Chit Chat Stocks - Investing Power Hour #53: Stripe Annual Letter; Deep Value in Colombia; $COST Comp Report

Episode Date: April 9, 2023

The CCM Investing Power Hour is a live-streamed show every Thursday at 9:15 AM 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 recommendation. Now, please enjoy this episode. This is the Investing Power Hour number 53. We're into the second year now, which is, I guess, pretty easy to believe. It's not hard to believe. It seems like we've done one

of these each week. It hasn't really flown by because they're very fun to do. But my name is Brett Schaefer, and I'm joined by my co-host, Ryan Henderson. It is 12.30 p.m. Eastern time, and that means we are live on YouTube for the Chit Chat Money Investing Power Hour. On these episodes, we cover all sorts of investing, business, and finance topics with no set script. Sometimes we have guests when we can get them, but usually it is just us two. So Ryan, how are you feeling today? Technical difficulties, but I think they were pretty easy to solve. Yeah, technical difficulties are always a little frustrating.

We're migrating out of our office, so it's been a little precarious sound-wise. I keep moving around. People might keep seeing different backgrounds. I'm going to try to figure out one stationary place to be, but we will see. But yeah, there are some interesting topics this week. A lot of annual letters came out, so I'm kind of looking forward to digging into those. Yeah, it seems like you have what? You have Columbia as an investing pond.

We might save that for later as that's not as the most enticing topic. That is very interesting, but I don't know if that'll tie people in. You have the Jamie Dimon annual lender, which I think will be exciting. And then I have Stripes annual letter. And what else did I have? Oh, Costco's March update I thought was extremely interesting. And we also have potentially Substack launching a new feature, Chamath's annual letter. Maybe we don't hit that, you know, don't say nice things in public, but I did have a few

tweets on that. Chipotle suing Sweetgreen and potentially some succession talk. It's going to be all over the place this week. But before we get into the episode, I want to talk about our presenting sponsor, Stratosphere. Actually, let me let Ryan share the screen here first. So Ryan can hop it up. One sec. Yeah.

Ryan's going to pull the platform, but either way, let me get through this. Today's episode is presented by Stratosphere, our investing home screen for fundamental research, Stratosphere's dashboard tools let us easily track our investments and stocks we are researching with a nifty newsfeed, SEC file aggregation, and a fundamental charting tool that can help you visualize all the different KPIs you want to look at for a company. We use it every day. And I'm not joking when I say we use it every day. That's our watch list or company tracker right there.

You can have a really nice looking watch list with all the different things you're tracking. So of course, you're going to have the daily change in a stock price on there. And you can also have annual reports as Ryan's looking at transcripts, press releases, basically everything you would want as a fundamental investor aggregated into one home screen. That's not going to be buggy like some of the older places like Yahoo Finance that just feel clunky, old, clickbaity. And if you want to upgrade to some of their paid plans, which give you vastly older historical financials, like Ryan is looking at right now, or some of their KPI data that you can't find anywhere else, go ahead and use our code CCM and get 15% off any paid

plan. The link is in the show notes. Tell them that we sent you. All right, Ryan, we're going to be using some stratosphere charts throughout the episode i have some ones loaded up on addion to compare them to stripe because i think those are two interesting competitors that are becoming huge parts of the global economy but first why don't we start with the jp morgan annual letter because it seems like you have some interesting notes there i'm going to audible because it's kind of a mixed letter i don't know it's it's not that it's not columbia is more fun columbia yeah i mean people have asked us to do a show on it so uh oh well yeah one person philip welter die uh i guess i guess it'll be fun it'll be fun i i think it's interesting maybe

maybe i'm thinking it's too niche but i'm interested in it so i think maybe we should use that as our cue um if we're both interested and i think listeners will be as well yeah i mean did you read the jp morgan or the jamie diamond letter i didn't know i mean those are too long i frankly don't care. Yeah, that's why I partially want to avoid it. It's a lot about banking regulations, which probably isn't that exciting for listeners. But Columbia, we had Ian Bezic. We talked to Ian Bezic last week for a show that will come out next week. I guess if you're listening to this, it'll come out four days after this show is released on a Mexican company, franchisor of a number of different quick service restaurant concepts. But it's a little teaser

there. But after the discussion, we were kind of talking about what's something you've looked at recently? What are you interested in? And he kept mentioning basically Colombian equities across the board because there's so much going on there. And a lot of people, I mean, I personally didn't really know that much about it, but I read up on his sub stack and he's got a lot of good coverage there. And basically what's gone on is equities have taken basically an all-time dive, Colombian equities all across the board. And in August, Gustavo Petro took office. He's apparently considered the first ever left-wing Colombian president. So I guess the concern or what people are worried about is that there's a lot of headlines saying that like they're moving

towards nationalism or like you know even some of the more uh classic south america kind of conflicts within the political realm that seem you know happen frequently in a lot of these countries yeah i'd say some of the more sensational headlines said they're moving towards like communism and stuff like that and you know we talked to ian who who lives in columbia and he He basically, he's like, yeah, it isn't happening, but you see all the headlines from people outside the country kind of having an impact on the equities there. And so since – over the last 12 months, the Columbia ETF of – and I'm blanking on the specific one. It's like an MSCI Columbia ETF – is down 43%. The Colombian peso has depreciated 20% versus the U.S. dollar.

