Chit Chat Stocks - Starbucks In Turmoil; Amazon Profit Inflection; PayPal Turnaround??? (SBUX, PYPL, AMZN)

Starting point is 00:00:00 Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Welcome to Chit Chat Stocks. This is our Thursday Not-So-Deep-Dive episode. It comes out on Sundays if you're listening to this in your podcast player, but we also do this live on YouTube on Thursdays at 12.30 Eastern Time, 9.30 Pacific Time. Wait, Ryan, you had a brain fart there. This is the live episode, the Investing Power Hour, but you said Not-So-Deep-Dive. Oh, Investing Power Hour.

Starting point is 00:00:56 RIP to those episodes, but I think the listeners understand. Investing Power Hour. We talk about essentially anything and you can come ask us questions live. So sorry, Ryan. Continue. No worries. Yeah. Appreciate the correction. Yes. This is our Investing Power Hour. For any new listeners, welcome to the show. We do this, like I said, once a week live so people can ask questions. And then we also post it on our podcast players as well. Today, we've got some news for the week. We are in the heart of earnings season. Lots to talk about. In particular, a coffee giant that has had some troubles with CEO succession, and it seems like they might be in a little more turmoil. So we'll talk about them.

Starting point is 00:01:39 Brett's going to talk about Warner Brothers Discovery, and we're going to have our anecdotal evidence for the week. Really, I think it's going to be mostly an earnings-based show today, kind of covering all sorts of businesses. But before we get to that, I want to talk about our friends at Public Options Traders, listen up. I want to tell you a bit about public.com. First, have you ever really thought about all the fees you're paying to trade options? Aside from the regulatory fees, there are commissions and most platforms charge per contract fees too. That's what makes a sponsor public.com so interesting. Public doesn't charge commissions or per contract fees. And in an industry first, they offer a rebate of up to

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Starting point is 00:03:00 description, US members only. Where do you want to start? Should we talk Starbucks? I mean, that's kind of the headline news for the week. Yeah, I guess that's the number one. Do you think that was the most surprising, at least in a negative way? yeah when i saw the headline transaction number i was quite surprised it's this has aside from covid where there's obviously bad comp sales because of people weren't going to the stores this was one of the worst looking comp sales years that i've seen or sorry quarters that I've seen for Starbucks in quite a long time. So just for context, total comp store sales, I believe it was minus 4%. I can double check that, but basically pricing the average ticket,

Starting point is 00:03:56 they break it up into two ways. It's average ticket and transaction volume. So average ticket grew 2% as it always seems to do at Starbucks. They tend to raise the average ticket constantly. They're constantly increasing the price of their coffee. I think everyone kind of knows that. But transaction volume declined by 6% relative to last year. So that is quite the steep drop off. Brett, if you have the chance, maybe you could pull up the FinChat KPI on it. I will. Give me a minute.

Starting point is 00:04:26 I am tweeting out the link, but yes. Okay. One minute. I'll add some data for us. Yeah. The stock dropped, I want to say, shoot, maybe 20% in total after earnings. I know it was down like 15% the day after. But this is closest – I believe they are in the largest drawdown since the great financial crisis relative to the stock's highs.

Starting point is 00:04:51 I think it was down 41% from recent highs. So Starbucks has kind of been one of those bellwether companies that's been pretty durable and tends to get a premium valuation because they have sort of that latent pricing power. They seem to have that pricing power that they can always tap into. Historically had that pricing power. Yeah. We're starting to see some weakness here. And I think what really got people concerned here is that, yes, the numbers were bad. But then the new CEO, Laxman Narasimhan, I might be pronouncing that wrong.

Starting point is 00:05:27 I apologize. He went on, well, first of all, the conference call after wasn't that reassuring. and it kind of seemed like he didn't have that great of an idea why the struggle was happening which sometimes it's hard to diagnose that within a business you know netflix had a quarter where subscribers didn't meet their guidance and they're like we don't really know why it's happening right now but we're going to try to figure it out and get the ball back on track and it kind of seems like that was it he tried to diagnose it as um long wait times for mobile orders was deterring sort of the average not loyal customer but then he went on cnbc and kind of got torn apart in this

Starting point is 00:06:13 public interview jim kramer which i know everyone has their own opinions on jim kramer first off don't go on mad money he's he's just trying to get some clickbait clips so yeah either positive or negative yeah and it i mean some of the stuff he said kind of made sense but he basically kind it came at him and was like, Tim Hortons, Dunkin' Donuts, McDonald's all say that you're losing share in out-of-home coffee. And Laxman didn't really have a great response. And maybe some of that's just economic struggles, like the macro situation, people are moving more towards value coffee as opposed to the $7 orders that you might get at Starbucks. But it seems like They're really struggling right now to get people in the doors and they're struggling

Starting point is 00:07:05 with throughput. Six months ago, they released, and this is probably the funniest thing I've ever seen, the triple shot reinvention with two pumps plan to really reinvigorate growth at the business, which is just a hilarious name for a growth strategy. I guess my question to you, first of all, did you look at the quarter? Second of all, do you have any sort of faith in Laxman here? Do you think Schultz is going to end up coming back? What are your thoughts?

Starting point is 00:07:36 Ooh, well, that's a lot of thoughts there. I did read the quarter. Seemed bad. Pretty much all around. Margins are going down. Transactions are going down. They're raising prices a little bit. Something seems to be off.

Starting point is 00:07:56 will schultz come back i don't know um maybe and the union is still they're still struggling with the union efforts yeah that's that's tough they've historically they had a really good relationship um but i think part of it might be they give out a lot of stock to their employees it's probably a small thing but if stock's been plaid for five years it doesn't matter as much what um what data point did you want to look up on finch go to the transactions okay so segments and kpis um so we got a lot of those yeah and you'll kind of see after and if you go to quarterly as well uh okay you'll see kind of the breakdown and it's been like comps have been pretty good following covet but this quarter was sort of the worst quarter they've had

Starting point is 00:08:53 So what do you want? Here's my other concern. Where is the? It's towards the bottom. Towards the bottom. Comparable company, comparable transactions growth? Correct. Yes.

