Chit Chat Stocks - Investing Power Hour #76: $AMZN Vertical Integration; Ranking Dumb Acquisitions; Instacart IPO

Episode Date: September 17, 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/ ****************************** Thank you to our sponsor The Science of Hitting Research service! Sign up for high-quality fundamental research before prices go up shortly: https://substack.com/@thescienceofhitting ****************************** 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 76 on Chitchat Money. My name is Brett Schaefer, and I'm joined as always by Ryan Henderson today on these episodes, which again, we do live,

but can also be recorded or are also recorded and are available on any podcast player of choice on sunday mornings these go live on thursdays so if you want to join ask us questions head on over to the youtube channel ryan how are you doing you got stuck in about two hours of traffic this morning but it looks like you have some fun topics for us we're gonna yeah really uh it really kerfuffled me i was unable to focus very very infuriated i felt like i felt like dennis in always sunny in philadelphia just screaming at traffic but that episode that episode is very it's very in touch with when you get stuck in traffic you turn into a psychopath but yeah or at least not just you everyone the yeah we're outside of earning season right now but it seems

like there's a lot to talk about we have the disney charter stuff we had some amazon news Maybe I'd maybe like to talk about that. You have a couple anecdotes and we're doing our rankings of worst acquisitions of all time. Can we maybe change that to dumbest acquisitions? I guess that could be the same thing, but I would like to do basically where the rationale didn't make sense at all. Yeah, I'm okay with that. We can do that because I don't know. Sometimes when we do these worst acquisitions of all time, it's easy to just say which ones went to zero.

Or best acquisitions, you could just be like, oh, double click. YouTube, Instagram. Yeah, of course. Yeah, I don't really have anything else. I guess the new iPhone came out, which really isn't much news. There wasn't anything new there when they launched the Vision Pro. I guess, yeah, why don't we get started, Ryan? I'll tweet out the link and say what we're going to be doing here.

And yeah, what's your first topic? It looks like you have Instacart, which is pricing their IPO. And then we also have Arm, which we don't really know much about, but it seems to be pricing at a very expensive valuation that SoftBank is trying to really, really get over the line here. Yeah, the SoftBank one doesn't make a whole lot of, or the Arm one makes less sense to me. But the Instacart valuation or what they're targeting as their most recent IPO is like, I think it's a $26 to $28 share price, which comes out to a range of like $8.7 to $9.3 billion in terms of market cap.

But I don't know, apparently it's a little complicated because a lot of the insiders are selling, so it's not going to the corporate balance sheet. And it just isn't totally clear what the fully diluted market cap is going to look like. So assuming a $9 billion valuation, that would put Instacart at 22 times operating income, which doesn't seem too crazy to me. And that's gap operating income. So it's encapsulating stock-based comp there. It's actually, it would trade at like 15 times net income, but there was this one-time tax benefit last year that isn't going to be there on a normalized basis. And so it feels like we have kind of a rational IPO market.

And to be honest, I mean, I looked at Instacart and we kind of had differing views on the value proposition. I think you kind of called it crazy that people use this stuff, but I think it's a pretty good business. And I know a lot of people that use it, it's kind of convenient for the average, for the busy parent, that kind of thing. So I think they have upside, but certainly it's come in a little bit just with people not wanting to spend as much money on delivery of these kinds of things. So growth has certainly slowed, but I think 22 times operating income for a business where my thought here is that online grocery spend will grow over time. It feels a lot like the other marketplaces where, whether it's DoorDash, whether it's Airbnb, Uber, a lot of it is just proof of concepts or proof of people using it and then having the validation that, oh, okay, this works. It's a process that I can get used to.

I think that kind of takes over over time. And for me, it looks kind of attractive. yeah i will comment on that but i will say we have julius caesar back today in the comments so thank you uh for time traveling and visiting us today and we had a good comment from tyler saying that all five of the worst acquisitions are going to belong to square which yeah i actually might just prime ebay might be worse that's true that's true uh if you look at the history of that but let's not spoil any of our picks and let anyone steal others so i think i kind of know what Ryan's is going to be as I was doing some research as well. But yeah, when I look at

Instacart, I think that valuation makes sense. 22 times, I think it's saying basically, okay, this isn't the... I think it's showing that a lot of other investors have my concerns, which maybe is an opportunity there if you're more optimistic like Ryan is. But here's one thing. I did a look. I wrote a Motley Fool article on them. So I only read a little bit of the S1, but the one thing that concerns me, maybe I'll just pull up the article so I get the numbers right, is that the advertising, or excuse me, a lot of their revenue growth over the last, looks like it hasn't been published yet. Well, okay. Well, it'll be published, but a lot of their growth over the last year and a half has really been

from the advertising division. And I think that opens them up. It's not all of it, but a lot of the growth, especially a lot of the gross profit growth has come from the advertising division, which again, it's not entirely advertising, but I would say it's most likely almost all advertising. And this could be promotions, whatever. It depends how you define advertising. I don't know how healthy of growth that is compared to a... I worry that it might open themselves up from competition from Uber and DoorDash, basically opening it up and saying, hey, look, we're getting a higher margin from our customers here. Maybe they're going to go and compete in the marketplace but you know these marketplaces are decent businesses it would be

