Chit Chat Stocks - Investing Power Hour #42: $NFLX Earnings Reaction; Cigarette Volume Trends; Stagnating Tik-Tok

Episode Date: January 22, 2023

The CCM Investing Power Hour is a live-streamed show every Thursday at 4:00 PM PST. 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/ ****************************** This episode is sponsored by Stratosphere.io, a web-based terminal for financial data, KPIs, and more. Try it out for FREE or use code “CCM” for 15% off any paid plan. Sign up here: https://www.stratosphere.io/ ****************************** Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. 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. This is the investing power hour. Number 42. Closing in on the one-year anniversary in a few months here. My name is Brett Schaefer, and I'm here with Ryan Henderson. As always, I do not

have our script loaded up for the entry or the introduction to the show, so I'm just going to wing it but uh this show what even is it we come up with news items we riff anything and everything we have some good stuff yeah we have some fun stuff today and we might not do everything and it might go totally off the rails into other stuff that whatever we want to talk about but it's just going to be investing focused finance focused business focused it goes live on youtube every thursday you'll watch the replays on youtube or as the majority of you do listen on the podcast which releases sunday mornings let me also add something if you're listening to this right now and you want to be a viewer or you want to ask questions and we just do it at a really shitty

time because we do this at like four o'clock on the west coast on thursdays you know most people are probably busy at that point. Try to reach out to us, whether it's email, chitchatmoneypodcast at gmail.com or Twitter, whatever, and give us a time that you think would work well because we're open to input. We don't have a fixed time here, but we want something that listeners would actually be able to tune into. Exactly. It makes it fun when it's interactive. We do get a couple of people on here and some people watching the replays, but it's really fun when we get people asking questions on the topics as well let's hit some uh new not news items uh stuff we want to talk about before the show starts if you're a regular listener make sure to subscribe to our

free newsletter for our not so deep dive episodes that is the best way to keep up with the show is to subscribe to the free newsletter it's through substack the link is in the show notes do that if you want to keep up with the episode and you're a new listener and if you enjoy the show give us review on either Spotify or Apple Podcasts. That is the best way to support us besides listening. Today's episode is presented by Stratosphere, the best web-based research terminal for company specific metrics like KPIs, segment revenues, and many other things. I can tell you for a fact, we're going to be using them for Netflix, I bet, when we cover them on their earnings report. And because they always have fascinating KPIs, we're going to take a look for one of my topics

the dichotomy of the tobacco companies raising prices, lower volumes, higher margins, all that good stuff, they can really have perfect visualizations here. Stratosphere has clean data for KPIs, segment data that is triple-checked for accuracy, and beautiful data visualizations helping save you time and frustration digging through SEC filings. We use Stratosphere as our investing home screen, and you can too for free by going to stratosphere.io that is stratosphere.io ryan why don't you start i'm gonna turn off the lights in the background because as you can kind of see they're a bit too bright but why don't you get started on the topics here yeah so uh where to begin microsoft laid off

people which is uh i don't know we discussed this on our last we did not microsoft for not so deep dive. And I know Brett, you were just away from the headphones, but I'm talking about the Microsoft layoffs. We talked about the business, what, two weeks ago, roughly, and the business is operating fine. I mean, they're doing, I would say probably the best. They're probably the most resilient of the big tech companies over the last year or so, maybe not stock-wise, but performance-wise. Yet they're reducing, they sent out a memo that said, we're planning to reduce the workforce by 10 000 employees by the end of 2023 that's roughly five percent of their staff um the cuts are reportedly centered around hololens and microsoft edge microsoft edge is

their web browser that they're trying to grow that was an interesting one either both those ones were surprising i wouldn't have guessed that the hololens i could see they're also cutting some jobs at bethesda which is one of their game studios and there was some other subsidiary that I'm not as familiar with. But the web browser thing to me was interesting because it's an area where they had put a lot of resources and I'd seen just purely based on commentary. Internally, they seemed to think that that was going to be additive to the ecosystem, but it sounds like maybe the moat around Google Chrome is just simply too much to really fight against, even on your own hardware products.

So that's kind of, I might be reading too far into this, but if this is something where they were supposed to be investing heavily and they're pulling back or laying off people in that area, to me, it screams they weren't seeing the traction that they were hoping for. Also, I know they use, we learned this today from someone, I think it was Mads Capital, which, big thank you, because huge value add on Twitter. If you're in the big tech space or cloud in general, I recommend reading what he's got to say. He mentioned that Microsoft's search browser was powered by Chromium anyways,

which is like the backend side of the search. So I think it's fair to say that kind of solidified my belief that Google's moat and search isn't going anywhere. The Chrome, the execution on Chrome, I think is underrated for solidifying that moat. Yeah. Really? They really took over the market there.

