Chit Chat Stocks - Mohawk Group - Asher Delug, Sean Emory, and Jonah Lupton

Episode Date: April 20, 2021

This week we discuss Mohawk Group (MWK) with Asher, Sean, and Jonah. The group discusses topics ranging from Mohawk's product mix to the company's capital structure. Listen in after the interview to hear Brett and Ryan share their favorite stories from the week and more. Let's go! Follow Asher Delug on Twitter: https://twitter.com/asherdelug?s=20 Follow Sean Emory on Twitter: https://twitter.com/_SeanDavid?s=20 Follow Jonah Lupton on Twitter: https://twitter.com/JonahLupton?s=20 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 1st Half | (3:32) Interview 2nd Half | (28:24) Amazon, Coinbase, & more | (59:01) 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, April 20th. Today we have an interview with three different people, I guess five in total, but we have Asher DeLugg, Sean Emery, and Jonah Lipton on the show and we're talking Mohawk Group. I want to throw a few disclosures out there before we start because I believe all three of them were shareholders and Asher DeLugg was a co-founder of Mohawk Group, but he is no longer a director or insider. um so the the discussion is not meant to be a recommendation by any means it's supposed to be for informational purposes only so do your own research every time don't listen to anyone else doesn't sound like something we should have to say but you know use build your own conviction yeah your own research yes use your own research this is like everyone says it's not recommendation we say that to a point you got to know what you own don't listen to what anyone else is saying But like we say, it's a fun discussion, and there's a lot of great insights from it.

Definitely. And afterward, we stick around for the show notes if you want. There's some interesting ones from this week. The Deli, Amazon shareholder letter. Yes. But what were sort of your highlights from the interview? Big takeaways. Yeah.

I mean, Asher gave a framework of how they look at the company, or at least what they did look at when he was there. Sean had a lot of data anecdotes about how they look at how Mohawk is doing outside of just looking at the earnings reports. And then we talked about the dynamic of kind of diluting the share count but also using it to make it creative acquisitions. That was just kind of – those are my favorite parts of the discussion. Definitely. And we have our sales pitch before we get to the interview.

So it's codeCCM at 7investing.com. Use that code. So I know we say it every show, but help us out, help them out, help yourself out. It's a win-win-win scenario. $10 off your first month, so it's only $7 to start off. That's a screaming deal. You get great analysis from Matt Cochran, our friend who does a lot of fintech expertise, financial expertise. Yeah, I'm going to list them off.

Dan Klein, retail expert. Dana is a healthcare expert. Newbie. Yeah, she's the one that just joined. You also have, oh gosh, I'm forgetting his name. Yeah, well, I was going to get to Simon last. Yeah, you have Max, who's an expert in biotech. You have Steve and Simon, who are very privy to what's going on within the tech landscape.

And then lastly, we have, oh, gosh, I'm blanking on his name. I thought we got him off. No, no, no. Oh, Arvon. Yeah, he is from, and I'm sorry, I'm not getting your name. Yeah, he is also very privy to tech. PhD, really, really impressive background there. So you get research.

Lots of pedigree on that. Yeah, so you get research from all different types of the market, and it can really help your research process. So, I don't know, why wouldn't you sign up? Yeah, use code CCM. Without further ado, here's the interview. 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 Chitchat Money by Ryan or Brett or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Okay, today we are welcomed by three different guests. So we've got Sean Emery, who our listeners are probably familiar with, Jono Lupton, and Asher DeLugg. Asher and Jonah are new to the show, but a little bit of background on everyone. Sean is the founder and CIO at Avery Co. Jonah Lipton, he runs Lipton Capital and a growth fund

for social capital. I think I'm getting that right. And then Asher DeLugg is the co-founder, a co-founder of Mohawk Group, and he's on the board at Spin Launch. So before we dive into the detailed discussion of the business, we wanted to kind of lay the groundwork, uh, give a little background for anyone who's unfamiliar. So why don't we start with Asher? Um, and then we can go around the room, sort of, why do you own the company? And, uh, I guess for Sean and Jonah, how did you come across it? And maybe Asher, what were the early days like? Sure. Um, you know, I'm, I'm a little bit different. I'm a co-founder. So I've been holding the stock for seven years now, since the very beginning. Um, I actually could have sold by

now i'm unrestricted but uh extremely bullish on their on their business and their business model so i'm a long-term holder um you know i guess the reason why i'm still holding it um after all these years and plan to keep holding it is because it's it's not only growing extremely fast but the Growth is extremely repeatable and sustainable, which is something that, you know, in my businesses in the past, every year you're, you know, you're growing fast. But every year you're asking yourself, how are we going to do this again? You know, how are we going to grow at this rate again? We need new levers. But in the case of Mohawk, it's it feels extremely repeatable.

They're their model. And I think they can do what they're doing with these kinds of growth rates for many years to come. you know okay sean what about you yeah no obviously echoing kind of uh someone he said obviously uh we are shareholders and full disclosure of that and and um we're not making any recommendations here but we are trying to kind of articulate our our rationale uh in the story we think um stepping back how did we find it obviously so so we try to look at all the ipos roadshows, once it got public, I actually remember in even kind of what seemed like a little basement, kind of pitching the story

digitally. And that was the first time I heard of it. And honestly, it was a compelling kind of idea. But to be quite honest with you, it seemed a little early. And the overall model didn't necessarily reflect maybe the potential opportunity. Fast forward a couple of years, we think they're starting to grow into themselves as an organization, when we look at kind of investments, specifically structural growth investments, we really focus on kind of five key pillars, which is management, growing market, growing market share within that market, margin, potential expansion, and multiple expansion. And

they kind of hit all those criterias in terms of what we're looking for. Online's growing, we're seeing that it's 30% of kind of total commerce. Asia, it's 50%. And we think both of those are still early days as kind of the foundation of online commerce continues to evolve and scale and many of the companies that are are building out the infrastructure are less than 10 years old um and then growing market share within kind of these these marketplace models we think if you think of the legacy models they're they're really around uh people sitting around a table and and procuring products and putting them into brick and mortar and and um essentially kind of a really top-down approach and you're paying for physical shelf space. The marketplace model turns this on

its head. It's really consumer-driven. It's digital shelf space. It's really predicated on reviews, rankings. Mohawk sits there trying to optimize for the consumer. Amazon is trying to optimize for the consumer. There's an alignment there. Ultimately, we think this is a compelling story just based on their success of organic product development along with this new acquisitive strategy that they've been taking on over the last six months. So all in all, we think this is an interesting story as they continue to go down this path of growing into online commerce and the marketplace model. Jonah, I know they kind of hit all the points, but how did you come across it? And then feel free to add anything. Yeah. So out of the three of us, I'm the newest

one to the stock. I've been in Mohawk since early December. So, last year, 2020, I was focused on larger companies. I had a big position in e-commerce stocks. I was in Shopify. I was in Etsy. I was in Farfetch. And then towards the end of 2020, I started transitioning my portfolio to small caps and mid-caps. I just thought that some of these large cap names had run too far, too fast and we were going to start to see some multiple contraction. So I wanted to start adding some smaller names to the portfolio, did some screens, talked to a few people. I actually had someone mention Mohawk to me back in the summer when the stock was in the single digits. I just never took a hard look at it because I had such a big position in Shopify and Etsy and so forth.

So once I made the decision in, let's say, early Q4 to start transitioning to small caps and mid by the end of the year, after I took a deep dive on Mohawk and actually did a sub stack write up on the company in mid-December, I've been adding to the position ever since. So Mohawk is right now my fourth largest position in my personal portfolio and probably second or third in my social capital fund because I've been adding a lot to the position. I don't have much cash in my personal portfolio, but I did have some cash coming into today in my social capital fund. So I've been adding to Mohawk today as it's pulled back under 29. So like both of these, both Asher and Sean said, I just think the story is pretty interesting,

especially at these prices, this valuation, the combination of launching products and growing them organically combined with the accretive M&A strategy. Right now the stock's trading at, let's call it 30 times EBITDA with the 100% top line growth. I don't see much more downside from here. Okay. Uh, now we're going to get to more of the specifics of the business. We're really going to focus on how they can grow from here because that is a big part of Mohawk. Um, we'll start with Asher. And then if anyone wants to follow up, please go ahead. How do you see the product mix expanding over time? Is it going to be more through acquisitions or organically through new product launches? Um, for the next few years, I personally, I think it's going to be,

mostly M&A. I think M&A will eclipse organic. Keep in mind, organic is going to still grow extremely strong like it has been since we started the business, like clockwork. But the M&A is just so overwhelmingly large, the roll-up opportunity in the near term, that I think it's going to give the direct business, direct product launch a run for its money. But I think probably the way I think about it beyond direct versus M&A is these are totally complementary strategies. When they acquire a new company, it gives them a beachhead and a new vertical to go ahead and launch tons of new products from there. So the M&A is just ultimately amplifying their direct product launch business.

