercial solar stuff, which I find interesting. So hopefully that can grow over time because that

Starting point is 00:49:53 with the tax stuff can be quite attractive for a business and a conglomerate like Nelnet. And then the education and software business continues to be the star because that's going to be, I think, well over $100 million in EBIT and generating very attractive cash flows. And each year there's going to be more than $100 million and growing, flowing to the balance sheet that they can reinvest into other stuff or return to shareholders. Yeah, the education business for me, I mean, it continues to be the jam here. It's a collection of software businesses that are deeply ingrained in the education system from K through 12, all the way to university system as well.

Starting point is 00:50:41 It's one of those that honestly, I don't even give that much thought to the quarterly earnings. I wait for the commentary, really, from the annual letter. And, you know, there's a lot of variability quarter to quarter, especially from the asset generation business. So we're sorry, the loan, the student loan. So I don't know. I think I'm comfortable just continuing to hold shares. Yep. I'm really glad they're buying back stock now.

Starting point is 00:51:09 That's one of the big things I look at each quarter. So, yeah, not much. huddles still won't go public but when it does what when it does what it does yeah like it would be a maybe annoying is not the right term it's not a very professional term but it'd be an unfortunate situation if huddle was the only catalyst that you're looking at for a business like this but they have a lot of other stuff that can drive growth and they're not afraid to buy back stock if they think it's cheap so hey you know huddle can be a nice cherry on top but if it doesn't happen i still think the stock works all right maybe they just buy the business outright

Starting point is 00:51:49 what maybe they just buy the business outright with all that cash oh that given what we think about the business that would take quite a lot of leverage for them yeah yeah it probably would i don't think they i i don't want them to do that okay i want to talk about we've got we've got some time so i looked up insider buys from this week and with finchat they've got this ownership tab so you can kind of check through and see where uh you know who's been buying the there here are six stocks that had insider buys this week and i i want you to a tell me if any of these sound remotely interesting but b also tell me whether or not you care at all that insider spot so number one disney uh an independent director named calvin mcdonald

Starting point is 00:52:40 purchased a million share a million dollars worth of shares um he basically doubled his stake here which kind of i don't know i think this one's a little trivial to be honest a director for disney first of all probably worth tons of money uh and he bought a million dollars worth of stock what's his name i'll look up his net worth calvin mcdonald calvin mcdonald the second one here that's the ceo of lululemon is it well if he's on if it's the same person yeah net worth 36 million dollars let's confirm that's the same calvin mcdonald but that could be certainly could be the the second one here zoom info this is a company we've talked about before it's one of those sort of sales contact networks um the ceo and founder henry shuck former washington state

Starting point is 00:53:34 university grad yeah we root for him because we gotta be the only ceo of a company more than paul don't forget yeah paul allen we're still glad i'm paul allen active ceo uh he he bought so he's the founder keep in mind roughly 13 million dollars worth of shares this week. The stock is down 88% from its highs. I like to look at the change in ownership to see if it's actually meaningful. He added 14.5% to his existing stake. So it is pretty meaningful, kind of an interesting signal there. I'll go through the rest of these a little more quickly. The co-founders of Red Rock Resorts, Lorenzo and Frank Fertitta purchased $16 million worth of shares a little bit of a weird transaction here they continue to buy stock so i i think it's

Starting point is 00:54:31 a good signal but stock's down 14 from its highs didn't look like i think it was trading at like an eb to ebit around 10 times so fairly interesting but i don't know sometimes i wonder if people do this for a little bit of extra voting power or something like that if there's personal reasons um fourth one custom truck one source ticker ctos two different people at the company the president of sales and the president of rentals bought stock both of them increased their stakes pretty significantly sometimes when it's a small stake like this i sometimes wonder if it's not worth anything but when you have two people that are both presidents of certain divisions buying simultaneously and increasing their stake by 13 or 19 percent i don't know kind of kind of

