Chit Chat Stocks - Investing Power Hour #59: $DIS Streaming Transition; Buffett's 13-F; Home Prices Finally Falling?

Episode Date: May 21, 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 59. No special significance there. I guess we'll hit the big six zero next week, but we're going to keep grinding along. My name is Brett Schaefer,

and I'm joined as always by Ryan Henderson. On the Investing Power Hours, we talk about really whatever's going on in the financial markets whatever's interesting us we typically like to focus more on a fundamental level for individual stocks investing news will hit this week the media and gaming industry i got some interesting stuff on disney's earnings they're at a bit of a crossroad in streaming and then there's some interesting stuff in the video game market with take two and grand theft auto six plus some other stuff that's been interesting and then ryan looks like he has some stuff on mortgage demand and it is 45 days after the close of the previous quarter so it is 13 f season we have some interesting charts that i'm

sure will be fun to discuss before we get into all that ryan how are we doing today how are we feeling as we close out earnings season feeling well i uh we got some feedback some constructive criticism around my audio so if you've hated it up until this point and not said anything we fixed it hopefully i've gotten my microphone and so hopefully my audio is better uh but no it's I'm, I'm good. I, and let us know if it's still not better because sometimes it's hard to tell. I thought Ryan's headset was good, but I know some people were complaining or maybe it was just one person that spammed us, but that spammer, he's helping, you know, we need that feedback. No, it's good. I I'm ready for earning season to be over. I think there's like always that lead up

to earnings season, I'm always a little excited for some new information. And then the week after I'm like, all right, I'm glad this is over. It was just kind of, it's always too much numbers at once. I've always thought, and you can maybe disagree with me here. Maybe it'd be a good idea to have the companies just not have an earnings season to just report, make them have like a make all the public us companies have like a different fiscal year that just kind of goes through 60 so you can just like constantly see the earnings updates instead of one keep one crazy month yeah i've also thought that maybe we should yeah stagger like that and then maybe go through to just twice a year one half and then

full year results but then we could also stagger throughout the year keep it interesting you could hit like instead of having all these companies within one week or basically all the companies within the same sector within one week you could spread it out have that sector be kind of i don't know it'd just be a lot easier and to be honest the reason they do it how they do it is for the media programs that's the only reason they have it to make it so um right you know for cnbc bloomberg and stuff like that and this would make it even better because that earning season it isn't even a season it's just constantly going just at a steady drip have you been reading or consuming any entertainment that has caught your eye lately why do you ask uh let's see

i mean i've been watching a lot of sports lately to be honest yeah this test you should be why rereading the intelligent investor every week yeah if you're really if you're really dedicated to the game no if you're true if you're actually dedicated true diehards read security analysis yeah cover to cover that's going to be useful modern times the uh what yeah i was just asking so you would ask yeah i you know when you ask somebody a question in hopes that they just reciprocate the same question the uh that happens on data guys you know yeah the success rate on that's quite low anyway i uh i recently read so i listened to interview with todd combs the i am home or whatever one and he mentioned

a book called killers the flower moon i believe it's what it's called probably the best book i've read in the last two years really good it's being uh they're making a movie about it right now it's in production leo dicaprio's in it really good so that's three and a half hours though that's the movie yeah gotta get those editors in there hopefully the book's kind of a short read it's only like 300 pages so uh i really what was it about the book um the osage native american tribe uh had basically they lived on this what everyone thought was kind of pointless land they moved there because settlers kind of kept coming in and kicking them out so they moved there they acquired they technically purchased the land from the government for like some crazy low price

because everyone just thought it was just this horrible land. They wanted to go somewhere where no one was going to come in and try to kick them out again. Turns out it was on like one of the best oil reservoirs or whatever in the US. And so they were – that town, I think it's called like Pahuska or something, was the richest town in the world on a GDP per capita or maybe it was like a net worth per capita basis for like in the early 1900s, apparently. And then suddenly, like slowly, they started getting like murdered a number of cases.

Like there was 24 cited cases, but the rumors are that there was really hundreds of cases that went unreported. And then this was like the formation of the FBI came in, stepped in. It has nothing to do with investing. So I'm sorry if I'm boring people that were hoping for... some more mortgage talk but uh yeah and it's kind of like this investigative book yeah don't uh yeah don't spoil the whole thing the uh sounds good yeah all right maybe there you go for any listeners recommendation what's it called flower moon killers of the flower moon all right sounds good

you know the early oil industry is always interesting um yeah maybe maybe you have to read it before watching yeah i have to read it before watching the movie anyway um i also listened to an interview recently with john rotanti on the acquirers podcast did you listen to that one john rotanti on the requires oh quite i i was gonna say i thought you got acquired um no no and uh that the toby and jay porn valley after hours yeah i saw that he was on there I haven't watched it, but I have it on my queue. I got to say that I was listening to the, on a different show called acquired with the Spotify CEO.

