Chit Chat Stocks - Power Hour #8: Snap Meltdown, a16z Crypto Fund, Executive Red Flags

Episode Date: May 29, 2022

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Book your stay at LQ.com. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not

formal advice or a recommendation. Now, please enjoy this episode. All right, welcome in. This is the CCM Investing Power Hour, the show where there's only one rule, and that is to not have anything prepared. So we have no idea where this conversation is going to go. I have Ian Gray joining me as always, and Ryan Henderson, co-host of the show. This will unfortunately be Ian's last CCM Power Hour.

He is graduating to the big investment banking world and what you got to keep everything under wraps. Right. Can't know no public talk about stocks anymore. Right. So exactly. Get in a little little more heavily regulated. Exactly. And yeah, so we're still going to be doing the show. It'll be Ryan and I possibly adding some new guests, but we'll work through that. But guys, let's get going. Any any big topics on your mind this week? Hmm. Not really. Ian, anything? I don't know. I got it.

Let me find some. Yeah. There's a few earnings that I thought were kind of interesting between, I thought Zoom was kind of interesting. NVIDIA. There was one other one that was just, I wanted to talk about. Oh, you want to talk about Acuity's report? Acuity? Yeah. I think it's, it's fairly niche and small. I don't want to, don't want to like pump that at all, but.

we can it's kind of i think the advertising oh snapchat was the other one i wanted to discuss because all right why don't we talk snap in the 8k that the entire financial world rests on yeah apparently trade desk just came out with something that said that they're on target with the same guy and so maybe snaps just not um that was an isolated incident but i don't know what were your thoughts on that well i i have generally been of the opinion that snap is not particularly well run um so i always take what i see there with a grain of salt but it does over the last um i don't know last two years or whatever it seems like it has a whatever snap says has an effect on all the other social media stocks and i follow pinterest more

closely and some of these like some of the demand side um platforms like the trade desk or acuity or some of these people seem to you know there's when snap speaks it seems to uh rattle everybody but i i am kind of curious to see long term whether that is because snap is run poorly or if they actually do have um oh i just lost the article i was pulling up but whether snaps run poorly or it's or if it's actually um uh you know some some greater problems with the advertising in industry but i don't know what do you guys generally think about that i have always felt like okay well i think there's sort of a ranking order within digital advertising and for me it feels like this last week everyone thought all right snap had bad rapport or or they announced that

they will miss their guidance um so that applies to all of digital ad tech and it's like if i'm a business and I'm cutting my ad spend, I think I would be much more reluctant to cut my Google search spend than maybe the riskier side of my marketing budget, which was Pinterest and Snapchat. Because Snapchat is insanely gimmicky ads and I don't think it's as effective um or useful in in terms of uh like return on ad spend so i don't know like i don't think it's maybe it's like the top of the indicator where people are like all right we're cutting back a little bit but i don't think it applies to the entire digital ad industry yeah i agree the there's a lot there's not just digital advertising there's brand advertising there's small business

advertising there's all the different types i forget all the definitions there are but the difference between google search there's a difference between uh that and even within the alphabet universe there's a difference between google search and um the actual website ones which i forget what that's called but you guys know what i'm describing there and then there's also So YouTube, yeah, AdSense. And then there's also Maps, whatever. And then you evolve over to Facebook. Even Facebook's different.

Facebook stuff ads is more small businesses. Instagram might be more brand aware or it might be more apparel kind of centered. And then Snap might be entirely different. I don't know them that well, but it doesn't look okay. In general, if the economy is slowing, advertising will slow because if consumer spending is down,

there's less things that need to be advertised for. You're not going to get that return on spend. But, and it is a little bit cyclical in nature. It will follow the business cycle. And we saw that in 2020 with Facebook and Alphabet's numbers. But I wouldn't, I'm not reading too much into this. If the businesses are high quality,

we'll get through eventually any sort of bullwhip effects on inventories and consumer spending or whatever and if they're running a high quality ad network and providing the value to these end customers merchants whoever they are

I mean it'll be fine in the end because yeah I guess does that make sense guys yes and I don't think I use Snapchat on occasion i guess i'm a daily active user just because i log in and send a picture to a friend

they got you hooked on that on that streak uh sending a blank photo the i'm probably going to delete it here soon and the advertisements that i see it's it's like promotion promotions from um like magazine type companies so they'll do like they'll do like promoted stories is one of the big ones. And it's just not, it is not effective at all. Whereas Google search is almost a toll. If you're a certain business, let's say, I'm thinking like the Motley Fool or Seeking Alpha or something like that, where it's like you have certain tolls on certain keywords that you have to pay to attract interest the that's way more durable to me through a bad or a bear market or a recession than snapchats which felt like a lot of experimental marketing

budget um and even spotify with spotify's podcasting might be that way too like there's there's a chance for that as well yeah and emoticonnected tv um that can be entirely different you don't really know that's probably more brand oriented say like the easiest example is car ads um if less people are buying cars there might be less on ctv but again it's really hard to tell because some of these are faster secular growers like maybe a ctv or an audio advertisement um so they could be able to buffer any sort of headwind but again snap specifically i mean i think i'm gonna agree with you guys i if you're invested in it you spend some time on the app because it is i right it just doesn't seem that good kylie jenner was right five years ago

