Chit Chat Stocks - Investing Power Hour #30: Can $SPOT Make Money? $META Meltdown, $SHOP Earnings

Episode Date: October 30, 2022

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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 guests is not formal advice or recommendation. Now, please enjoy this episode. Okay. Welcome in everybody. This is the Chit Chat Money Investing Power Hour. We do it every Thursday. We can talk about anything. Anything is fair game. The only rule is that we're not

allowed to come straight. Oh, sorry. It's going over. We talked about that. That is funny. We discussed it 30 seconds before about exiting out the thing, but it's hard. What do you go live on YouTube, you have to click a bunch of buttons while you're live. It's a multitasking. It's difficult. Anyway, the only rule here is you're not allowed to come prepared with anything. However, it is earnings season, so it's a little hard not to in this case. And I imagine we're going to talk about that. But first, we should probably talk about our exclusive partners at 7 Investing. We were able to chat with Simon this week, Simon and Christoph. First time chatting with Christoph. Will that episode be out already by the time people are listening to

this in podcast format? No, this will be a perfect tease. It'll be coming out next Wednesday. If you were listening to this on Sunday or Monday, that week that it comes out on the Sunday or Monday, it'll go out on the Wednesday. So very soon, very fun discussion on semiconductors and biotech stocks, some of the innovative, uh, industries that they really like to follow and study and recommend over at seven investing. Yeah. The biotech stuff is, it was awesome. Hard to wrap my mind around. I think for, uh, for as someone who doesn't really invest in the industry is some of the technology is pretty, and I guess, honestly, it's insane, but, uh, it's cool to listen to people that actually understand it. Anyway, if you, if you guys want

to, uh, uh, sign up for the service, use our code money. You get a hundred dollars off. It's a lifetime discount of 25%. Am I getting that right? Um, anyway, use the code that you get seven recs every month. Plus they've got 200 different, more than 200 different companies in the service that you can research. Um, so good research. Do you want me to tease what kind of companies they had last uh month and kind of what people might be expecting for the next month we got you know a large cap tech stock we got a software company we got a healthcare company we got two healthcare companies biotech company fintech tons of different areas so one of the best parts is that you can just explore whatever you're interested in they're likely to have reports on that it can

really help you learn about that industry and one of those i want to even characterize it as healthcare, really. It's almost more software, but I can't go any further on it. I actually really liked this last batch of companies. Anyway, let's move on. I think some people are probably going to tune in today because they want to hear us talk about Spotify's earnings, who reported this week. Do we want to start with that? Sure, that's fine. Yeah, we had someone ask and thank you for asking Twitter to discuss. Yeah, interesting report. I don't know, Ryan, do you want to kind of give your over maybe the overview first and maybe i can bring up the report and give any context for numbers if we forget well to be honest i wasn't a fan of the report

there were some positives but in general i'm starting to become a little frustrated um and honestly it just it synced up right in line with okay i watched that And I know this shouldn't matter, but it does. I watched that show on Netflix called The Playlist. And obviously, this was a long time. It was basically, the show's based around when they were starting the business, primarily. and it's very much a growth mindset and you're really focused on just not really things that drive value in the public securities world it was more how do we get to scale how do we get to ipo how do we disrupt music that kind of thing um doesn't really matter about generating cash And that was kind of the focus of the show. And then when I watch or when I read the earnings and I see kind of this constant deferral of profitability where the focus was basically – To their credit, they had a really good quarter user-wise.

I think they were 6 million MAUs above what they guided for. I think they're at, what, 456, 459 million? Do you want me to give context here? Yeah. So yeah, 456 million MAUs, 20% growth, 23 million in the quarter compared to Q2. So 23 million net additions in the quarter, which was a record high. And then premium subscribers growing a little slower, but it's still at 13%. So those are the paying subscribers.

However, and this is what Ryan is talking about, gross margins still only 24.7%. Basically the same thing, same as where it was in the 2017-2018 period. And then operating margin is still slightly negative. So yeah, continue, Ryan. Yeah. And basically listening to the conference call, they keep saying stuff like, so first of all, a lot of the thesis for investors today, and my thesis generally is around operating leverage, that they're going to see some, not a crazy amount, but some operating leverage in their business as they reach scale. not only in the music side, but because of podcasting and stuff like that. We simply are not seeing that play out. And I know now it's a bit of a mix shift because podcasts are hurting and

premium is growing a little bit in terms of gross margins, but it's 24.7% gross margins versus I think 24, some 24 point something percent when they IPO'd. It's essentially the same or the really now it's the exact same. Yeah. And when you ask questions on the conference call or analysts ask questions, it's basically – and listening to it, Daniel almost got defensive at the start by saying, I know a lot of you guys are going to be frustrated that we aren't seeing the margins, but we don't manage for the quarter. We worry about the lifetime value and hitting our internal metrics. We measure it differently, essentially, internally.

And they keep using this like we're doing well internally. If it's doing well internally, it would show up externally. Well, they could be right, but I agree. It should show up. It should show up in at least the gross margin numbers. And yeah, they said 2023 is going to be when they expand. I think investors probably have to hold their feet to the fire there. And if they don't, then maybe they're not as either.

