Chit Chat Stocks - Investing Power Hour #58: Ban Bank Short Sales? Block/TIDAL Debacle; Inflation Update

Episode Date: May 14, 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 a recommendation. Now, please enjoy this episode. This is the Investing Power Hour, number 58. I was thinking once we get to 100, we may have to do it a real Drinking Power Hour during the show as a celebration for doing 100 episodes if we get

there. Although that's 40, that's about a year away. Besides the fact, my name is Brett Schaefer and I am joined, as always, by Ryan Henderson. And on the Investing Power Hour, we talk about whatever's happening in the financial markets, investing news, anything you want to talk about today. We have potential US ban on short selling. We have a spicy, what was it? That was from a court document about Square slash Block's acquisition of Tidal. Basically, they were who we thought they were. Not to toot our own horns, but we were correct on that.

We have Airbnb earnings, an update on inflation, and Google's IO event if we get that far. Ryan, let's just kick it off right to you. How are you doing this week? How are you getting through earnings season? I know it's a lot of reading for all of us

during this time period. It is a busy one. um lots of earnings to get to which is a little draining at times but there's been a lot of i don't know uh it's exciting because i always get like that halfway through the quarter when there's no earnings i just get a little bored sometimes i'm like rereading companies they've already kind of read like hoping see something different um but there was also the the berkshire meeting which we did not attend but don't worry i was in if anyone's wondering i did hold down the fort in santa barbara for munger so you know as much as omaha sounds nice i don't know if i was gonna

skip it for california yeah um no we got a lot of stuff to get to i wanted to pull something up because we recently did a uh we took a look at block for a not so deep dive do you want do you need to share the screen or no no no we don't need to share the screen but i remember so just for context i believe block was sued by some shareholders lately and they had to go to court over their acquisition of title it seemed like it seemed exactly like what it was uh it didn't fit the business and jack dorsey wanted to be friends with jay-z and so um that's what i think that's basically what people were concerned about um and in our low lights for uh for for block when we were doing the not so deep dive one of your low lights i'll go ahead and go right here it says

purchase of title they haven't done anything with title it is still in the number in basically in the 30s on the audio app store charts this is going to be a hole in its pocket for years and with Jay-Z on the board and a friend of Dorsey, it feels unlikely they will sell it. So let me go through some of the court documents or some of the stuff from the court documents, because this is just, and we used to be block shareholders, but some of our concerns feel validated through this. So I'm just going to read a couple of quotes from the, basically from the court documents. It says, Block facilitates payment processing and helps individuals transfer money electronically. This is kind of known, but it's important.

It had never ventured into the music streaming industry, and at the time it acquired Tidal, had no plans to do so. The idea for the acquisition came to Jack Dorsey, Block's founder, CEO, and chairman when he was- On a mushroom trip. No, sorry. Keep going. When he was summering with Carter, and Carter is Jay-Z, in the Hamptons. From his Hamptons retreat, Dorsey joined a video conference meeting of Block's board and proposed that Block acquire title. The board formed a transaction committee to consider the proposal.

Just imagine being on the board. This guy's like probably faded. Yeah, him and Jay-Z are about six hours into an acid trip, yeah. And he's like, yeah, this title's not working. It's failing. injectors like bro i want to well we got to hang out more how about i buy this from you and i think an analyst at the time called it picking up a friend's bar tab so that you can stay friends with him and i think that's a very apt description because i'm going to keep going

uh so remember they they formed a transaction committee to evaluate the proposal and the transaction committee keep in mind these are board members the board members i just checked the proxy are paid handsomely every year, $200,000 to $300,000. And this is their only job. Yeah. I mean, you get paid $200,000 to $300,000 to basically tell the CEO yes. And of course, the shareholders could vote you out. So if you were to get voted out, it would be on the shareholders. But who's the largest shareholder? Who's the majority shareholder? Not in terms of shares but in voting power jack dorsey um and they've been trying to get rid of the dual class

share structure but dorsey voted against it unsurprisingly um so it says over the ensuing months the committee learned that title was failing financially losing its major contracts and facing an ongoing criminal investigation the committee also learned that carter jay-z personally loaned title 50 million dollars to help the troubled company through its difficulties well nothing wrong with that but i mean yeah but it's usually uh yeah yeah it's a sign of distress yeah yeah and so okay yeah title is a bad business this this is clear i mean music streaming is tough at scale music streaming subscale when you have like literally no users is really tough. And so there's obviously ways that you can spin any merger, you can spin any

acquisition and say, it's going to be better if we own it. I mean, Chit Chat Money could have bought Tidal and said, and we could have had a 20 slide presentation that said, well, we'll have exclusive distribution points here, which means higher margin and that kind of, you know, like there's always something you can do. And so people touted like Cash App maybe, but really it made no sense. They basically asked questions to, or from what I understand, the transaction committee asked a number of questions to Dorsey and the team that was proposing to buy it. And it says, before its October meeting, the transaction committee asked whether any other members of senior management supported the acquisition. In response, the committee learned that there

