Chit Chat Stocks - Our Bet on the Next Berkshire Hathaway (NNI)

Episode Date: March 13, 2024

In this episode of Chit Chat Stocks, Ryan Henderson and Brett Schafer discuss Nelnet, a small-cap conglomerate based in Nebraska. They compare Nelnet to Berkshire Hathaway and delve into the different segments of Nelnet's business, including Nelnet Business Services, Nelnet Diversified Services (Loan Servicing), NFS (Nelnet Financial Services), and the Solar Business. They provide insights into the performance, challenges, and potential value of each segment. The conversation covers the valuation of Nelnet's solar business, the discussion on the cable business, an overview of Allo Communications, analysis of the venture capital portfolio, valuing the Hudl investment, estimating the value of Nelnet, considerations on book value and stock buybacks, and a comparison to Berkshire Hathaway. They discuss: (00:00) Introduction and Comparison to Berkshire Hathaway (04:28) Nelnet Business Services (11:46) Nelnet Diversified Services, Loan Servicing (41:24) Solar Business (45:09) Valuing the Solar Business (46:44) Discussion on the Cable Business (49:12) Overview of Allo Communications (53:32) Analysis of the Venture Capital Portfolio (57:30) Valuing the Huddle Investment (01:00:28) Potential Worth of Nelnet (01:04:30) Estimating the Value of Nelnet (01:09:21) Considerations on Book Value and Stock Buybacks (01:12:46) Comparison to Berkshire Hathaway ***************************************************** Subscribe to our YouTube channel: https://www.youtube.com/@ChitChatStocks  Follow us on Twitter/X: ⁠https://twitter.com/chitchatstocks  Follow us on Substack: ⁠https://chitchatstocks.substack.com/  ********************************************************************* ⁠Public.com⁠ just launched options trading, and they’re doing something no other brokerage has done before: sharing 50% of their options revenue directly with you. That means instead of paying to place options trades, you get something back on every single trade.  -Earn $0.18 rebate per contract traded  -No commission fees  -No per-contract fees  By sharing 50% of their options revenue, Public has created a more transparent options trading experience. You’ll know exactly how much they make from each trade because they literally give you half of it. Activate options trading at ⁠Public.com/chitchatstocks⁠ by March 31 to lock in your lifetime rebate.  Options are not suitable for all investors and carry significant risk.  Certain complex options strategies carry additional risk. Options can be risky and are not suitable for all investors. See the Characteristics and Risks of Standardized Options to learn more. For each options transaction, Public Investing shares 50% of their order flow revenue as a rebate to help reduce your trading costs. This rebate will be displayed as a negative number in the “Additional Fees” column of your Trade Confirmation Statement and will be immediately reflected in the total dollars paid or received for the transaction. Order flow rebates are only issued for options trades and not for transactions involving other assets, including equities. For more information, refer to the Fee Schedule. All investing involves the risk of loss, including loss of principal. Brokerage services for US-listed, registered securities, options and bonds in a self-directed account are offered by Open to the Public Investing, Inc., member FINRA & SIPC. See public.com/#disclosures-main for more information. ********************************************************************* FinChat... Learn more about your ad choices. Visit megaphone.fm/adchoices

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public investing. You must activate options account by March 31st for revenue share. Options are not suitable for all investors and carry significant risk. Full disclosure is in the podcast description, US members only. Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. welcome to chit chat stocks i'm your host ryan henderson and i am joined by your co-host brett

shaffer today we are talking about a small cap conglomerate based out of nebraska so i'm going to lead right in with this question brett do you believe now that is the next berkshire hathaway can i cheat and say yes and no in some ways it is in some ways it isn't if i had to make a bet on one conglomerate with that's copied the berkshire model of rolling everything up under a single corporate entity and making it public i would say nelnet is my best bet especially under the smaller companies. I wouldn't exclude maybe the larger ones like Markel or Brookfield as perhaps they're too large, but that's an argument for another day. So I would say yes in that regard, but no, and we'll talk about this, the business model is slightly different. This is almost like

a bank that invests in other things. Yeah, there's definitely some differences here. Also, Nelnet is similar in that they are from Nebraska, a little city just to the west here, west of Omaha, I believe, maybe kind of southwest of Omaha in Lincoln. And they've got operations everywhere. We've talked about Nelnet here on this show before. We're going to go through the business again. They are unorthodox relative to a lot of other public market companies. they don't do conference calls. You really have to wait every year for a shareholder letter to get a lot of context about the business from the actual management team, which can be,

there's some pros and cons to that, but it is kind of a bit like Berkshire Hathaway in that way. We're going to just go through the business segments and talk about, we'll give a little bit of context about what the businesses actually do, what the different segments are, because we might have some new listeners that have never heard of this company. And then we'll also go through what their year looked like and how they've progressed and kind of our thoughts overall. And then we'll conclude things with our outlook on the business and whether we plan to continue holding it or if we have any plans to do anything with our shares. But let's kick things off with what I would consider – oh, jump in. You didn't answer the question, Ryan.

Do you believe NowNet is the next Berkshire Hathaway? I think there are some similarities. so like you i'm going to sit on the fence here and say both yes and no i don't think anyone is warren buffett and i don't think anyone will get returns like he had in his prime in sort of the 60s through the 80s really 60s all the way almost through the 2000s but there's some there's some similarities here. And they both run the business with that nice Midwest candor, that rationality, sensibility that we love. And it's a green flag. I've said this. It's a green flag, big positive for me. If a company is headquartered in the Midwest, they seem like a more sensible

bunch. So that already checks the box for me. But should we kick things off with... Go ahead. I was going to say, you're saying no one's going to match Berkshire's return. Famously, they had a 20 book value growth for a long long time but now that has gotten fairly close even after and if we'll talk about it tough year in 2023 it is on a per share basis their book value has compounded at 16 so not you know that last four percent is a big difference a long time that's a lot that's a big difference but it's it's it's not too far off and we'll talk about maybe the book value, a little bit understated. Potentially. All right. Let's kick things off with what I, and probably I think he'd agree here, what I think is the most important segment

to Nelnet's business. And they have, it's called Nelnet Business Services. Yes, the name kind of sucks and we'll talk about that in a sec, but what is it and what do you like about this business? what are your overall thoughts here? Yes. Everyone listening as well along with us is going to get confused learning all the names of the Nelnet subsidiaries. Welcome to the club. We still get confused and I just kind of name it this one, Enterprise and Payment Software for Educational Organizations and Other Educational Associated Entities. I'm going to kick things off with a quote here from, this is either the shareholder letter or the annual report. I would recommend to the listeners to read both. Here's the quote. It is our belief that on a standalone

basis, this business could arguably be valued nearly equal to the whole of Nelnet at its current market value. Munger would definitely be excited by this business as it creates a lot of cash flow, has dominant market share, a large moat, is not too difficult to understand, and has an industry-leading management team. That's funny how they kind of tooted their own horn and said that their management team is great, but I believe that's talking about the subsidiary level presidents. But let's get into it. NBS, known as business services, or I might just call software and payments, is a subsidiary and really a subsidiary of multiple subsidiaries of software and payment tools for educational organizations. These include tuition management, payment

processing, and other software tools focused on the administration department at schools, mainly in the United States. Now, we don't get a full P&L for NBS, but they do give us some good insights. It looks like, to me, a great business, low risk, and good cash flow conversion. As they talk about above, kind of go through these, it creates a lot of cash flow. You can see with that software model, it's not going to be capital intensive. They'll probably have pretty good cash conversion because, and it's probably even over 100% of earnings, to be honest. They have dominant market share, which I would say is there. And they talk about the moat.