Well, either two things. They didn't execute as well. they're not actually locked in on expanding margins um i thought yeah the quarter look besides the margins the quarter i thought was really strong um they showed a lot of good stuff on engagement um then on that movie stuff right i mean come on that's irrelevant i know it's kind of a joke but is it though because it's pretty i mean the the i think the book that the movie was based off of that is actually trying to be factual um is relevant so i'd recommend anyone read that to give any historical the true historical context and yeah they do focus a lot

on i mean they said i guess martin said that that's not that's not i mean they're not martin the old cfo he said the book wasn't indicative of what happened either the so but the movie was even more uh exaggerated than the book so i don't or not the movie the tv show i don't know if that should factor in any sort of investment thesis. Well, I think, okay. I think the proof's in, okay. The way I see it, management teams seem to measure success

one of two ways. The good ones measure it in cashflow for shareholders. Others measure it by the size of the business in terms of influence and employees. And my concern in watching that show is that it really seems – they really seem focused on disruption and the size of the operation and employees. And yes, they probably made it seem – I mean – Well, that could be – if the show didn't come out, that could still be true, and I think it might be true. Yeah, there was – I mean, there was one –

So, I mean, that's a huge highlight of the quarter. Finally got, finally got a question answered there. Yeah. That is huge. That's pretty cool. I guess I do. And you're going to roll your eyes when I say this, but I'm pulling up a quote from the show. Obviously it, keep in mind, it's from the show.

This is not real. Yeah. I mean, it's, it's, you know, basically when talking to, when they said, well, you got to figure out the business eventually, right? You got bills to pay. He said there was this whole scene where it really didn't make a lot of sense. But at the end, he goes, by then, we'll have shareholders, thousands of shareholders. They're the ones who will pay the bill. Growth, growth, growth.

Now, the reason I took that out is because it feels like that's what's happening when I read through these earnings releases. Yeah. Look, I think I could agree with you. I don't really, like I just said, don't really put any factor into the TV show. But that could definitely be correct. And it comes back to, I know any sort of the bold thesis in spite of that would be, oh, well, it's like Amazon. And I know that could be the case, but Amazon type investments where you don't generate cash as a public company or consolidate cash for, what would it be for Amazon? on maybe, what was it, 20 years? Yeah, probably less, a little less than 20 years, 15 years, something like that.

And you actually are able to, I don't, I mean, here's the thing. I think a good rule of thumb is no one is Amazon. Yeah, most like the 99.9% chance. The thing is though, is that it's hard to look at them because Spotify, I'm saying it's hard to look at Spotify and it's why the stock is down so much and why if they execute and kind of run any sort of numbers on margin expansion, the stock's going to probably do extremely well is that if they are not just making excuses and the operating leverage

is there and they say will show up and they consolidate numbers and does show up and they consolidate numbers in 2023 on at least the gross margin level and they're investing and getting tons of strong returns on that investment i mean this you know this is a chance to be a ginormous company however it's really hard to see that um today and it seems like each quarter they come up with another excuse of why consolidate numbers don't look great uh and yeah internal numbers yeah and i guess the one thing that could you know the foreign exchange stuff is out of their control and that's been a big headwind because they have a lot of employees in the u.s but a lot of revenue internationally i get that that's not something they can control but once that subsides or if

it subsides uh which like i mean we're not going to see the dollar go up by 20 every year for the foreseeable future um then they don't have that excuse anymore so i think 2023 is a big year um we kind of hit 10 minutes on that ryan do you have anything else and then we probably should go on to other topics and yeah anything to close out on spotify no i'm just kind of a lip okay they keep saying 2022 is an investment year we said that and the other part they say is we're sticking by our goals we're sticking by our goals that we set at the investor day i'm like well yeah you set those three months ago i i should hope so like well that's not really a big i mean why are you i wouldn't be mad because they keep pushing the they keep pushing the field goal posts they

keep moving them i mean sort of sort of sort of i mean they moved the field goal post from 20 the 2021 event early 2021 event um but from the investor day this year they have i mean it's they have moved the field goal post uh this is kind of this is what they said would happen but yeah but they also said there was going to be a much faster rollout on the advertising side which would have helped with margins. Yeah. Yeah. Oh, yeah.

For sure. So there's, I don't know. I could very much see a world in 2023 where we're at Q4 and they announce gross margins at 25%. And they say, well, there's some one-time stuff. But, I mean, internally, we're seeing the margin inflection. Yeah. It's very hard to judge.

It's a tough cookie, for sure. because everything else looks fantastic. Maybe not fantastic is the wrong word. Everything else looks great. I mean, the execution on users, attracting subscribers in all markets around the globe, even with major competition, and gaining the podcast market share,

which they said again, did really, really well just from consumption and users' engagement in the podcast. However, eventually you got to make, you know, you got to make money off those users. And if you have 500 million, probably a lot of 500 million by mid to early 2023, I think you got to come up with a business model that can work there or really show aggressive top line growth in these new business models. Yeah. All right. New topic, new topic.

