Chit Chat Stocks - Power Hour #11: Apple TV MLS Deal, FANMAG vs. S&P, 2021 FOMO

Episode Date: June 19, 2022

The CCM Power Hour is a live-streamed show every Thursday at 3:00 pm EST. On the show, Ryan, Brett, and a rotating list of guests have an unscripted discussion on a variety of investing topics.  You can watch the show on our YouTube channel here: https://www.youtube.com/c/ChitChatMoney  Follow the show on Twitter: https://twitter.com/chitchatmoney 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. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. This is the CCM Investing Power Hour. This is the show where Ryan and I just go through anything on our minds. And the only rule is that there is no preparation. So we'll hopefully get

into some good discussion. I'm sure there'll be plenty to talk about today. But yeah, no rules. and all we have here is just two guys talking. Hopefully people will join. Sometimes people join and ask questions. If you're listening on the podcast, you can join us at 3 p.m. Eastern time, 12 p.m. Pacific time every Thursday on the Chit Chat Money YouTube channel.

All right, Ryan. These episodes get a strange amount of listens. I would not have expected people like to hear us riff so much, but since the listeners enjoy it, We will keep doing that for the time being. Yep. All right.

And what is on your mind this week? Anything exciting besides the market turmoil? Of course, we're officially in a bear market. Not down 19%. We're down 21% now. I was actually reading Saudi America this morning, which was kind of interesting. And that's that new Bethany. Not new.

It's a Bethany McLean book on basically the oil industry and how sort of the origins, I guess, of fracking and how America kind of became, I mean, I'm not finished with it, so I don't know exactly how it finishes, but how America became sort of an energy powerhouse. And I found it funny that Chesapeake Energy, which is like that stock that everyone gets on robin hood for free when you sign up like they had a crazy or like origin story that i had no idea about yeah and then their ceo well i don't want to spoil it for you but you can research what there's what happened to their ceo i believe that's the one where they had that crazy accident um yeah it's like no one knows whether or not it was like a suicide or something but it was

uh yeah it was like the day after he got some sentence or some ruling against him um just a crazy story and i had no idea i thought it was just some obscure energy company but they were like a powerhouse there for a little bit um or they were at least much larger than they are today so kind of i don't know kind of a fascinating story yeah that's that's been uh that's been my morning so far have you been reading anything that's uh not lately not really anything interesting investing related um yeah i guess i picked up a book that it was like one of bill gates's recommendations uh lawrence hampton on twitter who's always putting out some nice book recommendations uh this guy named viklov smell who is like a really big scientist into energy

and stuff like that so i think it's a similar sort of topic but not as specific as kind of saudi america kind of interesting on where sort of energy goes and how um there's a lot of stuff that not a lot of stuff a lot of energy that goes into products what are the big four that he lays out cement plastics ammonia which is fertilizer for crops for agriculture and oh gosh i'm forgetting the fourth but either way the globalization around that and the complications are kind of interesting it's a bit of a dense read but i thought it was fascinating and he's a bit snarky which is kind of fun but also i i would like maybe half of that much because he does he is mean to a lot of economists and stuff like that he's got a a bit of munger vibes um which you know it is good

sometimes but i don't think you can have munger all day every day entertaining for sure yeah that is for sure uh what do you think of the mls deal on apple i like it i like it as a consumer um i worry that well my first thought would be like they might be alienating the 50 of america who doesn't have Apple TV or doesn't have a smart TV, but they're keeping their deals with ESPN and I think Telemundo

or Univision, so they should still get at least some of the games, but I think it's a smart move by Apple TV. I've been waiting for a streaming service to just gobble up the

league's rights, and the MLS some people i mean a lot of people aren't that into soccer but it's a growing sport i think the median salary in the mos has compounded a double digit rate over the last decade so the the money that's being poured into the sport and the viewership is growing and so i think apple tv got like a good i think it was the right move for them i think it it captures a lot of viewers that now have to sign up and have a reason to constantly subscribe yeah that i think it's pretty smart as well the sports rights are really complicated for these tv streamers and and linear as well

and it's hard to kind of gauge what value you're getting or the return on spending say well mls is probably a lot less do you know the number on the deal it's been a half billion over 10 years um i remember them saying that but they get all the matches um i it's not like a crazy number i think uh espn and either univision and telemundo and fox were all paying like i think it was like 60 million 70 million a piece a year um these are all ballpark numbers so i might be wrong on them So if you balance it out to $250 million a year, the rights aren't exclusive, but they get all the games. It seems like a semi-fair price to pay for a league that's growing. My concern as a viewer was it's only going to be the Apple TV commentators for all the games.

