Chit Chat Stocks - Google's Monster Quarter; Tesla Bounce Back Earnings; Reddit's Widening Moat? (RDDT, GOOG, TSLA, PYPL)

Starting point is 00:00:00 Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. welcome to chit chat stocks this is another episode of our weekly power hour where i am joined by my co-host brett schaefer i am one of the hosts as well ryan henderson and it is earning season so we got plenty of material to talk about i've got my small cap of the week i also have uh maybe a new segment here moat watch maybe uh i don't know what you think about that

Starting point is 00:00:58 Brett, but I've got a potential emerging moat showing up here. So we're going to talk about that as well. Brett, any topics that you're bringing to the table this week? I mean, we just got earnings, earnings, earnings, PayPal earnings, Alphabet earnings. Well, you made the notes for those, but we're both going to be able to discuss them. I mean, Tesla earnings from last week, SoFi. What are some non-hyper growth companies that we have? There are Electronic Arts, Visa, plenty out there. And I don't know if you saw this today. Super microcomputer. A little bit of a interesting decision from their auditor, but I won't spoil it. We'll get into that later. Okay, sweet. And before we do, we want to talk

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Starting point is 00:03:09 I have a question from Twitter here, Ryan. I think it leads into the entire episode because we're in, I'd say this is the meat. This is the number one earnings season week. And full disclosure, we're recording this on October 30th before the market closes. So there's some earnings that we're not going to be able to see yet. We'll talk about them next week. Here's a question from Stock Spotlight. Would be interesting to see how you look at and react to quarterly earnings reports from the stocks you own. For many investors, especially those beginning out, quarterly earnings reports can cause uneasiness and anxiety. Well, I think we're going to talk about at least five or six today and what one do you want to discuss first google perhaps the best quarterly

Starting point is 00:03:49 earnings we've ever seen from a company that might be hyperbole nvidia it's maybe google's best earnings report ever or the last you know yeah that's true and the and the other interesting part is usually they report great results and then sundar pichai comes on and gives like concerning commentary and all of a sudden the stock just drops back down that was not the case this time. And I do want to, before we get into some of the earnings, I want to actually address the question because it's an interesting one. There's so much volatility around earnings season, especially, maybe not every company, but sometimes you get a beat by a penny, miss by a penny, huge reaction, and it's just completely unjustified. And so something that

Starting point is 00:04:36 there's no, I don't know if this is actually a good strategy, so don't copy me here. But if you have had – if you invest in businesses that you think have a moat, you're very long-term oriented and you're buying businesses that you want to own for a really long time and potentially add to over time as well. Now, if you've built up the kind of knowledge of the company, you've known it for a while, maybe you've owned it for a while, something that I actually do, even if I haven't had time to really internalize the quarter, like maybe I read the report, read commentary from management, maybe listened to the call, maybe you weren't able to get to all of it, whatever it is. if you have a huge adverse reaction i i have actually been it has worked out to me to nibble a little bit the next day at the open if you get like amazon for example last quarter there's always an overreaction it seems like when there is a miss a small miss something like that so i don't have any problem i guess adding to shares on big drops the day after um you do at least want to check the report and make sure there isn't something that materially changes your thesis.

Starting point is 00:05:51 But if you're owning these things for a long time, I think it's pretty rare that a single quarter should shake you out, especially if you've owned it for a while. Yeah, I think that makes sense. You don't want to compete with Renaissance Technologies, Algo stuff, willy nilly and just say, well, something has a big drop. And what I mean by that is the reason these things drop and they drop literally instantly is because it's a lot of computers ingesting it and then the computers are trading.

Starting point is 00:06:19 If you see something that perhaps the computers are reacting to and that matters in the short run and they think it's going to cause the stock to drop and it can kind of be a self-fulfilling prophecy, but you still think the business is fine over the long term, yeah. I mean, if it's an existing holding,

Starting point is 00:06:37 it's not a bad time to take a nibble. I like the idea. you just have to make sure you understand the earnings report first and make sure there isn't something you're missing yeah and it's got to be huge like in my opinion there has to be something really really material that came out from the report to like warrant not nibbling at all or selling your stock it's so easy and i you know what i did this today or yesterday with dr horton to see the price reaction and think the market knows, the investors know something, this was horrible, whatever. And the reality is, like you said, a lot of it is just computers

Starting point is 00:07:18 reacting to, they're literally parsing the document, seeing whether it was beat or miss and instant reaction. And it gets oversold all the time. So yeah, I do think there's no harm in nibbling if you truly believe in the business. But with that said, do we want to pick a company here to talk through yeah let's do google go right through the numbers well i don't have all the numbers in front of me i i guess i handpicked a couple of numbers um i guess some of the highlights uh youtube across both advertising and subscription and brett maybe while i'm talking you can pull up some of the headline numbers because i probably should have jotted those down but across advertising and the subscription business so that includes nfl sunday ticket

Starting point is 00:08:03 youtube tv youtube premium and then obviously youtube advertising they crossed 50 billion dollars in trailing 12 month trailing 12 month revenue for context i know people do this like every single quarter they acquired youtube for i think 1.6 billion dollars in 2006 so yeah good clickbait nice acquisition forum um but this actually does give us a little bit of insight into the size of the subscriptions business, because it sounds like they're generating roughly $15 billion across them over the last 12 months. No idea on the economics of those, because part of it might be Sunday Ticket. We don't know the split. Part of it might be YouTube TV, which I imagine is not extremely profitable given just the economics or the suppliers in that

