Chit Chat Stocks - Investing Power Hour #68: Did Carvana Save Itself? AI ReBubble Continues; 2023 Predictions Update

Episode Date: July 23, 2023

The CCM Investing Power Hour is a live-streamed show every Thursday. On the show, Ryan, Brett, and a rotating list of guests have an unscripted discussion on a variety of investing topics. You can watch the show on our YouTube channel here: https://www.youtube.com/c/ChitChatMoney Follow the show on Twitter: https://twitter.com/chitchatmoney Subscribe to our newsletter: https://chitchatmoney.substack.com/ ****************************** Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. This is the Investing Power Hour number 68 on Chachet Money. My name is Brett Schaefer, and I'm joined as always by Ryan Henderson. You can watch these either on YouTube or Spotify or

listen Sunday mornings. I should say we're doing these on Wednesday today, but typically it's on Thursday. If you want to catch it live, you can do that. We don't really care. You can join in for comments if you want, which I guess is fun sometimes. So we appreciate the people that do that. These episodes, we talk about whatever we want in the investing world. So Ryan, what's on your mind this week? We really had an accelerated schedule for our recording. So I don't think we came up with many notes, but luckily earning season is back. I want to talk about Carvana because it's so interesting right now. They may have saved themselves we'll see but what what do you got anything on your mind uh well a little personal

update i'm going to hawaii this afternoon so uh that's why we had an accelerated schedule i had a slight slip up on uh insurance finance like an insurance uh reserve insurance reserve build thing on our lift show and it's it's really it's really hanging on my mind weighing on it because I got it all mixed up. So if you've listened to that, just know I apologize. No, he is taking it very, very personally. He's going to be thinking about it all in Hawaii. That's all he's going to think about in Hawaii.

Yeah, it's going to be hard to get my mind off that. But no, Big Bank's reported. Netflix reports this afternoon. I'm riding high because Ally's up 5%, so we're finally smart again. I don't want to talk about that one. I didn't read that report yet, but I want to talk about Carvana. Yeah, I don't know. Did you follow any of the big banks at all? Yeah. I mean, most of them are kind of like, I mean, they're really bland to look at sometimes, those reports.

It's just like, okay, consumer deposits dropped and whatever, the loan book's fine. But the one that was interesting, I'll say the banking panic doesn't seem to be taking hold, especially not at the big banks. it's paused for now wait just wait for next quarter for the next shoe to drop right uh but yeah i agree it was the crisis is i did read a crisis quote unquote is over i saw matt levine quote this week and he's like i mean technically yes if just deposits just flew out of every single bank yeah there would be a problem but he's like uh banking in the u.s is basically just a socially beneficial trick which i guess when you frame it like that it kind of it's kind of like a funny framing and that like you just tell people it's safe and then you take the money and you loan it

out in non-safe things so it's like anyway i thought it was funny uh the big bank reports were pretty good deposits are coming out because people are i think account balances are shrinking as people put in the money market funds, right? Probably. I mean, I guess I didn't check money market inflows, but I would guess that it's going elsewhere because the savings rates at these places are horrendous. So maybe it's going to SoFi, maybe it's going to Ally, but maybe it's also going to the economy because excess savings could be coming down. I don't know. Yeah. I mean, these smaller banks, these neobanks are such minnows. So I mean, Some of it, I guess, is technically because they're growing.

It's going to there, but yeah. Most of it's probably going to the economy and money market funds. The one I found interesting was Wells Fargo. They had, I think, a $900 million provision for credit losses from the commercial real estate portfolio. So it seems like they were the first one that I saw that actually called this out specifically. It's not a huge part of their overall loan portfolio, but it's a significant write-down of the exposure that they have. So, I mean, I think that's kind of – we're starting to see it hit the banks. I would be – I'd be really interested to see what banks have the most exposure.

I don't know if you can find a list like that, but – Yeah, I think you – I mean, you definitely can. I just don't want to do the work. There's so many out there. I'm not sure. It doesn't matter, but – Maybe it was Signature. Yeah, they're already priced in, but...

I think it might have been Signature Bank, honestly. No, they're not around anymore. When WestJet first took flight in 1996, the vibes were a bit different. People thought denim on denim was peak fashion, inline skates were everywhere, and two out of three women rocked the Rachel. While those things stayed in the 90s,

one thing that hasn't is that fuzzy feeling you get when WestJet welcomes you on board. Here's to WestJetting since 96. Travel back in time with us and actually travel with us at westjet.com slash 30 years uh do you want to talk carvana though did you see what they announced today i will say let me just give yeah so that here's what happened yesterday people are all we're all nervous because yesterday okay actually let's go back in early july they do

the classic press release we're set to report our conference call our con you know whatever our earnings results and do a conference call on august 3rd and yesterday out of the blue they said on July 18th, they said Carvana to report second quarter results on July 19th in the morning. So they basically said, hey, look, we're reporting tomorrow morning now. We had no context. So the stock sold off because people are nervous. But the reason they did that is because they announced, now this is a headline right here. It's about four lines. I want to read through it. This is literally what they said for their headline. They said Carvana announces agreement with note holders that will provide the company significant flexibility as it continues to execute its