And I think a lot of it's switching costs where you embed in these administrative departments, the software programs, the payment processing, and to switch over to someone else, it'd be quite difficult. It would take a multi-year undertaking. You probably don't want to do it. I think it's a classic switching cost you have with software. And it's easy to understand why these educational organizations would want, especially in modern times.

a really good working software tool for the administration department and payment processing for the ones that do tuition. Now, if we look at the size of this business, generated close to $500 million in revenue in 2023 and 91 million in operating earnings. Now, as people will see in our newsletter, which you can see in the show notes, again, subscribe to that. It's free. It'll give great access for all these stock research episodes. That's the key reason, I would say, for anyone to subscribe to our newsletters for these type of shows where we have a lot of charts and stuff from our good friends at FinChat and other places.

The earnings, operating earnings from this segment has compounded at 17.8%, let's just say 18% since 2012, so for over 10 years now. Operating earnings were at a record level last year, and they're still investing a lot to grow. So revenue keeps growing. They're acquiring other businesses. For any of our YouTube listeners, Ryan is popping up some stuff in the chat as well as I'll keep talking here. So the margin is solid. They've been profitable every year. They're very efficient. They're not going to be overly crazy about investing in sales and marketing. As we talked about,

they're not an aggressive Silicon Valley type software business. They are a Midwest style software business, but I think they are still under earning a bit. And I wouldn't be surprised that at maturity, given the margin structure, the unit economics of this business, that they could hit a 25% margin or even higher on operating earnings if they stop reinvesting for growth, which they're still doing. Now, as I close out this segment, I should say for reference, when we talk about book value later and how a lot of people value a financial services company like Nomet, MBS brings barely anything of, quote unquote, net worth to the book value on the balance sheet. But it is in our opinion, it is in management's opinion, and I think really any reasonable person's opinion, that the value of this segment is much higher than the $100 million it states on the balance sheet. So I'm going to close out this section with a question for you, Ryan, and a question for

myself. What do you think this business is worth? And would you be unsurprised if operating earnings doubled to $200 million by, let's say, 2030? No, I wouldn't be surprised at all. I think there's a lot of pricing power in this business as well. They probably haven't flexed that pricing muscle too much. It's very sticky. It is a software business with almost half a billion dollars in recurring revenue and 20% operating margins. There's probably operating leverage embedded here. I think it's worth – I would be willing to pay 20 times operating income for a business like this where it's growing predictably and it's locked in with customers where there's very low churn. So I think, yeah, it's a very valuable business, probably the most valuable part of now that's business overall. I agree.

I think it's probably worth – Well, if you're going to value it at $2 billion and say it's the most valuable part of the business, then you're saying that the book value of the financial services division is like not, you're saying it should be worth less than book value, which I would argue it shouldn't, but pretty close, either that or financial services. And I'd even make an argument that this could deserve to trade at, given the growth prospects and the historical growth rate in earnings, I would argue it probably deserves to trade at maybe 25, 30 times earnings, although that's obviously a steep multiple.

but either way two three billion dollars maybe if insurance yeah it's probably worth mentioning that some of that operating earnings growth or the income before taxes that we just showed for anyone that watches the videos some of it's been acquired they've added businesses by quite you know acquiring different software providers and that's tacked on some operating earnings here and there. So it seems like most of the growth has been organic, but they've been building out that collection of businesses over time. And I suspect they will continue to do so because they seem to be... We don't have all the exact numbers on it, but they seem to think the returns are well worth it. That's a great point. Okay. Next segment, Nelnet Diversified Services, Loan Servicing.

what happened to this business this year is this important to the thesis and i should reference when we talked about now that business services the education software and payment stuff that was kind of starting out with the easiest one there wasn't much it's not complicated it's easy to understand there's not anything really causing any chaos in the industry but with loan servicing it's kind of the opposite so ryan why don't you take us through it yeah it's It's once again, a very boring, bland name, Nelnet Diversified Services, but it is loan servicing. And a quick reminder on what loan servicing is, when a lender lends money to a borrower,

there's a layer of work being done under the hood that tends to go unnoticed. This layer includes the actual distribution and collection of money, maintenance of financial records, and a central dashboard for borrowers to interface with during the payback period. So that's what Nelnet loan servicing is. And in some case, Nelnet themselves are the actual lender. So they had a bunch of loans from a long time ago that they issued out. There were student loans. That program got brought in-house by the federal government. And so now they're not originating those loans themselves, but they're still the servicer of choice and actually the leading market share provider for student lending in general, student loan servicing, I should say. Um, so they're typically being the servicer. They're a third party servicer in it is for a variety of customers, but most commonly it's the U S government, which is their biggest customer by far. I think it accounts for 75% of roughly around there, 70% of loans, um, loans being

processed. And so let's start with what happened this year. Here's a quote. I'm going to go through a couple of quotes here from the shareholder letter that I think are important and it paints really good context about the difficulty in running a business like this. So Jeffrey Nordick, the CEO, he says, when the pandemic hit, every federally held loan was put into a non-interest bearing non-payment status, first using executive authority and then under the Coronavirus Aid, Relief and Economic Security CARES Act. The CARES Act forbearance was extended by President Trump through the 2020 election and then extended multiple times by president biden the biden administration also announced the president's forgiveness plan utilizing executive authority

based upon a unique interpretation which this kind of funny language here based on a unique interpretation of the health and economic recovery uh heroes act is basically what it's called i'll just abbreviate it passed back in 2003 which they argued gave the president emergency authority to forgive loans in the absence of congressional student loan forgiveness legislation. I'm going a little long here, but Nordic goes on to say, throughout the three and a half year CARES Act forbearance period, we were instructed by the U.S. Department of Education to maintain appropriate staffing levels in preparation for the inevitable and seemingly imminent return to repayment. We were frequently asked by Congress for our plans for return to repayment practically

each time a repayment date was announced we were repeatedly promised this time is it we're definitely going back into repayment and asked for staffing plans we ramped up hiring and stayed ready to provide high quality service in an unprecedented time period only to be told forbearance would be extended so obviously it's very hard to manage an organization when your largest customer is constantly teetering on okay we're going to need you to be ready in two months. And then two months comes and they say, oh, actually you got to hold out for three months and you're not really collecting as much revenue on that. So it sounds like if you're just, you're not looking at the numbers and you just hear that, you'd think, wow, that's a very