Starting point is 00:08:56 business, take a lot of the economics. But yeah, I guess kind of a victory lap there for YouTube. The advertising revenue for YouTube specifically, I believe grew 12% year over year. Search, Google search and other, I think is how they categorize it, grew revenues 12% year over year. So doesn't seem to be an advertising slowdown. And perhaps the biggest bright spot of the quarter was google cloud revenue at google cloud accelerated rapidly um the revenue growth i should say it was going i could check this on finchette real quick but it was like mid-teens percentage year-over-year revenue growth the last couple quarters i believe and then they jumped up to 34 if i'm not mistaken sorry for my typing here 34 revenue growth at google cloud i believe

Starting point is 00:09:53 this quarter. Either way, it was a massive acceleration. And probably the most impressive thing was that operating margins, which have, we've talked about this on the show before, but operating margins at Google Cloud have just steadily increased for like probably 30 quarters in a row. It just, it's gone from, I think like negative 30, maybe negative 40% operating margins to this quarter, 17% operating margins. And one of the analysts on the conference call asked about the rapid kind of margin expansion at Google Cloud.

Starting point is 00:10:28 And the answer from, I'm not sure if this was the head of cloud or Pichai himself, but he says, like, what's driving this? And he says, the first is scale. Obviously, as we scale the business, we have more opportunity for margin expansion. But the second, and shouldn't be underestimated,

Starting point is 00:10:42 is the work the team has done to drive efficiencies across the cloud business. And we're seeing those come through. whether it's through headcount management, which is an interesting term. And in Google's case, it might not be layoffs. It might literally be just hiring less people. Facilities management, other process efficiencies, we are seeing that go to the bottom line and driving the results you are seeing this quarter. I guess my question to you, we talked about this literally a week ago and you laid out a thesis for Google and why you'd add to it on 20% drop. And one of the points,

Starting point is 00:11:15 guess of contention was the potential margin expansion. Do you think we drastically underestimated the margin potential for Google? Maybe slightly, but not drastically. I mean, I think I said it would be around where it is today, which is about 30. I don't think cloud's going to get that much higher, but Google services is at 40%. And the way they do accounting though, like the alphabet related activities and other bets some of that is related to what powers google services because there's ai stuff i'm not sure exactly what all the details are but the consolidated profit margin this quarter was 32 i don't know i don't know if it's going to be that much higher with the other bets and ai investments they're putting through but hey prove me wrong all right yeah it's worth

Starting point is 00:12:06 noting that segment level margins like all the people you hire in cloud require certain back-end costs as well that are probably not grouped into cloud i would guess might be different here in this case but maybe there's probably costs across the organization that apply to cloud that maybe are not categorized there so i could be wrong on that but yeah what do you think this business what kind of profit margins do you think google call out sorry google cloud and maybe AWS Azure all the all three of the hyperscalers together could have kind of at maturity it seems like 30 percent I don't know but it's really hard showing kind of the mature margins already maybe it's just hard it's hard to tell because it all depends on if they want to start

Starting point is 00:12:58 a price war with each other but what's interesting is Google could be and I'm not saying they have it yet but they could be forming a competitive advantage if they say you know what they say about the efficiency cost on their computing is true because then they could charge the same price as someone else and earn a better margin but you have to ask the heads of those companies if they want to start a pricing war and if they don't i think margins will be high but if they do well then hey margins can go really really low yeah i wonder is ai a bubble i don't you know you know, is the AI spending a bubble? Maybe if AI spending is a bubble, then there's going to be a lot of excess computing capacity that doesn't get used. But if it's not a bubble,

Starting point is 00:13:44 it's going to be, the margins are going to be higher because it's all about the capacity utilization. I wonder if, and sorry, it seems like my internet might be struggling here. So I apologize if it's not looking good, but I wonder if there's like, it's really a commodity. Like we look at the cloud services and it's easy to think, okay, let's, it's probably AWS offers similar stuff to GCP, but I imagine it's probably more nuanced and there are certain services that Google cloud maybe offers that AWS does not. Maybe it's a better fit with certain companies as well. Same for like Azure. So I wonder if it could just, I think it might be harder for it to just become a price war than we're maybe imagining. possibly but they can just decide to lower the price on what they're offering per

Starting point is 00:14:38 i don't even know what the units are like i'm not an expert on this but i do know that they could lower the price on per and make it i don't even know what the how you quantify it but yeah all right you wanted the headline numbers 16 revenue growth constant currency operating margin 32 expanded from 28 in the same quarter a year ago 28.5 billion dollars in consolidated operating income. I will say, I think my prediction about Alphabet surpassing Apple's operating income is going to come true faster than I even thought. And I was very bullish on that. Other stuff, employees slightly down. So we're seeing good moderation there. I'm not just exploiting that employee count, which they had a big concern with in 2022. Other stuff,

Starting point is 00:15:25 keep buying back a lot of stock paying out the dividend everything looks great there was was there even any negatives this quarter now one big thing that could hold them up brian and i'm sure you didn't see this but a russian court has fined google and you're gonna like this number 2.5 decillion dollars that's a that's the real number they find them that's about six maybe eight commas I'm not sure there's a lot of zeros and it's because they won't put Russian state TV on YouTube. Is this going to kill the business? So does Google operate in Russia?

