The Canadian Investor - Nvidia Loses a Record Breaking $600 Billion in Market Cap

Episode Date: January 30, 2025

DeepSeek’s latest AI model sent shockwaves through the market, triggering the largest single-day market cap decline in history. Simon and Dan break down what makes DeepSeek-R1 different, why its cost efficiency could challenge Nvidia’s dominance, and how this news could reshape the AI landscape. They also discuss the implications for Big Tech’s massive AI investments, the impact on power-generating companies, and whether Nvidia’s drop was an overreaction.  Plus, earnings updates from American Express and Goodfood provide insight into consumer spending trends. Tickers of Stocks/ETFs discussed: NVDA, AXP, FOOD.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 Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Web player - The Canadian Real Estate Investor Asset Allocation ETFs | BMO Global Asset Management Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

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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. Welcome back to the Canadian Investor Podcast. I'm here with Dan Kent. We're back for our news and earnings episode. It's pretty jam-packed because unless you've been living under rock, you probably heard the news of DeepSeek, the Chinese large language model, LLM, that is

making a lot of waves and sending some pretty prominent stocks down. So we will be having a big segment on that. But before we get started on that, Dan, do you want to talk a little bit about the Bank of Canada? I think it's safe to say that tomorrow, so when people will be listening to this, don't know what they did, but I think it's safe to say that tomorrow, so when people will be listening to this, don't know what they did, but I think it's safe to say that they'll be cutting rates by a quarter basis point, right? Yeah, I think last week when we kind of were talking about it, I think they were pricing an 83%

chance. I don't know what the odds are now. I didn't look at it, but there's really been nothing that indicates it's going to you know nothing has changed I would say to put that towards less than 83% yeah I would actually argue maybe because of the potential tariffs coming in that there's an even greater chance it's definitely a tricky situation for Canada there was Trump is he's going crazy right now it's I'm really interested to see what he does, Teriff. When is he not is the question, but yeah, no. It's gonna be interesting, right?

I think he floated the deadline of February 1st now, or deadline, he's floated the date of February 1st. We'll have to see whether it happens or not, and we saw what they did with Columbia too. Yeah I don't know if you that's kind of saying about the craziness just like an immediate and then within what like 24 hours Columbia kind of changed her mind and kind of changed her tune because it's yeah, he's the US has a lot of power It's it's crazy. They do and then the end of the day It's our biggest trading partner.

Clearly, the US has some dependency on Canada as well, but not as much as we do on them. It'll be interesting whether it's really economically related or they're just leveraging their economic power over Canada to try and get some concession on other fronts. One that comes to mind that's been talked a lot about is defense spending, the 2% of GDP. So maybe Canada will agree or politicians will

agree to speed that up and try to get defense spending closer to 2% of GDP. I think they've committed to that, but it's a few years down the line. So we'll have to see. I really don't know, but I agree with you. The Bank of Canada will probably err on the side of caution and try to cut rates to try to mitigate any kind of tariffs that could be imposed. But again I think people just have to take a step back because we really don't know what can happen. I mean you did those tariffs and then they were lifted within a day or two, right? Not even our hours afterwards. So we'll have to see what he does. Yeah. And I mean, we were talking about this before the podcast, but the Globe and Mail

put out an article that, you know, they're looking at, and I would view them as a pretty good source that they're looking at, you know know pandemic level relief type relief for you know companies or workers that are hit hard because of the tariffs so obviously the government here thinks they're gonna come into place and they're gonna be pretty severe because they're already planning for it so it's gonna be pretty interesting to see what happens. Yeah yeah exactly now we'll move on to the next topic before we start start that, just a quick mention, I did move to a new place. So if there is a little more echo than usual on my end, I do apologize.

