Chit Chat Stocks - Super Micro Stock Collapse; AI Debate on ROI; A Small Cap CEO Bets on Himself (SMCI, PDD, NVDA)

Starting point is 00:00:00 Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Welcome to Chit Chat Stocks. This is our weekly Power Hour episode. I am one of your hosts, Ryan Henderson, and I am joined as always by Brett Schaefer. We've got a lot of news on the docket this week. They're on the show for anyone that's new to Chit Chat Stocks. On the Power Hour episodes, we riff on all things financial markets. Whatever's in the news for the week

Starting point is 00:00:55 will usually come with some predetermined segments as well. I've got my small cap of the week, which looks, it's probably, I'll just say it now, the most aggressive insider buying I've ever seen. So hopefully that keeps you captured until we get to it. But Brett, you've got some segments as well. We've got a short report, huh? Yeah, we've got some spicy stuff this week. Earnings are kind of mild. We're recording this before NVIDIA's big earnings report, which hopefully this hour long podcast will be reprived from any discussion on NVIDIA, which is getting quite tiring. But yes, I have two things. One, a short report on Super Microcomputer, which might be the most damning and concrete short report I've ever seen.

Starting point is 00:01:41 The red flags are numerous. And then also PDD Holdings, owner of Pinduoduo and Timu had an interesting press release that confused a lot of investors, also scared them. Stock went down 30%. That would be a fun one to discuss, especially with our, I don't know if they're hot takes, but negative takes on Chinese stocks. All right. Before we get to that, though, we want to talk about our friends. If you trade options, you've got to ask yourself, why wouldn't you choose an options trading platform that puts investors first at public.com? there are no commissions or per contract fees. And more importantly, it's the only platform where you can earn a rebate on every single contract traded. That means you can save on your options

Starting point is 00:02:25 trading costs and keep more of your capital in play. Whenever you trade options on public, your savings are automatically applied. So don't change your strategy, change your platform and see the difference in your bottom line. That's no commissions, no per contract fees. And it's the only options trading platform where you can earn a rebate on every contract traded public.com. This is paid for by public investing. Options are not suitable for all investors and carry significant risk. Full disclosures are in the podcast description. Where do we want to kick things off?

Starting point is 00:02:54 Because a lot of news this week. Alimentation Couchetard looks like they're gobbling up the convenience store industry, buying out 7-Eleven potentially. Carl Icahn, who I always kind of had – I don't want to pat myself on the back yet. I had a little bit of a bad feeling about this guy, and some of it's been validated by a recent SEC charge, so we can talk about that as well. But I feel like it might be more interesting to kick things off with a short report. Sure, yeah. Hindenburg Research, for people that don't know, the ones that I think became famous after exposing the Nikola fraud, which not necessarily the hardest short to find or the hardest fraud to identify, but one that was one of the best stories out there,

Starting point is 00:03:43 especially with that founder who turned out to be a total charlatan. But for anyone that doesn't know, Supermicrocomputer, it's been an AI winner. Revenue has absolutely exploded. If you check out any charts on FinChat, you can see that it went from basically a stagnating company to just exploding in revenue.

Starting point is 00:03:59 And the reason is, is that they build and assemble servers for data centers. So a company like AWS, a company like Meta, anyone that's building any big data center is going to want to make it as efficient as possible. And Supermicrocomputer, along with Dell, says they're an expert in this and will basically take chips from NVIDIA, other sources, and all the connecting equipment, all the complications, which I know nothing about, for building efficient computing servers. And they hopefully can provide value there. and it looks like i think just reading the bullet points from the hindenburger port there are a lot of red flags i should note we just released a podcast on peter lynch this week and this would have been one he would definitely avoid because it's one a company with a name that is essentially

Starting point is 00:04:57 the theme of the hot sector of the day and it's also one of the stocks in the hot sector of the day, which is something he always avoided. And I think if you look at the stock price now, probably to his benefit. So what was in the report? Let me just list off some things and see if you would think this is an investable company or it goes on your do not fly list. First, SMCI, which is their ticker, had an accounting scandal in 2018, fired the executives around the accounting scandal, and then rehired them three months later. Now, the accounting scandal was around channel stuffing, which they are apparently doing now, according to Hindenburg, after their investigation. There are partial shipments and defective shipments around quarter end, which is channel stuffing to boost revenue.

Starting point is 00:05:44 Now, what I thought was the most interesting are circular accounting with the related party companies that solely do business with SMCI. So these are people that are either extended family or family members with super microcomputer executives. they have these companies that do 99 business with super microcomputer so smci sells them products then eventually the products get sold back to smci what does that do boost revenue people like revenue growth people don't really like looking under the hood when there's a bull market and the stocks have a thousand percent they have in the past not sure if they're doing this today exported banned components to Iran. They violated exports to Russia after the war in Ukraine started. And they have deals with a Chinese company that has been reported for human rights violations. So

Starting point is 00:06:37 the trifecta of banned countries. Maybe if they sell to North Korea, they can get the Mount Rushmore of countries that U.S. companies aren't allowed to do business with. And then today, this is why the stock is down. I believe it's down 20% today on top of down already. Wow. It's totally collapsing. It's down 27% as of this recording. I should say still up 40% year to date, but off of its high, it was already off 50% of its high before today. Now it's down another 30%. And that is because they just delayed their 10K filing because they got to work on some accounting stuff. So Ryan, are you investing or are you out of this one? I think the answer is pretty obvious for this type of stock yeah obviously not investing um i was real i was concerned about the

