Chit Chat Stocks - Investing Power Hour #65: FTC vs. $MSFT (again); Short Report on $XPOF; Retail Shoplifting Issues

Episode Date: July 2, 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 65 on Chit Chat Money. My name is Brett Schaefer, and I'm joined as always by my co-host, Ryan Henderson. On these shows, we talk about whatever

we want, the financial world, financial markets, however you want to say it. It could be any investing-related topics. It could be any specific stocks. It could be investing philosophy. Really, whatever comes to our minds or whatever has been in the news this week. This week, we have some plans to talk about the Microsoft FTC lawsuit. There was a big trial with that, so a lot of information got spilled there. We also have an interesting take from the Moat King. What's his name? Pat Dorsey, which I think will spur some interesting conversation. I know there's a lot of debate around this on Twitter. And then Ryan has a short report on Exponential Fitness. That's a company we've looked at in the past. And it'll be interesting to see what they have

to say there because I didn't read that. So I'm really glad you had that. And also some shoplifting growth, I guess, in shoplifting, which could be affecting retailers. So Ryan, how are we feeling today? I've switched my background a bit. We're in a work in progress. so I know barely any people actually watch but we're trying to improve that my lighting isn't that great as I move locations but I'm

going to hopefully fix that by next week but we do have now if anyone can look Warren and Charlie kind of keeping their eyes on us yeah I I'm doing well it looks like the background is slowly improving

if we can get the door out of there we'll be i think we'll be yeah we'll be humming we gotta grab one of these ring light things they really do a number on the whole uh lighting situation yeah the uh my desk is it's small it's small no excuses no excuses get the job i know i know we gotta uh we gotta improve it yeah the door might be in the wrong spot i might just have to shift over a foot but whatever most people are 95 of the people are just listening so they have no idea what i'm talking about. But I should say that the Investing Power Hour goes live on YouTube every Thursday,

typically at 9.30 a.m. Pacific time, 12.30 p.m. Eastern time. So right around the Eastern time lunch hour, or you can watch the replays there or just listen to the replays on Sunday mornings, wherever you get your podcasts. Ryan, what do we want to talk about first this week? i don't think there was any big news that would be fun to talk about this is the last week of the quarter is besides seeing some stocks move very erratically for people painting the tape at the end of the quarter not much out there no yeah not very newsy there's some ftc stuff but really this is kind of quiet time i think like the lead up to earnings um i think banks do banks report next week or is the week after no i think it's second week in july is when stuff

starts trickling in yeah okay um yeah so it's always kind of the anticipatory time or the time when no one really wants to everyone's kind of just i don't think they want to do anything prior to earnings because earnings always get so busy i always think like the first week of earnings i'm like oh sweet this is fun i've got so much stuff to research or so much stuff to look at and then after like being two weeks in i'm like okay all right i'm i'm tired of this let's let's let's get back to the to the break but um no i guess we got a short report to talk about um well got that did you know that libor is ending is it today this week i think it's tomorrow let me what day is it the 29th i believe it ends on the 30th let me just give it all google when does libor

and let's see if this ai can work 30th of june 2023 wow rest in peace yeah i wonder what impact that really has for what they just have to switch their there's uh there was a story in the one of the news outlets saying that some finance teams like a good chunk of them have procrastinated too much and haven't changed their documents to reflect that their debt and stuff is not going to be based off LIBOR anymore. So I think there could be some interns and lower-level analysts that have a rough week this

week. So for anyone out there listening that has that, sorry about that for all this boring work you'd have to do. People just have to search and replace. They got to do search and replace for LIBOR and it's just going to be probably what they're just going to move it to.

What's it going to shift to? I think there's a SOFR. oh yeah whatever that thing was but yeah depends on who offered them the loan um she will be missed though libor yeah i don't have much else to say about that except that libor it was there you read it all the time it was always so simple yeah i was like libor plus 2.5 it's like okay all right okay yeah all right this has been a slow start to the show let's talk short reports exponential fitness um one of the largest global franchisers of boutique fitness brands they are

home to brands like pure bar club pilates psycho bar stretch lab i think is a new one um and some others anyway this week a short report came out from a research company called fuzzy panda research the title of the report was exponential fitness and abusive franchisor that is a house of cards which i think like that's a good tagline but you got to make sure you follow through on that house i feel like everyone just every short report where the ceo has done something a little sketchy in the past calls the whole thing a house of cards but well yeah i think we need new terms there's always certain terms that i use for certain things that i've noticed that just pattern up from time to time again i've always noticed like um this week for example there's

a story out there about volatility lurking underneath it's always lurking you know it's like slunking around it's either here or it's almost here yeah it's lurking it's lurking underneath the surface yeah but sorry continue yes i'll try to touch on some of the points here and i will say we've done an interview with a friend of the show paul sero um where he spoke to being long ex pof which is exponential fitness um i think he still owns it too but i'll try to touch on some of the concerning parts of the short report it's long and you know what i don't know why on earth no one has ever told these short report companies to like not structure their documents better because they're the most rambling random

like three pages of bullet points type stories. I'm like, dude, just like make this a more succinct story. Like have some writing prowess, please. I think that is part of the game where you make it a little confusing. So people get scared, which I would say, honestly, makes people trust you less. So I think they'd be much better suited to not do it like this. if you know what i mean where they like they want people to be a little confused reading the report