Starting point is 00:55:18 interesting i'll skip to the last one here because this one i find interesting the company is called presagen and it looks like some defunct biotech revenue's gone from like i don't know revenue's down like 95 take her pgen for anyone interested hey what's the market cap on it 308 million but i'll check right now pgen the 320 320 yeah okay the executive chairman randall kirk who i believe is the largest shareholder as well bought 20 million dollars worth of shares wow the stock is down 98 from its high so i don't know what he's doing or what he's planning to do but he just snagged a big chunk of the company in yeah dude brian windhorse meme yeah why why would he do that Yeah. That's interesting. I mean, that's risky stuff there. Microcaps, you're reading the tea leaves. Do not do that unless you're a professional.

Starting point is 00:56:18 Yeah. The other one that's maybe an honorable mention, but kind of a chuckle, Lyft CEO John Risher, he – after his company reported bad report, he bought $500,000 worth of stock, which increased his stake by a whopping half of a percent. this for me is one of those ones where it seems like you have a horrible earnings report you have a board meeting and you just point to someone and say we need we need we need some of you to buy stock yeah they pick john risher in this case yeah it's like have you guys read peter lynch investors love this all right i'm gonna show you the lou lemon guy was correct on that board of directors i'm gonna show you what the board of directors guy looks like um it's the ceo not the founder right it's not the it's the ceo yeah that founder i think has been banned from everything because he's kind of oh my gosh uh but look at this guy is that the ceo of lululemon or is that

Starting point is 00:57:24 the ceo of lululemon right there yeah it's a funny profile look at those glasses that's i mean he's dressed nicely i'm sure in all lululemon stuff but for anyone that is listening here it's Just good looking guy with a nice, that seems very well dressed. Do any of these stand out to you? Are there any where it would be a signal for you where you're like, I actually might look into this a little deeper? Well, Zoom Info, maybe, maybe. Stocks down a lot in that CEO. I remember him being very little idiosyncratic, maybe, versus other software style companies.

Starting point is 00:58:04 but that business is a bit funky um the precision pgen when the guy bought a ton versus the market cap could be a take private kind of you know preamble so that makes sense but again would have to look at that very closely but the red rock ones make sense i think some of the sleepy companies where you have you know you know that these aren't followed by that many analysts and you know that the board of directors and the executives have been there a long time and they haven't bought in a long time, but then they're buying now, I think that is a good indicator. So maybe I have to look at more of the details,

Starting point is 00:58:44 but Red Rocks and Custom Truck OneSource, I'd have to look at what the businesses actually do, but those interest me as well. Disney, no. The ones that, yeah, the Disney one is hilarious. Although I kind of think the stock might be cheap here. the receiving these box office numbers that they might be back i'm not giving any credit to bob eiger forever from this point on just timing his comeback when they're about to trough on

Starting point is 00:59:11 on content releases the biggest yeah true the biggest red flag that i ever saw for bob eiger was when he he stopped being the ceo and he wouldn't give up his office because it was because it had a shower in it and he wanted to keep going like where am i gonna write my not real succession planning where am i gonna write my memoir that just has my side of the story and how i'm so great yeah the uh him and howard schultz they have uh tried to ruin their reputations i guess at least howard schultz at least howard schultz hired brian nickel and didn't come back for a third time yeah geez that would be a nightmare the thing i find kind of funny is whenever i see insider transactions at a uh biotech especially a small biotech i think like

Starting point is 01:00:01 they they found something yeah exactly they nailed some drug there was some good i always think it's insider trading yeah i'm like they know something i don't uh that is interesting like what if you were i mean i wonder what the rules are on that so say you work in the research department things are going to get approved you don't have any sort of like collusion or telling anyone about it you just buy shares are there rules against that i wonder if there is like you have that material information maybe there's kind of a quiet period but yeah it's material if you know for sure that the drug is going to be approved if it's going to pass its clinical trial or whatever but what if you're i don't know that but the thing is like it's it's

