The Canadian Investor - Canadian Transportation Stocks Stealing the Show

Episode Date: November 3, 2022

2022 is turning out to be a very different year for software as a service (SAAS) stocks. The market is putting more importance on profitability. Companies that were trading at nosebleed valuations last year need to prove they can grow sales and be profitable. In the episode we have a look at several names to see if this is the case or not. We finish the episode with some boring Canadian  transportation companies that are actually profitable! Tickers of stocks discussed: SHOP.TO, SPOT, TDOC, PINS, AAPL, TFII.TO, CP.TO, AC.TO Bet on Canada event hosted by The Peak Shakepay Bitcoin Survey 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 Bélanger. The Canadian Investor Podcast date is November 1st, 2022. Welcome into the show. My name is Brayden Dennis, as always joined by the exquisite Simon Bélanger. How you doing, buddy? It's, the chocolate bar Halloween candy hangover day.

Yeah, yeah, I didn't. I was actually pretty good. I only had a couple, not yesterday, the day before and then a couple yesterday. And we just took some from the pile that we were giving out to kids because we didn't use them all, to be honest. Oh, really? Yeah. You know what? It was pouring here, so the traffic really curtailed about halfway through the night of Halloween. Before we begin today's show, I need you to give me a ranking, okay? I have five Canadian... These are actually... Some of them are Canadian, like Coffee Crisp. Do you know that's Canadian chocolate bar? Oh, I didn't know that. No. Yeah, now you know. Rank the following five, okay? Because this is in the classic

pack that you buy. Coffee Crisp, Kit Kat, Reese Cups, Smarties, and Aero chocolate bar. Give me your ranking. I would say Reese Cups, and then Coffee Crisp, Kit Kat, Smarties, and Aero is last. Really? Smarties above Aero? Smarties and Aero is last. Really? Smarties above Aero? Yeah.

Yeah. I just, I actually like dark chocolate. So Aero is just, I feel like a cheap version of that. At least the other ones are mixed with something else. So that's, that's why. Okay. Valid take. They are kind of boring, but Smarties are destined for the trash bin around my house.

Those are the worst. Coffee Crisp, Kit Kat. Those are top tier, S tier for me. And then Reese's is next. And then, yeah, Aero is kind of boring. But don't you dare make me eat Smarties. They're terrible. That's my fiery hot take of the day. Smarties are the worst. One last thing here, November 8th. So your list, this show comes out on Thursday and November 8th, which is next Tuesday. I am going to be at the peak summit downtown Toronto called bet on Canada. Okay. There is a link in the show notes to get tickets. That is the bet on Canada Summit. I will be presenting at 11 a.m. in the afternoon. It's a good lineup. The CEO and founder of Wealthsimple is going to be there presenting.

We got properly lots of cool fintech. Tim Horton's head of digital. There is a bunch of VCs, the person who runs global business development for the Toronto Stock Exchange. So go ahead and check that out. That is in the link to the show notes and get your tickets before they go up in price last minute. So go ahead and do that link in the show notes. Simone, let's hit it off with our first news item of the day, a story that, our first news item of the day, a story that, you know, we keep talking about because there's just more news. Our buddy Elon finds a way to be the star of the show no matter what. Yeah. And I mean, just Elon making news again. Obviously, I think the news that everyone has heard at this point, whether you use Twitter or not, but the deal finally closed last Thursday. And news started coming out Thursday that the Twitter deal was finally done.

Thursday night, Musk had fired CEO Parag Agrawal, CFO Neg Sehgal, and policy head V. Yacati. I'm probably butchering all these names, but news came out as well that of the firings. And then pictures of Musk visiting Twitter staff started emerging. Have you seen the one with him and the sink, I think it was? Yeah, he showed up with the kitchen sink and he said, let that sink in as he showed up to the headquarters. He never misses an opportunity to make it a meme, which you know what? That's his personality. And so, you know, love him or hate him for it. That's who he is. Yeah. And I won't attempt to understand fully what his motivation was to acquire Twitter, but it's something that I believe he tweeted this

out. It's a quote for him. It's important for to the future of civilization to have a common digital town square where a wide range of beliefs can be debated in a healthy manner without resorting to violence. There is currently great danger that social media will splinter into far right wing and far left wing eco chambers that generate more hate and divide our society. So, I mean, I think we've been getting to kind of side of Elon. I think this view has been coming out, but also the view that he doesn't want to scare advertisers. And it was also interesting to see on Friday that GM temporarily halted its advertising

on Twitter. They stated that they are communicating with Twitter to understand what direction the platform will be going in. Obviously, GM is a big competitor to Tesla. So I don't know if that has to do anything with it. But it was interesting, just the trickle effects of the news. Any comment on that before I just read out another tweet that I saw that was pretty interesting? Yeah, I mean, when I hear that, I'm like, okay, if Coke bought Twitter, do you think Pepsi would think about changing their advertising strategy? That's how I look into that. Yeah, no, that's a fair point. And, you know, we talk about long

term investing here quite a bit. And it's funny, because if you had a long term investing mindset, and you bought Twitter when it first IPO,. So it actually closed at pretty much $45.4490 on its first day of trading on November 7, 2013. And with the sell price of $54.20, that's a 20.7% cumulative return or a 2.1% annualized return during that time span. May sound okay, but let me point out that first, I don't think you would have kept up with inflation on the one hand. And second, the S&P 500 gained 157% over the same time period, which is an 11.1% annualized return.

Obviously, total returns, but Twitter was not paying a dividend. So total returns doesn't really, well, is the actual returns from Twitter because there's no dividends. Yeah. I mean, this was the clown car from the start in terms of a business, right? It's always been ridiculed as the digital advertising play that is just run so poorly in terms of making money. I mean, I'm just pulling up here. The amount of free cash flow that the business has generated as a public company is abysmal. It's abysmal compared to its importance, its traffic and its relevance, which has only continued to grow. And where has the top line and operating income come from its rise and importance as a social network? It hasn't because it's been a clown car the whole time. And so that's basically the bull case for the business the whole time.

