Chit Chat Stocks - Investment Roundtable with Ian and Brad

Episode Date: March 23, 2021

This week we welcome Brad and Ian to the show to discuss our best new ideas. Brett, Ryan, Brad, and Ian pitch one new investment idea each. Listen in closely as the group discusses 1847 Goedeker’s (GOED), Intellicheck (IDN), Procore (PCOR), and an intriguing ETF (MSO). Stay tuned for the second half where we cover the usual hot water, buy-sell-hold, and anecdotal evidence. Let's go! Follow Brad and check out his work on Twitter: https://twitter.com/StockMarketNerd?s=20 Follow Ian and check out his work on Twitter: https://twitter.com/IanGrayLive Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Subscribe to our YouTube channel: https://www.youtube.com/c/ChitChatMoney Follow us on Twitter: https://twitter.com/chitchatmoney Visit our website to see more from your hosts Ryan and Brett: https://www.chitchatmoney.com Email us: [e-mail] Timestamps Interview | (3:12) Stories | (57:20) Hot Water | (1:09:20) Buy-Sell-Hold | (1:22:07) Anecdotal Evidence | (1:23:37) 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 Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. Today is Tuesday, March 23rd. We are switching things up. New format. Our episodes have been getting quite long, which is a little too much work for Brady. Not really, but we just think it can get boring to have it that long. And so what we're going to do is we're going to take any interviews, any discussions that we have with other people, we're going to move it to the front. So best stuff first, and then you guys can feel free to stick around for our casual banter. But today, instead of a strict interview, we're basically just doing an open discussion with Brad and Ian. If you listen to the show frequently, you know who they are. But it's best idea, best new idea, and we're kind of feeling it out.

I know for me, it's something I don't have a position in. I don't think I could have a position in it because it's private, but I don't want to spoil anything. But we're basically just vetting ideas off of one another. if you listen to the investors podcast and they have that quarterly mastermind discussion we basically stole that idea but doing it more into our format you know individual companies kind of the more you know this these aren't things we necessarily own we're just trying to fill out the ideas or missing what do the other people think of it yep and then we are still doing a story if it's relevant so we'll do a big story if there's one to be talked about but this week i

I didn't find any huge ones, so you have one that's an acquisition. Do you want to talk about what that is? Yeah, Canadian Pacific buying Kansas City Southern. Huge railroad acquisition, under-followed industry that has done phenomenal over the past few decades, so got to take a look at that. Okay, and then we're still going to do hot water, buy, sell, hold, and anecdotal evidence, but before we get to the discussion, sales pitch time, and we are raking in the numbers.

That's good. Yep, pulling in plenty of subscribers. I guess it's probably more 7investing than ourselves. But, yeah, keep it going. It's an easy sell. Keep hitting the buy button. Yes. CCM is the code, $10 off.

It helps us. Yep, and it would be only $7 to try it out if you use our promo code. I mean, it's a pretty easy service to sell. Everyone there is nice. Let me break it down for you, okay? Okay, go ahead. So it's $7 for seven picks, essentially, for the first month. So you're doing $1 per pick.

I promise you, they spent more than an hour on this pick. So you're essentially paying these well-trained analysts, advisors, to give you an hour, more than an hour of their time for a dollar. Just go ahead and do it. That's the math. It makes sense. Use code CCM in order to do it. Without further ado, let's go.

Welcome to Chit Chat Money. On this show, hosts 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. welcome in today we are welcomed by brad and myself brett uh kind of a roundtable discussion here this is the first time all four of us are in the same zoom and it's kind of just open forum

we're talking i don't think we own the businesses that we're discussing maybe we do but it's we're sort of betting ideas off of one another yeah we named it new idea discussion do you guys have any good names for it. I don't know what to call this. Yeah. We need a clickbait headline. Yeah. I don't know. We'll stick with new idea discussion. Anyway. Okay. I'm going to go first. And so the company that I'm talking about is Procore. And the way we're going to do this is kind of a little two minute pitch. And then the rest of us can kind of ask questions and we'll go around the table. Yeah. But Procore for anyone that's unfamiliar is it's a construction management and workflow platform so think it's not apples to apples but think of like

dropbox like that sort of collaboration tool but it's on the construction it's really for the construction industry and so a lot of this stuff used to be done with like microsoft office tools um and this and construction is such a unique industry in that there's uh there's the office and then there's the job site and so they have to collaborate from two different places and on the site you're going to have probably tablet and you're going to be taking pictures of like corners of stairs and sending it back and stuff like that and so their namesake platform is the construction management platform but then they've built bolted on all these other features so like the financial management part they have resource management so you can kind of manage

who all uh is working in certain parts that kind of thing and then there's a lot of tools for owners now as well. But on any given construction project, for anyone that's unaware, there's a lot of different stakeholders. So there is the owner, there's general contractors, there's specialty contractors, architects, engineers, I might be missing some. So yeah, specialty contractors are called subcontractors. Okay. And basically, they're helping all those teams collaborate together. And you can add on, like, if you subscribe to Procore, it's based on per project. That's sort of how the pricing works, but you can add on contributors, even if they don't subscribe to Broker. And they have 10,000 customers around the world. They had 400 million

in revenue in 2020. They actually postponed their IPO originally. So they planned to do it, I think, two weeks before COVID hit. And then there was all that market turbulence. So instead, they just postponed the IPO and they took 150 million at a $5 billion valuation in private funding. And then they just released a re-amended S1, or amended S1, and they plan to go public again. A little bit's changed, but generally the business has been pretty steady. Other competitors that are notable, Autodesk and Oracle. Oracle acquired their way into the space. Autodesk did as well between their acquisition of PlanGrid and what's it called? Humble Connect or something like building connected building connected um and then there's also trimble but autodesk kind of has this

construction cloud and they're sort of the most daunting competitor i'd say because it's a logical next step because so many architects engineers use or designers use autodesk tools so they're kind of using it as this next level up for the construction space um but we don't have a whole lot of solid numbers on the construction cloud yet i'll give you a note well it's been talked about in conference calls yeah i'll save it for my my uh concerns but yeah okay but that's kind of the basics of the business uh they like i said the valuation was five billion a year ago but that's private we don't know how it's going to ipo what uh they had what 290 million in revenue in 2019, right?

So revenue, even during COVID, is growing pretty strongly. Yeah, I think it grew 38% year over year during 2020. But remember, a lot of the... I see Ian's question here, so I might go vaguely into it. But there's a lot of construction projects

that were stalled or halted or even stopped altogether. And they're paid or the contracts are based on projects. I think there might be fixed subscription costs as well. But it's mostly based on the contract size or the project size. And a lot of the times they're working with the giant general contractors, right?

So they're trying to get ProCard to that. And then they basically give access to all the different people working under the general contractors that are running these big job sites, for example, like out of state. Is that true? Yeah, they specialize really with the general contractors. I mean, that's how they started was just construction management for general contractors. um and they actually started in 2002 but like wi-fi on job sites was terrible um and so it didn't really get a whole lot of adoption but then when internet connected devices kind of

grew i think in early 2010s late 2000 maybe late 2000s so mobile phones big or smartphones are big phones tablets um anything internet connected that people can use on the job site once those were sort of boomed then pro course on massive adoption um yeah i think that hits pretty much everything basics of the business so whoever wants to fire some questions why don't we start with brad we'll kind of go through first i'm gonna throw your curveball just based on on what you are on the pitch you just gave so so i don't know if this if this is a good question or not but we'll see um so autodesk and oracle you said both purchased their way into the space so do you kind of view the construction space is more of a is more kind of like resistant to the viva systems

and and the other software players who are operating in other verticals and that they kind of have to purchase their way into the space or maybe even purchase this company to compete um i don't know viva systems well enough but it just so there were like so plan grid was planned grid and building connected or whatever those were the two that autodesk acquired those were growing businesses and trimble is a private business that does something similar um so most of the ones that have been successful in the construction space started purely as construction and then they got acquired um maybe it's too hard for autodesk to kind of build it on their own it is sort of i mean if anyone could build it on their own i would imagine it would be autodesk

because they have so much insight into the industry and they realized they had to pay i think they paid 875 million in cash for plan grid yeah they're a serial acquirer so it's kind of expected they really do acquire or basically oracle's the same way yes um i'm not sure i think It is super specialized, and it's not, you know, Slack can kind of fit any, like Slack, that kind of solution can fit for any business. That kind of stuff doesn't work as well on a construction site. Yeah. Yeah. I mean, I don't know. All the evidence that you're showing us and that I'm seeing kind of points to that being the case, that it kind of is specialized and is kind of more resistant to someone just creating a product out of the blue and competing than some other parts of cloud computing are. Yeah. And there's also, there's still a lot of manual systems. Like people still do pen and paper contracts, which is kind of surprising. But construction is one of the slowest adopters of digital solutions. So I think all, I think a lot of the businesses are going to grow. I don't think there's, Brett and I have kind of had a debate about it before, but I don't think it's a winner take all space.

