The Canadian Investor - Enbridge to Become Largest Gas Utility in North America

Episode Date: September 14, 2023

In this episode of the Canadian Investor Podcast, we start by talking about the Bank of Canada pause, Enbridge’s acquisition of dominion gas storage and utility assets and the instacart IPO. Symbols of stocks discussed: CART, ENB.TO Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

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

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Bélanger. The Canadian Investor Podcast. Welcome to the show. Today is September 12th, 2023. My name is Brayden Dennis, as always joined by the very charming Simon Bélanger. Breaking news here. Breaking news, Simon. What do we have right out of the gate? We're starting with fire today.

Yeah, so my title is SNC-Lavalin is no more. Although that is a bit misleading because, you know, they're still there. They're just changing their name from SNC-Lavalin to Atkin Realist. to Atkin Realists, and they'll be changing their ticker from SNC to ATRL. That'll be effective this upcoming Monday. Now, it's interesting because we actually talked about it. Atkin's Realists? Yeah, and there's like an accent. What is that? I'm not sure. I didn't read into the whole logic behind it.

I think there is some logic, but... Well, the logic is, how do we get ourselves away from this name and rebrand? But I got to dig more into this new name. Yeah, I think it's Réalis. I think there's an accent on the E as well. So I think they wanted to probably kind of keep a little bit of their French roots there. Preserve their French Canadian roots. But I was listening to an interview with their CEO, Ian Edwards, who's been CEO of SNC-Lavalin for more than four years now. At first, he was interim. I think it was June 2019.

And then I think a few months later, I think it was like probably November of 2019, they made him like the permanent CEO. You mentioned that it's part of their transformation plan, which started by exiting the oil and gas and construction industry and fixing underlying issues like culture and, you know, parts of the business. Obviously, culture, there was, you know, some discovery that they had done some bribes. And I think it was in Libya, if I remember correctly, amongst other countries to be able to get some contracts over there there was a big scandal because of that now they're really

focusing on nuclear infrastructure water and specifically around North America and the UK and they're focusing on profitability and paying down debt which has not been easy because a construction business they exited was dragging on their profitability. So it was a good business, but the fact that they were exiting it and this CEO was mentioning that longer term, it was the right move to do, but shorter term definitely faced some profitability headwinds. Now, according to him, there's also been an increased interest in nuclear power because of the energy crisis that we've seen over the last 18 months. He didn't mention this specifically, but I'm assuming he's kind of lining that up with when Russia invaded Ukraine and the close call in terms of Europe's energy dependence, specifically Germany over Russia. I know last winter there was a lot of people concerned that there could be some

massive energy shortage in Europe. Thankfully for them, they had some much warmer climates or much warmer weather than normal. So I mean, it's interesting. Obviously, I think it makes sense for them to rebrand over here. We'll see if it works out i mean it looks i haven't done a deep dive or anything and looked at their financials really closely but it sounds like they're doing the right things they have a very unique moat with nuclear and specifically canadian deuterium uranium nuclear technology so they are like an extension of the Canadian innovation that is Canadian deuterium uranium reactors. It's a very specific type of reactor. It's very safe. It uses H3O, which is hard water as it's cooling through the reactor. Many different continents and

countries have adopted Canadian deuterium uranium technology. SNC Level N is, you know, they're one in the same with the technology. They say here on their page, they are stewards of CANDU technology, which is, you know, pressurized heavy water reactors. I used to be in this world and I know their kind of foothold on this technology. My only concern here is that Europe is saying they recognize the need for more reactors, yet their actual actions are decommissioning and not refurbishment or new build. So it makes for a nice storyline i'm just taking action over over intent like what they're saying right now and i think that that's still really unclear

no i think that's a good point and i mean i think there's different factions in europe too because i think france is still very reliant on nuclear energy and i don't think but they're heavily decommissioning is it yeah are they So I haven't really dug deep into that. France is the most so of this, which is really, frankly, kind of disappointing, right? Because this is the only true baseload, no carbon emission during operation technology for baseload reliable power and no reliance on

that gas so in other words it's not intermittent like wind solar and these other kinds of renewable power okay no that's good to know exactly and i mean we had someone i think inquire about like potential nuclear energy plays obviously that could be one but you have to make sure you do do your due diligence because they were you know i, I just listened to this interview and the CEO was quite clear that they're still kind of in a turnaround phase. They're not looking at acquisitions or anything like that. They're really focusing on profitability, especially in the second half of this year, paying down debt and then focusing on what they do well and then down the line they may look at acquisition but that's not part of their immediate plan but um i think you