profitability and growth plan by reducing total debt, extending maturities, and lowering near-term cash interest expense. That's a mouthful. That's literally the headline of the press release. I'm seeing it right now. Yeah, that's a really long headline. So let me just go through the bullet points here. And in reaction to this, and I think the earnings report, which we can kind of go through,

the stock soared. it's up 25% today. Year to date, we are officially up 975%. You hear that, right? It's going to be up 1,000% this year at some point. So congrats to the people that either bought the dip or held onto this thing. But here's what the notes said. So basically, they're eliminating 80% of their 2025 and 2027 unsecured notes. And the most important thing, they're lowering their cash interest expense by over $430 million per year for the next two years. Reducing total debt outstanding by $1.2 billion. And they are offering new notes, which I'm reading this now. Again, apologies to the listeners. We didn't prepare too much today. So this is going to be maybe

more of a free form episode. It looks like they extended their debt because it said they just reduced their interest expense for the next two years. So I guess they were in liquidity, not a cry maybe a crisis i don't we don't know how close they got to running out of money but that was a big concern for people so i guess then the bondholders were like all right we don't want you to go out of business i guess we'll refinance this thing um yeah what do you think thoughts on that first ryan were you surprised i guess we don't really know what we don't follow the bond markets too closely but kind of surprising that they're able to get this done yeah have they done any equity offerings since stocks ripped do you know uh no i don't think so i don't know if they

have something just like outstanding you know like uh what were the things that were popular perpetual shelf offering or something yeah i don't think they were they're not that scummy yeah i was thinking about it the other day and i'm a fan of free money and i'm not a fan of people getting rich off it but if it keeps like cheap customer services around i'm okay with it like if carvana wants to deliver cars to my house for cheap i'm not opposed to it if the time comes when i want to buy a car same with amc i was thinking about that too like if amc stay i love the theaters so if amc stays around because people are just willing to support the stock relentlessly i'm i'm in favor i got my i got my oppenheimer tickets but that was at the one that

went bankrupt so not supporting amc are you gonna go see oppenheimer yeah probably won't i mean i'll be in hawaii so i don't know i'll see it right when it comes out but next week yeah that's pretty exciting one that's probably the best whatever it's literally made yeah it's literally me it was film made for me. Okay, here's the headline for their earnings report for Carvana. Now, this is classic, classic growth stock stuff. Carvana delivers best quarter in company history for adjusted EBITDA and total gross profit per unit. Now, does that make you want to buy the stock or does that make you want to buy the stock? I'll try to go through the letter here of maybe some of their results, but basically their retail units sold were down 35% as kind of the used car

market froze over a bit. Remedy only declined 24%, so they're getting a little higher prices on those, but again, declined, but their gross profit increased 26% and gross profit per unit sold was $6,500 compared to $3,100 in the second quarter of 2022. So pretty good year over year growth on that, but I will say you'll not be surprised here. Their net loss margin was negative 3.5% compared to 11% a year ago. They say their path to profitability is to one, drive the business to positive adjusted EBITDA, two, drive the business to significant positive unit economics. And after completing those two steps, return to growth. Now, I will look at, I don't want to throw out too many numbers to the listeners here

before we go through a discussion of Carvana. Look at the cash flow. For the first six months of this year, they have generated $443 million in positive operating cash flow. CapEx has been significantly lowered. So they're still at about $400 million in positive cash flow. But the reason they were able to do this is because, one, the proceeds from their loans that they sold versus the originations is significantly like the proceeds from ones they sold was much higher than the ones they originated because they offload their loans that they do to third parties. and that's most likely because their gross profits per unit are declining, or excuse me,

not their units sold are declining. I'm not sure exactly why. And their inventory declined by $564 million this year. So if you exclude that, they're still burning cash. Although obviously, they're in a much better spot than they were at the beginning of the year. I'm curious your thoughts here ryan do the garcia brothers slip away yet again with such a hater gosh you're such a hater what of uh these guys i mean the creating value oh yeah hey you know what if they get to true cold hard profitability you got to tip your hat to them what they're the felons how are they felons i mean the the senior is a felon right he's like felons yeah excuse me yeah i should say the senior guy um there is some comments in here andrew marshall says we are in a

clown market carvana up on a 350 million dollar stock offering there was stock offering oh there was okay cool cool i didn't see that um got some other comments in here as well john galago says Ryan and Brett, have you guys have had any thoughts on credit companies such as Oak Tree Specialty Lending, Eagle Point Credit? The yields on these make them interesting. I can honestly say I've not looked at any of them. I think John Rotonti has talked a lot about them lately, but I really haven't followed him. Follow him on Twitter. Yeah, there you go. Okay. Any thoughts there? I haven't followed them at all. Yeah. So no thoughts. Zero thoughts. Don't know anything about these businesses at all.

I'm going to look some of those up. So they did a $300 million, $50 million offer. Yeah, I mean, look, they might. I think Carvana could definitely slide out of here. Look, I don't like the management team, as maybe I alluded to, because I think they're pretty unethical in the way they operate, and they kind of screw over all their stakeholders. But like Ryan said, I think you got to maybe not tip your hat, but you can't be like, look, they're going to go out of business because if they can increase this cash position, extend

their runway and reduce, you know, and keep on this trajectory, I mean, they're not going to run out of money. And I kind of look at that stock offering and say, why wasn't it a billion dollars, right? I guess I'm not totally up to date with all the numbers, but yeah, I'd say like maximize the equity offering as much as you can. You've been given a second life. Use it.

