Chit Chat Stocks - What Happened to Super Micro Computer Stock? Plus, Our Takes on The DOJ Suing Apple (SMCI, AAPL)

Starting point is 00:00:00 Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siyaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll.

Starting point is 00:00:22 So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. Welcome to Chitchat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Welcome in, everyone. I believe we are live. This is the Chit Chat Stocks podcast. My name is Brett Schaefer. And as always, I'm joined by Ryan Henderson. And we are talking whatever we want,

Starting point is 00:01:16 because it is the investing power hour, our live stream show that goes out every Thursday. we try to do 10 30 or excuse me it's 10 30 my time 12 30 p.m eastern time although sometimes we don't get it exactly there but you can watch the recordings on the good old youtube channel or listen to it in podcast format um ryan i didn't come up with a pre uh planned i always come up with a question beforehand uh but i forgot to this time but i guess off the top of my mind did you see which i'll talk about later in the show the clip of on cnbc of the guy calling people that don't own nvidia inherently arrogant uh i did not no i apparently missed that well i'm gonna talk about it i wish i haven't figured out how to share videos

Starting point is 00:02:11 using our new software but i have the quote that we can read out it's a it's a great clip it's a short quote but i think it shows the sentiment around ai stocks at the moment yeah that's i mean there's always going to be a stock someone doesn't own and i think it's concerning when you feel like you have to convince other people to own your stock that's probably a bad sign ideally i live in a world where i own stocks that don't need to be owned by other people to generate a good return that's kind of the way i like it so yeah or you know not no one has to own your exact portfolio right no one's gonna have the exact same portfolio but we're gonna get right into it but i guess as we intro today ryan do you want to talk about our good friends at public.com and only two weeks left

Starting point is 00:03:05 or no one week week and a half until this new promo they're doing uh is over that is correct so just one more week and for all you chitchat listeners you know public.com is the all-in-one investing platform but they recently launched options trading and this is your final reminder that you can get a rebate of 18 cents on every contract traded all you have to do is lock in your lifetime rebate by activating options by march 31st it's simple create a public account, activate the options, and you're set for life. Then every time you trade options on public, you'll earn 18 cents per contract. Plus, unlike other investing platforms, there are no commissions or per contract fees. So instead of paying big fees to place options trade, you actually get

Starting point is 00:03:50 something back. Get your lifetime rebate of 18 cents on every contract traded, but hurry. You only have until March 31st at public.com. This is paid for by public investing. You must activate your options by March 31st for revenue share. Options are not suitable for all investors and carry significant risk. Full disclosures are in the podcast description. U.S. members only. There is some interesting stuff from this week that I want to talk about,

Starting point is 00:04:14 and it's not really even this week, but have you kept up with the super microcomputer, I don't want to call it a debacle. Have you seen the ticker trending? I have, yes. Have you glanced at the returns? I have, yeah. I've seen some of our friends on the old FinTwit that have owned it, so congrats to them.

Starting point is 00:04:42 I did write, I think, one Motley Fool article on them, so I figured out roughly what they do. Although I can't say I'm an expert on that. But, yeah, that's all I know. Okay. Well, I'm going to go through kind of the situation here, because I can't remember the last time I saw returns like this. in a public equity, just a public stock, I don't know if I've ever seen returns this good this fast. So for anyone that doesn't know,

Starting point is 00:05:16 Super Microcomputer, also known as SMCI, that's the ticker, is a, since the start of 2021, so a little over three years, they are a 31 bagger. That means if you... put in $10,000 in SMCI. I'm not going to do the mental math here, but you would have 31 times your money in a little over three years. Pretty astounding returns. And like I said, I can't think

Starting point is 00:05:45 of anyone in recent history who has generated that. Maybe Celsius, but I don't think they did it this quickly. So let's talk about what has happened and why it's happened. It's also kind of become – I'm a little hesitant to call it a meme stock because I don't think a lot of the performance is attributable to them being memed or anything like that. But there was at one point sort of a – not a short squeeze, but I guess people are calling it a gamma squeeze. And I know that's a funny term, but there's actually some merit behind it that caused pressure on the stock. So let's start with the basics. What is SMCI or super microcomputer? I'm stealing a quote from their page, but it says, we are a rack scale total IT solutions provider that designs

Starting point is 00:06:37 and builds a portfolio of servers, storage systems, switches, software, along with global support services. Basically, companies use them for, I guess, outsourcing server capacity or IT infrastructure. And as companies have been spending a lot of money on AI infrastructure in particular, Supermicro Computer, I'm just going to call them Supermicro, has really benefited. So the company, they've been growing over the last decade, I think as IT spend in general has grown. But from 2019 to 2021, revenue was pretty much flat. It had gone nowhere. It kind of re-accelerated coming out of COVID, but spending really slow during COVID. So really 2019 to 2021, very little revenue growth. However, with the recent AI spending,

Starting point is 00:07:37 I don't know if we're ready to call it a bubble yet. Are we an AI bubble show? Have we determined whether or not that's our terminology for it? Well, maybe we can table that question for my nvidia segment uh since i guess well if every one of our topics each week or not all of them i guess but if a good amount of our topics each week are about ai stocks that we don't actually follow for our portfolio then maybe there is a bit to this narrative i'd say one thing it is unsurprising that a company called super micro computer is the one that gets turned into a narrative stock Because I think some of these, not all of them, Cisco Systems, Intel, I guess people know what those were, but it doesn't really say it in the name. A lot of the times, and it comes back to the dot-com bubble and people would just add dot-com to everything, or now people are renaming stuff to AI, kind of in your name.