pretty hard to compete with instacart going forward if you wanted to start from scratch the same sort of business model and i wonder if the market of them uber and doordash will get rational but i think it's a big tbd on that front what do you think i think it's gonna be harder for people to move. I don't know. People keep having these worries that like, oh, Uber will get into that if it's anything marketplace related. I think it's way in it. Yeah, but Instacart's the leader. And I think Instacart's going to grow its lead. Lyft was in the same market as Uber. I think the big names in their specific markets, food delivery, DoorDash, Uber, ride sharing, grocery delivery, Instacart will continue to be the leaders just from the name notoriety. Like when

people think I want my groceries delivered, I think the first thing people go to is Instacart. Hey everyone, before we move on, I want to talk about our friend, Alex Morris. He founded the science of hitting investment research service. And one of the benefits of being hosts on a podcast is that typically your sponsors will comp you the service that whatever they're selling, they'll usually give you an example of the product. Alex did that for the first year with his product a couple, I think it was a couple of years ago. And since then, Brett and I have both decided to buy it ourselves. We are loyal followers of his service. Alex spent a decade working as a buy side equities analyst before launching this thing. And it is really, really

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Yeah. And look, that sort of makes sense. but let me try to find a chart here of let's see yeah okay well if we look at i can't find a good chart here going back to like 2015 but the food delivery shifted the dominant market player you know uh quite drastically i mean grubhub used to be the leader and then doordash came in flooded the market with money yeah softbank might be a part of that because they just gave everyone billions of dollars both uber and doordash and now it's flipped and doordash dominates the market and uber eats is second and grubhub is a distant third so i

don't you know i i wouldn't count out doordash and uh uber here because yeah instacart definitely has the lead but it seems like doordash is doing really really well with grocery although we we don't have very granular data on that. Could be. Yeah, it could be. Maybe that's part of the reason for the slowdown. They didn't really talk that much about,

and I was looking at the revenue year over year. Transaction revenue is still growing. I think it was 13% year over year, if I'm not mistaken in the most recent quarter and advertising was growing at like 20%. So it's off of a smaller base. So I think nominally transaction revenue is probably still growing about on par with advertising.

It, that that might be a reason for part of the slowdown the only thing that really concerns me and i needed to find some evidence to support this i had a feeling most ipo returns end up quite poor but i wasn't 100 sure so i wanted to confirm my bias um i found this chart i don't know can i share my screen oh let me let me give you access boom all right it's and i'm sure the listeners should hate it when i say that but the uh here's the distribution of ipo returns post ipo and so after three years 64 percent of ipos are down 10 percent or 10 percent i don't know if that's or versus the index or still i mean yeah underperforming 29 percent are greater

than 10% return. So maybe this wasn't quite as bad as I was expecting, I guess, but the, it just feels like you're at risk to lose a lot of money when investing in any of these things. Like I'm sure some of these were, and I bet following 2021, it's going to distort some of these numbers because it's going to be like 90% if they include SPACs. um i don't know history just says to wait yeah i always get attracted to some ipos i'm all i'm always the guy that says don't buy ipos and then there's like that one ipo in my wheelhouse i'm like oh you know what maybe it's like just don't do it i don't think i don't know if it's the cards

the one seems like they got a good executive over from facebook though or meta but yeah i think a big example here is we've kind of utilized it with another company that went public in 2021 one. We're like, hey, evaluation's a bit crazy here. We like this business. We think it has some promise. Let's wait two years. And the base rate would say, or I don't know if it's base rate, but basically if you look at the historical average, you'd say, all right, the stock is probably going to be down. And if you like the business and you think it has promise, the stock could probably be down after its IPO and the business could be doing just fine. And that's what happened with us. And that's why we think of an opportunity with one of those

companies, the same could happen with Instacart. And if the business continues to grow its earnings and the more it grows, which is nice about these marketplaces, as you're obviously well aware of, the wider their competitive advantage grows, they could be trading at a pretty discounted valuation if the scenario plays out. So maybe the opportunity is there, but yeah, IPOs generally, i think you gotta you gotta exude some patience there you know who could be that one outlier birkenstock they just filed their f1 uh here's the first sentence of i think after the they're foreign they're european yeah it says we are serving a primal need of all human beings all right boom i'm in don't say we are a company selling the experience

of walking as intended by nature this is only the beginning that is perfection right there i would say that that is going to have a premium valuation and i'm never going to touch it because any sort of fashion and apparel is i mean we've looked at so many of those companies and it's so unpredictable yeah there's a few brands out there that have stood the test of time maybe birkenstock is one of them but man it's such a tough industry and i get so nervous looking at all these companies hey if it's anything like crocs it's gonna have the most insanely volatile stock out there hey crocs has been a massive outperformer over the years i know i know i wonder the last the last 10 years right i wonder if this thing's profitable birkenstock oh it's

got to be if it's not i'd be shocked crocs is actually down too um this year maybe time to take a look at it again we just actually we had an interview with our friend jacob franklin discussing crocs if anyone wants to take a look at that i believe that was like two months ago but yeah ryan do you get the numbers are they are they profitable justin ebitda margins the first thing i'm saying uh 35 so i'm assuming unless they're unless they're granting 30 sbc as percentage of revenue yeah they're uh man they got all these like predecessor successor income statement stuff uh makes it a little complicated six months ending march 31st so the first six months of this year operating income was 106 118 million on 644 million dollars in revenue

And what's the value? I heard the valuation is going to be $8 billion. That would be crazy. The market cap. Yeah, that's what I heard. It's like 80 times earnings. Well, what was that $118 million for this year or six months? Yeah, but they have a ton of interest expense, it looks like.