Yeah, and I think I agree. What was the comment here from Andrew? We are in a clown market. Carvan is up $350 million in stock offering. Yeah, I think in general, if we're going to learn a lesson from the last couple of years and try to not make the same mistakes as the past, when stocks are going up, when they raise money, that's usually a sign that there might be a little excess animal spirits because typically almost all the time if someone does a stock offering their their stock goes down remember when the funny thing is like wait i will say remember when block went up when they acquired after pay remember that that should have been both companies went up yeah yeah it was like uh it was like the stock no what was it it was something like a ridiculous reaction just like after pay stock jumped which made sense but then yeah stock was up like block was up i think 20 or something like that after paying 42 times sales yep well that didn't prove out to be

best business in the world hey we own that at the time emphasis no not at the time we were early haters well the early shareholders and early haters luckily we hate crypto so much that that got us out of it i think that was a little bit luck there great news the federal ev rebate is back eligible customers get up to five thousand dollars with the federal evap rebate on select 2027 Volt and 2026 Equinox EV models. Visit your local Chevrolet dealer today for more details. When WestJet first took flight in 1996, the vibes were a bit different.

People thought denim on denim was peak fashion, inline skates were everywhere, and two out of three women rocked the Rachel. While those things stayed in the 90s, one thing that hasn't is that fuzzy feeling you get when WestJet welcomes you on board. Here's to WestJetting since 96. Travel back in time with us,

and actually travel with us at westjet.com slash 30 years. To John Gallagos, I'm looking at this explanation for Oak Tree Specialty Lending Corporation. And it's, I would say, maybe there's a time when we can figure, when we can start to look at some of these businesses, but I cannot provide anything insightful on this. That is not today.

One-stop credit solutions to companies with limited access to public or syndicated capital markets. i would have no idea what like the big drivers are here apologies but maybe maybe we can look at it a little more you see this comment about paylocity yeah i just sent him a comment i i didn't know honestly that it existed do you know this company exists like vaguely follow paycom so if it's anything like that it makes sense it's good they're good businesses honestly it's hard to differentiate the brand but yeah you know what stock i've been looking at lately rover group it's just like the dog the dog uh daycare marketplace i don't know anything about the

financials but my parents have been using this thing and i know a whole bunch of people that are going there now to get like doggy dog you know pet sitting plus there's like dog walking but it's mostly like I think the value is really in the pet sitting. I think there's some promise there. I think it's like a small cap too. What is it? Rover stock? It's like Rover Group

or something. Yeah, Rover Group. It's up 20% year to date. $900 million market cap. Let's just look at the financials real quick. See if we can do a little let's do a guessing game. If that thing's operating cash flow positive we're doing a not so deep dive on it.

All right. Let's see. What do you think their revenue growth was in Q1 of 2023 through they have a calendar year? So first three months of this calendar year. 45%. Pretty good. 48%. All right. You're on the ball with this thing. And what do you think there? Do they have a customer count? Okay. Booking. So how many, I assume this is dog walks. how many walks were booked well it's pet sit it's pet or is it pet sitting okay okay so total booking yeah if like you leave town or whatever you can have someone on rover like take care of your dog for the weekend you pay it's good price too the um total booking value i have no clue

probably like i'll go 10 billion oh that is a little off ryan 209 million so pretty small business still gross booking value for the quarter yeah uh okay i was thinking like annual but still it's way high what what's their like take must be like looks like okay let me do 41 divided by 210 so like 25 20 yeah pretty standard this seems like something i see would be interested in uh let's look at the numbers here on profitability let's see 41 million in revenue in the quarter loss from operations 7 million so not it's too bad not too bad yeah it's not as bad as lift as we just looked at and we'll get cash flow negative cash flow problem is we don't want to all these numbers so what was a stock i can already tell it's a business or an investment

that i'd want to like which means it's probably something i shouldn't invest in what uh yeah you do have a yeah it's good yeah it seems like that's when you run into issues for sure i love that love that platform yeah it's investable yeah you do that seems to be when you run into problems i so what's the why do you like what do you think you like the business well i think it's i think it addresses like a real pain point a lot of people with pets have a hard time like having someone take care of them and even if there are like you know doggy daycare type places it's and you can like have different arrangements where you could like have them come in and just like take care of the dog for at your house or something like that but even if there's already

those businesses those businesses can just plug into like rover's marketplace the same way people that had bed and breakfast could put themselves on airbnb i just think there needs to be a marketplace for connecting stuff like this yeah i agree they're kind of the leader from what i understand i agree i kind of like these toro care.com i mean it seems like it fits in the iac portfolio um i'm sure they were talking to them and they probably just didn't want to sell the you know what else i saw is i saw a i don't know why i saw this ad but i guess they're probably thrown out a bunch of ads in the summer so i clicked on it download the app it's called like swim swimly or swimplify this is pool sharing the pool sharing one they copied airbnb's format but

the app literally doesn't work it's like i can't get it it's like unusable but it looks exactly like airbnb yes yes it sounds exactly like again it looks they copied airbnb um but that was funny pool sharing you can rent out your pool kind of innovative idea but let's get that app working guys i'm seeing i saw someone post a screenshot of add-ins financials versus stripes financials I don't know where they got this Stripe data, but- Do you have, do you want to share it? Sure, yeah, yeah, yeah. Let me allow you to, yeah.