I'm still setting up my podcast studio and I don't have the soundproofing all set up. We've just been moving, moved for a few days with a toddler. So trying to get everything unboxed and everything ready to record. So I think I've done a decent job But it's possible there's a little bit more echo than usual It should get fixed the next couple in the next couple weeks now, like I mentioned going back to AI related stocks really I Mean, I don't know if they've all they didn't all crash but there is some big ones that had a significant dive yesterday

We're recording that on Tuesday, January 28th on the 27 you saw Nvidia the most prominent one was down 17% lost a Record I think a six hundred billion dollars worth of market cap, which I believe is an all-time record Maybe not inflation adjusted but on that on the pure number basis it is. Yeah, it was a pretty ugly day for, well, kind of US-based, but there was also a couple Canadian companies hit, like Capital Power was one of them. They're a utility company and they fell like 16%. Well, I don't know what they closed at, but at one point I looked and they fell like 16% and well I don't know what they closed at but at one point I looked and they were down 16% and they were I think they were supposed to be

a pretty big beneficiary of that big data center expansion we have here in Alberta. I don't know if that was the only you know main tailwind moving them over the last while but I mean obviously with this news there could be a lot less demand for data center and data center expansion overall so they took quite a hit and Hammond power would be another one so they've when they've just absolutely skyrocketed over the last year or two because they provide a lot of transformers and Kind of electricity components for a lot of these data centers, too So I think that was down 12 or 14%. So it wasn't just US.

I mean, obviously these are much smaller companies. Way smaller. Hammond might even still be a small cap company, but it wasn't just the US that took a hit. There were some Canadian companies as well. Yeah, exactly. And I'll go over what happened. I've listened to several podcasts

with people that are well in the know on this subject because I'm not an AI expert. I know you're not. Yeah. And I've read a lot of articles, some tech specific articles as well. So I'll try to make it as simple as possible at least to my understanding. And of course if you're someone that's deep into the space it's possible that you'll think this is over simple and we don't want to make a whole episode on it. We do want to touch on a few companies that report it as well. So I'll start off here with DeepSeek which is a Chinese large language model LLM. I'll be mentioning this quite a bit. Release its new AI model DeepSeek R1 on January 20th. So

you might be wondering why the market actually tanked yesterday a week later because there's a lot of skepticism that comes from anything China let's be real about it they were claiming that their models were as good or very close to it to Chad GPT to claw to some of the most prominent or Gemini some some of the most prominent models, but it required some testing. And as more and more people played with the model, which are open source versus closed source, which is the majority of the models,

I think with the exception of Meta's model, Lama, that is open source as well. Open source just means that the code is available publicly, while closed source means that the code is available publicly while close source means that it is private to the owner of the code like an open AI. So it really allowed a lot of people in the industry including in those companies to look at the model, see how it was, and then as more testing was done, as more expert looked at it, people came to realize that this was legit this was not there was this was not a false claim now the chatbot interface is free to use while the api access

is a fraction of the cost of the other llm models by fraction of the cost i mean less than five percent of the cost for the api versus a GPT for example, I think it's around like 3.5% of the cost, which is absolutely wild. But apparently that is the introductory price. It's likely going to be about 25% of the cost once regular pricing comes into effect. But still, you're slashing the cause by 75%. That's massive. And deep seek claims that it only spends 6 million to develop

the model, which has a lot of people skeptical. Granted, I think this is probably not... Yeah, there's no way. Yeah. I don't think it's probably correct. But even if you say, let's just say it costs 100 times that, 600 million, it's still much cheaper than the other LLMs out there because those have required investments in the billions of dollars and not one billion like billions of dollars. Now I'm not like an AI pro or anything but my understanding is that they've essentially focused on alternatives to using massive amounts of computing power because of the chip restrictions imposed on China by the US. We've talked about those quite a bit over the years or over the last year, year and a half, which

most of the restrictions have come into effect. And to keep it simple, they focus on new training methods, more efficient algorithms, and software optimization over brute force, which is what was being done in the US with big tech. Essentially they focus on being much more efficient. Like everything, when you focus more on one thing than another, it typically comes with tradeoffs and that tradeoffs was essentially being a little less precise. But it also offered a lot more of efficiency and it comes to the question, right, Dan, I will ask you if you can achieve say 85-90% of

the performance of another LLM at 25% of the cost, what LLM are you gonna use? Yeah, exactly. I mean it's just so weird because who knows the accuracy of the data? I mean, I was watching some videos this morning because again, I know nothing about this. Most of my knowledge came over the last 24 hours just watching YouTube videos and stuff. And I mean, from the videos that I've seen,

they said it was more accurate. They said like it was slightly more accurate than the GPT model. So, I mean, especially when costs are this low, like who knows? Like if you think about it, I think Meta has $60 billion planned out next year in capital expenditures,

which are like mostly AI focused. So you're talking like a monumental amount of money being spent and then this thing comes out that effectively it says it can do it for substantially less cost. But like you said even if they're you know under exaggerating this as you said a hundred X would still only be six hundred million dollars which is not even close to you know the the amount of money that all these big tech firms have poured out over the last Well, what would it be probably 15 18 months on infrastructure? And yeah, it's it's crazy