Okay. Anyone else have any follow-ups? Maybe we'll start with Jonah and then we'll move to Sean. So I do think right now, so I don't know exactly how fast organic is growing. They don't really break it out that clearly, but I do think the bigger opportunity is going to be on the M&A side. So I've never actually shared this, but five or six years ago, I was living in North Carolina running a web development company. And I met with a couple other entrepreneurs and we actually talked about doing something similar to this. We just thought there were so many of these smaller e-commerce brands out there that were looking for an exit. Someone started these companies with a couple of friends. They grew it to $5 or $10 million. And you're not getting acquired by

Procter & Gamble. So how do those founders actually exit the business and get some liquidity? And that's where Mohawk can be there to step in and buy these very attractive, still growing businesses, generating free cash flow at attractive multiples, chop out some of the overhead or unnecessary expenses and costs like people, and make those businesses even more profitable than they were before. So I think going forward, the M&A strategy is what's going to attract more institutional investors to the story. But I think the organic growth and launching products is kind of like the icing on the cupcake. Sean, anything to add? Yeah, I mean, not much. I think it's just echoing the fact that, yeah, look, there's new categories coming up all the time. And within

those categories or keywords or product listings, there's really an opportunity to organically create something and kind of they take that approach from the bottom up. Then you talk about the acquisition strategy and if it is this accretive and look we speak with amazon sellers quite often and speaking to single kind of product or single brand and very successful you actually recognize just how much help they actually need on the technology side and kind of the know-how of managing their supply chain and these are companies that are successful on this platform so that's essentially who they're going up against on the product side so organic or through acquisitions, it's really improving the products of, of kind of the example that I'm

talking about, or, or, or essentially just building from the ground up and, um, even building products for, uh, over the next kind of two, three, four, five years are for other marketplaces that I think, um, we're in the early endings of, of seeing play out. So that's really my kind of two cents to add on everything they already said. And I think that early, I think that early endings point is, is important because even though we saw the acceleration of e-commerce last year during the pandemic, this whole e-commerce thing is just getting started. I know people, including my parents, that really didn't do anything on e-commerce, including Amazon, until they had to last year, and now they're addicted to it. I think there's a lot of people. I know some people

like the poke holes in the story saying that Mohawk is so reliant on Amazon. I don't think that necessarily has to be a bad thing. Amazon's the largest, most powerful e-commerce platform on the planet, you know, with 150 or 200 million prime customers, I think the fact that Mohawk is aligned with them is a good thing. Yeah. And I guess on the acquisition side, how do you, and we can start with Sean on this, but how do you think about the dilution? Because a lot of these acquisitions are done or financed partially with stock. And so they're kind of using that as currency? Is that something you like at the current valuation? I mean, I guess, is it a concern for you at all? Or would you prefer that? Yeah, look, I'll take that in two

ways. It's really the form of funding and also the acquisition kind of strategy itself. And when you look at the terms of funding, obviously, equity is the most expensive form of financing. So I'd rather prefer the cheapest kind of funding possible. But I think what we're seeing is two things is one, an improvement in financing, right? We saw their latest deal, the size of it, and also the reduction in interest. So I think that's something to kind of put in your pocket, but also we have to keep in mind where they've been. So if you just step back, you look at most credit decisions are based on kind of like 12-month trailing. And the last 12 months is really the first time they've squeaked out any sort of profitability. So we have to understand

where we are, but more importantly is where we're going. So when you look over the next 12 months and you see the potential guidance that implies X level of profitability, we can assume that there's not only a product flywheel that's happening here, both organically and through acquisitions, but also one through financing and a financing flywheel as they improve this platform. And I think from a margin standpoint, that's going to be highly accretive at some point in the future. On top of that, I think it's important to understand that Mohawk probably went public maybe two years too early. This was, if you look at them right now, they're probably primed to go public right now if they were private. Just hitting profitability, just scaling

the business. And ultimately, I think people are kind of thinking of Mohawk, given that they've been public for so long, and then comparing kind of financing structures. This was very similar to a private equity, like financing, a late stage financing. And ultimately, I think that's where the business is. However, yet, if you think of where the business is going, I think, again, that flywheel on the financing side starts to make some sense. Now, the dilution comment that you mentioned, yeah, there's equity dilution, but it is accretive. So, it's important to understand that they're financing this business through dilution, but using a higher valued asset to buy or lower valued assets. Therefore, just in simple terms, the total asset in itself is we're

lowering the overall value of the conglomerate in a sense. So I think that's an important distinction when you're talking about using dilution to fund something and seeing that return on that investment. So that's how we look at it. Again, it's about finding the cheapest form of funding, but again, putting some context around where this company is today and where they're going. It's actually, that's a good point. That most recent financing, you know,

8% debt with warrants does look sort of similar to what you would get with a private company doing a venture debt deal so asher anything to add to sean's comments really interesting comments um i mean i will say as far as two years uh too early it does resonate you know we it was definitely a debate at the time uh about you know bringing the company public and it was a rocky initial go you know at this point i do feel despite the pullback we're in a great place um you know around that billion dollar valuation but it does resonate over all the comments that perhaps we went private a bit too uh public a bit too early and then just in general um you know in terms of how they're doing deals and you know whether or not i like that

strategy i mean i do because of the price tag of the deals you know they're only paying i think on average, let's call it three to five times EBIT, I believe was the healing solutions deal. And, you know, the stock is obviously trading at significantly higher than that. So if, you know, if they were, you know, if the stock was trading at 30 times EBITDA and they were doing deals at 30 times EBITDA, I wouldn't necessarily like it. But I think the strategy, you know, the fact that they're buying companies that are already proven and profitable and they're buying them what seems to be like a discount because those companies probably don't really have any other form of liquidity or exit, which is obviously a good thing for Mohawk. So I like it. I mean, I don't know

if we're going to see any new product launches in the near future. I guess I hope we do, but I mean, only if they really see big opportunity in that particular category. Otherwise, I want them to double down on the M&A strategy. Yeah. Asher, you got your hand up there? yeah just another point on the on the m and a which has been talked about a bit but you know obviously it's super accretive even at the three to five x type of multiples that they're looking to pay some deals have been less than that i think there was one at two and a half x but i think the real number when you look retrospectively in a year from now is going to be more like 1 to 2x when you factor all the cost synergies and all the ability to

enhance top line, new product launches, as well as SKU optimization for existing products. I think that's going to be a big wake-up call for the market, too, that people are talking about, oh, perhaps the multiples will rise over time. But in reality, when you look back on these multiples, they're going to be even, not just a little bit i think much cheaper than the headline number that we're seeing right now on these deals which is still very low you know yeah i'll add one thing too um yeah i think that that makes a ton of sense in terms of uh what asher is suggesting and taking it one step further is really trying to understand why they're buying um you know i think when you look at the technology

that they're trying to build and there's there's more to that right this unified approach look at the end of the day this this company was built to create products where they thought there was gaps uh and there was there was kind of an opportunity to slide in as a product or category leader and for them to make an acquisition in a category that they feel that they cannot necessarily become that first page of a search result i think says a lot about what they're actually buying um and the longevity of that um that that digital shelf space that's being acquired here. So I think we can assume that what they're buying is leading position and we can assume that these products can have an extended shelf life, which implies that a two to four X.