I believe either BlackRock or Blackstone is shuttering one of their Colombian investment vehicles. Yeah, you can see there. I've got a number of – yeah, it's MX – I'm blanking on the ticker, but it's the global MSCI Columbia ETF. Search it. You'll find it, yeah, if anyone's interested. And the market cap as a percentage of GDP, which is sometimes – I mean Buffett's used the indicator in the past before as kind of a way – a proxy for investor sentiment in a certain market relative to their actual influence in the global economy. is at 21%. For reference, the US market cap as a percentage of GDP is at 175%. Colombia, out of the ones listed here, is the lowest by far. The second lowest are Mexico and Peru. They're both tied at 32%. So all this to say that the investor sentiment has just gone out the

door for Columbia. And there has been some comments made by the new president that seem sort of targeted towards maybe not being a lucrative environment for investors. So there is warranted concern, but here's another tweet that says, according to BCA, Not only is Columbia two standard deviations cheap, which is – I'm not a standard deviations person. I don't really care about that, but it is two standard deviations cheap relative to emerging markets, and the Colombian peso is two standard deviations cheap as well. EC, which I'm guessing is the oil play in Columbia. Could be wrong there. Yeah, I think that was –

Yeah, that's the state-owned one. Has the 25% dividend yield. Yeah. Well, state-run oil companies, you know. Yeah. Not surprising to see. I mean, that is quite high. Yeah.

And then you talked about the peso as well. It's appreciating. I think we got Ian in the comments here saying it's GXG is the Columbia ETF. So, anyone listening? Yeah. It's just kind of interesting. Like, it feels like you get one of these runs every once in a while where the headlines say you've got a country moving to communism or something like that, and you get this huge undervaluation essentially across equities in that entire market. And any sort of continuation of a normal operating environment would just be huge for returns.

I guess my question to you is, do you think that market cap as a percentage of GDP is actually a relevant metric to look at? More or less. I think it can be somewhat helpful, but it's not the end-all be-all because when you look at the United States, once a lot of the companies within the United States are globally, they get a lot of their revenue from outside of the United States. So I think you should, for that one, it might not be apples to apples, but I think for a lot of these markets can be somewhat helpful. Yeah. I mean, if you compare them to the other ones, Columbia, it might indicate that there's undervaluation there. But in reality, I'm more, I would much rather just look at the earnings multiples of a lot of these companies. and when you're maybe looking at some of the energy ones, you want to take maybe a 10-year average or don't just look at one year because we've had some high oil prices and obviously that stuff can be volatile, but it can be helpful, I think, but it's not the first thing I'm looking at. And then the other thing I like somewhat about the South American ones is I think people

overrate or get way too scared about the currency devaluation. I know sometimes that can totally ruin you, but I think people take that risk a little bit too far and that can present some good risk reward scenarios. Obviously, Colombian stocks, especially with these foreign exchange risks, especially with the risks that some of these countries have gone through, terrible, downturns. Look at Venezuela, look at Argentina. There's that risk there, but sometimes things are so cheap. I do like Mexico a little bit better because of its ties to the US and where the United States

might say, look, we're never going to let Mexico Mexico is too important of a trade partner. We're never going to let them go down that path seriously, or they would somewhat stop them. But I like the South American countries better because the U.S. has a more dominant influence in this region compared to maybe the risk of communism in an African country, an Asian country, something like that. What are your thoughts? no i i think i agree that it seems like there's maybe more upside in mexico um with less risk i think just because all the reshoring and going on too um but when you yeah like the currency stuff i'm looking at the chart right now from 2003 to 2013

the colombian peso appreciated a lot against the dollar yeah so i think people kind of look at the they just look at glass half empty too much with the currencies yeah i mean and it's obviously it's come down a lot over the last 10 years but usually it feels like you usually in the u.s dollar has been an outlier but it's never as good or bad as it seems like unless the country's literally going out of existence. Usually the currencies kind of bounce back a bit. It feels like maybe that's what's going on with the Columbia peso, but obviously not a huge currency exchange person. The other thing that I'm kind of thinking about here, well, I guess- You know what solves that though? Dividend yields. I don't know if you're going to say, yeah.

Yeah. I was about to say that, where if you can get a company, let's say if you're an an American investor like us, and you're fishing in the pond of Colombian equities, getting that recurring dividend, whether that's quarterly or biannually or something like that, it gives you in some ways a little bit of less risk because you can just convert it back to the US dollar and invest it in something else. You could reinvest it too, but then you're still potentially having that same risk still. So the dividend helps alleviate some of those concerns. And right now, you look at some of the big dominant kind of Colombian businesses, some

of the larger ones, they all pay steep dividends because the multiples on the businesses have come in so much. So there is- It's interesting. It's interesting for sure. It's really, really- What do you think of that approach of looking at countries as – kind of sentiment around countries as a pond to fish in? Yeah, I think it can be interesting.

I would never want to have too much exposure to one country that I think there are political risks or currency risks like Colombia that are a little bit unquantifiable or they add a lot of uncertainty. But I think it can be a really great risk-reward opportunity to take maybe one stock you like a lot, take maybe a 3% to 4% position in your portfolio, or maybe even smaller. And it can be, I think, or even if you want to just take a starter position, it can be really interesting to, as a learning experience, to track the company, learn about this international market. But yeah, I do like looking at these South American and Central American. I like Mexico a little bit more, but you get maybe some potentially bigger discounts in Colombia right now. Here's what Ian's in the comments again. He says, British pounds per Colombian peso in 2003 was 5,000. 2023, it was 5,700, basically flat over 20 years. No one would say Britain is untouchable due to FX, yet, as you say, far higher yields in Colombia.