well the revenue the revenue has been up the revenue has grown pretty nicely i don't know about their free cash flow per share but we do have a uh a comment here from sleepwalker please ask ryan where he got his headphones i would like to know why is it bad or is it okay because Is it bad or good? You sound fine. You sound fine. If it sounds fine. I went to, uh, I went to a Best Buy and I think they're like gaming headphones maybe, but I don't know. I just asked for headphones with a microphone. So 60 bucks, right? Not too much. Pretty solid. Yeah. Not too crazy. Just something where I could do it from here. Ian, sorry, I interrupted you. What were you going to say? No, you're good. I just to kind of hit on the Snapchat point. I think the thing that I've always thought is Snapchat, the main activity that is trying to get you to do is not monetizable by ads, right? Like they don't when you're sending pictures back and forth between your friends, you're never once seeing an ad.

Now, if you start using stories or you're looking on some of their promoted stories or like the corporate store, like the Wall Street Journal who posts, like I know they post something or they've got all sorts of like scammy ones too. But the main thing that Snapchat, the reason people use Snapchat to send messages back and forth to each other actually does not like have any ads in it at all. Whereas if you look at something like Pinterest or Google or Facebook, Instagram, the normal use case, the normal path of behavior is something where there can be a lot of ad placement. It's almost like Snapchat is kind of like WhatsApp in a sense where its main activity isn't monetizable. And now Snapchat has tried to add on all these other things around it to make part of it, um, to, to basically, you know, create ad products, but they, their main, their main thing actually is not an ad product or it does not have room, uh, space for ad products. And so that's just, has always been kind of a high level critique I've had of it as a business. Um, but it seems like you have to, it seems harder to have to convince users to do something new on your app. That's not the main point of your app rather than, um, just monetize the activity that they're already doing. You know what I mean? yeah that yeah and that's more specific compared to this digital advertising in general but i think the the market right now uh would you guys agree that everyone's looking for a reason to sell

and snap that report or whatever that update wasn't even that bad they said they're going to be growing revenue but just a little bit slower and that they're slowing down their hiring which they hired i believe they said they hired 2 000 people in the last 12 months which what are those people working on? Because like Ryan was saying the app, well, has the app gotten any better? I mean, what are these people working on? But, uh, the, or what was I trying to say? Everyone's like, saw that little, like, okay, that's just a slight weakness.

We don't even have anything quantitated behind it and we're going to sell off anything related 5%. And basically the market's going to be down 3%. Um, that feels super, super skittish. Um, And that's so different than what it was four or five months ago, pre probably the Russia-Ukraine invasion. Yeah, it does. I mean, I don't think it's like that insightful to say that there's a whole bunch of pessimism and kind of fear. And I think a lot of what creates that is not necessarily the sharpness of a decline, but the longevity of a decline. Like how long are your stocks falling for and does it just start to wear you down as an investor?

I feel like we're seeing a lot of that where it's like you just stop buying the dip after you've done it 10 times and it's continued to collapse. So maybe that's why we've seen sort of this rotation away and it's been gradual. I wouldn't even say it's gotten that bad. I feel like there's a lot of margin that there hasn't necessarily been that many margin calls. Like the one that I'm thinking of right now is the Tesla one, potentially. Well, they just revised, I think. Are you talking with Elon or just in general? Elon, yeah.

Or the MicroStrategy one. There's just – and all that – I mean, that selling begets further selling. it's it's one of like the wonderful reasons never to use leverage on a non-cat like something without predictable cash flow yeah yeah outside of real estate or whatever something like that the yeah it'll be interesting i think with well bitcoin with micro strategy but with something like tesla specifically if it takes a big downturn because it's been fairly immune ish i mean it's like 30 40 but still up and basically flat in the last year if that takes a tumble along with the broad market i wonder how much leverage is embedded into that stock price um how many people

are on leverage there because you see a lot of individual investors tweeting about that and how they they have margin loans or whatever there's that famous example with someone with like 10 million bucks um but i just want to like it'll be interesting if something like that happens how how much for selling there will be i think there probably was quite a bit with some stuff but only in few pockets maybe like something like netflix or maybe something like carvana something like that but it hasn't really been broad-based um and there i mean there haven't really any been many stories of any big funds that were kind of levered up sort of like an archegos or something although that was a unique situation really have you guys seen anything on that uh because usually

that happens during a downturn. We see some big blowups. Nothing notable. There's been a lot of liquidations of funds, like returning money to investors, which is almost, I mean, that's not quite as bad, but it's forced liquidation. I think it's bad morally because they wanted to start over and use your hurdle rate, but that's just me. Yeah, but I think how it's affecting the stocks is our returns have now been bad. We have to liquidate. We're selling. So are we going to see more of that the longer that we see poor returns? It's for you. Credentials to advance, confidence to stand out in your career. At Regent University, you'll join more than 30,000 world changers making a difference in high demand fields. Pursue your bachelor's, master's or

