Chit Chat Stocks - How We Value a Business

Episode Date: June 8, 2021

Brett and Ryan take turns walking you through their valuation processes. Listen closely to find out what margins or metrics your hosts pay close attention to. After the break, Brett and Ryan discuss the top stories from the week, including AMC, Bezos, and bitcoin. Let's go! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Subscribe to our YouTube channel: https://www.youtube.com/c/ChitChatMoney Follow us on Twitter: https://twitter.com/chitchatmoney Visit our website to see more from your hosts Ryan and Brett: https://www.chitchatmoney.com Email us: [e-mail] Timestamps Valuation Process | (1:38) AMC | (27:47) Pershing Square | (32:30) Bezos to Space | (36:24) Cable Cowboy | (40:53) Cure for Alzheimer's | (45:13) Bitcoin Conference | (46:53) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. Today is Tuesday, June 8th. Today we do not have an interview, but we're doing a bit of a fun segment, kind of going through our own personal valuation processes. And then we got our typical show notes. But before we get to that, we have a word from our sponsor, our friends, our partners, Seven Investing. You want to go through it? Yeah, I can. So if you use our code CCM at checkout, you can get $10 off your first month their rates are actually going up in july so now is the time to strike get in while you can get in while you can either way it's a great service and they just dropped new wrecks the other day if you're a long-term investor if you're a growth style if you're more conservative

valuation style they have all different types of picks for you plus good video analysis to go along with it and written analysis tons of commentary and they're always talking with their uh subscribers. So all in all, great service. $10 off. Use code CCM. All right, Ryan, do you have anything else here? No. Without further ado, let's get to the show. Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast.

Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. All right, welcome in. We are diving into our valuation processes. I'm going to be going first kind of what i look at neither one of us use dcfs spoiler alert so if that turns off if that turns you off to the show hey we don't we don't yeah we don't use the explicit dcfs we use uh we're still discounting mental models yeah we're still discounting cash flows but whoever said this when we're doing that spaces q a with max uh thank you for asking about that kind of inspired this because whoever did they asked about how we go about valuation so here we go we're gonna go we're

going to go through it ryan you want to start yeah so uh the valuation modeling is based off your assumptions right and so i'm going to try to talk about how i mold my assumptions first and then i'll talk about sort of the mental math that i go through and the two things that i'm mostly paying attention to uh in order to make my assumptions are the cost structure of the business and the durability slash sustainability of the growth in the business and so when i talk about sustainability there's there's a bit of a dis i kind of distinguish durability versus sustain sustainability as sustainability is the environment around the business and then durability is what that business has going for it that makes it hard to uh kind of it allows them

to dictate their own growth um and so i guess the best thing like an example would be uh and in you might have a business that has competitive advantages that could be durable but then if the industry is in terminal decline it might not be sustainable that's kind of the way i think about it that's the definitions you're using okay that makes sense yeah and so there is we talked about this with louise on the show before but it's pretty easy to forecast out with some businesses it's easy to forecast out the next year or the next two years but once you get to five to ten years out it becomes you're looking at what does that business have what distinct trait does it have over its competitors where it allows them to have pricing power to keep their customers there

or what i think todd winning and in trend or ensemble capital calls idiosyncratic businesses so those are kind of the things we look for that help me mold my growth assumptions do you look at the industry too are you kind of focusing on is there i think kind of the way and maybe i'm still in my own way i look at it is do you look at kind of tailwind versus headwind that's kind i mean it simplifies it but like is this industry in a tailwind or is it gonna face some headwinds from demand from customers yeah that's the sustainability part ideally you have a business where there is something very distinct about it that you can only get from them and not the competitors and they're in an industry where there's a lot of natural growth, where they don't have to spend

to get that growth, even though they might voluntarily spend that money on sales and marketing or investing through the income statement. It kind of comes naturally. The one that comes to mind is gaming, stuff like that. And then the second part of that or the pillar is operating leverage for me or cost structure. And so I think, especially when you're starting out, it's really easy to say, okay, gross margins are at 90%. Then their operating margins are negative 50%. But eventually operating margins will just close in on gross margins or sort of that margin margin conversion. Right. But that was, I mean, that's probably what I did early on as well. But now it's kind of going into the 10 K looking at each line item, looking at each

cost or expense and saying which of these are variable, which of them are fixed, which one, if this company starts to sell more, it starts to reach scale, are they going to have to carry those expenses with it or is it kind of just one time development costs, you know, software as a service versus, the example I think of is the manufacturing and distribution costs that came with selling hard copy video games versus now the operating leverage they've seen where they build the software and deploy it digitally. Right, right. I think the number on that is 6% savings or 6% better profits if you're selling digitally versus in-store, which makes a lot of sense. And so I just kind of look through each one of those and then from there I take – try to take a conservative guess based on what costs I think will scale with the business, which ones won't, what free cash flow margins will look like three to five years out or even for more mature businesses, what does it look like right now and then can that improve?