know it's probably a smart move to to change the name rebrand um i don't think essence of any brings that well for a lot of people so we'll see i mean i just thought it was interesting to talk about that on the podcast yeah definitely time definitely. Time for a rebrand. And, you know, what was once a Canadian darling in innovation and technology, I hope they can get it back. No doubt. Like I said, they do have kind of an intimate relationship, a thought. A lot of the engineering projects in this country and power as well, both on the hydroelectric

side and the nuclear side. All right, Simone, today we got on the slate here. You're going to talk about the Bank of Canada rate hike last week. I'm going to talk about retail inflows, which has been remarkably strong. The Enbridge acquisition, which will scratch both of our heads. And then we'll talk about the Instacart IPO. So let's kick us off here with last week's Bank of Canada rate hike. Yeah, so this one was really interesting because really, I mean, I think a lot of people were predicting that it would pause, the Bank of Canada would pause last week, especially as we were getting closer and some data was coming out that basically showing that the economy, you know, just to put it bluntly, is just slowing down.

And before I get into the main points, I guess David Eby from BC, the premier from BC and Doug Ford are probably taking a victory lap right now because, you know, I'm sure they're going to say that, hey, we sent a letter and they listened to us oh yeah it was all them yeah no for sure uh jokes aside though here's what the bank of canada said regarding holding rates and i listened to the press conference afterwards it was a day after in calgary from tiff uh pretty much you know just what was in the release he just kind of recycled it a little bit in different words, but saying the same thing. Now, the economy significantly slowed compared to their expectations in the second quarter. Excess demand in the economy is easing.

There are concerns that the base effects will push headline inflation higher with oil pricing showing signs of increasing. CPI remains elevated with the July CPI print coming in at 3.3 percent after dropping to 2.8 percent in june china's economy is significantly slowing and i think that's putting it lightly like there's some serious headwinds in china and whether people want to admit it or not china's a big trading partner for a lot of countries around the world. So some slowdown in China will affect, you know, not only China, but Canada, the U.S. and other countries. The tightness in the labor market is starting to ease gradually, but wage growth is still quite strong at around 4 to 5 percent. He didn't mention that, but that's them saying that it's a bit too high to their liking. They are committed to that 2% inflation target.

He repeated that several times. And listening to his speech the day after, it's really clear that the Bank of Canada is wrestling with really two competing goals. Obviously, their main goal is getting inflation at 2%. And I posted on that on Twitter. But the other one is supporting the economy and financial institution, making sure things don't break down. And people were pushing back saying, oh, no, there's no dual mandate. Maybe not. But I think it's implicit. Obviously, if stuff starts breaking down or we

enter like a depression, they're probably going to ease on that 2% inflation target. And I was listening to Steve Serecki, who co-hosts the Looney Hour, and I think he had the best line to describe what the Bank of Canada did, a panic pause. So I think that's just the best line, just because I think they were probably looking at increasing, and then the data started coming in and probably realizing that that lag effect is starting to take place. And they figured that we need to pause right now and reassess until the next decision. Yeah, I like that. Because kind of like an oxymoron, a panic pause, right?

Yeah. No, I thought it was like the best, like, you know, if you want to describe to someone what the Bank of Canada did last week, two words, panic pause. That's it. Don't say anymore. Yeah, very fascinating. And this just goes to show predicting interest rates is a game I don't play because I don't like playing games.

I'm not a very good loser, Simone. I like winning. And I don't play games. I'm not a very good loser, Simone. I like winning. And I don't play games. I lose every single time. And predicting this stuff, I lose every time because the Fed or the Bank of Canada doesn't know what they're doing at the next meeting from when they finished the previous meeting, right? And these are the people who are the most intimately close to the situation. So treat it as such. 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. 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. It leans into our next topic really well. You go, who's got money anymore? Where did everyone's money go? Last time I checked, my bill for everything has exceeded. Every time I leave the house, I spend $300. What did I even do today? Who has any more money? Well, retail investors do. So here it is, a quote from a report done by Public, the brokerage. In 2020, a wave of retail investors entered the stock market. During the next two years, approximately 30 million new brokerage accounts were opened in the US. By 2021, retail investors comprised 25% of total equity volume. Wow. That's pretty significant. 25% of total equity trading volume. It's all those stimmy checks. All those stimmy checks straight into the bank. It's straight