Starting point is 00:07:31 fundamentals i guess when we looked at this i want to say six months ago roughly where it wasn't necessarily like like the revenue was growing really quickly and it was getting a premium evaluation. And we both kind of came to the conclusion that there's no way to know whether this is sustainable or not, or whether competition will come in and compete away any sort of revenue it's generating from being an AI beneficiary. So there was concerns there. This solidifies every other concern I have. So it's not like this is just a 66% drawdown on a really high quality business it's on quite a fragile one and it sounds like maybe a fraudulent one yeah i don't want to make allegations because this is a public thing and people can get in trouble for that but

Starting point is 00:08:26 the red flags are numerous i think there might be 10 just in the bullet points at the top of the Hindenburg Report. And any one of these things would keep me out of a company, especially one that's in the early stage that's in a hot sector where the thing about a hot sector like AI or the dot-com bubble in its day or cannabis in 2018, that's where the fraud ends up. Because the fraudsters go to that space. Talk about EVs. Talk about, what was it, crypto. The charlatans go to that space because i think they can make easy money now not all the companies are frauds but more often than not some of them will be i think it's pretty clear and it's seems like hindenburg is shooting fish in a barrel with this one yeah i'm trying to look through the insider trades

Starting point is 00:09:18 to see you know if companies were just dumping stock um for for smci yeah or executives were dumping stock i'm not really seeing it i mean every single executive seems to be exercising their options and selling um beautiful so must be a nice time to be them yeah they're just getting hundreds of thousands of dollars of stock options and selling um we had some questions from the audience i think that there's basically been a four and four every single day for the last last three four months so yeah well i think that's a good way to close out the first segment there. Classic short report. John Gallagos in the comment says, I have been looking at reducing my SGOV position. I think that's the short-term treasury ETF due to decreases in interest rates

Starting point is 00:10:11 and moving toward high dividend great companies. He says he has EQNR 12%, BTI, British American Tobacco 11%, Altria 8.5%, and a few others that have dividends at 7% or higher. Yeah, I think that makes sense. I would actually also look at the new product from our sponsor, Public. It seems like a very innovative product where they have this essentially fixed income fund that pays out a very high interest rate above a high yield savings account if you want to lock in interest rates or maybe not lock and look at the full product disclosure. I haven't looked at the whole thing yet, but I'll check that out. But yeah, some of those dividend stocks definitely make sense. We have a comment or question here from Tyler. I think it's inverting kind of the

Starting point is 00:10:56 hot sector question what are the sectors that you think are not in favor right now what sectors would lynch be looking at and what sectors would he be avoiding well let's you know i mean he'd be avoiding ai i think we can focus on what once he'd be looking at one is definitely alcohol spirits and beer not loved at all right now yeah definitely neglected and it seems to be everyone just seems to be discarding a lot of the beer companies because of the current trend in drinking um i don't know if i have any sectors in mind at the start of this year i would have said tobacco and nicotine but the stocks over the last few months have just absolutely done really well so maybe not so much now uh tyler has a follow-up here that says why

Starting point is 00:11:46 do you think people aren't drinking as much i think there's more of a stigma against it and possibly ozempic and glp ones and then definitely the growth of cannabis is taking share yeah there seems to be more and more alternative ways to get a buzz or feel here's another one uh that's neglected that we don't that we're afraid to invest in online dating yeah big time and you know i was gonna say gaming but maybe not the uh oh gosh it's just uh oil and gas seems to be very neglected and i'm probably going to continue to neglect it because i don't know how to analyze those companies, but it's one of those where actually anything cyclical right now or deemed to be cyclical seems to just be pushed to the wayside, especially a lot of stuff that's related

Starting point is 00:12:50 to the housing market, like Home Depot lows. They haven't really gotten the, I guess, discount that I was hoping for, but a lot of the home builders seem to still trade at single digit earnings multiples um not quite what they once were but certainly people seem to have soured on those and going back to john's question around reducing short-term treasury exposure and maybe going for some of the high higher dividend yield players typically if you find a company that has a dividend yield double or 1.5 times the short-term treasury rate there are some concerns typically around them being able to grow that over time or it's typically maybe in a low to no growth industry or cyclical like the first one he mentions here is eq and r i believe that's in

Starting point is 00:13:46 norwegian oil and gas play i would say take a basket approach unless you have very very good understanding of the business and you think it's going the right direction that kind of thing i would take a basket approach to the high dividend yields as opposed to just picking anyone yeah makes sense yeah i think i agree but i don't know anything i know you love all true tough but yeah all right next topic you got a few on your list here what do you want to hit first we could go hmm i do want to talk about my small cap of the week but we can save that for a second alimentation kushchard i think it might be alimentation i don't know i can't pronounce it kushchard uh is offering to buy seven and i holdings which is a japanese

Starting point is 00:14:41 is a company that runs 7-Eleven. And this is $31 billion in value is the offering. Seven and I Holdings, I believe, stock jumped 23% after the offer. These are, I believe, the two largest convenience store operators in the US. Combined, they would have roughly 13% market share, the US convenience store segment. The second closest player would be Casey's, which I think has less than 2% market share. So they are, I mean, it's still only 13% market share. It's convenience stores. So pretty competitive industry, but I guess thoughts here. Do you think this could go through? And then second question, would you have any interest in investing in the combined company? No idea if it goes through. It seems like it probably should,

Starting point is 00:15:34 but again hard to tell I have no interest in buying this but I do have interest in the convenience store space it seems interesting it seems like maybe one of those under followed unloved sectors at the moment definitely not a sexy sector but I would be much more interested in a Casey's or a Murphy USA that is smaller and I just don't like that this kind of conglomerate style i feel like maybe they whatever you call this company that's acquiring them i think they're canadian right they are yeah there's maybe they have a good track record but i don't want to invest in a large company in this space because there is limited upside there's just limited total addressable market i'd maybe be interested in some of the dollar stores dollar general dollar