Well, hopefully they raise some money and pay down that debt. well i i hate saying talking about this type of stuff when i haven't read the s1 maybe you know it could be a fun theme to do a bunch of s1s we could do instacart we could do birkenstock we could do turo and we could do arm that could be a fun month i don't want to do arm yeah that's actually way too hard it's it's like all right we had this yeah it's it's impossible to figure out we could do a theme of most egregious s1s or like most egregious tams yeah that could be that could be a fun one okay we have a comment here from tyler says a successful advertising scheme is hard to run it's interesting that instacart seems to have built one grocery

cell space charges being a good analogy to carts advertising meaning instacart i think that makes Makes sense. Yeah. Charging for shelf space. I think another example, which when we looked at Uber, we thought was probably the most bullish opportunity for them is promotions for the Uber Eats offering, which could also lead into their grocery stuff as well. Yeah. It seems like a very rational opportunity, very similar to Amazon. You just copy that sort of model. Makes a lot of sense, but the big concern in that industry, maybe as we wrap things up for me, is that DoorDash is crazy. that that's honestly my biggest concern could be

have you ever listened to them they're crazy they think they're going to disrupt Amazon no I really admittedly have not paid that much attention to them but the what was I going to say if you think about it from a brand's perspective like I don't know Pepsi or something like that

if you can target someone at the point of the transaction when they're ordering stuff it seems like a very like very valuable digital real estate you know as a place to kind of market to especially if you can get insights on like if they've added two bags of chips or a bag of chips to their cart promote pepsi that kind of thing it feels like just kind of a a great place to be but yeah i'm not surprised it does well yeah and this is not this would probably be different than the food delivery business where

i would say it's like i i would worry that the business model is not that sustainable because eventually the prices they're gonna have to pay these delivery workers and the prices that restaurants are gonna want to you know the margins don't make sense across the board sometimes with that business but with grocery delivery it seems like it could make a lot of sense we have uh Andrew Marshall in the house, thank you for joining again. We just had a nice call with them over at Capital Mindset. Speaking of grocery, we talked about Sprouts Farmer's Market, which will be up on their YouTube channel at some point in the near future.

So we'll point anyone to that. So again, yeah, I don't know. We got some other comments in here. Anything else on Instacart? Did you see this headline that Disney CEO Bob Iger wouldn't give up his office to Bob Chapek because he loved the shower so much? Yeah. There's a few people out there that I used to admire a lot. And I've learned a lot about them in the last five years in the business world. I won't mention the others, I guess, because I don't

want to just disparage a bunch of people. But Iger, he's a bit unique. And I wonder about his ego. I saw someone do like an edit where his book is called Ride of a Lifetime. And they were like round trip of a lifetime yeah uh that was that was romney right yeah i think so nice nice friend on twitter good follow i believe he's still living in india so very great insights on that market uh oh sorry go ahead here is a tweet i put out or a post i guess you're supposed to call them now still going to call them tweets all right this is a double i believe it's called a pair trade but honestly i don't really know the pure definition i think you'll understand so here it is first one long amazon short shopify plus long charter short disney what do you think does

this outperform don't know charter well enough i'm i'm a fan of the first one the thing that i don't know like disney sucks it's cheap though it's pretty cheap right now yeah but it feels like that's kind of priced in and the sentiment is i'm also always wrong on this whenever there's a business where i think long term the future is going to be all right and then all of a sudden the sentiment swings on it i'm always with the crowd i'm always like yep this is it's a shit now, like meta. I was like, yeah, this is uninvestable at the bottom. And so maybe I'm my own contra signal where I just kind of should check myself in these times of certainty where I think Disney's screwed. And maybe it's a good long-term investment from here.

Yeah. Meta's a good one to learn from, I think, from there. I think it's an example of your sentiment is my opportunity maybe to steal the bezos quote that can be you know for anyone that has high conviction in disney right now the sentiment is really poor and i think if you're right like i look i'm pretty bearish on espn i really i really am but there's a lot of other people that are and if you're right i mean forward returns could be really really strong if they start generating consistent cash flow again yeah the thing is it's going to from my view it's not like the sentiment is just so far off base because of previous financial results it's going to take i would imagine a real shift in strategy and like a change in execution for this thing to work out

so you kind of have to ask yourself is bob eiger the right guy to do it yeah and that's where i kind of lack belief is it it felt like he was the right guy over the last decade but really he left this kind of bag of crap for the successor and then he kind of comes in trying to act all like a hero it just doesn't seem i don't know yeah you can see how you can see where the cracks were when he left but you didn't see him while he was there yeah 100 and look this this new deal they did with charter really shows that they're losing their leverage i think and it's going to be a tough needle to thread but we talked about disney i think for like four straight shows even the one that I wasn't on, even though I did listen to that talk with Jason. So maybe we should go to

another topic. Here's a question from Tyler says, or one more thing, Ryan, you have another thing to add before we switch? I had a different topic, but let's hit the questions. Okay. He said, I'm excited for your guys' Adyen coverage. Yeah, we're going to be covering that in three weeks. Going to be perfect timing since the stock has kind of collapsed here recently. Have you guys looked into PayPal? Are you going to cover it briefly in the Adyen podcast? I'm sure we're to talk about that during the competitive section but we did recently do a not so deep dive on paypal let me try to figure out what month it is so people can figure it out in their podcast player or on youtube but i believe it was back in june during our payments month um yeah ryan

