Chit Chat Stocks - Investing Power Hour #37: FTX Testimony, State of Video Games, Private Equity Software Investments

Episode Date: December 18, 2022

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Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. This is the CCM Investing Power Hour, number 37. So we're really just chugging along here as we hit the end of the year. This episode, actually, let's say who we are first. My name

is Brett Schaefer, and I'm here joined with Ryan Henderson, as always. These episodes are ones where we bring a couple of topics to the table and also just talk about whatever is going on through the financial news. It's only been a few days since we did the last one since we were on a different timetable. If you're listening to this one on Sunday, we actually recorded this one on Monday, live on YouTube.

But these episodes go live on YouTube once a week. Typically, it's at Thursday at 4 p.m. Pacific time, 7 p.m. Eastern time. Today, we're doing 4 p.m. Pacific time on Monday if you're watching this live. All right. Anything else, Ryan, before we get started? Let's talk about our sponsor, though, first.

Newsletter. Newsletter, actually, yeah. Subscribe to the newsletter. It's free, easy, helps you keep track of the show. You can also do that on Twitter as well by following us there. And if you like this episode, please give us a good review on either Spotify or Apple Podcasts. I've been thinking about that. You know what?

even if you don't like us give us a review because all press is good press i think we should take that route from now on and kind of just be okay with the the one star reviews yeah maybe maybe that would help uh so either way give us a review get those numbers up five five stars probably better as uh but we've had some bad reviews lately some disgruntled listeners which are funny to see But yeah, let's talk about our sponsor before we get into the show today. And that is Seven Investing. Seven Investing is helping you empower your investing future. I believe that is their tagline. If not, that is pretty darn close. And they do seven stock research reports a month. You've heard us talking about them before. They do also plenty of stuff behind that. They're a very

personable investing service that can really help be your own personal financial advisor as you're trying to navigate the markets and know exactly what to do if you're someone that wants to buy individual stocks. So if you want to try them out, they have a perfect deal before the end of the year. Use our code money. You can get a seven-day free trial to try out the service risk-free and cancel anytime. And then if you want to stick around, you'll get $100 off your annual subscription every year for life. So use code money, try it out, help yourself out. I mean, honestly, like there's no reason not to at this point at least try that seven day free trial we think i like it all right ryan let's get into it what are your topics this week did you have any yeah

i got a lot um i also i gotta say for anyone that's watching this or anyone that's not watching this brett brett kind of has the whole uh being held hostage lighting going on right now so that It does look dark. I have a good background, so you can't see anything behind me. It is like a sheet, and it is dark out. Let that be the invitation to come watch these on YouTube and ask some questions. But no, I got a couple.

Bernstein had an interesting presentation on payments that someone kind of... I love when people just leak the slides on Twitter. They just screenshot and share them. It's always very nice. So we saw some of those. I'm going to talk about that. And then Tom Abravo raised a $32 billion fund,

which basically buys out software businesses. So among other things, they also invest. So we're going to talk about that. We also have a, yeah, you have something else as well. Uber started an advertising division. Chipotle sells merch. There's some Starbucks outrage among customers. All right. Well, why don't you get started on one of those topics while I tweet out the link here to the show?

Sure. All right. Payments. So this Bernstein note basically goes through some of the market share among checkout buttons or checkout solutions on e-commerce sites. And PayPal still holds the largest share with 16% of checkout buttons. Credit cards accounts for more than half. I think it's like 63%. So that's counted as its own thing. But Apple Pay is actually quickly gaining. So Apple Pay is now at 5%. And when you look at the year-over-year growth in terms of usage, PayPal for the month of November was down 8%. Credit cards were down 2%. Apple Pay was up 53%. There's also a category called finance, which I don't know if that's like BNPL, like installment loans. It wasn't defined and I was just looking at the screenshots, but that was down 9% as well. Basically, the only segment that was really up was Apple Pay, up 53%. So they are just eating market share within the payment space. With Apple Pay for context, the card networks still get paid. So it's still like you're going through a credit card, but Apple gets 0.15% of each transaction. So it's not as good for the

networks as them going directly through the credit card checkout process, but they are still facilitating that transaction. So I guess I'm trying to think of the best question here, but So it makes me feel like the payment space moves a lot and kind of changes quickly, except for one element, which is the card networks. Is there anyone worth betting on in the payment space that aren't the card networks? yeah well Apple I guess would be one but it's not relevant enough to that size of that business so I don't think so PayPal I do not like

at all I do not I think it's a lot of acquisitions a lot of mismanagement at Venmo where they've been able to ride this tailwind and grow their GMV

because of fantastic network effect and haven't been able to take advantage of it. And among other things, I think there's a lot of competition coming for that core checkout business. The fees are quite high. I absolutely hate using PayPal, the core PayPal service. Yeah, I've always hated that. Plus, yeah, you said that the fees are astronomical relative to other transactions. On the other hand, Venmo just launched. Yeah, Venmo apparently just launched with Amazon. We'll see if that can be nice, but it's not. No one thinks about Venmo in that way.

