Chit Chat Stocks - Q4 Earnings Talk (ASML, AXP, LVMH); Bonds Are Cheaper Than Stocks; Learning From Our Best and Worst Investments

Starting point is 00:00:00 Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. welcome to chit chat stocks this is our weekly power hour episode i am one of your hosts ryan henderson and i am joined as always by the one and only brett schaefer and today we have tons of topics to get through apparently the world is at a breaking point i guess with deep seek so we're going to be talking about that is nvidia dead that's what the people want to know and of

Starting point is 00:00:57 course, we're so technically proficient that we are the people to give some profound take on that. Not really, but we're going to get into it and we'll talk about what happened and if we actually have any thoughts on it. We've also got earnings season kicking off. We've got LVMH, Starbucks, ASML, American Express reported. So Brett's going to go through a bunch of those. We've got some fun discussion questions as well that I drafted up that I think will just kind of be a good revisit for ourselves to kind of look at our own investing careers. But I guess before I move on, Brett, welcome in. Thank you, Ryan. Yeah, thank you for everyone that is listening today. Got a lot of fun stuff. I should also say, given all of the developments in the past week,

Starting point is 00:01:44 we have a couple of Brett's bubble watch topics again. And it seems like people are enjoying that And given that NVIDIA, I don't know if it's crashing today, but maybe we did jinx it by starting this segment, which was, fingers crossed, what I was trying to do. Yeah, we also recorded an interview, a great interview, on the progress at NVIDIA over the last several years, which will be still timely, despite all the price reactions that we've seen. And before we get into some of those topics, though, I want to talk about our friends at Public. If you are serious about investing, you need to know about public.com. That is where you can invest in everything, stocks, options, bonds, crypto. They even offer some of the highest yields in the industry, like the bond accounts at

Starting point is 00:02:36 6% or higher yield that remains locked in even if the Fed cuts rates. What sets Public apart is how they give you the tools you need to make informed investment decisions. Their built-in AI tool called Alpha doesn't just tell you if an asset is moving, it tells you why the asset is moving so you can actually understand what's driving your portfolio's performance. Public is a FINRA-registered, SIPC-insured, US-based company with a customer support team that actually cares. Bottom line, your investments deserve a platform that takes them as seriously as you do. Fund your account in five minutes or less at public.com slash chitchatstocks and get up to

Starting point is 00:03:12 $10,000 when you transfer your old portfolio. That's public.com slash chitchatstocks paid for by public investing. Full disclosures in the podcast description. Brett, where do you want to start? Well, I don't know. People want us to talk about NVIDIA, but there was also people saying everyone's talking about deep seek i think let's just talk there let's start there it seems to be something that has just taken over the market you have some notes here but it's even developing some of the news today uh where it looks like i don't know if you remember the show silicon valley but it seems like open ai might have gotten jin yanged and had their ip he's stolen yeah so let's actually go through what it is what happened i know we are not going

Starting point is 00:04:13 to give some profound take on the implications of this and what companies will be most impacted but i do think we can at least go through kind of the headlines and talk about if we have any thoughts on the companies that might be impacted. So to start, I will say Ben Thompson from Stratetri. Everyone already reads him already. So I don't think he needs a shout out from us, but he had a good write-up on this. And whenever there's something high-tech that I don't understand, I usually go and check and he's probably got something that helps understand it. But before I get into his writing, let me explain a little bit to the best of my abilities of what happened so some team of engineers based in china released a new version of their model deep i think

Starting point is 00:04:59 a lot of people think deep sea like came out this week like just came out of the dark or something this week they've been around for a little while but they have a new model that's pretty comparable to the latest version of gpt 4.0 i believe is what people were saying it's comparable to and the big thing here is that they reportedly did all of this on less than a six million dollar budget for reference which is incorrect i mean that's that's not true why do you think that uh from all the reporters that follow this the guy that wrote the nvidia book take him uh the semiconductor analyst the people that run the independent semiconductor and ai sub stacks They seem to think that that was a bit misleading because it wasn't the full budget. It was some just small part of it. And yeah, it's also a Chinese company. They're not supposed to have chips. So they're incentivized to say they don't have that.

Starting point is 00:06:04 So no, not – yeah, maybe. There is – Ben Thompson's notes, we'll talk through them here in a second. But there is – he makes the case that this actually makes more sense on the H800s, which they are allowed to have. So – but I'll go through them in a second. You are right, yeah. I forget what it is, the inference or the training or whatever. That was the budget just for this. So there's probably much more spending out there.

Starting point is 00:06:37 There was some guy – and the clip went pretty viral that was like on CNBC that's like, no, they have 50,000 H100 GPUs. They're just hiding them and they won't say it. That does not – I don't think that's the case from based on – Ben Thompson doesn't seem to think that's the case. There's no proof on that yet. Yeah. And it makes sense. But just to kind of keep going here, the – yes, everyone's saying it's BS essentially and that they violated the CHIPS Act

Starting point is 00:07:04 and you can't do this without expensive NVIDIA GPUs. Before I mention some of the Ben Thompson quotes, I mentioned the H100 and the H800. Basically, look, I'm not the guy to explain the differences, but from what I understand, H100s are the really advanced, expensive GPUs with extra memory bandwidth. H800s are not. They're a little less expensive

Starting point is 00:07:30 and they are not illegal to buy in China. You can have them, you can buy them. It's not a violation of the CHIPS Act. Now, I'm just going to go through this quote from Ben Thompson. Basically, DeepSeek made these advances and here's kind of his logic behind what happened. He says, DeepSeek actually programmed 20 of the 132 processing units