Starting point is 00:16:07 I assume not. I don't know after the war of Ukraine started, but I'm pretty sure YouTube probably still starts there, but I'm saying just on YouTube in general, like not just in Russia. So are they going to come back? then they'll have they'll force them to pay this fine which is higher than global gdp probably cumulative global economic output ever but they'll pay it back yeah that is hilarious uh i did not

Starting point is 00:16:35 see that so uh yeah i guess people are not factoring that into their models which concerning from the investment banks uh but yeah that's besides the point i i guess anything else on this are they officially not losing an ai can we say that yeah yeah i think that's safe to say the other thing that just touching back on the cloud business you could and you could always like lower your prices on something but the chances that that takes away from competitors is probably pretty low like if google cloud reduces the price on something and you have already built your systems to run on AWS or whatever, it's not worth the cost of switching, even if it's a little lower. Maybe on one of your biggest input costs or something like that,

Starting point is 00:17:28 it's possible that you try to look for alternatives. But when something's running smoothly, cloud is usually... I feel like it's just such a pain to switch. Most companies won't want to do it. Yeah, it's a fair point. I can understand that logic. I guess I don't have huge conviction on just because I'm not no expert on the cloud. So I kind of go, all right, cherry on top. I can understand Google search, I think a lot better. But the cloud performance has been I don't think anyone a couple years ago would have modeled this out. Anything else on Alphabet, Ryan, they gave some for anyone that's interested in not just the financials. They gave a lot of good stuff on the conference call about what they're doing to improve AI tools within search and all

Starting point is 00:18:16 their stuff. And they gave a lot of good data points this time. I thought it was fascinating to read. So anyone go check them out. You can find those on FinChat, I should say. That's probably where you should go. One of our very nice sponsors. But next earnings, Ryan, what do you want to do? Maybe we'll do, I got a list here. I'm going to read it off and you just tell me which one, because then we can alternate to some of yours. Visa, Electronic Arts, Chipotle, McDonald's, SoFi, PayPal, Tesla, or AMD. I tried to look at all those, at least briefly, before hopping on today. Honestly, I read a lot of those reports and found that, well, I guess Tesla was somewhat exciting, but found a lot of them boring.

Starting point is 00:18:57 Do we want to talk about Tesla? I will say our predictions were wrong. So we should, you know, give revenue slowdown. Oh, yeah. Gross profit slowdown. Sorry. We expected, which may have been a little inflated and it's hard to say what the, how much of the credits they're going to be able to use on going forward. But yeah, gross profit sequentially did improve, like big gross profit jump on the automotive business, which I was expecting to deteriorate given some of the price decreases that we saw.

Starting point is 00:19:35 Yeah. And operating and it flowed through down to operating margin. yeah, good quarter. People say that if we're bearish on something, like, look, we try to look at it as it is. We're not trying to start any sort of war with anyone or any sort of investment group. My least favorite thing about the podcast is when people take any sort of bearish opinion. Personally, we are not going to cause the stock to move up or down. And yeah, Tesla had probably, what was it? Probably five or six bad quarters in a row before this. And this was probably you know unexpectedly a good one and given it's tesla the stock jumped probably what 100 150

Starting point is 00:20:13 billion dollars in market cap which as always an overreaction but yeah good quarter and seems like they're doing much better than the broad ev narrative would have said the slowdown in that sector might be over yeah that i mean that'd be good byd i think had some figures that came out this morning that were pretty solid as well um so maybe there's some yeah maybe there is a bit of a revival there i will say the regulatory credits boosted margins a little more than uh the ongoing business should produce so uh just kind of caveat there worth keeping that in mind but yeah pretty solid quarter have you when's the last time you actually listened to a tesla conference call oh i can't do that it's it's a lot of ramblings from from elon

Starting point is 00:21:11 and then a bunch of accounting people that seem like they're 30 yeah what blew my mind is like he apparently on the call he said self-driving again which this is hilarious self like robo taxis will be here next year how many times does that need to be said before like people stop believing that yeah what are they gonna do go to mars first or go to robo taxis because they've been both of those accomplishments have been on the couple year time horizon for the last 15 years now not 15 maybe 10 years but still like eventually you are the boy who cried wolf and with those two things the company is now it doesn't take away from the fact that they sell what is it almost 500 000 vehicles a year a quarter now it doesn't

Starting point is 00:22:08 take away from that but you have to look at it as it is and it's not happening yet speaking of we forgot about this, Ryan. Self-driving competitor Waymo, the Alphabet subsidiary, just announced that they are doing 150,000 robo-taxi rides and 1 million miles each week. They just raised $5.6 billion, and now they want to use Google's Gemini AI to train its robo-taxis. Seems like they're hitting the beginning of the s-curve and they could have a multi-year just absurd growth if they start launching in more and more cities across the u.s and that's the real i mean that's the operational robo taxis today it's yeah the year is going to be 2040 waymo is going to be in every city and operational and tesla is going to be saying next year robo taxis will be live

Starting point is 00:23:10 and people will be like tesla is leading the full self-driving initiative now first of all i do find it funny that like you have this subsidiary that's literally gobs of cash on the balance sheet and you're raising money from third parties yeah hey i guess if they don't i don't get if they want to maybe the vcs give them an attractive price i could see a lot of vcs really wanting to get in on the the waymo train and maybe they get an attractive price and alphabet can take advantage of that but yeah i don't i don't understand either where they don't just want to fully own it and then eventually maybe if you hit some sort of growth one runway spinning out as its own publicly traded company and give it a a bunch of cash but hey that's not

Starting point is 00:23:57 hard their balance sheet is it's really not hard to run you generate so much cash you have to figure out what to do with it um all right yeah tesla's quarter good go ahead isn't that a little like as a shareholder doesn't that upset you a bit within the other other bets is waymo and you're you think like i own you know shares in waymo but and they have the cash to invest in it themselves they're giving out portions of it to vcs like i don't know that kind of irks me like that that is fair that is fair i i don't know the exact cap the cap table sorry i hate when people use that term but that is that is true it seems like a cliched term all right other earnings chipotle's was interesting we talk about that a lot but it's fine i don't know it's fine what about

