Chit Chat Stocks - Investing Power Hour #19: Perverse Buyback Incentives, Musk Dumps $TSLA, Acquisitions in a Downturn

Episode Date: August 14, 2022

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join us on there today. 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. Welcome in to all the listeners. This is the Chit Chat Money Investing Power Hour number 19. and we were having some zoom trouble, but we are up and running now. So about a minute late,

but I think hopefully any viewers will forgive us. Um, the, the structure of the show is that we bring nothing prepared, but riff on all things, financial markets, and it's busy season, probably I would say week, week three of earning season, really kicking off financials. Don't really count that's like a lost week it's kind of the tone setter but it's like all right get your you know get your ducks in a row the real earning season's about to start and then uh but yeah we're week three that's comprised most of my time how about you anything worth talking about this week anything newsworthy hmm yeah i mean i looked at some earnings reports for sure stuff we own stuff we didn't own yeah just a lot of stuff there this is probably the last super busy

one until... Anything catch your eye? Any earnings not in the portfolio that we're like, hmm, I might have to re-look at that? Maybe. I mean, I looked at Coupang.

That's South Korean e-commerce company. Seems solid. Stock's been a bit strange with the reactions on the report. It went up right away and then that went down. So I guess that's not too crazy, but what other companies? Looking at Disney, I guess because we're recording for them next week

with Brad. But besides that, just standard earnings reports. So a lot of... I don't want to call them all bubble stocks, but a lot of stuff that's been down has shot up quite a bit. Did you see, I'd never know how to pronounce this company's name, Invitae? Invitae? Yeah, yeah, yeah. That little short squeeze there. I don't see what happened, no. I think it must have just been earnings, but I don't know what caused it, but I guess short squeeze stock was up like 200 something percent.

I don't like to see that just because it seems to me that maybe there's a little bit of froth left. Yeah, maybe that's kind of what I kind of I think, but and some other stuff as well. I mean, we've seen off of the lows in June, we've seen some stuff up, what, 100% that just got totally bombed out. Let me look up, I guess Carvana could be a good one. let's see can you guess how much carvana is up in the past month so 30 days take a guess 75 as of this writing 100.2 so people are working out the intriguing value of these companies i think not to uh you know i mean that's a joke but i think carvana raised a whole bunch of money and that was pretty much the big issue for them.

So they were helpful. Are you sure you're talking about this year? I thought that was, wouldn't that be every year going back to its entire existence? I mean, yeah, liquidity has always been sort of, but it's always been more accessible. I think there was some big investment

that they did buy themselves some time with the convertible notes or the senior notes. I think it was $3.2 billion worth for the acquisition of that auction company. Yeah, but that was before it bought. Yeah, $1.2 billion in equity raise. And then I think they may have done another equity raise recently because I saw something, but I mean, their earnings sucked.

I read through them. They were pretty bad. Yeah, that's just, I mean, we covered them on a not so deep dive. I think that one's still free and, or maybe not, don't quote me, But I just don't know. I looked at it and I was like, why would I ever follow this again? I don't short. So if you know what I mean, there's just so many issues with that business.

I just don't know why I'd take the risk. But hey, some people own it. Maybe they'll do well. And they've done well, quite well over the past month. I mean, 100% returns. It just feels like no one knows what to do. is sort of my feeling. If you get what I mean,

no one knows how to react right now. Does that make sense? When things are just kind of trading sporadically. We had inflation. People are confused on the month over month change versus the year over year change and how those are two separate things. But what'd you think on that?

I got nothing, but... I mean, there was that... Yeah, I think it went viral, the Biden clip of like, he was like, we had 0% inflation in the month of July. Which is correct, technically correct. I mean, all right, if you're the president or anyone who's like getting blamed for this, you're probably looking at this, frankly, on a month-over-month basis and trying to keep the cost of goods stable. uh not only by your actions on kind of a daily basis you probably do i mean they're he's painting it with a rosy brush the results but you're managing you're not managing from last year you're managing from the position you're currently in so technically it's the most

recent information i don't see i didn't have as much of a problem with it as everyone else but he kind of made it seem like a brag which nothing to be proud of yeah it's just one month we don't want them to get especially because it's out of their control so why do people blame them anyways

it's just one month so you never know what's going to happen I was wrong about that raising money I haven't found anything on that I think you're just thinking of the one before uh no there's some article that got released about a tiger global partner that left the hedge fund or something like that that was released in june but um yeah you know what other one i've been looking at so i uh recently had to take that class which is finishing up now and chegg

is I mean they have really I feel like unlimited pricing power maybe not unlimited but if you're a student and the work the coursework is on

JAG like you're going to pay yeah you're more than willing to pay $15 a month to essentially pass the class as we all know college students have really large dispensable income so I think that's a little bit of a take Ryan

but I see it I mean okay you're paying $1,500 for a course let's say you're not going to pay $30 to pass that course well majority people are they raised prices

a dollar and turned in a flinch I don't see any people are going to pay that if the answers are there And the longer that they exist, the better the catalog becomes, the more valuable it becomes to the next incremental user. What was their price before?