into the gambling stock market casino, double the decade prior. But here's what's fascinating for me is they've stuck around. In February of 2023, retail investors across the platform or across platforms, so not just there, so across all the platforms that they track on in data perspective, not to mention a bunch of them are publicly traded, which disclose active accounts and trading volume. Many of them are publicly traded. All-time highs for weekly inflows with $1.5 billion pouring into the market in a single week. Participation in the public markets remain extremely high from individual investors. I have here on the screen for the wonderful listeners of Join TCI who get to not only see our faces and our portfolios and the graphs we show but also me eat lunch during simone's segments today

you're like you know uh they did a pause at the bank of canada i'm like please don't ask me to say anything. I have soup in my mouth. That was your cue to ask me to show the chart. So yeah, well done. Yes, that's it right there. Look at this 2020 skyrockets in terms of daily net inflows by individuals. And the trend is just actually continuing to go up. Now, of course, there's ebbs and flows.

But my major takeaway here is how sticky the DIY investing by individuals regularly putting money to work in the markets, whether they're putting in the casino or long-term investing, I'm not sure. But through late 2021, in the fall, November of 2021, the good times stopped rolling. 2022 was the first time these, what, 3 million new brokerage accounts or, no, sorry, 30 million new brokerage accounts were like, oh, the stock market just doesn't go up and up every day. There's times of flat and there's times of real heavy drawdowns, especially on some of these high flying tech names. Look how strong daily net inflows has persisted through 2022 and back to new all-time highs in 2023. This is not what I would have expected. I would have expected a pretty severe drop-off in the second half of 2022. And then, okay, maybe inflows back in 23 when the good times are back. But this is sticky, man. This is a sticky group of individual investors that are putting money in

the markets. Weekly inflows are solid and strong and growing. The dollar cost averaging technique seems to be resonating with these 30 million new brokerage accounts. Yeah, I think that's a really interesting chart. I'll be interested to see it, say, like six to 12 months from now, just because, you know, talking about the economic data that's starting, you know, to roll over a little bit. And we talked about retail earnings and pretty much all the retailers are saying the same thing, right? But they're not impacted the same. But what they are saying is that consumer are shifting from non-essential to essential

spending. And when does that start hitting people's savings and then people's investment? I'm hoping that it stays high. Like I'm definitely hoping that's the case, but clearly like people will probably sell their investment before they sell a home if they have a home and stuff like that. So I'll be, I'm actually surprised that it stayed this high. I'll be, I'm with you, uh, in the past year or so I'm actually surprised that it stayed this high. I'm with you in the past year or so. I'm fingers crossed that it does stay this high because it shows that people are resilient and are able to whether it's cutting on maybe some things, some kind of little luxuries to be able to keep investing. Now, this is surely anecdotal, but this is perhaps a serious trend here, which is people have grown up, especially in Canada, with the notion of save, save,ing 101 you know buy a home start a family but there's no good investments other than buy a home have you seen how much money our parents have made on their

homes yada yada yada you know that that type of narrative is persistent through generations. And now no one can buy homes. Yeah, it's taking a hit. No one's being able to buy homes. The price of homes has far surpassed disposable income. And it's remained high in an environment where rates are materially different. And so this creates a really interesting dichotomy of save, save, save. And then people are going, wait, but even if I do rent or if I am an owner, there's this wonderful wealth creation machine of being able to invest in a broad basket of the best businesses in the world.

This iPhone that I'm addicted to, this Instagram app, all this stuff that people are so used to interacting with, it's not very common that they grew up knowing that they can actually own a piece of those companies. Now, it sounds extremely obvious for investors who are sophisticated and understand this, but that's not a concept that everyone across all status of wealth understand right out of the gate or finishing high school. And so that's amazing to me. That's exciting to me that people are having that realization. And sure, it's anecdotal, but the data is the data. And it is undeniable how sticky retail participation has been. Yeah. And just to get back to housing for a second, I mean, we talked about it early on. The number of people like that argument, I don't know, you must have heard it before, but you know, when you're like, why pay rent when you can pay your mortgage and then pay down the house? But people never take the time to actually do the calculation.

the calculation. So what's the total cost of owning a home? And what's the total cost of renting? You compare both. And in the vast majority of cases, at least when I did the calculation for Ottawa, I mean, it's much, much cheaper to rent. And you don't need a massive amount of money to put as a down payment, which you can invest and you can add that extra money and invest it as well. When you do those calculations, sometimes it may make sense to hone a home, but sometimes it may not. And a lot of people, I think, never take the time. And I think, I mean, I tweeted about that, like I think yesterday was, I think we just, we need better financial education in schools. People are like, oh, it won't solve everything. I know it won't solve everything.

