Chit Chat Stocks - Investing Power Hour #57: Earnings Recap; Bitcoin Hyperinflation Bet; Shopify Exits Logistics

Episode Date: May 7, 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/ ****************************** 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 57. As we keep marching on doing these once a week, these go live typically every Thursday at 1230 p.m. Eastern time. So right during your lunch

hour on the East Coast, or you can watch the replays on YouTube or listen to the audio on any of any of your um excuse me i said spotify but any of your podcast players of choice spotify apple wherever i am joined by my co-host as always ryan henderson and today we are talking about whatever we want as always but it's going to be earning season we got a lot of earnings this week as i look ryan loaded up some nice stuff to talk about starbucks uber snap which i'm already cringing thinking about that one um match group and then shopify special edition they have their earnings plus a very surprising transaction with flexport i have a bitcoin bet that maybe some people heard about that that was interesting potentially looking at some real estate platforms

launching some chat gtp stuff or i can never say that right g gpt gpt i always slip it and say gtp and then mortgage rate update along with interest rates and then possibly some fake meat data that industry is maybe based it's different plant-based fake me oh yeah that's pejorative is that are we not allowed to say that it's hurtful yeah yeah the uh and we may be talking about that we are allowed to say that because brett doesn't eat meat so yeah we're not slandering i have some good anecdotes there where i hate those products and i don't even eat the real stuff so um but yeah maybe we can talk about that i think that's an interesting case study of hyped up industries if we get to that later but ryan let's kick things off with you uh i'll tweet out some links here and

then why don't you get started yeah um i guess i maybe it's called earnings palooza this week it's probably the most chaotic week i think because i'm guessing this is the week where the most companies report earnings um and so there's been a ton that i've gone through that looked pretty interesting some of them looked horrendous um but i'll start with the interesting one. Starbucks, great report. Starbucks comp sales were up, I want to say 11%. Here, let me pull up the document real quick. Yeah. Q2 comp store sales up 11%. Now that's what I would have thought, right? Just pure pricing power. Volume transactions were global transactions increased 6%. average ticket increased 4%. So they're still driving pretty big volume growth. I do,

and I maybe didn't look into it, but I wonder if China reopening was maybe a big boost to sales for them. But either way, I mean, it looked like good results, even good results in North America. ComStore sales were up 12% in North America. So So, I mean, really good growth kind of across the board. Yeah, China comp store sales were only up 3%. So, this is not just China reopening. I will say, I live next to a Starbucks in Seattle that's kind of like one of the experimental ones. They test out a bunch of stuff that haven't been-

The big one, right? Or no? It's not the roastery or whatever, but it's the- They have a couple of stores where they trial different products. So like the olive oil coffees and there's a number of new breakfast items that apparently have been launched elsewhere. And I got to say, it feels like Starbucks is back on the come up. And the labor issues seem to be, at least from the commentary from management and just what I've read in the media, it seems like The labor issues have been maybe not resolved, but kind of slowed or union efforts are maybe kind of dying out.

Now, I will say some of that probably had to do with the union-busting actions that – and they're not going to call it union-busting, but I think it was union-busting. Actions that Howard Schultz took. So even though Howard Schultz can't seem to find a successful successor – Is he back? I thought they named a new... So they brought him back. It's so confusing. It's an endless story of him coming back.

No, they brought him back and then they named Laxman Narasimhan. Narasimhan, I apologize if I'm mispronouncing that, as his successor. And he came over from a consumer goods business. And they basically had this, I think it was like a six-month understudy role where Howard Schultz was the CEO and Laxman kind of just, it sounds like followed him around,

kind of got the lay of the land for the business. So it kind of remains to be seen how he'll do, but I do think it was an interesting time to be following around Howard Schultz because you had major inflation issues kind of, and there's always kind of uncertainty with the macro economy, but there was every conference call since 1950. We have, well, I don't even know if they did that then. Well, in this, we had great results despite macroeconomic uncertainty. I'm sick of hearing that at every conference call. It's like your business is unprecedented. Every day is unprecedented. Yeah, exactly. But he also did it at a time when they had labor issues. So kind of big labor issues, inflation problems, there was supply chain issues too. I think that they were,

They had to kind of navigate. So a period when basically they had to find a way to please all stakeholders and they did a good job. I think that's kind of an interesting time for him to be under Howard Schultz. But I will say Howard Schultz, even though he can't seem to pass the business off, when he's there, the business performs well. He was able to put, he cut the buyback, said they're investing in the- Appease Elizabeth Warren. There you go. That's your key stakeholder. Yeah, but I mean, within, I think, a year of him coming back, labor disputes have gotten better. Comp transactions or comp store sales are certainly going in the right direction. The buyback is back in place, or it's stated to be back in place. So he's made employees, customers, and shareholders all happy. And the stock, if I remember-

The stock was down, right? or is i mean down on the earnings but it's been up right it's done pretty well i'm not sure but uh not sure on the specific the earnings specifically but if i pull up performance versus the s&p 500 oh god not that one uh it's been you want to share it or are you just going of describe it? It's up basically 50%. Starbucks is up 50% in the last year, 43%. And the S&P 500 is flat. Yeah, pretty good. Do you think the labor stuff just kind of solved itself? It seemed like so many companies were getting, because the labor market was so loose and everyone had so much freedom. And now with the Fed and kind of layoffs and stuff like that, it's getting a lot tighter.