Starting point is 00:08:40 Everyone remembers the famous Long Island blockchain debacle. debacle i think well maybe not everyone but i remember that one because that was peak insanity over the blockchain narrative this one with the name super micro computer i think it is unsurprising that this is the one that got turned into the narrative company even if as you mentioned here they have seen some good financial performance yeah and i'm gonna pull up a chart here at some point during this and i'll do it i'll maybe take a little break and let you talk while i pull it up But the demand went through the roof, essentially, is the moral of the story here. And that meant greater revenue for them.

Starting point is 00:09:20 I imagine there was even some element of pricing power here as well. And revenue just accelerated at really an unbelievable pace. So they went from flat to moderate growth on the top line to last quarter growing 103%. And that was after the year prior growing 79% on the top line. So just a rapid acceleration over the last two, one and a half, two years. The other part is as demand went through the roof, costs really didn't change that much for them. So while the revenue acceleration was pretty insane, the earnings acceleration was pretty ludicrous. So I'm trying to come up with all these different terms to describe how unbelievable this growth was, but here, I'll give some numbers behind this. In 2021, so for the full year of 2021, Supermicrocomputer generated $112 million in earnings. That's the full year of 2021.

Starting point is 00:10:20 Fast forward to the most recent quarter. They generated $300 million in earnings in this quarter. So they have absolutely seen operating leverage and a major acceleration in earnings, which when you see a huge acceleration in earnings, unsurprisingly, Wall Street kind of pats you on the back for it and they give you the benefit of the doubt. So there's a massive acceleration in earnings, but there's also the expectation side of things. So when revenue kind of flatlined between 2019 and 2021, as you'd expect, investors soured a bit on them because it just kind of seems like another maybe cyclical IT slash – it wasn't AI at the time, semiconductor type business is maybe the term. they thought it was cyclical it traded at 10 times ebit despite decent growth over the last decade traded at 10 times ebit today it trades at 60 times ebit so and you know you look at that and you're like oh 60 times ebit wow that's pretty ridiculous but if you think that there's some level of this ai spending that could be sustained or even grow from here 60 times EBIT isn't too crazy I mean if they double again you're looking at 30 times

Starting point is 00:11:43 if you think earnings will double over the next year you're paying 30 times forward EBIT that's just a double easy well I mean the the forward earnings right now look obviously very different than the trailing earnings given the recent acceleration so it's not it it's honestly not that crazy there's a huge discrepancy between the last 12 months and next 12 months so it's not given all the multiples that we've seen that get kind of sky high this one isn't that insane you really do have to believe that ai spending is going to continue but it's not like this turned into a like if you have something that's trading at this number i think by definition the analyst expectations are going to be high but it's not guaranteed that the analysts

Starting point is 00:12:34 are going to be right like you mentioned we need this ai spending to continue and do you know if that's going to continue i certainly don't no no but i'm saying that if relatively speaking to a lot of the other ai stocks that are out there i've got a i don't know if you can hear that i've got a siren good old uh that that's the uh calling card of seattle right living yeah living in a nice seattle neighborhood yeah yeah the it's 26 times next 12 month ebit that's the multiple so if you believe that the ebit estimates are correct from analysts then it's still pretty crazy but the moral of the story here is that there has been major multiple expansion elsewhere in this thesis not really a thesis but the story there was

Starting point is 00:13:26 a gamma squeeze i guess uh so to add fuel to the fire smci the stock was absolutely soaring and then insiders were still buying which it was near all-time highs and you're seeing insider buys and i think that kind of fueled the gamma squeeze but i'm really not good at talking about a lot of this like volume type stuff so i found this snippet from a blog called fabricated knowledge. It's run by Doug O'Loughlin, I believe is his name, but it's a pretty good description of what happened. So he says, I don't know precisely what kicked it off. Maybe it was the insider purchases near all-time highs, the continued AI hype or the Russell 2000 overweight problem, but there became a quick and sustained demand for shares, which created a problem for call

Starting point is 00:14:16 sellers. Usually it's a relatively orderly process on options expiration day, given that the vast majority of calls and puts expire worthlessly. But when shares go up quickly for calls and the vast majority of calls are in the money, but call sellers usually want to hedge their notional exposure about buying the underlying shares in this case. So they will not be caught without shares on the option expiration day. It checks out, makes sense. There's, you know, when you have a huge rise in the stock price, you're going to have some pressure from call sellers. So it kind of creates even further demand. To summarize, the stock went from basically growing company to no growth, which led to investors souring on the company. And this is

Starting point is 00:15:02 kind of like elf beauty, right? Where the business was growing for a long time, it kind of had received this standard multiple, investors sort of believed it deserved to trade at whatever that multiple was. Growth flatlines, multiple compresses. Then you see a huge revenue reacceleration and you get a whirlwind of factors of earnings soar. So revenue soars, earnings soar even more because you got operating leverage there. The multiple expands, expectations get better. And then there was also some buying pressure as well. ultimately this has led to probably the best stock performance I've ever seen in a three-year time span. Maybe there were some kind of at the peak of 2020, but if you would have told me that

Starting point is 00:15:53 if you just asked me what happened to SMCI before I even looked at it, my first thought is this has turned into a meme stock. A whole bunch of people are buying it. Maybe there's some proof in the numbers but i would not have thought that it's powered primarily by the fundamental growth multiple expansion is a huge part of it but the fundamental improvement is a larger percentage of the uh stock growth there yeah some somewhat right but i'm looking at your numbers six 10x ebit to 60x ebit so six times multiple expansion so EPS is probably it's about half and half right if it's a 31