Surely they're going to figure out how to actually monetize this freaking thing, right? And so, yeah, I mean, I'm not surprised that it's been such a dog of a stock to own. And I wouldn't be surprised if Elon is very aggressive with making this thing a better business in the form of, he has hinted at, aggressively reducing the workforce. Because, Simone, I got to be honest, okay? I could build Twitter in like a weekend. Like most developers, like I'm the worst developer. My team and I, let me rephrase this. My team and I could rebuild the Twitter shell, put in user authentication, build the database of users tweets and have the engagement thing literally in a hackathon weekend. So I don't know how they have, why do they have so many employees? And so I think that Elon's wondering the same thing.

That's a good point. I've heard that quite a bit. There's also been talking about, you know, having a just decentralized platform that would be able to do it. I don't think like, look, I'm not really that great at coding either, but I've heard enough people saying it's not overly complicated. What makes it so important is those network effects because it's not like there hasn't been anyone trying to take away from that town hall kind of town square, whatever you want to call it. It's just the users on Twitter. And that's probably not going to change anytime soon. Yeah. And let me, let me rephrase. I'm not saying that it's not a particularly good business because it's really easy for me to make. I mean, it's extremely difficult to make because of the network effect. Exactly. Anyone can make that. Anyone can make the app shell, but can you get the users? Getting the users is the hard part.

That's the hard part. And so I think that it structurally should be a good business because of how important the relevance of the platform is. And it's risen and kept rising over time. But financially, they just haven't had anything to show for it. And it's just been really bloated. I think that that's actually a good segue to my vibe today on today's podcast recording, which is, dude, where's my profits is what I'll call the segment of the show today. And Twitter can lead the charge with that where investors are going, dude, okay, cool.

But where is the profit? So warning for the podcast today, buddy, I'm going to sound like a bear. I'm going to sound like such a bear today. And you know, that's not my style and it never has been. But I think that today it's for good reason. And I want to preface, it's not because of some macro backdrop that you'll hear on every other podcast or the Fed and geopolitics and is China going to evade Taiwan? That's not why I'm bearish today. It's more on a company by company basis, which is how I invest my money. I'm very bottoms up. And with earnings season and specifically around the profitability of the names I'm talking about today, because the reason I bring this up is if you look at how everything has really been destroyed with speculative, unprofitable high growth. I think that's a fair statement, right?

Like 2000.com crash type vibes on these stocks down 80%, 90%, 75% on speculative, high growth, unprofitable tech. Is that reasonably fair to say? It's been a slaughter for most of them. Yeah, it's definitely like growth stocks have definitely been smashed. I wouldn't really compare it to 2001 Cenges because the companies, for the most part, there's been a few exceptions, like company putting solar panels on their electric vehicles. But for the most part, companies were still generating revenues. But the vibe of generating

revenue at all costs, even though you're burning money, like you're running an incinerator. Yeah, that part I can definitely agree with. That part rings true and the drawdown rings true. That's where it's rhyming. The businesses today that have been washed out like that, we're actually real businesses, you know, multi-billion in sales sometimes compared to, you know, the dot-com bust where, you know, they're raising on billions on PowerPoint slides. So that's more bubble-ish-esque in that timeframe. But what I'm saying is that the unprofitable names during that time really never recovered. names during that time really never recovered. Many of them really didn't ever recover and come through it. And that's not what I'm saying is going to happen here today, but I'm looking forward over the next 10 years and what's going to be the catalyst for these businesses to all

of a sudden reward higher multiples again, if they're not ever going to produce profits. Because I feel like we've been scammed into thinking these tech companies are going to produce operating leverage. And this earning season in particular has really been frustrating into like, dude, where's the operating leverage? Do you know what I mean? Like, it's like, how many more quarters can we give management to really make more excuses? Do you see what I'm saying here? This has been Q3 earnings results for me so far. Yeah. No, I think that's fair. I mean, you're really seeing who, you know, has been caught without their pants on or whatever the expression is. Yeah. Yeah. Because there are some, I think some of the companies we'll be talking about that, you know, they actually have some pretty good businesses and pretty profitable.

But there are some that, yeah, they're really struggling. I'll be interested in looking at, I don't know when they report, maybe they just reported I missed it, but I'll have a look for the next couple of weeks. Lightspeed, just a company like that where there's a whole lot of competition. I have a hard time seeing how they can remain very competitive and then become profitable. I think it's going to be one or the other. If they become profitable, they'll have to do a lot of cuts, which then may kind of make them lag behind some of the competition, for example. That's exactly it, right? It's like, where does operating leverage kick in? And that's the question that I've been asking myself. And I felt like I've been as an investor

led astray on a few of these names. 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. So not so long ago, self-directed investors caught wind of the power of low-cost index investing. Once just a secret for the personal finance gurus is now common

knowledge for Canadians, and we are better for it. When BMO ETFs reached out to work with the podcast, I honestly was not prepared for what I was about to see because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust suite, and truly something for every investor. And here we are with this iconic Canadian brand in the asset management world, while folks online are regularly discussing and buying ETF tickers from asset managers in the US. Let's just look at ZEQT, for example, the BMO All Equity ETF. One single ETF, you get globally diversified equities. So easy way for Canadians to get global stock exposure with one ticker. Keeps it simple yet incredibly low cost and effective. Very

impressed with what BMO has built in their ETF business. And if you are an index investor and haven't checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. With that introduction, the reality is that I'm actually very excited about IRRs of fresh capital today than in previous few years. But I'm thinking a little differently about some of these names. And the reason I'm bringing it up is because I'm going to talk about Shopify's third quarter. And so what a ride this stock