People have a lot less freedom with their job choices. And after a lot of companies introduced these pay hikes, now people are a little probably less nervous of angering management because they don't have a ton of flexibility to leave for these jobs. I mean, a company we follow, or at least I keep following that we don't own, is Sprouts Farmer's Market. And they talked about the same thing where they had labor issues a year ago, or basically not like the same to the same extent with the union busting stuff or the you know threats to

unionize but they had you know struggles to attract workers and retain them because it was so easy to leave for another job and now that's tightening up a bit so i wonder if that almost solved itself and it was you know schultz can just thank jerome powell for that one yeah i think some i mean it's harder to find a job i think today um less less companies probably hiring out there incrementally yeah here's a question from matthias uh hope i always hope you're saying matt h who as i know from who's followed the show a long time he has an important question for you ryan have you tried the olive oil drink and if not you probably should okay did you like it i was so i will say going in i was a skeptic and because they were like bringing this tray

around kind of as like samplers and it was like a olive oil cold brew or something like that and i i know maybe people don't maybe listeners that are here for the it sounds like a great it sounds like a great way to up your calories with minimal uh taste but whatever i i thought it was i thought the drink was delicious i mean and you know what howard schultz went on like i think he was on some interview and he said like we have a new product that's going to completely change the game and he's like it's olive oil everyone's like what the hell and i i gotta say it was pretty damn good so what are they marketing it as do they say it's like healthy or just kind of cool or you know a new drink or just super tasty or they just kind of threw it out to you i don't know because i don't

think it was like i don't know they just kind of brought it around and i tried a sampler um but i i don't think they're like broadcasts as like the healthiest alternative or something like that i think it's more just like try this new flavor interesting all right let's move to the next one what do you have for us um well i guess before we move on i do see yeah you're right the stock dropped after and so i'm wondering if something was said on the call that concerned people. But anyway, Uber, I saw you've done a full 180 on Uber. Yeah. Maybe we can talk about that after you go through the earnings results and how... Well, let's be clear. The income statement doesn't look great, but the actual underlying business seems much better than I

thought it would be. And maybe we can talk about that after you go through what the results were. I mean, I think the trends of the income statement look great, but yeah, they are still not net income positive. But I think a lot of that has to do with the reserve bill for their insurance business now. So that's real, but it's, I guess, not a cashflow statement. They get a little bit afloat. Yeah. but it uh i mean it looked good mobility bookings which is just like the actual ride sharing platform um up 40 percent year over year 43 percent in constant currency delivery bookings were only up eight percent but still i mean it's not not bad at all um mobility seems just straight up profitable i mean you can kind of they do this segment adjusted ebita stuff which is a little tough to like parse because it doesn't include corporate costs and the costs are meant to serve

their segments so um isn't it 500 million if you're looking at right a quarter for their corporate costs yeah i mean the segment adjusted ebita for mobility or whatever is a billion so yeah technically it's whatever uh i think mobility would be profitable if they just cut everything but it doesn't matter. Yeah. Record free cash flow in the quarter, I think it was like 594 million in free cash flow. Net income is basically getting there. Sorry, I'm kind of doing these off the top of my head, but looking here. Net loss of 157 million, that's significantly improved from last year. Although they did have a mark to market loss on a bunch of stuff, I think last year. So it looks maybe- Yeah. For them, I think operating income

is the best. I don't even think free cashflow is good because one, they're heavy stock-based issuers, and two, the equity investments, and then three, that insurance build. I'm no expert on the business, but it seems like that is not really true free cashflow. Yeah. It looks like they'll probably be profitable at some point this year um maybe next year but the trends are certainly going the right direction um and that's on and that's with freight basically declining really quickly uh i i mean there's just a ton to like i think at this point they built damn near a monopoly I'd say

Lyft doesn't seem to be able to compete yeah yeah Uber Eats I think is losing to DoorDash but still it can be a good business it can be a profitable business I think once you layer on advertising I mean

there's just a lot to like here and it was one of those businesses I think where every time you use the service you think like gosh this is a valuable proposition for customers. And it's one you intuitively think, wow, this could be a big business. But then you look and you've just been like, just some of the corporate excess, I guess it's a little bit gross, but I think they're getting there. And maybe those ridiculous investments are paying off now because they've been able to out-compete some of the other people,

But I would say they probably could have done that with less expenses as well. Yeah, I think they've raised somewhere in the neighborhood of, I don't have it off the top of my head, but I believe it could be $40 billion. And they're still losing money, quote unquote. Obviously, they're generating cash, as Ryan mentioned, because of the working capital stuff in the SBC, but they're still not profitable. And just to give any numbers, I believe they're at a 3% operating loss, or excuse me, negative operating margin this quarter. And a year or two ago, they were at negative 50%. So the progress is there and you can see how it's working. But I don't know. Look, the business looks great to me right now, especially mobility. Delivery, TBD, we'll see how that shakes out.