were none aside from dorsey the transaction committee asked whether the artist's commitments which formed the basis for at least half of management's valuation of title yeah keep in mind there's you know were they they were music music streaming without artists there if you're losing artists and they were losing artists is that what was going on yeah and if you i mean your value it's you're not worth a whole lot if you don't have artists in your music streaming platform. Like a lot of artists, obviously. So the transaction committee asked whether the artist commitments, because they were just verbal commitments, which formed the basis for at least half of management's valuation of title were legally enforceable. In response, the committee

learned that Block would have no recourse if the artist decided to walk away. The transaction committee asked for near and long-term plans for integrating title into Block's business. This is an important part in response the committee learned that management had not created these plans and that this remained one of the biggest risks yeah i mean the the best first off one almost all acquisitions are you know tough second the best move here is to shut down title tomorrow or the next day or the day after because it's just gonna burn a bigger hole in blocks pocket and it was a 300 what something million acquisition say 300 million dollars but eventually it's going to burn a billion dollars or more and it's just going to be terrible and worse every single day

it operates and third bringing it back to maybe a slightly related topic watching people like dorsey companies like square it was so easy to predict on succession that gojo was a fraud right i call it i mean come on everything i'm on a roll right now i call it right i don't know we can talk about that maybe later but there's a real lesson there is that there are patterns from how these executives act yeah i mean this was clear when they i mean for first when he was running multiple companies and you know never there was there's questions about that two public companies at the same time there was when he started to loop bitcoin into every single facet of its business that felt like it was in the best interest of him as opposed to the best interest of

the business. When they acquired Afterpay for $42 billion, maybe that was- 29, 42 times sales. 42 times sales. Sorry. Maybe it'd be better if it was backwards. Maybe that was good intent, but it was clearly wrong. It's not going to drive value for shareholders. Yeah, that business is falling apart, too. Yeah, we have Matt H., loyal listener. Dorsey doesn't care about shareholders. It is legitimately that simple.

I think that's it. Yeah, management's important. I don't think you can ignore that when looking at some of these companies. A business can be as good as possible. It can be the best one in the world, and they can destroy it by taking in the cash flow. They got to do something rational with it. Another question here, or unless you have something else on this topic. Yeah, I have some other stuff.

So we have a number of friends that are invested in Block, and I'm sure we were invested in Block for a long time. And if we weren't forced to sell, I bet we would have sold it, but maybe we would have owned it and kind of tried to look past. But if you're doubting or you're maybe still hopeful that Jack Dorsey cares deeply about minority shareholders, There was that proposal in the proxy statement to remove the dual-class share structure so that it could be more meritocratic, where every share is one equal vote, and it would be basically this progressive phase-out of the dual-class share structure. If he believed in meritocracy and this very democratic process… Speaking of crypto, yeah, democratization. Right. And if he believed that he was right, the right guy for minority shareholders, why not let them have the say? And instead, he voted against that proposal. So, no, I think it's very clear that he does not have minority shareholders' best interest at heart. Yeah, it's disappointing because it's a promising business. It creates a lot of value for all its stakeholders. And it seems like one of those that, yeah, just should have a lot of promising growing. But sometimes management's not going to be there. You don't have to own every company. And if you don't trust management, you just can't own it because if something bad happens and you don't trust management, you're going to get really antsy.

It's going to make you nervous. It's going to, the likelihood of you making a bad decision, I think, rises. But here's a question we have from Mark USA. Don't think that's your real name. Have you guys ever looked at Matterport? Still bullish long-term, very strong-looking earnings this quarter. That actually just sparked an idea for maybe a theme we should do for one of the next quarter's not-so-deep dives.

and I think it should be Fallen Angels. I think Matterport could be one of them because I remember looking at the business, seemed fairly promising, but it came out as a SPAC and I remember looking at that valuation and it was fairly absurd and maybe right now it could be more interesting.

But besides that, I only have high level knowledge of the business and that it was growing quickly, but the valuation was a bit crazy. Ryan, have you followed this company at all? No, I just heard someone talking about the earnings like, I don't know, 30 minutes ago. And they did mention it is still a lot like a private company from what I understand. I think stock-based compensation accounted for 80% of revenue.

So there's elements to this where it's not really in my wheelhouse in terms of like what I like with a business. but yeah the tech I remember looking at the tech and being pretty impressed and one of the venture capitalists that was involved there was Josh Wolf who's a person I really like or a thinker that I really like

but if I remember seeing correctly that operating losses were more than 100% or were higher than revenue so it takes some time I think to get it's uncertain whether or not it'll ever return cash back to shareholders,

which is kind of why, what we look for when we invest. So I don't know. It could be too early stage for us. Yeah. A hundred percent. All right. Here's another, we avoid early stage stuff. Yeah. Generally, generally, or any ideas that we've thought were promising usually went down when we haven't owned them. We're like, Oh, this seems interesting. And then it goes down 90%. We're like, okay, few. Well, learn while it's on the watch list. Okay. Here's a fun one. What do you guys think about

the geopolitical risk associated with owning Chinese stocks right now? Are they worth looking into or should investors just stay away? I do not think they're worth looking into at all. The risk is too high that you're not going to get your money back. You're owning a lot of ADRs. It's just too confusing. I do wish I could own something like BYD because that just seems like a absolute runaway train of just growth and dominating the EV market as the low-cost provider, and they're just going to expand internationally. However,