yeah they might also just be lazy with their writing this wasn't so bad like it was just really long and kind of ran like there wasn't any specific like strategy to how the report read but um so the exponential fitness ceo geisler i want to make sure i get his first name right whatever i'll find out later something geisler was previously the ceo of a reverse merger pink sheets pump and dump called interactive solutions that used bangkok boiler rooms so boiler rooms for people that aren't familiar basically just high pressure sales rooms or call centers they have like a list of people to call that are called like the sucker list and it's basically just uh, kind of a crappy way of conducting business. And I don't know if it's necessarily illegal,

but it's very, uh, high pressure sales is probably not the way to go. Um, but he's also had some throughout the article, there was some previous colleagues that called them a crook. Uh, someone said, when you deal with guys or you don't walk away, you run as fast as you can. Um, a lot of people didn't have a lot of good things to say about him but i mean you can find that with probably most people in the world however he's also apparently been arrested for pulling a gun and threatening to kill a court-appointed process server not sure what that's about but usually an arrest is a bit of a bit of a yellow flag maybe yeah unless unless it was like a alcohol possession and when they were 19 in college then definitely yeah concerned yeah and he apparently geisler had

like gotten exposed on some show called like beyond the boiler room or something like that maybe he was like holding up some box i'm really not sure like about this guy's background but uh apparently the box was empty it was like some fake product and they're like that box you know it's like one of those expose shows you know like exposed oh he wasn't on there but they no he was the one that was exposed on the show well if you're maybe they don't say it but man get your team researching who these people are before you go on one of those shows it's like i don't know if you get asked to go on a show with nathan felder you should definitely research who he is and then say no i don't know yeah i'm not sure that much about like his

previous experience at Interactive Solutions, but he's had some colleagues that certainly didn't like him. He's been arrested. People have called him a crook. That Interactive Solutions really was, looks like a pump and dump. And then Geisler has also said a number of times that they've never closed a store for exponential fitness and Fuzzy Panda, which is the research company, hilarious name, found more than 30 permanently closed stores and there's an in their rebuttal so exponential fitness

released a rebuttal and it was basically like we have some that are temporarily closed and relocated but they haven't been closed permanently which you can just go on google maps and like look up some local ones and there's probably a couple that have been permanently closed so i think there's a little bit of misleading going on there um i guess it depends how you define the term closed uh if you're a retailer you're gonna close stores right no one's gonna be perfect so i don't know why that's like a big concern of why they would try to lie about that or mislead about that i don't want to say strictly from a legal sense we're not accusing exponential fitness of lying yeah and the the bulk of it there's a lot of stuff about geisler and kind

of his personal background and some sketchy stuff but there was also really the bulk of the article was around franchisee economics are way worse than what exponential fitness is painting. They sit, they fuzzy pandas. They, they assume eight out of 10 exponential fitness brands are losing money monthly. Um, they assumed, I think, uh, 50% have never made, I've never turned a profit and they called a number of franchisees. And I will say your worst franchisees will probably be your loudest critics, but a couple of the franchisees said, yeah, we're all just losing money. We're not making any money. And a number of the franchisees currently have or have resold their stores for a 75% discount to their initial cost. They actually, one of them

sold their store back to Exponential Fitness for literally a dollar. So there are some that aren't doing well but you're going to have that with any franchise concept but basically what uh fuzzy panda is saying is that the economics for the franchisees are significantly worse than what um people are what exponential fitness is telling investors uh i guess the only other concern is that geisler did sell more than 47 million dollars worth of stock in 2023 um so that usually for a company for a company of this size that is a very large amount yeah and insiders in total sold like 160 million so it's it isn't i mean let's say insiders sell stock all the time and geisler has still has a significant ownership in the business

But when you read that there's insider sales on top of all potentially the misleading reporting, it just kind of is cherry on top because it makes it seem like they know they're getting away with it. So they might as well take some money while they can. But Exponential Fitness did issue a pretty quick response, rebutting a number of the claims. I'm not going to go through the whole response, but all in all, I thought it was pretty good. there are definitely some accusations that i don't think they responded directly to they had one kind of vague quote from another insider that was just like geisler has a great you know he's a stand-up guy and kind of like all this like you know i've worked with him for a while and i know him and he's good but it didn't really answer a lot of the concerns um the other part oh was i

going to say there was also stuff about a big sexual kind of harassment culture at exponential fitness. It's kind of difficult to, they basically said we have a number of procedures in place to like combat that stuff, but you never really know unless people at the company are really speaking up. So I don't know. My takeaway here is that this guy could have changed. I never like when there's red flags and a CEO has passed, that's usually one of my biggest concerns for short reports because it makes me feel like, okay, it isn't just miscommunication. It's that he's doing something very much malevolent or malicious. However, I would say if you go to the worst franchisees for any franchise concept, they're probably going to bag on the parent company