Right. Which if they're like a total flop, like if they just absolutely suck, that ruins all the games. and uh i don't know that could potentially be concerning gonna have to watch the games on you but i think it's the right strategy i want to tie this back to investing not my soccer uh fans fanship but the uh i think that is the right strategy to keep customers subscribing because for the entire mls season i'll have that subscription which lasts a long time and if you can have like two leagues that span the whole year like where their seasons span the whole year you've got constant um you're minimizing churn i know those those rights are probably more expensive

than you know some tv shows but it it gets rid of my big concern was that all these streaming options are so disposable after you watch something that you like like if you don't have something you can always unsubscribe then resubscribe apple like having streaming rights to a league that goes whatever six months eliminates that for me yeah i think i agree totally that combination of nice quality tv content which apple has they're they're serving kind of their own niche they're not going for like reality tv stuff or anything like that but the combination of that plus sports seems like a way better product offering just to keep people from churning and i know everyone but netflix had churn problems and now netflix is kind of getting

back to where everyone else with decent churn problems although i believe they still have the lowest churn it seems like amazon strategy with thursday night football falls into that same regard probably a bit expensive but during football season it's in like if you're a prime member in the united states you're not and a football fan you're not gonna unsubscribe and that's just really really durable and it probably leads to pricing power in the future i mean if they had the full not no i guess no streaming service probably will get the full nfl slate but if they got some of the sunday nfl games uh or on monday night on amazon prime that could be big as well difference to me is that prime video doesn't need a lot of that stuff for amazon prime

to be worth it yeah but it still makes it that much i mean it maybe increases the pricing power but like apple tv i would not subscribe i'm not a subscriber to apple tv but now i will be for the next 10 years at least during the mls season they kind of needed this i think like they need these type of deals because you don't have like you don't get the one day shipping with prime or whatever yeah they don't have that going for them as well i guess they could pair it with like their iphones or something like new iphone sale yeah apple tv as well or something like that yeah amazon's coming from a way higher position of strength and then i think the only last thing i want to ask on this part or this one is do you think netflix needs to try to go i know they only

want global stuff to try to go for a global sports rights like uh f1 tennis golf what are some other ones i think that would be now olympics is unique but maybe one of those three or all three of those could really help them reduce churn because i i'm getting into f1 and that season's almost year-round i think it's about three months of an off season so nine months out of the year they have a week race every other week basically they have 23 in the season i'm not going to be turning off if i can watch on netflix and it's such an easier way for me to watch than through the old janky um whatever ways you can watch nowadays we uh we've got a question from connor shilu shilu you don't want to wait you don't want to answer what i just

my thoughts there or i want to answer the questions so in case the so it encourages people to stay on the uh keep keep hold that thought though it's just says he says thoughts on current hyper growth sass valuations i think there's a chance that a lot of them aren't hyper growth into the future um so that that kind of i don't know i mean it's sort of a well it's a broad question there's a i think there's a spectrum of them you got to treat it at the individual company level obviously the valuations have come down but you don't want to anchor i know there's a lot of charts that go around uh the last five years price to sales multiples or um ev to sales or whatever any sort of broad-based multiple of it's a like oh all-time low since 2017 or

something like this for these software companies but you have to ask yourself like does that mean they're cheap it just because you're anchoring to a time period when the multiple is higher doesn't mean the stocks are good by now i think you gotta look at it at an individual level that sales multiple let's say it was higher five years ago the forward sales growth was probably faster over the last five years than it maybe will be over the next five so it's not i mean and you can say that for almost for certainty with enterprise sas because the last decade was just a huge tailwind of adoption as cloud totally boomed yeah i'd say if you took the category as a whole i imagine even though i think that enterprise sas will grow i don't think growth

will be what it was. The other thing I'll add is I think a lot of people, myself included, did not recognize how much of the excess COVID demand or the quick acceleration because of COVID was actually just temporary. One company that I'm seeing it with right now is DocuSign, where where their sales staff is quitting. A lot of their sales staff are quitting because there isn't the low-hanging fruit. They talked about this. They were almost like customer support.

The sales staff was almost just customer support because they were getting so many inbounds during COVID, where it's like they need whatever, this many digital signatures to be allowed, this many seats that the companies do because they have to transition quickly now the sales staff is going out there like can we upsell you can can we cross sell you to e-notary or whatever and they're like yeah we don't really need that anymore like we could do this in person if if if it comes down to it so it's like some of those some of the companies i do think

saw temporary accelerations and may even see declining revenue over the coming year, which is so hard to... Going from 40% or 50% revenue growth to negative, declining revenue is so hard to imagine, but it's happening for a lot of the companies, which is pretty crazy. this episode is brought to you by lakinta by windham here you are miles from home and ready to start your vacation good thing you're staying at lakinta by windham they have free high-speed wi-fi to stream all your favorite movies and in the morning get fresh waffles with their free bright side breakfast or squeeze in a workout at their fitness center either way you're ready to conquer the day tonight lakinta tomorrow you triumph book your stay at lq.com

