Chit Chat Stocks - Will Starlink Crush the Competition? Plus, More Management Malfeasance

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 investing power hour number 107 so we've been doing this for two years a little over two years now just about yeah but yes we it's investing power hour number 107 we have got we talk all things investing on the show it could be any news from the financial markets it could be stocks we own it could be

Starting point is 00:00:57 stuff about our personal strategies for investing as well. And today, we've got some news for some of our holdings as well as an interesting article and a question I'm going to pose to you later on around executive integrity is maybe the question that I'm going to pose. And there's actually a couple instances. We'll talk about – we'll go through one of our holdings or at least one of my holdings Autodesk and some of the controversy that's going on there right now. But before we do that, a little housekeeping.

Starting point is 00:01:36 Follow us on our sub stack or go to our sub stack and subscribe. It's totally free. Has plenty of good notes from Brett. He summarizes a lot of our shows and he adds a bunch of free charts as well. If you're more of a visual learner and then like and review our show, it really helps. if you actually like it if you like us and you like hearing us talk it would be a huge help if you could just go in give us a nice five stars or four stars but uh just forget about it if it's any lower than that um preferably five and that's on spotify and apple podcast that's the best way to

Starting point is 00:02:14 get the show uh get the show out there yeah okay so we are live on youtube if you've got any questions by the way we do this every thursday at 9 30 pacific time 9 30 a.m pacific time uh live on youtube you can just go to youtube chit chat stocks you'll find us but then we post the recording to our podcast feed as well so if you want to ask us questions that's the place to do it or you could just message us wherever either on twitter or our email chitchat money chitchat money podcast at gmail.com still haven't changed that um but that's enough housekeeping items let's get before actually before we get into anything i do want to talk about our friends public.com options traders listen up i want to tell you a bit about public.com but first

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Starting point is 00:03:43 recently awarded public five stars for options trading and start earning up to 18 cents per contract traded only at 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, US members only. I have a question for you, Brett. Okay. If a CEO or executive for that matter, an important executive that isn't a CEO tells a small lie and it's not necessarily doesn't impact the financials but he has a history of telling small lies here and there does that stand out as a red flag to you i think a little bit yeah the context is important i'd say what what are they fibbing about? Is it something that could have easily been just a mistake?

Starting point is 00:04:42 Because people's memories aren't perfect, but if it's pretty clear, it's a deliberate lie used to perhaps nefarious reasons or to trick investors, to trick employees, to trick your customers. Yeah, that's a concern because it's pretty simple. If someone has lied in the past, they're comfortable with doing it again. All right. Well, you asked, you said the context matters. Here's the context. The CEO and co-founder of Axon Enterprise, for those that don't know Axon, they sell, they're most well known for selling tasers, but they also sell software to law enforcement agencies. So they, it's like evidence.com, they sell you cameras, they have like footage editing software it's like a whole bunch of different solutions for uh for law

Starting point is 00:05:38 enforcement agencies and their goal is to obsolete the bullet that's what they talk about but his founding story is has been a bit debunked by reuters now this was an article that came out a while ago and the title of the article is taser maker axon has a moving backstory it's mostly a myth so for those that don't know uh i believe it's rich smith or rick smith he's the ceo he's a pretty charismatic guy and he's told this founding story before it's in a whole bunch of the company's documents every time he does an interview he talks about this and he says that he co-founded his successful company because of the gun violence that killed his friends, whom he sometimes describes as football teammates. And he said, basically, it was

Starting point is 00:06:34 the loss of these friends that really inspired him. However, after Reuters did a little investigating, Smith was not friends with the deceased. Their names were Todd Bogers and Corey Holmes, according to three immediate family members and a close friend of the young men. And Smith also played on the same football team as the boys at this Scottsdale High School, but not at the same time, according to yearbooks seen by Reuters. The boys who died graduated in 1986, and Smith did not appear in the yearbooks until the school year that ended in 1987. And there's quotes from the deceased parents, and it's like, this guy is profiting off of a fake story that's the death of my kids. You know, it's just kind of obviously sad from the parent's point of view. Now, Axon has had insane returns as a public company.

Starting point is 00:07:30 And frankly, if I didn't know anything else about management, leadership, any proxy red flags, which we've talked about before, I would think this is a really good business. And it is a really good business from the looks of it. but I had some concerns about management and I think this may have solidified them a bit for me. Yeah. It's another check in the concern list, right? Or another line item in the concern list. They have this crazy, well, I wouldn't call it crazy. I would just say concerning SBC program for the executive team.

Starting point is 00:08:08 That's similar to the Musk program where there's just a self-fulfilling cycle of performance metrics based on adjusted EBITDA, adjusting out, giving out a bunch of stock-based compensation, adjusting that out, hitting your targets, blah, blah, blah. And they've diluted shareholders a lot while creating a lot of value with their cloud products. But I'd actually, you're going to talk about Autodesk here too. It's one that feels similar where you don't have,

Starting point is 00:08:37 say concrete quotes of a company saying yeah we don't really care about shareholders we just want to be big we want to treat our employees well we want to have these successful products but we don't really care about creating shareholder value that it's not a priority for us and i they don't explicitly say that at axon but i don't really i get the vibe that they don't care. And I would be worried about, as we just have a comment here from James that says, I definitely expect some kind of accounting scandal in the company's future. I'd say that's definitely higher risk than normal. Like it's not guaranteed. You know, this is not any sort of accusation. I mean, who knows exactly how the accounting is, you know, what the quality of the

Starting point is 00:09:25 accounting is. As Buffett has said, there's probably some sort of mini scandal going along at berkshire at any one time just because of how large the company is and how hard it is to track everything but is it higher at a company like this that it's deliberate yeah it's a little higher risk i'd say if they're lying about that i i wouldn't be i'd say it's it's more likely that they lie about something else that matters to shareholders they also use a lot of adjusted metrics and they spend a considerable amount of time it seems on their investor presentations which for me red flag i'm sorry if you were spending if you were dedicating that many resources to investor relations like i can't think of a great great company that spends a

