Chit Chat Stocks - Investing Power Hour #72: Adyen Collapse; $AAMC Craziness; Mt. Rushmore of Management Pet Peeves

Episode Date: August 20, 2023

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

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. This is the Investing Power Hour, number 72. As we're recording this, for some reason, my light is way too bright right now. You're glowing, Brett. You're glowing.

I need to adjust this setting. I don't know what it is with Zoom. We'll just turn it down. But this is the Investing Power Hour. As I just said, number 72. My name is Brett Schaefer. I'm as always by Ryan Henderson. We're talking whatever we want in the financial markets this week. I think that's really the only goal of the show. We're going to go for an hour. We have the AAMC conference call, not the AMC conference call. This is a strange microcap that had a wild conference call that Ryan has some notes on. We have Blocks earnings report. We got a bunch of other stuff. I think I might take a look at Adyen's report. I haven't looked at it yet. So maybe we can do a live look at it. It's a company we follow. It's down about 30% today. And then

I think a fun segment is going to be our four biggest management pet peeves, a little Mount Rushmore ranking competition, management pet peeves. And we can see maybe on Twitter or we'll do a Spotify poll of who, who won, who has the best ones. I'm kind of stealing this. It's from Pardon My Take, which is a popular sports podcast. I don't think they have a patent on it. It's a very popular concept. They just kind of did it for a lot of different, I guess that's where I saw the idea.

They do it when it's boring. So, you know, earnings season's kind of closing up. It's a boring time. This could be a fun time to do it. So hopefully this is a series of Mount Rushmores. We're starting with biggest management pet peeves. I don't know. Do you have any other Mount Rushmores

you think we should run? I was thinking analyst, worst analyst quotes. Analyst stuff could be good. Analyst stuff could 100% be good. You could do like best CEOs, best proxy statements, that kind of thing. Today's episode is presented by the Science of Hitting Investment Research Service. The Science of Hitting was founded by Alex Morris, who spent a decade working as a buy-side equities analyst before launching his own service in early 2021. You've heard him here on the show a number of times, but Alex produces really, really high-quality equity research.

And in addition, he provides 100% transparency into all his portfolio decision-making. We were early subscribers to the Science of Hitting Research Service, and we genuinely believe that Alex produces research that is on par with top Wall Street analysts at a fraction of the cost. I mean, the fact that you also get complete portfolio transparency and 100% accountability is just icing on the cake. Effectively, you're outsourcing a full-time equities analyst role for just $349 per year. Brett and I both pay for the service on our own, and we can tell you that it's honestly worth the money. Some of the companies that Alex covers includes Microsoft, Netflix, Meta, Roku, Costco, Match Group, Berkshire, tons of others.

So if you're interested, check out the TSOH Investment Research Service today at thescienceofhitting.com. Yeah. all right well what do you want to talk about first i'm going to tweet out the link for everyone well let's uh let's talk about this one sam bankman freed is going to jail now for people that have that kind of haven't followed the story he uh you know was arrested and then posted bail which was i think like 250 million dollars um sizable bail and then he basically was on house arrest at his parents house in palo alto and they tried to you know limit a lot of his behavior to make sure like you know he wasn't tampering with witnesses or you know doing

anything illegal and they put a bunch of provisions in that basically said you know you got to check Whoever comes into your house has to check in, essentially, to make sure they're not dealing with witnesses or having them come in. Because they can't monitor anything that's actually in the house, I don't think, but they can say who comes in, who comes out. And then there was also – so basically, the bail's been revoked. He was sent to jail because of a number of things. but the first thing he did was he set up a vpn um so that he couldn't be tracked i guessed online that kind of worried the judge and then the lawyers said it was so that he could like watch the national football league which listen i don't know sbf but i'm guessing he's not the biggest

biggest nfl fan i could be wrong also not yeah it's not on so yeah maybe he's just big fan of the nfl network off season but uh anyway so yes i guess that was his claim that's why he wanted the vpn i don't know why he wouldn't want to be tracked for that um then he was apparently also sending messages to on apps that like uh whatever aren't trackable so whatsapp and then there's like one other one that's like uh kind of popular i can't remember telegram or signal yeah signal i think is what it was to the old ceo of alameda researcher the the fund that they were running which is basically his ex-girlfriend um and it was just like i remember reading their quote around what he was telling her and it was basically like that thing from succession

when kendall's like on the phone he's like it'd be good to just connect you know and then but it's like he's trying basically it's trying to say like we should you know strategize together to like make sure we're saying the same lies um but so that that was another red flag and then the other one was witness intimidation he leaked her diaries her diary entries i don't know how he had these to the new york times because the new york times reporter came in to the house um and he i guess gave him the diaries and a lot of it was about like i think maybe it scares her that he's going to leak more if if she doesn't you know get in line and say what he says so all of that kind of culminated and the judge saying no listen you're going back to jail and apparently

it's going to make it difficult for them to prepare for the trial um i don't think there's much more to the story anymore he's going to go to prison for a long time and there's it's a pretty cold cut case but they just have to go through the legal process it is funny because at its core you know you you look at like so the parents sps parents were in the courthouse or whatever when he was sent to jail and the mom was just you know in shambles it sounds like it's just a really a guy that was very good with computers went to mit i think smart guy and kind of probably wasn't malicious from the jump probably didn't have ill intent necessarily but the more money that came in the more it kind of i guess made him feel invincible with it and