Yeah. I got to be honest, I have not looked at SaaS recently really at all, which I guess is maybe helping me not avoid some pain. But looking at it more generally, I think I saw some charts that the average sales multiple is down to eight on a trailing basis, could have been forward, not really sure. That seems reasonable for something that can generate 20% plus earnings or profit margins that has a path to grow. But when you have the uncertainty of future growth, which the market usually, a lot of investors get nervous if there's a few bad quarters, and you wouldn't really be surprised if a stock totally drops then. If something goes from, like Ryan mentioned, 40% revenue growth, totally down to negative,

That can totally throw investors for a loop. But the difference between that and, say, a company that has a huge sales staff, maybe lower gross margins, and can only get 10% to 15% profit margins, I mean, an eight-time sales multiple feels very, very, very expensive unless you're growing extremely quickly. Something that comes to mind in that regard that we talked about a lot, I know everyone talks about this one, is Shopify. they had a high sales multiple. It's come down to probably, well, I guess I haven't looked at it recently, probably around eight, right? Sales multiple. Yeah, I'll look at it right now.

Okay. There's a difference between that and then Adobe who has 40% profit margins and then Shopify, which has like 45 to 50% gross margins, I believe, ballpark, where their operating margins might be closer to 15% or free cash flow margins might be closer to 15% I mean it's just a huge difference but either way the opportunity set I think in general has to be better

or else the entire sector was just a bubble and I don't really believe that there was something that was Shopify just for context has an enterprise value of $32 billion according to Kofin and a $5

billion in revenue let me make sure that's right yeah five billion 4.8 so what six just over six times revenue okay wow that got cheap fast wow yeah it's at three hundred dollars it was at what 1700 last year yeah i think pushing 2000 actually yeah the there was like this tweet that i saw that, I'm going to get it wrong, but it was basically like, maybe paying developers $400,000 a year isn't a sustainable business model. Plus stock. So yeah, I mean, some of these companies might have 92% gross margin, or 90% plus, 80% plus. And it's so easy to say like, oh, well, they could probably get to 20% or 30% cashflow margins, but They are competing so much for developer talent and paying so much. That's where their costs are, not in the cost of goods sold. Their costs are in the operating expenses. That's almost, for SaaS companies, development talent almost is a cost of revenue.

Yeah, kind of. kind of it isn't but you know like you have to have it unless you have a business unless you have a platform that's so sticky that customers will never leave like an adobe like maybe an autodesk or i think you could make the case for maybe crm um or probably office 365 Yeah, but they still need, it's the efficiency that the quality companies have. Okay, here's an example. And this is an industry we don't really focus on, but I thought it was really stark. There was the announcement of the Coinbase layoffs, which that company seems to, I think they just got to stop tweeting because it just creates a whole flurry of controversy. but they laid off, I think, 20% of their staff and they had somewhere around like 9,000 employees. And then the other exchange, FTX, the founder there was like, we have just way, way less employees. And he was saying something about how most startups or early stage software companies

have like 10 times as many employees as they necessarily need. And that is something I think in the future, I kind of want to focus on more as finding a potential investment because the company is like, and I wouldn't really, I don't like crypto at all, so I wouldn't invest in FTX, but I would be much more inclined to investing in an FTX than a Coinbase just seeing those employee counts. Because if you're going to pay a developer, say your top developers in between $400,000 a year and a million dollars a year in total compensation, you want to be getting a lot of return from that and it seems like maybe the developer community got a little um not i don't want lazy is the wrong word but like overconfident and how valuable they were to a company if you

know what i mean where you could just be hired you kind of do average work it seems like there's a lot of stories like that floating around um yeah i think employed the employee numbers the total employee numbers and obviously that's a generalization but the total employee numbers and the pace of hiring, which you can look at in all the annual reports, they're required to put employee count. I think that's kind of important for people to track. Yeah, it's really one of my biggest red flags. I don't like when management brags about how many employees they're hiring.

I understand what the indication is that we've got all this demand and we're able to meet it by adding employees, But I should be able to see the improvement in demand in the financials or the bookings or the backlog instead of payroll or headcount. We've got another comment that basically says, Connor has been listening on Power Hour on Spotify every week. Thank you for your listenership. Much appreciated. He was kind of thinking about companies like CrowdStrike, Datadog, and Snowflake. that is i'll speak on behalf of both brett and i for this one i would say those tend to be outside

of our circle of competence uh however yeah however uh enterprise cyber security yeah or not yeah some of those yeah uh however i will say brad freeman who joins the show once a month on one of our not so deep dives he does a lot of good work on crowd strike he's helped me understand that a bit with his free newsletter so go maybe check that out and if you're looking on Datadog and Snowflake, there is a great website called Hypergrowth. Starts with three H's, so HHH and then Hypergrowth. So Connor, if you want to check that out, that has some really, really good stuff on Snowflake and Datadog. I think we did a show on Snowflake. If you want to check that one out, give you the basics of the business. I think we understood it pretty good, but if you want to