difficult environment to operate. But even with, and they had to announce a number of layoffs to manage that period and the US government cut the fees that they're willing to pay Nelnet on a per loan or a per lender basis, per borrower basis, I should say, the segment still generated just under $80 million in earnings before taxes this year. And that's up from the last three years. Obviously, there's been the forbearance period over those years as well. But this business over the last 10 years has generated just over $700 million in earnings before taxes. And it fluctuates a lot, but it's a profitable... I guess it's hard to wrap my mind around this segment because on the one hand,

it does generate earnings for this business. It's generated earnings every single year for the last decade, despite all the difficult environments they've operated in. But on the flip side they're at the whim of the u.s government that there's customer concentration risk here and we saw it because the customer uh reduced the fees that they were willing to pay now that so big risk there it's a contract that's renegotiated constantly and uh last time they tried not to renew with now that and then now that argued and appealed and uh they got it back so it's hard to really wrap my mind around this segment. I don't know whether to be optimistic or not. I don't love the business, that's for sure. But it's a pretty predictable earnings stream. And it's not going

to grow a whole lot, but you're getting a whole bunch of earnings that you can reinvest elsewhere in the business. Yeah. And if you look at the 78 million for 2023, they were, as they're trying to tell us probably under earning a little bit and they've acquired discovers i believe servicing i think it was discovered financial they're they have a larger amount of volume coming through their own subsidiaries uh you know the servicing subsidiaries and they bought someone i believe it was either in 2020 or 2021 so earnings should grow they should be higher i'd say they probably sneak up to $100 million, but as Ryan mentioned, there's a lot of uncertainty here. I think the question that's interesting to ask for an investor is if you had to make a bet, cumulative earnings

over the next decade, under or above $1 billion for this segment, I think that's a good bogey. I feel like I would go over, but not with high confidence. Yeah. The one thing that makes me a little bit confident about this segment is that there's been constant consolidation and a lot of companies that are giving up on their servicing operations for student loans. So it's allowed Nelnet to really eat market share and eat up student loan servicing volume like they did with Discover when they, I think they acquired the loans for servicing. So it's a loan portfolio that they bought and they said, we'll service these. Is that not right?

I think – so Discover is selling the loans, but they haven't decided who the seller or the buyer is going to be yet. Assuming now it's in the negotiating process for that because they're one of the buyers as we're about to get into. But the servicing – I think they said they sold it. On the Discover conference call, I thought they mentioned it. I believe that was servicing only because as we're getting to, I did do the NFS, the financial services one here. and I didn't see that talked about, but let me confirm maybe. Okay. We can check in a second, but I would say a billion dollars is probably a good

estimation for what they could earn. The only difficulty is that if the government tries to look for a different service provider, all these earnings could be at risk, right? So it could significantly drop off when you have that big of customer concentration. And it seems like they've had a not always so amicable relationship with the U.S. government. The U.S. government really kind of made them constantly raise and lower their staffing levels for this. And it just seems like it's a little bit tumultuous. And I wouldn't be surprised if the U.S. government started looking for alternatives. They already have.

but on the flip side yeah they're processing more and more loans and it seems like there's consolidation in the industry so potentially yeah a billion dollars in earnings over the next 10 years seems feasible okay i was doing some looking up the wall street journal website is atrocious but it says i'm not logged in but that's a conversation for another day how bad is their tech okay uh it said though that they're exploring the sale of the loan book but they've already transferred the servicing so who knows maybe now that's gonna buy this thing i wouldn't be surprised they're definitely one of the few buyers out there yeah either way it sounds like they'll be servicing that anyway so let's talk about the financial services segment which is probably the

most complicated, maybe complex segment within Nelnet now, and it's new. So what is it and how much do you think it could be worth? Yeah, it's new and old. As you can see here in the notes, Ryan, I said I would like to formally thank you for giving me the most confusing and annoying part of the business, but it is very important. Probably the most important segment from Nelnet in the near term, maybe in the long term as well, given how much are investing in here and said they're going to invest in it. If we look at the $3.2 billion plus in book value on the consolidated Nelnet business, over two and a half will come from NFS. So what is NFS? It's really their oldest business, but just a rename and combination of

a lot of their financial lending and all that sort of stuff, making the investments in loans, the banking operation, and we'll talk about it. So it's multiple segments here, and it's essentially anything where Nelnet is making a loan or making an investment, excluding its solar and VC, venture capital arm. So this includes old school FFELP student loans and other student loans sitting on the balance sheet. This includes real estate investments, insurance operations, Asset Management and Whitetail Rock and Nelnet Bank. Now, insurance and asset management are very small. They're not really relevant to the business.

I'm assuming it's a solid business. Well, insurance, I guess, no. Asset management, sure. But they're not going to be too relevant. Real estate, also not that relevant. And you can kind of look at their performance there. It's a small part of the business, but I guess it's done fine. And they seem to have a good head on their shoulders there.

But I want to talk FFELP. the other loans, and Nelnet Bank. FFELP is where Nelnet was. That was their core business in lending. But these unsecured loans, the new loans they're making with the cash flow coming in from FFELP and Nelnet Bank are kind of where they will be. Hopefully all are going to contribute to book value per share increasing. So let's get into it. FFELP loans, they were student loans originated by Nelnet or purchased from third parties where the principal payments are all but guaranteed by government and it was a specific type of student loans in the United States. So the company takes on a lot of leverage and securitizes these loans because they are guaranteed by the government,

or at least the principal is in almost all cases. And that's been quite profitable. However, as we've talked about in other shows with Nelnet, new loans cannot be made. And the segment has kind of been runoff mode, which you can see in the charts in the newsletter. We have some good charts from our friends at FinChat.io. We have Nelnet AGM assets, or that's basically the FFELP loans. And if we go back to December 2015, they hit a peak of just under $30 billion in assets, which is loans. And now at the end of 2023, we're just under $13.5 billion. So back to what all this stuff is.

