The Canadian Investor - Another US Bank Fails and the Battle for AI Has Begun

Episode Date: May 4, 2023

In this episode, we go over the First Republic takeover by the FDIC and the sale to JP Morgan Chase and we go over the earnings from Visa, Google, Microsoft, Pinterest and Allied Property REIT. We also go over the latest news about Teck Resources. Symbols of stocks discussed: FRC, JPM, GOOG, MSFT, V, TECK-B.TO, PINS, AP-U.TO Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. The Canadian Investor Podcast. Welcome into the show. Today is May 2nd. My name is Brayden Dennis, as always, joined by the captivating Simon Belanger. My good sir, we are here. So did the last one go on video we video guys i mean

it will eventually as i get better uh video editing so uh i'm getting there so anyone listening from join tci um it is the plan is just i'm very new to video editing so it'll take me almost a full day to figure out how the whole thing works but i've a couple podcasters crossing the chasm to becoming youtubers wow pretty much yeah i feel like a good thing people weren't watching me trying to edit because it did not look good at times i i will do it for you in no time don't you worry today we're talking earnings and news as we do once a week. On the podcast here, you're going to talk about another domino falling in US banking. I'll discuss Visa, more drama from Canadian resources company, Tech. We're going to talk about the AI war,

and then round it out with two Canadian names for earnings. Good, sir. Let's do it. Our earnings season has been jam-packed. Lots of good insights. I was listening to some conference calls today. Any conference calls on the bike trainer for you lately? No, my back is messed up, so I can't be on the bike trainer just yet. But it is in the cards soon.

But I actually, on a walk walk i went and listened to the allied property reit conference call uh quite interesting uh especially with what's going on with commercial real estate and estates i've been the pod's been really tough the last couple weeks especially these these news ones because i'm in in product building mode, day one of building a new startup, what it feels like, even though it's the same company. And you get a little distracted from the financial news. And you know what? It is great for the mental health, but also really hard for the podcast. So it's good that I have to come back to reality and do some recording for the podcast.

All right, another bank domino falling here. What's the deal? Yeah, so I'm sure most people have heard about it. So First Republic became the latest U.S. bank to fail. It's the second largest bank in history to fail. It was actually slightly larger than Silicon Valley Bank or SVB that we basically started all of this, I would say, back in early March. So I'll refer to them as FRC, which is just their ticker.

So FRC went into FDIC receivership, which is the federal deposit insurance in the US on the weekend and was auctioned off and bought by JP Morgan. According to the news and sources I've seen, I think a lot of them were on the condition of anonymity. There was four banks in the running for the bidding. Now, First Republic was similar in many ways to SVB, but also different. Here are some key points to keep in mind. So you'll notice that there's definitely some things that are similar. So first of all, FRC primarily serve high net individuals and their businesses. This means that a large portion of their deposits were not insured by the FDIC $250,000 insurance, similar to SVB. Close to 68% of their deposits

were actually uninsured. So that's a large chunk of their deposits. FRC also had duration mismatch in their loans. So it means that their demand deposits, so just regular deposits, which can be withdrawn at any time, like Silicon Valley Bank learned the hard way, aren't aligned with their loans, which are much longer term. So if there is a run on the bank, then FRC has to sell loans that are underwater and take the loss to repay those deposits. So it's not a great situation. And that's where the similarities with SVB were. The type of assets that they had were actually a bit different here. So it issued a lot of ultra low interest rate mortgages to the wealthy individuals that I just talked about and those were predominantly on single family

homes. So more than 80% of them had a duration of more than five years and more than 60% had a duration of more than 15 years. This is not unusual for the US. Just like government bonds, the mortgages cannot be sold at par in a rising rate environment since their value goes down. And mortgage backed securities have a lot of similarities to government bonds. But the issue as well with First Republic here is that a lot of those mortgages actually could not be backed and packaged like mortgage-backed securities. Because a lot of them, the high net individuals, they were made in a way that they only had to pay interest on those loans. So they would not qualify for the government kind of backed mortgage securities in the U.S. Now, First Republic used some of the funding facilities that were made available by the Fed in March, which was called the Bank Term Funding Program, which allows the banks to

use treasuries or mortgage-backed securities as collateral to borrow at par and not the actual market value, which is significantly down. So they did use some of this, but clearly it was not enough to provide sufficient liquidity. And that program is just really, the only intent of that program is just to allow the bank to get things in order and essentially get more deposit in the bank. If they can't manage to do that, this program is completely useless. And it was just not big enough for First Republic Bank. And back in March, for additional context here,