really understand it, I got a Hypergrowth website. All right. Do you want to do the other two questions ryan yeah one one uh nick says stock pitch idea since you're familiar with sfm which is sprouts farmers market what do you think of i am kta i believe that's ingles markets definitely has a dominant position in a growing market western carolina particularly uh we i haven't taken a deep look at them i know they were in michael burry's portfolio for a while um seems intriguing yeah it looks interesting we don't uh i won't talk about sprout since that was in the portfolio but the uh uh grocery i don't love grocery like it's a competitive business but they tend to just end up getting too cheap like the market just seems to overlook them

constantly so it ends up being a good place to fish but um like all else equal it's not the business model that i'm probably looking for it doesn't have yeah i wouldn't put in my top advantages yeah i wouldn't put in my top 10 like business models and i think in general the only way we would maybe be interested in a grocery store if it's trading at and it's hard to put the artificial numbers on there are restrictions, but like at a PE or price to free cashflow below 10 is kind of where we get attracted to it because we know the growth is going to be so low. But what makes it like not in the too hard pile is obviously grocery is pretty easy to understand. But one, the industry is durable. It's one of the most durable industries out there,

whether people got to get food at some point. And two, they do well during an inflationary period. Now, if there's 10% plus inflation for a sustained period of time, I don't think they're going to get hurt as well. But with moderate inflation, they actually do quite well just because, again, this is something that's a consumer staple and not a consumer discretionary product. So I like that aspect of the business a lot. And I also like the aspect that online sales haven't really taken off. I know Instacart has decent market share. there's decent online sales in Walmart, but it's still a tiny part of the business. It's around 10%, I think, for a lot of these places for grocery. And there's a real estate advantage

as well. So those three combinations kind of make it attractive, but it's not some super high quality business model at all. Yeah. Yeah. I'd agree. But I don't know, just on a quick look at Ingalls Markets, I might take a deeper look, but I can't really, Sorry, Nick, can't provide any crazy value to that question right now. Jonas Anderson asks, thoughts on Meta, otherwise known as Facebook, and it's in a past life. Thoughts on their stock, price to earnings of 10, low teens growth, cheap or reasonable? Greetings from Denmark. There we go.

First, I think that's our first international watcher, although on the podcast, I know a lot of listeners are from Europe. the Nordics, huge investing community out there. Yeah. As for Meta, to me, it's just a total conundrum and it's something that I've looked at on several occasions. Our friend of the show, Matt Cochran, has, I believe, pitched them before on the show. We've talked about them. He does some great analysis on them over at 7investing. um i just i love the core business obviously one of the best business models because of the network effect but i i don't i don't love this whole vr metaverse thing i i just really don't and i don't like i'm just not a fan of the capital allocation the it's i mean i do think they will generate

probably stable, if not growing cash flows from their core family of apps, WhatsApp, Instagram, Facebook. I'm not missing any there. Messenger, but that's kind of a part of Facebook. Yeah, but if the bulk of that cash is essentially being incinerated, let's say it's not being incinerated,

But let's say that Meta, Oculus, it was a flop. Let's say they pour $50 billion over the next five years into this initiative and it generates $0 in cash and probably negative cash and $10 billion in revenue. I'm going to call that incinerated. And that is, I mean, that's detrimental to your returns because that is your, on a trailing basis, it looks cheap, but you're getting, as a shareholder now, you are getting the future cash flows of the business, which that cash isn't going anywhere other than to the developers of this Oculus that potentially doesn't become anything. Yeah. And it's not just Oculus. Yeah. Yeah. There's a lot of different elements to all their VR stuff. But it just seems like a giant risk that I wouldn't be comfortable with as a shareholder.

And I'm just not a huge believer in it. So I guess those are my two gripes. Irish-born investor, a friend on Twitter says, I'm finally here. So we got him in the chat as well. The big European audience said, yeah, I mean, with Meta, it's so interesting because I do think there is a world where it is, from today's prices to say 2030, if they buy back stock at an attractive rate, if they don't just hemorrhage money in these new VR investments, you could have 15% compounded returns through 2030. If they buy back enough stock at these levels, I mean, they can they can do a lot. They've got a conservative balance sheet. Instagram seems to be executing really well to counter position against TikTok.