Yeah, I mean, I think a lot of the times the currency risk is kind of overstated when people evaluate some of these emerging markets. Yeah, because we have a lot. I mean, it seems like every market except for the United States and I guess Mexico now, Mexico and Canada, especially Europe, is almost a demerging market or a re-emerging market. It's turning it back into an emerging market ever so slowly, especially with all the stuff that's happening. Although maybe I've been reading too many tweets from Doomberg and that didn't materialize as much as people are saying this winter. Yeah. And if you look at like, the funny thing was FX was huge over the last year. But if you look at it over the last, I want to say six months, it's come down substantially US dollar against a lot of different currencies. And so maybe you get a little bit of a tailwind potentially for some of those businesses that are earning globally but domiciled here in the US. So I don't know. I kept – because it was kind of a – there's puts and takes.

Because if you look at it like – if you look at the earnings this year and you exclude foreign exchange, like if you just look at everything, you're like, well, on a constant currency basis. Yada, yada, yada. You can't really do that because those are like real material chain impacts. But at the same time- It's still useful to look at. It's a useful indicator for what the underlying business is actually like, the demand for the underlying business. Because you don't know what current- that's probably not going to continue, at least what the US dollar has done against all other currencies for the next five years. It seems unlikely. Yeah. And I think that had a huge impact on profit margins for US companies. I mean, look at all the largest companies in the S&P 500. You got Fang or whatever, FanMag, whatever you want to call them, the big five. You have NVIDIA, you have Visa MasterCard, you got the big CPG giants or healthcare giants, Johnson & Johnson, Procter & Gamble. You get the

other CPG giants like Pepsi and Coke. The list goes on and on and on. Tesla, some of the automakers, I guess automakers, except, I don't know. It's more of an import, I guess, in that regard. But I think the point stands, when the US dollar appreciated that quickly, I think that had a huge impact on profit margins. And going back from, not really, I guess, away from Columbia at this point, but in general, I think with the US companies, it will be interesting if people have been talking about how profit margins in the S&P 500 have just tanked in recent quarters.

it'll be interesting if the US dollar depreciates a bit here, how much that will benefit that or if it really wasn't that big of a deal. Yeah. And there's all this talk that I don't really understand about Brazil trying to buy something from China and evading the US dollar and China going to Saudi Arabia. But I think as long as all the classic, I guess they're not all charlatans, But all the classic doomers in the financial media are talking about the collapse of the U.S. dollar. So that's kind of an indicator to me that it's probably a bunch of nonsense. That's interesting to follow. Yeah, I agree.

The other thing, there's an investor known as Peter Kundell who ran a value fund in Canada and really outperformed for a long time. um is this your newest book report because you did say you're going to do by weekly book reports was this did you forget to do it is this what you just read i have read a couple more books but no this was from like a year and a half ago i read this uh read this book but it was you read the did you read that messy ronaldo book that i sent you or no no i did not uh i i read chip war which honestly i thought was kind of a slog but um and maybe it's just not my not my realm of interest but yeah you don't like you're not a department of defense history guy and not particularly no but the uh part of his strategy was this was like finding where finding geographies where

it was like investor sentiment was just so poor and people were saying this country is going to fold or whatever and even though there is obviously higher risk associated with those because maybe some of the

sensational headlines are maybe there's some truth to them the return or the upside potential was so worth it for a lot of these companies that if he got like The dividend plus oftentimes a little bit of multiple re-rating, he would get such good returns, even though he doesn't know the market that well, or even if it's a business that's

not perfectly inside a circle of competence, it's things no one else would touch. And so I just find that an interesting approach. It might be too risky feeling sometimes for my own liking, but it was an outperforming strategy for him. Yeah, I think it's interesting because say you make 10 of these bets over a 15-year period or you target 10 of these countries or you find 10 of these sort of geographical situations over a 15-year period, maybe two of them turn out poorly. But the eight of them that work are going to have – it's going to for sure lead to good returns because that's why you don't bet your entire portfolio on the Colombian market unless you're someone like Druckenmiller or something like that. And you could make the case that it's kind of what – it's kind of like Buffett's investment in PetroChina, where – Yeah, it's a good comparison.

Obviously, I don't think he loves the Chinese market, maybe not as much as his partner, but – Yeah, Mugger had some bias to him a bit, maybe, has bias to him. I don't know. But I mean, he saw the upside and I'm not sure if it was all purely from dividends. I think he was getting like an insane dividend on there. And like three times earnings at the start, something like that. Yeah. Like any level of multiple rewriting, you're in the clear as an investor. That's attractive, even though it's not as, maybe it's not as fun. Maybe you don't like love the operating environment. Maybe you don't like feel like you're a part of a team, you know, where like, I think a lot of shareholders for like US companies, let's say you own Tesla. It's kind of a primary example. You feel like you're a part of a team. Yeah, that's dangerous. I want to feel like that with some of these emerging market companies that I have no affiliation with, but I feel like it could be a winning strategy.

Yeah. Obviously, not investing advice. We haven't done any investing here. It's just kind of something we're exploring here. But it seems like, and again, I don't know that PetroChina situation is the exact same, but it seems like it could be a similar situation than that Columbia state oil company, and then the Brazil one, Petrobras, whatever. You'll be able to find it if you look it up for any listener. It, I believe, has a 25% dividend yield as well. So those could be similar situations where you got a state-run oil company in a kind of potentially communist or politically uncertain area, but it's an energy company during an energy shortage and

they're going to pay you all your cash back in a couple of years. It's interesting. The risk rewards there are interesting. What would you feel more inclined to swim towards?