doctorate online or on campus in Virginia Beach. Your degree from top-ranked Regent University is waiting. So is the world you will elevate. Say yes to your purpose and position yourself for a brighter future. Visit regent.edu slash learn more. regent.edu slash learn more. I mean, as someone who, we don't use leverage or whatever, super, super simple strategy, I hope that continues selfishly because if there's forced selling and quality names, then you can maybe pick something up at an irrational price doesn't seem like that's really happened in you it's not crazy right now but you can hope i don't want to hope for that because you don't want to you know i don't know you never want to hope any bad stuff on anyone but

it could potentially happen and provide some good buying opportunities um what did you uh what did you think of adam newman's new initiative oh yeah wait i wanted to let me get the definition of it. Ian, did you hear of this? I did not hear of this. This is the first time. Okay, well, let me pitch you on this. Okay.

Forget about WeWork. This past never happened. Now, pitch the idea, bro. Ian, yeah. Ian, let me see if you can be an investor here. We have a tokenized carbon credit system based on the blockchain.

They just got $70 million in funding from a16z crypto which just raised a what was that 4.5 billion dollar fund um and here's what it says flow carbons protocol helps projects sell tokenized carbon credits to companies looking to reduce their carbon footprint the credits can then be traded on crypto exchanges are you in or are you in uh that's a that's an interesting one um i think uh that that is crazy to me though that he would get backed with 70 million dollars from from anyone from andreason horowitz particularly andreason horowitz it's like and i'm sure they're looking at it as just a bet like you know high risk like all those

venture bets high risk high reward but man like i would have thought that he was he was gone for good you're taking an insane amount of reputational risk as a company to as an investment firm doing that after his we were collapsed they i mean they are taking a huge amount by betting all this on web 3 i mean didn't they they just doubled more than doubled their dollars going into crypto 4.5 billion which to me is just like all right geez the party is not going to be end because we have this backstop here for these projects is is a60z now obviously phenomenal track record are they flying too close to the sun here like it seems like just a giant bet on just something that's pure speculation at this point i don't think i don't think it's pure speculation

i think there is oh ian ian i think like i well like i think dogecoin and things like that clearly are. I think, you know, arguably some of the, you know, I think you can make the case that Bitcoin is pure speculation. But I do think there are some use cases for crypto

or, you know, the Web3, like I'm not an expert here, but I think there's something there. I've heard that so many times that, yeah, there's rampant speculation, but the underlying technology has some interesting applications. I haven't heard one, like, ever that I thought, like, the smart contracts, I don't get why that's differentiated, why that's, like, there was this long-winded explanation of this new blockchain-based technology that would allow for digital signatures.

What's wrong with digital signatures now? You can't authenticate. I don't want smart, I thought about this. I looked at the support contracts once cause I was like, Oh, that's interesting. I don't want that to be automated. We will, I want some leeway into that system, but okay. I want, let's not get out into a web three debate here. Let's move back to a 16 Z and their investments here into it.

And maybe with Adam new and I don't know, Ian. Yeah. So I would just, I would just say that as far as that, like I think there is when there's this much money around, there's going to be a lot of stuff, a lot of money put into things that fizzle out and die or were scammy to begin with or whatever. Right. Like there's, it's just, there's a lot of money out there for something where there's not a whole lot of, for lack of a better term, there's not a whole lot of there, there,

right. There's a lot of questions about all this stuff going on in web three and crypto. But I think what does happen in a situation like this is if there is anything there, $4.5 billion is going to figure out how to find it. You know what I mean? I have a question. is it bad for the economy to throw money at a bunch of zeros, like a bunch of speculative

securities when that money could be going into productive assets that help the economy grow? Ironically here, this is the same company investment firm that said at the start of the pandemic, it's time to build. And I guess they meant it's time to build Ponzi schemes, but i didn't know that at the time it just okay that's that's i don't understand the that feels like it's going to detract from gdp growth oh interesting yeah or just i mean not even yeah just quality of life i just think that's such a i think that's such a small portion of the economy right even if you but if everyone's putting some if everyone says well you just need five percent in there and there are so many people now that i and i know like in total i think total assets

in crypto aren't like it's it's not like 50 it's not detrimental but it's a it's a sizable yeah for sure and even if it's one to two percent maybe three percent that's three percent of capital that could have been put elsewhere right it could have been invested in nuclear power research or some stuff like that um is that what you're trying to get into ryan it's like where the opportunity feels yeah it feels like a huge waste and that's almost where i i empathize with monger's view that putting a stop to it is in the best interest of improving the quality of life for humanity yeah i love how uh i know i bet someone say like this is an extreme example but i always thought of when jack dorsey would go to africa and he's like we're bringing bitcoin to

africa i feel like everyone's like we just want some running water man like just can you take your billions and just we want some faucets and some showers like we don't need uh um any bitcoin here uh let me let me yeah let me just say one more thing about that because i think i think what needs to happen in crypto and it may reduce all i think people are smart at the end of the day like i think people individually are stupid but i think people collectively end up being pretty smart. Sometimes there's a lagging effect on that, but I think that over a longer period of time, the market's pretty efficient. I think one of the things that's causing some inefficiency in the market right now relative to crypto is that there's just so much uncertainty