I can't really own it. I know Buffett owns it. That's great he can own it because he has that relationship, but for us, unless you have that, I think it's just best to stay away. Has your opinion changed on this, Ryan, at all? No.

well i don't know yeah probably not it just seems like every six months we see something that's very concerning um so it kind of makes it hard to own i did see another comment from i believe mad's capital that says give me your take on the value trap yeah i brought up his tweet i i saw this earlier um do you want me to read off the list are you sure i don't know i got them all four or five of them but well i do paypal match group intel 3m cvs altria alibaba paramount glad we only own one of those but you can also call it the puke basket as they seem to just puke downwards and not rise um i really dislike paramount um so maybe that's blinding me here but i don't think it does this well i got a feeling though that intel is just the government's not going to let

that do poorly you know what i mean i just have a that's my gut feeling okay it's not gonna let them fail yeah exactly do well for shareholders is a different question yeah that's fair that's um but when i said i don't know a number of those i mean i know what they are i know what 3m is i know what cvs is i know until but i do not know them well enough to have like oh yeah yeah any sort of a good take paypal okay i think i think that would i think that could perform well yeah like part of me is like 13 14 times cash flow i know maybe like i'm so biased against them maybe that is just why there's an opportunity and if they get you know a solid buyback program going they start recurring turning cash to shareholders it could be interesting because

The numbers always look much better than I expect. They do have a good buyback program going. $1.4 billion bought back this quarter on a billion dollars in free cash flow. So more than they can sustainably. Are they on our schedule for next month? I think they are. All right. Well, that'll be fun.

Tune into that. They do have some stock-based comp, if I'm not mistaken. I'm looking right now trying to see if there's what's happened normalized five years shares are standing or down 4% over the last

five years but it's all happened kind of within the last year or two so yeah I do hate the business though I hate the fees they're ridiculous the core business yeah not the checkout part

because I'm not really on the merchant side, but I hate the international transfers. Yeah, and maybe when we dig into the business, it actually won't be that big of a part of the business. But again, I don't know well enough yet. Ask us in six weeks and we'll know well enough on that. But yeah, all right. Do you think match groups are a value trap?

Could be. I don't think so. Yeah. Well, it has been, but... Okay, here's my concern. I think Hinge can be a billion-dollar revenue business. I think it can be just as profitable as Tinder. But I am worried that Tinder, there's no reviving that brand.

What do you mean? Downloads are still high. I know, but among everyone, there is such a stigma. Like, okay, it's just Russian bots and spam and women that are not who they say they are. Probably men who are pretending to be women. Yeah. Hey, I met some real women on there. On Tinder? Yeah.

Oh, yeah. Well, internationally, I've heard it's very different. US is probably its worst market, yeah. But that is my living concern. But I don't know. We own that one. And so maybe that shows you our opinion on that. But what's great, though, is that management seems to understand this.

They don't specifically say it as frankly as you just did, but they seem to understand that that's the concern. And hopefully, you know, they're finally addressing it as they should have three years ago. Altria? Yeah, I would say value as opposed to value trap. But if they're declining, if cigarettes are declining by double digit percentage, no. I would call value trap, like perpetually. I saw one comment that was like, what's there going to be one pack of cigarettes left

that's selling for $60 billion? Because it's like... You know, part of it is immigration, if the US population goes up, right? But also, yeah, like, what is the normalized decline? That's just the giant question. And we were kind of right. I think we sold it.

We owned it in the first year of the fund, sold it for, I think it was like high 40s, maybe low 50s. Around 50-ish, yeah. And our concern was that there could be an acceleration in the decline rates, and it seems like that's happened. But yeah, I would say, just given the dividend, I'd probably say value as opposed to value trap. Yeah, it'd be hard to lose money unless if you don't reinvest the dividends. I mean, it'd be very hard to lose money. I don't know how much money you're going to make, but I think preserving your capital, inflation adjusted.

Do you want to hit our next topic so we can get through a few of these? Should the US ban bank short selling? I think this is fascinating. So why don't you go through that, Ryan? Yeah. I know sort of our maybe free market enthusiasts that listen are probably when they hear that question think, absolutely not. And that was kind of my gut reaction too. But there's some interesting stuff that's been going around short selling with regional banks. So there was this Twitter thread from Bob Elliott. He's the CIO of Unlimited Funds. Apparently,

he used to work at Bridgewater. He says, since last week, there has been acute downward pressure across regional bank stocks, particularly focused on, I think that's, I don't want to get this one wrong because there's two, I believe it was PAC West, not Pacific West, two separate banks, just to be clear. And then WAL, not really sure. I'll look it up while you go. Both regional bank stocks. What has been driving down those short loss or what have been driving down those losses, question mark, short selling and put activity. The reality is that it doesn't take much flow at this point to create big moves, given the market caps are on the order of $1 to $2 billion. You can see they have daily put option volume. There's this chart. I'm not going to show,

but daily put option volume have just spiked for both PacWest and Western Alliance. And then he says, it's not just those two banks. According to the Chicago Board Options Exchange, the regional Bank ETF, KRE is the ticker, is the fourth most traded options contract behind S&P 500, NASDAQ, and what's IWM? I think that's Russell 2000. Russell 2000. So clearly there's interest in the derivatives on these. Here's the issue though. Typically I would not care, but But because if the price is tampered with for like a traditional bank or a traditional business, like a software business, like, okay, whatever the stock goes down, it doesn't really have that big of an effect.

