Chit Chat Stocks - Investing Power Hour #70: Earnings, Earnings, and More Earnings

Episode Date: August 6, 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. I am Ryan Henderson. This is the Chit Chat Money Investing Power Hour. I am joined today. Apparently, I'm doing the hosting today. So this... Oh, do we have a... Am I having a hiccup here?

I don't think so. I don't think so, Ryan. Okay. I'm getting a weird message from YouTube. I'm hosting today. This is a little backwards. Usually Brett's the host, but Brett is vacationing. I should say I'm also joined by Brett Schaefer. But yeah, this is our Investing Power Hour. Brett, how is California? It is magical. I don't know. Maybe that's a little too strong, but I'm in Tahoe right now and a lot of golfing a lot of lake days a lot of hiking so yeah cannot complain but we have one of these to do every week and i'm excited to talk earnings for the next hour because i think we could go three hours on all these reports it's that time of year we just have endless amount

of stuff to read and the backlog is growing so excited to dig into it what was what's the one on your mind that you're the most excited to talk about they're going to match group stuff I thought it was pretty interesting I thought Nintendo was interesting but I didn't have enough time to look through everything and it usually takes a little bit to dig through

all of Nintendo stuff trying to think about it when Sprouts reported I'm seeing on I'm watching the thing for the comments you should change it to gallery view it's on single right now yeah boom

I don't know Sprouts Match Group Amazon reports today that'll be really interesting what's your prediction on that it's bound to be wrong

it's kind of it's a coin flip but if it's bound to be wrong then I'm going to say Big Miss the no I don't they always

I don't know they they are the ones that really don't care it seems like about the quarterly earnings and or at least the executive team seems to not care that much.

So we'll see. I haven't really thought about it that hard in terms of what's happened this quarter, but based off GCP and Azure, I would bet AWS has done well, which I think will drive the majority of the stock reaction, we'll see. And then I guess it was surprising to me

to figure out that AWS was twice as large as Azure. so or not twice but a little little under twice as large so that was definitely a positive but that's already probably priced in and then i'm trying to think of anything else retail who knows on profitability for retail as long as i think e-commerce trends are positive they should benefit i agree yeah we'll see and it's always yeah they got a lot of moving parts there's also the severance stuff that still could be rolling through i'm sure there's an analyst out there or the best analysts always cover amazon because it's one of the biggest companies in the world so i'm sure they have it narrowed down to an absolute t but that's not really our game what do you want

to hit first i was reading nintendo this morning i thought it was interesting i am disappointed that they don't give out a bookings number for their company because you know with video game sales you have to defer a lot of the revenue and they don't really talk about that and i think with the movie as well i was they don't really give much commentary and how much that's going to earn whether all the earnings they got from that movie was in this one quarter or whether it was you know going to be deferred to later quarters because you know the profitability jump in that segment for their non-gaming stuff was high but if that was their entire earnings from the movie that would be shockingly low i think would you agree or maybe what are your thoughts on nintendo

quarter yeah for a business that for a movie that did 1.3 billion dollars 1.4 billion dollars the box office i would be very surprised if what was it 30 million yen uh yeah and i think some of that's mobile gaming and other licensing so i would say the jump was 20 billion yen 30 billion Sorry, I said million. So that's about $140 million USD for them in total revenue from that. I would think over the lifetime, they would be pushing closer to $500, $600 million because of the split with Comcast and all that good stuff. But we'll see. Either way, that's a solid boost.

Yeah, it does feel low. Maybe we are wrong on the economics of it. But it's also, I think the at-home sales are more profitable. So I'll be curious to see kind of this next quarter, what they get from it. The Zelda looked good. Wouldn't you say the bookings is kind of priced in and the guidance though? I think so.

But the thing with Nintendo, which also is frustrating or where you have to read through the tea leaves, where you saw a lot of analysts this quarter really underpriced their revenue and profitability is they're going to under, they're going to conservatively guide or be way too conservative with their guide. So I don't know if it's Bryson because, okay, let me do some math. They did what? 18.5 million units, right? For Zelda. Let's say what average price 60,

just because the international markets in the U S it was $70 to 18.5 times 60. That's over a billion dollars in, or 1.1 billion dollars in revenue you got some marketing costs on there typically a game they say is break even at two to three million unit sales so you had about 15 million units of peer profit there i think that is it pretty much made their year already and it was really i think what a good chunk of their guidance was already hit in the first quarter so all around all around great report i thought is this there is this considered their q2 it's not q1 q1 yeah um yeah i mean it's just hilarious to frankly to like log in open that pdf see sales up 60 operating profit up 180

stock up one percent it's like it is just kind of funny to see the figures and how much people seem to just not trust nintendo's ability to continue performance now i mean obviously there is probably a lot of lumpiness associated with that because of the release of the mario movie and more so the release of the zelda game um yeah i will be curious to see how much of that zelda revenue kind of carries forward it seemed like it had a good impact and maybe the mario movie as well on hardware sales yeah for sure and they're just trying to bridge that gap till the next launch which there was that rumor always take them with a grain of salt that is coming in 2024 which seems the most likely given that they're doing that new kind of mario game for