and in a place where most of the assets we interact with in everyday life now, like the securities we interact with and the stocks we trade and all those types of things, we've got lots, we've got all the information we need, or at least all the information that we've become accustomed to. With crypto, we don't have all that same information. And so I think there's a lot more, there's just a lot more uncertainty there, which arguably is creating false expectations of the upside. Because there's, you know, expectations that X, Y, or Z is going to happen, or that this is backed by these types of assets and it's really not, or you name it, right? But there's not enough transparency, I think, in a lot of the crypto, which is kind of ironic, but there's not enough

transparency to know what's really going on. And there's a little bit of a hurdle to understand how it really works. And somehow it's reached mass adoption though. And so I think a lot of that is going to... It all evens out in the end. Ultimately, I think the market's fairly good capital allocation decisions um it just takes it takes some time and i don't think it's worth hey i got a book i got a book recommendation for you and it is called oh shoot what's who's i don't know the author people go mad in groups i think ian you may i may disagree with you that everyone's like the crowd's rational it can get i know i think the crowd i think the crowd can get irrational but i think you take it over enough a long enough period of time and i think the

perhaps pretty rational. Um, and it just takes, it just takes some time. And I don't think that the, the risks of, I don't like getting into the business of all of a sudden like, Oh, don't let people do this or don't let people do that. I think that's not the right way to answer these types of questions. I think getting more information out there about what's really going on. I think more education, more, um, information in it though it will sort itself out but part people have now died in the process of

sorting itself out right like there's scams is it such a net negative it's not regulated that people have lost their wealth and there was suicides related to the the luna collapse the right i think that's the i think that's the answer though is the regulation actually i think what do we write i don't i don't love regulation but just like we regulate um how you can market and sell securities like there's all these regulations about the ways that you can sell stocks who you can promote stuff to who you can to what type of language you can use all that type of stuff it's like the wild west with crypto and so people are they are um but people are getting scammed more easily i think with crypto than with with traditional securities

one thing one thing no no one thing one thing so i i see scotland scotland i see the comment on snow earnings we will touch on that uh but i say something brett because i i came across a company this week that's in the blockchain sector that i thought would catch you guys is it the athletic one do i can i choose it was that one or no well i maybe i'll save that other word for another time but uh so the claim is that we don't want it to crypto to be the wild west anymore but isn't the wild west the product so what's the point if it's not the wild west anymore because then it's just air it's just bits it's just whatever that wolf of wall street matthew mcconaughey thing of it's a you know it's that i think it's a different way to create networks

like that's the that's the question is is because like a lot of the you're right a lot of the value proposition right now is that it's like unregulated and so then you can do these things that then make it more effective and more cost effective to do some sorts of transactions and so even that's not always the case but i think the question becomes going forward as it becomes more regulated is the way that this process and these systems and these networks function um are those more effective than traditional software solutions or other types of networks but it's just a different it's a different way to that's fair to build networks i think and and i think that's the question is is there anything there i haven't been convinced yet that there is anything there

i'm just not willing to write it off and i think if there's to kind of bring it full circle i think if there's another four and a half billion dollars going into it um i think there's some decent odds that andreessen horowitz is going to find some of the things that actually are that become successful and capitalize on those types of networks um than if there wasn't four and a half billion dollars going into that industry and i don't know i think time will tell whether that was a worthwhile investment or not but i think if there's anything there i think they're gonna find it if they should make a deal that if nothing happens from this fund like legitimate you know and it's not just crypto on top of crypto whatever

loans to crypto on whatever that stuff is um they should make a deal to just shut it down like all right we're not going to try again because everyone wants there's so many people that want this to be successful and i worry that no one wants to admit that it's all wrong all right ryan what's your what's your picture the the company i saw i think it was called applied blockchain and our friend uh my friend through the motley fool his his name's connor Allen kind of presented this company and he's like, oh, it's a novel idea. And it was a company that had pivoted multiple times, which is always like a huge red flag. It kind of skated wherever the puck was. And so then they became Applied Blockchain. And they had a million dollars in

annual revenue and had i believe raised 58 million dollars in cash from financing so the they're just selling stock like that's a product what's their it was some mining concept where they're i don't i have no idea but it's a million dollars in revenue 58 million dollars in cash from financing they had i want to say 12 million dollars in stock-based compensation i was just looking at it. What a great ratio. 1,200% of revenue. It's insane. That's probably the part that gives me the most distaste for what's going on in blockchain is that people are getting rich without providing any value to anyone, really. Yeah. If we snapped our fingers and everything in crypto went to dust and it didn't exist there'd be more resources for more people

well there'd be more semiconductors for more people there would be more energy for people and the world wouldn't change nothing would change maybe now i did see some transactions there's some countries where it's less volatile than their currency so they try to use it for transactions. Well, that's pretty sad. And I hope that changes soon because, man, that's disappointing. This episode is brought to you by KPMG. As a business leader, how can you innovate, build trust, and move forward in a digital era? KPMG can help by bringing together the right talent and technologies, generating insights that spark opportunities. To explore their thinking, visit reed.kpmg.us slash opportunities. And I do think after a 50% decline,