What was it like 10, 15 years ago on that Chrome market share? I think that's when they launched. I think I read something that had like 3 billion Chrome users that may use something like that. It's pretty insane. Anyway, the other thing I was going to mention about this, Microsoft did not need to do this.

This was not a need thing. For meta, there may be parts of the business where they needed to cut. Amazon, there's probably parts of the business where they needed to cut because they were hemorrhaging cash. Google probably didn't need it. Apple probably didn't need it. I don't know if Apple even did it. But this, we talked about it a couple of weeks ago,

where it's like, there's a lot of companies now that can just hide behind, well, macro problems and then they can cut their worst performers or they can cut 5% of their staff that they think is kind of waste anyways. And so we, and for the last two years, we've been talking about how much bloat we think there is at probably a lot of these big tech companies.

Maybe they were just waiting for the right time to reduce staff because now, I mean, no one cares if Microsoft did this. If Microsoft did this two years ago, everyone would be concerned yeah it is it's hard to read through the tea leaves i think but unlike some of the other tech companies microsoft seems to be more prudent about okay we're spending this money we're not getting the return it doesn't our business is going fine but this actual thing isn't actually isn't going that well so we're going to cut it unlike amazon

unlike google unlike facebook um i guess apple's a bit more secretive so it's hard to tell i uh i think you gotta that's a big positive for microsoft that they're just more prudent across things i think the hololens division may have got well it's definitely hasn't gotten the commercial adoption i know they had that giant military contract that i think might be gone now i'm not exactly sure i read some headline about that and then microsoft edge maybe it just wasn't as successful all right we gotta pull back it's not a big deal i mean maybe it may be a big deal for the business, but if they're not seeing the success, you're not just going to throw good money after bad over and over and over, kind of like we've seen with Amazon, with Alexa over the

years. Alphabet has done that plenty of times. I can't think of any examples right now. And then Meta more recently, which is the one people have been talking about for the last year. There's a couple of comments that basically say kind of the, I think the same sort of sentiment we were trying to express, which is someone says they fired the rotten apples that they hired during the pandemic that weren't productive. Everybody will start firing rotten apples. Great timing to do so. Yeah, I think you're right. I'm guessing. I think you're doing that in all environments though, but maybe it was exacerbated because of the remote hiring. Yeah. The other part that I wanted to take away from this is they said they

expect a 10 000 person reduction in the workforce so by the end of 2023 that's not saying they're going to fire 10 000 and then replace them with 10 000 new employees that they think are higher performers they're they're actually reducing the workforce um i don't know but people weren't doing it at the same magnitude over the last two years of the layoffs yeah i think maybe okay here's what i meant is that you're generally what do you call it getting rid of the rotten apples that aren't productive i think generally most companies are doing that but maybe the tech companies because growth was so strong everything was so profitable they didn't need to do that and now we're getting to a point where they're more mature and we just got to be more um like they gotta they just got

to be a bit more efficient uh but why don't we go to netflix earnings because i know we talk about layoffs a lot i was about to say i feel like we talk about that's the playoffs every week yeah Yeah, and I know people don't want to just hear that over and over again. I'm going to load up their Investor Relations page. Yeah, it was a good quarter. I just glanced at it, so maybe we can kind of do a live look. I read the shareholder letter already. It was, I mean, it's good.

Reed Hastings is moved on, I guess, to executive chairman. Oh, really? Yeah, the last bullet point there. Ted Sarandos and Greg Peters are now the co-CEOs. And it sounds like from the rest of the commentary in the shareholder letter that that was already how they were operating internally, and now they're just finally announcing it to the public. But I think the big things here, the big takeaways for me at least, membership growth was really strong. and I thought their content and my personal and this is subjective

I thought their content slate sucked and yet they had a really good membership additions this quarter also the ad supported tier seems to have been pretty successful at least in terms of just the launch I know there's

did they give any numbers on the ad offering? I don't think they I didn't look through any of the tables that in depth but at the bottom they were like they mentioned that they think it's as high value as their ad

free offering and then I don't think I kind of think if they didn't give any maybe it's too early because it hasn't been very long I kind of think if they don't have any numbers on the ad thing they haven't

done a press release you know how the Netflix always leak stuff to the press release if they're doing well. Or excuse me, they always leak stuff to the press if they're doing well. I kind of think the advertising tier might not be as successful as they're making it out to be because they would have bragged about a number

if they hit a number. Maybe. Yeah, I guess you could be right just because it's not some sort of a competitive secret. like they're not trying to hide how well they're doing with it because pretty much every other service on streaming is already ad supported in some capacity um but i don't maybe they'll give some some numbers on the conference call i don't really know the the other part um this kind of page sharing i don't know how they're going to roll that out but i mean consumers are no longer

are going to get a free lunch in terms of being able to mooch accounts, which will be unfortunate for me. That should be accretive, though. It might, their number, you can definitely see their volume of whatever listening hours going

down, but it could definitely, that's got to be helpful for subs. One thing I see here is in 2023, they expect $3 billion in free cash flow at current FX foreign exchange rates. What do you think about that? It seems like they're the only one that's profitable now, which is quite interesting.