or the franchisor. If you go to companies that the CEO previously left, there's probably going to be colleagues that didn't like him. So you can find bad quotes about the company or the CEO if you want. And I'm sure it's possible to do that. And a lot of the short report was that, but I don't know if this had as much substance as some of the other short reports out there. the biggest concern for me was some of the stuff about the ceo's background yeah i mean what about the business being bad that i guess the numbers will prove it out in themselves but this is a good example of when you have some maybe a new concept out there or a new product and it's consumer facing one of the easiest things to do if you're going to go

along a company is go visit something in your local area check it out see if it's busy or in this case if it's a you know fitness concept see if it's busy but in other terms or whatever if it's like a cpg product go check it out the store see see how many people are buying it see where it's where it's placed in the store and then if it's a concept like this you can call around to some random locations and ask typically people talk to you for you know a couple minutes and you just have to ask a couple questions how busy are you you know is this thing working out whatever Like you have some specific questions that generally people would answer if you say, hey, we're doing an investor survey, you know, it actually can work. And you can kind of confirm a little bit, at least get some anecdotal evidence on whether the concept that this business is doing is resonating with consumers.

And then a lot of times if a short report comes out and it contradicts that, maybe you can say, OK, this is the time to buy. However, when it's a new concept and the management team has got a shady past, which I guess is your own interpretation of what a shady past is, that can bring up some concerns for me. Because I don't know. And yeah, there can be shady pasts that you're unaware of, right? Things can be hidden. There could be a company we own that has one of the people on the executive team has a shady past. But when that is there and there's a short report, it makes it really, really hard to trust the company, trust the management team, even if they're actually trying to do the right thing. And that's one of those situations where I think, I don't know if even if the investment looks promising, it's one of those situations where I know going into it, I could kind of get scared out of it.

If you get what I mean, because it's a management team, I worry about their integrity, then I worry about what I would do, you know, when something like this short report comes to light, because then I could really, really question what the executive team is doing. yeah the other one the only other thing that really concerned me is exponential fitness says i think like 70 of their revenue is from recurring sources so typically that's like the royalties and marketing fees um but fuzzy panda estimates that's more like 60 of their revenue is non-recurring so So it's new store openings, training fees, startup fees, selling overpriced equipment. Apparently, that's one of the complaints is that they prefer to have you buy from them if you're a franchisee and they put quite a markup on some of their equipment, apparently. So that would be, if there is any discrepancy in what they report is occurring, that would

be potentially a real low light or red flag for me. I don't know. I sometimes think that fitness is just uninvestable. Yeah, it's tough. It's much tougher. I was listening to Focus Compounding, which is a great show for anyone that wants to learn about from an expert, a seasoned expert that's invested in small caps and micro caps. And he said, I would much rather invest in grocery stores and focus on that than fitness concepts he says just there's some similarities there where you can have locations being kind of your advantage but the durability of grocery stores for concepts that work well is much much higher and much higher quality than fitness which is goes through so many different trends yeah unless you're like really unique like

like a luxury gym maybe the what are they called equinox equinox yeah i mean that that seems promising but who knows whether equinox would get disrupted by someone even that you know comes out of the next 10 years right i mean it's not very hard to disrupt someone in a certain town for a fitness center right like you can one individual person can start one up and it can be much better than the chain and it's not like that that there's no really economies of scale i think yeah i don't think there's i think you're right maybe you can like get um equipment at a discounted rate from suppliers if you have a number of locations that you're shipping them to but um the like fundamentally if you're starting a gym today you're kind of

at odds with your customers because you're hoping that they come in as little as possible because I'm guessing your biggest expense is either rent or equipment depreciation. So the less that they come in, the less you have equipment depreciating. So it just kind of, like I said, unless you have like just an ultra luxury brand, it feels like it would be really hard to run.

That's part of it. Yeah, it's part of the weird, that's a weird corp with the business as well. But yeah, I think it's hard to run. It's really seems like it can get disrupted time and time again. And it seems like Planet Fitness does pretty well, but besides that, I still get nervous in investing in that company too. There are people that talk about how if you have the broader chains, you can have the membership that can go anywhere across the country. But in reality, I don't think that means that much. There's only a few people out there, a small percentage of people out there that are going to really utilize that feature. so yeah the short report

TBD exponential fitness is definitely I guess a battleground stock now and I'm going to be interested in following what their earnings look like over the next few quarters it'll be fun to watch from the sidelines I'm sure stressful for anyone that's long or short yeah I DM'd Paul

our friend just asking you know what do you think of the short report and I'll double check but I don't think he's responded yet so he might have some thoughts on it as well he said some of the some of like the accusations are kind of industry standard practices like certain stores aren't included in same store sales or average unit volume so

um people like call that out and exponential fitness put that in their rebuttal but i think it's industry standard and he's pretty familiar with kind of the retail space so i think i trust his judgment on that but yeah there was some concerning stuff that came out the short report for sure yeah this last thought on that yeah there's always like there's always going to be something that a company doesn't do perfect so you can really formulate a short report and i think the key is whether do they generate cash like some companies are not doing things that maybe people like right and if they generate cash then the debate is you know whether how sustainable that cash generation is and i actually don't

know whether exponential business is generating cash, but if they're generating cash, the business is fine. But let me get to a question here from Andrew Marshall. Thank you. I don't know if you're watching anymore, but if you're really listening, I'll try to hit this. This will be interesting. Hey, guys, if you want to take a look, I think Carrier, it's C-A-R-R. Let me confirm that that's Carrier. Yes, that's Carrier, is an interesting play on HVAC, just acquired Weissman, and it doesn't look like sell-side estimates have included the Weissman acquisition. Also, homebuilders are continuing to build new homes in Europe as the market has very little HVAC currently. I have heard that from people that Europe seemingly, even in the Mediterranean, doesn't have HVAC,

which, guys, come on. When it's 95 degrees out, let's get that going. What do you think about that, Ryan, the long-term growth of air conditioners? Funny enough, I did see an article in the journal this morning. I'm going to share my screen quick and show a chart for everyone. It's super easy to describe. Basically shows that in 2020, the number of air conditioners in use globally. Can you see this, Ryan?

