The Canadian Investor - Buying Back Shares for the Wrong Reasons and Private Credit

Episode Date: August 5, 2024

In this episode of The Canadian Investor Podcast, we explore how companies issue substantial Stock based compensation (SBC) to their employees while simultaneously reducing the overall share count through buybacks. We discuss whether tying SBC to buybacks makes strategic sense and discuss how shareholders should view buybacks. Additionally, we give an overview of private credit, which is a type of non-bank lending that is marketed as offering higher returns and tailored loan solutions but comes with a slew of risks and challenges for investors. We cover everything from lock-up periods and redemption limitations to the high fees and credit risks involved. Lastly, we take a closer look at public fintech companies and how they’ve fared since 2021 and if some of the names are worth a closer look.   Tickers of Stocks & ETF discussed: WISE, ADYEN, SQ, AFRM, TOST, LSPD, V, MA 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 Dan’s Twitter: @stocktrades_ca 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  Web player - The Canadian Real Estate Investor Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. 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. My name is Brayden Dennis. As always, joined by the brilliant Simon Belanger. Good, sir. We have a lot on the slate today. Missed you last week, but got some episodes. The boys are in summer mode, you know? Yeah, exactly. I mean, it's been a while since we actually recorded an episode, but I think this is a good one. Just the topics we have on the slate, and I think we'll bring some energy to this one. Let's do it. I am going to kick us off

with a discussion about stock-based compensation. You're going to talk about private credit and what is the world of private credit. And then I'll talk about public fintechs, some stuff getting smashed lately. One of the most unloved areas of the market. All right. Stock-based compensation and buybacks done simultaneously. This is a conversation you and I have been discussing a handful of times. I figured it deserved a full breakdown. It came up quite a bit when we were talking about Autodesk because you were like, oh, look at the stock-based compensation. Then you pulled up the total shares outstanding, and that graph is going down slightly. Yet they're known as being, I guess, kind of bad actors in the software stock-based compensation world.

And so I wanted to find some data around what are the results? What's the performance when these companies do this together and how it might affect incentives for executives making those decisions? So there's not a lot of data on this and it's hard to kind of make sense of it and back test it. And it's always been an idea that has never really made sense to my brain, even though it is a very simple concept. that has never really made sense to my brain, even though it is a very simple concept. So I found a survey from the Journal of Financial Economics that interviewed and surveyed financial executives, like CFOs of public companies. And the survey came to the conclusion that 68% of CFOs indicated that offsetting dilution from stock-based compensation was either important or very important in their decision to buy back stock. Are you surprised by that stat?

No. I mean, I'm not surprised. And at the end of the day, it's yeah, it just I think it just reinforces the fact for people to understand that when they're looking at the income statement, that you have to understand everything that you're looking at, because sometimes the, you know, the net earnings will be kind of skewed by non cash item. And that would be an example of it right here. There is analysis that shows that companies buy back stock to manage their shares outstanding and stock-based compensation affects payout policy. There is clear evidence that many companies consider stock-based compensation and buybacks together in a report done by Morgan Stanley. I think it was written by the legendary Michael Mubison. Although data from CounterPoint Global shows that gross buybacks

as a multiple of stock-based compensation is still over one, but it's been declining steadily since 2006, meaning there is still a lot more buybacks by companies issuing stock-based compensation and buying back stock together, but that ratio is declining. The question for discussion here is if it makes sense for them to be tied back. And my basic thought is buybacks should always be looked at as opportunistic. And shareholders are trusting management to purchase when they're... They're trusting and hoping management's correct about the shares being undervalued and attractive to buy them compared to other options that they can do with that fresh capital. But having a systematic retiring of shares to compensate for the stock-based compensation, no pun intended, it's affecting payout policy

without any real sound logic to it. And I guess that's where I have an issue with it. I think the same way dividend policies and special dividends can be looked at as opportunistic, I look at buybacks the same way. Now, if you have so much cash guzzling out of the business and you have a routine buyback and a routine dividend policy back to shareholders, that makes sense. But to me, these things should always be done opportunistic. And I'm happy to trust management of the companies I own to do that rather than meet some mandate. That's just how I feel. Yeah. I mean, it's almost like companies are