Share the, is it, I'm assuming it's a graphic. Okay, we've got, can you see that? Yeah. Okay. In 2022, payment volumes for Adyen was $808 billion. Yeah, $808 billion. stripes was apparently 817 million i think the blue number probably means that there's like an asterisk by it estimate maybe yeah add-in was growing payment volume 33 stripe was growing

payment volume 26 the gross take rate was higher at stripe than it was at add-in more small businesses yeah so net gross revenue there's no way that's accurate though right okay no net revenue yeah net revenue is two below that is that right though 1.4 billion for add-in yeah remember this oh it's just incredibly profitable right um okay so yeah 1.4 billion dollars in net revenues for Adyen. Stripe is estimated at $3.2 billion in net revenues. So more than twice the size. Here's where it gets a little different though. And this is the cultural differences, it seems to me. The cost base, the total cost base for Adyen is about $634 million. So more than 50% EBITDA margins. For Stripe, keep in mind that $3.2 billion in revenue,

total cost base is 3.28 billion. So you're looking at EBITDA margins for Stripe of negative 3% versus 55% for Adyen. I like looking at, oh yes, keep going. You're going to get to it. The headcount is double at Stripe. So 7,000 employees. I think these are still estimates versus 3,300 employees at Adyen, the total payment volume per employee, 293 million. Yeah, a million. Yeah.

There's no way that's... Yeah, because it's the payment volume. Oh, payment volume. Yeah, yeah, yeah. $293 million versus $111 million at Stripe. So I don't know. Efficiency here. You could make the case though,

if stripe brings if stripe streamlines their costs i know like we're doing fallen angels this month and i just go like all right don't resist don't resist that truth like if you could look at all these and say what that is you know they just if they just fix these costs i love how uh the comments there first off you had a nice little ad from twitter's new ad products that just seem to be um mobile games that are uh let's just say have some lewd characters in them uh i mean it's it's getting ridiculous but i love the comment where the guy goes stripe should bring cost down thank you blue check thank you i think they're trying hey he's not wrong the uh i think i find interesting it's like it speaks to maybe like how difficult it would be to do this

to bring costs down after the fact yeah i think we're seeing it at amazon yeah and this is where okay we just looked at lyft it's like those founders probably good friends for three years those early employees probably really good friends they kept getting funding they feel there's probably all these celebrations they've been together for 10 years they're hiring new people. They feel like a family. There's no shareholders. There's just like private investors that are telling you to keep growing and keep marketing and do whatever you can to grow. Then all of a sudden, one day you IPO, it's a great celebration. Everyone's getting stock options. Everyone loves you. And then your stock falls through the roof

and all of a sudden people want to see profits and you have this new stakeholder that you have to please, which is the shareholder. I think it's very hard for the founder CEO in situations like that to start firing his friends to start saying oh it's hard to fire i know you've been firing i know you've been flying first class we're going to push back to uh economy and yeah we're not going to stay at those hotels anymore and just kind of making it a worse workplace for all your friends that's why they bring in separate ceos because they don't have to they don't have those relationships not as hard for them or that's why ceos step down because they don't want to have to take that role. I think if you don't have a profit-driven culture or a cashflow-driven

culture from the start, I feel like it's pretty hard to institute that after the fact with the same founder or CEO. Yeah. I mean, we see Stripe talk about this explicitly. I think Stripe is, or excuse me, Adyen. Stripe would be the opposite. We see Adyen talk about explicitly, when you don't advertise yourself as a giant spender, when you don't say, look, we're going to fly you first class, we're going to do all these perks, blah, blah, blah, blah, blah. Okay. You don't attract people that are just going there for the money, just going there for the perks, just going there because it's hot right now. Stripe, on the other hand, a lot of these companies, I mean, we have anecdotal evidence of plenty as people in our 20s working in a city

with a lot of tech exposure. A lot of people go to these positions because they're just attracted to the money and the, I wouldn't call it glamor, but just the perks, right? And they're actually there because they want to do it. And I think when you try to cost cut, people can get really upset. You have the wrong culture. Adyen, on the other hand, says explicitly, yeah, I mean, we're going to treat you well, but we're not going to just pay you exorbitantly. We're not going to hire a bunch of people for no reason. And you need to work here if you like to build software for payments that's it that's has to be your main goal so i think yeah i like those businesses much more and it builds a much better long-term culture for building value for all your stakeholders

because a lot of these tech companies like people don't like it when you complain about the employees because obviously the corporations are more powerful but a lot of the times the employees are sucking a lot of the balance sheets dry and it's just not sustainable yeah and it's i mean it's like it's not sustainable for them either they're going to eventually get fired that's what i'm saying yeah i was about to say it's like you can either have your cushy job or all the benefits that you currently have for the next year or two and then everyone goes or you take the very difficult decision to reduce some of the jobs to last longer i think i know it's always hard if you're especially if you're one of the laid off employees to recognize that but that is

i don't know it's capitalism that's i guess how it works so it's i think having that in your mind as you're working the kind of the i feel weird getting on my soapbox about this because i you know we don't work real jobs we just sit here on a podcast but But knowing that it is, especially for a public company, you are owned by the shareholders is, I think, important to have in your mind. Yeah, I mean, it's got to balance between the stakeholders. It's got to be balanced. Do you want to talk more about the AI bubble going into overdrive? Here's another press release, which I think it's really funny to read these, from an old friend of ours, Wix.com.