for sure uh ian you got one yeah so i had a follow-up question you just kind of answered a piece of that um i was going to ask you about whether you think it's a winner-take-all market and the reason i'm curious about that is it seems like um construction is going to like if if construction is going to change it seems like it's going to be want to be streamlined and everybody's going to want to be using the same system that if you have contractors and sub contractors using different systems that that's not really going to work very well for the different projects. And it's also harder to learn, right? Like you said, things change kind of slowly. And so people, people want to learn one system, know that system, use that system rather

than knowing, you know, various different softwares. And it seems to be kind of the pitch of both Procore and Autodesk is, hey, learn our system, we can do everything in here, all that type of stuff. So could you speak a little more on why you don't think it's a winner take all market? And I think I probably agree with you that it's like a big market, like there should be room that two successful companies could have you know lots of revenue and all that type of stuff from this market but it's a question of it's more of a question not of how big the market is but whether the market actually lends itself to um having multiple players yeah so part of the reason i don't say it's winner take all is because there's no closed ecosystems really so the uh like if

doing like 3d modeling that kind of documentation or like a certain file type um it can it translates to either autodesk construction cloud or pro core so they're they're kind of integrated together that way so you can share with someone using a different platform the other thing is like we i i pitched this at the motley fool this summer which was and i talked about there's like the education part so there are uh it's pro core system in a lot of construction management firms uh in colleges or not firms construction management classes classes schools uh in college they're taught like that platform is kind of taught in some of the classes so you're getting the employment pool is coming in uh already understanding the system now i imagine

autodesk is probably doing something similar yeah i mean autodesk has a huge history of being successful with their other things and more engineering architecture where they lock in basically all the classroom users for free and then then they learn the platform and then they can you know do this stuff but and it's just switching costs like i don't want to it's not like the people that are working on the job sites don't always have time to learn an entire new software platform and it's sometimes not worth their time um and so switching is hard uh you If a general contractor has 100 people working on different systems, getting them all to change when you're already facing deadlines or delays or stuff like that, it's just kind of a tall task. They don't have any specific churn numbers on the S1, but it's very valuable to the day-to-day lives of their customers.

Yeah, and their dollar-based net retention rate has been 120%, so that gives a good indication of the churn numbers. it dropped off in 2020 okay but that's kind of to be expected it was it was at about 120 and then to maybe clear things up for you guys because it's something i kind of i've been researching a little more it's not the they all both autodesk and procore and i'm assuming oracle they have basically these app marketplaces which would be similar to i mean dropbox or slack maybe for a more broader aspect where they can basically connect to all the different apps you would use Now, Autodesk has maybe a more vertically integrated solution, but if you subscribe or are a paying user of an Autodesk product, a lot of the times, I believe, at least currently, they could maybe cut, you know, Procore off. Potentially, I don't think they would do that, but you can plug in to the Procore platform.

So Procore is supposed to be basically the hub for all parts of the construction, like communication or any type of thing you have to use. Theoretically, you're supposed to go through Procore. I imagine there are massive consequences to Autodesk just pulling the plug on integrations. There's probably a contract too. But anyway, do you have any questions? You kind of know well too. Yeah. I mean, I like, okay. So the, it's a complicated industry. Yeah. So I guess we should pull disclosure there. We own Autodesk, but the only concern I have is the numbers that

Autodesk has brought out where they're saying that their dollar-based net retention rate is about 130% to 135%. That makes me a little concerned that they're growing faster than Procore if I was in, if I was in the construction cloud or the construction cloud, the, so that's bit of concern and then the fact that they own the bim yeah it's 3d modeling software where their ability to integrate it it almost feels a bit like apple with something where they can integrate everything uh where they're the ones that all the architects and engineers are using so that concerns me a bit with broker where that could be a competitive advantage for autodesk um but i really don't know like it is procore gonna i don't know are they gonna be fine with

that is the secular trend i mean it's gonna be strong for the next decade it seems like there's a lot of questions with procore that i don't know what the answer is i think procore will have to spend more to attract new customers um i think there are still a lot of firms that haven't adopted the digital solutions and they might have to spend more to acquire them but i also don't think the big customers they have are going to leave so right and then that's why i say it's not a winner-take-all okay yeah i think i i don't i don't know i don't know if i agree with you what guys uh ideas have any other thoughts i don't know i agree with i don't know okay all right do we wanna who wants to go next brad you want to hit it sure yeah uh i i cheated a little bit

I picked an ETF that holds things that I already own in my portfolio because I don't know, just just because. So the ticker is MSOS. That stands for multi-state operators or MSOs. It is an American cannabis ETF exclusively focused on growers that sell in the States. And I'll kind of do a qualitative and then quantitative bull case. So in terms of qualitative, states are quickly legalizing, and it doesn't appear as though the legalization is going to slow down with COVID-19 kind of destroying state budgets. And in a massive black market, that is just ripe for conversion, with governments having every single incentive to do so, to regulate it, to make it more safe for consumers on the products that they're consuming, and also to collect those tax dollars that these states really, really, truly and desperately need right now. So that's the qualitative case. And the quantitative case is this is an industry in the very first inning, I believe, of growth with compound annual growth rates ranging from, depending on where you look, 10 percent upwards of 25 percent. And there's really nothing standing in the way of these companies from just continuing to grow for years to come, in my opinion.

And I say that because they're currently delivering in terms of top line growth, in terms of extremely fat margins. And I also say that because let me let me go through one of the top holdings, Green Thumb, to kind of give you a sense of the quantitative side of things. So this trades that this is one of the more expensive. This is one of the more expensive companies in the ETF. So 77 times earnings, 26 times EBITDA, nine times sales, 57% gross profit margin, 37% EBITDA margin, and 133% top line growth. And not only do I think based on all these industry estimates that growth is going to continue, but there's also macro tailwinds for this ETF that I'll go into right now. So none of these companies that are in the underlying ETF are US listed. They're all listed on the Toronto Stock Exchange, so they're pink slip stocks over the counter. That's important because at this point in time, there is zero institutional support for any of

these companies, none whatsoever. So once the uplisting occurs, which according to the new administration is a matter of when, not if, then we get to see the institutional support meet the retail demand, and I think that'll be very positive for multiples. Another very big potential tailwind for this industry is a tax provision called 280E. And what this tax provision does is essentially prevents every single company selling a federally illegal good, which cannabis is still federally illegal, from deducting ordinary business expenses from their tax bill. So these cannabis companies are paying ridiculously high tax rates, and they're still posting positive gap net income, and they're still posting 37, or they're still posting 14% net income margins that EBITDA

wouldn't be affected by that. But once that 280E is reformed, which again, I really think that's going to happen, that really would help every single company in the space. And then lastly, what I would talk about is their cost of capital right now, because also they're not listed on the New York Stock Exchange is also crazy high. Green Thumb, which is one of the highest quality growers in the industry, is paying an interest rate well over 10% on any kind of debt that they're issuing. So I think that as uplisting occurs, as safe banking hopefully occurs, the cost of capital is going to come down. And we've got our very first sense of that by Green Thumb. They had the first historic, in the history of American cannabis, the very first

IPO available for accredited American investors, $100 million that was gobbled up immediately by one institution that everyone thinks is black rock, but I have not been able to confirm that anywhere. So please do not quote me on that. But as soon as I can confirm that I will. So yeah, I think the institutional demand is going to be incredible. The organic growth is pretty already astronomical and set to continue for a very long time. And yeah, there's just a lot of a lot of good things going well for there's a lot of things going well for this industry. And then last thing i know i'm kind of rambling so i'll make this part short um the relative value between these companies growing growing and selling in the united states and being listed in canada

versus the companies that are listed in the united states and growing and selling in canada is absolutely absurd so i'll give you i'll give you a sense of kind of canopy growth versus green thumb canopy growth has nearly doubled the ev with slower revenue growth on a lower base with a negative 500% gap net income margin versus a 12% gap net income margin for GreenThumb. And as you go down the list of all these holdings, the difference between GreenThumb and the American growers and the valuations of the Canadian growers, it's astronomical. So there's a lot that I like about this, and I do own three of the underlying holdings, but I am considering shifting some of that money into an ETF like this one because the industry is moving so quickly,

because um new regulation could change the the competitive dynamics of everything and because in that environment i'm not i'm not sure i can continue to pick the strongest operators so yeah that was my question i was going to say like uh why did you choose this format of betting on the space because it seems when i think about the cannabis industry i think there are going to be winners and big winners, but I think there's going to be a lot of losers. And that's, so I guess my question is like, why the ETF? Why not pick the businesses that you can vet? I know you just said you own most of them, but why would you transfer money from the companies you like to the ETF? Yeah, it's a really good question. And I think I should probably mention that if I do this,

