Chit Chat Stocks - Investing Power Hour #34: Iger Is Back at Disney, October Retail Trends, Amazon Losses at Alexa

Episode Date: November 27, 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 Subscribe to our newsletter: https://chitchatmoney.substack.com/ ****************************** 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, number 34. Almost been doing this for a year. Let me make sure I pause that.

All right. Always have our technical difficulties, but on this show, we talk about anything markets related. We used to come prepared with nothing, but now we've got uh two topics two topics a piece been a pretty light week some interesting stuff i know brett you've got some uh some juicy stuff let me gallery about that um with bob eiger back at disney but uh i guess before we get into our topics and the random discussion we should uh we should talk about our sponsor our friends seven investing got their background right here if you're watching this on YouTube. Most people do not, but that's all right. For those that don't know, with 7 Investing, you get seven stock recommendations each month. They write thorough pitches for each

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So let's dig in. I guess anything relevant that we didn't throw in our topics here for the week? I didn't see much. The Thanksgiving week has been slow, as expected. We're actually recording this early on Wednesday. So we're not recording this on Thursday as usual, if you're listening to this on Sunday. But I honestly didn't see much. I mean, earnings are winding down. FTX stuff is kind of winding down. I guess I just saw SBF tweet that he's going to be at the New York Times deal book conference next month. But that sounds like an interesting move to go to the United States soil. Because, yeah, within the investing world, yeah, not much, except Bob Iger kind of gave us a nice little juicy thing to talk about this week. I think we'll have a really interesting conversation around that. there's just any housekeeping stuff remember

we're doing the newsletter that's free along with each show and if you want to watch these on YouTube every Thursday except for when there's holidays like Thanksgiving at 4pm pacific time so

you can watch them live on YouTube only a few people do you can watch the replays on YouTube as well if you want to do that yeah anything else the sub stack is it for the Power Hours. It's really for the Not-So-Deep-Dive episode, so check that out. We're finishing up the Engineering Software Month.

I've got some overall market talk. All right. Month to date, and I know it's always sometimes hard to keep track of this. November so far, what factor do you think has performed the best?

I would guess November. Small cap growth. No, not in November. That'd be October. Excuse me. I would guess small cap value. No.

Do you think small cap value is positive or negative on the month? On the month? I don't even, I don't know what the market has done at all this month. I honestly have no reading. The worst performer is small cap growth. second worst is all the small caps are down pretty bad mid-cap is done okay mid-cap value is done all right but uh small i mean it's not that crazy small cap growth is down 3.6 percent on the month so been sort of a quiet month yeah nothing in terms of overall market movements

if we zoom out to the year to date what do you think has done the best what do you think has on the worst year to date i'm gonna go with small cap value no no but it is up it says it's up 5.2 year to date so what large cap value because i know growth wouldn't be up year to date yeah so large cap value large cap growth is the worst performer down 12 year to date that makes sense because small cap growth got hammered in 2021 as well but large cap growth was up anyone that was underweight uh big tech kind of experienced that but now 2022 big tech got the uh the axe as well um thank you for the comment caesar that the fbi is going to be attending to uh i think they might be i think they well they're attending everything in uh survey you know uh

i would be surprised surprised if some disgruntled uh ftx users will be attending also Yeah. I don't know what the tweet said. Maybe he said he's going to be there in person, but I would bet it's going to be over Zoom, which would be just amazing because it's strange how all these crypto founders seem to just be in these non-extradition countries. and they're just like, no, I like the Bahamas. It's nice. I'm here for vacation or I like Panama. It's great. I just like living here. There's no reason I don't come to the US anymore.

We do have another comment from Lars Thorin says, ended up listening to your pod episode on Consortio or read up on the company myself and liked what I saw, ended up buying a position. How do you view the risk the founders could retire soon? And I will say, and thank you for listening to the show. We always appreciate seeing some listeners chime in here on the chat. Thank you for saying that you enjoyed the episode.

We just had an interview with Ian Bezek. He has a sub stack, writes on Seeking Alpha and also has a Twitter. And he follows a lot of Latin American companies. and if you liked that episode he talks about an airports company on the deep dive i think it'll be coming out a mid-december two to three weeks yeah yeah i think uh i think you'll like that one as well as for the risk on the founders retiring they've been at it for a long time i think if they're retiring it's it's uh purely due to age and it would be kind of speculation on our part And I don't think they are too – I would like to think that the culture of overall kind of conservatism that I think they have portrayed relative to a lot of the other home builders in Mexico would trickle through to whoever their successors are.