Yeah, I think the accuracy is really in the computing itself. So it's a little lead accurate I think they without because that's a bit beyond what I you know my expertise But they use I think 8-bit versus 32-bit for a lot of the computing, which will be slightly less accurate, but the overall product may be as accurate if not a bit more. It really goes to the efficiency and the power being used because they're using that 8-bit over 32-bit. That's what I've read. Again, I'm not an expert and I'm trying to simplify it as much as I can and my knowledge is limited on this. But they also claim that they've only used 2000 Nvidia H800 GPUs. Those are the GPUs

that are a bit less powerful than the the highest-end one. They're actually made and tailored for China because they're made to be able to sell them to China in face of US restrictions. I think it's important for people to remind themselves of that and the GPUs are a little less powerful. But from what I've read as well, the other LLMs I've used in excess of 10,000 GPUs. So even if you think they've used more

than 2,000 if it's 5, 6, 7, 8,000 it's still a lot less and they're using the less powerful GPUs as well compared to the other one. So it's fair to say that it's definitely I think I think it's probably gonna be a game-changer. What kind of impact will it have? I'm not quite sure, but it's so efficient that apparently you can run it well on personal computers and smartphones. And one thing that I think a lot of people like is you can see it reason as well. There's the LLM will actually show you. I haven't used it yet myself, so I'm looking forward to trying it out.

But those are the main things I learned. And for me, what it kind of reminds me is, you're old enough to remember that too. Remember like in the early 2000s where CPUs were like a single core? And then at some point they got the dual, the multi-core. So I think it was around 2005. And then I think it was Intel then AMD came out

with CPUs that had multi cores and nowadays I mean you're seeing like 10 15 cores if not more but the reasoning back then was that if you had one core you had to increase the frequency or essentially It was taking more and more power to generate more performance and then they came in and added those additional cores and they were able to reduce the amount of power being used yet achieve better performance. And that kind of reminds me that a little bit although

it is different I get it in this situation but it reminds me of that where technology got better and the power usage actually got down. Yeah I mean I don't really know too much about that. I would have been like 10 years old at that time. I probably wasn't keeping up on that. But yeah, I mean, there's some rumors that, you know, they're using more powerful GPUs, but they can't really talk about it

because of the trade restrictions. Like they would kind of be like, They're circumventing it, yeah, buying it for third party countries and stuff like that. So they're kind of like, you know, they can't really openly talk about having access to them because it would be, you know, because of those trade restrictions,

because effectively, you know, the US has restricted them, which I mean, in turn might've bit them in the butt a bit. The US restrict them because obviously I mean they've found a way to innovate using lower end technology if that truly is all they're using and have come out with a again you know whether or not it's a more efficient product is I mean it's kind of just rumors at this point in time. I mean, I tried to sign up for it. I was gonna play around with it, but it wouldn't take my email for some reason.

I think it was just maybe overloaded. I think they closed off new registration yesterday because of the hack. Yeah, they got hacked like not too long after it came out. So I couldn't get into it because I was gonna play around with it because I do use, I do use GBT a lot. And I mean, if this thing's better, I have no problem going over and using this especially

because it doesn't cost anything. GPT I think we pay like 30 US dollars a month or something for GPT whereas this doesn't cost anything. Yeah we have it too. Yeah so I mean you have a free version but it's never the best model so if you're using it the free version if you want the most up-to-date model, it is costing something. 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 RSP or TFSA account fees. They have an award winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep

is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a

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

That is airbnb.ca forward slash host. That is airbnb.ca forward slash host. 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, if 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. What's interesting in all of that is regardless of how many GPUs they use and how powerful they are, the reality is people validated code and can say that yes, it's much more efficient. So I think that's the reality is people because it is open source from my understanding is people are like, yeah, they actually found a way to make it much more efficient with that 8-bit versus 32-bit that I was saying. And I think that's where there could be some impact from Nvidia.