We can talk about Spotify all day. We should not make the whole show about that. I want to talk about meta. uh meta that was the was that the craziest maybe not craziest most shocking press release you've ever read I'm gonna pull it up because that was it was a gut not a it was just every line after line was just oh my gosh wow like they're just it was amazing I have no words i have no words for it um someone had a really good tweet as a non-meta shareholder this is incredibly entertaining to watch him do exactly essentially what he said he i mean he's addicted

to the metaverse quite literally um and it's entirely his operation and people are just on their hands and knees begging him to slow spending and he's like rambling on about the metaverse it's pretty i mean yeah like i'd be frustrated if i were a shareholder though yeah i it's it's it's like similar to spotify or even alphabet a bit but it's slightly different it's just kind of a little bit of the expensive stuff there but it's similar to spotify except uh just totally unsteady just so much more um let me just go through some of the report for anyone that doesn't no or anyone that didn't see it so here's the big things one you saw revenue decline in the third quarter year over year down four percent and costs and expenses were up 19 which led to

operating margin to be down from 36 to 20 which is worse than people thought if we look at um their uh headcount if you look at it headcount was up 28 year over year and And if you look at their guidance for 2023... So here's what they gave for their long-term guidance. In 2022, they're expecting $85 to $87 billion in expenses, which is right around their prior outlook. But in 2023, they're expecting total expenses to be in the range of $96 billion to $101 billion, with capital expenditures to be $34 billion to $39 billion, which I think would be the highest out of all the big tech companies as they are increasing their investments in AI. And they're expecting Reality Labs expenses to grow significantly in 2023. So all those just

in combined, you just read those like the CFO outlook was just line after line after line, just, oh, wow. Wow. Just this is, I mean, just an amazing, amazing report. I think maybe my favorite part here, and there might be some timing stuff, but just looking at total costs and expenses for the last nine months, you're looking at $62 billion versus $50 billion during the same nine months last year. So $12 billion in incremental total expenses. You added $12 billion in expenses to generate quite literally a rounding error in Reality Labs revenue. Yeah. What was it?

$1.4 billion and grew to $1.43 billion. Yeah, I think the new Oculus released last year. But if the new Oculus released last year, and we're going to compare it to, say, a video game console, the second year should be better. It should be bigger the second year. Well, if there's any staying power, but having read some of the reporting from like the Wall Street Journal,

all the users are just churning after like a month. So there's no... We shouldn't expect it to be like Xbox or PlayStation, but that's the goal, right?

Ecosystem? Yeah, I mean, that's their nearest path to short-term earnings. Sorry, I said nearest path to short. Just their closest path to earnings for Reality Labs. The theory is probably they generate some money from Oculus with the gaming stuff, and maybe that was the idea, and then you can invest that into that crazier stuff that they're going after on the decade-long time horizon.

I guess it's not surprising to see the stock down. It seems like a very rational reaction. from everyone. But the disappointing thing is that they also do not, since they're investing so much here and they bought back so much stock in 2021, that they don't have the room to buy back a bunch of stock here anymore, which I think I would be very disappointed in as a shareholder. I don't have the number in front of me, but I think it was $20 billion bought back in Q4 2021. And then maybe if they knew that they were going to invest this heavily, I would be a little disappointed. I mean, similar to Spotify, really.

Disappointment in the buyback where they did it a little bit at higher lows and haven't at lower prices. Not having the capacity to do that for Meta seems disappointing. But here's the two questions I have that I think can make it more than just us talking in circles about Meta's earnings. One, the big tech employee count. You choose which one we want to do first. One, big tech employee count, and two, founder voting stock positives and negatives. What one do you want to do first? Let's start with the headcount because I thought everyone was laying people off this quarter.

They're lying to us. They're just constantly lying. uh yeah i didn't every like literally every big tech company basically say like we're gonna have to slow or stop headcount growth i think well yeah maybe not apple but they either all officially said it or leaked it right to wall street journal or something like that yeah i thought so i thought there was like an all hands meeting at meta that basically said like we're in a tough period. We're going to slow growth,

like slow headcount growth and expense growth. And there was like a whole bunch of leaks that came out from that. Was that just a ruse? Like, was that a fake leak from Mark? I think again, I think this one, you got to,

sometimes it takes a little bit to flow through. I think really the next few quarters is when you got to hold their feet. And if it doesn't help or if it doesn't reverse, then you got to, I think just face reality and say, these companies are not trying to optimize for cashflow and you got to make that into your models. I've been trying to think,

okay, at what point does a horrible compression in their stock price affect the company? Like actually affect the people for Mark. It doesn't matter because he's got enough. Okay. You're looking at, he has enough money.