But I don't know. It's kind of one of those risks that's really hard to quantify and really hard to, I guess, characterize. Yep. And that is a beautiful segue to Disney. Yeah. Let's talk about Bob Iger back at Disney. I think a lot of people saw this, even if you don't follow investing that closely at all,

because it was a huge news story. Regardless, just a quick overview before we get into the discussion. He is surprisingly back on, I think it was either a late Sunday announcement or Monday after only leaving a few years ago. Late Sunday. They always do that. They always release information that people don't want to see at times that they think people won't care.

Yeah, during football. The reporting came that there was an abrupt meeting of the board of directors last week saying they did not have confidence in Bob Chapek, the CEO who was Iger's successor that they left out. In a memo to employees, Iger said, quote, as you know, this is a time of enormous change and challenges in our industry,

and our work will also focus on creating a more efficient and cost-effective structure. Our goal is to have the new structure in place in the coming months. Without question, elements of our media division will remain, but I fundamentally believe that storytelling is what fuels this company and it belongs at the center of how we organize our business. Now, is that a record for buzzwords? That's just a lot of nonsense in a long sentence. Apparently, his contract is for two years. And there are also reports coming out that Iger has been constantly undermining JPEG through the media over the last two years. So it seems like this has been brewing for a long time, and it kind of makes sense when you saw a bunch of those articles about, quote, sources saying that people are not confident with JPEG anymore. The writing seemed to be a bit on the wall that Iger was manipulating the situation a bit. Now, everyone knows Disney. Everyone kind of follows the company.

And we follow it. We're not experts on it by any means, but we follow it from a bird's eye view. Does this inspire more or less confidence in the business for you? Less. Less confidence. And the other part is, I guess there's a couple of reasons for that. First of all, it makes me think that you can't move on past Bob Iger because – and this feels like a Bob Iger issue. It isn't like – I would not look at Bob Iger as the savior here.

I would say he's done a poor job grooming successors and being able to actually hand off the reins. um also it makes me think that whatever we just saw on the financials which weren't that great on the last report it's worse internally whatever's going on yeah i did see something um and again this is not we don't follow it too closely i did see something about how they're cross-releasing shows on linear and streaming. But the reason they're doing that is because on linear, if you release it on there, you can put the expense under the linear one

and it can mask a bit of the streaming losses. Not saying they're doing that a ton of the time, but again, that could be a way that they're masking streaming losses if they're worse than people think. Yeah, I mean, that seems like a good way to have analysts stop pointing at your streaming losses, but maybe not the most ethical way.

I don't know. What do you think of Bob Iger? Well, I think when anyone starts learning about investing, you learn about Disney is something you're probably going to look at first because it's kind of an easy case study. And then you look at the three big acquisitions that they made right when he got there,

pixar and then marvel i guess star wars was a little later pixar and marvel the most important you look at those and you go wow home run acquisitions good price and they really you know executed phenomenally on those but since then and star wars i would say is a you know mixed bag i mean commercially it's been a success but the reputation of that um you know it's gone downhill for their core fans i think it's pretty easy to conclude But since the big acquisitions, one, they got late into streaming. They decided to go into streaming in 2019 to embrace the internet, which I think we can say is late to the game. They were basically giving money to Netflix for years and letting them take a huge advantage. Two, he greenlit the $70 billion Fox acquisition, which leads me to another question. Does that huge...

I mean, just $70 billion is a lot. And again, some of it might have been in stock. So the true value can change. But does that Fox acquisition really mitigate, in your mind, the value created from the Marvel and Pixar ones? Because I kind of think it... That's a lot of years of, say, cash flow that comes from Pixar and Marvel that got thrown away into, what, The Simpsons and Avatar and some cartoons.

i mean it's obviously a stain on his acquisition reputation but the uh i think it's hard to quantify exactly the return they get on all that picture of stuff especially because we don't have the financials but like the parks and stuff and the reputation for disney and what people you know even marvel to like they monetize they can monetize that for the next 20 years they may have messed up on fox but pixar and marvel are going to be still wonderful businesses for the next 10 years both by kind of sticking with that strategy of digital content as well as uh physical parks content star wars hard to say the galaxy's edge thing wasn't that kind of an underwhelming release almost everything they've done with it has been

underwhelming both parks movies shows i would say have been underwhelming and the interesting here's what's concerning is they've you know the is the price raises at the parks i think that hasn't that been the majority of where the profits have come from over the last decade or the really nice profitable growth has been just at the parks raising prices. And I wonder, again, yes, it's pretty easy when you have the best parks in the world to raise prices. And it makes sense because people are willing to pay.