Starting point is 00:07:52 on each H800 specifically to manage cross-chip communications. This is actually impossible to do in CUDA. DeepSeq engineers had to drop down to PTX, a low-level instruction set for NVIDIA's GPUs that is basically like assembly language. This is an insane level of optimization that only makes sense if you are using H800s. And then he says, so was this a violation of the chip ban? He says, nope, H100s were prohibited by the chip ban, but not H800s. Everyone assumed that training leading-edge models required some more interchip memory

Starting point is 00:08:28 bandwidth, but that is exactly what DeepSeq optimized both their model structure and infrastructure around. So how did they do it? They apparently used a process called distillation. Distillation is, and I quote here, a means of extracting understanding from another model. You can send inputs to the teacher model and record the outputs and use that to train the student model. So basically, yes, it was probably a breach of the terms of conditions uh for open ai and chat gpt but they trained on the foundation models that were ultra ultra expensive to build and did so whether whether or not it was as low of cost as people said open ai just had the cost i mean if someone has to build it and they just stole it yes

Starting point is 00:09:20 whether yeah whether or not deep sea spent as much money as they said it was probably a significantly lower cost and they used open ai to do it so what does this mean for all of your stocks uh the answer is i have no idea but i suspect this is my take i suspect if someone can copycat the leading model for less than 10 million dollars or even say it was more than that if they can copycat the leading model the incentive to spend billions is a lot lower so if you're nvidia that's not great news uh so maybe maybe it's it's illegal though it's illegal like yeah it sounds like you can't really protect from people doing this though yeah if you're open source i mean maybe maybe you can not protect from someone doing this you can just

Starting point is 00:10:17 ban deep seek um from being used uh in in whatever country you operate in but i think it's funny because open ai has been accused and there has been some decent evidence that they without authorization used youtube data and other google data to train their own models so it might be getting a taste of their own medicine here i think everyone is doing this to everyone else just yeah but they're still training it so i think that there is an ip theft here are there patents is there ip law i don't know the exact laws but i would assume if someone spends all their money building a very useful product there should be protections around that and i would guess in the united states in places with these type of laws that would be

Starting point is 00:11:08 generally what you know the historical president says i also saw though and this is a very developing situation so it could be changing what by the time people are listening to this that the accuracy of deep seek is terrible not that the actual ai models have great accuracy nowadays um i think people really trust them more than they should uh when i don't know if i would trust anything that doesn't have 99.9 accuracy and maybe we get to there over time but today deep seek i saw something it was like 10 out of 11 in accuracy i had like a 17 accuracy rate but that's just a number i saw thrown around either way if it's it's not 99 i think perhaps okay this moment might not mean that nvidia spending or semiconductor spending immediately goes to zero

Starting point is 00:12:02 But my assumption is that if this is such a bottleneck, there are going to be, whether legally or not, there's going to be innovations worked on, like you said, and eventually people are going to find workarounds. If it's a trillion-dollar bottleneck, people are going to try to innovate to beat that, and if the smartest people in the world are working on it, I would guess that they're going to make some progress over the next few years. i just don't know why someone owns nvidia stock right now or is buying it because you're paying up for an insane amount of uncertainty this is like investing in internet stuff in 1995 and you're gonna pay up for that i just don't what it makes zero sense to me this is your i guess if you put yourself in the satya nadella seat for example and you allocated this quote unquote you know he said i'm good for my 80 billion or whatever and not yet though would you start let's say you saw this and now

Starting point is 00:13:16 i suspect deep seek will inspire some other people uh to to try to go this route if that if that was the method they used and it worked i'm sure other people or other engineers other companies will try to employ this. Would you, if you're Satya Nadella, spend the same budget you were expecting for the leading edge model to really train it, to get all the GPUs and kind of build the gold mine for everyone else? I don't know. It's uncertain. I don't think anyone knows the answer to this. Sam Altman doesn't know the answer to this. Satya Nadella doesn't know the answer to this. They are taking a big risk investing in this. I think it probably works out over the long term because at the end of the day, there one is going to be IP protection to

Starting point is 00:14:07 open AI is going to create some security thing to help stop this. I even saw they were working on this today. I will say quite a week or a second week to be starting as the AI and cryptos are for our favorite man, David Sachs. Seems like he's got quite a quite a bit on his plate here. But that's something that, again, it comes back to a place with business rule of law versus, and I'm bagging on the Chinese Communist Party, not the people here. There's nothing incentivizing people not to do that in China. And I don't think, I really don't think that it's going to kill these AI budgets. I don't. Maybe they decrease it.

Starting point is 00:14:54 Maybe this was the top. Maybe they timed it to do it right at the project Stargate announcement. But someone has to build the data centers. Yeah. It's, and I guess you can't, like, if you're training off the other models, you can't ever really, I don't think, be the leader, right? Like, DeepSeek, if they're training off OpenAI, can't ever, you know, replace OpenAI. they will be stopped but it doesn't seem like it's something they they said they're working on a way to get around it maybe there will be hackers but it's it's not something that

Starting point is 00:15:38 i i think is impossible to prevent from happening yeah well i guess this is all we can kind of wrap the segment there i don't think uh i don't think this really affects most of big tech this could potentially affect nvidia i don't think it affects most of big tech uh i think long term for consumers maybe it's a good thing to have a bunch of low-cost models i don't really know um i'm still a low-cost model ryan it's google i got a low-cost model i i i still just to use google dude i know but it wasn't that was not a low cost model that well it's i mean on an i actually don't know what their costs are but i would assume it's a low cost model when you query it no i i mean it was not low cost to build oh sure sure so i'm saying like if the cost on all