Starting point is 00:16:37 bagger then because you're getting 600% returns on or no 500 whatever it is on a 6x on the multiple and then probably a similar on the fundamentals yeah let me pull up some numbers real quick but talk about this

Starting point is 00:16:52 before today before I kind of went through this story what did you think of SMCI did any did this surprise you at all well it's not surprising because it's an ai narrative stock and it's one that's growing revenue really quickly so you have that combination right now you're going to get tossed in like the nvidia's of the world and nvidia seems to be the magic touch where any executives especially the founder ceo if they mention your company then you're going to go up

Starting point is 00:17:25 10 and you have that relationship with nvidia so it's not surprising but when i looked at the company and what it does is you know buys like the chips from these companies and helps assemble them efficiently and stuff and you know work with the data centers is kind of a middleman i think there's obviously going to be some other stuff in there as well one thing i thought is that it's it's low margin so there's going to be a lot of operating leverage here as they scale which can be a good or a bad thing and then second i i'm not sure exactly where you build a competitive edge as a middleman assembling these data centers where there's any unique insight where i kind of think you have the scale if you are you know amazon microsoft google cloud whoever building

Starting point is 00:18:17 the data centers and then you have whatever edge nvidia amd intel have uh in building the chips brand value performance power the r&d advantage but with these companies i'm not sure why i would bet on them having a sustaining edge if you're kind of just assembling the data centers i feel like you're in a weak position but i don't i'm no expert on the industry so i could totally be wrong But first read would be that middleman position would be a tough one to be in. Yeah, I'm going to share my screen here. I know podcast listeners, you can't hear this or you can't see this if you're just listening to the audio. But I'll describe what I'm seeing.

Starting point is 00:18:59 Pull up my full screen here. We do do this on YouTube live on Thursdays, by the way, if you're interested in ever watching it live. If not, here's what I'm seeing. since fourth quarter of 2018 to the fourth quarter of 2023 so i guess that's five years is that six years it doesn't matter the earnings per share has grown at a 71 percent gagger albeit off a slightly low base um but it's been a four fourteen hundred percent growth in earnings per share. And that compares to basically 4X in revenue. I'm looking at the quarterly revenue here. So a lot of it has been driven. I mean, obviously, expanding your multiple by six times

Starting point is 00:19:51 certainly helps. But this is the blueprint for a multibagger, right? You're generating – you are starting at a low valuation, which gives you plenty of upside. And we can say, oh, the valuation is ludicrous today. It's insane. But I mean, you could also look back and say 10 times EBIT for something that could have turned into a huge growth business is ludicrous to the low side. So I think this is kind of the standard multibagger, right? You're getting both multiple expansion and huge revenue and earnings acceleration. So pretty impressive for anyone who's owned shares. I don't know if you could have foreseen the AI hype cycle coming, but if you did, and that was a part of your thesis, I've got to say kudos because this is the best

Starting point is 00:20:49 stock performance in a short period that I have personally ever seen. Yeah, it's definitely high risk high reward so the outcome being large reward i think it comes with the fact that it was high risk right and i don't think it's surprising to see such strong returns yeah it's i mean incredible returns but i think we have a good comment here from tyler saying the million dollar question is whether current earnings are sustainable anyone who has invested in cyclicals mining oil uh others would be familiar with this analysis challenge this should apply to both nvidia and smci probably right and i think the difficulty for me looking at these sort of companies is that i you almost get forced to make a sell decision

Starting point is 00:21:40 which is tough i'd rather be in a stock that doesn't really get into that zone and have that risk of the cyclical because if we you could see a if the ai spending goes down this thing is in trouble and you would not be surprised to see a 90 drawdown now if you bought at the absolute low okay you're still fine but i mean that just does not seem like a fun ride it seems highly stressful and like okay it's amazing if you had the returns to here right and kudos to you but one thing like you mentioned could you have predicted that no when would i have sold on this run-up i think a lot earlier than this given the cyclical risks that i just mentioned and i just don't know if it's one it's almost like

Starting point is 00:22:34 someone i don't want to call it roulette that's probably misleading because some people i'm guessing had good fundamental theses here but i don't know if it's a replicable process to find these it's not something you can take home to yeah especially when it's got to be a little bit luck yeah i mean especially considering what's happened with ai spending it would have just been really hard to predict um however there are probably people who had a good thesis in tech that didn't have the ai spending it was just chairs on top and you probably would have made decent money buying at 10 times ebit sort of a trough multiple in 2020 time period the and just to clear yeah i would not buy shares today i do think the ai spending has a chance

Starting point is 00:23:27 to revert and some of their customers might pull back or contract their spending so it seems yeah highly speculative but i did like to see that there was it wasn't just some like pump and dump where right management got out yeah yeah like management insiders were buying probably prior to the huge gamma squeeze but and that's probably when i would have got out is when i started hearing rumblings of a gamma squeeze i think that would have been like okay usually good time to trim yeah at least trim when you hear anything about your stock being a gamma squeeze or people's thesis being that it's the highest weight in the russell 2000 it's probably a good idea to at least trim all right yeah the uh i mean it's it's fascinating it seems like at first whenever i