the holiday season and then closing out mario kart expansion pack in early 2024 seems like sometime in that time period will be the right uh window just depends whether they're going to do it the beginning of the year or holiday season 2024 i think it'd be pretty cool if they did holiday season 2024 and launched with a couple of flagship games probably the new mario kart maybe the new mario 3d one and some other stuff but we'll see oh yeah it's not baked into their guidance that's for sure no not for this fiscal year that is true they have been increasing their r d spend though and i would have to dig into the actual earnings report their actual earnings release and look at the balance sheet but i wonder if they built up some inventory we'll see we'll see and i think

those semiconductor companies or the chip companies or the manufacturers who have been reporting this that they're going to get an increasing you know sales because they contracted for a new console from a video game publisher kind of guarantee or not publisher excuse me video game hardware maker i think that kind of guarantees that nintendo's in the process of building one because it's not going to be xbox or playstation at the moment yeah the bummer is we've been saying that for three years you just never know um we got a good comment here on from james goodwin who always joins uh wd wbd call which is warner brothers discovery was good 1.7 billion in q2 free cash flow debt coming down dd d to c business is break even and barbie has

broken one billion dollars at global box office which will feed through to q3 yeah it's interesting barbie was a warner brothers i guess he's saying and no i watched oppenheimer though it was good the barbenheimer combo you didn't go back to back no i can't say that appealed to me but i heard it was good for for those that are interested but given those numbers i guess we don't have we don't follow water brothers discovery at all if d2c is breakeven already i think that's interesting as long as the max transition didn't totally blow up that business yeah i think the max transition didn't really end up mattering that much like everyone just knows it's hbo i think you can put pretty much any name on it hbo is yeah

And it's one of the key subsections under there. I think it's going to be fine. I know like some people are going to want to watch the discovery channel type stuff. And some people are going to be wanting to watch the HBO type stuff. You go into the app, you click the HBO thing. It gives you all the HBO stuff.

And I think what's interesting here is that HBO is so efficient with their marketing spend that, or excuse me, excuse me, that marketing spend content spend. Yeah. They can have higher profit margins and really, anyone else they don't have to put out 10 shows like netflix to cover everything they can put out

one show people are going to watch it you know it's going to be good or and yet they're break even yeah but i think that's pretty good i mean when was the transition done just a couple of years ago i don't know but it it would worry me for someone that i think is really efficient with their content spending and seems to be sort of a in the what do they call it the something geist you know i'm talking about oh yeah the zeitgeist the zeitgeist where it's so it's so popular kind of culturally for a business like that to be breakeven it kind of worries me for the companies that don't get so much word of mouth marketing like how how are they gonna do it would kind of concern me if i were in the streaming business and i wasn't

yeah the whole industry seems screwed there's just it's a supply bubble maybe not bubble but it's just a supply glut and it's just way too hard there's so much competition and younger people are going away further and further away from this type of stuff i mean i'm with people younger cousins this week they don't care about any of this stuff at all great time to be a consumer though great yeah i mean infinite choice i this hollywood strike you going for years i could care less because there's so much stuff that is just sitting on these streaming services that i'll watch maybe you know once you know what i need a new show or something like that but yeah what have you been

watching streaming wise the most of the last month what channel or app uh netflix or maybe not netflix i want to watch some of their the only thing i go to netflix now is those sports documentaries but i've been watching a little bit of apple tv a little bit of max but that's strictly because i have logins to it so the but yeah apple apple and hbo have good stuff or max excuse me and i think that's not an investing thesis thesis but i don't know it's it's it's there i i don't think those i think those can be less helpful like when someone says oh i watch this so i should buy like oh i watch hbo max so i should buy warner brothers discovery i think a lesson there is i mean we've done it before we've made that mistake we're trying to learn that

listen is when you use something doesn't necessarily make it a buy but it can be a helpful indicator but you got to look at maybe the business first and see okay well i might like this thing but the business could still be screwed yeah it's it's probably you think it's hurt you more than it's helped you the what what do they call it anecdotal evidence the filth it's kind of the phil fisher thing they're just like oh yeah yeah um buy what you know yeah i think it's been pretty neutral some stuff has been hurtful some stuff has been helpful but i think the lesson is by what you know unless it's 30 times earnings yeah we i think the mistake we we've made is just buying what you know but

not having the price discipline is when you have the mistake so i think if we keep that i mean it's very helpful. I think there's a lot of discussion. I think there was a comment on Twitter. I haven't been on Twitter much this week, but I did see that there was a comment and a large discussion about informational edge. And I don't think you technically have an informational edge where all the information is out there, but most people are not reading information. Like it actually shocks me again and again and again, how little information people are reading uh that's actually there of the companies they own and there's also the for us for people that aren't in the big you know have all the big informational

advantage we don't have bloomberg terminals whatever you want to describe it as understanding like what's actually happening in the real world and what you're actually seeing your friends and the people you interact with doing can be one of your only edges you have i think do you agree or disagree i think well i think you know your answer but yeah i honestly think that's one of my biggest pet peeves and i wanted you know what i wanted to do for this episode was what's the part of my take they do like a mount rushmore i think i was i wanted to do like a mount rushmore of investing pet peeves and the guy that's like what's your edge here is maybe up there on my Mount Rushmore. It's like, well, we can do that next week.