has been on. It's a name that you and I both own with our own money. And really, it's the end of the day. It's the curse of Royal Bank. It is the curse of Royal Bank, which is any Canadian stock that climbs to the number one spot in market cap and takes the throne away from RBC as the king of the TSX in market cap is sure to be in trouble. But hey, let's cherry pick some stats to make some shareholders feel better, you and I included. It is up 36% from the bottom. Hey, so you know what? We're on food stamps, but we're on 36% less food stamps. So the total top line revenue for the

third quarter year over year was up 22%. And they called out right in the earnings report, which does need to be called out, which is how pulled forward this growth has been and how exceptional it's been on a three year basis. Top line revenue has been on a compound annual growth rate of 52%. I mean, literally, if you look and you graph out anything in their income statement, just nonprofits, is ridiculous. It is truly a straight up and to the right type metrics. Subscription solutions, merchant solutions, GMV, across the board, you saw some pretty solid growth considering how pulled forward e-commerce volumes were in 2021. And it's some pretty tough comps. So overall, I think the quarter was impressive. And today, look, the stock trades at its COVID

crash price, essentially, even up 30% off the bottom, right? And the thing that has got me feeling like I got punched in the gut a little bit with names like this and some other ones is over the last 24 months, I've been thinking to myself, modeling out how much it can grow and they've hit those numbers. But where is the operating leverage? I run a tech company. This is the whole point of running a high margin recurring revenue business with untapped scale and almost no variable costs and distribution in the case of subscription solutions for Spotify anyways, except for Shopify. I'll talk about Spotify later for Shopify, because that's where the MRR monthly recurring revenue comes from. Like where does it kick in? How irresponsible can people light money on fire? It makes no sense to me.

And this is a, not a knock on Toby. I think that these guys are obviously incredible entrepreneurs, but times have changed and it's time to stop hiring and time to start looking at the bottom line. So overall on a five-year basis with trailing 12 month numbers, you've three X subscription solutions. You've six X merchant solutions, 5x on gross profit, two and a half times on monthly recurring revenue or annual recurring revenue, whatever you want to use. 4x times the GMV moving on the platform. And we still have a minus 3% operating margin. This is the questions that I'm asking. I think the market has smartened up over the last year. A lot of these multiples deserve to be punished. I'm very glad I anchored and sized things accordingly when

multiples are extremely high. But moving forward, I think it's been a valuable lesson that these tech companies with low variable costs don't matter when you are willing to grow at all costs and incinerate capital on low ROIC events when money's cheap, right? We've been trained with money being so cheap that it doesn't matter. And times have changed. A lot has changed in the last 12 months around how cheap money really is. Yeah. Yeah. When money is cheap, people bid up high growth because you can't get yield anywhere, right? Even some stocks that provided decent yield got bid up like dividend yield because people could not achieve yield anywhere else. And that's what happened, right? It was definitely a shock this time around because we've rarely seen, I guess the last time interest rates went up so quickly

was probably in the late 1980s. I don't think it's ever been that quick since then. So there was definitely a shock to the market and we are seeing capital shift to less risky asset because amongst other things, treasuries are, I think the latest I check is the 10-year is yielding above 4% for the U.S. 40%, I'm in. How do I lock that in? But even 4%, right, it's unheard of in recent years. So that's, you know, the macro. And how sharply it went, right?

Yeah, exactly. So, you know, we don't talk too much about the macro, but the reality is it does have an impact on the stock market at the very least in the short to medium term. And we're seeing it right now. Exactly. God, I sound like such a bear today. And you guys know that's not my style. Overall, I think it was a good quarter looking microscopically at Shopify. And I think the market is rewarding it for that in the very short term. But moving forward, Toby, Harley,

we got to end every other tech entrepreneur. We got to make money eventually. And the amount of growth that you all have seen, there should be some operating leverage. There's no more time for excuses. That is my PSA to these tech entrepreneurs that will never hear this because they don't care. No, that's good. Now, the next one on the list, a name that I think everyone that's been listening for a while knows, I own so Teladoc. So I had this one a bit on a short leash. I wanted to see things improve. Obviously, last quarter and the quarter before, they had to write off some pretty big amounts for Goodwill for the Livongo acquisition that they clearly overpaid for. But now, you know

what? It was a pretty good quarter. So revenues were up 17% over a year. So access fees revenues were up 21% in the US, 19% internationally. Access fees, those are the fees that are paid by insurers. And then visit fee revenues are individuals that would pay per visit. They were up 5% and 4% internationally, 5% for the U.S. Total visits were up 14%. Utilization was up 128 basis point to 22.3%, which is a really important metric because especially for insurers here, if they see that the members are using it and the employers obviously are paying the insurers for this, it's definitely a bonus because it's a service that's valued for the members. So definitely something you want to see here. Gross margins were up 20 basis point. something you want to see here. Gross margins were up 20 basis point. Marketing expenses were up 61%, although they had said that that was something they were expecting for a bit this year. They

were also up 9% on a sequential basis. Net loss of $73.5 million per share. They are still doing quite a bit of stock-based compensation, but it is down 22% from last year. So that's good to see. And free cash flow is up 8% for the first nine months of the year to $114 million. And on the call, management mentioned that although they had seen an increase in ad spend, like I just mentioned, it is starting to stabilize. They were seeing a lot of company just, you know, a bit like you were talking about, just pouring in money, especially in the mental health space, where there wasn't much regulation in the States on it. And these companies that were losing tons and tons of money, just pouring money. So the ad costs went up because of that. And they're also seeing that

their total integrated solutions of primary care, mental health, and chronic care are drawing more and more interest from insurers in an effort to reduce costs but still provide great care to their users. So overall, I think it was definitely a good quarter for Teladoc. Clearly, the expectations were really low. But for me, you know, I'll hang on to my shares for now. I want things to keep trending in that right direction, especially profitability on a gap basis. Although, I mean, you can make a case they are profitable, obvious on a free cash flow basis. This is one that I think summarizes what we've been talking about so much is it's like, yeah, the fundamentals are there. There's been so much pulled forward growth. They're still growing on those tough comps.