Starting point is 00:09:10 So, yeah. So I guess for context for listeners, we are using FinChat right now. They are one of our sponsors, but we actually, you know, we use them every single day. So we're more than happy to have them sponsor the show. And comp transactions, keep in mind, this is basically foot traffic at the stores is a way of thinking about it. This was down 6% year over year. The previous 10 quarters have all been positive except for a couple. But the ones that were negative were still hardly negative.

Starting point is 00:09:47 So this is by far kind of the worst, most difficult period they've had since COVID. My concern is kind of broader than just mismanagement. There is some evidence that people are moving away from coffee in general. People are moving more towards the ready-to-drink energy category. You're saying another Celsius killer. Or sorry, Celsius is killing another business, Ryan. yeah i don't know here's one of the my issues and i tend to do this pretty frequently starbucks has kind of been seen as a great business it's generated really good returns for shareholders

Starting point is 00:10:31 over the years lots of pricing power and if before this quarter if you ask someone what do you think of starbucks i bet most people would say like ah good business coffees are a little expensive but you know, they, you know, seems to work. Now they have one bad quarter of transaction growth. And all of a sudden everyone's like, we knew this was coming, but the prices on their coffee are too high. And all of a sudden you start to rationalize the drop with a, like a bigger picture issue. Instead of me thinking like prior to this, I thought it was a good business. And the reaction I probably should have is it's a short-term blip for a business that's probably going to have a good next decade. But instantly in my mind goes to, oh no, the energy category is taking share

Starting point is 00:11:20 from them. This is in a terminal drawdown. The industry is kind of screwed. And I wonder if all that is just wasted mental effort. Yeah. We got a comment here that says, it's pretty amazing that they guided to 17.5% 2024 earnings growth on January 30th. And then by march 31st they knew earnings per share was down 14 and then waited till may 1st to guide to no earnings growth in 2024 um let's see comment here that says pricing also to stretch while core customers are squeezed millennials and gen z question was starbucks a casualty of labor inflation they needed to raise prices at the same pace as wages to maintain margins but customers don't want to pay the higher prices yeah definitely i mean if inflation is tough especially

Starting point is 00:12:10 from a wage perspective they're going to be a business that gets hit and we've seen generally i mean mcdonald's i think reported it too a lot of these restaurants right now it seems like there's a macro headwind where a lot of people just because of the food affordability issues out there. And then you also have places like California that are forcing the minimum wages higher. That's causing a lot of people to transition, at least on the margin, to making more food at home. And that could be what's hurting Starbucks. I do have some anecdotal evidence on the CEO. So randomly a year ago, I got a DM from someone I've never talked to. this is on actually it's two years ago almost november 21st 2022 so i think i tweeted something

Starting point is 00:13:01 about the new starbucks ceo coming in the one you just mentioned and this guy said he's toxic randomly this person anonymous account dms me and he says i'm looking to short when he gets into the role um and i asked him why and he said we did work on him as a successor at pepsi he referenced poorly uh his tenure at his previous place was bad destroyed a lot of value despite talking a good game and bounced when he saw the top some notes uh for you don't yeah he said don't share that part he said also did some dodgy things with accounting and his former employer and it's scary that starbucks went for him he has no retail experience and is very weak operationally uh yeah well it's not and then i tweeted that i didn't share that uh i guess the person

Starting point is 00:13:56 keep that anonymous but i said a random anon account told me that the starbucks ceo was not uh not good essentially and then he came back and said told you so and he was definitely right And then I was like, well, after watching that interview and kind of reading, I'll pull up the press release. I have something that might seem like it doesn't matter, but it's concerning to me. I said the guy's vibes are off, and he said, again, he's a short. I'm telling you, he is a short, so the guy's conviction is still there. But let me pull up the press release from Starbucks. because there was something in the report that concerned me again you talked about how

Starting point is 00:14:46 they had the what was it the three the three pumps something something the uh triple shot reinvention with two so here's what they said in the press release just over the quarter i'm gonna read it to you and see what you think quote in a highly challenged environment this quarter's results do not reflect the power of our brand our capabilities or the opportunities ahead it did not meet our expectations but we understand the specific challenges and opportunities immediately in front of us we have a clear plan to execute and the entire organization is mobilized we are very confident in our long term i know that our triple shot reinvention with two pump strategy will deliver on the limitless potential of this brand

Starting point is 00:15:30 i mean that's a lot of nothing right there isn't it i think i'm concerned that this is mckinsey speak this is consultant speak this is just like they're not he he didn't say anything there where it's like okay what are you actually going to do it's like well we're reinvigorating the brand it's like no no what are you doing you know yeah what are the concrete steps that you are making at on on the at the store level to get people to get higher throughput and he didn't give any context about it and the other thing is it's not like it's not a trade secret it's not like he's afraid to say it because mcdonald's is going to replicate it like mcdonald's is doing just fine your stores are very different coffee strategy just for the

Starting point is 00:16:21 lowest you know cheap cheap cheap the lowest for the out of out of home coffee you know when schultz came back in part of the i guess concessions that he made with the labor union was he told them well first of all he said we're cutting our dividend or yeah we're stopped no it was either the dividend to the buyback he said we're stopping it and then he like you know restarted it whatever two quarters later but he also created voluntary tipping and i think that eroded the customer experience a bit yeah oh so it made it feel like every other place they're doing the same thing where you're paying a little extra where they flip it around and ask for 20 right off the bat

Starting point is 00:17:14 But that actually is an underrated, awkward situation. I'm researching a little teaser. My next stock I'm researching to do a research report for the podcast is Portillo's. And the CEO has multiple times prided himself in saying, we don't do the auto tip for a fast casual chain. Us and Chipotle are the only ones that don't do that because it really adds a lot of awkwardness and friction with the customer base. And it's underrated and they want to eliminate that. I didn't know that that actually could be an underrated part, but I still think the vibes of the CEO are the most important thing here where it's just too consultant, too political.