wix unveils groundbreaking ai site generator alongside suite of ai power feature sets to revolutionize web creation the upcoming ai site generator will create an entire website complete with text images and business solutions within seconds didn't really help the stock and went up like five percent so the pump didn't work that well But are you surprised at all to see this from our old friends at Wix? Well, I'm using Wix right now to build a website. And I can tell you firsthand that those AI functions did not work that well for me. I like it was very simple website.

I could not find a single template that was anywhere near what I wanted. So you basically just start from scratch. So I remember reading all these press releases because we built the Arch Capital website a long time ago and we did it on Wix. I was like, oh, that's a cool feature. It was a cool platform, worked. And then I saw all these press releases and I thought, man, this platform must have made a lot of progress. And I started building another website from scratch. I mean, it's still a cool platform, but it has not changed that much at all.

and all of these generative ai things are feeling like complete bullshit yeah i mean what is microsoft going to charge like 30 for this stuff they uh their stock popped again yesterday added so much in value i think it was like four percent which is a lot for a company that's closing in on a market cap of two three trillion dollars um yeah i mean it's clearly it's clearly a bubble like what's i think the lucky part of the last five years is we've gone through this story so many times cannabis nfts and crypto in general um sass spax meme stocks now it's ai we've seen this story so much even though we're younger luckily the last five years that it's so easy spot the trends yeah no 100 i start to trust the trend like now those signals i get when it's like

friends i have that don't aren't aren't investing at all or you know they they're never interested until something starts going on and then they start talking about it like the signal starts to mean something more to me now where i'm like okay yeah this might be bubbly behavior the the other thing i was thinking about here is what happens if nvidia significantly underperforms its guidance for the quarter that would be tough that would be uh what if a whole bunch of people a whole bunch of companies say yeah about that ai spending we don't really see the benefit at all yeah or they well here's the thing it's kind of thing it's going to hurt in the long run we saw meta i don't really know much about this but they

launched their new like software coding language i think it is honestly it could just be a platform for it but associated with you know large language models i've heard a lot from the people i follow which again i'm going basically not off of bible knowledge just kind of basing out for them saying that this new language from meta is taking a lot of market share from cuda nvidia is one i've heard from people that cuda is was part of nvidia's moat i could also see this accelerating the cloud providers to build their own chips which it seems like is already happening so yeah i don't know why one owns nvidia when asml and tsmc exist and for that matter apply materials should america just lbo asml and bring him bring him home yeah i don't know they already have a

bunch of stuff in san diego my brother actually works on it um yeah uh that's a trade secret can't give that out yeah uh do you want to talk activision blizzard they apparently accelerated their earnings report again and updated the transaction with microsoft have you heard about this at all when they got away i don't want to well here's i think it's yeah i know it's the one that we literally never can make money on uh luckily when we sold it like we bought something that went up which seems like everything went up in june so it's not that it's a little bittersweet that we seem to never get the activision blizzard right but we've been following it a lot i think maybe listeners will be interested. So yesterday, they extended the merger deal to be able to get

closed by October 18th this year. And they increased the payout that Microsoft has to give Activision Blizzard if the deal doesn't close to $3.5 billion if the transaction is terminated after August 29th, and to $4.5 billion if the transaction is terminated after September 15th. They also released their earnings. It looks solid. Diablo helped a lot. Bookings were $2.5 billion versus $1.6 billion in 2022.

Still not as TBD, whether they were at the new level of profitability but it's interesting to follow this that like i i just don't know as a still as a standalone company the upside here is okay what like what are they going to be how how much how big is this business really going to get yeah i mean it's 39 times earnings earnings might inflect a little bit this year but still you're paying north of 20 times earnings which i don't think historically has been a good price to buy activision at and i think it'll probably follow its long-term trends here's the other thing i was thinking about and that's that's interesting about the increased payout i don't want to get enticed

again so i'm not going to talk that much more about it but we first started buying activision blizzard i think at 91 90 roughly oh uh oh are you talking about like when before the merger yeah i'd say it was about 90 yeah pretty our cost basis in the end was probably around 80 a little higher are you talking about combining everything or oh after we added before any of the acquisition stuff i think our cost base was around 80 yeah probably yeah we've only ever lost money on it. And today it's at $92 a share. Stock is up. We've only ever lost money on it.

I think we just have the worst timing with it. I think that brands are really durable. I think King Games is a wonderful business, but I don't know. I wouldn't want to own it as a standalone company here.