I guess I would say 75, 80% of my equity would remain in my favorite operators and not in the ETF, but it's more of a, it's almost like a hedge against potentially not being able to pick the best operators and potentially being wrong about where I see the future winners coming. And the ETF would be a good way to kind of benefit from the rapid growth and the margin expansion that I see in the industry as a whole, rather than picking winners that I think I'm pretty confident I can choose based on current results and based on management and based on path, but I'm not positive. I had a kind of a question. You laid out a pretty good bull case for why we should be looking at this and why we should be interested. Just so investors know, what's kind of, in your

view, what's the downside scenario, both in terms of what causes a downside scenario and then what does that look like for a lot of these companies? Yeah, awesome question. So the downside scenario, i'd say is that this is or some people say it's a pure commodity and and it's going to be essentially whoever can grow the cheapest product um wins and and to that i'd say i i consider cannabis to be more like fine wine than than like than some other things there's several different tiers of quality and strain and experience and product and then the other and so yeah so commodity is one thing. And also, the interesting thing about federal legalization is if the border between Canada and the United States opens up as part of federal legalization, that would introduce

a lot of new supply from these Canadian LPs that are that are just itching to get into the States. Our politicians have hinted at the fact that they're going to make them do that via M&A and buying American growers instead of just flooding our market with with exports. And there's only a couple Canadian LPs that have the balance sheets to actually do that. Canopy really is the only one. But those are the two bear cases. The third bear case, actually, bear cases are important too, which is actually one that I don't believe in as much, is that these consumer packaged goods behemoths and alcohol companies just come in and do their own thing. And similarly to Ryan's pitch and Oracle and Autodesk buying their way into the industry. I see that as being

the only path of these companies really establishing a massive footprint because, I mean, Green Thumb and Trulieve and several other companies are running at billion-dollar revenue run rates with massive state footprints with hundreds and hundreds of licenses already in hand. And the federal government will always, no matter how much federal legalization, no matter how much it's opened up, there will always be a finite number of licenses and they will not just rip the licenses out of the hands of these states and state operators. So I think that the path of entrance is going to be through M&A for, we saw with Constellation buying Canopy because they can't buy Green Thumb and they can't buy Presco because it's not listed on the New York Stock

Exchange. But I think that's the path. And then just one quick follow-up. It looks like many of companies in the ctf are growers and you've talked a lot about the growers um i assume you think that that's probably the right way to kind of play this trend in this industry is why is that why why should we be focused on the growers yeah another great question um unsurprisingly so the well what makes people nervous about cannabis is what i think makes it more appealing um growing cannabis is very legally delicate and sensitive and expensive, um, in terms of, uh, hiring the lobbyists to get the licenses in place and the distribution network in place. There's a lot that goes into it, um, more so than I guess, growing, growing a vegetable or fruit that you're going to

sell in a grocery store. So a lot of people like, uh, what, what's that hydroponics chain, um, green or I don't remember the name. Pro generation. Thank you. And then IIPR, a lot of people love that that play because you're not really exposed to the regulatory risks as much of cannabis but i like being exposed to the regulatory risks because i think the deep-pocketed um cpg behemoths are are less kind of eager to venture into that space and it kind of almost creates an artificial moat with um i guess kind of the taboo nature of growing cannabis still at this at this state of our society not to get philosophical but yeah that's true brett yeah so i just have two first one should be quick. I mean, how do you think about that expense ratio? I think it's 0.745

or 4%. It's high. Yeah. Yeah. That's definitely a concern. And thank you for bringing that up too. Definitely something to keep in mind and definitely a reason that my exposure to the ETF space would stay low because as you look at, there's not a ton of options like MSOS, but all the expense ratios are pretty elevated, which I kind of guess is expected because it's made up of um higher risk less liquid over-the-counter stocks what did you say it was 0.74 percent and i guess okay yeah so it's not crazy but i said 7.4 no no 7.4 that that sounds a bit high but uh my last one so you mentioned that lobbying is important regulatory stuff very important uh we've seen ultra take a stake in chronos group do you look at that as a sort of

threat where they have the expertise they're the dominant player in selling tobacco um you know they could potentially buy chronos group and kind of supercharge them on their their network uh any sort of concerns there that they could win out i don't know if they own chronos group here because i think it's canadian company but how do you think about that yeah i think that's a that's a good point to make that chronos um it actually is one of the highest quality canadian cannabis companies out there, but it still has no access to, to us markets at this point in time. Um, it can't sell, it can't legally sell cannabis in the States and the TAM, not, not to use that cliche, but the higher, um, in the States than it is in Canada, simply because the population's

about 10 times the size. Uh, so, so uplisting, which means there'll be a list on the New York stock exchange, safe banking, interstate commerce, which is still illegal because it's federally illegal. I think all those things come in the next few years before that full federal legalization happens. And I don't even know if the full federal legalization will even allow the Canadian LPs to export because, again, these MSOs, these multi-state operators, they have some pretty deep connections with with politicians um fortunately and then you spend a lot on lobbying so uh so so i do think that they are in the ears of the politicians on how to make this the best american um growth story and not just winner take all do you think well yeah it's a i guess

i would argue that maybe altria is the ultimate lobbyer or lobbyist excuse me does you know it seems like maybe they can pull in but i don't know man just buys altria no no I mean, in terms of tobacco companies, yeah, you can't find, or maybe oil, I guess, but you can't find more powerful lauriers. And I guess Altria becomes a real threat and concern if Kronos can legally enter the American markets, which they can, and I don't see that happening anytime soon. I do think Kronos would be a phenomenal partner for one of these MSOs if safe banking happens and institutions can kind of get involved with their operations. But yeah, just to answer your question. Okay, that makes sense. Who's next, Dan?

Ian, yeah. Yeah, I'll go ahead and hit it. So the company I'm presenting today is Gettikers. Officially, I think it's 1847 Gettiker because it had a capital infusion from, I think it's called 1847 Capital. So, um, the ticker is G O E D. And for full disclosure, I have, uh, I started a small position and it kind of to keep an eye on it about a month ago, um, less than 1% of my portfolio, but something that I'm looking to add to in the near future, hopefully I'll, I'm going to, I'll keep you updated on it exactly. Um, what I do, but, and I'll get into why I haven't added

more to it yet, but it's about a $55 million company that's million with an M. Um, so micro cap really small what they do is they sell kitchen appliances mostly online and so they tout themselves as one of three pure play online um appliance dealers basically and so you can go on there you can buy a new dishwasher you can buy a new stove you can buy a new oven microwave um even washers and dryers for your laundry room so that type of stuff is what they specialize in i think they sell a little bit of furniture on there as well but the reason it's appealing to me they're the only publicly traded company out of these three pure play distributors and they kind of make a good case for that people um want this that basically if you go to your local appliance

dealer they're commission-based they're going to be charging higher prices than what you can get on gettickers and if you go to like a big box retailer like somewhere like home depot or lowes they don't have the selection or the quality that you're looking for necessarily. And so this has, it's kind of the Amazon effect back when Amazon was in the early days of books of having more inventory at a lower price. They're really trying to replicate the same thing, but with these bigger items. And that's a key to why this is kind of an interesting space is it's kind of like the Wayfair thing where Amazon didn't necessarily want to get into furniture because it's big, it's bulky it's harder to ship it's and it needs to be it's more special specialized shipping and

so you run into the same thing with getters that it's both the relationships with the appliance manufacturers that are important and it's also difficult to ship and when you ship out an appliance you generally have an existing appliance in your house and so you're going to want to get rid of that existing oven you have and replace it with the new oven and so part of their shipping is actually shipping installing and removing your existing um appliances if you want that and so they kind of make it becomes it's a little bit you know it's it's an overused term but it's a little bit amazon proof in that sense is that it's difficult enough that it doesn't make sense for someone who's selling all sorts of things to also be doing this they don't want to put a dishwasher

