Chit Chat Stocks - Investing Power Hour #69: Big Tech Earnings; $SPOT Margin Woes; What the Hell Is Worldcoin?

Episode Date: July 30, 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. My name is Brett Schaefer. I'm joined here by Ryan Henderson, as always, and this is the Investing Power Hour, number 69. As we keep climbing on here, any listeners, please get your

brains out of the gutter there. We have earnings season, really in full swing. We've got a lot of stuff to talk about. This is one of those shows every couple of months where we could probably go for three hours the first ryan as a little teaser here or a little warm-up how was hawaii you spent some time what island were you on i don't even know kona well it's kind of the island big island that but we were in kona um yeah it was a lot of fun the bad wi-fi though apparently they got yeah pretty pretty rough it was okay it just wouldn't have been like live streamable i mean you really got to have pretty solid wi-fi for to broadcast these shows i think but um no it was a lot of fun it's incredible weather i don't know sometimes i just think like

yeah it's a great place to retire but i wonder if you would like isn't there something called like island fever where you just get like kind of you feel like you're incredibly secluded I would definitely show that. 100%. All right. Well, this is the investing power hour. We do these every Thursday or once a week. And we basically talk about anything in the financial markets, investing, business world.

What do you have on the docket this week? It seems like you've just compiled a bunch of earnings reports that looked interesting. That is exactly what I've done. yeah, not, uh, not a whole lot of like big things, just a bunch of, I want to cover all the major companies. So just full blown earnings roundup earnings Palooza. We can go through every one. I know it'll be a little scatterbrained for people that want like a focus show, but, uh, yeah, I've got a lot to touch on. All right. Yeah. And then I have Spotify earnings and their price hikes kind of going through that the the plus and minuses of that report and then espn potentially

getting in bed with the sports leagues which i thought was interesting could be a nice little development as we get this sports transition to streaming that we've been following recently and then a little fun one we have the launch of world coin if we get to that so ryan he's getting distracted by the pet over here but i think why don't we start with you what do you want What company do you want to hit first? Sorry, there's a flying creature around here. I don't know. Let's talk Google.

Google's kind of the big one. We own it. One of the big three that reported this week, because we've had Meta, Google, Microsoft so far. Apple and Amazon have not reported yet. Netflix reported. Probably could have talked about that too. But Google, I don't know.

What were your thoughts? I thought the quarter looked pretty good. yeah nothing no but no big surprises i guess i think maybe a positive surprise in google cloud but besides that not much sorry i'm having some distractions over here uh oh yeah well we had uh i guess as i don't know this has been a horrible start to the show but that's all right yeah well we both do these from our home. What were your thoughts on the quarter? We can go through the segments and stuff like that, but I thought honestly very in line with what they said. I was surprised to see the stock

up, but I guess I honestly, every time I have to try to figure out what a stock's going to do after an earnings report, if I have to guess, I always go, hmm, I think it'll be down and then it's always up and it seems like i i honestly should just flip a coin because i would do no better than that yeah maybe i think sometimes if i read it occasionally if i read it i haven't seen the stock reaction you kind of know in advance like and it's usually to the downside you usually know like incredibly bad okay this is yes not going to go well the um but for google i thought it was a really good quarter and i mean search is kind of back search ads are search ad revenue was up five percent which might not be huge but for a business that seemed like it was really slowing primarily

due to just overall ad spending slowing i think that's certainly a positive uh the other one i was really impressed with google cloud google cloud still growing 28 year over year and margins i had a tweet the other day which just kind of went through the operating margins within google cloud for all the guys you did the growth hack that we said that we said right which yeah if you're trying to grow your followers just tweet numbers about big tech and you'll get there the uh but it went from their operating margins since Q1 of 2020 have gone from negative 62% to positive 5% in, what is that, 14 quarters, so three and a half years. I think it's a really good example of the advantage that big tech has now. In Google Cloud, I'm sure it was a solid offering to begin

with, but they had endless resources to invest in this offering, invest in this really business on its own, which competitors just don't have. So they have the capital to do it, the talent to do it. And I think this is just a really good example. They can lose money for a long time because they have so much room to invest that they're going to come out with a more profitable business in the end. now I want to see it continue because it seems like Google is one of those companies that likes to get a little bit of profitability and then hide it. Oh yeah. I mean, this quarter they were

like, Hey, we're growing again. So yeah, we're going to, you know, get back to hiring and stuff. And I really like, we can maybe talk meta later. I really like how they actually care about being efficient. They actually care about returning the spend and alphabet was like, Hey, we did this layoff so we're cool now right you know i know and it's yeah that is the one frustration for me is they just like you really can't underwrite margin expansion like you can't expect them to grow profitability because if they wanted to i think they could have probably 50 operating margins yeah that's true but you know they're investing in some stuff that could have promise like waymo and some of the other ai stuff and some of the biotech stuff and some of the youtube stuff the

cloud stuff but but a lot of the stuff a lot of the employees stuff employees are working on like google assistant stuff like that yeah so we get that i think yeah interesting thing on cloud one they said that google cloud project is growing faster than overall cloud revenue because i think they include google workspace which really doesn't they don't really care that much about so if you take that out they're actually growing faster than both azure and aws now they were growing slower than azure for a little bit now but they're it'll be interesting to see if they continue to grow over the next two three years um faster than their two competitors maybe they will maybe they won't yeah at a nominal basis it they're not growing as fast but on a percentage