It's flipped over the last few years. I mean, what are they at today? They were $1.6 billion the last year. I think that whatever, the Netflix moniker is out the window. Yeah, it's more of a valuation game here and a future growth game. Yeah. My thing is I still think they're probably close to saturation. I think growth is, I guess, in terms of just pure member growth, I would guess that it's going to be low single digits over the next five years annually.

So kind of how are they going to drive revenue beyond that? That's kind of what I was getting in reading through this was they're pulling a lot of different levers, both with the ad-supported tier and the page sharing stuff. and then the international expansion as well. Now, I think they would counter by looking at this chart right here. And I tend to agree with you, but they have the share of viewing for just TV worldwide in December 2022.

In the US, they're at approximately 8%. And it looks like all streaming, what does that number say? Maybe 35%, Ryan? Something like that, 35, 40%. and then the rest is still linear. And the big question is, does linear completely die? What do you think?

I think there's still a lot of people that are linear accounts that have Netflix. Well, no, no, this is just viewing hours. Oh. I don't know. I think the U.S. is probably pretty mature. like in terms of I think that's probably where they're going to stay

really I would do you really think I mean yeah if you look at the if you look at younger people it's definitely skews way

that's way different than where it is in this chart yeah well maybe but it's I mean yes less time spent on linear but

it's way more competitive now too like YouTube YouTube TV HBO like I'm kind of talking anecdotally but way less time in my experience is spent on netflix these days

than maybe i spent a year ago or two years ago no i agree what do you think of the youtube competition that's i think the big question for netflix yeah i think between youtube and youtube tv i mean they already have if i'm not mistaken the uh greater percentage of time spent or engagement so i don't it's pretty close yeah it's about the same on ctv yeah and what percentage of i can't uh households in the u.s have moved to streaming over linear i think it's more than 50 percent obviously there's still some low-hanging fruit but i don't well here's i just look at this and think like members are going to grow members are going to grow at a low rate would be my thought yeah and they they've succeeded on a on arpu average revenue per user but here's something

that kind of concerns me in the quarter because they i forget what the number was but they were bragging about or not bragging obviously they talk about the uh the number of subscribers that grew uh globally year over year but if you look at you can which is just north america the paid memberships were $75.2 million in Q4 last year. This year, it's down to $74.3 million.

And yeah, it's up quarter over quarter. And ARPU grew 10%. But I wonder... That's what I mean. It hasn't shown up in the financials yet, but it might in the next few years. I think the majority of revenue growth from here on out is not going to come from member growth. It's going to come from finding either new ways to monetize, ad-supported.

And maybe the math's going to change with the ad-supported tier because you'll get members that are like, well, maybe they're not lower ARPU, but they're lower they think they are. So I guess then maybe member growth is... I don't see the ad-supported tier being that prominent in the US. It's probably more for the international markets, but they got to find new ways to drive it other than just purely having good content and signing up new subscriptions because it's a way more competitive market

than it was three years ago. And the advertising thing, again, we talk about YouTube and how it's really grown time spent on CTV over the last, what would you say four or five years ryan i don't have the chart in front of me but as they go to advertising supported and as all these streamers go to advertising supported they are converging especially if they start doing free ad supported tv uh streaming channels you're competing very heavily with youtube at that point but on the flip side we look at what am i seeing here on emea which is europe middle east africa paid memberships were up 3.2 million in the quarter

Latin America up almost 2 million and then APAC almost 1.8 million in the quarter so pretty steady growth

across those areas it's really the North America market that's hurting them although we look at ARPU and APAC

it's down 17% year over year yeah I mean I think it's still go to the go to the last slide the last one or up higher

no keep going Up higher? Nope. Down lower? Down, down, down. Okay, sorry. I can't read your mind.

Up, up, up, sorry. Go to the stock performance chart that they have. Oh, this one. All right. I think this is such a brag at the end of the call or at the end of the letter. And they do this at the end of every annual letter. But they go through it and then they say,

all right, we just put this in because we have to. Don't worry. Go ahead and check out the long-term results. That is astounding cumulative results. Pretty darn good execution. That's what durable revenue growth will do with good unit economics. And I know this probably frustrates people that listen to the show and don't watch. So I'll explain it.

This year, Netflix's or the last one year performance of the stock, Netflix is down 51%. NASDAQ is down 33% and the S&P 500 was down 18%. Over the last 10 years, Netflix annualized performance 36% versus S&P 500's 13%. So the cumulative return since IPO for Netflix, 27,422%. I mean, that is – and maybe it's a different point in time, But I find it funny that people still seriously question this management team. Yeah.