Because gross margins, I don't really care that much about them, to be honest, because some costs of revenue don't scale as much with the business. And then gross margins can also change depending on the elements of the business that are doing better. So the one to think of is like Roku. Everyone was like, well, these gross margins are poor. and then obviously the platform came along as sort of this trojan horse no one's looking at it there's a part of the business that's growing that's a that has much different more just different economics that can kind of change that and what you're saying is not that gross margins don't matter it's that it's really not something to debate they're kind of there and then what

really matters what's going to change over time are a lot of the other inputs on the line items That will get you two free cash flow margins. Yeah. So, I mean, if you classify hiring a sales assistant or a customer representative as an operating expense or something like that, and you have to add one for every customer, that might as well be a cost of goods sold. So I think it's worth going into operating expenses and seeing what exactly are they classifying as that. do you think that specifically that line item will scale with the business or do you think they're putting a lot of the costs up front to get a lot of cash back later and to invert that situation i think a question you can ask is if they took away this expense they stopped spending

on this would the business totally fall apart would revenue growth or earnings growth collapse right and if it doesn't maybe it is going to scale a lot right and so then yeah as i said i don't really do dcfs um and i have sort of my own reasons i think you have to do i think it's worth doing dcfs at least once twice going through the exercise multiple times so you know what the math looks like um but for me i'm i'm an investor that's very susceptible to like very basic biases uh anchoring is probably the big one and i anchor a lot to like projections we all are yeah we all do and so i think if i put the numbers down on a spreadsheet and kind of pray to it you know where i'm you kind of worship the dcf then it can lead to overlooking flaws in the business um and you

kind of anchor to that and so i try not to do it but the mental math that i kind of go through is i'll give an example so if i have a business that trades at a two billion dollar market cap In this scenario, assume diluted share count doesn't change. It's net flat, yeah. And it has – so it's $2 billion market cap. It does $500 million in revenue. Of that, it has $100 million in free cash flow. So it trades at 20 times free cash flow trailing.

Yeah. If I think conservatively that that business is going to grow revenues at 10% annually for the next five years, And I think because of X, Y, Z factors, whether it's like the video game scenario, they're going from more manufacturing of disks to digital. I think they're going to boost their free cash flow margin from 20% to 30% over those five years. So they'll have better – yeah, their free cash flow is going to go faster than their revenue. Yes, or operating leverage basically is another way of saying that. then I can kind of do the mental math of, I basically just throw a terminal multiple on there that's hopefully conservative. So in that scenario, they'd have around $800 million in

revenue at the end of the five years, $250 million in free cash flow, roughly. Now if I take, now let's say I assume that it's going to trade at 15 times free cash flow. So I assume a little bit of multiple compression. Then you can go ahead and basically do the math. You can put it into a compounded annual growth rate calculator online if you want but after a while you kind of get you get an idea of how to do it in your head and so in that case you get about 87 percent upside i went in and put it on a calculator which is around 13 and a half percent a year that's the mental math i go through but it all comes down to the assumptions and just trying to use conservative assumptions wherever you can is the best thing you can do and then hopefully you get a scenario

where you're using conservative assumptions and it still kind of slaps you in the face and yeah that's that's in my mind a home run uh obviously there's risk in all those assumptions yeah true when when you're ever making a growth assumption i mean the stuff is all fake um so you have to be i think theoretical theoretical it's theoretical it's not fake it's more of like all right you're making predictions they are not guaranteed to come true uh do you have anything else or you want me to go no that's the basics of it for me okay yeah i'll go through mine um it's very similar obviously you know we have we have similar styles and uh i'll give two caveats here the valuation process does change over time we're always trying to learn here and i'm not

going to cover everything and there's always unique situations so it's not like you just plug and play one formula into every investment but there are five questions i usually try to answer when underwriting a potential investment first one what is the free cash flow yield second one what can free cash flow per share grow at over the next three to five years. That time range could change depending on what type of investment it is. How likely is it that my prediction of free cash flow per share growth is correct? What downside is there? And what free cash flow yield does this asset or company deserve to trade at if the thesis is correct? Similar to what Ryan does, but a little bit different. I'm going to leave out return on invested capital from this conversation,

but that can be an entirely different topic for a whole nother show. We could spend 20, 30 minutes on that alone or longer but using free cash flow highlights why capex is important as an example i don't like everyone's favorite company tesla because of the high capex needed that's going to it's just not gonna you know the cash that's going to be returned to shareholders might not be as high as some people think and then conversely what draws me to a video game company like activision blizzard is the low need for capital expenditures outside of just the employees So that matters a ton going into it, but that's just one of the inputs. So I'm going to try to answer at least a few of these questions with two different stocks as an example that are on a different part of the growth and value spectrum, Spotify and Sprouts Farmers Market.