11 large U.S. banks, including J.P. Morgan, injected $30 billion worth of deposit into First Republic after the failure of SVB. And that was meant to reassure depositors, but obviously it didn't work. So when FRC released its latest financial statement last week, it revealed that it had lost a whopping $100 billion in deposits in the quarter compared to the end of last year, which is a 41% decline. So once that news came out, it didn't take very long for basically the writing to be on the wall to most people knowing that the probability of the bank failing was quite high. Before I go on, Brayden, anything you want to mention here?

I just pasted First Republic Bank's average total deposits since 2012 as it had this kind of amazing historic rise and growth all the way through to the end of 2022. And their stock price resembles a carbon copy, if you will, of SVBs. And the reality here is that these companies had tremendous monster years right up until this very point, which is such an interesting data point with banks because, you know, throw it into a long list of reasons why I honestly find, even if you're 10 times smarter than me, which a lot of people who study banks are, it's just so hard to predict this kind of thing and value banks. They're so complex. And no, I don't really have anything more to add here other than once the writing was on the wall, it was, uh-oh, here it is again. It's for me once. Yeah, exactly. That's it. And banks are pretty complex to understand. And what ended up happening, like I mentioned at the beginning, JP Morgan ended up winning the bid to buy most of the assets. And all 84 branches have now become JP Morgan branches. Part of the deal is that they will pay $10.6 billion to buy the First Republic assets.

Not all of them, but most of them. And they will not assume any of the corporate debt or preferred shares and part of the deal is also that the FDIC will share the burden of any losses in the loan portfolio which is definitely something that could happen because those mortgages some could be underwater even though they're high networking individuals that typically you know pay back their loans. The risk of default is typically lower for these individuals. One of the key things and what people are kind of zeroing in on is the deal violates US law that prevents banks from becoming too big. So the law says that banks that have more than 10% of US deposits cannot acquire another bank, which is the case for JP Morgan.

So they went against that. My perspective here is clearly the U.S. government and the Biden administration did not want to say that they bailed out a bank. They were afraid probably what would happen if nothing would be done. They were afraid probably what would happen if nothing would be done. So I'm sure there was a lot of pressure behind the scene to encourage big banks to bid on this because the reality is, is we're starting in the U.S. to be in the election cycle. The 2024 election, I mean, the U.S. essentially a year and a half before the election, you're pretty much in an election cycle. So I think there was, you know, that's the rumbling I've been seeing is there was a lot of pressure behind the scenes. But it also sounds like JP Morgan got a pretty good deal out of it. And the last thing I'll say is I'm not I wouldn't be surprised if there's more regional banks that face a similar situation. This was definitely one of the larger ones, so they'll probably be smaller if there's other ones. But keep in mind that the next financial crisis, whether it's in 5, 10, 15, 20 years, it's most likely going to be something entirely different

because this crisis is definitely different than 2008 where it was a credit quality issue this is a duration mismatch so the next and that's the issue with regulation is it addresses this crisis but it doesn't really look forward on the other potential issues that could arise in the future yeah well said uh duration mismatch it seems so obvious and elementary when you look back at just kind of the huge mismanagement of their balance sheet and you know who thought rates was who thought rates were gonna have the move that they did i guess clearly not even these execs right yeah and the easiest way for people for people who may not fully understand this, just think about it on your personal situation, right? So, if you want to build an emergency fund, you want that money to be readily available if you need it. You're not going to put your emergency

fund in a five-year GIC that's locked in because you won't be able to access it or you might be able with some significant penalties. So that's the best way to kind of explain it from a personal perspective where you want things to be liquid that you may need at a moment's notice. And for anything else, yes, you can have a longer duration, but you have to realize that you won't have access to it right away. Yeah, good analogy. The way I'm thinking about it too is like, say with rates near zero, you bought a bunch of two-year GICs. And then a year later, you could get 5% on them and your current locked-in rate is like nothing.

