Chit Chat Stocks - Spotify & The Audio Opportunity - Sleepwell Capital

Episode Date: June 22, 2021

We are joined this week by Sleepwell Capital. We discuss Uhaul, Spotify, and the audio market as a whole. Listen in after the interview to hear about crypto, a new eye-catching direct listing, and Lordstown Motors. Let's go! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Sleepwell Capital on Twitter: https://twitter.com/SleepwellCap?s=20 Discover Sleepwell Capital's substack: https://sleepwell.substack.com/ Subscribe to our YouTube channel: https://www.youtube.com/c/ChitChatMoney Follow us on Twitter: https://twitter.com/chitchatmoney Visit our website to see more from your hosts Ryan and Brett: https://www.chitchatmoney.com Email us: [e-mail] Timestamps Interview | (3:14) Interview Continued | (47:53) Show Notes | (1:06:01) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. Today is Tuesday, June 22nd. Today we have an interview with Sleepwell Capital. He's our friend from Twitter. That's kind of how we met. He talks a lot about Spotify and we're going to dig into audio, basically the whole audio industry. He's really sort of an expert on Spotify as well. And U-Haul, which is another company he's covered. You can check out his sub stack. We'll probably link it in the show notes. But post interview, what are we talking about? Yeah. So we're going to be talking about, I see you got a fun crypto one. I'll let you maybe explain that. But I got the wise direct listing coming in London. That should be a fun topic. Huge fintech company going public. And then what else do I have? A list of a thousand beggars of the last four decades. Going to discuss that. And then some of those passive income takes on Twitter, the people that are going to take 50 bucks a month instead of a million dollars. We might discuss some of the merits and not of that. So should be fun. All right. And then I'll be talking about Titan, which there was sort of a big crash this week. It's kind of been all over the news and a big name was invested. So that'll be kind of interesting. And then the Lordstown Motors Mirage continued. There's been some fallout over the EV SPAC with the CEO stepping down. So I'll talk about that. And there's some kind of unique anecdotal evidence. I've been on vacation in Cabo, so I've got some anecdotals there.

Just like with the real estate agents from the big short, right? Yes, basically. But before we get to our interview with Sleepwell, you want to give our sales pitch for 7investing. Yes, we can. You are going to be listening to this on June 22nd. So that is right before the new month is going to drop. We're kind of almost a week out and there's going to be seven new picks. These are highly researched.

you know you get a full researched piece with it and you get a video call and you get continuous updates on these research picks so it's seven stock picks from seven different advisors across a variety of different industries and if you want to check it out uh you can use our code ccm and get ten dollars off your first month not much else to say it's a great service there's no reason not to there's no way you could go on to this and not find a new stock for your portfolio Yeah. There's so much brighter. You can look back over the last – this is $7 to look back over the entire last, what, year and two months if you're just now starting.

Plus, it's worth staying with them because they give all those updates. So whatever style you have, you'll find something for you. Yeah, certainly. All right. Without further ado, here's our interview. 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. Okay. Today we are welcomed by Sleepwell Capital. He is a friend from Twitter. We bonded over Spotify and I think we are all shareholders here. So that's kind of how we got to know each other.

And then we've been DMing frequently since then. So kind of for starters, how did you get on Twitter and then why the name Sleepwell? Yeah, sure. Thanks for having me guys. And good to get those disclaimers out of the way in an not, not sound, you know, way too bullish on the, on the name, but, um, but yeah, so I've actually been using Twitter for, for a pretty long time on the personal side. I think it's back in 2009, I got in it and I had a bunch of friends in there and just kind of on and off since then I had been using it. Um, I think maybe four years ago or so I kind of stumbled upon FinTwit as I, you know, became more and more interested in, in investing. You know, I'd never really used it as a, you know,

as, as someone who was putting out content from, from my personal account. And, but it was enjoying a lot of the content that was, that was out there. Eventually I realized I, you know, I had sort of the potential to, to put out content that people were, were interested in after kind of testing it out a little bit, but realized I didn't really have the right audience. And obviously, after, you know, seeing the popularity of certain anonymous accounts, I remember Bluegrass Capital was a big one back then. I just basically replicated that strategy and made my own account. The way that I came about Sleepwell is, I think it was, you know, just reading a lot about as much as you could about Buffett back, back when you're trying to learn as much as you can about

investing. And obviously most people kind of stumble upon it through him. There was a quote from him back in the eighties where, where he was talking about Gillette and he said that he would sleep well at night because he knew that billions of men would grow a beard overnight and sort of wake up to shave. Right. So that kind of struck a chord with me. And, and I don't know, as I kind of started developing my own investment style it became something that i kept coming back with you know coming back to and eventually i just decided to choose it as my as my anonymous account name yeah it seems it's the anonymous twitter account it seems like a unique existence but there are some advantages you can really just you know speak your mind yeah exactly it's it's kind of

bought. And I mean, when I started and I really only started in January, I remember I was kind of testing it out because you never know who you're really talking to. And it's weird when you don't have that many followers in the beginning. And I remember Value Terminal, who's a friend on Twitter as well. I think she tweeted out something like, if you have less than a thousand followers, tell us something about yourself and we'll give you a hand. And I, that was like my first bump. I put something in there and I got like 200 followers in a couple of days and I was impressed by that. And, you know, you kind of, yeah, you just kind of go and, and, and, and I think finding your voice is really important, but it does have its

advantages to kind of just forget that the fact that people don't know who you are, how old you are, what your background is. It's very meritocratic in that sense. Right. Right. Yeah. That makes sense all right and back to your investing style so how would you describe it like are you you know value growth or just whatever and then how do you manage your personal portfolio yeah so i think the best way to describe my style is first it's two parts it's it's first it's it's always evolving right because i guess i've been investing more seriously for for the last kind of eight years but it's it's always it's always changing especially when you're when you're getting started, you got to find what works best. I think right now I call myself kind of long-term

concentrated quality. That's what I've been migrating to kind of more recently. I started out in the traditional kind of value investing camp and trying to buy companies at six times earnings, hoping that they get up to nine or 10 times earnings and then selling them. But pretty quickly realize that those companies tend to be lower quality and and they can they can stay at those multiples for really long times or or even you know or even go down because because the earnings are are going down so you're you you they just naturally get more expensive as you as you hold them and it's just you have a lot of headwinds going against you and you know sort of that way i i came about more higher quality companies and and learning about you know

obviously Buffett's transition into more quality, but then more recent investors that have focused a lot on not only that, but holding companies through the very long-term, right? And for me, I guess long-term is really five to 10 years because everyone kind of has their own definition. But yeah, I mean, another part of my life that I think influenced a lot of my investment style was I spent a few years working in fixed income. So, you know, working in credit helps you think about companies in a different way because you always get to them and you start off with the question of kind of what can go wrong here, right? Because your upside is you get paid and you get, you know, you get paid back your principal plus your interest, but your downside

is the company stops paying you and you probably lose 70%, right? Depending on what the recovery is. But it's really just a very useful additional tool for equities investors to be able to understand the other side of the balance sheet. And I know if you look at my portfolio, you'll see some names that maybe you don't traditionally associate with high quality, but I became pretty comfortable with them after having looked at their bonds, for example. So as soon as I became comfortable with the liability side and these were trading at pretty low multiples and I thought the earnings would grow, I thought it made sense to buy the equity. Yeah, it's interesting. It's kind of like, I feel like most individual investors kind of overlook the fixed income side, but it

seems like it could tell you a lot about a business and sort of a quality of it. Yeah. What about, do you want to talk audio? Yeah, do we want to get into it now? I think that's what everyone's waiting for. I'll kick it off with the first question. It's going to be on, we're going to hit Spotify, but we're going to really hit live audio in general, kind of look at those dynamics because that's a really fast growing industry right now.

And then we're going to talk a little bit about UMG, the label that is getting spun off and going public. But first question, what's the live audio opportunity for Spotify? And then how are they positioned versus other competitors like Clubhouse and Twitter? And I guess Facebook's getting into the game as well. Yeah. And I mean, my sense is we're going to keep seeing more and more of the big tech people, you know, trying to get a piece of that.

I think first, it's important to, you know, kind of set the ground straight on a couple of things. Live audio is a huge opportunity, right? And there's also the fact that it's really a completely new market, right? There's no comparison to it besides looking at radio, which I like to think of radio as kind of the last domino to fall from the legacy media that hasn't really been struck as much from the internet, right? There's literally billions of people that still listen to radio every day.