Overall, like really impressive and kind of meeting what you would say is your expectations, I think. And if I'm speaking incorrectly. No, no, I think they did. I mean, I think obviously they still have some work to do. I'm not going to say it was a blowout quarter, but, you know, based on the previous two quarters of the year, they really needed a quarter like this. And they actually probably need another few quarters like this, to be honest. names that got so pumped from well past your ownership like didn't you entered like what like 2019 oh yeah i before that i think it was 2017 i think that frizz bought shares and during their ipo year yeah actually a year after that so 2018 okay 2018 yeah yeah but i mean i trimmed my position when it was i think around250 a share because I thought it was just too crazy.

Oh, man. Wow, you nailed that. I mean, I didn't know. Yeah, I just felt like it was, I can't remember. It was the Cathie Wood people pumping it to no end. And this was one of those to no end names like Zoom Communications, the video app, Teladoc. What else? Even Shop, maybe.

Just the Cathay Arc Pump is what these names were, right? Yeah. Oh, my. You timed that so well because the stock's down 90%. You still own some of it, though. If I was that smart, I would have sold it all and then bought it back. But, I mean, obviously, I still want it because I still like the business. So I trimmed it.

And hindsight is 20-20. But I'm happy I trimmed it. I'll be honest. Yeah. Yeah. No kidding. Just evaporated market cap, especially when you think about Livongo is 19 billion. Yeah.

Good old Goodwill. Oh, my goodness. Well, you know what? This is why the market can be a savage place. When there's drawdowns, they can be severe and ruthless and can always get worse. And the names that were bid up to prices that made absolutely no sense for fresh capital, those people got washed out. So lucky you still made money on this somehow after it peaked out so much.

Impressive, honestly. All right. Moving on to Braden the bear. Braden on the bear. Yes, that is me. Spotify's third quarter. Let's start with the good, okay? Switch it up here. Listeners of the pod who are new are probably like, this guy always such a bear. No, I think it's probably the complete opposite. Let's start with the good on Spotify. Total monthly active users has continued to grow at such a consistently nice pace. Exactly what management says they're going to accomplish in terms of growth. It looks like one of the most smooth growth curves you can find of monthly active users, premium subscribers, ad-supported from a customer, this podcast gets lots of listens to on Spotify. The user interface is crisp and clean. I've been using it for a long time.

I love the platform. Now, in terms of users and financials, they grew monthly active users at 20% year over year. And I think even more impressive, 5% quarter over quarter. And so they bring out those quarter over quarter numbers actually being really impressive in the third quarter here, especially when people say they're going to cut back their spending, right? Premium subscribers has grown 13%, ad-supported MAUs up 24%. And so all of that's good. They keep growing gross profit, kind of. they keep growing gross profit. Here's the concern for me is the gross margin.

Now, the gross margin has always been a point of contention for Spotify because so much of the pie goes to the artists. The unit economics for streaming is not great for Spotify. I get that. I understand that that's all cool. It's not a very typical model that you'd see for like a subscription software company with really high gross margins because they actually do have variable costs on the streaming, like paying the artists, which is great. That's how the industry should be. And by the way, there's a cool little dramatization on Netflix about Spotify. It's called The Playlist. I think I've watched two episodes. Oh, yeah. I think I've seen the ad for it. Yeah, it's in Swedish, so you can dub it or you can just listen in with the subtitles. Depends how tired I am, which decision I pick. So on that same note with gross margins, there has been virtually no

expansion of gross margins since 2018, like virtually none. And they keep saying it's going to go up and it won't. And so the free cash flow number even has been the exact same since the third quarter of 2018. Yet the user base has grown from like 450, sorry, from 200 million to 450 million. So more than two and a half X to the people using the platform and you have the exact same net free cashflow number. And so there's been virtually no expansion of margins and virtually no operating leverage. And so there's always some excuse for lack of gross margin expansion. There always is. As they try to easily try to break into better margin outside of music, they look at podcasts, audio books. I get that. That's all good. But now they're saying the audio books app is being blocked by Apple. And so Daniel Ek made this tweet saying that,

you know, complaining about Apple's non-competitive type ways and lots of other founders have jumped in on being like, yeah, why do they never get criticized for being so monopolistic? And I think that that's a pretty good question to be asking. But shocker, Simone, the gatekeeper of the app store wants to block their number one competitor in the music business. Like, shocker, shocker, right? Like, and I get it, they can't do things that are legal and anti-competitive, but guess what? They do. anti-competitive, but guess what? They do. You know what I mean? They do. It is what it is. So I'm going to read an excerpt for the update I wrote on the Patreon subscription yesterday.