Those GICs are not very valuable anymore, are they? could get 5% on them and that your current locked in rate is like nothing, those JC's are not very valuable anymore, are they? And it's not a good comparison because it's JC versus a bond. But to give you kind of an analogy of the markdown that these companies have to actually, the hits they have to actually take when those bond values are just not worth what they were when rates move as they did. So that's kind of what people talk about with the rate mismatch. Very interesting. Dude, I'm just looking here like FRC was a $220 stock in the fall of 2021 yeah i think it had like a 40 billion market cap and then just

when it closed last week i think it was like 500 million it's like it's crazy yeah yeah i gosh this is why i was so hesitant to try to take advantage of some deals, if you will, in the banking fallout. Because I thought FRC was going to be hurt deposit-wise, but I didn't think it would be like this. Yeah, and the other issue too, and I think Charlie Munger kind of, I saw some headlines that he mentioned. He talked a little bit about that on the weekend was that there's a lot of regional banks. And I'm going to do a segment on that in the near future in terms of commercial real estate in the U.S. where you're seeing banks who have loans on commercial properties, office space. And these offices, I know San Francisco is definitely at the top of that list where you have all these big tech companies that are basically barely using their

office space. The occupancy rate is extremely low. So you can make a case that, you know, the value of these buildings have gone way down when these loans come to renew. You know, the banks may be on the hook for quite a bit of money because ultimately, you know, they own the property at the end of the day if there's a lot, you know, there's a lot of mortgages issued against that. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones,

all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best

products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host.

Let's move on to, oh dude, before we do that, should we talk about this FinChat thing that's gone completely viral? I don't know. I think I've heard of it. Dude, there's like, there's some LinkedIn posts. Really? That, there's some LinkedIn posts that I'm finding in the wild. There's one that I found yesterday that like I didn't know about.

Like it hit my timeline organically or like my friend shared it to me hit his timeline organically and it had over 6 000 likes and 650 reposts on linkedin that day we we had 13 and a half thousand signups it's free free publicity right there that's the best kind of publicity yeah who doesn't love free marketing so it is i feel like with stratosphere you know a lot of the growth was attached to the podcast a lot of the growth was attached to just kind of like us willing its growth forward you know like direct outreach like elbow greasing it and this is just like viral loop and we've done some engineering things to make sure it goes viral but dude it's been uh it's been an absolutely nutty 48 hours or sorry uh week and a half ish yeah yeah

no i've seen and i mean the usage i use it uh you know when i'm work on the podcast a little bit too i'm still double checking to make sure the data is good but so far so good so um i think the first version the kpi data is just spitting out stratosphere data that we know is right yeah but i'm just like that right and i know i the early test version i think i had like texted you oh you may want to double check this kind of thing but uh the past several times i've used it never had any issues with it so yeah the i mean we fine-tuned it already to version 1.3 and and it's moving fast the first version like wasn't that impressive but i think it's pretty good now uh visa you ever heard of visa

yeah i heard of their um you've heard of him okay cool the had their quarterly release i guess was it uh a few days ago now the the q2 2023 this is their their q2 fiscal And net revenues were up in, I'll do in USD, constant currency. Net revenues were up 11%. Net income on GAAP was up 17%. Earnings per share up 20% because of the buybacks. And it's wonderful, double digits across the board, payments volume up 10%, cross-border volume still up massive, up 24%. So we're back with a vengeance more than 2019 numbers. Transactions processed was up 12%. Every KPI you can really think of in the 10% to 20% growth for this business. And I mean, here we are in 2023, and the thesis just still remains so strong,

so inflation resistant, given the fact that it's death by a thousand paper cuts type business, death by a thousand paper cuts type business, 60% operating margins. Like, are you not entertained? I keep this business and MasterCard at a 10% combined position and it's time I bumped them up because they're a percent or two, two low right now. So I was discussing on the joint DCI that I'm adding a percent to them each once this Norbert Gambit goes through. Put a little graph here, Simon. Total transaction volume is on a trailing 12 months of 14 and a quarter trillion, which is kind of hard to wrap your head around that number. hard to wrap your head around that number. Earnings per share has compounded at 26% since September 2012. Not much more to say other than the most brilliant unit economics you can think of with a business that is highly, highly entrenched and the show goes on.