It won't ever matter. So he doesn't really, this is kind of his pet project. He, he can never get voted out. super money shares all that stuff he can do what he wants he doesn't need the money and then when you think about it from like an engineering standpoint if you're getting paid two hundred fifty thousand dollars let's say a year and maybe you get some stock options as cherries on top

the recession doesn't really matter for you yeah oh so you're saying if they're still willing to throw up that money yeah here's a good some uh i think this kind of encompasses it uh good fact uh that that mbi mostly borrowed ideas the analysis account that does very we had him on the show forward as good write-ups on a lot of these companies here was the stat he kind of uh compiled in this analysis the number of headcount added by google in the last 14 quarters has is the equivalent of Metas, which is Facebook, total employees as of the second quarter, 2022.

So, yeah, it's hard. Here's... Okay, I kind of think of it in two ways. For someone like Alphabet, where it's more run by...

You have the founders, I think, still own a bunch of stock, but the founders are not there anymore. And it's kind of run by maybe the MBAs now, a little bit. you have the cfo there but they seem to not be focusing on operational efficiency it honestly might be better if the stock goes down a lot in the short run just so they wall street it kind of kicks their but that's what i'm trying to get them focused on actual is it's so this kind of connects to the founder share stuff where meta you're in a tougher spot because

nothing can affect Zuckerberg's ideas. What I'm trying to say is when does the Wall Street pressure start to affect how they run the business? And if you're getting paid $300,000 in cash each year, it simply just might not. There might not be a point where you start to compromise or change how you run the business because you know you're getting enough cash compensation that doesn't matter. That might be true. not going to be the pressure from share or there's not going to be the pressure from employees unless they're getting like unless half their compensation stock because they don't care they're getting paid well yeah they're insulated from any pressure and their jobs probably are not

uh as um well i shouldn't say just in general if they have a lot more people just hiring and there's not that much else to do they there might not it might be as difficult as job as say joining a startup with 100 employees there i think um engineering talent is the scarcest resource right now i'm like it looks like cash flow is the scarcest resource for yeah there was uh i retweeted this morning so i should be able to find it there there was a good tweet from someone on on finf with it said in retrospect this was the top single it was the hacker news post where the person said i currently have 10 fully remote engineering jobs the bar is so low oversight is so non-existent everyone is so forgiving for underperformance i can coast for about four to

eight weeks for given jobs fire me currently at a 1.5 million dollar run run rate i think a vc could back that for about 100 million in 2021 uh and the interviewing process so much faster it takes me about two to three hours of total effort to land a new job with thousands to choose from um yeah i guess we just saw that show up in the numbers yeah it'll be it's weird i guess what we were about to see amazon and apple report i think amazon even though i just gave that crazy stat about alphabet i think amazon is the most egregious when it comes to this type of employee um i don't want to use the word waste because it's probably a little harsh but employee and they're comfortable at high they're comfortable with hiring a lot of employees

without looking at the roi specifically we'll see what they look like but yeah this is what our this is what our economy is built on now search we're using google search to subsidize uh people that live in the tech the coastal cities if i okay if you could pick one forget the business if you could pick one operator to run your company today among all the big tech operators so mark tim cook sundar satya and let's go jassy i don't know how much influence bezos still really has no he's not no it's all it's jassy now bezos is out who's who's running the ship for you oh that is a great question well suck i don't know we're out we're out on suck yeah gone call that call the bottom time stamp this but we're out we're out on suck i think i would choose uh

nadella i think tim cook honestly he's been incredible tim cook yes if you look at the numbers the best since he took over right but some of the moves they make i think and obviously they have not shown up yet and it's not showing up yet and i doubt they're going to show up in this quarterly report i think some of the moves they'd make If you're going to say monopolistic, I'm going to go buy shares. No, no. Or anti-competitive. Yeah, well, I mean, they do have like...

Okay, sorry, finish your thought. Okay, both on operational efficiencies, relying on China a lot, right? Having the China exposure, I think that creates more risk than maybe is embedded into the stock price today and is not reflecting the numbers. And two, some of the moves they've done to flex their position in the marketplace compared to, say, Microsoft for Apple to juice their earnings is a riskier move than I think some of the stuff that Microsoft is doing. Plus, Microsoft has cloud. And I mean, that can just be bigger. Both the combination of Azure and AWS can both be bigger than iPhone someday. So I think that's just, that seals the deal for me for Microsoft.

Maybe Nadella takes the cake, but Cook has been watching or listening to Daniel Ek on the conference call just complaining about Apple. And then like the day of earnings, putting out that report about how Apple's stifling Spotify's rollouts just made me think like, why do I keep owning the ones fighting it when I could just like Tim Cook's been damn good every, every turn it'd be so much easier. i would i would stop caring so much and like why don't i just own the evil empire i think it's just the risk isn't and it's there look we could check back in five years and i was going to do anything i think the risk is just higher the i guess yeah the thing here the thing is like the company is like that are kind of getting hurt by apple spotify one of them what other ones a match group epic games more i guess now facebook snap uh twitter they are everyone yeah they were the infl i mean apple caused some of the inflation which is is interesting to think

about they did cause some of the inflation for sure that we're seeing um they are correct i think a lot of people like well who cares what a lot of i think they are correct in that apple is being anti-competitive but no one's done anything about it yet so it's kind of one of those you know the world it doesn't matter how what you want to happen this is how the world is right now