But if it can just bring a couple percentage points higher in terms of financial literacy as a broad base for our population, I think that would make a big difference. Every time I hear, why would I rent? Why would I pay someone else's mortgage? You know, that, that narrative, how often do you hear that? I just cringe and I don't say anything. I just let people, you know, I'm not going to change their mind. I'm going to change their mind at the bar. Like, you know, just let the, let those things pass. But more and more people are understanding. Yes, you can achieve returns in other asset classes.

And that's not a concept that everyone knows at birth. And if they never get taught it, or they have no experience in the public markets, or never bought an index fund or an individual stock or any asset other than real estate, that's not a concept that they're familiar with so yeah it's pretty fascinating and i think that this you know we could probably talk about this all yeah i was gonna say i was gonna add something else but it won't maybe we we do another segment where we uh talk a bit more about that i mean i'm pretty passionate about the education piece too you know just kind of the basic of understanding i think just a lot of people don't understand just the basics like compounding how it can work for or

against you and just the basics of that but anyways we won't uh yeah this episode will go on forever if we don't move on to the end bridge you know we're gonna we're gonna solve education by the end of this podcast you know everything's gonna be fixed yeah exactly i don't think so but you know i think i'm i'm of the mind if you take small measures here and there it kind of adds up right over time but um to go to ambridge so the big news i think it was last week um they came out and said that they would be buying Dominion gas storage and utility assets. So Dominion is located in the U.S. Right after we actually had finished recording, I have in my notes here, we got, you know, the news that Ambridge was making this purchase. purchase and they're purchasing for 9.4 billion us dollars and the assumption of 4.6 billion us for a total of a slick 14 billion dollars so they the assets yeah it's it's a lot of money

um and enbridge already has a lot of debt so we'll get to that towards the end here but um at first glance what's what's your reaction on this i think you and i were texting back and forth and i i no longer have any enbridge takes because i feel like i'm missing something and you responded with i i don't think you're missing anything but like i swear i must be like i i can't have the same take for the last decade. And the debt load just increases and increases. And they seem to just have unlimited money, pay out all the free cash flow to the dividend. There's got to be, I know electricity, infrastructure assets really, really well. infrastructure assets really, really well. Gas is a different beast that I'm not even close to as educated on how they build their rate case, how they build their CapEx plans, how pricing is. I don't know half of that stuff like I do with electricity assets. So I just don't have any more takes anymore, Thibaut. No, and that's fair.

So I'll give kind of my take here and just explain a bit what they're getting and generally what Enbridge looks at in terms of their own version of free cash flow. Because I had some people pushing back when I said, well, it doesn't look great for free cash flow and payout ratio. So I do get where they're coming from. So let's look at the assets first. So they're buying approximately an asset that serves 7 million customers in the U.S., including the East Ohio Gas Company, which currently serves more than 1.2 million customers in Ohio. Questar Gas, which serves about 1.2 million customers across Utah, Wyoming, and Idaho. The public service company in North Carolina, which serves more than 600,000 customers. Kind of ironic that it's called a public service company and it's sold by a private company.

But anyways, that's not the first thing, right? I'm a private company, but I operate for the public. That's my new motto for all my companies i'm a public server i'm a public good you guys like you're welcome you're welcome that we exist so now these assets they're buying they are regulated which i'm sure it's a big reason why inbridge is doing that, because a lot of their assets are currently regulated, which, you know, does have its benefits there. They'll be financing with a mix of equity and debt. The transaction is expected to close in 2024 and would make Enbridge the largest gas utility by volume in North America. Now, my take is that, you know, it's a bit like we were talking. It's a bit confusing because it's not on the

first hand like their stock was trading at you know all-time highs or anything like that so if they do issue equity it's going to be diluting shareholders more they'll also need to issue debt which will probably be in the six percent plus range so not cheap debt the u.s government also has been pushing hard to reduce emissions, so that could hit the business that they're buying. Although, you know, we are seeing certain U.S. states, mostly the red states, pushing back against that. And who knows if a Republican gets into office, there might be more lenience on at least natural gas, which is typically the cleanest of the fossil fuels, at least to my knowledge. You probably know that better than I do, but that's what I've read.

