Chit Chat Stocks - Investing Power Hour #55: Apple Savings; $TSLA + $NFLX Earnings; Taylor Swift and FTX

Episode Date: April 23, 2023

The CCM Investing Power Hour is a live-streamed show every Thursday. 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 CCM Chitchat Money Investing Power Hour number 55. My name is Brett Schaefer, and I'm joined as always by my co-host Ryan Henderson on these episodes, which we do live

on YouTube every Thursday and then get the replays uploaded on your podcast feeds on Sunday mornings. We talk about whatever is happening in the financial markets. It could be specific stocks, earnings season, philosophy, some research paper we found, or maybe some more comical stuff that we found as the financial markets do get absurd from time to time. And this week, we've got a mix of both. We got earnings. Earnings are in full swing. Ryan has some notes here on Netflix earnings. I also have some Tesla earnings, American Express, and then a few funny things and maybe some more long-term investment management stuff. But don't need to spoil everything. Ryan, how are you doing today? What are you

excited to talk about this week? What's on your mind? Yeah, there's a lot. I mean, The start of earning season is always fun. Netflix always gets a lot of eyeballs. I don't know if there's anything in particular. There was some interesting stuff with Apple, which always seems to get overblown, but they might apparently just cause a full-blown financial crisis. Yeah, I'm already going to fade this, but I won't spoil your topic.

Yeah, there's rumors that they're starting savings accounts. They are starting savings accounts. So we'll see. I'll talk about that in a second, but you want to talk about our sponsor first? Yes. Today's episode is presented by Stratosphere.io, our investing home screen for fundamental research. I already have some charts loaded up for Tesla when I talk about their earnings report. Ryan is going to load up a chart right here that has, and I'm looking at it, a Pepsi chart. And when you look at some of these larger companies, I think every company in the S&P 500, every company within the Toronto, I don't know what the exact name is, 50, they'll have specific KPIs over at Stratosphere. And we talk about the specific KPIs that you can't get anywhere else, but they have much more.

As you can see, anyone watching, they have analyst coverage, they have different modeling, they have what I like is a screener that they're improving day by day. And I just saw they released a chat GTP integration, excuse me, that looks quite exciting. And they've just launched version one. You said GTP, it's GPT. GPT, thank you. I think everyone understands that, but sorry about that misspoke, misspeaking there. They, yeah, and you can try that out. It's really, really helpful.

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All right, Ryan, let's get to this week's episode. What do you want to talk about first? Do you have the Apple savings? I guess maybe let's talk about that. Maybe that can be a fun discussion. Although, fair warning, neither of us are banking experts, which you are probably going to disclose already. Yeah, not banking experts, but some interesting news. So Apple launched a savings account for Apple card users.

I don't know how many Apple card users there are out there, but I think it's basically just right within your Apple wallet, I'm assuming. And apparently, I don't know if this was just like a screenshot someone took, but it's going to have like a 4% annual percentage yield is what I saw from someone's screenshot, but it seems kind of insanely high. here's what the press release said Apple today announced a new savings account for Apple Card that will allow users to save their daily cash and grow their rewards in a high yield savings account from Goldman Sachs I don't know specifically what high yield

will mean as all these savings accounts do but I guess the question here is do they steal wallet share from other banks potentially uh maybe maybe actually probably not probably not i'm gonna say no you're gonna

fade this you what makes you think this won't work well i think it'll work but i don't think it's gonna have meaningful a meaningful change may there's there's net interest margin not net interest margin excuse me whatever the uh interest rate that a bank has to offer is already seeing major pressure i don't know whether this is going to be a major change to that and is this going to make it so bank of america chase city all those companies is it going to force them to dramatically rise raise their interest rates i don't i kind of i don't see that happening why would you if you haven't moved out of your uh the money that you have within your bank account at say bank of america yet why are you going to do so because apple is offering this it seems great

for the stuff that's sitting with on your apple wallet right for the money sitting on your apple wallet that's great but i don't see that money was already not in your bank of america account in the first place are you going to move ryan thousands of dollars to your apple wallet i i guess you use a local bank but if you were i don't have an apple card oh so you did yeah okay but say you did because you're an apple user i'm not loser apparently the uh you have say you're say you use bank of america and you're an apple user and you have the ability to use it would you be Like, how incentivized are you to move a meaningful amount of money to there to earn 4% on something that was in your checking account, say, $5,000, something like that? If I was a big Apple card user, maybe there'd be some incentive.

I mean, you're getting 4% versus, what, zero? What do you get at the big banks today? Yeah, say it doesn't really matter, much, much lower, right? There's a big spread on the interest rate you can earn. The problem is, okay, the only thing that makes me think they might have some success is the success of Apple Pay. But it's important to distinguish. Apple Pay is not Apple Card. Most people just plug in their digital credit or debit card from their bank into their Apple Wallet and just pay using that. Apple Card is just completely independent. And even though Apple Pay has grown really, really quickly, I haven't seen any numbers on Apple Card.

