Chit Chat Stocks - Power Hour #6: Crypto Crash, Stock Based Compensation, Valuing Enterprise SaaS

Episode Date: May 15, 2022

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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. All right. This is the Chit Chat Money Investing Power Hour. We come on every Thursday at three o'clock Eastern time, 12 o'clock Pacific. The rule is there are no rules. There are no notes either.

So this is a broad topic or broad discussion. We can cover anything. And the only rule is we can't have any notes so uh what have you guys been up to this week do you guys have any uh thing to talk about crypto blow ups that was that's been fun to watch coinbase is not blowing up but kind of imploded um i'd say 50 in a week is a blow up yeah uh gosh i don't know ian any thoughts like i'm kind of it's been a jumbled week what what are your thoughts on that yeah i'd say it's it's been a weird week for sure um between the crypto stuff there is also one of my smaller holdings i think it's about a three billion dollar market cap there was news out that it was um it was getting it had won like a two billion dollar um award basically for

one of the other companies had been this other company had been like spying on it and all this corporate espionage and stealing their technology and stuff. And so, um, not that that's really matters that much, but it was just one of those, it was just a weird week, like you were saying between everything that was going on. And it felt like, you know, it feels like everything you pull, you pull up the brokerage account and everything's down five, 10%. And then maybe by the end of the day, it's, you know, only down for three or 4%, or maybe it's down, you know, 10 or 15%. So, um, yeah just a weird week one of those weeks that i kind of put the blinders on a little bit and just focus on some other things chaotic week for sure so much earnings too earnings just crowds

everything uh disney reported they had good subscriber growth take that netflix what uh yeah people don't care anymore though they don't if something is not knocking it out of the park that it's it's going down 10 i mean i guess first topic maybe that came to mind is the crypto stuff coinbase with that new disclosure and i didn't actually read the report so people can correct me if it was not a bad report but i guess they're seeing you know users down revenue down and they had to make that disclosure about how customers' assets may be used as collateral in a bankruptcy filing, which my immediate thought was

if my brokerage did that, I'm out immediately. And then we had the stablecoin blow up, which I think all three of us, I'm speaking for all three of us are now experts on that stuff, but I believe it was a $40 billion stablecoin that went to zero. I know Ryan probably was not following that at all, ian were you following that uh the the terra usd thing just a little bit i i can't speak very intelligently about it but i think it's i think this was probably before we were doing these

podcasts but um i think we were talking about this a few months ago and just how shady some of the stuff going on with these stable coins was that you know that and i this has been the news for a while it's not like we were breaking any news on that but just that it's so um opaque right you don't you can't see what's really you know what these stable coins are really what the assets are that are backing them and um i think i think this was bound to happen in one of them right when there's when there's uh some of the shenanigans that were going on um Um, you know, it just, it, it leads to situations like this, right. Where when, when things seem too good to be true, um, a lot of times they are.

I think we're learning that a lot of these speculative securities were smoke and mirrors and that they're also fairly interrelated. um if i'm not mistaken both the stable coin blow-ups uh caused a bit of a huge dip in bitcoin as well yeah i don't know that could be correlated to something else but yeah i think i agree that those sort of blow-ups the leverage in the crypto system can kind of uh all go to one I guess, and everything moves in the same direction. Okay, here's a question. Can we say that Bitcoin is not a hedge against inflation now?

Yes. Ryan's smiling there. I know Ryan's a hater along with me. How could it possibly be? How in any way could it be a hedge against inflation? it was a leading question so i agree with you but ian what are your thoughts i would just say i think the the you know i i would call myself kind of crypto neutral probably compared to most people that i'm not i don't you know i'm not a big cheerleader but i'm also i probably wouldn't

classify myself as a hater just on the category in general but i think that the the jury is still out on whether bitcoin over the long term is going to be an inflation hedge um obviously in the short term. It's not inversely correlated with inflation or the dollar or stuff in the short term, but I think you could probably still make a case that over the long term, it might be an inflation hedge depending on what we see. I don't know. I think ultimately that depends on its utility though. If Bitcoin doesn't do anything except serve as a hedge to, or a supposed hedge to inflation, then I don't think it can be a hedge to inflation because there's no, it just, it doesn't have enough value of itself. But anyways,

if anything drops 60% from its highs, I have a hard time within the span of what it's been six months and it's down 60%. During an inflationary environment. Even if we think long-term there's, that isn't a, I would never use the term hedge for that. Like. That's true. Right. I think of a hedge as basically a safety net. Right. That hasn't saved any. There's no margin of like. It's been just straight loss of capital. Yeah. Right. Bitcoin, Bitcoin predominantly right now, I would say, is not a hedge against inflation. Right. You can't make that case that it is currently doing that. It is a speculative asset.

also getting to we're getting close to micro strategies margin call price that's what i was going to bring up next is this all going down because they everyone calculated what micro strategies margin call would be and just whatever is for yeah i don't know if i really don't know if you can force it down i don't know how any of the trading works but well i do think the closer gets to the margin call price which is 21,000 people are afraid of the margin call

and probably sell out of fear that it's going to hit that which increases the selling does how much how many big points do they have I feel like they have a lot I actually looked this up the other day

so I was curious and it was like at one point A few weeks ago, it was worth $4 billion worth of Bitcoin. Well, I want to know how Bitcoin is. Bitcoin will be down 5%. MicroStrategy is down 25%. It's just a lever of Bitcoin, boy. Yeah, well, I don't know.

