Chit Chat Stocks - Investing Power Hour #31: Q3 Earnings Season, Betting on Cloud, What Price is $META a Buy?

Episode Date: November 6, 2022

The CCM Power Hour is a live-streamed show every Thursday at 3:00 pm EST. On the show, Ryan, Brett, and a rotating list of guests have an unscripted discussion on a variety of investing topics. You can watch the show on our YouTube channel here: https://www.youtube.com/c/ChitChatMoney Follow the show on Twitter: https://twitter.com/chitchatmoney ****************************** Interested in becoming a member of 7investing? Subscribe with code “MONEY” and get $100 off your annual subscription for life: https://7investing.com/checkout/ ****************************** Learn more about your ad choices. Visit megaphone.fm/adchoices

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 a recommendation. Now, please enjoy this episode. All right. Welcome in, everybody. This is the Chit Chat Money Investing Power Hour. We do these every Thursday at 3 p.m. Eastern time live on YouTube. Let me make sure everything

looks all right. Got to exit out there. Got to exit out. that audio. Anyway, this is the power hour. We don't come prepared with anything, although this is the heart of earning season, so I'm sure we've got stuff on our mind. But as always, I am joined by Brett Schaefer. Brett, anything newsy this week? Or I guess we should talk about our sponsors first, huh? Yeah. So we're going to talk about our sponsors, Seven Investing, but two updates for the show. One, I want to remind everyone listening that our Not So Deep Dives are free again uh appreciate anyone that subscribed to that but there was too few on that and so for the last four months if there was any not so deep dive you saw on our feed that you wanted to listen

to but you weren't a subscriber to the uh premium feed those are now freely available check them out i've seen a lot of people uh go back and listening to the back catalog and second we're going to keep reminding people on this and every show subscribe to our newsletter on substack the link will be in show notes we're going to be adding a lot of stuff through that newsletter for our not so deep dives charts show notes a lot of stuff that'll go along with our stock analysis shows but yeah ryan i'll kick it back to you you want to talk about seven investing uh this week new recommendations and i gotta say i'm very very interested to read some of these picks which ones in particular well i looked at simon's and his is in the semiconductor space now it is

High risk under the risk reward level. It's a growth investment. And obviously, I cannot spoil the name, but here's a little tease, kind of a quote from here that shows how deep Simon goes in his research. And this is Simon plus the other team members, but we're using Simon here as an example. here's a quote from the research report. Chips are finding their place into more demanding industrial applications where mechanical actuators have traditionally been used due to extreme pressures, temperatures, or voltages. Companies are interested in electrifying many of these processes, yet silicone-based chips are often less efficient here due to their energy losses, electric current resistance, or reduced thermal conductivity. Now, those are a lot of big words, but I think it shows that they understand, unlike maybe a lot of investors out there, the 7investing team understands the technology they're investing behind. And I think that's

great for someone that wants to invest in innovative, disruptive, high-tech, cutting-edge investments. Yeah, I agree. And if you want to get access to that report, use our code money at checkout, get a hundred dollars off the annual, a hundred dollars off every year, if I'm not mistaken. It's a hundred, okay, for every year, not just the first one. And there's obviously more than just that research report, but I don't think we need to go any longer. Most people know us, they know the code. So let's talk about what's going on in the world of investing this week. Earnings reports. I feel like it's always, listeners are always kind of curious about the companies we own

first I know we always get questions on that so but we don't like to yeah we don't like to cover too much because we don't want to you know we can cover some we can cover some of them but just understand that if we own them we'll be biased most likely but we'll try to keep it

objective I mean there's not a whole lot to I think both the reports that we've seen so far this week which were match group and EA not a whole lot there but what you think of both of them yeah ea was uh so i guess slight surprise on foreign exchange but really business as it goes there no i don't think there's really anything to discuss i mean

everything kind of just chugging along as it is match group i think i need to read the report again because with the new executive team they're doing a lot of stuff right now um there's just a lot of things in motion and i think i got to read through the report again just to kind of make sure okay, here's the key points. But I really liked what we're seeing at Hinge. I think that can be a billion-dollar business. We thought that a year ago, and maybe even two years ago, we thought there was a small chance it could be. But I think the path to that is very much closer today because they're proving that international works with that business. And then second, there's just a lot of low-hanging fruit that they pointed out

among the tinder application where the old team and they obviously they weren't uh disparaging the old team but you kind of read through the tea leaves and say that there's a lot of things that they didn't do right the old team at tinder and now these are some easy things like one just better marketing strategy and marketing connecting with the product team to make sure that it's all working together uh it seems like low-hanging fruit that tinder can go after and i gotta say pretty optimistic about the report after after the report however in the short run there's they said they're still seeing some uh spending uh headwinds with lower income consumers on a la carte purchases but yeah overall fine quarter i don't think there's anything crazy about it um but it seems

like i guess uh go to your any your any of your takes ryan no i thought it was a good quarter um Um, it really kind of, it made me realize how much, I don't want to say incompetence, but maybe, uh, complacency there may have been with the old management team by, and I, I've only, sadly, I've only now noticed it because someone else came in and kind of showed what could be done and that it seemed like they got just as good of returns, returns on top of the funnel with less marketing spend, it makes me feel like they had a whole lot of just kind of wasteful marketing spend going on.