Yeah, exactly. We'll have to get used to kind of go sharing our screen so uh people who are looking at the video but that's okay for the next one we're still you know that's why uh still podcasters yeah exactly youtubers yeah i think uh within i think the next probably month or so we'll we'll you know i'll get better with the video editing and we'll get better at just sharing our graphics so people actually know what we're talking about. It's a pretty nice looking graph, I must say. Yeah, that's it. Now, to move on, I think you alluded to this. So, there's more tech drama, not tech technology, but the mining company, TCK.

but the mining company, TCK. Essentially, you know, I think they're just taking over Rogers in terms of drama. It really seems like you had the family drama. We had the CPCN rail drama with Casey Southern. Then the Rogers family decided to spice it up. But now tech and Glencore move over. Yeah, exactly. Now, management decided to withdraw the separation agreement for shareholders to vote really at the last minute. I think there was like a 10, 15 minute delay, I think, from when I got a notification on my phone that it would go for a vote and then that it got pulled from a vote which i don't know was

kind of a bit of a head scratcher but the highly publicized proposal was to separate its steel making coal business from the rest of its mining operation which according to management would unlock value to shareholders what was noteworthy like i said is the last minute withdrawal here but most likely management just didn't think that it would get the majority of shareholders to approve the move so they pulled it before before the vote I mean if the writing is on the wall there's really no point and as I was researching this it really seems like there's three well a few different options here for tech first they could go ahead with their separation plan with some slight

modification in order to win shareholder approval second they could look to sell their steel making coal business to another mining company or third glencore or another buyer comes knocking for the whole business at a higher price and that one is really tricky because you had the federal government, so Trudeau and some of his lieutenants that were saying that that would go through a stringent review if they were to be bought or have an offer from a foreign company. conservatives were in power so i'm just talking about here the the politics just because it has something some implication and that's something i mentioned when we last talked about i think it was last week um so i'm sure there's going to be more to come in the coming weeks or month and we'll keep people posted but this one seems to getting a higher and higher profile, it seems, every single week. I believe I left the summary of when we talked about tech for last Thursday's podcast episode, and I was talking about tech and the Glencore proposal. And I think I left the segment with tech seems to think this is over, but I don't think Glenencore has i don't think glencore agrees with that sentiment

uh i don't think they think it's over so uh i this is going to be coming you know more and more of this for a while yeah i mean i don't i don't know it feels like um with both parties coming out that have obviously a chance of winning the next election, saying that they are not really, don't see them in favor. And you're seeing more and more emphasis with different countries to put, you know, protect their natural resources. I think that's the biggest wild card in here because Glencore could come. But if the federal government decides to nix the deal you know they're gonna nix the deal yeah good point tech uh so i i guess what's gonna happen right now with their you know what you're talking about here with their proposal to separate the business with

the steel making coal and the the mining. Like, what's the latest there? Because it seemed like everyone was on board for that. At least they communicated that, you know, their largest backers, the insiders were all on board. I don't know. Yeah, I really I haven't seen anything. But, you know, I'll keep people posted on the podcast in terms of what's coming up. Maybe some shareholders are trying to convince management to get a better offer from Glencore, maybe create a bidding war as that could be a potential better avenue.

I said in one of the outcomes, maybe they think just selling the steelmaking coal business and keeping the rest as Glencore would just unlock even more value. So I really don't know. It was definitely a surprise, but something must have changed that we don't know. Yeah, clearly. Let's talk about the Google and Microsoft quarterly reports, as well as the AI and search war that is now among us. I want to do something a little bit different here because, you know, like I do come out here to spew the business results for their quarter. And obviously those are important. So I'll summarize some key takeaways of their quarter before I get into the hot topic of artificial intelligence and the search war.

So Google, as an advertising business, definitely saw some softness in the results. Weakness in cost per clicks on search. YouTube had a bit of a down quarter and so forth. I mean, when you look at CPMs, cost per clicks, look, this is an advertising business and advertising is cyclical and has effects from the economy, the strength of the advertising market, for sure. And so the one really positive note here is the cloud business continues to grow at industry leading rates and had its first profitable quarter of operating income while they continue to gain some market share.

I personally like the product. We use Google Cloud infrastructure for my companies. They're super easy to use, which is contrary to i would say the uh google search console and the google analytics and uh or gmail oh my god oh my god the search on there is atrocious for a company that does the search business the g Gmail search is atrocious. Even if you're on the paid enterprise version of it, it's still like you like search something that you know exists in there. And you don't get the result. I know.