basis they are and then one other on the margin thing the royal canadian legion is celebrating its 100th anniversary and now our change has a two dollar coin to mark this milestone honor the legion's mission to carry forward stories of service and sacrifice to new generations and their dedication to supporting veterans and their families from coast to coast to coast celebrate this enduring legacy find the 100th anniversary of the royal canadian legion two dollar coin today yeah some of it i think any listener who follows these companies closely know that a lot of the margin is because they extended the life of their servers so the depreciation expenses lower um but i still think i think of all the companies are doing it that's because they found out that

the servers last longer and then i guess last yeah it's not that's not that's a good thing it's a good thing i bet if they could they would depreciate that quicker for the tax uh so they didn't have to show earnings i mean that's it seems like they realized they kind of had to because that was actually like the useful life of whatever the server so i don't think that's like financial gimmickry or gimmickry whatever yeah you know some people say yeah exactly and And then I think, yeah, when you mentioned that there's the advantage of being able to do this project versus, say, any other company that's not one of the big tech companies, you have, I guess, for anyone that doesn't know, Google severely overinvested, or I guess

I should say alphabet, but they severely overinvested into the Google Cloud project at the start to try to match the capabilities of especially Amazon Web Services, but also Azure. But at the start, they didn't have the customers to make that profitable. So like Ryan mentioned, where they had negative 60% operating margins, but they hired tons and tons of people, both sales staff, building that muscle out, and then also all the capabilities that AWS has, no one would be able to burn that tens of billions of dollars for multiple years on that. But now Alphabet can, and now it's paying off, and now it looks like they're going to

have a business that probably is going to hit. I don't want to say this is a guarantee, but probably hit a hundred billion dollars in annual revenue sometime, I don't know, five, six, seven years from now. Yeah, man. It's on what? $32 billion run rate right now. And the other thing I find interesting is I thought, and we can talk about Microsoft's earnings now too.

I thought Azure, you know, Microsoft reports intelligent cloud revenue. They don't report Azure specifically. I thought Azure made up a huge chunk of that, and I thought it was growing share, but those internal documents from the Activision litigation showed that it's only half the size of AWS, which means it's less than half of Microsoft's intelligent cloud revenue. So it's really not... I don't know. I think Microsoft was making it seem like they were a more formidable competitor than they maybe were. I mean, it's still a huge business, don't get me wrong, but I find it felt like they were maybe promoting themselves or putting themselves in a better light than they were actually positioned relative to AWS. Yeah, because I think some of the numbers you look at, and I can maybe even just look up something now, because when I do just look at cloud market share for, say, a Motley Fool article, I believe they put like AWS at 30% and then Azure at 20%, when in reality, it might be actually a lot wider than that. Let's see. I mean, they said they're generating half the revenue. So yeah, it would have to be. Yeah.

I don't know. And also, I was kind of going through Microsoft's conference call. I think they quote some market share stuff that might be... I wonder where they're getting these numbers. We're growing share in search. Maybe. Maybe. Not really, though.

I don't know. If, so if Google's growing search revenue at 5% and Bing's growing it at 6%, Google is still growing share. And they guided for, they literally said in the conference call, they said, let me make sure I find the quote. They expect, Microsoft expects search and news advertising to grow mid to high single digits over the next couple of years. A lot of that's LinkedIn too. LinkedIn is really the big growth driver there. So I don't know. I just kind of find it hard to believe that that's growing share versus Google.

Yeah. And if we look at the market share, if we just look at Statista, which I guess is not the arbiter of truth, but they have AWS at 32% market share and then Azure at 23%. That's typically around the numbers that I always see when I look stuff up without the hard numbers in front of me. So, yeah, I guess you're right, Ryan. They definitely do. I mean, it's still phenomenal business, but it seems like they overstate their size versus AWS.

Relevance. Yeah. And Microsoft. Maybe it's like, I don't know. Maybe there's a different way to measure it or something. Yeah. I wouldn't be surprised if Microsoft gains a little share on search queries because as someone who uses Windows for the laptop we're using right now, They're blasting users with notifications, switch to Bing, try Bing, try our new AI Bing thing.

And that's fine, but I don't really care. And you can try it up and then most people switch back because they're locked into the Google ecosystem or really the Apple ecosystem too. I think so far, it's pretty clear that the return on invested capital for all these AI tools in search, now TBD on office tools and productivity tools, but the return on spend for search seems very very negative what do you think yeah it i think we can look back now and frankly pat ourselves on the back because when google was selling off because chat gpt was going to take its whole market

that was in hindsight a wonderful buying opportunity and But I think a lot of people recognize like, yeah, that's just not going to happen. And I think it was one of probably one of the easier buying opportunities since I've started investing. Yeah. It's nice when you- I think we bought, didn't we? Which-

Yeah, I think so. Pat on the back. Yeah. We'll get to one where it's not a pat on the back next, but yeah, I think so. I can't remember honestly, but yeah, it seemed fairly easy. I think it's an example of you learn about a company and if you know about it, you understand it well, it might take a couple of years for something like Alphabet. It's a complicated one, but in the end, it's really not, I guess, when you get down to

it, but it's hard. All the different segments and stuff like that, you get comfortable with the long-term competitive advantages, and then you wait for this price dislocation out of some weird narrative and you see it time and time again, especially, I think it's even more influential in the internet age where some news narrative gets thrown around i mean it was so prominent with chat gpt earlier this year and there's some narrative about google losing market share and then if you're confident in the business hey it could be a good time to buy yeah all right as i was gonna say i think i found that if a competitive threat if it's just a threat like

there hasn't been any real change in market share usage or any change to the business fundamentally. Just a narrative around something that could happen. If it's, if something sells off because of that, it feels like nine times out of 10, it's, it means nothing.