And I think with some of the, you know, kind of recent trends that we've seen in the last couple of months, including Clubhouse as really one of the major drivers, because that's kind of when really people started waking up to it. I think it's going to be, again, it's going to be an evolving market where monetization is not as clear yet, but my sense is it's probably much bigger than people think. And that probably means there's also a decent amount of share for some of these companies to take. It's not necessarily going to be a winner-take-all market in my sense because there's, I mean, think about all the different formats and content and sort of categories that there are out there. I like to give the example of Twitter Spaces a lot because, you know, especially us that spend a lot of time on it, we're sometimes, I think, a little biased to Spaces because it works so perfectly well for FinTwit, right? like it's a very engaged audience that's super interested in learning and and you have you know so many experts that it i mean it's just so easy whenever one of them starts talking about a subject it's it's it's just really easy to drive the audience that you already have over

there right but that's that's just one niche right so i mean if we if we turn to to spotify they they bought locker room right three months ago which was a very sports oriented kind of Clubhouse competitor. This last week, they rebranded it and relaunched it as a Spotify green room. Now, Spotify has a couple of things going for them in live audio, right? I think first, the user base is massive, right? It's over 350 million monthly actives. um on the and it's a highly engaged um user base as well right so that's that's important but i think you have to also think about about the supply side because where is the content going to come from i mean spotify already has very strong and existing relationships with

basically every artist in the world right every artist in in the world really counts for spotify as their main um or at least not main but one of their biggest sources of streaming income right so You have that as a very natural fit for, call it live online concerts or a listening party or a Q&A with your favorite artists. So that's a very big advantage, in my opinion. But then if you think about the podcasting side, you not only have, I mean, existing podcasters like yourselves, where if you already have a big audience in Spotify, it's only going to be natural to sort of go there to engage even more with them.

But you also have exclusives, right? So, I mean, Joe Rogan, you know, hosting a Q&A on Green Room and selling tickets for it. I mean, there's a lot of things you can sort of experiment with. And this exclusive roster has only just kept growing, right? I think the bigger challenge for this industry that a lot of people have talked about is the discovery aspect, right? Because the problem with live audio is that, well, obviously, I mean, most of the time it's not recorded, right? So you can only listen to what's happening at the right exact moment, and it has to match your interest, right? So Spotify is at a great advantage in that sense because of that supply and demand dynamic that I talked about,

But also because of their focus on using data to really drive that discovery, which they've been arguably been able to do pretty successfully on the music side, right? I think there's no, people would probably agree on that side. So I think that's what they're going to try to do both in live and in podcasting. Right now, Greenroom is its own app, right? Yeah, that's correct. It's basically Locker Room rebranded. Like it's it's not like let's be clear, it's it has a lot of improvements to to to go. It's not a good app right now, but knowing how fast Spotify has has innovated their products over over the years and sort of management tracks record there, I would expect a lot of changes coming in the next, you know, in the next couple of months.

I mean, we saw it with we've seen it with podcasting. Right. And I think that's another important point to make that that that is a challenge for for other companies, especially when when I see, you know, companies like Facebook trying to get into into audio consumer habits are super hard to change. Right. We all we all know that. And I think one advantage that that Spotify has going for them is that everyone who uses Spotify thinks of Spotify as an audio app. Right. Like you don't have to really change their habits for for people that are listening to music to to change over to to podcasts. It was I mean, there was some some some habit changing that took place there, of course, but it wasn't as much as you would, you know, telling people to listen to audio in Instagram or Facebook where the where the use case is very different. And I think it speaks a lot to this fact that they were able to basically become the number one podcast player in a matter of three years, right? So I don't see why something similar doesn't play to their advantage in the live audio space, right? Yeah. And then two other things I have, I think Spotify has for their advantage is they own a ton of studios, right?

So you could have Bill Simmons going on weekly or I don't know what the cadence would be. He go on Spotify green room. You got the Gimlet people. I forget all the other ones that they own. Yeah. It's podcast Gimlet. It's, it's a lot. Yeah, you're right. I mean, they, they're definitely, they're definitely gonna, gonna leverage that. I think another kind of interesting question is, is cause Ryan, you were, you were talking about that. The fact that it's a separate app,

like I'm not sure if it's going to make sense to integrate that fully into, into Spotify eventually. I think it's also going to be sort of a testing phase to see if it makes sense to keep it separate or not. I think there's a point where you're putting way too much stuff in a, in a, in an app and maybe it's, it's detrimental to the, to the engagement. But again, I sort of leave that to, to, to management, right. And that's where you sort of have to trust them in their execution. That is, I mean, we, we talked about this just before the show is there's so much going on now with i guess you could call it optionality that it's like does that make the platform messy uh or difficult to navigate from the consumer side yeah what i mean what do you

think there in terms of sorry optionality in the app or or how yeah i mean you can add in so you could add in live audio you could do podcast discovery which we're going to briefly talk about here with the new pods integration potentially uh audio books too audio books all that stuff do you think there's any point when it's like all right that's too much for those or for a user yeah i mean it it definitely it definitely could could get to that and that's kind of the point i was i was trying to make with with you know maybe it makes sense to keep to keep live as a as a separate app because there's a point where you're you know kind of putting way too many features in one specific app that you know they sort of lose value for

for the customers and get and get lost and you know it's it's uh it's definitely a it's definitely a risk and something to to to consider yeah and i think with even with podcasts i know that it's great to have the interoperability but if they allow people to have the option of maybe doing spotify music only spotify podcast only or you can have it together if you want a lot of people would enjoy that because there's some people that just do music they don't want that podcast stuff crown at their feet i don't know if that's goes against like their um the benefits of that but we'll see yeah yeah that's an interesting one as well and i've definitely seen you know kind of segregated cases of people that that have criticized that that the combination but

so far from the data we've seen it it makes sense to have them to have them together for now and i and i do know kind of management thinks they want users to wake up and just like press play and just use spotify as their only audio app for the entire day and and just kind of pause along the way but come back you know so yeah um yeah it'll be it'll be interesting there's definitely a lot more more to come and we're still in the in the very early stages of this what do you think of the new pods acquisition i think that's closed or i don't know if it's even closed uh but they announced it last week um i and i guess then bigger question what do you think of the podcast related acquisitions that they've made in the past so far just generally yeah so i think it's very it's very

interesting and and it's definitely the the kinds of of acquisitions that that i want to see and that have historically worked for a company like like spotify because essentially what they're what they're buying here is supposed to be one of the best podcast discovery tools right and and And it's interesting because Paki actually wrote a pretty good piece about this, I think it was like six months ago or something. And he suggested that pods should partner with Spotify on this. So it's pretty funny that they ended up buying him. I mean, he talks about the power of this pods platform as being able to sort of using machine

learning pick and choose the best 30 second or yeah or one minute clips of any specific podcast and apparently it's really impressive what what they're able to to do so as if they can leverage this in in some way to to you know to help their podcast discovery and and you know another another kind of problem with podcasts that some people talk about is is that they they never go viral like you usually just see them on twitter or have a friend send it to you but you've never really seen a podcast go go viral i mean the only thing that comes to mind is elon musk smoking weed and in joe rogan but that was really like a visual kind of video right almost like a tiktok thing but um i i so i think that makes a lot of sense you know that it's interesting because spotify used

to make a lot of acquisitions on the on on the sort of algorithmic music discovery um space And one of the companies they bought was called The Echonest, which eventually put in sort of the foundation for Discover Weekly. And that's really when personalized music took off because people were just amazed at the quality of the songs that were being picked. and it wasn't just songs it wasn't actually songs you you knew it was it was songs that you probably had never heard before which made it all that more impressive right so i like to think of of this acquisition as as you know a signal that they're trying to do something similar with with podcasting and if if they are able to take up a big step forward on on that side as we as we've as we've talked about it's it's going to be huge right i think actually discovery is one of the main you know in music is is one of their main sort of competitive advantages that i think is pretty

misunderstood we can we can talk a little bit about that later but just you know continuing on with with the the other topic that that that you guys all asked about specific to their to their podcast acquisitions acquisitions you know that's probably the the most similar aspect that spotify has has to netflix right now um you know they i it's it's interesting because when you i think it's very instructive to actually study netflix when when you know just learning about business in in general but also when thinking about about spotify and i and i don't like to think of them as as equals but it's it's still you can you can definitely see a lot of of similarities along the way right because they started out you know renting out dvds they

basically saw the writing on the wall and say and said all videos are gonna and movies and tv shows are gonna go to the internet like we have to do something about this so they transitioned to streaming and then after after going through that transition they realized they needed to own their own content so it's it's kind of similar to to what spotify has has gone through right because they started out in in music um actually had a you know had a couple of setbacks along the way when when you know when the consumer was transitioning from the desktop to to the mobile phone um and they were they were able to survive that but then they kind of realized you know this market is is much bigger and, and, and we can, you know, music is, is, is definitely a tough business, um, to,