any thoughts on paypal uh yep june 6th all right so everyone just kind of search it through there you'll find it on june 6th well i'm i'm a little bit skeptical i think the threat from the mobile payments providers so the the apple pays the google pays that kind of stuff is a little some people have dismissed them but i think it's real and i think as more people i mean it's certainly been they've been stealing share in terms of transactions that's kind of no secret but I think the more people use them at point of sale systems, the more comfortable they're going to feel using them at checkout digitally. So I think they will steal a lot of share from PayPal branded checkout. That's kind of my concern. Yeah. I mean, Google pay is so nice,

dude. It's so nice. I mean, because especially if you use Chrome for all your browsers, it just automatically updates your card once you put it in for everywhere. And then all you have to do is use your fingerprint or whatever ID you want to use and boom, you can pay for something. Well, you're going to have to be an Apple Pay guy now. No, I actually, you know, what's interesting is if we want to talk about anecdotes on iPhones, I did switch and I do have some anecdotes on that. I would say there's some things that are better, some things that are worse across both as people might expect. Google Pay, I would say, is significantly better than Apple Pay. Apple Pay was a little clunkier. Google Pay was nicer,

I actually redownloaded Google Pay and I use that instead because specifically when I'm on my other devices, you're on Google Chrome, it updates automatically. But you're an iPhone user now. Yes, that's correct. You want to give some anecdotes? What do you think? A couple of weeks in, you've been on the other side of the war for a while. I know it could give some good perspective.

Let's see. one thing that i thought was interesting is they make whatsapp way worse on iphones than they do on android so i think meta probably has some gripes on that um and definitely that's because apple does it on purpose other one the blue messages thing is what like i don't know i don't i don't understand the hype but maybe it's because i'm not really i just use messaging for you know not much i don't know i just use it for information i'm not much of a messenger you message for functionality yeah yeah exactly other people seem to be quite happy about it but i don't really get it but whatever they seem to be happy so you know good for them uh let's see

what other things are better i mean i would say i don't like the face id thing versus the thumbprint i like thumbprint much better i think it's much easier and the face id kind of like turns on after a while i've been a hater about that for a while the android the new androids basically have like the thumbprint it's not like a thing on the back it's like on the on the screen you just push it right in the middle way better i think it's much easier to see what's better on android when coming over versus worse right because it's much easier to realize oh this is way worse i'm gonna have to deal with this forever now but i don't know what's better what was the switching process like i guess the photos are obviously better right with that stuff

they're really much better at that the switching process well i did lose my phone so it's way worse but i know that when you have the other phone it it is easy they can do that the store for you but for me i did lose everything so yeah but the photo the photos are much better which i think is kind of the key thing apple focuses on right the camera the the cameras are pretty much the same but people think that the android ones are worse because they make the images qualities worse when you send them over to an apple product but the actual photos app and all that sort of stuff with sharing and stuff like that is much much better than an android i think that's probably where apple succeeds and that's one of their differentiators which seems like a simple thing

but i guess people care about that a lot right it's probably the most important thing for people's phones. A little quick topic switch here. A couple of weeks ago, we went and we did the biggest signs of the bubble, like biggest top signals. And it was kind of like really the stupidest things that happened during the bubble. If something were to happen again, like a 2021 situation where pretty much, I don't know if it was really tech specific, but it kind of felt like an everything bubble what are the signals that you would look for to really feel like okay this is irrational exuberance we need to peel back and make actual changes oh four are you talking about like a general bubble or any other any other bubble

any bubble because i mean you could argue that the ai stuff is it's a tiny bit of a bubble because I mean, a real, something that's going to impact the indexes, like where equities really feel like they're in a bubble. Is there anything where, are there any signals that would really tell you that? Well, I think one signal that's here today is there's usually a story stock within a bubble or two that are, and this is with the broader bubbles and with the micro bubbles as well, where there's always one story stuck that people say you got to buy to get in on this theme. Obviously, that one today is NVIDIA.

If you look back at the tech bubble in the 90s, it would have been Cisco and Microsoft and Oracle and who's the fourth? Qualcomm, maybe? Qualcomm, yep, yep. And then if you look at some of the mini bubbles like cannabis, Tilray, the 3D printing bubble,

there was, oh, what was that one? that one is the last part of it is like systems there was a there was one there was a story stock on the 3d printing bubble and if we look at some of the other ones right uh what are the other mini bubbles from recent years ah whatever but yeah i think a story stock is one of the key points there that kind of gets me nervous today with nvidia but it doesn't seem like that has proliferated to the entire market um yeah that's harder to quantify though i mean like i don't know i think it's i think it's pretty easy to see when there's a story stock yeah but just like a single story story stock does not mean it's it's widespread you know what i mean

oh yeah yeah right right right it doesn't mean it's widespread yeah that's just one factor i would look for. Yeah. One of the ones that came to mind for me and probably inspired the question was the sheer number of IPOs in 2021. And I'm sure the sheer number of IPOs in 1999 was very similar where having that jump that quickly should be a big indicator that capital is too easy to come by for some of these companies. So, I mean, in 2021, it was, I think there was like a thousand companies that went public.