Yeah. Yes, I can. All right. the number of air conditioners in use globally, say 2020 or today, is about 2 billion. And if we look at the projections for 2050, it's going to be at probably over, say, 5.5 billion, with India getting a lot of growth, places like Indonesia, Asia, China growing, the rest of the world, which is basically a lot of the smaller countries that might be poor today, the Middle East growing, Mexico growing. So it seems like there's a long-term trend there.

And I think it would be interesting to look at some of the players in the HVAC space because it seems like there's a really durable tailwind as Europe, Asia, or Southeast Asia, India, and Latin America continue to incrementally grow the amount of air conditioners in use. Yeah, I mean, if global warming is persistent over the next 30 years, I would think AC is, air conditioning is a market that would certainly be a beneficiary, right? Yeah, it definitely seems like an interesting pond to fish in, for sure. I'll tell you what, I got a little window AC unit for where I stay, and it completely changed my life. I am one of the biggest proponents now of air conditioning units. So it feels like a growth market. It feels like there's lots of tailwinds there. You don't have to feel it, Ryan.

The numbers are there. But yes, the feeling matches up with the numbers. Yeah, I think it's interesting because it might be people like underrate it. You know, it's boring. But the business, I think, is strong. There's definitely going to be pricing power there, especially for the, you know, giant installations that people do. Yeah, I think we should definitely do that for a theme some month. maybe later this year.

So there's definitely a lot of companies out there in that space. And yeah, I'm curious about the economics. I know for anyone listening, there is a substat called Invariant, which is written by Devin Lassar, who we've had on the show before to talk about the tobacco industry.

If you're interested in the tobacco industry, go listen to those episodes and check out his work. But he did do one piece on HVAC, and I believe specifically Carrier, but it maybe was another company in the space. So if you're more interested in that, I'd check that out. The stuff is free.

So yeah, go check that out. I don't have much else to say about HVAC because I don't know the industry very well right now, but looking at that article today kind of inspired me to maybe, you know, in the future, we take a look at that industry and trying to learn more about it.

Okay, let's talk theft. All right, yeah, we'll hit yours. Shoplifting. What are these numbers? is it's it's uh is it getting bad out there for these retailers or what how bad is yes yes it is getting bad um so this is a tweet from an account called unprepared gibberish um used to be unprepared remarks i believe it's the same account good follow i recommend checking out some other stuff i think they just said they had to delete their account because of compliance

reasons so maybe rip but it was an anonymous account that did provide good tidbits yeah so he he says or he or she says we run a quarterly shoplifting survey of a thousand randomized people been doing it since 2020 when the political climate deteriorated just got back the results for q2 and it's wild more than one in three admit to stealing on self-checkout means real percentage even higher given self-reported. The average dollar theft per trip is up 120% versus last year. Almost 75% of those who admit to shoplifting say inflation has led them to be doing it more frequently and on more expensive things. 25% of those who don't shoplift on self-checkout are considering it because of inflation. Target has called this out as well. And they say it's most

common at big box retailers, Walmart, Target, the likes of that. In the most recent quarterly conference call, I believe the CFO or the CEO of Target said, shrink, which is theft, shrinkage, is inventory shrinkage, just magically disappears, will reduce our full year profitability by more than $500 million compared with last year. That is no small amount. It reduced gross margin by one percentage point um i believe so this is becoming a huge issue and they're talking about like ways to combat it but a lot of it is centered around self-checkout and that makes sense because it's so much easier to i don't know let's say you've got uh honey crisp apples and they're three you know and they're a dollar more expensive per pound than fuji apples or whatever you know

you can just type it in yourself and change it or you can just slip something into the bag at the end. And so you're done. And it's really hard to catch that. So compared to like normal checkout, I wonder even though they're trying to be as customer friendly as possible, I wonder if it's better to kind of pull back now on some of those customer friendly offerings. Trader Joe's does not let people do customer checkout. I just, I don't know. checkouts here to stay like what do you do i think okay i think there's three things

that three thoughts i have on that first yes the trader joe's model seems to be the one that actually makes the most sense for specifically like grocery type style stuff where you're going to have to have maybe yeah a little bit more employees at the front but you have way less shrink second i think this pushes more companies to invest into their e-commerce solutions where yeah there's theft at front door theft but again that can generally be solved from a home-to-home basis as they make some sort of secure way to drop off the packages right it's definitely you know going to have less shrinkage and third i think there's an opportunity for in-store for the technology stuff that you know there's more than just the amazon solution

but the one that amazon talked about where they have the uh the no checkout stuff where everything is basically scanned already. So you can't really hide stuff and maybe there'll be a way to cheat that system as well. But I think those type of solutions would maybe get more investment because if the shrinkage

across all of these things, which again, it's just theft, is into the billions of dollars each year, there is an opportunity to invest a good amount of money and still get good returns on this stuff. So yeah, I think the opportunity is there. It'll be interesting to see what happens.