And then again, if you use the multiples Asher was just using, we can assume that these investments will be highly accretive as time even goes on. So again, that's an important distinction to make in terms of what they're buying and the perceived moat that they're suggesting when they make this acquisition okay we'll move on to the next one unless ryan you have a follow-up or we get i was just gonna why why are they able to make these acquisitions at such cheap multiples is it just uh the the companies they're buying don't know where to go from there i'm curious why they're able to make such cheap acquisitions yeah i i i think you're right i mean i just think there's there's a lack of liquidity in those size companies. So I started a couple of e-commerce

companies six or seven years ago. I talked to a friend that was in the M&A space and he said, don't even think about getting acquired until you hit 10 and 2. 10 million of revenue, 2 million of EBITDA. Like he said, anything below that and there's no buyers for you whatsoever. And that was five or six years ago. Those numbers may have come up even more. So, you know, if you're an e-commerce brand doing, you know, 10, 15, even 20 million in revenue, you're just not really big enough for anyone to acquire you and make any impact at their bottom line. So I just think that's where Mohawk can, you know, really capitalize on these smaller brands and do this roll up strategy of companies that are doing, you know, kind of 15 to 30, 20 to 50, maybe somewhere in there. Yeah, Asher, you got something. Yeah, I agree with Jonah fully. Fabrice, I believe it was Fabrice, actually addressed this on, I believe, the last earnings call.

And one important point he was making is that from the perspective of the seller, it's way more than three to five, you know, whatever they're talking about on the headline multiple. The reason why that is is because the seller, you know, they have an extremely unoptimized capital structure. They're pouring a lot of that money right back into inventory and marketing. So when you look at their actual cash flow and their distribution activity to the founders, honestly, at times, I'm sure it's probably zero, if not, you know, much smaller numbers than the three to five X. So, you know, the EBITDA that they're valuing it on. So huge spread between, you know, the actual cash flow and what they're talking about on EBITDA multiples. You know, I think Fabrice said, by the way, one second, I think Fabrice said, I forgot the number he used, but I think he quoted, you know, effectively it feeling like 15, 20x to the founders. Sorry, go ahead, Sean.

Yeah, no, I mean, I was going to kind of say some of that. Yeah, no, it's the working capital. It's really all about working capital. And these sellers can't take the capital out of the business because they need to continue on. So they either keep selling or they don't. So it's either taking all your EBITDA and running away, or you're getting multiples of that EBITDA and running away. Um, now also you're seeing that the, the complication of trying to launch multiple products or multiple brands across multiple structures, which ultimately talks or kind of emphasizes the need for technology to be that, that solution, you know, these, these sellers are really archaic in the way that they're doing things. Um, they're using point solutions like jungle scatter, helium 10, which are good solutions in itself, but it's not unified.

So it makes it really, really difficult for them to scale beyond what they're already doing. And then now they're being asked to move international and kind of do other things. And now you're having the commercialization of this platform where somebody like a Mohawk or Thrasio or many of the other vendors that are out there that are doing well, that are essentially competing against them. So if you're a seller right now, and again, I've spoken with plenty and I can see underneath the surface what it actually looks like, and it's clear why they would sell in this environment. And it goes back to everything they just said. Okay, Brett, feel free to ask the next one. Yeah, so we covered this a bit. So I'm going to just pivot slightly. Is there ever a

point within the next few years where they can fund, say, either acquisitions or just new product launches through their operating cash? Do you see that as a path within the next few years? I guess we're going to start with Jonah on this one. I mean, maybe smaller deals, they probably could. But I mean, the way I look at Mohawk is, you know, as they generate more cash, pay down debt, strengthen the balance sheet, you know, they'll be able to write refinance that outstanding debt at cheaper rates. I mean, I think if they're going to grow and, and capitalize on this M&A strategy, I think they're going to still want to do it with debt. They're just going to want to do with cheaper debt without the warrants.

So I don't know if they'll actually end up paying for deals straight off the balance sheet or they'll just keep leveraging up with cheaper and cheaper debt as the balance sheet gets stronger. At least that's how I look at it. I mean, they're not, unlike Microsoft, right? Microsoft bought Nuance today for what?

16, $17 billion of cash. They have like 100 or 150 billion cash to spend that anyone wants to do with it. So I don't see Mohawk in that position anytime soon. So I think the goal for them is just to, you know, to get the cheapest debt possible. I guess, would you guys like to see them add debt to the balance sheet? I mean, if you're looking at like the past 12 months, it looks like they're just going scorched earth, like acquisition after acquisition, because they're finding these great deals. Would you like to see them kind of continue that and accelerate it with some debt?

Or would you rather be done through stock? I'd rather see it done through debt. I agree. Sean, any thoughts on that? Yeah, no, I mean, like I said before, wherever the cheapest form of capital is, that's what you take. And I think that flywheel will continue

as this product portfolio continues to expand. So, yeah, I mean, that's my two cents on all that outside of everything I said. Okay, perfect. Keep in mind, too, keep in mind that they are using stock as well. It's not purely that.

Okay, we're going to hit a quick break and then on the second half, we'll try to hit on the competitive advantages. Bring up some counterpoints as well. Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices. You'll get real-time alerts. Oh, like this one

so you don't have to worry about malware. Or when your kid downloads a song. from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply all right welcome back in uh next we're gonna hit competition uh and so this is this is the one i was really hoping to ask this is the fun part, yeah. Yeah, we have a very collectively a smart bunch here. So, I guess we'll start with Sean, but how hard is this model to replicate? And

then Amy, which is their artificial intelligence engine, sort of helps power the marketing side and more as well. But how much of an advantage does that give them? Because we know there's other companies out there that are sort of doing this as well. Yeah. So, yeah, to replicate this, I mean, it's really I alluded to some of it earlier, but there's the operational level kind of requirements that is you need to have to kind of build a product from to scale across the marketplace and therefore marketplaces. And then second is at the underlying individual products. So operationally, if you think marketplace sellers will continue to kind of commercialize these operations, really across many categories, single marketplace, and eventually on multiple marketplaces, then I think you have to believe that a unified solution on the technology side will be required, right? Because, again, you have to have something that is allowing you to speak from your support to your marketing to your inventory. Today, again, it's point solution. So there's technology kind of or operational intensity that is required.

And that in itself is not necessarily the norm today on these platforms. So Mohawk is six, seven, eight years ahead of the curve in terms of building that solution and having what I would call a systems advantage, especially when you compare it to the average seller which is the average kind of seller that's on these platforms and then on the product side it's the the the fact that each underlying product is highly fragmented and again this comes down to the product level so they're able to or they're they're competing against um each product at that product level on a keyword or or a category and what we're seeing is it's really, really hard to move. And Asher would know is it's hard to move off a category leader. And I mean like the first five or depending on which category. Otherwise,

and as evidence is we would expect then a company like GE would essentially be at the top of each appliance category. They have the most money, they have the best brand. So you've got to ask yourself, why aren't they the leader? Why aren't they the leader of each category and each keyword? And really, it comes down to reviews, ratings, and rankings where you're optimizing for the consumer and really building out a valuable listing that has that digital shelf space that's sitting in that category. And ultimately, when you think about it, so it's operational intensity, if you really believe that the commercialization of these marketplaces will continue, multiple marketplaces, which will make it even more complex. And then at their product side, you can take out one of their products, but you can't take out 1000 SKUs or 2000 SKUs. And what does it look like five years from now, if over the last six months, they've gone from 250 SKUs to 1000. So that's kind of how we think about the replication of kind of building a consumer package goods for the digital world. That's perfect. Asher, you may have your hand up there.

Do you have any follow-ups on that? I actually didn't mean to have my hand up. It's okay. yeah so i i think i think the market greatly underestimates the delta in technology you know technology between mohawk and some of these other guys that are popping up um like you know for years we've thought about hey we should go roll up e-commerce brands you know this is not a new thought but why has the company only done that over the last year um the reason is because we never thought we were ready. You know, yeah, we could run a thousand miles per hour and start

acquiring them and turn into a federation of brands, which I believe is what these other companies are currently. They're just a federation of disparate brands. For us, we were always focused on the centralized full stack e-commerce platform, full automation. And that, you know, took time and the concept, for example, the last healing, the deal we did with healing solutions, they onboarded thousands of SKUs in 48 hours. You know, that is insanity. Like that, that was our dream for years to be able to do that.