If you're investing in those markets, would you want the stuff where Bank of Columbia is one where it's less... It's not state-owned? It's not state-owned. but it's also not as cyclical as the oil business down there. But you get a much higher yield with the oil,

the more cyclical company. Would you find yourself going more towards the cyclicals that are just dirt cheap or the ones where you know, they're going to probably going to be around as long as the country's still around or going to be earning as much potentially? I think it all depends on price. It all depends on price because we, you know, we're not, we like the some of those when we delve into the deep value micro cap or whatever we we really like

stuff that may not be a good business but trades are like one or two times earnings that's the stuff that we're really looking at and so i think with the cyclicals i'd really want it to be extremely cheap but for the other ones possibly different hard to tell though i'm nowhere near the level of having any sort of intelligent thought on the on the the topics except for the overview stuff that we kind of read from some of ian's work but other topic ryan do you want to skip i mean we've got plenty of stuff this week so do you want to skip the jamie diamond letter go straight to the stripe annual letter because i think that'll be an interesting one sure maybe for if we're not going to talk about it i'll just maybe mention that it's the second half is worth

the read uh because it gives kind of his thoughts on um just the current environment as opposed to to just, unless you're a JP Morgan shareholder, I don't think the first half is that necessary because he talks a lot about just the company's approach and everything, but it solidifies my belief that I'm a full-blown Jamie Dimon fanboy, I think, at this point. He does a great job. Okay. I'll take one example. Yeah. I mean, they are the leader. They are the leader. They have always extended their lead. Let me find the example that I think exemplifies kind of who he is. So he's talking about ways to create actual franchise value.

I'll talk one quote, and then we can move to the Stripe annual letter because it might bore people. He says, if you buy or create a loan at par and put it on your balance sheet at par, think of a mortgage, and internally finance it, even match funded with 10% capital, you might believe you have a 12% return. Many companies subscribe to this interpretation and simply continue to borrow money to invest in such a thing. But I would tell you this product has no franchise value because it is only worth par. And in fact, a small change in that value because of interest rates and credit spread

could mean that you have made a huge mistake. If, on the other hand, you create a loan and sell it at more than par at a profit, you've created value, whether or not you keep it on your balance sheet. And far more important, if you create a loan and at the same time forge a client relationship and you add additional capitalite revenue, such as asset management, cash management, you have created something of long-term value that you can nurture and grow. This is franchise value. Simply taking interest rate risk, which contributed to the downfall of Silicon Valley Bank, is not a business, nor is simply taking credit risk. one person and a computer will suffice. You do not need 290,000 people circling the globe to do that. I think it's a good approach of managing the overall business. I think it's a good quote as well, but. Yeah. I don't know. When I read about banks, I don't know. I just, I know some

can turn into great stocks, but I just fall right asleep when I start reading about banks. It's so boring. It's so boring to me. I don't know why. It's just, I can't, I can't get myself to get excited about it i think that is important yeah it's you know there might be so many opportunities within the financial realm but sometimes i just struggle to get excited about it yeah but it is like always so at risk and so i mean he talks about this too but it's so built on trust that like anything happens that loses that trust your whole worth or your whole ownership might not be worth much but if they pay you out along the way potentially it's you know it's there the other thing is like the regulatory he talked about this they're like whenever something bad happens

regulators kind of instinct is to add more like stringent capital requirements that's usually not good for shareholders of the bank and coming out of this silicon valley bank crisis there's probably good chance that that happens if if it hasn't already so for all the banks for for all of them yeah just the regional at least at least the large ones like higher capital requirements um i think there is something about new basil you know they've always got those i think it's basil i think it's basil because it's swiss i think it's basil yeah i always hear about the basil accords but i have no idea what the hell those mean uh but let's go to the stripe letter so this is about 10 pages pretty you know i'd say it's pretty easy to read i'd recommend it for

anyone interested in the payments or startup or e-commerce realm, I guess. But I don't have really any major quotes. I think the main takeaways I had, I have five bullet points. One, they processed $817 billion in payments last year that grew 26% year over year. That was a significant slowdown from during the pandemic when they're growing at 60% rates. However, they didn't kind of contract. So we're still seeing them gain market share within all sorts of payments around the world because obviously the global economy wasn't growing at 26% year over year,

even with inflation. They talk significantly about, I think I want to talk about this in conjunction with them and Stripe, or excuse me, them and Adyen, about authorization rates and the huge improvement that is still left with that. They also, and this might be a red flag

because the management team loves to hop on the newest trends, But I think that is also part of their brand to kind of get startups to like them is they talk about the growth in AI startups and all the usernames and websites and stuff like that that are using .ai and things of that nature. And they also mentioned, maybe I'll share this chart because this one is interesting. I think maybe this can be a good one that we can hit specifically comparing the two payments ones. Yeah, this will be fun. So they talk about startups getting democratized outside of the West Coast of the United States. And if we look at this chart, it's loading, it's loading, it's loading.