People think about Apple Pay in that way. They think about, I'm not going to change my Amazon checkout. I already have my card logged in. You just click a button. It's not a huge deal. I saw that. We got a comment here from Matt saying, serious people use Zelle.

That's true. Zelle has gained a lot of market share, but sorry, go ahead, Ryan. Yeah. So especially for like larger payments, that makes sense. With the, I don't know, with Venmo, they've had such a hard time pivoting away from what they're most known for. And maybe they haven't tried that hard, but I don't know a lot of people that use the Venmo card. um and by the way is my is my internet okay it keeps saying unstable all good to me so i think

you're fine okay all right anyway i uh no i if i know it seems like it's kind of just the one solution and with the out amazon stuff like why would anyone pay with maybe if there was like the only like use case that i've heard was you've got some money in your venmo wallet and you don't want to take the the three days to transfer to your bank account to then use it on amazon you rather just use it directly maybe but i feel like that's kind of a niche use case and i think most people don't have that big of a working capital problem that they have they can't wait to three days so yeah i agree yes yeah the that that that fee thing that for sending the stuff it's not doesn't seem like a great business to me eventually it feels like fees just compress

and compress and compress in payment uh transactions so i think the industry is interesting, but everyone besides Visa and MasterCard I get a little bit concerned with. I guess I like Remittance a little bit. It's a steady grower. That's an interesting one because there's the regulatory

differences. I feel like it's going to be disrupted here in some way. Maybe it's by a crowd of Remittance services, but some of those fees that these Remittance services are getting. You're talking about PayPal? No, the Remittance companies even remitly what's the other one the the one that's kind of the value play wise but

then the one uh money gram mentioned on our podcast money gram who was it money gram money gram that's right western union is also a big one i feel like yeah i feel like there's just so many different solutions that could be uh that could just like there's fees that just don't need to be there yeah and and i've looked at wise uh as a remittance competitor and they've talked about consistently about how they consistently want to lower their fees and get them as close to zero as possible so if your reliance on high fees is your business model i think it's just risky very very risky uh and apple's whole thing yeah and apple pay is not even they don't even care about making money in that business they just want to keep people on the in the ecosystem for now for now

maybe they'll make money later we'll see i don't know i mean 0.15 of every transaction there's a lot i feel like i mean you saw the growth numbers there i think they've done like just a phenomenal job rolling that out and i i yet i haven't gone to a like any sort of retail location that hasn't accepted apple pay in a long time so whatever they've done they've done a pretty damn good job and i would not be surprised to see them hike hike that transaction fee in eventually three years apple loves doing that so here's another comment from matt again matt always is the best commenter here uh talking about another company i guess we forgot about in the payment space, but it's a little bit different than the consumer facing ones.

And that is Adyen. I really recommend go listen to our interview with Mostly Borrowed Ideas on them from a few months back. If you're interested in that company, there's a lot of good coverage out there on them. That's an interesting one as well. They provide a really good service to these enterprises and they continually try to lower their fees. And it's a really complicated thing that a lot of people aren't going to be able to do in-house. And then when you stick with them, You're going to be stuck with them for life. I like their competitive position better than Stripe. But yes, Addy and Trades at a very, very high multiple.

Yeah. All right. I don't know. That's kind of my November update for the payments. Last time we talked about the BNPL, which I don't know. I still haven't made my mind up on that. You're giving the... Oh, you're talking about the... you're talking about the report from last

I thought you were mentioning BNPL in general and I said it's over like it's but it's not it's not I mean I don't think I think a lot of those businesses yes they will fail and it became a commodity super fast but

people I think like I underestimated how much young people just hate credit which blows my mind well it is credit because it's the same thing yeah it's not a credit card but it is credit yeah i don't like the credit cards versus the debit cards because of just the comp like i i the debit card is so much simpler just takes less work but i know the the rewards you can get are higher um

but yes the bnpl versus credit card is not that big of a difference like if anything you should be using a debit card if you really really don't want to have credit but we'll see on the other hand if you are a responsible spender you can take a giant advantage of all those uh bonuses they give but this is not a personal finance podcast ryan let's move to the tama i never know how to pronounce the first name of their fund i always think it's thomas bravo yes how my mind reads it so what do they do they raise 32 billion dollars yeah so and i've never got it either i know the the one of the co-founders of the firm orlando bravo is like always active on twitter um which is a great guy probably a great person to learn from could probably

read more of his tweets i don't know why it doesn't show up in my feed much but anyway the uh yeah he co-founded the firm tala bravo it's kind of this famous uh software investment firm um and they just raised three different funds the total fundraising amounted to 32.4 billion There's basically three different strategies, but the big one is almost $25 billion worth of – it's designed to be a tech-focused buyout fund. And so there's all this comments on Twitter from – it seems like for a lot of people that have not had great returns over the last year in software stocks, kind of hoping that this is the hero that they need. um but people i think people think that he could set a floor on software valuations whether or not that's true uh i think it's probably not but 24 billion dollars he has it's not always like buying out the company in its entirety there's they have 400 investments in companies uh within the tama