And yeah, it's frustrating to not see the actual profitability of each unit. I think they have good pricing power within the mobility marketplace. It's a fine business. Yeah, there's regulatory risk. I don't know how I'd make the stock work from here. I think the market cap when I looked at it after the report was about $75 billion and going through a little bit of projections on their earnings, their operating income, I could kind of come away with maybe $4 to $5 billion in operating income three years from now. And that gets you about, if you add back, probably some taxes, although I'm guessing they have a lot of deferred tax assets, which is fine. That's good for them.

And I'm assuming you want to – I haven't done the EV calculation. This is just on the market cap. So, again, we have not really fully looked at the business in a while. You get about – on that $4 to $5 billion in earnings, you get about a market multiple on an earnings multiple. So I think you got to be pretty optimistic, especially given the dilution that's going to come in, stuff like that, that the stock is either one, going to trade at a high earnings multiple, or two, is going to grow a lot quicker than maybe I was pricing in like 10% growth a year, which I think on a consolidated basis is probably reasonable. But what do you think? I just think the stock's a little tough to get around at this current price. yeah i think a lot of uh the investment community recognized the direction that profits were going

a long time ago and kind of priced it in so a long time ago like no sorry like a year ago i remember when we looked at it for the not so deep dive and we kind of were uncertain as to whether or not they were going to get there i think that's basically when it started to turn around i don't know stocks up it's i mean year to date it's up 50 i feel like people are dogging it maybe that was just because all growth stocks were getting crushed at the end of the year end of 2022 um let's see over five years yeah i guess during the bubble it popped up to like 60 uh it's really followed kind of the art complex and the high growth stuff which maybe that's an advantage because the business seems to actually be making its way to being a legitimate one and

actually profitable. Yeah. I think it's a good business at this point. They've got such a big marketplace full of drivers that rely on this for legit income. They're not, at least in their mature markets, they're not underpricing their rides anymore. The rides are expensive and people are still using them on a regular basis. I think it's just really influential throughout North America, for sure, but

the world, probably. Yeah, I still would not underestimate their ability to waste capital. Yeah, they have 33,000 employees, and they got to pull a lift and lift fire 30% of their employees. They just hired too many people, right? Don't you think?

Yeah, and it I mean, they still invest in stupid stuff. They still buy equity stakes. And so that stuff isn't gone. I wouldn't expect this to be a business that returns capital to shareholders anytime soon. We do have a comment here in the chat from Neil says, what do you make of the Wix drop yesterday? I will just disclose this now. We are no longer shareholders Wix. Our holdings are now up to date. Sorry, I try to update them once a month on our website. And we haven't been a shareholder for, what, two or three months?

Double months. Yeah. Found some better. I mean, nothing changed. Well, a few things changed. Maybe we'll go over it on another episode. The price changed a bit from when we really liked it at an attractive valuation. Second, management team is showing no progress and getting rational.

They kind of have the same problem as Uber, I'd say. And that is okay at a cheap enough price, but is a big headwind versus other businesses. And then third, we found some ideas we liked better. I don't know why. I checked. I don't know why it's down. I assume Squarespace reported. That could be good.

Yeah. They didn't have earnings or anything like that. So I'm assuming Squarespace reported it. They tend to, I think people call it a sympathy trade where if Squarespace results are bad, everyone just thinks Wix's will be. I'm not seeing Wix or I'm not seeing any results from Squarespace. Let's look at, let's just look at what it is. Yeah. I saw that yesterday, Neil, as well.

And I couldn't figure out why, because both of them were down, both Squarespace and Wix are down. Maybe someone got some data. Maybe there was something out there. Typically they trade a little bit in line with Shopify as well. So maybe that was it. But Shopify is this morning. so I don't

the information wasn't out there yet and Shopify's wasn't that good or that bad I'll check the I'll check the news feed here see if we got anything

yeah great Wix stock tweet that out or yeah check out the Elan Stratosphere oh 18 hours ago why Fiverr Upwork and Wix

were all falling today oh it's because Chegg warned about chat GPT Oh, interesting. I think that's maybe a stupid reason to sell it off. Yeah, I could see.

They said Fiverr, Upwork, and Wix, and I'm assuming some other stuff for online platforms, but I could see Fiverr and Upwork selling off because maybe that makes sense. You can have a lot more of that stuff automated for freelance work, but Wix, that doesn't make sense to me, at least in the short term. I know you can have these language learning models

write code, but I think Wix provides a lot more value to small businesses than just simply... Yeah, Wix already does a lot of that automation for you. Honestly, I think it would help them as long as they don't botch it. Yeah, let's see.