Starting point is 00:16:26 tree but yeah i i like the convenience store space a little more total revenues for 7-eleven's gone kind of nowhere in terms of the top line but uh act let's call it has done a really good job growing their business i i wonder if there's really a whole lot of economies of scale here like is there any benefit of these two companies being together synergies you think yeah they'll talk about classic stuff like negotiations with suppliers or back office things but i don't think at the end of the day it's going to matter too much are these solid businesses yeah are they hurt by the decrease in tobacco sales yes but i think they're also getting saved by the increase in the new nicotine products vaping heat not burn stuff and nicotine pouches

Starting point is 00:17:24 i don't know i think these companies will be around for a long time if electric vehicles take over though i think that's a bit of a risk and that's going to they're gonna have to bridge the gap to a new business model because a lot of these are gas stations correct yeah they uh i listened to this interview one time with this guy that was he was a recurring customer of nicotine pouches and he's like he said i got a i got an electric vehicle so that i would stop going to the gas station to because every time he'd go to the gas station to fill up he'd get nicotine pouches and then he said now i just go just for the nicotine pouches so i wonder if like the convenience store operations which

Starting point is 00:18:13 for most of these businesses where they earn their margins where they earn their profits um i wonder if those would still do all right in an ev world yeah maybe maybe i i think it is a point of uncertainty though that's fine it's gonna it's gonna be multi-year did you see microsoft's uh reporting changes I saw that they made reporting changes, but I did not want to spend any brain power looking at it because it's just a company I'm not going to be investing in. Yeah, it's very confusing. They don't really say how they rearrange stuff, but basically, they're reclassifying how they report certain segments. And they had this little graphic that shows, like, here's what the growth used to be for every segment.

Starting point is 00:19:06 after we reclassify here's what the growth will look like and every single segment except for one is growing by more they put all the bad faster all the bad uh subsidiaries in one segment and then all the good ones and yeah it's it's annoying it's annoying it's it's it's similar to alphabet i guess alphabet is really one to underplay themselves and tries not but it's it's frustrating, I guess, in the opposite direction where it's like, well, give us more detail. I know some of these are doing better than you think. But with Microsoft, they do play a little bit of the Disney game where they reclassify to try to hide some things, I think. But maybe I'm looking at it too cynically. We have a question here. It says, are there areas that you would

Starting point is 00:19:55 never invest in? For example, would you invest in businesses in a commodity sector or does it just depend on your circle of competence? It's more on circle of competence for me. I definitely would invest in a commodity sector. But for example, in the past, I've looked at the lithium producer, hard to say its name, but it's Albert Marley. ALB, I think is a ticker, huge lithium producer. But when I looked at the industry, I saw that there's basically a ton of lithium in the ground. And all it takes is governments and companies deciding to dig it up. I don't think That's a great way to invest. And I had no sort of any, any sort of predictive power where lithium prices were going to be. So why would I buy? And you have companies or countries that are going at things like this on economically like China with other sort of commodities. So why would I invest in this? I think Buffett says that, you know, I guess it connects like the two questions relate because would you invest in commodities? No, because it is outside of my circle of competence because it is commodities and not driven by things that I think are predictable.

Starting point is 00:21:03 Yeah. Never say never here for me. Like, I don't know if there's an area where I would just absolutely write it off right now. But I think the likelihood that I ever end up investing in anything that's highly commodity dependent, like an oil or gas, like a lithium miner or anything like that is very low. Yeah. Yeah, oil's a little better because you know the supplies are limited. But I think people were people predicting fracking in 2005 to take over the world or take over the United States at least. No.

Starting point is 00:21:40 And there could be technological developments that lead to, you know, more supply unlock. We have a question here from Will that says, enjoyed the discussion on hims and hers last week. Any thoughts on the recent drawdown due to Eli Lilly entering the GLP-1 space? I do not have any thoughts. Here is my overview on hims and hers. And go listen to my discussion with Paul Serra last week. He did about 20, 30 minutes on the company. And there's plenty of other reports out there.

Starting point is 00:22:08 When you make a bet on hims and hers, a company like this, high risk, high reward, trying to disrupt a sector, trying to maybe enter gray areas from a regulatory perspective that Paul talked about last week. You make the bet, and you let it ride. It's either going to work or it's not. Don't worry about news items hitting your timeline every day. Just like Eli Lilly's entering the GLP-1 space, okay. That shouldn't really, like, shouldn't change much, right? Just hold it in your portfolio.

Starting point is 00:22:40 And if you're not comfortable holding it when Eli Lilly announces something, well, maybe you shouldn't own it. And I, yeah, I would caution against buying on constant dips because you never know when one of the – because Ham's and hers – I wasn't a part of the Pulsaro discussion, so maybe there's stuff that I missed. But that's the kind of company that's going to have news on a very regular basis and probably news that could actually impact the business, any sort of regulatory concerns, stuff like that.

Starting point is 00:23:11 So if you're buying on every dip, you might just end up buying constantly until it's too big of a part of your portfolio and you're not comfortable with the business. So I recommend, like Brett said, buy it and just look away. Yeah, exactly. All right. We have, I think Tyler says, is there a way to analogize? Sorry.