Starting point is 00:10:16 whole bunch of time designing investor presentations really nice pretty quarterly reports like you think about the big tech amazon microsoft google uh apple it's just bullet points it's a press release with bullet points yeah i i don't mind them but yeah i'm sure they have a couple of people working on their ir teams at least but you don't need more than that you don't need a giant ir team and i wouldn't it's not the end of the world if a company has presentations sometimes it's nice but yeah i agree with you second okay go ahead second uh addition of poor governance wait let me uh let me go yeah let me finish up on this axon topic they've gotten to be much bigger right this is the last thing i want to say on that

Starting point is 00:11:06 on this their market cap let me just confirm it right now it's like 23 billion somewhere around $23 billion. Yeah, they basically went... I mean, the stock's done so well. They basically went from obscurity. No one follows them. They were the company. They were even called like Taser.

Starting point is 00:11:20 They just made the Tasers. It was a niche product, and then they had all this stuff, and now they're a giant company. When you're smaller, it's easier to get away with these white lies and to do things without journalists covering you, without anyone really on your ass, I guess. Except for maybe some small-time investors, right? And that's what we talked about this week with Jim Gillies and Todd Wenning,

Starting point is 00:11:47 where they're looking at these undercover, under-followed stocks, small caps, maybe even micro caps. And there's very, very few people actually looking at these companies. And then if you're looking at them, you can think, okay, I might be one of the few people actually tracking what's going on here. So it's a lot easier for a management team, to get away with nefarious behavior. Not saying that's going on at Axon, but it's easier.

Starting point is 00:12:19 They have a lot more eyes on their back now. Yeah, it just feels like kind of with the when I read the proxy statement, I thought to myself, these guys seem to be focused on taking care of themselves first. And then when I read the story, it was just kind of solidified my belief. It's the whole, we are who they thought they were, or they are who we thought they were. That's what it feels like here. Do we want to talk Autodesk? Yeah.

Starting point is 00:12:49 Well, I'd say take care of your customers and employees first, then take care of the shareholders and the executives after. That's what I would say. Because it seems, yeah. If you take care of your customers and employees, if you take care of your customers and employees, you will probably take care of shareholders and executives in the process exactly all right autodesk what's up with them well i think i was the one that was looking at this but you kind of took it as a topic yeah i mean this was uh well it's kind of for me this might be the

Starting point is 00:13:28 straw that broke the camel's back. But we have come on this show a number of times and complained about the executive team at Autodesk and their use of metrics that might not really matter. But this week, news came out. I don't know if I'd call it news, but they've notified the SEC and investors that they're going to be filing their 10K late this year due to an internal investigation from the audit committee on their board of directors. It says the committee commenced an internal investigation with the assistance of outside counsel and advisors regarding the company's free cash flow and non-gap operating margin practices which i did like to see that i'm like please they talk so much about non-gap operating margins meanwhile real margins haven't

Starting point is 00:14:15 really gone anywhere in a while um but just to go through this list i titled this segment Autodesk needs an activist and it feels ripe for an activist to come in some sort of an activist investment firm it here are all my gripes with this team I and I'm getting a little uh the auto apple thing yeah that that thing's crazy for the listeners when for some reason on apple devices now if you put a thumbs up it does a little interactive emoji thing uh and yeah ryan hates when he accidentally does that yes anyway so wasteful spending across the board that's my first red flag and i'm not talking about like you know they're probably paying their employees well i don't care about that i think they're doing fine but they spent what was

Starting point is 00:15:15 half a million dollars on an ad on the sphere in las vegas which for me is kind of the ultimate sign of we want to feel important as executives and one of the best ways to do that is to put our name somewhere where everyone can see it and even though it shows nothing really about our product and there's probably a whole bunch of people here that are seeing the advertisement that will never be customers. It makes us feel important as the executives to be an important company. So red flag number one, the Sphere ad.

Starting point is 00:15:49 They also, what's the, you had the picture of it, but the Autodesk like university day or- I'm pretty sure that Sphere one was in conjunction with their, Autodesk University is like their company retreat for all the big customers, which makes sense to do if you have large corporate customers. I'm not opposed to that, but it was in Las Vegas. They're there for you already.

Starting point is 00:16:10 well already there for you yeah exactly the sphere the sphere is obviously you know that's wasteful spending i get it and you know you want to do a sort of retreat for your customers it makes sense i'm sure they spent like 10 million dollars in vegas which probably you know excessive uh the year before i think was the screenshot i had was from new orleans which it just looked like a giant party so i think as a slight red flag for me that they're probably spending another 10 million dollars in that um and then when you see that the revenue i think is not tripled well yeah close to tripled over the last few five years well maybe over the last couple years it's close to doubled at least across their key segment categories and gap operating margins haven't

Starting point is 00:16:57 budged when the incremental margins on these should be in the 70 80 90 percent range probably even 60 if you include sales and marketing yeah i mean it just shows i think excess spending when the thesis was that they go you know margins just expand because of the high unit economics of the software businesses yeah it's it's a concern and then on top of this at first i was like okay hey look this is a huge concern you know when someone says our definition of free cash flow might be off well hey throw up some science what what's off here like because that's that's big i get the non-gap operating margin is what? And they get paid on it. I believe that's one of the metrics. Right. And non-gap operating margin, I think that's maybe more standard board practice of,

Starting point is 00:17:44 hey, we don't like this term and you're using it for your compensation and we'll probably just get rid of it. But that's just already an adjusted number anyways. I'd be more concerned with the free cash flow. So at first, this company is on my watch list. I'm like, yeah, that's another red flag i'd like to see some new management in there but it could turn into an opportunity if this turns into a scandal because i'm pretty confident in the durability of these software programs and if there's an accounting scandal and i don't own the stock maybe maybe a buying opportunity shows up but that that might be too much of a conspiracy brain no we need to make this a scandal we need to make this a scandal that's yeah so that we can't get an entry point yeah that's