I don't, from an investment perspective, I don't know whether I care that much, but I don't think it's going to impact these companies that much. And they'll definitely clamp down if things get really bad, right? And like maybe targets. Things are pretty bad. I wonder, yeah. I mean, Target maybe specifically, but we should remember that Target does, let me confirm the number, but hundreds of billions in revenue a year.

So from their perspective, it's not like, wow. this whole business, we're getting theft. If I remember correctly, taking half a billion dollars off Target's profitability was pretty significant. Yeah, I'd say, yeah, sure. Definitely. Definitely. I can't remember the

total net income figure for the year, but I'm guessing it's in the ballpark of five to ten. Looking it up right now. I'm seeing $110 billion in 2022 revenue, but again, that's just a google search so i mean relative to their earnings which over the last 12 months

they've earned 2.7 2.7 billion really just that much geez shrinkage can be huge given how narrow the margins are on some of these businesses i think margins have come in a lot you know what's funny is yeah you know what's funny is i've gone to a target or i used to live close to one so i'd go there if there was some you know random thing to pick up right the checkout lines were still absurdly long even with the self-checkout there and so yeah some of these big box retailers i think are gonna struggle to fix that checkout experience because i don't know if they can eliminate self-checkout because the lines are getting so long in general for for waiting and having customers wait 15 minutes i don't know how trader shows does it someone needs to just they

just need to outsource and consult with these other retailers and say hey here's how we do it here's how we get all these people in through quickly and they don't even have to like put the stuff on the the conveyor belt those sales they don't even have conveyor belts it's quite incredible i kind of think of that from like an efficiency perspective but yeah target i maybe it is a problem because i don't know if like kind of thinking it through if they eliminate self-checkout how bad would those regular lines get it seems like it'd be pretty bad and that would be a terrible experience for their customers yeah i don't know if there's a way to just remedy it with like people that are more people patrolling the self-checkout stations

but maybe i mean that's more overhead cost potentially so yeah how does costco do it Don't you have to check out the person at the end with the cart thing? Yeah, that takes your receipt and looks at it, checks out your cart, makes sure everything. I think sometimes they

just check a couple items to make sure. Them and Trader Joe's seem to have the best models that I can think of. They're the best out there. So, you know, not surprising, not surprising. All right, let's talk Activision. Yeah.

For anyone that doesn't know, there was a trial going along with the long drawn out Microsoft Activision Blizzard acquisition. So we got people on the stand and it was basically publicly available. So there was a lot of journalists there covering what people said. And since they're under oath, they have to be, you know, less evasive than they would with talking with investors or something like that. So, there's a lot of nuggets that came to light for some of the practices in the industry, all that good stuff. First off, this is the FTC stance. The FTC does not want to include the Switch and PC gaming when looking at competition for Xbox. First off, we don't own any Activision Blizzard as of this recording. So again, we're not really biased with this anymore. Just want to be clear.

And then we do own some Nintendo, which would be probably the only company we're talking about here. But again, we do have the disclosure. Could own any of these companies from time to time. So they said that the Switch and PC gaming they're alleging is not a competitor to Xbox. Do you agree or disagree with that? honestly i kind of agree right now a little bit now i will say the next switch pro or whatever is rumored they have been in talks a lot with activision 4 and it's it's expected to be like a higher quality um yeah but it's expected to be ps4 quality that's what they said yeah but still

i mean even if you have ps4 quality you start to get maybe more game overlap between the two ecosystems because when you look at like the switch what is most the time spent played probably probably zelda pokemon mario not really the third-party publishers or the more intensive games like a call of duty i don't even think yeah it's called call of duty is not on there yet is it No, no, Call of Duty's not on there. Yeah, they... I mean, on the one hand, it's a competitor because it's time spent from gamers.

On the other hand, it is a different type of gamer, but I don't... I think there's still definitely kid-friendly, family-friendly, less shooter sports types that are available on Xbox. People just don't play them that much, like Minecraft. You know, I guess Minecraft is a popular one, but there's... it's it's kind of a competitor it's definitely taking some oxygen out of the industry but the

way they're framing it yet technically it can be described as not a competitor because it's handheld or whatever but there's a lot of time spent played on the switch i actually yes i redact my statement statement is redacted it when i look at my household or the place i currently live we've got a switch we've got a ps5 i think um it's mostly just someone else in my house but whenever we're considering what to play we're looking at the whole ecosystem we're saying okay do you want to bring down the switch plug it in instead and play mario kart or do you want to play you know fifa or something like that so you are kind of looking at the whole all your offerings you're not really like looking at them segmented so that's just one example but