Starting point is 00:23:34 Peter Lynch is teaching around retail where you go from a 10% to a 90% market share and looking at a reinvestment runway, but for a sector outside of retail and restaurants. Yeah, I think you just have to look at market share. and the internet has changed the game because a lot of companies can go global right away. I'm researching Remitly for this week's podcast. I know we had a question from a listener on Twitter saying, why don't I own Remitly? And I think the question will be answered on that podcast. I'm not going to buy until I finish my research on them. So there's no reason I don't own them yet. It's just because I haven't finished my thoughts. But something like that,

Starting point is 00:24:12 you can look at. They brag about, say, 2% market share. It's really inched up over time. And you can say, okay, they're at 2% market share. The value proposition works. Everyone has the same phones, either iOS or Android around the world, at least in the markets they operate. And everyone has a similar value proposition, right? You got to get money sent and you want to trust the person that's doing it. So I think looking at market share can be helpful and looking at whether they've been a market share taker and if they have like, okay, if someone's taken market share, it's usually fairly predictable that they can go from, if they've gone from 2% to 5%, that they could go from 5% to 15%. Now, when you're at say what you mentioned with 7-Eleven

Starting point is 00:25:06 and that other company. If you're getting into that kind of 15 to 20% range, maybe you're hitting some sort of wall because it's really hard. I know when we talk about either consumer goods companies, there's a lot of analysis out there about how things turn into oligopolies where, for example, you have like a Red Bull and Monster in the energy drink space, and they both kind of hold 40%, 30% market share. And then you have some other smaller players like the third player that has 15 and then you have a few other players it's yeah someone that has low market share has taken some market share and probably has a lot of room to run as where i would look at it for a lot of these internet companies yeah the market i think sometimes

Starting point is 00:25:50 people are looking for like the market share charts that have all the competitors and like or one succinct page to do it. If a company is growing quickly and the industry itself is not some massive growing space, they're pretty much a market share taker and you can analyze that. And my biggest thing,

Starting point is 00:26:12 I'm really forcing myself to do this more and more is when you finish research on a company, go and try to do some research on their closest competitor because it really does give perspective on, okay, who's stealing share, which company is worried about which. Water management team is talking about. Yeah.

Starting point is 00:26:35 And it's easiest when they don't have like a big private competitor. For example, Paycom, it was pretty easy to look. Most of their competitors are public, so you can go ahead and you can look at a lot of them and you can really get a sense of whether or not they're a share taker. Um, but whereas a company like SEMrush, their closest competitor is either a private company or Google search console, and you're not going to get a whole lot of information on Google search console.

Starting point is 00:27:03 So, um, sometimes it's easier than others, but yeah, I, I guess, I don't know if I really even answered the question, but yeah, market share taking is probably the thing you really have to, uh, try to boil it down to. And I think we said this in the other episode, but I would rather have a market share taker in a slow growth industry than a fast-growing company in a fast-growing industry because it's going to get competed away. The other thing I was just going to add – Well, it's just going to be more competitive. There's going to be a lot more competitors in a hot industry. Yeah.

Starting point is 00:27:39 Yeah. You mentioned the 15% to 20% thing. It really depends. For like the convenience store market, it's going to be hyper competitive and it's a lot easier to start a convenience store than start a home improvement retailer. Like for Lowe's and Home Depot, their economies of scale are always going – they're probably going to continue being a positive feedback loop for them where they continue to steal share, they can undercut the competitors on price, or they can invest the proceeds back into the business and improve the experience. So the biggest thing for me is just look at what are they doing with the profits they generate. If it feels like they're continuing to be the low-cost provider, then I would say market share.

Starting point is 00:28:27 It's unlikely, if you have a scaled business that continues to be a low-cost provider like a Costco, it's unlikely that they will stop taking market share. yeah as long as the business is well run in the same way that it's always been uh we have one more comment then we can move another one our own topic says hello gents crowdstrike earnings today will be good fun i can see this is definitely a british or not an american listener uh i still see conviction mark usa hey maybe uh gents and good fun that smells like british to me uh it says with crowdstrike i still see conviction on the long term if you can ride potential litigation still an underlying great business

Starting point is 00:29:08 hey look if you're if you have conviction that the product's great that it's a great business that there is a competitive advantage here i keep holding it but they had a big slip up they i think management might be going about it the wrong way by trying to blame delta airlines because that's not gonna just like publicly doing that might not end up well uh you're supposed to be the one that's monitoring the software right delta's outsourcing this to you and paying you probably hundreds of millions of dollars now maybe not hundreds maybe tens of millions of dollars a year so yeah i'd be the conference call will be fun to read i think that'll be a fun one for anyone yeah the other thing that's worth keeping an eye on it's if you're if you're a um sales rep at

Starting point is 00:29:54 CrowdStrike. Your pipeline, as soon as this happened, just broke. Your pipeline of leads, every single person probably put their purchase or whatever their deal was on pause because they're worried about security concerns now. So if you're investing here, probably need to expect a billings or RPO, remaining performance obligations, slow down because a lot of those new deals are likely on hold for the time being. Yeah, I want to see what they tell investors about the pipeline, how honest they are. If they get through this, though, it's a huge testament to their culture,

Starting point is 00:30:40 the management team, and the business. not to say you'd hope for any more of these outages to occur but it's it's some sort of i wouldn't maybe not a moat test maybe a bit of a moat test but just to test for the business in general all right do you want to hit this carl icon topic uh kind of a simple one but seems like the man has it's been maybe misleading i guess with his reputation i i don't know you go into the details maybe we can discuss it yeah and i apologize in advance because i got a little bit of background noise here but um yeah he's charged two million dollars by the sec he failed to disclose and a lot of this came out in a short report failed to disclose that he was using his

Starting point is 00:31:26 personal holdings and icon enterprises to as collateral for uh margin loans he was he had pledged up to 65 of the outstanding stock as collateral so this was a huge thing and he didn't even tell shareholders more or less uh charged two million dollars some of it was personal some of it was from the company it's kind of a slap on the wrist two million okay he's got some he he definitely is working the sec that's who what what information does he have on you know what dirt does he have in all these people that's what i want to know yeah i don't know how he kind of got skated by this one um yeah it seems like nothing uh before i do want to talk about our small capital week because this one's really enticing

Starting point is 00:32:18 but before we do i want to mention uh our partners again public earlier in the show you heard us talking about the investing platform public.com that's 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 nerd wallet recently gave public five out of five stars for options trading if you want to see why go to 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 full disclosures are in the podcast description u.s members only have you ever heard of nerdy have not have not what is it let's let's talk through this so uh this is my small cap of the