yeah i might be i might be a little i might be a little more cynical about the situation but you know it's hard to tell from an outside perspective i think though i'm interested in how the michael lewis book reads some of the stuff there was another another group of people that he was connected to this week in the college football world that totally got exposed as frauds or potentially i guess hasn't been confirmed legally yet who was you know the movie the blind side yeah that movie the lineman turns out that the family totally screwed over that guy in real life so he got no money from the movie and book and they got all of it so now he's suing yeah i'll be curious with this i mean michael lewis

to be honest finance books he's pretty goaded yeah so this could be uh this is his bread and butter this could be great yeah all right well that's a good update what about a let's do i want to say i want to talk ad again but let's do that that's more of kind of a homework segment a little bit let's do the aamc conference call because this is a fun one that's really interesting one i think can show the wildness and the chaotic stuff that can happen in a small microcap companies when you get a cowboy management team in there yeah it so i guess if you want kind of an update on what the thesis was prior to um the recent saga jeff moore who's a really smart guy went on our show we did an interview so i'm

shameless plugging ourselves here. And he basically pitched AAMC. He said they have a ton of cash. There is this legal overhang that he thinks is going to... There's a precedent for it to go away now. And then they've got all this cash and they're starting up this lending operation and they're bringing in the CEO who seems well-versed in the area and seems like he could grow this business. And it honestly checked out and the stock was cheap as hell. Basically, if you believed that the lending operation could generate any sort of earnings, if they could have any sort of functioning business, it was kind of a cash shell. So if anything worked out, the stock was really cheap. Now on the call, and they had established this, they're going to

be doing these. I can't remember the type of loans that they were going to offer, but that was the operation they were going for. They had the money to do it. They brought the guy in. I think his name was Jason Kopchak, I want to say, the CEO. And on the conference call, Jason Kopchak isn't there, which listen, this is an Amazon. So it's not like when Andy Jassy he doesn't show up like he's busy or whatever this is you know the ceo should be on the calls for these things and the board comes in and basically says like the whoever the chairman of the board comes in and basically says like we're not uh yeah you know our lending results weren't really what we were hoping for and so we're kind of exploring strategic alternatives

And maybe, you know, we might slow that business or just see if it's worth it altogether. And then, but we have this new, one of our shareholders presented this patent idea to us for an electric vehicle, some technology that goes into the electric vehicle that can make the range 8% longer. um and it's just this like it's an it's an idea that's it and he's like he's actually going to pitch it to you right now on the call and so he like brings on this guy who pitched it to them and he gives his whole pitch on the ev technology and then he's like thank you for that any questions and jeff our friend is like the only guy that asks questions on the call and the first

question he's like uh yeah so where's jason and the guy's like ah you know he's uh performing a strategic review right now of our operations so he's not he couldn't make it which like yeah just i guess that's like an hour yeah it's an hour you can hop on anywhere internet internet this call was 15 minutes so yeah he i think he could have made it and then the second question was like can we get any sort of an update on the lending operations because you know that was kind of like whole thesis here he's like yeah you know we're not really taking any questions on that um so that's what we've said is all we're gonna say it's like okay and then uh i mean he jeff asked like two more questions and that was kind of it and then the stock dropped i want to say 60

after hours yeah they i don't know i would be interesting to see what the insider trading was like around this time because it's red flags galore anytime a smaller microcap company is talking about some sort of patent play i mean that that's just an immediate indicator that you got to run for the hills yeah i maybe should have mentioned this the stock went from twenty dollars to basically a hundred dollars a share in the span of four months this year and it's a small it's really small so there could easily have been some manipulation there and since then it's come down from a hundred dollars a share to ten dollars so probably one of the most wild riots i've seen like within a year and probably the most insane conference call

i've been on because it like they just didn't even talk about the operations they just completely pivoted the business on a whim yeah it's like they were trying to dig their own grave here i don't know what the the thought process coming in was okay we're not going to talk about the lending business we're going to talk about this weird new ev thing we're not going to have the ceo on who did they file any form saying that he's gone or did you check that i don't think so i mean i haven't seen i was i'll go to the investor relations see what their their filings were i mean it's just like i've never seen anything like this do you think the stock was just going up because it's close to amc that could have been interesting no i i got a feeling there was some insider trading

going on here okay yeah like you said it was like they tried to schedule or it was like they tried to dig their own grave because like if you wanted to have the worst conference call possible it would look a lot like this like abandon your lending operation that seems okay like it seems like it could work go for some ev play don't take any questions on the core business and have your ceo go awol like that's like a perfect formula to have your stock drop 70 and it was like they had it's like they were pretending that uh analysts shouldn't even be upset yeah it's kind of weird they're like what are you asking about like why are you worried about our lending operation. Don't worry about that. Well, if we look at the last three months here,

revenue, most of this from loan interest income, 1.9, I'm assuming, yep, million, 1.92 million. That barely covers salaries and employee benefits of 1.9 million. And then if we look at their total expenses, 6.1 million. So not, I could see this. Yeah. I mean, tough scene, small microcaps is really hard because the management teams are generally the ones that, well, there's a reason we're about to do one on Lowe's this week or a podcast on Lowe's this weekend. That CEO is just top class, one of the best in the industry, just as total professional, lots of industry experience. And there's a reason that these small micro cap CEOs are the CEOs of small micro cap companies. They're not generally the best out there and you can get a lot of bad ones.