Starting point is 00:24:24 see something that goes up like 30x especially now given what's happened with like the game stop and all that stuff i just think like i get a little bit of schadenfreude i'm like well that's not sustainable these everyone's gonna lose money but when i looked at smci i was kind of like oh you know what good good for management you know they've been running this business fairly it seems like for more than a decade so good for them yeah at least there's a fundamental story here where if you look at all the crypto nonsense you look at something like c3 ai that just had the ticker ai and then said they were some sort of AI company. Although when you actually look at what they do,

Starting point is 00:25:03 you're like, what are you doing? You're not even growing, blah, blah, blah. That's a whole another case. And then, you know, something like that was just soaring. It's a way different story here because it seems like SMCI actually provided value. And maybe if, like you mentioned, there was the, there's kind of the bloggers

Starting point is 00:25:21 and the analysts that cover specifically the semiconductor sector, Maybe you could have seen SMCI as a good risk reward back when you mentioned at 10 times earnings if you followed the sector closely. But I think as a generalist, it would have been a tough one. Is there anything to learn here? Or is it just another one, as you mentioned with Elf Beauty, the combination of revenue acceleration with a decent starting multiple? It's just a great recipe for rapid stock appreciation. I don't think I could have predicted either of these.

Starting point is 00:25:54 obviously i didn't predict either of these and when you see flatlining revenue it's really hard to think unless you follow it really really closely probably have to own shares to follow this closely it's hard to imagine that revenue is going to quadruple in two years i mean just just like how do you predict that so i don't think i would have got elf i don't think i would We got SMCI, even if I was looking at them on a regular basis. So I don't know if there's any real takeaways, except for the fact that if you really want a multi-bagger, if you really want returns like this, paying a starting multiple that's pretty steep, you're not going to get this level of returns.

Starting point is 00:26:42 You can still do well, especially if the fundamental performance looks like what SMCI has had, but you're not going to get those potentially hundred baggers in short order style investments. Yep. And I think it comes back to this, this gets tossed around all the time is the, I think the status. And again, I'm remembering this. I haven't read the data in a while, but I believe most of the hundred baggers start out in the 10 to 15 times earnings range so i think that's a good kind of bogey to go after let's talk about or one more thing before we move on i was just looking at like the best performing stocks over the last five years and a lot of them are like that where it's 10 to 15 times earnings on like trough earnings where or

Starting point is 00:27:36 maybe not trough because they're not all cyclicals but where there's been a deceleration and people are just yeah telegraph down downturn kind of deal yeah but those are hard those are hard to so hard to predict yeah i i i totally agree with that all right i'm going to talk about my psychological short book performing absolutely phenomenally uh and i what i mean by that is stuff we talk about being bearish on uh but we actually never make money on it but first ryan you had a great chart that you pulled up right away with SMCI to kind of show what was fundamental performance, what was multiple expansion. Where can investors and listeners obtain these charts? Yeah, I should say a lot of people seem to be taking these words of encouragement to sign up

Starting point is 00:28:29 for FinChat seriously because a lot of people have already done it. FinChat.io, it's my personal research terminal it's brett's research terminal it's where i keep my dashboard and track all my stocks and then where i do a lot of my research and i used to think uh you know i'll just build my own charts myself you know because i thought i enjoyed doing it this has saved me so much time honestly they have basically every financial measure you could look for and they've got the segments and KPIs that you're probably tracking anyways. So it's been a huge time saver. And with our code, you do get 25% off any paid plans. It helps us, helps you guys, I think, especially if you're doing this on a regular basis. If you manage your portfolio pretty

Starting point is 00:29:16 actively, I think it's worth tracking them with an actual research terminal that you pay for. So it's finchat.io slash chitchat. That's finchat.io slash chitchat. You get 25% off any paid plans. They've got the plus and the pro. I think it's, I don't have the prices with the discount included, so I'm not going to say them, but yeah, you're getting 25% off. Please check it out.

Starting point is 00:29:40 Finchat.io slash chitchat. All right. Beautiful. And yes, thank you for anyone that has used our link. Ryan mentioned the code. There is no code, but the link is in the show notes. and if you can't figure that out, DM us, email us, we'll help you out. Okay, next topic and I'm glad this came out because it came out right before we started

Starting point is 00:30:02 recording. Apple is officially getting sued by the Department of Justice in the United States. Let's give some context to what they're trying to do here and then we can talk about our takes and any investing implications. So, quote, the Justice Department sued Apple on Thursday, alleging the tech giant blocks software developers and mobile gaming companies from offering better options on the iPhone, resulting in higher prices for consumers. One thing I thought was funny was that the DOJ says Apple succeeded with the iPod because they did an antitrust suit against Microsoft. I would call that a little bit of a stretch, although I guess I wasn't following the markets at the time um but besides that people are kind of making fun of that part of the case

Starting point is 00:30:49 but there's a lot of other things that have been talked about for years now one they mentioned inhibiting growth of cloud gaming which is interesting as this is sort of a nascent category that has a very uncertain future but they're saying that apple kind of holds the keys to the kingdom here and they're gonna basically if the tech starts getting popular it's going to be very difficult for anyone except apple to come up with any sort of service here which really reduces competition they talk about inhibiting the growth of other applications plus the classic 30 take rate on payments that we've all heard of you know from time to time that is a huge cash cow for apple they talk about i message degradation we actually have a full quote here

Starting point is 00:31:32 um for listeners i guess that are unaware about it and if you're younger you might be aware of it in the United States, but if you're international and you have WhatsApp as the primary message service, you might not understand this, but in the United States, it's very important. I think I'll read maybe part of this full quote here. For example, or no, excuse me. In addition to degrading the quality of third-party messaging apps, Apple affirmatively undermines the quality of rival smartphones. For example, if an iPhone user messages a non-iPhone user in apple messages the default messaging app on an iphone and the text appears as a green bubble and incorporates limited functionality the conversation is not encrypted videos are