Starting point is 00:33:04 week 124 million dollar market cap 87 million dollar enterprise value i think it was probably a recent ipo i would guess just based on the cash balance that they've got here so about 40 to 50 million in cash in the balance sheet they are i'll just steal it from fin chat here nerdy operates a platform for live online learning its learning destination provides learning experience across various subjects in multiple formats including one-on-one instruction small group classes large format group classes and adaptive self-study the company's flagship business varsity tutors operates platforms for live online tutoring and classes it's been a high growth business um in 2018 they had 72 million dollars in revenue

Starting point is 00:33:54 last 12 months they've had 200 million dollars in revenue so it's growing quite quickly um seems to be gaining steam in the education market now i think the education market is a little fickle i would really not be interested in this company at all except for i saw something last week which kind of blew my mind the ceo founder charles cone last week keep in mind this is a 120 million dollar market cap company last week he bought 12 million dollars worth of stock in the company he doubled his stake by purchasing 11 percent of the outstanding shares in one week so would you buy blindly off that that's pretty that's pretty interesting it's the peter lynch thing right like yeah the chances that a company

Starting point is 00:34:47 like this goes insolvent in the next year after the founder who knows the business far and away the best has the control over costs like he can cut marketing spend if he wants to that kind of thing doubles his stake buys 10 of the company yes i would probably buy some starter shares just purely off of that um i don't know that's that's a pure hypothetical yes just to be clear i have not uh and certainly not uh financial advice they expect to return to durable and profitable growth by the end of 2024 and they did get to operating cash flow positive two quarters ago had a down quarter this quarter um be curious what's going on there but they've got the if they can get to basically like break even cash flow or even positive cash flow margins

Starting point is 00:35:40 there it's a still a growing business seems durable maybe there's a scenario they've got 40 million dollars in cash maybe they could be buying back stock as well it's i don't know it's enticing yeah and i'm sharing the screen here from our friends at finchat use our link in the shown. Let's get a 15% discount. EV to gross profit, 0.6. Pretty cheap on a gross profit basis. Now, it seems like a classic Ian Cassell microcap where, and I have no idea whether he owns it or if he even has heard of this company, where he loves a company that goes from slightly negative margins to break even to say slightly positive profit margins where they essentially tell the investment community or prove to the investment community that they can generate a

Starting point is 00:36:37 profit. Because once they do that, that can lead to a huge, not only are the earnings growing, but you can get a big multiple expansion on top of that. this is also a shameless plug for one of our sponsors yellow brick the uh this is a good example don't know the company at all looked at nerdy for the first time saw that the insiders were buying i went i just went to join yellowbrick.com looked up the ticker nrdy and there are here's a high quality well i assume it's high quality uh because most of their pitches are you You can read the full article. It's a pitch from a, it looks like a sub stack and you just instantly get high quality write-ups

Starting point is 00:37:20 like on pretty much most companies globally. It's been rare that I've looked up a ticker and not seen it on here. So it's really easy. It's an aggregator of the best stock pitches across the internet and you get them all in one place. Plus I've been using the newsletter a lot more. So if you go to joinyellowbrick.com slash chitchat, you can get a discount on the new paid plans.

Starting point is 00:37:44 You can also check it out. It's free as well to just look up stock pitches. You'll get, I think it's a month delayed on the free plans. So there's still a huge catalog of write-ups in there. Beautiful. Yeah. With the freemium model, check it out. Anyone can go check it out.

Starting point is 00:38:00 But the value is, and the aggregation, the time it saves you. all right we had a question on nerdy on revenues since 2018 revenue has grown at a 20 annual rate looks like pretty consistent there and then we also had a question on gross margin now let me pull it up quick on our from our friends at finchette click over margins gross profit margin trended up where upwards uh december 2018 63 so i think that's full year 2018 last 12 months 69 peaked in 2023 at 70 so it's pulling down slightly but generally it's trending upwards so two positive developments there too definitely interesting uh i so many of these small caps that you find and it's great that you know yellow brick you find so

Starting point is 00:38:50 many of these it's the high risk high reward and the basket approach makes a ton of sense to me if that's the style that you want, where if I'm seeing these sub billion dollar market cap companies, a lot of them are risky, but take a basket approach at 10 to 15 of them. Maybe you make it 20% of your portfolio, say about 1% position each. I mean, over time, some of these will turn into huge winners. Some of them will go to zero, but then it'll become a larger percentage of your portfolio if they end up being a 10 bagger. Want to talk about what happened with pinduoduo yeah let's do it our friends over in china uh i guess this is more i what we call schadenfreude we're very say anti-chinese stocks just because of the how the government treats a

Starting point is 00:39:44 lot of the businesses and neither we don't know the market at all it's a very it's a market that's really, really hard to analyze as a foreigner. I can look at a place like Europe or a place like Mexico, and I think I can get a better grasp of how things are without getting boots on the ground. But in China, it's a lot different. Really, here's what happened. PDD Holdings, owner of Timu and Pinduoduo. Pinduoduo is similar to Timu, but a little different. It really dominates the Chinese e-commerce market. They saw their stock collapse about 30% after saying growth and profits would disappear in the coming quarters. I can bring up the press release because it was interesting. Like maybe, yeah, I'll just, let me try to find it so I can read the full quote.