As a disclosure, we both own these currently. So, you know, take it with a grain of salt. I'm obviously going to be biased to the upside here and none of this is a recommendation. But yeah, if you have anything, just hop in here. So first one, what is free cash flow yield? This is a very black and white question. It's pretty simple and that's why I would start out with. So for Sprouts Farmer's Market, it's simple.

It trades – like it's not like you're doing any analysis here. You just kind of look, all right, what's it trading at on a trailing basis? And it's around 10% for Sprouts Farmer's Market. And then Spotify, it's a little different. I mean it basically trades at free cash flow yield of 0%. And define free cash flow yield for – Oh, right, right, right. If someone doesn't know.

Yeah, it's just the inverse of price to free cash flow. So it's essentially saying the same thing of what Ryan was saying out of what multiple is it going to trade at. So if you're at a 20 times free cash flow, the yield is 5%. Yeah, it's how much of their market cap do they generate in free cash every year. Each year, yeah. I'm using the trailing basis here. And then if you trade at 10 times free cash flow, your free cash flow yield is 10%. And then Spotify's is zero.

So that kind of tells you something right away there. What are you going to have to assume if the free cash flow yield is currently at 0%? And then with a company with depressed free cash flow generation like Spotify, I really try to look at what free cash flow margins could be at scale based on the gross margins. I don't really know to go into this because, Ryan, you hit this pretty well, but what matters is gross margins, invested capital requirements, working capital dynamics, what management is telling us. with spotify you know they basically say what they're going to be and it's pretty easy with that subscription model that it'll likely be around 10 maybe higher if some other parts of the business do well what but sorry free cash flow margin margin yes not the yield so the margin something around 10 for them for each business it's going to be different and for sprouts farmers

market it's pretty easy to assume what it is because you're not making a bet or it's not likely the business is going to change that much and so over the next few years this kind of plays back into what i said where there's basically two different parts that could change the margin profile of a business so let's take like sprouts for example there's logistical efficiencies they could add distribution centers that might add a few basis points in but just a small margin yeah right and then for spotify on the other hand there could be that emerging part of the business that trojan horse uh let's say that's a podcast where it has totally different economics if that starts to make up more and more of the business the overall economics change and if a company is

investing heavily through the operating expenses line or just standard through just a regular capital expenditure you know the free cash flow margins might be more depressed and that's kind of what entices us a lot with a growth stock or something that may be described as a growth stock is there are a ton of investors that'll just throw something aside if it's current like free cash flow yield is zero percent or negative but the reason i start with this question is because it always tells us what growth in free cash flow needs to be in order for the investment to work out. So with Sprouts Farmer's Market, at a current 10% free cash flow yield, it is a low bar. And then with Spotify, it is at a much higher bar. So that comes into the next question, what can

free cash flow per share grow at over the next three to five years? This is probably the most important question in the input, or sorry, into the valuation model. And it can sometimes have tons of input. And it's really the one financial metric that matters if you're a buy and hold investor over the long term. Some people might argue differently, but that's kind of how I look at the investment world. So back to the examples with Sprouts Farmer's Market, it could be really simple. Store count can grow from what I'm assuming at 8% to 10% per year, and the company can buy back around 3% to 5% of its float, assuming minimal or no multiple expansion. Obviously, if the earnings multiple or free cash flow multiple expands a lot, yeah, you'll do fine with your investment.

But they're not going to be able to increase free cash flow per share as much. It's also a little harder if you're betting on multiple expansion, you're betting on investor sentiment, which is a harder bet to make. And it's really hard to predict. Yeah, so very simple conservative analysis there that is just a bet on durability. But then it gets more complicated with a growth stock like Spotify. since and it's unique with every situation so with them you know since it's a subscription business i think it is highly durable and pretty moaty like ryan said that's important with my analysis as well i and deal my kid you know like oh you can't really do that i just i really just

back for free cash flow margin based on what i assume revenue can grow to and try to be very conservative again i try to be conservative with the assumptions so for example if i think that the company can get to say 25 billion in revenue and at a 10 free cash flow margin that is two 2.5 billion in annual free cash flow. That is around 5.5% yield based on the current market cap. And then you can do similar analysis with that, with all sorts of different numbers based on what revenue currently is for Spotify and stuff like that. The conclusion you'll come to is that it is expensive. And in that case, you need to be highly confident, in my opinion, of management, durability, and I guess growth potential as well. So it really tells you what

needs to happen um anything on that or yeah so why don't you talk about what goes in to your assumption like how do you arrive at an assumption for the growth of free cash flow yeah so outside of just what management is saying the business can grow at kind of my assumptions of what share count and be and what financials can grow i really ask the question how likely is it that my prediction of free cash flow per share growth is correct so this is this is a really really hard question and i don't think any i don't have a formula for this i don't think anyone has a formula for this it really changes and it's very qualitative and what i try to do is come up with just a range in my confidence in the business and then slap some percentages on that so for