to be in at least at that, at that specific time with, with lower gross margins. So they decided to go after all of audio, which meant podcasting. And, and now they're basically following that Netflix playbook by, by buying all these, all these exclusives and licensing all these, all these different, you know, big names that we've, that we've all heard about. Are all of them going to work out? Probably not. But I mean, again, it speaks to their scale advantage because they can afford to pay more while at the same time pay less, right? And Ben Thompson has talked a lot about this over the years when analyzing Netflix. And I mean, I ran some quick numbers last week with Call Her Daddy, right? They're paying $20 million a year, basically means

you need to monetize 1.7 million users at $1 per month, right? Now, she has anywhere from three to four monthly listeners, three to four million, right? She has almost 2 million followers in Instagram and Spotify has, you know, 355 monthly active users. So it's not a stretch to think that you can that you can surpass those numbers and that doesn't even incorporate you know things like we were talking about live like what if she does a show um a special show in live and sells tickets to it well what if she sells subscriptions um she's obviously she's i'm pretty sure she's going to do some sort of advertising in partnership with spotify who's going to have um you know who's going to have the best probably um advertising technology and and the targeting

the targeting tools to to be able to monetize that better so you know it's it's going to take some time to to see the impact in in terms of the benefits to the to the business but um i think it's it's working out i mean if you look at the top five podcasts right now on spotify three of them are owned by spotify or exclusive to that right right and internally here we discuss you know all right, all these acquisitions seem smart. Things seem to be moving in the right direction. But does the ad network, is that really the crucial point? They have to get that right in order to make this, you know, all these acquisitions make sense from a financial standpoint. I think advertising is a very big part of the opportunity.

me um one you know the big problem with with advertising in in podcasting is that it's it's so it's so hard to track and it's it's so hard to sort of dynamically insert targeted ads as i'm sure you you guys you guys know and and this goes back to just kind of the the really old technology that podcasts is is based off right that the rails are all rss and all that rss will will tell you and an apple podcast is is built on this for example all they will tell you is is how many downloads you get right you don't get any sort of additional um statistics in in terms of of listenership and and and kind of yeah like if they skipped over the ads or if they even listen to the to the episode so i that's um that's a very big reason why why spotify decided to not go with the

with the rss technology and and just use their own their own streaming technology and and now they can they can track you know all these statistics much much better the next step as as you mentioned is is kind of going after the the the advertising by aggregating all the all the content and and and that's both on the on the podcasting side as well as the the ad inventory from whatever brands would would want to would want to advertise there and if it the the real opportunity is that it if it's if it's really solved and becomes, you know, a much more effective advertising means it's going to monetize at a much higher rate. Right. Um, I think advertising monetizes that. I think globally it's, it's probably around 30 to 40 cents per, per user per month.

And yeah, just to interject, we, we talk with, we work with Megaphone and they mentioned that on average right now, and to be clear to the listeners, Megaphone is owned by Spotify. their average cpm is 26 dollars so 26 cents yeah yeah exactly so okay so that's and i think in the u.s it's a little bit higher but right but you know if you look at i think pandora is around 160 and they've actually used uh uh dynamic sort of ad insertion for for a little while now so that's kind of an instructive uh comparison um but yeah i mean if they're able to you know it's not only about exclusives, because obviously, exclusives are a big part of, you know, engaging your existing audience and bringing in new users, etc. But if they're able to, you know, aggregate

all these content creators and have them spend more time on the platform because it monetizes at a higher rate. And I mean, you guys are a pretty good example. I'd love to get your take on it as well, but it's, it could be such a, such a large market. And I mean, radio is, is I think 35 billion globally, but you know, I, I, I'd say take that with a grain of salt when you're comparing the podcasting opportunity versus radio, because look at what happened if you, if you compared Google to, to the newspaper total addressable market, like you were off by, by magnitudes. Right. And that's what happens when, you know, your, your audience is much more global and you can probably monetize much more effectively, right? So how do you guys think

about that? I'd love to hear your thoughts given you guys are on the other side. Yeah, Ryan, you want to go first? Yeah. Yeah. I mean, the efficacy thing, like it's huge. And not only, I mean, Spotify kind of has the advantage because they have so much listener data and we don't always know what ads are run on our shows because it's specific to the listener. But yeah, I mean, just from not only as a host, but as a listener, I always find podcast ads when they can put like their own personal touch on it more effective. I think like the one I think of is the barstool cash app relationship. It just worked. I'm not sure. And maybe it's hard to track what goes on behind the scenes because maybe you don't click a link or something like that. But yeah, it feels

far more effective than a radio ad. Yeah. And then to add on to that from a show, we want people to listen on spotify because the ads work better than there or at least that's a little bit anecdotal but that's what we'd assume and then from the analytics standpoint if you use the spotify for podcasters i think that's what their analytics school uh that we use is called you can see how many people stream it or start a stream and you can see how many people listen to more than a minute and then you can see how many people are falling off at certain points so we've seen like for certain things okay we want to move something you know oh we lost 20 of our listeners at this segment okay this segment's not doing very well it really helps us out in crafting the show and

they're a lot more helpful than apple which is just honestly hurtful where they change their update and you lose like 10 of your listeners overnight or something like that you get no analytics it's a whole black box yeah to any to any listeners listening right now please stop skipping through those ads halfway through oh and then one thing on the dip at apple that a lot of the apple listens and we've talked about this with francisco who is you know in the very knowledgeable about spotify as well i we believe a lot of and i think a lot of people know this a lot of the apple downloads are not listens because we get a ton on apple the automatic that automatic right we drop the show at 1 a.m. Eastern time

and we get a ton of downloads right then, but that doesn't make any sense. You have no idea who's actually listening. Yeah, exactly. Yeah. Well, let's pivot to Universal a little bit because that's something we want to get your takes on. So I guess the deal, I believe, just closed.

So what are your thoughts on the valuation of the deal? What do you think of UMG? We don't have to go through the 10 different steps of the version square you know the most complicated deal of all time oh no yeah absolutely not and just to just to be clear i've been you know i've been looking at it you know very pretty much like like on a high level like i haven't i haven't you know done a deep dive or anything but you know broad strokes i'd say it's valuation looks looks interesting to me and and And one thing to kind of get out of the way is that I'm very bullish on the music industry as a whole in terms of, you know, sort of the revenue pie growing a lot and monetization getting better.

And kind of, you know, if you look at music and compare it to other media like video games and TV and movies, the difference is incredible. I think it's something to the order of four to five times smaller, right? So my sense is that's going to close over time, not completely, but just close the gap, right? So in terms of UMG specifically, the biggest growth driver is streaming, right? And really their transition to digital. It's about two thirds of their revenues right now, with the remaining one third being basically, you know, physical sales and things like merchandising. And it's pretty, you know, realistic to see a scenario where the revenue grows at 10% plus over the next five years. And the margins go from, I think they were just below 18% last year and probably going to surpass, you know, 22, 23 in the next five years or so.

So if you kind of play around with those numbers, and that's usually how I try to think about valuation. I prefer to use easy math and just, you know, make the assumptions easy. um i mean i could see i guess i could see this returning you know like a 14 15 percent irr over the next five years which is basically a double from here um and you know yeah they paid i think it's it's 23 times ebit um next year's ebit or something like that but again just thinking where the company could be in the next in the next five years which is usually how i try to think about about how to value a company because and it just goes back to to my long-term thinking and it's um it looks like a it looks like a pretty decent bet i mean they have a lot of things going

for them yeah how do you think about their relationship with the streaming providers so like uh i mean spotify and umg do you think there's any scenario where spotify has so much leverage that it starts to hurt universal yeah i think at least in in the next you know in the medium term call it i i don't think that's that that's gonna that's that's gonna hurt them too much or or or even happen right like spotify making a um a very big move in terms of you know magnitude of you know like starting to sign all these superstars or anything the label business is is a very is a very complex business and there's a reason why the the top i mean the top 10 artists are signed with a label, right? It's not only because they provide the money. It's a

very complex kind of marketing and logistics and sort of networking kind of business, right? But going back to that question, I think this is a supplier-customer relationship, right? And I like to think of it as very symbiotic, right? It's going to be profitable for both. Obviously, these negotiations that that take place every every two to three years are you know they're pretty complex but you know universal and and all the labels are as profitable as they've ever been and and in large part it's it's thanks to spotify and and spotify hasn't really captured the value or achieved the margins that arguably it deserves given the value that it has you know added to the to the industry and the whole ecosystem so um i think they'll they're going to get creative in

finding ways to, you know, to make it profitable for both without, you know, necessarily hurting each other. And there's many things they can do for, you know, to accomplish this. We've already seen the announcement of the two-sided marketplace, which basically means that, you know, Universal is going to be spending some marketing dollars on Spotify's platform. So that basically brings you know 85 margin revenue to spotify's you know pnl um while at the same time you know it's just moving around the marketing budget in universal it's probably going to take some time because again these labels are very big and old corporations and they're they're they're not known to kind of, you know, use a new technology and sort of in a broad way, right?