I think a lot of people, a lot of households that maybe have both console systems look at it as just, how do I want to spend my time? And if you're PlayStation, you are looking at your competitive set is anything that your consumers might spend time on. Yeah, it's not Nintendo's fault that they differentiated themselves enough where people would buy an Xbox and a Switch, and be able to buy a PlayStation 5 and a Switch, but they won't buy an Xbox and a PlayStation 5. Now, here's another thing that I thought was interesting. Well, on the PC gaming, I mean, that's pretty absurd, I'd say, because it's such a strong overlap

and it's actually growing quicker than the console market and taking share from those gamers. Yeah, no, that's a competitor for sure. Yeah, okay, here's what I thought was interesting. So speaking of PC gaming, Valve slash Steam, anyone knows that Steam is the biggest distribution platform for PC gaming. They refused to sign a distribution agreement locking in Call of Duty and Activision Blizzard games onto Steam. So just for reference for anyone that wants to get caught up, Xbox slash Microsoft is trying to offer 10 year contract agreements to keep a lot of the games that they would be acquiring from Activision Blizzard onto the other platforms. just to say, mitigate any concerns

that they would take all the games in-house and make it, you know, the Xbox system much more valuable for people to play on. Here's the quote. Valve believed strongly that content should be on their platform. They do not want to be seen signing contracts that lock up or drive commitments to content

over 10-year periods of time. They don't have any such other agreements in place. And they told us that they had no need to sign that agreement and that they believed us that we would continue to provide it on Steam. and that was a representative of xbox now this makes me think is valve the sneaky best business out there in gaming could be i think a lot of people overlook the pc market as a whole

um the other thing that this makes me think is why on earth did they do this deal like why did microsoft want this i still don't get it yeah what's interesting is they saw they looked at zynga and they said too small like i guess maybe that's true and but if you're going for kind of the mobile push why not buy zynga you know it's a pretty big mobile team well they i mean the documents that were i guess leaked from or presented in this court case basically said that they were going after tons of studios essentially everyone except electronic arts take two and nintendo yeah and nintendo's obviously off the board but basically everyone except electronic arts and take two i just don't see if they're just buying it because

whatever they think it's a good business and they're just going to keep running it as it currently runs and maybe it'll produce more and more cashflow over the years. That's one thing I'm sure that's not the case. I'm sure they want to use it to somehow bolster their Xbox cloud content or their Xbox ecosystem. I just don't see the advantage to having this. It's like some, it's like they said, we'll do this. We'll bring the games in house.

We'll make them exclusive at some point and drive bigger adoption. for our ecosystem the problem is i think as soon as the acquisition was announced everyone was like they're going to take this stuff exclusive and they immediately started signing these 10-year deals it makes me think that this was just it's better for microsoft to get out of this yeah it didn't make sense for me for them to do this if they get the cloud tech going it'll be fine um like in general it's not going to change much and it is a big acquisition there was an email from an internal person that said it would be i think this was in jest they said it'd be more valuable for us to spend 70 billion dollars developing a car which is strictly

not going to be true i mean activision blizzard generates like three billion dollars in cash a year and if they spent 70 billion dollars building a car it would just go all go to waste but yeah i think the acquisition even giving the stuff they said under oath and the stuff they've kind of had to walk back on the acquisition doesn't make as much sense anymore especially because uh the microsoft executives were talking about how they really don't want to build out an exclusive library of games which i don't think makes sense and they said that why not yeah it's like so why are you acquiring these companies the other thing is i think this does make sense and i think the ftc is kind of being a bit obtuse here when they look at it

is Xbox says that Sony with PlayStation has been much more aggressive securing exclusive titles, either from stuff they'd bought or securing it from a third-party publisher to build something exclusively on PlayStation. And that led to PlayStation gaining market share globally and being the winner. And then Microsoft has basically been forced to the table

to adopt that same strategy to try to counter, you know, defend their position in the marketplace versus playstation who again is the leader i i think i kind of agree with them there but do you think i know from an antitrust perspective it makes sense where like look this is a weird industry there's these two players plus nintendo's kind of in the mix and there maybe should be some regulations there about like cutting people off from content but if they're both like if xbox wants to do this doesn't seem like a giant deal to me um also do you believe them that they actually this is what microsoft truly wants to do

is like not is saying that they are forced to do this but this isn't their optimal strategy i think they see the opportunity within cloud gaming and gaming broadly if they're able to like really be the dominant ecosystem but i think they're not right now they're not right now no They're not. And I'm starting to come around to the FTC's argument a little more that this was a defensive move to try to kind of steal share from PlayStation. I get that. But there's no advantage that I can think of. And I'm not on the technical side, but there's no advantage to acquiring Activision and not making the games exclusive. so obviously that had initially i got a feeling that was part of someone's strategy whether that's phil spencer's or whoever's because and maybe that's why they did the 10-year deal it sounds like a long time but they can wait you can afford to wait yeah and there was executives talking under oath about how the cloud gaming they were like well it might be here by 2025 but realistically

it's a 2025 to 2035 timeline which as we all know just means we have no idea when it'll be actually ready there was some interesting stuff about nvidia coming into play with g-force now which is a cloud gaming service and again the cloud gaming stuff is a whole mess and it could change literally a year from now we have no idea but other interesting things that facts that came to light one bobby kodik who is the ceo of activision blizzard said that he regrets not bringing titles to the switch and that they will invest more into the next generation nintendo console which they think will have again ps4 type capabilities i wonder if he's saying that mostly to make it sound like the switch is a competitor yeah i think they are i think they are saying that