You're nodding, so I'll figure. I'll just say yes. It's a mix of nodding and inhaling Costco pesto. Okay, perfect. So I'll just finish. So like I was referencing, Ambridge uses, I guess, a metric specific to them. They've come up with this own metric. It's distributable cash flow. So this is, they define it as, and try to make sense of this because I've reread this so many times and it's, you know, anyways, I'll read it. You tell me. You're not allowed to use dcf

as an acronym yeah you know like no that's already an acronym that the finance world has allotted you know yeah so anyways they they came up with this metric it's like obviously i it's not a non-gap metric which that's not an issue in itself. The fact that it's non-gap, there's tons of useful non-gap metrics, but this one is a bit interesting, I'll just say. So DCF is defined as cash flow provided by operating activities before the impact of changes in operating assets and liabilities, including changes in environmental liabilities, less distribution to non-controlling interests, environmental liabilities, less distribution to non-controlling interests, preference share dividends, and maintenance capital expenditures, and further adjusted, and this is the best part, for unusual, infrequent, or other non-operating factors. So that's really the last part,

especially where it's like, okay, so it's basically at the discretion of management. That's a black box. Yeah, so where I have issues here is it's not unusual for either real estate investment trusts, REITs, or utilities to use funds from operation. That's the most common one. I've also seen CAD, cash available for distribution, but that DCF is very specific to Enbridge and that's where there's some red flags that start maybe not red but at least orange flags that start

happening to me because I've reread that multiple times and I've searched I tried to like you know search different like what does this mean what does that mean outside of Enbridge? And I'm still kind of confused to what it kind of what it is as a whole. So they say that their payout ratio for their dividend is well below, you know, their distributable cash flow, it's a sustainable level. But my pushback on that is, yeah, why are you using this and not something that's more widely used by the industry like funds from operation, which is used widely by capital intensive businesses? Yeah, this one's a bit of a head scratcher. Like, you're not allowed to go adjusted, adjusted EBITDA. You get one adjusted. This is a confusing business from the accounting and financial statement perspective that I've never understood. And it's not for a lack of

trying. I've really tried. The statements, the debt load, the distribution, like the dividend, the CapEx plan, these acquisitions, how does it all add up? And I've never been able to answer that with confidence. And that doesn't mean that there's something wrong or sketchy or Enbridge is a bad company or bad asset. I just don't understand it. And I think that that's important to disclose, right? Because there are some businesses that you'll look at time and time again, and you'll just have so many questions and head scratching things. You look through the footnotes and you'll see minus adjusted for unusual infrequent or other non-operating factors and you're like that's not a that's not a number that i know or want to know that's important but i don't want to

know that number because it's not a it's not a number i i'm comfortable with uh because that that's just a complete black box. And frankly, poor governance, you know, and not shareholder friendly. And so for those reasons, I'm out. Yeah, no, I think so too. I think it's just a good point. Look, maybe, you know, there's nothing wrong with it, but it's very vague. I can't make sense of it. And I've looked at a lot of capital intensive businesses. And, you know, maybe I'm just not smart enough to understand what they're saying here. But especially that last line, to me, it screams like, oh, there's a lot of subjectivity that goes into this.

They can kind of put in some stuff that they don't want impacting their DCF. But anyways, I know there's a lot of people that own it because, I mean, we look at the TD, most bought socks, and Enbridge constantly pops up on there. So I know a lot of Canadians do like Enbridge. I do hope it works out. It's a collection of localized monopolies

for gas distribution. I mean, that's... I do hope it, you know... It's easy to like that. It has, like, I don't have the stats, but I remember checking just a couple of days ago. It has underperformed even total returns over the last five or ten years, whatever period you look at. It has underperformed the markets pretty significantly. I think it underperformed the TSX and underperformed the S&P 500.