The biases guy, the like, oh, that's endowment bias or like, that's, you know, uh, your anchoring or it's like, I, I don't care. I just think it's a good investment. So yeah, I do the what's my edge guy is a big frustration for me. Um, I thought I found something kind of interesting this week if i can find it it was um about a buffett interview from a while back here okay yeah james goodwin says just reading a 10k is an edge i would say yes because there's so many people out there that are not actually i'm not joking they don't they're not reading that so if you're reading that you can get an edge because there's information i found on companies and i like tweeted out or something and people like whoa i didn't know that though it's like some

mystery but continue go ahead yeah and you know that's interesting it's like i remember when we when i first started a lot of people said like your time horizon is an edge and i was like yeah you know like whatever that's not really but it 100 is like if you just don't care that there was some goodwill impairment or something that like hurt short-term profitability like and you just know that whatever the company is let's take google for example if if you're not worried about the short-term fluctuations in like ad revenue or exchange yeah you're going to benefit because the rest of the people the people that need a quarter's earnings or need like a quarterly performance,

they have to care. And so it's like, I feel like that's why I checked out like my grandparents' portfolio not that long ago and they just owned like stuff where they were satisfied as a customer and my grandpa knew what he was doing when he was investing.

He was a satisfied customer, looked at it and said, yeah, this makes sense. Management seems... to care and they've grown over their history and it worked out really, really well for them if they, cause they ended up holding them. The holding period was like 20 years. And I don't know, I know it's simplistic, but.

Well, I, yeah, I think it's one of those lessons that, and it may be the bull market target talking with the S and P P ratio is what 26, 27 now again. But I still think the lesson applies regardless of where the market is trading and actually applies probably more now because you could have made a good investment in late 2022. We think we made some solid purchases in that time period when prices were a little cheaper. If you buy the right company with the right management team at the right price, the best outcome is you never sell. And most management teams that are good will not

let their stock price stay at a super inflated, whatever, 10 times overvalued, where you'd be probably forced to sell, they would, as Buffett says, the best outcome is not to get, he was frustrated, like, what was it, 98 when they were kind of overvalued with Berkshire? The best outcome is for the stock to be very close or around intrinsic value. That's the best outcome for everyone. Yeah. turn left to leave travel west through approaching continue toward you've arrived adventure and comfort with Volvo whether you prefer gas plug-in hybrid or fully

electric there's a Volvo for everyone learn more at volvocars.ca all right let me give this quote So someone was interviewing, I think it's Alice Schroeder or Alice Schrader, about Buffett, kind of like what's his process, why is he different? And so, I mean, this is a long quote, but basically, I'll start from here. It says, number one, in his classic investments, he expands a lot of energy, expends a lot of energy, checking out details and ferreting out nuggets of information way beyond the balance sheet. He would go back and look at the company's history in depth for decades. He used to pay people to attend shareholder meetings and ask questions for him.

He checked out the personal lives of people who ran the companies he invested in. He wanted to know about their financial status, their personal habits, what motivated them. He behaves like an investigative journalist. all this stuff about flipping through moody's manuals picking stocks it was a screen for him but he didn't stop there i think i thought it was pretty interesting i mean this is the older this is when he was younger following the smaller companies right probably but you know it might still apply today in some ways someone was like all of you think he bought apple because it was just a good business and it was like the he liked the product or whatever but really he was checking

out tim cook's mortgage or something and knew that he needed to meet mortgage payments that's an exaggeration but yeah i doubt tim cook has a mortgage uh maybe he does but that is irrelevant he's too well he's rich it doesn't matter but i think he definitely investigated tim cook because tim cook seems like the type of ceo he wants long-term thinking rational capital return strategy consistent capital return strategy and not i mean it seems like the classic ones he likes to go after with you know attached to obviously a strong consumer brand the other uh the other thing i was looking at this week which it's kind of a uh transition here was i took me a while to get to the philip morris earnings philip morris international i can't help but be butthurt every

time i read those reports yeah i know instead of owning instead of zen being the the biggest driver of growth it's like what less than 10 of the business right now but it sucks because we were right we were right about the inflection point for volumes going across the u.s and uh it's okay it's okay i mean you can't be upset when you lose money but or sorry don't lose money but i kind of think we could be because it was the compound or that was the one that you never sell but i don't want to talk about it every every quarter i mean what did you think that solid quarter all around yeah i mean i also just looked at the altria earnings and watching them i think volumes declined eight and a half percent year over year cigarette volumes for them

it's it's nice to kind of be right on a thesis for the right reasons because we've been right for the wrong reasons before and this one kind of feels validating because part of our thesis was hey it's a little more expensive than the other tobacco players but bill morris not ultra philip morris but they have far and away the best reduced risk product business which seems to be the future and volumes for their markets aren't declining at nearly the rate of Altria's market. So it seemed like kind of a fat pitch in terms of business model and where like, I mean, we like the tobacco business to begin with because it's sticky, there's pricing power, low cost to produce, very, very profitable, rational management teams.

