Chit Chat Stocks - Investing Power Hour #82: Earnings, Earnings, And...More Earnings

Episode Date: October 29, 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/⁠⁠ ****************************** Chit Chat Money is presented by Interactive Brokers. Switch to the best brokerage in investing today: ⁠⁠ibkr.com/info⁠⁠ ****************************** 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 recommendation. Now, please enjoy this episode. This is the Investing Power Hour number 82. My name is Brett Schaefer. I'm joined as always by Ryan Henderson. We're five minutes early, 9.25 Pacific Coast time, right around 12.30 East Coast

time or 9.30 Pacific Coast time, like we always do. But we're going to go for an hour. We're going to talk about anything in the investing world. This is the easy time of the year. We've got a lot of earnings to cover, tons of topics. I'm sure we could go for even longer if we wanted. If you want to join and ask questions, we do, again, live every week at the time I just mentioned, 9.30 Pacific, give or take. Ryan, how are we doing? What are your feelings on earnings season so far i have lukewarm feelings actually maybe luke cold if that's the thing there's been some bad reports well you know honestly some of the reports i thought were pretty good but the market just kind of shrugged off a lot of them google's i don't think google's

was that bad like that's probably the one that comes to mind first uh what are some of the other Everyone's metals are solid. Microsoft was solid. I don't know. Amazon's going to report today. My thought is everyone wants a recession that isn't happening. It's kind of what it feels like yet. It's always,

it's on the horizon, Ryan next quarter. Don't worry. Next quarter. I know everyone's so worried. Like some of these, some of the prices that i'm seeing today on a lot of these stocks and i know this is like everyone's gonna say this about stocks in their portfolio it seemed like you're gonna get really

good returns over five years you just got to be willing to wait yeah like yeah maybe i'm just anchoring to like old prices but also you can just like i don't know if you forecast any reasonable level of earnings or if it's anywhere near what's for some of these companies if it's anywhere near what they've earned over the last five years it's gonna be a good investment but it just seems like everyone's worried that doomsday is here and the scary jay powell is gonna raise rates again yeah it's a recessional show up eventually but if look there's so many people i follow that have been saying this since 2021 oh next quarter it's going to turn over oh you know this can't last forever oh blah blah blah blah blah eventually it will but hey you've been wrong

and if you say that the recession's imminent every quarter you will be right eventually but i don't think it's really the best way to look at things and we got a question here from Tyler, thoughts on GDP growth and the general market's reaction to it. I don't know if the market reacts to the GDP growth numbers, but I don't particularly care about GDP growth. Yeah. Is that going to help Philip Morris sell more SIGs? That's what we're worried about. i mean it's it's it's a number and there's a lot of numbers that go into that number and there's a lot of estimates that go into that number i don't particularly care i here's what i care more about payment volumes at visa mastercard and lesser extent american express

Speaking of, let me do a little show for you here. Visa CEO comment from the conference call said, we're not economic forecasters. And so at a macro level, we are assuming no recession. We are also not factoring in any impacts from rising inflation and student loan repayments, because as I mentioned before, we have yet to see any meaningful impact. who's got a better purview on the consumer than the visa ceo i can't really think of many people so visa ceo said it we're good we're in the clear recession's over yeah no well i should be clear not when we say this it doesn't mean we're like oh the recession's never gonna hit it's not here yet it will be here eventually i don't particularly care though especially if you have a long time

also have a question or comment here from john says good morning good morning john says your guys's second largest position is an sgov uh curious if you laddered into this or if it was just one giant purchase that's just a cash equivalent that's just a short-term treasury etf it's it's an easy way very low fees to just get access to short-term treasuries without having to do any of the treasury direct stuff or whatever you got to do yeah it's not there's no there's no thesis there it's just you get five and a half percent on a cash equivalent it's also i think sometimes we post our holdings and it's just a timing thing so we i'll just go full disclosure we sold sprouts recently i think it was probably a month ago now we sold sprouts

farmer's market and we had that had grown into a bigger position and we just had a bunch of cash we hadn't picked anywhere to redeploy it so we're going to just earn a little interest in the meantime on our cash balance which we just think of sgov as a cash balance so it's not us saying like there's no real thesis behind picking sgov it's not like we think oh it's going to be a better return than all the other holdings we're just it's in the meantime we're picking where to redeploy it so it's more of a timing thing than anything else yeah we got a comment here from foohat says a lot of small business is going to go bust in the next couple quarters that really isn't accounted for i would disagree with that and say it's irrelevant if we're looking at a

broader economy thousands of small businesses go bankrupt i'm guessing every quarter so yeah that's probably one order over others yeah they always are going to go bankrupt covid was a little bit of a temporary pause just because they said all right no one's going to go bankrupt but yeah there's always a reason there's always a reason to be bearish oh yeah and yeah it generally most of the time it pays to be bullish yeah well over the long run yeah as long as you don't take that too far don't take a good idea too far all right another comment here we'll get into earnings i want to hit maybe a couple of these we can't just hit everything uh for the comments thank you for i guess the people that join it's kind of fun