Yeah, not thoughtful, right? It's kind of maybe, yeah. It's also showing that Bernard Kim knows how to operate in a mobile business, I think. He's been pretty successful with that. I don't know. I mean, the quarters, it was hinges continuing to show really good strength. It was encouraging to see Azar start to grow again in constant currency.

They're not going to have to write that. They're not going to have to write that down to zero, which I was potentially worried about. And I guess they're seeing really bad headwinds on Forex with that app just because of the specific geographies. But yeah, pretty, pretty standard report. Yeah, they're kind of going with the mobile gaming playbook, which I think I like, but we'll see. It's going to be a multi-year path. And when we, I think looking back, and this is kind of, again, we're not trying to be teachers here because we're learning along with everyone, but I think something that helps us out is writing down our thesis beforehand and kind of writing down what we're assuming at the current price. And back when we first purchased shares in Match Group at around $100 a share, I think slightly higher, our assumption was 20% revenue growth, which was aggressive. And now constant currency for 2023, and this is a conservative guide because there's just

a lot of uncertainty in the market right now. They're kind of guiding for 5% to 10% revenue growth. And that is definitely below, as anyone that can do simple math, what our long-term assumptions were. But I still think they can get back to that or at least pretty close, depending on where foreign foreign exchange kind of plays out, because right now, a lot of the things they're focusing on are not as much on as a monetization, not as much monetizing as just solidifying their position in the marketplace that Tinder may have been not doing too well. And they stopped some of those old product monetization products that were going to come out this year, which there will be a lagging effect over the next year or so for the Tinder app. So I think if the business can grow at 10% in a tough macroeconomic environment for consumers, which they said they're seeing, it doesn't. And we'll have to see how Bumble does as well.

And there's so many variables out there. So maybe I'm kind of talking in circles. But yeah, I think what's important is that when we wrote that down, you know, the 20% growth, we'll have to get back to that eventually. But I still think there's a path there. Although I do worry maybe a few years from now, there could be a bit of thesis creep, but we'll see. We might already have a little bit of thesis creep. As for EA's results, pretty damn boring. Which is good. Yeah, that was good. I feel like the stock hasn't moved in two or three years, but that's outperformance in today's market, so not too bad.

The FIFA results were pretty strong, although you barely got any inclusion from that in this quarter. I really am excited to see what happens in Q4. Something that kind of shocked me was that unit sales for FIFA 23 were up 10%, but Ultimate Team players are only up 6%. Those typically have more of a one-to-one correlation. Yeah. We'll see what it shakes out in the next quarter. Yeah. It's just such a – my thesis of the perfect storm hopefully plays out

where they've got the World Cup in the winter and comps will hopefully look pretty good, but it might not matter. Other earnings reports that you saw this week? Anything interesting? Peloton reported. That was interesting to read. That was funny. All right, we've got some questions here.

We'll hit that one. Yeah, I want to keep on the gaming thing, but on the Peloton note, I'm not following them closely just because there's no way I'm going to invest until they show like a year of turnaround here. And I kind of understand, you know, it shouldn't be too hard to catch up after kind of looking at them in 2021. But I thought it was absolutely hilarious and potentially just such great timing that a fire alarm went off during their earnings call. I didn't see that. Yeah, a literal fire alarm went off during their earnings call. I didn't listen to it, but there's multiple people writing some little small funny reports

on that. That's hilarious. There's so many funny stuff from the shareholder letter. So that is hilarious. Now, on the gaming theme, I know you're probably about to address that question. Sony reported, and I think that is very important to track, even if you don't care about the actual business as an investment, if you're in the video game space as an investor, their unit supply is super important.

Now, they only sold 3.3 million PS5s last quarter. And I made this chart that I put on Twitter. If we look back, they've done a cumulative since launch in Q4 2020, which was, I think, November 2020, only 25 million unit sales, which is probably below what their actual demand is. And last quarter was 3.3 million. A year ago in Q3, it was 3.3 million. So they're still not getting that supply bump that we would hope they're going to see.

And bringing it back to EA, that could be a headwind for them, all the other publishers that have some console presence in Q4, which would be unfortunate just because kind of the timing with the holiday game cycle, if PS5s cannot come to market. However, if they get that supply up, I think it could be a nice boost if, say, PS5 could And so, I mean, last holiday quarter was only 3.9 million units. If that could double or even get to 10 million in a really optimistic scenario, because supply, you know, we've seen indications that supplies are coming online. I think that could be highly beneficial. Let's take the YouTube question. Best video game ever made?

oh well let's go do you want me to get we're not video gamers but let's go through the metacritic all-time rankings i mean the best-selling game of all time is minecraft second is gta5 i'd say from a neutral standpoint those two have to be some of them um but my personal my what's your personal favorite oh i gotta say age of empires 2 played that a ton as a kid and it's still very very popular today i'm sure that has a high high ranking as well really really like that one i think though if we're going to go objectively as the whole market we're gonna have to say gta 5 because minecraft yes is that the best-selling game and that is that an awesome game yeah but it's more of a it's like saying almost like saying it's not the same but it's

almost like saying Roblox is the best-selling game. It's not the exact same as an individual one. But the number one of all time is actually a Nintendo 64 game, The Legend of Zelda Ocarina of Time, Metacritic rating, the cumulative rating of the Metascore of 99. Only one ever.