So like we mentioned, dropped 17%. Clearly investors were spooked with the news. It will likely impact demand for the most advanced GPUs with most of them being currently produced by Nvidia. So I think this is a likely and when you see people with hot takes, I mean you have to be careful a little bit just because it's pretty new. We don't have all the information. Who knows how things are going to play out.

The reality though and we've chatted about that for Nvidia is that it's trading very expensively and I'm just showing here a chart for joint TCI of viewers and subscribers. So you can see here the chart that I have, it's the price earnings ratio on a trailing basis. Whatever, you can use forward basis if you want, that's backward looking, that's fine, but now the forward basis is probably even trickier to use

because then who knows what the forward estimates will look like. You don't know what the impact is gonna be, yeah. Exactly, so I think the trailing is probably the better one to use at this point, but again, these are all to give people an idea. And it's trading at 47 at P and 30 forward P, I actually have the 30 forward P,

but the 30 forward P is based on previous estimates. So we'll have to see whether that changes or not. And if you look at it from place to sells, it's still trading at around 25, 26, which is extremely expensive. And people might say, okay, 47, 30 is not that bad. Yeah, if the company is growing super quickly and has massive growth rates, sure.

And granted, Nvidia could very well keep growing pretty well, company is growing super quickly and has massive growth rates, sure. And granted, Nvidia could very well keep growing pretty well, but even if the growth rate decelerates a little bit, that's where you could see some big swings in the stock price for Nvidia because these expectations were so high. And that's the issue I see with people that are saying this is an overreaction is they never mention valuation. Sure it might be an overreaction the overall business of Nvidia. I'll give them that maybe it is I'm not I'm not a clairvoyant I don't know what will happen in the future but

the reality is when you have a stock company that is priced to perfection, it does not take much for it to have a pretty massive drawdown. So that's the one thing I will push back for people saying that. Now, if we look at Nvidia and we just look at how concentrated its revenues are, it's pretty staggering. So for a Joint TCI viewers, you'll see the chart here. So you have the data center revenue, which is pretty much all related to AI, and then you have total revenue.

And over the years, it's been more, a bigger and bigger portion of Nvidia's revenue. So right now you're looking at the last 12 months, the data set of revenue is 87% of all revenue. Now compare that to 40% in 2022, when AI was just starting, you had companies that were already investing in it, even though Chad GPT came out in the fall of 2022,

you still had investment, but again, it was 40% of revenue back then. So there's not much room margin for error or margin of safety involved here, especially when you're so reliant on that one segment. And the problem that you start seeing here is Nvidia's margins. So if you're looking at their margins, their margins over the last 10 years have never been this high. So you're looking in terms of gross

margins at 76% and 63% for operating margins. And that's where it gets really tricky in my opinion for Nvidia is because who knows what will happen in the future. You can make a case that yes, demand for Nvidia will still be pretty strong. But again, if this new technology is allowing companies to invest in AI, but using less of these GPUs, for example, or alternate GPUs that are produced by AMD, for example, that may be 90% as good as the Nvidia one, but for a fraction of the price, you may start seeing some demand shifting over to competitors

because now they can say, well, you know what? Yeah, you have the best GPUs, but for my money, for the value, for the use that I'm going to do, it's much better that I go with the cheaper alternative from your competitor. And that's another risk that I think you'll see from an Nvidia. And if that starts happening, then their margins will start compressing. I think the one thing I will say here that I'm almost certain is that you will see that their margins have peaked. Those margins, the gross margin of 76 and 63, if you're an Nvidia shareholder, enjoy it while it lasts because I don't think you'll see these margins last for the next couple years. I think you'll see that coming down. That will impact profitability.

And again, even if you say, you know what, over the long term, this will just accelerate adoption into AI. I know Satya Nadella posted something, the Jevons paradox strikes again. This was his tweet, as AI gets more efficient and accessible, we will see its use skyrocket, turning into a commodity we just can't get enough of. Which could be a tailwind for Nvidia, but at the same time, when you think about all the implications, you can make a case that yes, demand will stay relatively strong for Nvidia, but there's going to be margin compression happening.

The demand will not be as strong as a lot of people projected. And it's going to result in probably some lower returns than people anticipated over the next few years and longer term as well. Yeah, I mean that was the main theory that I seen where it would kind of be bullish for Nvidia. They pretty much stayed just like you said that, you know, as costs get lower to develop, the technology gets adopted more, and maybe where it was unprofitable now turns into profitable as the technology gets cheaper.