I imagine a lot of those transactions flood. It's no longer seen as the less volatile currency after that. But the other thing that someone brought to our attention is in terms of us as investors allocating resources or allocating capital if a stock declines if a cash flow in business it's it's traded security declines by 50 the likelihood of it declining by 50 again is reduced it's inverted for crypto because the network effect and the virality of people yeah the moment because there's no yeah there's no underlying asset so it's like i can't get comfortable with that risk as an investor at all well here's what's interesting and we talked about this again with someone offline from one of our interviews is that

and this is has surprised me again and again is that very surprisingly few people get the concept that a stock is attached to a company that generates cash for you no i just how is that so hard maybe switching topics here because we can probably move on from crypto we should limit we should do a timer on how much we talk crypto every time but does that why is that why do you guys think that's the case why do people can't can't can they not grasp it well well i think it's difficult because the way things are traded like it's hard to i don't know you were probably like this when you started too like you look you look at a like why does the stock move why does this like thing with four letters move sporadically every day if it's just like the business isn't

you know but people feel separate but why can't people like it should be so simple to tell to teach someone this and then they it's like oh yeah okay i understand because you don't make money by teaching it no you make money by gamifying it people people associate the stock market more with the charts than they do with the financial statements okay which i think is is the problem right every time someone says the stock market or you see it on cnbc or you see anything you're seeing oh what's the stock doing like ryan was saying what's the stock been doing today how are these four letters moving on this chart you know let's look at these angles and the the lines and all this stuff to see like oh is it

going to bounce or is it going to you know drop is it a falling knife like all everybody's casual interactions with the stock market are about price action rather than about the, the financial wherewithal of the business. And I think the other piece of it is that I don't think as many people as I would like to believe, I don't think there's as many people as I would like to believe that actually, um, understand finance just frankly. Right. I think people don't like in their personal lives, they kind of get it that like, okay, I want to be generally taking in more than I'm spending. And I generally kind of want to have savings, but I don't think people understand it in a systematic way. And so when you try and apply that to a business, even less

people understand it. When you try and apply it to not a business that's owned by them, but a business that's owned by a million different people, the idea of how the decisions they're making are affecting the bottom line and what's actually happening and how those earnings get dispersed or how they get reinvested. And, um, I think it's just, it's a hard concept for people to grasp when they don't have the building blocks of finance or microeconomics or those types of things. And I don't think it has to be like, I don't think people need to have super in-depth understandings of those, but I think, I think the, I don't think we've done a very good job, particularly in this country of teaching just the standard building blocks of, you know,

even supply and demand and um you know revenues and expenses and profit right how do we know and it's not even that difficult if you put it if you don't try to over complicate it got a good comment here from scotland thank you for being one of the few to uh to join the comments say uh you said or they said nothing hurts my investments than watching hurts my investments more than watching cnbc every day that is i can agree with that um i decided never to watch cnbc except for maybe you know a twitter clip or something like that it's just not helpful return on time is rather poor did any of you guys look at the snowflake earnings glanced at the highlights um saw revenue continue to grow quickly customers aren't really growing that quickly but that's kind of as to be expected

net revenue retention is really really great um i mean i guess the thing is like if that keeps continuing along net revenue retention above 150 things will be fine but you gotta see operating leverage eventually they're kind of going you know scorched earth grow as fast as possible so no surprise that they're going to get hit in this market when they're not generating cash and obviously it was still really expensive stuff when you do have a sticky platform like i believe snowflake is and the lifetime value of your customers is as high as they've proven it can be with their retention rate there's no reason not to go scorched earth towards growth because if you can well you don't want to be having a native

operating margin of 100 but as long as those aren't costs that scale in line with revenue over time you eventually the operating leverage could come if you have enough if that platform's sticky enough yeah i think the key like thing that a lot of people need to focus on and it's not even um understanding the depths of the product so well on what a data lake or the data warehouse thing is it's how good is their sales efficiency because a lot of their sales and marketing spend and the ratio of that to revenue is going to be so important and it's a hard question to answer and there's not much research you can do about it and switching costs Yeah, well, I mean, that comes into it of how much you're going to have to pay to keep people around as well