What was the dollar in percentage terms? It was $14.95, raised it to $15.95. They were like, all right, well, we wanted to see if we could. And they were like, yeah, nothing happened. That's not much of a test. All right. You raise it by, what is that, 7%? Yeah, that's not.

Come on. you're telling me you wouldn't have paid an extra five dollars no i'm saying that class i'm saying that i'm saying that's a big uh difference between uh saying they have unlimited pricing power versus them raising it seven percent one time it's essentially a green check for like and it's for all your classes essentially unless you're in some like super custom stem where everything changes frequently if the course material has been used by any professor ever i mean shake can really i think they can throw whatever price they want out there and people are going to sign up for it yeah there's just structural problems with

that business that just i mean why bother investing sorry for it the fact that they're not playing as uh uh they're not playing a let's see yeah what's the best way to say it colleges don't like them yeah i guess that's a good way to put it the what i found is professors would like purposely be make stuff to be anti-cheg just so you couldn't you know use them and obviously a lot of professors don't care but i think that's just a problem um i saw that more and more as i got older so chad got really popular as i was getting into my later years in college and i there's just huge risks with that business and it makes sense like it's one of those it feels like one of those where uh i don't know everything looks good until it doesn't or there's

that risk of just totally losing that, like just losing business because all the teachers are not teachers, professors and colleges kind of get their act together and say, Hey, look, everyone's just cheating online through this company. We're going to work to stop it. Maybe they can't stop it. I mean, honestly, what can you do? You can not, I don't know. You can make your questions new which i guess like if the professors are really into their job they probably do but now the chegg network has gotten good enough where you can post that question it's not all the old catalog either either you can just post a question and they've got like they've chegg has collected or aggregated enough experts now that that question is going to be answered in less than

30 minutes most likely yeah i mean they could just tell you that you can't like we'll have a login like they could the school could ban a lot ban you from having a login i think literally how would they do that they have all your information what do you mean like schools i mean schools have a lot of you know information they could say like i mean yeah you can work around it but i'm just saying there's barriers people the schools can put up against this kind like I guess they've been trying to do it for like five years and I uh Chegg's grown every year so I don't see it as a like yes universities have tried but I think eventually you probably like there's nothing they can really do I mean I'm witnessing this firsthand right now and I was

looking at the results the raise prices the the business is humming along fine they're getting more and more users now granted there's a pretty but the bigger they get lifespan on those users it's you're recycling it pretty much every four years but well i mean you know there's no new students coming in i guess they have decent but the bigger they get the bigger the risk of revolt gets isn't that kind of an issue like the larger there is no way to revolt i i mean no there's no way to revolt like with a one move but there's just it's sort of like it's like something that has bad health effects. The more and more

people do it, the bigger the risk of is of like you can't stop kids from vaping or something like that, but you can set restrictions on. I would say if that's the comparison, then it's probably a good time to get Long Cheg. Vaping? Oh, come on.

I'm talking about cigarettes. No, no. If there's bad health effects, I I mean, the return on pretty much any cigarette company, I think, has been pretty strong. Well, I was mainly referring to Juul, but as the youth part, but I see what your point is about, like, they provide a lot of value to the customers, but just within the ecosystem they're in, the industry they're in, there's just permanent risk there that I just don't know why it's investable.

Well, share count is down 15% year over year. Well, that'll entice me. Not joking. That is enticing. They are buying back in spades here. If you're listening to this ad right now, we know you're already a listener to our show. But for our avid listeners, we've also started a paid membership service called Chitchat Money Plus that extends beyond just our podcast.

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to hold a stock in the Arch Capital Investment Fund, along with shows on our broader investment strategy. Sign up and become a Chit Chat Money Plus subscriber today. We can't wait for you to join our community. We do have a question. What are your thoughts on high stock-based compensation in tech companies? Every day I get excited, but I just get smashed because of high sbc um the problem is that i don't ever see this going away yeah it's it's a worthy concern i think it's just a matter of well for one pure pure sbc the sbc line item taken on its own isn't hugely valuable um you kind of have to look at just shares outstanding over time and then check what their granting pace is going to be.

Bretz can probably explain better how to do that. And it's all in, I think, either the proxy or the 10K and probably all the queues as well. But there is something to be said for the stage of the company paying in stock and giving some incentive, but you're taking the risk of... tying potentially employee morale and performance to the stock if you give them too much.