because i don't know why they would bring call of duty to the switch it doesn't really make any sense um that is a bit of pandering i think to the audience other thing that i think was interesting though and this is why sony is so intent on making sure activision blizzard doesn't get acquired by microsoft and gets out of the playstation ecosystem is that apparently from an estimate call of duty is worth 1.5 billion dollars a year to sony which yeah so it's a lot that is a lot who do you think who are the losers in this

let's say let me run through a scenario the deal breaks Activision goes back to being a standalone company Sony continues as is

and Microsoft continues as is who are the winners who are the losers I feel like it goes back to what it is before right where sony's going to continue being a winner xbox will continue being a loser unless

they can really revolutionize cloud gaming activision blizzard will be the same i don't really see much change happening there seems like they're executing pretty well right now and they're getting past their issues but they still have those issues and that's one of the reasons why they sold out i think activision's a winner you get a big break fee yeah the break not sure what the specific break fee is in the meantime maybe it was the perfect distraction you needed because it seems like a lot of the issues have been resolved there just based on not hearing as much about it in the news and them getting back on the same production schedule so not having as much delays which probably means less voluntary turnover

i think that's a that's a big win for them and all the games that they've produced have really been hits so it seems like the company's really firing on all cylinders they're going to get probably two billion plus in cash and i just feel like they're in the best place coming out of this microsoft it's a i mean it's i don't know they're not gonna matter i i think honestly at some point they might need to spin off the gaming division because i don't think it's actually profitable i think they're treating it they're investing a ton in the cloud stuff maybe it's better in house i guess if they spun it off they'd have to capitalize it with a lot of money but unless they can crack i don't know where they go from here because once you know pc keeps

gaining market share playstation dominates and there's really no signs that playstation is going to stop dominating nintendo seems to be doing well and yes maybe there's an opportunity if nintendo flops on their next console but that is not going to be it's not going to change the game for xbox and yeah they continue to sell more than their previous generations but they i don't think they're making much progress and the fact that they sell their hardware at a loss is a huge deal also what's interesting i guess lastly tidbit here maybe we'll try to hit another topic before we end because we i think we have where we started 12 minutes left i thought this was very interesting from our from investing perspective looking at game publishers

and how we look to look at it is that scale really matters a lot. And there's actually two facts here. One is that Activision was able to secure better revenue share agreements with both Xbox and PlayStation. So I'm assuming that means going down from the 30% take rate to 20%,

which I thought was very interesting. And then second is that Sony accidentally didn't redact some of their stuff or they redacted it so poorly people could see it of how much game development costs. And for some of these AAA titles, which I guess an easy example is Horizon Forbidden West, which is a fairly big game,

but maybe not as big as a Grand Theft Auto or a Call of Duty title, but still very, very big. It cost over $200 million to make and took five years time. So again, they're probably honestly giving the time value of money, like underestimating that. The scale really matters. If you're going to have a AAA game, it's got to be doing a billion dollar plus in revenue.

I think to make it really, really funny or maybe $500 million plus to really be an earnings driver, it's got to be doing a billion dollars plus because you include marketing costs in there too. And it really, it really increases. For context, they go, I don't know where you'd have to go to find this, but we saw this. They literally just took a, like a, not even a Sharpie, a marker to the paper to these documents and tried to like exclude some of the numbers. and you can see right through them or the scanner numbers. So I wonder if they like low key wanted people to see the numbers, but yeah, whatever.

Oh, here, here, here's the last thing that I thought was funny is that, and if you're any executive at Amazon, please listen to this. I actually got a DM from someone. I can't say who,

but works in at Amazon in a division that would know about this. And there, what was the direct quote i'm gonna find it first off the name of this person i'm gonna say is funny but the i know that person's name has he probably the person probably hates the person probably hates that yeah oust him yeah yeah the person's name was you gotta look at the tweet but here's the quote no no no the the person that was in the trial oh okay yeah yeah um the name is funny uh But just don't go look at the tweet or go to the trial to see the name. Here's the quote.

Amazon has shown no ability to execute on game content. I would say that is precisely correct. They burned so much money on that. Executives need to understand this. And secondly, this applies to all of the big tech companies. Even Xbox has not been able to, or excuse me, Microsoft slash Xbox has been in this for like 20 years. They haven't been able to build their own organic content. I think it shows that no matter how much money you have,

this is a strange industry where it's hard to break into. It's hard to break into and you need the right people and you do need to spend a lot of money, but just because you spend a lot of money doesn't mean there's going to be success. So like it's expensive and you're not guaranteed. It's not guaranteed to work. Yeah.