But pricing out everyone that's not, say, the top 30% of income earners in the United States and maybe around the world from going to your parks because they can't afford to spend $1,000 a day if they have two kids. I think that is a risk of ruining the long-term reputation of your business because one of the most important things

of the Disney flywheel is to interact with the characters at the parks. And I think juicing profits from the parks in a short-term manner, this isn't some crazy take. A lot of analysts have said this, does risk kids

evolving and the parents saying, look, we can't spend $5,000 to go a weekend to Disney World if we have multiple kids. You're going to have to be on Roblox or you're going to have to be doing whatever, playing

video games or something like that. And then that risks them loving other characters and other IP besides the Disney ones which will not what's most dangerous about that is things will it's it's uh you know speaking of uh this is nice for the thanksgiving theme it's almost like the uh the the the stuffed turkey chart where things will actually look really really great for the parks until they won't because it will be hard to see that in the financials but

uh do you agree or disagree with that risk it's kind of hard i've kind of doubted how much they could raise prices at the parks for like the last 10 years and it hasn't slowed them so maybe they are squeezing out the amount of people that can go but so far they've they've continued to raise successfully oh i know i don't doubt that they yeah i don't doubt that they can continue because there are there are enough rich people that will go yeah in the chat someone says uh matt h says eiger talk is fine but how do you view the terminal value of disney with all the ip they have ip terminal value seems to power your nintendo thesis in a similar manner he's i mean he's certainly right we think i mean i personally

think both disney and nintendo's ip especially the core characters are timeless and they're going to be able to juice that or monetize that for a long long time here's the difference between And here's the difference between Nintendo and Disney, which I think is why I've leaned into the Nintendo camp, even though a lot more people like Disney. One, Nintendo is only just starting to embrace more than their core monetization, more than their core gaming, which Disney started 30, 40 years ago. I mean, Disneyland really did start before that, but came into its own with the launch of Disney World and all that good stuff. So one, Nintendo is earlier on in that journey. And two, Disney is much more willing to juice properties where they're coming out with multiple Star Wars stuff every year. I mean, what, 10 Marvel things a year, at least, most likely, and we're talking just visual content. nintendo one is still profitable and they don't have to do that so disney i think has a lot less flexibility to increase the volume of content they push out whether that be any sort of entertainment

form uh and nintendo has a lot more room to be flexible within that so that's why i think it's different but i agree that regardless of whether eiger is actually an overrated ceo and disney man disney has been mismanaged over the last five years the the ip value is still there i mean just because marvel just started pumping out show after show after show and movie after movie after movie the the ip value is still still i mean extremely high yeah i i also think and this is anecdotal and i really don't have i don't have like box office numbers or viewership numbers on some of the stuff that Disney has released show-wise on Disney+, but it feels like there's some brand erosion going on at Disney.

Both companies are pumping out a lot of content with their core brands. So you think Pokemon versus Marvel, and Pokemon's basically subsidiary. It's not, but you could consider it one. Yeah, semi kind of, you know. Both produce tons of content. pokemon fans love it it seems like a lot of marvel fans are starting to sour to the brand and maybe that's just kind of through what i've read maybe i have the wrong

group or the wrong anecdotes but you could probably go you've definitely seen that with star wars i haven't really seen that with mario they continue and in my experience it seems like Nintendo continues to please its core customers while Disney's, at least over the last couple of years, it feels like they've risked their brand with their customers because they need content on Disney+. Yeah, here's, look,

I don't want to turn this into a Nintendo Bowl thing because again, full disclosure, look at our, we own Nintendo, we're biased. So please point out anything where we're wrong. but people forgetting that that nintendo basically has their walt disney still at the company and his he is working his uh sole not purpose but his two big things that he's working on over the last couple years have been one theme parks and two visual content so i like when you have your basically your walt disney which is shigeru i forgot to say miyamoto

Miyamoto's his last name. I can't pronounce his first name. I am a little more confident in the creativity and the way they describe how they treat their customers is way more non-zero-sum than Disney because the way they look at it, look, I'll pull up a quote from the latest conference call and yes, it's kind of Japanese translation,

but give me a little bit of time to pull it up. But Ryan, anything else to add there? No, I think they are maniac And sometimes to the frustration of investors, they are maniacally focused on sustaining a good relationship with all their stakeholders. Disney feels very investor-centric lately. And I know we say that on the backs of massive operating losses, but to me, it feels like they've just really risked their relationships with a lot of their brand's core customers. what do you think disney's returns have been over the last five years negative what do you think oh it's like negative 20 i think um not that bad but it's pretty it's been like uh very flat right

yeah since like i mean it's down since 2015. if you would have told me that they launched disney plus had how many subs of that 200 million plus total if you combine all the services yeah right uh yeah but they they juice those numbers yeah would you i would not have thought it'd be where it is but it was the uh i mean i think there was look hindsight's 2020 but i think there was also multiple mistakes from the eiger led team before his departure, his first departure, one, pricing Disney+, at such a low price point when they have the IP advantage where they could have launched at $12 a month. And now they have to raise prices. And it's really tough to raise prices, especially in a macroeconomic environment