the downside is that FFELP loans are interest rate sensitive. So I don't think we need to get into the details of how all this stuff works. It's kind of bad audio for a podcast. And honestly, I don't know some of the intricacies. It's hard to understand. They do very, very complicated things here, which is kind of the one yellow flag I would have for this business. But investors need to understand this. Yeah, exactly. They're in a spread like a bank. Think of it a little bit like the bank. But investors really need to understand that as interest rates rise, the cash flow from Nelnet's loan book can decline. There's multiple variables in here. Again, I'm not going to pretend to understand the segment here. But the good news

is, I'd say, is in two years or so, this will be irrelevant to the Nelnet story. And honestly, as a shareholder, I think that day cannot arrive soon enough because then I think Wall Street investors, maybe anyone who even knows that now that exists is going to treat this business differently, hopefully. I'd say maybe there'll be a re-rating, but TBD on that one. And if we look at the effect of interest rate management tries to hedge as best as possible, they had some hedges in place during the interest rate hiking cycle of 2022 and 2023. however during the banking panic of last year they got a little spooked about liquidity and decided to unwind their hedges um i have some full quotes for the newsletter i'm not gonna

share them all now but essentially on march 15th 2023 so during the peak of the silicon bank valley banking panic and if anyone is forgetting this was quite a panic i remember ryan I was on vacation and kind of in the wilderness and I came out of like back to cell service and Ryan was texting me like the Motley Fool's bank might

have collapsed we might not have payroll or something like that and that was back when Ryan still wrote for the Motley Fool and that was not like an exaggeration of a concern there were a lot of business customers that banked with Silicon Valley yeah and it was a huge concern so and

there it's a little bit opaque of whether i don't silicon valley i don't think was like associated with melvin at all but they said that during this time they uh let's see terminated its derivative portfolio earning fixed rate floor income of 2.8 billion dollars notional amount uh and in march 15th they received cash or had a receivable from the clearinghouse related to various margin equal to the fair value as of march 15 2023 three, um, blah, blah, blah, blah, blah. So essentially they unwound the derivatives, even though it was during the time when the fed was still raising interest rates and they could

have benefited from these hedges. And here's what I really like about them is during the shareholder letter, they admitted what, you know, they said what exactly happened and then admitted that mistakes were made. They were caught slightly a little flat footed. They had to act defensively during the small bank panic in the spring, 2023, something they said they don't want to repeat going forward. And they also may have overreacted. I'll just paraphrase this for the podcast, but the full notes will be in the newsletter. They basically said, in 2023, your chairman ate a lot of humble pie and we had a return on equity of only 3.4%. And basically, they said the ingredients to that were a bad acquisition that Ryan will talk about in another segment, and then

the impact of these interest rates and the liquidity on their investment positions. they essentially, if we look at this, they had in March $2 billion of asset-backed security loans, which are kind of these unsecured loans, personal loans in the balance sheet. And then they had $1.2 billion in short-term leverage. They had the derivative position. And then they basically said when Silicon Valley Bank failed, they were really worried and they didn't have a lot of opportunistic liquidity, which basically means the flexibility to do what they want, sort of like how you know berkshire hathaway acts today um which may mean this investment this executive team is not as good as buffett because i'm not sure he would let this happen but

who knows i think people are allowed to make mistakes and if we look at it i think they're trying to overplay what happened because the actual cost as we look here um they they say that there was a $6 million immediate cost to sell $300 million in leveraged loans and then $2 million to refinance student loan securitization to free up $500 million in cash. And it hit gap earnings by $26 million, but with no long-term effect on cash flow. And then they also said when unwinding the derivative portfolio, it took out some of the hedging that they put into in-case interest rates rose. And people know interest rates are rising quite quickly. There was an opportunity cost there of tens of millions of dollars. But if I look at it, and honestly,

they didn't lose that much money here, right, Ryan? I mean, it was going to be a tough year either way, because interest rates going from zero to 5% is going to be extremely hard for a business like this. And that's one of the biggest headwinds I think they'll ever face with the financial services division. So I wouldn't expect them to have a great year anyways. but they made it sound like they had a terrible mistake here and i don't think that much talk value was destroyed no i think the biggest problem is just the opportunity cost if they didn't sell it so soon they would have been fine but it would have been hard to see at the time and the other part that's a little frustrating is we don't know what these

there isn't that much clarity here like we don't know what the derivatives are uh so you kind of there's like this quote from a big it was a berkshire meeting i want to say like 20 years ago and charlie munger was just basically like if your company has a derivatives book you have no idea what's in it it doesn't matter like i could run the company i don't know what's in the derivatives book so he doesn't like having them but counterparty we talked about right that that's what they were specifically talking about you kind of and maybe that was the situation here i don't know uh maybe some of the other investments that they have their vc portfolio maybe they banked with silicon valley it could there could be a lot of options but for some

reason they got spooked if i could talk to management today i would love to ask them what spooked you you know what worries you why did you decide to unwind it because obviously it didn't end up as bad as a lot of people thought it could so in hindsight it looks like they made a mistake but i guess better safe than sorry in this scenario yeah i think what they were saying mea culpa on i can never pronounce that correctly is that they would have rather had been someone with a fortress balance sheet and they got a little bit away from that that could be cute with these hedges. And now they don't want that to be as effective on their ability during a crisis to, as a financial services company, to acquire some of these distressed assets,

which is what they try to do. I mean, they might be trying to do that from Discover as of this moment. But if we keep going, so they have this liquidating loan book and interest rates can affect what's going to happen here. And hopefully, honestly, interest rates go down and they Get a nice little jump. But the projection for the cash flow generation is from these loans in 2024. So this year, $325 million. Next year, $200 million. Year after that, $150 million. And it kind of turns into a relevancy. So we got a couple more years of relevancy here. And you might ask, okay, well, what's this division even going to be going forward? So the stated goal from them, as they read in their annual letter and time and time again in the 10K

this year, is they want to take the earnings generated from FFELP and reinvest them into other loans, assets, investments, et cetera. And a lot of the cashflow is reinvesting into new loans on the open market that they believe they can get a good rate of return on. Here's a quote from the annual report. During 2023, the company purchased $556.1 million of private education, consumer, and other non-FFELP loans. AGM's competition for the purchase of loan portfolios include banks, hedge funds, and other finance companies. So they're going more in the open market here. And for anyone that's confused on the naming of all these things, they say AGM. That's another way they talk about these loans. I would just

think of it all as the financial services division, making loans, buying loans, all that good stuff. don't really get confused in it. If you're buying the Nelnet corporate stock, you're buying all of this no matter what division it's coming from. If you look at the table we have that's in the shareholder letter and also going to be in our newsletter, they have invested over $1.5 billion in the last 10 years into originating private consumer loans and loan residuals from third parties. So I'd say buying existing loans. And I guess the main way we can track the progress and how good they are at making these loans and making these loan purchases is with the growth of book value on the balance sheet, which is historically done quite well. Now, the third

important piece here that we haven't talked about yet is Nelnet Bank. This is a small fully-owned bank that was given a charter in November 2020. In November 2023, it exited it. Oh, yeah. Thank you, Ryan. You're correcting my spelling error there. It is not really relevant to earnings today. Excuse me, sorry. In 2023, it exited its de novo period, which means it can now operate more freely. And the company is small. Like I mentioned, it's not relevant to earnings today, but somehow it is something management is excited about investing in, likely because it will reduce the cost of funding for making loans. Nelnet Bank itself has not been profitable, likely due to the interest rate hikes impacting the deposit side of things and the fact that it's so small and has