Starting point is 00:24:55 um so far it seemed like nothing was surprising no nothing really stood out comp sales are kind of deteriorating a little bit at mcdonald's which but not bad like it was expected which and that's not surprising no i guess it's kind of interesting to see the company the quick service restaurants that are holding up in this environment um starbucks and mcdonald's have really struggled i mean starbucks might have problems that are outside of the macro environment but comp sales have turned negative there chipotle's been pretty resilient six percent plus uh comp sales growth this quarter so pretty strong i believe it was six percent um people love the slop they love they love

Starting point is 00:25:48 they love eating that stuff you know what's interesting wing stop 21 comp sales growth this quarter stock dropped by 50 well that's because it was training at i think a hundred times earnings expectations matter that's a good lesson there yeah while we're on this sorry go ahead while we're on this i did a little thread this week i just screened for basically the fastest growing restaurants restaurant chains in america over the last three years i'm gonna name all five you tell me if you're interested at all i want to make sure i get them right but uh i believe it was kava number one sweet green number two number three was wing stop i believe number four i'm blanking on number four but number five was there's one more texas roadhouse might have

Starting point is 00:26:50 been number five uh all right you tell me i remember reading it and looking at texas roadhouse i mean all these companies except sweet green i just don't necessarily understand the concept i know some of their top line numbers look good but that doesn't really make sense to me All these, Texas Roadhouse, good model. Kava, good model. Wingstop, good model. But the stocks are all very expensive. Well, I don't know about Texas Roadhouse, but at least Kava and Wingstop, stocks are wildly expensive.

Starting point is 00:27:22 Shake Shack was number four. Shake Shack now. So those are the five fastest growing restaurants in America at the moment, at least on a percentage basis. looks like it's cutting out all right yeah it gave me a little update but it says it's back it says we're good live recording still good all right well yeah i'll say that shake shack i'm not interested in something that's just burgers it's too tough to plan kava makes a lot of sense to me because there is that differentiation in no one else does this i know someone can repeat it but they are the first ones doing this

Starting point is 00:28:04 mediterranean at scale similar to a chipotle although other chipotle competitors have popped up texas roadhouse not an expert on them but they seem to be run well wingstop i'm not sure they seem to be run well again but there's a lot of competitors restaurants are tough and you just can't buy at inflated multiples you just can't it's just not going to work and it's so easy for them to get inflated

Starting point is 00:28:34 it seems like you have a couple quarters in a row of really strong comps and people extrapolate pretty quickly and so often they can trade at just steep multiples it seems like, especially if it's a growing

Starting point is 00:28:51 concept if they're adding tons of units it seems like it tends to tends to get a premium multiple do we want to look at my the company on my moat watch yes

Starting point is 00:29:06 the last earnings I want to talk about those PayPal briefly then we can move to those I got a chart to share with you I would say this was a surprisingly strong report at least from my eyes

Starting point is 00:29:21 I'm not sure what the valuation is looking like, but if you see this chart here, and I know take rate has come down, but payment volume across the core legacy business actually grew at 6% this quarter, which has the higher margin. Total payment volume since 2012 has grown at a 22.6% compound annual growth rate to the last 12 months. This does not follow the narrative of the stock price whatsoever. If we look at maybe the take rate, yes, it's come down, but it hasn't come down in a way that destroys the business. And some of it is from that brain tree volumes, which are, I think, more stable. If we look at active accounts, active accounts have stabilized and started to grow again as they've tried to get healthier accounts on there

Starting point is 00:30:09 and transactions per active account have grown. Let me try to look at the cash flow statement in here quick. I saw free cash flow, I think over a billion dollars in the quarter. There we go. Last 12 months, free cash flow, and perhaps given the lending side of things, it's a little bit wonky. $7 billion. I'm not sure that's a number you want to look at. Maybe we can look at operating income as well, but strong. I thought good, and much better than I thought. I really was concerned that this business was going to deteriorate let's see operating earnings yeah wow record high operating earnings over the last 12 months i thought it was a good quarter paypal it looked strong the take rate came down a little more but that's i mean brain tree is growing just faster

Starting point is 00:31:01 than the rest of the business so yeah that is a lower take and that's called their unbranded checkout so it's like you said it's not killing the business but it is i guess going to revenues are not going to grow as quickly as total payment volume they seem to be better capital allocators now than they have been in the past i think this is one of those businesses where hopefully it'll just kind of grow with digital spending and if that's the case you probably get a pretty good outcome from here. So, uh, certainly, yeah, I thought it was a decent quarter and investors seem to have just completely soured on it. So, um, with that said, do we want to move to moat watch? Yes, we can. Yes, we can. We have a question in the comments though, that says thoughts on

Starting point is 00:31:52 transmedics. Uh, we don't, they dropped 40%. I've seen people talk about it. I don't think Ryan knows anything about the business. I don't either. I should have said, thank you for the people that are joining us live uh and just on a warning on ryan's wi-fi it's a temporary situation he's in the transition of a move so this won't be a permanent setup and we'll try to get the internet connection stronger uh yeah we don't want this we want this to be a high quality recording as possible all right yeah let's do this moat watch i think it's an exciting segment because hey that's one of the most important things we want to look for is an expanding or you know determining whether the moat is getting wider or shrinking and that can be a big indicator of