And the strategy. Yeah. Well, I mean, hey, you were just questioning some of it. No, you weren't questioning the strategy. You're questioning how big they can get. But yeah, I wonder, here's the question. Why the co-CEOs? Well, I don't know.

It works. They seem to have some sort of reason to do it internally. but the other thing is I don't think, just for the record I'm not questioning the management team I just think and they've kind of shown this, they're going to have to drive revenue

in new ways beyond just peer member growth and I think they can do it I think this can also be profitable, they've now proven that I look forward to Alex Morris' write-up as he always does It's also always the earnings report that gets the most coverage

because it's the first tech one of the season. Yep, first non-finance financials. What do you think about this? Should they acquire, whose stock is in the tech, Ubisoft, or however you pronounce it? No. $3 billion, $4 billion? It's a year of cash flow.

No, I don't think so. I think it would be having the right permanent rights to Assassin's Creed would be worth much more than three billion dollars

just for the linear content yeah they gotta execute but it could be the next like it could be as just as popular as James Bond

I think on movies and TV essentially the same thing maybe but if they just okay if all they bought was the Assassin's Creed

rights sure but buying Ubisoft is not just buying the Assassin's Creed rights That would be a tough pill to swallow of saying I paid $3 billion for the Assassin's Creed rights

I think there's shareholders would definitely have a problem with that That seems like a lofty price to pay Well, they have more than just that I remember being very concerned looking at that business Well, yeah, because it's mismanaged

but they got good assets I think it would be better to if they're going to spend three billion dollars on gaming i think it'd be better spent on an acquisition like that than internal why because there's a lot of catch-up period to building up the culture of of a gaming content though you know we've talked about before the history of how no company that started out in linear media or or visual or whatever tv and movies have been able to make their own game studios successful so i kind of think you need maybe ubisoft is the most broken studio and has no and and something's really it's tough there you

know something's really going wrong there but they do have a long track record of building games that people like, and the merging of all this stuff, I think can be very profitable. But you can't, you need

a you just need the gaming IP to do it. Yeah, my gripe would be like, I don't even know if they're really going after that market. Yeah. AAA console that might just

I would rather have them inch their way in until they see some actual traction than take a big gulp on Ubisoft and potentially just destroy capital yeah well either way they're destroying capital

if they're inching their way in with no success not nearly as much though who knows I mean the I think probably going after

mobile the way they've been going after it is probably gonna lead to less value destruction than spending

four or five billion to acquire a massive gaming studio that seems to be it also might just require a totally different like

type of manager like it's just a different business that's a good point I don't know I've played those scenarios out in my head where some big gaming company gets acquired

by a traditional media format, not interactive. It sounds good in theory, but I worry about that actually happening. I mean, yeah, because the benefits you can get from the relationship can be... You can have that just from a licensing or partnership or relationship to have the IP to make whatever you make

as visual content. You really need to let them act autonomously to make their games on their own. But my thought is they could just throw out a lowball offer for Ubisoft that's really higher than the current share price. That's a whole. Ubisoft has got the family running it that might not even care. Game Ops. The Game Ops.

Yeah. The French family. They might not even care about getting acquired. All right. Next topic. It looks like you got dating app updates. Yeah. So news came out or an article came out this week that Hinge,

which is a popular dating app among, what is it? Gen Z, technically? Millennials. I would say post-college single people is reportedly rolling out a $60 a month subscription. The current one, I believe, costs $35. So this is a significant price increase. For reference, and this is Hinge,

the average revenue per user at Hinge in the third quarter of last year was $25 versus $20 the year prior. So they'd already been slightly increasing prices. Now, if you're thinking, well, if it sells for a $35 subscription, why is it $25? They also have a lot of a la carte purchases.

So you can buy like extra likes for like 99 cents. I forget the exact terms on it, but there's some a la carte transactions. Yep. And it's average revenue per paying user. So it's just anyone that's paid average divided by all the revenue the app made. My thought here, and I heard a lot of people like, people love to dunk on this stuff. investors are like, who would pay $60? A lot of people.

Maybe you've been married for 20 years, but a lot of people would pay this money. You would pay unless you were 6'4 and... Well, maybe not 6'4. Unless you were 6'2 and chiseled on both your face and your body.

You will likely be paying unless you want to have no matches. The other thing is, okay, the bigger the platform becomes the more valuable the subscription so the more they can raise prices especially if you think they're rolling it out in Europe

my thought here would be that the platform becomes much more valuable when it's in Germany and the UK and all the different countries I suppose just one because the subscription is more

well for young people traveling around young people traveling around the continent you're on a trip to Italy right

you know it's really it's different than yeah that's like just going on a trip to California the other part is the bigger the platform

gets I think the more you have to do to probably make your account stand out to have success on these apps

which often requires paying or dramatically changing your looks the easier solution in that case would be pain um so yeah i think and the other part is this is the post-graduate demographic it's not tinder tinder does college yeah main is college yeah sorry i keep interrupting you're doing you're saying exactly what is on my mind tinder is probably

more for the have fun crowd i would say hinge is more the existential crisis crowd where you're getting to the point now where dating is no longer, you know, let's see. It's existential crisis. It's I need to find something now and I'm going to pay to do it.