They sort of have to get used to it first. But yeah, the other part that I think they can play around with is the price increases, right? They've both talked about it. Spotify has started announcing price increases in actually a couple of markets. And, you know, it's a very interesting way to kind of effectively increase Spotify's margins without optically seeming like they're paying less to the labels. Because if you think about, you know, they pay around two thirds of their revenues out to rights holders, right? It's not all to the labels, but it's to the rights holders.

And if they agree that for every incremental dollar, Spotify is going to get 50% instead of that 35% or whatever, the labels are going to get more and Spotify is going to get more. So it comes back to that comment I was saying about closing that gap. And I know the labels are very enthusiastic about that as well. And they talk about it in all their filings about the pricing power and all that. And that's going to be a very interesting route. I think the bear thesis about the labels kind of pulling catalog has been completely… Yeah, they can't. Yeah, it's practically impossible by now.

Like, and I've, I've talked about this on Twitter multiple, multiple times, but basically it would be, you know, you're losing 20% of your highest margin revenue and you have to deal with shareholders, deal with management. That's not going to reach their, their incentive targets. You have to deal with all the artists and songwriters that stopped getting paid. Like it's, it's, it doesn't make any sense. Like for what reason you can't, they're not going to go exclusive. Like everyone knows exclusive music doesn't work.

Yeah. Yeah. Outside of the streaming services, it's pretty easy to see the steady growth there. how how does it work with you know youtube tiktok um even roblox is i guess a new partner how does that work how did the licensing deals get done on that yeah so you know at least in in in in the example of tiktok where where um you know it's a large part of of the of the platform is is kind of based off of music yeah it's it's tough because i think what the labels try to try to get to is is capture you know capture some of the value that's being

you know kind of generated by this platform thanks to to to music and with tiktok i'm guessing those negotiations were were pretty were pretty complex but you know essentially what they end up doing is they take a cut of the revenues. In the case of TikTok, it's going to be the advertising revenues that TikTok makes. But of course, TikTok is going to argue, you know, music is only a part of it.

Like it's our algorithm. It's our, you know, it's the videos that people are posting, et cetera. So they probably end up paying obviously much lower than Spotify in a percentage basis, as well as in an absolute basis. I think it's Peloton that pays out

i could definitely be wrong on this but it's it's it's a number like 20 20 plus of the of their of their revenues if i don't if i recall correctly it's uh it's it's not insignificant right but um yeah i mean that's that's the labels it's the label's job right it's it's they have to monetize as as as much as they can and sort of try to make the case that that music is is being used in a in a way that's that you know that that they should be sharing part of that revenue with with with them and i mean they have to pay them something always because it's it's illegal to to use music without without a license in a in a place like like tick tock and and youtube and and roblox etc but but yeah there's there's not a lot of transparency in these in these deals and

and you you're never gonna you're never gonna get like the exact um details of it because they're super confidential but that but we kind of know how they work right right and with i guess spotify in general, flipping to their viewpoint, is there any way for them to negotiate the revenue share lower if podcasts become a better part? I know they have to go back to the drawing board and renegotiate stuff, but do you think that's going to give them some leverage to maybe get it down to 60% payout or something like that instead of two? I wouldn't expect that. And I'm not really counting on that. Like, um, it's not, it's not impossible, especially if, if podcasting becomes a huge part of the, of the business and, and, and they struggle to monetize it correctly.

I think they could probably go back and try something like that, but it's, it's definitely not like my, my base case. And what's interesting is on the, so Spotify is, is, is two businesses, right? Basically it's, it's the ad supported and the, and the subscription business on the subscription business, everything goes to the labels. No matter how many podcasts you're listening to, the way the agreements work is that all that revenue share is for the labels. What they were able to do so far is separate the advertising. So any advertising, obviously, that takes place in a podcast is going to be separated to podcasting and the creators and have a different margin profile. What I think is going to be, what I think they're going to,

they're going to be able to, to do is, is, is just to incrementally monetize the podcasting side. And that goes back to what we were talking about, about advertising. And they've also talked about, about a premium subscription service for, for special, you know, for, for, for, for podcasts, right. And I mean, you guys, I don't know if you've, if you've heard anything, anything about this but you eventually will be able to sort of charge five dollars per month and have bonus episodes and maybe even like a q a and green room and stuff like that with with your premium subscribers and and most of that is that's how i like to think about their their potential opportunity is this incremental revenue that's going to sit on top of of the of the existing

revenue base that they have right no yeah we've heard of that it's still slow to be enrolled at it's definitely a great way to experiment but in general i'll say the the podcasting strategy and people forget about this sometimes but it it's it will help them a lot in the thing the negotiations going forward and and again they're this these contracts are not only about the payouts there's a lot more to them in terms of what spotify can do and and um you know business like business initiatives like we know that that the labels at some point had to approve like acquisitions that spotify was doing etc so if you're if you if you go back to the to the you know to the negotiating table and and and 50 of your users are listening to podcasts you know and

just call call it two-thirds music one-third podcast it's going to be a different conversation than if you were still 100 music right i mean the labels is going to essentially have um their their listening share diluted right so i think it's going to be interesting last question before we hit an ad break and then move on to u-haul uh what do you think of a tiktok competitor as a threat to spotify yeah you know competitions is is interesting and and and definitely very like important to to to keep a to keep an eye on i think tiktok as it is is is in no way a competitor i mean it's it's a this it's a it's a music discovery tool if if anything and it's it's almost accidental like people don't go to tiktok just to listen to to music i mean at the end of

the day they're i forget if they're 15 or 30 second clips but but yes it helps it can help an artist kind of blow up but eventually they just go to spotify to actually listen to the to the songs what i think is more interesting is is their ambition to also build their own music streaming platform because they have they have announced that um i think it's called yeah It's called Briso, and I think it's launched in only a handful of markets, and we haven't really heard much updates on that side. But the fact that TikTok obviously has very powerful technology and it's a large financial backer and large valuation, so they can raise tons of capital at pretty decent terms. So if they really wanted to go after, I think it's definitely something to keep an eye on. I think the other kind of competitor that I think about a little bit is YouTube, even more than Apple and Amazon, where I'd argue their music is merely a distraction for them.

And I mean, there's a lot of evidence to that. But with YouTube, I mean, there's over 2 billion people that use YouTube, right? and a lot of them listen to music uh the problem is i haven't seen them really take audio seriously right if they if they really shifted their strategy towards like audio and started giving out more you know giving out the product for for for free and and you know and really innovating on on that front i i think they could be a pretty you know a pretty compelling competitor to spotify i just i just haven't seen any any evidence of of them sort of shifting their their strategy and it's probably going to stay that way because video is much much higher margin and it would

probably disrupt their own business etc so yeah all right well we're gonna hit a quick break and then we'll talk you all on the second half this episode is brought to you by lakinta by windham here you are miles from home and ready to start your vacation good thing you're staying at lakinta by windham they have free high-speed wi-fi to stream all your favorite movies and in the morning get fresh waffles with their free bright side breakfast or squeeze in a workout at their fitness center either way you're ready to conquer the day tonight la quinta tomorrow you triumph book your stay at lq.com cox panoramic wi-fi includes advanced security to help protect all your connected devices you'll get real-time alerts oh like this one so you don't have to

worry about malware or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply welcome back in uh next up this is a company that we haven't looked at much but you've covered on and it's u-haul probably uh something uh anybody that's moved is familiar with. So just generally, what's kind of the thesis there for you? Yeah, sure. So, you know, when I invest, one of the first things I like to do is just really understand the two or three drivers that are going to drive, you know, the majority of the

company's value going forward. And in the case of U-Haul, you have to believe basically three things. The first is that they're going to keep being the indisputable leader in what is called the do-it-yourself moving space, which obviously is just going out and renting out a truck and moving yourself. They've been around for 75 years and they've historically kept taking market share every single year. More recently, the past 10 years, they've been growing at high single digits. The second the second kind of premise that you that you have to focus on is their expansion into self-storage. OK, so U-Haul basically 20 years ago realized that self-storage was super complementary to their business because obviously people that are moving, a lot of them tend to have storage needs. So it just became kind of low-hanging fruit to combine those two and build storage units close to the U-Haul locations.