Starting point is 00:32:36 whether it's something you want to add to your portfolio yeah so the company i'm officially putting on our moat watch or our emerging moat watch i should say is reddit which might have people's like shuddering or concerned gave it maybe you just got the chills because of all the meme stock uh craziness that's happened on there but the network effect is pretty obvious with reddit right yeah the more people contributing to the platform the more it attracts other users and you if you've searched anything on google over the last probably 12 months you may have noticed that reddit seems to be showing up way more in search results turns out that is not just gut feel. In late 2022, Google changed part of its ranking algorithm and essentially started

Starting point is 00:33:27 prioritizing forums more. That helped Reddit in a huge way. And as of the latest report from some third-party data provider, Reddit was ranked number five highest visibility domain in Google's US organic search results. Same time a year ago, it was ranked number 68. So it's made this massive step up because of the reprioritization of or i guess prioritization of forums this has also led to tons of traffic to reddit and ultimately higher daily active users so daily active users at reddit brett maybe you can uh pull up the graphic here from finchat had it was basically flat from 2021 through to 2023 it went from like 55 million daus to 60 million there was pretty much no growth over the last five quarters it's gone from 60 million daus to 97 million so it's

Starting point is 00:34:22 absolutely just exploded in terms of active users and part of me thinks well okay it's totally dependent on google which is true to a degree for its growth but if you are a daily active user on reddit it's probably not coming through just search results over and over you would probably made an account you're a part of certain um subreddits you're contributing on a regular basis you're going there directly so it's i think it's really kind of helped power the google's prioritization here or change in algorithm has really helped power the network effect for reddit i will be i'm kind of keeping a closer eye on here because so on one hand yes if there's any changed the algorithm from here on out maybe it affects growth but they've 100 million people

Starting point is 00:35:16 visiting the site on a daily basis is and it's not roblox type daus where they're double counting it's active unique accounts um it and they're not on my they're not 13 years old so these people have uh well maybe some of them are 13 years old but the majority aren't 13 years old so they actually have money to spend yeah it's it's a real network effect at this point so um yeah watching them i honestly don't know how profitable they are how they're like whether or not their monetization is really that effective but um yeah 97 million daily active users gives you a lot of flexibility to earn money so keeping them on the radar do you have any interest in them Brett? I do. Yeah, I would. I'm guessing the valuation is probably absurd, but that doesn't

Starting point is 00:36:13 mean you shouldn't research something and put it on your watch list. I'm confident that this website, maybe I would have some confidence that it's around 10, 15 years from now. It's not something like Pinterest where I get a little bit concerned on the durability. I definitely see permanent need for forums and people like that. And the fact that you have to contribute so much means that it is something that someone else can't replicate. You can't just ingest a bunch of AI TikTok videos and then, you know, then the algorithm does its thing. You need people to contribute and you can't just have computers generating it or who knows, maybe a lot of the accounts are fake. I guess I'm not sure. But the one concern I would have, like I have with

Starting point is 00:36:57 or have had with every other social platform except for Meta and its properties is the ability to have a strong advertising platform. Pinterest, not very good at advertising. Snapchat, not very good at advertising. Twitter or X, not very good at advertising. Reddit, I would think is going to have the same trouble as Twitter because it's much harder to monetize text versus visual stuff like youtube or instagram yeah yeah there's certainly a possibility the other thing this gives me so much belief in google's moat the fact that they can just like dictate outcomes like this with the change of an algorithm so slightly um oh yeah yeah read the conference call for alphabet i will say that again and you can see the data advantage they have across basically the aggregation

Starting point is 00:37:56 of demand they just had their seventh platform hit two billion users google maps and the advantage they have in ai which all of that stuff is going to connect together and if the ai bull thesis is correct alphabet has the right to win and i explained that pretty thoroughly on the call but hey maybe reddit will benefit because yeah possible uh all right let's before we move on we want to talk about our friends at public listen up folks time could be running out to lock in a six percent or higher yield at public.com but you can lock in a six percent or higher yield with a bond account you your yield is not locked in however until the time of purchase so you might want to act fast lock in a six percent or higher

Starting point is 00:38:41 yield with a diversified portfolio of high yield and investment grade corporate bonds only at public.com slash chitchat stocks that is our lovely sponsor public again i will say made an account myself it uh is very seamless very easy process does not take very long and was significantly easier than a lot of the legacy brokers with that said i do want to talk about dr horton and the potential housing downturn which you may have called brett you may have gotten it right. I would say the existing home sales is maybe one thing. Existing home sales and inventory. If I learned anything from following the housing analyst, track those charts, track that data, because that can have a big impact on demand for the home builders.

Starting point is 00:39:34 Okay. Let's look. So I say housing downturn overall, but really it was just D.R. Horton's earnings report. So D.R. Horton is the largest home builder in America by volume. They reported earnings this week and the stock dropped ironically because we talked about this in a recent episode, what stocks would we buy on a 20% drop? It almost dropped 20% right after earnings. So actually did not end up buying. But anyways, there was some interesting commentary on the conference call. D.R. Horton's CEO said, while mortgage rates have decreased from their highs earlier this year, many potential home buyers expect rates to be lower in 2025, which is kind of like delaying demand. And then someone asked about this, like, is this common? Kind of what

Starting point is 00:40:24 are you seeing? Or if rates went up again, would they feel more inclined to buy that kind of thing? He said more than any one given rate, I think stability in rates is most helpful for us in seen buyer demand and come off the sidelines. So that they're not waiting for rates to come down or fearful that they're going to go up. They're just going to escape affordability. They're going to escape their ability to afford right now. Basically, I don't know if they're trying to just kind of point fingers at issues or really figure it out. And it seems like people are, they see a little bit of a rate decrease and they're looking at, oh, maybe this will continue into 2025, whatever, which makes sense, I guess, if that's what you believe and you're