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Restrictions apply And that's great WhatsApp still has a ton of potential I love what they're doing with payments in international markets Although it's not going to be that meaningful I don't know why I'm still out you you were you were in mexico and you said whatsapp was like a way bigger business than you thought right yes it is not not necessarily business but just usage um it is the combination

of messaging so anyone that would be using imessage in the united states all that stuff's on whatsapp they also have some status stuff like uh it's a little bit snapchat like for a lot of people people posting statuses kind of like you know you know what i mean uh sorry not status They call it status. And then it also replaces email communication for a lot of businesses, for WhatsApp business. So it's pretty sticky with a lot of these customers. So like any sort of company I was communicating with or any sort of individual I was communicating with, it was all on WhatsApp. And that's probably undervalued, but the business is so large and WhatsApp generates so little revenue right now that I have trouble seeing how valuable that could be. Although it is a bit of a call option over the next decade. I think it just comes down to growth of Instagram. Facebook doesn't fall off a cliff.

And then how much money they're burning and their buybacks. It seems like there could be a path forward here, but I don't know. Yeah, the cynic in me just says, cut the metaverse spend, start buying back stock. They can do both. Could they ever be obsolete if they don't keep investing? That's probably the big concern for management. The holdup for me is I don't like social in general. um i i don't know it's just it's so hard to predict and you constantly see new competitors

come into play there what's that new one that was up on the charts be real yeah i don't do these i don't know the social platforms at all i'm like grandpa i think that one's gimmicky that one's like i know how it works you like it sends you a ping once a day at any at a random time and you just have like you have 20 minutes or whatever to take a picture of what you're doing and so it's meant to be like that's the authentic you it's like real social media um but something tells me that's not gonna be like that someone tells me that's a product not a company and uh tiktok though seems that seems to have eaten everyone's lunch and you're just competing on time spent which is like the most competitive

place in the world that part does kind of concern me about social the stock's still cheap though it's not as egregious as the people talking about Coinbase at three times trailing PE but

I do like did you see this petition to have the executives removed from employees at Coinbase no explain all right hold up i want to make sure i get it right the uh basically a bunch of employees banded together and said like we need to remove the executives um and brian armstrong

posted it on twitter and said this is so dumb and i'm like why would you do that and then they fired 15 of their workforce or something like that like two weeks later that was okay i thought that was more like after the firings well i think it was not related but this guy's just like lost the ball brian i i i kind of think of like a more poorly managed business right now let me uh let me pull it up plus i think their demand is just evaporating and there's all these uh platforms just losing or just locking up accounts like are you serious yeah i uh well yeah we don't want to do any shot and fork because we haven't crypto haters part of me smiles when all this stuff goes down but it does really suck that these companies

treat people so badly yeah no words from ryan i was on me i was on mute i'm looking for this uh this hilarious tweet the uh gosh i can't find it now but the uh they honestly might have taken it down most likely no yeah no no he did not take it down um okay i'm pulling it up the according to why so it was a post on y hacker news it says coinbase employees petitioned to remove execs brian armstrong posted it and tweeted this is really dumb on multiple levels well of course it's dumb from your view and then he goes on in this like giant thread to say um i want to make sure i get it right we basically it's praise in public criticize in private like that's that's

our culture but he starts the thread with this is really dumb on multiple levels so he's yeah he's hypocritical on that and then all right so that was june 10th june 14th another one of these threads which i always laugh whenever i see i'm starting a thread today i shared that i've made the difficult decision to reduce the size of our team at coinbase by about 18 percent come on yeah it just doesn't look great it doesn't look great and the fact that they cashed out on that direct listing um yeah i don't know all right um let me scroll through the you were talking about uh you were talking about the formula one rights and international sports rights for specifically for improving netflix's churn do you think here's maybe a better question there

so they said they're going to invest a lot of money into mobile games do you think it would be better spent to get some sports rights either formula one maybe a tennis uh golf those are the three i was thinking of for international rights that are popular uh no you you don't what what no i mean obviously the formula one stuff was a huge success but and if they were going to go the sports route i think international is probably the way to go because they already have such sort of a stranglehold on the like america well they said that they said that they would only do international that's why that's why i mentioned that um but i and international i mean uh global like it's including the u.s but yeah but it's not solely the u.s yeah the uh i would not like them

to replace their gaming spend though unlike most people i actually think the gaming strategy is a good idea especially if they go with some sort of like a lower price tier because the mobile games are pretty unique they just announced that they're coming out with um like a queen's gambit based video game that's like chess tutorials and then you can play against other people like i could see that it's chess yeah but mobile chess like i mean think about how popular chess was after the queen's gambit you know i don't know if you remember that like keyword searches for chess were way up on google the uh i i could see that being a huge success and they're also like it's just a way to get more people i mean right now you have to be a member to play these games

you have to be a subscriber but if you can be a lower price subscriber let's say two to three dollars a month it's essentially the apple arcade business and like i could see that actually working out i think a lot of these mobile games certainly have a niche that they can target and have success with and it introduces a lot of people to netflix to put to potentially become a subscriber are they available outside the netflix subscription oh they were only within the netflix subscription they are but i'm saying if you end up doing they're talking about this lighter tier ad supported gotcha that seems like something that could work to me yeah it kind of i think you have to do it i think you have to have for the game's component to be a big success i think