But a comment from Tyler, I think this is also underappreciated, lots of operating leverage in big tech, Google, Microsoft revenue growth 12% to 13%, but EBIT growth, which is earnings before interest and taxes, essentially operating income, that growth is greater than 20%. I think it's a good point. We said here meta revenue growth 23%, EBIT growth of greater than 100%. Probably see some extreme example with Amazon today, unless things go very, very poorly. If that doesn't happen with Amazon, the stock's probably going to be down quite a bit. But yeah, I think that's a great point.

Look at the EBIT growth from these big tech companies that accounts for what? More than all of the small businesses that are going under. I'm just, you know, it can be sad for those to happen. But yeah, I mean, the big tech companies, we... seen some charts float around i think we showed uh in a previous episode of how they're valued at the same level as they were during the nifty 50 but i think if you look on a trailing basis they generally again tesla's in there kind of maybe you don't want to include that they're probably under earning ford estimates i would say should be much much higher

yeah i agree there's all but there's always potential operating leverage at these big tech companies like if they really chose to remove bloat okay microsoft google meta yeah they could all have 50 operating margins if they wanted but it's like there i do think it's a conscious decision to raise your margins slowly over time, to not just collect cash every single quarter and sit on it because you're just asking for regulatory interference and someone to point at you. If you're just earning tons and tons of cash and you're not reinvesting and not subsidizing some services to consumers, like you see with Google, antitrust comes a lot faster, it seems. So I don't know. I think you're always going to be able to say, well, they could be earning more

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today maybe more still right now but you could always for microsoft google alphabet or microsoft google meta not so much apple amazon you're going to be able to say margins are going to expand forever. Yeah. Give or take. I mean, not forever, but... But it's always a part of the thesis. Like right now for all those companies, it's a part of the

thesis that margins just gradually expand. Yeah. I mean, just look at unit economics, Amazon especially. I would say generally Amazon makes those numbers for the broader charts. oh it's it's a bit it's not a chart crime but it's it's bad data to have the trailing number for amazon just because they've just had a period of really heavy investment that's

flowing through the income statement over the last 12 months yeah alphabets interest well the thing is yeah all these companies reinvest into long-term projects a lot of which probably have low returns on invested capital, especially in the short run. Waymo, good example. But they do have low probabilities of becoming big businesses over time. And it's very tough to underwrite. I would say maybe a little bit of margin expansion should be accounted for for all these but it it's hard to tell either way like i think the earnings power especially on per share braces for all these companies should be able to grow at 10 percent whatever rate they choose to be honest i think for some of these businesses they can dictate their own earnings growth

wow microsoft did that with i mean it's earning say cash flow but okay we're raising the taxes prices we're raising the price of excel get with the program yeah and it works yeah the or i mean they can moderate expenses as they choose although google seems to be having a hard time with that which is a little frustrating but the Why don't we dig into earnings? Where do you want to start? Yeah, what do you want to do? You summarized them, so why don't you go first?

Well, apparently Alphabet is a zero, I guess. Everyone's selling it. It was down like 10% after earnings. I thought the quarter looked all right. Cloud basically didn't grow quite as quickly as everyone was expecting. And these businesses are lumpy. And I think someone came on the conference call and said this actually, too, that cloud is a lot lumpier than ads. The cloud computing business is a lot lumpier than ads.

They're going to have bad quarters, especially when companies are trying to cut costs. So even though Azure had a quarter that was in line with expectations, I think everyone just wants to read into it and say Google Cloud's going to zero or that Microsoft's winning. And for some reason, they all want to paint who's winning right now in cloud. They're all winning. So I don't really understand all the hate around GCP. Operating margins continue to trend in the right direction there. They are still growing 22% year on year. we saw aws have slowdowns and struggles with optimizations last year i don't know like it's

going to happen but it's still growing over time and then on youtube great results i thought and they're understated i don't know if you're about to hit that but yeah it's understated because of the transition to premium that's getting hit yeah yeah I meant both on the advertising side and the premium side. They talked about, it's all like vague because they just say like our, what do they call it? Other revenues grew quickly because of YouTube subscriptions, which I kind of hate that because it's like, is that YouTube premium?