So keep that in mind. I know the dividend is very alluring. And that's total returns. Total returns. In before people say, yeah, but what about the dividend? We're talking about total. Yeah. We're talking about total return. It's underperformed. So I think enough about Enbridge, but I'm trying to get a guest on the podcast because I know you won't be able to record in a couple of weeks from now. So I'm setting up some guests to basically someone that knows the business well that can potentially demystify it because, you know, it's a pretty complex business to dig into and not one that I'm overly excited about.

So I think a guest is perfect for these kind of situations. Yeah, it's like it's really easy to understand like the actual business the actual business is a collection of you know distribution monopolies for nat gas and nat gas is 100 percent required for humans to live in this climate uh in terms of heating And it's also a very important asset for power generation. Here in Ontario, only for peaking power that those combined cycle nat gas plants actually come on, but it is used very much so in the summer when everyone's AC is on. And so from that perspective, no confusion. We're good. It's when you actually do financial analysis and look through the statements. And it's okay if things are outside of your circle of competence. There's

a lot of great businesses to own. 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. 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. Let's talk about Instacart. Instacart, have you ever used this service by the way way yeah i saw your note is it even available in canada yeah it is oh i didn't know i thought yeah i thought it wasn't available in canada i

thought it was like uber you know groceries or whatever um i didn't i know my i have family members in the u.s that use it pretty frequently yeah yeah you can use it for sure in canada and you know what the the experience is kind of nice like you just basically do your grocery shopping from your computer screen or your or the mobile the mobile app so from that perspective it's very fast because you can just kind of like search like i need bananas you know i need bread you know you just type it so from that perspective it's kind of amazing um and of course they got this huge huge, you know, stay at home bump when everyone is forced to at least give it a shot. Right. What kind of fees are you looking at?

Just out of curiosity. So, you know, I am, you know, I am in cheap. Oh, I mean, I am too. I think that's one way you can easily cut costs is remove some of those kind of nice to have but you don't really need i just mean that i used all my free like okay okay i used all my free delivery things and then to be honest i'm not sure what it costs after that but it clearly wasn't enough from it clearly wasn't a value proposition enough for me to stick around um plus i'm a i'm a real costco adult now simone no i know yeah well the reason i'm asking is instacart you know we're

seeing like i'm i'm hearing it in my everyday life more and more anecdotal as people are you know they're feeling the pinch right now and they're trying to cut where they can without affecting too much of their lifestyle and to me, I don't know the business. I haven't looked at their financials or anything. But to me, logically, this is something that people, if they need to cut, that's going to be at the top of the list. It's just like such a convenience economy type thing. Yeah.

That being said, though, since you have, you know, like if you're shopping at a big grocery store and you're, you know, I'm shopping at the, the superstore, the one that the Loblaws superstore, they have basic, it's like kind of like a Walmart, they have everything. And they have, you can basically go by like pamphlet deals and like what's on sale. So you can actually be pretty frugal easily because those things are hard to pull off in the store in terms of actually going for all the deals and the like it's a lot easier to do it from a screen than physically being in the in the store so i i don't really know so they deliver it to you or do you like yeah they deliver okay okay yeah someone just like uber someone goes and and picks up your groceries and if they don't have

that item in the store they'll be like they'll message you on the app and be like is this okay instead and they'll like send a photo of it oh yeah you get to like approve or deny i heard stories of them like putting substitute that make no sense at all no sense yeah they're just like drivers you know there's very experience of grocery shoppers versus drivers yeah i want bread and you got me chicken but okay yeah thanks man really appreciate that uh okay so i love reading s1s because instacart filed an s1 and for our new listeners an s1 is just the name of a form that companies file with the US SEC, the Securities Exchange Commission, with plans for the company to go

public via initial public offering, aka IPO. Like we always say, there's so many acronyms in this world that sounds fancy and complex, but represents concepts we all know and are actually more intuitive than you may think. My actual advice here is like side note, people in whatever industry they're in, in their career, you're going to see a lot of people use jargon in meetings and stuff. Like they say a lot of words and that don't mean a whole lot. If you can communicate with just like words you'd use with your friends and actually get your pointer across, you come off more trustworthy and intelligent than using jargon. Just my hot tip.