Starting point is 00:32:15 pixelated and grainy and users cannot edit messages or see typing indicators the signals to users that rival smartphones are lower quality because the experience of messaging friends and family who do not know an iphone is worse even though apple not the rival smartphone is the cause of that degraded user experience and then they go on to talk about how um the effect is way more powerful for younger demographics i couldn't have said better they are uh i literally could have wrote this i read this and i was like wow this is me and i think a lot of other people some android user some disgruntled android user in the department of justice it's like i'm finally stepping up what do you yeah maybe we can talk about this one first because it's

Starting point is 00:33:00 interesting to see this finally becoming an actual legal battle what do you think do they have i know we're not legal experts but from maybe a common sense perspective do they have a case here i i don't know because it's like is it on on the one hand are they just is it just like a competitive tactic to win is that like technically illegal i don't know are they purposely it sounds like as part of the i guess do you call this an accusation the the accusation is that they are purposely making it like lower quality for everyone making the experience worse for as opposed to just making their their experience better they are intentionally making the other experience worse i think you

Starting point is 00:33:54 at least have a moral obligation or like an ethical obligation to not do that if that's the case to treat your customers well yeah which i don't know there's a legal argument there but yeah that's the thing is that a lot of this stuff feels like kind of blurred lines where it's like they is it them making the experience on the iphone for iphone users so good that people are frustrated not having one or is it them having an ethical obligation to treat everyone the same which i don't know if they do i don't know if it's a are they legally obliged to make every single android iphone smartphone user have the same experience yeah my gut kind of says no they're not yeah and yeah on the one hand you're right on the other hand i have a soft spot

Starting point is 00:34:56 for say a young family that has a couple of kids and the kids are telling them they can't make friends unless they have an iphone you're like look this is gonna stretch our budget a lot and you know you know something like that where if you might be you know you don't have a super you're on a high earner or anything like that and you're like look i could buy these cheaper androids but i gotta buy an iphone or else you know suzy says she's not gonna have any friends like part of me thinks that that's what i mean i'm not in these households but i have a high confidence that that's what's going on i mean you can think about how kids act if the younger people are saying that you have to have these messaging services to basically be a part of these friend groups

Starting point is 00:35:44 it seems to me like there's a lot of power here that should probably be regulated um i don't know how much it's going to impact apple financially though stocks down about three and a half percent today i think more importantly is the app store and the google payment because those are actual profit like huge profit drivers for the company yeah you want to talk about the uh proposed deal that they have with google yeah maybe i don't know if i have the details on that but what it was basically putting google gemini type stuff within the iphones i think the only takeaway i had and i'm probably an idiot on ai but i think it shows that apple is behind the eight ball here specifically with ai what do you

Starting point is 00:36:37 think yeah or they think gemini is good enough that it should be a part of the or they think it's just so superior on the ai front or they don't trust sam alton yeah that's another point It probably shows people are a little skittish around open AI. Yeah. What did you think about this lawsuit? Did you read any of it? I know it came out about an hour before we started recording. No, to be honest, it feels like they have so many ongoing lawsuits, it's hard to track.

Starting point is 00:37:11 Yeah. But I guess this one might be more significant than the others. Well, yeah, this one, it's its home market, biggest market. I think, okay, here's the question. Does it have an impact financially on the company five to 10 years from now? Great news. The federal EV rebate is back. Eligible customers get up to $5,000 with the federal EVAP rebate on select 2027 Volt and

Starting point is 00:37:42 2026 Equinox EV models. Visit your local Chevrolet dealer today for more details. Yes, would be my gut reaction. I think I would agree. Okay, you go first. It just feels like the walls are closing in from all directions. I don't know if the DOJ case specifically is the one that hurts them, but it feels like they have so much backlash, both from the development community, from other big tech companies, rivals, and in this case, the government as well. So yeah, it seems like the walls are closing in.

Starting point is 00:38:21 and I imagine this eats away a bit at the margins of their services side of things. Yeah, and I also saw today that a consortium, I guess it's just a fancy way of saying group, of both Microsoft, Meta, X, which is Twitter, Spotify, and Match Group are joining Epic Games in a new lawsuit. to sue the company to open up the app store.

Starting point is 00:38:54 So that's just another one that adds on here. I think I would lean yes as well. Not necessarily because of the customer tie-in, because I think if you eliminated this iMessage advantage, you eliminate some of the lock-in across the Apple Watch, the AirPods, whatever. I think people still would go to Apple products, but I would be very concerned about the services profits.

Starting point is 00:39:19 Yeah, I agree. 30% take, if that comes down, that's probably a decent chunk of it, especially if they reduce their payments to Google. Yeah. And what's interesting here is that the last part I thought was that they didn't mention, and maybe it's because they're doing this in Europe, but they didn't mention Apple competing directly with companies such as Spotify with their own service, even though they are essentially, you have to go on their rail track, their railroad, and yet they're competing with you on what you know service people should buy and i'm not necessarily saying that a company can't do that and vertically integrate but the fact that they

Starting point is 00:40:01 can do so with minimal regulations and the proven stuff where the european union just find them two billion dollars around this of um basically making it much more difficult for these direct competitors to operate you know to put promotions within the app to get updates to the app store spotify routinely says that they have the same you know basically the same application across android and apple except that it takes them much much longer to get approved for updates going on the app store so you see that and yeah it doesn't prove malintent but when you have these the these pieces of evidence and you have apple music competing with spotify and you have this true with you know apple tv plus blah blah some other stuff that one makes a lot of sense to me i'm not