I think there's tons of price and power on Match Group's side for Hinge. Yeah. To be fair, it's not all their users, but that's definitely

more than, yeah, if you have the, the way you described it makes sense. The existential crisis crowd is going to go to Hinge first. Yeah.

They definitely have more pricing power there because you get one popularity in urban areas in the United States. Most of those young professionals are going to have a lot of income coming in. The ARPU there, I think can be quite strong. But you also have this other note about Tinder thinking about a mega price increase to $500 a month. I know this is just rumor. They're not actually launching this yet. So they may have been trying to test the waters among people because I know companies like to do that. But what are your thoughts?

Yeah, so this was kind of thrown in that Bloomberg article as well. Match Group's apparently testing a $500 a month subscription for Tinder. Now, I just bashed people for hating on the Hinge premium pricing offering. I will be the basher now. If you're spending $500 a month on Tinder, you've got to find a new hobby. And obviously, they're testing this for a reason. maybe there are people that are such serial daters on Tinder

that they'll pay a ridiculous price to have it but that's crazy yes well yeah yeah it is crazy and maybe they throw out 500 for a reason maybe it's actually going to be slightly lower but I think you got to look at it

through the lens of the management team now the management team is all from mobile gaming and the initiatives they're trying out are basically to make even more a la carte purchases, which is shorter term subscriptions, which are basically a la carte, which I think makes sense. Say you're going on some trip for a week to somewhere. You don't want to buy a full subscription for a month. You can buy it for a couple of days. That makes sense. But also what makes the mobile gaming popular is wealthy people who are fans of the game

paying a ton of money with what they call the whale spenders. So I think testing this out makes sense although in dating it might not actually work as well as in mobile gaming but i think that's where they're coming from is they're taking that mobile gaming mindset and applying it to apps that are kind of similar to mobile gaming but just a different sector and that's why they're also testing advertising as well because if tinder is more of a if the people are spending a lot of time on tinder but it's a lot more casual and maybe they're actually serious, the advertising could work as well.

There's a lot of dynamics there. To be fair, we might sound bullish because as a full disclosure, it's a stock we own now and a stock we might own in the future, so full disclosure. It is a stock we own now.

Did you say it might be? I said it might be one we own in the future as well. Yeah. Anyway, yeah, I like that they're experimenting with all this stuff. Bernard Kim's the new CEO, and he's kind of got to prove it, I guess, to, I think, a lot of investors. But I don't see any reason why the $60 a month subscription for Hinge is anything but additive to ARPU. Did you see what the features would be? kind of they briefly reported it in the bloomberg article it was stuff like um like higher promotion in people's likes so so really yeah so it's obviously it's for guys

but yeah some people have like uh obviously a lot of likes and you can't necessarily see all the likes unless you like and i haven't been on the app in a while but the way it's more of a it's more of a woman problem yeah basically you're there's all these guys vying for the interest of women and if you pay for the subscription you get uh your like gets promoted it's more visible to the uh to the likey you go to the front of the line most it's a single file line for the you can promote it to the front of the line

and I think it was like better recommendations or something like that for like people that will see your profile basically your account just be amplified in general interesting well we wrote

on our I wrote it but it's really our authorship on our match group pitch thesis, which you can find on our funds website, that people would pay upwards of $1,000 for dating if they had the money, because it's such a fundamental need for humans. So we'll see if we're proven right with this Tinder one. But let's move on to the next topic. Why don't we do... It's the mid-roll here. Why don't we do a little stratosphere one, a little stratosphere mid-roll ad that I think will be very fun to

talk about, and that is Altria's... Let me share the screen here. Volume declines. Explain what Altria is for the people that don't know. Oh, right. They own Philip Morris, so the largest... Actually, they own Philip Morris USA, so they're the largest cigarette manufacturer in the United States with approximately 40% market share. Let me share the screen here. Again, go to stratosphere.io. It's free. Ryan, you can see that, right? For anyone listening, this is basically tracking And this is one of their KPIs things that they add on here for companies that disclose a lot of things each year. And as everyone's well aware of, total cigarette shipments or volumes have declined steadily over the last few decades. If we look at 2013, they were at about 129,000.