bravo portfolio already and then 55 total portfolio companies my question is do you think this actually has any odds of raising the valuations for software companies especially in like the small to mid-cap range possibly i think it has a chance to Yeah, I think so, because people are going to be forward thinking and expecting these acquisitions to come into play. If there's a company that might be maybe a little bit mismanaged or people don't like as much and it's not that profitable, but it's trading at, it has 80% gross margins and trades at three times sales now, there could be an expectation that there's a floor there and people could get optimistic. I think that makes sense a bit, but I would also worry. I think it's more of a concern because you could get, say you bought something earlier this year, it's down 50% and you bought it at a premium valuation, but you had the expectation that it's going to grow and you underwrote it at a premium valuation. You knew the risk was that the stock could fall in the near term, and it did. And then someone like these private equity funds, it's not like they're doing their job.

It's not their fault, but they could come in and scoop things up at a 20% premium to the current price, and you could still lose money. So that's a concern for sure. Something to consider. How many companies do you think are going to go the way of Poshmark, where they were software companies, wanted the public market money, didn't want to deal with the social and operational implications of a just drastically falling stock price, so they decided to go private? Do you feel like that's going to be a common route over the next couple of years? If I had to guess, yes, but I have no way of predicting that. I have no idea to what magnitude it'll be. I think the ones that are unprofitable, which means they're stocks in the gutter now and or are in industries that were in the hype cycle,

cannabis, electric vehicles, software as a service, I guess, is a broad one there, are going to see some of these and say, oh, we can take it out of 30% current premium. Our stock's just getting hammered. Yeah, I think that could definitely happen. On the other hand, I think there also could be some distressed assets that happen over the next couple of years as a lot of these unsustainable business models come into play but what's interesting is there's probably even more of these unsustainable business models that are that didn't come go public that are still private venture-backed businesses i don't know i feel like some of these companies were formed just to go public during 2020 like yeah but i think well

that's true but i think there's more that are still private given how many got how many vcs how much money VCs spent in 2020 and 2021 yeah I think it's probably right yeah

I keep thinking about like how abysmal Poshmark's like public performance was like it's crazy to think about what a journey they had

stock goes public immediately down to 100 yeah like two weeks tons of shares they

dropped to 10 yeah within like less than a year and then goes private they came for the money and left instantly

yeah that one I think that could happen yeah quite a few times that was probably the like most that was probably the quickest I've seen of the companies I've looked at that's the quickest I've seen a company

go public and then come right back private yeah that was something they got a good offer though definitely got a good offer really yeah it was like a what

it was a huge premium wow no no no shares were at like $15 and I think they got like $18 a share yeah but it was a huge premium to when it was back at $10 like two months before got the buyout which I think there may have been

there was no reason for the stock to go up someone knew there was buyout there was some there had to have been activist rumors I mean at one point it was like 60% of the market now if you include

customer cash which I guess you shouldn't it was like 70% of the market cap in cash if you exclude that it's 50% still so I don't know yeah the business model the business was so bad

what do you mean it was still growing oh man it was just a bad business I don't know I don't know if I agree entirely on that I feel like especially right now too like I think used clothes are going to be

I think they're going to see a lot of volume like an increase in volume flowing through that platform over the next five years. Maybe, but we're not going to know as they're private. I got a couple other pieces of news that aren't really... What about, let's do mine instead of... All right.

I also, if we're still doing the seven investing like random articles that we sprinkle through here, do we want to talk about that? I found a good one. Yeah, I guess we can do that now as the mid-break ad. this uh yeah it's even less of an ad because it kind of plays right into our uh our personal strategies but dana abramovitz i believe it's i'm saying the last name right um wrote an article titled is online dating a good business and it was on it was honestly a fun read i recommend

everyone going to read it because she actually kind of chronicles like the journey that i think a lot of people go through where she basically talks about how everyone kind of thinks they're going to meet their partner organically and kind of have like you know just through their day-to-day they're going to meet people at their ordinary activities but it often doesn't turn out that way and more and more people continue to result or resort to the online dating solution so she kind of goes through that um i hear she's talking about the the unknown the unwritten rules of online dating yeah everyone learns that it's you gotta kind of trial bear there yeah and she uh i mean there's like a lot of candor in this article too which i like it was kind of fun to read through

but then basically at the end kind of comes to the same conclusion that we have come to which is A lot of people say that the lifetime of a user is short. If you're successful, you get rid of your customers. But she also provides some good points here, which is you get what you pay for oftentimes. And so the higher value services, you're going to pay more for them. And more and more people, especially the longer that you're on there, you tend to eventually pay. And it's a continually growing market to go after. And it's still so young in terms of the markets that are actually adopting the solution. And I think it's still got that stigma worldwide. So I don't know. She goes through it. I think it's worth a read. I thought it was pretty interesting because I always, I mean, that's like the common bear case.