And it's really hard. It's really not even a company. Yeah. It's not even a company. It's just basically like bank account. you have small and micro-cap companies. Oh, Ryan's back. Can you see me, Ryan?

Yeah. So here's the example I want to talk about is generally in small and micro-caps, you do not, you get a lot of bad management teams. And I think you have to be really either you get a big margin of safety from the share, you know, where the stock is trading way below book value at a really dirt cheap earnings multiple, or you have to be very, very critical and wait for that one out of 10 CEO and executive team that's actually a good one in the small micro cap space. Yeah. I think if it's small and it smells fishy at all, avoid it. The other thing,

i think i have a hard rule now if a stock goes up more than 200 or maybe even more than 100 in the span of a month or two in a month okay yeah i was gonna say in a year but in a month yeah yeah i don't care how cheap it is it's still like it just makes me so cautious because it's like something that's going on here and it's obviously driven by someone or a group of people that are kind of influencing it a hundred percent a hundred and that's mostly for smalls like maybe i i know there's probably some out there but a large cap isn't going up a hundred percent in a month and if it does like a nvidia nvidia or tesla and it's probably time to trim yeah i don't know if nvidia got up a hundred percent in a single month but pretty darn close pretty darn close this year

they report soon too i believe yeah all right you want to do wait no let me let me do the conference call this is a short one i think it's another lesson of in 2020 and 2021 and even before the pandemic no one cared about this stuff and now everyone's being hypercritical about it and dorsey jack dorsey last one of the party is finally a little no spoiler but go ahead yeah this is kind of a they're exactly who we thought they were situation you could probably throw that meme on it um you know what i'll probably throw that meme on it on twitter after this but that's besides the point uh so yeah block formerly square which i mean if there was ever anything that signaled the top i think it might have been squares name change to block and the after pay

acquisition yeah yeah there was some other probably big signals at the top as well but that i mean that was one of the big ones anyway um so on that's another way that's that's another matt rushmore we could have matt rushmore the the top signals from 2021 i'll jot yeah jot that down the uh but the there's a quote he says during the conference call leaders across our company are now looking at the true full cost of their businesses, which shout out to Marcelo Lima for kind of finding this. And he asked sort of the same question I was thinking, which was what on earth were they doing before? Yeah. If you're like not looking at the cost, just growing at whatever cost they want. It's the exact opposite culture of what you

want to set up for a business, especially one that has different sorts of subsidiaries like block, where the flip side, I guess the positive would be something like Constellation Software, where Mark Leonard, the team that started that thing, they talk about there being a very decentralized company most of the time. I don't know the business as well as other people, but they set up the culture of thinking their priority is return on invested capital. What's the ROI we're going to get on this investment? Does this pass our hurdle rate when we're buying this company. So that's permeated throughout the organization as the culture. It seems like block is the opposite where you build a good product or something interesting, quote unquote,

because a lot of these aren't actually good products that they're building. They're just experimenting with blockchain BS. And they're not thinking at all about return on invested capital or return on employee spend or return on employee time spent. It's just not something you want to see it. And these are the type of businesses that, again, we've talked about this for anyone that's listened for a long time. We own Block slash Square 2018, 2019, 2020. It's something that as rookie investors, we didn't really look at at all, but it's something that's very, very important to us today. It's the management's philosophy around how they manage the cash that's coming in and what they're spending it on yeah yeah that was i don't know dorsey lost me

like let's say two and a half three years ago he started to lose me the bitcoin in the balance sheet was the big one for me that was what broke the camel's back yeah and then i remember looking at the investor there was like some block investor day which was six hours six hours the first slide said we're an ecosystem of ecosystems like just a bunch of shit just doesn't mean anything he's in a beanie he's in a beanie sitting on a table with his hand on his knee yeah yeah uh he uh and then there was a part where they started talking about this bitcoin or like crypto subsidiary in their uh i can't it was like one of the tbd things oh yeah it was like we're just we're giving out money we're giving money to crypto projects like giving money grants

they're they were literally giving money away yeah it's interesting i don't yeah block clearly uninvestable very interesting now i listened to a business breakdowns and take two this week and i there was another interesting thing around management and subsidiaries and how you do that and there was an analyst that on it i don't know if i'd call it an analyst consultant some someone who's been in the video game space for multiple decades talks to all the people at these companies and he said on the business breakdowns which i thought some good tidbits the business models aren't that crazy to look at but a lot of good tidbits on the entire industry really and not just take two interactive but yeah it's really great quote where he said and take two for example

owns the 2k subsidiary for nba 2k and then rockstar which makes the popular grand theft auto and red redemption games and a lot of other subsidiaries so it's like the parent company plus a lot of subsidiary studios and publishers he said quote they have no control at all over rockstar's decisions none so when they're putting out any sort of guidance like rockstar can come out with their new grand theft auto or red dead redemption game whenever they want but the parent company They can't really do anything, which on the one hand is a good thing because you don't want them meddling in like kind of electronic arts did with Battlefield and stuff like that, which can turn into really bad results.