So yeah, but I saw that's in my queue. Excited to see some of our friends on FinTwit getting to the big time on value after hours, huh? Yeah. Although it was entertaining. It's an entertaining listen. How's the Daniel Ek interview? Same old stuff you're not talking about so far.

I haven't listened to the whole thing, but I think they'll probably try to ask some good questions at least, because I think at least from their perspective, they're a big podcast and hopefully throughout the episode, they'll ask questions that people actually care about unlike the investing analysts who don't actually seem to understand the market too well. But yeah, I think it's good. I don't know. All right. Should we talk-

Topics? The same. We're back. All right. that just isn't yeah you want to hit yours first sure this is just i you know what i can't tell whether people like this or not i we've made a whatever a tiktok like a youtube short about like the housing crisis or whatever total engagement bait works great people oh it did really yeah it's probably our best one just because it like gets so much i don't know

Everyone has like some anecdotal take on the housing market. Either they're super bullish or super bearish. And you can tell whether they're bearish when they're frustrated like us about housing affordability or you're bullish when you have skin in the game. Anyway, I think Michael Burry called it like he said, it's like watching a slow plane crash. And I think that's maybe an app description. so i guess new data came out just kind of around uh affordability so i've got this chart here let me can i show my screen oh yeah let me uh do you have access here should have access now yeah people are uh i know people now you got to describe the show yeah the audio you'll be able

to describe it we always try to that's a rule now is to make charts that are easily described for the audio um but i think it's fine i've listened to it i've re-listened you know watch watch them film like like an athlete right yeah okay so this should be fairly easy to describe this is data from the federal reserve bank of atlanta and it's basically just a chart that is it's the share of income needed to cover housing costs so the percentage of the median family's income required for housing at modern affordability levels. And it's up to, I believe, 39% of one's income right now on average to cover housing costs. That is the highest level since 2006, 2007, basically pre-bubble, pre-GFC. There's some more quotes. This was from Charlie Bielo,

I think is his name. He says, and this is really just kind of staggering to think about. He says, in January of 2021, the 30-year mortgage rate was 2.65%. An average new home price in the US was $401,700. So $400,000 home price, 2.65% 30-year mortgage. Today, two years and four months later, the 30-year mortgage rate is 5.23%, so more than double, and the average new home price is $570,000. There are currently more realtors in the US than single-family homes available for sale. I think that's a tough job to have right now. I would not want to be a real estate agent. I don't know. I saw Tobias Carlyle mention that, but mortgage application is apparently at a 22-year low. I don't think that's all that

surprising. It's just a matter of whether or not people can afford it. You're not going to apply for a mortgage if you can't afford it. 21% lower than a year ago, that was lower than the year prior, it's, I don't see how, but at the same time, such low inventory, I don't see how, I guess, I go through my, like, I think once a month I go through this like thought process where I say, okay, no one can afford a home or significantly less people can afford a home. Obviously prices have to come down to match demand. But like that quote, more realtors in the US than single family homes, there's no supply.

So is it more just a matter of people sitting on their houses waiting for better bids? I think they're bag holders, but maybe I'm biased. I think it's already starting to happen because there was, unless you already mentioned it, I'll mention it again. There was a chart that came out this morning from that same account. I don't think, well, he didn't come up with the data, but he always posts that. Charlie, I can never pronounce his last name correctly, Bilello, where home prices are officially falling down 2% year over year.

Now, we are lapping the ultimate kind of mini bubble, maybe bigger bubble, we'll never know, in early 2022. So it's happening, but it's slow. I wonder if it's going to continue. But I think the most interesting thing to me, and there's a great sub stack from this, I believe it's a longtime housing analyst. I think it's Bill McBride, I think is his name. Either way, look it up. It's called, actually, I'm going to confirm the name of it right now for anyone that's interested.

He does a lot of free stuff. Yeah, Calculated Risk Real Estate News. You'll be able to find it super easily. Yeah, Bill McBride. He had a chart earlier this week that he sent out on his newsletter outlining that multifamily residential real estate. So anything, I believe it was with two or more, and it could have been five or more, but either way, that kind of just says large apartment buildings or small apartment buildings

or condos or stuff like that. Works in progress was, I believe, at 1.4 million units, which is at an all-time high, not set or not maybe i think it was the high not set since 1972 it's much higher than anything in recent history so i think that could have a big impact as well as those come online but again yeah we can talk in circles about it it seems like housing prices from the data that's coming through are falling slowly maybe we were kind of in the camp that they should have fallen quicker but i think to your point the um the low inventory the people holding on to their low rate mortgages is probably adding some friction to the rationalization of the housing market

once you agree it seems like this is kind of how you know you'd expect it to play out there hasn't been any giant surprises if you kind of if you came with information that okay the inventory is going to be stuck there's going to be all these people trying to hold limbo maybe not Not call them bag holders, but keep their – not put stuff onto the market. Yeah, well, I don't think it can be a – it's not going to be a crash, like a fast crash, because it's not a delinquencies problem. It's just that prices have gotten so stretched that it's an expectations problem that will just take some time to reset, I think. Like, okay, OA, obviously that was a delinquencies issue. That was people buying homes they couldn't afford.