Starting point is 00:18:24 probably why the stock hasn't dropped that much i think it was down like seven to ten percent on this news but here's some of my other gripes so the other one here they don't answer or even take any difficult questions at the shareholders meeting so they have like this public shareholder investor day um camera what what exactly they called it but it was like an investors meeting and they filter the questions to take the ones they want and was it you that put in like some of the hard questions or maybe it was me like i was on um autodesk or what no yeah it must have been i don't remember this might have been okay well i was i don't remember it i don't remember so maybe it was you anyway there's some investor day where you can basically

Starting point is 00:19:12 put in questions and they just reject it or didn't really take any of the questions they didn't want to talk about so that was kind of frustrating i like an open forum the third one here. Executives own virtually zero stock and they're constant sellers. That's probably the biggest red flag here. There is not that much incentive for them to drive true shareholder value over the long run. The fourth one, they measure themselves by metrics that don't... And maybe they don't... They talk about the rule of 40 and it's totally irrelevant for them. And the rule of 40, for anyone that doesn't know, it's just your... I can't remember how they define it as a non-gap margin plus your revenue growth, and you want it to be above 40%,

Starting point is 00:20:00 but they could have 40% margins and be growing. So they're just choosing to set this low bar because they just want to keep it low for themselves. That's usually for early stage companies that are trying to get funding rounds. And that's more of But yeah, early stage venture capital style metrics. Not 60-year-old like – Yeah, giant whatever. Embedded software companies that are a staple of the industry. Yeah, $50 billion market caps.

Starting point is 00:20:32 Yeah, someone had a question here. How does it compare to the Fincheck corporate retreat, Ryan? Which I don't know if that's where you were at this week, but you did go visit the corporate offices. How was that? Yeah, I don't know if I'd call it a corporate retreat. Yeah. No. So we did not buy an ad on the Las Vegas Sphere, and I'm getting a message here that says I have a lack of stable internet.

Starting point is 00:20:59 So if anything happens here, let me know. No, it was really good. We just worked a week in Toronto where our offices are, and we do a lot of remote work. So being able to actually meet everyone in person is a lot of fun. I got to say, after a little bit of experience with in-person work, and maybe I would have gotten tired of it after a while, but I do think there's more productivity. Working in person, collaborating in person, things seem to move a lot faster. Yeah, you don't need to force people to do it every day or say like, hey, you got to

Starting point is 00:21:41 be here eight hours five days a week or else you're fired but mixing it up in and out i mean seems seems smart at least every once in a while yeah um but yeah it was it was a good week anyway autodesk i am begging what's his name jesse cone and you always use him as an example there's other activists although i did i have texted my friend that works at their um at elliot and said hey check this out just send a link like hey you guys should check this out do it uh but there's other there's like i'm sure there's dozens of activist funds out there i mean it's yeah you got to be sizable in this case because it is like you said 50 billion 50 billion market cap roughly i think but it's also kind of in that sweet spot for the big activist investing firms where you

Starting point is 00:22:32 make a real impact on your returns for investors. So I don't know. I feel like it would be ripe for the taking. Plus, you're not fighting against huge insider ownership here. So I'm surprised someone hasn't come in yet. Yeah, it's interesting. And I saw today that the gross profit ratio has fallen below 10. And this is a company that could easily get to Adobe level bottom line margins. So I think you're probably at, if you think you can get them to 40%, 45%, 50% operating margins on a gap basis, which I think they can if they streamlined operations much better and we're just reined in some of the dumb spending. The stock's not that expensive, but I can't control that. An activist could do that. So maybe that's where you got to wait for that to happen.

Starting point is 00:23:24 Let's just think about it at the very basic level. And I think when people hear us talk about, oh margins could expand the first thing that comes to mind is oh brett and ryan think they could lay off employees that is not what we're saying they could do if you're autodesk do you need to hire a new employee to generate growth not really i think the business will grow on its own right as more and more end customers and firms get added to the world they're going to eight Autodesk products. The incremental margins, like you said on that, they're like 90%, maybe 80%, whatever. You need research and development and the minimal cost of revenue that they have. I'm getting that little thumbs up pop up again. All I'm saying is this could get to

Starting point is 00:24:12 significantly higher margins by not advertising on the sphere, not wasting a whole bunch of money trying to impress customers in the world and not trying to match your expenses with your revenue growth. So that's my activist campaign. And employees will be more happy if your stock's not in the gutter for multiple years, especially if you're paying them 10%, 20% of their salary in SPC and they don't see the stock going up, they're not going to be happy. So it aligns everyone together, I think, to run it much more efficiently. And yes, like we mentioned, you got to care about employees you got to care about your customers you got to care about all your stakeholders but shareholders are one of your stakeholders and when everything gets out of whack well

Starting point is 00:24:56 yeah this is when this type of thing happens all right let's move on to my topics i have something on starlink i think was interesting first off and neither of these are our sponsors or anything but this article is from bloomberg i've been a wall street journal subscriber um i kind of think bloomberg might have some better stuff for like people that care about investing business studies investigative reporting in the wall street journal like half of it is you know it's got a lot of politics which you expect you can just ignore that but it's like a lot of lifestyle stuff for rich people and

Starting point is 00:25:34 it's like way too much of that as an aside isn't a lot of it doesn't feel like there's as many hard-hitting pieces with the wall street journal like it's just general reporting like they're and maybe that's intended they want to keep their opinions out of it as much as you can but with bloomberg it feels like i'm getting much more valuable takeaways whenever i end up reading a bloomberg article i agree so i agree with you there yeah uh speaking of that there was one on starlink Sorry, let me send this comment here to someone. Someone said, we don't, surprised we don't speak about oil and gas companies from John Gallagos. Hope I'm saying that right. Yeah, you know, they're not, I'm saying they're not very podcast friendly. You know, we can't talk about obscure stuff all the time and expect people to listen. So we got to go for stuff that's interesting and stuff a lot of people want to hear about. I will say, though, I've noticed that when I do a screener or something like that, I always filter out oil and gas stocks.