in the amazon prime truck to and have their guys install it right they just want to drop it off on your front door and so get occurs has a little bit of an advantage there they did it out oh go ahead uh so i'm i missed the last part so someone whoever delivers it comes in and then does the installation as well that's correct they do they um that's kind of one of their competitive advantages against more traditional e-commerce stores is they can they can uh have people who are specialized in in uh installing these and so what happens is they actually have a few distribution centers around the country um they have a fleet of their own trucks and drivers and so that provides a little bit of infrastructure makes a little asset heavier

but it provides that infrastructure where they can um try and ship them out efficiently so i'll give a couple of recent updates now so one recent update is i mentioned there were three pure play companies like this get occurs is the only one that's publicly listed but they bought out their large arrival, um, the appliances connections, which did about $150 million in revenue last year, I believe. And so it's two to three times, you know, three times as big as get occurs, but they're buying them. Um, there's been a little bit of interesting stuff with the deal where it's about a $200 million, uh, $215 million deal, I think. And they haven't announced how they're going to finance it. They don't have enough cash to do it. They don't have enough debt

to do it. Like I said, they have this capital partner who I assume is going to try and raise the money to do it, but it's not announced exactly how that's going to happen. And that's the reason I haven't invested more yet. I want to see how the capital structure works out. I want to make sure they don't load themselves up with too much high interest debt or anything like that. And that's something to keep an eye on. And they said that they were going to announce that back in December at some point, they kind of made some, they didn't officially say that, but in the conference calls, they said, oh yeah, in the next couple of weeks, we'll announce how we're financing it. Oh, go ahead. I said, I saw that, that I was going to, that was going to be my

question that the finance hasn't really come through yet. Yeah. The financing has not come through yet. They revised the deal terms, um, fairly recently as well. And so there's just a couple, like they're not red flags, but there's just a couple of yellow flags that I kind of want to keep an eye on, see exactly what's going on. They've announced some pretty impressive numbers, um, going forward, but, uh, kind of in the last couple of months that both the companies are doing and so they seem to still be excited about the deal and trying to work towards a resolution but it hasn't all the terms haven't quite come together yet and so i want to see like i said how it's financed the other recent update i'll give quickly is um they typically convert about

80 percent of their orders into revenue and so um they report both numbers and basically in orders when someone goes on there they click it they say this is what i want to buy but then there's generally a little bit of a lead time where it takes, you know, a couple of days, a couple of weeks, occasionally a couple of months to actually ship it out to them. And in that time, people can request a refund. And so typically about 80% of those orders actually turn into revenue. Over the past year, it was way lower than that. I want to say, I'm blanking on the exact number right now, but I want to say it was around like 30%, 35% of orders were converted into revenue, largely because of supply issues with manufacturers and so and that was a problem

across the industry that many people in the industry were having trouble actually getting enough appliances out there but um anyways so that's something to keep in mind they've been reporting recently they've been putting out some press releases about how much orders are up that doesn't just keep in mind that doesn't necessarily translate into revenue and so in 2021 you're going to want to keep an eye on how well are they converting orders into revenue Because if they can get that back up to 80% or so, then it should be a great business. But if it's going to be, you know, stick closer to that 35, 40, 45%, it's going to be a little bit of a problem.

Okay. Is that it? We are going on to questions now. Brad, do you want to start off? Sure. Do you think the semiconductor shortage that's kind of hurting the automakers and some other industries, do you view that as a headwind for them or not really? That's an interesting question.

I don't think that many of their, um, I don't think it's semiconductor specific. That's really hurting the industry. It's more of just, uh, like I said, many of the manufacturers are having trouble, you know, many of those supply chains were focused in China. And so just having manufacturing, anything has been a little bit of, of an issue for many of these types of things. So, um, they've made some comments that they think it's rebounding some and starting to kind of pick back up.

They're having, they're being able to get stuff a little bit quicker than they were in 2020. um but yeah i think it's it's more of a manufacturing a whole thing less of a i haven't seen anything about uh the semiconductors in particular got it thanks yeah um this is kind of not i mean you kind of covered this but do you worry that this is a part of e or commerce i guess that won't go to e-commerce at all yeah because like as the consumer i picture if i'm buying a huge appliance i'm just gonna go to a store uh if i'm buying a small appliance like a i don't know if they sell these but like toasters or like smaller microwaves um i'll go and do it on amazon

um does that worry you at all or is that kind of me reaching for uh no it's it's a fair point um i think the comp that i like to draw and we always have to be careful because no two companies are exactly the same. But I think Wayfair is a pretty good example of a company that has done what Gettycurs is now trying to do. An item that's a little bit more of a bulky item, a little bit harder to ship, not something that Amazon is super focused on. And they're doing in the 2020 Wayfair did $14 billion in revenue. And so a pretty impressive revenue number. um, get occurs is about 50 million right now after the acquisition will be somewhere closer to 200, 250 million, um, in revenue. They think that they can hit a billion dollars in revenue

in three years after this acquisition. So, um, pretty aggressive growth, you know, that's almost a hundred percent growth year over year for the next three years. Um, but, uh, they think that the market's there and it's a matter of capitalizing on it. And the other thing I'll mention briefly is they're starting traditionally they've been selling straight to like consumers to end users but they're starting to try and create relationships um with some like apartment builders and uh home builders and say like hey we'll do this entire subdivision for you um we'll give you a little better rate and then that just does a lot of volume for them and helps with some of those delivery costs they don't have to do as much installation in those

types of things either i would assume because you know it's they're going to construction sites so um or you know nearly finished homes so uh anyways that's kind of an interesting like they just started talking about that recently that they're going to try and move into that more it's kind of an interesting way to play there's a lot of talk about the the move to the suburbs and i'm looking at some of the home builders because of um you know there's a lot of there's not a lot of housing supply and so this is kind of an interesting way to get at that trend too is actually there's going to be someone who's supplying most of these uh most of these appliances and if they can somehow take a little piece of that market that'll be interesting too

right so you think that the key competitive advantage or the reason that get a girl can win is that they do this they don't necessarily have a streamlined option for everything like an amazon or even similarly a wayfair where they're going to specifically make it so this process is easier you're, you know, installing these appliances is not something a lot of people want to do on their own. If they can get, you know, the old one out, or if it's just a new one, get the new one in. That is really how they're going to win where they can make this, you know, the appliance, it seems like purchasing appliances, large ones, like refrigerators or ovens or something like that is a hard process. Is their goal to necessarily like make it easier for the consumer

and that so they're going to win them over? Or do they not talk about that? No, they do talk about that. And I think that's, that's a pretty good way to put it. I think they want to make it easier for the consumer. And ideally, this hasn't happened in the last year, but ideally, they'd like to make it faster, that you can have a wide selection, it can be at your house within a week or two, because that's been a big problem with a lot of these types of appliances, you try and order an appliance like this, and it takes forever to get it. And so if they can make that easier and faster, that's really how they're going to be successful. okay and any thoughts on management or management uh i'll make a quick comment on that so insider ownership is a over 50 and so very high insider ownership part of that's from the biggest shareholder is this capital partner that came in 1847 um and the that's where the chairman of the board is from um and so he is definitely someone who seems to be fairly important to the company. They brought in more of a professional CEO. This had traditionally been a more family business. They brought in a professional CEO in the last year or two.

I can't remember the exact date on that. Was he the guy on the YouTube video? Yes, he was. The hostage YouTube video. Yeah. They have an interesting kind of investor presentation in the video format, which was kind of, it was cool actually getting to hear management speak about it a little bit, but it is a little bit funny to to be pitched to the company by management but that's the stage this company is at they're worth 55 million dollars they need to uh raise some capital the more the higher their stock prices the easier it is to make this acquisition and some other stuff so um anyways interesting company but yeah no no big red flags for me on management or anything like

that all right brett go ahead yeah we'll wrap things up with intellicheck um i guess ticker is IDN. If anyone wants to know, I'll probably go over valuation last, but it's a little bit confusing. So I'll try to explain it. So they verify using their software in person and online identities. And they work with businesses, specifically financial institutions and retailers to address fraud. And they also work with law enforcement. So the easiest, I guess, example is fake IDs for law enforcement. Now, this is a smaller part of their business, so it's not necessarily how they make the most money, but you kind of understand where the police officers or law enforcement, they can't just look at a fake ID. The ones that they make