Starting point is 00:16:35 these things come down and then all the companies that build on top of these that are more like point solutions it could potentially lower costs for end consumers in some way but yeah that's kind of like or enterprise yeah yeah anyway it's also earnings week earnings season i think it's officially today i would say is like netflix always kind of gives us the feeling that earnings season is coming and then there's like this kind of week where it's just dry and boring but today it's heating back up and i guess if you're listening to this on the podcast we recorded this on wednesday so yeah meta microsoft tesla are all reporting today you have any big predictions ryan i got a feeling we're gonna see the word deep seek all over conference calls uh yeah i i

Starting point is 00:17:27 well tesla's a different story but yeah i i feel like we're gonna see less certainty on capex budgets we might go well we're thinking about 80 billion we don't know we'll see how it plays out uh yeah the conference calls are going to be uh market movers i will say that yeah the predictions here no i've got nothing i i mean no no like notable predictions i don't think any there's any company where i'm like they're gonna secretly outperform and i'm the only one that knows it uh but i do want to go kind of rapid fire through some earnings so you can just say whether or not you actually saw these and we can give some thoughts on it did you look at all at starbucks just a tad i just saw they're cutting down on the total menu items that's interesting

Starting point is 00:18:22 their food i mean well i i bet the new ceo came in and he just goes wait you're serving this food like it looks like it's garbage i mean their food is is it is terrible but what did you see uh anything anything exciting there i think it's probably too soon to see what sort of an impact uh brian nickel's gonna have um but next quarter they will officially be lapping like the negative volume so i guess for context i think transactions comp transactions declined six percent year over year uh price comparable like average ticket increased three percent basically prices grew again volumes declined which has kind of been the moral of the story for starbucks for uh the last i guess four quarters now next quarter they will be lapping the bad transactions

Starting point is 00:19:18 so if they continue then you're seeing bad transactions like like decreasing transactions on top of decreasing transactions, you need to see a real inflection upwards, I think, if you are going to have some belief that Starbucks can turn things around, I should say.

Starting point is 00:19:40 But it seems like some of the steps Brian Nickell has taken seem good. The advertising is a lot more straightforward now. Very simple. They just show like drip coffee and how it's how it's harvested all that it's good people having a good time yeah that's how all commercials work they are working to simplify the menu they've taken out like the

Starting point is 00:20:07 extra dairy charges and stuff like that i will say no homeless people in the bathroom in seattle maybe we can get that one on the agenda list they did doing uh you have to order something to be in the bathroom now that's the good news we don't want people doing fentanyl in the bathrooms i think that's going to drive volumes away if i have any sort of hot take on that yeah and actually for anyone who's who's not in a big metropolitan area that has this issue that is a very real issue in a lot of like the big cities is uh people know that starbucks has clean bathrooms and that they're free for the most part um so this will probably attract more actual customers to come in and maybe not ruin the experience for some other people.

Starting point is 00:20:54 So that was, I would say, a step in the right direction. So we'll see. I've seen on FinChat here, let me get to the overview. I've seen a PE of 30, 32. I'm still of the opinion that this is a wildly overrated business. What makes this a high-quality business? Tell me. Addictive product.

Starting point is 00:21:19 Don't get me excited. China? Well, not to today's point. I think they're pretty much mature in the US, although they say they can still expand store count quite a lot. But it is a very replicable model with good returns, I assume, on their average store, the average new store. So there's been – I think the proof is kind of in the pudding in terms of why it's an attractive concept, but – Tell me why I should buy the stock. Attractive investment, I don't think that's the case. But attractive concept, like solid unit economics, yeah. You don't get to 30,000 stores without having attractive unit economics.

Starting point is 00:22:10 Yeah. Wow. Subway may have begged to differ on that one. For a while, they might have. $5 footlong and then inflation hit and they're like, shoot, our whole concept is ruined. That is such a funny case study because even today, if I go into a Subway, I see the footlong price and any sort of value deal that they advertise, my instant thought is like, well, That's not as valuable as the $5 footlong used to be. It was so good that it honestly was counterproductive for them.

Starting point is 00:22:44 And maybe that's why like don't ever bank your franchise on like a value deal because when prices come up, people will always reference it. Anyways, okay. Yeah, Starbucks. More earnings? Not a lot to report there. Portillo's. I assume you checked out the earnings? I actually haven't.

Starting point is 00:23:03 I gotta say but I assume they're fine I think the stock jumped How about LVMH Did you take a look at that I saw that leather goods were down 1% So I'm assuming volumes are pretty bad

Starting point is 00:23:19 I'm assuming East Asia And especially China is still really bad But I figure they'll do fine It's just such a big business One thing though And it's a tiny part of their business I worry about Tiffany's because of the explosion in lab-grown diamonds. Yeah, I don't know how much of a contributor that is to the overall business, but it makes sense.

Starting point is 00:23:46 Yeah, it's small. I mean, it's really, if I remember correctly, researching the company when we did a show on them, I think a year and a half ago. It's really Louis Vuitton and Dior that drive most of the revenue. yeah okay i don't have the numbers right in front of me i can pull them up uh but let's say it trades at 20 times earnings i don't know if that's the actual let me just do it on chat here and for i will say for earning season if you want the quick numbers on pretty much everything finchette's incredible usually the segments and kpis are up in like five minutes they do a great job over there ryan knows he's really uh driving the team

Starting point is 00:24:31 No, she's not yelling at them to get those KPIs up. But yes, when we've seen some people sign up with our links, we appreciate that. We've seen those commissions come through and it's because you can get quite a bit of value, whether you're a professional or an individual with a good chunk of change in a savings account and you invest on your own.