And the year before it was like a hundred. Yeah, I'm trying to get a chart. Okay, well, this is a table. Hopefully, do they have a chart in here? Yeah, it's just a large paper, but let me read it off this table here. If we look at number of IPOs, let's go. Yeah, number here.

So let's go to 1991, 286, 1996, 667, and actually that was the peak. Then 1997, 474, 1998, 283, 1999, 476, 2003, 80, 2001, 80. Now, if you look at, well, this is going to be distorted because SPACs. That one might have been harder to tell. Well, I think there was other science that were pretty clear with, wasn't the NASDAQ trading at 100 times earnings. If we look at it here, it kind of doesn't show the 2021 bubble as clearly because it has 2020, 165, 2021, 311, but wasn't there a thousand SPACs that went public? So those aren't included here. Okay. Let's rephrase the question then. Let's say you think we are tilting really far towards greed and we're getting tons and tons of IPOs. Valuations feel stretched on the NASDAQ, maybe even the S&P. People are quoting stock as currency. So they're like, well, they can just keep issuing stock and then raise money. what would you change relative to what you did last time portfolio wise well definitely if i think the way we we've thought about it looking forward as kind of a post-mortem

of any sort of mistakes is one if something gets extreme from a valuation perspective which from our case it would be like okay we bought it at a price we think is pretty reasonable like we think it can get 15% returns going forward, blah, blah, blah. But then it goes up 200% in a year or 150%. We would definitely trim a lot of that. I think that's part of our strategy is, okay, look, regardless of the tax hit, regardless of whatever, if the thing gets extreme, we're going to trim. And then second is just focusing on valuation very intensely during that time period or like trying to buy stuff that is more optically cheap, more maybe value oriented during that time period, because I think that's kind of how you save yourself.

We wouldn't, shorting is dangerous during that time period. Just sitting on the cash on the sidelines also seems dangerous, but maybe not today as you can get 5% on your cash. But at the time, I mean, you kind of just, you kind of just say, well, shit's expensive. so i'm gonna go i should probably stop sorry you can't just say stuff's expensive so i'm gonna go into fixed income at the time because you're getting literally i think one percent yeah or less or yeah one percent yeah i think i think that's the key is is making sure your portfolio you don't have to sell out of an entire position but if something is extreme you should probably

trim it down maybe maybe like i think that's it and we're not talking about okay the stock goes up 50 sell the whole thing that's clearly a mistake especially if you're buying a long-term compounder but if something is is extreme on a valuation front i think like you can't just be like oh i'm just gonna pretend like nothing happens i'm just you know i'm just gonna throw a blind eye my philosophy is never sell like you have to look for reality in the face there um what's a good example the other thing i don't think we appreciated enough was like how correlated the trading would be between a lot of our positions. And I don't know if that's true.

Like we just had a ton of tech exposure and yeah, they're all different businesses, but they all traded really similarly, which I don't know. Maybe you could just say, well, if you have a long-term horizon, who cares? But it feels, I don't know, like maybe having different industries and exposure to different, because the purchasing habits are going to be different in those industries. So you might get a little, I don't know,

you might be able to capitalize and sell some of your Philip Morris when your match group plummets through the floor and you can sell some and purchase the other one. Whereas everything we had, or a lot of what we had was coming down at the same time as everything else. So it was harder to kind of evaluate that opportunity cost.

Yeah. And it takes years to build up the muscle here. And we're still have a goal of kind of building up this muscle and it doesn't have to be exactly how we're doing it. But I think you can get in trouble if you only target a certain factor portion or a sector of the market where a lot of people that are listening to this individuals will target technology, consumer technology, and large gaps, right? Even if you're not doing it on purpose. Yeah. And we did that as well. It's a mistake a lot of early investors make. We have made that mistake. And I think trying to build up a muscle of the one we're kind of trying to target at

is micro cap, small cap, deep value. And we're trying to learn how to be better at that. We've made, I think, you know, one good investment there, one bad one, or maybe two good and one bad one. We'll see TBD, right? I think building up those different types of muscles can be very helpful because a lot of the times when say large cap or the easiest examples, the most recent in 2021 when these stocks just went crazy. A lot of them are up 100%. The buying opportunities are very terrible. There's nothing really to buy in that industry. You're probably going to want to trim down those positions if you own them. But deep value micro cap and deep value small cap looked pretty attractive if you could find the right opportunities there. So I think having those

two, being very flexible, being able to go after different types of the market or different parts in the market can be helpful to maybe, you know, if you sell something, okay, I can't just have it sit in cash here, but I can actually go deploy it into something that looks, you know, attractive from a valuation, from a risk reward perspective at the time. Yeah, I think that makes sense. All right. Easier said than done though, where it's taking us multiple years to, it's hard to learn to get better at that.