now are a lot better where you just hold them up there with the exact same. But IntelliJerk has the technology to have a 99% success rate of identifying whether, you know, this idea is actually real. And the reason that they have this and why they have a competitive advantage over other, you know, security or identification people, which I guess a public one would be the tech systems, if people have heard about that before. So the tech systems and the other ones reportedly have about a 65 to 80% success rate, but IntelliCheck actually has a 99% success rate. So it's a lot bigger. And the reason they have that is they, one, about 20 years ago, they had a relationship with the Department of Defense for working on identity checks on

military bases. So they gave them a little bit of information there. They worked with them as a partner. I don't know if that relationship is still going on, but they currently have a relationship with the DMV and there's an association that works with the DMV throughout mexico united states and canada where when there's new licenses they're the ones that kind of test it out so they have all that information that allows them to actually check through the barcodes the technology i honestly don't know how it works and it's kind of a little bit of a black box there but they are able to check that like legitimately where if you look at another competitor they're kind of just looking at where the you know the lighting the kind of those glare things behind

them but intelligent can actually do it whereas it's legit and it's not is this making sense yeah i'm just picturing like the bartender like squeezing your license yes so they're trying to bring that type of stuff to the 21st century and the way they do this is first where they're working at say a retail a retailer so any retailer someone's signing up for say a account or a credit credit card or something like that they want to verify that's the person that's using it so they a lot of the times there's and companies are losing and it's mainly financial institutions are losing billions and billions of dollars each year to this where they're faking these accounts and then you know using the credit card or whatever they're able to insert and it's hard

to explain inserts intellitex technology within their barcode scanner so when they sign these people up. All it takes is like 10, 20, maybe 30 seconds to route the information to IntelliCheck. They verify that it's that person. And then they're able to sign them up with, again, a 99% success rate. So they're able to help eliminate the fraud. And they also do this for person not present transactions where their new technology is. So say, okay, you're with your bank account or something like that, where you have to call them up and give them information, right a lot of the times people that are trying to do i don't know you know steal stuff from someone's bank account they are going to just basically you know you social security numbers

can be found on the internet they'll take them and they'll hack them but the way intellicheck does it is one you have to take a picture of the person's id and then you have to take a short video of yourself and they're able to verify through their you know database and their partnership with the DMV, that that person is actually the one using that. So they're able to help that they work with financial institutions. If you have any other questions, we can go through it, but I'll hit the valuation. So they're not designed for like restaurants or bars. They're more like auto dealers or banks. Yeah. So law enforcement uses them, but mainly they sell to banks who sell to retailers who are, you know, credit card partners. So they want to be

with every financial institution uh so you know retailers don't necessarily care because the people that are on the hook are the banks so they they've switched before new management came in they were trying to sell to the retailers but again you know retailers are on the hook so they're trying to you know get the banks to work with them and get the product out there right it's not as much when you say like you're trying to identify fake ids it's not as much it's more for the financial risk it's not for like oh yeah yes like is this person 21 or older yeah yeah so yeah that is true the majority of their business is that the one the first the financial stuff they do have that product but again it's a really small part um and i guess

valuation a little pricey price sales about 15.7 but gross margins are around 90 they said conservatively it'll be 85 but they've been a lot higher recently um they're operating cash flow break even. So the share dilution might be there as they try to grow. They're growing their sales team. But yeah, I think it's a high margin business. I really think they have that competitive advantage. They're the only ones out there that can get a 99% success rate. And there's a long runway for growth where they can address this throughout basically anyone who's starting an account and is at risk of a financial problem. All right. Questions? Brad or Ian, you guys want to go first i can go first um this could be a dumb question because i don't know the

technology or the space very well but i will give it a go anyway um so how how do you think dual authentication kind of i guess limits um this company's value proposition is dual authentication a less secure version of this kind of is that a good way to think about it uh yeah so for you know octa you're probably you're probably talking about them right Where that sign-on stuff is not for, it's for stuff that's less important. So yeah, IntelliJ isn't going to be for signing on to applications, but for things where there's risk of incredible amounts of fraud, for example, when someone signs up for an auto loan,

if they, a lot of the times say, and it's not the mob, it's just criminal crime rings or whatever they have, there's a huge, I forget the numbers they have, but some of them are over 10 billion. It's at least a billion for all the different products where, single sign-on is not going to do much you have to verify that the person holding the id is real and you have to verify that the person on the id is actually that person and intel check's the only one that can do it with a 99 success rate um so i think yes you know they're not doing single sign on anything like that but uh octa or whomever is not going to really there's no way for them

to address this, the problem that they're going to be after. How do they grow? So they're only in, I believe, I think there's 10 large banks that they address, and there's Amex and Discover. So like these in MasterCard don't count because they're not really issuing

credit cards, but they're only in five right now. And they honestly have a lot of different products that they can upsell to them because they have not everyone using them. And then the banks themselves again can work with other retailers uh so they're only in five banks and i think there's 12 different financial institutions that they're trying to go after so they still can really go after them and

i i think they have a lot of pricing power as well where right now they don't give it out but they do a minimum with like a financial institution where you pay a minimum per month or per quarter or something like that and then you it's all per use right transaction yeah so it's a minimum plus a per use. So there's a minimum you have to pay, but if you have no scans, then you still pay the minimum, but then you pay after that threshold, a per scan. And I believe it's like 20 cents, but they don't give it out. It's like an API. Yeah. Yeah. It's a bit hard to describe over audio, just talking about it. But yes, it's similar to that where I think the value they're providing uh the pricing power i think is really really strong especially if again i think the key

is that relationship with the dmv and all that stuff where they're the only ones that can do 99 success rate if they have that the the ability to raise prices is i think substantial yeah it makes a lot of sense and yeah and i was just gonna ask i think it looks like it's about 170 million dollar company um is this the type of company you think i know we were talking about octa earlier but octa or another similar type of company might acquire um seems like you know not not super expensive at this point 15 times sales but many of those companies are trading it greater than 15 times sales and it looks like at least to me the cross-selling opportunities for something like intellicheck might um not for all of octa's customers but i have to imagine that there's

a portion of like Okta's customers that would also like a higher security option with something like IntelliCheck for some of their offerings. And so do you see this as a potential acquisition target or do you think this one's going to ride it out on its own for a long time? Management has talked about it. The guy that runs it seems to be kind of like a guy that really wants to take it to the end or whatever. But he has actually mentioned on one of the, they had a really, there was a lot of candor

at this like fireside chat. they had one of these conferences over zoom where he talked about how they're definitely an acquisition candidate. He didn't, he didn't name names, but I think that does leave a floor if, you know, again, if they struggle to grow there, there's other products out there that are not as good, but if the bigger companies like the tech systems can market their products better and the switching costs are fairly high,

then I think an acquisition, I think an acquisition does, you know, it is a four there and there's a potential to, for a buyout at a premium for sure. Yeah, so you're looking at this as more of an acquisition should give investors more of a sense of security rather than what they're planning on for the return. Yeah, I mean, I have only looked at this for a few weeks, so I'm not like 100% in or out on this company yet. But yeah, the market opportunity seems a lot stronger than a short-term buyout. Let's see. Yeah, I'm trying to get some numbers, but there's a lot out there.

i'd read their that fireside chat to kind of understand where another thing is that these competitors they have to sell custom hardware to these retail centers and they can cost like a few hundred bucks where intellicheck integrates into your uh your scanning hardware like itself so all you do is however they do it just upload the code or whatever as uh non-techies we'll talk about that but they basically have no extra hardware that you need and they have that 99 success rate so i may be trying to look at this through rose-colored glasses but it seems like there's not a strong not a way that a competitor could come in and disrupt them okay all right what uh what was your favorite today my favorite stock that wasn't yours uh i guess i'll go first i

like brad's brad your pitches you're good because i'm very i'm very uh skeptical about marijuana but all that stuff the catalyst cannabis not marijuana not always cannabis cannabis uh that stuff made a lot of sense ian what about you favorite yeah i think i'm gonna have to go with intellichek um i'm intrigued i'm gonna take a deeper look it's uh you know i think brad you made a good fish and i'm i'm intrigued all right yeah small caps right throughout me so brad yeah I'm going, I'm going to go with Ryan's. I had a chance to look at a large chunk of the S1 and it looks, I don't know. It looks pretty darn interesting.

All right. Well, I guess we just go round table. I liked 1847 Gettiker's. Yeah. We all have to be nice and pick each other. I mean, if what happens with that finance, I would like to see how they finance that deal, but I like the, the proposition that the business serves. I like that area. I like, I think they have, it's a niche that's underserved. I agree.

All right. I think that's going to do it. Thank you guys for joining us. Yeah, thanks for having us. Fun show today. Yeah, always a good time. Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices.