Like if you do well, your customers are gone, but that's just never played out in the financials for any of these successful dating companies. Yeah, there are plenty of bear cases that are, I think, legitimate, but not that one. Yeah. It sounds like I'd be right, though. Yeah, but it's not like everyone in the world is not going to be single once the dating apps... You know what I mean? Yeah. It's kind of funny that you just kind of think it through a bit. But yeah, I was kind of scrolling through this while you were talking. It seems pretty good. I definitely agree with a lot of that analysis. and either whether we agree or disagree at seven investing, they have plenty of good free articles

that you can go check out and definitely go use our code money, uh, and get a free trial for seven days to all their premium stuff. And then a hundred dollars off your annual subscription. All right. We have, uh, some questions in the chat that maybe we should talk about first before we hit to my topics. Here's one from, I believe your name is Guido, uh, Hendricks from, sorry if I said your last name there from the Netherlands so hey some international audience there we go

what is your take on Salesforce margins are improving second co-CEO leaving and RPO growth slowing but still excellent business at a good price question mark yeah I don't know Salesforce that well I just get turned

off by the executive team specifically Benioff this feels a bit like a What don't you like about Benioff? It feels very like a Bob Iger, Howard Schultz situation where there's no

the culture is him which I don't like. However, their track record of growth is phenomenal. There's nothing you can go ahead. It's one of those businesses that I've looked at a couple of times and still

can't fully grasp what all they do. And I've been in business, I've worked at like, like summer internships at companies that really rely on this. And like, you know, it's critical to its customers workflow often, but I don't know, like you, I have some worries that this is a business that relies really heavily on Mark Benioff and what happens when he's gone. Yeah. And they have never been disciplined with spending. If that changes, it's probably a very attractive business. But they have relied solely on revenue growth, driven with a lot of SBC over the last few decades and through acquisitions. It's worked well. We'll see. We'll see what happens this decade. Yeah. I don't know what the stock is trading at, but I trust the comment there that it looks cheap right now. Here's another thing that I

think people are probably concerned with, and this could either just be a totally overhyped concern or not, is that how many subscriptions are they selling to unprofitable businesses that won't be around in the next few years? Because if they're selling to a lot of startups, those sales teams, right? They all have sales teams. All these SaaS companies have sales teams. They're using Salesforce. How much of that? I don't want to be as worried about them they're not they would not be the first losers in that situation in my opinion well if you're saying so many i mean they have like so many customers that yeah they're going to definitely have a lot of customers that are unprofitable and and funded by vcs but they

also have some of the biggest enterprises in the world that they could raise prices on yeah i just on the other hand i think i wonder if over the last couple years there was a bubble and and in software sales but we had this like not a bubble like there was this theory too many people in like they're they these companies hired too many people right and on top of it it was just a hodgepodge fest of software subscriptions like it was like companies would be like we'll we'll subscribe to your software if you subscribe to ours kind of thing until it felt like every software company

was using every other software company's solutions for every tiny niche part of their business. Yeah, Salesforce is the OG with that. Yeah, I don't know. Yeah, I guess that did kind of worry me. I think that spend's probably going

to consolidate. Yeah, but look, stock looks kind of cheap from looking at COIF in here next 12 month EV to EBITDA 16.4

yeah looks alright I don't know about those the estimates are for them to grow 10% a year over the next

three years so they do that probably fine but I don't think it's the end market because that software

is going to be sticky that's it's not the huge concern it's just the management team and their ability to truly generate shareholder value all right should we uh should we talk ftx let's hit my topics yes the news everyone wants to hear that is correct uh yeah we include this just so the title can be because because not enough people have talked about it well there's news every day it seems like and this isn't even just spf it is ftx uh

The restructuring CEO spoke to Congress. So this is the person that took over for FDX for the restructuring process. They spoke to Congress today. Here's a quote from their, I think it was their speech that they gave to the House Financial Services Committee, and they wrote it. They had to write it out, and it's, I think, a public filing. Here's the quote. Nearly all of these situations share common characteristics.

He's referring to all the restructurings he's done, ranging from gross mismanagement, excessive leverage failures of internal internal controls failures of external checks as a result of audit firm failures or insufficient board governance but never in my career have i seen such an utter failure of corporate controls at every level of an organization from the lack of financial statements to a complete failure of any internal controls or governance whatsoever ever. It shows us it's one of the craziest run businesses I've ever seen. Here is a list of what he said went wrong at FTX. One, senior execs had access to computer infrastructure that allowed them to touch customer assets with no security measures. Two, there was no documentation for

transactions or minimal documentation for transactions involving nearly 500 investments made by the FTX group. Three, there were no audited or quote-unquote reliable financial statements. And four, there was no risk management or independent governance. There's a few other quotes here. Quote, we are working around the clock to locate and secure the property of the estate, a substantial portion of which may be missing, misappropriated, or not readily traceable due to the lack of proper record keeping yeah that makes sense last one here looks like we were going to get a full understanding of what happened uh here's the quote every week we gain a better understanding of what occurred in the path forward which will be

shared with interested and affected parties through the chapter 11 process so good thing this person seems to be trying to do this publicly so everyone can understand what really really happened here um he also lined up and i have a i'm not gonna read the whole thing here ryan what is uh who put this guy in place like yeah he just kind of came in got hired by the board i'm assuming and he's a big ftx um not fc excuse me he's a big restructuring ceo so they brought him in he did a lot of restructuring stuff at enron i'm sure he's just a bankruptcy ceo So, yeah. Okay.