So, I think if it's a high-quality software business, you should see that scale and spend But it's really hard in this early stage when someone is going scorched earth, like Brian said Something else I was thinking about was there are a lot of companies now, public companies that are being pressured in private companies too, because we've seen a lot of down rounds, that are being pressured to show operating leverage now, whether that's just general market pressure or on conference calls with investors, whatever it is. The companies that opt not to do that, that don't care what their price says today, are going to be better off in the long run. Yeah. Doing what they think is correct without the outset influence yeah i agree with that a lot because i know a lot of

people hide behind this but sometimes the best thing for long-term free cash flow per share is not to show cash flow now or not to show earnings taxable earnings in the current moment so it's like i know a lot of people just like copy bezos and say that and then they're actually just funneling money towards nothing but that's kind of where that's kind of where i'm not towards nothing they're funneling it towards google and facebook's operating profits that yeah the i do yeah i mean they're but that's kind of where i've been fishing lately like is which companies are like still have been like just don't care about like oh okay i see the market like wants us to produce cashflow. We might peel back a little spending. Like, no, we're just going to keep

doing what we're doing and keep our heads down. And I do think that is not independent of stock based compensation because the more stock that you've issued to employees and executives, the more susceptible you are to changing your attitude when things go poorly. So maybe part of that is lower and stock-based compensation has been cut become such a hot topic now i was harping on this a year ago people don't go on we need to get on this train i think people try to oversimplify it that they're just like well you just give them multiple free cash flow minus spc like all right i'll that's not how you do it but i'll take your returns if you want to do that the there's i mean There's gotta be a reason

That all these companies do it Besides masking True profitability Well there's some tax benefits I just hate how They're basically buying high Selling low If the stock keeps going up

If they're buying back to offset tuition It's so Annoying I guess is the only word to describe it because when you're selling a stock option, say it's at that, whatever lower strike price. And then if you buy it back at a higher price later, that is value destruction. All else equal. What do you think?

I've been thinking about this a little bit recently because I a hundred percent agree with what you just said. Obviously it's just logic, but, um, what do you do with these companies that just start hoarding cash on the balance sheet and whether it's like an extreme example like apple or google or or berkshire hathaway traditionally you know in the last you know i know they've been spending some recently but um or even i've been looking at some companies like i'm trying to think i think pinterest was in this boat where they're basically cash flow positive um and they've got two or three billion dollars in cash or whatever it was when we were looking at it the other day and like don't really

have a use for that cash necessarily. But now with the stock price coming down, the cash is, you know, let me just, I'm going to pull up some numbers here on Pinterest because that's what we were just looking at the other day. Shout out to go listen to our not so deep dive episode. But yeah, they've got, they've got a market cap of 2.6 billion and cash of, or sorry, market cap of 12.6 billion and cash of about 2.6, 2.7 billion. And so, you know, almost 15% in cash and you're like, okay, that cash really isn't serving you. Well, it's providing a little bit of a margin of safety for the business, but their cash flowing, um, let's see, 695 in the last 12 months, 695 million. Even if you take out stock-based compensation, there's still at almost

300 million in uh free cash flow so you know they seem to have plenty of cash you know they're not they don't need that 2.7 billion to reinvest in the business and it does provide some margin of safety and they can make some acquisitions or something like that but it seems like more cash than they really need to operate the business um but i don't know like maybe you start looking at doing some buybacks i just don't know there seems to be a number of companies i'm coming across that like this where they have a pretty big cash balance relative to their market cap they don't need the cash but i would also not necessarily say that buying back the stock is the best option like i'd love if they had reinvestment opportunities to use the cash but everybody

raised cash when it was you can get convertible notes at zero percent or whatever it is kind of like an awkward point in time where a lot of these companies might not necessarily be cheap enough to the stocks might not necessarily be cheap enough to warrant repurchasing shares or they there may be more attractive places to put the capital um at that stage in their life but if you don't need it what else do you do with it and the the thing is i feel like a lot of companies are like saving it for a rainy day now the rain now it's raining and no one's deploying it I don't understand So many companies are just disappointing

On their capital allocation decisions Especially tech Well tech's a broad word Especially Silicon Valley style You've gone full bear market grump Brett you've gone full bear market grump Oh Ryan's First it's crypto now it's the capital allocation decision

Ryan was lagging there I think You came in as kind of Well, I don't know You started complaining about something And maybe That was the market gods If you can still hear me

I said you've gone full bear market grump I feel like there are a lot of And I mean it's You've been kind of preaching it for A while now And so part of me There's been like a lot of this froth Overall

of whether that's like excess SBC or stuff that just never felt that shareholder friendly throughout the bull market. And now, even though I feel inclined to take like a victory lap and like see like stocks don't always trade at that.

It's better to swallow my pride and buy the companies that are quality businesses. But at the same time, like the noise of oh it wasn't a quality business also you the stock does change the sentiment yeah but management's so important over the long term about where the reapplying capital either back to you as a shareholder or into the business it's just hard if someone like with pinterest especially they made i guess a lot of these companies made the smart move doing the

convertible note but now they have the cash i mean a pinterest it's not that crazy expensive if they think that okay if they're right like about what they think the business can do it should be cheap and why not buy back there's nothing else to do and buy an acquisition almost assuredly will be value destroying you just hire you hire more and more and more employees so that one day so that one day you can get an in-house checkout that process that yeah that's exactly right yes so what is most companies what do you guys agree with it do you guys disagree or agree that almost every single company has too many employees

I would have to probably agree with that I think that's the investor in you speaking Have you worked at a large company before? Well, you worked at a unique one, the Motley Fool But you can't say I'm not going to comment on that We still work there, so no comment But I worked at a subsidiary of Altria