We have Bay Area growth in kind of, they define like breakout startups. I think it's just successful ones. You know, the Bay Area was growing, but there are other areas, specifically Miami, Paris is growing well Toronto and Tokyo that are growing much faster so I think that's quite interesting that the startup

realm and maybe San Francisco isn't doing San Francisco and Seattle aren't doing themselves the best favors the local governments are not doing themselves the best favors and what we just saw I mean that's not a laughing matter that old cash app creator

got murdered on the street I mean you know Can't really make excuses for that. But it's interesting, I think, that it's getting more democratized to the East Coast and then also Europe, Toronto, Tokyo. Any thoughts on that, Ryan, I guess, before we move on to the second part? Well, I feel like we've heard a lot about startups moving out of San Francisco. And I mean, we have friends or people we know that live in San Francisco, and oftentimes they say it's not as bad as people make it out to be. But I do think the sentiment around it of, I guess, safeness and the story of the Cash App founder probably doesn't help, discourages a lot of people from starting there.

So, I was surprised by the Bay Area stat there still held up so well relative to a lot of others I mean, it probably helps Yeah, it's not a negative for the Bay Area because it still is significantly larger than when it had pure dominance in 2016, 2017 Well, I guess Seattle, New York, Boston still had some, but yeah Yeah, I mean, I think having so many venture capitalists there probably helps But yeah, it is interesting Anything else from the Stripe annual letter that you thought was fascinating? Well, they talked about the authorization rates being so important, and they kind of

had a few paragraphs on that, which I don't need to, I guess, read off all of them. But I think that is the key reason why them and Adyen are gaining market share within all these small businesses, internet companies, enterprises. And for reference, Adyen is someone similar to Stripe where they are the backend. And they're not the exact same company, but they run the back end for a lot of these, say, I don't know, omni-channel companies. For example, Stripe has a partnership with Amazon to run some of their back end of their payments. Adyen has two big customers in Spotify and Uber. Stripe has a customer in DoorDash, companies like that.

And then Stripe also caters more to small businesses, which is why they have a few that are a bit more expensive for them. But we don't need to get into the details. But the reason that they're getting chosen is because they're much better at these authorization rates for payment transactions because, and I guess what the authorization rate is, is how many times someone tries to make a payment or tries to get to the checkout page and finish the transaction and order something. or even at an in-person transaction, it is how many are successful that should be successful for a merchant. And to be honest, a lot of the times, it is actually, it's much lower than people think.

It could be as low as for some of these other merchant acquirers, something like 93% or lower. And for Stripe, I believe, I don't have the number in front of me, but they're significantly higher than some of these legacy providers. Adyen is known to have the best authorization rates throughout the industry or around the globe. And you might think, okay, 93% versus something like

96%. That's not a huge difference. But it's huge for the companies that can change their revenue by... I think Stripe gave an example of a company in the United Kingdom that boosted their revenue by 500 million pounds simply because of this change in authorization rates. And that's just a gigantic difference. And I wonder if this is a long-term competitive advantage for these two companies or because it takes so much work and so much backend, it's so much R&D, it's so much machine learning tools to build out these, to improve this authorization rate and get closer and closer to 100% and to have your products available throughout the globe. I wonder if this is a long-term competitive advantage and they'll continue to gain market share. Because for example,

Stripe is obviously dominated. Let me share this screen here of a nice chart with Adyen, who's a similar size um it's loading up here yeah adian again this is a nice chart in stratosphere go check them out their total process volume has grown at a 57 rate since 2015 and over the last 12 months which is fiscal year 2022 they're at 770 basically called 706 or excuse me 768 billion in process volume. So just slightly under Stripe, but I think growing a little bit quicker. Yeah, looks like it. I don't know. Any thoughts on this, Ryan? Because I kind of feel that Stripe may be one of those Silicon Valley companies that spends a bit too much and is really just worried about payment volume growth and writing good blog posts and stuff like that.

So regardless of the profitability, that's a whole other question. do you think this these companies i feel like it's just not a slam dunk but pretty easy to see how these companies grow at a double digit rate for a long time and just eat market share from these legacy providers that just cannot keep up with these authorization rates yeah i mean the authorization rates being better is definitely a benefit but it also especially when you think But like the startup ecosystem and people establishing like a payments system for the first time, they have such good brand awareness, I think, especially within that cohort. And it's easy to implement too, where you just paste in the code.

Yeah, you're right. So I think that's sort of another major help. But I think where the authorization rate is a major differentiator is the ones that already have some sort of payments processor that's legacy and they're a bigger business because that's when you can easily quantify the difference in what your revenue would be. or let's say, you know, I'm trying to think of a high profile business that's switched recently to Adyen, but- Yeah, they don't. Yeah. Let's just say Subway. Subway. Subway just switched to them. I believe. Maybe that was a few years ago, but Subway is a good example. They're a customer of Adyen. Yeah. You can easily look at that and say, okay, here would be my difference in revenue. Whereas if

you're a startup, you don't really know what your revenue is going to be. So you're just going to go the most seamless integration and the one you know well the one that everyone else is using yeah so i wonder here's the big question because addion has tried to go go for enterprises originally while stripe went for startups and grew with them and some of these startups turned into huge businesses over time which they've been able to ride but both companies now are kind of trying to move back into the are become full-fledged you know stripes trying to move into enterprise a bit. Addion is trying to move into small businesses. Who do you think is going to have an easier time? I think Stripe will, but I don't know if they can do so profitably because Addion

runs so efficiently that they're able to offer lower rates. And that's why, say, that Amazon deal that Stripe had, maybe they're going to make some margin, but Amazon signed that because stripe agreed to uh sign a long-term deal for amazon web services so i i don't know how profitable that could be for them because addion has shown that the hardest customers the enterprises they can be quite profitable with but stripe i i don't know tbd it'll be really interesting to watch though yeah i don't know it like it feels to me like it would be more difficult to move up market towards the enterprise because that way from the internet processor before. Can you hear me? Sorry.