Is that YouTube TV? Is that- Probably both. probably a combination there, but I wish they would just be a little more direct about that. YouTube, to me, is one of the best positioned platforms over the next five years, in my opinion, especially moving to CTV, like streaming, there's all these questions. For a lot of the players that create their own content, YouTube, you just don't have to worry. Like you just know that their content is their moat and it's not created by them.

It's created by everyone else. So they seem to be in a really good position. I don't know if I'm buying shares today. Stock's still, I'd say that's super cheap. I wish they would buy back a little more stock, but the nice thing about not caring, not having estimates going into a quarter which i get it's the people's jobs but for the people where it's not your job it shouldn't really matter to you i saw the 22 growth for google cloud and i was like okay that's fine i i don't know what i should have expected it's just the result is going to

be the result the search results maybe were better than i was expecting which is nice we're getting back to yeah i guess that was growing ad sales too pretty quickly yeah i think advertising for everyone except our podcast yeah exactly i mean we'll probably talk about spotify's too they're growing uh quickly uh ish ish uh but on a nominal basis obviously still very small i should we should do a comparison though i think it would be nice just to look at the growth of google search or maybe google services as a whole on a nominal basis like how much revenue they added in a quarter versus meta because i remember doing it last time and meta grew a share uh i think amazon grew a share too but it wasn't it wasn't by a lot it was

similar nominally yeah i don't even know if i'd include amazon because a lot of it's sponsored listings and yeah like i guess that can be the same as a lot of google stuff but are you going to compare the largest advertising business yeah but are you going to include like who's in that category are we going to include walmart slotting fees there i i don't yeah it's hard it's always hard to define the ad market all right it's always hard to define that stuff um let's see we got a ton of questions yeah well oh here's one related to google how much could they sell waymo for today i don't know if there's a buyer out there i don't know it only fits with them do we have their revenue numbers well i'll just look at other bets yeah there's

there's other stuff there too right actually i think they have i think they give it away right now since they're in trial period they don't sell or it's at a really steep discount yeah i don't know which doesn't matter it's not gonna i mean they're still gonna burn a lot of money from that division it's uh i would love for that to just be fully operational and i think in time you know that'll be something that probably succeeds as far as the other bets go i i think that's the only thing in my mind that i like i can't think of what else is under there there's that the what's it called wing which is the drone delivery service they just partnered with walmart you see this yeah let's get rid of that thing it does not fit into the business no maybe if it's

with i think waymo fits in because of the ai stuff google maps it ties in google cloud but the drone delivery doesn't seem like it fits it's kind of like amazon doing self-driving doesn't make much sense to me but it makes sense for them maybe to do drone delivery you can't do everything guys it's uh or maybe you can but it's just i'm just picturing like how do you how do you come to that partnership like what what's that process like is it just some guy at that division that's like their sales rep and he's just like giving he's just taking taking some walmart exec out to dinner and like all right hear me out we deliver your packages via drone we can only do it we'll do it with like one city no one will buy it but we gotta

to say it on our conference call it's like so the people know what's going on in our other bets that's no no no i mean yeah they're saying that's not that's not how they're that's not how google operates culturally no probably not but the uh i don't know this they're not they're not feels like a pointless partnership to be honest yes yes uh yeah i was we got a comment here i was confused on the Waymo stuff. I always get confused on that. He said, I took a Waymo. A guy named Michael says, took a Waymo. It was $12 versus Uber $25.

Showed up in three minutes. Okay, whatever. 12 a.m. in San Francisco. Yeah, so they're essentially giving it away at a big discount right now. Probably makes sense. Again, the revenue number is not going to matter to Alphabet for a long, long time. So,

I don't even mind if they just gave them away for free. But right now, it's more of a novelty. With Cruise out of the picture in San Francisco, you see this cruise got their revoked it's interesting that they may have been like they they hid some data potentially we'll see what the full story comes out on that over time we got another one on tractor supply had earnings this morning i will say we're doing a interview on tractor supply with a value stock geek who people may or may not know so i think we'll maybe save that for then tyler says love the merger our pod uh i will say that's the episode you'll see before

this on your podcast feed so go check that one out uh better question what's the negative net present value of reality labs how much would the market cap increase if zuck woke up one day and just canceled it we've talked about that one before but maybe that can transition you probably had meta on here why don't you what do you think is the market cap contribution to of reality labs to meta my guess is minus 200 billion yeah gee i give or take i think that's what we came up with before and it's getting worse right because the revenue is not going anywhere and it's am i am i correct on that i think i saw that but i didn't really look at the quarter that super lumpy because it's like hardware based and product release based but it's like a great