Starting point is 00:26:47 I'm constantly excluding those, which that just kind of made me realize if you're in that industry, there are so many people that are ignoring you despite the recent returns. and it's really hard for a generalist to invest there so uh i i think there's probably plenty of opportunity yeah i've been researching lithium miners a little bit trying to dip my toe in learn a little bit more um and i keep going man there's a lot more to learn i don't know if i could buy any of these anytime soon but it's also everyone just says well prices are unpredictable who you know they just throw it away right throw it out right away and there could be an opportunity there as well but let's get back to the topic starlink this is a sexy topic this is a podcast level topic uh bloomberg had some nice reporting uh here's some quotes from the article people familiar with

Starting point is 00:27:41 the finances of one of the world's most valuable private companies say starlink has at times lost hundreds of dollars on each of the millions of ground terminals it ships um yeah okay they started out with kind of a clickbaity uh sentence there i wouldn't say the financial system situation doesn't look as bad as you as you think i guess for context this is one of the largest subsidiaries of spacex spacex being the well rocket lab i guess is doing some work now but one of the only um space flight private space flight contractors out there and they're sending up their own satellites to provide satellite internet around the world. And it's pretty interesting business. There's been a couple of copycats out there. There's OneWeb now, and then also Amazon's

Starting point is 00:28:27 Kuiper that's going to come in. But Starlink has grown quite rapidly. It has 2.6 million customers today. Here's another quote from the article. It says, right now, Starlink has 5,600 active satellites deployed, but plans to add tens of thousands more to reduce transmission times and boost internet capabilities around the world. So essentially how these work are, i think they're about 300 miles above the surface give or take and there's kind of in a web and they beam internet down and you connect to it essentially i'm sure that there's obviously more technical stuff uh with that but the more satellites you have the more internet let's just call it capacity that you can get right you know you could stream 10 videos with one satellite for

Starting point is 00:29:12 example that's not like any sort of relative metric but if you have 10 000 you can stream a lot more videos so you can provide internet services to a lot more people um but what's interesting i thought from this article is that when you go over the big cities starlink um if they get a lot of users the service begins to deteriorate and apparently in 2022 when adoption rapidly grew um there's only a fixed amount of satellite capacity at any one time and then once they hit that hurdle you know uh the internet speeds start going down which i think is interesting it's probably a good problem to have right because you just have to launch more satellites but it's also capital intensive so it's kind of an interesting business where it's almost like

Starting point is 00:29:59 the cable companies of the past where you have to lay out a ton of catbacks up front and hopefully you're going to have these locked-in customers over the long term. Here's another quote. All the major airlines, Delta, Southwest, American, and United, have spurned the Musk-led service in favor of sticking with established Wi-Fi providers like Viasat. Analysts say SpaceX doesn't provide the long-term contracts and exclusivity that corporate clients often want and that it's cost-prohibitive to rip out existing Wi-Fi for a service that doesn't yet stand out for competitors.

Starting point is 00:30:30 Quote, Delta executives were eager to test Starlink Internet, But as this jetliner flew upwards of 30,000 feet over Chicago, the plane wasn't connecting to the service. And that's because of the too many people on the network at one time. On a more positive note, they've had really big success with maritime customers. And clearly they have 2.6 million total customers. So they're doing quite well. And the overall SpaceX company is expected to generate $15 billion in revenue this year and growing quickly because of Starlink. So it seems like a business in a really interesting spot.

Starting point is 00:31:03 like they're burning money right now but you can see that the long-term economics could be there it's capex intensive they're relying on you know launching stuff uh through their own rocket company so you have this vertical integration play you also have competing with the cable internet providers you have amazon coming out with their new product um you know on a time delay there's also the one web one yeah i think it's fascinating what are your initial thoughts it sounds like it'd be a pretty solid business even if it doesn't hit the big cities if they can really capture a lot of the rural or the maritime customers because i mean maritime it seems like that'd make a lot of sense uh given that they're you're not competing necessarily for

Starting point is 00:31:48 as much bandwidth is that maybe the right term um but yeah i imagine that could be quite a profitable business at scale and he as in elon musk and spacex in general probably have pretty easy access to capital i think a lot of vc firms line up to give him money um when are they not to mention i think they could with this revenue growth i think it's like a true they might want to keep it private if they can like you mentioned the vcs but revenue has gone from like four billion to 15 billion they could raise 10 20 billion dollars that would be nice in the public markets yeah i'm sure they could raise a ton and i am guessing whatever figure we're estimating it could probably be substantially higher people love people will

Starting point is 00:32:43 invest in whatever Elon Musk is doing. It could be like the Boring Company, a business that doesn't make a lot of sense. Individualized transit, like we're going backwards from the bus.

Starting point is 00:33:02 But people will give money to it. So, yeah, I'm sure they can have a very successful IPO. I had an experience with pretty poor airplane internet the other day and it just made me think gogo could have some potential here well the i well i know they're not going to go on the commercial but i just thought i was so i was on a major airline alaska i paid for the wi-fi to stream something and it's and

Starting point is 00:33:33 it's just so spotty and we talked about some of the limitations with that made me realize that i'm sure there's companies that are investing pretty heavily there and they don't seem to be able to upgrade the wi-fi the airplane wi-fi doesn't seem to have gotten better much in the last five years so maybe gogo's got a nice little business there with the private jets yeah another thing they talked about in this article is that a lot of the commercial airliners don't want to rip out their existing services even though as you mentioned the via sat the old stuff that gogo sold is pretty bad um they don't want to rip out this their their equipment because it just takes too long and starlink has to be so much better for them to replace it and the fact

Starting point is 00:34:20 that gogo yeah we talked about on the show that the report i did on them if they can match starlink's speeds and go global and already have all this existing equipment in the private jets that has an exclusive spectrum ban, which essentially just means that you're not going to have that interference over the big cities. Yeah. It's nice. It seems like a problem that should be solved