So you can go to join tci.com. Today's November 1st. So that means that there was a new monthly portfolio update for me and Simone's personal portfolios. We showed in a spreadsheet and see our thoughts. So here is an excerpt from what I wrote last night. The other stock on my short leash that fits this criteria is my beloved Spotify. I love this company. I love their product. And Daniel Ake is one of my favorite entrepreneurs in the world today. But my goodness, I am really losing faith in their ability to expand gross margins like they keep saying they will. Instead, I hear excuses. This is so important for the business. I'm not seeing any operating leverage and real profitability in their future. If they can't figure this out with even the most impressive execution and growth of premium subscribers,

when will they? That's basically how I'm feeling about this business today. when will they? That's basically how I'm feeling about this business today. And I'll continue to cheer for the business, but I'm starting to think that gross margin expansion is not in the cards. I am really starting to think that it just really isn't in the cards, like even over the next 10 years. Yeah, no, I mean, I never, I always had a hard time making a case for Spotify just because of the unit economics for it. Like I Like I just had a hard time figuring how they could make money with the business model and the royalties they have to give back to, you know, songwriters, you know, all the label companies or whomever, right? So that was kind of my view on them. But yeah, clearly, I mean, it's not trending the right direction, but my guess,

are you going to give them a few more quarters? Like, what's your plan on this? I don't think so. No? This one's on the chopping block. And like I said, I think it's a great company. I just don't know if it's a great business. And I guess my mistake was thinking, okay, you know, such an easy comp is like Netflix

of audio, right? And so, that is an easy comp. And then I said, okay, well, you know what? It's actually better. They have higher variable costs, but they don't have this ridiculous fixed CapEx cost that Netflix has, which I always struggled with to justify being a shareholder of Netflix because of that ridiculous high CapEx to create the content. And so I always thought Spotify was such a better biz. But given that, I just haven't seen any of the unit economics change or expand whatsoever like they keep saying they will. And so I think I'm out of quarters is what I'm saying.

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. So not so long ago, self-directed investors caught wind of the power of low-cost index investing. Once just a secret for the personal finance gurus is now common knowledge for Canadians, and we are better for it. When BMO ETFs reached out to work with the podcast, I honestly was not prepared for what I was about to see because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust suite, and truly something for every investor. And here we are with this iconic Canadian brand in the asset management world, while folks online are regularly discussing and buying ETF tickers from

asset managers in the US. Let's just look at ZEQT, for example, the BMO All Equity ETF. One single ETF, you get globally diversified equities. So easy way for Canadians to get global stock exposure with one ticker. Keeps it simple yet incredibly low cost and effective. Very impressed with what BMO has built in their ETF business. And if you are an index investor and haven't checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. Now, moving on to another name, now advertising play, one that I used to own that I did put on the chopping block a couple months ago, Pinterest.

So Pinterest actually had a pretty decent quarter compared to other ad plays. Revenues were up 8% to $685 million. Revenues for US and Canada up 9%, but Europe, which is their second most profitable market, was down 4%. Global ARPU, ARPU is the average revenue per user, was up 11%, and global is just all of it together. US, Canada was up 15%, while Europe was down 3%. You can really see Europe struggling here. The rest of the world was up 38%, but it's from really negligible amount. It's not even close to Europe and US Canada is way bigger than Europe in terms of ARPU as well. Now, they're still struggling a bit with monthly

active users and that's the reason why I sold. That was a primary reason. It was down 2% year over year, but up 3% on a sequential basis for US and Canada. And again, US and Canada are so important because they drive most of their revenue. They are back in terms of MAUs for US and Canada to their Q1 level at this point. So it's been kind of up and down. Obviously, year over year, not looking great. But I don't know, maybe it starts trending up. But again, that was my biggest reservation. And this quarter hasn't really given me any change of heart in terms of if it's trending the right way or not.

They'll definitely need to be improving over the next couple of quarters before I can actually agree that yes, the MAUs are trending the right way. And globally, MAUs were flats. Total expenses have ballooned by 41%. However, I will hand that management did say that an increase of 35% to 40% was coming this year for expenses. So that's somewhat in line with that, a bit above. And they had a loss of $65 million versus net income of $94 million last year. They generated $383 million in free cash flow so far this year, but that's down 38% versus last year. So I think overall, I mean, considering it's an ad play and considering most ad plays have struggle, and I think I'm being pretty kind here, struggle in this quarter, Google including, which is a bit of a surprise. I think Pinterest had a pretty good quarter considering everything.

Yeah, considering everything. And I think the stock popped quite a bit, didn't it too? Yeah, but then it kind of leveled out. I think it's at the price that I sold, to be honest. So it was, I think people were so down on the stock. It's another one where expectations, I think, were pretty low. But yeah, definitely the stock pop, I think, in the teens, the day of the earnings release. Yeah, no, I think that, you know, you've hinted at there's kind of two things happening here, right? It's like this real struggle about with MAUs, but the opportunity to monetize those MAUs so much.

And we're seeing more and more of that. The total expenses ballooned up 41%. I just, okay, so I come from the church of mostly bootstrapped companies, right? Like in terms of tech, like, and the funding round we're going through right now, I can't provide a whole lot of details yet, probably in the next two or three weeks, but we are all in a school of thought and people providing us money too. And the amount of money we're raising is all in the whole reason we're starting tech companies is because of how profitable they can be. What happened? What happened, man? It's unbelievable. And I understand talent is very expensive in tech. That is the

number one expensive line item compared to other industries. It's unbelievable how out of control costs have gotten in the past 48 months-ish for a lot of these technology companies. It's unbelievable to my brain. Yeah, it's been pretty crazy. And I guess the last thing I'll circle back with Pinterest, I guess the biggest concern I'd have if I was a shareholder, aside from the MAUs, is, you know, it's nice to see revenues for US and Canada being up quite a bit. And, you know, they're still monetizing them way better than the rest of the world. But at some point, those US and Canada users, assuming they stay on the platform and don't go away, they're going to level out, right? So they're going to have to grow the rest of the world. And what I'm seeing here is