Starting point is 00:40:55 sure why it's not the focus here of the doj case because they spent part of the the letter here just bragging that they tried to you know stop microsoft from being an all-powerful entity and they they think for some reason that's why the ipod was successful i would say the ipod was successful because it was a it's a great product had nothing to do with microsoft but yeah i think that's that's my take uh i'm not surprised to see the stock down it's been underperforming probably beside because of these sort of things coming down the line and as you mentioned there are so many lawsuits right now coming against this company that maybe one of them sticks

Starting point is 00:41:38 and it hurts him here, but again I think I've already said it twice the key is the super high margin services revenue from the App Store and the distribution payment from Google Yeah

Starting point is 00:41:54 I think we've kind of talked about it enough it feels to me like the walls are walls are caving in there's not much apple can potentially do here except be more open to the rest of the non-iphone user community so we'll see what happens do you want to talk about this nvidia god trade event yeah um okay yeah we got some comments here let me see if i make sure is the ai software going to have too much competition we're only a select few win as well as the picks and shovels companies, semi-stocks. I'd say that's a trillion dollar

Starting point is 00:42:33 question right there. Fake alias, I'm not sure. And you probably should ask a different podcast. Let's see. It sure looks like, according to Tyler here, that the value of LLMs will accrue to infrastructure, AWS, Azure, GCP, data owners, big tech, and consumers. I think I'd lean to that first part. I'd have a high confidence in where you have a lot of value going to the internet infrastructure companies now which ones i'd say probably the cloud providers but tbd on others um let's see anything else yeah let's hit this nvidia one so i guess it's an ai theme show maybe this is a signal at the top but i thought this was absolutely hilarious and there were more bubbled vibes i would say on cnbc i mean when

Starting point is 00:43:27 When the CEO of NVIDIA is doing a keynote speech and it's indistinguishable from a rock concert, I think maybe that's a sign that there is very, very high sentiment here. But this was a clip on CNBC. If you want the full video, I think you can probably find it because it went slightly viral on the good old FinTwitch. But if you can't find it, DM us on Twitter. We'll share it with you. It's less than 30 seconds. I only have a good clip here. And they're talking about owning NVIDIA versus not owning NVIDIA.

Starting point is 00:43:58 And here's what the quote is. I wrote arrogance to say I don't own it based on current valuation. And my question for you, Ryan, is are you God? Because you don't own NVIDIA. Couldn't you flip this? Couldn't you just say that if you own it, you're God? That's exactly what I was thinking. It's like this is price driving.

Starting point is 00:44:22 People talk about price driving narrative. I think this one is price-driving arrogance. Yeah. I mean, there's two sides. Every valuation discussion has people on both sides. That's why the valuation is where it is. So you could easily flip this and say that if you own Nvidia today, you have a clear understanding of what the results are going to look like in the future. So you know the valuation is lower.

Starting point is 00:44:49 I mean, this is just – yes, arrogance is maybe the way to describe it. he said this on cnbc yes yes and i don't think the tone i was giving there is is is doing it justice um the guy slicked back hair very nice suits he's doing kind of i don't want to do it that angle but uh he's doing like kind of like an up to the right thing where he's saying but if you're saying you're not going to get along for this ride like you're just saying you're going to underperform man and he's kind of i think it shows the mindset of a lot of investors is that they have this thing where they they believe you can't underperform ever and it's like okay if you don't own nvidia you're going to underperform over the next three months

Starting point is 00:45:44 so do you you have to own this thing and it's like i don't care who owns nvidia i don't care if i underperform i want to own stuff i'm comfortable with stuff that i believe you know are quality businesses that i'm buying at a reasonable price and if they're flat for six months that's fine with me yeah this is a pretty outlandish quote i think cnbc knows this clickbait works and it worked for us so yeah we're talking about it yeah okay question here's um okay okay is it related to ai or no not at all okay we have one good comment here then then we can go on to the next topic once all the big tech companies have all the ai chips they need what happens if r&d is not ahead enough to warrant these companies upgrading to new ai chips

Starting point is 00:46:32 thank you for that comment there fake alias um i think i would even broaden that out as look there's so much spending here that there's just an absurd amount of quote-unquote invested capital right whether you're calling it or not the returns on that have there has to be such a good return here to warrant all this investment i'm just nervous that we're not seeing that I think the idea here is that the need for – the question says, what happens when they have all the AI chips they need? I think the idea is that that need keeps expanding and that there's enough use out of whatever these AI models – they're generating enough return on their AI spending that it can continue to grow. I would probably take the other side of that as well. because i know you're about to say that brett but yeah ad targeting better get quite good or else

Starting point is 00:47:34 this you know what i mean right is how much better is advertising targeting gonna be all right there's only so much money people have in their pockets but we can't talk about ai the whole show don't want to be an ai focused podcast what was your question ryan i was looking at some basically trying to find like some serial acquirers that have done well and there was a number of companies from sweden so it got me to thinking if you could only invest in one other market and you weren't allowed to invest in the u.s what market would you choose now if i could do all of the nordics i'd maybe say that but sweden's up there um got a comment here that says india i think it's a good choice i believe i saw that their market is super expensive right now from an earnings multiple but