Yeah, I guess maybe there'll be more. Chegg is the number one, when I think of businesses that are most likely to be impacted, and I know this is hindsight or whatever, to be most likely impacted by ChatGPT, Chegg's number one, because at least all the use cases that I've kind of, and I'm not talking about people like toying around with it. I mean, the true use cases

where it actually helps is people cheating on homework, which is Chegg's core value proposition. So yeah. And you know what? We've looked at Chegg a number of times. If you were in college in the last 10 years, you know that Chegg is uninvestable. right it's always been sort of a fragile model because it's built on something that a number of stakeholders are trying to get rid of it's built on a lie yeah i remember yeah i remember hearing someone like pitch it to me as like an online college textbook store i was like that's not what shag is yeah it's all right it's confusing though because the way they talk to investors they

don't explain yeah what are they gonna say like we uh we help kids cheat yeah exactly all right i think that's enough with uber i would be fascinated to check them out maybe in a year or so we can do another not so deep dive on them because that's such a dynamic company maybe we could do fallen angels or basically 2010 startups as a theme but let's move on to the next earnings wait who's bigger today airbnb or uber probably it's probably close i know we had our bet ah uber's slightly up at least yeah by like a billion yeah it's about the same what do you buy what i like here i'd like to be better same although it's more just because uber's more overvalued but i think everybody is slightly better business okay next earnings

what do we have ryan yeah number of uh number of different reports to get to snapchat reporter snap i didn't look well how bad i mean it's just a business that'll never generate money and in well i never say never i guess but you talk about like this feeling like a project i mean it feels like this is evan spiegel's like just little experiment lab where he just got a whole bunch of

VC money and now he just throws it at whatever he wants I mean some of their AI stuff is like frankly pathetic they gave

they have formed an AI bot to talk to people on Snapchat like send messages are you a user still of Snapchat did you test this out

I don't use it anymore but my friends have told me they're like this thing's just like creepy and weird like no one wants it they're building stuff that no one's asking

for and I'm looking right now I'm going to do I mean they got dual class this is a big with that dual class shareholder or excuse me dual class stock where I

believe and this could have changed Spiegel has complete control of this company so the board is a bit powerless on whatever he wants to do okay Okay. Net income over the last eight years, seven years, negative 500 million, negative three and a half billion. Do you want to share it? No, that's all right. Basically, they've never gotten anywhere near profitability. And over the last 12 months, they've lost 1.5 billion.

And sometimes I wonder, okay, without free capital today, how long is this business going to be around? You obviously can't keep doing this. I got another, or go ahead, go ahead. The other thing, okay, so there was a really good question on the conference call. Rich Greenfield came on and basically called him out. He said, why not scale back the AR, the augmented reality investments until you're in a better financial position?

You know, obviously, it feels like Meta has got the luxury of sort of walking and chewing gum. When I look at like their Metaverse investment, I'm not sure you have that luxury. So how do you think about how do you balance sort of what you need to do accelerate your core business versus sort of investing in the future? Basically saying like, hey, you're not Meta, you don't print cash, you can't just treat this as your little experimental box, your incubator, because it's a public company. Yeah. And they gave like this just horrid word salad answer. I mean, it's a business that just has to cut expenses. I agree. I will also give another bearish anecdote. In Latin America, WhatsApp has copied all of the core features. They have stories and it's very popular.

I'm assuming it's popular outside of North America as well. in other parts outside of North America. I think Snap is going to have a very, very hard time making inroads into new markets because WhatsApp is really trying to lock down the social messaging, kind of less broadcast social media stuff, if you want to describe it like that,

for a lot of these people. I mean, when I was down there, the Stories feature, which it seemed exactly like what snapchat is just without advertising it completely copied it and yeah it's i just don't see them growing much at all and i think yeah it would be if someone said he had to make a bet i guess even odds whatever we're not gonna handicap it that um is snapchat gonna be around five years from now or not

as the same equity or the same corporation without going through bankruptcy, I would vote no. Yeah. I only see this getting worse. I only see it getting worse. Snapchat's

price-to-sales ratio in 2021 reached 40 times. Let me... Yeah, you got to share this. Today, it's 2.7 times. Let me pull it up.

Yeah, I don't. I mean, multiple compressions is a bitch, I guess. But yeah, it's like 95% multiple compression. God, that's crazy. Wait. Yeah. Wow. Yeah, over the last five years, it's down 67%.

Yeah. I'm going to share it right now. Price of sales, December 20th. I mean, this is not even sharing the peak. I mean, look at that change. Remember when they had the Kardashian thing with the new formatting and then there was the whole panic in the investor community, which has got to be funny in a mature investment place who was in Snapchat and they're like, talking to your PM, dude, did you hear? They're like, why is the stock down so much? You didn't here the kardashians tweeted something and that's gotta be hilarious but then what are we seeing here back up to 29 then 18 which is still absurd and now below three i guess that shows that i mean that's really that's around the market average of a sales ratio which we talked with

our friend jim gillies the other day um sales ratios are fairly useless except to show over the last few years how absolutely absurd they are some you know valuation metrics are it's usually only useless to show how absurd something is which in snaps case it was yeah it's completely useless unless it unless you're trying to demonstrate how useless it truly is

the it I think this business I think snapchat may be the number one like letting tech VC Silicon Valley culture

dictate how you spend money like that might be the best example because this is one where there's never been a focus on minority shareholders there's never been a focus on ever generating cash um yeah i just never got the thesis on it i don't think it's going to change yeah i never got the thesis yeah i agree all right we got a comment here from scotland thanks for joining scotland one of the few uh that always joins uh he says looking at all these tickers. I believe they're all one of them specific trust or whatever it was. Yeah, all the regional banks.