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welcome back in uh we are moving to our stories i don't have one so what is yours we'll kick up this one not too much to talk about but i thought it was interesting gonna be a few discussion questions about this so canadian pacific railway is buying kansas city southern now if you're some sort of i don't know i don't want to stereotype anyone but like the tech investors the high growth people you might roll your eyes at this and think all right well this is boring these businesses don't make sense but it sounds like a headline from the 40s yes but look at the performance of some of these companies and those will get you excited about investing in these businesses even though they are boring and to be honest we have literally we have looked at the

railroad industry so we don't know how the industry works much at all we've looked at it probably i don't know once or twice i've never never you'd never looked at it so i think we talked about it with lawrence hamptill well we did we did and he's right the that it's right up his alley but i just i don't know what i'm trying to say here is that boring businesses sexy returns yeah it's one of those under-followed businesses by the majority of investors that are just putting up great returns with good capital allocation. But yeah, Canadian Pacific, they're buying Kansas City Southern in a stock and cash deal at an enterprise value of about $29 billion. Canadian Pacific is taking on $3.8 billion in Kansas City Southern debt. The rationale is the combined

companies will create the first railway connecting Canada, US, and Mexico. So if you look at the map they have on the combined map there. It is about, so Canadian Pacific, as you might guess, runs through kind of a west to east or east to west through the Canadian border, kind of through Chicago and then to the northeast. And then it goes down to about Kansas City. Kansas City Southern starts at about Kansas City, moves through Texas a little bit into the southeast and then through Mexico. So the rationale is to connect Canada, U.S. and Mexico, create a nice route there through the middle of the country and connecting the two countries to our north and our south. Canadian Pacific is issuing about 44.5 million shares and $8.6 billion in debt to fund the

acquisition. KCS, Kansas City Southern, shareholders will own around 25% of the combined company, but they're also getting cash as well. The combined company will have about a four times leverage ratio and estimates are that it will generate about $7 billion in levered free cash flow over the next three years. So it's going to take a few years to pay down that debt. That's basically the acquisition at its whole. Initial thoughts? Why do we think the railroad business is so unloved? Because of that ARC video. The ARC video. Yeah, that one really... It makes no sense. The returns have been really impressive um but it feels like uh to typical investors today it probably feels like

a industry that hit maturity 100 years ago yeah which is weird is that they were terrible investments 100 years ago because they were high tech but now everything's kind of laid out there's so much capital invested into it it's it's weird it's not something you would have thought all right year 2000 this is gonna basically crush all almost all other investments And it did. I don't know what, I mean, a lot of people know more about what actually happened within the industry, but their profit margins just soared. Maybe it is that they're so in love by people like us. I don't know.

Yeah, I'd agree. I mean, it's not sexy. It's not fun to, you know, it's not fun to read about unless you love returns. Yeah, because you, that's true. And at first you kind of just throw it aside. But then if you just, if you think about the dynamics in the industry for a few seconds, you're like, oh, right, this does make sense why they're just printing cash now. It's so hard to disrupt. And it makes sense why, I guess, Berkshire bought the BNSF in 2011.

But what industries do you think, like railroads, kind of went from or can go from irrational to rational now? Easy ones I have here that I probably stole from you. You have cable, so telecom, stuff like that, fiber optic, broadband, cell towers. They probably overbuilt, and I think they did overbuild. But now they're getting, you know, kind of rationalized in this industry that people argue and there's so much invested capital that it's really hard to disrupt unless you want to spend billions and billions of dollars. I kind of thought that, you know, you could argue logistics was one of them. And you probably have an idea that maybe UPS and FedEx were, but then Amazon came in and decided that, yeah, we're going to invest all this money to disrupt. Do you have any thoughts on those or any other?

Logistics is a big one. It seems similar, but Amazon's kind of taking it over. yeah but what about xpo logistics they've done well haven't they i mean yeah amazon doesn't do logistics for everyone right i mean i don't know logistics business well enough like like we're saying here it's an unsexy industry but it does feel like something that yeah econ it's the plumbing of e-commerce yeah and it almost feels like it's in that mode where it's kind of it's been a you know it feels right like it was rational maybe in the 80s and 90s with ups and FedEx, right? But it's kind of in a phase where it's in maybe an irrational phase and possibly

moving back to rational. Who knows? Because it seems like there's a lot of variables at the moment and that is whatever, you know, Amazon's investing tens of billions into their network each year. There's a lot of things that they could choose to do that could, and we know that they're big, you know, my margin is my opportunity. That's kind of their, or sorry, your margin is my opportunity that's their mantra um anything else hold on you thought you don't have xpl logistics stuff okay yo they've i think they've uh i think they've done well uh to be honest i don't know but i think the the easiest comparison has got to be cable right like 200 this year 200 this year what about long term long yeah wait that includes march uh long term yeah like uh five years uh it

It was at $29. It's at $122 now. Oh, yeah. That's – well. I mean, it's not sexy, but it generates good returns. Yeah. I guess it had a fall off. Maybe it had a – maybe it had that Amazon scare like UPS and FedEx.

I just think there's a lot more commerce to go around than what Amazon brings to the table. That's true. And maybe they're doing it for a lot more businesses than I'm imagining. Yeah. Yeah. Well, I think another thing that people should consider, so this is a whole other topic, but a lot of people, their bull case on maybe Shopify or DoorDash is that they're going to disrupt and invest in the last mile logistics or whatever that is. You know what I mean? They're going to try to disrupt that, but none of them are investing near as amount as UPS, FedEx,

or Amazon. I just don't see how Shopify is investing maybe a billion, maybe 2 billion, and Amazon's investing, like, at least $10 billion a year, it feels like that, you know what I mean? I don't know. There's just, there are a lot of e-commerce brands that are sort of bringing a lot of stuff in-house. That's true. This gets back to the mailman's edge, you know?

We wrote about this a long time ago, or someone wrote about it. There was a mailman that had some Reddit post, and he's like, I saw Etsy boxes. I saw a whole lot of them early on, bought. i saw amazon boxes early on bought he saw poshmark right or pot poshmark he said and now i'm incredibly bullish on poshmark or poshmark um so there's that mailman's edge maybe they uh maybe we got to get a mailman on the show we'll uh we'll we'll reach out well but what about what about okay what about the cable industry this one seems the most similar

to railroads because one there's the telecom boom and bust in around year 2000 or 2001 right railroads have a long history in the 1800s and early 1900s of being you know incredibly like important business businesses but really overbuilt and now we're getting and it's in compressed timeline it seems like now we're getting to the rational part of the cable industry where these might be good businesses now and i think people identified that probably back in you know 2011 2012 and it was probably you know early on that but you know things like charter even comcast although they're a conglomerate i don't know altice yeah i don't know we got to have francisco back on yeah these are all industries anyone an expert in these industries is probably

like oh you guys have no idea what you're talking about that is true we don't know anything about these industries but i do think they're interesting and it's something that any investor that's looking to broaden their horizons these are industries you can understand but you just got to put the time all right i'll go to the next question does this make you more interested in mexico at all i know there's a lot of potential catalysts that could help them you know moving away from china yeah the partnerships across and then now this railroad no one ever talks about mexican markets and it's surprising to me um and i haven't looked him up at all i follow aaron edelheit on twitter he's basically the inspiration here yeah for me

yeah and yeah maybe it's something worth diving into but i don't have enough uh knowledge right there's gonna i wouldn't i wouldn't take some mexican etf because a railroad starts to travel in there that's true that's true i there's probably there's a big learning curve but i think it's again it's a market that an american investor could understand a lot better than i don't know a southeast asian market all right last one before we move on uh we also have this funny thing though at the end uh does this solidify the bnsf purchase as a top five berkshire investment of all time so for example so the combined companies here are going to have an enterprise value i think just doing a little bit of in my head math probably around 100 billion

dollar enterprise value and now the combined cp or canadian pacific kansas city railroad well or kansas city southern excuse me we'll have 20 000 miles of lines bnsf which is under berkshire hathaway has over 32 000 lines or railroad lines i don't you know what i mean right yeah miles miles oh wait sorry i'm not saying miles 32 000 miles of lines canadian railroads don't say lines it sounds like uh it sounds like drugs well that's how they describe it uh i can't remember what the term is but they have 32 000 miles versus kansas canadian pacific and kansas city will have 20 000 i mean that's they bought did they buy bnsf for I believe $38 billion, and I think that's going to be doing pretty well for a long time.