But on the other hand, it makes it unpredictable, and these gaming studios might not care at all about getting the best return on time spent and stuff like that. They just want to make the best game. And clearly GTA has worked in the past to do it this way, but I thought it was quite interesting where they can't even tell them, Hey, look, like give us a timeline on it. They're going to say, Hey, look, when we're ready, we're ready. It's going to, the game's going to come out.

I think I got one hand. I like that, but as an investor, it's very hard to predict. Yeah. I'm not sure I like investing in a company that's run by its subsidiaries essentially. Yeah. Yeah. Especially, I don't know, are the heads of those studios, do we have visibility into what their incentives are, what their compensation is? Because if they just get paid like $5 million a

year, regardless of performance, and they're just like, yeah, we'll come out with it when we want. We don't care about the success for shareholders. And it's kind of concerning. All right. Should we this mount rushmore sure you you go first and i didn't write anything down so it's yeah yeah well obviously you have to alternate but i didn't come up with any or i didn't write anything down so just gonna be at the top of the head here yeah i gotta say even though i came up with this one i didn't have anything that great but so we're gonna do mount rushmore of the four biggest management pet peeves we have and so my first one these really aren't in any particular order but And I, for me, when I know there's a big issue for a company or something that like should be talked about, like, you know, maybe there was something bad in the quarterly press release or like headline news, that's really not good.

and they mention it like in passing in the prepared remarks in the conference call and they kind of paint it in a good light but like paint it in the exact way that they can to not get any to say to say that we mentioned it but and then when people read it later they're like wait wait this is way worse than i thought when they actually kind of read into some of the details right so they mention it in the prepared remarks and then when they're asked about it and And I've seen this happen a number of times when they're asked about it, the CEO or the manager goes, you know, we already mentioned that in the prepared remarks or like we already said, and they just repeat everything they just said, or they say, yeah, you know, we've

already touched on that. So I don't think we need to go any further. That's like a big pet peeve for me. Okay. I was worried you're going to take my first one, which is being, and it's not necessarily just the act of doing this, but it's the bragging that they're offsetting stock-based compensation with buybacks. Yeah. Ryan's on mute, but he's agreeing. That just gave me an idea for a new one. All right. Well, what's your number two then?

I'm going to take that right now. Rule of 40 CEOs. I hate it. Absolutely hate it. I don't care about the rule of 40. Yeah. The rule of 40 is made up by VCs so they can get more fees. the, I mean, so many businesses do that company we own does it all the time. And it's like one of my biggest pet peeves. They say like, and I think this is a direct quote, the hallmark of any great business is the rule of 40. And it's like, you could have, which for those that don't know, it's just, I think it's free cashflow margins plus revenue growth, right? You could have 40 margins today you could have rule of 40 whenever you want like there's no reason to have that be your goal so i don't know rule of 40 ceos are just my and you could it's like

like people could just have negative 40 free cash flow margins and 80 revenue growth and you hit the rule of 40 or whatever yeah i'm going to say for my second one there's so many small ones out there i think i'm going to say on the conference call and a lot of these are on the conference call when they talk about they go direct like basically they talk to the analysts about updating their models where they go and this is for your models here i just hate that quote and this is for your models here and then it's three paragraphs i just skip huge pet peeve yeah and it's like the cfo goes line by line through like sbc was this quarter or sbc was this this quarter and do that offline honestly like do that do that not whenever listen if you want to have

your own model you can talk whatever talk to make your own model and just upload it if you're a company, if that's the way you want to do it. And some companies do that, right? They just like put their financials on a spreadsheet and they just upload that. Do that. I'd rather have that. The other one, we do have some comments in the chat too. So maybe we'll take those in a second. So this is my third, making layoffs all about them. Oh, good one. Yep. Layoffs are a difficult topic to talk about. It means they made a mistake. The management team made a mistake and the employee, okay,

you go, you go. Yeah. And there's no, there's no perfect way to announce layoffs, but I would say the worst way is to say something like dear Twilions or like give them some cute nickname and then say, this is the hardest day of my life because I guarantee they don't care how hard it is for you as a billionaire when they're trying to when they're jobless so that's that's a big one for me it's just like listen tell them the news give them all the things they need to know all the details about it give them solutions for finding new jobs try to be a good backstop or support for them but god don't make it about yourself yeah yep i agree that okay so let me write that down. Layoff letters. You'll write whatever. When we do the little thing, it'll be

better. Okay. Here's mine. Oh, shit. Did I just forget it? Oh, no. I got it. More than seven listed executives, or maybe not just arbitrarily at seven, but something like 14 or 15 listed executives. You got the chief people officer. You got the chief innovation officer. You got the chief technology officer you got the chief human resources officer well chief people and human resources i guess the same thing he just goes on and on and on and on and on for not for some companies it isn't i guess yeah yeah you got what did google just do with uh or at the chief investment something and then they have the chief financial and then they have the chief accounting it's kind of absurd and especially with the companies that seem to have really bad capital

allocation. It doesn't make much sense to me. I think there should be a maximum of like five executives because if you have too many, it just like, here's the one that doesn't make sense to me. When a company has a CEO and then they have a COO, which is the chief operating officer, and then they also have a president. I thought the COO and the president were the same thing. I get when you have a CEO and a president in some regards where the day-to-day versus the CEO might be more of a capital allocator or a acquisition, stuff like that. That makes sense. But a COO and a president, that one never makes sense to me.