So I think, yeah, examples like Coinbase, which I think was at like 31% or something like that, Palantir, which is at 39%. Unless you have a top tier manager who's very good at managing expectations, there's probably going to be employee attrition when things go poorly, like we're seeing at a lot of tech companies. um although right now it seems more that the companies themselves are firing i tend to try to avoid companies that issue a ton of stock well no dude look at our portfolio come on if that's a lie that's a lot 30 percent 30 north of 30 percent of revenue sure sure okay

that's that's that's fair i mean that's rare 30 of revenue is rare but we have tons of companies that issue stock consistently in poor form, I would argue. But I mean, it doesn't make something... I don't think it makes something uninvestable unless, yes, it is egregious in that super high double-digit range. Well, and it's just that we own companies that do issue a lot of stock and there has been dilution over the years. However, that's just how we look at it.

we look at it as how have the fundamentals grown on a per share basis? Because revenue growth plainly can be not great if the revenue per share over time, then same, obviously, as you go down the income statement to the cashflow. But I think there's some examples where it can help a business and there's some examples where it's masking real problems. Jumia is one that I don't think revenues grown over the last two years on a per share basis, but reported revenues up almost like double or gross profit or something like that. I remember looking at that one. So I don't know. I just look at the performance on a per share basis. What are your thoughts? Yeah. Here's the quote from the question. Every idea I get excited by just gets smashed because

of high SPC. That feels like a flawed strategy to me. To be frank, you have to just take it into account. Because if you're going to exclude all these companies, that's just excluding a lot of great companies. I mean, look at Google's share count from... Let me just pull it up. Oh, gosh. Hopefully, it goes all the way back. Their share count was growing until basically three to four years ago. I don't have the exact timing on here. Yeah. Okay. If we go from 2006, their share count was, okay, like 11, say 11 billion. And then it inched up to say 2018 timeframe, 13.7, I think billion split adjusted. Either way, steadily went higher, tons and ton of SBC, still a great business to own. Now they're returning

stock. Now they're returning capital to shareholders and reducing their share count pretty consistently, which is another plus, but it's just a factor that you have to consider. And yeah, there's that risk of employee attrition. So if too much of their compensation is in stock, it's just something to track. And that does add something as a risk, but I wouldn't say it's like a red flag unless it's, again, like Ryan talked about, 30% of revenue like some of these companies, but that's few and far between. And if it's, I don't know, because sometimes I see people say, all right, they generated a hundred million dollars in cash, but they had 50 million in stock-based compensation. So they're not really generating any cash kind of thing,

but I mean, they're generating 50 million in that case, but whatever. I think that's maybe too simplistic of a way to look at it because if that cash is growing on a per share basis, or your claim on it, it doesn't really matter that they're drawing that back. But at the same time, those companies that are allocating 30% of their revenue to stock-based compensation, I have a hard time believing they're going to grow cash flow on a per share basis. It's just unrealistic unless they grow revenue really quickly. Yeah. They better have 50% quote unquote free cash flow margins if they do. But yeah, I mean, this all comes down to free cashflow per share. Yeah. If there's SBC,

there's going to be a headwind on free cashflow per share growth. But as long as... I mean, if a company is... Okay. If someone's... Say SBC is 5% of revenue and yet free cashflow per share is consistently grown at a 10% to 15% clip. In my mind, that's not uninvestable. I mean, it depends on price you're paying for something, obviously. But just because sbc is heavy i don't think necessarily makes it uninvestable this segues into another topic that i saw this week and that is the one more thing okay yeah the the other thing is if you're running let's say one of these businesses where developer and engineer talent is kind of it's in high demand and you're a relatively young business the stock pack the stock-based

compensation package, I know Brett might be wincing at this, is probably a good tool if it's used properly to attract talent and if it's employees that actually buy in. So even though you could just pay them really, really well in cash, I imagine some employees like to have ownership and feel like they're a part of something, almost like a team because they pretty much are on that team. So I think managers do use it as sort of an incentive tool. Yeah, that's fair. I wouldn't argue with that. However, if you're a company and you don't have the capacity to pay people in cash, you're forced to pay in stock, I think you should first reevaluate your business model and expense structure because maybe it's not viable.

But besides that, yeah, I get it. But that leads into the excise tax on share repurchases that has been proposed. I at first thought this was a bad idea. And then I read more of the details and I found out it's even a worse idea than initially proposed. Yeah, it's only going to be 1% on share repurchases, and it's for companies at the company level. But here's some little detail that just... Again, it's only 1%, so it's not going to be a huge deal, but I just think totally misaligns companies' incentives for creating shareholder value. Here's a quote from the Wall Street Journal. I know the legislation can change. So if you actually care about this, read the actual stuff that could be changing as it goes through all the process, but here's the quote. The tax on net buybacks is total shares repurchased offset by the number of shares issued during the year. For example, as a part of a stock-based

compensation program or because employees exercise stock options. So they are only going to punish companies that reduce share count, which- Oh, that's terrible. yeah it's just i mean it's one percent so it's not a big deal but that just feels it's gonna incentivize more sbc and disincentivize reducing share count um i mean maybe that's good for society because more people will become owners or or if you get what i mean but from a shareholder perspective i don't that doesn't seem great no so it's net too essentially it's net shares repurchased that are going to be taxed oh yeah oh god i don't know yeah i don't know what to think because one percent doesn't sound like a lot

but yeah it's after tax money i know it's weird well isn't it essentially i mean they're paying that basically out of their retained earnings or cash that they've generated in the past assuming that they've been taxed on that cash that they generated yeah it is a double tax sure that is tax net income more i don't know i think maybe it's this again i don't like the idea of taxing share buybacks and the same as dividends, but the positive spin could be that net income isn't perfect and people can massage that to make it seem like they're not as profitable as they truly are. So taxing buybacks and dividends, while at first principles might not make sense, It would actually be taxing the capital returns back to the shareholder class, which would maybe be a better metric on the true profitability of a business because if they're trying to return cash to shareholders, they have that capacity.