But given what's happened here, people manipulating the stock price, and there's clear examples now where the stock price, huge declines, create big news articles on it. It scares off depositors. depositors flee, and then you have an actual bank run. And then it makes the stock manipulation worth it because you're right. And you can kind of hide behind, oh, well, they're going to have long-term problems anyways. There is a question. And in September 2008, the US and UK regulators temporarily banned investors from selling short financial stocks. I think, or I'll pose a question to you. Do you think that this should be, the short selling should be more regulated for the

banking system in America or only in times of turmoil? I think it makes sense in modern times because of the ability to, you know, communication flows so quickly to everyone now because of the internet and the ability to take your money out immediately because of the internet. I think this could make sense. I'd be with, I'd be on the side of banning the short selling. There was a Usually short sellers get a bad rap But I think in this case I don't know if they're being malignant here

But I would be on the side of banning it Just because Look, the healthy banking system Is more important than short sellers In this case, I think I can't remember where I saw it But apparently there was a video with Jamie Dimon saying that they should be

If you're purposely manipulating the prices of regional banks or banks in general. What is purposely manipulating? You can't really prove that, can you? You could have a thesis on the company. You're going to short it. You could be manipulating it.

If you're shorting it to cause damage to the actual business, not damage to the stock. But where's the proof on that? Yeah. I think in general, look, short sellers can make money in other stuff banks with these specific specifically maybe they only do it in times like you said

that are stressful periods but how do you define that you know i think just putting a general ban on that would assuage people's concerns especially because there's a large part of the general population that doesn't understand short selling so banning it they would think like oh that's a positive for the business and since psychology is so important in banking i think that's that's a positive i would much rather have short sellers be a little angry than having all these banks collapse oh it's one of those things where it's yeah short selling for some reason is like a bad word for the public i think people just have like there's just like the stigma where it's like evil short sellers only if they're naked yeah the other ones is the

the other term that politicians always target is they always say enriches shareholders yeah and i'm like that's the shareholders of the public for most of the companies so it's like it sounds like this evil side of like society but it's i don't know it's it's the public so And Rich's Calipers. Yeah. They always talk about the dark pools. They talk about shadow banks, which those terms, whoever came up with that, sorry, you just had some bad branding there. But yeah, they also talk about, I love when people talk about naked short sellers, because I still do not know what the hell that is. It's basically hedges. No, that's not what it means. I think what they mean is that they pretend they short shares without getting any shares and they call them naked because then you can short unlimited amount. These are the conspiracy theories I like to read about. They think there is an unlimited amount

that they've shorted. They call them the naked short sellers. So when they start a rally in the stock, they think that they're going to have to try to buy back the stock, but all these naked shorts have no share. There's too many of them, so they're not going to be able to buy back 100% of the float. It's incredible stuff.

It is a funny term. Naked short sellers, just a bunch of people without clothes on. Or ladder attacks. I mean, that's a classic. I did think it was, I'll be honest,

I thought it was just unhedged. Exposure. Yeah, that does sound right. Anyway, well, that's kind of my two big topics. Airbnb reported earnings I thought they looked pretty good, but we can talk about that later.

Yeah, but who would stay in an Airbnb, Ryan? I know. I saw some cold takes about how – and everyone has a cold take that hotels are better than Airbnbs. Yeah, for one night, yeah, 100%. There's more predictability. You know the quality you're probably going to get with like a Hilton or something like that, but it's way more cost-effective to stay there for a long-term stay or for a family. Yeah, for a single person or a business traveler or a couple for two or three nights or less, a hotel's great. Everything else, Airbnb crushes them. But why don't we do the inflation update

because I think this is interesting. First, let me share a quick chart here just to show and give people context before I go through some of these notes. We've slowly become macro people. Well, it's interesting right now. This week, I think it's interesting. And on these shows, I do like to not talk about individual stocks we own too much. All right, let's share it. Let's zoom in. Come on. Always makes me press on the thing to zoom in. All right. So if you can see that here, we have the chart is year over year inflation. The blue is services. think a lot of that's housing. Orange is goods. Make sure to describe what you're seeing. Yeah, I will describe after what I'm seeing. Okay. And then food is yellow. Energy is green.

In early 2021, or excuse me, late 2021, early 2022, the majority of inflation was from goods. So think apparel, just physical products and energy. So think oil prices were skyrocketing. Now, in early 2023, as we sit here today, the majority of inflation is from services, so think housing, and then there's a good chunk from food as well. And there was a lot of notes on this week's inflation report covering the month of April. I think generally that kind of transition is the big highlight people were talking about. And we saw the overall rate fall below, slightly below 5%. It continues to steadily fall.