dollar cost averaging their shares. They don't really think about it. And what I'm sharing here for Join TCI is Berkshire, right? And Warren Buffett, who clearly will only buy back shares of Berkshire stock if he thinks it's actually good value to do so. I think for a while, he had that kind of a price to book target. So if it fell below a price to book target, he would start buying back the share. I think now he's a little less kind of harsh on that rule. But nonetheless, I think he's still opportunistic as he finds that the company is undervalued or not. And at the end of the day, what you were saying for me, and that's just a personal preference, if a company is mindlessly buying back shares when the shares are undervalued, overvalued, but they're not necessarily doing it in a very

intelligent fashion, with a lack of better word. I honestly would just prefer that they pay a special dividend at that point. Just let me, as a shareholder, let me take that cash and I'll decide how I want to invest that cash or whatever I want to do with it. Because at the end of the day, if they're buying back shares and they're doing it when the company is either overvalued or it's not the best use of capital, I'm not quite sure if I want management to be doing that. Have you ever looked at AutoZone stock? I have a while back, but I know they buy back a lot of shares. Yeah, they buy a ton. I'm pulling it back right now. So they have reduced the share count so substantially. By almost half, right? In the last 10 years, in the last decade. Almost exactly half in the last 10 years. Since 2004, I got data going

back 20 years here. 2004, there was 80 million shares outstanding. Today, there's 17. Holy smokes. They were reducing the share count aggressively through the 2000s and have continued to through 04. And that's worked out extremely well for shareholders. I just think it's never a stock that gets expensive. That's why. Yeah. And do you think, I mean, I feel like one of the incentives aside from stock-based compensation would be that clearly companies can manipulate EPS by buying back shares as well, right? And a lot of Wall Street, Bay Street, they tend to focus not even on earnings. They tend to focus even more so on EPS, earnings per share, which can be manipulated by buying back shares. You know, you can have declining earnings on an absolute absolute basis but your eps is going up because

you bought back so many shares so i think that's something to to keep in mind it may also be the incentive those are misaligned for certain businesses depending how executives are compensated it could be based on eps if it is then obviously they have an incentive to buy back shares. Yeah, definitely look at that share, like that compensation structure. The AutoZone stock, just for kicks, I was looking, the shares during that time were up 33 times your money. So no one's been too upset about them buying back stock.

No, no, yeah. The point of this discussion is it should be a nuanced conversation. Like that Berkshire example, it's like he's just got so much cash that it's almost difficult to do actual capital allocation that he could do 30 years ago. But nowadays with these software companies, I think that they are bad actors. software companies, I think that they are bad actors. And now I have actual evidence from the Journal of Economics and Morgan Stanley backing up what I've thought for the last five years. And so I just feel like I can finally check that box. Yeah. Yeah. And you wonder maybe at some point in the next 5, 10, 15, 20 years that they kind

of shift from SBC to just compensate your employees better, give them a hiring bonus that you have to, they have to stay on for a year or two. If not, it gets clawed back. There's different ways to do it, you know, just do it in cash instead of stock. But I guess like I, to my previous point, companies don't necessarily love that because it does impact earnings versus stock based compensation, which is just dilutive. So it doesn't show up the same way on your income statement. Yeah. And depending on who you talk to, some very heated debates about how it affects free cash flow in the accounting world. 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, 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.

Calling all DIY do-it-yourself investors. Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends. And there's other stuff like learning Duolingo style education lessons that are completely free. You can search up Blossom Social in the app store and join the community today.

I'm on there. I encourage you go on there and follow me, search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, Blossom Social in the app store, and I'll see you there. ahead, Blossom Social in the app store, and I'll see you there. 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, 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 at airbnb.ca forward slash host. That is airbnb.ca forward slash host. All right, let's move on to private credit. Yeah, private credit. I mean, I feel like when I get into anything private, I start going down a rapid hole. It's, well, first of all, anything private,

the data can be a bit opaque at times because it's not the public markets. It's not always super accessible. So I think I would encourage people just to take this as well. Keep that in mind. But, you know, private credit, there has been more and more talk about it. I think a lot of more people are starting to get worried about this sheer size of the private credit market. But I'll kind of go over what it is and some of the