They were a bubble stock during the dot-com bubble. So anyone that's buying that, I'm sorry. Fool me once, whatever that saying is. Fool me once, shame on me. fully twice shame on you you guys agree opposite but yes or is it the opposite sorry i could never remember any sayings uh okay but i want to talk i guess we could talk in circles about bitcoin forever but and maybe we don't know enough about these stable coin things but that here's a question is this going to warrant a like congressional investigation because it was

40 billion dollars in quote-unquote wealth wiped out in weeks that's a lot right am i crazy and saying that 40 billion dollars there some people are upset i'm assuming and the developers said they i don't know the developers are getting all their hands into it it feels messy like this could be something that can inspire legal action to regulate this stuff let me pose a real question the if i have okay this whole week has made me think about a few things first of all if you're an institution and you're managing money on behalf of others and you decided to start a crypto strategy i look forward to seeing how people explain that coming out of this wow all right ryan b and b and i guess you're just generally hey not speaking individually so i guess yeah

criticize my category but yeah how are you going to rationalize that to investors like oh well it'll be hard like what was the analysis that went behind that i think my analysis is buying it we bought it my analysis is crypto.com bought the rights to the staples center or renamed it to crypto.com arena or whatever it is and that was literally the day of the top so tom brady was the top and well he's also the rise no no that was before then that was last that was last spring but okay the real top was the real top was matt damon um dare to well fuck what is it dare to be brave uh fortune favors the bold fortune favors the brave whatever it is that was the top and i wonder how old mr damon feels about that now like

oh i got about 10 million from doing this but man uh i don't know like i don't know if it looks good anymore yeah 10 million dollars to ruin his reputation the uh i it is so okay the story isn't over obviously so maybe we're we're like bottom ticking this right now but it feels like the snowball that was being pushed up the hill and eventually there just wasn't enough money to keep pushing the snowball up and now it's kind of broke everyone's legs on the way down if crypto does if the entire crypto spaced whether it's through the stable coin blow-ups or just the slow decline, if that evaporates a bunch of wealth, does that lead to a general recession? Oh, you mean like, okay, so the wealth effect gets totally reversed and people feel like

they have less spending power and they're not spending stuff on whatever, a boat. I mean, theoretically, 50% of everyone's wealth could have gone to – I'm saying if someone had 50% of their wealth in it, and that goes to zero, theoretically, I think spending gets curb-stomped. Yeah, but the stock market is still so much larger. And a 20% decline in the S&P, I think would have a way bigger wealth effect than even if crypto went to zero. You guys follow me there? Or do you agree or disagree? Yeah, that's probably right. Ian, any thoughts? No, I think that's probably right. But generally, I think directionally, yeah. Well, Ryan, maybe with crypto, a subset of the population, because it's more focused within, I don't know, maybe Silicon Valley or whatever, compared to the stock market in general. what uh all right any other we've talked crypto for 15 minutes i think we should probably do

something else um if anything we have a little not that many people watching but if you are watching sending questions in the comments we'll answer whatever um especially because we don't have many people that watch this right now i guarantee you we will see your question because the feed's not going to be gone through too fast. This episode is brought to you by La Quinta by Wyndham. Here you are miles from home

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Or squeeze in a workout at their fitness center. Either way, you're ready to conquer the day. Tonight, La Quinta. Tomorrow, you triumph. But I don't know. Any other topics this week? Any earnings, guys? Any big stuff? There's a lot of earnings I found interesting.

Should we talk about the Coinbase or is it just not worth it? Nah. I don't know. I have nothing to say. I will say that this is... I saw a lot of people referencing the PE, the price to earnings. and then someone was like wait the e can change like that's a joke and it's like it is i think that's important to think about how many how many situations right now where we're looking at trailing numbers that are going to be wildly different yeah in the coming years i think Whenever I see something where a PE, price for cash flow, whatever valuation metric you're looking at, is cheap, I think the question isn't to ask, oh, my God, I should buy. The question you should ask yourself is, why are investors valuing this so cheaply?

Because there's always a reason. And then if you disagree, maybe it's time to buy. But there's always a reason. And with Coinbase, I think the reason is pretty clear. There was a top in the crypto markets. Also, I'm sure that the big institutions have better inter-corridor tracking metrics on what Coinbase's revenue is going to look like. Oh, just from data? Yeah. Like transaction data.

I agree. I agree. I also thought there was not a – I couldn't think of a bigger red flag than when Coinbase was forced to put that disclosure in their 10Q, the bankruptcy disclosure in the event of bankruptcy. And then the CEO comes out and says, all right, I know we had to put something in there, but don't worry about that. It's getting blown way out of proportion. All is well. All is well, guys. Yeah. Yeah.

I don't know. I'd be nervous. If I had assets in Coibus, I would be... No one's seen this except for the bubble on Fintwit. And I mean, just like the Fintwit sphere of people. I don't know. I think I would be out and going somewhere else. Because if Schwab did that to me, I'm out.

I'm going somewhere else. Do you guys agree on that or no? Yeah, of course. I mean, that's insane. Okay. Okay. Any other earnings that interest you this week? Well, hold on. We got a question. We got a question. Yeah, you go ahead and read it.

You said in the episode on Brookfield, you all seem very skeptical about their weird corporate structure. Do you have similar opinions toward John Malone's Liberty Complex? Yeah, I do. Good question, Kevin. Yeah, it's a really good question. yeah i will say brookfield there's a lot of fans we figured out there are a lot of fans of that company that when we were skeptical uh they did not like that but that is okay we can agree to disagree but yeah i'd say i'm less skeptical about liberty because it's a little bit more understandable but the thing about brookfield was that and i spent a few hours trying to read their annual report i got nowhere the journalist that i read had a great analogy that it's like

watching a basketball game with the lights out. That's how I felt reading the annual report. I kind of got nowhere. I think with Liberty, it's a bit different. You can understand what's there if you put in enough work. But to be honest, I don't like their assets. So that's just my personal opinion. Okay, that is similar.