these overhead costs to start out. In 2023, the bank's net interest margin was just 1.85%, which I think could have been higher if interest rates didn't rise so much, but TBD, something to track going forward. And if interest rates remain stable, so we'll see what we can do here. I think they also just need to get quite a bit bigger. If we look at the book value of Nelnet Bank specifically, they have it listed as $140 million, which is small, pretty irrelevant for the size of the actual entire NFS division, which has a book value of $2.6 billion. But it's something they want to invest a lot into. And I think we want to look at, okay, how do they grow the loan book here, but also

tracking. And I think that most important KPI for them, because I don't have any concern on their ability to lend they have a multi-decade history of making you know rational conservative loans is is attracting deposits because that's kind of a new muscle they need to get through here before we get to the conclusion of this segment ryan thoughts on nfs any comments on kind of the rocky year they had well no i appreciate the candor from the team i appreciate that the chairman said outright we made some mistakes and they tried to explain it kind of the best they could if they went into the granularities of the derivative book i'm not sure it would have helped anyways people probably would have just been confused if they did that in the shareholder

letter the bummer here is that it's just a bit opaque it's and honestly it's it's a challenge to understand the financial this entire division it's a little hard to follow which is maybe just the biggest frustration i have and especially because it keeps changing and they're adding new stuff all the time what do you think i want to say it keeps changing from the underlying loan strategy but they did make a change on how they name it this year and yeah they just started the bank but they've been doing the same sort of loans you know for for a long time now really ever since they couldn't originate new FFELP loans, which came along with the Obamacare Act. Yeah, the bummer is that this is, without having people to explain it,

if you just come across Nelnet, it's hard to understand. Like going through the 10K, this stuff's a bit tough to understand for the average investor. And I think it deters a lot of people. Yeah, I wouldn't say I understand it fully. I think I get a little better every year just because I've been following them for multiple years now, but I'm definitely not fully there. And as I mentioned this year, I didn't even think about it. I guess it comes back to the confidence in the management team that I didn't really think about them too much during the spring of 2023. And I thought they would act reasonably. And I

think they did. And maybe they acted too conservatively. But I think the one thing investors need to understand is that the chairman is a bit bearish on the economy and i think the management team is very skeptical on stuff like modern monetary theory the government debt all that good stuff so they're very yeah skittish a little bit with that but that's probably a good thing i guess just so they don't get caught over their skis too much but let's bring it all together how much is nfs worth how much is this division's worth i'm not exactly sure i think a little bit of a range here. Historically, the segment generated fantastic return on equity. It's the main driver of book value per share compounding at 16.2% since 2004. However, now we are exiting

the kind of what I'd call the guaranteed return era of FFELP, which is just a wonderful business that had minimal risk, which is kind of incredible. As we'll talk about later, they're very good at finding businesses where the government's just going to give them money, which is nice. And now they're getting into unsecured loans on the balance sheet. You have the bank that's growing and still unprofitable. You have insurance that they started. And yeah, 2023 was a tough year with interest rates, but they made those mistakes that we talked about. I think a couple of questions I have. Can these strong ROEs continue? I would say probably, but after 2023, I'm a little less confident. I think they need to earn my confidence with these new strategies. And

I think that is reflected across many of the investors and why the share price has underperformed. I think if you talk to management, they would say the same thing. The question is, for our podcast, what level of book value does NFS deserve to trade at? 1, 1.5, 2? 2 is probably bit much but what do you think ryan i it doesn't surprise me that it trades at less than book value i think it's basically less than book value if you assign any value to yeah to the other stuff because i'm not sure the return on equities the returns on equity that they've generated can continue and that's probably investors concerned they're not

certain about it the guaranteed portfolio that they had is rolling off more and more if it's going to have to come from Nelnet Bank you're not sure how much capital they're going to be able to attract it's kind of pivoting to a different business so

the uncertainty yeah I think around one times book value seems reasonable yeah i would be a bit more optimistic even if if we're saying it deserves to trade at one times book what is that are we gonna be like eight ten i think maybe that's what people are pricing in i would be more optimistic that they can be quite strong going forward and closer to the historical average but i guess mark the investors are in proven mode i think maybe a slight premium to

book value is what i would think it's worth but i'm glad that it trades it below book because the expectations from investors and they really have been except for a small period i'd say in maybe 2021 they have been quite pessimistic on this division all right we've gotten through the meat of this i think hopefully anyone that listened to that segment kind of understands how complicated it is hopefully we have a good clear idea of what's going on there because that that had to go along. I don't think there's any way we could go shorter there. But let's talk about some more fun stuff. Simple, easier to understand, potentially. But this is the other bugaboo they had this year, and that's solar. So Ryan, why don't you take the listeners through it?

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ask FinChat. That is their conversational AI powered by FinChat's proprietary data. So that'll save you tons and tons of time researching. They've got stock screening tool. They've got fundamental charting that is best in class in terms of design. I use FinChat every day. I absolutely love the platform. Brett does as well. We both use it as our primary dashboard and the place where we do all our research. So if you want to get 25% off any paid plan, use our link finchat.io slash chit chat. That is finchat.io slash chit chat. The link will also be in our show notes. Yeah. Bugaboo might be a bit of a generous term. So here's another one of the renamings. They used to call this Nelnet Renewable Services. I don't know if they still do. They kind

I just refer to it as solar now. Nelnet's role was as a tax equity investor in solar energy partnerships. That was the business for a while, and that worked pretty well. I'm stealing this quote from you. It says, this meant that Nelnet, along with its co-investors, invested money to develop solar energy projects around the country. In return, the company got cash flow plus tax equity credits equal to 26% to 30% of the project cost. I believe that's been up now to about 30% to 40% of the project cost. So even more reason

to invest there. But they went ahead and bought a company called GRNE Solar. And GRNE Solar is a contracting company that builds, they build the projects themselves for other people. And here's what they said on last year's 10K versus this year's shareholder letter. It's kind of fun to look back and contrast the two. So it says, the acquisition of GR&E Solar provides technical know-how, customer relationships, a talented workforce, and revenue streams to Nelnet's expanding renewable energy business. The acquisition gives the company an ability to realize a diversified revenue stream by generating a fee-based service from its EPC and operations and maintenance services. This is construction, which is more capital intensive than

what they've done historically. Here's what they say in this year's shareholder letter. It says, in 2022, we acquired a solar construction business to leverage our tax credit and syndication business and expand our development capabilities. We had another good year in the tax credit and syndication business. Our solar construction business, on the other hand, had a very rough year with escalating construction costs, higher interest rates, reduced residential demand, and made solar projects more costly, adding some mispriced projects along with us being almost over our ski tips outside of our circle of competency, leading us to writing off $21 million in goodwill and intangibles, along with an annual pre-tax operating loss of $34 million.