Yeah. I've always thought there were a lot of executive roles that were pretty redundant. Like the COO sometimes for me, like, okay, maybe the Lowe's is a good example. Marvin Ellison, he's the CEO of Lowe's. I think he's a really good operator. He understands the business really well. That's great. Yeah. I don't know what sort of impact he has on the capital allocation philosophy at the company. I would be fine if it's operator, like operator CEO, and then the CFO makes the capital allocation

decisions. But when you have a CEO, a COO, a CFO, and a chief accounting officer, and a president, it's like those are duplicate roles that just aren't necessary like there's there's no way this guy can't be doing the same thing anyway here's uh james goodwin has a comment specific on this one chief commercial officer always seems a bit redundant to me that's one i don't understand i don't understand a commercial officer the innovation the innovation officer is the worst clearly clearly i mean that's what's the worst officer you've ever seen there was one That's another Mount Rushmore. After doing so many not-so-deep dives,

we could find some chief innovation officer stuff. There were some bad ones. There have been some bad ones. I mean, Salesforce probably would be my entire Mount Rushmore. I think Allbirds has a chief innovation officer. That's right. And they're probably not going to last. Okay.

Either way, last one for me. What's your last one for you? It's kind of between two. um you already kind of talked about the sbc thing no not allowed not allowed yeah unless it's way different it's kind of different uh okay i'll just go with it everyone founders giving themselves huge bonuses this is going to be mine it's going to be mine it's like assuming it's the founder with a big stake which most founders probably do like you just don't need the bonus just sell a little bit of stock or take a loan and pledge your stock as collateral.

If you really need the money to buy a yacht or whatever, like there's no way that if you own 50% of a company worth $10 billion, you need to be paying yourself a 20 to $30 million bonus for the year. So I'll take that one, I guess. That's a good one. I was going to take that one. I will do, I got to come up with one a little bit on the spot, founder awards for Ryan to themselves. Yeah. And it's always to themselves. Like at the end of the day with these things, it's always to themselves. And then, and then they say, well, it wasn't up to me. The compensation committee was, that's what they determined. And the compensation committee says it wasn't up to me. It was the compensation consultant that decided this, which leads to my

last one, which is the usage of compensation consultants. It's the most absurd job in the world. And if anyone, like I explain compensation consultants sometimes, if I'm like, I don't know, someone asks about it or they don't ask about it specifically, but they ask, I don't know, must come up some boring, you know, we're in a car ride. I explain what it is. It doesn't take that long to explain. They go to a T. Everyone says that's the most useless job I've ever heard of. You're doing the job of the board of directors who are getting paid already to do that. It doesn't it's it's so ridiculous there's like if you took all those away the world would be i don't know not changed at all yeah i think i don't they say they're so useless i mean

i'm totally with monger there yeah the other one is putting i know there's a couple companies that have done this but putting like people that are actively in the military on your board like generals it just feels kind of strange to me because like i think salesforce does this i don't think you need a general on your board like you're not going to war it's enterprise software only one is defense contractors yeah i mean i guess that makes sense because it's a customer the uh or an ex-customer yeah but yeah obviously i don't think serving go on the board but yeah i guess you could say putting putting giving matthew mcconaughey 10 million dollars a year that might be yeah i mean salesforce is a walking

is a walking executive i guess okay let's hit the comments we had one specific on this one from matt's capital thank you for commenting as always prisoner of the moment management they extrapolate too much on things happening now without regard for what has happened before may happen after they disregard the mean oh yeah so basically just well i think this also is hopping on the classic you know hype at the moment examples are galore right now with companies hyping up their ai capabilities quote unquote i'm doing air quotes for the listeners the i mean that's just clearly i think if your company is just bragging a ton about ai and they're not just talking about it when asked about it on on conference calls because the analysts are

really a on all these executives i think if they're coming out explicitly with all these press releases or talking about it that is a red flag for me and it's also a pet peeve the uh yeah if you were talking about the metaverse in 2021 talking about ai now you're probably not going to make it yeah there's some other ones that were like i mean there's so many i had founder shares remember the one the axon one the exponential ceo plan oh yeah all those guys just have incredible growth hack yeah which is unfortunately because that was just an exceptional business but it was like these huge bonuses based on based on annual numbers that disregarded your bonus yeah exactly all right here's another one from tyler ferris uh related