Like it doesn't actually impact the business in any way. Yeah, I agree. I agree. Although remember when we said, what was the company with Anheuser-Busch? We said that in the spring, That was another example that we're like, oh yeah, typically, you know, if we look at kind of the historical examples, you want to fade that, but that was the one, that's the one out of 10 there.

That's the exception to the rule. Yeah, that was, that was kind of the, the odd one out. I would say there's still time maybe before. There is still time. It could still short-term could be multiple years, but obviously a beer company that's been around for 400 years or whatever it is, 300, 200 years. Yeah, that could be short in their timeframe. But let's move to one that wasn't very good. Stock was down over 10%, and that is Spotify.

I have some interesting maybe numbers to roll through, and we can talk about the price increases and how that might impact it and how we're thinking about that. But Ryan, why don't we go through maybe some of the earnings first, the actual numbers, and see what you think? Oh, I guess I don't really have any numbers. I just wanted to maybe go, MAUs, user, I'll just go with the generalizations from what I remember. User growth was a record this quarter, if I'm not mistaken, especially over the last 12 months. They've had more user onboards than any other 12-month period in their company's history by a mile. Revenue growth was a little slower. It seems like they're signing on a lot of lower ARPU customers because they're seeing

big adoption in the rest of the world, which I'm guessing, I haven't read the conference call still, but I'm guessing there was some solid growth in India, which is kind of a lower ARPU market. They called that out the last conference call as a particular market that did well. So revenue growth lagged, user growth a little bit. The issue here was that gross margin expansion was non-existent. And that's kind of the story here. Basically, are they going to be able to get out of this 25% gross margin rut where they pay every 60 to 70 cents on every dollar out to the labels?

It doesn't seem like anything has come yet. Advertising on the podcast side was growing, albeit a little slowly. I mean, it was fine. Yeah. It's like 30%. And it's like, okay, it's not bad, but it's not great given all the investments. Yeah. So I don't know. I actually, I don't know. I came away a little disappointed this quarter. It feels to me like Groundhog Day where we've seen no real margin improvement. There's a bunch of one-time costs that if you strip out, maybe they're – and for the first time, I think, ever, they started reporting an adjusted gross margin, which I'm not a fan of that. I hope they don't have to do that on an ongoing basis. I think it's fair.

I think it's fair for the layoffs. When a company does layoffs, I think that's fair. But I don't want to say that every year. I think it's totally fair. If you're still hiring a lot of people and you just have to keep doing different rounds of layoffs, you're going to keep getting – I don't know. maybe if it's just a one-time layoff, but if they're hiring in some places laying off in other places and they keep having to do it, there's a problem. And they've done two rounds, right?

No, maybe, maybe hard to remember. I think they didn't want big one. Anyway, whatever it, it just, it feels like every quarter I don't necessarily, we don't see kind of the margin of improvement you'd want to see an aggregate and every single time it's just wait till the end of the year. Just wait till the end of the year. There's going to be some margin improvement. And I don't know.

I think eventually you just kind of grow frustrated, but I've given myself a timetable. We've said we want to see a full 2023 because that's when their investment period is fading away. So there should be kind of the true steady state economics. Yeah. I think one other note, I basically agree with all that. Other note is that I think, honestly, the biggest spending problem might be in the operating expense line. Because we look at their R&D spend, I want to, actually, no, I remember what it is. It was over 400 million euros, which if we convert to dollars, it'd be a little less with this current exchange rate, but we'll just keep it as euros.

Over 400 million euros in R&D spend last quarter, which I think is quite high for a company of this size. They don't have the advantage of a big tech company to be able to spend 10, $20 billion a quarter, or not a quarter, a year, or whatever they spend. either way. I wouldn't call it a deciding factor because maybe they're getting really good returns on this R&D spend, but I think the easiest way for them to do it, to get to profitability in the short term would be to really cut down on that R&D spend because the sales and marketing spend looks great. They're getting really efficient with that for onboarding customers.

the gna spend has always been fine they don't they're pretty efficient in that regard but it seems like they got all these projects like they're kind of a big tech company they have a little bit of the amazon problem but they've never shown profitability so i don't think they have like investors like ourselves are not going to give them the leeway to have other bets big bets huge r d spend because they haven't proven that they've been can be profitable yet they i I don't know, curious your thoughts on that, of whether they need to show it first before having the trust from investors that, okay, you can spend big on this R&D because we know you can actually be profitable if you want to be.

Yeah, because I think that's honestly a huge question is whether or not they can generate consistent 10% profit margins if they wanted to, because it doesn't seem like they can. The other part that's, yeah, if they were getting huge returns out of these R&D investments, stuff like AI DJ, it's cool. I know you like it. It seems like they're getting a lot of usage on it. That's probably a good one, right? It's definitely, I mean, I think that's fantastic. That's a fantastic piece of R&D spend because they're retaining users and they're going to increase the usage.