business do you know anyone that still uses like oculus uh or meta quest like goggles i don't know anyone yeah who uh maybe there's certain applications at like the enterprise level for like engineers or something like that i i see them keep they can they really advertise that i see them constantly like here's how the meta quest is being used in organizations oh yeah i got some why do i care yeah they got a commercial that probably cut yeah commercial that probably cost five million dollars where everyone's looking like they're all nodding their head and everyone's happy there's really really upbeat music playing yeah uh let's go through the numbers here reality labs revenue 210 million reality labs operating loss this quarter 3.7 billion

so run rate what are we at 12 plus 2.8 14.8 basically 15 billion dollars on uh run rate operating loss there so and it could grow 200 billion might be yeah i could i guess 200 billion might be a bit aggressive maybe because that's a lot of years i don't know i do think a lot of years if they announce tomorrow we're done with reality labs we're moving over our resources to family of apps like our engineering resources and all that capital allocation those investments you don't think they'd add 200 billion dollars to that market cap i think it's very possible what are they at today maybe maybe they are at

730 billion so you would need a 25 percent increase jump in stock i think it's doable yeah more but 33 yeah the yeah i don't know hard to say reality labs is uh certainly a negative contribution to the investment today or the results look good yeah probably the big tech so far until amazon reports today right this is gonna jinx it the past particular big tech report until amazon reports after the close yeah how do you think this goes my guess and i'm stealing some these takes great results cloud doing well profitability's back jesse hops on the call and says something super pessimistic boom we're up yeah it'd be nice if they did that yeah it'd be nice if they were pessimistic and bought back stock but if they're not going to

buy back stock i don't care just be optimistic if if you don't want to keep the stock cheap for All right. Some other earnings that I thought were interesting. First of all, I read Google's conference call and our alphabets. Ruth, man, Ruth's killing me. Some of these answers are the most word salad, mean nothing answers I've ever seen. Well, she's gone soon. Yeah.

You literally, it could have been a yes or no answer. they were just like, do you still plan on increasing revenue more than operating expenses next year? And she gave, let me find that because I want to read this. And it was, you could just say, yeah, we do. Or you'd be like, no, we've changed our guidance. But instead she said, let me pull this up. I know this makes for really good. Yeah. He said, you talked about how expenses could grow slower than revenue in 2024. Is that sort of still the high level way to think about it? Ruth's answer? Sure. Thanks for that, Brian. So overall, that's sort of a truism, as you know well, looking to grow revenues at a

faster rate than expenses as we're focused on delivering sustainable financial value. And so that really takes us to the work streams, which I tried to tick through. Again, those remain the driver. They're the real priority. Those are the efforts that are going to enable less to expense growth and it's moderated as possible while supporting the environment. I don't understand. What does that mean? Yeah. Just say we're going to be like not get crazy on hiring too many people again.

But my concern is that was her way of saying like, well, we were planning on that, but AI, those engineers cost a lot. So we're going to have to actually change that. Yeah. Wow. yeah not gonna matter you gotta speak you gotta speak cfo in order to understand it though yeah it is a annoyingly nothing conference call they just throw a lot of tidbits on data that's irrelevant and maybe it's fine because the moat's so strong but hey mexican airports

you hear about this you see this follow it track it uh i just a little bit i didn't check the details okay so like a month ago mexican government released some statement or whatever the aviation sector of the mexican government released a statement that they are basically uh re-evaluating the tariffs or the contracts that they have at private airports and they reached an agreement i want to say a week ago now all the private airport operators with the government that taxes are going to be going up from 5% of gross revenue to 9% of gross revenue. The start date isn't determined yet.

What do you think? How does this – if you were thinking about investing in any of the Mexican airports, how does this change anything? well i would say if this changes anything you didn't understand the risks going into these this is one of the risks and it can happen the government in mexico uh say most people well should i call them incompetent or maybe they're just a little wacky or unpredictable maybe unpredictable is the best way to put it the mexican government kind of hard to predict what they're going to do so and when you're beholden to them this is how

how you do that you know what can happen from time to time is it an overreaction maybe the one thing i do like about these stocks which can mitigate some of this risk especially if you buy at the right price i think this is another example when we're looking at companies outside the u.s we want a pretty big discount like really cheap multiple uh but other point is they pay a pretty hefty dividend you get some of that cash back you know you know if things go sour right yeah the yield's not as great as i would have thought but yeah right about six percent for uh omab right now that's the ticker yeah pacifico airports i think it's like three and a half the let me try to find toll returns for these things but you go ahead yeah you know it seems like you've got a company

that is earning 70% EBITDA margins and they're at the whim of the Mexican government. It just felt like a recipe for the government to step in and take something, you know, because they knew they could. Maybe, yeah.