like this. Second is embracing China. That is biting them in the butt. Will the Shanghai Park ever open what do you think the rationale was for the fox acquisition i mean that was another one that's that was a big mistake the the rationale i think was they needed the scale to compete with netflix but i i thought they already had the scale with star wars marvel pixar disney animation and other stuff and what ip did they pick up in that acquisition that helped disney plus that much simpsons uh avatar um a few other things i mean standard like cbs type shows that new avatar that is coming out soon isn't it i guess look i it seems to me like i have no intention of watching it um let me see i don't think i could find the quote but um

yeah they talk about it it's it's it's hard to translate from the japanese stuff but all right next topic next topic enough on disney got a smaller one uh and it is master cards retail snapshot uh this is a tweet from the transcript which is a great sub stack to go check out they have a free and premium tier really good stuff that they pull quotes from conference calls I really enjoy reading them. Here's a quote from MasterCard. Expect Black Friday shopping to be in full force across channels this year while retailers have already been heavily discounting the season. Consumers and retailers are likely holding out for some special promos on blah, blah, blah. Okay. Standard stuff. But they gave out a chart of the US retail snapshot in October

of this year. They compared it to 2021 and they also compared it to 2019 before the pandemic. A couple of things stood out to me. One, total retail excluding automotive was up 9% year over year and up 23.6% from 2022. So still extremely strong. Not all inflation, but some of that still seems very strong. And I think even if it is inflation, the consumer is not getting hurt by that yet second e-commerce is up from 2021 12.7 outpacing total retail uh this year and it's up 96 since 2019 uh looking at this chart anything staying out to you i guess the only things that declined year over year would be furniture which makes sense jewelry and then luxury excluding jewelry, so luxury and jewelry both

declined. Fuel and convenience up 20.1%. Yeah, fuel prices, that is not surprising. But don't you think fuel... I don't know. I feel like the majority of this

is just inflation, frankly. Yes and no. Yeah, that's what I think. It seems like everyone, well, not everyone, but on average, people are able to still spend, their incomes are able to work through this. I think the biggest surprise to me was the e-commerce number, how it's still outpacing overall sales. Yeah. And it surprises me that spend on electronics is up four and a half percent because that is totally at odds with what every big retailer is reporting right now. That's true. A lot of them, Best Buy is really struggling. I think Best Buy's comps are like down 10%. So it's actually like, I'm looking at this and if you read retail conference calls, it sounds like it paints a totally different picture.

That is true. The narrative out there is that electronics are dead, but apparently not yet. I mean, they're growing slower. They're up 4.5%, but it's up 29% since 2022. I think the department store one is also interesting, flat year over year, and up 7.8% since before the pandemic, which is interesting because the department stores

still can't seem to get competent with it, right? It seems like they just continue to struggle. I would say the big standout here is once every couple of months, I think to myself, why on earth don't I just own MasterCard and Visa? And this report makes me think that all over again. Well, they have the take rate on everything,

but you know valuation valuation comes into play I have a question for you there was a there was a question posed on Twitter this week

that was five biggest moats of all of currently businesses with the biggest moats right now

and can you guess which which company was named the most I am not going to cheat so don't you spoil it you know

I can spoil it but you, you answer for the listeners. Oh, do you know it? Uh, yeah, I saw the chart. It's yeah. Google. Um, unsurprisingly, who would you list as your five? I replied. So let me find my reply. Um, where is my reply? Yep. I'm pretty sure I did the exact same choices for our top five best businesses show. When we did a round table with, um, Ian and Brad back last year, maybe, or earlier in 2022, I chose Hershey, Visa, Altria, the Marlboro brand for Altria

slash Philip Morris, Costco, and Google search over at Alphabet. Although I would toss some other Google properties in there as well. Well, what did you two actually have yours? You have similar. Yeah, I kind of find it, but I believe it was Google, Costco, moody's probably you could put standard and pores in there as well um the payments rails and then i think it was like a split for the last for the fifth place between microsoft autodesk and home depot yeah hey we said the same thing and yet yours got way more likes yeah that's all right the twitter out you know it happens all right all right should we talk about uh your vindication here yeah go to your tie i'm very very happy to go to your next topic amazon is apparently closing

or not closing but drastically reducing the amount of spend in its alexa division so it's it's no secret that amazon's been looking for ways to cut costs they announced a big layoff i think they're They're aiming to cut 10,000 jobs. And last week, it was mentioned that they began the corporate layoffs primarily in the Alexa and Luna cloud gaming divisions. Shut down the Luna cloud. Shut down the cloud gaming thing already. I mean, what is what even? Come on.