And they've been expanding that for the better part of the last 20 years and are actually now the second or third biggest self-storage player in the U.S., which is pretty impressive. And a lot of people don't realize that. And the third, you know, the third aspect is management, because this is a company that is, you know, for all intents and purposes, a family owned company that that's controlled, right? The founders own over 40% of the company. So you really have to be, you know, on their side and trust all the decisions that they're making because the, you know, how they treat shareholders and their capital allocation priorities, et cetera, are super important for the business going forward. So I think those are the three kind of things that I like to think about in terms of U-Haul as a, you know, as an investment going forward. Right, right. And then getting deeper, you know.

When you look at U-Haul, you're like, well, this business probably has a moat or competitive advantage because when you think it's moving, you're like, well, I'm just going to get a U-Haul. But could you go maybe deeper on why they have a moat and what they've invested in that gives them some sort of competitive advantage? Yeah, absolutely. So the most important part is realizing that in this business, scale is a huge advantage, right?

and scale also means you eventually reached a point where you have physical network effects that kick in and are super powerful because i mean you guys you guys are in seattle right if you if you want to move to i don't know some random town in in ohio you want to have you want to be able to to find the cheapest option but also kind of if you're going to do it yourself you're going to be able to rent out from a place that's close to your house, the one that you're living in, but also a place that's close to the house that you're moving to, right? So if you look at locations of U-Haul versus competitors, they have 10 times more locations than the next closest competitor, which is budget. And if you look at the amount of trucks that they have, they have

25 times more than, than budget. Right. So it's a, it's a huge difference in terms of, of, of size and it's pretty, you know, pretty quickly you realize that, you know, the majority of the time they're going to have the most convenient, um, option for anyone to, to move, um, whether that be, you know, in town or out of town, obviously in town is more competitive because you're only moving, you know, maybe, maybe a 10 minute drive or, or whatever, but it's, it's proven out to be that it's super important to have that scale. And if you look at, you know, budget and even Penske and Ryder, which are the other two kind of big truck leasing companies, they've both retrenched. I mean, budget has gone through multiple restructurings the past 10 years

and has reduced their fleet. And Penske and Ryder basically turned to B2B, right? They only focus on the commercial side right now. So, you know, everything points to, to the, to the fact that it's, that this is a real competitive, um, advantage. Now it's not, I'll be clear on this part. It's U-Haul's not a great business. Okay. It's, it's, it's a good business. Right. Um, and what I mean by that is that if you, if you look at the return returns on, on, on invested capital, it's probably around 11% to 12%, right? So nothing sensational, right? A great business would probably be closer to 20% or even more than that. But what makes me very comfortable is the fact that the competition, as I said, is very limited. And this sort of gives you a much better

kind of long-term visibility for the business going forward. And you can make a good amount of money on, on businesses like this, especially with a company like U-Haul that's, that's investing all of their capital back into the, into the, into the business and has some leverage. So it's, I think that's another kind of, you know, some people focus too much on, on, on, on like ROIC and like only screen for, for companies that are above a certain level and stuff. But I think if anything, U-Haul's ROIC is going to go up. And one of the, one of the best ways to make money in the, in the stock market is to kind of invest in a company right before it's, it's ROIC in, in, in flex upwards, right? You can, you can,

you can make a lot of money that way. Right. Or go ahead, Ryan. I don't know if you have the numbers in front of you, but what kind of valuation does it trade at? Do you know? Yeah, it's around 10 billion right now. So the way that I, it's, it's hard to think about you all in, in terms of, you have to make a lot of adjustments, right. To the, to the income statement and and management doesn't provide any sort of guidance or

or even adjusted earnings which most companies do um they'll just tell you the gap earnings and you have to kind of go go your way i was reading the conference call the analysts are mad every time i don't know if you read the conference calls but the analysts get mad they're like are you gonna do something they're like nah no they do yeah they do and and that's why i stressed that that management is so important because this is not a company to hold for two or three years like You really have to be up with them on the long term because that's the way that they operate and think. But going back to the valuation, so, you know, on a pair share basis, I think the company probably makes, will make this year around $40 per share. So that's around 13 times at the current valuation.

There's a couple of things you have to consider going forward, right? The first is that self-storage, the way that they've expanded to self-storage, especially in recent years, is not by buying properties like existing properties, because Anisfen has been pretty vocal about the fact that it's super expensive and it's a pretty hot market right now. So what they do is they, you know, they build from the ground up, right? They buy or convert an existing maybe retailer or something and turn it into a self-storage. And that takes a lot of time. And you also have a big headwind from the fact that you're going to have full operating expenses from day one, and you're going to have zero revenues because you have to fill the units, right?

So their occupancy is much lower than any other competitor, and there's sort of a natural tailwind that as units get to full occupancy, which is usually above 90%, you're going to have a lot of incremental margins. So the self-storage opportunity is definitely not being priced in correctly at the moment. And the other part is the moving business that saw huge benefits from COVID, obviously, as people decided to move a lot. And we saw this the last nine months where, you know, because the same, I guess, the quarter of the current quarter we're in last year was when everything was shut down. So they also suffered. But as things started opening back up, they, you know, revenues were up 25 percent or something insane like that. And my belief is that there's an interesting option when you invest in the stock right now that the mover rate is going to kick up, which has consistently been coming down. It's around, I think it's 9% or 10% 2019.

I haven't seen 2020 numbers. But if post-COVID we get into a situation where people start moving more, they're going to benefit greatly. And the margins are just going to kick into high gear and the stock is going to prove to be to be much cheaper than it actually looks. Right. That makes sense. One pushback I'd have or maybe a concern that I've just been thinking about is, you know, we've seen at least in the United States, which is where they operate. There's a lot of government push to change transportation to all electric. Do you think that would give them an increase in capital intensity over the next decade that could really hurt their cash generation? Have you thought about that at all? Or could that be a benefit?

I actually think it's a benefit. And it's a very good question. And one that I've that I've heard a lot, as well as the sort of the autonomous question, which I think it's much further down the road. But the EV question is certainly very important. And if it does happen, it's not going to be like a one year mandate, right? Like these things tend to have, you know, at least five years in terms of actually coming to being, you know, into law and be mandated for everyone is my sense. U-Haul turns, I think it could be anywhere from 15% plus of their fleet every year. So it's a pretty high number.

It's not as high as car rental companies, which are a terrible business for that reason. They have to turn over half of their fleet. But 15% means you can basically switch your fleet completely in seven years, right? So if that does happen, I think they would be able to do it. They have great relationships with Ford and GM, who are their biggest suppliers on the truck side. And the the other benefit that I think would come from being all electric is that repair repair costs, which are repair maintenance, which are a huge, huge part of their costs would probably go down. Because the way I understand that, you know, electric vehicles don't need as much as much repairs as as you know, it's less complexity on the on the as a versus a nice motor.

Right. So there might be a there might be an incremental benefit on that side as well. Does U-Haul have any other businesses other than the self-storage and transportation? Yeah. So they actually they actually do. And, you know, the company is called Americal and it's technically a holding company. And it's funny because you were talking about the earnings call and another criticism they get every every single one. like you go go to a transcripts and take a look and there's always someone telling them why don't you change your name to u-haul and they're always like no no we don't we don't care about that it just gets cut off but uh but yeah so they they actually have um two insurance companies which is a little bit odd um one of them makes sense because it's a it's a property casualty

insurance that basically insures the the moving and self-storage operation when you when you rent the U-Haul and you get insurance, like that's who's underwriting that, right? So that makes some sense. The other one is a life insurance company that they've owned for a long time. And I mean, it's profitable, but there's no synergies between one and the other. And I don't think it's going to go anywhere. Like management seems to be okay with it. Within moving, there's a couple interesting things that they also have that maybe is not as obvious, but their retail operation is actually pretty um pretty big right like if you the you know product and service sales if you if you go to if you go to u-haul and buy you know and buy a box or or buy you know anything related to

moving really that they're going to sell you in the store that's that's that's a pretty you know significant part of the of the business i think it's it's around 300 300 million dollars um they also have, uh, a more recent initiative called, uh, you box, uh, which basically, you know, they bring a box to your, to, to, to your home as you're moving and you put all your stuff there and they'll take it to wherever you, you want them to, to, to move. Right. Um, so that's another one that I think has been growing pretty, um, pretty nicely, which I think makes sense to kind of experiment with, with different, uh, with different business models and moving as well. All right. I think that's going to wrap it up for you all. We don't want to go too long. So let's

hit the wrap up questions. First one, what is one financial saying you disagree with? Sure. I mean, there's definitely many and it's funny because in investing, I always go back to the fact that there's no absolutes in investing, right? So every time you hear sort of a saying in finance, it's always healthy to question it. One that I used to do a lot and kind of learned the hard way that it's it's not as simple as as as it sounds is is averaging down right like the traditional value investing school will teach you to sort of double down on a stock when the when the price drops i don't know 15 30 percent and i've learned that it's that you have to you know first you have to really think about the reason why it dropped right because in in in some

cases you know a very substantial piece of negative news came out and and you know say the company lost a, a, a 30%, a 30% customer and, and, and fall and fell 30%, but maybe it's more expensive because that was their most profitable customer or something like that. So you always have to, you know, really consider why the company, the company stock is, is down and, and, and, and realize what that means for, for your investment thesis, if it's, if, if it's changed or not. So you have to be kind of really true to yourself in that sense. um and i've actually learned to average up more often than averaging down um i mean spotify is an example i mean as they i started buying in the in the low 100s um and you know i kept buying all the

way to probably around these levels because when i started buying it was it was mostly focused on music but then they basically doubled their their addressable market and and executed on podcasting And I mean, the stock price went up, but the opportunity also did. So it's one of those examples where I think it made sense. I think we're in the same boat there with Spotify and it seems counterintuitive and it's easy to like anchor to the stock price itself. Or just the sales multiple. Yeah, I guess.