Second, Tony Hawk's Pro Skater 2. And third, Grand Theft Auto 4. But I'd definitely put GTA 5 because it is still going. It's still one of the best-selling games and it was made 10 years ago. Yeah, it's still selling $5 million a year. But what are your thoughts?

I know you liked Wii Sports. I know you're a big Nintendo sports guy. Yeah, I like those games. Those numbers from Legend of Zelda gives me some optimism going into their next launch. I know Legend of Zelda Breath of the Wild 2 for Nintendo is supposed to come out in the spring, right? Yep, and the original Breath of the Wild,

number 14 all time on the Metacritic. I'm seeing it right. here uh 97 rating so pretty good and it's hitting at sort of a perfect time because their active player base is like as large as it's ever been so uh kind of perfect for them uh my favorite game i really wasn't the biggest gamer as a kid i enjoyed the sports simulation games a lot so that's maybe where i get my electronic arts anecdotal evidence with where's your what's your favorite what's your favorite fifa edition ever i know you haven't played them all but 14 or 15 okay and that was probably that i mean it's usually the one when you're like 15 years old

right that yeah it was always everyone's favorite it wasn't like nowadays the game is advanced enough that like it you can tell the difference between a good player and a bad player like the difference is much larger whereas back then it was the quality of the gameplay wasn't advanced enough that like I could compete with somebody who was much better than me nowadays I'm getting like destroyed by 12 year olds so it's really no fun to play just because I don't play enough Um, but that's, that's good for EA that, you know, if you actually commit the time to the game, you can get better at it. We do have another question in the, uh, YouTube chat.

Sandeep asks, how do you see the, some of the parts for Amazon? That's a really interesting question. I was looking at, uh, you looked at the Amazon report. I haven't looked at it in depth yet, but I did look at Azure's results. i'm i'm starting to think maybe just grab the cloud basket of gcp azure and aws and hold them for the next 10 years and you're going to be just fine because those look like the most resilient businesses of all time yeah i may agree there and microsoft to be honest haven't looked at kind of the valuation closely um so i'm sure it's down because the stock's down but i i tend to agree

there. Let's look specifically at Amazon. I kind of tweeted that earlier today just because I was writing a Motley Fool article for them. And I was like, oh, wow. The numbers looked a little bit better than I thought. So let's see. I compiled some numbers here. So over the last 12 months, just to give some context, their traditional online selling business, so just online stores, this is not their physical stores, did $221 billion in revenue. Now, this is going to be the one with extremely low margins, probably closer to the Costco or Walmart model even of maybe 5% margins at scale, so not really too meaningful. But if we look at the three big profit drivers or what, excluding AWS, I guess we'll leave

that to the end, the three big profit drivers, we have third-party seller services, subscription services, and advertising services. Last quarter, third-party seller services grew 23% year over year, and that's just third-party sales, the revenue they get off of third-party sales on their platform, that grew 23%. And over the last 12 months, that business has done $112 billion in revenue. Now, if we look at subscription services, which is stuff like Prime, mainly Prime, that grew 14% and is on an annualized run rate of $35.6 billion. And then if you look at advertising, I was very impressed to see that grow 30% year over year and hit $36 billion over the last 12 months.

So I think you combine those together, it's really tough because their consolidated profit margins are fairly close to zero. But I think those businesses combined, you look at the high margins you can get on advertising, you look at the scale economies they should be able to get on this fixed cost basis on their logistics, infrastructure, whatever, on the third-party sellers as that continues to grow. I wouldn't be surprised if the e-commerce business could do $30 billion in annual operating income or maybe closer to $40 billion.

And then you have AWS, which did over $5 billion in operating income last quarter. I think people are disappointed because it grew a little bit slower, grew 28%. The cloud segment grew 28%, which is slower on a percentage basis than GCP or Azure, but they're the largest one already. So I think on a dollar basis, it's probably not that bad. So at a market cap of $900 billion, I don't think any of that's too crazy. And I think you can get a sum of the parts, which is dangerous. You don't want to just do some of the parts. But I think you don't have to get crazy to say, okay, this business can be doing $50 billion in operating income soon if they're able to rationalize some of their spending, which people don't focus on.