With Liberty, the assets are more understandable. Yeah. It's hard. The legal structure is complicated also. So that part is similar to Brookfield. That was kind of a yellow flag for me. And it's not even, that could be an advantage, but it makes it harder for me to understand.

Yeah, I mean, both companies have phenomenal track records, but it's just personally, it's hard to understand. But the actual underlying businesses, like I was looking at Brookfield Infrastructure Partners this week. I don't really understand those assets nearly as well as i would understand a serious xm or um formula one formula one or the braves although admittedly i'm not interested in owning the braves yeah baseball teams hey that's the world series champion they won the world series i know they talked about in the comments call once i read it

and i was like i know well no i don't yeah they won the world series and we signed whatever Acuna or whatever you say his name we have this star and I'm like okay great what are the margins but no Liberty's similar but I think and both have great track records like I said before but it's just complicated and I don't like complication simple as that right I think I think what you're doing in those situations and I would say this is also to some degree true if you're buying berkshire hathaway is you're just putting a lot of faith in the management team that you're kind of abdicating some of your responsibility towards you know managing every little aspect and you have to trust that the management team is going to be um is going to make good capital allocation

decisions on your behalf basically and that you're not going to be able to understand everything that's going on and some of what's going on is going to be obscured obscured from you and there might be some ways and i've always thought this with this may not be true but i think with the liberty complex i've i've always been a little bit scared off by some of that just because it seems like they can move around debt to different entities and you you're never really owning even if you're owning like the formula one uh tracking stock i'm not quite sure it feels like from what i've i haven't done a deep dive on in a long time but it feels like they can kind of move stuff around in ways that might not necessarily be shareholder friendly. And you just have to kind

of trust that they're not going to do that, that they've, that they've got shareholders best interest in mind, um, at least for the most part. And so, you know, I think it's, I don't know. I think that there's reasonable, um, reasons to invest in those types of things. I, I don't currently hold anything like that, but every, whatever stock, whatever public equity you're investing and it's going to have some level of obscurity um or not obscurity but like it's going to you're not going to be able to see everything that's going on right you're not a manager of the business and so um you don't get complete access to every single line item and understand exactly what's going on in the business and i think you just have to get whatever you're investing in

you have to get comfortable between what you can see and what you can track and how much you trust management and how good of a track record management has yeah great way i think that's a great uh way to put it one of the things i've been thinking about unless you have something else on that right no go ahead and one of the things i've been thinking about recently is just two things one is obviously the market has just been crashing as particularly the nasdaq type stocks have been crashing recently um what now i haven't seen that what are you talking about And it feels like, you know, there's all these people talking about, Oh,

the bottom must be in. We're so close. I was just scrolling through Twitter today and seeing, you know, the fear and greed index is showing up with like a six. So extreme fear. And, but then you start looking at the valuations and they're like, compared to what they were, these are, there's a lot of deals using air quotes in comparison to what it was, but it doesn't seem to be the types of generational buying opportunities that a

lot of people are saying, like, it could be, you never know what's going to happen going forward. Right. And, and I think as long as you can model it out and you're happy with whatever, you know, your forward returns are based on your analysis, then like, I'm not going to get mad at anybody for buying, but it doesn't quite, you know, there's not, I'm trying to think of like some good examples, but like even zoom recently, which I, you know, I own some, and I think there's some good cases to be made for zoom right now.

It's trading at 20 times, uh, free cashflow approximately. And I think that's not taking into market multiple. Right. And so it's like, okay, yeah, that seems, it seems like that's cheap for a company that has the growth potential that zoom has. Um, and maybe, you know, some increased profitability, profitability, but it's not like, it's not like it's trading at like five times for cashflow, right. You know, And I don't know if it feels like from investors I've talked to in the past that in the true, like in the aftermath of the dot-com bubble, that there was just, that there was stuff like that out there, right?

That there were, that it was really carnage and that, like, I don't know that I can really call what's happened to my portfolio carnage when I would imagine that my overall portfolio is still trading above the market multiple, right? yeah the okay yeah i think i mean it's hard to it's impossible to call the bottom unless you're someone like david tepper who seems to have a great knack and we're not like him most people aren't maybe someone listening is uh right and just to be clear i don't think that like i don't think that calling the bottom is necessary to be a great investor like i'm saying yeah you kind of if you can you can model out some kind of forward returns that work and um not that your models are what's actually going to happen but if you can get comfortable looking you know at forward returns it doesn't really matter if it goes down more in the short term as long as your long-term assumptions

actually play out but here's here's two indicators i'm seeing yeah go for it the great fear and greed index might be a little bit overstated one arc is still getting inflows that is telling me people are way too optimistic to actually be some sort of capitulation. And two, it seems like everyone wants everyone else to capitulate. And when I say capitulate, like basically sell out, go to cash or whatever, that's kind of what the definition of capitulating is or puking your portfolio or however you want to define it. It seems like everyone, at least in the Twitter sphere, is saying, oh, I hope everyone else

is capitulating. Oh, is this everyone capitulating? But that does not feel very bullish to me because... And again, I don't care. But that's not how we invest at all. If everyone else wants everyone else to capitulate, that doesn't mean there's much capitulation going on. And it seems like it's just hedge funds like Tiger Global or whoever that are getting liquidated out of their positions. Gosh, I don't know. What do you guys think on that? The sentiment doesn't seem drastically bad. There's some people that are saying, you see the slivers of it like, all right, I'm done or whatever.

But it cannot be as bad as it was in 2001, 2002, 2009, 73, 32. I guarantee you it's not as bad as 32. It's interesting what the bear market psychology actually feels like when you go through it. Because it starts with, hey, all right, it's down, I'll buy more. That's like, okay, this is down for a reason. Okay, this is down a ton, generational buying opportunity. Okay, everyone else was right. I don't know if this is ownable anymore.