Starting point is 00:24:48 That is finchat.io slash chitchat. Get 15% off any paid plan. All right, Ryan, what are those LVMH numbers? EV to EBIT is... like 19 times roughly priced earnings 25 times it let's let's just call it whatever 20 times slightly over 20 times earnings however you want to i assume they have a big cash balance because of the ev what uh do you think this works out from here yes but it's it's big i i don't think it does phenomenally well but if i was

Starting point is 00:25:32 for anyone listening you can probably tell from our voices that we're not that old uh we're all of us are under 30 and i think if i was someone that was 50 this would be a perfect stock i really thought it was a low risk opportunity good management yes there's the succession planning that could throw a wrench into the mix here but these are high quality brands that'll do well over the long term is it going to be a massive compounder from here i don't think so but is it going to be very hard to lose money over a 10-year period i think so if that makes sense ryan yeah that makes sense i wonder if this temporary slowdown is like all driven largely by china and it has presented just a good opportunity

Starting point is 00:26:23 yeah given the reshoring i think we're going to take that out and bring it to latin america and i think people are going to like those they like luxury products travel everywhere so i think maybe we'll see some upticks in other markets so everything is bullish for mexico yeah maybe maybe maybe we got a comment here that says that uh i guess this is regarding starbucks they said that's the authentic starbucks experience though yeah well maybe in a video but when you experience it in person um that can really ruin the brand quality when you see someone doing drugs in the bathroom and someone says any thoughts on celsius continued struggles it looks pretty cheap here um my number's a little bit lower and then i checked portillo's ryan stock was up i don't

Starting point is 00:27:11 think the earnings came through unless i didn't get that email update the like the earnings report i don't think yeah unless i'm missing it on their ir page here i do think they reported earnings the uh i will say portillo i'm not seeing a press release really but someone must upgrade the stock because it ripped this week kpis were updated uh but the so we got something to work on for the fin chat team the uh yeah no i saw i thought i saw some earnings numbers the maybe they there they did like a preliminary or something they did do preliminary at a conference yes it was just like a couple numbers that you guys probably put in there yeah that is correct i did see though If someone said Chili's, 30% comp sales, I think that's my indicator for the low to middle income consumer is in a great spot.

Starting point is 00:28:06 American Express is for my wealthy consumer indicator. Chili's, that's my middle class. Spending is still good. Consumer balance sheets are strong. Yeah. 30%? Chili's comp sales, I guess that is kind of a nice indication for the middle income consumer. Let's maybe touch on some other ones here.

Starting point is 00:28:27 ASML. Do you have any thoughts? Yeah, I got some numbers here for you too. Bookings, 7 billion euros this quarter, which is like customer orders versus only 2.6 billion last quarter. And the stock fell on that 2.6 billion euros last quarter because it was a big slowdown.

Starting point is 00:28:45 So we saw a recovery there, which is a good sign. Net income of just 7.5 billion euros in 2024, which is actually down from 2023. So the semiconductor capital equipment companies are not doing as well as the headline numbers might suggest if you're just following that AI narrative. But they are expecting a solid jump to 30 to 35 billion euros in revenue this year. I'm not sure what the valuation is at the moment, but my gut feeling says this is just a slower growth business. And yes, durable, but maybe a slower growth business than we think. Yeah. I think this is probably just one of the lumpiest businesses around. And it is – yeah. I don't think it's going to be a hyper growth type thing where you're seeing significant – it's not going to be 20% plus revenue growth, I would suspect, annually over the next 10 years.

Starting point is 00:29:45 but there's the valuation has taken a knock there is I know PE is just quoting a PE is not I don't know

Starting point is 00:30:00 it can be misleading but I'm seeing 37 yeah I kind of just don't have a hot take like on ASML the look seems very hard

Starting point is 00:30:12 to disrupt but or replace or i guess repeat i should say like it's hard to repeat the tech so it'll always be in demand there are new new orders on their lithography systems hit an all-time high this quarter but it's like these machines are huge they're very costly bookings are going to be super lumpy over time it should probably work out but it trades at a bit of a premium valuation and i don't think growth is going to be insane so it just i don't know it's kind of like lvmh for me it's big people know it's a good business i kind of just am not that interested yeah i think returns

Starting point is 00:30:59 will be fine but i i just am not attracted to stuff where i'm betting the multiple is going to continue to stay high just not the game i like to play okay we're about halfway into our power hour here. So I do want to mention one of our sponsors, Blue Chippers. There was a meeting this week and a whole bunch of people have joined from Chit Chat Stocks. So I commend you for doing that. And I appreciate you for looking at them. For anyone that doesn't know, Blue Chippers Club is a new sponsor here on Chit Chat Stocks. This was recently started by two friends of ours with the goal of building a tight-knit community of stock-focused investors inside the community. You can share, break down your portfolios, pitch stocks, receive feedback, and participate in

Starting point is 00:31:47 weekly calls. It's really just a nice place to kind of build a real network of like-minded investors. So I really do recommend checking it out. If you're interested in joining, head on over to bluechippersclub.com and hit apply. It is literally free to join. There's no charge here. So go ahead, check it out. The link will also be in the description. we should also mention our friends at public again if you are serious about investing you need to know about public.com that is where you can invest in everything stocks options bonds crypto you can even earn some of the highest yields in the industry like the six percent or higher yield you can lock in with a bond account public is a fin road registered sipc insured that