So I'd be surprised if that's taken or had as much success as Apple Pay. I mean, I would really have no eagerness, I think, to sign up for Apple Card and use this because there's always some threat to banking. Like, okay, look at it. I mean, there's so many bank accounts out there now, a yield savings or a high yield, an interest rate higher than what you get at Bank of America or Chase. But those banks continue to grow deposits. Maybe not this quarter, but they continue to grow deposits, which I just don't think that's ever going to change. There's so much friction involved in switching bank accounts.

It just is never really going to happen. I've been talking about how great it is that Ally gives these insane rates, and yet I'm still at this regional bank that provides me nothing on my savings, basically. So why? Just because there's so much friction. And it's one of those things where you're just like, yeah, I should switch someday, but you never do. yeah if anything whenever i have xx savings i i put it into my investment account so i think

maybe we're not we're not because not everyone does that so maybe we're not we're thinking we have a little bit less incentive i think you know it's a good product apple seems to have these financial services things they can add on and keep retain their power users but these sort of stories get so much airtime within the news on twitter or within wherever and it's going to be meaningless to Apple's business and it's going to be meaningless to the bank. So I don't really understand why these become news stories so much.

I think, I don't want to say necessarily it's going to fail, but it's a pretty irrelevant product from an investment perspective looking at Apple itself or any of its companies that it's trying to steal deposits from. And plus it's partnering with Goldman Sachs. So they got to, if anything, Goldman Sachs will benefit. But we've seen Goldman Sachs, at least generally, kind of stumble with their trying to enter the retail depositor space and they're not profitable at all there.

So if anything, this Apple-Goldman Sachs partnership has not shown to be super fruitful in the past. I don't know why this is going to change it. And if anything, what's the big deal if banks see deposit outflows? they have a ton of wiggle room to increase their interest rates, right? It's not like, yeah, their business might suffer a little bit or their margins might suffer, but if they start losing deposits, they have plenty of room to increase those interest rates. Yeah, absolutely.

I mean, I looked at Bank of America's earnings this year or this quarter and the net interest... I mean, the people that bank with them... What's their NIM? What's their net interest margin? It's wider than it was last year. I'm not sure what it was, but the thing about people that bank with those big banks

is they aren't putting the money there because of some interest rate or some tiny 1% difference. Chances are... Especially a checking account. Yeah, chances are they're doing it because they like the service. The parents did it before them. Their parents did it before them. And so they kind of were just like raised into that bank. And then you probably are just so used to using it that you don't really care. And if you want to earn high yield, you'll probably go move it somewhere else anyways. it's interesting that there was this thesis that when interest rates rise again that the banks were all going to benefit but it seems like some of the banks benefited greatly the ones that

didn't get pressure on the lending side or excuse me the depositor side paying out the interest rates which would be the big banks mainly and then there was a ton of pressure for when they rose too quickly and then they got some of the other banks as we saw ever so uh whatever the huge news story when svb and sydney street bank failed they had terrible net interest margin compression whatever the asset liability mismatch we don't need to relitigate all that but they they definitely had a huge headwind when interest rates rose but it's interesting how not all banks are the same not all when someone usually i think the not the key but But maybe a big takeaway is when someone says, or there's a narrative out there that says, when interest rates rise, banks are going to do well, it's usually more complicated than that.

And it's never just all these companies are going to do well because some macroeconomic change. Yeah, I think you're right. And the other thing that I think is worth revisiting is we can totally laugh at all the VCs now that call this a giant banking crisis. The earnings are out. This was not a bank analysis. It was basically – no. There was such negligible money that came out of the regional banks and went into the big banks. Like it was maybe like a one day change. If I'm like, I don't know, I bank with a regional bank. I read the stories and I'm privy to a lot of the, you know, financial information that's out there. And I care a lot about this stuff, probably more so than the typical banking customer. And there was never a point where I'm like, well, yeah, I'm going to, I'm going to switch. It was so, it was just unrealistic. And I think the VCs that were saying that we're, you know, we caused this panic to save the common man. It's just, yeah, they are the worst. And this solidified my belief that they're the worst. Now, looking at the podcast chart rankings, there's definitely some overlap to that one show that has four people on that maybe have a poker analogy. I can't take that. Please, if you're listening to that show, I just got to say they are all four of them are charlatans, and they've been known to be charlatan-like.

i just don't it just really we don't put down other shows we don't put down other shows but what i will say is they look up for their best interest yeah well above all else they're they're yeah more so than most people and it's it's a shame because there are a lot of vcs out there that i really i respect honam um he shares frequently on twitter and he was one of the first people that was like um someone said like why don't any of these vcs come out and say wow you know what yeah we took too much risk having all our businesses put all their cash deposits in one place and he was a big investor in roblox who had a lot of money with silicon valley bank and he literally just said exactly that he said i think you're 100 right we we

didn't see this risk uh yeah it's just the the inability to and like like everyone has this instinct to not want to admit that you're wrong about stuff but usually you do that when you're like 18. And I would think that when someone's 40 years old, they'd be able to admit more when they're wrong. But the inability for a lot of these people to not admit when they're wrong, I think should be telling and is a big example for anyone to learn in the investing universe. And it was not really a lesson for me, but another reiteration that it's much better over the long-term to admit that you're going to be wrong because it's kind of like the baseball analogies fit. You're not going to bet a thousand when making investment or financial decisions.