And before the company was ready to do that, it felt like if you're going to keep ingesting SKUs, not it felt like we knew from experience, if you're going to keep ingesting SKUs, you're going to create an operational nightmare for yourself because you need for every deal, you're going to need more customer service, more marketers, more every down, every, every link in the chain, just throwing more people at it.

If you look at the revenue per employee or just employee count growth of Mohawk versus, you know, some of the high profile competitors that are popping up that tells some of the story um and i've also been hearing just in the industry that they you know some of these other aggregators are becoming sort of like uh you know 200 headed monsters with you know acquiring these companies extremely fast with no centralized tech and ops platform and it becomes this nightmarish federation of brands that said i think there's going to be a lot of great winners in the space i think there's a lot you know they're going to do well but it will take a lot of time

for them to get to the place where mohawk is now as far as that centralized stack and who knows where mohawk will be in those few years um because god knows they're working on the next generation at this point john any follow-up there and they yeah they both have some great comments so i'm not going to add too much but i mean i think when mohawk got started you know they wanted to build a you know tech enabled cpg company where they think about the tech first the platform like sean said kind of the the unified approach the logistics and all of that and then bring in the products to lay over the top and i think too many other companies have done it the other way around they start with the products and then try to figure out the tech later and realize you know

they've put themselves in a messy situation where they just can't manage that many brands and that many SKUs. So I think Mohawk had the right idea from the beginning. And now that they've got everything set up, now they can start digesting these acquisitions. So I guess my follow-up there would be, if Amy's viewed as a competitive advantage, is that something someone could go out and do the same thing or does that get better with time where now that mohawk's been doing it and had so many different acquisitions that amy software continues to sort of get further ahead of the competitors am i thinking about that right or is it still sort of replicable actually it's probably the right i want to answer that i mean it's what i said i mean it's a six

six to seven year headstart is a very significant headstart. And not only that, it's the data and experience they've had in that time. So, yeah, like I said, I think there's a lot of great companies that are going to catch up eventually to where Mohawk is today on tech and op stack. But, you know, I wish, you know, I'm no longer an insider, obviously. I wish I could see their roadmap for Amy and the platform. I don't know what it is, but I can guarantee you it's impressive. It is. I remember years back when I was still at the company every day, the roadmap was truly endless. It felt like a roadmap that could never be completed. There's just so many hooks platforms angles that uh that you know and i'm sure it's grown so my guess is

that they're just gonna maintain their lead um and uh i think mohawk they may not be the the leader in some other aspects like you know some of the competitors have have raised more capital and it's impressive um but i think mohawk does have first of all i think they have the same access to capital as the competitors um but their technology advantage will be forever in my view all right anything else uh if not i'll move on to the next one this one and correct me if i'm wrong here and we can just move on um but one thing that came up when we were looking at it is why does mohawk license out the amy software we're looking this up and i think a few months ago, there was an article on that. Would you rather them keep this in-house? And I know it's

a tiny part of the business right now. I guess we'll start with Asher. You may know more about that. Like you said, it's an extremely tiny percentage of the business now. I know though, you know, they've said publicly and, you know, they have some senior positions at the company that indicates that they, you know, are working on something bigger with that. All I will say is I trust management that whatever they do in that space is going to be a worthwhile and be non-competitive with their core business. So, you know, I think there, there are ways to do it. For me, it's not something I'm overly excited about. It's show me the money.

You know, if they announce one day that they've a super interesting deal on that end, that'd be great. But I'm, I'm like Sean and Jen, I'm looking at, you know, how much M&A can they do? How much direct product growth can they do? Okay. So it's not the core story. Go ahead, Jonah. Yeah. I'll ask a question to Asher. Asher, do you think Amy is more important for which side of the business for identifying opportunities and categories or for identifying M&A targets?

I mean, I think the identifying part, that's, you know, what we call prospecting that is whether you're, you know, that is just one tiny part of what Amy does, right? Tiny. I mean, it's important, but it's a tiny, tiny part of what Amy does. So, you know, as far as the prospecting side, I would say, you know, well, I guess for the next few years, maybe M&A in the longterm, direct product growth for sure. But M&A, you know, honestly, you, there's, you don't need the AI based system to do that.

but you know the the other sides of the other aspects of amy you know the more automated marketing which that alone i feel like that could be a standalone business like a really big standalone business it is the best automated you know digital ad buying system for for e-commerce out there in my opinion it's unbelievable um what they're doing with on customer service with ai and and tying customer service into the system what they're doing with inventory management and logistics and fulfillment um you know there's there's so many of these areas that that amy touches um you know prospecting is an important one though so the they are sort of using that i guess secret sauce if you will that's sort of the background that's their

uh that's what their big advantage is and they're kind of just giving access to brands to be like here let us help you sort of optimize is that what that licensing part is to be honest um you know they haven't really announced you know they i mean they had some when i left we had some small pilots we had frankly some of the largest companies in the world asking to license Amy. I'm talking about top five CPG companies, multiple Fortune 500s. We never pursued it. Now, you know, they haven't gotten, maybe correct me if I'm wrong, Sean or Jonah, but it doesn't seem like they've given a whole lot of detail on that. I know that there was a public release on, I believe, like a private equity fund that they're helping out or some sort

of uh fund or financial vehicle that they're integrating with but um it's infinitesimally small at this point you know there's no yeah okay um i guess back to the acquisition side and have jonah sort of starting on this one uh when we think about competition if if we see mohawk's uh business model work out i imagine there's going to be a lot of copycats that want to do something like this, which would make me think, okay, there's going to be more demand for these smaller brands. So maybe they'll be paying higher multiples. Do you think Mohawk will have to pay more of a premium to get these brands in the future? Or is that kind of less likely? I mean, there's a lot of these brands out there. So I don't know how many competitors there would

need to be for the market to get so crowded where Mohawk was overpaying for deals. It feels like there's plenty of deals out there to be had. I mean, the name that always gets thrown around is Thrasio. I thought maybe they would come public this year, but they just raised another private round of capital. So I don't know if that means that they're going to come public later this year or next year, but my guess is we'll probably see them trading publicly in the next 12 to 18 months. I don't know if it's going to be an IPO, a SPAC, a direct listing. I guess we'll have to wait and see. But I mean, that's the one that Mohawk kind of gets compared to. Thrasio is definitely bigger. I believe they're at a billion, either 500 or a billion run rate. I think they

just raised capital at five or six times sales. I actually know one of the angel investors and he's given me all the numbers before. I just forget them off the top of my head. But I think they just raised capital at five or six times sales. And then Mohawk is trading at three times this year sales, maybe a little bit lower than that now. So, I mean, that's why I kind of hope that Thrasio does come public because I think it would be a nice comp for Mohawk and make Mohawk look a little bit cheaper. But just in terms of competition, I'm not really sure. I mean, I don't know. Maybe Asher or Sean can answer this question better. I don't know how many other of These roll-up companies are out there that have the sort of scale and resources that Mohawk has.

But yeah, I mean, it's very possible that if Mohawk becomes a huge success or a bigger success than it already has been, that you could see some other players come out there and do this. Now, whether or not they started from scratch or what, I don't really know. I mean, Asher's been through these, you know, Asher helped start this company. So I'm sure he can tell you that the early days, it was not easy to get going. you know, or maybe just, you know, a bunch of guys get together and, you know, raise some VC money and start sort of a CPG fund and go out there and acquire brands. And then I, so I don't know. I mean, it'll be interesting, but I'm not too worried about it. I think there's enough e-commerce brands out there that Mohawk can, can run pretty fast for the next two or three years

without having to overpay for deals. Yeah. Yeah. I mean, a couple of points on that. I mean, this has been talked about, but the, you know, the market's gigantic. If you just look at the TAM, it's, Sean would know better, maybe 300 to 400 billion, just if you look at Amazon, right? Third party. But the growth of that TAM is, you know, growing 40, 50 billion. Again, Sean would know these exact numbers better, I'm sure. 40, 50 billion per year.