And every time they make one of these things that people actually use, AIDJ, Discover Weekly, all the automated playlists. I mean, that's the key reason why they have lower churn, why they have higher usage rates, why they're going to have that essentially the pricing power. I think those are great. But doing that running stuff with Nike back in the day, the hardware stuff,

the plenty of other things that were kind of the wilder R&D bets, I think are a little far-fetched. Yeah. i'm not sure what the makeup is of that whole r&d line but i imagine a lot of it now is they acquired a bunch of businesses wooshka all in podcasting gimlet megaphone anchor uh just i'm probably what was it footlocker no uh locker room find a way or locker room yeah i think that find a way with another one locker rooms all shut down now yeah yeah they remember they made spotify live remember they probably put a lot of r&d dollars into that yeah just it feels like

the majority have been misses they they've had good every time they've kind of changed the user interface changed the user experience it's been pretty successful but some of these new products are just flops. And so I'm okay with them taking chances if we know that they're actually profitable first. And since we don't know that, it's like, if you're going to miss a bunch of times, it's not worth it for me if I have no sense of what you're generating. The other part that kind of pisses me off is the stock-based compensation. We've talked about it before. My concern here is that I get annoyed with this for other companies, but for Spotify, they consistently talk about free cashflow. We generate positive free cashflow.

Okay. I've got the numbers up from Stratosphere right here. Since, let's call it 2019, because I want to pick a number that's been public for a while. Now, stock-based compensation, I think free cash flow is probably flat to down over the last three or four years. Stock-based compensation has compounded at 32% a year. Well, I don't get that free cash flow number there. Yeah, I don't. I don't know.

It's consistently frustrating for me. Yeah, the operating expenses, they earn a better spot. I mean, it's not a good spot because they're spending too much on their optics. but they're in a better spot than a company that say has to spend a lot of money on sales and marketing just to kind of keep the engine rolling because then the risk is, okay, we take off the sales and marketing spend and the whole thing falls apart. That doesn't seem to be an issue. And that's a way bigger issue for us when we look at a company, but it seems like the R&D spend, they're not willing to get it. Yeah. They're not willing to get efficient in there.

And you see when they talk about that, I think, look, yeah, eventually push is going to come to shove. It's interesting because a lot of the business looks really, really strong right now. I think maybe we can talk about the pricing power stuff here because we don't want to complain as frustrated shareholders for the entire podcast. But there's a lot of stuff that looks good, right? And there's just a few problems. Yeah, it's users. That's it. well users and i mean and the ability to raise prices and the i thought they were slow yeah okay

that i think they'll be able to raise prices it's weird that they didn't mention it i guess much but i thought they were like shuttering their podcast originals what do you mean oh they're shutting the the spotify studios but now it's all either in uh licensed or ringer or gimlet i think they shut down podcast and absorbed those into other stuff the successful shows they absorbed into other ones i think or it actually could be reversed gimlet could be shutting down i don't remember but they still have the originals it's just not under the spotify originals anymore so this new trevor noah show is that that's just a I think it's licensed or it's produced by one of these other companies.

Yeah. But that's better than doing a Kim Kardashian show. At least he's a successful media personality, but let's, let's move into the pricing power. Cause I think this is another interesting discussion as we talk about the streaming business in general. And as I ran through the numbers, I was kind of thinking, man, maybe this, the labels might be the better opportunity here as a lot of people seem to

comment and talk to us about, And maybe we'll finally get religion there, but let's go through some math and kind of what the price hikes are going to be. So these price hikes were done in a lot of countries, but I kind of want to hone in on North America as an example. That's Canada and the United States. It's one of their most important regions, maybe their most important region in total. If we go through the math, they basically have 61.6 million subscribers in North America

as at the end of Q2. now someone mentioned to me that a lot of these subscribers are going to be on the duo plan or the family plans where there might be as much as six people that count under one subscription plan so these price hikes won't be as meaningful as we're talking about here uh when i go through these numbers but some of the price you know some of the plans were increased by two dollars there's also international price hikes so i think this is a good rough because they don't they don't break out how many people are in the family plan. So this is a good ballpark number of what the growth is going to be from these. And if we look at what the price hikes were,

basically they announced $1 a month price hikes across the board for all those plans. Some of it were different. So if we say that all of these 61.6 million subs stay around, get the price hike, they're going to be paying $12 more per month, or excuse me, per year to Spotify. And if we run through the math on what that'll mean from a revenue generation, just multiply those two numbers together, that would be $740 million in revenue for Spotify each year. Premium business currently, if we analyze Q2, is at $12.2 billion. So that can mean 6% revenue growth for the company just from these North American price increases over the next year i think that's pretty sizable and i think it's interesting but the big question is something

they can't really share with us until it actually flows through the income statement is whether they negotiated better margins with the labels while they wrote raised prices well they talked about the labels talked about that on a conference call didn't they i think the the no one has said anything explicitly i think that they didn't get better uh if you kind of read through the tea leaves they didn't get better or whatever it's the same unit economics but i don't know what are your thoughts on the price hikes i i don't think that they got better economics would be my bet but that's kind of you know it's impossible to know i'm trying to find alex morris talked about this a little bit um shout out alex we had a we had him on as an interview

talking kava last week um as you look for that we have a question from matthias i hope i'm always pronouncing your name right uh thank you matt h for coming back on the show again or on the comment section can they i think he's talking about spotify here really keep taking price going forward i've seen youtube music pushing its product hard to me the past few weeks haven't switched but was intriguing i will say that youtube premium which i think is where a lot of people access youtube music they increase their prices by two dollars as well what are your thoughts on that ryan the competition people saying they're gonna leave or yeah the the can spotify continue to raise prices say could they do it this is the scenario i laid down could they do