So it gets wide scale use by more companies, things like that, more applications. But I mean, like you said, that data center revenue, it's compounded at like a 78% pace over the last, since 2013. So I mean, if you see a slowdown in that, ultimately when you add, so before the crash, I think Nvidia was trading at like 65 times trailing free cash flows. And I mean, as soon as you get any sort of uncertainty in the future or even a potential, no matter how small you think the chance of a potential disruption would be,

I mean any company that price is going to tank, and I mean we saw it tank 20 plus percent just off the worries, because like you said, it was priced to perfection, there's no doubt, 65 times free cash flow is a very expensive valuation. When we look at a company like Meta, it's trading trading at 30 X or I think it was like 32 X so like half the price of a company like like Nvidia and and and it's still expensive yeah and that's yeah like 32 X free cash flow is fairly expensive so I mean it's not

surprising to see like any disruption to you know the overall outlook on the business I mean it's gonna hit the stock price hard no matter how unjustified you It's not surprising to see like any disruption to, you know, the overall outlook on the business. I mean, it's going to hit the stock price hard, no matter how unjustified you think it is. I mean, there's going to be a lot of panic there for sure. Yeah, because people were pricing it or were willing to pay a really high multiple for NVIDIA because they were projecting in the future thinking, okay AI is super power hungry, we need the best companies, we'll need to buy the best GPUs, Nvidia is the best that there is right now, it'll probably be the best for the years to come as well. So they'll be able to keep their margins, they'll keep generating cash, gobs of cash over and over. So it justifies

evaluation. A lot of the arguments that I just said now you can start poking a lot of holes in these arguments which is the reason why the stock took such a big hit and I wouldn't be surprised if it continues to face a lot of downward pressure over the next few weeks months years I wouldn't be surprised I think Nvidia is still gonna be a really good company but again if the valuation is not right you can buy a really good company and you can be looking at subpar returns or even negative returns because you paid too much for the company. Yeah I mean if we think about you know how much you know this industry is in its infancy I mean, if we think about how much this industry is in its infancy, I mean, you never know

what other innovations that will come forward that just kind of change it forever. I mean, this is kind of a... Well, I would guess it's a fairly relevant example. I mean, you look back at BlackBerry during the smartphone days, I mean, they were dominant, dominant player in the smartphone industry and I mean they just failed to adapt and eventually just got crushed by Apple and Android devices. I mean they had a dominant market share.

What would that be? That would have been like probably just financial crisis, post financial crisis and then they kind of fell off. I mean they, but I mean I think this situation is a little fell off. I mean, they, but I mean, I think this situation is a little bit different, but I just, I think that's kind of a comparable situation to a player who back then, probably,

a lot of people thought the moat was untouchable until it wasn't, and I mean, in a situation like this, a lot of people thought that this company was just gonna continue to rip moving forward, which I mean, prior to yesterday, when this just came out of nowhere, you could argue that it could, but now you have something like this comes in,

it's more efficient, it's like half the cost. Maybe companies don't need to spend, well, Meta, $60 billion in capital expenditures every year to develop these programs, which ultimately like who were they Spending that Capex on its companies. Yeah, it'll be interesting Listening to those conference calls coming this week right from big tech So I think all of big tech is reporting this week and especially Google Tesla Microsoft meta It'll be really interesting to hear

Tesla, Microsoft Meta, it'll be really interesting to hear what the CEOs have to say in terms of deep sea because you can guarantee every single one of them will be asked about it. Satya Nadella was on Endavos, I believe, and saying this was the real deal too. So people are really taking notice and you may have some shareholders asking like, okay, so you spend all this money for no reason, or you won't see the return on investment that you thought you were going to do, because keep in mind, these companies, they weren't spending all that money out of the goodness of their hearts.

They were spending all that money because they wanted to build such a big mouth around it that they would remain dominant, integrate that with their various services. And now they've spent billions and billions of dollars that they might not see a lot of return on investment on. So it'll be interesting if shareholders start asking some question and I don't know, it'll be I'll definitely listen to most

of them just to see what what they have to say. I don't have too much more to say anything else you want to add before we move on to earnings here. Nope that's it. 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 money sense. 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 RSP or TFSA account fees.