Starting point is 00:41:11 holding out to buy a home. I wonder, DR Horton's the biggest home builder in America, but I'm curious what happens to other home builders as well. A lot of home builder stocks sold off on this news. DR Horton said that they're probably going to start to offer larger incentives like mortgage buy downs which basically just reduce the rate and for the first couple years kind of thing it doesn't affect the average selling price but it will hurt yeah it's going to hurt gross margins for dr horton um they also emphasize that throughout the call that they're pushing more

Starting point is 00:41:49 towards build to rent units as well as like redesigning some floor plans within their um land plots to make them smaller homes smaller units which has helps affordability might hurt the gross margins on a per unit basis but if you're able to build them out effectively over a huge plot of land it's a bunch of smaller units you can still achieve the same margins in aggregate um it kind of interesting moving towards built to rent and then they also said they're moving a little more towards townhomes. So the stock was down as much as 15% after earnings. For the companies that don't have as much flexibility to be able to pivot like that, I wonder if this means potentially we see some real cashflow constraints,

Starting point is 00:42:38 some problems for some of the home builders. Definitely could. Yeah. It's a very hard market to understand. It's one that's when the Fed can determine your fate for a year or two and seeing the mortgage rates jump back up to 7%, yeah, it's a bit concerning. And you're seeing the freezing of the market, which helped the R. Horton because the existing homes were stuck. People weren't leaving them, so we needed new homes to come online. But if that switches or if it's so frozen that no one wants to buy new homes anymore yeah it's gonna hurt you it's gonna hurt you it still seems like a good business and it's one that'll do well over the long term but it's hard to tell and maybe something

Starting point is 00:43:24 we didn't focus on enough in that episode uh that we posted last week is the margins and whether affordability or um not affordability but supply versus demand dynamics can impact that Even if DR Horton has the most scale. Yeah. A lot of people are, well, a lot of people saw this and were like supply. There isn't a supply shortage.

Starting point is 00:43:52 See, and that doesn't, I don't know if that's really the case. It's one quarter. It's one quarter. Yeah. Let's put some breaks on any, I guess,

Starting point is 00:44:01 big guesses in terms of what happens from with homes from here. They're still forecasting. Home closings growth next year. So. basically flat to up like one or two percentage points and that's you know 90 000 plus homes delivered in a year so pretty good the uh or pretty large i should say i guess i don't know we can go round and round in circles with dr horton it's not quite that fun uh but do we want to talk about any other stocks any other big earnings uh before i get to my small cap of the

Starting point is 00:44:39 week yeah let's maybe do small cap of the week first why don't you talk about uh make sure to update our friend uh listeners about our friends from fin chat and do your small cap of the week sponsored by yellow brick and then if we have time we'll cover as many earnings as we can as we end this episode all right yep small cap of the week this is presented by yellow brick investing the reason i say it's presented by is because every time and this is exactly what happened this time someone sends in a recommendation thank you to uh i'm not sure who actually sent this one in brett you relate it to me but simulation plus it's a mostly a software but also a services company um first thing i do never heard of the company i go ahead type in the ticker or the name

Starting point is 00:45:25 to yellow bricks directory and you instantly find some high quality write-ups which is exactly what happened here. So Simulation Plus, I guess I can just go through maybe some quotes from the write-ups that I saw. It says, from a business perspective, the company sells biosimulation vertical software to pharma and the FDA. They are part of the regulatory process and services are added on top to ensure pharma clients go through the compliance process smoothly. As a reminder, the FDA uses the product during application reviews. There is a big upsell cycle currently underway and pricing power has been coiled. This will all start to inflect in the coming years under new reporting. This is someone who is quite optimistic about it. But, and I will say

Starting point is 00:46:12 revenue growth has looked really strong, 16% CAGR since, that's compound annual growth rate since 2015. However, there's been some acquisitions in there, actually quite a few acquisitions. So it's a bit a bit inflated and organic growth does not look quite the same there was however a short report that i found as well which um maybe tempered my expectations for the business and keep in mind some of this is outdated simulation plus a couple years ago traded at really a ludicrous multiple um and the stock is down more than 60 since this write-up so kudos to the guy that wrote this or person that wrote this says far from a hot startup simulation plus is actually a fairly mature 25 year old company with the majority of its growth coming from a lower margin

Starting point is 00:46:59 consulting business and acquisitions simulation plus sells licensed software for pharmaceutical research and development and its core product gastro plus simulates the mechanics and interactions of drug compounds he says while gastro plus is by all measures a quality leading product its addressable market is fairly limited, with revenues growing to just around $20 million since its launch in the mid-90s. I think that's a good point, actually. If this is a leading product and it's been around for 25 years, only generating $20 million in revenue from it, it might be able to grow, you might be able to raise prices, that kind of thing, but there might be some limitations in terms of customers. I'm not really sure what to think here.