party transactions are always big red flag especially in microcaps i think another yeah on top of that unnecessary related part of transactions where you go hey we use the software from our cfo's wife's company or you know something like that you don't need that it's just gonna come off bad i just don't like it yeah i mean in terms of like related party transactions it's probably not the end of the world but it's a pet peeve though it just shows to me that you're self-serving yeah but i think some of those too it's like whatever you use your wife's dad as like a legal counsel he might just yeah he might just give you like an exceptional rate yeah it's not the end of the world but it's it's a it's a pet peeve yeah all right we do have

a lot more questions um square acquiring after pay was a giant red flag the second title was the reddest of flags title was the worst that was they're still trying to come out with that i mean they're gonna burn so much money with that thing it's amazing did you ever see yeah and two i think it was like two years after the acquisition they gave some details about how that deal happened and it was that he was literally uh summer vacationing in the hamptons with jay-z and i I'm assuming Jay-Z was complaining about how poorly his music streaming business was. And he saved him.

Jack Dorsey literally called the board like that day and was like, Hey, I think we should acquire title because I'm guessing Jay-Z is like, if you want to come over to my house a couple of times, like, yeah, you know, just lob me a half a billion dollars to acquire a title or whatever it

was. The, that was a huge threat for the square in general, man. just red flags all across the board um what's on your guys's watch list these days are you interested in asml yes uh any not so deep dive or guest pods in the future i will say this um we did i think our structure for the podcast isn't necessarily all that clear unless you're like following us on twitter but the not so deep dives we're doing the share cannibals theme this

month next month it's dividend airlines airlines airlines um and then we've done an asml deep dive with leandro invest runs um not potential multi-baggers he runs best anchor stocks yeah it'll be the same type of get a good overview on that one he knows it very well okay what's on the top of your watch list today well i have our watch list open here and it has two companies that we're waiting for the right price on add-in and airbnb add-in got a lot closer today but it's still not there yet i'd say i have american express on the watch list i was gonna say amex uh kind of those three this is three a three a's company yeah add-in airbnb amex definitely are up there to be honest i have a watch list full of companies

i should probably get rid of let me look at yeah i have a bunch on there that i don't actually like anymore i have wise on there it's always overvalued i have flash luckily i never bought that i have roku never seem to buy it roblox never seem to buy that top graph callaway never seem to get comfortable Hershey not a bad business though Altria of Altria keeps getting cheaper there we go I know it's getting up it's like

9.2% dividend yield right now somewhere like that it's still though those volume declines have accelerated which I think at 10% volume declines the math starts to break a little bit for

Altria unless they have some other business that starts to drive performance. Yeah, for sure. Yeah, we own Philip Morris International, like that better for durability. Here's another question. What do you guys think about this macro environment? Is the crash imminent? I do not know. I don't really follow the macro too much from an investing perspective. I kind of like to read about some of the stuff, but honestly, the economic data today looks really great in the United States, but who knows? It could change on a dime in the next few quarters. I have no clue. We should start having really hot takes on whether or not, which way the market's going,

because that's going to create better clicks. Is the market crashing tomorrow? S&P down 25% tomorrow? You know what would be hilarious is if our title was just for the episode was Michael Burry from Big Short Fame makes 1.6 billion all caps bet on the economy, on the market crashing. That's just our entire title. Yeah.

We don't talk about it at all. People love the brewery engagement bait. It works. But I honestly, we don't care about macro. We care about micro, but we avoid company. We just care about countries that value the rule of law with businesses. So we avoid China, stuff like that. Let's try to make a claim though.

Where would you say you're at? Like if it's just a general barometer on the macro and you're kind of, where's your way better than I thought. Oh, for basically my fear agreed or your fear and greed. Where do you think, where are you at? Regardless of where the market is trading, because it seemed it's above the quote unquote risk-free rate. So I get a little bit confused on that right now.

It makes me a bit nervous. I don't want to buy anything really with an earnings ratio above 20, unless I think it's growing, but regardless of where the market is, I'd say greed and the numbers just look phenomenal and across the board for the United States right now. And the, the interest rate impacts have been way less than people thought. Now that could really impact stuff in the next few quarters. It could finally be like kind of a coil of spring that's ready to drop, but I have no idea.

And the numbers really, really look good. I mean, what did the Atlanta Fed change their prediction to for Q3, I think, or maybe it was Q4. One of the quarters for this year, they're projecting 5.8% GDP growth now, 5.8. I thought it was supposed to be a recession. We're in 20s. Yeah, I mean, some of the stuff, I mean, that manufacturing spend, this looks amazing. the UPS renegotiation, yeah, that's going to hurt UPS's margins,

but it's going to be a huge positive impact on the economy because all these people are going to have more money. That's 300,000 people with a bunch more money. I mean, that's going to reverberate across the board.

We got a question from Mads Capital here. Did you comment on adding debt? Have you looked at the report? Yeah, do you want to just go? I didn't look at it. No, let's see. um try to make sure we hit everything here uh here's someone that said just join what are your three top three picks as a financial sector disruptor uh thanks visa mastercard amex i don't

know uh i don't like those fintech disruptors honestly uh so i mean can't really comment on it can't really invest in this one but i think apple pay is probably the most promising business in the financial sector, and it's kind of among payment processors. Is that a payment processor? No, it's not. It's not a processor. No, it's not a processor. It's a wallet you're thinking of.