once every two years without yeah i think so i don't think i'm not gonna i was thinking about it today i was like if i had to switch would just be such a pain sure there's the same music on all the platforms but just like getting used to the new layout downloading all the same playlists maybe trying to find some software that switches it like it's just not worth it when you can just pay a dollar extra plus spotify is one of the cheaper ones anyways if i'm not mistaken maybe you get something subsidized by apple maybe youtube you get no ads but i don't know i like spotify i think most people like spotify they have the lowest churn in the industry i believe and their value is still pretty pretty high or the spread is pretty wide because you only need

one music streaming service and like the usage rate like the the value people get like i use multiple hours per day it's it's very very useful it would take a lot for me to switch but it who knows we'll see in the data it is yeah it is one of those things where people are i've seen this a lot it's always people on like surveys or outspoken on social media where they're like spotify finally finally raising prices gives me a chance to switch i'm like all the other all the other platforms you'd switch to raise prices too like yeah you just not you you don't have that one so you haven't notice um anyway but the uh so i found the quote here it says this was from the universal music group earnings call the ceo i think said you asked about the rates were paid from dsps which is

spotify in them if at higher prices we were paid a different rate i think the simple answer is no in terms of then i guess don't have to read through the tlac it's pretty explicit there yeah i think yeah yeah seems unlikely they got better you can still it well it should it's a lift to gross profit yeah here's the thing yeah i was about to say the same thing it is okay only they collect only two-thirds of that um it's still going that's that's too like the one-third that goes to oh wait excuse me they collect one-third two-thirds goes to the labels and the rights holders they collect one-third of that that's still 30 of that revenue of that 740 million. A third of that is going to hopefully, as we say, it's always theoretical then, hopefully

that's straight to the bottom line, straight to the balance sheet that they can either reinvest, which as we talked about, they might be reinvesting a little too much, but hopefully it'll fall straight to the bottom line. With the price increases, they can be attractive regardless of whether it pushes margins up because with the music business, they have ways to drive margins higher, which is the marketplace, which we've seen consistently over the last five years, them doing so. The problem is, and again, I'll reiterate this, is the operating expenses and the gross margins on all the podcast investments, which they seem to have overdone. Everyone's probably seen the story with Meghan Markle and all that stuff and all these crazy

shows. Only a few of them really made sense to the established shows like Joe Rogan, Armchair Expert, Call Her Daddy, stuff like that. Here's another question from Matt H. He says, Google and Apple always just bundle and undercut them on price, keeping margins low. I've heard the margins will improve for like five years now and it never does i think that makes sense in theory but in reality that's not what we're actually seeing with the business google and apple have had competitors out there for years the margins are going to be the same when i grow spaces across all these players and again i will say the problem is the 400 plus million euros in r&d spent so i i think that i'm curious what your final thoughts here ryan is we maybe want to move

onto something else no matthias i think you're right but in this case for the wrong reasons so i mean margins are consistently low but that's not because of competition the fact is they have been undercutting on price subsidizing bundling bundling doing all this stuff and still spotify has gained share spotify has gone from probably 100 million in 2015 time period to 551 million monthly active users in the time when all those companies were offering different products. So it's, and margins are still the same, but it's not because of the pricing competitiveness. In my opinion, it's because the labels take the contracts with the labels are just simply fickle and-

They experiment with stuff, right? Yeah. They got too many employees. They got a lot of employees. My gripe isn't in the cost of revenue line. It's in the operating expense line. Same as Brett's. I have more of an issue, I think, with management's approach as opposed to the market as a whole. I'm not very concerned about the competitive threats. Yeah. And if these companies, it seems like they kind of work, it's one of those rational industries where they just keep raising prices. If they do that, and then the premium subscribers as a whole are growing and they're raising prices, for the next 10 years, you should be able to see industry revenues, and I'm talking about DSP revenues, grow at 10%, probably annually. we had another question here uh from our i'm sorry i'm not gonna be able to pronounce your name here but thank you for the question thank you for joining what do you think of farfetch

we looked at them a long time ago it's kind of a fallen angel it was one of the ones we debated on doing this month for our fallen angels uh which for anyone that hasn't referenced we're doing we've done lyft pinterest and why am i forgetting the other one ryan what was we're gonna be doing we work here we've also done lyft pinterest so far so far so far was probably the most intriguing lift in pinterest i was kind of disappointed in farfetch'd though it's down a ton stocks at 5.40 and market cap's only 1.9 billion if i remember correctly well one this was a bill huang uh what do i call pump and dump or pump without without i guess it was just the pump without the dump uh i just remember being worried about the china exposure as that's just a tough market for

us americans to understand yeah there was a lot of china exposure you know i don't know the business that well but i remember looking at the balance sheet and thinking it was extremely complicated and typically if it's a complicated balance sheet but you can get the sense that it's not a huge deal like if it's complicated in terms of like their debt structure but the debt isn't that big you know you can look past it as an investor but they were heavily indebted if i'm not mistaken and it becomes kind of a much bigger issue when it's a ton of debt and really complicated maybe i just don't look at it for long enough and maybe it's gotten a little cleaner since but i remember thinking it's a complicated balance sheet and they're not consistently profitable

which makes it really difficult to kind of assess and it makes it feel like a higher risk investment which is probably i'm guessing why it's sold off yeah yeah it honestly seems maybe, I don't know. I haven't looked at the numbers, maybe similar to a Lyft, maybe similar to a Pinterest where there's good theory on why the investment could work, but they haven't really shown it in the income statement or the cashflow yet. But honestly, I could be wrong. I haven't looked at Farfetch yet. If they are profitable, maybe it's an interesting time to buy. I like the concept. I like the marketplace for luxury goods concept. It seems like something that should be its own service as opposed to a part of like Amazon or something.