I don't know how to value this business. It sounds to me like the partnerships and investing where they are not the main developer here, and it's kind of a lower risk strategy, less capital intensive i like it new free money that's the new that's the new free money right there yeah i mean they'd love like i said right off it makes everything a little worse government yeah government subsidies stuff like that but the construction business you could maybe count that as a zero it sounds like even worse yeah it could be worse i mean they acquired it for i believe 34 million dollars but i don't have that number in front of me either way not small but that you know there could be a negative value associated that i'd definitely write that value

down to zero but the solar business on the whole it's quite attractive when you get 30 to 40 percent on that tax equity stuff and i would say that's worth probably hundreds of millions at least what they've invested into it and they say they think they can get very very consistent good returns which i think to them means like 15 on that book value when you combine because they're good the thing is like with again excluding construction which could be a huge black hole or not i wouldn't say like a black hole but a huge negative like it looks like it's hemorrhaging a lot of money yeah but even if you have that in there you have the lot like the stated losses from the solar investments but that's honestly a good thing excluding the construction because that's a

real business but the the accounting on the solar business you want more losses because that's the like the tax write-off i'm explaining it poorly because i'm not an accountant but like no i get it like it's gonna look bad but it's actually creating a lot of value Because you get that tax write-off and you get to own these assets that generate a regulated return. Yeah, yeah, exactly. Yeah, but the construction business is a part of this segment now. And I don't like the construction business much. So what do you do?

Do you try to sell it? Try to get rid of it? or do you keep running it and hoping you find competency there and you're able to turn it around? I would kind of hope that they partner with someone and offload a lot of the money or offload a lot of the responsibility, kind of like they did with Allo a couple of years ago. So I don't love the solar business.

I think they got a bit outside their circle of competence, as they said themselves but it's not a huge part of the business overall no it's not even if you take exclude the construction it's like the solar equity stuff is attractive i think that's a great segment but it's not going to be worth that much of the whole story today all right let's talk about their cable business allo communications what do you value it at what has kind of happened here and maybe give some context about what it actually is. Okay. I'm going to start out with a quote from either the annual letter or the annual report. And it says, the company believes the fair value of its voting membership interest in Allo

is significantly greater than its carrying value. And I think that's interesting because, and I guess we didn't go through every other previous shareholder letter and look for this, But I think this is the first time they've started putting that language into their documents. The thing is interesting because they're trying to indicate to us as shareholders that even them, the ones that try to hide a lot of stuff, they're like, guys, this is not worth what the gap accounting is telling us it's worth. We're doing it on purpose. So go ahead, Ryan. I'll pause you there. This whole letter was honestly a little more pumpy than normal.

But the bit about their education and payments business being worth more than the business overall and how Charlie Munger would like it, I kind of was like, that's definitely a change of tone. However, these letters for a long time were also written by Dunlap as opposed to Nordic. So there might be a bit of just different language in general. right and maybe they're just trying to tell people like maybe like us like the the few people that talk about it or you know the few people that follow this company hey guys like you might be underestimating i i don't know if it's a bad thing it'd be a bad thing if they try to like pump it like specifically because it's kind of subtle you know but if they believe it's so undervalued the one question i have is is why are you not more aggressive on the buyback

that's my question that would be my hold up but let's get into this segment before we kind of go into closing thoughts and valuation so now that owns 45 voting stake in aloe communications it's a leading fiber to the home provider in nebraska and some neighboring states it actually dominates the lincoln market uh where they're headquartered so it's not that's not a coincidence they used to fully own this business they have a preferred stock worth 155 million let's say this preferred let's just keep it at 155 million. We'll keep that like that. Maybe there's some other complications there, but whatever. But due to its want to save taxes, Nelma itself has been using what I'd call accounting mumbo jumbo, official term, right? To reduce the stated value of its

45% voting stake in Allo Communications. And it's going to be, quote unquote, worth zero on the balance sheet by the end of the first quarter of this year. But as management said above, They think it's worth much more than this. Today, Allo has approximately 150,000 customers. I'd round that up from the end of the year 2023 when they had slightly less. And in 2022, it had 131,000 customers. So growing quickly, they get government subsidies from the rural thing with fiber that got brought out that gives a good amount.

I think it was billions of dollars, which is quite nice for them. and they said it generated $150 million in revenue in the last year. If you value each customer at, say, $2,500, maybe it's each line, each account. Maybe that's a good value. I don't know. Maybe it should be higher. I'm not a cable expert.

If you did that, multiply their customers by that, it's worth $375 million. Perhaps they reach 200,000 customers soon. They're growing fairly quickly and go into these expansion markets. I'm not really sure, but the issue is, from putting a value for Nelnet itself today, is that the company, Allo, has taken on $715 million in debt in order to finance growth as they go into these expansion markets and try to grow their footprint. So they're taking on a lot of leverage to grow, which I think can work,

but that's going to be where a lot of the enterprise value resides today. and I think that's probably why Nelnet split it off as an investment because they knew they wanted to be aggressive for growth and all that good stuff, and they can keep that. It's not going to come back to haunt Nelnet if this thing blows up, which I don't think it will, but still. So perhaps the company is worth a lot, but as I mentioned, $715 million in debt, I mean, if you put a value on each customer

at even a pretty aggressive number, that's going to come out to that. So is Allo's stake really worth that much? I don't know. It's not a big part of the value creation story here. They're not going to get a bunch of cash flow coming in from this. Maybe they grow a lot in like four to five years, Allo goes public or gets sold to Charter or someone like that, but they're already owned by private equity.

I'm not sure there's going to be much value creation here for Nelnet shareholders. It could be a good tax write-off. That's fine. But curious your thoughts here, Ben. no i mean it's at its core it's a good business you lay out you literally lay out money and fiber i believe this is fiber to the home right today and you've got most companies don't want to overbuild maybe there are more overbuilds and maybe i'm wrong about the economics but

especially in rural areas once you lay that fiber out you've got access to a lot of these homes and And it's kind of this recurring revenue stream that's pretty high margin over time. And as long as you provide good service to those customers, they're going to stick around. So I think it's a good business. At its worst, it's worth something. And it's not weighing on the business like I would say solar might be. Right. I think there's a little more predictability here.

I think there would be even more concern if this was fully consolidated just because of the headwinds that the cable internet business has gone through recently. I mean look at Charter's share price. Yeah, it's – I kind of like that they split it off. They could deconsolidate it from their P&L and just kind of market it at some value on the balance sheet. But speaking of balance sheet values, I want to talk about their VC portfolio because this is maybe one of the segments. It's the most fun. And it's something that we both know pretty well. We know the business.

But for context, they call this other investments. It's really their venture capital portfolio. And they've got investments in 91 entities. So a lot of different bets that they spit across here. The total carrying value of the whole portfolio is $285.5 million. The largest of that is Huddle. If you are familiar with high school sports, you've probably heard the name Huddle, especially here in the US. The company itself is technically called Agile Sports Technologies. They're from the Lincoln area, actually. I believe it was a former University of Nebraska football player, a couple of them who actually founded this business. And they are sports film, essentially.