All right, Instacart. So Instacart is a grocery delivery platform. You do your grocery shopping, you press order and someone goes and does your shopping and it shows up at your door. Like, you know, one of these magical Silicon Valley infused businesses. It is the ultimate gig economy, convenience economy of an idea. The same way people drive to, you know, sign up to drive Uber, people can sign up to go do your grocery shopping and deliver your groceries. Now, this is one of those businesses that are real VC dollar, low interest rate phenomena, because you look at these businesses like Uber and the knock on them for so long is like the unit economics are horrendous. You got to like burn $4 billion a quarter for

years and years and years, raise tens of billions of dollars to get it off the ground. And the risk of that they'll ever get the value of the money they raised is so small. But because we're in an environment that that may never happen again in our lifetimes, it actually becomes really defensible because who can replace it? And so I don't know if Instacart deserves that kind of accolade that an Airbnb or an Uber does, but it is an interesting thing to think about. So they will go public under ticker CART, which reached a $39 billion valuation in its last round of financing it. Actually, no, not their last round, but that was their peak round of financing in 2021 at the peak of startup bubble.

Yeah, good luck with that. Yeah, yeah. This IPO is $26 to $28 target share price, which represents a $9.3 billion valuation, fully diluted. So a quarter, roughly, of the peak valuation. Any thoughts before I get into the actual business and stats about their S1 here? No, no. I mean, I was looking at your notes for the stats. I'll probably chime in for that part, but no, not too much to add. Okay. So the question as I look into their S1 is, is this a story of hard comps from the boom they had in 2020 when they won me as a customer and then I turned off? Or is the growth really, really down in terms of new customer ads? Or is it a sign of the times in terms of valuation compression?

Now, my thoughts are probably all three, but let's see for sure. So they have two segments, which are transaction volume, sorry, transaction revenue, which is a take rate on the total order, which is 79% of the revenue and advertising, which is 21% of the revenue. Just like I said, long enough time horizon, everyone sells ads. They sell ads on the platform for shoppers to pick up certain items. And so roughly 80-20 between transaction volume revenue and advertising revenue. They did two and a half, just a little over two and a half billion in revenue for 2022, which was up 39% year over year. And they did roughly 1.5 billion in the first six months of this year so far,

which is an increase of 31% year over year. The take rates on that gross transaction volume are 7.2% and 2.7% for the advertising split. So these have been trending up by a few basis points, looks like every quarter based on what I'm seeing here on the S1. Here's where I get a little bit of concern is that the gross transaction volume, which I believe is the most gross transaction volume and number of orders are the most important KPIs here. And they're growing a lot slower than revenue. For example, it only grew 4% in the first half of this year compared to the first half of 2022. And so look at the difference between 31% revenue growth year over year, but actually only 4% gross transaction volume growth. And so what are they doing? They're just hiking take rates.

They're just doing pricing power. And that's great that they can display pricing power, but is that the sustainable move here for this business? Or are they just trying to show revenue growth at all costs? I lean towards the latter, but I don't know for sure. The business. So they have this marketplace, which is the core business. They have this enterprise platform, which works with these large grocers to build them out e-commerce, logistics, and more. And then they have the advertising business and so in that transaction they have retailer fees customer fees and then they also have this membership program called instacart plus which offers unlimited delivery just like you know all these platforms have the subscription cost that will like take away yeah yeah yeah yeah exactly it'll take away the

delivery cost right it's like free shipping it's like amazon prime you know they kind of which by the way uber one i've had it on and off and i believe i've paid a total of five dollars for it for probably nine months because i how i just get it when they offer it for for free for month or two. And a couple of times I've gotten it for a month and cancel right before it ends. And they're like, would you like it for another month for $1? Like, okay, I'll do it. And then that's what I do for those kind of subscription. When it goes back to regular price, I just cancel.

Yeah. You and me both, man. We're cheap. No matter how fast our net worth grows, you can't shake the frugalness out of us. It just won't shake. All right. So my biggest concern here are the growth transaction volume is not growing. Well, it's growing less than inflation.