Yeah. And that's the— This seems like—yeah, it seems like Buffett would be all over this kind of—feels like he would finance this deal. It kind of feels like Rockefeller would finance this deal, but— Yeah, that's true, if it was back in 1900. But I think the BNSF, it might go down as, you know, there's Gen Re, there's Geico. Apples. See's Candy, Apple, Coke.

I think it's better than most of those or it will end up being better. Yeah, I'd agree with that. Geico? Wait, you're missing Geico? I said Geico. I just stuck it in there. But our friend Alex at the Science of Hitting said someone was like, you know, there's a big conversation about railroads and stuff about how they're actually done super well. and that's, you know, they're even more carbon efficient than trucking,

so it's a better option for a lot of people if they can use them. But then he responded to Barry Schwartz, who's pretty good, on Twitter, and he said, you fail to consider that autonomous Teslas will likely haul about 95% of all bulk commodities in North America within 36 to 48 months. Well, that leads right into my hot water. I assumed you had this. i was gonna yeah hold on all right all right you're done that's that's it that's it yeah yeah so the i'll yeah i'll take the arc invest new price target for tesla as my hot water um and

you know what we're in maybe we're in hot water because last time we were wrong uh that's true their est first of all their estimates on everything was wrong except the stock price yeah their estimates were so yeah i mean their numbers were if they predicted multiple expansion That'd be one thing. Yeah, the business is going to be in a worse shape, but the multiple expansion will be there. All right, fine. Yeah, I'd be okay with that. But anyway, they expect the company to be worth approximately $3.6 trillion by 2025.

Without share dilution. Without share dilution, yes. That market cap is equivalent to approximately 20% of U.S. GDP this year. Does that make sense to you? Well, you're not factoring the moon's GDP. No, I don't know. Oh, yeah, it doesn't make any sense. What was the most audacious or strange thing you saw?

The insurance. The insurance thing is, I mean, I don't know that much about the insurance industry. I try to understand because I'm a fan of Buffett. Chris Blumstrand, someone that we respect a lot, was on Twitter, basically dissected this. The insurance thing was so ridiculous that it's unbelievable that they don't have their CFA charter pulled. I don't know. It's crazy. It's – if you're like – and then someone – there's a funny tweet.

Do you like understanding the insurance industry or do you like making money? A little shout-out to old Peru sex, you know. But the – I mean, you know my take. It's the most ridiculous thing ever. I mean, I don't know. What were your thoughts? But the thing is she could be right with enough multiple expansion from here. Sure.

I think every part of the analysis in terms of estimating, like, the revenue that comes in from each part of the business, I think all those will be wrong, but she could still be right on the stock price. Sure. Infinite, yeah, infinite margin expansion. Infinite margin calls. I mean, margin expansion. Margin expansion. All right. Oh, no, the funniest thing is that, okay, their share count was lower than the fully diluted share count right now.

and that's not putting in that at that stock level all of elon musk's would it's going to be a buyback machine yeah it'll be such a buyback machine but the the i think their fully diluted share count is like 1.1 billion i could totally have that wrong but it's a lot lower or higher excuse me than their average weighted outstanding uh but if you assume that stock's going to stay high all those will exercise and they have it at like 1 billion and then they have their working capital flatlined when they're gonna 10x their manufacturing capacity i mean it's just i don't know they're living in a dream world but who knows the dream world might last and you know 20x overvalued is no different than 50x overvalued it's all the same at this point if david einhorn

if david einhorn could see 1999 and push it to now i don't know he would be like if you said that there were any there would be okay i wasn't there in 1999 but this feels like a palm pilot became the number one, the biggest stock in the market. It's like it became bigger than Microsoft. Yeah, you're going to get hate for that take. But anyway. Yeah, sure. I mean, I assume the Tesla bulls, you're gone by now.

Yeah, you're gone by now. You'll be back, though. Common sense is in hot water this week as well. Last week, a New York City man sold a fart as an NFT for $85. If this is a bubble, which I'm not sure how it would not be, um yeah imagine looking back at this from a hundred like a hundred years from now and thinking how could they not tell no i mean yeah it's clear that it's clear i don't there's some interesting things that if you could get some ownership in businesses um you know that kind

of stuff decentralized ownership and like uh you know like you know stuff like that it's really inefficient when the i was trying to read up on it and kind of you know all right just embrace it read up how this stuff works no i'm not talking nfts that's obviously ridiculous but if you can attach ownership to a business kind of through this process you know when you have a stake on the cash flow is kind of like ownership in a stock which why not just make it a stock but you're explaining the stock market i know but it's supposedly now a lot of this ends up just talking in circles and you're just like well it's better because it's on the blockchain ha but the it gives you like full the the shareholders more autonomy but honestly when you're running a

company you kind of want it to be a democratic republic where the shareholders can keep people in line and the board of directors can keep the you know executives in line but you really want a few people or one person or an executive team to have a vision and go after it you don't want thousands and thousands of people i don't know i could be talking who knows maybe we're gonna I don't understand what you're saying, but what's your hot water for? No, no. I kind of get it. So it's like it gives you more ownership.

But it sounds like you're explaining a stock on the blockchain. Yeah. Either I understand it and it's really not that special or there's parts of this I'm not getting. But, yeah, I was trying to read up on it and how something like that would work. And I don't know. It doesn't seem that different. But it's on the blockchain, so don't worry. So it's worth more that way.

All right. What do you have? I guess. Okay, Leon Black. So do you know who that is? No. You ever heard of Apollo, the PE giant, private equity giant? I've heard the name.

Yeah. So he's the founder there, and he is stepping down from Apollo management completely. So he retired a few months ago, I think, and he was going to be the chairman of the board. But now he is leaving completely, and at the same time, we're kind of in a timeline where it came out that he had paid Jeffrey Epstein. Yes, that Jeffrey Epstein that you're thinking of, $150 million for, quote, tax consulting. So put two and two together, I think no one needs to really have some Einstein-level IQ to understand there's something going on there. and it'll be exciting, fascinating to what comes after this. That's the one thing that no one...

People are ardent defenders of anyone until you tag them in the same sentence as Jeffrey Epstein. Musk is a big one. People hate to admit it, that they were tied together. No, no, it's cool, though. It's cool. No, it was fine. Musk, dude, he's...

I guess a lot of people probably encountered Epstein during his life. Yeah, no need to make, yeah. But this Leon Black stuff, I mean, the $150 million, okay. Like, all right, what's going on there? All right, next. Next one, Root Insurance.

I know a lot of smart people. I know, I think, I don't, I'm not going to say any names, but I've seen a lot of people kind of bullish on this company. But Edwin Dorsey, stock jabber, very good. He's not a short seller, But he's kind of trying to be kind of one of those, you know, not like...

Local critics? Yeah, or he's trying to expose frauds and stuff like that to help short sellers and just the market in general. So pretty noble thing, I think, although he probably gets a lot of flack. But, you know, got to have tough skin there. But he's the thread, and I assume it was under his newsletter too, that Root Insurance has been raising rates on customers for no reason. and the average amount of complaints are off the charts. It's like four times the national average if they did some aggregate of the level of claims they have,

or sorry, level of insured people or customers they have versus the number of complaints. It seems like these AI, machine learning, like insurance, fintech, lending stuff, I don't know, I can't get around those things. What do you think? yeah i i'm always hesitant whenever the company's edge or competitive advantage is ai or machine learning because it feels like you can just someone could mask like masquerade yeah a business

by using that as the terminology in your 10k like what goes on in the back end don't worry about it say i yeah no especially if that's like your first thing under like what the business does under the 10k it's like we're ai it's like okay you think geico's not doing this i i honestly i read this stuff and i think that geico is gonna do just fine they're gonna be the low they're the lowest cost and progressive and whoever too like everyone's gonna compete on low cost and they're gonna yeah i mean they just it feels very hard to i mean what kind of data are they have do they have that's gonna like give them such a big edge that it just totally disrupts this thing i mean These companies have been aggregating data for centuries.

Not centuries, decades. I don't know enough about root insurance, though. I think it's a car insurance. Yeah, they could be doing something totally different. But if they're raising rates, if their rates are higher than what customers are supposed to get, if you have higher rates, what's the point? Like premiums? No, like they made them.

Oh, yes, yes, premiums, premiums. Yeah, I'm not sure. Who knows? It would be interesting to honestly look. Yeah, I'm going to read into the Dorsey thread. Yeah, the root insurance, the lemonades, I don't have a – or we don't have any whatchamacallits. I don't have a gripe with lemonade, but I'm – my concern is that there's parts – AI is not – I mean – Tech is a competitive advantage.