But I think the big takeaway from this report, and I know it generally is going to figure itself out. And yeah, like you mentioned, Ryan, we don't actually invest due to these things, but I still think it's really interesting either way, is housing and shelter costs are driving inflation right now. And the big question is, will there be disinflation in shelter costs, which for reference is 35% of the CPI. It's the largest factor over the next year to get inflation from the current 5% down to 2%. A lot of analysts seem to think that this will happen because of the lagging data in shelter.

There's a good quote from Colin Roche at Discipline Funds, and a lot of other analysts think this as well. Here's the quote. The reason shelter lags so much is due to the way the BLS surveys consumers. What they do is try to reflect the manner in which shelter contracts reflect sticky prices, so rents are updated every six months. For instance, your rent doesn't change every month. It typically changes once a year, and so inflation can be rising, but you won't experience the increase until the landlord updates your contract. So there's a temporal lag in the way consumers actually experience shelter inflation, whereas the CPI is reported in a real-time manner. So what he's saying is that real-time data that's not showing up in the inflation reports yet

is pointing towards disinflation in rent prices and housing prices, and that if this continues, we're going to get inflation back down to 2%, 3% within the next year or so. So you're telling me home prices are coming down? well that either now i know that's what i thought at first but then i kept thinking well that that can just mean flat you know what i mean yeah or it could actually be still be rising but just at two percent a year instead of instead of 10 now here's saying that for a while though well it's starting to happen um yeah it's starting to happen and i think that that's why we've been so fascinated about housing over the last year or so. I want to have a question here before we

move on to some topics that we can have maybe a little bit more real insights on. Do we think inflation is going to head lower for the rest of the year because of these trends in housing, or do you have no idea? I have no idea. I might just leave it at that. I've been a housing bear. It's like the only thing that's held up, shockingly. And in some markets, it hasn't held up. Yeah, look at that chart, right? It's gotten worse to start the year. Yeah. And I don't know. There's a bunch of moving parts. Housing supply is a big part of it. But ultimately, I feel like it comes down to affordability. I wonder if interest rates actually hurt that. So there's really only one. Okay. The way I see it, there's like four things that can happen.

Either A, interest rates can come down, making homes more affordable because the rate on your mortgage isn't as high. Home prices can come down, making homes more affordable. median incomes can slowly rise to make homes more affordable or we can stay in this limbo phase for forever a while while mortgage applications just shrink and shrink and shrink yeah nothing happens yeah i don't know what's going to happen to inflation with shelter but i think it's important for anyone that cares about inflation to know that But right now, the composition has totally changed over the last few quarters. Or fifth one, this may be the other real fourth one.

People can start to pay more as a percentage of their income for the houses, but that is going to have an effect on the rest of the economy because there's less money to be spent elsewhere. Maybe that leads to disinflation and deflation and the other stuff like food and goods and maybe energy really as well because there's less dollars flowing to that and the supply is not going to decrease by 20%.

Who knows? Who knows? There's a lot of moving parts. And I've heard so much like, yeah, we'll probably do a housing update in like a month or something. But I thought this inflation report was fascinating. That chart, I think, which just really highlights it. I feel like we've been talking about real

estate, regional banks, and we stopped talking about tech layoffs but we were talking about tech layoffs like every episode for like four months

for the last three months do we want to hit anything with Airbnb earnings was there anything interesting it seemed kind of just steady Eddie

I know it's a company we both follow well I mean so they get if you look at their cash flow margin this quarter it looks really high

there's a whole bunch of unearned revenue from what I understand they just it's a working capital thing where people pay Airbnb first, they don't pay it out to the hosts for a certain amount of time. So the one huge benefit here is with interest rates rising, they can purchase short-term

securities and earn higher interest on that cash. That, I don't know, it kind of excites me. This feels like a business that's actually genuinely changed the world. It's changed the way people travel. It's changed how people can afford their homes because they can rent out extra bedrooms like they never have been able to before. It's changed how people can generate income. I don't know. I love the business and I would love for it to be a cheaper stock. Yeah. It's at about 33 times trailing earnings when you include their cash flow. That's bringing down to the EV as well. I just ran the numbers. So yeah, not great. As a fair warning to everyone, do not use the cash flow number. It only looks really strong when they're growing. And as they

mature, that cash flow is going to translate closer to their net income. Although as Ryan mentioned, they do really have that strong advantage with that working capital to hold on their balance sheet. I believe the number they earned this quarter with interest rates rising was about 150 million in net interest, which over a full year, that's fantastic because they did about $2 billion in operating income and their interest income is actually leads them to have their net income being like right around the same amount. But yeah, I mean, having like 600 million on an annualized basis, that would just be fantastic. But I think Q1 seasonally a little bit higher. There's also another comment because we were talking about how people are always like,