The upside certainly seems limited on MergerArb here. I think there's maybe more downside than upside, but just because, you know, deal could still break, can't it? You never know, right? You never know. So, I don't know.

Would you buy this for $92 a share? No. Neither would I. I only like ARBs if I think the stock is cheap on its own and it's a very widespread. So we don't really do it very often. but when we do i guess we lose money well i should say lose not very much but yeah uh still lose money still can't seem to make money uh when other people do hey but buffett did the same thing

as us so we're just like him he sold out of activision in the spring true so hands paper hands buffett we're just copying the goat all right he was doing the same thing as him we also own ally so to see we're very similar very similar investors yeah the rest of the portfolio overlap okay netflix reports today do they beat on subscriber guidance let me look up what their guidance was uh okay we got okay your name is because this will determine this will determine the the rest of the market for like the next two weeks i remember netflix is always the first like if netflix doesn't hit the subscriber numbers everyone thinks like the digital world is going to shit so that is true okay we got a comment from uh europe some fake name that says hello

uh but let me look up what their guidance was because i want to base it off of that uh what is it 2023 first quarter okay guidance forecast forecast forecast where is it i don't know ah nope i don't know what they still give subscriber guidance i might uphold that the uh the other thing let me do a ctrl f what how about this password sharing huh yeah i guess it's working according to the third party data good for them man don't doubt reed hastings ever i guess not yeah they really time these rollouts pretty well right when everyone's flailing

and their competitors are all flailing they're like okay we can do password sharing when everyone else is not making money and they convinced everyone else not to do advertising actually we're going to do it yeah they're very good I'm good the

I forget what their subscriber guidance is okay let's look at analysts let's look I'm gonna look at the analyst estimates for because they always have an estimate right it's apparently like you said the entire world is based off of um uh you know whether netflix hits their earnings okay earnings preview from variety hopefully they have it please tell me they have a number ah okay that's the report say too yeah okay analysts project they're going to add 1.8 million new subscribers in the second quarter i think they are going to beat it

i don't know how the password sharing like takes effect on that so if it's if every account that's added is technically a subscriber then yeah i say they beat that but arpu i mean arpu would just plummet right technically uh not maybe not plummet but i guess it's a headwind it'll be like a bad indicator at this point but it's pure it's revenue creative yeah and the incremental margins are so high so yeah uh i you think they'd be huh i think this could age really well or poorly it's just a guess i think they miss and no they rarely miss

i don't know it's a guessing game i would you mentioned the tesla yeah do they beat or miss on what i mean they already had deliveries so free cash flow i think the delivery numbers are strong they're gonna have margin compression but i mean i think it's gonna be it's gonna be lower because of the margin compression i think that's been very uh how do you call it like you know it's not guaranteed but it's been basically i don't know streamlined not streamlined i can't get the word in my mouth but since they lower the prices right the margins are going to be down but they the the quarter of deliveries is really really strong so we'll see all right

I'm going to pull up our half or our end of year estimates. One of mine is aging really well, and one of mine is aging really poorly. It's basically because I said one stock would go down and one stock would go up. What was it? Was it a power hour? Probably, yeah. I'm guessing this is number 68, so 50-something. No, 40-something.

39. 39. yeah i nailed it all right cool 2023 bold predictions all right do you remember what yours were yeah it was amazon's gonna be the largest company in the world by the end of the year and tesla will be down 50 so one's looking solid yeah you really only had two one can still happen both can still happen technically the uh yeah i mean i would be a very happy amazon shareholder if you're right on that first prediction tesla down 50 what's it at this what's it it's probably up 100 year to date yeah so 172 year to date so wow it's 172

I didn't know it was that much. All right. You want to go through mine? Yeah. I forgot yours. We will have a soft landing. That's looking good so far. But the thing is all soft landings are all hard landings or look like soft landings first.

So I said the annual inflation rate, which I just used increase in CPI for 2023 will drop below the current federal funds rate at the time, which was four and a half percent. This is aging good so far. This is aging really well. second i would say these are less bold than me but you know we'll keep it you're getting them right yeah that wasn't very bold at all let me look up the whole fred u.s house index okay so i said the average u.s home price measured by fred's u.s national home price index will decline by more than 10 percent from current levels still possible it's flat right it's pretty flat i guess i don't

now can you look it up i don't know what is it is it new from fred u.s national home price index not new homes okay schiller we'll just do that whatever that's the end of the year okay january 2023 it's saying 293 000 and there is seasonality so so far you know uh home prices are up um to 300 000 but there is seasonality in the spring so it's not over yet no not over the uh yeah those two were kind of at odds with each other huh if the inflation rate comes down well the wealth effect i don't think so that's the problem uh yeah i actually don't know i don't think they're at odds i actually think if inflation comes down and interest rates come down that housing prices will finally kind of you know

there'll be like the vacuum will you know whatever pop and there'll be you know ability for prices to normalize okay this one's interesting i said so last year the nasdaq was down 33 percent the s&p 500 was down 20 percent and the dow was down nine percent i said they will finish the three major indexes will finish in reverse order this in 2023 so nasdaq will be the best s&p and then dow i think that's right so far wait wait what sorry say that again so the nasdaq did the worst last year s&p 500 did the middle and then dow did the best and i said they will finish in reverse order so that NASDAQ will do the best, S&P will do the second best,

DAO will do the worst this year. So far, that's looking really well. Come on. Let's go. Yeah. Some good, bold predictions so far. All right. To the person listening, I will open up our DMs so you can apparently

if you get verified, the DMs get closed. I thought we had them open for our chitchat money, but whatever. So look at those spam inbounds every day. Those are some weekend. Those are real people. Big time news.