sprouts farmers market as an example i'm going to use these two companies again i have less confidence in the business i don't think the business is of high quality as spotify uh in growing free cash flow per share so i'd say like you know you can't put an exact percentage on it but my assuming that i'm thinking it can grow free cash flow per share at like 12 based on the two financial metrics that really matter or sorry store count and then free cash flow uh and then free cash flow margins and then stock buybacks i think i'm like 45 to 60 confident in that but then spotify i'm maybe more 60 to 80 confident in the quality of the business and what it can grow at so this question again it's really qualitative but it kind of tells me whether i need more of a margin

of safety in the current free cash flow yield for example something like sprouts farmer's market is something where you know it's already trading at a 10 free cash flow yield it's a lower bar to hop over to make it a good investment or if the margin of safety is in the quality of the business which is something like spotify is and that comes back to a lot if you're really interested in a margin of safety with the quality of business i'd check out ensemble capital stuff they do really good stuff i'm kind of it's hard to describe but you know what i mean and obviously there are businesses where it's easier to uh say how likely it is like you know autodesk for example you can you can take a good guess that the prices uh they have such a differentiated

product that they're going to be able to raise prices incrementally over time so you can kind of be a little more confident in your assumptions whereas obviously something that's susceptible to uh consumer habits or something like that might be a little less likely yeah yeah and then why why is the per share part so important just okay okay yeah talk about that and how it can change yeah so and i guess i just wrote a blog post on this so it kind of made me inspired to, I guess, talk about this a lot, is that really when you're an investor, and I think a lot of people listening know this, but when you're an investor, you're buying shares in a company. It really matters how much profits and cash they're generating per your share. And the

two things, and there's a few other ways you can go about it, but the two things that will impact it positively are share buybacks, reducing the share count. So if you're steadily reducing the share count by like three four percent a year and the business is generating consistent free cash flow and it is growing at say eight percent a year you add that on to the compounding free cash flow and hopefully the intrinsic value of the business now if you're diluting shares and giving out stock options having to do a ton of common stock raises stuff like that that'll hurt you and that is a share count headwind and that can the compounding of share growth share count growth can work in the opposite direction does that make sense in describing it yeah and i i always try to think

about it like imagine if you owned a business with two other people right you had it in thirds and that business generated a hundred dollars in cash that year you'd get a third of it now what happened now think about it on either side of the spectrum there if shares were bought back or you buy back shares from someone else or you add a fourth partner right you're obviously not going to get as much cash uh in your hands and that's the end of the game is or the theoretical end of the game is how much cash comes to you yep exactly and then another thing i ask is what downside there is in this investment at these prices this is another difficult question but it's very unique to each situation so this is where and i think a lot of people should do this

write a pre-mortem on everything we own it's the opposite of a porous mortem it's like all right If things are going to go badly, what would happen? With Sprouts Farmer's Market, and usually, you know, it's pretty simple for every business. It all comes down to, okay, comp sales are going to stagnate or decline. It would lead to margin pressure, you know, all that stuff for Sprouts Farmer's Market. And you kind of want to identify reasons why that would occur. And it's likely if, you know, Amazon finally executes on its brick-and-mortar strategy, stuff like that. if really people come up with a better scale offering and then with spotify you know the

downside would be stagnating user growth and podcast consumption very simple with that as well however while the current valuation with something like spotify does imply a lot of downside if the business can't grow again with the current profit generation the current uh valuation based on what kind of gross profits their generation i actually think there is a ton of margin of safety due to how much value this asset would have to a lot of other businesses. Now, that's pretty debatable and it's very qualitative, but you can kind of think about it. Okay, if the business is stagnating, if they're looking for a potential acquirer, there's people that would put a lot of value on getting whatever it is, three, 400 million monthly active users of a music streaming service

or an audio streaming service. And I think the big takeaway here from this question is the downside is unique and hard to predict for every investment, but you should try to at least think it out so if bad things start happening you aren't you don't trick yourself into thinking no it's fine it's like no no you wrote this down six months ago do not trick your future self into thinking everything's fine when what you said that's can happen is happening and the investment is going poorly you know then you might have to change your mind okay and so what is sort of that terminal valuation what do you look for what what is uh we all try to use evaluation at the end to kind of discount too what is yours yeah so this is very very similar

to yours pretty uh black and white it's fairly easy you know i i like to put in a range though um and if you have any public competitors you can kind of put it there so with someone like sprout farmers market i'd say versus you know other grocery competitors versus the quality of the business versus the um you know groceries pretty recurring in nature but it's not a subscription business i think it probably deserves to trade it you know 15 to 20 times free cash flow if they do what they say they're going to do and then for spotify in my book this might be a little you know some people might not agree with this but i think it deserves to trade at 25 to 30 times free cash flow uh due to the low churn and the modiness of the business but i i really this