I don't know. Okay, there we go. It's a point that kind of provides a little bit of a back a little bit of confirmation for my point earlier when you over earn ridiculously everyone comes for you and comes for those earnings especially when you're basically not a government-run business but we're enabled by the government yeah that's why you gotta yeah and uh that's why big tech pays for ridiculous bets maybe maybe i i don't know if that's why they do it but i think what can maybe counter that are the ones that are the exception to the rule

are platforms that or networks that require no people to run or there's no labor associated do you even think about this as well visa card yeah moody's uh yeah evolution master card it's not like it's not like people don't want to disrupt them or don't want to step in like we've seen it before everyone's tried it's just you just new bill governments have tried the indian government and yeah there is a new bill outright against them for the debit cards yeah so rule number one, never show more than 50% margins. I don't know if that's how I would operate, but it's definitely a risk. If you have high margins, probably have a competitive advantage, which means you could be described as anti-competitive. That's kind of the definition of a competitive

advantage. That's what Buffett, he doesn't say it that way though. So yeah, it's interesting. I will say, let's look at the total return. I looked it up for OMAB, Grupo Aeropuerto, or Aeroportario. Yeah. Okay. Ticker is O-M-A-B for the English speakers and for people who want to look up the ticker. I do not, but I know this is one of the Mexican ones. Went public, looks like right around the GFC.

total return since that time after this drop 550 uh beating the s&p 500 313 over that same time period so not bad not bad at all the uh i wanted to talk about this match group paper that i read you want to move to that yeah i want to know why you always find these things a month after they get published because i'm you're like behind you're like behind the ball on all these i know whatever it doesn't matter the just i hit save i like them and then i like don't read them in the moment and i come back overloaded then you have your list and yeah and then i go through this list and in the moment i don't know which ones i'm going to be like wow i'm really glad i read that paper so i ended up reading a bunch of stuff that i probably don't

need to read but anyway the yeah so it's a really good piece by george hadjia on twitter he actually recently went on a business breakdowns episode but which is a bummer because i was gonna reach out to him and see if he wanted to come oh i reached out that's what i reached out a month ago but he said i'm recording business breakdowns like all right well you graduated behind us they they got you so anyway listen to that though that's a good if you're if you're interested people listen to that one it's a really good piece i had kind of there was one point that he made that i had kind of thought about but i didn't really have a way of like articulating what i was thinking which is the saturation at tinder like why is it happening and it felt like we even

did a whole episode around like what's going wrong at tinder because the growth is kind of plateauing especially on a usage basis based on sensor tower data and we kind of came up with a number of reasons but i think he articulates it really well which is that at some point there are diminishing returns of tinder got big because it was this network effect business right there's if you're a guy in a town and you've got a 20 mile radius and there's 100 girls if you add another 100 girls the the platform gets that much better right especially on a college campus easily goes viral right but today especially in big cities there are so many people and there's not that much way to filter because tinder the whole shtick is that you can get set up really fast you don't have to

put that much stuff with hinge it takes like 15 minutes even 30 minutes to set up a profile right you got to add bios. You got to put a lot of time. No, I think on average, it was like 15 to 20 minutes. I can't remember where I saw that, but the, you know, putting in like, whether or not you drink or smoke, whether what's your religion, you don't have to show all these things where you live. You have to answer a bunch of prompts with Tinder. You just post four or five pictures and you're good to go. So because it's so easy to get up and running, there's not that much filter capabilities, which means you're filtering through potentially... If you've got 50,000 people in your city that are potential mates or potential significant others,

the 60,000, the next 10,000 they add, it's really not that valuable. And you got to filter through so much, frankly, crap to find anything relevant. And it just really erodes the experience. So they call these, and I can't remember who came up with the term. I think it was A16Z did this report. Instead of a network effect, they're called network contaminants, where it erodes the experience. And we saw this, especially with a lot of the fake accounts and stuff like that.