That's not really the case. This is just people can't buy the homes because they can't afford them. So it's got to be a reset of expectations. The works in progress is kind of interesting. I imagine that'll trickle through and lead to further home prices declines. my take, my whatever New Year's take, my bold prediction was minus 10% median home price. I think we're on pace. Yeah. It was like at 2% so far. I think you could definitely hit that for sure. It was a pretty easy comp, got to say, since we're at very, very high prices, but

there's a lot of people that are not predicting home prices to fall. A lot of people just every year say, oh, houses are, prices are going to go up. Prices are going to go up. Prices are going to go up um but we'll see uh so there's there's a real estate talk uh john yeah what about yeah do we want to talk commercial real estate oh we got a comment here about office REITs um I will say we should not talk about that because I don't know anything except there's a lot of people that are bearish that's all I know yeah I'm regurgitating takes from value after hours but I remember Tobias saying that, um, occupancy rates were extremely low, um, and a lot of major cities, right? Yeah. And I know a lot of people are kind of, uh, I think work from home is kind of this

polarizing idea. A lot of people believe that everyone should work in the office. That's way more productive. You're, you're not allowed to goof off or waste time like you do at home. There's other people on the side of the aisle that say everyone, everything should be completely flexible. I think the reality is 2023 and beyond, there's going to be more work from home than there was prior to 2020. Yeah. It doesn't matter. It's just incremental. That definitely is going to affect the commercial real estate. How much? I have no clue, but let's see. Yeah. We've gotten a little bit on real estate. I want to do another topic, make sure we get all these here. Why don't we fit let's just do the 13 apps because maybe that'll be exciting and then we can talk about

more comprehensive stuff with like the media and gaming space to end the episode all right yeah it is 13 f season that means we you know it might as well just be called confirmation bias season because everyone just sees big investors that bought the same thing as them and they say oh well you know ackman was buying google when we were so we're smart Yeah. Anyway, let's talk Berkshire. Their portfolio value is at $325 billion right now. Largest holdings haven't really changed. Apple, Bank of America. Apple's a huge chunk of the portfolio. But keep in mind, they have owned businesses that are not accounted for here. um american express is the third one coca-cola chevron has slowly crept up occidental petroleum they continue to add to basically the biggest ad was hpq hp um i'm on an hp right now although i bought it during their kind of oh i don't want to call bubble again but they're um the period

where they had a lot of demand in 2020 yeah apparently part of this too is that they had to integrate someone else's portfolio into the um berkshire equity holdings so don't take this as buffett's buying this or whatever but um i mean any big takeaways here they reduced their ally financial stake slightly right slightly like i think it was percent yeah i thought that was inconsequential um yeah ally i guess not really a big takeaway there i love that they own markel and markel owns them so it's just a closed loop infinite loop of equity purchases i wonder if they ever will toss out a bid to markel and say like hey you guys want to you know come work with us it'll be infinite capital whatever not really but i don't know if it would actually

work i don't know why they own markel but we'll see what happens there i think it's very interesting that they're buying apple at these prices because typically buffett hates buying things that are anywhere significantly higher than PE ratio 10 and they were loading up on Apple when it was close to you know it was at those depressed levels and people thought we hit peak iPhone blah blah blah what was that 2016 through 2018

period and the PE was very low and it was super discounted and they're buying back stock and now we're at above 20 maybe even closer to 30 and he's still buying I find that very very interesting I wonder what he's seeing there over a

you know basically just holding the cash in treasuries right now, which will pay you 5% and you have the optionality. Yeah. I mean, this is something that I talked about on that value after hour show with John Rotante. There's that quote where it used to be buy fine businesses at wonderful prices, and now it's buy wonderful businesses at fair prices or something like that. He was rarely ever paying a fair price. Basically, I can't think of a situation where he was paying more than like 15 times earnings for any business except one and it's apple right now it does surprise me that may have been part of the other portfolio being lumped on possibly it's a pretty large buy

adding two percent of the position is not aimed significant given how big of a stake that is Yeah, I'd be very surprised if Buffett was just adding to it here when it's almost 50% of his equities portfolio. Not to mention they're increasing their position somewhat through the buyback, which he loves to talk about. yeah they love talking about the buyback the double buyback when the berkshire is buying back and then apple's buying back it's it's fantastic stuff i think the markel stuff is just incredible though they both own shares in each other uh i don't yeah i don't think nothing really big from him i mean maybe or what's the more exciting what do you have next burry yeah burry's is when he's wild he changes you know every quarter so his stuff his portfolio might be completely different as we're talking about this but still yeah some the largest part