you have to have some sort of an ad supported tier or else you're already getting subscribers that are just playing on their phones it doesn't really seem doesn't seem like a huge value add to me yeah that's i i don't know i have no good opinion on the gaming one i don't think it's a good idea but i'm open to being wrong two more okay wait last thing i'll say there's two more questions in the chat that i want to answer but the uh uh last thing i'll say on netflix are you signing up for the real life squid games no but that's a good idea from them the that's brilliant isn't it yeah it's a good idea yeah making that reality show um i do think they can be more successful if they focus

on their tent. What do they call those things? Tentpole? The successful shows like Squid Games, Squid Game, Stranger Things. The Witcher's a little different because it's already, it was already a video game.

And like Bridgerton and kind of trying to make more stuff off of those brands instead of just plowing, just constantly having these new, new, new stuff. Stranger Things game i think they should probably invest a ton into that kids would love that they're doing right now they're doing three i think it's three games are going to be coming out in 2022 that are based

off netflix shows queen's gambit game ones like la casa de papel i've never watched that and there's a third one that i don't know but those are all popular so i think they're kind of taking that approach that you're talking about yeah i heard i read something that they were doing that but who knows it's they, they changed their strategy a lot. So two questions, one from Jonas Anderson, he says, do you believe Fang stocks will outperform the market over the next 10 years? Thanks for the answer guys. I'll let you go first. Okay. Preface this with,

there's a lot of uncertainty and what's Fang here. So Fang is, let me just kind of think of them in my head. Let's call it FanMag. Let's call it FanMag. No, well he says Fang. Okay. I feel like people have to include Microsoft now okay you include Microsoft Netflix is in there I

will go no I think it's always Netflix even though NVIDIA is much larger they always no one really considers NVIDIA the N is interchangeable I would go with yes

but as you can tell by the tone of my voice not a strong answer I think they trade very reasonably well the difficulty here is that FanMag will drive market returns over the next 10 years I imagine

so the majority of them you're discounting the old Tesla there come on this is only what 2% yeah probably less now yeah I think FanMag will do really well

especially because energy is still so you know doing so well right now if you kind of go what i mean there uh uh not quite keep going like since energy is had a huge resurgence the starting point of kind of competitive returns within the s p 500 is it it's better position for fan mag right now yeah that's probably accurate the i like i mean facebook we kind of just talked about it's a bit bit of an anomaly but apple amazon microsoft google can we call those maybe four of the best businesses ever yeah well i don't know about amazon retail to tbd but uh yes i think they'll figure it out the uh i mean those are let's call them four of the best businesses ever trading at

i mean google and microsoft i believe are trading at fairly reasonable multiples now amazon is as well assuming they can get back to cash flow positive or at least break even on their retail business um or at least stop hemorrhaging money i i yeah i'll take that over the market for the next 10 years definitely yeah mine's a little more confident than yours all right next question this one's a little more fun we do own wix so try not to pump it too much um it says wix trading out of shopify multiple or shopify trading at a wix multiple which happens first it's a good question you better for shop play shareholders i hope that that doesn't trade at a wix multiple because that

would be a lot of downside from here okay two all right let me let me rephrase the question then let's assume they're at the same multiple which do you take that's a good question right now it's i think wix is wix is easy to sales is probably just like off the top of my head one point in between 1.5 and two times i think shopify is at six times let's say they meet in the middle three and a half times yeah that's not this that's not this question that's not this question i think wix goes wix going to six is more likely because shopify going down to 1.5 is very unlikely to me yeah it doesn't never say never but going from 50 times to six times seemed

fairly unreasonable no no as well no no that that i disagree with that let's okay let's let's say wix is so wix's management has said that they think they can get to uh 20 for cash flow margins by 2025, I think was the number. If the business is generating 20 cents on every dollar in cash, I don't think it makes sense for them still to be at one and a half times revenue.

So I would say it's more likely that Wix re-rates up than Shopify re-rating down if management's right in their projections. Every company looks good if management's projections are correct. That's right. But every investor day, I mean, if you watch those, the market's going to rip higher.

I'd love to see just an investor day that's like, we're not going to make it. You know, it's an investor day to short a company. Yeah, we are liquidating. That's the whole investor day. If you want to use this as a liquidation event, that'd be quite the investor day. I do like that question, though. That's an interesting one. And you know what? No one would compare those two companies during last year. They're two totally different businesses, and they are still fairly different businesses. But now everyone's making the comparisons because of the valuation rewriting. So it's kind of interesting.