All right. What do we want to talk about next? Meta. Okay. Go right ahead. Meta. Gosh. Good quarter. Stock was up like 7%. And they're taking this year of efficiency to heart. So they ended the second quarter with over 71,000 employees down 7% from the first quarter. And they said their Q2 headcount still included roughly half of the approximately 10,000 employees impacted by the 2023 layoff. So it should come down even. Hey, Daniel, talk to your guy, talk to your friend, Zuck, and let's get, like, come on. But sorry, continue.

Yeah, other than that, I mean, revenue was up 11%. Daily active people or users was up 7%, which is just astounding. and considering they already have basically i think it's like 3 billion or something like that um then operating income was up 12 i it this was probably the investment and company we were the most wrong on in the last two years of uh we didn't do anything but yeah i guess sin of we don't lose any money sin of omission because we understood that instagram was going to stick around whatsapp was going to continue to grow yeah the worst part was i was public about it saying it was not a good investment so people can hold hold my feet to the fire on that one but uh

yeah i still have some of the same concerns i think just around to me i still don't see why the metaverse spend is as large as it is and you know i just don't think they're going to get a good return on that. But I think where I was wrong was they are able to continue growing earnings from the core businesses at a pace where it allows them to not only... They can keep investing in the metaverse while still growing earnings. That kind of surprised me. I didn't expect that. And I think now after all the Twitter shenanigans that have gone on it's given me a sense that social media businesses are pretty impossible to disrupt at this point yeah because we're still on twitter i think i'm on x oh x yeah

i'm on x.com oh boy oh boy don't think about what do you think about that interesting i think he's trying to see how many dumb things he can do to keep people and people still stick around the only thing that i'll stick around we're a little different because i guess it's part of our business but still there yeah the only thing that's bothered i don't care if i got a different logo the only thing that's bothered me is like like when i have it as a tab on my computer i keep missing it you know i'm like where's the blue bird yeah and that's what yeah meta with threads thing needs to create a browser because i as someone who's basically takes twitter off the phone because we'd be on it too much on finchwit you need it on the browser i'm not

going to go on thread i'm not going to create a chitchat money threads account unless we have a browser access i think yeah the meta it's interesting tiktok should have never doubted the zuck yeah they're good they're just good at filling ads they're good at making they're just good at ads and they're good at getting people to stick to their product i mean instagram is so strong reels is crushing it tiktok is stagnating tiktok's still big but it's stagnating and that's really it yeah yeah it's man and you know what they are taking this efficiency approach to heart and actually implementing it other ones are saying it and you're not really seeing it I mean, employee count, I think it's still going up at Google.

They never said they wanted to be efficient, but they, well, it went down this quarter, but what's funny is it went down significantly less than the people they laid off. So they're still hiring. And it's probably going to be growing year over year. I think it's probably still up year over year, maybe not, but even if it is, it's going to be, it's going to be up year over year soon. It was up like 7,000 employees year over year.

Yeah. So they're not saying it seriously. here's on the ear of efficiency though the one gripe i have with meta the one gripe i have with google the one gripe i have with a lot of these big tech companies except the one we don't talk about very much and that is apple is the finance departments the capital returns programs apple is so much better than these people i think it's probably why buffett's in there over others and we've seen that we saw that viral video probably didn't go viral because no one really cares about it except people like us when the cfo was talking about how they have like seven people that just consistently buy back that manages their entire 100 billion dollar cash

pile yeah and they just buy back bought back stock consistently we see google or alphabet just have a ton of cash on the balance sheet they didn't take any of the low cost leverage they have gotten 10-year bonds at sub 3% for a long time. They probably, like Apple, they probably couldn't, I don't know how much Apple has, maybe $200 billion in debt. They could have taken that out, bought back stock. The same as Apple. Facebook, or Meta, excuse me, is talking about getting debt now. Why are you today getting debt instead of two, three years ago? Preston Pyshko , They did their first bond offering not that long ago. I think it was a couple of quarters ago. I'm like,

I bet they still got a decent rate, but it could have been doing this. It's easy to say that with hindsight, but it was honestly pretty even then. No, no, there's no hindsight bias here. The rates were, yeah, zero. The money was, they were giving you money. As long as you can invest it and earn a positive return, it makes sense to take it. Yeah, let me look at, and I know Apple at some points was trading at a cheaper valuation, But I think Alphabet could have done the same thing.

Meta for a time was trading at a, probably for sometimes a higher valuation. But if they just did consistent buybacks, I think it wouldn't matter. If we look at the last 10 years, Apple's shares outstanding are down 37.5%. Now, let me look at Google. Down 5.5%. Meta. down 4.4%. So just slight declines really only happened in the last few years.