That would be cool if you guys could do a video or episode just talking about the banking madness. So let's break it down in layman's terms. You guys do a great job about that. Whatever. Thank you. Thank you for the compliment. But I don't think we can do it this episode. We need to probably prep a little bit, but maybe we could do it next week.

Could be interesting. We kind of have underplayed it a bit. Ryan did say that all the bad timing Yeah. Which is fine. Which is fine. But we could maybe try to explain it.

We're not banking analysts, but maybe the basic stuff. And I don't know. Maybe we could get someone on at some point to talk about that. What do you think, Ryan? But definitely not this week. We need notes for sure because it's not something we follow closely. Maybe sometime we can try to get someone better than ourselves. I would say that just in general, I think...

The problem is every time I say something, the situation changes, and then I look like an idiot. Yeah, I would rather do a post-mortem when we know kind of when things have fallen where they are. Because you don't know, in a week, everything could totally change. I mean, Jerome Powell yesterday was like, everything's sound. And then, although people are over-hyping this Pacific Trust Bank or whatever it is, because it's so small, but whatever. Yeah, I think generally what's happening is most of these banks that people are concerned about, it's an asset problem. So they're concerned about the loans, or maybe not the loans, just the securities that they hold being either marked down, like they're not worth as much as they were two years ago because people can get higher returns today on those loans. Yeah, the commercial real estate gets written down a bunch, something like that.

Yeah, so I think people are worried about that as the primary concern. But I think the big concern is that somehow the asset problem becomes a liability problem where people get concerned about the solvency or the earnings power of the bank, and then they think deposits might flee. Yeah, so it's a delicate situation. Again, maybe we'll talk about it in a few weeks, but we can't – yeah, not going to talk about it today. But yeah, that's a good idea. Yep. Also, Scott, I had a question. Can Ryan elaborate on the Silicon Valley culture? Yeah. Maybe. Yeah, go ahead.

It sounded – there's so much innovation going on over there. I sound like just a scummy finance guy when I say like, oh, the gross culture in Silicon Valley. But in general, it seems like they treat the public shareholders, like the public markets, as a place to dump their losses. So, the VCs give them money, say, go invest as much as you can in new employees and products and trying to get customers on the platform at whatever cost. And basically, when you finally get to enough scale, we'll have – as a public shareholder, I look at it and say, are you generating cash for me? They look at their liquidity event as changing the shares, giving them to someone else, which is dumping them on the public. That's kind of what I think of. I mean, generally speaking, businesses that lose a bunch of money every single year shouldn't live on forever. Yeah, that's a good way to put it. Yeah, I agree.

And here's, I think, a good example of a company that used to be like that, but switched is Airbnb, where they, during the pandemic, they had to really tighten down the hatches. And before that, they talked about how they were really unprofitable. You know, they talk about great, quote unquote, unit economics, and then they would burn money in marketing, burn money on growth, hire as many employees as they could. Then during the pandemic, they had to go into panic mode when they had all these refunds coming in to try to, you know, they had to raise some really expensive debt and then just batten down the hatches, fire a bunch of people, lower their costs. And then when they

came out of that, they realized, okay, well, maybe all that hiring and expenses weren't actually that useful. We can still grow because our business model is sound, generate cash, make our employees happy that are there. There's going to be less of them. Make our VC investors happy because their valuation is going to be higher because we're generating cash as a public company. and then making the public shareholders happy as well because, again, you're actually profitable. So I think, yeah, the VCs don't, no, it's not all of them,

but some of these companies, and there's a big trend that happened since 2010, is some of the companies do not value one of their key stakeholders, which are outside investors, properly. And hopefully that changes. But I think it's a key risk when you look at a company like that,

like Uber, right? As a public company investment, has that culture really, can they fix that? That's how we look at it. Because we're not like, they can be run like that. We're just not going to buy the stock.

If you know what I mean? Like we're, you know, it's not illegal, but it's just a negative for us. I mean, just, and it, I think when you're told,

okay, how old was Evan Spiegel when he started the business, like 20? I think when you're 20 years old. In college, yeah. I don't mean to go on the whole Scott Galloway rant, but when you're 20 years old and- And Ryan is 24, so. You're told by a lot of people how influential you are.

Basically, when you're not a public company, a lot of people, and you're kind of in the Silicon Valley realm and you're going out and people know who you are. I think a lot of your relevance is based on how many people work at your company. What kind of influence does your company have in the Silicon Valley community?

How many people are using the app? It's not on... People don't really give a shit what your operating cash flow, your free cash flow looks like. So I think it can be easy to conflate that with actual shareholder returns. And maybe that's better for your life,

better for your employees. um and a company can be run like that maybe not forever but a company can't be run like that it's just not going to provide returns for shareholders um so that's kind of why i avoid some of the stuff where it feels like they're deeply entrenched in that kind of ideology um that that was a big concern with us for wix and that was the reason why we sold um that kind of you know we soured on it because they weren't really fixing that issue even though they said they were it was one of those, watch what they're doing and not what they're saying because they said, look, we're fixing it. We're getting rational

and it wasn't showing up. I saw a tweet that I thought was interesting. It kind of reminds me of like Silicon Valley. A lot of the companies that have come out of the valley, but it's a Buko Capital tweet, which just for the record, I think a great follow up. He's funny. He's probably my

second funniest on there besides, I can never say right, Kubiko. Kubuki. No, Kubuki. It's Kubuki theater, but that's the funniest account. Bucco Capital is another very, very funny anonymous account. But yeah, go ahead. Yeah. He says lots of software companies who thought they had recurring revenue unlocked do not have that revenue unlock. Lots of software companies are going to guide for second half acceleration, basically a Hail Mary that the macro improves.