Starting point is 00:40:34 They did essentially on August 26th, they announced their second quarter earnings. They go through a classic thing where they go second quarter highlights, total revenue increased 86%, operating profit increased 156%, net income increased 144%. And you're like, okay, great. Another good quarter. Then you get to the quote here. I'm going to read this. And it's really shocking how negative it was. Quote, while encouraged by the solid progress we made in the past few quarters, we see many challenges ahead. We are committed to transitioning toward high quality development and fostering a sustainable ecosystem. We will invest heavily in the platform's trust and safety, support high quality merchants and relentlessly

Starting point is 00:41:11 improve the merchant ecosystem. We are prepared to accept short term sacrifices and potential decline in profitability. Another quote, in the past quarter, our revenue growth rate slowed quarter on quarter. Looking ahead, revenue growth will inevitably face pressure due to intensified competition and external challenges. Profitability will also likely to be impacted as we continue to invest resolutely. That is a scary, those are some scary quotes. Now, there could be lost in translation a bit but i see those numbers i see their their figures and i go what's going on here someone rugged the shareholders and i wonder who it is it's either the chinese regulators it's either the management team or yeah i guess it would just be those two but i wonder why why

Starting point is 00:42:02 now what's going on and i think there could be a few things that occurred one their merchants are really mad or their merchants have some scandals on their platform that they're not really, you know, there could be like, okay, is there lead on this stuff or something like that? Second, they could be doing accounting fraud. No idea. It could be. Or third, the regulators are saying in China, you're too profitable. Kind of an Alibaba style. A couple of years ago, you're too profitable. You're too big. Hey, lower these profit margins. Why don't you? Before we, you know, make some changes over here and get a little bit more aggressive, kind of a mafia style it would be in your best interest to to lower profit margins from to 10

Starting point is 00:42:43 or whatever the number would be what did you think after seeing this or hearing some of those quotes yeah it's bizarre because they're already like the lowest cost provider by a mile like globally so i wonder if they came in and said we want even lower prices seems unlikely but uh it's so i don't know this is why this is why we avoid china it's just super unpredictable like you read those first few bullet points and you think wow that's a great quarter fantastic it's growing just as i expected and then they say we don't want any more of it like profits are going to disappear it's pretty concerning and you know what this is one of those where we have avoided chinese stocks for a long time and i'm really glad we have i think we got some skepticism from

Starting point is 00:43:34 it yeah you look at that revenue chart oh my no that's not revenue ryan that's cash and short term investments oh 40 billion dollars in cash uh i think that it's yeah i have on usd yep and they're not buying back or paying a dividend gosh why is that do with it yeah well my question is is it there or are they allowed to give it back to shareholders? Well, they're definitely not feels like Chinese companies rarely give it, especially to Chinese tech companies, rarely give back cash to shareholders.

Starting point is 00:44:09 I, uh, it's just frustrating. There are a lot of Chinese companies that seem promising, but it's hard to invest just because it's frankly unpredictable. The regulatory environment is concerning. They, they remember when there was the legislation that was going to be introduced that would

Starting point is 00:44:30 delist chinese adrs right yeah let's get that back concerning that chinese companies like this or you know not like timu's necessarily doing anything that's that harmful but um they're getting u.s foreign investment and if it's going if they're going to get penalized or whatever if it somehow ends up back in the hands of like the chinese government it's it's really quite a good operation from the uh from the chinese chinese perspective because they're not giving this money back and people are still willing to directly invest in it hey i got a pe here of nine ryan last 12 months pe of nine and a half are you buying shares outstanding look like uh yeah with that cash balance that ev to the earnings is going to be

Starting point is 00:45:21 quite lower let's do total shares outstanding uh let me just go as long as we can change to a bar chart well it's just been going higher yeah and they listed a bunch looks like i'm guessing 2017 is the ipo market cap 133 billion usd ev 95 billion hey buy back stock if they started buying back a ton of stock would you have any more interest yeah or do you want a dividend that's not gonna happen no i'd prefer a dividend for sure yeah if they if i if yeah it's kind of like the say a mexican company or a lot of the companies that we've looked at in latin america where the dividend can help with

Starting point is 00:46:16 any sort of foreign exchange uh sorry foreign currency risks can hedge that a bit let's see we have some comments here. They have zero reason to have American shareholders interest at hand. I think if you look at their actions, I agree with that. Just as Chinese companies as a whole sounds like Colin Zhang wanted to avoid going on a month long vacation. Another comment there. I think that's a founder. Also, no actual ownership under Chinese VIEs. You own nothing. Don't worry. You can sue in the Caymans. Yeah, I think this is a Cayman Island company. So they also say in the press release which i think is funny uh the headquarters are dublin and shanghai now that is a combination i do not want to invest in because ireland is another place where people

Starting point is 00:47:05 go to avoid regulations and sanctions but yeah i think that sums it up yeah no china remains uninvestable for the time being for me what would have to change for you to change that strategy From the top, what I mean from the government, I would need to see words and actions around actually embracing capitalism, not going after companies just because they're profitable, not going after executives just because they're rich. And then from a company perspective, I would want to look for a lot more clean structures from a governance and basically just the business structure. And then I would look for much more returning capital as shareholders. Which, I mean, Japan didn't have all those problems, but it seems like Japan has fixed the governance and or the government is working to try to fix the company's governance and capital returns programs. And that seems to be a much more attractive market. If you're looking at East Asian economies that have terrible demographics, Japan might be a bit better for American investors.