I don't know if they're doing that all that well. Europe is not trending well and the rest of the world. Yeah, it was a good percentage, but I think it went from eight cents per user to 11 cents. So it's kind of a low base effect type of deal. Is there video on Pinterest? Yeah. Yeah. Yeah. They're moving towards a bit more for that. Yeah. Yeah. That's what they're making a push for. Yeah. Yeah. Like everyone, right? They're like, dude, everyone says they want photos, but they don't engage with photos. So don't do what they say, do what they're watching. And it's video. So I'm not surprised. Let's do one more here for you

from this small company, this ridiculously, I don't even know what to say. And they just continue to surpass far above expectations quarter after year, after decade at this point. Yeah. Can we say it's the one big tech that bucked the trend for this quarter? I would say. Yeah, I think so. Yeah, I think so. Yeah. So, I mean, I'm thinking here like mega cap. I think there are other large companies that did pretty well in the tech space. But yeah, I'm talking obviously about Apple. So Q4 and fiscal year 2022 earnings, a bit of weird reporting year for them. Now I'll talk a bit about Q4, but also full year, just because I think it's important to look at the period that just ended,

because how we've seen this quarter being, you know, very all over the place, I would say, or lackluster for a lot of businesses. So the full year can kind of skew things a bit, if you think about it, because their full year would include time last year from pretty much this time up until the new year. Now, for Q4, sales were up 8% to $90 billion. Sales were up 7.7% for the full year to $394 billion. So you want to take a second to wrap it up? Just think about that $394 billion. Just think about that, $394 billion. I'm going to need more than a second to try to comprehend the scale of $394 billion in sales. It's crazy, huh? It's just, it's insane for one company. It is insane.

And while you're talking, I'm just going to pull up their segments from stratosphere.io because we track Mac and Apple and stuff. And it's just unbelievable the base that it's growing off of yeah no it's crazy yeah and it's just every young person wouldn't dare not get an iphone these days it seems like if we're talking about the gen z generation because it's like social suicide not having the blue text messages that's what i'm told from the young kids and so they can't risk not being in the group chats they can't risk not being in the apple ecosystem socially yeah right it's just ridiculously it's unbelievable what they have done apparently that's what they said on the. I didn't have the chance to listen to the earnings call. But they said that they're

still seeing Android users switching over to the iPhone. So that that would be a good example. But I'll just continue here. And then you can put things in context with each segment. Now, yeah, in terms of percentages, it still look good. And like you'll say, like the basis where it was off from is insane. Now, iPhone sales were up 9.6% for the quarter and 7% for the year. Services were up 5% for Q4 and 14% for the year. For those who are not aware, services is actually their second biggest segment now. And all other segments were up for the quarter with the exception of the iPad. But I know they came out with some new iPads. I think it was just a month ago. I think it was after their big event.

So I anticipate that the iPad sales will pick up. And operating margins were down 90 basis points for the quarter. But considering what's going on on a geopolitical level, because for them, it would affect them, because obviously they have a lot of manufacturing happening in China for their devices. And the lockdowns that we've seen that are still happening in China, it's pretty impressive, the 90 basis points, I'll be honest, just being down by that much. They generated $111 billion of free cash flow for the year, which is 19% more than last year. So there's not many companies in the trailing 12 months that can say they generated 19% more cash flow than last year. And then you do that on a per share basis and it's like, oh my God.

Yeah, and what did they do with that cash? Well, they bought back $89 billion worth of stock during the year. Oh my God. Yeah. And what did they do with that cash? Well, they bought back 89 billion worth of stock during the year. Oh my God. It's insane. Yeah. It is insane. Just as the numbers are like, yeah. And that graph you put up here is insane. Yeah. The share is outstanding. So it's a graph I got from Stratosphere, which,

you know, I'm just kind of eyeballing it because it has what they kind of call them charts or whatever you want to call it. Yeah, bar chart. Bar charts, exactly. So from 2012, let's say they had about 20, that's in 27, so 27 billion shares. Am I reading that correctly? Yeah, that's right. 27 billion shares and then now they're down to about, I would say, 17 billion shares.

So that's pretty crazy. Yeah. And they're still paying a small dividend at the same time. So if people are wondering why Buffett owns Apple, this chart explains it right here. This chart does explain it. Yeah. Oh my goodness. It's one of the most consistent buybacks machine you'll find.

And another chart I just pulled up here on the doc below that I just threw in there is the services as a percentage of total top line sales. It has ballooned from like 7% 10 years ago to on a trailing 12 months of exactly 20%. You hinted that it's now the second largest segment in terms of top line sales. You hinted that it's now the second largest segment in terms of top line sales. And in the trailing 12 months, it's generated $56 billion in gross profits to service the segment. Yeah, no, it's super profitable. And I bet you my $1.50 of iCloud storage is in there.

Oh, yeah. Every month though, right? Dude, how smart is that they're like let's put some amount tax on everyone every month of a amount that is so small and will make it so annoying for them to stay store photos that they're gonna be like ah it's a dollar fifty and then when we raise it to 250 and then we raise it to 350 and then it'll be eventually 10 bucks and everyone will be way too hooked on the drug that is Apple to switch. It's just, it's Tim Apple, man. This guy's a killer. Oh yeah. I mean, there's, it's no wonder that Steve Jobs kind of tagged him to be his successor. I mean, I think they're very similar in a whole lot of ways. And I think I mentioned

this on the podcast before, but I think it was something someone interviewing Tim Cook and just asking like, oh, like, you know, don't you think it's you should make iMessages like available for all phones and things like that? You know, like like you were mentioning with the social suicide for kids who don't have it. And Tim Cook said, no, I mean, I think it's fine on iPhone. And if people want it, they can just get an iPhone. He's a killer, man. Yeah. He's a fierce competitor. And I think that the U.S. government needs to start paying a little more attention.

Stop worrying about Zuck and google and amazon when you know the most anti-competitive companies are in front of their eyes i am surprised it's holding its multiple given the tsm risk because look how much tsm has came down and how much multiple compression there is to try to try to size the risk of of what happen there in Taiwan with Taiwan Semiconductor. And who's making Apple chips? It's Taiwan Semiconductor. I'm surprised it's been holding its multiple, to be honest. No, that's a good point.