And then it was also kind of had that growth engine of reduced risk products. So we liked it. And it seems like based on the limited declines in cigarette volumes for Philip Morris, I think it was what, minus half a percent year over year for the cigarette business. It feels like we're right. Because we were considering an ultra as well. Yeah. And at the right price, Altria is probably, which I would say, maybe a 10% dividend yield, given the risk of the management recent history not being, I would say, just to be fair, not

strong, I think would be a conservative way to put it. Yeah. And Philip Morris's overall volumes are growing. So if you consolidate both the risk-reduced products, which again, is like the nicotine pouches, tobacco-free stuff, the heat-not-burn products, they're growing on a consolidated basis when you add the cigarette business which is slightly declining will continue to decline so yeah and i think what's interesting when you look at altria um some of the other companies with big exposure to tobacco in the united states is i think when these risk reduced products kind

of hit an inflection point in certain areas and we could see it when we bring in the new products as they slowly get approved by the fda philip morris is bringing back the icos product to the americas you could see potentially cigarette volumes decline at an even faster rate and you know that could hurt phil morris's business in international markets in the short run but they're the ones with the two biggest brands that are going to benefit over the long term from these and there are some risks uh you know taxes are always a risk if they increase with these risk reduced products there's foreign exchange risk specifically with phil morris International and the stock has gone nowhere for 10 years, but it seems like a good quarter

overall. I want to talk about, unless you have anything else on that topic, match group support. It's a very interesting one. Stock went up after hours, but went back down, really didn't know why. That always happens. Who knows? But it's always a fascinating one because they have so many moving parts at the moment. They're in that transitional period, they're launching new products they're revamping tinder maybe to kick it over to you first what did you think about the quarter overall what were the any highlights any surprises any big takeaways i mean when i first read the report i was excited like most investors and then i listened to the call and it was i still impressed i thought it was a good quarter but it just tinder is getting

better but there isn't necessarily the growth in like downloads as much as like like revenue is a little misleading because of the pricing mix so i was hoping to see maybe a little more color around like downloads for tinder and they give some stuff but they always give like a very small it seemed okay it seemed like a decent growth on downloads but yes i think there's more work to be done what i thought was interesting is that the old management team seemed to focus on getting that payers growth to be so consistent right when in reality the first thing you need on the dating app is a weekly subscription well the weekly subscription was very easy and i gotta say we were right and that was that was an that was an anecdotal evidence thing that

that worked out i guess when we were like yeah we could we would use that but the uh what were they saying with that oh yeah so the user so the the most important thing is activity but in in reality if you if you get your subscription prices too low which is get to you the unlimited swipes all that type of stuff and mainly this is guys that are buying the subscriptions there could be too much activity versus how many of the other you know the people that they're swiping on and you could overwhelm them so i kind of think balancing that out with raising prices and lowering your overall payers isn't a bad thing as long as you're balancing revenue versus app activity and keeping people engaged. And I like that they're not focused on

just growing that payers number because that's not necessarily the outcome of a healthy app. And in reality, people, when they pay for it, get slightly frustrated. So honestly, the higher price stuff, I think, is the right move. yeah and i mean gary swither there was even like a question on the call around payers versus revenue per pair there was a lot of questions on it and he basically was like listen the only reason we give it out is because people like people like you guys the analysts uh care about it he's like we don't think about the business like that we could easily just put out one dollar subscriptions and juice payers growth but it hit a kpi that all you guys want yeah he's

So that doesn't benefit the actual revenue line. We're just looking for anything that's really accretive to revenue. The other thing that I saw that was a little bit concerning was that they did the pricing tests in the international markets and just didn't see the benefits. Basically, it wasn't revenue accretive or their propensity to pay wasn't quite as high. I do like the idea of this revamped Tinder because they're working on rolling out this kind of new product for it. so it'll be nice to see that and i do think if you have kind of these shorter term subscriptions

it almost works as like a limited trial where it's like because there's so many people that where it's i don't want necessarily to buy a one-month bass because when i do it yeah when i do it i i get you know i only use it for a couple days and then like i'm tired of this but I already paid, I guess. Yeah. So I don't know. I mean, just price that perfectly and just give them a couple of day pass. The other thing that was important that he mentioned was there's a lot of people that are in subscriptions already. So they're not going to see the increased prices at Tinder. So that's not going to roll through the income statement quite yet. So that should help them get to kind of that double digit constant currency growth. Again, at Tinder,

I thought Hinge was incredible. Solid again. Re-accelerated revenue. That business feels like it's going to be... I mean, downloads were up 50% year over year. It feels like that business has so much momentum. It's already, what was it? Top three downloaded app in 14 markets. And it's like just now starting its really international expansion. Yeah. I honestly wouldn't be upset if they accelerated. And I know they want to be consistent and not do it too quickly, but accelerated their marketing spend. I think they've been hesitant in the past to do marketing spend very aggressively

and they're fixing that with Tinder. And I think honestly with Hinge, I wouldn't mind because they said the app is running at close to I think 30% operating margins right now. I wouldn't mind if they accelerated marketing spend, at least in the short term to get that flywheel going.