I mean, sales are more on double digits. So yeah, the multiple might even, maybe I'm wrong, but it might be cheaper now than it was at 160 or whatever it was three years ago. Yeah. I can take a look quick, but I don't know if you want to ask the last question. Yeah. I'll get to the last one. What's one piece of advice you have for anyone that's starting out in the investing world? Yeah. So I would say really try to find something that, you know, that, that fascinates you. That's, that's, you know, your passion or your, or your, or your hobby and, and really try to learn as much in terms of, you know, whatever industry or company is related to that. And it's, you know, I like to, I like to give out

the example of skiing, right? I love skiing and I've been, I've been looking at, at Vail Resorts for a while now. And it's a company that I, it was so easy for me to study it because I'm so familiar with it. And it's a, and it's something I love doing. So I think that applies to, to so many, you know, to so many different aspects in, in, in investing. And it just, it just makes it a lot more fun. Right. And you're going to learn a lot more if, if you, if you have, you know, if you have the interest to, to, to do it and really the fascination for it. So I think that that's going to, that's going to play to, to anyone's advantage when they're, when they're starting out on investing. All right. That makes sense. I looked at the sales multiple quick,

it's slightly higher than it was in 2019, but it's below the IPO. So yeah, but they've, they've grown with it right so yeah all right well i think that's gonna do it uh where can anyone find you what's the sub stack twitter yeah so uh my twitter is sleep well cap and the sub stack is sleep well dot sub stack dot com so yeah dms are open if you have any if you want to chat or have any any feedback for any of my tweets or sub stack pieces always always happy to get that perfect all right thank you for your time enjoyed it yeah it was very fun guys uh thanks for having me and hopefully we'll do it sometime soon all right welcome back in thanks again to sleep well capital for joining us uh i'm gonna kick things off with this week's story so i titled it titan to zero and you got a

long list here i'm excited about hearing the story it's really complicated which that should start as a red flag. If these things are super complicated to understand, it's probably not worth investing in them, to be honest. And obviously, this one wasn't. But Iron Titanium Token, aka Titan, crashed this week. And I mean crashed. So Titan belongs to Iron Finance, which is one of those, it's partially collateralized and it's a stable coin protocol. So there's all these derivatives off crypto now. And this is basically one of them. And the details of how this thing worked were super complicated but the aim is basically to reduce the volatility of certain cryptos by linking it to the u.s dollar and then another quote-unquote stable coin uh but be in crypto

which is sort of i think it's like a crypto website explains titan like this iron finance uses a two token mechanism an iron stable coin intended to be pegged to one dollar and a titan collateral coin this is designed to absorb market volatility caused by shifts in the supply and demand for iron iron is not like it's not real it's just another coin iron it's like another coin yeah so it's just like ticker iron essentially all right so iron which allows users to mint new stable coins i know this is getting complicated uses titan as part of its collateral backing okay so it's kind of like but this is where if you saw michael perry's tweets this week about leverage in the system okay there's a lot of reliance on other cryptos within

existing cryptos and we're starting to see the fallout of that so i'm deferring to coin desk for a further explanation but it says due to how the tokenomics of this particular d5 project functions when new iron stable coins are minted the demand for titan increases driving up its price conversely when the price of titan falls dramatically as was the case on wednesday evening the peg becomes unstable so it's all the whole point of titan is that it's supposed to be the stable peg doesn't sound like it doesn't sound like it was pegged really yeah and however wednesday night titan's price fell from 65 to 60 so only it dropped five dollars there's an eight percent decline this caused bigger investors to have to start selling or offloading their titan

tokens uh because it's supposed to be this reliable uh peg um which basically created this sort of run on the bank type of thing or type of event and so that night titan fell to literally zero dollars it's like trading at one one millionth of a penny yeah we're at the one thousandth uh there's like three zeros after the decimal point yeah and this started to decrease the value of iron obviously and let them go from a value of north of two billion dollars to around 365 million dollars in less than a day obviously there's also that peg to the u.s dollar or usdt um so there is like some i guess value left in it and there was like an arbitrage opportunity but that got really complicated isn't usdt tether isn't that a separate thing or are these related

yeah but there was like a way you were allowed to like redeem i don't i guess no idea i don't know who's on the hook for that money anyway that's part of the complication it's all too complicated and so mark cuban was a big supporter of titan uh and most people say that he even popular popularized it which is a perfect example of not knowing what you're doing um and then when he was asked on twitter about it he said i got hit like everyone else crazy part is i got out the thought they were increasing their total value locked enough because you have to have like a certain value in order to be stable uh which is kind of ironic and he says then bam you know what come on and he's treating it like uh and he said it was a small portion of his crypto portfolio

but enough to upset him which probably a lot more upsetting to the people that follow him in a letter to bloomberg he said there should be regulation to define what a stable coin is and what collateralization is acceptable so i think it's like this it's become a theme now where you get hit with it and then you blame the system among influencers that there should be something uh someone should maybe a centralized entity you know we could have central you know There could be someone that makes these decisions and keeps everything stable like governments. Yeah. That's bad.

He's been getting basically torn apart on social media. I think this is a perfect lesson of that it takes 20 years to build a reputation, five minutes to ruin it. It seems like he had a – like I don't know. Really, it doesn't matter what his reputation is. But it seems like his reputation was irrationally too high. Like he's been doing kind of shady – I mean he kind of sold out during the dot-com bubble and just sold it to, I forget who, Yahoo for like basically nothing for like $4 billion. I mean, he's kind of doing shady stuff like this for a long time.

Yeah, it was a very tone-deaf week for him on Twitter. And then shortly after, I think it's unrelated, but the Mavericks, like coaches, resigned. Yes, they were probably all long Titan coin. Or maybe that's where he was paying them under the bus. I don't know. There was rumors that the Golden – these were fake rumors, But people are speculating that, you know, the only reason people used to get the big players to the Golden State Warriors is they, you know, maybe Chamath slid them a little Bitcoin. But there's no sources.

People on Twitter also started making memes about it. There was a picture of him on the cover of Remember the Titans. I enjoyed that one. That's good. He'll never live this down. It's funny. Like he could do, you know, he could have a lot of good investments. But one fraudulent, I mean, pumping a scam.

Yeah, he's pumped multiple scams. I mean, I guess because, you know, Dogecoin is not, I guess you can't call it a scam. It's just kind of weird. Dogecoin is weird. But he, for some strange reason, has just been so hyped up on Dogecoin, which just makes no sense. Like, people have just been shocked. The truck's followers. Yeah, I mean, it's just, he's like, we're going to take tickets with Dogecoin and stuff.

So I'm like, I don't know, guys. I'd be nervous, honestly, if I was in the Mavericks organization. I'd be nervous if I was Cuban, dude. If we had a real SEC, I mean, I feel like you should go to prison. I don't know the exact rules. What's your story? Okay, well, we got Wise is a direct listing in London. And this is TransferWise, if you don't know.