Starting point is 00:17:55 I don't know if he's actually understands what's going on. Yeah, I agree. And you raise a good point where it's, it's not only are you paying more if you have to tip, right? First of all, that's one way for Starbucks to pay their employee, quote unquote, pay their employees more without actually doing it themselves, right? They're just asking customers to tip. Second of all, it does create that friction where all of a sudden, okay, when I go to Starbucks, I get black coffee. They turn around, they put it in, they just hit a button

Starting point is 00:18:29 and it fills it up itself. It's a nice nifty machine. I'm not going to tip 20% for that. sorry i'm not like the full-blown anti-tipping culture but that's kind of a ridiculous ask it makes it uncomfortable to not tip in that situation and it kind of deters me from going back because i just don't want to deal with that yeah yeah we don't need to do a whole philosophy thing on tipping but i totally agree with that let's see we have a question here maybe last one um the comment that says how do these well i won't say what type of ceo these CEOs convince boards that they are the person in the search process. I think it's just the consultant pipeline.

Starting point is 00:19:10 I think it's the consultant pipeline because they have all these relationships at all these executive suites. And that's honestly, I'm not, it's one of the biggest red flags I look for is just consultant pipeline to executive suite, which you know how they get there because the consultants have all these relationships with these executives. And I don't actually know if they understand how to do their job. I would have so much more confidence if it's an internal hire that worked their way up through the organization and just went to a state college and didn't have any of this prestigious consultant stuff going on. They know the business.

Starting point is 00:19:50 Yeah, those internal hires know the business. You look at a company like O'Reilly, it's either the CEO or CFO. He has been there for, what was it, 26 years. he was mopping the floors of one of the early o'reilly stores became a store manager himself and just slowly worked his way up same with the uh ryan mcinerney at american express he started as some manager in like 20 years ago those people know the business they've seen it evolve they're not coming in with these like platitudes and generalities of what works for businesses they actually have an idea of what works i i think you're right i would totally done a lot on

Starting point is 00:20:34 starbucks final thoughts you said something about how part of you is screaming that it's a buy yeah and then i remembered the china exposure to be like there was a part part of me that thought everyone soured on it right now kind of reminded me of dollar general in a way where it was kind of a darling retail concept for a while all of a sudden everyone sours on it after one bad quarter and maybe you can kind of just catch a fallen angel that way but the china exposure does concern me luck and coffee's having a lot of success over there whether it's yeah success or they're just printing fake tickets again they're not afraid to be aggressive i'll tell you that much so if they want to sell stuff at cost and drive prices down that could be

Starting point is 00:21:28 you know yeah but but starbucks isn't starbucks is struggling there the the they've had less progress than they were expecting so that tells me that either someone else is winning or the coffee market isn't as large as starbucks thought in china so now i'm probably even if i confidence and everything like the okay even if i had confidence this was a short-term blip and the financials are at least or something like the moat is intact in the short run or something and i had no worries about the china exposure this ceo would keep me out it has to matter these are very important things and it's it's one of the ways an individual i think can have an advantage is to be very how do i say it have a high bar for your management teams all right next one do you want

Starting point is 00:22:19 to hit warner brothers discovery we have a question here from listener and i know he's joining right now i see him doing some comments here and one of our sponsors of firm returns on warner brothers discovery i think a provocative question when i asked for one and did make me think a lot but i think there is a couple of differences here. So here's the question when I asked for suggestions for today's show. The parallels between Warner Brothers Discovery and, quote, any mature tobacco company. Both have a legacy business in secular decline. Both have a growth engine that could replace the declining revenue from the legacy business. Both generating cash and have very low valuations. Why isn't Warner Brothers Discovery right up your street? Now, I got some numbers for

Starting point is 00:23:05 us to, I don't know, help with any sort of context, try to go through this stock down 34% year to date, it's been severely underperforming the market sentiment really couldn't be worse. I mean, everyone hates the stock, right? I mean, if you go for like, but looking at the numbers, you're like, yeah, you kind of just get that you're like, that's sort of I with the company. But if you look at the financials first, free cash flow is actually growing. $6 billion in 2023 free cash flow. They haven't reported Q1 yet, so we'll see what happens then. But the stock's been down, I believe, on paramount numbers. So I think it was just stuff on that and probably the sports right stuff as well, which we'll get into. Market cap is only $19

Starting point is 00:23:51 billion. So we have $6 billion in free cash flow, market cap $19 billion. I mean, that's easy, right? Well, I'd argue not exactly. First, there's, I'd say there's two things that concern me. Well, maybe three, but first, and this is the one that anyone can see when kind of getting a first look at the balance sheet and the earnings is they have a lot of debt. So according to Q4 2023, during our presentation, they have $44 billion in gross debt. Now, average maturity on that is about 15 years. So they have plenty of time to pay it back, you know, as long as cashflow remains positive. If you do $6 billion in cashflow a year and you have $44 billion in debt spread out over a decade, you're going to be able to pay that back. It's not going to be a