Yeah, you froze a bit. I don't know. Yeah, you're choppy, but you're back now, I think. I heard something about moving up to the enterprise is more difficult. Yeah, I'll try to talk slow and cut me off if it's bad. But yeah, I think the more difficult part would be getting someone to shift a big company to shift away from an existing player because that process might be fragile, I guess. You don't want to have anything offline for a while or it might be sticky. I guess I'm not that familiar with that process, but it sounds more difficult than just starting from square one and having an API that's easy to embed. um but at the same time get it trying to get to the brand awareness level that stripe has

has got to be extremely difficult um and that's that's a lot harder to cultivate even though probably has it at least in in europe i don't know if they'll ever have that sort of brand relevance with the bay area or or the system in the u.s that's right yeah i agree i agree and add in yeah it's european company so the uh hmm yeah tbd i think the big i don't know again stripe from some of the stories that have been written about them because they're not a public company yet. It has been noted that they might not be as frugal as some people might like, but I would definitely bet that 10 years from now, both these companies are processing $5 trillion in annual payments and then saying not. If I had to choose, I would bet that they both

would be. Did the 26% growth surprise you? No, I think that's about down the middle of what I would think because you look at their customer bases they're still growing even though they saw an e-commerce slowdown i think yeah like maybe it's a little higher than i thought or expected just given the slowdown but no it's about about right in line it is crazy to me that that level of a slowdown has such an impact on profitability i guess and we don't know their exact profits but we knew they if i'm not mistaken they had to do a number of layoffs i think they were planning for a lot higher growth starting this year yeah so they had to invest in front of that although adian has been able to scale maybe

it's because it's enterprise but i don't know why stripe needs to invest in front of it when it's just a lot of it's not like your customer scale with you and stuff like that i don't understand but whatever yeah isn't there the story that like the business was started with a single line of code or seven lines of code or something like that and that's how easy it was to just like embed for customers well uh i think you could so the customers have api was seven lines yeah the customers only had to embed seven lines of code or whatever it is 10 but there's millions and millions and millions underlying that and that's why their authorization rates are so higher. But I think they're both going to have, because, and maybe any listener, correct me if

I'm wrong, I don't think Stripe acquires companies either. So you have Stripe and Etion that have built their own systems, clean from scratch with modern technologies, the best engineers, and then all the legacy players they're going after are inside of banks and built on this just antiquated stuff and duct taped together. And it just feels impossible for these other legacy providers to catch up. And then eventually, you talked about the stickiness of some of these products. I think it's a little bit of a weaker competitive advantage than people think because you could are on board, say, Adyen in a certain geography for some of the payments can get processed and doing a test run, and then you can slowly grow with them over time. That's why they

get the majority of their revenue growth from existing customers because they expand their merchant acquiring usage across them because they have better authorization rates. So you don't have to lock in with a single payment acquirer. And I think people were actually concerned when Shopify basically said that they only use Stripe at one point. I think they may have multiple merchant acquirers

now because they usually test out some for better authorization rates, better payments, and stuff like that. Alright, let's talk about you want to talk about Costco? I think that'll be fun. Well, maybe I'll throw out some of these random ones. Chipotle is suing

sweet green thoughts yeah i wonder what the sweet green people did to them because people use the chipotle term all the time so i wonder what sweet green do they feel threatened by sweet green or do they just have some random beef with them yeah i'm not sure it is kind of an interesting thing yeah so just for context i believe they sued them over the use of chipotle chicken as like branding over their one of their chicken products it was like a bowl right yeah yeah um but people say that people call stuff chipotle chicken all the time like tons of restaurants i can think of maybe they do have a specific beef with sweet green just because i think sweet greens i don't know if they've cultivated this brand on purpose but i think it's largely known as like the chipotle

but for salads sort of yeah yeah more expensive more expensive that's for sure perhaps it's uh perhaps it's some more i don't know why concern i i personally know this about investing at all i do not know why anyone would go to sweet green because those are it's how long does it take to make one of those things at home like five minutes just chop it up put in a bowl and it costs like three bucks from the store but whatever i guess i mean you could say the same stuff for chipotle yeah but that'll take a little bit longer to make a little bit yeah yeah i mean it's not usually like straight like a lot of people will put you know uh chicken and stuff in their uh salads which i imagine takes about as long yeah yeah i just have no i don't people like it

I mean, it's, remember, we have a bad gauge on consumers. Yeah, I just, they don't, the store, the concept makes zero sense to me. But let's talk about Costco. I think really interesting people are calling this the canary in the coal mine. So we'll see. But it's just one data point. So they do their, they update their sales every month. And they released their March 1 yesterday as of the time of this recording.

And they said, for the 31 weeks ending April 2nd, the company reported net sales of $138 billion, an increase of 6% from $130 billion from the year prior. However, for the five weeks in March, so I think the trailing five weeks for the date of April 2nd, so five weeks trailing April 2nd, in the US, comparable sales were down 1.5%. In Canada, they were down 2.5%. In international, they were only up 2%. So the total company comp sales were minus 1%. And e-commerce was- Does that exclude gas? I'm guessing. Because they usually report it as two different things.