question isn't crucial but i think it helps me determine what multiple expansion or compression could look like if the investment is successful but it's not something i try to bank on having unless it's the compression part where you're like okay you're going to face some valuation headwinds but that's okay it's just something you got to expect it's going to happen and you don't do a dcf i don't yet like you i do i do not do an explicit dcf i think we are doing dcfs but just very simple ones um i know some people might be either angry at that that's just the way we like to do things if it's bad that's good for you because you'll do better than us um but the reason i don't personally is that i know myself i would get caught up in the spreadsheet i anchor to those

things just like ryan said and i guess to wrap things up the one thing i've started to ask myself to prevent myself from getting to the you know quote pie in the stye stuff where convincing myself that something trading at 30 or 40 times sales is okay um i try to ask can this business get to at least a 10% free cash flow yield on my cost basis, which is the price I'm paying for my investment? And how long will it take for the stock to get to a free cash flow yield of 10% if it doesn't already? Does that make sense? Assuming the price doesn't move. Assuming, yeah. And the crucial thing here is on my cost basis. And then with Sprouts Farmer's Market, it already trades at about 10%. You could argue it might be a little lower

depending on the day uh but with spotify it's going to take a lot of years so it kind of it's another way of telling you okay how high of a bar is this investment hurdle or did i totally botch that how high of a bar do we have to jump over here no that makes sense and then spotify like obviously something that's growing faster uh there is so for sprouts it might be at 10 right now it might not grow that free cash flow yield isn't going to grow as fast as spotify would even if it took longer it better not and if it does then sprouts is a pretty good opportunity but yeah that's that's what you're assuming yeah okay anything else i don't think so i hope we covered it if you have any questions find us on twitter dms we love the chat if we got anything

wrong um we always love to approve our analysis this isn't something like this isn't the 10 commandments or anything you know like we we don't we know this is a sensitive topic for a lot of investors so all right we're gonna hit a quick break and then we're gonna get to our regular show notes cox panoramic wi-fi includes advanced security to help protect all your connected devices you'll get real-time alerts oh like this one so you don't have to worry about malware or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must

be enabled in the panoramic wi-fi app restrictions apply welcome back in i'm kicking things off with my story uh so amc was in the news for a lot of reasons last week took all the headlines last week very annoying and boring to be honest one that i didn't mention here was amc uh ceo adam aaron on the video call without pants on the emperor was wearing no clothes literally yes well there's a theory he did it on purpose to make himself part of the common you know the narrative is he's one of the people you know he could have done that on purpose who knows though um so for anyone that hasn't kept up with it uh last monday i think might have been tuesday but amc shares skyrocketed they were up 100 a day um the stock is up more than 1400 this year to put it in

perspective it's kind of become a meme stock which once again for anyone who doesn't know it's basically there's a lot of people on social media saying like trying to pick like like it's a battle like we gotta get the angry shorts yeah high short interest not a big market cap um we can move it together move it together with stock options stuff like that yeah yeah and so uh the amc afterwards uh it might have been i forget the timing of it but they announced that shareholders will be getting free popcorn if they visited amc theater this summer or cinema um so shareholder incentive program right there i don't this might be the first of its kind i've never seen something like this yeah i mean are we going to tax that it's a it's basically a dividend it's a popcorn

dividend is that going to be taxed yeah the irs might be going through some really annoying uh paperwork this uh this next year yeah and the stock was uh anyway after the 100 day the stock was it looked like going to continue its ascent but uh because it was trading up like 40 or something like that in pre-market and then amc filed with regulators to sell more than 11 million shares in this filing they warned investors by saying our current market prices reflect market and trading dynamics unrelated to our underlying business. You don't say. This was their seventh equity offering in nine months.

Adam Aaron, the CEO, then tweeted, I think today, the financial press has banner headlines about how innovative AMC and I are in reaching out to our individual investors. Odd that they praise something so obvious. CEOs and professional management teams should listen to shareholders. You own our company.

We listen to you. uh now in 2020 adam aaron was awarded a five million dollar special incentive bonus in light of extreme challenges faced uh thanks post-market for letting us see that um so he really is a man of the people as you can see technically none of this is illegal but should this type of behavior be illegal what behavior are you describing uh stealing stealing i suppose what's leveraging uh leveraging retail investors to take their money i guess egging on investors yeah that's that's a fine line but giving popcorn giving giving free gifts that's yeah i don't know about And then selling shares?

No, I mean... There should have to be like, maybe there already is. But there should be like a filing. You have to wait a certain amount of time for equity offerings. Gosh, I don't know. It's a tough line. AMC has definitely been smart about the share offerings. It's really saved them.