Starting point is 00:24:36 huge deal. But I think the question is, and the big question is, will the cashflow remain stable? Will it remain positive? Now, if you look at the segments here and Warner Brothers Discovery, they have the legacy business and then the streaming business, and they also have their studios business. But if you look at their earnings, $9 billion and perhaps the majority of their adjusted EBITDA comes from the networks, which is the legacy TV business. And I think I would just have a lot of concerns that goes away rather quickly. If we're doing an analogy to the tobacco business, there are a lot more fixed costs here. And I think there's a lot more uncertainty. Yeah, you know, like the tobacco business, they could decline, it could go from

Starting point is 00:25:25 6% to 10% declines. But I don't think there's any risk that it's going to literally go away in two to three years, right? I think that there's a case here. And there's not very much pricing power that they can pass on because they have all these fixed costs. And I also think that with all these fixed costs, if pay TV, you know, as it continues to climb, the profit really can erode rather quickly and then i also think that they're in a tough position with sports right the nba rights are in a bidding war right now i think that presents it really a lose-lose situation for them i mean that that's been a cornerstone for them you know nba and tnt all that stuff if they win the rights well they probably can't afford them i think it's similar to paramount with the

Starting point is 00:26:07 national football league but if they lose the bidding war um they are at risk i think of heading into a subscale era with sports they i think lose a lot of relevancy for people in the united states and then continue to lose market share to someone like amazon netflix youtube and disney and then if we look at their dtc numbers they weren't desirable for me either subscribers are essentially flatlining i mean they're growing a little bit but arpu is barely budging it's about if i'm going off the numbers probably half of netflix's numbers in the united states i think the difference between me and and like a philip morris international for uh for warner bar's discovery is one i think the predictability of the legacy business even if

Starting point is 00:26:55 it's declining is a lot higher for me especially because you have the pricing power that's still there even if earnings are going down and second they don't own the premier brands within the new you know the new age if for this this would be streaming versus nicotine for the new age nicotine product pouches vaping etc etc heated tobacco the safer stuff they it's like phil morris international owns netflix but warner brothers discovery i don't know if that's ever going to be profitable their streaming operations i think the big question here is is there 44 billion in value here to clear their debt size. I think there is some uncertainty here. Things could go wrong where if sports rights really get reshuffled and streaming finally takes the hurdle and

Starting point is 00:27:49 everything goes streaming, that network's earnings goes away quickly and you have a large fixed cost base. But that's a lot of talk for me. Ryan, what are your thoughts? yes i don't for warner brothers discovery specifically i don't have any thoughts on the valuation i haven't looked into it enough but just from a basic understanding of the core business i don't like the analogy with um especially philip morris international but big tobacco in general i get the whole good company bad company situation or kind of new company legacy company style analogy but first of all for philip morse international specifically their cigarettes or their um combustibles portfolio really isn't declining much at all

Starting point is 00:28:43 because it's internationally and so i i know a lot of our listeners are in developed markets the u.s uh the nordics england that kind of stuff where combustibles has really declined that's not really the case for philip morris international i think cigarette volumes were down one percent year over year this quarter um whereas and on the flip side when we look at the new businesses the let's call them zin versus paramount for example for zin it costs five cents to make a pouch you sell it for a dollar there's incredible customer loyalty and you can raise prices consistently and you have 76 market share in the united states for paramount you are competing on price with everyone else you are competing for content spending with everyone else

Starting point is 00:29:32 there's no proven unit economics to yeah maybe they have two percent market share in smart tv or streaming tv time spent like if we were making the analogy like if warner brothers discovery had netflix as their second or as their new business maybe but even then that's eight percent market share of streaming tv versus you know 75 share for uh nicotine pouches i just think the business characteristics of a tobacco business are much better than a streaming business where it's kind of a crapshoot and everyone's throwing money at it there are not that many startups in the nicotine pouch space and if they are it's really hard to get to scale because really it's hard to do a lot of marketing

Starting point is 00:30:22 so i definitely okay we have a comment here that i i don't love yeah look it's so cheap it might work i think it could work look you just need the tv networks business to generate you know similar amounts of cash for a couple more years honestly you don't need that long of a time period they can pay back they can get the debt to a more manageable level and then you see what you have left in d2c with this new age business maybe they can execute look got a comment here that they're doing account sharing restrictions in tandem with the house of the dragon i guess maybe i'll watch that show i did watch the first season maybe i'll resubscribe but i think what will keep it keeps me out of this is that historically this is a good

Starting point is 00:31:10 business because of the cable bundle you know the the the cable bundles paying them there's also you know you have the bundle stuff that they don't have to work for it's a really really really nice business and the competitive set was rational now we have youtube apple and amazon netflix maybe in the sports rights i just think it's a whole different ball game with these people that these new competitors that exist because they don't care i mean amazon is going to bid for these nba rights they're seeing they're going to be the highest bidder for some of these and they don't care that they're going to lose a little bit of money on it because it's irrelevant to someone of their size so i i just don't see yeah i agree why why if they have no sports rights why

Starting point is 00:31:57 do i subscribe to max because of hbo i i can't i just think that producing shows like that is sort of a commodity amazon produced that fallout show it got 70 million viewers netflix produces all these types of shows they just had the new one the three body problem like these premium shows apple has shown plenty of skill in doing that why buy for this dcc business when you know that Okay, maybe the deck can get paid back by this legacy business that generates cash and then goes away. But what am I buying? Yeah, I agree. The other thing is, it's never been easier to switch.