who you know who even wants to use an airbnb so i'm not gonna try to pronounce that name because i think it's i think it's fake but he says they said the same thing about meta that nobody uses it yeah i i agree people talk about how facebook and instagram are kind of washed and old old tech but people are addicted to that stuff yeah and maybe people are saying the same thing about tinder but that that's more of a tbd because the downloads look good but we should time stamp this because if match group is a huge winner yeah the next 10 years let's say and tinder like stagnated for a couple quarters and everyone said the business is going to die like it's going to it's going to shrink and shrink and shrink we will see why it was so hard to have bought because

maybe people will look back in 10 years and say, how did someone not own Match Group? It was trading at whatever, 10 times cashflow. And it was growing users in a booming industry, something like that. But you can see right now why it's more difficult to buy in the moment. It's like people saying, why don't you buy MasterCard in 2013 or something like that? obviously it's 2011 yeah 2011 but yes yeah what was that the the something act there was a there's some legislation that was potentially going to get passed yeah no yeah totally true and we can yeah we can use them to show that we were right or we could use the videos to show if we were right but if it's wrong our show is so small enough that no one's going to remember so when that's

Yeah, except for in the stock returns, which is, I guess, what truly matters. All right. Other topic is the Google I.O. event. I think this is interesting, especially this year. Well, they seem to hit all the buzzwords and got their stock up, which whatever. I don't understand who's buying just because they said AI 100 times at the event. But I think like Apple, this is one of the tech companies when they do announcements and they change part of their operating systems,

they can have reverberations across dozens and dozens of hundreds of companies in the world just because they are one of the dominating operating systems at this event, which I guess for any listeners or viewers, it is their annual event where they update a lot of their hardware, they update a lot of their software services, basically everything. They just do a bunch of announcements on their products.

It's about two hours long. So for anyone that doesn't watch it, here was a few of the big things. First, yes, they did throw a lot of AI buzzwords into the product updates. I'm probably going to refrain from talking too much about those because we can't really provide any value for the listeners there. Go listen to some AI expert out there, which there seems to be millions online now. But first, here's what I thought was interesting. I think we can have some fun discussions on here they announced three new hardware devices first an 1800 foldable phone i think under the pixel line second a 500 tablet slash spart speaker and third a 500

discounted pixel device here's my question we can just call it a flip phone for short the flip phone yeah although it's it's pretty meaty it's it turns into like a tablet so it's it's not as it's like the the sizing is completely opposite but yes yeah i find it ironic that we're going back in time yeah and here's the question with pixel hardware sales soaring i believe they're growing about 100 from a very small base mind you so don't get too excited about this is it smart for alphabet to keep pushing these devices at lowish cost because with this tablet that's really undercutting, you know, an iPad. I know a lot of people won't change from the iPad. I have like an eight-year-old iPad that we got from playing college sports that

is finally falling apart. I think I actually might buy this tablet from Google because it also has the smart speaker and like 500 bucks, you know. Do you think it's smart to sell these at a pretty, you know, discounted price, excluding the foldable phone to reduce search and YouTube, you know, traffic acquisition costs, which is their largest cost of revenue? What do you think, i don't know as someone that's been incredibly impatient about google's lack of earnings growth i would say no but long term it seems like the right move the other thing is like a lot of these things are very affordable when you throw the financing plans on there oh from yeah all the way i did that i did that and i don't like it maybe it's just because i've been traveling

internationally they lock you in you can't like change the sim card and stuff so anyone listening there are a lot of downsides to that maybe i don't know but yeah you are right the other thing is a lot of the um or cell phone providers your your plan providers will subsidize a lot of these costs where they'll say you know we'll give you this half off for if you switch or something like that so um what do you think about okay i think it just makes it more affordable like the headline numbers always seem really expensive where it's probably a little more affordable for people than it maybe seems yeah all right do you think the foldable phone probably a bust right yeah probably at least they're pricing it at high enough things where it's only going to be

a niche device and maybe they actually make money on it what's the point of it like folding so it's like a like a tablet for for games so it's actually a bigger screen um and how big is this thing let's let's look i mean i just like don't picture that being a very obvious case do you play mobile games i mean right maybe but do you really need it to fold in order to play candy crush? No, but it's more of a What are the specs? Give me the specs. Come on.

That's not saying anything. It says it's bigger than galaxies. Just give me the inches. 7.6 inches. A piece of paper is 11. Pretty close. Pretty big. One folded out. I don't know.

I think it's for gaming. Yeah, it's for gaming, but I also agree with you. I got a feeling it's going to be a flop. Okay, here's the second one, which I think it actually is a little bit less risky and maybe really, really interesting just on where this industry is going.