Starting point is 00:32:29 platform that takes your investments as seriously as you do fund your account in five minutes or less at public.com slash chit chat stocks and get up to ten thousand dollars when you transfer your old portfolio. That's public.com slash chitchat stocks paid for by public investing. Full disclosures in the podcast description. Just looked up the bond account, 6.7% yield as of this recording, obviously subject to change given on prices, stuff like that. And I have a topic here, Ryan, that might show that there potentially should be more interest in a product like this given where stocks are trading. Do we want to do uh the bubble watch and maybe this equity risk premium one before we hit a small cap of the week

Starting point is 00:33:13 yeah let's do bubble watch anecdotally i've heard some people uh saying they really like your bubble watch topics good had some people uh chime in say they enjoyed it so what do we have this week yeah well they're upped in on the roommate apparently there's a coin that's called brett coin so he likes that one since it's my name but don't act like you don't know anything about that yeah i i didn't uh i didn't start it but it apparently hasn't been doing too well and i guess the meme coins might be potentially hitting a peak uh but we have one here from jack raines he's a writer of what's that newsletter called but good guy that does a lot of finance and personal finance and kind of psychology topics and he had a tweet apparently the newest bachelor

Starting point is 00:34:05 which that show is going strong that thing's been lasting a long time didn't know it was still still cooking along here the newest bachelor is a quote day trader and the day the season premiered is when nvidia fell 17 he said the top might be in um and from a quote from his what is it bio from probably some vanity fair thing he says after his professional basketball career ended ellis started working as a day trader quote s&p 500 that's the only instrument i trade i studied and went all in he said in august 2024 episode of the vile files that i think encapsulates a lot of what we've been seeing out there anecdotally it's yeah my favorite thing is i did some research i studied it i read it i read the

Starting point is 00:35:04 situation went all in it's like all right you know i think it takes well maybe the returns have been good but i think it takes a little more than that i also micro the micro strategy that sort of reminded me of is when they're like we studied micro strategy i was like yeah i studied it took about five minutes to understand what they were doing and then they're like most people to understand what's going on here yeah man they don't understand yeah i think you're just taking a lot of risk yeah that that's once everyone starts day trading as a profession well maybe even as a hobby it's usually a concerning sign that leads to my equity risk premium one which is i guess a separate topic but also part of the bubble watch we'll hit after this

Starting point is 00:35:52 but i wanted to talk about this meme i don't know if you saw this but the meme account mad's capital posted a revised version of buffett's by american i am but he is after deep sea came out he said by chinese i am and he revised it as a joke uh but he got community noted and in the community note the whoever made it said this is a fake image warren buffett but spelled ryan it's a disease it's a pandemic spelled buffet in the community note i would like to community note this community note um they said it twice and they're calling them buffet so yeah i would like to request a community note on that one he uh yeah we should tell by the way matt's capital is an incredible meme account for financial memes if you like them um but the yeah you should tell them to

Starting point is 00:36:50 respond to the community notes there it's it is a it's a plague it's a disease it's an epidemic we need to i even shouted some molly fool ones i was i think i'd be maybe messaged our like internal slack and said hey guys psa let's that's two t's two t's remember that it's one thing you want to remember two t's this will be yeah the one thing the the hill you die on is buffett with two t's the all right any other bubble watch uh indicators for you yeah i know i'm all over the place but we saw something from brian armstrong ceo of coinbase founder and ceo said that he wants a revised listing process for tokens because there are and i was astonished there are 1 million new crypto tokens created every week week so a million new meme coins are getting

Starting point is 00:37:53 created every week i'm assuming getting help with ai or automated tools can we go china on this one and just kill the industry it's i'm sick of it it's such a waste of time yeah and it's just think about that like to anyone that's like no this one's different there are a million created each week it probably takes like a day to build one and launch one we're we're creating ryan coin i think we're going to launch that one soon uh yeah sure i bet it's out probably already yeah um okay let's i want to talk my small cap of the week kind of an interesting company a big change of pace here not the kind of company we not at all what we've been talking about today and then i've got some questions for you you can take a look at them uh at the top there too

Starting point is 00:38:51 bread if you want so you can be prepared but this week's small cap of the week presented by yellow brick investing is cake box let me uh let me also say i i found this write-up on yellow brick i literally just searched write-ups or stock pitches that are less than a billion dollars in market cap scrolled through a couple and found a really good sub stack uh called alex of rome Capital. I think he's a young emerging manager who runs a pretty good sub-stack. The company, Cakebox, is the leading cake shop chain in the UK with approximately 250 stores compared to just 20 to 30 stores for its closest competitors. Operating under a franchise model, Cakebox manages its network exceptionally well. This model enables the company to remain capital light,

Starting point is 00:39:43 highly profitable and scalable so the company is based in the uk as it mentioned there they have a 74 million british pound market cap for context that's like 90 million usd they plan to open 20 to 30 stores a year and their numbers actually look pretty good revenue has compounded at 25 and a half percent annually since 2016 they're pretty profitable although apparently they've been investing in internal systems uh which has kind of reduced profitability a bit but still seven million dollars in i think it's seven million pounds actually uh in operating income over the last 12 months so i think the ev that true earnings over the last 12 months is like 14 times so pretty attractive valuation uh i think this probably goes under most people's radars for

Starting point is 00:40:44 obvious reasons it's a cake store in the uk i think analysts probably just aren't focused on it um and what did you say market cap of under 100 million yeah and here's here's a quote from the yellow the write-up we found on yellow brick says the author of this blog believe or sorry He says, Cakebox is now poised to pull the operating lever, having completed its investments in central functions and entering a new growth phase. As a result, we estimate Cakebox can deliver 20% plus net profit growth over the next few years. The part I like here, 5% dividend yield currently. They have grown the dividend pretty consistently. So I do think you're potentially getting high dividend payer plus true growth, and I would assume an industry where there aren't a whole lot of big competitors.