so I know I know so like now they've got a precedent to just keep well that's one that's one court case I mean it's a vast vast ecosystem the mobile ecosystem you know there's tons of

other court cases that will come through and in other countries as well. I don't know. I've just been saying that for three years now. Yeah, it's one of those where... And then every time you piss them off, they'll make it worse for you. Yeah, they just did that thing

with the in-app purchases for advertising that's going to hurt Twitter a lot. Look. I guess that's more news we should talk about too. The Twitter consummation. yes yeah I mean I guess the only I think the only thing on Apple that

just we thought like they are just taking more risk I think with their market position that they're going to look even if like they're just going to look really really bad from an anti-competitive

standpoint soon and it's going to get worse and worse if they keep going down this path um now it's hard i like maybe nothing happens but it just seems like it's riskier than say microsoft uh but all right new topic actually it's 12 30 halfway through should we talk seven investing again get a quick sure go to that segment first yeah so as everyone remembers Everyone listening, watching The 7 Investing, our presenting sponsor through the end of 2022, use code MONEY to get $100 off your annual subscription. I was checking out their recent article by one of their advisors, Luke Hallard, which you can find this for free, called The ABCs of ADRs, Exploring the Mechanics of Buying American Depository Receipts.

Really great article that goes through the basics of these things. If you're interested in investing in international companies, I think this is a great overview if you're kind of scared of buying an ADR, what it means, what the risk can be. I think maybe as a good discussion topic here, we could talk about the downsides of ADRs because we invested in a few before, checked some out, or had to invest in the home market country stock because the ADRs in the United States were so thinly traded. i kind of think the major downside is just the illiquidity of a lot of them which can lead to the price being totally mismatched and the bid ask spread being being a lot tougher yeah i mean the the only downside that i've actually felt like noticed was the illiquidity but there's like there's kind of the concern of black swan events that's never really happened yet what do you like d listings i've never oh deal listings yeah yeah i haven't really seen that

happen to anything i owned yeah i guess the other one is some of the sec requirements are less stringent so you've had we've had the example of the chinese adrs where they've committed a lot of fraud and there's not really anything that they can do um so i guess i would look at what sort of level they're at so like the example luke uses in the articles the dutch shell company or shell excuse me, on the London Stock Exchange, where with its listing in the United States, it's at the full level three, I think it is. And it has the same exact requirements as a domestic US company, but some of the lower level ones, which I'm assuming the Chinese ADRs are, only have to publish an annual report that do not have to follow generally accepted accounting

principles and the SEC requirements. So I think checking those is important. um kind of interesting topic what's weird is ADRs haven't really changed over the last hundred years and there's constantly been this like this whole thing about Chinese listed ADRs are all going to get delisted for like the last three years I feel like people have been talking about that it just hasn't come to fruition well we I guess we should have hoped they got delisted given where the stock prices are um but yeah it's interesting that I want I wonder if there needs to be an update to this model that kind of make it

more 21st century no don't say blockchain but it is kind of wild get a better better system it is kind of wild to think that we're we clearly like the US clearly has some

problems or tensions with China right now yet the US is allowing Americans to funnel capital into that country because like in the end it is a lot of it is ending up in chinese government's pocket the us dollars yeah a conspiracy theory might say that they're investing in bike dance and then by dance starts buys tick tock or buys whatever the company is

and turns it into tick tock for the international rollout and yet the biggest media company well what's growing into the biggest media entity in the united states is uh owned by our geopolitical rival that's turning into the second cold war i mean that's you know we thought we were laughing at meta for about 10 minutes but that tiktok banning tiktok bull case here's here's the two bull cases on meta sorry i know we're this is kind of going back to an old topic the two bull cases on meta and we laugh at this one but laugh at us for the spotify one as well for the margin expansion because we've been saying it for years and it hasn't happened but the two the two bull cases i love are well they're about to ban tiktok i mean did we see that this week where someone was

like i'm hearing tiktok's gonna get banned it happens all the time like and then the second one is that though forever for two years they've said for two years two years never gonna happen come on right you're saying a lot of nevers today only a seth deals in absolutes we know this second one likely that's gonna happen especially anytime given until likely if it's gonna happen it's gonna happen at the beginning of a presidential term because no one's going to ban tiktok right before a vote uh you're gonna lose everyone i i don't know the uh you're sounding very certain today the second bull case that i think i found very funny is this is the decade of whatsapp which could have been the tweet every year since like 2016 um that one

has grown grow come on come on let's look at the numbers here let's look at if you talk about spotify growing whatsapp's growing uh at as a percent at a greater scale at just as good of a percentage and neither one's really generating cash i got a doubtful other revenue for facebook over the last nine months which is not advertising so a lot of that's whatsapp 624 million in 2021 that was 567 million so less than 100 million dollars in growth or the first nine months of this year i mean yeah i'm not saying the monetization i'm saying the growth of the app user wise yeah but come on i can see a world where e-commerce takes off and on the whatsapp

i know but we said that in payments and stuff but we've been saying that since 2017 that's another one of these where they're not what's interesting is they could they hired so many employees and I wonder what percentage are going to WhatsApp because it feels like the opportunity is ripe