Oh, they have it. Yeah, they have the one excluding gas. US was 0.9, up 0.9. So still a big slowdown from the other one. Yeah. No, that's a good catch. Yeah. I wanted to say that, but still, giant slowdown. And e-commerce totally took a hit, negative 13% for them. What do you think about that? Because from my seat, it feels like that's a good data point that inflation might be down, and that the consumer is normalizing and not spending an absurd amount. And then we've kind of got through this excess savings Yeah I mean the

I think it's important To look at it with the excluding gas Because gas prices can change And it's not really up to Costco Right so they were all up with gas Just for any listeners that are confused In the US for the 5 weeks ending in March It was up 0.9%

But in the 31 weeks It was actually at 5.5% Excluding gas so big slowdown in March Still Yeah, it is kind of interesting. I do think it's a fairly good barometer for inflation in the US or consumer sentiment in the US, consumer spending, because Costco is such a big chunk of a lot of households' spending. I guess Maybe that has to do with I mean it's a bummer

Because they don't break out like what is them Taking price versus what is volume But yeah I think we were Generally they run pretty Break even right and it's all membership fees So Who knows I don't know Yeah I mean they still

Com sales will still usually be up just because well yeah sales but I'm saying the margin they say like when

they're growing comp sales it's because of they're not taking margin typically it's because

their costs are going right and or more people are spending it's like they're not

trying to take profits on the product sales yeah I'm more trying to decipher what

is them raising prices versus what is people more people coming through like more

tickets but I guess I don't think they really disclosed that. I don't know. I mean, it felt like we were going to see a consumer spending slowdown for a long time. I'm honestly surprised that we're still getting positive comp sales. But I guess with all the price increases, that means that has to be probably a big slowdown in average, or not average ticket, but the number of tickets or people coming through. So, I don't know. I guess they don't have any hot takes on it. Yeah, I think it's a little bit worrisome for some of these companies, but I'll also be interested to see how Amazon fares and whether they are actually gaining a lot of share here. I think they're definitely getting share in e-commerce. Costco is not really a competitor here, but yeah,

I'll be really interested to read the Amazon numbers compared to this. I also think, to bring it back to the housing that we always talk about, that the more people that lock in 50% of their income into their mortgage payment, which each month more people are doing it, each month more families are locking at 50% of their income into mortgage payments, the worst that this headwind is going to get. It can only get worse. I mean, that effect can only get worse unless something changes with the housing market. yeah i mean affordability for homes is obviously not as not as good as it was a couple years ago

i'm trying to see what's that site fred fred yeah housing prices housing index looking at oh yeah prices are still no uh year over year i think they went up i think they're up i think that one's lagging too there's some forward ones that said they were like prices went up so all transaction house price for the united states uh one year it's up yeah that is shocking yeah i mean on a real basis down but yeah the affordability on that yeah so it's gonna be it's gotta be a headwind for some of these companies like you're gonna you're not gonna buy that extra thing at costco or you're gonna lose some members or someone's not going to buy that extra thing on amazon it has to impact what do you go from 30 of the income

to 50 it has to impact it just there's no other way around it and it's just it's incremental yes not everyone but it's it's a hat i think it has to have an effect i mean there's how does it not i'm yeah is there a savings rate uh is there is there income that is magically going to show up that i'm not aware of or are we going to just run credit cards forever wage inflation true yeah maybe more personal savings rate over the last year it's back to where it was yeah i saw it's kind of normal right or no or is it super low 0.6 percent yeah pretty normal you know it's up relative to the same time only 22 yeah but i yeah i the more i study this stuff or research it the less i feel like i know because i've been a believer that home prices have to come down for

a long time, or at least since mortgages have gone up. But personal savings rate is back to where it was last year and home prices are up. Yeah. I mean, there's so many variables, but maybe, I guess home prices don't have to come down, but the flows go somewhere and there's less flows for other things if people are spending more on housing. All right. We've got a few minutes left since we started late probably for one more topic what do you got Ryan let's talk sub stack

creating short form short form posts maybe trying to become a little bit of a twitter and maybe more broadly for anyone that's that uses twitter they added a dog logo yeah what a product

team the doge logo it was supposed to be the April Fool's joke they couldn't get out of time about three days late now they seem to can't get it out yeah

something I do find interesting is like so bad does if Musk owns if Musk owns Doge

coin or whatever does that like is that securities manipulation yeah or if you're on that product team

and you buy Doge yeah I don't know what 30% it's shady it's unethical that's never stopped him the but yeah I don't know that

I used to be I used to hate when people would say like Twitter's going downhill yada yada yada but I think over the last week I've kind of had a bad experience on there but like my tweets are no longer like relevant like the stuff

I see is all like politically controversial and stuff I don't want to see. Yeah, I only do chronological. Can't do that for you bullshit. I know, I don't want to see. And I always get Musk's tweets on the for you. I'm like, okay.

I'm team chronological. Yeah, I think you got to be. Other thing, a certain VC wrote a letter and reference the man in the arena quotes. It's pretty inferior. That to me is probably one of the most

come on. We are not any men in any arena just allocating. I think it's very important as capital allocators to understand your role in society. We are not creating anything.