Starting point is 01:00:46 almost like you're building a product you know is going to be successful so like if you're just a regular employee there like how insider tradie is that where you're like okay this drug's work and i think we haven't gotten the approval yet it feels like that shouldn't be illegal to buy now it should be illegal to tell everyone all this non-material public information right but i don't you know i think if you're building a cool product and you buy stock before you ship it there's no guarantees it's going to be well adopted exactly so that shouldn't be insider trading but if you have a drug that meets a very specific need and it's one of a kind or you know for a fact that it's when the clinical trial results are released that it's going to

Starting point is 01:01:32 move the stock i would probably consider that insider trading i don't know but you don't know if it's going to turn into profits you don't know if people are going to buy it i imagine with certain applications you do know yeah maybe you have like companies that have you know wholesalers or whatever that have said like yeah we'll we'll buy it if you get certain trials approved yeah i just don't know what if that's it's on the fence for me of whether that should be illegal like i get if it's an executive getting the information beforehand and then buying but if you're an employee you don't have the trial information you just know that this drug is working when you guys are doing research hey i don't know okay it doesn't sound like the end of the world to me

Starting point is 01:02:16 we have one question on gogo i guess that's really more for me quarter seemed okay there's just a big narrative still around starling competition and other competitors out there and there's more risks of as always the same as it's been for the whole year delaying the launch of 5G and the GoGoGalileo site or low Earth orbit constellation. So the whole thesis has not really changed. The business is generating cash flow. The balance sheet looks okay. But the bet, and again, it's kind of a catalyst stock, is 5G and GoGoGalileo are going to launch and there's going to be a cash flow inflection. And I don't think anything has changed. And honestly, stocks gotten cheaper i don't think the story's changed too much so quarter was kind of average

Starting point is 01:03:08 no too not many big surprises and there's not a hundred percent certainty that these new products are going to be successful so that's there is downside there but i would go back and listen to our episode and how starlink and some of these other competitors are a little bit disadvantaged versus goga but we're getting up on time so i don't have time to go through the whole thing today yeah and that should be in any all of our podcast players about sometime in 2024 we released that all right you want to take them take the audience here through the rest of the schedule what's coming up and uh take us out yeah yeah that's a good point uh we got today actually check your podcast feeds interview with ian bezek author of insider ian's insider corner

Starting point is 01:03:54 and an expert i would say on latin american and mexican stocks we cover the gambit in mexico we We talk Alsea Group, which is a fast food chain, or it's complicated, but they do franchises for American brands. We talk about the airports, which are highly profitable. We talk about the Grupo Rotoplus, which is tickers Agua, a great ticker, one of the best tickers I've ever seen, but a water company, which is very important in Mexico. Then we got our schedule coming up. We have next week, two software stocks that Ryan is interested in. We basically do a two, four research report with Ryan leading the way. Then we're going to be doing a Peter Lynch overview, which I'm quite excited about, I think really applies to all this, you know, for individuals

Starting point is 01:04:40 like us and all our listeners. It's a fantastic book to go through because it's really written for the individual. And then after that, I think I'm going to be doing a research report on Remitly. And that'll be fun. And then on the docket, I think I'm going to do Rocket Lab after that. They've got some quite interesting things and people love that stock. So I think we'll do that for the listens as well. But I think it's quite an interesting company. They're succeeding. Well, basically the only company besides SpaceX that's succeeding at all in spaceflight. All right. Let's bring things out. Thank you everyone for listening. As a disclosure, we are not financial advisors. Anything we say on this show is not formal advice or recommendation.

Starting point is 01:05:22 Ryan, I, or any podcast guests may hold securities discussed in this podcast, may have held them in the past, and may buy, sell, or hold them in the future. Thank you, everyone, for tuning in, and we'll see you next time.

Chit Chat Stocks - Google Is a Monopoly; Starbucks Steals Chipotle's Top Dog; 6 Stocks With Insider Buys (GOOG, CMG)

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