But SBF doesn't have enough control of the company to just keep it himself? I don't know the exact details. I think once they went to Chapter 11, then all the equity is gone. Yeah, I suppose. But I don't know the details. I don't think that's important. So here's also what he said. And I think this is the most interesting thing for what he understands went down here.

He says, so while I'm going to read, this is kind of a quote, I just put a screenshot in here. He says, while there are still many unknowns, they know the following right now. Customer assets from FTX were co-mingled with assets from the Alameda trading platform. Two, Alameda used client funds to engage in margin trading. Three, the FTX group went on a spending binge in late 2021 and through 2022, during which approximately $5 billion was spent buying a myriad of businesses and investments, many of which may be worth only a fraction of what was paid for them. Four, loans and other payments were made to insiders in excess of $1 billion.

And five, Alameda's business model as a market maker required deploying funds to various third-party exchanges, which were inherently unsafe. Last one, not a big deal for us. It always is so... It gets worse and worse and worse. $5 billion just on these. They were like Scarface from the movie. They were just on drugs the entire time, right? As we've known. And they're just going crazy with this stuff. I think anyone that invests in this, you cannot make excuses. How did you not see this? There are 500 different investments i mean come on it yeah okay so it kind of makes kind of makes like when people

hear that and i at least for me it kind of makes my blood boil because it's like he's been going on this news rampage where it's kind of like i wish i knew what i was doing was wrong kind of approach where it's like feel bad for me my only goal is to give people their money back but you read this there is no way in hell that he did not know what he was doing was wrong yeah they loaned out a billion dollars to what is it they loaned out themselves a billion dollars to to insiders yeah so themselves whoever um yeah i mean it's bad here we have a comment here that uh for matt that according to the financial review ftx inner circle had a secret group chat that they called wire fraud, which again, that's not great. Speaking of which though, I don't think

that's even the craziest crypto news that came out this morning. Well, maybe this isn't crazy, but I think this one might be more important. So according to Reuters, the US Department of justice is weighing whether to bring criminal charges against binance which is a bigger exchange compared to ftx i think it's the largest in the world here's a quote from the article some of at least half a dozen federal prosecutors involved in the case believe the evidence already gathered justifies moving aggressively against the exchange and filing criminal charges against individual executives including founder i'm going to mispronounce this chang pang zhao goes by cc It's easy. And he's the one that dumped the FTX, FTT coin thing and started the process. Apparently, Binance's defense attorneys are arguing that the charges shouldn't be brought against them because it will, quote, wreck havoc on the crypto markets, which is a very funny excuse.

like, oh, it's going to make the markets go down. Yeah, because maybe your whole operation is a criminal and maybe a bit of a sham. Here's another quote. Reuters has investigated Binance's financial crime compliance over the course of 2022. The reporting showed that Binance kept weak anti-money laundering controls, shocker, and processed over $10 billion in payments for criminals and companies seeking to evade US sanctions. And some of these are both in uh north korea and iran which can get him to serious trouble uh i don't know what's going to happen with with bydance but it does not sound good there was also a quote from the article about how cz mandated the entire company not use email and only use encrypted messaging which is something

you totally do when you're not doing things illegally right i just it's very standard It's such a tell to me. And as we're recording this, a lot of listeners are going to listen to this on the Sunday, and maybe there'll be something crazy said. But tomorrow, which is Tuesday, the 13th of December, SBF is going to appear for the House Financial Services Committee. uh but apparently he's not gonna he wasn't able to attend because he's worried about the paparazzi effect that's what he said in the twitter spaces um probably not because he's gonna get jailed uh on u.s soil but he's sticking in the bahamas right now he's just gonna zoom in i would be a little uh i think he has some right to probably be worried about his well-being yeah well people can go to the bahamas and do that right people have like stampeded outside his condo like a mob boss it's like literally people are so yeah i think if someone saw him

in the in the states it would probably not be for the best um no but i wonder whether they the government is going to force him to go well that was the what do you mean go in person yeah i wonder yeah i wish that yeah i wish they would i mean that's the part that concerns me is that it's the whole so many people were being nice to him about this that we're like in the political realm getting donations yeah it like made me go

full anti system full zero hedge yeah I don't know maybe you know hopefully it says something self incriminating it's so it's such a criminal

I don't get a question from Matt we'll wait on that one about I have no idea I don't know about that one but possible that person could be in play here

yeah what was I thinking I think even if he has all these connections right he did something so illegal that's so obvious that no one there's not going to be any choice

because everyone can understand this and it's just gonna yeah I always like man I'm looking forward to this book from yeah Michael Lewis although originally Michael Lewis was writing it as a positive for him

originally hopefully he probably like got to know the guy and was like alright yeah I think now he's probably changes tune No, I mean, he has too good of a sense for who people are that I'm sure once he was following this guy around for a while, he knew he was full of shit. Yeah.