They've been generating excess cash. Now, there could be some flaws in that thinking because I'm just kind of making this up on the fly. But I don't think it's a terribly negative thing, but from a shareholder point of view, I'm not the biggest fan. No. Would you rather have that or have your income tax raised by 1%, let's say? Oh, I don't know. They're both not. Until it gets to like 10%, it's kind of not noticeable.

So don't really have a take. But if it was at 10%, yeah, the buybacks for sure. Like companies can work around that better than I can work around sales tax. Yeah. Any other big notes from the week? Oof. I saw that our friend, our friend Francisco Oliveira was mentioned in the Wall Street Journal this morning on Disney's earnings report?

Yes. When we record, yeah, listen to his show on Formula One. When we record Disney, that's the person in the back of my mind. Like, all right, I got to make sure when we record this episode on Disney, I get things right.

Because I think of like, okay, if I was talking to him, you know what I mean? Because he knows that company so well. Our friend, listener, I'm thinking, I'm guessing one of the five uh watchers on youtube um the elon musk decided to sell some more tesla even though he said

he wasn't a few days prior are you surprised or are you yeah that's shocking i never saw that come in and you know what is just a load of crap this oh no i'll buy it back if i don't have to buy twitter like shut up no you won't i made sure to screenshot it he'll buy like a tiny portion and then see like so i say i told you yeah he's gonna buy back all 20 billion or whatever it is i don't know the exact amount um but it is kind of strange he's he like was hyping up the stock at the meeting and then selling it they had they had the shareholder meeting isn't that what's he going to do? Talk it down and sell it at a lower price? Who would do that? Warren Buffett? Or actually speaking of, we just had that show on Winmark come out today with Jim Gillies. And

maybe the biggest highlight I have from that was the chairman or CEO, I forget who, deliberately selling at a discount to the traded price as the company buys back stock, as he kind of leaves the company and is retiring. I thought that was a huge, like seeing something like that when looking at a potential investment is just huge for evaluating culture and management. But back on Elon,

yeah, that, I mean, okay. Isn't that what someone at Enron got in trouble for? Is saying like, buy the stock or like whatever, like shorts are screwed, however they said it. And then selling stock like in a form for, super close after is Elon just above the law are we just realizing that again

oh yeah I mean come on this is known it's I don't know it blows my mind that people don't shareholders don't care

it's happened how many times he's sold what 35 billion worth of his shares and every single time they say like well he needs it for like the good of humanity for some bullshit reason like dude just look at what come on he's selling i know the spin the spin zone on that is astounding um yeah the uh yeah something yeah there was a uh acquisition recently that was blocked a Facebook acquisition

and it made me think and this was it was basically the meta was trying to buy this company called within that has like a boxing subscription service it's like VR subscription based boxing and it's got

like flow class it's like a fitness classes and the FTC was like basically no you already have something like this it's anti-competitive plus you could just build it if you wanted to yeah which makes me think that if acquisitions were hoping to be a part of meta strategy this that's not gonna happen yeah i think they just got to play with the cards that they're dealt it's interesting that amazon and microsoft just seem to be going willy-nilly. It doesn't seem fair to me. Oh, that reminds me. I saw someone say

that the purchase of iRobot, Amazon's $1.7 billion purchase of iRobot is the most dangerous acquisition in company history. Oh, yeah. It's going to be. What could Amazon possibly do with iRobot's data? Honestly, how does that even help them? They're going to sell more. The size of your living room rug. Hey, you're Mr. Defend Alexa about the data advantage. So you explain. But Alexa is interactive.