And then you've got all these, I don't know. Now I find myself, I kind of have to check my sentiment because I'm feeling more and more bearish with a slow grind down. like it's just going to keep happening when there are like, I don't know, there are discounts or not discounts, but there are good businesses at good prices out there that I would have not even twitched at buying last year. Yeah.

It's that psychology, it works against everyone. Like you can know what's going to happen and it's still going to affect you. We had a good comment here from Patrick that said there was no E back in 2000. What it means is there was no earnings. And what I think, I'll take it another step further, there wasn't even revenue in a lot of those dot-com companies. I mean, do you guys?

But there were, okay. But there's a lot of revenue today that's unprofitable. There's a lot of revenue with bad, bad margins. And there were good, that isn't necessarily true. There were a lot of good businesses, like really good businesses where the future looked sound and the future was sound. Amazon's business looked very bad in 2000. It looked terrible. okay sure yes yes microsoft intel yes and you and you would have been underwater for 15 years

despite great results from there on out yeah like it can still be wildly overvalued even if they are quality businesses did you guys see the memo or that the internal slack from one of the shopify execs yeah we've talked about them them on like every show but they are making a lot of news i guess so that i i wish they would just shut up i want okay because this stock looks pretty cheap yeah we don't own it i don't think ian you may have a little bit i've got a little bit it's on a major position yeah we don't own it so i'm comfortable speaking freely i mean it looks cheap right now but i'm just the management is freaking me out yeah simple like the biggest bag holder quotes right now are coming from the

management team and all i'm like if they were not talking about the stock so much lately or why analysts are so wrong i'd be more inclined to buy it and they still haven't done a buyback well right come on let's not get delusional here oh it's a buyback it would still be pretty okay here's the numbers i have though they have a lot of cash they raise a lot of money They're expected to do, according to Coifin, $5.8 billion in revenue this year. That's after some revenue downgrades. Their enterprise value is still $37 billion. I mean, that does not seem that cheap to me.

Yeah. The average price to sales, and they have better margins than most companies, but the average price to sales is about $2 to $2.5 right now for the S&P 500. so uh do people think that either shopify is going to grow a lot quicker most likely or have way better margins than the average s&p 500 company yeah i'd say that's most likely as well but you're betting on a very high quality like you're betting that the business is going to have very very strong margins even at these prices but what's crazy is i would never expect it like i kind of thought before and i'm using round numbers before i would think oh once it gets

down to 10 times sales i'll think about it but there's a reason it's gone down to 10 times sales and the opportunity well okay that's a good point opportunity cost is there as well in other companies but management i i don't know ian i'm curious about your take on here too they're freaking me like i said i guess i already said this they're freaking me out with the tweets i want to also say i'll let ian kind of answer that i want to say that this is where i actually have a plum for Elon because he knew it was, when the bull market was raging in 2020, he, at multiple points, at one point it was a meme of, it's not you, it's not the bull market, it's really you to other executives. And no one else talked about the stock when it was absurdly

overvalued but now they're complaining about the stock and analysts when it's insanely undervalued like you kind of got to do it both ways like you got to really be tempering expectations yeah agreed and what sorry what did you think about the shopify stuff yeah i think the well to provide a couple numbers real quick it topped out in 2021 at a high of about 72 times uh revenue today it's about seven times revenue i'm sorry sorry go ahead but yeah it's it's you know it's pretty wild numbers right to get to 72 times revenue um trailing revenue and today be at seven times trailing revenue that's a that's a big decline right um brings up another point i wanted to talk about at some point but when you have these things that are down 90 percent

um you know 70 even like i would imagine that out of and i think this happened coming out of the 2000s things that were down 70 80 90 percent um a lot of those things are never going to actually get back up to the previous levels and there's going to be maybe if you had a basket of 20 of them maybe maybe two or three of those 20 that have declined 70 maybe two or three of them if you're lucky get back above what their highs i don't know you know that's that's something i want to discuss get your guys's opinion a second but first i'll say as far as the shopify stuff just to kind of close the book there i think the most concerning thing to me about the management team is when they start going after analysts because that's not really especially a company

that's the size of shopify like if you're a micro cap and you want to say hey analysts are misvaluing us and here's how you should value us and you're actively like as a micro cap or a small cap you need to raise money and it really has an impact on you you can make a case for why they're misvaluing you then then go for it as the as the ceo of a you know 30 40 billion dollar company going after the sell side analysts because you think they're it just it seems like it's not the thing i want my management team focused on at that point like you have plenty of money you're not trying to raise like maybe the stock price is affecting your ability to hire to some extent but but you know that really shouldn't be affecting your ability to hire that

much um if you're doing you know like especially in a market like this where everything's going down people people understand that i think in the in the labor market so you just have to no i don't think they do and i don't think they do no i'm serious you don't think you don't think people in the labor market like when they're looking at what what i'm trying to say is that if i'm picking a job and i'm deciding between you know shopify stripe um as a developer i want to pick between shopify stripe twilio and i'm seeing all these you know valuations coming way down that like they're gonna pick one of those places anyways you know what i mean like they're not And maybe they decide to go to Google, right?

Maybe Google becomes more attractive because people see it as a steadier option. But I don't think there's, I think in a market like this where the stock prices have come down on everything, I don't think it has a huge effect on hiring, but I could be wrong. Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices. You'll get real-time alerts. Oh, like this one. So you don't have to worry about malware. Or when your kid downloads a song from a shady link.