Yeah, among digital wallets, it's growing the quickest by far. Yeah, I think Venmo's in trouble, honestly. I've used Zelle a lot recently. Yeah. PayPal though had some bad takes there

oh actually financial technology disruptor the one we like the best for sure is wise but the price is very expensive today

I like it a lot we haven't pitched it we had never bought it but I got it on the watch list for sure no yeah I think really the card networks

if I had to buy anything in the financial sector today it's going to be the card networks yeah and at today's price it's going to be amex but we haven't bought any of them yet who are the big processors stripe adian braintree braintree yeah and then the legacy ones their names there's a lot of a lot of ones and i forget the name uh do you okay okay let's talk we got a question yeah we got a question

on ally just say the pre-mortem i think is in there in our write-up that we posted on twitter You can find that on our website, archcapitalfund.com. I think that goes through it, but DM us on Twitter. We can kind of discuss the premortem on that. The big risk with any bank is pretty much the same, right? You lose deposits in a quick manner. Yeah, yeah, exactly. Exactly.

Or the loans blow up. Or, yeah, I mean. That's both. Those both. I think you'd have loan book blows up or deposits blow up. I mean, if car prices go down, probably it impacts them pretty badly, but we think they're. blow-up risk though on the loan side seems low yeah because it would take just a full-blown like depression massive implosion of the auto market which seems unlikely considering how much cars

are relied on today and how much americans love cars um and deposit outflow would be huge yeah and then tyler says global payments that is one that the like one of the legacy providers and we also have a quick question i can answer do you think apple will ever be forced to spend on apple pay. I don't think they'd be forced to spend it out, but there could be some regulation there because they have been anti-competitive. Okay. Let's look at Adyen. I'm going to pull up the results. They always have nice charts. Speaking of, there was a bit of an anti-competitive thing that I noticed from Apple. I'm guessing this is anti-competitive. If you log into Spotify and you listen to the podcast,

on the Spotify audience network ads, so the automated ads that we get, which if you're listening to this on the podcast now you can't skip them in spotify but if you close your phone and do it through the apple like a little thing on like the lock screen you can skip it so i think apple my guess is they're making they're not letting spotify make it unskippable interesting yeah i mean they're just the worst with that type of stuff that is so annoying okay let's look at this. Add in, I'm sharing the screen for the listeners, but I'll really just lay these out for them. First half 2023 process volume, which is his payment volume, 426 billion euros up 20, wait, oh, that's versus 22. Okay. Yeah. Up 23% year over year net revenue of 21% year over year,

740 million EBITDA down significantly, down 10% to 320 million. That's probably where people are concerned. Let's see. They have some notes here. They added apparently 551 full-time engineers in the first half. So that's a big difference from when they were pausing. They said that they're going to take advantage of these layoffs and try to go for people. I saw someone commenting that a couple of months back, they said they were going to start investing heavily to of be a little more competitive with stripe on that front which seemed well i mean now it's hurting them but we'll see what kind of impact it has long gonna be a good time yeah it could be good timing and hopefully they'll keep their philosophy of not just higher of being basically

the opposite of stripe and being more disciplined in hiring they say the majority of new hires 75 were in tech roles building out our global engineering muscle dedicated to both young and mature initiatives yeah let's see they say they're in a period of growth they have a bunch of pictures of people working at their european offices what do you think kind of hard to say they said that they're seeing pricing pressure from big platforms in north america so So, you know, like the North American customers are looking for cost savings. Maybe that's from Braintree or Stripe trying to compete on cost here. Could be an issue.

I think what is interesting is that you look at a lot of these businesses in this space, they seem to be very highly touted. Everyone seems to love Braintree. Everyone loves Stripe. Everyone loves Adyen. But I wonder how rational the market's going to be. I think it probably turns into a rational market from a pricing perspective. But if someone's trying to go for a price war here, it could really, really hurt them.

I'd have to get the full context on the conference call, but I'd still like this. I like this business. They seem to have a great management team. but the numbers obviously here don't warrant the giant earnings multiple. I mean, they still trade at way above the market average. And if they're growing, they're seeing margin compression in the near term. It's not surprising to see the stock drop off like this, but I think that's the risk you get when trying to buy something with super high margins

and betting basically that revenue is going to grow 25%, 30% in perpetuity. yeah i mean it's i think it's still a solid business and it doesn't seem like it would be that surprising that there's a big slowdown in payment volume given the customers that they have right you know a lot of these tech businesses they've had slowdowns which is just going to trickle through to add in yeah on the other hand some of them are recovering like uber so true speaking of uh to kind of bridge the gap between the worst chief or the worst officer we've ever seen and payments processors chief climate officer at stripe that's that's the one is that the one you're trying to think of yeah i think it's head of climate now but i'm pretty

sure there was a chief climate officer for a while so probably getting paid 400 000 a year and getting $200,000 in stock bonuses. That's crazy. You can only get a 1,000-square-foot apartment with that in San Francisco, right? Oh, my gosh. If you're the chief environmental officer, you're the CEO. That's true. That's true.