It is weird. And maybe those people that we not so subtly referenced are maybe just the loudest. Yeah, if you listen to that, you know what I'm talking about. But I think people are confused if you don't know what that show is. Yeah. Maybe they're just the loudest, but it seems like there's a lack of humility that was rampant and probably a byproduct of all the money that flew into Silicon Valley over the last decade. and I would hope that some of this bear market would have an impact and kind of

change their mindset maybe because their valuations don't continue to just go up and to the right I think it's fine if they don't they can act like a-holes try not to swear but It doesn't actually matter, I guess, unless they'll fire in a crowded theater with the bank run thing that they seem to cause with Silicon Valley Bank.

And then I guess Signature is different because they're potentially, I guess we should say, potentially doing some crypto fraud. but there was one headline that came out of this bank earning season that would probably scare people

which was Charles Schwab bank deposits declined by 30% year over year and so if you just looked at the headline you'd say like

oh my god that's you know there was a real panic but it's also worth noting that interest rates are significantly higher so

there's less interest traction to just holding it in cash at banks. So they're staying at Schwab but they're in a different... Yeah, probably. They're probably having some bond or some yielding security

where it's a safe yielding security. They even said very few of the withdrawals were because of the panic. It was primarily because there's better alternatives to cash now. And then on top of it, more people are probably using their cash.

so yeah yeah it's kind of unfortunate that they had that headline this quarter um all right make a make a prediction though as we move i want to talk we've got other topics i think will be more exciting as much as i want to talk about banks for 20 minutes is the is the banking crisis was it a fake phantom banking crisis or was this is it's just kind of a slow moving train rick where we could see some more pain over the next few quarters what side and obviously don't make any investment decisions based on this just for fun what

side of that the room do you land on no banking crisis or start of the banking crisis and it's just the calm before the storm no I'd say it's over and I'm sure maybe there are people that said that in LA or whatever but

well there definitely were but that doesn't mean that this time it's not you know what I mean people always take Of course, people in 07 were saying that things were fine. If they weren't, then the stock market would have already crashed, but whatever. And if you look at the banks that did collapse, and maybe there were some smaller ones I didn't look into as much, but Silicon Valley Bank was a very unique situation. Most banks do not have all of-

Unique, you mean stupid. Yeah, there was, okay, the interest rate risk was, there was a lot of greed, I think, in going for longer dating assets. But it's also probably a part of just being in that VC culture, being in the Silicon Valley mindset, and there's so much money flowing around and sloshing around. And you probably start to believe that this isn't going to change significantly because some guy in Washington, Jay Powell, decides to take the rate up. It's not going to change my whole life and all of my customers aren't going to lose all their money, that kind of thing. I'm sure you get in that mindset that not all your deposits are at risk but i i mean like what other banks have

probably 50 plus of your assets or 50 plus of your deposits controlled really by like two or three people like because because they're the prominent vcs that can basically dictate what they're uh companies they've invested in do so yeah yeah that's definitely risk yeah yeah for sure for sure and i'm gonna lean on the side of the it was a phantom banking crisis and that's what i think we can call it if we're correct here however i am open to the idea of the people talking about the commercial real estate risks and stuff like that i could see that there's a lot of thoughts around that um headlines and stuff like but we'll see we'll see i think i lean on the that it was so overblown because remember it took over everyone was talking about it for about a

week right i guess i'm out of the country so i don't really know but you you were correct right i'm correct on that everyone was talking about it for a couple days there yeah i heard like maybe some casual references to it for people that weren't in like the finance community they were like yeah i heard some some bank in san francisco collapsed the uh anyway all right next i do have one thing that's one more thing maybe not that interesting maybe it always depends on if you're into the financials but this figure might shock you blackstone's aum in in spite of all the news that went on with them like withholding withdrawals or whatever increased eight percent year over year almost to a trillion dollars in AUM.

I don't like that. I know there's so many smart people that put good pitches on them and KKR and stuff. I just don't like the private equity. It seems like it's a whole nother topic, but I just don't like how with interest rates rising, their funding costs increase, right? Unless they're getting outside capital,

but I guess for leveraged buyouts, right? Their funding costs increase. I also don't like how they treated their customers with Breit. And I also don't like how there's better, lower risk alternatives for, say, a 4% to 5% return in treasuries right now. And I just think the differential of capital allocation over the next few years, if interest rates stay higher, it just concerns me about what their performance is going to be and whether their volatility laundering is some of the prominent analysts have to say however however private equity factor-based investing all that quant

any quant stuff any any big sort of macro investing categories where people talk about private you know you know what i mean where it's not like individual companies it is a bit over my head so i get confused of it but i get it is impressive though that they can't there's like they go in spite of everyone hating them in the investment community they keep growing uh what What did you say? Not deposits. AUM. AUM, Canon. Well, I guess if you withhold people.