Last 12 months, we're at 87,000. And what's funny is that in 2020, what made that funny a bit depressing is the decline flatlined, which again, I know it's a tough year for everyone. Something to take the edge off. Yeah. Maybe if people think the world's going to hell, as a lot of the perma bears out there in the finance world think maybe ultra-group will benefit as people get more nervous. But the big takeaway is that shipment volumes have declined 4.4% a year for the last 10 years.

However, if you look at the... Let me pull up some different charts here on their income statement. If you look at their revenue, and they've actually sold off a business, so that's why Revenue is slightly down, but it would be flatlined. Revenue is actually up, compounded at 2% a year. If we look at operating income, it's compounded at, let me scroll back up there, 4.4% a year. So if we basically have volumes declining by 4.4% a year, operating income growing at 4.4% a year, obviously we're seeing margin expansion and raising prices, which is a well-known phenomenon for anyone that smokes or anyone that follows these companies. Here's my question to

you, Ryan. One, and we've discussed this before. One, can this dynamic of declining volumes and raising prices continue this decade? And can you envision a world where cigarette volumes flatline as... I guess it's kind of similar to what we talked about with streaming. Is there you know what will linear ever flatline in the market share kind of retain itself will cigarettes maybe globally or in the u.s ever flatline i kind of think it's a fascinating question i don't think so you don't you think boom eventually it's over zero not for longer than like a three-year period the i mean we saw some sort of flatline through covet but the yeah right that that doesn't count to me yeah and you showed the last i think it was 10 years

something like that these cigarette volumes have been declining for like the last 30 years i think if you would have you could have said at any point during that are would volumes flatline i think the the future is probably going to look a lot like the last 30 years, at least the next 10 years. And there's so many other alternatives now to cigarettes that no, I just don't see a scenario where they flatline for like a five-year period. That just doesn't seem likely. Do I think the trend can continue financially? To a certain point, maybe. But I think the better question is, what would you pay? What's the right price to pay for a business

that's almost... What's the terminal value? Imagine there wasn't any other investments. The terminal value of everything is zero. Imagine this is only the cigarette business and you know volumes declined by 5%. They raised prices by 10% each year I'm just throwing rough numbers out there which exasperates the decline further because you continue to raise prices to a certain point

can they do that for 10-15 more years are people going to be paying $70 for a pack of cigarettes well I don't think they're not paying that much right now Marlboro is $9 where we are

I think they could raise it to 20 over the next decade wouldn't be I wouldn't be shocked what is that annual annual increases what is that probably

7% a year no clue but sounds about right yeah they could but I think they're going to lose customers along the way not only from them

literally dying but I think there's so many alternatives now yeah i think it look that makes sense but that was the bear case 15 years ago too so it's like dang you know that's why i asked what's the right price for it because if they're going to pay you out 10 a year in pure cash dividends that might be worth it if you think this thing ships no cigarettes in 10 years

or is shipping half the volume that it is now they'll still take that 10% dividend yeah if they're shipping half the volume

that they are now revenue could be flat and operating income could be up I wouldn't be surprised which is interesting then I would say 10 times

10 times operating income is the right a fair price to pay if you think volumes would be half of what they are and operating income will be exactly where it is today in 10 years.

I guess it depends what kind of return you want. It also depends if you're in a taxable account or not, since a lot of this is dividends. It's also interesting with the non-cigarette stuff that's growing in volumes. It's not nearly as big, but it will be interesting to see what they can do with the pouches.

because will that get, as a percentage of cigarette volumes, could it get to 10%? Is it going to get to 20%? I think that's a huge question for the durability of this business. Well, it doesn't have to grow in order to grow as a percentage of cigarette volumes. Well, that's right. Yeah, but I'm talking about replacing their revenue because it's not nowhere near the size yet to replace their revenue

or maybe even earnings, but it could get there soon. But that's a harder bet to make because you're betting on really fast growth. I would much rather own... I hate talking about the entire tobacco space or anything within nicotine, because it just frustrates me that we had such a gem in the Swedish match. The Philip Morris stole it? Yeah. Philip Morris International, for anyone confused. i would be a little a little more scared owning i think anything that didn't have a really prominent profitable

alternative to cigarettes in their portfolio so um the one that i i mean it's philip morris international now that's got um zen right so yeah plus uh i forget the name of the other thing that's very popular as well i forget uh jewel vape whatever no no heat not burn thing plus is that the thing no iqos remember that thing oh right yeah yeah i forget what the numbers are on that but apparently that's doing well too all right let's move on to the next topic as we got 15 minutes left sometimes these go quickly okay a couple things i found interesting um roku there was like this report that came out that they are apparently by far the number one way people choose to cut the cord um so there was like some survey which i know were survey haters

but cord cutter news surveyed 2 000 people basically asking how did you cut the cord most of them said Roku the second which was like half of as many basically Roku was twice as popular of a choice as

Fire TV those negative 30% gross margins they gotta count for something when you sell this stuff at such a loss that's what blows my mind I go back and forth probably, I would say, two or three times a year and think this could be a huge business. It could be the operating system of the CTV world, or it could be completely irrelevant and they hold no power.