Do they have one? It's the head of climate. Head of climate. CCO. That's a way to get some good... i think you should just joke around and have that too at a company like google so people just have big conspiracies you know about them controlling the weather and stuff like that that'd be funny yeah there'll be some good youtube videos and did you know who owns their shares

two companies blackrock and vanguard i love when people i love when people bring that up takes oh yeah so many people have this take they're like dude yeah and they always get it wrong too like yeah this company owns every every stock it's like blackstone they're like no black rock and they're like wait wait there's two of these and i'm like yeah there's a black rock and a black stone it's very confusing but it shows that you have no idea what you're talking about good welcome to the entire financial sector everything is named after a color maybe like a a weather and an item in nature rock stone tree yeah that's the worst green forest capital that's another one that rush more rankings uh i would like to come up with a different name because i feel like we

are stealing even though it's a very common concept is worst industry company names remember we just did an interview with next week on a very fascinating couple we have never heard of before called Paylocity in the human capital something software. It's basically payment and HR management, automation, stuff like that for medium businesses, small businesses, large businesses. And the companies are called Paycom, Paylocity, like Paycheck. We should just go back to the 1900s, like HR Software Incorporated. That's right.

Amalgamated copper company. It's better than Rover. Yeah. The, uh, do we have anything else? We got four minutes here. Um, okay. Here's, here's what I, here's what I got. Um, actually we don't have really, I can't really go over the numbers. American express. Maybe we talk American express. The price is kind of going down. It's kind of closer to where we say we pitch it. Do you have, after we talked about them earlier this year,

we kind of kept up with them though. Do you have any concerns about Amex that have kind of come up in your mind after going through that one? Because I know everyone talks about the credit risk, but we kind of think it's a little bit overblown. No, I think it's interesting that so many people highlight the credit risk because it's a small part of the business. It seems like one of the areas where of the credit spectrum that would be the most or the least likely to have big defaults because of their customers. And I mean, obviously it can increase a little bit, but it's not going to, there's no blow up risk here, in my opinion. Yeah. And people pay these off first because the fees are so high.

so i don't know it just seems unlikely to me that there's any big risk here with the credit there's i think they may risk destroying a little customer brand value with these lounge things at all the airports it shows that the cards are getting more popular again but they're being i guess that is a risk like i think that's a risk if there's too many people in the ecosystem that get the value deteriorate yeah but i think oh they maybe just need to pull lever of making the lounges more exclusive again like upping the price yeah or whatever it's already what eight hundred dollars for to be a part of the amex platinum it's uh yeah it's like 650 something like that the i mean the benefits are pretty solid yeah but like for ubers every

month or something but and other stuff that they give you back but i think maybe they need to make those lounges definitely more exclusive because that is ruining some customer brand or i think it could ruin the value of the brand and the for customers but besides that seems like they're doing a lot of things and everyone has these claims about them like oh they don't have the distribution that visa mastercard have that's pretty it's wrong in a lot of countries now especially in the united states they're at par basically they're trying to get the distribution higher in almost all the countries around the world. Yeah, I mean, there's just a lot of stuff here that I think people are concerned about, but they've changed over the last five years that should make things better.

And they're a great share of Cannibal, buying back stock constantly. One thing I think is also interesting is the potential for them to win the Apple card. That could be a fantastic partnership, given those are both just kind of the premium consumer brands. yeah i agree what is your favorite not so deep dive that we've done this year let me pull up the list right now i'm gonna scroll through yeah maybe we should say what's your favorite theme um no let's do deep not so deep i have one in mind okay i'm pulling through these right now okay so we did payments

um share cannibals engineering software oh wait no that was last year fallen angels okay we did big tech financials

financials dating apps payments which was a separate one dating apps was rough man there's pretty much one that's but

that's ownable and that's even questionably ownable um I like the financials market access american express and no no payments i like payments the i think visa for me was my favorite not so deep dive that we've done this year yeah that was a good one i think my favorite yeah and that's definitely

one that people should listen to i think we did a good job um comparatively to all the ones we usually do i think my favorite was rocket lab also think we did a good job there that was a fun one very interesting company that is executing really strongly there are a company not a company i invest in but if you're a hyper growth investor very early stage type investor that's one to really keep an eye on what's the worst business we looked at this year we work i'm pretty sure it basically went like bankrupt right after we're like they say they're gonna make it to 2024 but it looks like they could file bankruptcy at any time turns out we had a very very very good timing on that i think spark networks is probably just as bad those are both structurally bankrupt

and that was that really bad dating app company but i think that's time great questions for everyone today thank you for everyone tuning in remember these will be going out thursdays or actually no next week we'll do a thursday a thursday morning will be thursday mornings 9 30 pacific 12 30 eastern typically although we do change it up depending on our schedules i think that's it anything else no i think we'll have to disclosure remember we are not financial advisors anything we say on this show is not formal advice or recommendation we are general partners of arch capital and clients may hold securities discussed in this pot on this podcast podcast recording comes out on your spotify apple or whatever sunday mornings you can watch on

youtube from thursday after it's live whenever you know it'll be on there infinitely thank you everyone for tuning in we'll see you next time We'll see you next time.