Starting point is 00:41:39 I imagine most of the cake stores are – Not hamburgers, yeah. Yeah, mom and pop shops kind of thing. Bankeries, yeah. So for some reason, I don't invest in a whole lot of UK stocks. I don't know what deters me, but this one's actually – I find this pretty interesting. Any thoughts here? Yeah, I think they should bring it over to the United States, get those Costco – I don't want to disrespect them.

Starting point is 00:42:09 Those Costco people to do some reviews. They'd love it. This thing would work great in the US. But more seriously, I think that this is the type of concept they talk about pulling the operating lever. This is something that could have really good unit economics if you have high volumes, because I doubt you need that many employees compared to, for example, a regular restaurant like even a McDonald's or Portillo's, I guess, always comes to mind for me. and your ingredients except for maybe eggs which i think generally actually aren't that cheap but we just had that weird fluctuation recently i think generally you have pretty cheap ingredients similar to like a dominoes which could be hey you got any similarities to the cost concept or the

Starting point is 00:42:56 cost structure of a dominoes that makes a lot of sense to me um it could be interesting i'd like to see what management has to say given how small they are i think they'd probably talk to individual investors so if you're someone that's researching this just call them up i'll probably i'll probably talk to you yeah i would assume you don't need too much in the way of equipment or that much in terms of systems in those stores you need four walls some frosting and some batter and probably an oven it seems like the economics could be pretty good and if you're a baker and this is the kind of thing you like, but you don't really want to just purely have the business side. Maybe you want to partner in the process, that kind of thing. This is probably, I imagine, attracts some

Starting point is 00:43:45 franchisees pretty easily. Yeah, I don't know. Interesting. Founded on Yellowbrick. For anyone that doesn't know, one of the easiest, best places to find high quality stock pitches. They aggregate them from all over, fund letters, sub stacks, blogs, podcasts, bring them all to you in a single place. So go ahead, check them out. You can use our code FinChat. Sorry, not FinChat, Yellowbrick. Join yellowbrick.com slash chitchat to get a discount on any paid plans. The link will be in the show notes. Okay. The question to you, Brett, what is one stock that did not meet your expectations? Surprise to the downside. and what lessons did you take away from it we've got a follow-up here which is just in general

Starting point is 00:44:35 yeah like any not not like this quarter yeah in general but i mean more so business performance the business did not perform the way you were expecting and why match group and that's because I overestimated the runway for growth and I underestimated the importance of innovation at Tinder and the fact that they rested on their laurels with the original innovation in the swipe left and swipe right concept. And they didn't really change much. Yeah, we got a comment that says match from Tyler. Yeah, we're speaking on the same wavelength there. Yeah, I'd say that's one. and we talked about them ad nauseum but i think it's pretty clear why that happened it's understandable and cutting bait now maybe maybe it does well we talked bumble last week

Starting point is 00:45:32 maybe maybe match group bumble and grinder are good performers over the next five years i think that's possible but i don't like match groups management and yeah you can see why despite them growing very rapidly with hinge given the user numbers on tinder and what they finally disclosed didn't work out okay what is one stock yeah and that makes sense i think that's an underappreciated aspect of a lot of network effect businesses in general like you can't just okay great you've got a network effect let's just we don't have to innovate we can keep the platform Keep the platform as is doesn't really work. You got to really nurture that network effect, which Tinder just outright did not do. And they're still not doing it. They talk about some of these AI initiatives that are completely worthless, totally worthless. And I'm not going to get into it. But yeah, they did not. That's a perfect example of not nurturing a network effect. second question

Starting point is 00:46:43 what is one stock that surprised to the upside for you and by surprise to the upside business performed better than you expected and any lessons Philip Morris International and

Starting point is 00:46:59 that is on the new age products I guess you can lead back to the merger with Swedish Match but I thought that Zinn nicotine pouches would be a solid growth category. But the numbers, they surpassed my expectations quarter after quarter, and I had to revise what my expectations were in a good way. And we could go from this being

Starting point is 00:47:24 20, if you include Icos, like include not just the nicotine pouches, what I thought could be about 20 to 25% of their profits on a consolidated basis, we could see this become if the growth continues maybe this is the near-term top and maybe growth is going to slow down but if growth continues we could see this become half of their profits within five years yeah that one i agree with that one i guess we kind of both experienced those uh i believe you're a pm that's true yeah philip morris investor uh okay about you you have anything you came up with these questions for the downside i would say nintendo did not now things can change but i overestimated how i thought they just like basically would be out of

Starting point is 00:48:22 the cycle like no longer be cyclical whatsoever and or maybe i should say oh i underestimated how much of a pull forward in hardware demand there was from covid and the switch and you underestimated the yen and how annoying true that too um and it's not that it can't end up being a good performer from here because who knows the switch 2 could you know kind of raise the bar once again as i think you expect it to do but yeah i i overestimated i guess their ability to continue generating hardware sales the adr is over 16 ryan the path to 30 the progress bar it keeps getting higher so we'll see we'll see a lot of way a lot of ways to go and we'll see what happens this year but yes i'm still optimistic someone mentioned spotify as better than expected

Starting point is 00:49:22 i don't know if that's what you were going to choose yeah it probably would be i would say either amazon amazon got much more profitable much quicker than i was expecting but spotify i never and i actually sold them for this reason i did not think without the help of like podcasting becoming a really big business, I did not think they could get to 10% plus operating margins. And then they just decided to. Yeah. And then they literally, it seems they decided to on a whim. It just goes to show how much some of these big VC backed companies that have all the notoriety and fame coming into the public markets to begin with, how much bloat there might be and how much maybe redundancy,

Starting point is 00:50:17 how much bureaucracy there might be to some degree. And just really just probably too much people because frankly, the margin expansion was pretty much tied at the hip with the headcount retraction. So yeah. And the business's growth didn't change. It didn't even affect R&D that much. Yeah. So I think the lesson we can take, Ryan, is that if part of your thesis is operating margin expansion or just profit margin expansion, and you have some good conviction that can happen, it seems like the market can underrate that time and time again.