If you stop people from withdrawing, AUM is going to go up. And you mark your AUM yourself sometimes. Yeah, and that's the other interesting part. And maybe there isn't any incentive to do this. I don't know. But their distributable earnings was like $1.2 billion for the quarter. those were down I want to say 35%

versus last year because they earned a lot of performance fees on liquidity events so when they sell the asset and so they said we weren't able to sell as many of our assets so we earned less money but they're not marking down a lot of their assets that they own so if no one's

if way less people are buying them isn't that a sign that they're probably not worth as much as you're quoting them at yeah and that's the biggest really the key problem i have is just earning the fees on that while marking something up higher earning either a management fee or performance fee on that i mean vcs do it too it's not just blackstone it's a whole thing in that industry but i think that's a topic for another day i want to hit the other topics we have you have netflix earnings let's do that

seems like a fun one i feel like the bear cases are officially it's done it's it's yeah i think it's maybe there's a lot of ways to look at it well i'm talking about the bear cases that they were going to go bankrupt oh debtflix yeah no i think that's in the past but the so i read the quarterly results did you take a look at them yeah i usually give them a glance but typically you have a chart here from the science of hitting research service which we subscribed to i usually go for alex over there goes over about covers about 12 to 15 companies on a regular basis netflix being one of them and i actually kind of outsource it to him because he does uh he does such a good job yeah he knows that company extremely well so if you like netflix

he gives the best overview i think each quarter yeah um i guess there's a lot of ways to look at So the total subscriber growth was lighter than people were expecting or the street was expecting or whatever. I mean, it's still growing, but it's kind of slight. And it's not the membership growth that's actually declining. I think it declined year over year in the US or the, what do they call it, UCAN. But Alex kind of puts an interesting spin on it. He said in his coverage, he said, at the end of the first quarter, so this most recent report, Netflix had roughly 233 million global paid subscribers.

As you can see in the chart below, this total is 40% larger than it was Q4 2019, so pre-pandemic. Given the competitive dynamics at play during the intervening years, which included aggressive pricing by legacy media companies looking to establish a DTC subscriber base, the precursor to building a DTC business, which is direct-to-consumer, I think double-digit annualized subscriber growth for the incumbent after 10 plus years in the business is an impressive outcome. I think that is because so many people looked at it and said, wow, this business is maturing. Global streaming subscribers are flatlining. This is not the subscribers. This is the content spend that Brett's showing right now, if you're looking at it.

But Alex does kind of a – he puts a different spin on it, which if you zoom out, I think he's right that there has been – it's been like the ultimate competitive environment. HBO, Disney, all the Disney subsidiaries, ESPN, Hulu, stuff like that. I'm probably missing some. Paramount, they've been aggressively discounting. Paramount Plus has actually done well. I said that jokingly, but yeah. But yeah, continue. Aggressively discounting.

And in spite of that, Netflix's subscriber base is 14% higher, 40% higher than it was pre-pandemic in a period when they, as far as I know, they have not been discounting. So maybe in some of their more developing markets. So I think that really is a testament to them as kind of the premier player. Yeah, I want to get to the discounting and yeah, the developing markets because they have been. but that's another topic. You have the chart here on the content spend. Curious what your thoughts on that were. Why do you want to share that this week? Well, I find this interesting because the revenue has continued to grow. But if you look at 2021 spending on cash content spend versus what they're expecting for 2024, it's actually down in 2024 relative to 2021. So

So they are spending less and then now this hasn't happened, but their estimate for what they're going to spend two years out is less than it was in 2021. That's basically accrued to cashflow. So they're expecting $3.5 billion in cashflow this year and it's more than they were guiding for initially. Does it concern you that content spend isn't growing? Because my thought would be if there's so much demand for engagement, wouldn't you be I mean, and Reed Hastings has said that he wants to increase content spend over time because that means the business is doing well, but the fact that they're guiding for flat content spend, I don't know if that's, wow, look at management, like that's a really good job controlling your costs or that maybe they're being cautious because they don't think they'll grow subscribers by that much.

Yeah, that's an interesting point because we, and this is reminding me, we just did an interview with Leandro from Best Anchor Stocks on Copart. And one of the key reasons people like that stock, why he likes that stock is that because they can invest a lot and then incrementally invest a lot each year and then get a bigger return on that investment through a classic growing your business with a strong return on invested capital. And Netflix, I think, yeah, you'd want the content spend to grow over time because that's basically their capital investment.

And if that's increasing and they're able to grow the business, then yeah, the business will be bigger and the stock will do well. However, what I think is interesting is if maybe they overspent or grew too quickly kind of heading up into that 20, I mean, the pandemic kind of skews it a little bit, but into that 2021 period, and now they're normalizing a bit and then they'll incrementally grow over time because I think there's a few different ways they're going about it that can increase their revenue in a way that's not going to kill their customer base, while also it's in a way that they don't need to increase their content spend to do it, it's just optimizing

their current business. Because if you think about it, they have the global subscriber base and they have the content spend. If they had one subscriber, that's obviously very, very high incremental margins there. So first thing they're doing is they change the pricing to be more cost available, I guess, for most consumers in, I think, like 150 countries. So say a lot of the countries where the GDP per capita is quite low, the biggest example they gave was India, where they cut prices by, I think, over 50%, if not more. where I think that's smart because if their content spending is flat,

then even if they're adding, say, 10 million very, very low-priced subscribers in India, that will be margin accretive. Second, the advertising tier, which seems to be small but successful, where the ARPUs are very strong, that can help as well. And then the password sharing,