Starting point is 00:32:40 It's never been easier to switch off the service, right? I love House of the Dragons. I think it's a great show. The Game of Thrones style. As an extension of Game of Thrones, I like Game of Thrones too. And maybe I'll subscribe for two months while the episodes are being aired. but then i'll turn it off it's a lot easier to kick that subscription to the side than it is to kick a nicotine addiction to the side so we're talking about like which business is stickier

Starting point is 00:33:07 i definitely would say tobacco uh but i just don't i think it's a totally new competitive set you're right it might be cheap enough that it just still works out anyways but aside from netflix i wouldn't want to own anyone in streaming tv netflix is expensive now it could work like i don't know i could hear an argument for it i just think there's a lot of uncertainty and i'd rather play plus talked about executives the warner brothers guy likes to pay himself a lot of money is that yeah zazlov he also is he has a tough because his name is so funny that headline people remember who he is and then all the headlines go after him but i think he's fine he gets paid enough to get to get attacked like that all right what do you want

Starting point is 00:34:07 to do now paypal or do you want to talk some of our sponsors first let's talk about our friend And speaking of better Warner Brothers Discovery coverage, because he has write-ups on it that are definitely more thorough than kind of our surface level thoughts, let's talk about Firm Returns. Firm Returns is a stock research blog ran by a friend of ours, and it covers stocks from all over the world, leans more towards the United Kingdom as that's his home market, and he has easier access to management. He has companies like TinyBuild, Warner Brothers Discovery, as I mentioned, and there's an archive of long-form write-ups that you can access for free. There is a paid tier if you want to get four in-depth research reports on new companies each year, but I really do encourage you to just look at it. If you're interested in Warner Brothers Discovery at all, go get some of that free coverage and see if you like the writing, and then you can check out the more in-depth research reports for the paid tier as well. Like I said, he covers a lot of the companies that we don't talk about on the show, a lot of undiscovered UK stocks, and he's size agnostic. He'll cover companies with

Starting point is 00:35:17 market caps of $10 million all the way up to $40 billion. So I really, really do recommend just going and checking it out. If you go to firmreturns.com slash chitchat, you will get your discount 20% off. And if you just go to firmreturns.com in general, you can access all the great high quality write-ups. So I'll leave it at that, but yes, go ahead, check out Firm Returns. Second friend I want to mention here, earlier in the show, you heard us talking about the investing platform, public.com. That is where you can trade options with no commissions or per contract fees, and you get a rebate of up to 18 cents per contract traded. NerdWallet recently gave public five out of five stars for options trading. And if you want to see why, go to

Starting point is 00:35:59 public.com and start getting a rebate of up to 18 cents per contract traded. This is paid for by public investing. Options are not suitable for all investors and carry significant risk. NerdWallet overall rating 4.6 out of 5 as of April 2024. Full disclosures are in the podcast description, US members only. Earlier in the show, we did mention FinChat too. I'll take a moment to just do that right now. If you like FinChat, if you like the charts we're showing, If you're looking for a stock research platform, just in general, which I do highly recommend, it saves so much time. Finchat.io slash chitchat gets you 15% off any of the paid plans.

Starting point is 00:36:41 We've actually had a ton of people using our code. So I think it shows you, if you're looking for social proof, there's a lot of people that seem to be getting value out of it. So go check out the platform. Me and Ryan, all the people here at Chitchat Stocks. Well, there's just one other guy, Brady. But we appreciate that very much, and it helps us keep producing the show. All right.

Starting point is 00:37:06 The man behind the glass. The man behind the Riverside virtual studio recordings. All right. PayPal. This is a fun one. If there was another company that people wanted to talk about, it was definitely PayPal. Let's see. I want to make sure we're hitting up any.

Starting point is 00:37:26 Yeah. Yep. Yep. James, firm return. In the comments, there's details. I'll tell you what, if I were PayPal... Okay, you go ahead first. I'm loading up stuff.

Starting point is 00:37:37 If I were PayPal, I would simply stop reporting my take rate. Just earnings. Maybe I'd simply just stop reporting earnings, but the... I obviously can't do that. No, the take rate is such an irrelevant metric for them that I honestly probably would stop reporting it. I know it seemed like a bit of a red flag, but because they – I mean, I guess it doesn't matter because you can just look at the revenue as a percentage of payment volume, so you can find the taker anyways. I'm going to read these highlights off to you. but total payment volume 400 billion year over year growth 14 percent revenue uh 7.7 billion

Starting point is 00:38:18 growing 10 foreign exchange neutral non-gap operating margin of 18 percent and they say under our new non-gap methodology we exclude we include the impact of stock based compensation so that's nice they're getting a little bit better it's a good adjustment management team seems okay now let's look at account activity i'll pull up some charts here for you too active accounts declining one percent year over year monthly active accounts i'm sure that's just people that are actually using the platform uh 220 million flat two percent number of payment transactions growing 11 transactions per active account growing 13 percent uh they have a lot of stuff here that, you know, breaks out

Starting point is 00:39:03 Braintree and Venmo and all that stuff. Okay. The most important metric is revenue for these guys. Just to be clear. It's payment volume as Braintree grows. I mean, it's Braintree competes with the likes of Stripe and Addian. It's basically

Starting point is 00:39:21 I think it's mostly used as a gateway, but it's kind of a full payment service provider and their volume less much less of that goes to paypal themselves so it the payment volume itself i don't think is a super relevant metric but revenue and then whether or not they're raining in costs are probably the two most important things they have through marketing and promotions and stuff regain accounts and try to acquire new accounts i think okay you look at this chart here we have

Starting point is 00:39:57 and finish out one of their nice KPI things. You know, if we go back to 2020, 2021, they're adding over 10 million each year from, or each quarter. Yeah, this is quarter. Each quarter, starting in December 2019 through December 2021, they added 10 million accounts. Now, if we go to 2022, they were adding about 3 million. And then if we looked at last year, they started losing active accounts. So they had net new active accounts of minus 2 million, minus 2 million, minus 3 million, minus two million now this quarter they stem the bleeding a little bit positive one million what do you think about that ryan is that a good that seems like a good that's not it's better than they've been doing right that's not bad it's a step in the right direction it's

Starting point is 00:40:45 a step in the right direction for sure the only concern for me is you know you know venmo is growing like to some degree it's got to be growing that network effect is so strong that i'm sure it's adding some accounts so my concern with the general decline in active accounts over the last year is that the core paypal service which is their cash cow by far i mean they have like if you use paypal to pay at checkout and you use cash in your account all the the entire Their take rate goes to PayPal there. They have all the economics. That is their cash cow.