I thought the other, unless you have another point here, interesting thing on Match Group was that the buyback was small, but really only at a price that was extremely low at like, I think it was below $32 a share. So on the one hand, I kind of think that's interesting that they really value being a good repurchaser of their shares. But on the other hand, I might think that they're too strict about it.

Yeah. I'm not opposed to them. Now that we've seen kind of the benefits of some of the operational improvements and the investments they made in the workforce and getting the right people in place, investing in marketing to reignite some of the Tinder brand, rolling out new apps, rolling out new features. It feels like they used to be talking about, oh, we're stopping the buyback because we want to invest in, we need to get the company back on track, essentially. And I wasn't excited about that. But now that I'm seeing it, it's like, I would much rather have a match group that's

growing 10% on the top line and getting not linearly, but slowly more profitable. And then maybe buy back a little bit at a time than one that's plowing so much money into buybacks that they are risking or like not necessarily operating or improving the product. Especially with their leverage ratio. Yeah. Because that, it's like, Match Group to me is worth so much more

if it's growing and the product is improving. Yeah, because the momentum is just, the bigger the data gap gets, the stronger the mode is. Or the more active, I guess, people are on it. The other thing that I like is, I know they say Hinge doesn't cannibalize Tinder, but I think it probably has to some extent a little bit, especially in the US.

the fact that they're still able to grow the top line for Tinder while Hinge is growing 50% downloads, that excites me. I'd say the overlap is there, but it's not. It's a Venn diagram. Yeah. In a perfect world, these are two businesses that both generate $2 billion in revenue and are 50% operating margin businesses. Yeah. Or honestly, even higher, but it kind of depends on the mix. So what's interesting is they have all these different tools and i think they have an advantage versus everyone else in this industry and maybe we'll stop hitting on this company because if anyone wants a deep dive we did what was it a couple months ago we did a podcast type you know arch capital type report audio

report on them the one thing i will say is that they they're much more advantage versus any competitor because they can balance say their uh consumer pitch for hinge versus tinder and they can really balance that as well as the other apps in their portfolio that are smaller and they can really balance the marketing push how they're talking to consumers how they advertise the other apps on their own dating apps to get the mix of people going through all these different places they can really balance that and have so much more flexibility versus someone that has to say look we have this one app okay we got to really push this but then for example bumble versus hinge is a pretty big overlap, I would say.

Yeah. That puts Bumble in a really tough spot because while Hinge and Tinder can really balance each other out, Hinge can go after Bumble and take a lot of that market share. At least that's what I think is happening in the United States.

Yeah, I guess my thoughts coming away were I like Bernard Kim and we're in a much better place than we were a year ago. Yeah, it wasn't, I would say, good, like good report. it's kind of what we're expecting but it wasn't blowout yeah i agree um someone responded to me when i talked about the earnings so like yeah people are i was like looks like tinder's growing

again and then someone's like yeah in this economy everyone needs a partner to save money yeah i always tell people like they're like nah dude i wouldn't pay for a dating app and it's like better than spending 100 bucks at the bar and not getting any luck yeah it doesn't I think the price isn't that expensive versus the value. I am. I know it's kind of saturated in the US. Like it feels like most of the people that will be on dating apps are on dating apps already. But I think it does have like sort of this, it has a legitimate impact in terms of how people interact like face to face.

where if you're a girl or even if you're a guy 30 years ago you meet someone in person it's like i better like you know i better go talk to them there's not that sort of existentialism now because it's like oh okay i can just go swipe my finger and plan a date or something like that so yeah or you're like i better call them yeah 100 all right other sprouts i guess i don't know if we want to just cover ours, but that was pretty boring. Shopify reported. Yeah. I didn't see it. Let me, uh, I guess we follow on closely. Let me just pull it up right now. See, uh, I'll say read it. Yeah. Okay. I am a Shopify hater. I'm a full-blown Shopify hater. Now I think the, the quarter was okay. It was fine. It looked pretty good, but expectations are really high.

the it just to me i don't know with all the management stuff that's happened lately and the like toby being like yelling at short sellers did he do that again recently or was that maybe wasn't that recent but that was in definitely in 2021 i think or 2022 the toby.eth remember that yeah he did it seems like he gets caught up in the hype cycles which is not the end of the world but what's weird is that the other website builder that we follow wix does that same thing they've been launching they had a solid quarter as well um you know let me just give out the numbers for any listeners gmv gross merchandise volume grew 17 percent revenue up 31 percent uh let's see merchant solutions which is basically payments up 35 percent to 1.3 billion

dollars so majority of this business is shopify pay at this point gpb which is payment volume on their own processor was 58 percent of gmb which is up from 53 percent subscription solutions grew 21 percent gross profit grew 27 percent so gross margin declined again which i guess is you know because of the i believe it would be yeah the shopify pay pay operating loss 1.6 billion but there was impairment on the logistics business i think that deliverer thing kind of shows to me that i don't trust them as a capital allocator yeah i mean I mean, getting rid of it was the right thing to do. There were a lot of companies that drank the Kool-Aid when and wanted to, I don't know.