Yeah. I saw a chart the other day that their account growth has still been really solid. I think they passed 70 million accounts. then on the other hand i see them having zero negotiating leverage with youtube and youtube's talking about having streaming channels within the youtube app on ctv and the ad supported ones and then having the ability to buy streaming channels within the youtube app and kind of making the youtube app the home you know the home screen and i think okay roku's gonna have a tough time competing with that as they try to monetize their advertising business build up the roku

channel, which is in a really tough place competitively versus YouTube. So I see that and I'm like, okay, they're growing accounts, great, but they're not playing a very easy game. So there's a path for them winning and being in good business, but why play why buy Roku over, and again, some people might be morally against this, but why would you buy Roku over Altria at an 8.5%

dividend yield? It just doesn't make sense. Obviously, at the right price. Right, morals, morals, morals is fair. But say Altria or anything equivalent to that, that's way more durable. Why would you buy that when Roku's not training at a dirt cheap multiple?

Yeah, I don't know. It's a tough one. Other things, interactive brokerage reported earnings crushed it, I would say. net interest income basically doubled year over year so good for them Luis we just had on Luis Sanchez who basically

gave a wonderful pitch for why it's going to be a much a good investment over the next few years and I think that's playing out exactly as he said so part of it was net interest income and for reference that is Interactive Brokers IBKR it should be like

four shows older than this on the podcast feed yeah other things i read i'm doing a little this is a little pledge to myself i'm studying it publicly here so i stick to it i'm my goal is to read one book every two weeks that's one book every two weeks a little personal goal for me yeah yeah yeah it should be doable um as long as i don't it's it's gonna it's gonna push me towards shorter books but you should say yeah we got to set a band 300 pages to 600 pages 600 page max yeah i don't want to be right snowball and titan might slow me down uh i think those are in the past but anyway um last man standing i read which is a biography from i don't have the name here but it's a biography on jamie diamond essentially in his career and i will say it was a really good

book. I recommend reading it. It's an interesting tale through banking. For one, it's fascinating on Jamie Dimon because I found it to be pretty remarkable. Obviously, that's the point of the book, but it also gives a really good illustration of the culture inside the big banks and how much management bases their performance on whether or not it's better than peers, which provides

I mean it was like every year they were like, what was our return on equity versus Bank of America's or Bear Stearns or Goldman's or Morgan Stanley's they literally ranked themselves and then they determined whether or not it was a good job, I think Jamie Dimon did

a little less so, but And it sets up these horrible incentives, and you saw this before 2008, where people take insane risks to beat competitors in terms of return on equity. And some of the companies that were juicing their ROE in 2005 and 2006, and even 2007, were non-existent two years after. So it kind of concerned me in wanting to invest in big banks because there's so much in there that the outside investor doesn't know exists. Yeah. I kind of like Bank of America because I've had an account with them for so long. I'm always like, oh, I should switch. I never have. but to your point the investment banking side for them

or anything else besides their consumer banking side it's just such a black box I'll let Buffett own it yeah it is like I have no idea what's in the derivative segment of any of those businesses and

I mean even Diamond they were better positioned in 08, but they weren't immune to it either. They had a lot of mortgage exposure too. They weren't going to collapse. They took a bailout, but they weren't going to collapse, but it was going to be terrible for them either way.

Yeah. They didn't need the money, but they took it because it would have been stupid probably not to if everyone else was taking it. and I don't I mean there was

they were able to there were banks and I can't remember the specific one that did it so they acquired Bear Stearns after Bear Stearns bought a bunch of exposure to the mortgage market but I think Morgan Stanley was the

one where the management was literally loading up like tripling down on their mortgage bets in 07 well Goldman and JP Morgan were getting out selling it to them yeah I know yeah JP Morgan so slowly got out but it affected I mean it had ripple effects across all the credit markets I don't know I mean I did I came away with a lot of admiration for Jamie Dimon there's a tough industry though it's a tough industry and they've been the top dog for so long

that there's got to be something strangely special there but it's just such a tough industry that you know right isn't that makes it doesn't that make sense yeah it's also i mean it's yeah it's hard not to compare yourself to all the other banks when you're a big bank but it just creates some bad incentives anyway the incentives for the employees they're attracting as well probably leads to that it's kind of a self-fulfilling cycle anyway so this is my pledge my public pledge for anyone listening. I will come back every two weeks with a five-minute book

report on one bullet point in the document. One bullet point in the document. What are you reading right now? I started a new one called American Rascal. It's about some guy