What's the one stock that you think this quarter's earnings is a make or break? Maybe I would have said Carvana. I don't know. I mean, none that we follow because I wouldn't. We don't buy stocks that make or break.

Going through our portfolio, I don't really see anything. There's always like that one stock that just drops 50% on a bad earnings report. I think it was Chegg last quarter because ChatGPT just like killed them. Yeah, that was a tough one. That was very tough. I don't have any thoughts for you. Do you have any on your mind? no i really don't um what about now we talked about eiger last week

just scrolling through my likes don't really see much sucks that i apologize that earnings are prepared for this because this hawaii thing's throwing things off we're we front loaded the week and so usually i have time to yeah i still think we're getting some good stuff but unfortunately we can't have the tesla netflix stuff for tomorrow but that's okay Apparently, there were developments in crypto land. I think the Celsius creator is going behind bars. The criminal? Yeah.

He was a pure criminal. Apparently, Ripple's the security. I will talk about crypto. I like how they're saying, I don't know, the narrative is that, oh, Ripple is not a security, or I don't even know what the decision was. So we're going to buy. We're going to relist it. We're going to buy. it's got it's bullish for ripple and congrats to anyone that made money on it but

it makes no difference to me what the classification is there's still magic beans like there's no coinbase stock is up 217 percent year to date it is up seven percent in the last month this episode is making me think it's time to take some risk off but we don't really yeah i mean the rebubble is here and it's it's coming i think honestly the tesla report it's not make or break for it but i think there are a few reports okay what are the number one reports obviously nvidia but the number one reports to keep the re-bubble ai bubble gone i think tesla's one we'll see how optimistic elon sounds he's been very optimistic lately also i think microsoft they have been a bit they've been

they've been a bit of bubble boy pumpy bubble boy bubble boy lately yeah they've been a bit of a bizatti has been bubble boy lately uh you had a good tweet when they're like we're gonna make google dance and its market share is just like unchanged yeah people like that one whenever you tweet something positive about a company that everyone owns guaranteed to do well let's say you hack financial twitter uh what do you think that really is you just like buy all the big tech companies and just retweet all their press releases and you'll get a whole bunch of followers the uh who are the bubble boys um oh yeah who i think c3 ai c3 ai needs to get a little they need to keep that going that's just such a dude the ticker is worth like 10 billion dollars

i guess for about another believe it for a couple more quarters it is yeah because i wasn't there weren't their numbers just horrendous but they just oh yeah they just got bailed out by a ticker yeah because you just look up ai stock and c3i comes up uh 100 what about i saw remember we uh company in the i won't call the bubble category but say the fallen angels category that we followed and actually kind of liked was rocket lab uh potentially i mean it's not our cup of tea but so there's potential apparently they uh let me look let me confirm the press release but apparently they can they did a full reusable rocket thing like spacex now they they made a

big progress on that and i think let's see they are a bit of a press release happy company so i can find it um they are doing some satellites for nasa and more commercial ones and then they took the next step in their rocket reusability program so it seems like they're making progress to be the second company within the space economy i mean we saw a report from spacex that they're doing eight billion dollars in revenue and they said they were profitable if they exclude the building the rockets which is weird expenses revenue yeah revenue no what was it profits excluding expenses no it's it's uh uh it's yeah it's called it's pack it's you know it's pack no no pbc profit before cost

yeah that's what someone said pbc it's my new indicator uh but rocket lab honestly if you like spacex i know there's a ton of people i bet there's listeners here that like spacex i'd look at rocket lab if you really like that i mean the market uh what again i would say not our cup of tea but it's a very interesting company they seem to be executing and the market cap is only 3.7 billion. So if you really think they're the second SpaceX. Whatever happened to the battery company? What was it called? QuantumScape. I'll look up

the chart for you. I bet it's up a lot this year. Okay. We look at all time. Okay, well. Jeez. Yeah, I mean it went through a bubble. It's technically up all time. It's above its back price.

Year to date, do you want to guess what QuantumScape is up? A company that's not going to Have any revenue for five years? Yeah, 80, 90%. Yeah, it's just a, we're back. It's a re-ball. I'm glad I'm back. Honestly, at the end of 2022, I was like,

God, we should really be shorting these shit codes. I mean, we look at it all the time. We're really good at finding the ones that are going to be down 90%. And then this year, I was like, no, I'm glad we don't do that. We spend like, I'd say we spend like 50% of our time just insulting shit codes. We shut the shards. That's right.

like yeah like i mean and then we just buy things that have like the same factor exposure yeah i think it's yeah honestly the error of this bubble is there's so many companies that you just get we get so frustrated looking at them or like all right same old shtick like you're gonna do all this stuff that it's just pure it's just the pumping playbook the bubble playbook and it's so annoying. Yeah, gosh. Press release. Press release happy companies scare me.