You could argue a lot of the companies that people have loved over the past year that are trading at you know 30 40 50 times sales should have been just as aggressive with share offerings i know some of them have so i don't that part's obviously fine but yeah some of the little details of the popcorn the egging on shareholders to like you know you're part of this movement now feels disingenuous i mean i don't think you can make it illegal though i i i don't think we're ever investing in amc but i don't think we were anyway so it doesn't affect us but it's a story and to be honest it really ruins the financial news of the day because it's such a boring topic it's really not fun to talk about but it really ruins amc

theaters for me yeah it's gonna ruin them forever that is true um i won't be able to go and not think about wall street bets all right what's your story okay this is a fun one too i guess pershing square taunting is merging with you universal music group so bill ackman's pershing square taunting holdings is taking and it's a spec uh very unique spec huge one that he raised last year is taking universal music group public they are buying it from vivendi which owns umg right now and the deal helps vivendi which is going to have a huge tack bill for its shareholders if it's spun out umg not take this bill by having pc uh by having persian square take some of this off their hands so pretty smart there uh values umg had around 21 times even though uh and i guess

we should describe what umg is they're the biggest and fastest growing music label in the world essentially they are riding the tailwind of music streaming and other online royalties like tiktok generating very consistent cash flow it is an insanely complicated transaction i've heard a lot of people describe this transaction as the most complicated thing in finance they've possibly ever seen um i'm not going to be able to cover all the points in the show it would be a ton of numbers and there's like 15 different things that investors need to know but we can link to some good stuff that people have uh written about and if you're in a SPAC arbitrage and stuff like that with all these warrants and the options and all the second SPACs that pershing square is doing

there can be some interesting opportunities there if you're that type of investor But the only question I have is any interest in UMG once it goes post all this SPAC nonsense, I guess. Not really. I don't know. It's kind of like there's some give and take because there has been a rise of individual artists. But at the same time, they are benefiting from the world of streaming, and that's clear. So it's just like where do you see the world heading? i personally am not a huge fan of labels but that's me as a biased spotify shareholder yeah

we're pretty biased as the as the spotify shareholder here i mean they they've had pretty bad tactics in the past they're not bad but aggressive and possibly one might say immoral tactics in the past um some might even describe it as collusion against a lot of the streaming services but i mean it's a damn consistent business it's just kind of if you're looking something that's going to generate cash at a steady rate i mean i don't think you can look farther here but it's not it's not a chamath spec i'll say that people may have been disappointed in that my question is what is the world does the world look better or worse without it i don't know that's if these are individual artists obviously they might not have as much success maybe have

want to have been promoted but i i'm of the belief that they're sort of a middleman that and i'm not an artist so i might be missing something but they're a middleman that i don't think is that necessary yeah but it was you it used to be yeah or they're getting a lot of the supply chain or sorry the margin if for every dollar they're getting a lot of it more than they technically should deserve i mean i guess that's a good point but there's also the back catalogs those are the lucrative ones like the whatever i don't know if umg owns it but like the beatles or stuff like that they're just sitting on yeah they're just sitting on very durable less payouts basically i'll go into them stuff like that yeah all right and what about you

slightly interested but not really it seems like there's a few things holding it up i don't know if this is a compounder i mean if you're looking for a typical investment that feels safe ish i mean there's some left tail risk with you know if the streaming services or the artists get too fed up with them it seems like that's unlikely i'm not sure it it's definitely in the circle of competence though um it's something i think i can understand at the right price i'd be interested but yeah there is sort of terminal risk maybe and there could i might be wrong yeah all right uh my next story is not super crazy it's not that relevant it's good it's just kind of funny uh or interesting i guess this morning it was announced that i believe via

Jeff Bezos' Instagram, which I did not expect him to be active on Instagram, but he is. This morning it was announced that he will be flying to space on the first crewed flight of the New Shepard, which was built by Blue Origin. His space company, I think, was founded in, was it 2000, 2004? 2000, 2001, yeah, something like that. He'll be flying on July 20th. That's 15 days after he's set to resign as the CEO from Amazon. he's bringing his brother along and some random winner of an auction i think

cool for that guy that's quite the crew to go up with i guess do you think this now that we know this information is this the main reason he resigned as ceo because you could not have a ceo of one of the big tech companies doing this yeah that's true it's a bit of a flex honestly if this is he he's like this has been my passion since i was a kid uh i've always wanted to do this it almost feels like oh i built one of the most valuable companies in the world just to fulfill my dream and now he's literally going to the moon he's like man all right he actually said in amazon unbound to or no amazon unbound which is the sequel to the other amazon um biography i guess you could kind of call it the business biography he said in the early days that we're

taking amazon to the moon so he was the original wall street bet meeting investor is jeff bezos but continue yeah blue origin has been notoriously secretive about their test flights as well so i think this kind of came as a shock considering that he will bezos is kind of the first of that billionaire bunch to actually be going to space um everyone i think thought it was going to be elon branson's kind of been all over the place no him and chamath are they're welcome they're solid they're managing liquidity they got stuff they're you know they're managing liquidity according to npr the flight is expected to last a whopping 11 minutes uh and space is defined as the area past the carmen line which is 62 miles above sea level which is they're expected to fly