And he just did a really good job of articulating why that's been an issue and how it's kind of i think ultimately led to some saturation so i guess my question posed to you is what do you do here if you're match group how do you fix that problem at tinder specifically i know hinge is like on basically really well counter positioned to that where there's so much hyper so much ways to filter how do you how do you fix the problem at tinder there i think there's two ways one already doing and i'm just copying what they're saying they're going to do for the other one one is use these ai tools to eliminate more of the fraudulent accounts the fake accounts which they have been doing and they gave out some data on it but it's clearly working it's it's it's much

better than it used to be i think that problem is not solved but it's in a much better spot than it has been and then second they're just going to have to they kind of rested on their laurels right for five years with tinder the product didn't change and now that it's so big i think creating filter tools i don't know if they should make it a paid tool because you probably want everyone to have access to these things at least the most important ones but i'd say allowing the thing is you want to make it easy for people to onboard but i don't think that's the biggest issue now you should probably force people to give at least five or six characteristics of themselves yeah some people are gonna lie that's how it goes but that's the other you're uh you do

that you'll allow people to filter a bit more and hopefully that could lead to better results so yeah that's the other thing with cinder seems solvable but go ahead it's part of the difference between Tinder and Hinge is with Tinder, you have to match. Basically, you can't see your likes. With Hinge, you can see who's liked your profile. So when you have to match and you have 60,000 people to filter through, you got to be on there longer to find a lot of matches. So it gets harder in bigger cities. Whereas Hinge, you're kind of right off to the races once you're kind of on there and you can filter by a whole bunch of things, whether or not people smoke or drink, you can filter by height sorry for all the short kings out there um but there's ways to really

zone in on your focus or zone in on on your search that tinder kind of doesn't have and i i i'm concerned that you can't walk that back i don't think i think there becomes a problem in terms of new user onboarding if you start to have all these like you gotta say five things or whatever yeah i'm not sure maybe it helps maybe that's where the ai improvements where the ai like helping with prompts picking photos stuff like that can speed up that process yeah i think you might be overthinking it could be the there's there's so many ways to go about this And I, for this situation, they have all the data. They know what's actually going on.

It kind of worries me that they might be seeing some things that they're hiding from the Tinder quality or region perspective. That's the big worry for me is how bad are the numbers in certain regions. But I'm going to let them make the choice here because they probably know what's going to work best. There are some things that seemed obvious, like the weekly subscriptions. just intuitively we were like yeah we'd use these but yeah all right let's go yeah 20 minutes i connected with bernard kim on linkedin asked me if i wanted to come on the podcast and he goes no response yeah well all right it's over i doubt that he's actually on there if he's actually if he responding to if he's responding to you on there that's a that's a red

flag yeah if you're actually like if you're a ceo and you're actually on linkedin and don't have it's not just there with the uh the ir team or something is managing it for you i don't know like serious all right it's like a waste of time um let's spot let's hit spotify earnings seemed pretty solid all around people were surprised but I don't know why they would be

bar was pretty low from a profitability standpoint but I'm curious your thoughts I thought it was really good yeah I thought it was a good quarter across the board I mean they're profitable

they're actually profitable is that the first quarter ever No, I don't think so. But one of the few. Yeah. I've kind of made this mistake before where, and it seems like they're focusing more on the operating expenses. I think operating expenses came down, if I'm not mistaken, actually. But I worry about taking any sort of long-term, like extracting the current quarter or extrapolating out the current quarter's gross margins and just saying like, oh, we're moving up in gross margins because we've done that in the past.

And even though they did attribute some of it to better podcast profitability and marketplace activity there's so much lumpiness with their gross margins that i worry that i mean the premium side is good but the advertising side it's going to take continued operating expense discipline it's not just like one quarter is not going to do it like this isn't i just worry about extrapolating out these current results yeah that's fair but also if it was they give out that anecdote on podcast revenue growing quickly they never get the exact number but they always say something like robust double digits which could be 20 could be 60 the could be 20 could be could be 80 i think those are some key numbers

because you're going to get the operating leverage on the gross margin side of things just because of the way they do their accounting if the podcast revenue just needs to get higher. And if that happens, we should see consolidated gross margins inch closer to 30% because the premium gross margin is already fine.

I do think we're seeing also just anecdotally some serious improvement on the advertising side where Spotify audience network, At least for me, it's filling more frequently when I listen to shows where it's plugged in. It's, I think on our show, on our shows, we're seeing better impressions too. So, you know, maybe you're hearing one right after this or right before this, something like that, that's them hopefully improving. And it feels, maybe it's just better advertising demand.