So, with all the headlines we've seen about Thrasio and Branded and this company and that company. The total money raised is, forget about the TAM, it can't even keep up with the growth of the TAM every year. Not even close. It's just dwarfed by it. I'm also hearing in the market that these companies, despite being, again, all the headlines of all these companies out in the space, it almost would feel like, wow, these companies are bidding against each other for e-commerce deals and it's this active market it's not they're barely bumping into each other out there so the market is so big that these guys you know with all the headlines they're not even i mean i'm sure here and there they are but they're they're for the most part operating in their own

little bubbles that's how big the market is um so interesting sean do you have anything on that as well or yeah no the market's huge right and at the end of the day that's what it is and and some of the rough numbers that were thrown out are accurate and it's growing, right? And we're also seeing the companies like Walmart turn on and really emphasize and even provide incentive to join their platform, which is a good thing for anyone that is subject to Amazon's marketplace. But if we're just looking at this marketplace, think about the competition. The competition is really single product sellers, single brand sellers, right? So we're talking about mom and pop type of sellers that are on the platform. And that's the bulk of them. The other side of it is

if we're talking about the acquisition competitors, I think we have to separate it, right? There's roughly like 15 that are sitting out there that are making acquisitions both here and in Europe. And kind of decomposing that slightly, you have Thrasio, which does have capabilities internally, meaning they're hiring people that are operationally savvy and to lead different parts of that organization. But then you have just financial-related acquisition strategies, which I think is actually playing to a key benefit longer term to someone like a Mohawk who's product first. Because at the end of the day, you have to maintain your leadership. I mean, some of these products don't just sit there without any continued curation, understand the

supply chain, understand the small iterations that are required, understand the marketing capabilities that are required to keep that leading position on search results, the automated pricing, dynamic pricing that is required as well. So again, when you have financial sponsors coming in simply for accretive acquisitions, yes, that's good in the short term for potentially those financial investors, but I do think long-term that could be the demise of some of those brands. um so there's kind of there's there's so many different aspects that are on this platform but i think we're talking about mohawk product first uh has the capabilities from uh amy which is again for me it's more about a unified platform as opposed to kind of some of the buzzwords like

machine learning and ai and some other things it's really just a centralized place um so that's really how i look at uh mohawk from a competitive standpoint relative to who they're competing up against. So do you think being public is, puts them in a better position versus competitors? I mean, I'd say, yeah, I mean, personally, yeah, of course, I think being able to use some of this equity capital that they've been able to use here in the short term, I think has been beneficial to them. Having that equity value that is valued in real time, you could say in some days, it's not exciting, but for the most part, if you're talking about walking up to a single seller that has one product and you're offering them a small sliver of your company, I mean, talk about a reason to

jump on board and kind of be along for the long haul with an organization. And we've seen that over the last acquisitions where they've become, in some cases, meaningful shareholders of the business and kind of grow with them. One little antidote is, again, I've spoken with a couple amazon sellers large um and one of the key things is they don't want to give their baby away and what's a better way to give your baby away than uh kind of uh owning the equity and kind of uh from a perception standpoint kind of being along for the ride right perfect do you guys have anything else before we move on to the last few questions here no all right i think the i think that sean hit it though with with regards to being a public company is typically an advantage i think

that's why we've seen a lot of companies come public via SPAC. They want to get public because they want access to the public markets. They won't be able to use their stock as currency for acquisitions. I mean, even, you know, Port, for instance, you know, they came public. And as soon as they de-SPAC, they basically announced four deals right away. You know, Upstart just came public in December. They just announced an acquisition of a company called prodigy. So, you know, I think as these companies, there's definitely an advantage to being a public company. So I think that works in Mohawk's favor. All right, perfect. And that rolls right into the concerns and counterpoints. You know, we're going to try to play devil's advocate for any

potential shareholders. And we'll start with Sean on this one, because I know on your in-depth write-up, which I think was in August of this year, which you can find on your website pretty easily. You talked about the reliance on Amazon FBA. Are there any worries about relying so heavily on Amazon going forward? And how do you see that evolve? Yeah, I mean, there's so many aspects to kind of take away there. I mean, one is really, ultimately, so you hear that a lot is like, oh, they're on Amazon, and there's an issue there. And again, it first understand what's the alignment and what's the interest of Amazon, it's really to serve. We've seen that from their cloud business all the way to their consumer business. I think their mission is we aim to be the Earth's

most consumer-centric company. So, going against your merchants, which in theory is going against your consumers, I think would be a black eye, specifically in the light of having some of the regulatory potential concerns that are out there today for big tech. Then you have the fact that they're a dominant marketplace. I mean, this isn't the first time. for some reason this is getting locked into like a mohawk or some others uh but look if you're if you created an app and you're in ios and in the app store or you're on xbox or playstation you're making you're a gaming publisher i mean you're locked into one or two uh marketplaces where you have no control and they kick madden off um i mean there would be a revolt from all nfl fans

um if that happened i mean obviously those have kind of consumerization to them the other thing I tend to hear is what if they get too large? And I think that's a silly one because, okay, let's say they get too large. What is too large, right? Is it 10%? Is it 5%? And if we throw the numbers around, is it a $300 billion marketplace? Is it a $600 billion marketplace in five years from now? So you're telling me at 5%, they're a $30 billion revenue business. Yeah, it's a pretty bad or good problem to have. And then last thing, I know I'm taking up a lot, but Amazon Basics and competing against. I know Marketplace Pulse has done a pretty good job at aggregating Amazon basic products and their search rankings. And what we've seen is a decline in Amazon basics

across their categories, right? In terms of where they rank after a keyword. So I think when you start to put all that together, I think the perception that being on Amazon is a risk, which it is in some ways, right? I mean, there's risk there. But I do think there's an alignment. This isn't the first time this has happened. If they do get too big, that's a good problem to have. And Amazon Basics, you don't have to be the number one product on a keyword. You just have to land in the first top five and be kind of in the cereal aisle and be kind of eye level. That's essentially what we're talking about here. Asher, Jonah, any follow-ups to that? um yeah i mean i like sean said i mean there's definitely a risk to being so reliant on amazon

but there's also a lot of advantages to being so reliant on amazon since they're the largest e-commerce marketplace in the world i mean i would i i like that i like their reliance on amazon versus if they weren't on amazon and they were just running all their own shopify stores and they had to worry about all of their own you know lead gen customer acquisition themselves I mean, I think the amount that they give up to be part of Amazon is worth it. So, yeah, I mean, I do worry about Amazon getting more heavily into their private label business. But I also do think that they realize the politicians are watching over them. And if they start to screw over their merchants and, you know, put their private label products at the top in all search results, you know, they'll Jeff Bezos or whoever the new CEO is, we'll be back in front of Congress pretty quickly.

So that's really great. Okay. What about, so we try to sort of look at the downsides with our investments. And so I guess what could go wrong here? What do you guys see as the potential risks with this investment? I mean, I guess just how would you track or how would you know if this wasn't going according to plan? Sean, feel free to start. Yeah, I mean, look, I'll tell you, too.

One has always been the case, and that's actually come down quite a bit. So honestly, the biggest risk when we first made our investment was product diversification. So we knew that there was 20% of the revenue roughly making, or yeah, 20% of the products making roughly 80% of the revenue. That's a risk, right? So what we've seen is these series of acquisitions, which are accretive in nature, but also reducing the dependency on a single product. I think so that risk in itself has come down.

The second risk for me is really around execution risk. And again, there's always execution risk, no matter the business, no matter anything. But when you are patching on many of these acquisitions at this speed, and I'm assuming potentially the flywheel increases at some point, there's risk to that. So there's execution risk with supply chain because these are physical goods and getting them from warehouse to home, I think, is an important risk to consider. Now, how are we monitoring this stuff? Well, uh, the reality is, is there's APIs for all of this Amazon, um, stuff out there and we're tracking almost every product that they, that they have. Um, so that's our risk management.