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I want to see if you have any thoughts here. This could be, I don't know if anyone's ever thought of this before. Paying people in cash. I know you guys know this. I know you guys know I talk to this every time, but what do we think about this? Paying people in cash and all seriousness, when the stock goes down, your compensation is leveraged to your stock price. Yeah, this is actually a really, this is, it's such a, there's so much more momentum than I thought that's involved with stock-based compensation. Because I saw it with Unity's report.

there's no reason that this needed to happen, but their stock-based compensation jumped more than 60%. Sales jumped 33%. And they did not hire that much more people. Like hiring was not, there was not 60% growth in headcount. So, and I was looking for a tweet on it, but people are asking if your bonus gets cut in half from last year, because you're getting awarded the same amount of shares, apparently employees are outraged and they're requiring more stock. I mean, we saw, we're about to do a not so deep dive recording on Pinterest as a little revisited episode from a year ago because of the stocks down so much, kind of be a fun one. And I'm the one that kind of looks at the option stuff for the show research. And they have like

50 million shares outstanding, or sorry, 50 million options in RSUs outstanding. That's pretty heavy and it's been high but their pace had been a bit lower but then i see a subsequent event in their 10q and they just did a 25 billion dollar 25 million share um rsu grant i don't know who it was to maybe i didn't look at the proxy but i'm assuming it was to a lot of different employees um if it was just the executive team that is um a sick like not a good like it's a Terrible move. Very selfish to do. But that's worth like $570 million at the price it was granted at. And that's going to be some heavy dilution. And I think it's because they need to retain their employees. And for someone like Pinterest, if I remember looking back...

Well, I do remember because I looked back at our notes from the episode we did in early summer last year. They were really, really heavy on their SBC. And that works well when your stock was going to the moon. And it looks good and employees are happy, but now that their stock's down 80%, I don't have the numbers. I think it's down like 80%. The Slack channels are filled talking about the stock. You got to grant a lot more and that's fine if that's what you want to do, but man, that's not good for outside shareholders. How do the employees feel? What do you think it does to employee morale? Because I always hear the argument that they're better incentivized. I got a feeling employee morale isn't very good

when their net worth is being wiped out and their bonus from last year was cut in half. Yeah. Well, if we paid them in cash, we wouldn't have that problem. Here's a... I like to do this if I get...

If I think like if I kind of look at a 10Q or whatever and I'm like, oh, that options outstanding is very high. Take it. And this is a good exercise to do. Divide the options or RSUs, whatever. The total dilutive security is outstanding, excluding maybe warrants

and convertible notes. and divide them by the total employee count. If you're getting a really, really high number, maybe there's a lot of leverage on that stock price that you're not maybe thinking about. Because some companies are really, really high. Like Pinterest only has, I believe, 3,500 employees. And they got now 75 billion

dilutive security outstanding to those employees. Now, a lot of that's probably the executive team, but that's a lot per employee. For minus 9% user growth Oh yeah well We don't need to get into that episode before we do it But I mean just as an example Yeah

They don't grant it Okay that's the biggest Irritation for me Is the grant The granting of stock isn't because Is it a reward Often It's because they have to

They feel like they have to yeah or i guess if you're on problem once you start it's really hard to stop yeah it's a disease it's it's a it's a disease especially when that becomes a like i think i heard someone say it like during bear markets sbc can either become way more dilutive or it becomes a cash expense which is gonna hurt a lot of companies cash flow yeah the i wish companies because look we're we're complaining about this and i'm sure you'll hear us complain about it in other power hours, but it's a part of the market

and we invest in companies that do this bullshit. And I just wish more companies would think individually, or not individually, like originally, you know what I mean? And kind of think for themselves because we've gone through, each week we research a new company. Ian, you've been doing one

every other week as a part of the show. And the patterns you recognize in compensation and everything it's all the same i just wish people would act more like a constellation software and do something where i don't know unique makes sense for the business you have and just is just not just doing what everyone else is doing if you guys kind of get what i mean there yeah yeah i i think in my opinion i understand why people grant stock especially um like in private companies and early stage companies you're trying to like getting you

know when you're when you're one of the first 10 or even 100 or maybe even 500 employees um granting stock options as you're trying to conserve cash for other things and you're trying to incentivize people who are part of a small team i think it makes sense i think once you get to the level of a public company that um has thousands of employees and has plenty of cash to actually just pay people, that it makes less sense. I think one of the hard things that I will say is for companies is when do you make that transition? If you've had this culture of granting stock options, what's the day when you say, well, now we're just going to be giving people cash and you can buy the stock on your own. I think one of the best solutions maybe,

and maybe there's some issues with this that I haven't thought about, but I can't remember which company does this, but I've seen it a few places, I think, where companies will pay people in cash and then provide like stock purchase programs. If people want to participate where they'll get a 10% discount, right? Exactly. Where they'll let people kind of buy the stock. And I feel like that does maybe provide some, a little bit of incentive or incentivizes people a little bit, because even at a large stage public company, because it's a decision that they're making, right? They're saying, Hey, I'm going to take this cash. I'm getting a little bit of a discount on, um, buying the stock. And, uh, you know, let's, I'm going to, I, I believe in

the company. I'm going to make this affirmative stance that I actually want to be an owner of this company I work for. Um, so I don't know if that seems to me to be the best of both worlds where you can give people a little bit of, um, a little additional perk of the job while still letting people ultimately make that decision on their own and it's just and it keeps it simpler i think because it's actually just straight shares rather than these options which the options are great but um when it's when it's options uh you know when you have the strike prices involved and you have when you have to exercise them and you know take out a loan to exercise them or whatever right there's just some added complication there that i think um makes them a little less

employee friendly what uh what earnings reports have you guys read this week any any that i guess i'll keep it from stuff that we don't own i thought the callaway report was interesting we just reported a deep dive with green bowl capital on that i thought it was quite interesting ian you may you've been following that one i mean did you read that report too i love i think top golf st venue sales are looking fantastic margins are to be determined but and they got a lot of debt, but man, it looks, it's interesting that I think they're executing well. Yeah, I would agree. I think they continue to be extremely popular. The top golf piece of it continues to be extremely popular and that it is clear that there's still growth runway there.