downsides. The reason I decided to do this segment is because my Cairo, so shout out to Shane, who loves the podcast, was asking me about private credit because it's available on the Wealthsimple platform. So Wealthsimple, obviously, they're offering private equity funds as well for people to invest in. I think it's $10,000 for people to get into those funds. I know they like to offer these products and show that, you know, it's available to the masses. It doesn't mean that something's available normally to high net worth individual institutional investors that it's necessarily a good product. And private credit, very similar to private equity, is that, you know, Wall Street's necessarily a good product. And private credit, very similar to private equity is that, you know, Wall Street's pretty big on that,

Bay Street as well. That's because they make some good money offering those products. And you have to keep that in mind when a product is being like kind of pushed and you almost see it like a lot of marketing around it. That's when my personal alarm bell started going off. I don't know about you, Breda. I don't think... This is almost like a backhanded compliment. I don't think people recognize how good Wall Street and financial markets and financial services are at marketing. It's not the type of marketing that you're used to seeing on TV and, you know, traditional marketing, but they are very, very good. And usually added complexity to the way that they offer something makes it sound actually more appealing. Yeah. Yeah.

And they will tend to qualify these investment as alternative investment. Right. It's this big pool of investment. Alts is sexy. Let's go. Exactly. And they make it sound like it's almost like this unicorn. It's too good to be true.

Or I mean, it's yeah, this unicorn. And I'll just say that in a lot of cases, it's probably too good to be true. Not to say just like private equity, private credit funds. There are, I'm funds, there are, I'm sure, some good ones. And there's some companies that people are very familiar that are quite present in this space, which I'll touch on as well. So private credit refers to non-bank lending where private funds or institutional investors provide loans or other forms of credit to company or projects, sometimes individuals, but it's typically more companies. This is done outside of the traditional banking system. There's usually going to be a

lockup period where redemptions are not allowed from the fund. So this means that once the money is committed, you cannot take it out until the lockup period is done. However, once the lockup period is done, there will typically be a maximum total redemption set by the fund for a given period of time. So that will be typically either by month, quarter, or yearly basis. So for example, the fund may only allow 5% of redemptions for a given quarter. fund may only allow 5% of redemptions for a given quarter. So if a lot of investors want to cash out, not all of them will be allowed to do so or allowed to cash out the amount that they want. So the lack of liquidity, as people may start figuring out as I'm saying this, is definitely an issue with these type of funds. Essentially, they offer loans or credit to businesses that would otherwise not be able

to get loans elsewhere for a variety of reason. For example, it could be loans to corporations that are below investment grades. So clearly, you know, junk bonds are even below junk status. Private credit will be marketed as a way to get higher returns by firms offering it. And the argument is that they are able to get higher interest because of the increased risk. But I'll be a little sarcastic. Fear not. These are professionals who do deep diligence on the companies or individuals they lend to. So obviously, I'm a bit sarcastic here because you can make some counter arguments to the fact that the due diligence is maybe not as good in certain cases. And I'll touch on that

and some of the risk a bit later on. Another advantage that proponents of private credits claim is that the loans will typically be tailored on a case by case basis, which allows private credit to have more control over its investment versus publicly traded debt, for example. So in terms, there are a lot of risk and issues here. Before I go over them, anything you wanted to add, Brayden? On the redemptions, is it a first come, first serve? Who gets liquidity priority? That's my understanding. Yeah, first come, first serve. Okay, got it. No, I'm good. Keep going. Yeah. I could be wrong, but that's my understanding in terms of redemption. There might be some sort of pref stack as well.