of his portfolio right now is jd.com and olibaba both those are completely new positions if i'm not mistaken that he has a whole bunch of regional bank exposure to um he bought zoom at basically seven percent of his portfolio now interesting part for me yeah is yeah in covid he literally said are we not at peak zoom and i don't know if you ever put a short on but it's it's cool that he's able to kind of whipsaw his uh like opinions on things so quickly kind of tells you how uh how he tries to not attach emotion to his investing philosophy others i mean i didn't think anything was that crazy he sold out a whole bunch of his portfolio that prison or whatever he used to own reduce that substantially i love the the media would

put pictures of him looking kind of you know it's the awkward look and they would go great uh big short investor takes giant bet on private prisons and it's like a such a quick bait headline uh and saw the mgm too that must have done pretty well for him yeah not bad yeah anyway his is always entertaining but it's also probably one of the hardest to emulate because i think he does a lot of derivative positions so that percentage of the portfolio might not be entirely accurate the other one that i always find a little more interesting is chuck ackrey um And Ackrey is very much a quality guy, looks for just the highest quality businesses he can. He's adding to MasterCard, which is-

Slightly, that was- Yeah, about 20% of his portfolio, 19%. The only other one that he really added to was Brookfield, which I've irritated with the Brookfield complex. And then he reduced his CarMax stake. was there anything from any of these 13 apps where you said hmm that's interesting i might look into that more nah nah first off acree i believe does not run anything anymore but it's that great whatever same philosophy uh with the disciples yeah i think acree is interesting when they take a new position that isn't a starter position that's the only time i'm really

interested i guess car max was interesting maybe they i don't know what they saw there it seems like i guess car max is somewhat similar to carvana i'm guessing a little bit uh more well run uh without looking at it but it could still be hitting that wall of used car prices maybe they saw that i think brookfield possibly could be a spin out because i know they have brookfield there was i don't follow the company closely but there was brookfield asset management and they spun out brookfield corp again i don't know what happened there so maybe that was seen in the 13f But either way, they have a sizable chunk of the portfolio and that at 5%. I think what interests me with ACRI is if you look at the previous, let's see, basically, they had a bet on like, okay, the payment providers, excuse me, the payment rails, Visa and MasterCard.

They also have Moody's, just a separate bet. They also have American Tower, which did well. And those have been their long-term bets from, say, 10, 15 years ago that have worked out and really driven the portfolio returns. But it seems recently they're trying to take pretty big positions in the private equity companies. They have a sizable stake in KKR. You have Brookfield and Brookfield Asset Management.

Again, I don't know the- Alternative asset managers. Yeah, alternative. Let's just say combining to that. And then you also have Roper, which I don't think is alternative asset management, but it's a bit of a roll up of, again, I don't know that company closely, but it's a roll up of, I believe they transitioned to more like software stuff or out of, and they were basically, they're a little bit of a mini conglomerate roll up, sort of like a Danaher

or something like that. They also own Danaher as well. I find it interesting that they're, they have a lot of exposure to those types of companies, especially the alternative asset managers. Cause I don't really, I don't like. The alternative asset manager has got to say it's too much of a black box to me. Yeah, but I think the proof is in the pudding with those returns there. Oh, yeah.

I mean, flows are going to drive fees and then earnings go up. I wonder if at the end of the day, that's what it is really, is that these are just wonderful sales organizations. They can just attract incredible amounts of AUM. and they really like the pure investment performance doesn't matter as much as their ability to drive assets um the other one i find interesting is they own digital bridge so they kind of have a little bit of a little bit of a chuck ackrey versus jim chanos thing going on because i know jim chanos is short a lot of the uh he if i'm not mistaken he went on and talked about uh how he doesn't believe in the data center reads and he believes a lot of them

are kind of inflating there i think digital bridge oh yeah yeah okay yeah yeah data centers yeah yeah i guess so it's a tiny position though for act 0.5 we'll see i find their position sizing a little strange i gotta say i would love to hear more of a um like what their philosophy is because it seems like when they take new positions they're very very small and they're not going to have any effect because what's going to drive this portfolio is mastercard modis american power visa o'reilly kkr and all these other positions aren't meaningful so i wonder if they're just tracking positions i i i'd be really interested to hear their their portfolio management philosophy agreed i i don't know 13 and a

half season's been a little boring so far it's always you know i mean what about general act what what if you just buy you just bought uh google is that really it i'm a little soured on acmen if i'm being honest the general the expert on everything gosh i don't know what's he's just kind of pushing square person square i think he's just got a god complex going and it's really kind of cringy to watch yeah wow google up to a to find the two tickers 10 percent holding wow we got i mean he's like he makes bold bets though low 20 historically he's been a great great equities analyst great analyst in general but it's just like the attitude and the the proclamations via twitter and you know he woke up that day that day icon enterprises was