And the threads as well. They're so confusing. Like I don't understand how they haven't been able to fix that. But I digress sorry no no you're right i mean like they're they're b2b enterprise tools have some of the worst ui ux i can possibly think of which is like how don't you have like didn didn't you hire 13,000 employees in the last quarter? And so, yeah, I do like the cloud offerings they have. Of course, it's become a little commoditized between the Azures, the AWS, the Google Cloud Console, but I do like it. Now, one thing that was not mentioned on the call and why none of the analysts were deciding to grill them, I don't know, is one of the great mysteries of that conference call was the cost-cutting strategies they've come out with are like no more snacks in the lunchroom.

in the lunchroom. It feels like this business is being run like a summer camp while Apple and Microsoft are being run like businesses with disciplined capital allocation. And it's fine to be run like a summer camp, Simon, if you continue to own the most lucrative monopoly on planet Earth, which they have for 20 some odd years. lucrative monopoly on planet Earth, which they have for 20 some odd years. But the world is changing.

All of big tech, unfortunately, I'm not celebrating layoffs, but it is the reality of it. There's been immense layoffs in technology as companies kind of scale back their spend. They realize, okay, we're not going to probably grow 30% year over year for eternity. So we got to have some disciplined capital allocation and longevity here, which is business in itself. It feels like Google is still being run like a summer camp. And the business I didn't foresee having rapid changing dynamics with search and the way people extract information. Just a year ago, we did a stocks on our watch list segment. I think it was June-ish. I did a segment about how I think Google is outrageously cheap here at 17 and a half times earnings. I'm increasing my position. The gatekeeper of the internet trading at sub 20 has optionality in cloud,

YouTube, other bets, AI, look no further. And I still agree with that sentiment. I still hold that sentiment here. But the future is looking more different than the same in how people extract information online. And when the future looks different than the current status quo, that's like the arch nemesis of a natural monopoly. And so I've had to kind of change my thinking and do some more extraction and understand AI and understand what are the unit economics of a search when it's all kind of creating this text, the answers in front of you instead of driving clicks. Like how does that affect the business model? Anything more to add there

until I get into Microsoft and the wars here? Yeah, I mean, not too much, but your comment, you know, for the efficiency part, you know, we're just cutting the snacks and stuff like that. Like I do. I do think at this point, maybe gets a year or, you know, grace period. But I think you're going to start seeing some shareholders asking for a change in CEO. It's too bad to say. I think he's done some. I think Sundar has done some really good things. But from what I've been reading and hearing is that there seems to be this culture at Google of, you know, being afraid to break things where you have their competitors that are like, you know, just going 100 miles ahead, pulling maybe, you know, a page of elon musk's playbook where you know you try something doesn't work you break it that's fine just move on you know revert it back to what it was yeah but at least you've learned something like startups yeah like startups do i mean i'm not saying to do like twitter is doing because i feel like that's probably a bit too

extreme because the extreme they they're actually we don't see their financials but i feel like they are hurting their business and there's starting to be more and more alternatives that could be elon said he's running the world's largest yeah exactly but i mean yeah twitter um that's probably the other extreme but i think there's probably a place in between where Google is at now and Twitter and Elon Musk where, you know, I can't imagine that they can't do some more cost savings and have more ambition and just forward thinking in terms of new products and not have everything perfectly done. That's okay. Yeah. okay yeah now of course there is a lot of moving parts in these gigantic trillion dollar businesses of course there's so many people there's so many execs that are involved in some of the decision making but having said that it feels to me like the strongest ce CEOs are moving forward in this new environment in a completely different step function than the weaker big tech CEOs.

Look at the momentum Microsoft has. Satya Nadella is probably the best non-founder CEO the industry has seen in a long time um tim tim apple mr tim cook yeah like he'll get sued by uh donald trump for using the yeah he's got a trademark on tim apple uh he's got that dog in him uh that business has always been run more lean than the other tech companies. And of course, you know, don't cock the zuck. He seems to be finding his step in his quote unquote year of efficiency. And then you have Andy Jassy and Sundar coming out with just meager results and in a time where things are, you know, quote unquote, wartime CEOs, you know, like if it's a stupid saying, of course, like, you know, but it's true. You're seeing a bit of a divergence, I think, in the quality of the person at the top.