Starting point is 00:34:45 by now, and I know it's a big luxury to connect to the internet in the sky. There's always those comedic jokes about that, but it provides people a lot of value, especially the business executives. The Autodesk executives can constantly be

Starting point is 00:35:01 wasting money by doing that. Let's see. We have some comments from Tyler. I'm not a huge believer in LEO internet companies, but the one thing I'm certain in is that they are going to crush the fiber companies. The fiber companies rely on being the only provider in town, and this is essentially saying rural areas in the United States. So say a small town like two hours outside of Chicago versus inside Chicago using our prior example. So they have the they're the only provider in these towns with these LEO constellations are going to add a second, third, et cetera, competitor to every fiber passing in the world. I think that makes sense because, you know, it would be much tougher to compete with Comcast in a big city. There's not going to be that much on the edges there that you can go with these LEO satellites. But in a tiny town, definitely, there's plenty of capacity because the density of the network matters for the satellite services. Okay. I see that you want to talk about Fiverr.

Starting point is 00:36:04 But before we get to that, I want to talk quickly about our friend, Firm Returns. It is a stock research blog, and he does a really good job, really thorough write-ups. He covers pretty much anything. It's mostly companies from the UK, but he's willing to invest anywhere. He's also size agnostic. So he'll cover companies with market cap of $10 million to companies with the market cap of $40 billion. And the coverage in terms of sector is quite diverse as well.

Starting point is 00:36:34 The one company and the write-ups that I really enjoyed are for TinyBuild. So when he invests, and TinyBuild's a smaller game developer in the UK, when he invests on the smaller end of the spectrum, he'll actually build up relationships with management and have frequent conversations with them that'll kind of help keep his readers more informed because he'll be able to use some of that dialogue for his content. He is, I've mentioned it here before, very thorough with his write-ups. Some of these long form reports can take upwards of 100 hours of research. So go ahead and check it out. He's very value focused. It's firmreturns.com. And he's a listener of Chit Chat Stocks.

Starting point is 00:37:14 Yes, he is. The affiliate link is firmreturns.com slash chitchat. You get, correct me if I'm wrong here, Brett, 20% off? That is correct. Link will be in the show notes. And yes, I believe, yeah, James is watching right now. He is Firm Returns. That's his pseudonym.

Starting point is 00:37:33 So he contributes to the show. That's great. And as we mentioned, the smaller management teams, you get access because no one's following them. That's something he's trying to provide. And there can be a lot of alpha and undervalued companies. Did you want to talk about public? Our other friend.

Starting point is 00:37:50 Earlier in the show, you heard us talk about the investing platform, public.com. That is where you can trade options with no commissions or per contract fees. And you get a rebate of up to $0.18 per contract traded. NerdWallet 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 $0.18 per contract traded. This is paid for by public investing. Options are not suitable for all investors and carry significant risk. Full disclosures in the podcast description, U.S. members only.

Starting point is 00:38:19 Let's talk Fiverr because this is a company. What's that old Star Wars meme? That's a name I haven't heard in a long time. That's what it feels like with Fiverr. This was a growth darling. Yeah, let's look at market cap, Arnold Finch at here. Market cap peaked at over $10 billion. dollars now we're about below a billion um drawdown is 94 percent let's kind of look at

Starting point is 00:38:45 some of these metrics here you have some of the notes here i guess i'm not looking at right now because i'm doing the share screen but we have revenue growing it's grown at 38 since 2017 but it slowed down last year in the last couple of years slowed down last year to about seven percent um if one thing i thought was really interesting looking at this company and i guess for context for the listeners we ask on twitter what we should talk about and a lot of people actually said fiverr um so i wanted to talk about today as you mentioned we haven't looked at them for a couple years they have they were extremely popular but with the stock down not as popular anymore but i want to look at uh something i thought was really interesting which is the

Starting point is 00:39:26 difference between the operating margin and free cash flow now this is something that will maybe not surprise you because you've seen these type of companies before, but it's quite a wide gap. So we have, for the listeners, in December 2020 year, they had negative 6% margins, operating margin. Then 2021, negative 15.

Starting point is 00:39:48 2022, negative 14. And then 2023, significant improvement to negative 4%. But if you look at free cash flow... We go quarterly. I just want to see. See if they've gotten... yeah similar trend keeps keeps moving in the right direction um although some some companies might have lumpiness so the annual might be more helpful but look at the free cash flow here

Starting point is 00:40:14 so last year they generated positive 23 free cash flow margins but negative four percent operating margin on the one hand they're not going to be cash strapped i believe they have 200 million dollars in net cash on the balance sheet but on the other hand um i think they're spending a healthy amount on stock-based compensation if we look at the trailing valuation we're at a gross profit ratio of 2.5 so quite cheap if they can get their act together on a profitability standpoint but i'd like to see the definition of that they might they may also have a working capital advantage holding that's true from that's true yeah what you call it freelancers that this would be i would not ignore this like this is something i

Starting point is 00:41:07 could see myself potentially investing in here evita free cash flow 13 okay not great but give me some give me some more numbers last thing i will say 200 million dollars in net cash but they have like 400 something million in convertible notes so they actually have a lot of strict cash on the balance sheet and some of its client deposits, but I think I excluded that when doing a calculation. Market cap is $800 million today, and they just announced a $100 million buyback program. Revenue's still growing.

Starting point is 00:41:37 I think this is a huge narrative around, well, first it was the COVID overhang, right? Because they had a huge benefit. For anyone that doesn't know, Fiverr's like Upwork. It's similar in that regard where it's a, connects contractors to work. for example if we wanted some sort of work done on the podcast on the back end we could go to fiverr and look for someone to do that contract work but you know there's the covet

Starting point is 00:42:04 overhang because that was so popular but now i think there's an ai overhang for people are worried about that oh interesting that could be an opportunity here yeah all right that's kind of interesting i think they're also they're also based in israel i think I can confirm that. So that might be also affecting them, given the war. Yeah, I think there might be a number of opportunities for these companies where everyone's kind of discounting them because they think they're going to get destroyed by AI. I think Text is another one where it's like that live chat software for companies. I think they're based in Poland.