And if you, again, if you've seen me on Twitter, I'm posting all types of products that are previously announced right now, they have, um, the Rift 6 brands, not on Amazon, some of them not on Amazon, and actually the launch of some of their exercise, uh, equipment, like the punching bag and, and the rower are sitting on Walmart marketplace prior to being on Amazon. And I thought that was an interesting phenomenon. I hadn't seen that previously. So we'll see. I mean, those are kind of how we're tracking some of these risks that are out there. I mean, one of the things I think about, and I haven't heard management actually say this specifically, but I think a lot of their products prior to the M&A strategy were a lot of, so it was a lot of home goods, but it was also a lot of like one-time buys. And I think as they move more into M&A, I think they want to try to find products where it's more of a subscription or recurring revenue stream.

I mean, we all like half of the stuff that I buy off Amazon is just set up for auto ship. You know, I get it every two weeks, three weeks, four weeks, however I set it up. I think Mohawk is going to hopefully start pushing harder in that direction just so they so it's more predictive revenue going forward. okay asher how are you great another risk that no one's mentioned yet is china you know there's a lot of uh chinese manufacturing involved like with every other consumer goods product and consumer goods company in the world so i think we're good there but if there was you know there's always that exposure obviously they went through what i would think would be the worst of it with uh you know the the trade war that we had a few years ago and didn't really affect them but that's

another one out there got you you got any more questions uh i think that's it i can't add anything to this okay all right well uh so for any listeners where can they find you uh uh we'll Let's start with Sean on chit chat money. No, on, uh, on Twitter. Um, I'm sure I you'll, you'll see us on chit chat monies, uh, tweet when they, when they throw this out there. And, um, I think it's underscore Sean, David got to remember that one. Yeah. So that's where you can find me. And there's also a good write-up on Mohawk. If you want to read about it on Sean's website, I think it's averyco.com.

Am I getting that right? avery.xyz so taking the uh we didn't want to pay the 60 000 for dot com and and uh and google went with xyz so we thought it was cool there we go there we go all right asher what about you guys yeah you can find me on twitter uh just my first name last name so at jonah lupton and then in my bio there's some links to my websites and newsletters and stuff that you can sign up for perfect Twitter alright

alright thank you guys I appreciate the time thanks for coming on okay welcome back in thanks again to Jonah

Asher Sean for all coming on really enjoyed the interview but we're moving to our show notes plenty of good stuff this week

things got crazy yeah the froth is back it's so bad it feels like it fell frothy this week It feels like February 1st, feels like late January again. Not sure if it'll stick, but it was a fun week for sure.

So my first story is the New Jersey Deli. I'm sure a lot of people have heard about this. If you haven't, though, David Einhorn wrote a letter to his partners or investors sort of warning about some of the froth in the markets and what he's seen. One company he mentioned was Hometown International. The ticker is H-W-I-N. it is a single deli in New Jersey. In 2019, it had $22,000 in sales. In 2020, it had $13,000 in sales. Tough year for delis, obviously with COVID. I guess they were, weren't they closed

for half the year? You might be getting to that. Yes. But the largest shareholder is also the CEO, CFO, treasurer, and a director. And he happens to be the wrestling coach at the high school that's next to the deli um the company at one point traded at a 113 million dollar market cap still there to still over a million dollars today according to coifin right now i'm looking at it right now that's mind-blowing einhorn uh well you're just not discounting you're just not discounting the cash flows sorry einhorn stated that the pastrami must be amazing well they have as austin learman said they have a sandwich as a service model Yeah, I think someone else might have said that first.

Oh, well, it's all stolen. That's just who I saw. Sass. Anyway, it trades over-the-counter, and the company has about 60 total shareholders. Nice. 60, not 60,060. Nice. In the time that the deli was closed, the stock nearly tripled.

Well, how many shares did they issue? Because even if it tripled, I mean, that's still kind of crazy. The company sold 2.5 million shares in 2020. I think they had north of $2 million in cash from stock issuance. Yeah, because we're looking at a $13 share price right now. So, yeah, it's a solid amount. This is maybe the frothiest thing I've seen in my entire time since investing. No, Nikola, what?

I'm going to have something later, too, that's a little frothy, too. Maybe, but this is Nikola had, I mean, there was a narrative behind it. This has no narrative. It is a concept. Yeah, that is a concept. Well, yeah, I mean, you can't defend the deli. Did you see the pictures of the deli? Yeah, I know.

You can't defend the deli. But it's minimal. You know what I mean? I don't know. I guess it's not surprising, but it's so weird. Like, I'm not surprised that this is happening in early 2021, but it's so weird that it's just the deli. Like, I thought this would be a tech startup or something.

Who would, like, how did they come up with the idea to go public? doing $13,000 in sales. It's something. It's something. I don't know. Honestly, prop to this wrestling coach. How do they get the stock price up?

There's got to be something going on. I don't know how that's possible. How do you get the stock price to go up? There might be something. Maybe. Maybe there's some hidden recipe. I don't know. Like a really good sandwich.

I don't know. They could license out maybe? I mean, In all seriousness, it's probably fraud. But we'll see. I guess there's no proof yet. I don't know how this isn't. I mean, Einhorn tweeted it out or shared it through his letter.

It was all over Twitter, and it still trades at more than a $100 million market cap. I mean, you can't. Less than, like, there's barely 100. If I read the CNBC article correctly, there's only a few shares that trade hands each day. Yeah, so it's like it's so stupid that it's just – it is what it is. No one can like – no one big enough can short it. There's no reason to go long. It's just kind of there.

It's a bit like Dogecoin. You know what I mean? You're just like, eh, it's there. It's just there. It's crazy though. It's a scarce asset. There will only be 20 million New York deli. There's only one deli out there.

There's only one New Jersey deli if you know this, yeah. All right. What's your story? Okay. On a serious note, Amazon shareholder letter came out. Good one. Bezos' last one. I've read them all, not to brag. And this was probably his best one. Some of them in the early 2000s were good too, because it's kind of the conviction in keeping the business going. A few things he talked about. One, he talked about at the core, sustainable businesses create more value than they take from their stakeholders. Is this a good basic criterion for evaluating a stock,

do you think yeah it's kind of the first thing yeah i mean it it talks to the non-zero sumness thing um sort of that principle that uh both the customers and the businesses are winning um in those transactions i think amazon's sort of the pinnacle of that yeah do you have any companies let's invert it are there any companies that provide like they use less value that less value that or maybe an example that's kind of maybe hard to come up on at the top of your head i'm trying to think hometown international maybe hometown well then the stocks worth potentially that i think they provide value to their customers but i don't know their shareholders might not be it's hard to be a successful company providing no value to your customers or taking more than

you provide i mean that i think i guess in general the thing about pricing powers you really have to balance that there's been a lot of companies in the past that you know they have the pricing power and they use it but then that really yeah then they start that that value equilibrium starts sliding more and more in their direction yeah they're providing still some value to their stakeholders or their customers but if they start taking more of that then you lose the sustainability of your business you anger your customers you allow people to come in at a lower price point it's that weird dynamic that yeah that you have to balance i mean amazon's kind of in that you know with amazon prime stuff like that bezos really does make me question

if pricing power is really uh should be sort of a investing thesis it should be well it's nice it's not generate value without having to raise prices to do so yeah i think pricing power is nice to a point but it can't be your entire thesis of where growth is going to come in and there's no such thing as unlimited pricing power oh no no no no no even the most sticky businesses in the world i just don't think it exists but yes to uh to your point this was an incredible letter um kind of a salute by my captain i guess yeah yeah it was really good uh the but some of the times i feel like he's a bit of a hypocrite just because But this next point, they talk about treating their employees better.

It's been a problem for Amazon for years that their employees kind of complain about harsh working conditions. Yeah, some of it might be overblown. But do you think with Amazon specifically, and I guess other companies, can it bite them in the butt unless they become more like Costco where people consistently rate them as a great place to work? It feels like they're not providing here more value to their employees than they're getting from them. maybe i i am starting to be of the camp that maybe some of these amazon uh employees hate their work uh might be a little overblown oh it definitely is i mean it's a classic you know news story but i've heard a lot of positive things from amazon employees as well um well yeah i don't know it feels like everyone makes costco the poster boy you know like why don't you just be more like

costco it's like i don't know it's hard like well it is hard but i mean doesn't that make costco doesn't that make costco's moat i guess you could describe it even better now that they're able to have you know this system but their employees are actually enjoying themselves i'm not all of them but in general they rate the business highly as a great place to work yeah it seems like a Warehouse is the management, but I don't know. I mean, Amazon employees are getting paid well, too. $15 an hour. Would you work $15 an hour at a warehouse?