I feel like that's happening a lot right now, which is like growth, expect slow growth in the first two quarters, but we expect it to re-accelerate into the back half, which is like just a prayer. Don't worry. When all the excess consumer savings go out the door and the businesses have to refinance and all these higher interest rates are flowing through to these businesses, don't worry, things will get better then.

Like, are you kidding me? But I should note though, for any listeners, like what does this guy know about? I don't know the person personally. I've DMed with him before, but this person works as a, I think a VP or some sort of manager within a company like in the software space.

So he's deciding whether to buy these software programs as that's kind of his evidence. And he probably talks with a lot of colleagues within the industry. So he has boots on the ground. Yeah, I'll just read the second tweet and then I'll stop. He says, one tricky thing that businesses

are going to learn the hard way, frictionless sales, that's like product-led growth, touchless purchase via website, freemium, et cetera, is great on the way up, gnarly on the way down. No relationship holding that contract together, no friction in, none out either. I think that's going to prove true where it's going to be so hard. Customers don't care when budgets contract how easy it was to become a customer initially. They're going to get rid of that if they need to.

And if you don't have a relationship kind of holding that together, or you don't provide tons of necessity value, something that they need for their business to run, I think there's going to be a lot of churn for products like that. I mean, there's tons of software companies that are kind of like that right now. So I don't know. It just reminds me, I guess, that maybe some of the software businesses, even though they are asset light, higher margin, I think sometimes those high gross margins can be like a reverse indicator. Of what? that and i mean each business is different but if you have really high gross margins it costs very little like variable expenses there's very little variable expenses in your business maybe you don't have that deep of a relationship with your customers or and i know it's different for every business like consumer products obviously very different but i'm thinking of like sorry to call some companies out but the asanas of the world like scheduling products stuff like um

i'm trying to think of other ones yeah you had to decide or i think the biggest question if you're an investor in these companies is you have to decide whether you are confident this is actually mission critical if they're a high switching cost if the company decided to leave this software program would their business take a huge hit and if not and if it's only more of a productivity tool or some sort of management tool that's not actually affecting their core product then i think that's where that's the big question i ask yeah all right well we've got 15 minutes here anything else you want to talk about i i don't know if you have anything prepped i have some stuff do you want to talk about a fun bitcoin story or a fun crypto story sure yeah this one's

this one's funny i don't know i don't know how you didn't see this it was all over the uh i saw I saw the headlines. The headlines, okay. The Balaji or something like that, right? Yeah, Balaji, yeah. The guy that made the big bet. Apologies to the guy. I don't know how to say his name.

Okay. They call, this is from the QZ. I'm going to be quoting a lot of stuff from here, but it says, all right, there's a pseudonymous, which is an anonymous, I guess, leftist Twitter account, won $1 million from crypto investor Balaji. Gosh, I can never say your last name. Apologies for that.

Over a bet on US inflation. So let's go through what this was. Let's see. How do I even describe it? Let me just share the screen here. So Medlock, who is this anonymous account, it's not the real person's name, said he'd bet anyone $1 million that the US wouldn't enter hyperinflation because during

the time, I think during the middle of the March banking crisis, people are talking about hyperinflation. And then Balaji, he had been warning about the risk of hyperinflation. So I think they're already debating heavily about this topic. Took him up on the bet, setting a term of 90 days. He said at first, and this got settled, funny enough, not with a smart contract, but this got settled with lawyers later on and they finalized how to decide and stuff like that. He said, I will take that bet. You buy one Bitcoin. I will send 1 million USD. This is a 40 to 1 odds as one Bitcoin is worth $26,000 today. The term is 90 days. All we need is a mutually agreed custodian. Funny enough, a mutually agreed custodian. Well, what about that smart contract,

buddy. So basically it was a bet that Bitcoin would go to a million dollars in 90 days because the US was hitting hyperinflation, right? And this was in the middle of March. So it's been less than 90 days. And how do I describe this? It was a win-win for Medlock because if it was hyperinflation, then sending Balaji $1 million basically is just, it's not that much money. But if it doesn't happen, then this Bellagio guy has to send him $1 million on an even odds or basically, you know, even payout. But Bitcoin had to go up by 40 times in 90 days. Do you see how this might be a, you know, uneven bet? I really wish I was the one that tweeted that out because this was the bet of a lifetime.