They announced major updates for Android Auto, which is their car software services. They estimate that they're going to be in 200 million vehicles at the end of the year. You can now watch YouTube while charging your electric vehicle or just idling, among other apps. They are embracing more crowdsourced navigation on Maps and Waze, which is just like,

I don't know, just helping people get to the right charging stations, just helping people get whatever. And you can also do video conferencing from your car now, so Zoom, Teams, whatever. I think this is really embracing kind of what the EV transition, and what do you think about the opportunity

in automotive for Alphabet as we kind of go to this connected car, as people call it, industry where they're electric. So you're going to have these idle times at the charging stations. You're going to have more autonomous vehicles slash driver assist programs, and you're going to have all of them connected

to the internet. I think it's a fairly sizable opportunity for them, but I mean, it's not going to be a game changer. but I think it's interesting that they're really going after this and seem to be succeeding yeah it seems just like another way to expand human beings time on the internet and think about once we add in Waymo

I mean just Galaxy Brain those numbers right there I was going to say throw self-driving on those Android Auto whatever downloads and boom you can triple the enterprise value in your DCF um no i i don't know it's interesting but like i'll also most people don't charge their car from like a charging station they charge it while they're at home so i don't think that market's as big as people think but yeah um i don't know the auto stuff meh meh for me i think we we both

have cars that aren't new enough to have that right yeah i mean it's like nice to have like good functionality while you're driving but i don't spend that much time and until like cars are driving fully autonomous autonomously i don't spend that much time looking at it even the people i know that have like teslas don't spend that much time just sitting in the car playing with their screens yeah yeah 100 although it's nice to see them being maybe a little too prepared for the potential self-driving future uh so i think google is definitely setting themselves up to win that way most way most winning what 10 000 rides a day autonomous and they're gonna 10x it this year yeah i mean that's that's not i mean that's not that much for ride sharing just because there's

so many rides out there but i mean that's not nothing that's a lot and people talk about everyone does the same thing when you tweet about it or talk about it is they say what are they going to do in January in Chicago? I'm like, well, I don't think they're going to use it there. You know what I mean? It's like, but whatever. All right. Here's a third one. I think it's even more interesting for their kind of defending their search position in the near term is they are bringing more personalized search results to Google, which means generally expanding more outside of just web links. So these could include YouTube clips, Reddit posts, other social media posts. Do you think this is because they see the data of young people searching for things more

on Instagram and TikTok and YouTube, which I guess is their own property? Yeah. And I just saw something too on like the YouTube homepage. There's like this new, have you seen this? The search labs icon? That's on the Google homepage, you mean? Yeah. Yeah. I joined the wait list. Don't know what. but what's that for? I think it's for testing new AI tools. So you can like test stuff with them and try out Bard, stuff like that.

Yeah. I saw some comment or I saw some thing today where if you ask Bard, how is the first quarter? It just gets the numbers completely wrong. It's like, how is Google's first quarter? It's like revenue is up 23%. Revenue is up like 3%.

Yeah. The AI Reference It's 2022 numbers Whatever AI is the future I guess so Yeah

Yeah we're definitely Not in a bubble Although I think If we are in a bubble I think we're only In the early stages I think If we

If we are in a bubble And I'm not saying This is not a prediction Do not I'm not investing Because of this I think Microsoft Could become

The first company To hit a Four trillion dollar Market cap If we really get Into an AI bubble We hit all You know

The NASDAQ Just keeps going NVIDIA Will just become An ultimate bubble stock I mean It could get crazy again. I'm not saying that's going to happen.

I just could envision it happening. I hope that's not the case. You don't want to go through another bubble, a re-bubble again? Every conference call is so boring. Yeah. So here's our AI strategy. You have nothing to do with AI. I don't care.

And every single one is the exact same. It's like, there's a lot of talk about AI right now. At Fiverr, we've been working on AI since we started. It's a part of our DNA. I'm like, okay, I get everyone's been working on AI, but it would be a huge green flag for me if I read through a whole shareholder letter or a conference call and did not see the word AI. yeah no hopping on the hype train yeah i mean it's not a giant downside if people talk about it it's more it'd be more of like we're changing our entire it's the metaverse all over again yeah maybe a little more integrated into actual real life maybe a little more use cases yeah but yeah all right here's the last thing i thought when reading through all these google product announcements is, you know, with all these AI tools, which for anyone go look them up yourself. I don't have any insights on that. They did a lot though. All the AI tools are coming

to Google cloud and Google cloud. And a lot of these devices and services are powered by Google's own computer chips. Now they hyped it up when talking about the hardware, Google cloud, the AI stuff, and they're generally called TPUs, which I think are tensor processing units. here's what is interesting is we talked about when i forget what company we're looking at but maybe it was on one of these power hours is the chip companies being i don't know if you're nvidia over the long term do you feel threatened a bit by the vertical integration here i mean the market could be giant but i don't know it seems like this vertical integration strategy from these from someone like Google or Amazon,

and Microsoft's been a bit behind the ball, but it seems like it's very smart to save on costs. Yeah. I mean, from the outside looking in, if they can successfully produce a chip that saves them money, then yeah, it's great. But I imagine that is a very costly process that most companies aren't capable of replicating.