The wine division And I got to say It had two times as many employees as it needed and it actually hurt to have more employees than less i think that can happen with a lot of these like we're at the snap one where they said they hired 2 000 people in the last year what's the return on that investment you're looking at in that lens like i do hate uh that is maybe my unless it's for a role that is hard to attract so like like like it's talent that's hard to get so i think like video game developers are in high demand right now and they're hard to

attract well that's a that's a employee intensive business the the part of me just gets really frustrated when i see companies bragging about how many employees they hire especially two investors like we just recorded that show or doesn't mean anything for me yeah we just recorded that show ad yen that might be the only company that doesn't have more employees than it needs and it comes out with way way better products than its competitors i saw that stripe and this is uh just a photo someone was sharing on twitter they have it like a chief climate officer what what what is that that's that's a that's first off it's a chief so it's got to be paying like at least three hundred $400,000 a year, and you're a payments company. Someone's got to hire him, Brett,

or else unemployment would be at like 20%. Yeah. Think about how many unemployed chief climate officers there'd be in the world if there wasn't a stripe out there handing out the jobs. I know it hurts the bottom line, but it gives people purpose. so okay we don't need to get yeah there is some give and take there you could have like 20 of people unemployed and then just tax companies at a higher rate well give it back to the people or you could give them something to do during the day i think people would figure out something to do instead of filing paperwork i think there's a lot of things that people would enjoy more or call me crazy we could actually make it easier for people to start their own businesses

so that then these people can you know you're crazy okay what about what's the biggest red flag biggest executive red flag right now if they did this today you would be like

alright I might have to sell shares okay biggest red flag not .eth that's I don't think anyone's doing anymore in their Twitter profile gosh I believe it would be there's a lot of them.

I don't think there's any that stand out, but one that I've seen recently that I've just been disappointed by is giving yourself bonuses on low hurdle rates. That one's not like a thesis breaker,

but it's just disappointing. I mean, yeah, that's detrimental. That sucks. I was thinking more like character flaws. Oh, character flaws.

Because that's like literally bad for your return system. Oh, right, right, right. Outside shareholder. Character flaws, definitely focusing on the quote-unquote enemies, competition, or financial analysts, stuff like that. That's the biggest red flag because historically looking at Enron, all that sort of stuff, companies like Enron, there's a correlation between that and hiding something. And there's quite a few companies I've avoided because of that focus. Most aren't as bad as Enron and being as aggressive against their enemies, quote-unquote.

but yeah that's the biggest one one thing i'd throw out there one thing i'd throw out there is the um how these companies are kind of dealing with employees right now and so there's been a lot of companies that were posting that type of stuff about hey we hired 2 000 people we did all this type of stuff and now having to come out and say oh we're you know cutting our workforce by a third and um i always find it frustrating um to see some companies that do stuff like that that like say they're super like when things are going well they're super employee friendly and all this type of stuff but then it ends up causing if if they're not very smart about hiring then when things get tough then they just cut everybody and i don't think that's necessarily the best way to

run a business to to kind of be whipsawing back and forth between being having too many employees and too few employees and and i just don't think it's great for morale and so when i see it's a little bit of a red flag if i'm looking to invest just because i'm um if they don't do a very good job of handling that that's i think that's a pretty big important thing in the culture of a company and the performance of the company is figuring out how to hire at the right speed and treat your employees well and not just be constantly you know not not have the rosy glasses on when things are going well and then and then uh when things turn south all of a sudden be like oh we can't have any of these people hired and this is a total problem and we should

have seen this coming and all that type of stuff it just it doesn't have a very good taste in my mouth i feel like yeah consistency seems like a like a huge factor to me in looking at companies like do you are you champion are you championing championing yourself when the stock's doing well and blaming others when the stock's doing poorly. Ideally, the business like really does. If I'm a worker at a business, my day-to-day is not changed at all dependent on the stock price.

That would be like- That's why it would be better to, like I think going clean slate, never doing SPC is the way to go. It just is way more fragile or sorry, It's way less fragile to have no SBC, if possible. I mean, there's so many quality companies that- What if you could do it in a way that net is less costly to you as the employer, but you can give them stock?

What do you mean by that? Well, whether that's tax advantages or you're able to pay them less in total, but part of it's in stock. If you're talking all the benefits and detractions of stock-based compensation, I don't think there's any argument unless you're really, really unprofitable at an early stage. You don't have the resources to pay them? I mean, think of Amazon stopped doing SBC like five years ago and just started paying people in cash. They could do it. It'd be fine. And there would be less worries right now among employee attrition. And here's the thing. With a lot of these type of companies, people get paid healthy, healthy salaries and

they can buy the stock. I've said this like 20 times. You can buy the stock if you want. it's public. I don't see any benefits to the stock options besides the small savings you get on cashflow expenses and taxes. And it might not be worth owning. Make the decision for yourself. Exactly. That's the other thing. I feel like I've seen too, a lot of the times, employees get, they're so skewed by what they see on a day-to-day basis that they feel like they have to own the stock or that the stock will do well because the companies do it well. Speaking of going mad in groups, I think it's just because everyone else is doing it. So everyone thinks that stock options are the right way to go and that it's smart and that,

oh, that's the best way to make a lot of money. I get stock options, blah, blah, blah, blah, blah. But it's just, I think everyone's gotten mad. And some companies, I mean, this is we companies we own do this. I mean, they're spending 10% of revenue on stock-based compensation. I mean, it's just so aggressive. Um, what, what are you guys thoughts on executive compensation though? I've been looking at some stuff. Is there, they should all just be giant founders and shareholders.