It's a tough life. Not all of them get paid $15 an hour, first off. Well, minimum. That is the minimum, yes. What's Costco's minimum? I think it's like average is like $22. It's hard to tell, though. I think minimum is like $16 or something.

but managers will yeah managers will make like 100k yeah i don't know i don't know i okay here's another question sometimes but well it's not political it's just critical the uh yeah i see hypocriticals because it seems like they always say over the last decade you know they're like oh we gotta treat our employees better and then they never actually do like they didn't even put ac in a lot of their warehouses for like a decade i think i read it's like well yeah i mean i can see why they're upset well here's an i got another question yeah see like just your margin is my opportunity yeah that i think that thought can maybe and i guess there's nothing you can plan if your name's on shareholder but here's another question if you

are looking at a business and you see that they either they they raise their minimum wage or they're like, all right, we're going to pay our employees better. Is that, you know, some people are like, oh my God, that's going to be such a high cost. Don't you think of that as like an investment and you hope to get a nice return on invested capital there with the employee base? Because if you have happy employees, if you have well-paid employees, I would think that is an advantage over your competition. Yeah. I don't know. It's just kind of tough because some of it, a lot of it comes down to the culture too. Like you could argue, and there's been a lot of case studies that there's less employee turnovers if your employees are happy but even if i was working

at mcdonald's or whatever and i was getting paid better than average somewhere else you're still it's still sort of an intermediary job it's not something you want to stick around for i guess it depends on what location yeah but i mean i don't know i think it comes back down to if the employees are happy then the cup you know customers are happy it can be an advantage like you saw that That's, you know, there's all those complaints of fast food places that are saying, like, we can't hire anyone. And I was like, well, I mean, this isn't an original thought. You know, everyone was saying this, like, well, you might have to just pay them more. I don't know.

You know, if you're like, oh, we can't hire anyone. Well, I think if you just raise that wage, maybe you might get more employees. Yeah, perhaps. I don't know. I don't know if warehouse employees make the customers more happy really fits here. I don't know. Has it ever deterred you from buying something on Amazon? Well, no, no.

It's just the framework is they're going to do their job better, and then aggregate the customers are going to be happier because the rate of getting the packages there on time is just going to be better. the value you know the customers become more satisfied because the employees are doing their job better it seems like i don't know i just think of that as something that companies underrate as an investment they can make into the future netflix is big on that too of paying employees that are really good and it's different because it's mostly software they're they're paying them good at firing employees that suck they're uh well they're they're an interesting culture but

I think Hastings talked about how these employees, especially in software, are providing so much value. Why wouldn't we just not pay up for them if they're going to perform well? It keeps them around. Yeah, I just don't know if it's necessarily apples to apples here.

No, it's not. It's not, but... But, all right. Is that all you have for the story? Okay, last one. Last one he talks about fighting to be original. This is a classic, you know, motivating people. But he said there as a company, and I guess as a person, you want to resist the temptation to be normal.

Because if you're normal, that's just kind of what everyone flows to as like a company. And the question I have about this is when a company just copies other companies, is that a sign they've lost originality? Big example here is obviously Facebook copying other social media companies. But is that in general a sign that they've lost their originality? Yeah, perhaps. But, yeah, I mean, if you're just becoming a copycat, I guess you're losing some sense of originality. I mean, you kind of see that with Oracle and stuff like that too. Facebook's – I think Facebook's –

Well, ignore Facebook. Ignore Facebook. That's just one example. There's obviously a special situation, but just in general. Yeah. Yeah, I guess you could say that. I'm going to move to my story, though. The Coinbase, I guess it was an IPO.

It was a direct listing. Yeah, then it's so much better. Yeah. They went public this week, and I think it was last Wednesday, via a direct listing. The market cap at one point reached more than $100 billion. Now, the insider selling stuff was overblown. I think a lot of people interpreted this stuff wrong. Yeah, I mean, classic, classic.

People said the CFO sold 100% of his shares. That's not true. The CEO did not sell 97% of his shares either. It's all right. Four and fours are very hard to read. So I'm not, you know, it's tough to read. Yeah. They did sell shares.

That is true. I think I would sell shares. Yeah, why not? I don't know. It's overpriced. Yeah, it's kind of a hoorah, like you made it. It's $100 billion. But anyways, the $100 billion market cap puts Coinbase at a price to sales of about 83 times.

yeah i mean it's froth i don't know so and i think it's about a thousand times earnings but that stuff doesn't matter um i guess i don't know does this make any sense to you because i know we tend to be haters on i mean the valuation doesn't really make much sense at all to be honest but doesn't the competitive landscape doesn't that feel like coinbase isn't going to be the one or it's got to be a commodity product eventually yeah yeah that's i was going to say i don't know the competitive landscape in crypto but if you look at and also i don't get the decentralized centralized decentralized exchange you know what i mean the conundrum the catch-22 that these things are under where it's like oh it's crypto we're

decentralizing finance oh no but you can all centralize on this platform that's besides the point when you're looking at stock exchanges or if you're looking at brokerages what's succeeded in the past is lowering costs and scaling right why schwab has succeeded stuff like that um i really don't get how they can keep up the four percent take rate and i see that going to you know close closing down to zero because there's it's pretty easy to undercut someone on price here right yeah right i mean that's the whole point i feel like the the margin is just going to totally evaporate i say that as not an expert in the industry but uh what are your thoughts it has become sort of the mainstream crypto wallet though i will give them that they they're

the ones that are pumping the youtube ads with earn free crypto by learning about it i think they do attract sort of the typical people um that don't understand it they're probably the first one because they might be the only notable one that's true they are good at marketing they are good at marketing for sure they make it accessible but you have to question accessible to what i don't know you know what i mean what is this stuff it's egregious i mean yeah it is the four percent is insane think about that they won't take like they require it's it's what's strange to me is the whole idea of a decentralized currency is sort of like democratizing the process right like yeah but and that's why they command eight percent interest rates on normal accounts

and whatever that block fire stuff is but then they still doesn't make sense to me still doesn't make sense four percent to coinbase that's not decent that's not democratized i don't know it's like robin hood it's all big gaslight you know they're saying they're doing stuff and it's just the complete opposite i think i don't know could be wrong all right what about what's your next story okay another fun one 87 billion dollar ev startup in china bloomberg story out called uh on a story i'm sorry a company called ever grant um 87 billion dollar ev startup that has drumroll never sold a car planning and having deliveries by the end of 2022 i think they were trial deliveries um timeline has been pushed back repeatedly their goal as the story says

five million cars a year by 2035 but management doesn't have much experience building cars so they're kind of suspect here there's a lot of other things in the story one they're worth more than you know like ford the classic stuff like that who so it seems like the five million cars are priced in but who am i to say there's also a ton of competition in evs last thing and this was strange this kind of puts it into the delhi territory for me although it is in china so it's something that you know we have less understanding of they could have some different parts of the business here but management has some strange kpis they get bonuses for selling apartments which doesn't make any sense and it seems to me that there's some interest

i just don't know how this got to 87 billion dollars like what what happened the thing is it's like almost unshortable because oh yeah for sure when does it stop like 87 billion four billion hundred billion what's the difference 400 what's the difference four billion well the ability to raise cash i guess but it's like neo neo seemed ridiculous but it's gonna as long as that price stays inflated i have no idea where neo is trading at right now but you know obviously on a trailing basis those numbers look ridiculous their gross margins were negative if i remember We're looking at NIO, just term positive, which shows how hard the car business is. Do people understand how difficult it is to just, I don't know, you can't just go out like, I'm going to start a car company.

All right. First, you've got to engineer it. I mean, you've got to engineer a car that's differentiated, and then you've got to be better than all your other competitors. Yeah, it's a commodity. I don't know. And the margins are still razor thin. Yeah. All right.