I see no reason why those shares outstanding charts shouldn't look exactly like Apple. And what's funny is Apple is actually paying out a dividend too. Yeah. So that's my big gripe with meta on the cost stuff. Everything else looks great, but yeah, the only bummer I think with,

so for Google and meta, most of the employees that I'm thinking of are all like it's I bet as a percentage of the overall employees there's more

engineers and like salaried employees than what Apple has because I think Apple has a lot more like employees that are working at like the storefronts so it's i don't know probably not paying out stock-based compensation to those but the either way still

it doesn't matter yeah they're just as profitable from a size like their earnings ratios gap you know including spc we're pretty close for a while apple for a little bit was training at a really really cheap valuation but alphabet's been there before with all the money the alphabet's been putting into the buyback the fact that the shares outstanding are down like a single digit percentage over the last three years isn't- No, no, that was 10. That was 10. Let me look at three.

Are you looking at the Jerry Capital thing? I think it was by quarter, not by year. Well, I was doing 10 for this reference, but pretty last three years for Alphabet, we're at seven. Down 7%? Down 7%. I mean, still pretty, you know.

It's fine. But considering how much they've probably put, what, $200 billion into the buyback almost? They're at a pace. Right now they're at a pace at 60 billion per year. I think it's higher than it was, so maybe let's say $150,000. Yeah, that's a bummer. But at least, I don't know.

I like that with Google, it doesn't trade a ridiculous premium because it makes it easier to own. It's frustrating sometimes, but I think they're, what, 21 times free cash flow? They should throw a huge bag at the Apple CFO and convince him to come over. throw him i'm not joking a billion dollar thing he would make it would be so worth it he's the only like feel like who should replace the google cfo apple guy 100 he's the best he's the best cfo well didn't they just hire um a chief investment officer no no that was the existing cfo come on ryan you're a shareholder you gotta sorry no it's confusing it really doesn't matter but Yeah. The CFO is transitioning to a chief investment officer, which again,

smells like bloat to me, but. Okay. I thought it said it. I just read appointment of president and CIO. Yeah. I'm fine with that. I am fine with it's Ruth, right? Ruth moving on. I gotta be honest. I don't think she did a good job. I concur with that statement. All right. But it doesn't matter because it's such an easy business to run that, you know, there's a lot of faults that can be, uh,

uh whatever you paste it over i sometimes think about all the costs that google is fronting for other people for like the users that they're keeping free and it blows my mind like with google workspace all the gigs of storage that is giving out and then if like if i max out 15 i just make a new email and do it again instead of paying like i don't know they are just fronting the cost for all these users and they're still generating 30 margins the problem is the employees yeah it's not even the variable costs anyway uh okay other companies that reported earnings let's go through some of these fast visa mastercard the card networks remarkable 15 revenue growth a little higher operating earnings growth both of them

actually here. Here are the exact numbers. MasterCard grew revenues 14% year over year and operating income 21%. Visa grew revenues 15% and net income 22%. Is that constant currency or net revenue? No, that was reported. Constant currency was slightly higher on both revenue and earnings, But they are – I think if I were just an investor that didn't waste my time looking at my portfolio every day and not trying to manage positions, and I just wanted something that I was going to keep in basically a stock portfolio for the next 20 years, Visa and MasterCard would be at the top of my list. Yeah, I'd throw in a Trifecta, add an Amex. Yeah. Yeah, the one thing I did read the visa calls when I try to keep up with, and the one concerning thing was that spending volume growth in the United States has declined to more or closer to, I think, 5%.

So I guess that's a little bit of a concern, but I think there was a headwind because of gasoline prices that had a big impact. because last year at this time, energy prices were soaring. So there was some inflation there. And Visa is a great business because it's hedged against inflation. But this year, there was a little bit of deflation on energy prices. Hey, if a bad year is 5% growth, really profitable growth, that's pretty impressive. Chipotle, down like 10% after earnings. Well, when you're trading at 60 times earnings, what's funny is like, what's that PE now going

to be? Like 55. I've seen Google here. It says 52 could be. Yeah. I think some of these consumer goods businesses are so overvalued. You have Coca-Cola here too. Yeah.

Like Pepsi, we were looking at, like, listen, these are really good businesses, but they just aren't going to generate good returns at 30 times earnings. You know, maybe, maybe what's people just realize that they're very indestructible and they're okay with getting three, four, 5% returns, but yeah, I mean, the forward returns are going to be pretty damn low unless you think that the multiple is going to continue to expand. What about this Hershey short report? I hope it works.

I hope the shorts are right. That's what I said to someone about Texas instruments too. there's like a good little thesis on texas instruments can run into some trouble with inventory woes and stuff like that i hope it goes down 50 so i can buy both of those companies hershey is uh it's it's a damn good business let me just read off their brands we did cut we did cover them i want to say a little while ago they have a ton of brands they got dots now dots pretzels yeah that's doing well for them the yeah but didn't we do a show on them some semi-recently if someone wants to actually have the inside i thought that was a really fun show

and surprisingly i thought even better about their business than it used to be they have okay reese's hershey obviously dots skinny pop twizzlers your peppermint patties rolos kit kat brookside chocolate hershey's kisses obviously they own the snack aisle or they own the candy aisle they're one of the yeah they're one of the big ones that owns the candy aisle along with mars and forgetting the other one yeah i hope i i don't the short reports are new entrants aren't going to work as we've seen time and time again there's no way reese's is i think it's similar to pepsi how frito-lay is actually like an amazing business under the pepsi brand reese's is like the same thing where it's better than the namesake brand yeah to me it i didn't read the short report so