Starting point is 00:41:26 That must be bleeding if net new active accounts are declining when Venmo has 60 million active users. Continues to grow. And it's definitely growing. And here's the thing, though. I have another chart we're sharing here. Operating income hit all-time high over the last 12 months, $5 billion. I mean, it's up from 2014. It was only $1.3 billion.

Starting point is 00:41:47 It's just compounded, compounded, compounded, except for 2022. And they're generating interest income on cash held in the account, so operating income doesn't include that. You can add that in there as well. They have a benefit from that now with interest rates rising, but I still have your same concern. another thing that no matter whether this quarter was good or bad that over the long term concerns me is the exposure to high fee foreign um basically cross-border currency not currency uh you know p2p payments and payment stuff where wise remitly some of all these other players are coming in and lowering costs for cross-border,

Starting point is 00:42:32 not transactions like with a merchant, but sending money to people. And that's been their cash cow as well. Now, it's hard to see why someone would stick with PayPal there when we've had this experience before. We worked with cross-border payments. We've said, you know, at first people are like, oh, let's use PayPal.

Starting point is 00:42:51 And then you look at the fees and it's like 2%. And then we go, no, let's just switch to Wise because the fees are going to be like 0.5%. 3% or 0.4% or maybe even lower if it's like Canada to U.S. dollars. Why can't everyone do that? It's not like Venmo where there's a network effect where it's just, oh, we'll send some money here. But we'll see.

Starting point is 00:43:16 Look, I think a lot of that's priced into the stock here and the new management team seems to have a better head on their shoulders. So TBD, and I don't know PayPal well, maybe there's some better green shoots in the quarter, But it seemed kind of the same as it has been where, yes, earnings are good, but there's still some things they need to turn around. And hopefully they're being – it looks like they're being more honest with investors. But what's weird is that there's all this sentiment that's negative, right? And earnings just keep climbing higher. You know, like eventually it doesn't matter.

Starting point is 00:43:49 yeah if here's the way i kind of look at it if as a collective all of paypal's other businesses so unbranded checkout aka braintree venmo uh what are some of the other ones zelle honey whatever if all of their other businesses as a collective can replace the cash flow from branded checkout in the long run, I think they're going to be okay. But I worry about branded checkout on its own. As you mentioned too, with international transfers, we've had international advertisers on this show before, and we've opted for Wise. And if someone were like, let's use PayPal, I would be very reluctant to do it just because of the take rate. I think they are asking people to eat away at their market. And that seems to be happening right now, especially with Wise.

Starting point is 00:44:46 uh wise is probably just getting low-hanging fruit from yeah i'd say so and some other people out there as well there's not just wise let's see we have some questions here here's a good one what business do you guys think is more relevant five years from now paypal or match i'd say more relevant you know not compared to the two but compared to where their company is today where they are today it's a good question match i would say match group so okay most of the dating apps for match group are growing tinder is in terms of like active users i think it's maybe flatlined a bit but still in general it's paypal i would imagine declines quicker yeah especially it's to check out the competitive threat is not upending the entire business model

Starting point is 00:45:44 you know what i mean yeah i mean for match group it's really not the competition at all i think it's more just a byproduct of paying users specifically it's a byproduct of probably the price increases but just overall online daters and hitting maturity in some of their more developed markets and maybe being replaced by themselves right hinge replacing tinder uh or stealing users from tinder most likely so uh i would guess that as a yeah as a group match group probably more relevant five years from now than it is today paypal i would yeah other questions do you still like the look of wise ryan um i think you are doing that for your next research episode so look a couple weeks a couple weeks on that one yeah i'm torn i'm also

Starting point is 00:46:45 looking at auto nation i found them pretty interesting so i might be looking at them as well i will say it uh wise very attractive this kind of leads me to my anecdotal evidence for the week i use wise pretty frequently both for work and we use it for um the podcast as well it's a good business or it's a great customer service I would say great customer experience they pride themselves on being a low cost provider

Starting point is 00:47:14 I think it will replace a lot of wire transfers a lot of international transfers and a lot of like bill pay from international business so yes, I like the look of Wise I think they're adding

Starting point is 00:47:32 functionality that is actually helpful for the business model, for example. So the WiseCard, Brett, you've used the WiseCard before. The Wise account gets you, I think, a pretty high interest rate right now. So there's reasons to keep your money with Wise and not just look at it like a Venmo. With Venmo, for the most part, you're really just transferring money and then giving it back to your bank account and there isn't a whole lot of take rate on it. Whereas Wise, I think they can really start to drive different ways of adding value and capturing value yeah yeah we have some questions uh on wise yeah james one of our sponsors says i just paid an international

Starting point is 00:48:16 invoice using wise and he sent the winky faced emoji i was like oh okay thanks for that one um let's see here's a question that leads into something i also want to talk about we didn't talk about add-in last week um because like every european company out there that can't seem to get an organized ir page but i found the numbers don't worry uh the question is from john doe is there any real difference between all these companies is the difference just take rate and fees now there is one thing which we talked about if you want to listen to a full episode on it i'd highly recommend going back and listening or watching what we did on addion um i think within the last year but it's still relevant uh one thing that is very important especially when looking at

Starting point is 00:49:01 Braintree and anything merchant related where you're basically processing stuff for merchants is the, I forget the exact industry term, but it's essentially the approval rate where if someone tries to purchase something, it works and what your rate is on that, because that can save a large merchant a lot, a lot of money. Now, authorization rate. Thank you. Authorization. All right. I want to add in here and get your thoughts because the stock's down on their Q1 update. It's not a full update because they're a European company. So I think they just have to do, you know, every six months forward EV to EBIT. Now, this might be the bull market talking is down to 31, Ryan. um they said that their revenue growth is still intact to grow at about they still think they're 20 plus kind of the mid-20s range is a good target for them they still think they're on