Yeah. No more comments. Alright, we got five more minutes. I don't know. Yeah, sorry for the underpreparation, guys, but my portfolio's up, so I'm happy again. I gotta say, I think my emotional happiness

is tied to my portfolio oh it is i know for a fact it is if i check in the morning and it's red and i'm like look all right i'm not checking for the rest of the day if it's green i'm like i'll check again yeah uh i uh yeah i mean as someone who talks to you basically every day i know that i i can say that's true what did you think from the lift 10k when they said i hope this gets revised next year with the new ceo what do you think when they said for their mission or their first sentence it said we believe good energy moves the world what do you think that was that the first one i remember them having some something just obnoxious in their uh in their 10k something like the transportation account now whatever i mean yeah that they're

living like five years ago this is oh oh yeah yeah they're living in 2019 yeah yeah they look it sounded like we were okay let me share the screen on something that i think will be interesting here's the chart of the nielsen data from june 2023 for streaming mark and share uh if we look at here's what i think the most interesting thing is yeah you know youtube and netflix are still winning i think people see that everything else seems to be fairly steady you got prime video hulu and then disney plus are kind of decent share but i think the most important thing for me or the most interesting thing is that we're seeing a very very strong growth probably even acceleration and growth of the overall streaming category taking share of us tv time we're up to i'll say let's just say

that's 37 and a half percent versus like 32 and a half percent at the start of the year i mean that's pretty that's pretty dang good i think you know we could be hitting the um i mean when does the cable package eventually fall off does it have to get to 55 60 market share i mean i think we're pretty close from seeing a weird inflection point here that could really shake up a lot of these companies yeah i think it's the services like youtube tv and even youtube tv is excluded from these all those virtual cable packages are i thought it was integrated with youtube no trust me our guy alex morris who follows us every time and shares it they exclude uh youtube tv from it now so even yeah i mean technically

i guess these companies have been more market share but yeah yeah i mean youtube tv and kind of stuff like that feels like such a seamless transition to smart tvs because it's literally just cable for connected TVs. It's amazing that they're probably going to end up winning that. YouTube's going to end up winning the linear TV market just because...

They're really not doing anything that innovative. They just had a cheaper cost and a better user interface, and they seem to just be the place where everyone's going to watch the same TV that they were watching on their old TVs.

Yeah. YouTube, though, yeah, I'm constantly happy that I'm a Google shareholder because that thing just feels so hard to disrupt at this point. And no one cares about the writer's strike or the actor's strike. It'll benefit them. It's true. If it extends out any further, yeah. it's i mean it's just at this point it's one of those one of those marketplaces where or you know i guess you call it a marketplace but it's one of those platforms where

there's such a huge network effect it's impossible to replace yeah how the chinese government the chinese government couldn't do it i mean it would take decades to replace to like copy that content that library of content yeah i mean think of how much advertising tiktok spend on marketing their product and you know how profitable meta is advertising instagram which i guess is not the biggest overlap is probably tiktok the the numbers that came out from bite dance is that the company is yeah growing quickly but extremely unprofitable and they still can't seem to budge youtube so yeah i mean no one outside the in no no one outside of china has been able to do anything

it's pretty impressive even if not even if netflix's share of streaming time just stays flat if they're just basically raising prices it's i mean they're still gonna do just fine yeah what's interesting is that yeah they don't really it's not as tied to i guess the streaming time but i think it is an indicator that they'll have the ability to raise prices if more and more people are watching netflix compared to a disney plus i also say though advertising i think the market the the streaming time stuff shows how much potential netflix has for advertising because of how often it's just on for people yeah i mean i i feel like youtube just runs on our tv downstairs 24 7 and no one's even watching it yeah well you do have the ideal house of five dudes in their 20s that's

that's like youtube no one can compete with youtube with that yeah it's just some like youtube some podcasts going it's always like lex friedman which whatever it's just like it's always this like hour-long conversation that someone starts and just leaves it on there like all right yeah yeah it's lots of ads lots of ad placements for youtube yep all right that's gonna do it it is the one hour mark thank you everyone for joining thank you too let me get the names out here Andrew Marshall. Oh, we got one right at the end here. Question. Do you guys research international small caps at all? Yes, we do. Uh, but we really like deep value, I guess. Um, I don't really have anything else. I'd say if you like, if you like international coverage,

check out Ian Bezek or Ian Bezek. It's B E Z E K. He does a really good job covering a lot of Latin American companies. Yep. And you can find all this stuff on Twitter. Yeah. Thank you to Andrew, thank you to John for the comment. 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. Again, you can listen to these Sunday mornings on your favorite podcast player, but if you

want to watch, you can find the replays on YouTube. And if you want to be one of the commenters, one of the few, one of the couple that joined the comment section, you can do so. usually thursday mornings 12 30 p.m eastern time all right thank you everyone we'll see you next time real canadian superstore has everything you need this back to school season save on lunchbox savers like ziggy sliced deli meat products for always 375 and get life brand Pure Vita Shampoo or Conditioner for $8 each. At Real Canadian Superstore, when you're ready, we're ready.

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