But Amazon is very, they don't advertise it that much, but they basically have like kind of a meta reality labs style stuff going on. they just don't talk about it and rename their company too they just didn't they didn't build their entire company personality about it they didn't rename they didn't rename their company alexa yeah okay so looking at intelligent cloud on microsoft which that's how they report this segment um it says our intelligent cloud consists of our public private and hybrid server products and cloud services that can power modern businesses and developers um which so it's a little more than azure but trailing 12 month revenue is about 78 billion 78.6 billion from intelligent cloud trailing 12 month operating income is 34 billion and operating margins have expanded consistently

and it's just literally been all right so i said 78 billion trailing 12 month in q4 of 2017 the number was at 27 billion um it's just been rapid growth how much would you pay for hold on hold on i know you're grimacing how much would you pay for this business azure or purse or intelligent cloud at $80 billion revenue run rate with 45% operating margins and growing, I think it was 26% constant currency. And you said run rate, but that's trailing 12 months, right? Yeah. Yeah.

But the 80, I think it crossed 20 billion in the most recent quarter. So it's still about 80 billion. Okay. I saw someone throw out a hundred billion dollars, but that could be a different way of doing the business. So what was it? $34 billion? In operating income.

Would you pay 25 times? I think a solid... Oh, yeah, for sure. For sure. Given the growth rate. I think a solid, like, $34 billion. I feel like that's worth about a trillion dollars. If that's the case,

their enterprise value is 1.6 today. and so if you're saying Azure or their intelligent cloud is worth a trillion and you think AWS is potentially

worth more than Amazon's well yeah that says more about depending on if they hemorrhage money in the rest of their

businesses Amazon is worth it's pretty valuable right now I guess yeah and AWS if it's worth

a similar amount now is I think that feels like a fair value for Microsoft's Intelligent Cloud business but I don't know if I'd buy it at a $1 trillion market cap if you know what I mean because you want that discount

that is still a premium multiple but then if you look at Microsoft you get $600 billion for the rest of the business, Office, Xbox LinkedIn. Just bigger it's doing more in terms of operating cash flow over the last 12 months than the Intelligent Cloud side. Yeah

although that's it's not I don't think it's it's pretty clear that intelligent cloud is the majority of the value here going forward but i mean those other parts of the business aren't aren't tiny man yeah some of these big tech yeah the cloud i love the cloud focus because i get nervous about net well netflix isn't big tech anymore i get nervous i guess it never really was but it gets tossed in there for some reason i always get nervous about netflix just because of the competition and um you know the classic bear cases i get worried about i get worried

about Meta because they don't have... I think their moats are more flimsy and the investments seem a bit crazy. And then I worry about Apple. Irrationally, apparently, I'm the one person that doesn't get this business just because I think the consumer brand moat is just a bit tougher for me to get around a lot of the times, even though they have the strongest consumer brand in the world probably ever there might be a few you could argue has better but clearly top five if you focus on the cloud ones there could be those could be the the three that look at least the most interesting to me to be fair as of this recording we own shares of alphabet um or slash google but yeah the cloud businesses look extremely interesting to me and i say that

though both of us say this as very big generalists in the cloud market um which my only real like understanding of cloud comes from that one acquired episode where they talked about aws and i'm like oh my god like you walk away thinking this is just an incredible business it's hard not to but the if you're looking at each of those businesses independently and you're buying the whole thing you get them like if you're buying amazon you're getting the most exposure to cloud as opposed to if you buy google at the whole enterprise value you're not getting that much of gcp you're really more paying for search and microsoft you're still paying a lot for um the personal computing and the productivity and business processes and stuff

like that so um yeah i don't know i guess some of the parts for uh some of the parts for amazon is just AWS equals enterprise value? Yes. And it's not surprising to see the huge discount and the potential for Amazon if you kind of go through any sort of scenarios. And that's just right now, it's not surprising that the investors,

they want companies, or they're paying more of a premium for companies that have consistent earnings. Google slash Alphabet and Microsoft both consistently generate cash. And I think investors just want that at the moment. Amazon is just less, right? It's just, they don't have that.

And you can see why they have the discount because of that. Yeah. The other thing I find funny is the full circle that we've come from 2020, when all of these businesses, you looked at them basically as each of them are the most wonderful businesses that have come that have that have been around at so every time i think we we kind of did this exercise a couple of times we looked at the top of the index at each decade and what companies comprise the majority of the top of the index and we said well this decade it's apple google amazon microsoft and three decades ago or whatever it was ge and you know other companies

exxon mobile exxon mobile we uh we said if that is it likely that these are going to be there in the next 10 years and my thought was yes because they're higher quality than all these other ones and now everyone seems to be having their doubts yeah and it's hard uh oh i hope no one heard that i got an email notification i don't think anyone heard that but apologies if that happened okay that was just in my headphones uh but it's hard to see any sort of businesses out there with a tam that are as large as these companies can go after because they're the ones that captured cloud which is kind of crazy that the right um so we'll see but

it your time is big tech's opportunity well well there's only certain there's certain there's only certain markets that have the size the size where anyone could rationalize a trillion dollar plus market cap at at this point and there are only a few that big tech doesn't dominate maybe payments rails maybe someone like that visa or mastercard probably visa just because they're a bit bigger could become that but they're still not that's that's a pretty tough hill to climb for a company that does essentially one thing and what other tams are there or addressable markets there's health care but that's super messy there's there's housing but that's there's energy but that's politically just a stink bomb you don't want to touch it you don't get near it