Starting point is 00:50:59 yeah i'd say my lesson there is if you have a platform that's like truly valuable to a lot of people and revenue is growing like if you have a best-in-class product that's sticky and the top line looks good you can figure out the bottom line like most of those companies can it might take them a while to figure it out, but eventually the pressure will get put on them and they'll do it. And we saw that with Salesforce. We saw that with Spotify. Saw that with even meta to some degree, Amazon a little bit. Basically when the stock starts performing poorly, the pressure to get profitable comes quick and that people can change sort of their philosophy and ideals and how much they're looking to invest in growth, quote unquote, which is oftentimes more headcount

Starting point is 00:51:58 than they need in sort of empire building, they can change that pretty quick. So that was probably my takeaway. We've got a little bit of time left here. Do you want to go through American Express earnings? Sure. Yeah. My barometer for the health of the, I guess, upper end of the economy, 9% revenue growth year over year and acceleration to 8% billings growth, which is essentially just card volume. Net write-off rates on their loans for credit cards are still below pandemic levels, so no hurting there. Fee growth on their credit cards growing 18% year over year, probably the most attractive part of their business right now. And as a little tease, It's been, I think, four years now since they upgraded the platinum card fee, and they'll probably be doing that in 2025, so that could be another step change in growth there.

Starting point is 00:52:53 A great company. It's done really well over the past year and a half. It seems to me, Ryan, that the United States economy keeps doing well. I saw this from Bill, who is an anonymous account on X slash Twitter at Wabuffo, says the Atlanta Fed GDP, their estimate for Q4 2024 has now been revised up to 3.2% growth. And we've seen an acceleration. The previous one, like at the end of 2024, was two and a half percent. seems like things are going fine do you remember when two years ago executives were all over talking like a recession was guaranteed

Starting point is 00:53:42 yes crazy yeah it seemed like it i guess but that was at the point when like you had already been baked into prices um yeah and people thought inflation would kind of go on forever that it was just the beginning now there was still some weakness at the lower end of consumers over the last couple years yeah ally discover they're doing fine but they're not doing terribly it's a middle of the pack the average fee per card for american express that is a beautiful chart it's basically doubled over the last five years people are paying let's make sure i'm getting this figure right they are paying now 108 dollars per quarter on average to have an american express card and they're adding about three million new card members per quarter yeah

Starting point is 00:54:49 not bad not a bad business especially when you consider i think they've doubled their international acceptance over the last three years and they still have plenty of room to grow there if they can figure that part out the moat can expand quite a bit there's a reason it's buffett still hasn't sold at berkshire and there's a reason it's probably if he sells more of apple which i think probably will given the fact that usually when buffett sells he sells the whole thing uh this is going to be i think his large longest term holding besides coca-cola or maybe even longer and it'll be his largest position and it's been a hundred bagger for him since his initial purchase uh including if you do it on a total shareholder return basis

Starting point is 00:55:36 the uh couple other companies that reported earnings adp i know no one cares about this but i did not realize adp still grows revenues in the high single digit percentages every year. When I hear ADP without even having looked at the business at all, I just think like archaic technology. Yeah. Well, it's a thousand bagger. No, a hundred bagger. Yeah. So still growing revenues, high single digits. They were founded, I did not realize this, in 1949. Now, back then it was probably just like payroll services, but now it's more software this space is probably one of the most competitive spaces within software generally hr payroll software so this that's got to be a testament to the adp switching costs

Starting point is 00:56:34 because there's no way that they are like the easiest to use yeah i think it's a testament to the industry quality yeah the other one i wanted to mention nasdaq which people whenever people hear nasdaq they tend to think of like the indices the company they reported 66 new ipos this quarter more than double last year are we officially is the ipo market officially back well i guess it bought them but it's not back we had a thousand right in 2020 and 2021 i think if you kind of do back half of 2020 first half of 2021 so no it's not back yet okay all right last thing i wanted to do too i forgot to put this down but i had an anecdotal evidence from this week i went to costco and it's not in texas for anyone that doesn't know ryan's in austin now i know you

Starting point is 00:57:38 had some people contact you but anyway i didn't listen last week uh finch whip people or listeners hit him up he's looking for some investing friends down there i am the thing i noticed celsius was you know they're kind of displayed back in that energy drink area but right next to him alani new and this basically kind of the same sort of presentation zoa right next to him as well that to me is sort of the concern if if you dominate the convenience stores as an energy drink you're probably going to be a wonderful business like it's going to be you're going to be just fine i think monster is a great example of that but i think costco Costco really helps raise awareness for some of these upstart type energy drink brands, and you're seeing it in some of the market share data.