What are they even trying to do? Sorry. Continue. Continue. The Alexa division is apparently on pace to lose $10 billion this year. Um, which is an astounding, how is that? Not the, I mean, I guess it is. Why is the division still around like at all? And I would have thought, and last time, and you were right, you said Alexa is a total waste of money, total waste of spending. And my thesis was that it makes purchasing easier, that they can easily measure the increase in spending from Alexa device holders versus non-Alexa device holders. But in some transcript with one of those expert transcript calls, they said, apparently simplifying the purchase process is a relatively niche case for the Alexa device.

So my thesis was wrong. the biggest use cases for alexa are playing music setting timers and hearing the news that makes sense yeah and make money on that though yeah for the playing music part they're compatible with spotify and apple so that it's not necessarily pushing amazon music subs and my thought would have been they could have literally said in order for alexa to play music you have to have amazon music and i think people would have subscribed to both spotify and on music and just treated it like a speaker and they could have done better but that's not what they did kudos to them i guess in some ways but i think it was the wrong decision um so where i

don't see where this generates revenue and they uh i can't believe this division is still around yeah or or this size um yeah because i think the thesis like it's a fair thesis to have that sort of you know the voice technology could be the next big thing back in 2016 2017 but we've played it out enough where it's not just not there um you know we've seen apple google who else is there even some smaller companies kind of give up on being overly ambitious with voice technology and they kind of you know just right-sized it um they probably realized that no one uses siri or the google assistant for anything that can make any money and it's nice to have but i mean alexa was probably the best at it and they they're losing 10 billion dollars a year i'm just

imagining how much these rest the rest of the companies hopefully they're doing it at a smaller scale but yeah the it's really i think an interesting case study and looking at meta I wonder if people are being too optimistic. Well, here's what's interesting. Amazon always hid this stuff. Meta, with their Metaverse investments, are putting it out in the public. So I wonder if the company will have a shorter leash, Meta, to waste $10 billion a year versus Amazon, which has done it for, what, six, seven years? I, it's, it's just going to be interesting to see if, if the history will repeat with the,

with the metaverse stuff and yeah, maybe meta will find, you know, some stuff that can be profitable, but all indications are right now that it's a similar science project to Alexa. Apparently prime was losing money too. Um, well that's, that's not, I think it was prime video. And I think that's just classification. That's, I'd say that it's a loss leader for you're locking the customers. Sure, sure. What are the profitable divisions? Are the only things left that are profitable at Amazon, AWS, and advertising?

I mean, I think looking at core e-commerce compared to, and I don't have the numbers in front of me, looking at core e-commerce compared to these loss numbers that are coming out with Alexa and some of the other divisions, I think core e-commerce is profitable. And yes, advertising has got to be profitable. And AWS is profitable. One thing that I think people should note with Amazon, though, is that free cash flow in the next couple of years might be a little lagging because AWS is a lot of upfront spend and a lot of CapEx versus annuities down the line for all their customers.

So the more they invest into that, which they said more and more of their CapEx every year is going into servers and all the good stuff over at AWS. I think that division is so profitable from an operating income perspective that you look at the cashflow, if they right-size and they start generating a decent amount of free cashflow

over the, say, the next year or two, there could be a big inflection to where this thing is generating over $50 billion a year in free cash flow if they execute this right. And what's also interesting is that this is coming at a time when Andy Jassy has been around for about a year or so

and he's getting blamed for a lot of this. When he set up Amazon with a culture, or excuse me, he set up AWS basically on his own. He ran that very, very autonomously. He set that up with a culture of profitability and profitable growth. And it'd be interesting to see if he can get that culture across the rest of Amazon. When did Bezos leave again? Was that 2020?

2021 was the official leave. Yeah. Was he like the top? Sort of. Sort of. I think. Pretty close. Although I think all the big tech stocks peaked in late 2021 because that's when SP peaked.

I wonder if he has any influence on whether or not Alexis is still around. He did love it, but he also loved Fire Phone. And this is not a, from all indications, this isn't the Zuckerberg. This is a hedge fund manager that is really, really good at optimizing things. so yeah i suppose that's true all right should we talk about my last topic here and then we can riff um not really a whole lot to talk about here but netflix is apparently diving deeper into games so i saw a tweet today from jerry capital which is well worth the follow if you're on twitter go check him out uh he said video gaming ambitions may be taking us this is a quote from i believe

in netflix i don't know where he didn't source a quote video gaming ambitions may be taking a step up as the company's los angeles games office is looking to hire a skilled director to build a brand new triple a pc game and that was in reference to the new netflix uh la gaming studio yeah it's interesting i wonder how they're going to monetize it because again i think i've said this multiple times but if it's just going to be under the bundle of the subscription you better hope that a lot of your subscribers like video games yeah apparently i missed it too they acquired a seattle-based game developer called cozy games at the end of october so yeah they've acquired a lot of studios now yeah they've acquired a lot of small studios i think that's probably smart

but again i wonder what was i really will be interested in the monetization strategy because i think you just come up between a rock and a hard place where no one over the age well no one no one right now goes to netflix to watch game to play games um and i think there's someone lost well there's some people that play okay the vast majority right now and that's fine because they just started getting into this thing but it's going to take a ton of effort to convince people over the age of 40, 35 to go and log into Netflix to play games. And I just don't know how the...