They're a sports film company where all the footage from games – and it really got its start in high school football here in the United States – get uploaded to Huddle. You can compare companies. You can watch film. You can train. And it's got a huge moat with these high school teams. And they're really diversified across a lot of different sports. They've acquired some professional platforms as well, which are big in professional soccer. And they bought Crossover, which I think is big for college basketball.

And they're just starting to consolidate it all into this huddle experience. So I really like it. They currently value the huddle investment at $165.5 million on its books. that's estimated to be about a 20% stake last time it was reported. However, though, this part's pretty interesting. So it says, during the first quarter of 2023, the company acquired additional ownership interest in Huddle for $31.5 million from existing Huddle investors.

This transaction was not considered an observable market transaction because it was not subject to customary marketing activities. So if Huddle were to do another venture capital round, I don't know what round they'd be on, but let's say they did another one. They would have to mark up – and by they, I mean Nelnet. Nelnet would have to mark up their value for Huddle. However, sometimes when there's a lead investor for a private company, they will have a term in their contract that says if someone else is selling your stock or selling shares in your company, we have first dibs to buy that stock. It sounds like that's what happened here. So one of the co-investors from a previous round said, we got to return capital to shareholders. Doesn't really look like Huddle's IPO-ing anytime soon. We got to sell it. I assume Nelnet had the preference rights and went and bought it and didn't need to revise the value. I got to, sorry, something's popping up on the screen here. Didn't need to revise the value on the balance sheet.

This is really understated. Here's actually the exact words from the shareholder letter. He says, we remain extremely optimistic about our investment in Huddle. We are currently carrying the value of this at $165 million, and we believe the actual market value of this investment is significantly higher than our carrying value. It says, Huddle provides more than 230,000 teams across 40 sports and in 150 countries that incites to be more competitive. Great news.

The federal EV rebate is back. Eligible customers get up to $5,000 with the federal EVAP rebate on select 2027 Volt and 2026 Equinox EV models. Visit your local Chevrolet dealer today for more details. Let me give you a break here. I should mention Huddle's also in Lincoln. The companies are extremely tight. Huddle's founder is on the Nelnet board.

So these, like, think of it as almost, we're going to make the Berkshire comparison. I'm not saying this is as good of a business as, you know, an American Express, but think of it like as Buff, you know, Berkshire's investment in American Express or Coca-Cola being the largest shareholder sticking around, right? That type of stuff. Yeah. I mean, they're very tight knit, I think. and I'm going to try to do some guesswork here to run the math on what this business could be worth.

If you just look up some of those aggregators, those websites that guess, if you say like huddle revenue, some of them, they range. Some of them will say north of $500 million. Some of them say $20 million, which is obviously wrong. But I went to the huddle website, just found the pricing. And if you are a A gold member or a platinum member, or if you have those subscriptions and you're a team, you got those. It's between, it's either $1,600 a year or $3,300 a year. There is a silver tier for $900 a year, but it only allows for a hundred hours of video. I would guess most teams have a lot more video footage than that. Especially a football teams, which is their core market.

Right. And so just I split the price between the gold and the platinum. This is probably bad guesswork, but who cares because we're not going to know for a little bit. $2,450 a year would be the average there. If you assume that the 230,000 teams, which a lot of them are not high school teams, so there's probably pros, pro teams that are spending more than this. 230 000 teams paying two thousand five hundred dollars a year roughly you get to 560 million dollars in annual recurring revenue that's i would think this is a wide moat business very sticky customers i would imagine this trades for anywhere between five to ten times annual recurring revenue it's probably very profitable and growing i'll give you another note for the shareholders, or excuse me, the investors, not investors, listeners here, could be investors, I guess. Last year, same note said 200,000 teams. So growing fairly quickly as well. And probably some latent pricing power. So anyway, good business.

Yeah. I would say if the average revenue per team per year is 2,500, like you're saying, i would think that's either too low of an estimate or they have a ton of pricing power so it's kind of a good balance like either way it's good yeah and there's other things they're doing too which we haven't even talked about but they're putting cameras up at basically a bunch of these high school stadiums all around the country and they've rolled out huddle tv where fans can watch it online and there's these local advertisers so they they also sell tickets they are becoming the home for high school sports in the u.s uh across a variety of different functions not just the film and i would say what the software and technological backbone maybe

maybe the it software backbone of a lot of high school sports teams and professional teams as well yeah we i mean i i really think this is good business five to ten times revenue seems realistic if they're doing more than 500 million dollars in revenue that implies anywhere from three billion dollar market cap to a little under six billion dollar market cap on the low end that would mean now that stake would be worth more than 500 million dollars so more than twice the carrying value that they've got on the balance sheet right now it's in my opinion and i don't know if they'll ever go public i don't know what they do with this stake if they just continue to hold it and mark it up on the balance sheet over time it'll

hope the book value but i would love to see this company go public and get a real sense of of what the stake is worth probably not gonna happen yeah i i would like them to go public too especially because it seems like a good time to go public you can raise a good amount of money you can be even more aggressive to grow here yeah i would even think it's on the higher end of that that investment where i'd say closer to a billion maybe for huddle the huddle stick but again it's going to be hard for them to monetize and they don't really care so don't expect this to be some value creation story over the next year but who knows maybe we're jinxing it and they're going to go public this year we have no idea seems unlikely especially if they just bought it back

if they just bought a stake if nelma just bought a stake from a co-investor i would imagine the co-investors were like hey are you ever going to go public they probably said not for a while and then sold their stake right but you know it could be within two to three years you never know i'm hopeful yeah and it's that'd be cool what's interesting i'm a long-term shareholder but i would really like some short-term gratification well it would be nice to just get the numbers because it is along with the education and software part i think one of the more attractive assets where you know financial services like they're good at it but whatever um and then And servicing also, eh, out of communications, eh, solar, eh.

But these two, Huddle and Nelnet Business Services, very attractive. I'd like to see, you know, if we're right about how attractive the Huddle business is, which leads to this next final question we have here. Let me lob this idea out there. Okay. Before we move on, scenario for you. Nelnet acquires all of Huddle somehow, and all of a sudden you've got Nelnet Sports Streaming. No, Nelnet Sports Services. Nelnet Athletic Services.