We got another question, which is, this has been fun. I like having an active chat. Tyler Hamill, have you guys found a single former SPAC you like? A lot of names to sort through, but a lot of names down more than 90%. Oh, I got one. Sorry. Go ahead. So there's one. Let me read you off this capital structure here. Market cap, 191 million. Cash and investments, 263 million. Debt, 2.6 million so enterprise value negative 70 million that is latch who kind of had to they cut a lot of employees um and they're hemorrhaging money right now so don't trust that ev but i i thought that was interesting that's the only one that i kind of like their business model um i do think

they'll probably end up burning the majority of that cash pile but if they come out the other side the stock could be cheap here it's just really really uncertain like there's i feel like you can say that for every spec you can say oh this one has great unit economics i think i latch i believe has great unit economics could no it does it does how much are they burning right now on every dollar in revenue oh well a lot on a cash flow basis but their software margins are fantastic it's just yeah but you don't get the software margins without the hardware implementation so the hardware implementation is a part of the unit economics sort of not after they get installed at a at a apartment building but but they have to get

enough installed first that's yeah i don't know it feels like such a tiny chunk of revenue right now i still that's the only one that's the only fact that i follow matterport's interesting but i really that one is just kind of one of those like i don't understand the competitive landscape kind of for matterport um another one that is pretty interesting but isn't down very much we had the cfo on on a recent episode haggerty it's not sort of like it's not your typical spec they aren't really uh they aren't hemorrhaging money and they aren't like some newfound idea they've been around for a long time and just i think maybe chose the wrong way to go public uh well the estate farm had a spack or something or markel had a spack and they were already investors something like that

yeah and state farm markel invested but it's not i wouldn't say it's like you're not dumpster diving like you might be with some of these other companies that are like down 95 percent hired i think trades at like 10 times book so yeah it's not cheap and yeah but it's a good business that grows constantly and has a sort of a state farm if to me if state so they they are the lead insurer the lead specialty insurer of classic vehicles or like the enthusiast vehicle market and so um it's kind of like this niche and state farm who's one of the largest national insurers basically partnered with them and nine out of ten of the largest national insurers have partnered with them so that's kind of to me validation that this is a market that

is hard to compete with and that hagerty hagerty is a little bit difficult to disrupt maybe a I got her own interview. Listen to listen to him. What was that? A few weeks ago, something like that. Pretty interesting company. Never heard of it,

but it seems very attractive. So far. I'll say it's kind of interesting. It's fairly interesting. I was looking at it this morning. Good solid business, solid business. Yeah.

The, the student loan moratorium has hit them pretty hard because so much of their interest revenue comes from loans held. so that's a bit of a hang up until this kind of gets solved yeah and they're investing pretty heavily in their other offerings which is like if you're investing

heavily and not collecting revenue for a sustained period of time you're going to be burning cash so that's a bit of the hang up but still an interesting model and they continue to grow members plus that Galileo thing that API business

continues to grow it accounts for like 20% of revenue now. So interesting business. Like we mentioned earlier, Brad Freeman, he covers that one too. So he has a lot of good write-ups on that. Yeah.

All right. Here's something before we end, we have about 10 minutes, nine minutes for it. Ryan has to hop off. Inflation predictions that are meaningless. All right. Here's what the,

our good macro guy, Colin Roche on Twitter said, And my crystal ball is pretty hazy, but here's how I see this playing out. One, oil booms into the summer. That's disappointing. Two, commodities crash, Q3, Q4. Three, defaults surge by Q4. And four, debt deflation becomes the dominant risk by Q1 2023.

I don't know why he's thinking these things, but he did show a chart. Go through it one more time. Go through it one more time. Okay. One oil booms into the summer. So it continues to boom. Two, commodities crash Q3, Q4, probably because from demand destruction. Three, defaults start surging by Q4. Four, debt deflation becomes dominant risk by Q1, 2023. And he is showing a chart, I believe, and I'm not a credit guy. He's showing a chart of the high yield spreads and they're starting to creep up again. So I think that was kind of his indicator, part of the indicator there,

which they typically do during recession. Either way, if that happens, inflation would go down. What is your guaranteed to be wrong inflation prediction? Because we just had it come out, What, last week? Last Thursday? Yeah, a week ago. Well, Colin Roche is definitely smarter than me. So I might just agree with his take. That seems fairly plausible.