Unless the majority of your customers are engaging with these things, I just don't know how you get the ROI from price increases on your subscriptions unless you do separate tiers where one tier is video content only at one tier is gaming and it's an extra five bucks a month or something like that yeah frankly i don't get it and then the the vp of gaming was at tech crunch disrupt and he had a couple of quotes he

said they are seriously exploring a cloud gaming offering he said we'll approach this the same way as we did with mobile start small be humble be thoughtful the extension into the cloud is really about reaching the other devices where people experience Netflix. The thing that we're potentially concerned is if you're a Netflix shareholder, this is becoming a bigger investment. They've bought five studios.

They're building one themselves in LA or SoCal. It doesn't feel like a pet project any longer. So I think now, and there hasn't been a whole lot of analyst questions on the conference calls about this, But I think now you kind of have to actually try to figure out what the hell management strategy is here because it's not really clear. If I put my rose-colored glasses on, maybe given how many people interface with smart TVs, watching things like Netflix on their smart TV, how much time spent on there. and i think they are the most time spent other than youtube and youtube tv combined

maybe there is a way for this to be like their what would it be third act fourth act because yeah third third act i think uh from distributing cds to platform to original content maybe it could be one yeah that's true maybe games is a fourth act here if i were like just the total optimist i would think this could be a fourth act and you know what they have shown an ability reed hastings and the team have shown an ability to pivot really really well yeah but look streaming was such a green field gaming is a whole new beast cloud gaming though it could be yes but again i think compared to say early days of streaming video they're at a big disadvantage one they're not going to be building out the cloud infrastructure

themselves it'll be on aws and two microsoft has a huge advantage in cloud gaming because of azure and that's their partner but that is true it is their partner for advertising so I wonder how that relationship will develop but I think cloud gaming is probably the right strategy for sure

I think that is definitely the right strategy but there's so much uncertainty there and the market is just so different than Ubisoft said they're going to make a couple of mobile games to be produced on Netflix

yeah but they there are i don't use this they are they like to sell themselves out to everyone they're hyping up their vr stuff on oculus years ago they're a sucker for any platform yeah they you know i mean like look take two hypes up their apple arcade games which are like the top ones on there i mean it's meaningless it doesn't matter matt age says they're the only profitable direct to consumer company why not just focus there yeah i think that's true they're in a position of strength now with disney struggling all of them are struggling i mean why not put the you know why not invest more into video and maybe they see something we don't the other thing is like they said that whatever spending i remember this on one of the conference calls they said

whatever spending they have for video games or game, their gaming division is going to replace content spent. So it's not going to be additive. So if they're getting the good return on their content spend and they are, I mean, they are really the advantage business right now. I would say step on the gas pedal and not distract your focus. Yeah. Like, you know, increase, yeah. Increase your content. What would be a better ROI? Creating some mobile games or taking a few years to make a AAA game that has the likelihood of success of around 20% because it's not going to be an established game?

or increase your investments in your international studios like Korea, Japan, India, some of the European markets, South America? Would that be a better ROI as you try to scale out those international businesses and really, really get the economies of scale in streaming video? I think, again, from an outside perspective, it seems like this is a crazy move, if they go into this path with any sort of further intensity. However, they

have better KPIs and better numbers about how the business is going, so maybe they're seeing something we aren't. Yeah, that's true. All right. What are the odds of a holiday, what do they call it, a Santa Claus rally?

Oh. If it wouldn't be surprising if we get another low inflation reading that the market rips, but don't bank on it. Do not invest because you think that's going to happen. But I would not be surprising to see that happen, right? Well, I think tax loss harvesting is probably this week, next week. Yeah, sure. Sure. Then we get the Santa Claus rally after. It makes perfect sense.