They also, like, yeah. This validates, though, my being headquartered in the Bahamas thesis. It should be a case. like if you're domiciled there and I've heard like we talked about this like that was a low light for us on some SPAC a long time ago and people were like no that's totally regular for SPACs

like don't worry about that no you know what headquarter yourself or domicile yourself in Delaware like everyone else do it in the United States or your country of operations yeah 100% alright

you want to talk video games yeah some more That's, I think, interesting. FTX is fun to follow, but there's less investing applications there. Yeah, so the NPD group updated the video game results for the month of November. Total sales were up 3% year over year, reversing declines that had happened throughout the year. So we're kind of seeing a reversal in the trend there. And the sales were really driven by a 45% increase in hardware sales. And hardware sales mean console sales. This was led by the PS5. I should note, though, I checked before we recorded this, the PS5 is still buy invitation only on Amazon right now. So I don't even think they fully have reached equilibrium on supply and demand yet.

But we'll see if that ever happens for the next couple of months. um now if we look at the full year after the giant increase in ps5 supply uh this year the ps5 now leads in dollar sales for the us and the switch leads in unit sales and the xbox always placed kind of third place there um cod call of duty is now the best seller year to date so that game really contributed to getting growth back uh the last two months because the the launch of that it's the biggest game of the year every year and this one did really well on top of that

the European news came out and basically confirmed this Nintendo Switch is still number one in Europe and yeah all the top games were the same so again I don't need to go through the exact Europe numbers because it's kind of all the same there

but again America and Europe were pretty in line let me see what the questions were that I had Do you think, so we saw a decline in gaming revenue throughout 2022. And yeah, November is just one month. So I guess we have to confirm that over the next few months here. But was the decline in gaming revenue this year all chalked up to these hardware limitations? And how do we think it'll affect the industry in 2023? three no would be my answer i think people generally have less free time this year relative to like stay at home period because that was still last year right at this time last year there was still or at least this during 2022 relative to 2021 a lot of people

we're still staying at home. You really think that has an impact? On the margin? A big impact? Yeah. Really? Yeah. 100%.

Well, if that correlated, then the revenue would be down like 30%. So I don't think it has that big of an impact. Maybe on the margin. Not all that's... I think it has an impact on in-game sales. and not all the revenue in the industry is in-game sales

majority's not or probably half and half now at this point yeah I think the majority though is as a shareholder of EA and Take-Two and Nintendo I would love to say that it's all like hardware pitfalls but

there was especially among people that couldn't go to school there was an unreal amount of engagement yeah especially for the kids yeah I still think the majority though is the hardware limitations because if you don't

get the hardware you're not going to buy the game so it's a double whammy really on industry spending but again in this month there was some big launches I guess Call of Duty was in October so it's not as big but there was that God of War game a Sony

game that did really well and then the Pokemon games, which probably gave it a bit of an artificial boost. But they are comping back to the holiday season last year, which definitely had some huge game launches as well. I think we'll see, but

how do you think it affects the industry in 2023 if this is a sign that the hardware shortages are over? Yeah, I mean, if they start meeting demand, I think it's business as usual

for a lot of the gaming companies back to probably what you saw through 2018 to 2020 period or maybe not even maybe in the last two the last three decades just steady growth I would say it looks a lot like

the years prior to the Switch launch oh at least for at least for the Xbox and play I'm not even sure I don't even think that so much of an effect yeah I think yeah I agree

it's just so unique I don't know yeah obviously if they can meet demand they're going to sell more units if they sell more units they're going to sell more games yeah I think but that's not as prominent

the game sales that are in conjunction with the hardware sales anymore no but it's you have well you don't buy it in tandem but if you have a console no one's buying a console and just going I got a console

alright here it is you have to buy you're going to buy three or four games if you don't have the console you're not going to buy them yeah but people aren't people that haven't been able to get the Xbox Series S or X aren't waiting to get caught

that's fair yeah yeah because it's not like backwards compatible when you get this next next chance yeah it's not going it's no one's not playing games but I think there's definitely a delay

because if you buy the one that's for the old hardware you're not getting the best graphics so if you're saying okay I can buy this and wait three months for this new souped up whatever the next generation I think it's going to be a positive

but console isn't even that big of a part of the industry anymore mobile is more important i think though what's interesting is that there was calls this summer that the gaming industry was cyclical now and maybe this is head fake again it could be head fake but the revenues declined like one percent year over year or like five percent year over year for a few months and now we're getting back to growth so i think that uh short-lived yeah it could be proved as a short cycle there um here's another positive i saw is that microsoft is officially raising the standard price for its premium title so 70 a piece uh a lot of other companies have started to do this over the last few years where i think the majority are now um take two yeah yeah is launching at 70

with their new premium Star Wars game. For the last, since 20, or not 20, 2006, the game, whatever, you know, the premium title that you pay, not in-game purchases, we're not talking about that. The actual game you buy

has been around $60. So it's underperformed. The cost of a game is underperformed inflation. Any thoughts on here? Because I think for a lot of these premium titles, there's going to be, Once that $60 barrier got broken, I think there's going to be a lot more flexibility where you'll have maybe some game will stay at $60, $70 if it's not something that a company is willing to bet people are going to pay up for.