Yeah, I know. It's crazy. It's crazy, and we talk about this because right now it feels like we're on the back end of the EV bubble. I guess maybe selling apartments are a higher margin. I guess. I have no idea why they get bonuses for selling apartments. It seems strange. Yeah, if someone knows anything about Evergrande, I doubt.

I mean, it's an under-followed company. And how it got to $87 billion, let us know. It would be interesting to talk about. But one thing that's kind of a theme in finance on this show, whatever, investing through the last few months has been the EV bubble. I think we can clearly say it's a bubble at this point. How do we rank the EV bubble in comparison to the other mini bubbles of the last decade? I'll go and say it went one now, crypto bubble 2017, two. I'll go cannabis bubble in 2018, three.

And I'm going to go 3D printing one a little while back as the next one. Those ones were all clearly just things got out of hand. Yeah, I don't know how you'd rank them. This one's definitely up there, but is it worse than Tulips? Well, Tulips were kind of fake if you read the history books, but. I don't know. Yeah, it's up there, but I'm willing to bet this has been going on. There's probably something like this at least every five years,

There's some sort of micro bubble. There's been five in the last five years, I think. EVs is bigger, though. It's like a few trillion dollars, maybe. I think history has a way of repeating itself. I would not be surprised if we saw another one. The space bubble, is that coming? There was a mini one with Virgin Galactic.

We'll see. As SpaceX ever IPOs, I mean, that'll just turn into a meme stock right away. Yeah, for sure. Okay, my story this week. Apparently, J.P. Morgan is going out of business. Our favorite person, I'm not going to say his name, but someone came on and someone went on to financial media or I think one of the financial media news outlets and said that J.P. Morgan, Goldman Sachs, and Wells Fargo potentially won't exist within 20 years. I just wanted to say that J.P. Morgan's earliest roots trace back to 1799. It's been 222 years since its start, and it now has more than $3 trillion in assets.

I don't understand why people think the rise of crypto means the end of banks. Yeah, I know. It's weird. Lending is still going to – You still need someone to lend money or lend value. Yeah, credit is still going to exist. That's what – I don't know. They evolved to like –

They would just change. yeah they've evolved yeah they've evolved for the last 200 years um also saying they're going to be gone in 20 years is interesting because they don't i don't know this is exactly don't they have existing loan books um right some of these loans are pretty long term maybe they won't well maybe they're going to start losing loans um new loans to new banks stuff like that or maybe they'll start writing bad credits something like that but yeah it's not like the only possibility is that there's some sort of catastrophic blow-up, but I don't think that was sort of the intent of the

statement. I think it was saying that it would get replaced by some sort of new system, which I don't see happening. Isn't the system just going to be credit still? It's just loans. It's just loans, guys. It's just loans.

If you put it in a database, it's still loans. Sorry, no need to rant. This one's serious. I'm going to discuss on this one The Stitch Fix founder and CEO is retiring from the board. Big announcement. A little bit of a surprise from Stitch Fix. Katrina Lake is retiring to become chair of the board.

Elizabeth Spalding, current president, is stepping in to take over. And it looks like she was likely running the show or half running it for a while now because she was in charge of two of their big efforts, international and direct buy. Those are kind of the most important growth initiatives. Lake brought the company to over $1.7 billion in sales in less than a decade. She's still under 42. So I think, or sorry, under 40 as well. I think she's like 39 or 38.

That's interesting because it seems like that's early for a founder to go out. But, you know, whatever. Everyone has their own personal reasons. When a founder leaves, how do you think about that? Because I know we saw someone, our friend Austin Lieberman, and you respect, I think he tweeted, and I don't want to put words in his mouth, that he was going to be selling or considering selling his Stitch Fix shares because of this. and you've got to respect having your investment thesis is around the founder. When the facts change and the founder is not there,

you may not be comfortable owning shares. But when a founder leaves in general, how do you think about it? I think it's different every time. I think this is a case of Stitch Fix evolving and it sounds like Katrina Lake was sort of giving Spalding the reins prior to her departure. She's still on the board. I'm a big fan of founders cashing out early.

Why? Go live your life. Go retire. You're 40. I don't know. You got all that money. To do what? I don't know.

I'd rather run the company. It's kind of fun. I don't know. Gates was relatively young when he went out. I respect a baller move when you just go out early. What do you mean by baller move? I don't know. Now you've got all this money.

You're retired. You can do whatever you want. Now you're just the chairman. You don't have to run the day-to-day operations. I feel like that would bog you down. I'm in. You're not – I'm in. CEO is really not doing day-to-day.

You're kind of big picture anyways. You're supposed to be. I don't think that's how it always plays out. I don't know. I think this is a good situation. I don't think it's – Are there any – I mean, are there situations – I think the business model is changing.

Yeah, I mean, they haven't evolved. I mean, to be serious, you know, not any recommendation on Stitch Fix or anything. But if you are confident in Spalding, I mean, it seems like nothing will change here. Yeah, I mean, it's tough to tell, though. Sometimes if a founder leaves, they are the key asset sometimes. Like if Bezos left in 2006, it would kind of be the same timing here. I mean that it can impact it

I'd pay more attention to what she does with her equity that's important too I guess yeah that's true if she's just leaving it like what if she thought

Spalding was that much better of a CEO and she decided to step down and said I'll keep my equity and let you make money

for me yeah and maybe she has a family or something now she wants to spend time with them that's great I guess everyone

has their own personal situation but it is this classic thing when this news hits uh there's all investors always sells off you know yeah and uh stuff's generally when there's any sort of thing that is a surprise thing you know the stock will sell off but people get flustered because it's like a surprise you have to just kind of think through the situation and

you know i mean maybe they'll do bad in the next two years okay that's fine then the thesis just broke but yeah it's interesting when a founder leaves though and when there's new management change because it can really affect the long-term uh trajectory of a company what's your next story uh i want to talk about dogecoin keep this simple any thoughts craziness any stories anything i have no hot take on it i'm hearing a lot of like uh i was at like a barbecue and people were talking about it they're talking about their gains in it and there's nothing like more it's so hard to just sit there and be quiet like uh i don't know it's so weird it's gone mainstream for sure it's doge day today i guess i don't know what that even means i just saw

something about it but it's it's wild it's wild it's it's pure speculation it's it's a total just meme it's it's crazy and it makes obviously zero sense but i mean i think elon was right it is the ultimate irony yeah he's definitely yeah he's right like i'm not saying this if that became you know global reserve currency it's similar to the u.s dollar because you can i was reading the specs on it you can technically print as much as you want so i mean it's not that different except it's controlled by no one or it's not controlled by government you know except one guy i yeah i i also have this weird joke going on in my head where the dogecoin price isn't actually affected by buying and selling there's just a guy

like has two levers like up and down and he's just deciding where it's going and people are putting money in but they they think it's going to drive the price up right but it's really just the guy deciding and he's like all right let's just totally pump it today i know that's not actually happening but it's not that it's not that far from the truth all right before we wrap things up we have a tweet from the st louis fed uh there's a link there if you haven't seen it there's t-shirts out where you can have some fred economic data on your t-shirt what do you think yeah i'm buying the merch 20 bucks i think i might get it t-shirt i think it was just a matter of time before the fed started selling merch yeah well it's a diversification strategy i mean if i were like

let's say this was a bubble and 20 years from now you looked back and you said Dogecoin was almost the global reserve currency and the Fed was selling merch

well it's not I mean I would think anyone who didn't know this bubble was an idiot I don't think obviously

that's not that's not a real investing thesis but it's just it's just the Fred website selling there were some

great comments to it yeah what's the top comment oh it was deleted Happy birthday, Fred. Purchasing power, USD. Thanks, guy. Thanks, Obi-Wan Kenobit with the red eyes here.

All right. I think that's going to do it, right? Yeah, it's all stories on that. Thank you guys for listening. Hope you enjoyed the interview. As we mentioned, I think, before the interview, we are general partners at Arch Capital, and partners there may have positions in the securities discussed on this podcast.

We're also not financial advisors, so anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. Thank you guys for listening. We'll see you next time.