Starting point is 00:48:27 Yeah, I mean, their capital allocation is pretty conservative as well, but at least, you know, there's some returning of capital to shareholders. Yeah. All right. We had a question on Twitter. Someone wanted to talk Tesla full self-driving. I thought it was interesting listening to that invest like the best interview where I did not hear it. So, the ex-semiconductor analyst and tech analyst that now runs a fund called Atreides Asset Management, Gavin Baker, pretty big expert on semiconductors, I would say, from listening to that interview, and longtime shareholder, I think, now check the 13S, this is not any sort of confirmation, I think longtime shareholder on NVIDIA and Tesla, so done quite well. he said that the biggest benefit of ai might be in the near term will be tesla full stealth driving

Starting point is 00:49:24 uh tyler says do you think gavin was being a bit hyperbolic i think he was i think he was doing it for maybe for the podcast it's not you know we have a podcast not afraid to do put out some hot takes out there from an investing perspective and someone asked about that i would say i have no expertise on that ryan has none either what i do think is interesting is looking at and people wanted to have an update on the EV space, I would look at the charts, and there's a great chart in the Wall Street Journal, and just look at the data out there. We've seen a reversal in the United States, at least, where electric vehicles, this time last year, were growing unit sales 50% year over year. Plug-in hybrids weren't growing at all. That has reversed. Plug-in hybrids are growing

Starting point is 00:50:09 50 year in a year of a year oh uh full electric vehicles are flatlining they're not growing on a total unit sales basis you can see that that's why tesla's prices are declining that's why rivian's not growing its unit sales and that's why some of these other companies like toyota are thriving in 2024 and i think that is the most important thing to watch for these automotive companies at the moment yeah that's fair i have very little to add i haven't listened to the show if you've owned tesla and nvidia i've listened to gavin baker a number of times i like what he says i would be uncomfortable owning those two stocks but if you've owned them thus far like

Starting point is 00:50:50 my gosh congrats tesla less so lately but yeah he's yeah i guess tesla since 2021 hasn't done well um one thing that again he knows way more going from that never he knows way more about semiconductors and ai than i do but from my seat people have been promising that tesla full self driving would be a game changer over the next 12 months for the last five years so right now i think those type of people are a boy who cried wolf situation i honestly think the same with ai could happened over the next couple of years. We'd better see some real breakthroughs with this spending. He said what I think was interesting, and he did have some great points around the overall return on invested capital at some of these companies, Amazon, Microsoft, Meta, and

Starting point is 00:51:45 Google, the ones that are spending a ton on data center infrastructure. So the ROIC has been improving. One pushback I would have on that is that they've just extended server lives. So I don't know if the ROIC was just understated before, but saying that anyone that's a skeptic on AI return on investment is like laughably wrong. I would say let's maybe hold out and see what the jury says in a couple of years, because right now, how much is getting spent? A lot. A lot. And let's just see. I'd say let's wait and see.

Starting point is 00:52:26 Yeah, the CapEx charts are wild across big tech. Yeah, tons being spent on it. Yeah, I agree. We are seeing Andy Jassy had those tweets coming out about the time savings for developers that they've been able to create. So maybe there is benefits that we're not recognizing. But yeah, it does feel – it doesn't feel tangible yet, the benefits to me. Yeah, like the time savings to me – But I'm also not in the dev space.

Starting point is 00:53:02 Like that's probably where the majority of development is going or the most clearest benefits. Yeah, and I would say that is pretty clear. Like you can't really deny that. but if this is a labor thing and all these companies amazon google meta which are basically take rates on us and somewhere global consumer spending while a bunch of people are getting laid off like eventually it's kind of circular right we can't can't all just be automated people have to get paid you know 100 did you read the target report i glanced at the headline numbers probably just glanced at a thin chat that's one of the best uses of the platform i know we talk

Starting point is 00:53:52 about our advertiser a lot but it is nice to kind of get those headline numbers and visualize them quickly good good report though right on comp sales yeah yeah better i mean they're lapping a difficult period so it would be concerning if it was negative again but um they're seeing better traffic they said they were working hard to drive down prices in the stores i will say the only it seems like the only two companies to report really solid any two retail companies to report really solid consumer habits or consumer trends were walmart and target that's all of them said yeah all of them said and there's probably some other ones that i'm missing but they all basically said the consumer is spending less per trip but we're getting more and more consumers in the door

Starting point is 00:54:42 because we have the lowest prices and they're being more discerning about what they buy so that doesn't sound like where do we where do we stand stand with the consumer yeah we talked about i think we're kind of in a spot now where consumer spending is tightened and the discretionary spending seems to be pinched yeah we talked about this with paul last week the macro stuff is very hard to predict like if you're one of the permables you look at this and say Costco, Target, Walmart, Amazon, they're doing fine. People are spending money. But if you have the bearish tilt, you would say, well, people are trading down. That does not necessarily indicate consumer health. It indicates tightening of the budgets. And if that gets worse, that's a pretty

Starting point is 00:55:36 clear indicator of a recession. I like the idea that Walmart having a great few quarters is actually a bad indicator for the economy over the next year because it shows that people are trading down but am i going to invest because of that i got to make any investment decisions because of that no i think it's helpful to understand that maybe that's why walmart and target are doing well at the moment yeah there's it's nice to own companies that benefit from a difficult economy and when you're a dollar general yeah your dollar store you know you're going to be in a good spot as long as you maintain that proposition. I think McDonald's is kind of straight away from it a bit,

Starting point is 00:56:20 and maybe that's why they're seeing like declining traffic. But it is nice to be sort of counter cyclical in that way. Walmart, can you guess how many quarters in a row they've had positive comp sales, their current streak? So I'm guessing pandemic. can i say pandemic they were all positive they were 100 no 40 but pretty good 10 years in a row every single quarter positive comp sales it's pretty impressive even lapping the pandemic oh yeah and lapping the what you would call it stimmies

Starting point is 00:57:06 haven't said stimmy in a while but remember those stimulus checks yeah those were interesting as well and definitely those last ones may have been the worst thing for inflation i gotta say yeah remember target and walmart everyone got stimulus checks and a quarter later they're like our tv sales are off though we've never seen this good it's like wow look where it's being spent yeah uh okay well we had all reported crazy comps in their electronic segment yeah i thought that was funny yeah okay we had a commenter ask about target gross margins i mean pre well last year i think they took a big flush on some inventory but pre-pandemic they're at about 29 to 30 percent looks like they really have a target to hit no pun intended