But the funniest thing that happened is that, and maybe I should stop sharing the screen so we can just talk. even it hasn't even been 90 days and uh it's around the the vc guy sorry i'm not gonna be able to pronounce her name correctly said all right you won it's over because bitcoin's still below i think 30k and he just sent him the money and his excuse was i sent them a million i lost a million to tell the world they're printing trillions and i just think what is this vc brain macro doomer brain i mean what's gone into these people because he just uh i don't know what did you think of this because it seemed like one of the craziest because officially the money got sent it actually was one of these bets that went down

and half of it went to um i think some charity but i mean think about five hundred thousand dollars in less than 90 days for one of the easiest bets you could ever make i mean how lucky is this guy medlock i mean congrats to him yeah i'm congrats to him for making sure the guy followed through it seems like one of the dumbest bets to offer and it was probably you know just for like the purposes of like attracting eyeballs and getting more people that kind of believe in crypto um i think by saying i think bitcoin will hit a million dollars in three months or something like that uh he might lose a million dollars but he probably has bitcoin holdings or that if people are like if people cling to that or something and increase the value of bitcoin maybe he makes more

than a million dollars so maybe let me let me convert the price right now bitcoin price as of this recording 28 900 usd i don't know how much money he has in bitcoin but assuming that's gone from 26 to 29 he probably made more than a million during that time period that's fair but it's you know probably it's not the only tweet yeah and but the only way to productively use it is to sell the bitcoin um let's talk about shopify yeah no yeah here here's a question i have though Oh, yeah, we probably, what do we have? We started a little late, so we have more than 10 minutes. But here's one question I have. Is it unethical to say that you think the economy is going to head into hyperinflation? Do you think it's unethical to say that? Because some people would argue that they want to warn about the facts, right? but i think historically it's almost been shown that that's really i think immoral because you convince people that the world's going to end and they really destroy a lot of their wealth by making

dumb bets and following a lot of these people i'm not going to name any of the names the doomers they can do whatever they want but what do you think on that is it unethical to say the u.s is heading into hyperinflation i think it depends on who you are like if some random guy does it on Twitter, I'd say who cares? But if Buffett does it, that would be an immoral move by someone like him. Yeah, I think so.

If you know that what you say influences people's decisions and can cause something to happen, it's like him buying any stock. And frankly, I think if he buys something and the stock shoots up because he bought

something and he sells it, I think that's somewhat unethical. The same way him saying, I think the U.S. will hit hyperinflation, there are people that could probably speak it into existence. If Jerome Powell does it, yeah, it could probably speak it into existence. Or Yellen or something like that. Yeah. Hopefully I described that correctly. It was very hard to understand that bet. Maybe I should have made better notes. I mean, it was a stupid bet, so it was kind of hard to explain the rationale. Yeah, because I just thought it was very funny. Good marketing. I lost a million to tell you they're printing trillions. And I was like, thumbs up. Good for you. But yeah, let's hit Shopify. I think this is super interesting. I would love to discuss this. Yeah. Shopify reported earnings this morning as of, we're talking on Thursday the 4th. May the 4th be with you, by the way. Yeah, they reported earnings and I believe the earnings looked pretty

good. Stock jumped like 25% this morning, so it must have been good. They announced a layoff for a fifth of their workforce. And then one of the big announcements here is that they are exiting basically their logistics efforts. They're selling Shopify logistics to, what's it called? Flexport, I think is the company. Yeah, Flexport. And they're getting an equity stake

in Flexport as well. They already owned a stake in Flexport, so it was already, it's deepening. They love to say deepening the partnership. Ooh, so exciting. Yeah. And you know, okay, I love to dunk on Shopify because I think they sometimes, I don't know, to be honest, Toby Lurkey's done some stuff in the past that kind of like, I don't like, I don't think him pressuring short sellers is, whenever a CEO calls out short sellers for like being anti, like bad people, I don't really like that because I think they serve a purpose in the market. but um nfts he says all this stuff about like side quests and he loves to make like gaming

references he's big into gaming um and he's like logistics was a side quest for us and it's like okay nice little side quest to burn a billion dollars yeah yeah that's a very expensive side quest for your shareholders um it's maybe a flattering term to say to basically say that we lost a bunch of money. But I think ultimately, my takeaway from this, honestly, was that every once in a while, investors are reminded how deep Amazon's competitive advantages are. Yeah, or how expensive it would be to copy them. And when their primary competitor exits their logistics business, to me, it shows, okay, no one can replicate that fulfillment.

Yeah, I was seeing an article in the Wall Street Journal talking about how Flexport is now going to be a competitor to Shopify, or excuse me, Amazon. But that was totally, if you're reading some article about that, I would disagree with that because Flexport is like a marketplace where you can hop onto Amazon's fulfillment network. But here's what I thought was interesting. And again, there's more to just these three points in Shopify's business. First, they decided to get rid of the logistics arm with this deal with Flexport, which is probably, you know, maybe could be worth something over the long term because they have a big stake in Flexport. Flexport becomes a big business, whatever. It's not worth that much today.