AI can be masqueraded as a competitive advantage when it really might not be. Yeah, but either way, I'm fascinated to see how these play out. You know, like if they end up winning, it'll just be fun to watch. But will we invest in them? No, no way. No way. Yeah, even if they win, we'll miss the boat. I'll be comfortable with that.

All right, last one. Now, this is a funny one. You probably saw this, but real marijuana is in hot water. I woke up today and saw this tweet from Ryan Mack and I laughed for a solid minute because first off his tweet was this is without exaggeration the dumbest I'll keep it PG you know stuff I have ever heard and it was an Instagram post from Forbes and I'm gonna read this to you would you buy quote digital marijuana blockchain-based NFTs have officially arrived in cannabis and jesse grundy would like to sell you a bag of digital marijuana grundy is the founder

and chief executive of peaks spelled with the z of course an upscale cannabis brand based in oakland california grundy is selling what he believes is a world's first a bag of cannabis that exists only sorry i can't keep it in that exists only online linked to blockchain technology for quote authenticity called quote lava coin the digital bag is available anywhere in the world and unlike most marijuana in most other places it is also legal anywhere in the world because it is link in the bio for details of course you gotta have that man there what do you think of this are you buying in on this is going to be the new cannabis bubble who do they think's buying in investors or do they think uh people that enjoy cannabis are going to buy it without it's so it's

so dumb it's so dumb look am i upset that that might be worse than the 85 fart no it's worse yeah it's worth 85 or 85 was it 85 it wasn't 85 000 it was 85 dollars the nft thing i'm glad it's not okay maybe it'll end up being bad i'm glad it's not scamming people or anything like that i'm glad that it's just rich people that made money on cryptocurrency just wasting it i'm you know it's not bad it's uh yeah it's it makes it gives us plenty of content for hot water so yeah dude if they want to waste their money on this i i'll laugh at it all day but we gotta wrap up so all right so hold by so hold the theme is our last three deep dives so callaway redfin and ping identity okay okay we're

gonna throw and i know redfin's a lot everyone loves redfin but we got some dms from a guy in the or no guy or girl i don't know if it's guy or girl but in the real estate industry who was not as bullish on redfin's business model as people think he actually ranked or they ranked the competitors as one compass company we didn't even talk about two zillow three redfin and then they were they said open door was stupid so i'm unsure about redfin so i'm gonna sell it because it's just an industry i don't get uh probably callaway is probably number one for me paying identity seems solid seems like a hold yeah like i liked a lot of what they had management seem good but it's also an industry i don't understand yeah it's not i don't understand

what competitive advantage they'd have versus octa and that's concerning even though their valuation is a lot less than octa yeah or is it octa i do i'd probably go the same way all right callaway i mean callaway with top golf is compelling like they're not gonna have they have to invest so much in that real estate that it's gonna the the cash flow is gonna look bad for a few years, but I think in like five to 10 years, there's a chance it's printing a lot of cash. Yeah. Plus real estate only goes up. Oh yeah. Well that goes without saying if the GMO is trying to see gift. All right. Um, anecdotal evidence for me, I guess I have two. Okay. Uh, how many do you have? Two. Okay. My first one, I went to a grocery store this week.

I know pretty crazy. Uh, and I realized that I hate self-checkout. I think it's terrible. there's never enough space for my items and if i try to rearrange them it yells at me and then an attendant has to come over i would rather just go back to the stuff where there's multiple checkouts being attended to because right now there's like no one there isn't enough people using the typical checkout lines that there's not they aren't very staffed and so either you have a fat line over there or you have to go through this terrible process of self-checkout so i say we just get rid of it uh that's my take i agree trader joe's has the best option i know we're sprout farmers market people so we can't uh that's the competition but trader does has a really

they're the best at checkout they don't have self-checkout they they don't even have you put it onto a thing you just roll up the cart they just take it out of your cart they do it all for you but you don't have to put on the little conveyor belt so it's it's a lot faster i don't know whatever process they have it works really well um and if you're if you're the kroger exec or a grocery store exec and you have self-checkout whatever numbers you think people are cheating you on self-checkout multiply by like 10 because it's it's way worse than you think the losses on that have got to be astronomical they're not worth it yeah i'd agree with that um i wrote a tweet this week about instagram becoming facebook i got a lot of slack from facebook shareholders finn twits

It's FinTwit's favorite stock right now. Okay. I said e-commerce. Basically what I said was I don't like the Instagram experience anymore. It's too bogged down by ads. People my age are saying the exact same thing. You're kind of feeling that. I mean because, you know, we're the – not to toot our own horn, but we're, you know, you're the target demo that could kind of be the 20s, Gen Z, millennial type, you know, their target market.

And if it's bogging down my experience, the e-commerce isn't going to work if I'm just going there once a day to check in on birthdays or whoever is posting some monumental life moment. Like my engagement is far lower. I think across my demographic, engagement feels lower. Now, that's all anecdotal. But then I saw, and they started talking about this IDFA stuff, and Zuck went on a clubhouse and said how it's going to benefit them. With Toby and Daniel Leck. It was a great listen.

Honestly, I don't know how they got those three together. I had an epiphany that the IDFA stuff is like the marketing ban on Altria or on tobacco. Yeah, could be. I think it's going to have sort of the same regulatory – that regulation is going to have the same repercussions where it sort of insulates the people that already have reach. And Facebook can – they'll have the ability to work around. Yeah, I mean that isn't really necessarily a concern. But is the user base – is it going to stay around?

Is the consumer going to stay around for as long? I will also – yeah, I will also say this. when i tweeted out that instagram was becoming facebook a whole bunch of people my age liked the tweet every facebook shareholder i believe was older and they were like no you don't know what you're talking about that was the point of the tweet it's becoming facebook it's going towards that older demographic yeah i mean yeah the people compare people yeah it's anecdotal that's why that's why it's called anecdotal evidence that's why i have it in this section yeah people call facebook a sin stock and i potentially agree but you have to ask okay one

is it going to trade at a sin stock multiple you know maybe that's it has to get down to that and two you know comparing it to tobacco or something it's a lot more dynamic of an industry it's yeah and it's feeling very bag holdery with every single person saying i mean they just keep tweeting they keep loving it more and more at these cheap multiples which yes and there is is better they're right yeah but it's like the the market is pricing in what zuck said on the q4 conference call of concerns over uh good ads yeah left tail risk is strong here and the market is just pricing it i don't think people should be surprised but if i don't think it's a microsoft 2010 i think too many people are treating it like that where it's like the big tech right under your

nose you should have seen it the whole time yeah if you uh if you if you like microsoft 2010 let me introduce you to some you know little nintendo uh but that's a whole different story i mean facebook look either facebook facebook shareholders are gonna be oh we gotta wrap things up sorry facebook shareholders are going to be either super right or totally wrong i mean i could see a way where this is a two trillion dollar company they reduce the share count i don't know give me a great investment gotta get to yours okay uh first one doordash anecdotally pure anecdotal that's totally personal i'm their ultimate target customer live in an apartment uh younger you know kind of in a place where you're supposed to you know like the type of demographic that

they that's supposed to be a power user i have no urge to use them even though i don't know less lazy maybe people are super lazy but is that really a bull case plus the bull case we talked about is the logistics network i'm hearing them supposed to compete on last month's delivery are they really going to compete with amazon and xpl logistics and ups and fedex i mean good luck but sorry last one souring on peloton too yes no diamond hands for me here um we never owned shares we're just kind of something we're researching a little bit it was interesting yeah i'll say argumentatively emotionally or whatever just for the take i'm off them now I was convinced for a while.

Yeah, I was too. I just bought a cheap wrong machine on Amazon. It's going to be here in two days on like the four-week wait on Peloton. YouTube has a lot of workout content. I really think it's fine. I just put it on a 20-minute thing. I just fail to grasp the competitive advantages. I don't know.

Any thoughts? Am I totally discounting it? Everyone says the classes, and it does have a cult-like following, so I imagine that the classes are nice. I don't think people would say that if they didn't actually like the glasses. That's true. They wouldn't just be lying. And I'm not just talking about shareholders.

I'm talking about users. Yeah, that's correct. That is correct. I mean, if anything, their competitive advantage would be customer goodwill. But it's just hard to build. Okay. Well, we have a hard stop here. So thank you guys for listening.

Thanks, Brad and Ian, for coming on. What am I missing here? Disclosures. Oh, right. We are general partners at Arch Capital, so investors may have positions in the securities discussed. We are also not financial advisors, so anything we discuss on this podcast is not advice or recommendation. Thank you guys for listening. We'll see you next time.