It's not something that you can say, oh, I'm going to buy small caps now. Deep value. You gotta, you really gotta learn. all right we do have a couple comments from tyler in the chat what do you guys see as the future of the media landscape a complete unbundled streamer world or bundles of streamers will the internet slash cable companies own the bundle slash customer relationships thanks no clue beats me no idea that's why i'm not touching the industry i like video games a bit more but the traditional media space is is tough well i think you could say we like video games more

the media you know video games might be a little still don't like them that much but yeah and it i think the longer that we've owned video game businesses the less we've grown to like or in my case the less i've grown to like them um and i think a lot of that is just dealing with the creative talent is difficult like you really have to spend a lot of money to have them you got to keep them really happy and there's just a lot of problems that come with that but on the linear media side i don't know it feels unsolvable for me yeah i don't know what's going to happen and yeah i we've talked about this a lot i don't really want to talk about it again because i don't i don't know and i think that's why you probably need a big discount when looking at

some of these companies okay do we want to do mount rushmore of dumbest acquisitions sure sure i didn't write anything down but neither did i you go first okay uh i wish i had more time to prep i'll take i'll take square with after pay i thought it was really ridiculous all right that's a good first one i am going to go and people might i guess we are talking about disney again disney acquiring fox yeah that's a good one 70 bill rent 70 you Okay. There was a comment about this in the chat. Bob Iger made good acquisitions. Intel Fox. If you make three good acquisitions at $20 billion a piece, and then you blow it on a $70 billion acquisition, I mean, you got it. But the acquisitions, I think he kind of ruined his reputation with that Fox acquisition. And he ruined his track record.

yep all right what's your next one man i'm trying to think of some of the ones from last year where just the tires don't make any sense what about ftx any anything from ftx right or maybe we should say that that was just crazy did ftx buy a bunch of stuff oh yeah oh yeah oh i didn't even know that they took like a stake in robin hood or maybe that was sps personal thing i think they bought voyager someone they got tricked into buying this company called voyager that was completely bankrupt and a huge liability from a credit perspective but that could be the wrong name there yeah i mean they were just on drugs and honestly whatever they do a document that i'm really hoping that book is is good yeah but i mean everyone all these everything in like on google is

all about like the dot com stuff which i bet the time warner aol one was horrible but just really wasn't around to know how dumb that was you know what's the one AT&T just did with Time Warner yeah it was Time Warner it wasn't Time Warner AOL it was AT&T Time Warner I mean that one's pretty bad you want to take that for a second I think yeah I think the the ones where you try to get into a new industry by just making a splashy acquisition just I would be surprised if there's any examples of those that went really well. Yep. I would agree. Now, Tyler is taking my second one here and it is going to be title from block. I would qualify that as not the largest incineration of capital after pay. It's going to be much larger, but title is dumber than after pay.

It's dumber than after pay, but obviously it's not going to have as big of an impact on shareholders all right what's your third i'm hoping i got one as my third that i hope you don't take let's see were there any horrible ones oh locker room spotify yeah yeah yeah that's dumb talk about just chasing the trend and i think we were too blind to see this for a while at least just 50 million yeah at least yeah it was small but it was dumb it was yeah clearly dumb they it feels like they always just kind of tried to skate wherever things were popular live audio i'm it's so funny to me that that's just been such a flop people were saying it's like like it's gonna replace social media yeah that that was hilarious remember when we tried to we were

like okay let's download the app see what this is all about and it was just empty it's totally empty it was me you it was like we were doing like a phone call it was a little crappy quality and then some random person hopped in it was like what's going on in here i was like okay this is weird yeah that was a bad one all right all right here's my third and you're gonna you're gonna groan when i take this one altria and jewel uh yeah that's a good one that that was uh they tricked them they really tricked them they knew they had these liabilities coming because they were targeting ads to teenagers with nicotine products and they dumped a bag on them for 13 billion dollars what's the other one that they bought uh chronos yeah can we you want to double

dip on that one yeah that one was stupid too okay i'm curious if if enjoy will end up that way too my reaction is yes yeah vaping such a hard market uh okay my last one unless did you take that or for chronos or no yeah i feel like i'm forgetting about some like i feel like meta's probably had some bad ones throughout history not take oculus yeah i mean that's probably been one of the biggest like after the acquisition it's probably been one of the most wasteful acquisitions

yeah hot take Oculus I honestly I could get behind that my last one's gonna be the eBay and Microsoft or actually well I would say Microsoft Nokia it was let me see what that was

when did Microsoft acquire this is great audio nokia all right google 2014 five years at least five years after the iphone became popular they bought nokia i mean are you kidding microsoft did yeah it was for seven billion dollars and then came the biggest uh well i don't know if this at the same time but the biggest hilarious soundbite from steve ballmer of no one's gonna ever buy the iphone no one's ever gonna pay for that real business is done on the blackberry yeah that's true did you watch that blackberry movie i watched it on a plane the other day

no i didn't pretty good for if you if for investors investors would like it then the guy that plays dennis and always sunny is the one of the main characters so yeah we've got some uh some comments in the chat whole foods no that was fine that's fine i don't think it was that bad yeah oh i guess this wasn't like a corporate tie-up but twitter yeah that's gotta be one of the most wasteful elon buying it yeah hey who knows the turnaround story's coming yeah no i think it's clearly clearly at this moment it's clearly bad i mean revenue was down 60%. What's interesting is that a lot of it was his own fault, I think, but TBD. I think the story's not over with that, but yeah. The interesting part is it just feels

unmonetizable. I think the subscription business ended up being okay, but I would be surprised if that's really helped that much financially. And he's made a ton of changes, which is what Twitter was unwilling to do prior to him coming in. And it feels like the changes really haven't made that big of a difference. It's a little bit of like, it's kind of ruining the experience a bit, but whatever. I'll stick with it because everyone's on here. You made a threads account. Has anything happened over there?