Rockefeller and Vanderbilt called him the smartest man they knew and it was some like financier in the 1870s oh james may have been a crook jay gould jay gould not james james jay gould yeah okay fun one yeah he may have been a crook may have been brilliant i'm really not sure they don't really disclose it until the end i don't think so maybe i'll learn more about it but he's a very secretive guy it sounds like um but i like reading those books that are based in like the late 1800s to early 1900s because it makes me

appreciate like you know having like clean water and stuff and not having like all my siblings die from like simple illnesses yeah it sounded awful yeah so it gives me a newfound appreciation but anyway any other uh well did you see i was in a bit of a conundrum i don't want to call it a conundrum but a i kind of played myself i did a i mean i kind of cut out there for a second but what do you say if i cut out um slightly okay maybe that's just on my end but you played yourself okay so did you see the fake buffett quote i tweeted yeah yeah so i said just because as a play on uh when tesla cut prices and people like to compare it to being one of the best businesses in the world uh there's the buffett quote that he the real one what he said is essentially a good

business is one that can raise prices and not have to what do they call hold their note what does he say hold their nose oh go through a prayer session beforehand so basically coca-cola hershey whatever you can raise prices willy-nilly but i flipped it as a parody quote and i thought everyone would understand this right when tesla cut prices by 20 percent i said quote a good business is the one that cuts prices by 20 and makes it up in volume warren buffett maybe i should have said warren buffet to make it clear that it wasn't him uh but so they go like viral or anything but it's probably the most popular tweet i've had in a long time with it says here like over a hundred thousand views and the majority were tesla fans that took it as a

serious quote and said berkshire's about to buy load up on a stick rocket ship rocket ship rob chip hashtag tesla this thing's you know whatever i was just constantly playing my feet and i thought like wow they should just start playing the curb your enthusiasm music in the background for me because i thought it was pretty clear that's a fake quote but it was funny either way yeah it felt it felt good i gotta say selfishly to trick uh the tesla bulls like that But I thought people would just be clear that it's not a good thing to do. We're three minutes from this being done, and we haven't talked about Tesla. But I don't know.

Maybe we should have a Tesla alarm or something whenever we have some way. We should snap a rubber band on our wrists every time we talk about Tesla because we can't seem to not do it. No tech layoffs, no Tesla. But since we already started, went down this rabbit hole, yeah, I find it ridiculous that people that are saying this was a strategic poker move, like, what are you talking about? Yeah. This is – it may have been the right thing to do, but lowering prices is not some strategic poker move to gain market share. Yeah. They need to sell more cars.

The other thing, I hate when people quote EVs in market share. This is to get out ahead in market share. This isn't enterprise software. You can switch cars. Yeah, I know. There's no... Is there really a first mover advantage here? Yeah, we'll see.

Hey, look, yeah. Before, yeah, I want to do one thing here. We won't have time to talk about it, but yeah. I think they report earnings next week. I hope maybe it's before the show or after, so we can save a reel. We'll go through the actual report and see the numbers. But here's one.

I don't know if you want to load up the chart, but it shows TikTok growth in the US, user growth, has stagnated, and year-over-year growth is actually 0%, and will likely, as the trend continues, go negative. What do you think? What do you think about that? I would say long reels and long YouTube shorts. you think that's a competitive thing or what

I kind of well we're about to record on meta and I kind of want to look at I tested out YouTube shorts again I got it kind of made me like those things are psychotic I don't it's scary

I never want to start using those things they're a bit hectic and it makes I can see why people have anxiety watching them just stop watching them guys but if I kind of had this thought that if all of this social media, or it's not really even social media anymore, if it's all converging onto just video,

there's not really a competitive advantage for these upstart like TikTok, besides being the first mover. And the platform with the users like YouTube is going to succeed because they already have two or three billion users. I kind of think like if it's all this video, it's not, I think YouTube is going to win.

but they're probably it's not going to be a winner take all but i think it gives them a slight advantage if it's just it has nothing to do with the friends you have it's just videos maybe yeah the other part that's worth mentioning is they got to a billion users faster than any platform ever so i think it was inevitable that growth is going to slow quicker but yeah it was a blessing and a curse yeah um yeah i wonder if growing too fast is like the kiss of death where 100 agree yeah you've got i mean what was the clubhouse if you if you grow too quickly everyone will copy you you're gonna get competition from all sides look at roblox just durable steady growth yeah pandemic was quick but just durable steady growth there i think i think

durable growth is the way to go which spotify even to spotify netflix yeah i uh the smart investors already know this but i think durable growth is it is where it's at all right that's gonna do it for this episode guys the people that tuned in thank you i know we had one guy who left but either way you can watch the replays on youtube or just continue listening to them on spotify or woman might not have that guy guys uh although majority of our listeners do tend to scheme mail 91 as the data tells us um but either way thank you everyone for listening check out our sponsor stratosphere at stratosphere.io fantastic platform you can try for free remember 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. Thank you all for listening. The show is live every Thursday. We'll see you next time.