uh want to trade on that though i want to bank on it um all right i know we're going to have sort of our holiday episode what are your bold predictions for 2023 uh i'm still in the inflation was transitory camp i think it's going to just go away in 2020 Yeah. There's a lot of leading indicators now. Well, I'll know if this is right or wrong in 2023, because a lot of the leading indicators like used car prices, home prices, shipping rates are collapsing. And if those go back to normal or what it was in like, say, 2019, whatever. and inflation is still high then I'll know I was wrong

but if you know we'll know in 2023 and I think there's some signs that it'll go down

but again there's so many variables there that it's not there's no investing thesis behind that

yeah I think we did like one of these shows at the end of 2019 and my

bold take was we would not see a greater than 25% maybe it was 30 decline for the next decade and that lasted like two months yeah what was uh let me be let me be everyone's contra whatever my bold take is go ahead and bet the opposite for 2023

it was uh it was right before covid yeah and my roaring 20s coming out of covid that was totally wrong too had that take that was that was uh horrible there was a rebound in air travel i will say that there's some rebound in leisure travel so maybe i called that but well uh you know the roaring 20s started after a huge uh deflationary period after a big inflationary period so um the roaring 20s didn't start really until 23 24 so you know we still could be good remember there was that depression uh actually no one remembers this but there was the depression in 1921 which had a huge deflation so hey maybe that could happen we could both be right what yeah the uh what's going to be the florida land boom oh well phoenix it already came and went to

be honest yeah the housing market could get rough if mortgage rates do not subside it's going to get rough out there. What do you think will be the next sick bubble? We've had some great ones. I think Cannabis was really an insane one because 2018. I remember the day Tilray

hit something bizarre, some wild price. I wonder if that's still around, but also then we've had Metaverse. I don't know if that was bubble. Web3. Certainly a bubble. NFTs.

Web3, NFTs, crypto, non-Bitcoin, crypto, we're all the same-ish. We have, I mean... Housing to some extent, potentially? Sort of a micro bubble? Yeah, I mean, it's not like... Yeah, it's hard to look at that. I mean, prices have to come down, but it wasn't like... TBD, I guess, on that one.

Yeah, there were some other bubbles. We're forgetting them, but they're there. There's usually like one a year. Oh, SaaS, software, software, the SaaS bubble. Oh, yeah, that was blatant. The SPAC bubble. SPAC bubble. Oh, electric vehicles.

All right, what's next? Combo. I think, well, this is really hard because if you can predict it, then you can make a lot of money. A large cap value bubble? I think, again, I have no clue Because I think maybe some sort of industrials sector where you get the reshoring ideas, you get a lot of that, the momentum looks strong on some of these companies' earnings and they start getting priced at, you know, they're going to get priced at 30 times sales, but they might get priced at some earnings multiples that are unsustainable. I think that could be something because it's not going to be some of these bull BS things anymore, or at least not for a long time, right?

Because we already went through that. It's not possible to have one of those bubbles if the 10-year is over four. Yeah, but let's look at what the 10-year was in 1999. Let's see. Because I think interest rates are a little less important than people are making it out. Uh, let's see. I don't know. Uh, what is it? Uh, I got it. I'm pulling it up. 2000. Nope. Wait. Okay. Right at the bubble. Um, actually we'll go the lower point. So the lowest the 10-year was in 1999-98 range was 4.7%. And it hovered close to 6% for the majority of that bubble.

All right. I guess the speculation is always possible. But I think it has to. It can't be rising. That's true. At an aggressive rate like it is. Yeah, I guess maybe if things normalize. Because, yeah, that makes sense.

i liked uh what's his name from markel tom gainer he like refers to interest rates he makes the analogy of interest rates as like curfews and how you like the zero interest rates like no curfew like bad things are bound to happen that is true that is true and people always had the idea with earlier curfews yeah and there's always that idea that i kind of like i kind of believed where you know they'd say well you know investors might not work out well but all the money getting thrown at all these ideas will be good for kind of just society and people in general as we get this you know maybe a consumer surplus and all these new ideas and all we got was

electric vehicle frauds and crypto frauds. Sam Bankman-Fried is good as an inspiration. Okay. Go ahead. I'm sure there's

been lots of stuff that are going to actually generate you know positive positive impact uh it's not black and white but again i i'm not i think i'm against the the low interest rates are good for innovation take anymore yeah i think i agree with that um okay we just had that conversation with paul sarah which will come out what a week and a half maybe two weeks from uh no a week from the podcast post yeah and we're talking about small businesses. And it got me to looking on that biz buy sell site. And I was thinking, if you are going to buy a small business, what would you consider your circle of competence?

Because then your circle of competence gets a lot tighter when you own it outright. Yeah. I mean, I think it's got to be in your hobbies, right? I think fitness, sports um golf which golf courses no because those are um those are more like wineries those are more uh charities a lot of the time they're not very profitable but like driving rages stuff like that i think it's got to be something that you interact with in your daily life um or have a hobby for so i think anything sports fitness or golf for me would work um and i guess everyone sort of can understand restaurants and bars but those are really tough to run so that they're they're a specialty thing that i think you have to most likely have a lot of experience in because