The people sitting in the stands while the gladiators fight. literally that's exactly what you are you are the opposite of the man in the arena same for us buying stocks is not we're not in some arena

it's just pressing a button yeah that's always a red flag if I see someone quoting that in finance the yeah I mean I don't think there's much to say on that letter it's just kind of a joke um but you should no one should have imposter syndrome because this person

improvised their way to people for about three months thinking they were going to thinking they were the next buffet but i want to talk about the sub stack creating this twitter-esque product what do you think disruptive or no well we'll see i guess it hasn't actually rolled out to users yet, but what do you think on the potential of Substack becoming an app website that people use for the short form plus having this email newsletter stuff as well? Yeah, it also kind of reminds me, honestly, it feels maybe more similar to Common Stock

which we've posted on before, kind of going that direction. I think it could be useful. I mean, right now on Twitter, anytime I see like a long form post it's really not um user friendly for someone who doesn't uh subscribe because it like just redirects me to some safari link and it's kind of like it's just not really i just avoid those so it makes me think like yes if there was a app that was more convenient for those sort of medium form posts where it's like a couple paragraphs like yeah i'd love to read that But I don't know if it's really going to replace Twitter.

Every time I see that stuff, first of all, I see it on Twitter. And everyone talks about, is this going to replace it? And they talk about it on Twitter. I think Twitter is always going to be, as long as the experience is not just bogged down by some of the stuff we've talked about, it's always going to be sort of the, what do they call it, the town square for really short-form content. the the modern news feed i don't see that changing yeah i kind of see your point but one musk is doing his best to destroy it two substack is huge there's a huge overlap between the key power users on twitter and the the people that uh write on substack across all different domains sports investing politics other stuff philosophy so i think they've already captured a lot of that

audience. And if they can convince people to only post on Substack because they have a large enough audience, maybe the people will get attracted to start going there only because the key is having the big time accounts that post a lot. For reference, the biggest one, Elon Musk, to be on Twitter and posting. And if you get a lot of these places like, what's a big Substack that I'm trying to think of? I mean, think of the finance ones that people follow or subscribe to. If they are strictly on Substack, and that turns into almost a social network for them as well to share their posts. Maybe it replaces it. However, right now, Twitter is such a huge funnel for almost all these Substacks and email newsletters in general that unless that becomes not valuable

for these individuals or companies anymore, then they'll probably stick around and be on both. but we'll see if anything one can do it i think it's going to be substack yeah i i'm rooting for him i like substack i've always been a fan of that platform makes it really easy for creators and and for readers we have like well yeah two or three minutes you want to talk succession yeah what do you think favorite quote so far season's fine I'm rooting for Roman because he seems the most competent and he seems the most

psychologically like you know his father I'm rooting for him because it seems like all the problems he has are clearly because his father treated him like absolute dog shit and he actually is competent after he's learned a bit so I'm definitely rooting for him and of course

Greg to succeed by the end those are my two those are my two horses Yeah I am Obviously Obviously you have to root for Greg I I like Tom

But he gave kind of A measly speech there At the beginning Of episode two Oh yeah He's gonna get pushed out He's definitely gonna get pushed out I don't know

What you're You're a Kendall hater Yeah Come on He's a chump Substack meets Masterclass Meets the New Yorker I mean he has no idea

What he's talking about He's He's Very dumb He's like What if we just do Africa Every day I mean he's supposed to be

The idiot And Roman's supposed to be The one that actually Has business sense So that's why I'm rooting for him He does seem to His intuition Seems to

Take him the wrong way Often Yeah Although Shiv might be worse But She's more confident Yeah Shiv is more confident

I don't know. I guess it all comes down to Cousin Greg. Yeah. Something tells me he's not going to end up at the throne. He's not? Yeah. Who do you think they're basing Madsen off of? I think it's Musk.

Big time Musk vibes, yeah. Especially when he was drunk on the couch, calling him up. I was like, oh, yeah, it's Musk. Yeah. I like that character. Yeah, he's good. character yeah definitely a good addition to the show they're they're very it's very funny this season though people talk the only complaints i hear about succession is that's the same old

stuff i'm like yeah it is but it's very funny yeah i don't mind i like i like the same time people get all uh they're like i need to understand this this debt structure in the boardroom deal and whatever whatever the fuck they're doing and it's like no you're not supposed to they don't give you the details on it so you're not going to be able to understand it they're just they're getting a deal together that's all you need to know and they either need someone or trying to try to screw someone that's it i know all the all the analysts of twitter were like trying to screenshot and hyper analyze the the comps for the gojo waystar deal they're like oh what's what is it i do like how i do like how they're they're taking the the disney fox merger

to a T, where, I mean, it's not the same because it's a tech company technically acquiring them, but where they're spinning up ATN, which is Fox News. I do like that aspect. It could be fun because it seems like that's, I don't know, Murdoch, you know, with the Fox News stuff and the spinoff, it'll just be

interesting. I thought that was just a fascinating way to go about it. Yeah. I think Roman would be very good at running Fox News. I'm not saying it'd be good for the country, but I'm saying he'd be very good at it. as long as he uh kept his pants on all right well i think that's gonna do it yep that is gonna do it

uh all right yeah let me see what oh check out stratosphere sorry i had a little bit of brain melt down there use our code ccm get 50 off they have great fundamental charting tools like the ones we were using with adyen this week and you can try it for free download it tell them we sent you. 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. Follow us on Twitter at Chit Chat Money. Subscribe to the free email newsletter to get updates on the show. At Substack, link will be in the show notes and give us a review on Spotify or Apple Podcasts to support the show. These go live every Thursday, 1230

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