Starting point is 00:48:32 i mean it doesn't mean there's a lot of opportunities there and their gdp is growing extremely quickly i think sweden's a good choice some people like i think japan is up there for me yeah some people like australia because it's cheap and there's a lot of publicly traded stocks but i think the quality is low um britain yeah i don't ever really see that many exciting companies coming out of britain japan's a good one i mean that's a large market what about there are some there are some good businesses in britain i think maybe we just don't spend that much time looking okay there obviously has to be at least some but i'm saying generally i don't get too excited um canada's not a bad shout

Starting point is 00:49:16 a little australia like though a lot of energy a lot of mining a lot of banks then shopify and constellation software yeah that seems to be the two if you just look at the biggest software companies in canada it's like shopify constellation huge gap everyone else yeah it is that is interesting i don't know if i'd say sweden but it'd be up there i think if i'm gonna go my top five i would go and this is outside the u.s if this is a clip sweden mexico japan i think i i don't know if there's any others that didn't excite me that much yeah i mean there's a couple things i would want right you'd want some diversification in terms of where the the number of companies in each industry you wouldn't want it to be super

Starting point is 00:50:18 energy heavy and like no software companies or vice versa i'd want some sensible fiscal policy where and rule of law yeah and rule of law so some stability you'd want probably

Starting point is 00:50:38 a culture of rewarding shareholders which I think is a bit where Japan lacks so I think Japan checks a lot of these boxes

Starting point is 00:50:46 but they lack in that department where they're just maybe too conservative that might change in the next 10 years who knows but

Starting point is 00:50:53 it's at least been that way for the last decade um And then probably some good demographic tailwinds. I don't think you want a country where they're constantly losing, that they're a net, what is it, emigrator? A huge demographic loser, which would be countries like Germany, Italy, I can't name them all off the top of my head. China, of course, South Korea. Japan's in there too. so i think japan probably won't well yeah political stability is probably a big thing here too so i don't know yeah i think a lot of south american companies i don't know if they'd be my first choice yeah we have some people here saying brazil one like they're a part of bricks

Starting point is 00:51:42 so clearly they don't have the tightest relationship with the u.s and their allies i would much rather have someone like mexico i think that whether you know you have i mean they're not best friends the u.s and mexico but they have a very tight relationship you know and the cultures are much closer so i think my you know we've talked through this i kind of didn't have any prep here i think sweden and mexico would be my my top choices and and maybe canada honestly except i just don't like the composition of the companies there because a lot of the Canadian influence like you know you have you have Costco's there you have a lot of U.S. companies that I wouldn't technically be able to invest in but are contributing to the

Starting point is 00:52:30 Canadian economy yeah South Korea maybe although it's pretty tech heavy I think South Korea and Japan feel similar to me yeah these conglomerates just you know some maybe some undervalued stocks you have the demographic worries and then they're both as positives you know tight relationship with the united states for for that yeah i think if i could you're probably right if i could take the nordics as a whole that'd probably be the easiest they seem to have very they're very shareholder friendly lots of publicly listed companies over there lots of diversification in terms of industry and they're generally stable uh countries so i think i'd like that yeah i think and there's just

Starting point is 00:53:27 a good track record too a great historical track record in sweden of generating shareholder value building these durable businesses that have done well over decades and i think whatever the culture is over there maybe they have a patient mindset maybe they have a long-term mindset they maybe they're more frugal they're not about you know spending on corporate jets like ceos in the united states might be but i just read the ge book so i was you know finally read that anecdote about the ceo the double jets the backup jet going around there that cost 250 000 for each trip did you know that each one well it's important um well it's important that yeah that's that's worth it apparently um but yeah i think they might have shareholder friendly values even though they i

Starting point is 00:54:20 think from the outside you look at them and they have that democratic uh socialist narrative when you look at the under like on the ground well some of the stock performer performance of these conglomerates and just operating businesses have been quite good i mean even recently you have spotify has been large obviously it kind of came public at a tough valuation for for its stock performance but then you have evolution gaming you have the older companies there's some of those industrial conglomerates that have done really well and i'm sure i don't know were there any other ones that came to mind for you no there's just a lot of conglomerates that uh like a lot of serial acquirers that i had no idea about that have done a really good job oh this would just

Starting point is 00:55:07 match a couple roll-ups like some are diversified holding companies but a lot of them are kind of roll-ups within their industry and hidden maybe we should add a segment to this called hidden gem watch there are a couple that i have found that i kind of like there's um vitek software group not a recommendation check it out pretty impressive performance compounded annual returns of 42 percent over the last decade so they were pretty small to begin with but they've done a really good job just software businesses it looks like a little bit of constellation software style yeah seems like it there's another one i believe it's called like lifeco liftco lifco and they've been just like eating up uh rolling up dentist equipment

Starting point is 00:56:04 businesses dental equipment businesses and they've been doing a really good job also so there's a couple in there i just looked up like best cereal acquirers out there and there were a ton of swedish companies that had generated pretty impressive returns interesting and maybe Part of the attractiveness of the Nordics is that you don't have, unlike in the United States, there's not the private equity influence where private equity in the United States might eat up a lot of these businesses and keep some high quality ones away from the public markets, which is tougher for individual investors such as ourselves. But if you go to a different country, maybe there's more of them left. yeah a bit speculative but i wonder if how much private equity is going for companies abroad as well that's true yeah i have no clue i just hate the private equity no i don't i don't love the idea of just a whole bunch of small family businesses