Starting point is 00:47:45 Earnings per share has only grown in the high single digits relative to revenue, which has grown at 16%. And keep in mind, there has been some margin deterioration as of late, which makes it look worse than probably would be. But $615 million market cap, $6 million in operating income over the last 12 months. Like I said, there was apparently a one-time cost that is hurting profitability over the last 12 months. So if I – I'll give them the benefit of the doubt here and I haven't done enough research to really make it form, I guess, a valid opinion. But if I use their peak earnings from 2022, which was about $15 million in 2022 operating income, it would be trading at 41 times operating income. for a business that's growing, I guess, maybe high single digits, low double digits for like organically. I just don't really love the setup here. So I'm probably going to end up

Starting point is 00:48:47 passing, but I do really appreciate the recommendations from audience members on potential small caps. Yeah, it does seem a little expensive. I was checking gross profit too, even if the peak gross profit, as you mentioned, just going off of August, 2023 is 48 million. that's not dirt cheap. I mean, hey, if you think that, like that a lot of that can convert to operating income over time, sure. That could be cheap. But I don't think that's dirt cheap. And it's not an industry that I think I have any sort of skill in and what was it an upsell or an inflection coming like I don't have any skill in predicting that or understanding whether that could be the case but yeah ryan uh do we want to highlight our sponsor of this segment yellow

Starting point is 00:49:35 brick investing and tell people where they can find that yeah yellow brick investing they are the wonderful aggregator of the best stock pitches across the internet so fund letters twitter blogs newsletters substacks podcasts even a couple of our uh pitches have been on there um they collect and summarize the best stock pitches and bring them to you in a single place. So check out joinyellowbrick.com slash chitchat and you'll get a discount as well. It is free, but if you want to upgrade to any paid plans,

Starting point is 00:50:05 you can use that code for some discounts. Try it for yourself. Highly recommend. Yep. And our other sponsor is, or sorry, let me talk about our other sponsor, finchat.io. You can get a 15% discount on any paid plan by using our link in the show notes.

Starting point is 00:50:23 We appreciate all the people that use it And it is a vital research tool during earnings seasons, transcripts, reports, data, financials, KPIs, updated in a timely manner. And I use them every day during earnings season, researching stuff for the show and for my own portfolio. So the link's in the show notes, finchat.io slash chitchat. Now, do we want to talk about your favorite company, Supermicrocomputer? Yeah, let me give you a quote here, Ryan. This is the quote from Ernst & Young, SMCI's auditor, quote, We are resigning due to information that has recently come to our attention, which has led us to no longer be able to rely on management and the audit committee's representations and to be unwilling to be associated with the financial statements prepared by management.

Starting point is 00:51:14 And after concluding, we can no longer provide the audit services in accordance with applicable law or professional obligations. that says guilty right there i mean they are saying we you are guilty it's over stock is down 32 percent today uh year to date as you know the stock is still up 17 percent uh but it was at one point almost at 120 and now it's at 33 this was an ai bubble stock it doesn't mean that NVIDIA is a bubble that's another discussion but this is what happens when there's a boom some of these shenanigan companies pop up and oh wow that is one of the most damning things I've ever seen from an auditor they straight up just said we found we can't trust these people anymore and given how much the audit firms have given leeway to these companies in the

Starting point is 00:52:13 past and saying no no no it's fine like it might be a little sketchy like this is it's not like they're strict usually they usually they'll audit any company this was bad yeah stuck i'd say like i'm not i'm surprised it's not down more but yeah you go ahead no i mean we're talking about an s&p 500 company that like that's a huge revenue generator probably for i mean ernst and Young, obviously a large company, but for them to turn down a big chunk of revenue tells you what they think of the financial statements here. Yeah, that's probably one of the most damning quotes I've read. Even you look at short reports and stuff like that, that was a very damning quote, especially

Starting point is 00:53:04 when it's coming from an auditor. So it's literally saying we are rejecting your money because we think we can't work with it. It's lies, essentially. Shout out to, I guess, the S&P 500 committee for including them and making it a part of people's retirements. Getting none of the upside and all the downside. But there's just a little bit of index fund money in tracking the S&P 500, right? It's not that much. It's not everyone's retirement that they're building up over many, many decades.

Starting point is 00:53:41 No. But yeah, that's the unfortunate thing that happens nowadays. Happened with Tesla too, right? When they were peaking. Yeah, it can happen. But hey, Google makes up for everything, right? it's probably i guess this is probably an inconsequential amount of the index exactly exactly all right what else do we want to talk about i mean they're not really

Starting point is 00:54:05 anything else to talk about super microcomputer it's it's done it's like it's over it could be a worldcom it's so i think worldcom makes a lot of sense here i think who was it that wrote the short report was this hindenburg hindenburg yeah if you read again i know the short reports are long but that was the one i did decide to read and i don't fault anyone for not reading it because they did take time it was pretty clear it was there was so much smoke like it was it was blinding it's like a it's like a california wildfire yeah hindenburg tell you what hindenburg and they deserve a lot of credit and i will say if they write a report on a company you own you may want to read that thoroughly because

Starting point is 00:54:56 yeah it seems rare that they miss yes sir yes sir all right what else do we want to talk about dropbox maybe cut 20 of its workforce our favorite stable coin stock doesn't go anywhere that's pretty much the entire news item there gdp growth is good yeah gdp great I guess. The Dropbox – I will say I'm glad to no longer be a shareholder there. It's just tough. It's a very competitive business. If you read the letter from Drew Houston, I will say he does better than maybe some of the other CEOs at sending layoff letters because he literally says, this is my decision you know it's uh i take full responsibility for and i'm i'm sorry essentially to anyone being affected um however it's pretty concerning from a shareholder standpoint because

Starting point is 00:56:02 in there it also says demand has really weakened and we can no longer support this and i don't know if that's just an excuse for employees or it's legit and they can no longer support 24 20 percent of their workforce which if that is the case i'm not sure dropbox should be trading up on this news it's up like four percent yeah yeah i mean they've already optimized a lot it's hard to tell we'll see what happens with their earnings reports the earnings reports are always like if the narrative on dropbox is good they always disappoint but if the narrative is bad that's why i call them the stable coin the narrative is bad they always do a little bit better than people are expecting it's kind of like all right decent revenue growth is free