Yeah. Yeah, exactly. But typically, right, it's institutional investors that will. So, you're thinking about pension funds here, endowments, players like that, that will be putting money into these private credit funds. So these investors will typically have a longer time horizon. There's also, you can have a high net accredited investors, so high net worth individuals that will have access to these kinds of products. So it's definitely not available typically to the retail investor. However, you know, there's Walt Simple trying

to democratize that. And I do commend them for doing that on one hand, but doesn't mean it's a good product. I think that's what I'm trying to say here. So in terms of risk and issues, well, there is an easy argument to be made that credit risks are higher since these borrowers can't get financing through the traditional banking system. Like I mentioned before, there's liquidity risk. And that's one of the major risks, in my opinion. Like I mentioned earlier, it can be very hard to get the money out even once the lockup period is done. On top of that, a lot of people don't realize that, and it's not only for private credit, private equity would be similar to

this, even private or real estate funds, you might see this as well. Fund managers can actually decide to close redemptions altogether for a period of time, meaning that the capital is actually stuck in there. This is also known as gating withdrawals. An example of that is, well, a couple of examples that come to mind. you've seen the the big short right brayden i sure have so remember when michael burry at some point in the movie just basically tells his investors like i'm making this bet i'm betting against housing and this will work out but the premiums every month that they had to pay were quite high and the fund was essentially bleeding. And that's before the actual market started crashing and the investment that they did actually started going up in value.

Yeah, it's the whole idea that you can be right, but the market can stay irrational longer than you can stay solvent is that exact scenario where the premiums are so high that every investment bank is like, sure. You want to make this trade? We'll take the other side of that. But the premiums, how long can you withstand these premiums basically? Yeah. And to avoid that, Michael Brewer decided, because his investors were not really on board with the bet he was doing, and he didn't want them to start pulling the capital. And essentially, it would just create losses on its own because investors would start redeeming. So he closed a redemption. So that's an example in

that movie. That's exactly what private credit funds can do. We saw that happen for private real estate funds or real estate funds when COVID hit. A lot of these funds closed redemptions for that same reason is because there was a lack of transaction and they didn't want investors to start pulling capital because if investors started doing that, they would have had to sold their commercial real estate, likely at a major loss. And then it would have impacted the returns, really negative returns. So that's the reasoning behind it. But they can certainly do that for private equity and private credit. So that's important to understand because some investors may think, okay, when the lockup period is done,

I can start withdrawing my capital even if there's a limit on what I can withdraw. Well, they can actually close that if it's at their discretion. I think they need a good reason, but again, they can probably make up something if they want to close redemptions or all of them. They did that scene in the big short so well

with Michael Burry in his office and all the emails coming in and the phone calls coming in and everyone's just turning on him. It basically has the equivalent of a bank run happening, which he had to get in front of. That was just so expertly done. That is really good cinema right there.

Yeah, exactly. But I thought it's a good example to illustrate just this and fees, just like private equity, the fees for private credit are like are just really high. They're stupid high. There is a reason why these products are being pushed by Wall Street and Bay Street. That's because they make a lot of money on these products. I won't go over all the fees, but there's two main types of fees. The first one, management fees, where people are pretty familiar with. And the second one is carried interest fees.

So the fund manager gets paid whether he performs or not via management fees. Typically, they'll be around 1% to 2%. But if you're fearing that the fund manager would starve on those fees, then don't worry. They've got you covered. They also get the higher fees if they achieve a certain hurdle rate. So typically it will be around 5% to 8%. So if the manager exceeds the hurdle rate, they'll get 15% to 20% on that excess returns that they provided on top of the actual management fees that they're getting. So say a fund has a hurdle rate of 5% and 20% performance fees on that. So if the fund gets 12% return, then they'll get an extra 20% on that 7% additional returns that they did. So it's very

lucrative for fund managers. Let's not hide it here. They make good money on it. And what's worse is they make good money whether they perform or not. Sure, there could be some reputational risk, and I'll talk a bit more about that. But I think it's important to understand. Very similar to private equity, the way the fees are structured. Credit risk, that's one of the biggest risks here. So it simply means that the company receiving these loans may not be able to pay them back. So as more and more firms get into private credit space, there's more competition, but also firms that probably should not be in the space competing with those who have been in private credit for years, if not decades. And the larger, more established firms are likely

to get the best deal and leaving the ones they don't like to the other firms. And you'll probably recognize some of the names here, Braden. I'll share my screen for Join TCI. At the top of the list, people may not be familiar with this one but i know you will so it's oak tree capital management and loans oak tree that's brookfield that owns oak tree so there's about a handful here on the chart i'm showing so there's oak tree capital management at the top and you're looking here at in excess of 100 billion in private debt private credit and, and a decent amount, I'd say about like 10, 15 billion in dry powder. Goldman Sachs is second, Eris Management, HPS Investment Partners, and Blackstone Group round out the top five. And there's a clear demarcation at the top five mark, with all of