Well, TSMC is producing it, but yeah. No, I mean, just like developing a more cost-effective chip, like isn't that i don't know probably a little more complicated than it sounds yeah but i think if you it doesn't have to be exactly better than nvidia it just has to be better than nvidia for your specific use case for your use case and plus the margin there they were going to earn by selling it to you yeah i guess that's true um i don't know chips makes me feel stupid so yeah i know you never have semiconductors like i've zero zero valuable takes but yeah i know you never want to say anything about semis uh that's all right all right here's this energy

drink stuff well i saw the energy drink volumes continue to rise uh celsius i know that people love that stock and that earnings report was just a blowout but remarkable here's some yeah here's something from uh lt lawrence hantel who we should probably get back on the show soon i don't know there's just a lot of companies that would be fascinating to cover he said i don't remember exactly if it was buffett or someone else who said that people in 1930 or 1940 would likely have argued that the coca-cola story had played out and you missed the boat but that certainly could have been applied to monster many times over the last 20 years as well i think that's quite interesting um i did read uh or i'm in the middle of reading the history of soda

which is pretty good for anyone interested in business history and that definitely was the case where people thought they kind of peaked although world war ii was just an absolute uh catalyst for coca-cola but that's besides the point pepsi right wasn't that great depression right when they came out with the five cent cans and it was just a huge hit well depression pepsi helped but coca-cola uh world war ii there was various political reasons why coca-cola was the supplier for the army uh for the all the departments of the united states so when they went to all these other countries and were hanging out there they were all drinking coca-cola and yeah it's pretty good branding so but what do you think on the energy drinks do you think

we could like i remember we talked about energy drink companies and we said man i mean it feels like you know it's maturing and stuff like that and it could just be there could be 30 years more of runway for the energy drink business yeah they're good i mean it's still the industry overall is growing volumes like 15 isn't it i don't know if it's that hot but maybe volumes plus pricing the uh i will say i've been drinking a lot more celsius as myself what do you think i think they're good i think i'm addicted do they have the b vitamins what What are their health things that they say? I don't know.

Tastes good. They do. And you know what? Monsters tried to copy them a little bit with their own health-focused energy drink, where I think the only difference, really, maybe there's some chemical difference, but it's a thinner bottle. So maybe it makes you seem like you're not drinking as much. That'll work.

Don't just... That'll work. I mean, Red Bull versus Monster, people, right? Yeah. It works. No, I was looking at that Celsius report and I'm going to be really upset if Celsius turns out to be a massive business. A hundred billion? We just looked at Monster and we said, man, it'd be great to find this in its early stages.

Now, the difficulty is Celsius is a $9 billion market cap, I think. So do I think it's going to be almost a trillion dollar business? It's really hard to imagine. No, but maybe, yeah, no. I hope they go through like two rough quarters. Yeah, that'd be great. But they did. And I think now that they're tapped into the Pepsi logistics,

it seems like it'll be a little more of an easygoing. There's always the lawsuit. Maybe there's a lawsuit that comes out. I know that Flo Rida sued him for like $80 million. And that was successful, but it didn't really seem to have that big of an impact on the price. Let me try to look at their earnings multiples. Maybe we'll just look at a sales ratio.

No, they just kind of got to true earnings power. They jumped from like, I don't know, they're like 17% operating margins now pretty quickly. Well, let me look at the sales ratio just because we kind of know what we can translate that down. Yeah, 2020. Let me just share it. 2020 27 time sales 2021 17 and a half an hour closer to i mean it's still pretty expensive yeah but doubling volumes but you can't do that forever right yeah and it's not just convincing ourselves not to buy even though we i don't know i i kudos to everyone that's held on to celsius

honestly yeah yeah yeah yeah i mean the time to buy was i don't think monster was doing i don't think monster traded at multiples like this if i remember looking at it correctly there was like it was not trading at 20 times sales at any point yeah let's look before we wrap up here and maybe because monster has been so successful it allows people to want to be want to bid it up. Yeah, exactly. Never been over 10 times. And when I was the ultimate buying opportunity

was at one-time sales. And just remember, we're using that because Celsius hasn't had steady margins. Just think that generally because they're selling drinks, they're going to have similar unit economics. All right, we got two minutes left. Someone said they loved our episode on Nintendo.

Thank you. Appreciate that. right on the right on the channel yeah a lot of people watched it so if you're on the podcast app it's going to be a couple weeks old and on this the youtube channel they'll be right there yeah they just reported earnings too so what do you think our takes didn't didn't age that poorly which is whenever we publish a show right before earnings i'm always worried that it's just going to totally make the show pointless uh no i think our takes were so good it's also worth remembering that the movie

and the benefits from the movie were not really incorporated into this quarter. Yeah, they're Q2. Yeah. And the most important, if anyone's watching Nintendo, the most important thing

is their software guidance. Yeah. And everything looks really good Zelda-wise. That new Zelda game apparently came out and it's like, people are saying

it's the best Zelda game of all time. Yeah. That's a huge seller for them. Anyway, and we're nerding now on nintendo it's about time i think we've been recording for 59 minutes so yep we can go through the disclosure if anyone wants to watch these live they go youtube every thursday and around

midday uh today was a little later 2 30 eastern but typically we'll do about 12 30 eastern or maybe a little later if you're around that time watch a live or if you want to watch the replays You can do so on YouTube or listen to the replays on your favorite podcast player of choice. We don't care what you do. All right. Remember, we are not financial advisors. Anything we say on the show is not formal advice or recommendation.

We are general partners at Arch Capital and clients may hold securities discussed in this podcast. Thank you, everyone, for tuning in and the fun questions. We'll see you next time. Bye.