i'm not slandering the short reporter at all and i think that guy actually does pretty good work but it it's not gonna like it's not gonna kill hershey there's no way and and what we're referring to is like mr beast which is a very popular uh kind of youtuber mostly but number one i think yeah um launched his own candy but like that is great but people have attachments to reese's and these brands that were cultivated over 20 years they're not going to stop buying them just because beastables is out or whatever yeah it's similar to the alcohol stuff where who has a lot of celebrities do tequila brands you're not going to take down the number ones out there and honestly candy's probably more durable but a question here uh

from mr seymour duck don't think that's your real name uh what do you think about comcast mario ip strong with the movie and super nintendo world thanks nintendo uh full disclosure we own nintendo we think that's probably the better way to do it but comcast i think is from what i've read uh again the person we mentioned earlier science of hitting alex he covers them pretty well and that's kind of where i get my info on them since i don't fall on that closely i think if they fix their tv stuff their tv like media their media stuff the stock looks cheap because the cable business seems steady the universal studios business seems steady just if they can figure out like peacock is just a big pimple that i i don't i mean it's

just going to burn money for a long long time it i i just don't like the and i've said this for a while i don't like the um media businesses that are like sitting on the fence where they're kind of like the the linear business is slowly declining or just melting and then the streaming business is like subscale i think you really got to pour your investments into one place um i think disney's going through a lot of the same troubles the but i will say however peacock i use peacock a lot i know that's that doesn't change the economics of business uh soccer yeah they've got the they've got all the epl sports rights um and i've been watching yellowstone too which is pretty good they got that nbc's got it i mean

or comcast is a good uh good catalog of stuff but that's true yeah they have they have a good one just seems like they're doing the same as hbo max where it's like it's just not netflix is just crushing you on everything else like every which is funny because it's it's all ad supported too so you would think they have like enough revenue per user to make the economics work but yeah i think though the mention the comment here about the relationship with nintendo is probably being underrated if they have the long-term relationship for Nintendo for all their

non-video game stuff, right? For the big licensing partner there. I think that's a very, very strong relationship to have. Yeah, he said earnings were up. Earnings were today, and it's up 6%, so. And the cable business is solid.

Cable is very durable. All right, two minutes left. Anything else? Okay, let's go to WorldCoin. I'm going to read this off to you. You see this WorldCoin stuff? No, it's WorldCoin. Yeah, yeah. Okay, okay. This is good. This is good. It's the guy that embedded chat GPT, Sam Altman, came out with a new cryptocurrency. And I'm glad you didn't see it because we're on vacation, kind of off the grid a bit. here is this is a tweet from them the world coin project is now live there's a few paragraphs here but i'm going to read it and you tell me if you're interested uh let's see

okay so basically what it is is you have these orbs with these iris scanning devices and they they lock you into this cryptocurrency system to have your iris scanned and it says you can now download world app the first protocol compatible wallet and reserve your share after visiting an orb the thing that you stare into a biometric verification device you will receive a world id this lets you prove you are a real and unique person online while remaining completely private and the global distribution of orbs is ramping up so you can find the closest one and book time to be verified with world app and worldcoin.org are you interested ryan and join sam altman's world coin revolution here oh my god no yes i'm not giving my eyes information to a company called

world coin i just i've watched too many sci-fi movies also come on it's so close to worldcom that's a good point that's i gotta say this this at omen the open ai stuff there's world coin i don't trust these entities at all there's just something that smells not a hater i just i'm a little skeptical like something seems off with this stuff i don't know i just i get a bad feeling i get a bad feeling i don't know if it's like i don't know if i get the same like bad feeling necessarily because i just don't think it'll be that important like i don't think it's just a lot of useful yeah it's a lot of hype right now And so it's like, is it really going to affect us in any way?

No, I don't necessarily trust Sam Allman, especially after this WorldCoin stuff. That's kind of mind-blowing to me. I didn't know they were like, I didn't know he's a crypto guy too. Yeah, that's kind of one of the interesting things. and i know we're going over but a lot of people around the crypto universe they tout the secrecy and privacy and how it's decentralized and all this stuff and then there's projects like this where it's like just give us all your dna or your eyeballs don't worry it's private don't worry it's private yeah but it's not no one else will have access to

it just us it's like yeah yeah that's the same it's decentralized through us yeah and they're like dude this thing's this thing's going crazy like there's lines out the door and i don't know where it was let's say the philippines it could have been the somewhere else but it was these giant line of 100 people going to get their eye scanned and it's like yeah because you're promising them 20 so if that's 20 bucks to do something along those lines you're getting paid basically because if you scan it you get your crypto that seems unsustainable yeah well tbd we'll see what happens uh there's already a ton of as again we're going on there's a huge mit review study that basically showed this that world coin is a huge scam but who knows maybe it's going to

take over the world and i think we're going to need a world coin update maybe a couple months from now we'll see how it's doing okay that's going to do for this episode thank you all for listening. Thank you for the people coming in with the great comments. Matt H., Seymour Duck, all the rest. You can join us on Thursday mornings or Thursday midday, depending on where you live, 1230 Eastern Time, 930 AM Pacific Time. We typically go live. You can watch the replays on YouTube or listen to the replays wherever you get your podcasts. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. We are general partners at Arch Capital and clients may hold securities discussed in this podcast.

Thank you all for listening. We'll see you next week.