those being over 60 billion in terms of actual private credit investments. And over, I would say, about $75-80 billion if you include the dry powder. And then there's a significant drop from that point on. Yeah, this is the kings of the alts at the top here. I mean, this is fantastic business too. I mean, you just described how these fund structures work and it is pretty lucrative for the asset managers, that's for sure. And then you think about one that may have only 500 million or 1 billion. I mean, it's peanuts

compared to these companies, right? It's a bit like you're more familiar with the venture capital space, which is private, right, as well. It's a different kind of private investment. But the big players tend to get first dibs on, you know, most of the deals. And it's not any different here. And when these big players pass on the deals, maybe, you know, they miss some, some deals they should have gone through. Like, obviously they will, like no one's perfect, but I think there's a good argument to be said that, you know, probably majority of the time when the big players pass on the deals, they're probably not that great because they have a whole lot of experience in this space. Yeah. Like track record really matters for every type of asset manager and VC is no different. It's like some VC wants

to give you money and it's like, sure, I'm a founder. If you're really desperate, then maybe you'll take their money. But if they have no track record of success with companies in their portfolio that are at least adjacent in your type of vertical or industry, it's going to be really hard. And you're not going to be able to back, you're not going to be able to go call other founders in their portfolio and just get that seal of approval that they were good to have, especially if they're taking a board seat on your company, right? The last thing you want is to give up a board seat in a venture round with a group of people you don't get along with. Yeah, exactly. So, I mean, it's really interesting.

And the chart I showed is actually from the Federal Reserve in the U.S. So there is a really interesting piece that they did on that. The IMF even raised it as a global systemic risk private credit. It's getting quite massive. And I'll talk a bit more about the size here. Defaults rates are low in private credit. It's getting quite massive. And I'll talk a bit more about the size here. Defaults rates are low in private credit currently. However, interest coverage ratio has been declining since peaking in 2022, meaning that the companies are having your you know, they have their interest payments covered less and less by EBITDA. So it's not something

you want to see, especially if you're in private credit. It's not an alarming phase just now, but it is something that the Federal Reserve did highlight in the paper. And on average, according to Federal Reserve, again, 33% of the value on a loan is recovered when there's a default for private credit that's versus 39% for high yield bonds, and 52% for syndicated loans. So syndicated loan would just be multiple kind of multiple banks or multiple companies providing loans to one big project, for example. So if it's a major project, you'd have you'd have several partners in there. But it just goes to show that when a company does default, the recovery rate is not great. And I think that's important because we don't talk that much about bonds in general for

corporate bonds. But obviously, if a company goes bankrupt or defaults, usually bonds will be at the top in terms of the rights to the asset. And then shareholders will typically not typically, but a lot of the time will just get wiped out because there's just not enough assets to, you know, pay the debt holders and then go all the way to the shareholders. you how risky it can be when you have high yield bonds, which is junk bonds, that their recovery rate is still quite a decent amount higher than private credit. That's a good summary. So are you dumping money into private credit here or what? No, no, not yet.

So in terms of size, I mean, it is quite massive. So in 2010, private credit had around $250 billion in asset under management. And according to a 2024 Prequin Global report on private debt, in 2022, that amount had reached $1.5 trillion. And in April of this year, that amount was estimated to have grown to $2.8 trillion. So I wouldn't be surprised if globally, in terms of private credit, we reach a $3 trillion mark by the end of this year. And then, you know, I'll just kind of wrap this up in terms of saying, look, there's no, obviously there's risk to any investment, but I think it's important for people, especially when you see these opportunities on your broker, like Wealthsimple offering them, it may be good.

Oftentimes they'll show you the returns, historical returns, but I've noticed they tend to show a gross return, so not net of fees. So that's something to keep in mind. And, you know, make sure you do your research on the investment they're offering you, especially because Wealthsimple, I mean, they're offering it, but it's a minimum $10,000 investment.