Starting point is 00:58:07 30 on that gross margin last 12 months 28 was like a trailing maybe it's lower lower ticket item seemed to be the one selling so maybe that's hurting them hey look even with those positive comp sales and they talked about trading down and discounts and stuff like that gross margin has improved from the trough in january 23 for one two three four five six straight quarters so positive good comp sales and they're not selling a dollar for 90 cents i see a comment here that says did you guys see kathy wood sold zoom no i'll be honest i don't really track her holdings much anymore there was a period where it was did you ever take well i think throughout covet and stuff it was kind of fun for talking points like that's true

Starting point is 00:58:59 especially once you everyone and i probably did this too we're taking victory laps because i mean the main reason was that she had very very let's call it aggressive assumptions i thought they were a little dishonest or disingenuous and it was just a way to kind of promote her fund well if you sell zoom uh if you sell zoom 98 below your price target yeah um so it was nice to for a while there people were taking victory laps and saying oh look you know this funds down however much at this point i'm kind of bored of it and i i don't really track it quite as much i'm curious what the aum is in the ark invests etfs look it up wonder how i'm guessing most people have lost money i got two trivia questions yeah yeah you

Starting point is 00:59:50 looked that up i got two trivia questions for you returns for zoom stock since its ipo in april of 2019 positive or negative what do you think can you guess sorry repeat that i was looking this up okay zoom went public in april of 2019 cumulative return since then positive or negative well i think because you're asking i'm going to say negative positive but only positive 13 percent it's four percent irr that's a well i think that's like a two percent irr and can you guess their market cap yeah sorry that's a two percent dang it's already 2024 um market cap Let's go $9 billion.

Starting point is 01:00:44 $22. Really? $22 billion. Well, remember when they used to be bigger than ExxonMobil? Do you remember when Michael Burry said, literally at the peak of COVID, he was like, how are we not at peak Zoom? And everyone's like, no, you know, they're going to raise prices, like people will stick around. And it was perfect. Like, it was perfect timing.

Starting point is 01:01:07 One, competition came. two people didn't need it anymore like everyone at the time was working remote it you switch to a hybrid environment you don't need zoom as much at least don't need as many seats you don't need i mean it's just like all the reasons supported it and people call them crazy for it and it was so prescient i mean he could not have been more right on his timing yeah i agree i agree the man seems crazy but fairly good investor he has been embracing the chinese stocks so he is deep value and he is not a play he's not afraid to plunge into the depths we have a comment here that says update on gogo news i'm not sure there was really anything

Starting point is 01:01:51 that relevant i mean it's really just developments that people are expecting i'm sure we'll do an update on them sometime next year as a part of a podcast but right now nothing's changed with my thesis and i'm gonna go back to that full podcast we done them but we discuss why i own them there's gonna similar to hims and hers this is one where there's gonna be a lot of narrative out there especially because it's competing with an elon type company starlink huge narrative around that it's one where i'm gonna i made my investment i'm gonna hold it for many years if it works it works if it doesn't it doesn't and that's gonna be that can you guess sorry i just found this so i i know we're switching topics here can

Starting point is 01:02:40 you guess how much arc innovation etf has in net assets that's the flagship yes 2.5 billion six wow that's still good that's still pretty good i mean that's a big fund yeah that's a big fund uh performance has likely been inadequate i'm not 100 sure but i can actually look it up I'm going to finish that here. ARKK. Has it beat QQQ since inception? I've been told that that's who Buffett needs to be benchmarking against. $10,000 invested in ARK's innovation ETF five years ago.

Starting point is 01:03:28 You would have $11,000 today, roughly, 10.9. Let's compound that out. Positive 9% returns over five years. We're playing a long game. We're playing a long game. Three years. Go ahead. The three-year return is negative 63%.

Starting point is 01:03:46 Yeah, that's, you know, don't invest in the hot sectors at the top. Lesson everyone needs to learn. All right, we're going long, but did you see Buffett or Berkshire hit trillion dollars? Trillion dollar market cap. Really? Yeah, get that FinChat. tweet out yeah that can be your fin chat tweet of the day i already had a motley fool headline primed for this he's really doing it for our for trying to hit our bonuses for clickbait

Starting point is 01:04:15 headlines wow good for good for one i wonder if he's having an extra coca-cola today yeah maybe maybe i i have no clue uh he's also outperforming i think on 3 10 and 30 years versus the s&p 500 so do you think not bad what do you think's a bigger milestone for him taking the company to a trillion dollars or taking the bursar a shares to a million probably the a shares to a million because per share matters to him more especially because he under he understands that that's what's more important versus the market cap i think those are the two milestones he wanted though before he goes before he uh passes away it's an incredible accomplishment yeah run those numbers get those what was the textile mill worth when he bought it i think less than 10 million i

Starting point is 01:05:14 think like seven and a half million dollars it's all like that it's some decent compounding right there yeah all right but you know what long but thank you all for the people that joined live asks us questions ryan anything else before we close out i was just gonna say remember how we were like skeptics about all the fund managers that just have berkshire as their biggest position because it seemed a little redundant good for them hey yeah that's true but it has it has outperformed and if you buy it right if you buy on that price to books low man it's a manager and that's a management team you can trust okay but yeah let's get close things out here thank you everyone for tuning in live. We do these Wednesday around midday Eastern time. Try to do it at 1.30

Starting point is 01:05:58 p.m. Eastern time, but sometimes with our schedules, we have to mix things up. I haven't said this in a while, but if you've listened to this full episode, give us a review on Spotify or Apple Podcasts. It's the best way to grow the podcast. 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 held them in the past and may buy, sell or hold them in the future. Thank you, everyone, once again, and we'll see you next week.

Chit Chat Stocks - Super Micro Stock Collapse; AI Debate on ROI; A Small Cap CEO Bets on Himself (SMCI, PDD, NVDA)

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