above that for a few moments as opposed to the carmen line which would be 62 percentage points below book value no that's a terrible joke sorry if they continue uh this is also a reusable rocket it so i mean things are looking great for old jeff here he's in good shape it looks like he's yeah they had to be yeah you gotta be easy on these flights i guess real sentimental instagram post by the way there we go yeah definitely not manufactured for narrative it's good it's all good no i mean i have three takeaways i have from here one this is the best midlife crisis i was about to say that had everyone we've all that's been a big thing everyone's been talking about i guess best midlife crisis two the guy has not watched billions yeah i'm not gonna bring that up but

there's some unfortunate things that go on in that show and then three i'm not saying it but there's a lot of people that have been talking about amazon put options i i would not go there but there's some people and if i was an anonymous account i maybe talking about that but do you think he has that much influence still it's almost like uh i describe it as warren buffett you know passing on and then someone buying put out from the grocery yeah i mean the stock would probably tank i don't know no i'm saying do you think bezos has that much influence on amazon anymore like do you on day-to-day operations uh no not really don't you think it's fine in andy jassy's hands oh yeah yeah for sure i'm just telling you the reaction would be

pretty bad yeah i hope i mean i'm not voting for that i would never do that that's almost like the uh i don't think anyone actually did this but that's like you know with the world trade center stuff that 9-11 that would be some trades that would make you feel horrible horrible guilty inside something you never want to root for all right uh yeah there wasn't really any big investment takeaways from there so uh what's your next story yeah the investment in blue origin that'd be very risky one that is that would be one of the riskiest i guess you can invest in space flight in general so risky insanely risky uh but go ahead buy it whatever 80 100 they don't do any revenue yeah um all right i guess revenue yeah i got a fun one i've been reading cable

cowboy uh started you know one of the most popular business books chronicles the rise of tci which is the biggest cable company in the 80s and 90s, and kind of looks at it through a biography of sorts of John Malone. If you're older, you probably know John Malone, but if you're younger, you might not know him. Some big takeaways from the book, which is a really good read, great storytelling, good narrative. One, Malone hates taxes and loves complicated deals.

I think you can tell from Liberty Media. The more complicated, the better, to be honest. He loves the complication because basically he can trick other executives into doing stuff that benefits him, which is fine. I mean, all rights to him. The executives just don't know what they're doing. Nobody in their right mind would have invested in TCI in 1972, which is when Malone took over. It had $19.2 million in revenue and $132 million in debt, which it was destined for bankruptcy. The only reason it succeeded was because of really strong managerial talent and a lot of luck, like they said this in the book.

I mean, you can't – I mean, betting on that is just insane. They also had the origin story of Liberty Media, which is, again, complicated but interesting. And then some stats on how well the stock did. uh from 1974 to 1997 tci went up 5 578 times or that's like a hunter beggar what 55 times over the best performing stock on the market during that time period and then they sold to at&t so at&t oh they i mean good there you can read the book there's a lot of details they definitely I mean, TCI got the better end of the deal, but I'll give out an anecdote, I guess. So after selling to AT&T in 1998, Malone had less control over TCI, but he was still getting fed up with the board on AT&T and kind of seeing how dumb the executives were acting.

So the head of AT&T Cable offered to sell 1.2 million cable subs in Montana for $3 billion to take out some of AT&T's $62 billion in debt. i guess things were the same at 18g you know got off of the debt it's always been terrible and what was worse but the sale was going to be taxed which probably drew the line from alone because he's like no we can do this and not uh not pay taxes at all um here's a quote so certainly if you can't i think he's telling this um to the ceo of 18g quote certainly if you can't sell them to anybody else sell them to liberty we can buy them tax-free and i will pay you 50 million more than the after-tax proceeds of this deal whatever it is and at the time you know he was running liberty media and then so the board he says and this is really really funny he said

i'm not doing this because i want to go into the cable business i'm doing this because i think it is the most stupid uh freaking thing he used the explicit there what are the headlines going to say buy them for 5 000 a sub and then sell them for 1700 sub and make it up in volume he's the worst dealer that I've ever seen in my life. You guys are nuts. There are a bunch of exclamation points here. You are actually going to take your leverage up by selling these assets. So as you can see, he was the cable cowboy and he was not afraid to speak his mind and tell AT&T when they're acting very, very stupidly. I haven't finished the book and I know there's some ways it ends there. Is there a more one-sided relationship than the loan and AT&T? It's like an undefeated record,