called out you know he was just punching air just hey i'm so excited i would be too if i was him All right. Next topic. Let's hit Disney earnings. So I think the earnings were kind of as people were expecting, but the one thing I want to hit on, and then maybe we'll... There's another question I have with the parts combining it at the end. I'm assuming everyone is aware of the Disney business, but I want to talk about the D2C business as a reminder. We've had him on the show a lot but alex morris signs hitting his sub stack covers this extremely well this is where i actually got a lot of the info and inspired some of our discussion questions so first note here in the quarter they had over 500 million dollars in streaming losses so d2c streaming same thing

on over 22 billion dollars in run rate revenues and another note before i talk the first discussion question here. Is there a UCAN ARPU, average revenue per user, and UCAN is US and Canada, is up 20% at Disney Plus after implementing their price hikes. However, we have seen a stagnation in user growth. Here's my first question. Should Disney Plus try to be more of a niche offering for families and kids at a higher price point? Or should they continue to try and reach a very wide audience which seems to be somewhat they seem to be a little bit in the middle with their current strategy what are your thoughts ryan i think make it a catch-all make it just one complete holistic easy to navigate bundle where you've got the disney

plus you've got the kids offering you've got the sports you've got the hulu you're skipping into about it you're skipping it to my next question but yeah i mean i read about that you know it was kind of popular news that they're leaning towards that but i i think at this point it's easier to just consolidate and have one really high value subscription instead of trying to get them to subscribe to different pieces i mean like that bundle how much would you pay for that bundle me yeah um i don't think i'm the right audience but not much but i think the right family would pay a lot what if there were certain what if there are certain sports yeah it would because i think that's the thing with the bundle they could make it a here's what alex is arguing

i think it really makes sense is the bundle shouldn't be too expensive but obviously should have positive unit economics and then the a la carte offerings like at disney plus for a family with kids should be fairly expensive probably 15 to 20 bucks a month and then espn plus on its own should probably 15 be 15 to 20 bucks a month depending on how much content they put there and then the bundle could probably be something like 30 to 40 um when you add in hulu i would probably end up subscribing if there was a i don't know it depends if you can get your sports elsewhere right and that's the whole big question here is what do you subscribe to right now well

i mean share the share with the family full disclosure but as you are too as i'm well aware but i would probably do uh netflix hbo whatever it's going to be called max i guess that's going to help disney because that's just very dumb but and then apple i guess a few i like a few on there so if i had to probably hbo and netflix you don't have like a sports fix what's your sports fix well i guess i have access to cable right now but that's the big question because sometimes some of the sports you can only get on cable or the virtual cable providers and es plan plus doesn't have anything i really want so yeah i agree but that's interesting mls which for me was

a big selling point but apple plus apple tv took it over um i don't know i'd pay probably for a family for the bundle i think 40 bucks is reasonable in you can yeah for the bundle yeah uh for sure if it's a family and as especially you have one person that likes sports most likely you'll have one person who likes sports in north america then you'll have most likely the kids that want to watch the disney plus content and possibly some adults other like topic or go ahead i said essentially i feel like for the families with kids multiple kids that disney plus is like priceless Yeah, but how many of those are there? I don't know.

I guess maybe there is data. That's some data we could find. Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll. So bundle up and come along for the bumpy ride.

Stream a new episode of North of North Tuesdays on CBC Gem. The other topic I think is interesting is that linear TV revenue declines, or revenue is declining and users are declining, and it seems to be accelerating. And it's really hitting the operating leverage. I believe the number was like 6% revenue decline in the quarter. and over 20% operating income decline. So we're going to see this turn it from a cash cow to potentially losing a lot of its profitability

for the Disney business in the next few years. Here's the big question. I think this is even a bigger question than that bundled offering, because that's kind of an easy way to just make it a better value proposition or better understanding from consumers. is it time for disney to accelerate their transition away from the cable bundle using their market power especially with sports especially with you know a lot of the cable networks and really try to shift the industry because they always say like not really as

frankly as i'm going to say it but they have a lot of control to break the cable bundle if they really want it to and i wonder whether the it's just like they should have you know there comes a point where they really just need to make a hard choice here right because eventually this business dies and you've got to break it up eventually like why not just do it now get a rip the bandaid off well and just to be clear the linear networks operating income declined by 35 percent year over year wow yeah even worse than i thought um that's why i struggle to own disney is because that's such a difficult problem to solve and you yeah you could rip the bandaid off and then what all those people with cable just don't get espn now well they hopefully sign up

for espn plus for a very high arpu i know but there's probably a lot of families that don't have streaming well they will get it they all have internet now they will get it i mean they are i mean yes losses are accelerating but it's their only business still generating operating income on the streaming side or on the disney media and content side um so i don't uh that seems like a very risky thing to do less less risky than less risky than letting the pure plays get keep eating share like what are you going to just let apple and amazon steal sports rights for streaming there is benefits or there are benefits to them porting over a lot of the espn stuff to the streaming like for example if you wanted to watch