Starting point is 00:42:44 But there's a number of these software businesses or businesses where it could theoretically be done by AI, and they just seem to be getting crushed right now. I'd say it's almost like the Amazon effect of seven years ago, where if you're in Amazon's path, all of a sudden your stock gets dropped by 20%. True. And that served to be an opportunity for a lot of companies. The other thing I'll mention here, if you like that little screen share Brett just did, FinChat, my place of employment, finchat.io slash chitchat will get you 15% off any paid plans. It's also, you get a two-week free trial right now, so might as well try it out as soon as you sign up. saves you a ton of time if you research individual stocks save you a lot of time and it is significantly uh more cost not effective but it's way way less cost per hit of than the bloomberg

Starting point is 00:43:47 cap iq it's nowhere near that absurd pricing that you get on those ones and it is just right from your browser with all these great numbers so finchette.io slash chitchat link in the show notes Anything else, Brian? Ally Financial earnings this morning. Catch those? I did, but I have a comment here on Fiverr that I think will help. It's going to make you cringe. So Tyler said, do you know if there's any Fiverr competitors?

Starting point is 00:44:17 He was like, is IAC a competitor? And I was like, Upwork is the competitor, but that got me an idea. What if IAC bought Fiverr? Now, that's an ugly acquisition right there. but i think it makes sense for them that's right up their alley they do love marketplaces they love struggling marketplaces yeah um that would be interesting i don't think i'd be a huge fan of that um but i wonder if there could be it's companies like this where they've maybe They faked profitability for a while because they showed growth and it was kind of idiotic not to be investing back into the business.

Starting point is 00:45:03 But now push comes to shove. The market doesn't take – doesn't care about your growth anymore and they want to see profits. I think this is when management teams tend to find religion and I think it's a good opportunity. If they're able to – I don't see why this is a business that couldn't be profitable. It's pretty capital light. Does it remind you of – and I'm reminded because this company is based in Israel as well as Wix, a little similar. Yeah, to some degree. When it was in that $50 to $60, $70 range, it's like management is a little shaky, a lot of SBC, but they got a COVID overhang.

Starting point is 00:45:45 but it might not grow as slowly as people think yeah with wix they quickly found religion on profitability because a lot of i think there was a lot of investor involvement just encouraging them to you know rein in costs uh hopefully fiber could be in a similar situation it is a bit concerning with just being headquartered in israel i am curious what kind of the risks there are day-to-day like working dynamics look like is it a you know what's it like being an employee there are you running uh move to like other countries working remote what's the process so i'd love to hear more about that on conference call or something uh tyler says fiverr just needs to advertise on the sphere and that'll fix things that's a great point but you want to talk you

Starting point is 00:46:34 know what they would make more sense to advertise on the sphere because you know anyone could be a freelancer that could be a potential customer autodesk what you think a bunch of architects are like are just pondering this i mean maybe like they're just wandering the streets of las vegas i i'm gonna be in las vegas this weekend actually and i will i'll tell you whether or not i think there's a bunch of architects walking the streets well i'm gonna predict no yeah you're going to a wedding in las vegas i gotta say whoever that bride is that's a keeper right there choosing that say it's a place to go all right ally did you read the quarterly report i did didn't put any notes down or anything yet but i just read through it and say

Starting point is 00:47:22 my immediate thought was the market expectations were lower than i assumed did you think that as well because the numbers aren't great right now but the stock keeps going up yeah it's funny watching the narrative on these guys change so quickly um just like any hint of struggle the stock shot down any hint of like net charge off rate was like just marginally down from last quarter the stock jumped eight percent this morning yeah so do you think do you think people are expecting like they're like oh the expectations are way too high the charge-off rates all the delinquencies are just gonna keep moving higher because of that karmagun karmageddon narrative or what i don't know kind of bummed i didn't i do own this but i

Starting point is 00:48:15 kind of wish i put more money into it what a starter position almost yeah i think it was like 4%, 5% of my portfolio. It felt like out of the last three years, if there was any business that I thought was truly a home run, this one felt like it checked a lot of the boxes more than any other because it was less than 10 times earnings normalized. The business itself had a competitive advantage in terms of digital distribution. They had a cost advantage. They were growing. They have a loan portfolio that doesn't have that long of terms. So you knew that it was kind of under-earning relative to what it could do in a couple of years. It just felt like it checked a lot of the boxes. The only part that concerned me, and this was probably the

Starting point is 00:49:14 most concerning was the executive turnover yeah we just got a comment here that says real question is why did all the c-suite leave i personally can't figure it out so i can't invest yeah there's something to watch out for um they brought in the new person i think it was someone that just went to discover and left because of the capital one merger right are we sure it wasn't the guy that like got ousted for the issues i don't know i don't i don't own the stocks uh i don't but i think this guy came in after like he wasn't he wasn't the discover ceo for very long if you get what i mean okay i'll yeah i'll have to look into it more the uh because if there was the one guy that was at discover and then they had they like charged all those merchants like

Starting point is 00:50:10 they put them in the wrong pricing tier and they had to like refund all those merchants and then right he was ousted that's another one that uh i would say in a vacuum fairly weak report and the stock's up three percent today even though we're in they're also in a merger uh what would you call that like not a vacuum but uh you know like the place i i don't know what's that word that people use where you're like sitting in between waiting for the decision to happen limbo you know limbo yeah yeah they're in they're in acquisition limbo yeah that is an interesting one that capital one discover did we ever do a show specifically on them or should we we should maybe you you've been trying