So many companies made these acquisitions in 2020 and 2021. Probably a lot of it was stock and then basically had to impair it in the next coming year. So I don't necessarily fault them. Listen, if you're trading at 60 times earnings and you bought Deliveroo with stock or 60 times sales, whatever, take that swing. If you have to impair it later, you impair it later. Why are you a hater on Shopify? I need to know. It's just little things.

Okay. They talked about free cash flow margin. The free cash flow margin, first of all, it doesn't include stock-based comp, obviously. and they're increasing the stock-based compensation by quite a lot. And they sold- $280 million this quarter. They had a gain on sale of marketable securities, which helped their cashflow a lot.

And they didn't really talk about it. And then they also said, we would have been operating income profitable if you exclude the impairment. If you go in there, that is not true. They would have been adjusted operating income profitable. They don't think about stock-based comp. I am seeing that.

Yeah, it says impairment was $1.34 billion and operating loss $1.64 billion. So yeah, I mean, look, they generated... Here's what I love to look at. And we've just talked about this as Spotify too. If we look at their gross profit generation for the quarter, $835 million. Do you want to guess what their R&D spend was? No. sorry, who is this? Shopify. Shopify. R&D spent, it was probably really high. I'd say 50% of

gross profit. Higher, $648 million. So yeah, your revenue is growing really quickly. And yeah, you're probably creating value, but it's taking a lot of effort here and maybe that's increasing the vote. I mean, it's a good business, bar none, but that's not, it doesn't seem very efficient to me no and i don't know i sometimes think shopify like toby doesn't like harley finkelstein does all the comments on the press releases and stuff and it feels like toby kind of treats it like i'm too good for the investing community like you either get all get along with our story or you don't and it's like it could work out that could work out i guess and andy jassy does the same think he doesn't go on the conference calls but but it's a much bigger business yeah he cares

about shareholders i think uh i don't know it's just some of the like adjustments without saying it the dilution the like the the subscription revenue was up because there was price increases really yeah across the subscriptions and then the when they like rolled out the buy with prime And they're like, actually, we're going to take that. He's like, it's not going to have this effect that everyone thinks. Cause they announced like we're partnering with Amazon for buy with prime. And then the stock dropped like 10%. And they're like, it's not what everyone thinks.

And then they're like, actually, we're not going to do it. So I mean. Buy with prime just seems like a big, obviously not a black swan. Cause we already know about it, but it seems like a big looming risk for me that continues. I mean, it's not a giant, it's not going to kill the business, but I think it's another incremental thing that if amazon really succeeds with that it could really hurt shopify's ability to grow yeah i keep flip-flopping on it because it's like it feels to me like a much better um alternative you know you get better fulfillment better like uh delivery speeds but

at the same time i think a lot of people are on shopify because they want to be separate from amazon and so they kind of want to make sure they're routing their orders through shopify So I don't think it was maybe what I once thought it would be. But the customer is going to want it. If it's on the website, I'm choosing ByWithPrime. Yeah. So I don't know. But honestly, getting the merchants to adopt it.

Yeah, you're right. Could be very difficult. Here's so people, you know, Shopify stocks done well over the long term. Other stocks that have these founders that seem to be very aloof and not care about shareholders or really don't. that maybe their priority for them is last or they don't like analysts and stuff. Toby, obviously, maybe one of the worst of this, he seems to call out short sellers and stuff like that.

I would look at the number of golden boy founder or one of them, Mark Zuckerberg. He cares about shareholders. He talks with them. He understands that they're one of the stakeholders in this business. And when you don't value them, it throws things off kilter

when everyone in the call it an ecosystem, call them everyone related to the business, the management team the employees, the shareholders all the customers they all matter and if you disregard shareholders I don't think

it's the optimal way to run your business over the long run yeah I mean yeah it's still clearly a good business but given how much given some of their commentary it doesn't seem like they care about shareholders with the stuff where like we're still uh operating income profitable it's like if you say that

with the with the idea that stock-based compensation isn't included in there to me that comes across as we're operating income profitable except for shareholders yeah true true except for the money that shareholders actually get yeah all right stock market cap $76 billion right now. Stock's down after this report. What do you think Shopify three years from now? Stock up or down?

I'm going to look up their trailing 12-month revenue. I don't know. I think it's like 13 or 14 times sales, if I remember correctly. Gross margins are shrinking too. Let me look up their gross profit trailing to a month.

2.83 billion i don't think it's updated to the latest quarter so let's just give it a round number and say 3 billion gross profit versus 76 billion dollar market cap i think the stock is likely down three years from now yeah maybe maybe it just kind of treads water for a while yeah i mean it could be up who knows obviously it could be we could have another bubble i mean it is really good business, really good product. So I could see how it just continues to grow the top line.