Second, they're laying off 20% of their workforce. Some of that is with the Flexport deal. And then third, they reported a maybe average earnings report with gross profit up, I believe, I don't have the number in front of me, up about 12%. So fine, coming out of there because they're lapping some of the tough COVID comps still. Today, their stock is up 24%, Ryan. And they've added, I think, trying to do some rough numbers, I'm not going to do the math in my head exactly, but maybe $15 billion in market cap today. They've added $15 billion in market cap, currently trading at a $73 billion market cap. What are your thoughts on that? Maybe I'll pull up their valuation and see what you think. I mean, I still love the business. I still think they offer a wonderful product. But their ability to take money from their merchants, so their take rate, is going to be reduced if they provide less value to them. So, and I know they still offer the easiest way to set up a shop online, but if you're not providing the logistics, that's going to lead to take great compression.

If Amazon's sneaking in there with their Buy With Prime initiative, where they can integrate that onto their Shopify website, that's more value being given to Amazon. You've got the EV to sales up here. I mean, it still trades at a relative premium to most businesses out there. A healthy premium, I'm seeing for the listeners here. Of course, during the bubble, they were up at ridiculous kind of 60 times sales. Today, again, it's not perfect. We're just using stratosphere here. It is EV to sales of 13.1.

For reference, their margins are below, I believe, around 50% on a gross margin basis. So that it's not like they're 90%, like a great software company would be. So they're trading at what? If we divide, say they have 50% gross margins, they're trading at like 26 times gross profit and typically again everything you know depends how much you translate your gross profit into earnings shop i think would be fairly low though um typically a company will trade at about six five to eight times gross profit on average so it's like this is still like how here's my comes how big can this business get what do you think

run if it's just providing the online shop and payments all software basically yeah but i'm saying payments it's gonna go to amazon oh you think it's all gonna go there they're still growing share i wouldn't i mean yeah that is that is a competitive threat yeah i mean that's a threat to think about yeah well it's it's a business with a lot of operating expenses right They have to pay for development. CMS and being the builder of the merchant site is a competitive world. There's a lot of other alternatives. Maybe they aren't as good as Shopify, but I think Wix, Squarespace, BigCommerce, even just putting up your own shop on Amazon, which obviously is not your own. Most people do both. Yeah, most people do both. Like that's competitive. And you constantly, that means the operating expenses are probably going to be perpetual that you have to continue to invest in those developers over time to keep having a competitive product. I don't think their ability to convert gross profits, gross profit dollars to earnings is going to be that high. I would guess it's probably fairly low, like you said. So, I mean, the valuation seems a little extreme, but yeah, I do think it's a wonderful product.

And I think a lot of people get fixated on that and conflate that with whether or not this is going to provide good shareholder returns. I have a hard time imagining. All businesses are going to be valued on their cash flows over time. I think, what's today's market cap? 75. Let's say 75 billion. And EV is going to be slightly different, but yeah, $75 billion. I mean, I'm sure it can generate some cash, but it's a steep multiple.

Props to Brad Freeman, actually, because this is one of those businesses that we identified where we said, this is a really good business model. My thoughts have maybe changed a little bit over time, but we said, if this gets cut in half or gets cut by 70% or something like that in 2021, maybe this would be investable. Brad did it at kind of a one now hindsight with earnings behind us at a wonderful price. Yeah. And yeah, I guess, yeah, he's been very smart on that. He's been trimming his stake, I believe, but we don't want to put words about he has the stock market news, stock market nerd newsletter. That's completely free. He kind of covers a group of companies that he owns and some

of the companies that he follows and you can kind of see what trades he's doing in real time, which I think is interesting to follow, especially if you're interested in those stocks as well. And one of those is Shopify. Yeah, we'll have to get him back on the show sometime. He did used to join us on a regular basis. We have like one or two minutes left, Ryan. I'm seeing the clock here.

Maybe one minute. Anything else before we wrap up the show today? Match group reported. We are match group shareholders. Yeah, probably for me, it was probably in line with what I was expecting. Nothing too surprising, nothing too... disappointing yeah yeah i agree kind of just like no no big no big surprise for me although the

stock no one knew how to trade that stock in the days following it was like down two percent up five percent no one knew how to understand the report yeah my i guess it would just be like if tinder were dying like if tinder's relevance were diminishing i'm not sure i'd be able to identify it early on maybe that's what's been happening and now i think it's still as large as it was last year but it's kind of hard to say because they don't report like the user data yeah they don't yeah and it's kind of hard to tell um because like what how valuable is a user versus an active user you know because there's some people that probably hop on there and swipe like once versus someone

that's active or someone who's going to pay. Yeah. I think it's a big TBD. It's one that we'll definitely have to do a post-mortem on, I think two to three years from now. It'll be very interesting because I could see a way we're right. I could see a way we're wrong. But we do like it today.

We'd actually did do a full show on them. What would be that one month ago, two months ago now that anyone that's interested in that going through the full, again, when we talk about stuff we own, we try to be as bearish as possible. you know,

we're not like we outline all the risks there and some of that stuff is materializing, but yeah, all around kind of just, all right, let's get to the next quarter. Is that it? I agree.

Yeah. I think that's right up on time. We've been streaming for 59 minutes now. 59. All right. Perfect. That's going to do it for this episode. Anyone that is watching,

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okay as a disclosure we are not financial advisors anything we say on the show is not formal advice or recommendation we are general partners at arch capital and clients may hold securities discussed in this podcast thank you everyone for joining us this week matt h and scotland the core the core watchers and we'll see you next time Bye.