Starting point is 00:50:59 to figure out what it's our research and maybe maybe that should be you hey yeah maybe you do that all right for your next doctor research i like that coupon subscription hike we were right on something finally finally yeah the one stock island that's going up yeah give me a second to brag here 20 of my portfolio there we go but uh part of that is because everything else seems to be going down so yeah i haven't added but it's growing yeah this is an interesting one seems a bit defensive uh i know they talk about being customer focused and not worried about competitors which is the same thing that amazon says but there's just huge reporting today from the wall street journal that amazon literally does recon on all their competitors like every

Starting point is 00:51:52 other companies. So it's just a bit of marketing. I think Coupang does the same, even if customers are the first priority. But I guess for context, here's some quotes from an article from some South Korean newspaper. Coupang, South Korea's largest e-commerce platform, said on Friday it will raise its membership fees 58% to approximately $5.70 USD per month as it plans to spend more than 3 trillion won, about 2.2 billion US dollars to offer rocket delivery across the country to fight off Chinese rivals such as AliExpress and Timu. Think of rocket delivery for anyone that doesn't know this company as similar to Amazon Prime with its own local nuances. This is the first increase in two years. And for other contexts, last month, AliExpress announced that it would vest

Starting point is 00:52:44 $1.1 billion in building fulfillment centers in Korea over the next three years to challenge coupon what are your thoughts here you like it do you not like it is it smart for them to get a little bit i'd say playing offense to play defense getting more aggressive with the spending raising the price hike so they can invest more in this fulfillment network to make sure that their competitive positioning is better than aliexpress yeah um i did read a report this week that was pretty critical maybe not critical of coupon but just highlighted some of the risks of the chinese competition and i think yeah what's the ultimate advantage for coupon it has to be just speed uh speed of delivery and so being that provider um where it's going to be hard to compete with

Starting point is 00:53:41 aliexpress on pricing there's just really not an easy way to do that but on coupon or an aliexpress on pricing you mean yeah i mean they are the lowest price provider by far but right is it similar to timu or is that what i don't know okay where it's just like ultra cheap and probably some of the goods are ultra cheap they will capture i'm sure aliexpress and timu they've gained some share in South Korea. I'm sure they will continue to capture some share, but Coupang has not lost share. And I imagine that's because they have a lot of high value customers who are so delighted with the convenience and the speed of delivery that they're willing to spend more and more. So the Chinese competition, it's something to watch, but I'm definitely not selling because of

Starting point is 00:54:35 it one okay two things first costco and dollar general can both exist and thrive second i would hope coupon takes the subscription hike and not only invest in the fulfillment network which is important but i would say invest in the adjacent stuff that can further separate you from an aliexpress that is not going to do it for example the sports rights in south korea they i believe they have some of that international sports rights that can be a bit interesting in a smaller country not as expensive they got some soccer games i think some baseball games stuff like that um as well as some other video stuff i would really hope they invest in that because along with the say local coupon eats which is like a doordash um subsidiary that they

Starting point is 00:55:26 have along with the discounts there that is something that an aliexpress a timu whoever is going to have a much harder time competing with because they can't just invent a streaming platform specifically for the Korean market. And if they do, I think it would have a low chance of success. And then as well, it'd be pretty difficult for them to create a food delivery network as well. So, yeah.

Starting point is 00:55:52 Yeah, I agree. I like the idea. Well, first of all, I like the price hike. It's probably pretty low-hanging fruit for them. because it's like the equivalent of $3 a month, if I'm not mistaken, maybe even less. Right, and South Korea is a fairly rich market, yeah. So they have the capacity to do it. That's why they have more than 10 million Rocket WoW members.

Starting point is 00:56:18 For them to be investing big into improving their delivery speeds and hopefully investing in other initiatives, I think that's, like you said, a big differentiator between them and AliExpress. Same with Timu. So, like you said, Timu has become very popular in the U.S. too. AliExpress, I think, delivers to the U.S. also. Amazon had a great year. Amazon's e-commerce business has done just fine in spite of it.

Starting point is 00:56:47 So, I think there's more than enough room to exist. In my experience, the people that are buying Timu stuff are maybe not the highest value customers. Yeah. And it's kind of like a running joke. Once you get that off Tmoo, it's such bad quality. It feels like Coupang and Amazon and the leaders in their respective markets are going to be just fine. Yeah, I got a comment here that says Wish 2.0. Yeah, again, I think those are harder to run, the really cheap marketplaces.

Starting point is 00:57:22 And I think, look, there's not that many examples, but if you look historically for the last 20, 30 years, the e-commerce companies with their ability and I'm leaving some of the legacy players like a Walmart. The e-commerce companies with their ability across the world Amazon Walmart, MercadoLibre

Starting point is 00:57:43 Coupang's younger but this is why I like them is because they're going after the same route. The vertical integration of delivery is the key. Because you control your own destiny. i think that's really it and as long as they keep investing in that smartly i'll be sticking around yeah and i trust management for now this is kind of in the never sell camp for me

Starting point is 00:58:14 it's probably gonna shrink as a percentage of my portfolio over time but uh it's still in the never sell yeah yeah hey what uh what's wrong with being a never sell guy honestly what's so bad no i know it's just funny that it goes up like 20 and now you're like yep it's never so this was never so at the start part of being never so it has to be yeah i know i know i'm in the it's i i agree with the philosophy too the philosophy is never so sometimes a company forces your hand but either making mistakes or whatever something happens um as we wrap things up we got a couple of minutes left someone says are you guys excited for the netflix earnings i would consider netflix earnings almost like the groundhog day of earnings when they report it's almost like

Starting point is 00:59:07 earnings season has started and if they have a good report it's like a good omen for everyone else and you know people like other stocks trade on it it always makes me kind of chuckle that spotify's stock changes depending on netflix's results that is what what really is the correlation there's no correlation people are subscribing to things wow that's great every subscription business should just rip on netflix's earnings yeah well what do you think the expectations for them but they continue to crush it yeah kind of related i mean that to me i'm i'm pretty bummed out we didn't take a deeper look at them when it was trading at a pretty reasonable cash flow multiple

Starting point is 01:00:01 and when i think of like top top executives today netflix has them yeah they're they're probably on my Mount Rushmore of current executives. Are you aware that Hastings is not running the business anymore? Isn't he still affiliated? He's still chairman, right? Yeah, but he's in his Bezos mode. He's like renovating his ski resort in Utah. I don't think he's in full Bezos mode.