Um, and it's just, like you said, the big question is where do margins ultimately come out on this thing? Um, some, this is anecdotal evidence, but there's one that opened up right next to where I went to school in Loyola Marymount and El Segundo. And from my friends who are out there have been saying it's just like four or five hour waits to get in basically every day. So I think that's the first one in LA. So, you know, it seems, yeah, they seem to be moving on the right track and it's just going to be like, like you were saying, it's ultimately going to be about margins where the margins come out but i think they've got a winning concept here those weight breaking news top golf is popular and i think it will be popular yeah

people spend a lot of money that the the wait times kind of indicate to me that they may have quite a bit of pricing power even though people shell out a lot of money with a party at those things it feels like given the demand they have pricing power yeah i think it's pricing power but I think that also indicates the growth potential because they could raise prices and improve margins and all those types of things. And they might do that. But they can also, like in Phoenix in the last couple of years, they started with one in Phoenix, way out east. Now, a couple of years later, they've got three. So LA, they could have six.

Right. Potentially. It seems like I wondered when they first built these, whether it was going to be like one per city. maybe two per city that that was going to have, you know, that was going to fulfill capacity, but it seems like there's a lot more demand for this than, um, that I might've initially anticipated. Yeah. That's an interesting one. I read coupon. Coupon was good.

I read some smack that I was looking at called, uh, latch. I think we did a show on them. I've been following them for a while, but man they disappointed like i don't know they can't get their revenue going i guess that's the the perils of investing in something and i never i've never bought or sold any uh any of that stock but that's the perils of investing in something that's either pre-revenue or basically pre-revenue at like 10 million dollars in revenue there's a lot of uncertainty and i guess a lot of people other than learning that lesson. What were the highlights and lowlights on Coupang?

Highlights, margin expansion, 450 basis points, which is quite impressive going from, I believe, 17% to 20.5%, which is great. Did you say on Coupang or Q1? Coupang. I thought you said highlights and lowlights on Q1. Q1. Another one that I thought was good,

they were able to get their active customers back up and the spend per active customer was increasing as well. But I would say that, and they were for the first time ever EBITDA positive on their core product business. So most of the losses are coming from their extra investments in international markets and like coupon eats and coupon play or some of the fintech initiatives yeah i thought that was a good report i haven't read the call they don't give out much info which is disappointing for a company that is international i would like more information on they're very scarce on doing uh analyst conferences investment presentations whatever but i don't know it looks like a good looks like a good report any what about this any bad reports

from anyone that you saw besides coinbase i know that on did you guys uh yeah you looked at that one i didn't look at the report yeah i looked at that one a little bit let me i'm gonna pull up the numbers here because it was it was pretty brutal what happened to upstarts report to cause to drop 50 because i didn't take a look the guidance for the full year revenue was they dropped it by 150 million from what like 1.5 billion it was one point i want to say it was 1.4 to 1.25 um that warrants a 50 drop i guess in this market not surprising and and they were They were holding more loans on their own balance sheet, so they weren't able to offload them to the banks as much. Well, let me pull up the investor presentation. I'm sure that's not biased in their favor.

I think the worry here is that Everyone thinks they're way more tied to the credit cycle Than initially thought Maybe these banks Aren't quite as receptive To some of these new upstart loans Since so much are being held on Since more and more are being held on

Upstart's balance sheet Well that would be are not able to offload them as well. Yeah, it looks like growth stalled from Q4. Yeah, look at that chart there. I mean, they're still profitable, so borrowers are up.

Well, I probably don't know what I'm talking about. Just looking at it here. Credit union partners are up. Well, there's a lot of people that know a lot better than us, but just looking at that, that's just the investor presentation. I mean, 50%, that

That seems a bit much. Yeah, not that much. What do they do? They're at 2. My God, they're at a $2.7 billion market cap now. Wasn't that like $25 billion in late last year? Something like that, I think. My God.

Sorry, let's go to- I think people are worried about the loans. Yeah, true. Which was not a problem if you were able to offload them all to the banks, but if you're holding them now and the banks won't take them, that could be a huge bottleneck. Okay, Peloton earnings. Ian, tell me, let's look at a good company. This is a company firing on all cylinders, right? Yeah. So this is the first earnings report under new CEO Barry McCarthy. Basically, revenue fell 24% from last year, which was mostly a result of product sales being down significantly. So the product's revenue was down 42% year over year, which to their credit, and their credit is probably the wrong terminology, but in their defense, they have said that they're trying to shift more towards subscription revenue. But it looks like they're trying to shift more towards subscription revenue, largely because they have to.

Subscription revenue was up 55% year over year. So that's pretty good. Yeah. And it's just a question of whether that'll continue to develop like that. Subscription gross margin was up 20 basis points quarter over quarter, 360 basis points year over year. How much cash are they losing? Sorry, I just want to know how much cash they're losing. Yep. So free cash flow, and this is using the error number. I'm going to assume it's close enough, but free cash flow was, they lost basically $750 million. Lots of burn. Don't you think this business should be easier to run? I have no clue. Sorry, what did you say, Ryan? Don't you think the business should be easier to run?

Okay, here's what the CEO said. McCarthy said in a CNBC article or some sort of report, and maybe it was on the conference call, they were just quoting him. He was like, there's three or four things here that I was a bit surprised were going on. So I think he was a bit shocked about how poorly run it was. And I'm going to make a statement here.