if they put enough employees behind there but it seems like we got to make Horizon Worlds and the Legolas avatars maybe might just not be very easy to monetize the pay i look uh maybe it's harder than i think but we've seen the i think they could dominate venmo or not venmo but whatever the equivalent is and the markets are popular i mean but they

have the functionality right they just haven't worked to get it proven in all the different markets and they haven't invested heavily enough to advertise i was talking with someone that is in india and saying they just totally dropped the ball on the rollout of whatsapp payment whatsapp pay in india and that it's so the app is so popular it should do much better but for the payments part but they just did not execute and i it's the lack of focus maybe on that sort of that segment when this is apparently supposed to be the whatsapp decade that it seems to be the burn money in reality labs decade instead um but who knows maybe it's about to turn on the growth engine but it's just it hasn't shown up

no i'm tired okay yeah that i am tired of any thesis that's what what it could be i'm i'm tired of hearing those yeah well so much money has been lost on well if they get it right if it isn't right then wait until they get it right to own it yeah you know like there someone someone kind of said that to me a while back where like there's plenty of options right now of businesses that are already generating tons of cash trading at big

discounts. Why buy the ones where the cash flow is theoretical? Oh, if you have a big enough discount. Yeah. I mean, the discounts aren't all black, all the same discount. Yeah, I know it's basically

upside potential. That would be the answer is, well, there's more upside, but I'm starting to just not buy it. maybe that's a buy signal for ourselves i think yeah i i love using my personal contraindicator as if i get uncomfortable that means maybe yeah you don't want to twist your brain into a pretzel but that uncomfortability if your own like if your own thesis again you're getting uncomfortable and you think they're you

know a lot of other people i guess what i'm trying to say are probably getting uncomfortable as well which that could present opportunity if the thesis is still correct but you also could just be wrong and the contra it's tough to it's easier when the company

TikTok's going to be banned no idea I have no idea whether it's going to be banned but it seems fairly likely just if it's getting more popular it's basically there's so much evidence that Has the U.S. ever really done that before? I mean...

Like banned some sort of big global technology? I know China's done it to U.S.-based technologies, but I can't think of an example where we've done it. Well, I guess no other company has really... country has really done one before, so... Yeah, I guess. Not really any example to go off of, But I mean, just think of it in a vacuum, but just the specific situation, regardless of the history.

And the situation does not look good for TikTok if the 70-year-old senators in Congress get their heads on their shoulders. It's essentially, I think I've used this analogy before, so apologies. But it's essentially like if in the 50s, the third biggest, we had three big TV networks, and then Russia invented a fourth that was taking market share and becoming insanely popular. And the US was like, yeah, I think we should, yeah, it's fine. Let's keep that. I think the US citizen should be watching that. But I doubt if that happened, we would be like, oh, yeah, no, I think that's good. We should, yeah, no, it's fine.

We'll just keep the Russian TV network. What do you think the consumer's reaction will be if TikTok is banned? What do you think that reaction will actually be for people? Will they just move over to shorts and reels or will they grow frustrated and start to protest on social media? I think that's an interesting question. It's probably just an overblown. I don't know how many people are actually going to change their vote because TikTok got banned or not. yeah maybe not but i think majority of people on tiktok people are timid to do it like it seems

like government is timid to do it and they have all the reasons to already well they are all very old they're all they're very old i think they just don't they gotta get the balls gotta get moving um and maybe they have bigger priorities right now but i think that's a big priority I feel like I've also seen, like, on multiple occasions over the last two years, people tweet, like, looking like TikTok will be banned today by whatever, this institution, and it never happens. Yeah, well, the thing is, the reports that come out are very, very damning. I mean, there's been plenty of them. It seems like there's one each month about the nefarious activities that they do, but no one seems to care as of yet. um all right new topic can't talk about one thing forever the twitter deal is done

official congratulations to the arbitrage investors for nice little 100 return there um or 100 annualized return i think i'm pretty i think i'm in the camp as any long-time listener knows i'm not a fan of tesla and elon musk but i I kind of like his ideas for the platform. What are his ideas? Basically, he wants better targeting for advertisers. That's a long, you know, maybe execute on that. Paying people that are big accounts, kind of sort of like a YouTube sort of model.

And I also think there's just a lot of low-hanging fruit that he can go after to make the app and site work a lot better. And it seems like there's a lot of good energy there. Is the company good business? Maybe, maybe not. But I kind of am optimistic about what, yeah, especially kind of for, I'm thinking selfishly, but since a lot of our funnel for new people that listen come from Twitter, I'm kind of optimistic. Although make sure to delete all your, any sort of negative Tesla stuff.

i'll have to delete that just so he doesn't uh come in and advance all but no that's just joe he probably won't do that i don't know i feel like twitter might just be pretty similar in a couple years maybe at least you know it's so buggy that i think you're known to roll out lots of you roll stuff out prematurely uh they're uh it's just a very buggy so if they just fix that um maybe it's impossible to fix but their video functionality is absolutely horrendous that's a great example good example good example the video stuff is terrible um for uploading anything look they had a ceo that wasn't even didn't care he wanted it

to become a protocol and he was a part-time ceo of one of the most important apps in the world it is crazy that he said all that afterward yeah square would be squares unownable in my opinion after that unless he's gone unless he gets out of there yeah that would be it'd be very interesting if uh yeah it's kind of it's interesting that like block square um is almost down to where it was, well, I guess it was down to like $40 during the COVID crisis. And it was one of the best investments both of us have ever made.