Starting point is 01:00:30 He's spending like a billion dollars to renovate a ski resort in Utah. Really? Yeah, I think he's in full Bezos mode. I like Ted, though. I'd say like, yeah, they've had the cashflow struggles, but definitely earnings. And it's one where over the last three, four or five years, the moat has clearly widened. And they've gone from having multiple threats, Disney, HBO, whoever, to really, I'd say only one direct threat, and that's YouTube. and that's a good problem to have now that they're so big and youtube is embracing tv so much yeah the other thing with bezos with hastings perhaps their best achievement is creating a group of successors that can run the business

Starting point is 01:01:25 just as well as them where ted sarandos seems to be doing a fine job the the long-term growth and free cashflow is a part of the culture at both of those companies where we've seen that go wrong at companies where you have great founders. Starbucks is a good example. What's Disney, I guess, not really a founder in Bob Iger, but not being able to pass on the executive chair. They've done a really good job with that. And it's one of those things that's probably hard to identify as an investor until you see the next CEO. But both Andy Jassy and Ted Sarandos seem to carry a lot of the same philosophy as Bezos and Hastings. Yep. Okay. What did you think? This reminds me, I know we're going a little bit long,

Starting point is 01:02:22 but final question. What did you think of the Jassy annual letter? Did it get you more bullish or more bearish on Amazon? I liked it. uh a lot of developers speak which was uh like a pretty technical letter relative to some of what bezos used to write uh but i like that that means it's a guy who's in the weeds and he's not just kind of this purveyor of all he's more involved it seems like a really good business the uh sorry a really well-run business obviously amazon is a good business um yeah i'm quite confident that jesse's gonna be around for a long time the other thing i really liked is he took shots at regulators in an interview uh publicly and is that the cnbc one

Starting point is 01:03:15 yeah where he basically said like they voted to block the irobot deal that means more consumer data in for americans is going to go to chinese competitors a bunch of people at irobot lost their jobs and they were completely off the ball by being concerned that first party orders would grow and he's like we make more money on third party orders why would we get preferential treatment to our own products i know that's what i think they should just get rid of amazon basics you're not the same as costco you're a third party marketplace yeah yeah i agree and if you want like a what's the amazon check where it's like the prime check yeah the prime label yeah that gives you what you need as a consumer that gives me confidence that like this is an okay product

Starting point is 01:04:12 yeah i don't think the letter got me um what yeah i don't think they need amazon basics either yeah they're probably making no money like i what do people buy like batteries and electronic cables stuff that has no margin um yeah i think i got more bullish there was reporting out there that he people are like worried that the company's getting too big and he's telling people that they need to think bigger and become that he's like we can be much bigger and it's like all right i kind of like this guy's energy he's getting aggressive he wants to go bold big and i'm not a shareholder today but um i would say he's gonna be it's gonna be like tim cook on steroids where he can be the overseer of not just a trillion or what was tim cook two trillion

Starting point is 01:05:06 in shareholder value creation but twice triple quadruple that i mean the market opportunities out here for for amazon is just i'm doing a lot of runway what i'm doing a lot of price anchoring with amazon because we bought it whatever a year and a half ago and i felt so much cheaper and now i'm like oh i'm not gonna get the same returns but the other part of me but the other part of me is like just shut my eyes and buy it you know i know nothing don't look at the valuation i know i know that's just that's that's just the um that's just the market that's just the price talking but uh we're going long but i will close things out here with saying when bezos said that the cloud had an infinite runaway for reinvestment i've never been more

Starting point is 01:05:59 turned on to an investment to a stock when he said there's an m he's like we may literally never stop running out of ways to reinvest in the cloud i was like all right might be an interesting opportunity yeah but yeah what was the thing you said the other day uh 90 to 95 percent of it spend is still on premise yeah now some experts i think say that's a bit misleading but even if it's a little higher than that yeah still big opportunity and the entire pie is obviously growing and they've locked down all these government contracts i mean come on i kind of saw it at a granular level last week in person just talking to some of the development team what uh there is such a vendor lock-in what are you guys i don't want to get

Starting point is 01:06:41 is it uh one of the big three well i think for any company you probably have to have some level of one of the big three and you're like okay starting from the ground up the uh so yes but the like especially for a company that's growing really fast or like small, trying to scale, or I imagine it's even more prominent in some of these enterprise businesses, but there's such a big vendor lock-in where maybe you can be like multi-cloud,

Starting point is 01:07:12 you'll use multiple providers, but to rework a lot of your workloads to a new provider, it seems like it's not that big of a benefit and it's just a lot of time consumption. And you probably have to have some downtime. Right. I mean, think if you're like IBM, Amazon and Google are coming out with new chips that are custom for their cloud services that are reducing costs for their customers by what, like 50%? That might not be the exact number, but how do you compete with that? They have thousands of people working on their internal chip teams. Yeah. I just think these cloud businesses are going to, this decade will look a lot like the last one. yeah and he was who you know might be the best out performer who was starting you know could

Starting point is 01:08:04 be the fourth horseman is oracle oracle's actually done quite well interesting player but they've had the stocks actually yeah done done pretty well but that's the topic for another time do you want to hit the disclosure ryan sure yeah uh thank you all for tuning in please like and review five stars if you like us uh it's really appreciated it's the easiest way to help this show grow thank you all for tuning in uh brett and i not financial advisors anything we say on this show is not formal advice or recommendation we may buy sell hold any stocks discussed on this podcast uh with that enjoy your week and we'll see you next time Thank you.

Chit Chat Stocks - Will Starlink Crush the Competition? Plus, More Management Malfeasance

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