So it used to be called TransferWise, and they switched their name to Wise, whatever. So they're a cross-border payment system that was built to replace the clunky legacy systems. So we all know like when you send things across the border, there's obscene fees that you have to pay each time. It can be up to 7% of the dollar amount if you're using Western Union. And that really screws over people that are sending money to either a business or to families in other countries. So a couple of quick stats on TransferWise. 75 billion in gpv last year that's gross payment volume so that's the amount of dollars flowing through their network 586 million dollars in full year revenue and for some stats on a quick you

know tam here i know we're not i know we kind of are anti-tam sanity but there there's 25 trillion dollars moved across borders each year which people spend 264 billion dollars to make happen which is insane yeah uh wise wants to disrupt that obviously with cheaper fees and faster transactions and they built a modern network that the old networks were built decades and decades ago so it's just the infrastructure isn't built it's just impossible to replace until you make a whole new system like transferwise did they have over 10 million customers and i'm not sure if that's monthly active users or just people that have used the platform gross profit is actually quite strong, $110 million in 2019, up to $362 million in fiscal year 2021, which I assumed

ended sometime in early 2021. And then they had $145 million in free cash flow last year. So really strong cash conversion. Wise looks to me like a great business. Any potential concerns here? What's stopping them from continuing this growth? I don't know. I mean, it looks like a good business. I don't know if there's anything stopping them. It's strange how business to business and even just generally cross-border payments has been so full of friction for so long. It feels like anyone could have done this.

Well, there's just a lot of inertia. like everyone is doing something a certain way and is convincing people to move to something else just seems extremely hard. You've got to convince everyone to switch to something else, which I guess maybe the Western Union or something, they do have strong network effects. I mean, even like look at PayPal.

Weren't their business transaction fees just overly expensive? I don't know. They were just too high that people are looking for an alternative? Are you meaning for cross-border? Yeah, and business in general because this this can apply to also like uh inter sure yes yeah i mean you don't have to go cross border right now wise i believe is all cross border but yes they could try to disrupt business to business stuff as we all know wire transfers or wire fees are really really high um which is

such a hassle yeah it's it's an extreme hassle i mean what my thought was is that wise is basically everything crypto wants to be we've talked we just had the story about all these um i don't want to call them by their it's not a slang term but uh uh the alts coins the non you know bitcoin and ethereum that are all basically bs right yeah this is like something that you know they're actually solving a problem in reality here and they're doing good with them you know yeah using crypto as a means for i mean not if you take coin desks or coin bases transaction fees but well you don't understand the token tokenomics it i mean using it as a way to uh change your currency seems like the most easy application or the most logical application in my mind um for sure but

why is this doing that i mean they're doing it with that i guess you don't need it yeah and they're doing how do they make revenue just a fee yeah they the the way they set it up and they can be profitable as we as i where we see with the numbers i laid out with i think the average fee is 0.7% for cross-border, which is still a fee, but you got to make money somehow. I would rather have a little bit lower than the competitors

and a transparent fee, like them just tell you exactly how much it's going to be. Guaranteed without crypto, you have no idea if your money is going to go to zero. Yeah, and there's, I mean, some of these other services

have gone ahead and tried to complicate the fee structure so much, like a fixed 10 cent plus 2% unless it's over $5, and it's like, just give me a flat fee and I'll pay it. That was one of their pitches too. Make it easy.

Yeah, they have a whole prospectus if you want to check it out on their investor relations page. I just took a glance at the first 10 pages. We'll have to take a look for all the details, but that was one of their pitches as well. Extremely transparent on the fees, really simple. Last question though,

what multiple of gross profit or free cash flow do you think this is getting? I'm thinking this is going to be really, really- 30 times sales. So like 80 times free cash flow, something higher no it's even higher i mean unfortunately gross profit multiple of like 70 no no that would be like 50 i'll bet it gets something close to adyen yeah because that makes sense international true true maybe discount a little bit true if this was

an uh because they're headquartered where in london yeah and i wouldn't say adyen's at a discount it's at like 50 temp sales well compared to stripe okay well those yeah i mean And if we peg everything to Stripe, yes, then I think 30 times sales makes sense. I would think, you know, you've got to do a lot of investigations here. I would think this is something you'd want to – I wouldn't mind paying up a high multiple for, but we'll see how high it gets. I'd love to own it at the right price from the numbers that I see there. But I'm going to get into my next story. It's the Lordstown Motors Mirage Continued.

So last week, the CEO of Lordstown Motors, we've talked about him before. His name is Steve Burns, resigned after an investigation into the company's pre-orders. The CFO also resigned, not until he had sold a big chunk of stock, but he also resigned. And this was following the Hindenburg report. So right after the report was released, Lordstown hired a special committee, the board of directors did, to review the merits of the claims and look into the pre-orders. a few weeks back the company admitted that it needed more money to execute on its production plans it's been a rough few weeks and the company said on several occasions this is what they found after the investigation that the majority of its 100 000 non-binding pre-orders were made from

commercial fleets that's what they said originally but they found out that this was obviously not the case the investigation also found that one company made a large pre-order purchase but does not appear to have the resources to complete a large purchase i believe that's probably the two guys living in an apartment that ordered a billion dollars worth of cars i just imagine the the committee coming in or whatever and then they got the person that's in charge of this of kind of creating this illusion of demand and they go on their excel like excel spreadsheet and they just hit themselves in the head they're like oh there it is you know like oh how did i miss that you know yeah yeah it's just all it's all just theater yeah this one was like a pretty obvious fraud and

the probe also discovered that among other things lordstown motors paid a company to drum up around a thousand pre-orders uh now steve burns who has been called a con man or a pt barnum figure by many former employees from his time at workhorse which reminder he was ousted by the board at workhorse three months later he started lordstown motors and workhorse is now a meme stock too right This stuff is crazy. Yeah. But additionally, before this news came to light in the public, so before the public really knew about it, executives were selling stock. Wall Street Journal reported that in all, five top executives, including the company's president and its chief former CFO, so the guy that resigned, sold more than $8 million in stock over three days in early February, according to the filings.

Here's the craziest part. The stock is still flat on the year and they just said they won't be able to produce. They won't be – they don't have enough money to hire people to manufacture the cars. It still trades at a $1.8 billion market cap. So how – what I don't understand is how does the SEC not do anything? It's – the fraud is over. They're so underfunded. It's been – like it's been discovered that this is a fraud.

And now there's still no action. I mean, it's the golden age of fraud, clearly. I mean, there's a lot of comparisons to the dot-com bubble. And I think the difference is right now maybe valuations aren't as crazy on some things. Obviously, Lordstown, you can't even peg something. It's just kind of like it's almost like a cryptocurrency or like what's $10 billion versus $20 million versus $1 billion. But right now compared to the dot-com bubble, and maybe I wasn't there at the dot-com bubble, so I don't know anything firsthand. but it seems like there's a lot more fraud going on nowadays.

And the SEC, if they step up, they could ruin a ton of this stuff. I mean, for the better. I mean, you're protecting investors and people in general. I think, well, so obviously Tesla actually makes cars, but the fame that Elon saw and the reputation that he gained from tesla's rise gave way i believe to trevor milton which gave rate gave way to steve burns which has given way to every other ev spack and spack sponsors to feel like this is a chance to cash in oh yeah and every time it happens and the sec doesn't do anything it's just another

reason for someone to do it again oh for sure it makes me like it honestly makes me mad thinking that steve burns is going to be walking around with him as a billionaire we we walked yeah potentially a billionaire if not a lot of money no matter how you add it up it reminds me of what we discussed with jamie powell last week i don't know trevor milton and adam newman's kids adam newman just bought a 50 million dollar property in miami i mean that's infuriating stuff i get pretty angry i don't know i think everyone does seeing this and it all starts i think and people might some people disagree i think it all starts august 2018 like you said the the sec buyout tweet and it all starts with the solar roof tile reveal and then the full self-driving fraud

was elizabeth holmes just too early yeah dude she would be cooking right now she would be It would be right up there with some of the best investors in the world. Madoff and Holmes were so much better at hiding things than Trevor Milton and Steve Burns. Milton was just – it was so fake. On Instagram, why? It was so fake. I mean Holmes and Madoff were really – like, OK, they were obviously criminals and stuff like that. But they were really smart about it.

They would be – I mean, dude, Holmes would have a $20 billion SPAC on right now, which scares me. It scares me. I know, it's mind-blowing that it makes me afraid of all SPACs, to be honest. It scares me off. And then when you think about the trillions of dollars, and I'm not trillions of dollars in crypto, I mean, you add that on top, it's like, man, there's just a lot of money floating around and things that don't generate cash.

I mean, now that we've seen the Lordstown Motors, we've seen Titan fall to zero. Nikola. It makes me feel like there might be – the fallout might kind of be here where you can only give that mirage or that like, oh, it's coming. It's coming for so long before you have to show people cash. Yeah. There's been some good hints – or go ahead. But the stock's flat. Post fraud.

Yeah, dude. I don't know. I can't imagine shorting this stuff. I know Muddy Waters has talked about how there's the – what was that? That Chinese education startup. I don't know much about it, but they're like, you know, they're really good at shorting Chinese companies. That one was known to be a fraud for a long time and then it just shot up 200% and now it's down like 60%. But, you know, it was worth like zero or whatever.