I think that's probably the hottest topic that might be the most controversial of when they implement it. But they said that in their four test markets, it was subscriber and whatever revenue accretive. I think they either said revenue or subscriber accretive. I'm just going to go with revenue. They said it was good for their business financially in their test markets. And now TBD, whether it hurts their customer base over the long term, I think doing those three things will help them grow the revenue even if content spend trails that, which I think is great for cash flow.

yeah the other thing is they said that their ad supported plan now monetizes better than their standard plan in the US which

I think a lot of people were skeptical about that but that's the case yeah do you think they need should they lower the price on the ad plan

it feels like if they're getting that good of an ad load I would say yeah or to make it a big a big enough difference you know what I mean

They're already raising prices on the standard plan. I think revenue was up 9% in UCAN. Maybe it was 8%. And memberships was down 1%. So, I mean, it must be pricing is the difference. But do you think it'd be better for them to lower the cost of their ad supported or raise the price of their standard plan because I guess they can

because their ad-supported monetize is better. Yeah, my gut would say keep a good separation between the ad-supported plan pricing and the non-ad-supported plan prices. However, I think this is one where you defer to the company where they have the analytics

to know what works the best. So they're going to have the data. It's just going to be a data-driven decision there. There's also, there's a couple of other things they can do. And so there's this Twitter account called TitleCap that did something kind of interesting, which basically laid out, there's a couple of ways to make this potentially even better, I guess, for Netflix. So they can potentially do tweaks to the service. Maybe they could downgrade what you get with basic, with ads, or ad-supported. I know YouTube Premium doesn't really do this, but if more people sign up for YouTube Premium, there's more ad load for the people that are still on ad-supported.

So you could just kind of bog down the ad supported service until people switch. The only thing that's interesting is if ad supported monetizes better, maybe you want people to downgrade. Yeah. I don't know. It's less predictable. CBD.

Yeah. I think we'll see. We'll see. I don't have any big takes on there. Do you think you'd ever be an investor in Netflix? yes now yeah yeah yeah unfortunately the price was better this summer where looking back like if i had the conviction this summer that they were going to get through that period which is why that opportunity is there because there's a lot of people like us that were doubting

whether they were going to stay as relevant as they were i think yeah yeah they're making a lot to write moves i don't know what they're going to do with sports and obviously that live thing whatever they had a bug recently happens to every company um yeah they're doing great things with the sports documentaries that seem smart the reality tv stuff is pretty damn smart to embrace that kind of kill all the old cable channels that had that you know the ones that young people all used to watch like whatever music-based ones um love-based ones everyone knows love love is blind and forget all the other ones, but they have a lot.

I think, yeah, very, very smart. And let me look at the stock price. Here, there's an interesting quote too that I saw this week. And this was from an interview like five or six months ago, but Reed Hastings was interviewed and he said, I have two religions,

customer satisfaction and operating income. Yeah, he's good at propaganda. They're the best at corporate propaganda. Just don't, you can't. Not in propaganda though, but they like- That's propaganda. Yeah, it is. It's propaganda?

It's investor propaganda. They back it up. Yeah, true, true, true. Yeah, yeah. It's not fake. Yeah. And it's – they also have one of the most, I think, kind of lean cultures or cutthroat cultures, but everyone seems – all the employees at Netflix seem to like it. Yeah. And because it's literally in their stated plans, they want to hire well, teach employees well, and fire well, which is kind of like most companies don't come out right and say it. So maybe it's an interesting tactic. Yeah. The last thing on Netflix here. So stock price is about $3.26 today. Market cap's say $1.45.

But in the summer, it got down to about, let's just call it $200 because you can't perfectly time the bottom. 200 would have been something like a market cap of what i'm trying to do some math here let's say roughly like 80 80 90 billion i'm trying to do that math in my head let's just say i can serve 80 90 billion i i mean there's a clear path to them going to 10 billion in cash flow a year here if you think they're right where they can leverage this content spend like they are now trying to do um yeah i mean that the stock the stock would easily be cheap there i think yeah i mean not that i would i would have bought it i would buy it now at 200 250 but i don't know if it's ever gonna get back there i do like the business now however i like i like gaming

businesses like i like ea and take to interactive a bit better however netflix has much more recurring revenue they are a bit lumpier and that's i think why they get a discount but i do like them a little bit better i think the growth prospects over the long term are similar but netflix is a bit within their core industry because i do think yeah with it well they have a better competitive advantage um within their industry but i just worry a bit about trends in general and this is why netflix is investing in gaming about general um usage or entertainment usage around the world going to gaming instead of tv and movies so that's why i like the gaming market a little bit better and that's the big i think concern with me with netflix but their

actual competitive advantages versus industry participants i think yeah it's widened over the last two years and i like a lot yeah and for context they're expecting three and a half billion dollars in free cash flow so price to free cash flow is like price to expected full year free cash was like 40 times a little higher still a premium obviously but every time i read their like letter or their quarterly earnings i think like i don't know how i feel about this and then i read alex's write-up and i'm like yeah i can invest in netflix yeah i mean i do i do think the password sharing is going to be good people are going to hate it but they're gonna like tough love it's a little tough love the funny thing is for their customer