Starting point is 00:50:03 track for that and they still think they're on track to hit their EBITDA margin expansion back to above 50 which is uh EBITDA is a pretty good number for them that translates fairly well into cash flow uh right now even to margins slightly lower so my thinking is here is you have to believe them but yes you have the chance to grow revenue at about 20 percent for a while and there's a chance for margin expansion so earnings could grow pretty rapidly over the next few years is the stock cheap here 31 times forward earnings cheap no but i'm told i'm happy you told me this because i'm going to do a little digging after the show this is one i do want to own it's in my want to own at the right price category and

Starting point is 00:50:52 if you didn't tell me what the forward ebit was i probably would have just neglected it for a little while so i'm glad you mentioned that these things with between stripe and add-in i think they're so well positioned to continue capturing volume and having now been in a bit of a startup kind of trying to a company that's trying to move quickly you can see the advantage of not having not being a patchwork of acquisitions like a lot of these legacy payments companies so much of their time if you're an employee if you're a developer is spent on going back through old code bases that you acquired going back and like revising old like a lot of maintenance work as opposed to new growth oriented work where you can really try to service customers and add

Starting point is 00:51:52 value and add new products. At the end, because they've been built from the ground up and it's not a patchwork of different acquisitions, they can just diagnose problems quicker. They can move so much faster. I think it's an actual true big advantage. And they are simpler for a merchant to integrate. If you go through the old system, there's the merchant acquirer, there's the payments processor, there's the payments gateway, and you can have all these disparate solutions, or you could just have a total payment service provider in Adyen, which has higher authorization rates as well. It's kind of a no-brainer. So I think they're going to continue to capture volume. And I don't know if I'd call it completely

Starting point is 00:52:35 cheap here, but I like the way they run their business as well. On this kind of a side note here, did you see the striped statue? With the famous Italian marble. blows my mind yeah first of all okay second thing i know what are they doing publishing books this is you like you can't scheme up a better business than stripe they process a trillion dollars in volume how are they not profitable i'm sure maybe they are like slightly profitable I've seen little tidbits sneak out that they are somewhat profitable. But Adyen is generating 60% margins, as they should, because it's, at its core, such a profitable business. When I say Adyen has been in the past, now it's a little bit lower as they – so they invested a little ahead of growth to acquire some employees, some strong employees they found.

Starting point is 00:53:37 I think the question or the answer is just employees. They hired a lot of employees. They published books. They do a lot of other things, Silicon Valley style. Yeah, there's a lot of expenses out there. Statues. I think with Addian, yeah, it's maybe hitting the buy zone. I think for my watch list, it doesn't mean I would actually buy it.

Starting point is 00:53:58 I got probably five or six on the watch list that I would buy once I deposit more money into my personal account. Maybe it ends up there, but if it falls even further, yeah, I'd love to start a position. and i think look i'm pretty confident like obviously it's not guaranteed to be right i'm pretty confident they can grow earnings at at least the same level as revenue probably higher over the next three to four years and if you have 30 times earnings growing revenue at 20 percent with probably expanding margins if you think they deserve a premium multiple which i think they do

Starting point is 00:54:37 just because the churn is so low yeah and you're inflation protected i i i don't think this is the worst place to put your money if you're long term obviously short term who knows just given the valuation but long term i i think things go well from here it's obviously not as good as when i was at 20 times trailing uh for that short period in october of 2023 but that seemed like a you know once in a once in a decade evaluation here's okay hey it could happen hope i jinx it uh let's see comment here uh yeah let's see i've integrated stripe into a few websites great product in the main but if you start using any more niche features there there are loads of bugs yeah what are all those employees doing there they should focus on payments because that's part of

Starting point is 00:55:30 Listen to... If you want full thoughts on payments, I would listen. We did a whole theme on them last year. I believe in June. So go back and listen to those. And we did a full episode on why we really like Addy and Stock. That's over an hour long. Go listen to that if you want full thoughts on that company.

Starting point is 00:55:48 But I want to close out, Ryan, with Amazon. 10% EBIT margins. What did you think? Yeah. hey that was that's probably one of the only times in my life where i was like here's my model it could hit 10 ebit margins and it did it like that felt pretty cool but i didn't so bummer uh yeah i guess jesse's not a total bum so for everyone that was hoping bezos would come back and replace jesse i think i'm okay with jesse in there i'm like you know

Starting point is 00:56:31 how we have our mentally short and our mentally long buckets where they're not actually in our portfolio but we believe in the company or we don't believe online this is at the top of my mentally long bucket the i constantly come back to the fact that they probably have one of the deepest competitive advantages in corporate america today they spend when you when you take off at an airport i was looking through this and i keep a running list in my phone i've i tweeted about this the other day i keep a running list in my phone of businesses that when i come across them in real life and i like think wow that's a powerful business model i jot them down the other day i was taking off and i saw like 12 amazon prime

Starting point is 00:57:20 planes parked right next to each other. And I just thought, there's no way anyone's catching this logistics advantage and they're spending whatever, 65 billion a year on CapEx. It's a business that's going to have a logistics advantage probably for two decades. I think this is a good business. And I think retail can be profitable. they have advertising which is certainly helping but i think they could get closer to profitability even without advertising i would not be surprised if margins continue to expand within three years do they hit no it's gonna be a tough one i'm kind of exaggerating a little bit i don't know if they'll actually get there within three years do they hit 20 consolidated operating margins