One – or what was I going to say? I forgot. You changed – oh, OK. No, no. There's good signs with this new SEC. I don't know if it's a chairman or whatever the head of the SEC is called. There's good signs. they've been making some announcements that they want to do things but there hasn't been really

much material yet we'll see over the next few months if they start you know really using their tools because maybe the infrastructure bill includes some funding for the sec it should i think there was like a couple two there's like 10 billion for the irs and they were hoping to return like 100 billion i'm getting those numbers wrong but like i was surprised i was like wow 10 billion for the irs and they're like well for all the evasion of uh taxes that we see we could get 250 billion dollars back on this that kind of reminds me of what the sec you know it might need a billion dollars in funding but we might catch billions and billions of dollars worth of bad guys there i think that what sums it up the best is uh that it's it's a good troll account

it's a very humorous troll account on twitter nick at fdp i'm not exactly sure what his name is he had the meme of the lebron james and jr smith and lebron's like looking at jr smith and lebron is everyone and the sec is jr smith it's like yeah do something it's right there it's it's weird because it used to be the there's like the quote that it's always the autopsy never the diagnosis now there's not even the autopsy it's being diagnosed the fraud's right there and no one's acting it's it's crazy it's crazy all right well what's your uh next story okay this should be a fun one i didn't have any notes here but uh someone tweeted out a list of a thousand beggars over the last four decades i'll let you pull it up and we can talk about any surprises lessons or

patterns that we're seeing here let me kill like the tweet so we got let me read it off and this is going from best to worst we have uh and worst is you know still extremely good a thousand beggar We have Monster Beverage, Expel, Amazon, Microsoft Corporation, Tractor Supply, Apple, Adobe, Jack Henry & Associates. Never heard of that one. Oracle, The Home Depot, Biogen, and then Berkshire Hathaway sneaks in from 1980 to 2021. Thousand banger. They're starting at a pretty high multiple. But any surprises here?

Any thoughts? What's Jack Henry & Associates? I don't know. i should look it up quick but i haven't heard of them hmm uh surprises no i'd heard about monster before i'd heard about expel uh obviously it's not a surprise that amazon and microsoft are there and this is over the last four decades so there's some earlier ones you know that yeah oracle's a bit of a surprise but i guess they're capturing that from if you're capturing that from like i guess it depends at what life at what stage in their life cycle they ipo'd

Well, they IPO'd in 87, so their whole public company life cycle. They were a monster in the 90s, so that makes sense. Same with Biogen in 94. Expel and Monster, though, were fascinating. Expel is only from 2011. It was a tiny microcap, and they do stuff with automobiles. What do they do exactly? It's something with paint.

I looked it up once, but I've never taken a deeper dive. 3 2900 bagger and it's cagger which is compound annual growth rate from 2011 to now so june 2021 122 which is in below is pi everything else on this list the highest the other highest one would be tractor supply and monster beverage at 41 percent geez i mean that's crazy right i don't no tractor supply is impressive too from 2000 to 2021 41 i'm willing to bet that that thousand bagger or that 2900 bagger from expel didn't start with them at a sales multiple above 40 no i'm guessing it was probably like 0.2 it had to be huge multiple expansion here yeah i have to imagine that a lot of that came from just the multiple expanding um but i mean but the best ones

though are just the the you hop on i mean walmart would be on here if you want earlier coca-cola would be on here if you want earlier mcdonald's will be on here if you want earlier a lot of them are just businesses people know and you buy and hold for three four decades yeah easier said than done it's it's it's difficult for sure i mean amazon i mean you're holding through that 95 percent drawdown yeah i'll uh i'll get to my anecdotal evidence which is my next story i haven't really done one of these in a while so this will be kind of fun but i think zin is the new Marlboro uh I'm not even sure that's really a hot take but I was in Cabo and feels like everywhere I go I see it as sort of the new form of nicotine consumption

people and I agree especially now that smoking uh or even chewing tobacco because you kind of have to spit into whatever a cup or something is really frowned upon in public yeah chewing tobacco is like not as unhealthy as smoking cigarettes but people think it's gross and you a lot of people don't want to do it and look gross whereas zen uh you don't have to spit and so people can kind of sneak it yeah um and obviously smoking cigarettes isn't really as accepted like in most in most indoor places now downside though my friend told me that and he's a zen user and he says i wake up in the morning and my mouth is so dry until i have a zen so there might be a negative side effect that's just one person but yeah you know although i've

also and i think the brand part matters too because people are it's they're always asking for zen they're not asking for like oral nicotine it's it's almost like a verb at this point yeah i think it's great uh swedish the it's by swedish match i've been researching them i guess that's kind of what brought us on our radar we've been seeing someone was tweeting about it there's also a reward system that seems that people seem to be like so you you can take a picture of your zen can or scan a code and earn rewards the people seem to be all over that as well maybe it's just a college thing maybe it's a phase but yeah do you worry it's all like it's like jewel at all yeah potentially but but jewel's still doing so oral nicotine seems less fragmented

than e-vapor products that's true then e-vapor probably yeah that's definitely true e-vapor has a lot of just random companies hopping in it's a lot it's different zoo with nicotine pouches there seems to be only four or five players and zin has i believe 75 market share in the u.s so right now they're dominant they'll probably lose a lot of that but i mean that's still 75 it's huge yeah all right uh how many more stories do you have i have one more okay we'll end with a fun one the passive income crazy takes i know you're on vacation so you may not have seen these but i Yeah, I guess it was hard not to see him if you just went on the Twitter machine. So there were people that were talking about the passive income people.

They're a bit much, but they have some good ideas. Try to get your money working for you. But a few of them may have taken things too far when they said they would rather take $50 a month for the rest of their life instead of $1 million now. Now, if we think the S&P 500 even had as low as a 1% dividend yield, which is like at all-time lows, that would be, if I'm getting the numbers right, $10,000 in dividend incomes a year. So per month, just way, way higher than $50 a month if you put all your $1 million into an index fund. um there's also something about planting a tomato farm as an argument here that one was a little crazy i do hate to say it uh to defeat your point here but that was a guy trolling and i know that guy has had some bad takes in the past but no no he he came out after and was like yeah i trolled

all of twitter yes he said that but no no way he wasn't serious there's no way anyone i mean it's a million dollars you can invest in the 10 year and get a better return than 50 bucks a month It's okay. We don't know if he was trolling or not. I tend to think with his past ideas that he was not trolling, but I guess we'll never know inside of his mind. Then I guess there was also a financial guru, one of those people that sells the services, which I really do not like those things that, you know, it's not like investing services or anything like that. It's almost like you pay me money, I get your life right type of deals. they said 20 million dollars wasn't enough money to live off of that was another crazy take maybe

these people are just doing things to get they're probably just doing them to get likes or whatever but that's these financial community people that is grab my gears top five things you see at the peak of a bull market these things i mean not the passive things but that is the 20 million isn't enough yeah that's absolutely insane it's in whose world is that no one's world I mean, all right, here's a question I want, though, that I think would be fun to talk about. At what money amount for the one-time payment would you switch to the $50 a month? I think I would, if it was like $50K, I would consider switching to the $50 a month for the rest of my life. Something like that.

I don't know. You could sit down and you could do the math. What's the risk-free rate right now? Well, yeah, yeah. I mean, risk-free rates, I mean, that's not. that's that's the risk free right now it's not the risk free rate your whole life and you have to ask yourself what are you gonna do with the 50k well i have plenty of time so i'll take 50k and the s&p right now for 50 for the rest of it maybe i don't know you really take

50 for the rest of your life every month instead of 50 000 right i think that's where i consider changing because 50k you know it's a lot but it's not like something you can take and do a ton with instead of just putting in some index funds. Maybe you can make some investments, but that's still tied up. I could take 50K at that point, I think. Just do the average 9.8% a year. That's also an assumption. That is an assumption, but I'm reluctant to choose $50 a month at that point.

Okay, well, how low would it have to go? I don't know. Probably $10,000 to $20,000. You're thinking it has to go as low as $20,000? How long does it take you, $50 a month, to get $10,000? How many months? It would take about 10 years, a little less than 10 years. All right.

It's all mental math. I think that might be wrong. Oh, no. Sorry. 20 years. A little less than 20 years. You've got to double it. Yeah.

It might take the $20,000. $90,000 is too high. Yeah. I think that's going to do it unless you have any more stories. No. All right. That is going to do it. Thank you guys for listening.

Thank you, Sleepwell Capital, for joining us. We want to remind you that we are general partners at Arch Capital. Clients may have positions in the securities discussed on this podcast. We are not financial advisors. Anything we say or discuss on this show is not formal advice or recommendation. Thank you for listening. We'll see you next time.