Yeah. So especially on grocery, which has seen 10%. It's barely growing. Yeah. Yeah. It's barely growing. All right. Here's something interesting. Orders, number of orders last year in the first half of the year was 132.3. I guess that's in millions, 132.3 million. This year, 132.9. It has grown for all intensive purposes by exactly 0%. It is the exact same number as it was last year, minus a couple thousand orders. Yeah, it's just the order size that increased slightly. That's it. Yeah. Just inflation, but even less than the actual inflation number. So they're showing this really nice gross profit growth, nice gross margins, nice EBITDA adjustment, adjustment, adjustment,

EBITDA. Who's counting anymore? They don't put their operating margins on. It's kind of, yeah, they just happen to leave that out. Yeah, leave that piece out there. But orders and gross transaction volume, like the two KPIs, I built a business about KPIs and how important they are for public companies. The most important ones are not growing at all. Like they're flat, like 100% flat. And that's very concerning that they're just hiking their take rate on the revs. And so I'll balance that with, I think they have a lot of optionality pulling levers to take, you know, to keep growing this massive opportunity of grocery, just being, you know,

the technology business inside of grocery, just being, you know, the technology business inside of grocery, especially with their enterprise options that they have available for those customers. I think that that's interesting. Grocery businesses are extremely complex. And I think that they've actually carved out something quite defensible here with working with a lot of these large grocers, they said that they have 85% of the market in terms of large grocery store chains who use Instacart. And the 2020 cohort of people who started using it is relatively sticky. Of course, there is some natural churn, but I have here from the S1 that is respectably sticky. I mean, that's that orange line here for the video

here for joint DCI. Of course, there's some churn, but relatively sticky. And you're seeing the new cohorts for 2022 and 2021 get added on. Pretty profitable business here in terms of, at least on the gross margin side, how much that actually falls through to free cash flow. I'd have to look through more with a fine tooth comb. But interesting business, obviously one that has had a huge drop in valuation, really hard comps, really hard to build off that huge surge they had between 2019 and 2020. My question here moving forward is, do people care enough, or is there enough of a value proposition for people to really pay attention and care about this and keep using this? I think the idea is awesome because you get your groceries delivered,

people are busy. Brilliant. I think it's awesome. because you get your groceries delivered. People are busy. Brilliant. I think it's awesome. But the numbers around gross transaction volume and orders flat year over year is extremely, you know, I'll use your term there. It's not red flag, but it's at least a yellow or an orange. Yeah. Yeah. I mean, I think for me, it's more of if anyone's interested, I think my recommendation would be take a step back.

Don't FOMO into this IPO. Give it a year. I would say like personally, I would give it at least a year. I mean, I'm not considering it as an investment, but at least a full year to see how things play out in the public market and you have more data available and be able to make a better decision based on that. And the other concern is just, especially from the membership side, to me, Uber just offers better value because you can use it for different things. You can use it for stuff. Yeah. The

groceries, you can use it for obviously transportation, order food from for delivery. So I think that's going to be a bit of a challenge for them is because I think Uber has done a obviously transportation, order food for delivery. So I think that's going to be a bit of a challenge for them is because I think Uber has done a really good job and much better than I thought they would four or five years ago. Honestly, they've surprised me. I didn't think Uber would be that good of a business at this point in time. They've really... I think it's time for us to dig into the business

because it's trading basically very similar to its initial IPO price. And the business is materially better. Like not even just a little bit better. It is so much better than when they IPO. Yeah, yeah. I mean, I haven't looked into it deep. seen is they've done a pretty good job of at least making it like a one-stop shop for all things kind of delivery transportation and i think they've developed quite a sticky ecosystem so um yeah i think that's a great largest competitor lift i mean it looks like they're heading

for bankruptcy at this point like i how much cash they have in their cash burn it looks pretty grim yeah i haven't looked at it either recently but i i from what i've heard is same thing yeah yeah and so who's left basically just this impossible to replicate network that they've built and and they have so much optionality like with uber's brand name they come in and yes there's insanely complex logistics with getting in the grocery business but as they go and they challenge more and more of the door dashes and the uh the instacarts for some of these adjacent opportunities huge markets if there's someone has optionality i think it's uber and so i i i think they're just a little bit more proven here yeah no exactly uh nothing more to add i

wanted to talk about uh lululemon's earnings but we can do that next week as we're running a bit long here and um i think i just uh and you gotta go car. I got to go get the bank draft to buy a car. Yes, yes. There you go. It's all one in the same. Thank you so much for listening to the pod. We really appreciate you guys. We are here twice a week, Mondays and Thursdays.

And we really appreciate if you go and subscribe to the Patreon at join TCI.com and or leave a five star review on the Apple podcast player, the Spotify player really helps us appreciate us and gives us that beautiful dopamine hit. You might make our you might make our day by leaving a nice five star review. So thank you so much. We'll see in a few days. 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.