And I wouldn't be surprised what you said with Sundar. I mean, he did a good job with a lot of the business, but is he the guy for right now? I don't know. No, exactly. That's the question. But yeah, anyways, I think I made some good points. I'll let you finish your segment here. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker

by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission-free so that you can choose the ETFs, not just a few select ones, all commission-free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable

and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with

Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. So when it comes to Microsoft, I love this quote from Satya Nadella because, oh God, I wouldn't want to compete with this guy. He goes, at the end of the day,

Google is the 800 pound gorilla and he's being asked about search with the new Bing and how it's going to fare. So he goes, at the end of the day, Google is the 800 poundpound gorilla in this. I hope with our innovation, they will definitely want to come out and show that they can dance. And I want people to know that we made them dance. That was quote CEO Microsoft Satya Nadella.

I just listened to the earnings call Q&A for Alphabet for Google, and there was lots of discussion on AI, the optionality they have. That's all fine. I think that there's tons of opportunity here. It just feels to me like Microsoft's playing to win, and they're the more fierce competitor. And they've made the brilliant moves over the last couple years with GitHub. over the last couple of years with GitHub. Now they're huge instrumental investment in open AI and then follow on 10 billion round,

making them use Azure. It's basically like, oh, you need 10 billion? Well, guess what? We'll give you it, but we're going to own a significant amount and you're going to use Azure for all your computing power. They've engineered some noticeable brilliance over

the past 12 months, three years, looking more broadly. And I'm feeling pretty good about my decision for moving some capital off the table from Google into Microsoft in January, which is somehow up 37% on my cost basis. I did not have that on my 2023 bingo card for a $2 trillion company. It's like I did not have that on my 2023 bingo card for a $2 trillion company. But I mean, I can't take a lot of credit. Big Tech has had a huge rebound across most of their stock prices so far. I'll leave it at that. But the Azure growth rates continue to be impressive as well.

You wonder how much of this being subsidized by their open AI investment. Yeah, no, exactly. I mean, I feel like there's probably a bit of a run-up, people getting excited for Microsoft, but also, I mean, there's a lot of good things. And keep in mind, I know we, I guess we didn't add that to our notes today, but Microsoft has a newfound fresh capital at their disposal with the Activision Blizzard acquisition,

most likely not going through after UK regulators. Did we just learn that? That was last week. Yeah, yeah. Yeah, I guess. Remember how I told you that I've been literally in the trenches? Yeah, yeah, no, it was last week. No, I can't believe it.

I just kind of clued in as you were doing this segment. But yeah, I didn't. I mean, I don't have it. I'm just going on memory just here. But yeah, the UK regulators basically are looking to block it. I think it's not officially dead. Microsoft will probably have to go through the motion just to make sure they minimize, I think, a breakup fee. I think there's still going to be one but um not that large and they're going to have that capital available for them

if they uh well clearly if the deal doesn't go through which seems to be the the direction it's going right now can i throw your brain for a backflip a backflip here yeah with the big tech reversal. I'll leave it at this for big tech here after this. It's an idea taken here from searching capital on Twitter. Amazon, the largest, sorry, Amazon, the fastest growing online ads business. Microsoft, the fastest growing search engine.

Meta, the most disciplined big tech capital allocator now. Google, the fastest growing search engine. Meta, the most disciplined big tech capital allocator now. Google, the fastest growing cloud business. Yeah, I mean. We have had a complete, everyone like, you know, they're playing musical chairs and they all just said, get up. All right, everyone switch it up. We're all sitting in new chairs. Isn't Google's cloud business profitable too? I didn't have a chance to go through there.

Yeah, I mentioned that. Sorry, I must have missed that but uh yeah profitable big p yeah exactly that's pretty for cloud yeah for cloud businesses that's uh that's quite an accomplishment um now we'll go to small tech with uh pinterest i mean pinterest is pretty small and compared to those behemoths. Yeah, I've just never heard that. I love it. Pinterest earnings Q1 2023. Clearly, the market did not like these results. I mean, it was significantly down. I think it was down close to like 15%, 16%

on the heels of the earnings release. Revenues increased 5% to $603 million. It's an increase of 3% for US and Canada, 6% for Europe, and 38% for the rest of the world. Global monthly active users or MAUs, often referred to, increased 7% to $463 million. That's an increase of 1% for the US and Canada, which is by far the most profitable per user market. And it was flat on a sequential basis here, increase of 7% of monthly active users for Europe, but only up 3% on a sequential basis, an increase of 9% for the rest of the world, but only up 4% on a sequential basis. So you're starting to see the theme here that I'm talking about. The average revenue per user was down 1%,

and then that you can really see that because the global monthly active users increased 7%, yet revenues only increased 5%. So clearly, the average revenue per user will be down that kind of situation. They had a net loss of $209 million for Q1 versus a net loss of 209 million for q1 versus a net loss of 5 million last year during the same quarter so a much bigger loss they repurchased 72 million worth of stock during the quarter which is i guess probably the silver lining although a company in pinterest situation i would almost prefer that management not do that. But yeah, that's just my take. Free cash flow was down 11% for the first quarter. And one piece of good news, though, is the partnership with Amazon for third party ads that they're starting.