And then the theory is always that, you know, if they decide to get a little more efficient with their operations. Okay. Look, if they double their gross profit and remember the dilution is going to come through. So the market cap is going to actually be higher.

If the stock price is at the same level, if they double it, it's 6 billion versus a $76 billion market cap. I mean, yeah, well, we'll see. People love it.

That's true. That's true. who loves it more though the customers or the shareholders i would guess the shareholders but it is crazy just to think it was 60 times sales i know it's like an obvious statement in hindsight but 60 times sales that is insane probably the craziest valuation i've heard of other than the memes and you know what maybe even the memes because they were smaller so it's like theoretically it could get there or whatever but i mean 60 times sales on a business that has a ton of sales already is just that's crazy yeah i know um yeah i don't think i can say

anything else to that paypal reported yeah i didn't look at it what they do they they beat but stocks down like eight percent the um i i hate that stuff they beat oh god they just told the analysts what they were going to expect and then they sandbagged it doesn't matter i know i'm trying to remember some of the qualities they finally rolled out tap to pay for the venmo which i think apple was like preventing them from doing that yeah i remember yeah the the nfc chip thing uh google and apple both were being very anti-competitive with that the uh yeah they finally look like they're rolling that out cash flow was bad because of bnpl loans that they were issuing but they're going to be selling those to kkr it sounds like so

that shouldn't be a big deal they bought back 1.5 billion dollars in stock so yeah i mean you're looking at probably 10 of the market cap and buybacks now they said yeah they Yep. They said this year, $5 billion in buybacks. So look at the stock. We're at $72 billion. So yeah, a decent amount. $72 billion market cap. They're expecting revenue to grow 8% this year, depending on foreign exchange can always throw things for a loop. the thing is i i still we talked about on the episode we covered with it for them they're just getting eaten on all sides are attacked at all sides and i that is a it's a conundrum for me i don't know whether they're gonna be able to survive getting attacked by so many companies so many very well we talked about shopify not caring about shareholders but their product execution whether they're spending too much on it given their r&d

stuff the product execution is phenomenal yeah everyone seems to have their own button now the i mean braintree i'm guessing grew pretty quickly because gmv was up 11 percent revenue is only up seven so braintree they have a lower take but it's probably driving most of or not gmv tpv total payment volume uh get a question from mr seymour duck once again thank you for joining again always a good name he said did you talk about nintendo earnings yet uh we did so i'd probably listen to the replay we covered that right at the beginning correct yeah i'd say one sentence summary we like the quarter but no one really knows how to look at the business including ourselves in some cases like it's hard to predict what's going to happen in the next year so yeah i wouldn't here's i think

yeah another the other takeaway in nintendo is i don't know if i would expect multiple expansion but if we're correct over the long term and the company generates four or five billion dollars in cash per quarter at least or not excuse you per year at least then it's not going to matter because they're going to generate more than their entire market cap in cash so things will be fine like they'll either return it to shareholders or do something or the stock will go up but i wouldn't expect a big multiple re-rating in the short term because people it's really nintendo's fault because they don't give out good guidance they don't give out good kpis besides just the video game unit sales so yeah i wouldn't expect it's not going to be something that jumps because of some change

business or some guidance thing some long-term guidance i guess if they launch the new console and it does well it'll probably go up but in the most important thing other from the quarter one other takeaway active players continue to grow yeah a couple things first of all revisiting google's quarter oh yeah okay i'm thinking about just making that my entire roth ira the it feels indestructible frankly yeah and the more you think about it then maybe you're just convincing yourself too much but i agree uh yeah the other thing apple reports today in three hours anecdotal evidence i bought a new iphone okay why didn't didn't you expect an iphone beat yeah didn't yours someone was up with yours right or was it old yeah it was just uh screen was

just busted it didn't work anymore but that's a big part of their model i'm not gonna say maybe but they let me sell it back to them for like that's true i will say they make the transition process very very easy just went to an at&t store they said you know if you buy this one we'll give you i think they valued my old crappy phone at 350 back i was like all right and then it becomes i don't know they just have such an easy way of making it seem affordable like it was like all right it'll be like 12 a month for three years for this brand new phone they're the best yeah i mean they're the best by far there's no one here none of their competitors are even close with that type of stuff yeah yeah and i did ask you know when like sometimes you try to get like

some scuttlebutt and people look at you like just like leave me alone the at the at&t store is like so how you know do you sell a lot of google phones do you know like trying to get like scuttlebutt on pixels or whatever yeah and they're like yeah why do you care i'm kind of like but uh they said they sell like probably mostly iphones but a lot of android based devices yeah like more than they more than i would have thought yeah it is i mean it is over 30 of the market um but it is obviously you know the younger excuse more apple the yeah but what's interesting i think in that market apple's going to retain its lead i would say it's pretty obvious but i may maybe i'm jinxing them i don't know but the most interesting thing i think is google