This is just, what can they do with a map or a floor plan? Honestly, there's nothing that, how does that provide any benefit to Amazon? I think Amazon might've done it just to see, just to test the regulatory waters. be like all right what's the most pointless thing we can buy let's see what regulators think of this and you're like oh let's buy vacuums like obviously no one's going to complain about vacuums hey robot vacuums are interactive i don't know what you're talking about they're they're interactive they collect data you can't okay you can't make a purchase order maybe you can maybe amazon's going to change it

but who gives a shit if you order something from your vacuum like i don't know it doesn't provide that much it's just what's I honestly now whatever they have the scanning thing

they have the scanning stuff so like it maps your home and stuff like that so the theory this guy had was that it would basically be

super anti-competitive because they'll know what you need at your house but I mean great if they can actually if they could

actually figure that out great for the consumer yeah that I would be I would enjoy that but all the smart device is just like they just annoy me whenever i get any sort of appliance that's

internet connected which i know amazon's going heavily into it just they always don't work as well like my family has a 30 year old toaster that works beautifully way better than any other smart appliance they've ever gotten and it's can i just have that again if anything ever breaks i don't get that there's zero way that the vacuum is going to be able to be like oh they need he needs new oats it's just the scanning of the maps of the homes so i think people are just worried about that data but again it's your floor plan i mean it's yeah the people have i mean that is don't real estate companies have it yeah all right but back to the the facebook stuff yeah that's kind of i don't know why they're blocking that

acquisition maybe they just don't like meta slash facebook but it seems that that's their strategy because my microsoft and amazon have been going great not crazy but you know pretty consistently buying companies that you would argue have the same sort of scale benefits obviously they're all different um maybe meta that's just the cars they're dealt i don't know i don't really have anything else to say about that i would say maybe it's a little self-earned well they yeah yeah that is true that's fair judging by some historical events store some historical things that they may have either done or uh like not looked into with enough care as a multi uh 100 billion dollar whatever company here's here's something that maybe that i was kind of poking around my head

That could just be a terrible idea. People just don't want companies that are big enough size to be able to buy up all their companies, right? This has always been a problem, right? It makes sense. What if like if you're... If it only benefits the consumer? No, no, because that's a little hard to say.

What if your company that is, say, as a percentage of GDP, say either probably not your revenue, it would have to be market cap as a percentage of GDP, is at a certain threshold. you're not allowed to acquire companies anymore because you're too big. I mean, maybe, but... You're so successful that for the time being, the society is like, all right, you want... I think maybe there's a better barometer than market cap because we've seen some companies, some trees grow to the sky, even though maybe it isn't. So Tesla's too anti-competitive.

Maybe, yeah. I want to be too upset if Tesla started making acquisitions. Yeah. All right. Here's a good comment from Matt. I think it's the same Matt, Matt H. Thank you for joining all the time. Matt has spent $20 million on lobbying in 2021.

They need to up that spend most likely. All chisels. Yeah. I mean, the tobacco lawyers are top notch. They're always getting that legislation that makes no sense for anyone except tobacco companies. Shocking. the thing is they probably could pick the next president if they wanted to so i would stop people would be more you don't think that oh meta meta i thought you said i thought you meant the tobacco

companies i was like uh no but sure sure sure yeah if they really wanted to get like mean and and really like flex the push the button or push the pedal on on the political power yeah yeah I like how much the crypto industry is lobbying you know how there's just a ton it's a ton and it's not surprising yeah

what's with the like you need to cover our losses we should be FDIC insured screw the big banks but we'll take the bailout yeah we're gonna disrupt the government and national currencies but actually no we need to

partner with legislators and we need FDIC insurance. It's very ironic as maybe Senator Palpatine would say. Here's a question from and I've been thinking about this because we've been covering streaming and researching

it this week for our Not So Deep Dive. Here's a poll from The Science of Hitting, Alex Morris. Netflix will launch a free ad-supported tier by year-end 2024. 56% of people said yes, 43% people said no, or 44%

of people said no, so basically a tie. What are your thoughts on this? Is there enough inventory to make a free tier successful for some of these streaming companies?

At least the larger ones. Free? I don't think they've expressed anything about free management. They didn't express anything about advertising at all a year ago. Yeah, but I'm saying even when they talked about it, they mentioned that it was like... I guess they didn't say anything on pricing,

but Paramount Plus does... I think it's $5.99 ad-supported, $9.99 without. I think they're probably going to say... I mean, they can probably do the math and say at what price does average revenue per user from the ad-supported side get high enough to make the cost worth it or cashflow positive generally. Maybe they sell it as a loss later at the start,

like free and then up it, but that seems like a bad strategy on the ad-supported side. The other thing is I hate ad-supported plans they have to pay for. Yeah, it's a double pay. It's better to go free, but... That would have to be ads everywhere. Yeah, unless it's sports.

But, I mean, that's what YouTube... It's basically YouTube. Well, you mean with the... Except it started free, you know. You mean with ads everywhere? Yeah. Because isn't it two tiers? If you go premium, there's no ads, right?