It's pretty empty, but it's because we're starting from scratch. And I literally just made it yesterday. so the stand light is so it goes crazy the uh well the listeners can't see you yeah the it just changes like i don't know what's up with it but it's it's fairly empty and we made it yesterday i just made it for the chit chat money account which again if anyone's actually on there go download follow us check it out but seems fine like it it's pretty bare bones at the moment but what's interesting is that the products actually work because a lot of the twitter stuff is so buggy now uh it's very frustrating so i would i'd rather have a threads succeed compared to twitter

but i think we're going to hedge our bets with both yeah okay all right well i think that concludes most of the mount rushmore what out of the companies we've owned what's the biggest like i wish you didn't buy that for the years well maybe with hyperconnect oh acquisitions yeah yeah

it's hard though it's just tough typing on that it didn't seem that crazy at the time but clearly they were getting caught up in the pandemic bullwhip trying to think through all the companies I mean Autodesk

You know who went on a bunch of buying sprees when we owned them was Wix. They bought a ton of companies. Right. A lot of small ones that were like, man. Could work, I guess. Yeah. I'm sure you're paying 30 times sales for this and it's not profitable. But you know what?

There's synergies for the e-commerce and payments platform, right? Yeah. Have you seen all this? i find this kind of funny because on the wall street journal there's been a lot of coverage about spotify's wasted money on on podcasts and there was actually a podcast that came out from the journal podcast which is co-produced with gimlet who is owned by spotify about how much money spotify has wasted yeah which i find kind of interesting but i did not realize i don't know i guess just how careless they were being with some of these efforts

like telling the teams do whatever you can to get listens don't worry about cost yeah it just what's interesting is that they they're a little bit behind the timeline because they've switched that strategy say six months ago but obviously there's still going to be a few years of you know like it's not gonna they can't just eliminate those costs overnight yeah i do stand by the fact though that this spotify has an operating expense problem not a cost of revenue problem yeah what sucks is that the like the bear the bears have been right on spotify but for the wrong reasons like i always say i'm like no that's not why the stock is It just frustrates me in that regard, but you know, whatever, make money, make money.

There has been, I think that's been probably one of my biggest hiccups over the years in my own stock ownership, where with stocks I own, I'll often see bears with takes that don't make any sense or takes that I disagree with. And I'll think that's wrong. And as if that's justification for continuing to own something that isn't worth owning, because the opposite side is wrong. So I must be right. It was like Spotify had all these bad bear takes.

In my opinion, there are people saying like, they got to own all the content on there, that kind of stuff. They have to be Netflix. I disagreed with all that. But at the end of the day, the problem was they just hired too many people and they spent too much

money when they didn't need to. Yup. Yup. All right. Yeah. That's all. I totally agree. No,

no further, no further comments. anything else do you see I got a question here do you guys have any thoughts about Amazon trying to dominate the entire end to end logistics of third party commerce Tyler was reading my mind because I was

that was exactly what oh he said I had a great tweet about it I did think that was funny did you see that yeah yeah I saw that yeah sorry I was nodding my head and drinking so I didn't want the microphone to pick all that up here's what the blog post. Let me just scroll through my tweets and find it. Hopefully you can't hear me scrolling.

All right. So new product from them says, here's the headline, introducing supply chain by Amazon, an automated solution to help sellers quickly and reliably ship products around the world. Okay. So I think there's a lot of paragraphs in this blog post and it's not going to be good audio if I just read it, but basically they're saying, okay, we're not going to be your manufacturer in asia and mexico and the united states wherever but we can connect you with that and we can basically okay say you like you you make a contract with this manufacturer in vietnam we can manage all that for you take your inventory manage it as we get it across the ocean some of that's going to be on our own stuff some of that's going to be on you know like a merc or

what's that what are their ships called whatever the giant shippers whoever those companies are And we're going to do it for you. And then as we get to the United States, we're going to hop it on our own network. And we're going to basically do end-to-end vertically integration here. And we can manage all of that for you. And they're saying, let's see, what's the stat they had about it being 25% cheaper? Yeah. Okay.

So if we look at their Amazon Global Logistics offering, which again, there's a lot of different offerings here, but essentially they're kind of extending further back into the supply chain. So they're going more vertically integrated here. They said their new pricing now reflects a discount of up to 25% on all cross-border transportation that is bound for Amazon warehousing, further reducing costs for selling partners using supply chain by Amazon. They also had another stat here that FBA, which is fulfillment by Amazon, they're more closer to, once it gets to the warehouses in the United States, has become a very valuable service for our selling partners, offering a fast and reliable fulfillment service. That is, and this is the important part, on average, 70% less expensive than other fulfillment services. So I think what's interesting is they're making it so cheap that this can be a real growing advantage for them where people can, you know, those costs on the back end are going to be cheaper.

So now they can sell on Amazon at a cheaper price, still make a profit. I think that makes it a bit similar to Costco. It's a beautiful moat. Yeah. And for anyone that doesn't reference it, the tweet was, give me a shareholder base with a long enough time horizon I can vertically integrate the world. I think that kind of sums up what they're trying to do here. What's interesting, I thought they didn't really have much vertical integration left, but they're still really going after it. It's ambitious.