the nba again i think that's on tnt but whatever there's certain stuff that's on espn that you can't get on espn plus that i think yeah the nba if there's part of the nba that would be drastically enhance the value of espn and maybe i would sign up streaming maybe it'd get streaming to some level of profitability but i would say over the next three to four years if they let linear networks slowly decline and then migrate stuff over slowly they'll probably generate more cash but they might i wonder about their yeah that's what i'm saying is the long-term market position seems to be the most important locking that down and i don't know whatever their contracts are whether they can break and stuff like that but my thought is switch over as fast as humanly

possible, I guess, without blaring that in bold letters to competitors, market participants, whatever. That's my thought. Now, here's why I kind of think this is their best move. Because parks, experiences, and products, which again is mainly parks, showed a lot of health last quarter, $16 billion in revenue, up 19% year over year, and $5.2 billion in operating income. i have a question here is that they should they use these profitability from this asset to get even more aggressive versus their content peers i'm going to say yes because max paramount whoever do not have this advantage and they can take the profits from this and really squeeze out a lot of competitors as they make this aggressive push to streaming but it seems like they're they got one

foot you know they got one foot in the i don't know they need to jump both feet over right if kind of get what i mean and not have one foot in the boat one for the water here yeah i don't know it's such like i i know i think alex is still a shareholder um it just feels like there's easier bets to make or situations where like it doesn't feel like disney's going to struggle to be like really profitable over the next three five years maybe or they're going to start turning this thing around and generating 10 plus billion in cashflow because that's when it's going to look like when you combine the parts and if streaming is successful and they combine the parts within it and then you have obviously the other stuff like cruises then this thing is going to print money

but it's a big tbd on streaming success there are so many moving parts right now yeah yeah it just feels like a big question mark to me um you want to talk take two yeah this is a fun one for anyone that doesn't know take two is one of the biggest gaming publishers out there they own rockstar games producer of grand theft auto red dead redemption and others they own 2k games which it produces the nba 2k franchise and they also own zynga which is one of the largest casual mobile game portfolios or publishers i should say so there's also a thread here that maybe we can hit on if we don't have time or excuse me if we have more time. But Take-Two had their earnings. The actual quarterly earnings were quite boring.

They beat their guidance slightly, which is driven by outperformance at Grand Theft Auto, Red Dead Redemption, and the Zynga mobile portfolio doing well. Only surprise there may have been the Zynga performance. You could have seen in a lot of the data that gets released publicly on a lot of the news sites that Grand Theft Auto and Red Dead Redemption continue to do well. They gave out guidance for this fiscal year, which is fiscal year 2024, that started in April. They called for about $5.5 billion in bookings versus $5.3 billion last year. So again, nothing exciting. But then they kind of did a surprise here, and they gave a sneak peek to their financial plans for the next two to three years. And I'm not going to read the whole

slide, but they basically said, and you can go check on their investor relations for all the slides. It's very easy to find. Just go to their financials page. We've got their quota results. I looked at the investor presentation. They say fiscal year 2025, which again is confusing. It's calendar year 2024. They say it's a highly anticipated year for the company. They're preparing big product pipelines. And they believe, well, they say some corporate speak here, they're going to take to even greater levels of success. But the numbers here are that they believe they're going to hit $8 million in net bookings. And for any confusion, net bookings in video game businesses is revenue. I know the industry loves to make it confusing for investors.

So they want to hit $8 billion in net bookings compared to $5.5 billion in the year before and over $1 billion in operating cash flow with growth in fiscal year 2026. This seems to confirm, Ryan, that Grand Theft Auto 6 and other titles are possibly coming within the next 12 to 18 months. currently the market cap is about 23.5 billion dollars they expect to generate over 1 billion dollars in cash flow next fiscal year i think the first question i want to ask before maybe we get into a broader discussion on the economics of grant that dot o6 how do you value a business like this it seems like it's weird because the market you kind of like i thought everyone knew that grand theft auto six was coming next year but when they announced it it was almost like a

schrodinger's cat thing where it was like okay now we know what it is now we can buy the stock and it's up 10 today so it's a bit strange but curious your thoughts well yeah i guess it's a little frustrating i think if you're an investor because it's kind of like this weird limbo period where you're just waiting for gta6 you're basically waiting for fiscal year 2025 this whole next year I'd be surprised if the stock moved a whole lot even if they beat earnings marginally or whatever, missed earnings

Yeah, that break-even right now is not a big deal Although they are I mean, if you include StockBaseComp they are losing money, but that is StockBaseComp they generated $1 million

I mean, they're losing money right now $1 million in operating cashflow for the year. There had to be some capex. So if it's another period like this, that's a bummer, but really it's kind of like a wait and see who cares until 2025. Do you know what, because the figure they said is adjusted unrestricted operating cashflow of a billion dollars. Do you know what that generally converts to in free? Oh, it's fairly high. I don't know why they do this on adjusted unrestricted. It rarely is that much different than their actual operating cash flow and their capex is usually quite low so it'll translate fairly well so free cash flow i would say again watch the sbc but free cash

will be fairly similar just slightly lower yeah i don't know you're still paying what you think operating cash flow is just up and to the right from there Yeah, that's the big question. That's a big question. Yeah. I think its stock is a lot more enticing, closer to $80 to $90, especially given all the other opportunities out there in the market today, because you wonder how much higher than the $1 billion in operating cash flow they can hit. But however, here's the next question. How likely is it that GTA 6 outperforms their expectations? My anecdotal evidence talking to everyone that I know, that I know plays video games, has possibly played GTA, they say that there's not one person that says they're not buying this game.