pixels trying to take market share from samsung i think that's going to be the most interesting thing because it seems to me like google is investing heavily into this hardware line to steal that market share they're not competing with Samsung but they can sell it at below cost and make it up in services it's Android either way isn't it right but Samsung

they you know pay money to Samsung for not for Android but all the other stuff Google search stuff like that all right we got seven minutes any other companies any other things you saw this week

i'm trying to think of any anecdotal evidence i have it was more zen anecdotal evidence i gotta say yeah everyone like everyone once you get to college and beyond it seems it is everyone's vice at this point yeah um the conservatives still hate bud light really yeah they have some they have some anecdotes yeah i have some anecdotes there uh i don't know besides that i don't know it's been so busy with earnings the uh there's just a lot to sift through yeah i think i said this last quarter but i'm gonna continue i think i'm gonna start a petition that we have to space out earnings that it's just gonna be like everyone has a different calendar year and we're gonna try to make it like it's either the nasdaq or the new york stock exchange responsibility to make sure

it's evenly spaced out so that we can like not have it all not be super busy for two weeks and it's probably way worse for all the like freaking the lower level junior analysts at these big firms that have to hop on their pms earnings calls i always find that yeah any any earnings call funnies this earnings season? Yeah, any funny? No, just the WeWork one we read was interesting

when they started yelling at the analyst, basically, or getting into a fight. On the match group one, there was some guy that was, I think it was the match group one, they were like, he, the operator was like, okay, we've got

blah, blah, blah from Evercore ISI something like that and then it's like no one came through there was just no voice and then at the end he's like ah finally i'm back and he's like sorry i was on two calls at once i had picked the other one it's like i know all right just you can't have this or your intern ask the question yeah okay two i have two thoughts to end it and maybe we'll only hit one if this one goes long after because i know the spotify report is strange it's always hard to digest and it's been a week later because i think we talked about it like the day after last week any other thoughts has anything changed or really the same no i'm a little frustrated i would say i'd say i'm more

frustrated maybe than i was a week ago with them it's good to see the user growth but it's hard to see them really getting operating efficient i read your article about them and you know oh it's a fool on the fool there we go thank you for helping my bonus if you strip out those uh those charges or whatever that they said like oh we had a lot of one-time charges they're still not profitable and they're not anywhere near a level where it justifies the valuation. So I don't know. It is frustrating to me. It's frustrating reading their talk about free cashflow because, okay, they did $9 million in free cashflow this quarter on $3 billion in gross profit. And they were like, while free cashflow will fluctuate, we've been consistently

free cashflow positive. And it's basically just trended down over the last three years because It's whatever, an investment period. Stock-based compensation is up 4X, almost 5X since 2018. Now, that probably synced up with the IPO, but still. It feels like all the stuff we complain about for a company like Shopify, where it doesn't feel that shareholder-friendly, it seems like Spotify has a lot of those same traits. Yeah. And we gave them until the end of the year to prove us wrong and they're halfway through and say, if they do the same thing, the next two quarters,

we will be most likely, you know, obviously there's other variables most likely out of the picture, which is unfortunate because we think the business has so much, such long-term prospects, great long-term prospects and these are fixable issues to just get a little more efficient. Yeah. It's frustrating, but you can't just wish it, you know if it never happens uh you just say we were wrong all right uh we have two minutes left i want to tease because next week i think we have a very exciting episode we're doing an

arch capita episode on coupon a company we have on our watch list that we think is super interesting i've been one i'm the person that follows it a little more closely every quarter you've been freshening up on it as we're about to record it after this little tease what was uh anything surprise you looking back at this that they're frankly so profitable yeah yeah it is it seems like boom suit kim the ceo really has a good grasp on how to run the business delusion has not been too bad at all for them they've been growing um i what was i gonna say oh the other thing was it was kind of interesting in reading that they had a fire at the fulfillment center and it had such a big impact on the

business because it feels like you just never read anything like that anymore yeah gear right though gear right had that i'm not really oh that's right yeah we'll see i don't know i was pretty impressed with the business it there was a lot to like the gross margin improvements been really does it watch does it make you more bullish on coupon obviously price you know we're kind of just kind of holding us back a little teaser we'll do the episode and kind of go through the numbers but does it make you more bullish on coupong or amazon because it makes me bullish on amazon since they're similar models yeah i mean with coupong it it's such a denser population so it's i don't know it feels like the the margins margin potential there is so much

higher. So I thought it was cool that, I don't know if it really has any bearings on my thoughts on Amazon, honestly. It's just two totally different markets, it feels like. Yeah. All right. Well, that's a good tease as we close out this episode. I guess, Ryan, you're leading it today, but yeah, that episode will be out. If you're listening to this on Sunday, it'll be out next episode on Tuesday. Yeah. And I'll say I kind of like the WeWork one too. So feel free to listen to that because that is a fascinating story. That is going to do it though. It's 1030 on the West Coast, 130 on the East Coast. This was the Chit Chat Money Investing Power Hour. We should remind listeners because we talked about a bunch of our holdings today that Brett

and I are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital and clients do have positions in the securities discussed in this podcast. Thank you all for listening. We'll be right back.