I think Peloton is way closer to WeWork than people think. Foley? well they could turn it around i think it's honestly is the the path isn't that different it was just a public company foley did almost the same exact moves as newton buying the house on margin that's the core one like trying to become some sort of celebrity another one uh trying to pump up the stock whatever i feel so much it feels very similar to WeWork? Do you guys, looking at Peloton's business

now, do you agree or disagree? I think it's hard to call anything the level that WeWork was at. WeWork is still a functioning business. Peloton's still a functioning

business too, to some extent. They burned $750 million in the last quarter or whatever. What's that burn? I just, I think what some of the things that Adam Newman was doing, I think it's hard to compare. Like, I don't know what's all of what fully is doing, but the Peloton Outlook Park is not that much less absurd than the surfboard

company, the Peloton Outlook Park. Come on. The, I mean, just, I'm laughing at that now. Like that was ridiculous. Is there any way, Ian, in your opinion, is there any way that they can generate cash? Like why are, why are they losing so much money? Um, I think it's, I think it's largely due to bad inventory management in a lot of ways is that they just, they built too much. They thought they were writing this eye of people using it for years and years and years.

And I think their products were too expensive as well, like both in terms of what they were charging people and, and how much they were costing. Um, and that's going to be the big question is if they can get these, like, that was one of the things that people were really worried about is in the quarter um the gross margin on the products went from like last year in the third quarter they they're on a different fiscal year but last year in the third quarter their gross margin on products was 28 this year it was negative 11 they're losing yeah and so if they can get that somewhere around break even and then they can keep growing the subscription business,

then yeah, they can generate cash flow. The problem is, I think they're, and McCarthy said it, that they're thinly capitalized for business of our scale, is I think his quote. They've got $879 million and they just signed a binding commitment letter with JP Morgan and Goldman Sachs for a $750 million loan. So they're trying to raise money now. it's like a sad thing is when their stock price was about 10 times this they probably should have

been doing some convertible notes and i think they do have some convertible notes they did they did but remember they said oh we don't need to raise money we don't need to raise money right and i think it's nice to hear him come in and it also just goes to show how stupid that statement was before that he comes in and goes we're thinly capitalized versus the other people uh the former or i don't know that cfo may actually still be around i'm trying to remember now if i think it's if she's still around i mean what are what are they doing like i can't imagine if she is like i can't imagine she's gonna be around for long but um i feel like the end state is similar to roku where they right size hardware costs and the subscription has to become a much

bigger part of the business we've got some but like some positive things out of it is that they um like this is another negative actually is the churn the churn increased a little bit but their connected fitness workouts were up and average monthly workouts per subscription was up slightly quarter over quarter. It was down, um, uh, year over year, but it was up quarter over quarter to about 18.8 versus 15.5 in the previous quarter, which has been a thing that people have been harping on is, Oh, people are using this less and less. There's no one going to use it. I think there's a chance that people do use these. I think it just is a matter of getting that product gross margin at least to zero and hopefully a little bit positive and then just growing the connective fitness subscriptions.

But I don't know. They've got a lot of work to do, no doubt. We've got one question in the chat. Achilleus asked, what's a reasonable price to sales, in your opinion, for enterprise software as a service companies? You guys want to take that? Yeah, I can take that. It depends. I definitely... You got to take it on a case-by-case basis. So let me go two different

examples. Okay. One of the best, I guess, is Adobe. They're enterprise plus consumer software, but Adobe has... And I haven't looked at their numbers recently, but let's say, hypothetically, they have 90% gross margins. I think the best way you got to do is work down the income statement. 90% gross margins. Okay. You're starting it there with your gross profit number. Typically, they've got about 10% on G&A, maybe at a company their size. It's like 8%, something like that. But let's say they're at 10% on G&A, which is general administrative, you're down to 80% left. Now you have 80% of gross profit dollars to spend on R&D and sales and marketing, SBC, whatever. With something like that, where people are attached

to it and they're coming to you to buy, you don't have a giant direct sales force going out to people. You can assume with something like that, your sales and marketing spend as a percentage of revenue might be closer to $20. And again, Adobe's could be higher than this, but I doubt it given their operating margins. It's probably closer to like 20%. And that moves you maybe down to 60% of your gross profit dollars, or excuse me, of your revenue is left as profit. And then lastly, you have R&D, which is basically all your CapEx for a software company. For a company like Adobe, I'm assuming it's like 20% as well. And that gets you down to 40%. operating margin or free cashflow margin or whatever you want to define it, okay, that

company probably deserves a price to sales depending on how high quality you think their mode is and their runway for growth. Probably like 10 or 12, at least. That seems very reasonable for someone like Adobe, and that's where they've traded at in the past. But conversely, and maybe I'm having a hard time thinking of an example here, but someone with a giant direct sales force. All right. Interrupt me. So first of all, Well, in Adobe's case, it's 45% operating cashflow margins. Right. Pretty close. There you go. Right around that. Every enterprise SaaS kind of gets bottled into one big thing,

but each one of them has a different cost structure. And also what, I mean, I would pay attention to, to answer your question, what price to sales does a company deserve to trade at? It depends on the return that you want, essentially. That's true as well. That's true as well. But that's one of the variables. Also, the example I wanted to give, and this is a hypothetical because I think there's

plenty out there, but I can't think of a specific one. Someone that needs a giant direct sales staff, someone that needs to spend 40% of their revenue on sales and marketing, if they have the same gross margins as an Adobe, and especially if their gross margins are lower, like 75%, they're not going to have those margins and they deserve a lower price of sales. And the biggest, really one of the biggest advantages is whether or not someone can offer a competing service. In Adobe's case, no one can offer what they offer, especially when bundled together. So when you think about those applications, they don't have to compete on price, which means their margins are going to be higher, which means they should command a higher multiple potentially.