base netflix in general is kind of and maybe this is just like my cohort of friends but everyone i know like who has a netflix subscription they're like yeah i i don't they say they prefer hbo they're like i don't even like the netflix shows they're terrible but yeah the data works yeah the data the data i think the data doesn't back that up on usage although i don't know if you like if you're watching 10 hours of like background stuff on netflix i don't think that is apples to apples to a one-hour show on hbo that you really really love but again it also has such a better user experience like yeah it's it's it's a way better app speaking of succession yeah that's it's like they all go yeah it's like star go remember that

one the circle yeah that's a little bit too on the nose that hbo max produces that show um okay next topic because we don't run it yeah well we got 20 minutes we have plenty of time uh tesla earnings we always got to do this for engagement bait what'd you think uh well i think the financial results look a lot like what you would expect if you saw the events that led up to it the price declines yeah yeah if a company drops prices that quarter, you should expect margins to probably come down. If a car company drops prices, you should probably expect margins to come down, which is exactly what happened. I don't think that's... I hope nobody was shocked by that. The funny thing is it used to be... And now the thesis

and the thesis always changes. But the thesis is that they're doing this on purpose. They're dropping prices on purpose so they can just skyrocket volume so that there's tons of cars on the road so that when they finally unlock full self-driving, it'll be that much more valuable to shareholders, that much larger of a value unlock. The thing is, if you're doing that at the expense of profits right now, it's no longer a cherry on top of the thesis. It is the thesis like they don't it's not nice to have that additional unlock of software revenue it's they have to have it in order for this to make sense so i don't know that would be and i'm skeptical that i'm skeptical of their autonomous capabilities to begin with but there are a lot

of people that believe in it and i would say that that kind of for me would i mean the thesis is obviously changing yeah and i think here i have a chart here loaded up for the audio listeners i will explain it uh it's from stratosphere and what's great about them they already updated the kpis pretty quick which gets good to see that their revenue was up i believe i think it was yeah and their volume their unit volumes were up and i think when people look at that you have to really look at the underlying profitability because their automotive gross profit in Q1 of 2022, when their operating margins and their gross margins peaked, at least maybe they could go higher over the long term, who knows, but their operating margin in that

quarter, excuse me, gross profit generation in that quarter last year was 5.5 billion. This quarter, the one I just reported, even though revenue and unit volumes were up 4.2 billion, and we're seeing operating margin go in the exact wrong direction. So I think the key concern for me is that the stock is valued at a company that is going to grow, say, two to four times their revenue, which is maybe doable, but have 15% to 20% operating margins. Now, if the company at a $500 billion market cap has 5% operating margins, you need Walmart-level revenue generation which means they need to somewhere in the neighborhood of six to seven times their revenue base and can they do that can tesla do that i just don't think so

that's that's the big concern here so i think the the margin deterioration really really would concern me that right it that like i think the thesis was that that margin expansion was permanent And I guess we're seeing that it was a little bit of a COVID supply chain, supply restriction benefit. Yeah. I mean, I don't understand why people are debating that. They decrease prices. They decrease prices because they had to. It's that simple.

and i'm not sure i know people want it's tesla's kind of become religion for a lot of shareholders or it's kind of become a cult and i get that people are you know people love the company but if you decrease prices it's indicative that people aren't buying your cars at the old price so there was a lack of demand yeah and what's interesting is so far and i think the the account that jim chanos runs and if you see if you use twitter the account is called oh what's it called why i'm forgetting wall street cynic he had a good interesting point because the narrative has been out there i guess the bold narrative which you know it could make sense if it was showing up in the data that they're trying to take advantage of that that they're the biggest

player, at least outside of China, with their already ramped up manufacturing and play a little price war and try to hurt the EV margins of some of their competitors. However, so far, and I guess we'll see over the next few quarters, it hasn't shown up in a lot of their competitors yet. I think he showed that Mercedes was doing just fine, which I think makes sense because Mercedes has the ability, and I guess they're not going to be a mass market brand. They have the ability to sell a car for $100,000 to a lot of these rich customers compared to Tesla, which is trying to compete for someone paying $40,000 to $50,000, at least on the base end. The other thing I think about a lot with Tesla is, do you really believe that most cars on

the road are going to be a Tesla if they flood the market with volume or with extra cars i feel like it becomes less attractive to have a tesla yeah it's kind of cool because it's different right now and it's maybe less so different than it was two years ago obviously but i'd say specifically on the west coast it's very mainstream now yes i just uh i think they're going to have a harder time hitting their 50 percent compounded annual unit growth over the next decade than they expect yeah and to close things out expect yeah to close things out because i want to do another topic here because i know we could talk about this all day um what was i going to say so when you see that maybe this is was a pandemic stimmy thing that happened when

you see your what do i want to call it your neighbor that you think you're wealthier than driving a tesla and you're also driving a tesla when you think you're because i know people have these in their head they want to be superior to everyone else right when you see the person you want to be superior to also driving a tesla it makes the differentiation less and that's why historically i think it's the key reason why the car market has been so fragmented because people tie a little bit of their identity to what they're driving why do you think subarus dominate in the pacific northwest where we live i mean i think that's the key there where there's never going to be a mass market vehicle like an iphone anything else before we go another topic no no okay i mean