And like I said, the stock got pretty crushed after the earnings release. I think one of the reasons is, like I said, the average revenue per user was down, and the guidance wasn't great. They said that revenue growth would be in line with the current quarter, which is implying mid-single digits. However, they guided for expenses to grow in the low teens, which means that profitability will be impacted further.

So I used to own Pinterest. I'm glad I sold it because I was starting to see these signs and I didn't know if things were going to turn around. And my bet was that it would. But after a year and change of waiting for things to turn around, I just decided it was best to sell my position here. And I don't know. There is a lot of red flags here that things may be taking a turn for the worse maybe this partnership with amazon will kind of turn

things around but um not great in terms of if you're a shareholder for pinterest pinterest for me has never passed the... If the stock market closes down for 10 years and you can't do anything and you can't ever sell the stock, the old Warren Buffett 10-year test, it's so like, just the alarm bells go off. It doesn't even come close to passing, you know, the first tier of that test. Because I just don't know how long this business really has product market fit. I'm not sure. And clearly, you aren't either.

And why do you exit the business? Yeah, I mean, it's, unfortunately, I thought, I think the platform still has a lot of potential. It's just, you know, it's based on images and videos. So it does. And a lot of the time I know from personal experience, I would go on there. I used it a lot for projects outside, but also recipes. And I'm for some things like projects, if you need a specific tool or kind of, you know, item related to that project you know i

i'd be wide open to hey can i get a link to amazon to buy it right away the exact thing that i need but for whatever reason i mean such high search exactly but uh i mean i think they've done an okay job it actually their arpu has actually increased quite well over the last two three years but the fact that their user growth is kind of stagnating a bit they're really just seeing good uptake in the other than europe and canada us which is not great because those markets are not being monetized all that well um yeah there's a lot left to to be desired here unfortunately i love i like how you put that um all right let's let's round it out here last uh one you have uh one more so i own this company so allied property reap earnings and like i mentioned earlier in the episode i'm looking to do a segment on commercial

real estate. I'll try to maybe compare it to US and Canada because there's some pretty significant differences with what's happening here versus the US. A lot of red flags in the US, but this is Canada. Allied has all its properties located in Canada, mostly Toronto, Montreal, but also Calgary, Vancouver, and a couple other urban areas in Canada. But I think just by memory, Toronto and Montreal is like 80 something percent of their total leaseable square footage. Now, operating income was up 14.5 percent. That was mainly because of last year's acquisitions and development completion. Funds from operation was up 5%, but FFO per unit was down 3.6%.

explain quickly every time I talk about this, if we have new listeners, it's essentially your profits or net income, but you remove the impacts of amortization and depreciation and any gains or losses that you would get from selling buildings. So that's, it's a really widely used metric for a real estate investment trust. And if that's something you're interested in, you really need to get familiar with this metric. The other one is AFFO, so adjusted fund from operations. Very similar to FFO, but also includes recurring expenses for maintenance and essentially normalizes rents over that period of time. Now, AFFO, what? I look at AFFO as like the, I look at it, adjusted funds affo what i look at affo as like the i look at it adjusted funds from operation i look at it as like the nirvana metric yeah there's it's a very it's the holy grail

exactly and when you look at a reet make sure that you look at their definition because the definition i gave you is the most widely used one, but depending, these are not official metrics. So depending on the company, they may calculate it ever so differently. So they'll usually have a section, their financial statements where it explain how they calculate it. Just make sure you're aware of that. So AFFO was up 4.1%, but per unit was down 4.5%. Now, they are seeing strong rent growth with rent per occupied square foot, excluding their UDC portfolio, which is their urban data centers, which is up for sale currently. So that was up 3.7%.