Something else that kind of sparked for me. So I don't have an inflation take. No, you had to make a prediction. Persists at more than 5% for the next three years. Wow. That's pretty strong. That's above what a lot of – you're in the inflation sticky. The 10-year is at 5% in 2024. But then you said on the other show, you said it'll abate within a decade, right? the will obey over yes over 10 years it will the the deflationary factors i.e uh innovation

which i know that's like the whole arc thesis so but it's right i mean but like obviously that's helped like uh deflation over time shale shale was innovation um so i think yeah inflation will be, I don't think we'll have nearly as much inflation by the next decade, but that brings something up for me. Remember how everyone was talking about how if you don't have debt, you can't go bankrupt like last year? I mean, that kind of made sense to me at the time, but if you don't have debt now and you don't have cash flow, I think eventually you'll have debt.

because they're the only ones that'll give you money. That to me seems like it's funny how quick you can turn from a no debt company to a debt company. Yeah. A lever company. Yeah. Interesting. So you can, you will go bankrupt eventually. Yeah. Assuming you take on some debt. Yeah. It's hard.

I think there is always uncertainty if you're not generating steady cash or not steady, consistent cash, because we have a few portfolio companies that generate consistent cash and they took advantage of the debt markets and got, say, 20, 30 debt at 3%. And with inflation, that's going to be beautiful to have, especially if they just start buying back stock at cheaper prices. but the only way they are able to take advantage of that is because they're generating cash. So if you're not profitable, it just leads to so much more complications. All right.

We've got five minutes left and we've got a great question here because it paints us in a good light. So I'm going to go ahead. Partially, maybe. It kind of paints us in a good light. He says, did you guys feel, and this is Jonas Anderson. Thank you again for the question. Did you guys feel the FOMO, for any of our listeners that don't know what that means, fear of missing out, in 2020 to the 2021 market, which is kind of when everything was booming, you guys remained skeptic over a lot of growth names like Sea Limited, which went up every day, but is down big now. So I think we probably did get some FOMO in that it just felt like everyone was posting their holdings and we're up like 100% every year.

But I would say we remained fairly price disciplined relative to other investors, but relative doesn't really matter. So it's like a lot of the companies- We still made some mistakes with price. We made a lot of mistakes, yeah. not i do think generally we ended up turning over a lot of rocks and ignoring them even though we like the businesses i see limited in particular it helped that it wasn't domestic because i didn't quite have a good grasp on the business yeah i definitely had fomo i don't know if fomo is the

right word i had doubts about myself when crypto was rising uh when something like shopify was at 60 times sales and i was saying it was ridiculous at 20 times sales um yeah that was because people people kind of hated it hated us for it because we were like critical of it's like the companies can do no wrong at that point which that didn't make us popular with a lot of the people a lot of the shareholders of certain companies but so that was probably the like the prevailing feeling as opposed to FOMO more of like are we risking relationships or reputations by being too skeptical or cynical that was probably more of my feeling yeah the yeah it's interesting i think if you feel FOMO you gotta like because people definitely do people

talk about that that's not really something that is a huge concern for me psychologically but if you know that you get FOMO, you need to create some artificial barriers or rules-based things to keep you from buying a electric vehicle SPAC with no revenue at a $60 billion valuation, something like that. Does that make sense, you think, Ryan? Yeah. I think sometimes, even though I say no hard rules in investing, I think certain hard rules help like avoid detrimental mistakes let's say you had a hard line at nothing over 20 times sales which most people probably should be even though you might miss some you're probably going to be the better for it net yeah net you'll be better

um and it helps you make avoid making the easy mistake of overestimating what a company can grow at, which is so easy to do when times are good. I mean, how many people extrapolated out like 30% revenue growth for a lot of these SaaS enterprise companies for the next decade? It was very easy to do at that time, or even other companies, not just SaaS enterprise, because they had five years of that or five years of 70% or 80% growth. It's super easy to extrapolate out 30%. Most companies do not achieve that. So especially when capital isn't quite as cheap as it is today. Last question before we have to go

because we've got one minute left. How do you evaluate names right after a big acquisition and before their first report as a combined business? That's a tough one. Hopefully, they put out a good prospectus that could be helpful. You said Take-Two Interactive for an example. Take-Two Interactive had a,

I think it was like a 400-page S4 that was really helpful. And they went through independent projections for each business that I found to be pretty useful. Yeah. That was only like two pages of it. That was probably what you needed

to actually read. Most of it's like lawyer stuff, but. Yeah. And then management and any commentary on the conference call can also be helpful. Acquisitions are, I would say, maybe a great, like an area

that I'm not great with. Like I can always envision the synergies, which is probably the bad way to look at most acquisitions. Yeah. Yeah. I like to look at what they said during their merger presentation. And then a year later or a year and a half later, was it close? And if so, then maybe that, you know, we're right about it, but if not, what went wrong? All right. We'll get it. We get to wrap up. Yeah. I think that's

going to have to do it. Okay. Well make sure if you're listening, I know we had a good audience today, but if you're listening on Spotify or Apple or wherever, join us 12 PM Pacific, 3 PM Eastern live on YouTube every Thursday, potentially Wednesdays, sometimes. Review us on Apple or Spotify. That's the easiest way to do it. Remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. We are, however, general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Thank you all for listening. you