So I know for a lot of people, 10 grand may be a significant portion of their investment portfolio, whether it's 10%, 15%, 20%. And that's a lot of money to put in one single investment. So it's really important to do your research when you see these kinds of offers, especially when they may seem too good to be true, because a lot of the time that's unfortunately the case.

These fintechs eventually become further and further looking more like traditional financial services, because that's where all the margin is. So just something to be aware of. where all the margin is. So just something to be aware of. Yeah. Yeah. And I guess too, one thing I didn't mention is you have these smaller companies, right? Or these smaller funds and they may not have access to a whole lot of deal. And typically they'll have a given amount of time to find deals. If not, they have to return the capital to their investors. So there is also a perverse incentive for them to actually invest the money, deploy, even if it might not be a great deal, because they want at least to have a shot at those performance fees because they're getting their management fees regardless. And it may not be good for their reputation if they just sit on the money,

they return it to investors instead of investing it, even if they don't end up getting great returns, at least they invested it. So something to keep in mind as well as I wrap this up. And a tangible example to relate it back to venture is no one was deploying in 2022 because it was spooky and scary to be in high growth software, remember? So like everyone's FOMO, everyone follows the trends, whether it's private or public, same thing. But they have a limited amount of time before they have to deploy that fund.

Because say they're on fund three, the firm's on fund three. They have a certain amount of time to deploy. If that is creeping into 2024 or whatever, it's like they're in a sprint to deploy in a bunch of different portfolio companies and sprinkle cash here or whatever. I want to bear fees on the capital. Are you kidding me? I don't want to return capital. I worked so hard to gather all the capital. So that's a really good point around incentives to sprint to deploy.

It happens in every asset class. Yeah. I don't know about you, but if I'm giving my money to someone to invest it, I don't want them to rush and invest it and throw it at whatever they first see because they don't have a choice. But that's just me. Yeah, well put.

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. questtrade.com. Calling all DIY do-it-yourself investors, Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends, and there's other stuff like learning Duololingo-style education lessons that are completely free.

You can search up Blossom Social in the App Store and join the community today. I'm on there. I encourage you, go on there and follow me. Search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking,

sharing their investment ideas, and using the analytics tools. So go ahead, Blossom Social in the the app store and I'll see you there. 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. All right, let's shift gears and look at some public FinTech, specifically in the payment space. So the ETF FinX, F-I-N-X, I'm going to put everything basically to the end of 2021 in terms of a timeframe to look at when a lot of this stuff kind of peaked. It was right before it peaked and then it all kind of came crashing down. So that ETFEx, is down 47% since that timeframe. We'll call it July 2021. How similar do you think it is to ARK?

Yeah, it looks pretty similar to ARK. If I was to comp them out, I think ARK's been actually worse. But yeah, a lot of this buy now, pay later junk got smoked as well. So I'm going to talk a lot about some of these names. I have some select fintech names here that are all down at least 65%, up to 92%. Wise, Adyen, Square, Affirm, Toast, Lightspeed are all down bad. PayPal is down 73% during that timeframe. It's just astounding. You have Lightspeed down 82%. It's been crazy. The price to gross profit multiples are all down more than 65%. Sorry, I misspoke there. That's all the multiples are down at least 65%. All the stocks are negative during that time in terms of share price.

Some of them down well over 50% and into the 80%. If you look at just square, or I guess now block, but ticker SQ is down 72% during that timeframe. Woof. The only ones that are kind of holding out a little bit are wise and kind of Adyen, but Adyen has been getting smoked as well. PayPal's price to gross profit is down 82% during that timeframe. So that is just complete multiple compression. So where I'm going with this is the multiple that investors have assigned to these payments companies is way, way down. They're very, very out of favor. Now, that doesn't take a genius to say that, but the analysis here is, is this deserved or is this an opportunity?