Not in a short, short careers. And frankly, all multiple expansion predominantly. No, no, no, no. Cash App grew 100% year over year. We were right. I mean, more than half, you know, we got a little 3X extra. There was multiple expansions.

you also but i mean that's not look everyone was right buying anything during covid i mean this was look look look that's not that's not that's whatever but it's at the same it's getting close to the same price today and it just feels like meh it's yeah like it's it's sort of i guess they're not investing as much as meta but like the crypto stuff and the non getting away from the core stuff i actually recently um sorry i gotta sneeze so i might mute myself you go talk i gotta sneeze i can't buy into it at all frankly and the it also the market cap hasn't moved down nearly as much as the stock price which anytime i see that i just like roll my eyes yeah the after pay deal like you're getting all that dilution my god that that was such a bad

acquisition and you know what i'll pat myself on the back for this one i said that's going to go down as one of the worst acquisitions of all time yeah i think has that been has that been integrated into the cash app yet uh sort of i was going to say that anecdotally i quit the cash app because all the boosts and stuff are just based on like i think it's sort of integrated so it's like all this fashion stuff now that i don't care about and now that they don't give me 10 five percent back on my groceries there was no reason to be there um so and there's oh yeah there's a little explore page yeah it's explore like they're just trying to uh i think they've lost a little bit track of what made the cash app great it made me think though that venmo

while while venmo has been uh not innovating at all not innovating yes on ways to monetize compared to how the Cash App did for maybe the 2015 to 2020 period, their competitive advantage to the network effect is so strong that it gives them so much breathing room. And I was like, huh, maybe competitive advantages are really, really important. Yeah, honestly, the network effects,

a network effect business, once it's at massive scale, is so hard to destroy network effect yeah especially like even you think about twitter like okay there's lots of services that could function just like fin twit that are just i mean it's gonna be such an uphill battle trying to get people to convert from their existing habits yeah twitter has a great great network effect um yeah i don't think there's anything anything there it has that doesn't mean it's investable yeah it has it has been a horrible business which would you be surprised to see musk spin this thing out with the most optimistic projections

They put up some solid growth numbers. Would you be surprised to see them spin it out a few years from now, maybe five years from now, at $100 billion, $150 billion enterprise value if the bull market kind of, if we get out of this crazy bear market? I would not be surprised. His ability to win at all costs is unmatched. I would not be surprised if he did that. i'm starting to think you're going to come full circle and go oh no i said unmatched means doing

illegal things so to be clear i still think he's a criminal but i think three years from now i could see you being his biggest supporter from originally i mean no one dislikes him to begin with but then you well maybe that's changed but typically you don't have your suspicions right off the bat you like him maybe you find stuff out that you disagree with don't like him but i've never seen anyone go like to dislike back to full support so i can see the full circle route for you never say never but i doubt that a future x a future x shareholder yeah the x company well What was that tweet? Oh, it's an accelerant to X, the super app.

Yeah. Speaking of network effects, good tweet chart here. Good chart from Alex Morris. Signs are hitting. Check out our show on Roku that we did with him. LinkedIn, constant currency revenues. Looks like one of the best businesses I've ever seen. Fiscal year 2012, $522 million.

Fiscal year 2022, which I think just ended for Microsoft, so the third quarter of the calendar year. 13.8 billion dollars this is is this the third biggest social network after um facebook and instagram now from a from a revenue standpoint that this is like that sort of network effect i know everyone hates linkedin but so many people are on it i mean it just seems like that's a really really good business and again nadella i guess maybe they acquired it before he got there but that that's just the the sneaky parts of a microsoft business microsoft's business is i don't know they they just seem to all execute well time and time again yeah i think

microsoft's good at everything yeah don't they own bing though well they're good at everything except search i wonder that's just like linkedin that that whole pitch you just gave seems like it could work as a pitch for doximity doximity you've been looking at that recently yeah it kind of feels very much like the linkedin for doctors you just said though the network effects are hard to break um but it's probably doctors could be such a niche that i mean that they're there i'd say that the benefit on that they have more than 80 percent of doctors in the u.s are on it so Ah, so they weren't on LinkedIn to begin with. Yeah, LinkedIn's too general.