other businesses even though it could be software as a service sprout social is one that comes to mind so sprout social offers social media management solutions it allows you to view all your likes view your comments you can post something and manage basically all of your twitter presence instagram presence if you're a big business things like that don't quite have nearly as high of barriers to build a substitute product as ANSYS's simulation software. So I think businesses like that deserve a higher multiple because it's more durable. Yeah. But that one's on a case-by-case basis. Yeah. But specifically, the one you can take home on any of them is to look at what they're spending on their operating expense line. I think

that's really something anyone getting started out in can... Because what you're talking about, Ryan is super important, but I think that's something very, very difficult to kind of go through. And it's something, I mean, I'm sure we'll be trying to figure out for the rest of our investing careers, but the operating expense line is something anyone can understand. It's pretty simple. And like, you can, I don't know, it can help you understand what sort of margins you should expect or what you need to expect at the current share price. And if you've had, And if you've been able to have really high operating margins or profit margins, however you measure that, whether it's operating cash flow earnings, for a sustained period of time, you probably don't have any viable competitors. That's true.

I mean, Adobe's had, what, 40% operating margins for the last 10 years? They got competitors, though. They got competitors. Canva. canvas a competitor i don't know yeah but not across the entire creative suite like if you can bundle illustrator photoshop and premiere that's true i don't know the business that well no one's gonna churn yeah i think in general that's the rule and that's definitely you know whatever the when there's the margin capitalism competes in a way but there's some industries that have had

high ones where there's high competition. I mean, video games, competition's been pretty fierce and all their margins are quite high. So that one always confounds me when people say that capitalism can be such a way because video game stocks beg to differ. I don't know. Does that make sense, guys?

Or am I speaking out of my ass here? I mean, but even those have sustainable competitive advantages. Some of them. Yeah, but they have competition. like fierce competition, spending billions of dollars. Yeah, but

it's not, they're not necessarily competing for the same direct customers. Like, I don't think EA with FIFA competes for the same customers as Call of Duty. Eh.

I don't know. Hard to tell. Yeah. Nope. No answer. Ian, what price of sales does an enterprise SaaS company deserve to trade at? It's all at 10, right? Every single one.

Ian's going to come in and say 10. Yeah. No, I think you guys covered kind of some of the things to consider. One of the things I always like, just to kind of keep it simple, is basically what do you think is going to generate free cash flow at maturity? And some of the companies, some of these enterprise SaaS companies are at maturity or close to maturity. And so you can actually just value it on a price to free cashflow multiple, which I much prefer doing, um, and, uh, or EV to free cashflow. Um, but if you can't, then I like to come in and kind of see, okay, what's, what's their free cashflow margins going to be based on some things that are kind of similar to them. So I can get a ballpark and then I'll value it on a price to free cashflow multiple.

And so if it's, you know, assuming a market multiple somewhere between 20 and 25 times, if you think the business is particularly durable, valuing it above 25 times on a free cash flow multiple basis is, I think, reasonable. If you think there's a lot of risks in the business, then whether it's the current free cash flow multiple or what you're projecting the free cash flow multiple will be, I think you want to have it at a discount to that. And I think the best way to kind of visualize that a lot of times is to use free cash flow yield, which is just flipping the equation around and seeing, okay, for every dollar I invest in this, what percentage do I get back in free cash flow, basically. And now sometimes that free cash flow is going to get reinvested into the business, and hopefully the business is doing a good job of that and you're getting good returns on that capital, or it's giving it to you in the form of share buybacks or dividends. And so then you can start to see how the company, what percentage you're getting, um, hopefully above the, the yield on like a risk-free investment, like a treasury. Um, but then you can kind of, you can compare the yield that you're currently getting. So the free cashflow you're getting per dollar you invested, and you can start, um, kind

of projecting out what you think the growth will be in that company. And you can get a pretty good estimation of what your return is going to be going forward. And so by combining the current yield with your growth rate going forward, you can start to kind of get an idea about the projected, you know, some people call it like the free cash flow total return. So you can start to kind of get an idea. The other exercise I'll do is, okay, if I hold the free cash flow multiple constant, the free cash flow yield constant, basically the growth in free cash flow will be my return. and so um getting a little bit of a sense of that just that that helps me out too is trying to limit as many variables as possible um when i'm doing this and so and kind of getting an idea an idea about what what return is so in terms of um i i hate to cut you off but we do have to end here soon because we went over our time but it's a good lesson though good uh thank you this is good

Thank you, professor. Yeah, going back to my tutoring days, but I'll just say this to close. I think that when you're asking about what a reasonable price to sales is for enterprise SaaS companies, it's going to be heavily dependent on a lot of factors. And the best way to figure it out is trying to limit those factors to as few things as possible where you can understand it. Because anybody can understand a multiple on free cash flow and how much money a business is currently generating or you expect it to generate and kind of getting to a comfortable

place where you see, Hey, and you'll hear us do this in our deep dive episodes. You've got a hundred, you know, a hundred million in free cashflow today. If we think it's can do 500 million in free cashflow five years from now, and we'll give it a market multiple at that point, then, you know, we'll throw on 20 times, 500 million, get to a $10 billion market cap. And it's a currently at a $5 billion market cap. We've got a double in five years. And are you happy with that and you're not happy with it and just trying to kind of boil it down to those types of numbers not that you're ever going to predict it exactly right but just that you can um start to get a frame of reference for for what different numbers will mean and what different assumptions

so that'll that'll conclude my lesson for today i just slap a 15 times sales multiple right that's that's valuation mark professor gray class in session well that's got to do it uh for us on the power hour do we throw disclosures on these if you want well probably we're not financial advisors so anything we say or discuss is not formal advice uh we are general partners at arch capital though so clients may hold positions in the securities discussed in this podcast thank you all for listening we'll see you guys next week You