If I look at just top line growth for these names, it's been pretty good during that timeframe of July, 2021. And even like, if you look at an international payments like Mercado Libre or something. You get a very nice growth trajectory and a very declining stock multiple on gross profit, on earnings, on sales, whatever you want to use. So all of those names are up at least 75% in terms of on their revenue. Toast, which is the restaurant's point of sale system, is up 342% on revenue. Wise and Adyen and Lightspeed are all up over 200%. So those businesses have been growing. Now, are any of them really particularly interesting? I would say Wise and Adyen are the most interesting. They're both European payments companies. That's ticker Wise on the line of stock exchange and ticker Adyen,

which is the ADR in the US. Because none of the other names are consistently profitable, maybe outside of PayPal, Wise and Adyen are basically the only ones predictably creating EBITDA and operating cashflow and free cashflow. Now, PayPal is a very interesting one here because PayPal has been getting smoked, very unloved company. The company just reported earnings yesterday and transaction volumes continue to tick up very effectively. So something's got to give here with some of these payment company names. I think it's a pretty good place to hunt. I don't like the unprofitable ones, but Wise, Adyen, and maybe PayPal. PayPal's certainly got some problems, but the numbers still look good. I think this is a really good place to hunt right now, Simon.

Yeah. I mean, it's different than 2021. I remember when these, yeah, the prices were just crazy and people were just, I mean- These were like the most expensive stocks in the market two years ago. Yeah, I think it was growth, top line growth at all costs. Didn't matter whether you were profitable or not. As long as you grew the top line, that was good. I mean, I think we can also probably make the argument that it kind of goes hand in hand with the ZERP policy. It kind of goes hand in hand with the ZERP policy. So zero interest rate policy that was in place where people had no incentive at all to hold cash.

So they were looking to invest in anything that provided growth. And these were clearly providing growth, probably not the right kind of growth, but they were definitely there. And I'm with you. I would definitely look more at the profitable ones. The non-profitable ones, I can't, I mean, we'll have to see by the end of the year, flight speeds able to be profitable. I think they use adjusted profit, profit, profitability. My God, having trouble with that word today, but, uh, their adjusted metrics, if they're profitable on that, I'm not quite sure they'll be able to

and honestly i would like them to just be profitable on a gap basis but also on a free casual basis but it it shows that it's not an easy industry there's a lot of competition and a lot of these companies like you know adn better than i do but i think their margins have been hit a bit too right in the last couple of years they have been but they're still so good yeah yeah but i'm just saying right is what you're starting to see for these companies is that you know you're seeing the margins being hit so the company has to be quite solid from a margin perspective to be able to take a little bit of a hit there, but still be profitable. Adyen is a 33 billion euro, 25 billion enterprise value in euros company today.

They're doing the same transaction volume as Stripe. And Stripe is now valued, I think, at 80 billion on their latest private valuation, 80 billion US. So there is a massive disparity between those two companies right now on... And Adyen's way more efficient, way more efficient. They do the same amount of volume with way less people and way higher margins and similar growth profiles. So I think that they're both pretty awesome businesses in terms of sitting there as the payment processors B2B for a lot of people, all API based, very, very good businesses. It's just so hard. Every time I arrive at, I'll buy more Visa and MasterCard. I think that they're attractive here too. American Express, even I would be comfortable with as well. I think it's the third most attractive of the three credit card players, but still very different business, but still

a very good business. Yeah. So in summary, Adyen, Wise, the two European fintechs, I think they have some growth issues when it comes to active users on the platform going to competitors like Revolut and Wise, for instance. Adyen and Wise feel like they're the babies being thrown out with the bathwater. That's how I think about these companies right now. And that's where there's good opportunity. Yeah. I mean, Adyen is trading at the cheapest multiple, pretty much almost it ever has. Not quite, but it's getting there.

It's around, you know, on a forward basis, around like 40 in terms of price to earnings and price to free cash flow. And it, I mean, it was trading in the high 100s at the peak in 2021 and early 22. Yeah, it's traded at a median of 77 EBITDA, expensive stock. It's at 32 today and much less on a forward. So that's the point of my segment. I think these are worth a look here. Without a doubt, they're very unloved.

They were maybe the most loved companies just a few years ago. And it's so funny what can happen in the market. Stuff goes in and out of favor. The question you have to ask yourself is, is it deserved? And to me, blinders on to stock price, these businesses, I'll throw MercadoLibre in the mix too as well. Those businesses have been executing on all cylinders. And the multiple just continues to compress. So worth a look. Yeah, yeah.