Like we've seen that with meta, we saw that with Google. So that, that would be a huge boost. I think that'd be helpful, but we've, we've long said it's not a gross margin issue. It's an operating margin issue with these guys and they seem to be taking that to heart. Not that, not like what we're saying, but they're starting to kind of find religion with moderating operating expenses, which is good. I worry that they're kind of like one of those companies that just skate wherever, like they talk about what everyone else is talking about that they just kind of invest

randomly and there hasn't been that much strategy like we saw that really with the podcast efforts i didn't appreciate it at the time but we've seen articles come out now where some of the people that have been laid off there were like they said management was like we don't care what you spend just go out and try to get listeners because you know capital's cheap right now podcast numbers yeah when the live audio stuff was out luckily they didn't waste too much money but i would say ai i'd say investors are lucky that ai will is actually a huge like there's so many promising things for them with that whether it's improving the playlists improving the search results doing the audio advertisements reducing friction there some of the stuff they have for cross

language for a lot of things i mean there's just an endless amount of opportunities for them to invest in these products and improve both monetization and the user experience so i'm glad that i'm glad that ai's the the the thief of the day because spotify can benefit so much from that no but just feels like every time something new comes out this happened with live audio i was like well they're kind of just doing what everyone else is doing but or they're like writing whatever the hype cycle is i'm like oh it might work out for them though like same with ai i'm like ai dj oh that makes a lot of sense i've never used it i've been a spotify user i use it like every day it's great they i think they said it's even yeah i mean the like yes they're hype cycle writers but

this ai stuff they've executed pretty damn well and it's i think showing tons of results and the advertising stuff is great because unlike a google ad amazon ad or facebook ad it's it's difficult i guess there's a little bit of friction to to produce an audio ad and if someone can have the ability to do that mechanically for your company i think that reduces a lot of friction and helps smaller companies join because yeah it can work if you're a large business going to a agency they record it for you or whoever it would be but it's kind of hard to convince someone to say hey record this for us add it on here but if you can give them the script give them your voice or something or they do the voice for you i think that's quite promising

yeah we'll see i still think there's low-hanging fruit that they could go after for advertising that would help the all sides of the marketplace like what do you think letting podcasts do banner ads promotions okay yeah i mean that seems like a pretty simple one podcast to podcast advertising on span i don't know if they've rolled that out yet but for the longest time they weren't allowing it i'm not sure what the point of that is the i don't know it just feels they go after and they They invest a lot of resources in very audacious things when there's sometimes low-hanging fruit right in front of them that they should be focused on.

I think they should give better data to the podcasters as well. They've made tons of acquisitions over the years that they just haven't blended together. That's true. They're giving a little bit now, but yeah, I agree with that. They spent a lot of money on that. I think it should be a little bit better. I will also say, temper expectations on those MAU numbers, almost so much of them are coming from very low-income countries, which isn't a negative, but these are not going to be as valuable because the premium subscriptions there are much less.

Okay, I wanted to talk about this. It's a bit weird and comes back. We've talked about this before, but it kind of had been a moot issue for a while, but I guess with interest rates now coming down, the real estate market still in a very strange spot. Residential's obviously been very, we've talked about those dynamics before, but the commercial side of things is struggling quite a bit. there is still the Blackstone Real Estate Income Trust, BREIT or BREIT that we've talked about. I'm not going to pretend to be an expert on the mechanics of this thing. I would reference a lot

of other people that if anyone's interested on, you'll be able to find those out there that go through what is happening but essentially it is a fund and invest in these real estate assets most likely these real estate assets are worth a lot less than they are being marked today however blackstone is still receiving fees on these assets and not true they're worth whatever people will pay for them and if they don't have anyone paying for them right now they don't have to remark they're worth whatever they decide to mark them at the mark to myth isn't that what they call it yeah yeah that's a good one yeah uh there's a lot of sayings for people complaining complaining about this uh but there is and i want to confirm what the exact nav is yeah okay here it

is so there's a company or maybe it's an lp that is offering investors in bereit the ability to pay them $9.27 per class S share. So $9.27 per share or per unit, but that is a 38% discount to BeReit's estimated net asset value per share of $14.88. And I may just be describing it differently, but again, it's from the paper they are soliciting to people. It's a 38% discount. And here's the thing, it's because the B REIT is gating redemptions. So if someone wants to redeem, they might not be able to for a long time. And Blackstone is still earning fees on these things at these inflated valuations. I think, look, you can't, the F word, fraud, can't accuse someone of that without them

being proven, even someone like SPF, right? We got to wait for the legal systems to run its course. But I think this is extremely shady behavior. Maybe someone can explain it to me different. Blackstone. Well, let's put the brakes on that because anyone can do this. We can go out and we can offer up a paper that says, we'll pay you a dollar for your $14 shares if you want.