Starting point is 00:58:11 i don't think they'd hit 20 i think they could be high teens but 20 reaching yeah i don't have to see 20 it depends how much aws makes up of the pie but just given how much they'd love to reinvest it seems pretty unlikely they have been i would love to know the split on advertising revenue between promoted listings on the amazon like core website and where else the advertising revenue is coming from because now i'm getting advertisements on my i don't want to say it too loud here uh i'll just the robotic device i have in my kitchen that belongs to amazon i get ads there i get ads on prime video i get ads there's ads all over and i'm starting to use more and more i'm consuming more and more amazon products outside of

Starting point is 00:59:13 just being on the amazon website so i i would love to know what the split is there i would just like where's the smart devices are quite low and just given that the numbers on no one using them prime video they just started adding that the ads in a more in a at a higher rate i know they had them on some of their sports products but i'd say that's more of a growth opportunity and maybe we'll see it could be a larger piece of the pie in a couple of years but i'd say the vast majority has to be sponsored listings right now and i think they mentioned that before without giving out any concrete numbers i i'd guess 80 it's such a good business for the sponsored listings and honestly it's one of the things that i think would concern me a little bit because it is

Starting point is 01:00:00 i guess it's similar to google search but honestly even worse where it's like you just have to pay up to stay where you would be already because a lot of this i i don't know a lot of it is a lot of the sponsored listings are listed right next to each like the same product right next to each other and you just have to click the sponsored one or not and like it's not that big of a difference. You kind of get what I mean, right? Where I know the value is there and I know they have the captive audience, but I worry that

Starting point is 01:00:33 it is a bit aggressive and that regulators might have a bit of a true bone to pick with them in that regard. Yeah. I know what you mean. And I don't know if having a bunch of promoted listings adds

Starting point is 01:00:51 value to the customer experience. It's almost like And Brian Chesky kind of came on and said, like, anyone can just do promoted listings on a marketplace or a platform. It's easy. But it's like kind of one of those things you do maybe when you're running out of ideas to raise margins. It doesn't seem like it's really like degrading the experience though on Amazon, at least anecdotally from what I've witnessed. So I'd say, yeah, just let it keep going. the only bummer about amazon doing so incredibly well is that more and more of the business is

Starting point is 01:01:27 slowly becoming aws which when i read the conference calls i'm just a little lost like they're talking about all these different developer initiatives and i'm like well i yeah like i think that's good right that sounds cool oh bedrock that's i know one thing and it's just kind of that's that's it that's it i just look at the growth rates simple storage yeah well let's see they have a comment here that says sponsored listings are definitely pushing the envelope on what they they can get i think that's what's really is driving the margins the thing is the only worry here is regulators because they basically customers aren't going to be too upset like ryan mentioned i don't think it really degrades the experience that much yeah

Starting point is 01:02:09 you might get a bit annoyed if you see a couple of sponsored listings but when you're searching for products on amazon as opposed to like getting a subscribe and save for rice or something it's kind of a browsing experience so it's not that bad that you have sponsored listings and it's not that different from a store where levi's will promote and pay to be you know have that center thing at a physical location but they are squeezing the merchants in this regard a lot i think that's one of the the merchants complain a lot and you see all these documentaries and all these reports on that and i think the advertising payola kind of sponsored listing stuff is the one true gripe that i think i can get behind where it's a little bit egregious but the the other

Starting point is 01:02:58 third-party seller services i think that's just an amazing business where that one is just yeah yeah yeah it's the classic them turning a cost center into a revenue generator where they've built out the infrastructure why not use it the fulfillment by amazon it was just kind of one of those perfect made all the sense in the world businesses where you can let other e-commerce platforms like the wix or the big commerce even shopify i don't know if they peel it back or not. Do you mean buy with Prime? Those merchants

Starting point is 01:03:40 buy with Prime, not Fulfillment. Yeah, exactly. Buy with Prime is kind of leveraging that same infrastructure. Fulfillment by Amazon is not. I was talking about it with Prime. It's just a big value unlock. There's so much they can do

Starting point is 01:03:57 once you have that infrastructure advantage. It just gives them, and I hate to use this word because I know it's overused, but it does give you so much optionality. Okay. Well, I think this is a fun earnings report episode. Let's see. I'll do the closeout. We do these live every Thursday, 9.30 a.m. Pacific time, 12.30 p.m. Eastern. We are recording an episode on Stan Drunkenmiller this week, which will be quite fun. the man who called NVIDIA and Ozempic, well, the weight loss drug stocks. One of the best investors ever.

Starting point is 01:04:32 We'll go through the details of how he invests and what we can learn as individuals from him. We're also doing a research episode on Portillo's. That will be mine. And then Ryan is TBDing, but potentially Wise, potentially AutoNation. I'd probably vote Wise because it's a little bit sexier for driving in new listeners, but that's what people can look forward to. hey auto nation shares outstanding over the last 20 years all right well that's a good

Starting point is 01:05:00 right there we can toss that right into the title let's hit the disclosure we are not financial advisors anything we say on this show is not formal advice or recommendation ryan i or any podcast guests may hold securities discussed in this podcast may have bought them in the past and may buy, sell, or hold them in the future. Thank you for everyone that tunes in live or listens on the podcast player of choice. We'll see you next week. Okay, when I sell my business, I want the best tax and investment advice. I want to help my kids, and I want to give back to the community. Ooh, then it's the vacation of a lifetime.

Starting point is 01:06:01 I wonder if my head of office has a forever setting. An IG Private Wealth Advisor creates the clarity you need with plans that harmonize your business, your family, and your dreams. Get financial advice that puts you at the center. Find your advisor at IGPrivateWealth.com.

Chit Chat Stocks - Starbucks In Turmoil; Amazon Profit Inflection; PayPal Turnaround??? (SBUX, PYPL, AMZN)

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