That sounds like something that's perfectly what Amazon wants to do, but i don't understand why amazon is in gaming at all why are they in it yeah i'm not i'm not sure same with same with uh alphabet or google google's actually said there was a there was someone under oath that said google quit their games division when they realized it was too expensive for them so when something's too expensive for google i mean that shows that how expensive it is to make these type of games and too long takes too long and sure you know what if luna cloud gaming was the premier cloud gaming platform and all the value accrued to them and they were like the platform of the future for gaming that that is the kind of market that amazon likes to go after

these big taking big swings and potentially missing but they also say they like to cut initiatives when they see it's not going to work i don't know how they haven't seen yet that it's not going to work i mean come on their games from what i've heard it's completely unusable and their games are all bus and their their content is all terrible apparently and they spend a lot of money on marketing that yeah i don't know i don't know that for sure but i see it non-stop yeah so this was really fascinating there was if you want to get into the details there was a verge um kind of play-by-play thing that goes through all the quotes you'll be able find that pretty easily if you search that so for anyone that's interested definitely do that

to close things out more broader view there was a someone shared this um it's just an account that has a random name so it's basically a quote about reinvestment runways um versus companies moat so here's a quote from pat dorsey who's kind of the moat expert about analyzing them stuff like that and i don't know if i want to read the whole thing but i'll just go with the start he says the way i think about the linkage between moats and intrinsic value is that moats add the most value to businesses that have lots of reinvestment opportunities within their moats and he did use an example of microsoft where might have aged poorly but i think maybe not because they invested kind of outside of their moat

into the cloud to create a lot of value. But yeah, what are your thoughts on that? Do you think that connection makes a lot of sense? And I kind of agree with it. And I honestly look for the reinvestment runway first. And then I think that's more important of a starting point. And then kind of go, oh, do they have the moat to go along with it?

Okay, is that pair work? Then I'll invest, potentially invest. Yeah, I definitely prefer like a kind of a reinvestment runway within your existing business than I've heard the quote that like great management teams always find a way to expand their TAM. I would much rather invest in a business like a Starbucks where. Starbucks. Yeah, I don't know if the moat was that. i don't know if you'd classify it as like a significant moat it just had a lot of like loyal customers but the reinvestment runway was clearly there other ones i think microsoft is

maybe a good example within office 365 there's obviously a moat there there's a network effect and there's tons of room to continue to sell that product especially early days maybe not so much anymore. I'm trying to think of other ones, maybe Home Depot, models like that, where they can continuously expand it. I know they haven't been growing store count over the last decade as much, but you're thinking earlier. Yeah. What's an example today of a business that has a moat and still has reinvestment runway? These could age poorly because if I do the opposite, I don't want to be exactly like Dorsey and say something like Microsoft has a lot of reinvestment runway has a moat let's look at our portfolios because there's got to be one in there right

if we're we're theoretically moat investors i think i'm going to choose yeah i'm going to choose spotify i'm actually spotify yeah they don't have a physical invested capital where it's a little different but there is a big opportunity out there for them and there's a lot of room to invest. Now, the ROIC on that, I think people can debate. It's definitely heavily debated and it's going to kind of determine the stock returns. But I think that's a good example.

Another good example, I think, is Nintendo. There's a lot of room to invest in the core business as gaming kind of continuously gets better and better and better and you can have more capabilities and it grows the audience there and they can invest outside of gaming. into the other entertainment strategies and that also goes along with emote what do you think do

those do those work for that one i know i don't the tech like the lid they're not investing real invested capital it's more of kind of intangibles but what do you think yeah i might pick like some of the successful reduced risk products in the tobacco space so like zen i think is a business where there's clearly room to reinvest, expand your production capacity, move it to new markets. And there's kind of an addiction. There's a lock in there.

Same with Icos, which is one of the- Vaping, yeah. Not really vaping, but just a reduced risk smoking product. Yeah, vaping included into the reduced risk. Heat not burn, I believe is the technology there. Anyway, I think those are some clear ones. i would say yeah spotify is there but it doesn't fit the like blueprint of exactly invested capital it's intangibles yeah a lot of it is intangibles i'd here's what i also think is interesting and

it kind of was on my mind because of the kava ipo because a lot of these fast casual chains could have a lot of room to reinvest and it seems like the cat's gone out of the bag there and maybe people are even more optimistic than me on that because of the earnings ratios on these things but i think that that makes sense i mean chipotle was a really good example like yeah like it was rare that chipotle had was a cheap on an earnings ratio basis or an earnings yield but you had a fantastic and pretty clear path to reinvest even if the moat wasn't as strong as say i don't know something else out there right like i would much rather have something where i believe the unit economics are stable durable the moat is

okay or maybe it's emerging but I think the stock is cheap and there's a long reinvestment runway I think a good example of that would be Sprouts farmers market yeah we're talking about stuff that we all own so we're clearly biased but I think Sprouts really fits into that category for me where the moats

not perfect but I believe there is a bit of durability there and the reinvestment runway is quite large yeah I don't know if the moats big in grocery but that certainly checks the box

for the reinvestment side of things. There's a lot of businesses out there that are clearly moats, but the reinvestment runway isn't quite as large. Yeah, I just don't. Those can still generate good returns, but not quite as good.

When they're trading at 25 to 30 times earnings, it just doesn't excite me and maybe to my detriment. All right. I think that's a good time to wrap things up. I think we're right on the one hour mark. thank you anyone that tuned in thank you to andrew for the comment uh i think that'll inspire us to look at hvac companies in the future you can watch these as i mentioned on youtube at live

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