it's groundhog day sometimes with these earnings because it's like it's the same yeah yeah well the first week is always netflix and tesla so the results were a little underwhelming but then on the conference call he says full self-driving is coming at the end of the year which for the record he has said like eight times in the last 10 years yeah wait wait he said it again oh boy oh wow well um gotta have hope okay hope is an important part of the thesis yeah don't don't base your investments off of watching shawshank redemption all right uh here's here's what i want to talk about american express and then this will be a fun little macro one as well pulling up a chart right here oh no please okay yes the share scare was going right over the chart at the beginning

for me. Okay. Here's a chart from there. I'll try to describe it as simple as possible. So in their earnings report, they just had a great one, is their historical volumes trend. And typically, and this is for American Express, and it's just network volume spend and network volume spend equals revenue. And it also can be a big indication on the health of the consumer, especially the upper middle class to wealthy consumers in the United States, Japan, and Europe. So if we look at network volumes indexed to 2000, they have somewhat of a linear trend growth that, yeah, I don't know. Everything seemed to be growing very, very linearly. And in the great financial crisis, they saw a little bit of a downturn compared to that trend.

It was down 9% year over year. And then during the COVID pandemic, during 2020, obviously that saw a downturn, especially within their travel and entertainment index. People aren't spending money on planes. However, instead of just going back to trend, like coming out of the great financial crisis, in 2022, we're seeing a huge boost from the network volumes index to 2000. And there was a great tweet here from Wall Street Dropout who said, is there a structural reason why American Express volumes don't revert back to trend? And yeah, just kind of some throwaway responses from people. curious your thoughts here because I think one inflation might be helping them here but two

I would be a little bit worried that we're in a time period where they're over earning a bit I think the wealth effect probably helped them in 2022 yeah but they just said in Q1

you know what's crazy I believe I don't have this in front of me so could be getting strong, either in March or in Q1, they saw acceleration in spending. Acceleration, that's kind of crazy. Yeah, I mean, the volume growth has been impressive, but I also think a lot of it might have to do with the fact that they are doing a really good job executing.

Also, their fastest growing demographic is their youngest demographic. So those people are going to have more money to spend as the years come. So I wouldn't – I mean, the trend's not going to – they're not going to grow as quickly as they did in 2022, but first quarter results looked pretty good for them, aside from the higher provisions for credit losses. So I feel like it would usually revert back to trend, and if I were betting on American Express, I think that's probably the most likely scenario, or at least growth won't be what it did – what it was a year ago. But I would expect them to continue growing. I would not expect volumes to decline this year, given, first of all, their customer demographic, which is super affluent, high-spending individuals.

But also, if you're paying $700 for a Platinum card, don't you feel inclined to use it as much as you can? Yeah, but remember that Dave Ramsey video from this week? That spooked me. Yeah, that'll spook you into becoming a perma bear. Yeah, I think you might be right. They might just be a better managed business than before. They might have just, and yeah, inflation helped them a bit and STEMIs helped them a bit, but they might just be better run.

Yeah, I mean, there was more money probably to go around. I'm sure that helped the trend. But like, if you look at the first quarter results, I don't see how you look at it and say network volumes will decline this year. It just seems very unlikely. Wow. You better knock on some wood, Ryan, because you're trying to jinx them. I mean, the growth rate might revert back. Of course. Of course.

I'm saying like, you think network volumes would decline? No, I don't think so. But you are trying to jinx them. I mean, they declined 9% in the great financial crisis. That's really, I mean, and it's a much better business in my opinion than it was then. Again, you were trying to, I know, I know, I know. I agree with you. but you are trying your hardest to jinx them. I read the earnings this morning. I actually thought they, I don't know.

It's a business that I find really attractive, but that is cause for concern that they had that massive acceleration. Yeah. It's almost like the business, if the business is too good, people get scared, which is weird. Also, if volumes decline, they can still just raise card fees. Yeah. Yeah.

All right. Next topic. This is a fun one. is this is a question for you is taylor swift a better investor than the majority of the venture capital firms out there i saw this here's here's what here's what taylor swift and i think everyone in the financial world they weren't already in love with her is now in love with her because here's what there was a big i think whatever there's a lot of stuff coming out from ftx from time to time here's a quote from some lawyer in the lawsuit the one person i found

that did due diligence was taylor swift in our discovery taylor swift actually asked them quote can you can you tell me that these are not unregistered securities end quote wow i mean when is she raising outside capital because i gotta say we get these things there's like a kardashian fund out there let's get let's get the t swift fund going because she avoids that was her lawyer yeah i mean it's still but it's smart to talk to your lawyer right because yeah she was out for a hundred million yeah a hundred million other people in this lawsuit uh class section lawsuit against them i mean shaquille o'neal tom brady lair david clearly had multiple lawyers working for them and they still did it yeah i mean isn't that crazy that

all you had to do was say hey talk to my financial advisor talk to my lawyer and say hey is this like you know what do you think about this and basically every single one of them say But yeah, that's probably a bit sketchy. And then you just ask them, hey, am I hawking securities here? I think it was Elon that initially tweeted this, actually. But apparently, Taylor Swift's dad was a prominent investment banker. So maybe there's some ties there. Maybe he knew.