Well, what are their margins? Because they're still at, what, 12 times sales here? I think it's like 35% free cash flow margins. Maybe. Maybe. Could be interesting. It's an interesting one. The management team seems to know what they're doing.

there are they they're doctors i'm assuming i don't know i honestly have no idea if they were doctors in a past life but they've been running doximity for a while but it does like i don't know they wanted i think their quote was like we want it to be a bloomberg for doctors kind of which they have really kind of expanded beyond just the like posting different studies and stuff like that to now they've got like the scheduling component for doctors they've got communication yeah you can like uh they've got the telehealth dialer thing where i mean it's sort of a basic telehealth function but it seems like they've added some particular rollouts that are very doctor specific um maybe i haven't kept up with all the other

telehealth providers but maybe it's basically sort of a commodity at this point but it having it integrated. Yeah, I mean, I think we kind of did come to that. I think we all did come to that conclusion that telehealth is a bit of a commodity. Setting up the Zoom videos within a HIPAA-compliant app, not too

crazy. Yeah, I mean, that could be an interesting stock to watch. Any other earnings reports that you're keeping an eye on right now? Oh, something I didn't mention. Okay, go ahead. Do you ever read

Alluvial Capital's letters? No, never heard of it. It's the Dave Waters guy. Never heard of him. He follows Harvard Diversified. But anyway, he's like really into small caps. He wrote up a really good piece

on the new banking thing. There's like some new banking program where it's basically The U.S. government is giving capital to a bunch of banks in underserved markets, so they're trying to get investment or lending to potentially underbanked communities, and they're giving them to them at 2% cost of capital, which right now they could theoretically just earn yields on the 10-year. but there's both there's like certain conditions where you have to lend a portion of it out i'm sure uh but it's like a huge i mean it's a huge benefit if you're a shareholder of these small banks you can't you're also there's some like rules around executive compensation you can't just take it and pay yourself but yeah what's the fed funds three percent yeah it's pretty

interesting so they're giving it below fed funds yeah uh and what's the thesis that the banks are just going to grow their deposits and be able to loan get some good returns on those loans yeah assume they yield like four or five percent at the right price that could be interesting so he's just looking at a lot of the banks the small banks yeah a lot of them are in like the Southeast. They are so tedious to cover, though. So tedious. That's where the opportunities lie.

Maybe. Reading through his letters, these companies are obscure as hell. Just tiny European companies. But his returns so far have beaten the market. I don't know if I can play that game. but yeah well if he enjoys it you know no yeah you gotta ask yourself whether it's something you can do if you enjoy looking at those type of companies then maybe it can work but if you don't enjoy looking at the companies because the time you have to put in it doesn't feel right

like it would work it's a good letter to read though i recommend it all right we got two minutes left were you about to say something uh shopify that was the one did you read the report yeah it was pretty good no surprises they're hyping up the fulfillment network i think the yeah the numbers look good they're not you know profitable yet but you can see the margin um is fine they have good they uh the one thing though is that on the call you could see probably they're all happy and stuff and then someone asked so how are the negotiations with byreth prime going and you could see them all laughing and probably this is just hypothetical laughing and then they just go just well so i think everyone thinks it

is kind of thing it's funny if they said like they said that they're like everyone seems to be making it out to be this big like time bomb but that's not what it is it's a great partnership it's great for our merchants and then like a couple weeks later they're like actually it'd be best if our merchants didn't adopt us yeah so they said that the negotiations are ongoing i think or are in good talks but kind of the whole conclusion i had from reading the report and there's some good summaries from both mostly borrowed ideas and brad freeman stock park nerd on the reports

the stock looks like it could be great here if you're comfortable with buying with Prime I'm uncomfortable I don't think it's pretty easy to understand but I think if you're uncomfortable

it's not I understand the economics of it I don't think they're just going to give up all their GPV to Amazon it's probably not that simple I imagine Amazon's going to give them some sort of kickback i bet yeah no no the i mean understanding like getting comfortable with the risk of buy with prime if you don't think it's as big of a deal as people are making it out to be then yeah i'm saying goodbye here i don't think people know really what the risk is yet

you think it's just going to eliminate their i mean 54 of their merchant volume is payments yeah i don't like that out no no i don't i i don't i don't know that's just why like i mean we're the stock one it seems like people are betting on that buy with prime takes a lot of market share over the next five years but the i can totally see a world where shopify uh it's fairly resilient just from switching costs uh you know buy with prime is just a small part of amazon's business they might not invest in it too much the uh last i want to say on shopify because we're running out of time they used maybe the most diplomatic uh description for their layoffs that i've ever seen

they did they did layoffs yeah today uh they called it i want to make sure i get it right i believe they said we recalibrated our organizational structure ah nice that's a good word yeah the layoffs toby wrote that letter oh yeah i'm remembering now that's why you get mbas on the staff so they can write stuff like that and then they talk about their flex program for compensation. I don't. I go, all right, guys, you'll let people choose

how much cash or stock they want. Congratulations. It's a good idea, but so what? I bet that kind of existed already at a lot of companies. It just never was probably as easy as they made it.

We're running up on time. We have a bar. We have a bar for the conversation. You can click. This is innovation, guys. All right. Yeah. All right.

Let's sign off. Well, that's going to do it. We should probably throw a disclosure in here. Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. We are general partners at Arch Capital, so clients may have positions in the securities discussed in this podcast. Thank you all for listening.

We'll see you next time.