and the what was the other one i was gonna say there's there's real estate but that has always been highly fragmented it's hard to see any sort of like maybe new industries will be invented but and especially over the next 30 years there will but over the next 10 it's hard to envision what once but you know they're going after it all they're going to become

yeah they're going to become a super app that's all that's a big red flag maybe just because I used to be so interested in square slash block what do you think about this $8 for verification on Twitter ooh

that you could know immediately that that was going to be such a hot button issue the minute it started it's like uh what was the other thing that became a hot button issue that was just a nothing oh it's like uh that johnny depp trial like stuff that doesn't really matter that you could see that the news the news organizations are like this has extreme clickbait potential but But either way, I think it's fine if they offer stuff that it's not just the verification and the verification isn't necessarily for a status symbol like it was in the past, which again, there was a big benefit to that for Twitter itself to get that people are trying to attain that and more of verifying that it's a real human with a single account or the business account. isn't that kind of sad though that maybe Twitter put all these bots

onto the platform on purpose so that verification mattered more yeah they weren't charging for it so now it's like let the bots come and say alright you can pay $8 to not be looked at as a bot

yeah it's we'll see You'll still have to go through the verification process, though, won't you? I think so. And I don't really, it seems like it shouldn't be that bad because you can just verify with like your ID or something like that. But maybe it's a lot more difficult than I'm thinking.

However, I think last time I talked about being optimistic about Elon's potential owning this business and the way he's going off the cuff here, just firing half of his, which is apparently going to happen today fire half of his employees and kind of just going right as we've seen just kind of tweeting the way through the product roadmap i may be a little bit less optimistic today that he has a coherent strategy um but i'm still pushing for him because that's again the place that we spend the most time online and i would love to see it improved the bummer is we uh we don't get to see it in the quarterly results no but if they spin it out in five years a hundred a double the price then then we'll go

it'll be good here's something that's a little frustrating for me and i think i saw this correctly but arc has like a venture fund which is sort of a mix of public and private companies And they have Twitter private in their venture fund, which they can just shill out to retail investors. So this bag that they are left holding, they're just dumping on individual investors. Yeah. Because, I mean, everyone knows that if Twitter were public today, it would not have been worth $54.20 a share. There's like no way. everyone that i think that's kind of universally accepted but arc invest can now basically unload

its stake that it helped find elon finance on public investors that's kind of i mean people don't have to invest in that fund but it feels scummy yeah and going back to arc let's we don't want to bag on them a hundred percent although they they kind of do deserve it they one of their highest holdings roku just reported largest holding i think it's third largest holding although maybe not after today uh stocks down people there seem to be these it's turning all roku's turning almost into a battleground stock and it's very interesting to watch because i don't know who was right yet their accounts keep growing usage keeps growing and here's a good tweet from deep sail capital it's not the entire bull case uh but he kind of this is kind of the

sentiment and maybe the bullish side uh here's the tweet that might have been the roku bottom kitchens sink and all as scatter is going to improve and mau's growth still strong don't know i think you might have meant to mean ads um add on q4 launches of disney plus advertisements and Netflix advertisement tiers should be a good underlying sector story. And you kind of see that, you're like, okay, they have growing accounts around the world. CTV advertising is growing and lagging usage.

So there should be a nice three to five year tailwind still in play for CTV advertising. However, the bear side would be, well, they don't get any YouTube advertising, which is the biggest player. They're not going to get any Netflix advertising yet, or there's no indication they will. And they might not get Disney Plus advertising.

And those are the three biggest players, I think. Maybe Hulu and Disney Plus. Disney Plus should, I guess what I'm saying, will be the third biggest player soon, at least in the United States. That's the bear side. And we covered it in that nice interview we did with the Science of Hitting, Alex Morris.

I don't know who's right. Did you read, I guess, back, did you read the report? um and any thoughts or just glance at it yeah i read it and it my problem after kind of looking through this is yes there's still like good engagement growth with um active accounts and then streaming hours per active account are growing as well our poo is also growing all those are pretty strong platform revenue is growing but platform gross margins are contracting and i have absolutely no clue what cash flow margins look like for this business in like uh at any sort of level of maturity at sort of peak margins last year i think they were

at like 17 or like mid-teens percentage adjusted ebita on a trailing 12-month basis they give out tons of stock so i don't think that they are uh i don't think that they're really generating an increasing amount of cash for shareholders and even if they do they just allocate it into content spend with roku channel that's my concern is what the hell are they like the platform business i like but what are they going to do with it it feels like they're working way too hard to try to establish a moat that just might not ever exist. I agree.

Their OPEX spend seems to be a bit... I don't understand it. They said in the conference call they're going to be a little more cognizant of spending, but I swear every management team has said that just to please analyst. They just want... Yeah, watch what they do.