Yeah. They all get paid a dollar a day like Jack Dorsey. Um, what like, is there an optimal way or is it a company by company basis where It depends on the fit. No, I don't think there's an optimal one-size-fits-all way. I think Buffett said that too before. With all his companies, compensation is different. It depends on the goals of the organization. It also depends on that person's role at the company. If they were a founder and they own 30% of the stock, I don't think you need to give them a bunch of stock. exactly that's a big red flag if someone already owns a lot of stock and is gifting basically gifting themselves more that's a huge red flag to me what about i spent i tend not to spend a lot of time like focusing on executive compensation because i don't think this is this becomes less true when it's um if it's a small cap or micro cap but in most cases with lots of the companies we're investing in that are over a billion dollar companies, the executive compensation

doesn't have a meaningful impact. I don't think on the success of the business. Um, I think it's sometimes it can give you some indicators about some other problems within the business. Like maybe the CEO isn't very, um, fair or isn't very, um, is focused too much on lifestyle and not enough on the business or things like that. Sometimes you may be able to read between the lines to see that type of stuff. But I don't think the actual compensation piece of it ends up affecting the outcome of the business in most cases, because there's a lot of businesses that have done very well where the executives have been very highly compensated. And there's been a lot of businesses that have done very well where the executives have been compensated at

a much lower rate. And I just don't think it has a whole lot of bearing on what the company ultimately does but yeah that's a great point i like it's frustrating to see executives getting paid too much because it's hurting the bottom line um and it seems unfair if someone's getting paid 50 million dollars a year uh but on the other hand i do i think i agree with you that if you're worried about executive compensation and you're worried about say the ceo's incentive plan and you're saying, okay, they have this incentive plan. Now it's going to be a good investment. The business might not be as high quality enough

for you to invest in anyways, because then like if the executive matters so much, the business can't be that good. Right, if it's coming down, if your investment decision is coming down to whether they're paid $10 million a year or $2 million a year, it probably isn't the right place to invest.

Unless the market caps 100 million. Right, yes, exactly. If, all right, this is, I try to not criticize by name, but if a certain, at Block, if a certain executive left, would you consider owning that company? a certain a certain guy that likes bitcoin a lot yeah uh uh maybe yeah i'd look at it again yeah depends depends on everything shakes out depends on what sort of strategy they laid out but yeah i feel like that's a good example of how uh how much of an influence a ceo can have on on like the organization's goals strategy you know what i mean because there's been so many initiatives that are skewed towards

decentralized finance instead of just growing the cash app. Yeah. Agreed. Agreed. All right. Anything else? That's a random question, but well, I just have to, I have to shout this out, but I think it's funny, but sleepwalker said, who are, who is your guys's least favorite financial YouTuber slash gurus? And I, I don't think I'll be getting into that. I don't think you guys will either. there's you know there's a lot out there i just don't listen if anyone is promising returns don't listen to them but yeah they we all know everyone has probably been served those ads and seen those

recommendations of those crazy videos of people promising stuff and all that um i don't even know their names yeah praise by name praise by name there's a lot yeah yeah yeah we all know like i don't know any of their names but there is there's a lot of um bs out there what's your most let me me change the question what's your least favorite guru trait what's a red flag for you that says okay this this guy might be full of a or this guy or gal oh it's almost always a guy but uh hyper confidence like uh yeah if you speak speaks in certainties yeah yeah only if sith deals in absolute right absolute yeah that's a good one i think having two or three ferraris in the front of a uh track home that's just funny like is yeah that's always that's always a good

one but yeah it's so funny how they all seem to do the same things uh yeah uh ian froze your eyes are closed for a second they're in all right anything else guys no i think it's time to sign off we're about to record our last or potentially last not so deep that with you and so ian anything you want to say um something to the crowd yeah for the for the well for the four people on youtube and the the few thousand on on the podcast yeah i'll just say it has been awesome getting on with you guys i always love talking stocks and um wanted to thank you guys for kind of giving me the opportunity to, to do this podcast with you. And it's been great getting to know you and meeting some of the people through this podcast. Um, it's been awesome. And I've just, I've learned

a lot, made some friends and, uh, you know, excited to stay in touch going forward. All right. Yeah. That's a good way to end it. My heart is very full at this point. But yeah. Uh, all right. That's going to do it. Thank you all for listening. Um, I guess we should just do the disclosure or maybe not. There'll be a disclosure somewhere. it'll be at the beginning. Remember, we are not financial advisors. Anything we say on the 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 or

watching. If you are listening, we do do this on YouTube. What is it? Every Thursday at 12 p.m. Bye.