I had another segment, but I'm not sure if we'll have time. Should we do it or wait for next time? I moved it up to the top of the dock for next time. Okay. So we'll wait. Yeah, okay. I was kind of looking for it and I wasn't sure. I got to get ready for a flight to New York. So tomorrow I'm going to New York at 7 a.m. and flying home at 7 p.m. I've never done this before. We'll see how it goes. I'm experimenting. But it's a full, it's literally a commute. I'm commuting for the day it's commute yeah yeah i mean it's uh yeah it was one i've never done that

in one day but uh i'm not a fan typically of the airport travel experience so uh good luck with that i'll be a billy bishop dude i am not i'm not going to pearson so i'm good that's the but it's still going to the u.s right so there's gonna be is it not a bit more intense or it's still going to the u.s but i got that nexus card okay okay but you know i still got it so they they got all the data on you yeah basically big data has everything they need to know about me hey big data you can know anything you need to know about me as long as i get to the airport faster i'm willing to sell my soul br Braden for CBDC. Yeah, yeah, yeah. Yeah, you heard it here first.

Thanks for listening to the podcast, folks. We really appreciate you. We are here Mondays and Thursdays. If you're on your podcast player right now, you're looking at that phone and you're on Spotify and you haven't pressed follow, subscribe to the podcast on the top of our podcast page, do so.

If you're on Apple Podcasts or any of the other ones that are coming into the fold here, if you subscribe, it would really, really help. On Apple Podcasts now, they changed some stuff. So you got to actually go into the pod. They disabled a bunch of notifications and getting people to go listen to the podcast if they're subscribed. So if you're on Apple Podcasts and you're like, oh, I haven't been tuning into podcasts as much or this podcast, for instance, it's because Apple's made some changes. Tim Cook, Thanos, just snap of a finger, changes a couple of businesses and doesn't even notice. Perfect.

Oh, it was probably a side project in between that new AI Apple intelligence that they unveiled, I think, was it yesterday? Did they do something yesterday? For developers? Oh. Yeah, I think so. WCC was yesterday. World Developer Conference, whatever. Worldwide Developer Conference, WWDC.

Yeah. So I think they unveiled it. I mean, they unveiled it. I mean, they unveiled it. They said it was coming a month or two ago, but I think they were launching it yesterday for developers to try out. Oh, okay. Yeah, because I thought the developer conference was like a month or so ago. Yeah, they announced it then, and then I think I saw they launched it yesterday. So, yeah, it's going to turn Apple's iPhone sales around.

They'll start growing because everyone will switch. Because everyone wants ChatGPT on their phone, right? That's exactly why. Yeah, that's the bet right there. I'm going to go buy a stock. I'm a little skeptical. Yeah, exactly. But we'll see.

We'll see. Maybe they will. I'm a little skeptical myself. I'm skeptical. You know, it's so funny. I run an AI company. I'm skeptical on all these applications of AI because so many of them are completely useless. But I don't feel that same way about investment research. Being able to summarize an earnings call and not have to listen to it in four seconds, that's really useful. Like for my workflow and for professional investors too. But it's like, Google works fine for a lot of the stuff that people want to do. I, I, I haven't seen

search volumes come down at all. Yeah. And chat GPT is, it's a great tool. Um, I use it all the time, but it's not, it's far from perfect. If you've used ChatGPT a little bit, you know it's far from perfect. And, you know, you have to make sure when you ask it questions and you're looking for data, I always double check with the sources just to make sure it's accurate and not hallucinating. Sometimes I ask it to, you know, just kind of rework an email or whatever. And sometimes it will just kind of remove an important part. And I have to tell it to like redo it and include that important part so it's not it's not perfect i will obviously get better over time but i think i mean i'm more than happy to have it on my laptop

and when i want to use it i go on there i'll upgrade my iphone in a couple years my iphone 13 works just fine i won't upgrade fine. I won't speed up the upgrades just because of this. You're not going to jump to the Apple store when this comes out? I'm shocked. I will not. No, sorry, Tim. Sorry, Tim. Tim Apple. Sorry, Tim Apple. Thanks for listening, folks. See you in a few days. Bye-bye. The Canadian Investor Podcast should not be construed as investment or financial advice. The host and guests featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before

making any financial or investment decisions.