Starting point is 00:56:46 cash flow per share really growing that much yeah a little bit but it's nothing explosive and it's it's an interesting one for sure the way they're doing the capital allocation and stuff like that um what did you think did you see visas report blah boring so boring honestly like payment volume grew mid to high single digits shocking it's it's just so a little bit of an acceleration though it's yeah it just never looks that attractive to me like it is so mature it touches so much of the economy already like so many transactions i just it's hard for me to get really it will grow probably forever as long as uh regulators let it but i just have a hard time getting excited about the stock yeah i i agree pe of 30 but hey diluted earnings per share

Starting point is 00:57:49 grow grew and this was in q4 17 percent if we look at guidance for 2025 they give funny guidance so i want to read it revenue growth for full year 2025 let me see if you can figure out what this number is high single digit to low double digit so 10 operating expense growth uh same thing but this is my favorite diluted uh earnings per share growth they are expecting the high end of low double digit what do you think that is what does that mean high end of low double digit there i i yeah that's exactly couldn't that be 51 yeah it's true there's a lot of double digits out there i think 12 percent makes sense but regardless of that joke 17 growth 12 growth this year i don't fault people for holding it at 30 times earnings but

Starting point is 00:58:46 yeah it doesn't seem that cheap it's gonna be hard to yeah will you beat the index with that all right hey it's it's trading at basically the s&p multiple so maybe maybe i think or i i doubt the s&p will grow earnings as fast as visa it's a fair point but look i don't think the s&p is going to do well uh inflation adjusted over the next 10 years so yeah um anything else we okay we had a question here. I think maybe we can close with some philosophy type stuff, investing philosophy. This is a good one. So it's a little bit long, but I'll read it. If Charlie's quote below is accurate, then why am I waiting for Visa, MasterCard, blah, blah, blah, Costco to get

Starting point is 00:59:38 cheaper before buying them? Quote, if a business earns 18% on its capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with one hell of a result. Or to put the question the other way, what do you do when a stock you started a position in starts to run away. I got 3% in Google in the low 150s, but now what am I supposed to do with what is probably going to open at 180 tomorrow? I'd say don't get too specifically on Google. Do not get too particular or cute about it when it's just jumped that much. I think what Munker is talking about and how we like to look at it is if things get really extreme, like if Google went to 40 times earnings i given the earnings growth i don't think low 50s versus 180 is even that

Starting point is 01:00:24 different from an earnings ratio perspective um but given that quote what munger is talking about i don't know if it applies in the 21st century to some for some of these things are trading because if you look at what he has talked about costco one of the premium quality stocks that he's owned, he taught or excuse me, RIP did own. They, he said he would not even, there would be no chance he was buying it at 50 times earnings. So his quote, he's going against his own quote, because eventually, the math works against you, you have to care about price. And yes, you should consider the quality and the growth and all that stuff. But price does matter just depends on what you're paying for yeah i think it's probably been taken out of context because

Starting point is 01:01:18 he says you know paying too much it might not be people might think oh okay that means i can pay you know whatever multiple for the high returns that is not what i meant um now if you're debating between 15 times earnings 20 times earnings for google and yeah frankly probably over 20 30 years It's not going to affect – it's probably not going to have a huge effect on your returns. But I think studies have been done that have shown that that quote isn't exactly correct. If there is massive multiple compression, it has a huge impact on returns even over that 20th, 30th year period. So yeah, it doesn't – unfortunately, I would say maybe don't act rationally purely because of that quote. Also, it's really quite difficult to know what companies are going to earn 20% returns on capital over 30 years.

Starting point is 01:02:19 Yeah, exactly. Because so much can change. Yeah. But then on the other hand, what we're talking about there is buying. Now, if you're thinking of selling something, we're of the opinion that you should never, maybe not never, but only in rare circumstances when a valuation gets absolutely crazy you should only sell if the business is telling you it's deteriorating and google's earnings report told you the business is firing on all cylinders so there's no reason to sell that right now especially when it hasn't

Starting point is 01:02:51 moved that much all right all right yeah any closing thoughts ryan no cheers to earnings season happy Halloween to those who celebrate and hopefully your earnings reports will not be too spooky yeah Ryan's targeting our

Starting point is 01:03:16 5 to 15 year old audience the trick or treaters huge chunk of our listeners yeah exactly hey I bet a lot of our listeners have young kids we do have that kind of 30 to 40 year old listener base. But yeah, let me hit the disclosure. We are not financial advisors.

Starting point is 01:03:35 Anything we say on the show is not formal advice or recommendation. Ryan and I may hold securities discussed in this podcast, may have held them in the past and may buy, sell or hold them in the future. Nothing we say is a recommendation on this podcast. If you're listening to this, you listen to the full episode, I should say, give us a review. Five stars, hopefully on Apple or Spotify. We've seen people do that. And it is the best way to help support the show. Just go on the page. Click it. It's very quick. It takes about five seconds. You can also follow us on Twitter, Substack, wherever. Thank you for supporting the show. We do these live every Wednesday, 1.30 p.m. Eastern Time on the Chit Chat Stocks YouTube page. You can join us then,

Starting point is 01:04:18 listen to the replays on YouTube, or listen to the replays wherever you get your podcasts on Sunday morning. Thank you, everyone, once again, and we'll see you discussing more earnings next week. Thank you so much for watching, and I'll see you in the next video.

Chit Chat Stocks - Google's Monster Quarter; Tesla Bounce Back Earnings; Reddit's Widening Moat? (RDDT, GOOG, TSLA, PYPL)

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