Yeah. I mean, I'd have to dig whether they're doing investments and maybe, I don't know, supporting the building of some factories in the US that could eventually produce that. But again, even if they are, that's probably at least five, six years down the line, if not more. These things take a whole lot of time to build. And it's funny that, you know, TSM has been, you know, smashed completely while a company like Apple doesn't seem to be affected by it too much.

Yeah, it should be. I think it should be. And even if it is short term, it's going to hurt a whole lot short term for Apple if something goes down, right? Yeah. I mean, I feel like they must have a plan B whether they kind of revert to slightly older chips for a generation. I don't know. Because obviously TSM produces like 90% of the most advanced chips, but I think worldwide they produce about 30, 35% of all the chips.

So there are other producers, but I'm assuming they must have a plan B. I can't see them not having one. I can see some people trying to pair trade this with like Intel or something to try to play this risk if something does go down. All right, let's round out today's show with some Canadian transportation stocks. We'll try to rifle through this because we've been talking earnings for quite some time. I'll kick us off here with TFI International.

Boring profitable value stocks have held up extremely well in 2022. Thankfully for my net worth to counteract the aforementioned businesses I have discussed today. And I am very glad that I have positioned them accordingly. I'll say that the only company that's really gotten in a huge drawdown that I own big size of is Google, thankfully. And so that's why you position waiting is the most under-discussed and most important thing for investors to try to think about and max their conviction and try to do

some risk management there. Because if you're betting the farm on some unprofitable 30 times sales growth stock and things don't go the way that you hope they would, that's not going to feel so good. So I'm glad that I have anchored my position appropriately. All right. So the third quarter for TFI International operating income was up 66% to 318 million. The top line sales was up 7% to $2.24 billion for the quarter. Nine months into this year compared to nine month comps last year, revenues are up a nice 35%. Really nice stuff, really nice execution. And you're seeing the results of that carve out that they did from UPS Freight taking their less than truck load business. So in 2022, so far, they have acquired eight trucking companies and they keep rolling up and rolling up this industry. You got to love it. And they're damn good at it.

They hiked the dividend 17% from 23 cents to 20. Okay. Get this. Okay. They hiked the dividend 17% from 23 cents to 27 cents per share. Two days before the release, they're like, you know what? Nah, let's hike it to 35 cents, a whopping 30% hike on top of the previous hike. This represents a 52% dividend increase. Bruh. My yield on cost on this thing is getting pretty juicy. They're buying back lots of stock and are authorized to repurchase up to 6.3 million shares. Clearly, they think the stock trading at nine times earnings is too cheap, given this, you know, what they've been continually been able to sustain, which is high single digits revenue

growth, which are achieving again today. And really nice bottom line, 66% in operating income. They're really good at carving stuff out, making it more profitable, integrating it and seeing real synergies. Because synergies are such an overstated benefit of acquisitions and roll-ups, except for a few companies. And I think that TFI really does see synergies when they do these roll-ups or else you wouldn't see this operating income explode like it has over the past five years. No, no. I mean, I think the result speaks for themselves. So very impressive. They obviously benefited a lot from the pandemic in terms of their operations, but they keep trucking along, no pun intended.

Nice. They do keep trucking along and maybe this company will keep training along. Yeah, exactly. So moving on to our next one, like you just said, a train company or railway. So CP earnings, Canadian National Rail also reported, but I wanted to talk to CP just to basically listen on the call to see where they're at for the Kansas City Southern acquisition. Now, before I get to that, total revenues up 19% to $2.3 billion. Operating ratio operating ratio was down 70 basis point to 59.5 still respectable earnings per share was up 37 to 96 cents and so far this year free cash flow is down 28 to 1.4 billion however it is up just

shy of three times for this quarter compared to last year And this is actually what management had anticipated, a weaker first half and then stronger second half led by strong demand for potash and intermodal. And like I said, I listened to the call just at the beginning because I knew they were going to talk about the Kansas City Southern acquisition. They've been doing so at every quarter. Management team said they just attended hearings a few weeks ago from the STB, which is the Surface Transportation Board in the US, and answered questions from all stakeholders that were present. The CEO said that although it is taking longer to review than expected for the

review to be done, they commended the STB for being so thorough and hearing from all parties involved. And he added that they think that the acquisition should have wide ranging benefits for most stakeholders. I think there was a little bit of, you know, trying to raise them up a little bit on the call, saying that, you know, they're happy they're doing that. Obviously, they would like them to close, approve it as soon as possible. But, you know, I think they're saying the right things, you know, still don't really know what's going to happen there. But from what I've been reading, it sounds like, you know, I'm not trying to predict anything, but it sounds like probably worst case, it would be approving the acquisition, but having them divest maybe parts of Kansas City Southern for

competition reasons. Yeah, it seems like such a complicated deal to get done, but I'm glad you're listening to the call because that one sounds painfully boring. I'm glad you can head over to the call and report back to myself and the podcast listeners because CP Rail earnings call is not one I wake up, get excited to listen to. No, that's fair. That's fair. Now, one that you probably don't get excited listening to, another one in the transportation. I think I might get more excited just to listen to what's going on. Yeah, I guess this one is kind of a pandemic recovery play.