Now, I think investors need to really... hold their feet to the fire in 2023 on that on that expense stuff someone asked what do you think of fubo i'll let you get on your soapbox here and uh bash them as much as you want two thumbs down no um i'm sorry if there's any fubo bowls out there but just look at the unit economics it is atrocious they are it's like they're a cable company back in the like 1990 when cable but cable is dying and there's no infrastructure advantage it's not a good place to be they have negative or had negative gross margins and even if they have slightly positive gross margins now it's not nearly going to cover their overhead and their customer relationships are

extremely poor so the in september with uh our local baseball team the only way to watch without cable our local baseball team is you on fubo because they're the only ones with the deal with the sports um channel which the sports is trying to you know bend their strategy probably smart but i subscribed to fubo it's like 90 bucks a month because i wanted to watch the local baseball team on their playoff run plus football uh i thought it was fine and i bought their sports package right which is supposed to encompass every sports thing and it's 90 bucks so i was like okay this better have everything but then then comes october and i'm watching that and i'm like okay this this baseball playoff games on tbs let me let me turn it on and they don't have tbs

or tnt which is one of the largest sports channels so i was absolutely you know i wasn't didn't throw a fit but i was like this is terrible you're saying you have the sports package and you don't have two of the largest sports channels that just didn't make it may be extremely angry and i'm not gonna go back to there um so yeah and you've been a bear you've been a bear ever since i was a bear before that i mean just look at the income statement and it's not i mean this isn't gonna work i have very few hard rules and investing but negative gross margins is one i don't that should be everyone's rule i don't look further than that i don't think and i know they can change but i show me one business that's had negative gross margins

in the last two years that's been a huge positive inflection upwards since that point i can't think of a single one peloton had negative gross margins for a quarter beyond me probably did i'm guessing i think they may have at one point fubo um who else has had just every ev manufacturer pre-scale it doesn't once capital dries up you can't really operate anymore yeah it's it's puts you in a really really precarious position um yeah why why let me read let me read this to you okay that's how the shareholder letter starts if you ever had a goal you were serious about achieving you most likely had a strategy for achieving it and if you had a strategy you also had a timeline for the last nine months my goal has been to turn around peloton and

position it for sustained growth and scale i thought it would take a year we are beating that timeline there's some if anyone can do this i think it's barry mccarthy yeah but he's great at he's great at speaking though and writing yeah but here's my concern he says our results show we're making significant progress take by way of example free cash flow which was negative 747 million in q3 of 2022 improved to minus 412 in q4 improved again to minus 246 in q1 which is that they're currently on q1 and is forecasted to reach near break even for the second half of fiscal year 2023. Near break-even. Later on, he goes on and says, let me make sure I find it. Oh, where is it? Hold on, hold on, hold on. Break-even free cashflow is an objective, but it is not a

guaranteed outcome. The objective is break-even free cashflow. So you're theoretically paying for a business that might be able to not lose money. That's my concern. Yeah, it might be worth zero, not negative dollars. Yeah, I think we should have said this during the cloud segment, though. We're over the halfway point. We should talk about our advertiser again.

Seven Investing, use code MONEY, link in the show notes to get $100 off your annual subscription for life. We were talking about cloud computing and their resident expert on the cloud, on ear bond actually wrote on halloween a cloud computing check-in i think this is one of their free articles as well so this is not a recommendation um they go through different companies they go through gcp azure aws um and he kind of gives his perspective as an expert

in the industry so i thought i'd cut that in there um and say yeah you know check those out as they're free they have some free stuff on there so check out their website as well Best way to support the show. And if you're looking for research and highly innovative stuff, they are going to be the place to go. I like this. I like this end to the article. First of all, yeah, it's nice to kind of do a quarterly update of all three cloud providers

kind of gives you a state of cloud competing generally. But at the end, he says the hyperscalers are today approximately on a $170 billion per year run rate. And by hyperscalers, he means AWS, GCP, and Azure, I believe. they're on 170 billion dollars per year run rate growing at a 30 plus per year cadence that says something about the scale of cloud computing these hyperscaler providers are also pouring a lot of money to keep growing their infrastructure which says something about the scope of future opportunities that is another i guess thing that we didn't talk about is when you see the increased

CapEx, it shows what they think demand scale look like. So, I mean, it feels like if I had to pick one industry where I'm like, all right, this will definitely grow 20% for the next three to five years in aggregate, it'd probably be at the top of the list. Yeah. Those three cloud right now. 20% might be a bit high, but yeah. General consensus there. Yeah. Who else would you throw in there? What other industry do you think is predictable enough to have that kind of growth? 20% growth or just growth?

20%. That's a steep bar. I would say... For the next three years. CTV advertising, I think, would be one. Although, again, I don't know. Flying almost. Well, I think over the next three years,

it ctv we're not gonna it's gonna be hard to track because youtube's not gonna break out what's their ctv revenue but with the launch of netflix ads with the launch of the disney plus ads with the continued growth of those free uh all the way free tiers that's i think it's not a lock but i'd be pretty confident in that overall industry going 20 at least in the united states are there any other reports you read this week i guess i looked at airbnb a bit but nothing really crazy to report there their margins look great so they're actually the one a business that's showing or a management team that's showing

and i know there's someone listening right now that's saying spc spc spc i get it you're the s look don't be the spc don't be the guy that comments on every single thing spc we understand what spc is and we know it exists but there air maybe is one of the companies that has actually shown in their results that they can rationalize their spending and that it's possible to do while still growing.