Starting point is 00:57:11 being turned into private equity shops yeah yeah i also don't like the ones when they have the stories about the healthcare businesses that just get whatever they are old you know old senior living facilities hospitals what you name it just getting bought up by private equity and i'm sure some of them treat them well but there's a lot of horror stories about the quality of the service going down um yeah yeah i mean yeah okay had a comment here i don't know if you have anything special on this but tyler says if you guys run out of topics do you think tinder re-accelerates growth in users payers arpu etc do you think match is going to keep growing or taper off i i think i'll go first here i saw someone um throw out a tweet that i thought was interesting

Starting point is 00:58:03 and they said if match group and bumble have turned into the same kind of operating duopoly give or take as uber and lyft why are the stocks basically in the dumps while uber and lyft have started to do well and i'm interested what you think of that analogy where the narrative on uber and lyft for a long long time and maybe still lyft were that they couldn't make any money but if you kind of and i was a part of that for a while but i've changed my tune um but if you looked at the underlying unit economics it was actually quite strong and there was minimal competition and i think there were some bare arguments about the total addressable market for uber and lyft going down you know not being that large stuff like that do you think that

Starting point is 00:58:54 comparison makes sense and full disclosure for the listeners we are a little bit biased to the dating app stocks as as of this recording we both own shares of match group i don't know if i love that comparison my concern is really more so with match group and even bumble that there may be closer to saturation than everyone believes whereas i didn't really think that for uber and lyft they kind of carved out i would say they're even still further away from saturation uber and lyft are then match group potentially and maybe that's just the current numbers talking but do i think tinder re-accelerates maybe on the top line but i don't know if i would expect tinder to really grow its user base that much more unless they have a lot of success in markets that they're

Starting point is 00:59:48 not already in but as far as i remember they're in pretty much all the big international markets already yeah i would i think i agree with you in the developed markets where everyone has access to the internet already but and these are going to be lower value markets from an arpu perspective there are still a lot of countries out there that are adding internet users every year and And I think what Westerners or I guess it's not just Westerners, it's places with very strong internet speeds underestimate is that when someone just first gets the internet, your speeds are so slow that a lot of this stuff is unusable. You're not going to be able to stream music, video. I think stuff like dating apps are going to be very, very hard for you to use until the internet speed. You don't just get your first access to the internet, but you get much, much stronger speeds on your mobile device.

Starting point is 01:00:43 i think there's still some tailwind there for example like 100 million people are adding you know internet usage in india and surrounding countries every year but i agree with you that i think the users i don't know i'm not sure i'm not sure i there it's not going to be like youtube where everyone in the world has an account yeah that's accurate but i think not even all the single people have an account exactly exactly and i think the thesis if you own match or bumble is that the pricing power on these things is consistent with good unit economics like you're going to be able to grow prices ahead of inflation with very very good margins um

Starting point is 01:01:34 yeah that's really it and then increasing the percent of people that pay over time yeah there's a comment here from tyler that says it's not basically it's not similar network effects so he says you can't have a rideshare app without users in many cities but you can build a dating app for a small subsector so uber and lyft have no competitors but match has to constantly compete with potential new small competitors i don't agree on this i i think you really do especially now need scale beyond like i've never seen a dating app that excels in one city right that's it like because people move yeah travel um going to university really really hard to start a new one and succeed

Starting point is 01:02:25 and it's pretty surprising that hindrew is able to do it uh john gallagher says hey gents i don't seem to get notifications that your show is starting you gotta find a way to fix that somehow yeah i'll be honest the stuff is the recording software and youtube itself um you know youtube is in a fortunate spot that everyone's forced to use it because stuff's hard to work uh but i'll try i'll make a note to try to figure that out to get to get a notification i try to tweet it out sometimes but i guess i didn't today um but maybe there's a setting we can change but sorry what's his question he says are you making the pilgrimage to omaha in may i don't think we are i don't think so sorry about that um i would go if it was cheaper i guess it's uh sorry you know jv

Starting point is 01:03:16 diamond raises the price on some stuff yeah i do want to go i really want to go especially this year just given with with charlie passing seems like it'd be fun i imagine a lot of people will go out this year yeah if i didn't go two years if we didn't go two years ago i would definitely go but we made the pilgrimage once i don't know if i'll be even as i have more spending power over the years i don't know if i'll be a regular like every year but i could see myself going like once every three years kind of thing yeah yeah i could yeah yeah i'm definitely not gonna be a regular i will say though our university is playing a ncaa tournament game in omaha in that same arena in approximately 12 hours no nine hours yeah so there we go they got some good

Starting point is 01:04:13 value investing juju right from from the old buffet master okay well we went a little bit over uh but appreciate those nice questions from the listeners again yeah we may want to figure out those notification things but i just say if you subscribe to the youtube channel it should show up i try to tweet it out on the chit chat stocks twitter but either way we try to go 12 30 p.m eastern time for the live show if you care about that you can add in your questions which we usually try to answer because we don't get too many uh comments we'll probably answer yours but if you don't listen to the live stream you can watch the replays on youtube and then you can get the same podcast in audio format in your podcast player of choice whether it's spotify

Starting point is 01:04:59 apple podcast overcast you name it make sure to follow us on youtube spotify or apple podcast if you enjoy the show the best way to support is to give a quick five-star review on apple podcast or Spotify. If you want to keep up with the show, you can do so on Twitter or Substack. Just search Chit Chat Stocks. You'll get them there. Let's get to the disclosure. We are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan, I, or any podcast guest 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, in the comments for tuning in. Thank you to all the listeners, and we'll see you next week.

Chit Chat Stocks - What Happened to Super Micro Computer Stock? Plus, Our Takes on The DOJ Suing Apple (SMCI, AAPL)

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