So that's quite strong considering what we're seeing down south, for example. Leased area was down 50 basis point to 88.8%, while occupied area was only down 10 basis point to 88.2%. So it's actually, you know, the metrics are still staying very strong for a market that a lot of people are very unsure about, to say the least. And there was an analyst that asked during the conference call what the occupancy would be for the rest of the year. And management said it will be in the low 90s for sure by the end of the year. And I quote, that's what they said. So management seems to be still relatively bullish on their business.

There is clearly saying that it's taking more time to close deals, which is usually in relation when you see economic downturns and companies knowing that there might be some turmoil in the forecast. So they're doing their due diligence, which is typical, nothing unusual. And they also said that they haven't seen any impact for the layoffs in the tech space in the US that we've been seeing. They haven't seen any of that impact translate on their business. So that's encouraging as well. Tenant retention is around 65% to 70%. And the forecast, actually it was 60%. And the forecast for this year is around 65% to 70 percent and the forecast actually was 60 percent and the forecast for this year is around 65 to 70 percent and typically they are around 75 percent so a bit lower than usual but still

still something that's positive in my opinion considering the situation for office space right now and the interest cost was up because of variable debt, which they intend on getting rid of once the sale of their UDC portfolio has been completed. They also provided an update about that. They are working with Scotiabank and CBRE on the process and they've received interest from 30% of the firms that were contacted.

They said it was roughly 100 firms that were contacted. So I would say around 30 uh expressed interest they received first round bids on march 24th and narrowed the field for the second round of bidding they expect to receive firm offers after the third round of bidding so it's moving along quite well and really it's paying off debt and getting those debt levels a bit better so that they can look at expanding a few years down the line. And the last thing I'll mention here is there was an interesting question from analysts who said, ask them about their thoughts on what's happening with commercial real estate in the U.S. And the management didn't want to answer the question. It was it was pretty insightful. But basically, they are looking at what's happening in the U.S. They don't have any plans in the short to medium term to expand there,

but they are keeping an eye on it, and they're not ruling it out either at some point when the time is right to potentially expand their business in the US. They think that there's still some expansion opportunities left in Canada, but it sounds like they're keeping an eye on it. They may be opportunistic. They didn't want to be committal or anything like that. I could tell that they were answering the question, but they didn't want to I could tell that they were kind of, they were answering the question, but they didn't want to, you know, imply anything that would not be true. But I thought that was a really, really interesting question from, from an analyst there. Commercial real estate is in a weird place right now.

Oh yeah. To say the least. That's the understatement of the podcast. That might be the understatement of the entire podcast. Yeah. So I guess the big question here is this Urban Data Center portfolio. Yeah. Yeah, exactly. I mean, it's going well. I think it's actually smart for them to do that because they want to focus on what they do well. And urban data center have been doing, or I mean, data centers as a whole have been performing pretty well, at least in the last year or so. So I think there's, I'm not surprised that they had a lot of interest in that. So I can see them getting a pretty good value out of it.

And then removing that variable debt off of the balance sheet, I think is a smart move. And then their balance sheet will be in good space and they should be able to weather any kind of downturn in the rental office real estate if there is one in the next few years. Thanks so much for listening to the podcast today, folks. We appreciate you. This is the Canadian Investor Podcast. We're here twice a week, no matter what. And you can listen anywhere on your podcast players. If you want to support the Patreon page, that is at joinTCI.com. We just did our post yesterday. We're going to have video on there soon for the listeners to watch and our monthly portfolio updates that go in there as well. If you are living under a rock and haven't gone to join TCI, sorry, wow, I got too many URLs.

If you're living under a rock and have not gone to finchat.io, F-I-N-CHAT.IO, it is like ChatGPT, but loaded with financial data and trained on, uh, being a financial analyst. We trained it on 3,500 pages of Warren Buffett, um, tens and tens of thousands of financial metrics,

tens and tens of thousands of earnings calls, transcripts, and investment books as well. So, uh, and it can also help you with your golf swing. That's right. If you pay it enough money, it'll also help you with your golf swing.

Dude, imagine. It's going to affect the physical world one day, and maybe that'll be true. We're about to record another show for the Monday release. And I'm actually going to talk about investing and how it relates to your golf swing. So stay tuned there, Mr. Bailange. You stay tuned there. I wasn't even thinking about that, actually. Yeah, you're ahead of the game. I will see you in a few days. Take care. Bye-bye.

The Canadian Investor Podcast should not be taken as investment or financial advice. Brayden and Simone may own securities or assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.