Starting point is 00:58:38 Now, that doesn't mean it's very profitable for those companies, but if they hear about them in Costco, they try a lot of new, whatever, maybe it's slightly lower cost than Celsius. It's right next to it. Is there some – I guess I just have some concerns about the competitive positioning of Celsius long term. yeah i can see some of that i understand some of that but convenience stores i mean what there was uh what are the older energy drinks rockstar was it c40 uh what are some of the other those were next to monsters at convenience stores i think what's important and it's unclear to me whether they're going to do it or not is if celsius can become the go-to modern um Gatorade or Powerade maybe there's room for both two winners there where

Starting point is 00:59:31 you have this association with health and fitness and athletics I think that's what they have to do because Gatorade and Powerade were very replicable but they had that branding quality the advertising quality and we'll see if Celsius can do that I think they're doing some good things with that signing up athletes, things like that. But yeah, given that risk, given the competitive set in sugar-free energy drinks, I think you want a discount for Celsius when you buy. I typed in the chat here to someone asking a question about that. My number is $23 is where I'm kind of going to compare it to some existing holdings. I think that's fairly cheap. So we're pretty close. Like we've talked before how we're getting closer, we're getting closer. I'd say I'm pretty close

Starting point is 01:00:18 to be in my buy number because I think the upside, if you're right about this one, you got a long runway to grow. Yeah. And I actually am looking at the numbers now. This is not something that's reported every quarter, but Costco only accounts for 15% of Celsius's revenue. I would have expected that. Amazon might be higher. Yeah. Let me check. By the way, they have these numbers on Finch app, so shout out. The Amazon accounts for 10% as of the latest quarter. Everything's changed. I mean, Pepsi accounts for 47% just because they're the distribution partner now.

Starting point is 01:01:02 It could work. That's better than I expected. I want to hit this risk premium one before we get out of here, Ryan. And there's some interesting quotes here that I think are classic indicators that, not that the top is in now, anytime soon, but that people should be careful and that when everyone's chasing these things, it is best to stay conservative. We had someone typing in here today that the tobacco basket is doing well. Yes, conservative. It's time to be conservative, I think, from an investing perspective. And it was an article from the Wall Street Journal this week and how this is the first

Starting point is 01:01:37 time since the dot-com bubble that the extra reward for owning stocks over bonds has disappeared. So the earnings yield, which is the inverse of the PE, is lower than the yield you can get on, I think they probably use the 10-year treasury. And they had some quotes from this article. I'm going to say the person's name because they allowed themselves to be in the Wall Street Journal. So it's not like we're outing anyone here. And here's the quote.

Starting point is 01:01:59 I think you get what you pay for, said Mike Ugino, a 73-year-old retired surgeon in Columbia, South Carolina. High valuations have deterred him from scooping up more shares of Robinhood, Nvidia, and Intuitive Surgical in recent weeks. Despite his age, Ugino keeps more than 80% of his portfolio in equities and said he believes tech stocks, including Tesla and Meta, can keep powering double-digit percentage gains in major stock market indexes in 2025. Another one here Despite being a former bond trader, Robin Davis Wilson keeps the entirety of her $1.7 million portfolio in the stock market. Big tech stocks comprise about 60% of her investments. That's almost an anomaly for someone my age to be that aggressive. I'm a big believer in these stocks.

Starting point is 01:02:47 I think there's people that just think these companies are can't lose. That's dangerous. I don't understand someone with a big portfolio saying – how – is your quality of life going to improve if you're 75 years old and you have a bunch of these things? Like if you kind of get what I'm saying? Hey, I will say to this 73-year-old, I don't necessarily want to stop investing in businesses I think have long-term potential just because I'm getting old. So now, there is some degree of portfolio management. Make sure you have enough cash to live on in case things do go poorly. But yeah, look, the other part is, look, they own these equities outright. But this guy does, and it sounds like the other – what's her name?

Starting point is 01:03:40 Robin Wilson does as well. I guess it's better than index funds. Is that what you're about to say? Would it be any different? Would it really be a whole lot different than just owning the index, which probably the majority of retirees – I assume that accounts for the majority of their retirements. I think for me, I think indexes are worse. Maybe not Tesla. I think that's high risk and an extreme valuation.

Starting point is 01:04:05 But – I can lock in 10-year treasuries as a 75-year-old at 4.5%. Maybe, I know it kind of changed wildly this week, or I can buy into the S&P at a 31 times P.E., and we're betting, essentially, that a recession won't occur over the next decade. Like, is that the bet you really want to make? No, obviously. I just don't get it.

Starting point is 01:04:34 I think there are better returns elsewhere, but I don't knock them for keeping kind of the long-term mindset just because they get old. I think it's boring intellectually to just say, okay, I'm 60. Here come the bonds. Like, just so boring. Well, if that's what you want, yeah. But I think I could do that with a small part of my portfolio, and you can still have the intellectual pursuit and the competition with yourself or whoever. I'm going to beat the market or beat this benchmark, whatever my benchmark is. You still have your life to live.

Starting point is 01:05:13 True. Maybe that's a whole another conversation. All right. We're going long. I'll hit the disclosure for us. Thank you for everyone who listened. We do these live every Wednesday, 1.30 p.m. Eastern time. you can join on the chit chat stocks podcast youtube page you can listen to the replay on

Starting point is 01:05:32 youtube spotify apple podcast wherever you get your podcast and give us a review on apple or spotify best way to help grow the show preferably five stars we've seen some people do that thank you to all our sponsors finch at blue chippers yellow brick investing and public as a reminder we are not financial advisors anything we say on this show is not formal advice or recommendation Ryan, I, or any podcast guests may hold securities discussed in this podcast, may have held them in the past, and may buy, sell, or hold them in the future. Thank you, everyone, for tuning in, and we'll see you next week.

Chit Chat Stocks - Q4 Earnings Talk (ASML, AXP, LVMH); Bonds Are Cheaper Than Stocks; Learning From Our Best and Worst Investments

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.