but for a big game that someone takes five years to make i think there's going to be room to even go past this because if you play if you buy if a consumer buys a one of these titles that you play for months and months and months that you spend 100 hours in over a course of a year say one of the blizzard type games like you know the new diablo that's going to come out or red dead redemption and grand theft auto one of those star wars games maybe from respawn um there's lots of others i'm missing the difference in value like the price per hour of entertainment you're paying for when you have a say a 70 game versus 100 game is not that big of a difference i just think there's going to be tons of pricing power there because when you have those top brands

i don't think there's going to be incremental losses in sales given how much people spend on this compared to like a movie or something like that yes okay maybe with like the apps Maybe with COD, let's say. But I would think it would go the other direction. That if, especially if like cloud gaming becomes more commonplace, that you'd want to lower your prices so that you can get more people in-game to spend on in-game content. I always thought that the industry was kind of heading the other way.

Yeah, it had. I think Fortnite really threw a wrench into it, right? over when that happened I think a lot of the established publishers said we wanted to release stuff for free and EA even mentioned once that they were going to give up on all these premium games

and kind of go the in-game live services route which has been their big growth driver but when they launched that old what was it Star Wars Fallen Order or something like that that was the prequel to the one that they're about to launch here it reconvinced

that there's still a market for the single player game. So I think it's two different, I guess it's two different categories where you have these single player ones that aren't maybe as life services-y, it's not as social. I think there's plenty of pricing power there. And it's a huge difference if you have 10 million customers paying 70 bucks, that's 700 million revenue, I think. And then if you have 10 million paying 100 bucks, That's $1 billion in revenue. But yeah, I think there's definitely two sides of the market where you have something like the sports games,

which might actually benefit from going free just because they make all the money on the live services. So, yeah. It always has blown my mind that game costs just really haven't changed. I mean, they've become more profitable over the years thanks to digital distribution, but... they they're still the same top line or same same price tag although at the same time i'm seeing a lot more like yeah the standard game is 60 but you can get the ultimate edition for 150 plus a

couple of in-game packs kind of thing with like i don't know it feels like there's more iterations of existing games now the average price has probably gone up yeah i wonder how many people to take advantage of those if they're the core customer. All right, enough gaming. It seems like industry is kind of doing as it does. Let's do some quick hitters here. Yeah.

Go ahead, Ryan. Uber officially launched their advertising division. Came out of beta because they had this going. Kind of came out of a revamp almost. They're going full throttle into it. Yeah. Yeah, I mean, now they put some guy at the head of the division, and they launched it on a couple of their channels. I want to make sure I get all the different advertising inventory spots correct.

Okay, so they will have prominent place-sponsored listings across Uber Eats. Seems like the right thing to do. And they also have sponsored emails. Not entirely sure where they're going with that. It says sponsored emails that enable brands to promote exclusive offers to Uber and Uber Eats consumers through email delivery directly into their inboxes. All right, that's innovative. of um other one homepage billboards so this is like instead of search-based promoted listings it's just like an uber eats ad on the front page kind of like taco bell offers blah blah blah that kind of thing other ones and this is where it kind of gets interesting um there's tab they're working on a tablet advertising pilot which will see strategic partners pilot in-car tablets in la and san francisco for ads so like tablets on the back of car seats that's some pretty

lame advertising that's not gonna no the eat stuff the eat search stuff seems promising if they can drive volume but again the fundamental business model is awful so i wonder if it can this advertising save them i don't know but it seems that seems like the one that's gonna have right like a lot of promise where people would pay up to have the promotion Yeah, I would think so. There's some other ones too, but I don't quite understand exactly where they exist. I don't understand where they would be in the customer journey on any of the apps. And then there's this one. Highly visible digital out-of-home car top ads, which enable brands to reach consumers based on location and time of day across top U.S. cities. Taxis, right? The taxi ads that are on top of the things? Yeah. Digital, though.

Yeah. How creative is it going to be to a business of that size? I have my doubts. eats eats is the one that makes sense to me speaking of which the next one you have here is chipotle who's someone again who could you know spend right some advertising dollars through that channel if they want to get to the top of someone's home page or not even whatever the search results are for food in your area yeah uh other ones here uh well no more yeah no more really some there's some other ad inventory but some other news chipotle is selling merch now i went checked it out uh huge that's gonna be it's gonna be huge yeah no probably not but they also are selling they've got these mystery merch boxes that you

can give to someone for christmas um and i think it's like one in every 500 mystery merch boxes gets cilantro soap included. So, hey, I don't know if this is a joke, but apparently they're really leaning into the merch stuff. Yeah, and the 10% of people that the cilantro thing, the 10% of the people that think it tastes like soap, the merch thing. No, no.