especially given what just went on recently with discovery no i think at&t they're like picturesque for punching bag for bureaucrat bloat oh yes yes he just goes do we guys do we need to offload some debt raise a little money sell some stuff why don't we sell some stuff to at&t guys we just keep selling stuff to at&t it's all good it's yeah they have such a their acquisitions are great yeah if you yeah and i mean and then they acquired time warner cable recently they've acquired all these assets tough history for them but that book is really good don't really have anything else to say you want to go to your next story yeah last story for me this week uh u.s regulators approved a drug called adukanumab sorry i'm messing that one up but it promises to slow

the progression of alzheimer's um so as you know uh brett and i suck with biotech don't really understand it at all uh but the company producing the drug is biogen and the stock was up 60 percent this morning alone this also gives the green light to several competitors who stalled these projects previously um apparently this was uh the fd fda had not approved this at first and now they have and so them not approving it gave a bunch of okay a bunch of other companies stalled their projects on it um so competition is expected to come does this it's so i just feel like biotech investing so lumpy and unpredictable it makes stories like this where it's up 60 in the morning but and some people are saying like there's gonna be 10 billion dollars of revenue recognized over

the next 10 years from this but then over the next year competitors could all come out with a competing product and take most of those sales? Doesn't it just make you want to stray away? Yeah, or if you're going to go into biotech, I mean, be careful and probably take a basket approach. That seems the logical move.

I talked to someone that knows more about the industry, but yeah, it's tough. I'll say someone probably made a lot of money on call options this morning, so that's good for them. Someone definitely got rich. Probably an insider somewhere.

Somewhere, yeah. I mean, nowadays, is the with the sec not doing much yeah uh someone on reddit probably all right what's uh what's your next story okay we're gonna wrap it with some fun ones uh the bitcoin conference i don't if you're not aware you may or may not pay attention to this stuff but was comedy gold yeah i mean we gotta end with the bitcoin conference well people may be calling bretton woods too no no one's calling it that but uh they may be joking uh i'll give out my favorite parts one the insane energy guy coming out on the stage feeling like he's all drugged up saying yelling like we're never selling

and then uh what was it f-elon which i'm okay with but i think his name is max kaiser if you want to follow his stuff he is energetic and then the same guy uh kaiser tearing up dollar bills in a cnbc interview 10 bills 10 bills huge yeah not one dollar bill so he's rich yeah if he's looking to offload all his fiat i'm your guy uh and then he also claimed in the interview that he can own the congress people with the bitcoin which is quite interesting there's also i mean yeah i hate to hate on him i really don't but uh he tweeted earlier today they just bought a house in el salvador because the el salvador president made bitcoin the illegal tender i think he's a dictator to be honest i don't know i'm pretty sure el salvador has one of the highest murder rates

in the world is it yeah it's tough tough tough place but uh he tweeted that he just bought a house in el salvador but someone found the picture and it was actually a house in costa rica so spoiler alert it might be embellishing the truth on some of this stuff uh but the more homely part for the more i guess just pure fun was the dogecoin shirt reveal that was just an amazing 10 seconds yeah the guy runs up on stage chairs off his suit and then has the doge shirt he's slapping his chest you guys gotta watch the videos of this because it's hard to describe how funny it is the problem was it was they were trying to take it very serious and they themselves found out that it's not a very serious group and i've never seen anything more cult like

and i'm willing to bet most people that own bitcoin were discouraged watching this um yeah the guy that started crying on stage i didn't see that no there was one guy that was crying it's like i'm never selling man it's i mean it's i mean there's it's a cult oh yeah it's a cult i imagine if we had a fiat conference and people were like never i'm never selling i would go to a fiat conference if it was mainly to just be sarcastic isn't that a problem if you're never selling it you know for spending it i mean yeah there's a lot of problems i don't know i think tether could be one of the i mean tether is a tether is a potential buried nuclear bomb you know what i mean that someone discovers after world war ii i have no idea what's going to

happen with tether but that stuff just it seems interesting what what was your favorite moment I have to go with the tearing up the dollar bills interview. I mean, that was just all-timer. I was saying, don't do drugs, guys, because that'll lead you to act like that. Yeah, I think the funniest part about the tearing up the dollar bills is that he chose a 10. And that was supposed to mean something over tearing up a 1. But it's like, at the same time, I think he was a little scared to tear up something of more value. it's also illegal technically it's illegal brady's nodding it's but he owns congress

people so it doesn't matter dude i follow this guy he's a great follow i mean it's funny stuff i mean good for them though they bought bitcoin at a dollar these are going to be our rulers if bitcoin goes to a million dollars and i'm not happy about it It's not going to be fun if they take over the world. All right. Well, I think that's going to do it. Thank you, everyone, for listening. Hopefully, you got some value out of this show.

Hopefully, we'll get some good interviews soon. We'll keep trying. We'll keep trying. Yep. We are general partners at Arch Capital. So us or investors may have positions in the securities discussed on this podcast. We are not financial advisors. Anything we say or discuss on this podcast is not formal advice or a recommendation.

Thank you guys for listening. We'll see you next time.