Yeah, I think it can certainly beat expectations. For some reason, the stock does not excite me here Because there is some adjustments on that operating cash flow figure. There's a lot of stock-based comp. A billion is the forecast for two years out. Maybe it's higher than that three years out. You're still paying $20 billion market cap. I think they raised a billion dollars in debt at 5% this quarter.

Yeah, I guess the EV is a little higher too. And they just paid way too much for Zynga, frankly. It would have been hard to forecast what was going to happen in mobile gaming. But I don't know. It doesn't really attract me here. But then on the other side, I just ran some quick math. And this is probably around the expectation for unit sales. At a $70 unit price, which can maybe go higher, but they'll probably go $70 unit price, 50 million units.

That's $3.5 billion in net booking for four online recurring spending, which is a good, good chunk. so you can see gta 6 when you add on the gta online the gta recurring spending all that stuff the subscriptions they do in-game stuff you can see it turning into maybe 78 billion seven to eight billion dollars in bookings over a two to three year period if not 10 billion dollars over maybe a three-year period you look at that and go man are they are they sandbagging here or are they you know i guess you know there's always a chance the game's not a you know it could be a flop right it's not guaranteed maybe not a flop but maybe it doesn't have the life like maybe it doesn't have the lifetime sales that GTA 5 had or like the shelf life is maybe shorter

it seems unlikely but yeah they seem to be trying prepping to have the same sort of success here and what do they say um yeah they say they want to release several groundbreaking titles that we believe will set new standards in our industry maybe we'll see yeah and that's but i think the most or the most interesting thing there is that they said titles not title so there's going to be something besides grand theft auto i wonder what it is yeah wwe 2k24 i i doubt it is the uh it's going to be i doubt it's going to be a vr wrestling game or something like that but yeah all right here's uh it's just all forecasts i remember someone saying like don't buy on forecasts buy on real numbers

and that kind of like i know everything is a forecast whatever but it's one thing if the proof is there and they're earning that now and they're more likely to earn it later i just sometimes i don't know some sometimes these cash flows feel like they stay theoretical forever also yeah yeah i get yeah i see your point there but the best investor ever or one of the best stan drunken miller says don't don't envision today envision 18 months out so i'm gonna get a balance that as well yeah well you want to look at uh the well here here's the first question i have i know we've been talking nintendo recently we had a show on them for anyone that is listening go check out it's pretty recently we go through the whole company and how the business works

why we like the stock blah blah blah what was your reaction to the zelda unit sale numbers did it greatly exceed kind of what you were expecting because for me it really really exceeded any numbers that i was expecting the 10 million in three days yeah yeah is that the best-selling title they've ever had it tie it ties pokemon and usually pokemon is is much more popular you know commercially um yeah i don't know like the first couple of days i started to see all the buzz and i always whenever i start to see that i think okay this is obviously gonna sell millions of titles um or millions of copies 10 million it's higher than probably i was expecting but the other part for me is like where else do the unit sales come from this year for

nintendo there i don't feel like there's any big titles they've announced yet i know they always the existing ones there's there's a lot of if you look at the unit sales what's interesting as i think is unit sales yeah are important but there's also i'm going to pull up just their digital seller's best list. But if you look at the Zelda one, so, okay, just for context, they're guiding for 180 million software unit sales. Some of that's going to be subscriptions, probably about 40 million of that. Take that off the books already. But 20 to 30 million Zelda unit sales are going to be much more profitable than a lot of these other games. So if you look at their top digital bestsellers right now, number two is a game called Inside.

cost two bucks there's a monopoly game that has a free demo 40 bucks among us three dollars and 50 cents minecraft 30 bucks stardew valley zelda 70 bucks and zelda 70 and they have no they don't pay out to this it's all vertically integrated there's overcooked which is six dollars and 30 cents so again there's a lot of these yeah see look there's a lot of these quirky fun casual games maybe that people play mobile on the mobile version maybe of the nintendo switch or maybe on the tv screen as well that i think drives the unit sales but the majority of the profits we look at the zelda game they said they'll be profitable at two million unit sales they already hit 10 and all the they don't have to market that much for this game i mean they will do marketing