You know, I found a book speaking of TV actors. The actor that plays Elaine in Seinfeld and also the V character, Julie Louis-Dreyfus, is the great-great-granddaughter, maybe great-great-granddaughter of one of the leading commodity trading companies, which is called Louis-Dreyfus. So isn't that funny? I read that in a book and it was like, the company was Louis-Dreyfus. And I was like, that's the same as Elaine from Seinfeld. And I was like, I looked it up and little, yeah, it was, it was right. I was like, yep. That's the same last name. Interesting. All right. We have five minutes left. Anything, anything else?

I've been reading, what is it? The house of Morgan or whatever. Oh, that's a big project. I stopped reading that. And I'm, I'm considering ceasing my, my research here, but i do find it uh i don't know it is kind of interesting how long they've been around for and how just like absolutely resilient they've been great brand great brand great brand all right well let's just talk succession for three minutes if you want what'd you think last episode was it good yeah i thought it was pretty solid um what's her name the weasel came back oh you're not you're Not a fan of Carrie?

Oh, no, Marsha. Not Carrie. Marsha. I don't like Marsha. Yeah, she is very mean and selfish. She's extremely mean. I liked Connor in this episode. I've always thought Connor was an underrated character.

Yeah. Probably one of my favorites. Yeah. Even though he's clearly pretty crazy, he's strangely got his head on straight in some aspects. Although he talks about the funny stuff about being that crazy libertarian political candidate. He just has less to care about.

yeah yeah exactly i'm rooting for carl i think for sure like carl yeah carl's my guy dude they said he's basically john malone cable cowboy yeah what about i mean no one i think no one except people that are in the investing people or you know fundamental research whatever diehards or even cable people we're not like no one else laughed at that line but when they said i was laughing for a book so i'll admit it what had he's they said what you did in the 90s in cable extraordinary it was i mean that's such a that's such a good lie that just shows that they unlike some other finance shows out there this this show actually talks to people that know what they're doing you know what i mean because that's something i would say that's something people would

say yeah they do a good job um no i thought this was good we got a question i think this will be a fun one we did a show on monster which we did covering monster beverage check it out what do you a question from Kingsley. What do you guys think about Celsius? I think high risk, high reward. Yeah. We'll be talking about, we're going to be talking about Pepsi tomorrow, but it'll come out next Tuesday or this Tuesday, I guess, if you're listening to this on Sunday, but they recently took a big stake in Celsius and basically took over the logistics and fulfillment for them. I think it's a good way to go. It's basically what Monster did with Coca-Cola.

It could be very smart, yeah. 2014. It could be a 10-bagger. It's high-risk, high-reward. It's an emerging brand. Emerging brands are high-risk, high-reward opportunities. If Celsius gets... This is the part that frustrates me.

We've done the CPG theme now for the month, and I keep thinking if there's a business that's growing volumes, that has an addictive product and has a large runway to keep growing volumes just buy it but i'm seeing this with celsius now because it fits the bill frankly and i'm like i'm just not looking at it anymore and i was thinking about it this week like god it would have been so cool to invest in monster and

just hold for 20 years i know it's obvious but you would have outperformed like i don't know almost all funds except jim simons no you definitely i mean still still outperformed him i think at least compounded because remember those returns aren't compounded that's why those returns look so good um yeah yeah i mean what let's look at the celsius returns i like celsius i like the product the business is not without its problems and if i'm not mistaken There were some accounting issues Yeah They had

I don't I maybe don't think As highly of the management team As I would have With Monsters Kingsley is saying That they are based Out of Boca Raton

I did not know that I gotta say Don't like that at all Boca's Fraud central But not to say They're fraud They're clearly

Selling real products Stocks up Well they were Yeah Guess what Guess what the stock's up In the last five years Give a gold

Give a gold guess 12x oh wow pretty close 1500 so i think it might it might be it was a different business it was i mean it's very similar to monster honestly it was a very different business they came out with celsius completely transformed the brand or completely transformed the company i think they have a new management team in place um but i think it's intriguing i actually like the celsius product i think they have kind of interesting counter positioning to monster because they like treat it as the more healthy like energy it's not even though it's not but whatever um i like it but it is it does trade it certainly trades at a premium yeah yeah yeah we had rather

the show but yeah it could be one where like you put on the watch list and they start performing and maybe you know what we saw with monster studying them there was a period where they totally just rocketed higher like up a thousand percent and it was flat for a while had a little bit of a downturn but the business was still chugging along and that that could be your buying opportunity so i think that pepsi steak is uh if you're a shareholder i'd be very optimistic about that because that takes away a lot of the big risk which is in all all in the logistics yeah all right well that's going to do it for this episode remember to watch these live on thursdays sometimes the time changes it was 2 p.m eastern today depending on our work schedule

um yeah and you can get the replays on youtube or in your podcast player of choice we don't care we just thank you for continuing listening remember we are not financial advisors anything we say on the show is not formal advice or recommendation remember uh we are general partners arch capital and clients may hold securities discussed in this podcast thank you all for listening kingsley thank you for that comment that was very fun anyone who wants to comment, come on here. We'll answer them. There aren't that many people. So thank you for those who do though. And we'll see you next time.