Or am I... I don't know. I don't have premium. No, that's right. That's what I'm saying. It's like if you just make the free experience so... Sorry. absolutely horrible

alright see this bothers me this bothers me Apple gets to send just like notifications to me instantly I have to allow other companies to do it

on my Mac but Apple gets to do it immediately that's BS join team Android come on make the switch join the dark side

you're never gonna do you're never they're never gonna do it everyone you have to you have to buy sorry we'll go back to what you're talking about

with the streaming but yeah everyone has to buy an iPhone to differentiate themselves even though everyone owns it yeah you got to be different it's the only way to be unique you got to prove you got to prove your superior by owning what everyone else sounds all right but back to sorry ad supported oh i forgot where it was but uh comparing to youtube the two separate yeah i mean you just make the ad supported experience so absolutely horrible

and bog it down with ads until people you know decide all right i guess i'll up to premium Although YouTube's more unique, in my opinion, than like if Netflix bogged it down hard with ads, I think there's too many alternatives. Yeah, I think the problem isn't even going to, again, I'm not versed in the advertising industry or the advertising technology industry, but we have all these companies coming into streaming, trying to do connected TV advertising, essentially, right? I feel like the issue might be that there's just not the advertiser supply yet. So I don't know if that, you know what I mean? There's going to be so much inventory opening up.

I wonder if the problem won't be that there's too many ads is that they got to fill all these different slots and it's going to be a buildup slowly over time. Yeah. I think that's a, and they're doing it at a point where there's sort of an advertising pullback. We do have a comment that says,

not sure if you spoke about Disney, but they're torching cash on streaming also that doesn't surprise me although we'll cover it on the not so deep dive this week i'm sure yeah i was gonna say in some of their offerings they are seriously underpricing not anymore not anymore they're raising plus is ten dollars now i'd say it's still maybe not on the disney plus but you if you get me with live sports like espn plus i'd probably pay 20 bucks a month yeah it's only 10 right now plus i think that's the underrated thing about the sports which i've harped on again and again is the fact that people will pay and there's distinct times for advertising so you get that

great i think you get phenomenal arpus um which they actually mentioned in their conference call that espn plus raised to 10 bucks a month from like six which is a pretty steep bump and they don't even have nearly all of their content on there from a sports wise yet at least none of their flagship stuff is exclusively on espn plus and nobody churned so or not nobody but they saw no change in uh a churn dynamic so that's a pretty positive sign yeah uh the other thing kind of to touch on matt's point i just don't know if i'm going to touch anything streaming related until someone can prove they can generate cash yeah

I mean who everyone's in this like horrible competitive environment to see who can produce the best content and it's just like yeah everyone's going to acquire more users but this

like aggregate cost to acquire them is just elevating it's interesting for sure you know what else I saw I saw that the Roku channel allows so you can like sign up

for I think it's like 50 different services Paramount Plus is included in the Roku channel and then you can like navigate Paramount Plus within the Roku channel what's the benefit for Roku to do that I think just better revenue share

probably just like a higher likelihood of transactions I don't know what the yeah that doesn't really make sense the roku channel strategy doesn't make sense um i don't think they've expressed a strategy at all or laid out anything that they want to do i don't get it but yeah all right here's another one avalera seattle native seattle seattle prospect project, got bought out at a pretty decent discount to their all-time high. Is there any way to be proactive in finding companies that will not take themselves out, get taken

out during a downturn, and you maybe get a 20% loss if you're buying for the long term? do you just have to make sure you buy at the right price or is there something with management that can come into play i don't know i mean even if you have a whole bunch of insider ownership people might just want out yeah they might just have their own personal situation where they want the money now sucks can't really control that find someone who like really loves the business like they really like their job and you can tell but it's hard like even you can you can every ceo is going to masquerade that but you think like so mark zuckerberg you're saying we should buy meta no i'm joking i think zuckerberg would fit into that

category um i mean warren obviously because he's outright said it like 20 probably a million times that he loves his job now if he makes the 100 I'll say he's dedicated if he's if he's CEO at 100 then maybe we'll talk I think

maybe Reed Hastings fits that bill sort of but he kind of was when they were like cruising along he was kind of saying I was

you know what I mean he was giving more now co-CEO yeah exactly that co-CEO thing with Sarandos although I bet he's back in now

What am I trying to say? A little more hands-on. Yeah, hands-on, exactly. I don't know if there's a good way to tell whether or not management will take the payday. Yeah. You can blame them. Someone gives you a good buyout opportunity.

But with the Avalara one, there wasn't much of a premium, which is probably disappointing for shareholders. companies buying back a ton is probably a good indicator Swedish match I suppose but I

would have thought like hey if you're buying back you know you're not going to sell unless it's a pretty steep premium because you think alright we're already trading at a discount and it may be like companies that are buying back opportunistically not just putting it on the back burner like

and they've done so recently or at around the price, because then you can say, all right, they've made it clear. They think this is a discount. There's no way they're going to sell for anything less than this. Well, they're just buying back because of the tax incentives with stock-based compensation. Yeah. Get them all out before the end of the year. All right. Here's a question from, sorry, don't know how to say your name. Thoughts on Apple and Microsoft making up over 13% of the S&P weighting. no way do they really uh i'm going to say that is correct yeah damn i would say at that point yeah you stop letting people you stop letting companies