Yeah, the SBC got you guys. It's boring. It's a tired joke. It's the guy that calls the elbows at college parties. Oh, yeah. Don't be that guy.

Do not be that guy. Anyway. Unless you're like Palantir and you're reaching Halfway over the table The other reports I looked at I guess I looked at Well block reports today Electro Peloton

Under Armour If you want to look at a retail business that's struggling And see what it looks like Under Armour is a good example That's why I worry about Consumer brands Yeah I mean it's a really good example of momentum going the wrong way um ebay is surprisingly holding up okay

i kind of read their report they gotta get they gotta get some better engineers in there though they got it i mean they're trying like a new strategy of a bunch of like targeted niches like a bunch of targeted niche marketplaces so instead of sort of a one-size-fits-all which amazon's eaten their lunch on they're really going more for like jewelry auto parts sneakers and sort of these or trading cards as well sort of these niche collectibles and or other items because they've really kind of built a community around those and i think those are some of the ones that have been more difficult to disrupt i'm yet to see a big jewelry e-com provider that's that's one so i don't know i think their ability to live like continue

operating is is better than most people expect and they're buying back like 10 of their shares every year so yeah if they just have durability i mean that's a recipe for success what irks me though is just the low quality of their customer experience because I and this could have been just me I tried to sign up through Google and sell something

and it just it closed my account for fraud immediately so I sign up through my Gmail and I don't think I'm

the only person that it's happened to with they're being extremely frustrated with their seller tools. And then I just went to what's the other one called Craigslist instead. So, yeah, we, we do have one question that you kind of answered in the chat here, but it says, will you do any more? Why we own episodes? This is maybe a good chance because some people are going to listen to this over the podcast. This is a good chance to lay out exactly what the structure is going forward.

Cause I think a lot of people just see new podcast episodes and they click on them if it's like an enticing title, But for anyone to understand the structure, the way we're going to do this, everything's going to be free. Nothing's going to be behind a paywall. We're going to keep the newsletter up. If you want to sign up for that, go ahead. We're going to have Tuesday are not so deep dive episodes the same way we've been doing them, except they're going to be accessible to everyone. Thursday are deep dive interviews. And then we record these power hours on Thursdays as well, but they don't come out until Sundays on the podcast feed. So those are the three each week. And then we'll do once a month, basically a portfolio update where we try to keep listeners up to date on something that's happened in the fund, whether it's like why we bought something, why we own something, maybe why we sold something, or maybe just how we structure the fund,

that kind of thing so hopefully that provides all the color people might need am i forgetting anything there i mean we'll do like periodic random quarterly or monthly episodes with seven investing and other guests but it's about it no yeah i think that's it everything yeah and the newsletter again is free uh can be a good conjunction with every episode and the only i guess the other thing is we're doing themes every month for the not so deep dives so october we did housing september we did gaming this month we're doing engineering software and we got some good feedback on that and i think that people like that format because and we've experienced ourselves when studying it after completing the month of research and i think after if you listen to say

all four or five episodes i think it would probably be five per month uh typically or four or five you really feel a much better understanding of the industry or the sector which i think it's just great because i think at the end of housing we understood it better i mean we weren't experts on housing after that but we understood kind of home builders where the market was at how they make money their benefits and and issues and i think at the end of engineering software we will as well. All right. Any other topics? Yeah. I want to play a bit of a guessing game with you. So I posed this question on Twitter, but don't look, don't look up the answer. I hope you don't know it. At what multiple of operating cashflow would you consider investing in meta platforms

or formerly Facebook? Operating cash flow? Yeah. I'm trying to envision because their capex is so large right now. EV to operating cash flow. EV? Well, the EV is getting pretty close

to the same as the market cap. They have like, what, $30 billion in net cash? Something like that? A little less, I think. Yeah, so even less. not a huge deal anymore hmm

I want to know what they're generating operating cash flow I'd say five four or five it's four times right now yeah but I don't that's maybe like this is

I tweeted earlier this week I think this is the price where it kind of gets interesting even if they destroy with reality labs But it might just be in the unownable pile It's really hard to judge right now Because Zuck is on a war path To destroy capital

And It's tough to get around It's really tough to get around I am thinking this may be This may go down in history as the Single largest Two year destruction of capital Of all time

If Nothing comes of Reality Labs which you know what right now basically nothing's come of it 1.4 billion in revenue over the last nine months yeah just hemorrhaging money it's just it's it's kind of fun to watch from an from the outside but i would be so aggravated as a shareholder yeah it does not seem i mean it's no surprise to see the stock down because people are probably extremely frustrated what's when i say i guess maybe i should mention when i say operating cash flow They have committed to spending, I think it's like $37.5 billion in CapEx.

So the free cash flow multiple is much larger because they spent so much on CapEx. So don't just take that multiple at face value if you're listening to this. And they've shown a really, really poor buyback strategy. They've shown that they're very poor at timing the buybacks when they did that giant Q4 2021 one and they're not buying back today. So that, it gives me not, it's just not a positive sign either. Yeah, what's interesting, and this is not to dunk, but it's interesting to kind of read the sentiment because everyone makes mistakes. We make mistakes.