but all all the you know extra unit sales are going to be pure profit for the company so i think that can drive a billion dollars in earnings and then you have the movie as well that's going to hit the majority of nintendo's operating profit guidance and then they'll hit their software guidance if these kind of smaller games that really don't mean much financially work plus you have the i think people forget the subscription business now i saw it was driving huge sales or just huge re-engagement across a whole bunch of titles too like the zelda success was driving success of the first breath of the wild um it was the mario games saw an uptick as well that might also be conflated with the uh follow-on of the mario movie but i don't i don't

see how they don't absolutely crush estimates this quarter yeah here's an interesting note i had there i was going to share this thread on the u.s gaming sales for the quarter but our excuse for about april it's not that interesting but here's what was interesting from matt iscatella at surana says april us i'm looking basically said video game quick takes the zelda oled had a huge impact and zelda oled is the zelda oled switch model may should be fun uh sub growth continues to slow blah blah blah so before the game came out in april the zelda oled actually drove a lot of growth and if you look at the charts they're even better now so i wonder how much yeah you're right you know how much that's going to affect the month of may seems like it's

going to be a good month for the company but after this there's not much left for the next uh 12 months right yeah the other thing that this helps with is just the buzz around these titles anytime i see a number where it's like 10 million copies sold in three days it gives me a little more confirmation that we are seven years into the switch console and they're selling 10 million copies in three days. We're going to be, this console isn't dead. I think this is definitely no, we, and I know there's always the chance that it's still cyclical, but seeing this level of engagement seven years in, I think gives me a little bit of confirmation that we're, we're, this is more of a sustainable business.

yeah i agree i agree now next quarter sales are going to fall off a cliff our engagement's going to fall off a cliff um yeah i am worried about their holiday season but they never announce stuff until it's much closer like the opposite of disney so we'll see we've got three minutes yeah the uh i don't know i guess is there any companies you've been looking at lately that have your interest? Nah, not really. Would you ever invest in an oil business? Yeah, at the right price.

At the right price, yeah. And that doesn't mean a low PE, but I don't want to get caught up in that, you know what I mean, as a cyclical. I think, yeah, it's one of those where you have to trust management maybe a lot, but and you also want a big discount um i definitely would rather own other stuff though yeah what do you think about this ai double the

double bubble i'm starting to call it it's really um sponsored by double bubble god i think it's so overblown i don't want to see another conference call where people talk about ai and it's people that just don't, they don't deserve to talk about AI. It's somewhat the analyst's fault, but maybe the executive's TM up, send them a little WhatsApp message, send them a little telegram message, say, hey, why don't you serve me up a little AI question? I got some juicy for you on this call. You know who spent a ton of time talking about AI?

Surprise, surprise, the Wix letter. Yeah, I bet. Although to be fair, they invest in automation a lot, but they haven't been calling it the same AI stuff. their stock their stock also took a tumble because of people were afraid that ai was going to replace wix yeah just build websites for you but there's not i don't there's some friction to that i suppose yeah i think nvidia is dangerous not the company the stock is so dangerous i would not touch that thing long or short i mean this thing i wouldn't be surprised when vidiot

crashes 90% from here. I also wouldn't be surprised if it has a larger market cap than Apple by the end of the year. I would not be surprised either. I mean, the company... Wow. $776 billion market cap?

Yeah. And let's look at trailing revenue. I know we're about to go long, but I want to look at it just for the listeners to close things out here. Is that a real earnings multiple or is it like... No, no. They're... Okay, trailing 12-month revenue of $30 billion.

Yeah. They have a higher market cap than, almost than Amazon. No, they're a little less right now. Amazon's kind of rebubbled. Rerated, I should say, properly, now that we're shareholders. Yeah, but, okay, here's what I want to make. is nvidia more likely down down 90 a year from now or a higher larger market cap than apple uh am i allowed to say somewhere in between no no you can't that's why it's a hard question

more like obviously each is a low likelihood but i mean that's starting okay once you start to get to two trillion there starts to be like a ceiling you're bumping into in terms of how much you can bubble stuff i don't know that's not just you think it's just investor sentiment at that point if they accelerate if the ai revenue numbers come in like just bonkers i could see them just taking off tesla was like the ultimate uh exuberance of an investor community i don't think nvidia is at that level and that only got up to like what one trillion at one point one slightly or maybe 1.2 i don't know like think if they crush on these ai um chips in the next few quarters like just crush the numbers there's no competition right now

yeah i guess i think it's more like i i think it's more like about it you know what i liked i liked that management team from winmark for just saying we had a good quarter and then leaving it at that no talk about ai yeah yeah well you know who had a good point is coupon the guy was like he just said uh yeah i think those things are interesting but we're focusing on providing value to our customers and the analyst was like okay next question no but i i'm gonna say right here it's more likely that nvidia is a larger market cap than apple than down 90 all right both are unlikely yeah yeah we're about a minute long here that's gonna do it for this episode hope everyone enjoyed listening you can watch every thursday on

youtube uh typically around midday eastern time it changes up depending on our schedules or you You can watch the replays on YouTube or listen to the replays wherever you get your podcast. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. We are general partners at Arch Capital and clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time.