acquire other companies as the percentage yeah apple's really run up since they had that solid earnest report that we talked about last week um i uh gosh i think there's a lot of avenues to go when a company like there's a lot of different things that can happen when a company makes up such a large portion of the index especially when index funds are so uh big with so many flows so much flows going into there um i'm a little over my head discussing that but just there's a lot of flows that are probably going into microsoft and apple stock uh we consider it's tough i would it's like my xbox on its own yeah their strategy has been sound the last few years they are definitely doing well versus uh uh sony although

that's a just classic duopoly that oh my god what a take rate on all those games switch switch yeah but that's their own I mean they're their own their own beast people don't play COD on the Switch yeah you can play

maybe COD from 2004 but that yeah as the company's making up that big of a portion of the index from an investing

perspective maybe I guess if you're buying the S&P 500 index fund you're betting on a lot of fan mag

earnings growth and feels safe feels fine but i don't really i don't think there's any huge like you can kind of turn your head into a pretzel of thinking about all the different here's the thing do you think they in both cases do you think they extract more value than they or do you think they create more value than they extract because i would say as long as they're creating more value than they extract to society don't do anything microsoft a hundred percent is creating more

value than they're taking apple i would say probably no because the value like if apple went away people wouldn't nothing would tragically go wrong if you kind of get what i mean like people would be a little bit annoyed they'd have to get a different phone android whatever but it's not like their life's over that people might say my life's over. I don't have an Apple phone anymore, but if you, if you kind of get what I mean there, I mean,

I would say Microsoft's probably the same way though. Oh, if Microsoft, no dude, if Microsoft went away, the world would hop to a different email. Hopped. Okay,

dude. No, the world will collapse. If Microsoft, how so everything is, you know, that meme of the, everything has to go.

Convert it to Google Sheets Dude that takes I know the world runs on Excel Whatever that meme is with the guy But you can't There's so much switching costs there it would take Decades What about all the data that's stored with Apple

I mean it's like the same as everything that's stored with Excel In a way Yes but also in a way No because Microsoft is kind of the grease that keeps The world running the business world running I should say

and Apple's just a good brand I'm a Google Sheets, I love Google Sheets and no one uses it but no one uses it but us, people laugh at us someone said Google Sheets with a laughy face I love Google Sheets I love Google Sheets, Google Finance

Google Finance API is great updates constantly for us but it just there's so much built into Excel just in the global economy how much of the global economy

is built into Excel is that what you mean yeah yeah it's true I mean yeah another guy said Google Sheets with I think a puking emoji alright Excel's good we have a shared folder

what am I going to do convert Microsoft Excel every single time it's a waste of time. We're broke. We also just have free Google Drive, but that just shows you how little money we actually make. But what I was going to say is Excel is a great brand. People love it, especially in finance. It's true. At one point, I was listening to this Business Breakdowns episode on Union Pacific. I think in the early 1900s, the railroads Made up 60% of the Dow The 30 companies

In the Dow The railroad based companies The early 1900s you mean Yeah whenever the Dow was like Invented Late 1800s I think Or maybe early 1900s Super early 1900s

Talk about a monopoly Whatever you want to call it It's hard to build railroads these days Because of all the regulatory stuff So you know those they just have like a permanent advantage as long as the government doesn't opt not to build them themselves yeah you can't uh the digital revolution is not going to be able to enable you to break the laws of thermodynamics or whatever whatever you want to say the laws of

physics um yeah but the the fact that the railroads is such a large part of the index is kind of a good pitch for index funds because if you just own index funds you basically ride all the technological change and the companies that are becoming the larger part of the index and then

falling and stuff like that whatever becomes a more valuable part of the economy you're going to own yep let's see anything else anything else in a tax advantaged way as well that is true that is true

they yeah they sell for you what did you think of the AMC ape stuff I didn't look into any of the details because it looks super complicated but neither did I but you know what kudos to that CEO man for just selling his soul just sold his soul

I honestly respect it thank you for being facetious but no I mean think you know I think you would have done the same if you knew that you'd get what's his I assume his payday has been north of $100 million. I hope I would not be doing the same thing in the same manner.

I hope I wouldn't. Well, he's playing to his audience, man. Maybe he just has this pet thesis that it's going to somehow increase ticket sales. There's so many of them that they're going to go to so many other movies. But that's just bullish for Disney because Disney gouges them on ticket prices. So, it's not like they actually... What's the last movie you went to in theaters? Top Gun.

Damn, I never went to that in theaters. You should go before. Yeah, I think so. You should go before it ends. It's probably only good in theaters, really. I've been to a lot of those Disney ones lately. Oh, my God. Quite underwhelming.

I will use that anecdotal evidence when we record our episode tomorrow. I'm looking forward to She-Hulk Attorney at Law to be... uh no no that wasn't canceled was it which one was the one that got canceled by a company that was bad girl but you went to see thor whatever instead of instead of top gun come on that's just your own fault all right so we had nothing on amc no literally nothing i just don't keep up with it and there's always so much going on that it's so hard to keep up with yeah um Applovin is buying Unity. Did you look into that at all?