Everyone does in investing. But back, I think in the spring, I tweeted something about how Visa was trading, and I think maybe at 9% earnings yield back in 2011. And I was like, wow, that was such an easy time to invest. And there were some people that back then, there was some overhang, I guess, with something politically with Visa at that time that they had to get through, which was giving a big discount on the stock. And so many people compared that.

They said, that's Facebook today because it was trading at a trailing earnings yield of of the same amount almost at that time because people you know at the time people are like oh pe is 10 p whatever with meta and i think that it's just not the same business because you have to look at one management and their focus and two competitive advantages and i think if you focus on that, it's just hard to compare the two and say that Facebook was in the same exact spot. Yes, hindsight is 20-20 looking back today, but I think even at that time, there's no way you can say that meta platforms was the same sort of opportunity risk reward as Visa at a 10% earnings yield in 2011,

before the war on cash even really kicked into full swing. Yeah, listening to the conference call is just interesting because Mark Zuckerberg has a different plan for the cash at his disposal than what every analyst or every shareholder seems to want. And every single question, you read them and they go, mark if you could could mark touch on this could mark answer this and mark never answers it they they just delegate it to the cfo or the cfo they like he doesn't want to be on those conference calls it looks like and analysts are just begging for expense decreases it doesn't feel like it's

going to happen yeah you think you'll ever call it quits on that on the expenses on their product their pipeline if the stock goes down enough maybe but he has the super voting shares and he seems to be a hard-headed guy so we'll see and look at and again one other thing to look at is just visas like again you have to look at management look at their shares outstanding chart it's just consistent downward pressure or downward trajectory like that again is just not not to just harp on visa a ton again is a much better sign than meta who just kind of bought back randomly at a really, really poor time right after they announced the Metaverse

investments. Something that's unrelated that I found kind of interesting. Did you hear Bang Energy has filed for bankruptcy? Yes. We hit that last week. Did we? Yeah, or two weeks ago.

Yeah, we did. I remember talking about their CEO, who is Accenture. But we have a good question here we want to get before the end, which I think could be fascinating. And I think shows the dichotomy between maybe people that are optimistic about meta platforms right now and pessimistic. So here's the question. Thank you. It's a good one. Steve Jobs in the early days of Apple, bumpy stock, but company was building for the future, similar to Zuckerberg today. I'm hearing a lot of people make that comparison.

Maybe. I'd say the jury's still out, but if you're betting, I think there's two things and investing you don't want to do is one, bet on your company being the Amazon that can be unprofitable for 20 years and everything be fine. And two, well, I guess Amazon is a little showing profits. We don't need to get into details there. But two, betting on the manager being Steve Jobs

because Steve Jobs was one, his ability to tell stories, his maniacal stuff. he's not that sort of way of managing is not some it's not replicable they don't they don't teach that in mba classes and he was kind of maybe not even kind of pretty crazy right it's just not i i wouldn't i that's not an investing thesis i i don't think yeah i if my if my thesis rested on a product being as successful as the next iPhone aka the most successful

product of all time I'd feel like that's a pretty shaky thesis or not even well maybe they want it to be the next platform I guess you're right they want it to be the next platform it feels like this is a

not only is this a destruction of capital but it almost feels like he's doing it out of spite because apple pressed their advantages on him yeah yeah which i don't maybe i'm wrong but i don't think steve jobs invented the iphone out of spite no no i don't think so either and he he went about it from a consumer point of view everything that the consumer is saying is we don't want this it looks like i mean all the all the metrics yeah all the philosophy that jobs had is not getting applied in meta here i mean what what is one of the things that uh that his

principles i'm no steve jobs expert i know there's plenty of them out there is for a consumer product to be widely loved or widely used it has to be easily understood the concept of the product has to be easily understood and no one understands the metaverse and no one even in the industry understands the metaverse because apparently they they haven't been playing interactive video games um it's still crazy to me that the the sims the sims probably ea's fourth now yeah maybe third or fourth most important franchise of just a regular video game publisher their third or fourth most important franchise is light years ahead of whatever the hell meta is building and has a hundred times as many users on a regular basis this is not

the comparison to steve i gotta say no no way no way i think that's correct i think you're probably accurate there all right we are uh it's one o'clock on the west coast so four o'clock Eastern time. That's going to do it. Any other closing thoughts? We had an active chat. So appreciate all the questions from everybody. Yes. Join us on Thursdays. Fingers crossed for their Carvana earnings report. I know a lot of people hate the stock. We've been haters as well, but we don't want the company to go bankrupt and all the investors lose money. So I'm really fascinated to read that report. Yeah. All right. Well, that is going to do it. We want to remind our listeners that Brett and I are not financial advisors. So anything we say

or discuss here on Chitchat Money is not formal advice or recommendation. We are general partners at Arch Capital and we did talk about some securities that clients hold in the fund. So keep in mind, it's just not financial advice. I think that's going to do it. Thank you all for tuning in.

We'll see you next time.