It doesn't mean anything. the unless there is a lot of people take up this offer if a lot of people take up this offer and things aren't remarked then yeah this is a huge issue and it's very fragile well i think that i think the the i guess they signed the contract it's just i think scummy maybe is the right word not let people pull money out unethical the way they describe yeah i mean this thing is huge it has a lot of let's get earns a lot of fees again no expert on this so look i could be corrected wrong blackstone could be fine here but from the smart people i follow that follow reits follow this sort of stuff follow market structure follow all these things they're like hey like this

is a really big issue and tbd what's going to happen but we'll see it'll be fascinating to follow because huge i think i had like 60 billion in assets at one point great yeah i mean it's the biggest real estate uh isn't it like the biggest real estate partnership maybe private rate yeah i don't know in some subset either either way it's big i mean i yeah i buy that it's big But I think we got to see how many people are willing to take up this offer. Because if there's a lot of people willing to take up this offer, then everyone's going to know that Blackstone has a problem. I think a lot of people already have a good sense of it, but we'll see for sure.

The thing that I find interesting and probably maybe the thing I've learned the most in running our fund is that a lot of fund managers out there, even though they've done better than we've done, folk pay themselves first. They're focused solely on earning their fees and there isn't, and maybe it's because it's Blackstone, it's huge. You don't really have a personal connection to the investors, but they don't really take care of their investors. So every fund has that that pretty much every fund has that waiting period or whatever, the lockup agreement. And if you try to break the lockup agreement, maybe you have to pay or people can stop certain redemptions. Managers can just waive that. I mean, they can waive that if they want and let people-

But here's the thing. Now, part of the problem is that they're in a bunch of illiquid assets. It's really hard to It's not like it's public equities, but to me, if people are taking this up and they're still getting redemptions, it screams to me that they're not really taking care of their investors, the B reason in this. Well, there was a guy that follows this named Phil Bach. I believe that's how you say his last name. Good follow on the old ex slash Twitter.

He's the one that shared this. i gave it a retweet if anyone wants to see that um basically said mackenzie capital announces a tender offer that's what she said tender offer to breed investors at a nine dollars and 27 cents per share the current nab is 14.81 i guess that's the updated one a 37 discount and porter collins the as people may remember this is the real person played by one of the people in the big short says you know you know he knows a thing or two about real estate he says uh something i really don't get this right he says give me a two-way there is a zero percent chance 14.81 is the correct nav and then someone responded probably oh wait maybe that's a reference to steve eisman

he said someone responded the correct nav is zero let's say it's older horses there but yeah yeah okay a lot of these are just like major real estate assets i don't think they're worth zero but the depends again it depends how much leverage they used true the i think maybe it might be a little premature to be dancing on blackstone's grave here because like i said anyone can throw a tender out there it depends how much how subscribed it is or how many people accept the like the tender yeah and blackstone's been a damn good business for a long time right yeah plus they can but but for the time being they can just raise new capital to fill the hole here is something i want to leave with people today we got about two minutes left we

didn't get to the brooklyn investors blog post which i thought was really good but yeah okay i want to get to this phil fisher quote as we close things out i think it relates potentially to this but i think it's also good for people to think about here's the quote from phil fisher one of the best investors ever history has shown that in every age and in every field of human knowledge many of the views which almost everyone accepted as true and never bothered to think about further were in time proven completely wrong so the key points there everyone accepts something is true but no one is actually thinking about so the real estate's gonna go down home prices will fall home prices will fall no people are thinking about that a lot but i would

say maybe the private equity model not model but there's a lot there's not very many naysayers for that type of stuff and i'd say maybe we it's not bad i'd say it's not the bad end of the world to have some skeptics like these people complaining about b reed right it's good to have people balancing that out yeah for sure yeah i agree all right we got a minute left any comments are in here someone asked about autodesk any updated thoughts there same old great business one of the best businesses in the world i wish an activist would come in i'm not a family nudge what's his name uh anagnostia tough tough last name no not not andrew the Uh, Elliot management, Elliot, who runs that again?

All senior Paul, we need Paul and we need his protege camera, his name, but the guy that went into Salesforce and basically just showed, uh, showed Benny off what he wants him to do. We need him to just step into Autodesk. It would be good for their portfolio. It would be good too, because it's sizable and it could actually have an impact for him. yeah they're gonna be like well let's show some slides on the rule of 40. now we're gonna have you heard of the rule of 40. and then he's gonna be like he's just gonna cut him off right away

and he's like here's what you're gonna do let me show you our next ceo you see this 50 column staff you got here we're gonna let most of them go they're good people and then we're gonna lever up and buy back some stock all right uh let's close things out uh let's hit the disclosure thank you everyone for tuning in thank you for the comments you can listen to these everywhere you get podcasts youtube spotify apple on sunday mornings or you can watch live as some of the people are doing now but either way doesn't matter to us as a disclosure we are not financial advisors anything we say on the show is not formal advice or recommendation. We are general partners at Arch Capital and clients may hold securities discussed in this podcast. Thank you everyone

for tuning in. I'll see you next time.