Really? Kind of a fish that ate the whale situation there, if I'm not mistaken. I think Unity was larger than Applovin. I was going to say, Applovin's that big of a business? $13 billion? Okay. To be frank, I've never known what Applovin actually does.

Can we pull it up right now? Let me see the description. An app loving engages in building a software-based platform for mobile app developers to enhance the marketing and monetization of their apps in the United States and internationally. It's Unity. It's literally Unity. Yeah, you could not tell me the difference between both of those. Well, I hope it goes well for them. 50% premium to Unity's share price.

Wow. Good for Unity, whatever people that bought the dip. All right, hold on. I've thought about this. 50% premium to Unity's share price on July 12th. nearly 20 premium to yesterday's as of this whatever when this was written either maybe that was the market overall just rising but every time i see that i think god i hope the sec is looking into that whenever you see like this weird random just like gradual increase right

into an acquisition price like come on someone knew someone's fine someone's leaking yeah and And then we had a comment, didn't Unity buy IronSource? Yeah. Oh, I saw that it is the AppLovin deal is contingent on them not buying IronSource. So it's kind of an own-to-management

Unity's management if AppLovin's saying we're only going to buy it if you scratch the IronSource deal. Yeah. I don't have any. I don't know anything about any of the companies. I think a lot of people i think a lot of people buy developer based companies that are built for developers without

understanding the competitive landscape involved there because i don't know everyone loves unity but i've got a feeling that unity is not the only one doing what they're doing and obviously they aren't and also we don't know and we would have no idea if there's a startup coming along that it kind of plays into the fact that you want to counterintuitively people might disagree with this

invest in industries that have less technological disruption. Yeah. All right. Here's I want to do a good game here. I'm going to lay out.

OK, the years don't matter. I'm going to lay out revenue growth rates for a I think it's a seven-year period for a software company. I want you to tell me whether you'd buy it or whether you'd be interested at all in this company. First year, 3%. Second year, 16%. Third year, minus 2%. Fourth year, 13%. Fifth year, 25%. Third year, minus 3%. Fourth year, minus 5%. percent if you saw this tweet from someone you might have you might be i didn't see it okay good

would this keep you away like would you be like super i don't know worried about this company in general like after you take kind of a first glance you'd be like okay what's going on why aren't they growing revenue i i don't know would that just be on its face what if i told you that was adobe in 2003 and a 33x it's just that was a good little tease from mbi business now too so it's hard those transition periods or turnarounds or uh i guess transition periods of business models and stuff like that it's so hard to predict adobe was also like a fraction of the products in 2003 that it is today like i'm pretty sure that was like built on just a few products yes but that hindsight is you know we have perfect hindsight but at that time wouldn't it be really hard to

look at something like yeah just kind of shows how hard it is to look at something without kind of i don't know i guess it comes down to trusting management strategy and stuff like that but i think there's probably a lot of companies that have been in situations like that that haven't turned out like Adobe. Yeah. A lot of software businesses, especially around 03. Yeah, true.

That timing could be strange for the tech bubble bursting. But if you look at, it kind of goes back, if you want those kind of potential hundred bagger stocks, you have to really be at a starting point most of the time

where things don't look perfect. Because if things look like if the company's firing in all cylinders, it's going to have a premium valuation as Adobe has today, or at least did. I think probably does. I think the evaluation has come down a bit if I remember correctly,

but I mean, if it's above 20, I mean, it's still, you know, technically premium. Yeah. It's like 30 times EBITDA.

If I'm looking correctly, that could be wrong. I have to buy. I think there's this like disillusion or illusion. Maybe it's just illusion that companies will get completely disconnected from their fundamentals and you can easily buy them. When companies really drop in price, it's usually fundamentals driven. Yeah.

Or something's going on that people are concerned about. So yeah, you kind of, I have to imagine most hundred baggers, maybe not like monster, were bought either at a precarious time or the outlook just wasn't good. Yeah. I think the best, the easiest one to kind of go into is when revenue is going to be slow for like two quarters and you know, it's just some anomalous thing. That's my favorite one because so many people are just like, oh my God, revenue is going to grow. Revenue is going to slow for two quarters. What are we going to do? Like they lose their minds. But if you know, like if

you're pretty confident that that's just going to be a short-term blip for whatever reason, that can be, that can be nice. That can be a nice opportunity from my point of view. All right. It's 101 on the West Coast here. So it's been an hour. Going to go ahead and sign off. Matt, thanks for all the comments. Ethan or Athan, if I'm saying that right. Thanks for the comments as well. Everyone that was on here, appreciate the questions. That's going to do it. We do this every Thursday, 12 o'clock Pacific time, three o'clock Eastern time. Feel free to go to our YouTube, just look up Chit Chat Money. We'll have a live video going and you can put some questions in the chat if it interests you. Thank you all for listening. I guess we should hit a disclosure. Brett and I

are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. Thank you all for listening. Thanks, Matt, for telling us a good show. Appreciate it and have a good one. See you guys next time. Bye.