Go ahead. Oh, yeah. I didn't even think that people thought cilantro tastes like soap. But apparently they had that on their merch site or whatever, and it sold out instantly. so how many items how many was the question that we sold out our 100 items that we had tweeted across our 10 million followers yeah they've got some interesting merchandise i guess they make all the right moves here i don't want to lapse or i don't want to go into your next

question but ask your next question i think that's the problem isn't all these ancillary things they do but could be the thing you're about to ask yeah um so they just added their 500th Chipotle lane and 80% of their new openings will have Chipotle lanes. There are still retrofitting existing stores or existing locations to add some as well, but

my concern and maybe it's just because I go there too often, is this push towards higher velocity in terms of getting customers in and out or fulfilling orders has led to a lapse in quality i 100 agree i noticed the same thing i was talking

with my friends some some friends the other day and they said the exact same thing but mainly more like bro talk of chipotle stinks now or something like that or like i'm out on chipotle um and i kind of agree the quality is way worse and that's it's important like they can they can sell the merch they can do all the great stuff uh but doesn't matter yeah it uh i mean i still eat there for now but uh they're leaving the door open for someone to who is less focused on output or throughput and could provide a same quality meal other ones starbucks so you know how there's And I know we only have a few minutes left. Starbucks, there's kind of these unionization efforts, you know what I'm talking about?

Yes. Okay, so part of kind of, I don't want to call it union busting, but part of the actions that the company took to discourage companies from unionizing. To shake up the union, right? Yeah. Yeah. So they raised wages for non-union stores, which was kind of just to prove the point that you have to go through negotiations to raise wages if you're a unionized store. So it's like, oh, you guys are the ones that made it difficult here. So there's that. Then they implemented tipping, optional tipping for customers at Starbucks. And I'm starting to notice this

myself they at the end you get that awkward moment where for the first time it's a new thing that they're doing they turn it around like a lot of the small restaurants do now but it's yeah they're holding the little point of sale system right in front of you and it says all right two dollars three dollars or four dollars on your six dollar coffee order yeah and you're i love when the tip I love when the minimum tip for the restaurant starts at 25%. I get 20% I can deal with, right? But when they assume 25%, that's when I get a little... Yeah, but when I...

It should be... Okay, I get a black coffee. Like, they just have to put it under the thing. Well, here's your problem. You're getting black coffee at Starbucks. That's your issue. I got a gift card. All right.

It's gift card system. A lot of gift card. Yeah, that's fair. But the... It should be like, they talked about the complexity of certain orders now. It's getting harder to make orders because TikTok has given all these custom orders that make it really difficult to achieve the same throughput. Oh boy. but so so maybe you should be able to tip on some really complex order but when i get my grande pike roast and you just put it under the thing and you know fill it up like i don't think it's weird for

me to tip you know 25 on that yeah so and there's been reports that customers are getting pretty upset about it it's like a price hike without a price hike and it's a big one too yeah starbucks I don't, their labor issues are just keeping me away from that thing. Yeah, I think they, I think that might've been a bit of a mistake, I guess. We've got some comments here. Yeah. Well, before we go to that, we'll do that to wrap things up. I always, like in the back of my mind, I'm always thinking after reading the history

of GE, General Electric, like what company is the General Electric where everyone just has, everyone is kind of like that quote that got famous in the big short where it's what you know for certain that just ain't so. GE was that one. I worry about what businesses are GE. Starbucks I worry about could be a GE. Well, not as bad probably. I worry about Disney being a GE. When I feel that in the back of my mind, I just kind of get a nervous feeling in my stomach about investing in a company. But go ahead, the comments. Yeah. Bijan, sorry if I'm getting it wrong, says, love the Mercado Libre episode really interesting company

yes totally agree that was a fun one yeah very very fun other ones Matt and Bijan both say getting tipping culture is getting crazy always very awkward yeah like what am I going to do like if they put in

like there's something there you know looking at you with the point of sale system in their hand and you've got 35 you know 30 35 percent 40 percent like well Am I going to sit there and go, no, here, give that to me. Let me go custom tip.

Then you get disgruntled employees, a tumultuous relationship between you and your barista if you're regular. I think it was a risky move and one that they might end up provoking here soon. Yeah, they're stuck in a rock and a hard place because what are they going to do? Raise prices even more? Are they going to raise prices by a dollar? Get rid of tipping and raise the price on your coffee. That's what I say. Could they do that without,

could they raise prices by a dollar? I don't know, but I just think one of the benefits is they've always had a premium price, but you don't have to tip. Yeah. I don't know. Pass through some of those price that price increases to your customers or your employees.

All right. Well, that is time though, I believe, right? Yeah. We started. Yep.

An hour ago. All right. You want to sign things off? You want me to? yeah, I can do it this week. All right. Well, thank you all for listening. Use code money. Check out 7investing. Limited time left before the end of the holiday season. Subscribe to the newsletter and let's hit the

disclosure. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. We are general partners at Arch Capital and clients may hold securities discussed in this podcast. Thanks again for everyone for tuning in. Usually, what's the time? Why am I blanking? Thursday is four o'clock Pacific time. Thursday's 4 o'clock Pacific time not this week though not this week but the next week after typically typically it'll be for

4 o'clock Pacific time on Thursdays thank you all for tuning in or listening we'll see you next time