Bellwether, maybe. Okay. Yeah, I guess this one is kind of a pandemic recovery play. So bellwether, maybe. Bellwether, yeah, Air Canada, Q3 2022. So with the business impacted heavily by the pandemic, I think we're still at the point where it's good to compare 2019 numbers. I pulled the numbers from 2019 and 2021 to get a good idea of where they are trending. Revenues were up 2.5x versus last year, but revenues were up every segment except cargo. So cargo was actually down a little bit. Total revenues for

the quarter were 5.3 billion. Now that's down 4% compared to 2019. Operating expenses were up 2% compared to 2019, even though revenues were lower. And I think it doesn't make any sense here to compare it to last year because with such a low volume last year, I mean, obviously their operating expenses were much lower. Operating margins of 12.1%. However, that's compared to 17% in 2019. So down 500 basis points pretty much. It's the first quarter since the start of the pandemic

that they had positive operating income. You're going to like that, Brayden? Yeah, hell yeah. Money. One second while I pivot my entire portfolio to airlines. Yeah, exactly. We would have known, right? Air Canada profitable when tech plays aren't. But anyways, I digress. So they had a net loss of $508 million versus net income of $636 million in 2019. Free cash flow negative of $43 million versus free cash flow positive of $533 million in 2019.

$533 million in 2019. So for the first nine months of this year, though, free cash flow positive of close to $500 million versus $3.3 billion in 2019. So they're still, you know, they're trending the right way, I would say. The last thing that's encouraging here is advanced ticket sales were up 95%. Actually, they were 95% of that of the same period in 2019. So I think overall, a bit like we talked about when you did Delta a few weeks ago, I think they are trending in the right direction. But I think it could, you know, if the recession kind of fears actually come true, whether we are in a recession or not, I don't know. But it'll be interesting to see if they continue trending that way because something that people can easily cut out are vacations, are trips if they're struggling financially. So Air Canada will be a very interesting name, I think, okay, you had this unbelievable fall from grace during 2020 because, of course, I mean, global air travel came to a complete halt with no idea when the resume button comes back. And now we have volumes, passenger flight volumes at all- time highs, higher than 2019 volumes. That's the number

that these companies keep tracking is how close are we to those 2019 numbers. But two things have materially changed. One, their balance sheets. I think you and I were talking about the Delta balance sheet, how it has ballooned with debt and paying down debt is like their number one priority since they had to take on so much credit financing and tap every single credit line they could just so they don't go bankrupt. And then the other thing that has materially changed is, you know, fool me once, but fool me twice, you know, shame on me. And that's basically the airline thing, right? Is like investors already knew from the previous decade, you know, that they suck as businesses. They're not good businesses. And then all of a sudden, you know, people forgot about that. And now they're

reminded again, and they're like, okay, you know, fool me twice. I ain't bidding up the multiples of any of these airlines. And that's why you okay, fool me twice. I ain't bidding up the multiples of any of these airlines. And that's why you've seen the businesses fundamentally recover, but not the multiple. And I think that they're trading probably where they should, which is very low in terms of the demand for the multiple. So I think those two things have materially changed for these businesses as investors have gotten a little smarter. They're not going to be fooled again by these companies. And two, that the balance sheets across the border are pretty ugly. But I mean, hey, good old Air Canada. I'm taking an Air Canada flight later this month. Yeah, I think and I was just kind of as you were talking, I was pulling up their chart

and looking at their debt. So their debt has also really increased in recent years. Like you said, I think it was probably a combination of government, you know, loans and private loans. I don't really remember for Air Canada at the very least. And the other thing is when the pandemic started, we were talking in the podcast and I was saying like, don't invest in Air Canada now. Like even if you're interested in airlines, like why not wait until they return to profitability? And if you look at what they're trading at right now, they are pretty much trading at close to the levels they were trading at when the pandemic started. So it's. Yeah.

They had that like ridiculously fall off a cliff and then they've kind of bounced around since. Exactly. So people that were trying to like buy low because, oh, it's going to bounce back. Well, you know, when you have zero traffic or close to it, you know, it's kind of hard to bounce back. And that's what we've seen over the past couple of years with them. I'm hoping they do well. We don't own them. Obviously, we're not really interested in it. But that's just a quick snippet I wanted to say. I'm just thinking I remember very distinctly, like, it's kind of like a remember where you were moment when they declared it, you know, pandemic, every airline was going to be shutting

their borders. You know, the NBA closed. Like, that was kind of like the Sunday night, the NBA said, we're stopping. And then the market opening on Monday and just being like, oh my God. And Air Canada was just like, okay, you guys are donezo. Like it's unbelievable. And so at that point, they just tapped every credit facility they could find. And that's, you can see that.

It comes out on their balance sheet if you look at it historically. So yeah, no, that's a good one, Simone. Good episode. That's the episode. Good episode. I like that. Lots of Canadian names in here as well. And lots of me being highly frustrated with these companies not wanting to make any money over time, which is quite counterintuitive to the way I thought business was run. But hey, you know what? It is what it is. Before we sign off today, just as a reminder,

if you want to come see me in person, we'll give you a break. You don't have to come down from Ottawa. But if you're in Toronto, if you're listening to this podcast and you're living in Toronto or you're going to be in Toronto, this coming Tuesday, November, oh, don't make me forget this. November 8th. I will be there.

It's the Bet on Canada Summit downtown on Front Street in Toronto. You can buy tickets. It is the number one link on the show notes. We'll put it at the top of this podcast so you can see it. I'll be speaking at 11 a.m. I haven't done public speaking in front of hundreds of people like this in a long time. I might be wearing two pairs of underwear, Simone. That's all right.

We have our extra diapers if you want one. I might have to come up, grab some diapers. There's a real diaper shortage here, and I might need to come get some diapers for this event. Come get tickets. So that's on November 8th. I don't make money from you buying tickets, but here it is. If you want to do some networking and do some stuff here in Toronto, come see me wear two diapers at once. Last thing is we just put out join TCI.com last night on the site. So you can go join TCI.com, support the show.

So we can keep doing this for a long time. And then you get to see our portfolios. So that when we're talking about all these names we do, don't own, there's just good context on the position sizing and what we're thinking and to get some additional disclosures. I think that that's important. That is at joinTCI.com. See you in a few days. 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.