They continuously find new ways to kind of expand their infrastructure mode, which I would have been. i mean they are gonna i can i can picture a world where they're shipping everything and that would be nice would you be surprised if they bought a what do they call those the giant ships i forget the names on it you know the the freight my liners the giant ones would you would you be surprised if they bought one of those i'm gonna say yeah just because i would prefer they did it on their own they've never really done that before right in terms of when they build out their fulfillment network it's never been through acquisition it's always primarily been through we're going to build it ourselves oh yeah no so no i would say a specific literally a little not

not a company but you know getting a ship i think that would be a bit i would get a bit nervous about that but i wouldn't be surprised right because a lot of the stuff's coming from different areas of the world and you can say look you hop on our ship you're part of the network do they have their own ports no i think that's not going to happen that would be quite quite hard maybe even their own sub segment of a port i i don't know given how much they process in terms of volume it wouldn't surprise me if they had their own there'll be a world with with their own ships their own ports the own amazon mailbox i mean there is there is like amazon mailboxes at these uh apartment complexes big apartment complexes now yeah it's pretty nice and other shippers use

it but amazon powers it like other shippers can use it but they're the ones that power the thing yeah i was in a place that had that before i mean you know people might be like oh they're not gonna buy a giant ship but they have a fleet of like 100 planes now and i don't think it's that crazy to get into that market although it's a bit more expensive yeah and it's interesting I'd say. I'd say it's quite interesting. And it would be so hard to switch off of them now as a supplier. And here's actually... Oh, wait. One other thing from this note that I think was important is that they're now allowing you to get managed by Amazon, even if those products are not meant to be sold specifically on Amazon. So you can have your inventory, all your supply

chain managed by amazon but you can have it managed for stuff that's getting sold on your shopify store stuff that's going to get sold at your in-person store and stuff that's going to get sold at your wholesale retailers and that's going to get sold on amazon.com so they're expanding from not you know traditionally the stuff was really only available for amazon.com yeah i love that it's i mean we talked about it i want to say a year ago where it's like they every time they sacrifice a little bit of margins, that moat just gets wider and wider and it becomes so hard to compete with them. I would say their moat in shipping and fulfillment is one of the... Maybe we should do a Mount Rushmore of moats because I think that might

be up there for me. We've done that before. I think when we used to have Ian and Brad join the show which for any long-time listeners we are having brad freeman back on for an interview on sofi coming out next week which will be very fun the yeah i think we did that before or maybe it was like just vague and we said best businesses but we could come back and try to reanalyze best moats and yeah i think a little teaser my number one would be visa but i'm a fan of that company yeah because it's definitely up there they're all going to be good if you do anything that's digital a digital based moat i'm reluctant to have that be the number one because i think with amazon it's way harder there could maybe be some way digitally to circumvent visa or google's moats

or maybe regulatory problems but with the physical go ahead it's like i don't know if anyone has the money to replicate the physical infrastructure that amazon has built yeah no and clearly it's strong but i would maybe this is a tease on what the debate would be but visa has gotten attacked by numerous governments around the world to try to defeat them and they can't so if there was a global coalition it's possible yeah if every country in the world decided that yeah i actually don't think i honestly would say i honestly don't i don't know if uh i don't know they would win because how do you even like what are you going to do get all the cards out of circulation what are you going to do you get all this new thing on 200 million merchants like

whatever yeah okay i hope please yeah let's spread we need a new like crypto obviously isn't going to tank these anymore we need a new narrative that tanks the stock uh like buy now pay later so i can finally pitch it and we can buy some some shares andrew says a moat that requires that much capex is such a better moat than a lot of software in my opinion i think that's right with the network on visa i think you can make the argument but yeah those physical modes to me are such a huge advantage yeah i can get around that i can get around that i i definitely see that argument the other part is like let's say i gave you 300 billion dollars and you can build the infrastructure you want to try to compete with Amazon. It might take more money than that.

Even with that money, you have to have the expertise and the logistics prowess to really build a physical network that works. And I just think there's zero chance, if you gave me all the money in the world, that I can make that happen. Even if you gave it to the ex like an ex amazon executive to do to copy like and plus over the amazon's not gonna like you could copy what they are today but it would take you multiple years and then you're still behind them it's similar to taiwan semiconductor you could argue excluding geopolitical risk they're one of the tightest boats along with samsung in the foundry space

yeah i mean that's a good one we could do a full show really describing all these sort of things but yeah oh one thing i would say is did you see that the flexport all that flexport stuff with the amazon ce or x executive like leaving and the whole debate debate around that oh i saw that yeah they're they were firing people after saying that they were hiring them or something so okay the the founder left brought on an amazon exec that used to work in kind of a similar space where Flexport is trying to be a supply chain type of company. They really don't know their business model, but then apparently the founder did not like what this guy was

doing, so he came back and took over the company, blamed the Amazon guy for a lot of stuff that mistakes they made. What if this guy was just a mole to defeat Flexport from the start? Honestly,

that's my conspiracy. Was Flexport the one that did the deal with Shopify that got spun out? Yeah. was okay oh yeah logistics i would hate to be an upstart logistics company yeah all right well i think that's a great way to end it thank you for the people joining remember this goes live typically thursday mornings 9 30 a.m pacific time 12 30 eastern you'll watch the replays on youtube and catch the live chat where we have the questions you can also listen on your favorite

podcast player of choice, Spotify, Apple, Google, wherever those come out Sunday mornings. Thank you everyone for listening for the disclosure here. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. We're general partners at Arch Capital and clients may hold securities discussed in this podcast. Thank you everyone again, and we'll see you next time. You