i don't know if they have if they could convince them to only buy it for like two billion dollars maybe they could do it but they're so aggressive with building up this loan book that they would have to like build up some capital for a while and sell some stuff off so i don't know if they have i think it's not yeah it'd be interesting though but let's go to the final question we're hitting on the hour mark here what do you think this entire business is worth i'm gonna let us both go through our strategy here, but I should give a note on Nelnet book value per share. There's a good chart here we have in the newsletter from our friends at finchat.io. Book value per share compound annual

growth rate since December 2014 has been 10%. It's a bit lower than the historical average, but people should remember, aloe is artificially deflating that, solar artificially deflating that, and then 2023 was a really tough year where you can see on the chart historically the book value growth has been quite consistent but there was only a tiny bit of growth in 2023 so ryan i'm gonna let you go first what do you think this business is worth maybe give a conservative or aggressive or when would you sell type deal? Yeah. Any way you slice it, I think this business is undervalued. And I'm just going to keep my analysis pretty simple. I don't like some of the parts, but I'll do it anyways. Let's say you take the education

and payments business. I think that should be worth 20 times EBIT because it's got a wide moat, very sticky customers, and it has some pricing power and they've shown an ability to grow. And there's probably operating leverage there as well. I don't think three times revenue, – three times annual recurring revenue is that demand in here. So I give that basically a little under a $2 billion valuation. Loan servicing, I think it's maybe worth 10 times last 12-month earnings before taxes. That might be aggressive, but like we discussed earlier, I think it will grow a bit. the earnings figure will grow and could probably do 700 800 million dollars over the next 10 years

in earnings so seems like a fair estimate 10 times earnings essentially so between those two you've got almost their market cap in value then everything else you basically have to ask is everything else worth more than 500 million dollars We already said it. I think huddle is worth that much. You also get literally a pile of loans that will give you a billion dollars in cash flow over the next 10 years or over the next five years actually. So yeah, I'm not going to play dumb. I think it's worth more than $500 million. The only thing I don't like about some of the parts, and we were talking about this earlier, is it feels pretty short-term. When you look at a some-of-the-parts analysis, it typically implies that you want something to be monetized. I would rather them develop subsidiaries that earn a lot of operating income for the business. I would like to see this business generate, I don't know, $300 million, $400 million in operating income.

and obviously the loan book's a little less predictable, but I'm talking about between the operating subsidiaries, loan servicing, the business services. What else am I missing here? I guess everything else is just on the balance sheet, which is a little frustrating, but it's hard to value. I think there's tons of really good businesses in here, and it's worth more than it's currently stated for or investors are willing to pay, my frustration is that there wasn't that much buybacks this year. Yeah. I think that came down to the liquidity concerns on the financial services division, but I would like that. I was going to ask you that too.

If I look at Nelnet from post great financial crisis, they're generally valued at book value. what are your thoughts on the fact that they are purposefully and i'm saying this is theory they are purposefully kind of deflating the book value again with aloe solar equity some of these carrying values like you take that and they're trading at book value but the the true quote unquote book value and the fact that they are investing in a lot of if we look at the business services is an asset light business where book value doesn't make sense the fact that they're investing so much in that and not buying backs or excuse me that they're trading at such a discount to those and are not buying back stock what do you think about that versus the consideration okay

well their historical track record of creating value by making all these investments has been quite good so like you know what i mean where they should get a good return investing in all these other things, but it would be so simple to just let some cash pile up and then take out 20, 30% of your shares. Yeah. Before they developed the education and payment segment into this full-blown software conglomerate, I would have said, keep investing elsewhere and try to build out some other sustainable businesses. But now you've got a business doing almost $100 million dollars in operating income you can go and buy back stock it's not like you're going to be left with nothing it's not just a cash shell you've got some subsidiaries that are highly functioning

and very capable of earning money for a long time i know that they believe and have created a lot of value by taking the cash flow and investing in all these loans like i mentioned the 1.5 billion invested into those. But I would wonder if it's more attractive to take that and repurchase stock and make even like you have a higher percentage ownership in these asset light, highly attractive businesses, either as a partial owner in huddle or full owner in MBS. And that I think could be valued at much higher in the public markets and deserves to be. But let me go through mine. I think there's four main contributors here of value. NFS, so financial services, NBS, software and payments, loan servicing, and huddle.

I'll try to slap a value on all these, but again, there is some uncertainty. If we look at NFS and Nelnet Bank, that book value is $2.6 billion. I would say, though, that historically, they've generated well above a 10% ROE, so I think this deserves to trade at a slight premium to book value. i'd say at 1.25 times book value you're at a 3.25 billion dollars in values there which is funny enough like exactly their market cap if we look at education software and payments go with ryan's estimate maybe around two billion dollars loan servicing maybe a billion dollars because it's low growth uh lower multiple more uncertainty we've talked about all that stuff i'd say the

huddle stake probably worth a billion dollars now it we're not going to monetize that no one's going to care for a long time but i think the value is there and growing as we've shown with the growth number of teams that are subscribers you send that together again it's the the dangerous word summing it together that those four together is 7.25 billion dollars you add in smaller stuff solar, aloe, maybe even give a higher premium to book value for NFS. I think a good financial that has generated those 16% ROE should have traded like one and a half times book value. This company could be worth $10 billion. I might be a bit aggressive, but I'm saying that's kind of like the high end aggressive. I'm not sure I think that's what it's worth. And to be honest,

I think if I'm going with where I would sell, like, okay, you're telling me nothing changes tomorrow it's trading at this this this this this and we go up to a trillion dollars where you'd obviously sell i think i would sell it maybe 15 billion dollar market cap which clearly you know if we look at the market cap today it's about three billion dollars so i'm not i think it's severely undervalued and this is why it's the largest position in my portfolio but yeah it's in the never sell cap i have no intention of selling this business right now I think management is honest and pretty capable. They've shown an ability to be successful over time.

And if it does well, I'm just going to keep owning it. If it starts going towards zero, I'm just going to keep owning it. I believe in the management team. I don't know. Yeah. They've gone, they went from no, book value of zero. Yeah. Book value of zero over multi-decade period to today.

We'll see. I think they're smart. I think that's a good way to end it. Anything else, Ryan, before we tune out here? No, let's leave it there. Okay. Maybe, let's say, after this year's update, which I think we'll probably do one every year,

unless we stop owning it for whatever reason. Probably do another update after the annual letter next year. Is this the next Berkshire Hathaway? close it out or not or is this an entirely different operation i would say it's a lot different because the no berkshire doesn't operate as a bank it's it's different it's the insurance so that's that's the key difference here yeah this is not the next berkshire hathaway but i believe in dunlap the same kind of my investment thesis would be similar for both which is belief in management it's that's what it comes down to and transparency from the management

team so it's similar in that sense but no the businesses are quite quite opposite actually yeah let's just get a ghost writer like buffett has for some of the letters to make it a little bit more coherent because those the letters are not as um scholarly or you know well written yeah they're still good though they're good they're good they're just not as they're more it's not like a how buffets are where he tries to make it super artistic sounding almost you know what i mean i'm trying to right articulate yeah yeah but all right that's a great way to end up we went well over an hour here but i hopefully let us know if that was too long but i think that was a good good amount of value for the listeners there let's hit the disclosure we

are not a financial advisor. Anything we say on the show is not formal advice or recommendation. Ryan, I, or any podcast guests may own securities discussed in this podcast. We may have held them in the past and we may buy, sell, or hold them in the future. That's especially important today as this is one of the few episodes we talk about our personal holdings. So Ryan, that's it. We'll see you all next time.