there's so many nuances with those jobs and those businesses what are you efficiently uh i know i know what would be outside my circle of competence uh software businesses any software businesses i would struggle with um especially any that i would have the ability to buy because it would have to be a really small software business which means it's probably hard to sell um what about uh matt here industrial would be self-storage laundromat what like breaking bad um yeah that's a good one that's actually there's some basic i struggle with a laundromat yeah laundromat i don't know i don't know anything about laundromat um self-storage self-storage i would yeah yeah but there was actually a bubble that's comes back

to the bubble talk i think there was a bubble in self-storage because that's so easy that people just were like you know those tiktok videos like i'm gonna tell you how to generate one million dollars in passive income within five years one take out these crazy loans that have variable interest rates two buy these self-storage facilities three profit it's like i think yeah i would say businesses that are just really simple i think the driving ranges is like kind of the perfect analogy that's sort of the perfect example for me you set up maybe some retail spots along there all you need is a couple used clubs you oh you don't know you are look right i think you're this is you don't golf enough you don't need to use clubs at a driving range you need

it's good to have them no i just have a couple oh what you what about the people that's that's not that's top of the funnel no no that's not uh you you're you want to target core golf customers because the people that are becoming every week multiple times per week are the ones that are your core golf customers that you can get onto those subscription plans slash you know those card things the punch cards you want one good grass two you want good food and drink not like giant restaurant but like good food and drink that people will hang out and eat it afterwards two or three you want good uh like people need to understand where they're hitting the distances and stuff like that and besides that yeah a couple top tracer bays you're fine yeah uh top tracer

yeah people want that as well i think you're underestimating this is the same problem with the podcast if we if we just make too many references to terms that people don't know there goes the top of the funnel people don't listen they don't they're too into it or you know that we're not explaining it enough with golf it's got to be somewhat introductory to the first timers no i don't think so for a driving range that's what top golfs are for no you're not you're going to make money on the first timers because the majority of them look like you know they're terrible and they're not going to come back you're not gonna uh it's not worth it i mean it's not money on them because they just hit the balls you go get them i know but they're not they're not uh

i've been to driving ranges and the same people are there every time there's no this rare rare newbies um i mean yeah you can have some old clubs sitting around but again people are going to borrow clubs at um from their friends because if they're newbies they're not going to be coming by themselves most likely other businesses because tired of the golf talk restaurants i think i could do all right with uh i don't know there's so many business when i start to think about owning something outright it really makes me question my circle of competence I think I know consumer businesses fairly well, but I wouldn't want to be the operator. I would trust other people more than myself.

Yeah, I think you can expand in a circle of competence easier than people think. It seems daunting, but if you study something for a while, I mean, you're not going to study, you're not going to learn it overnight. But I think if you focus on something and you're smart, you can develop a circle of competence as long as it's not biotech or healthcare, crazy technology stuff. Yeah. Fitness is probably fairly easy as well. Yeah. When you have the customer experience, it can help because you know what works and doesn't because you know what you get mad at or get frustrated at. I would see also how that could help people become better investors in public equities.

Yeah, I agree. Yeah, for sure. I think give people more slack. We got three minutes. We got one question on your top five golf courses played, but I'm sorry, Matt. I don't know if I want to talk too much golf. People, most of our listeners might not be intrigued by that. I'll let you do your favorite one.

How about that? I don't even know. I haven't played that much. I'm not that old and don't have that much money. I mean, the one we had... No surprises. Pretty...

Yeah, no big surprises. Everything kind of just continues to chug in line. People are going to be optimistic about last report because for some reason they beat a little bit on some of the KPIs ever so slightly. And now people

are going to be maybe a little more pessimistic because they underperform, but that's just how business flows. I think the long-term trend still seems fine. A lot of the stuff we track still seems fine. And a teaser actually on that, we are going to be doing that as our closing episode for the November engineering software month. We're covering PTC next week. And then on top of that, we'll be doing a show on Autodesk, laying out the thesis on that and hopefully improving, uh, over the video format with some screen sharing stuff, posting some of our, you know, just making it more interactive. Uh, so people can understand some of the analysis we're doing and sharing it, you know, for free. And that's a good, uh, reminder to check out the

newsletter. It's chitchat money, sub stack, totally free. Everything's free now. Um, and I think that's going to wrap we're at, uh, we started streaming 59 minutes ago. So we usually go for an hour this is the investing power hour so uh probably good to call it here thanks everyone the chat was pretty active today so appreciate everyone for tuning in and asking questions um feel free if you want to watch us uh we should commit to a time because it was kind of it's it's moved around a little bit just during the holiday season but if i'm not mistaken it's what thursdays at four o'clock pacific time that is correct uh except when there's thanksgiving I think that would be the only, the only one probably is the, that messes up on Thursdays.

All right. We got cheers. Cheers, everyone in the chat. Maybe remind our listeners that 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 however, general partners, arch capitals, clients may have positions in the securities discussed in this podcast. Thank you all for listening. We'll see you guys next time. Bye.