They have an award winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly.

Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show we talk about companies with strong two-sided networks make for the best products. I'm gonna spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized,

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

That is airbnb.ca forward slash host. So 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. Well, 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. Okay, so we'll move on to earnings.

The first one, I guess I'll let you go ahead with Goodfood because I feel like I've talked most of the first segment, so I need a little break here. Yeah, so Goodfood, it's a company I typically follow. We kind of go over it a lot on here because it reports like kind of off the path of many Canadian companies, so it always gets brought up because it's an early reporter. But I also think it's kind of a pretty good insight into, you know, discretionary spending for, for Canadians. I would definitely call this a luxury type item.

And I mean, their results certainly paint a picture, how soft the Canadian consumer is. And I say this now because we're comparing results to December of 2023, which really would have no pandemic related tailwinds left. Like we're now just comparing year over year results in relatively the same environment. And the thing is it's still struggling so badly. I mean, the company reported revenue of 34.6 million.

That's down 14% from the first quarter of 2024. So this was their first quarter fiscal 2025 year. So it's down 14% from the first quarter of 2024. Gross margins came in at 39.6% which is a 0.2% improvement. With food inflation coming down, it looks like the company is starting to report margins came in at 39.6%, which is a 0.2% improvement. With food inflation coming down, it looks like the company is starting to report some stability in gross margins at least because it took a pretty big hit in this regard

when, well, what was food inflation? It was seven or 8%, I think, for a while there. So I could imagine that it took a big hit on that front. I mean, operating margins are razor thin. They're only 0.7%. The company is having a very hard time pushing out any sort of profitability in this environment. Back in November they made an acquisition of Genuine Tea in order to try and expand the business. But I mean their leverage ratio is now 2.64x so this this would be debt to, I would imagine, adjusted EBITDA. It used to be, so one year ago, it would have been 2.34x. So I mean, I would argue that an

acquisition for a company struggling to even achieve profitability isn't the best. However, I can't really say. I don't know much about Genuine Tea. Maybe it does well for them, but I just don't think, you know, spending in this type of environment, especially when they're struggling all that bad is all that good, but they're, they've tried to shift their business so many times. Like I think during COVID when they, when they kind of knew the meal boxes would slow down, they tried to get on like meal delivery, like grocery delivery. They were building warehouses in Ontario and everything to trial that. It didn't work out that well. Obviously they're trying now to further diversify into a tea company maybe

for delivery, maybe to be included in the boxes. I'm not exactly sure. Pre-pandemic the company had interest expenses of around 1 million annually, so it now has annual interest expenses of $5.6 million and that's despite revenue being lower than it was back in 2019. So revenue is down, interest expenses have almost 6x and it's just, it's a pretty rough time for good food. I mean the company's guidance doesn't really bring any sort of confidence either so they suggest that the meal kit penetration for Canadian households will be about four point two percent in twenty twenty nine.

But the thing is, it's only three point five percent right now. So, I mean, that's a that's a compound like that's a compound growth rate of around four percent a year. So, I mean, that's not really like encouraging guidance based on what. Yeah. Yeah, I don't know. Like it's just like, oh, that's really not that high. I feel like they just took a number out of thin air and they're like, oh, you know, this is achievable.

If you're gonna take a number out of thin air, I guess you should probably try to make it more impressive though. Like as soon as I seen that, I'm like 3.5 to 4.2. That's really not that much, but the investor presentation is pretty funny too. So they have like their net income and free cash flow charts. And like on the top of them, it says they highlight the consistent growth and profitability

and meaningful free cash flow generation. But the charts are all over the map. Like net income up, down, up, down a little more, down, up. It's all, same with free cash flow. So I mean, there's nothing consistent about those charts, yet they kind of label them as, you know, consistent growth. The only thing that I would say has been consistent is just the decline in active customers.

This is a company, I actually owned this during the pandemic. I bought it relatively early and booked some profits when it soared up, so I didn't end up doing all that bad. But I sold off the final chunk of my position. I think it was in between $4.50 or $5.00, so it's down, oh what is it now? I think it's like $0.50.

$0.48. Yeah, so it's down like 90% since then. Yeah. And they did have a ton of momentum during COVID originally, and I felt growth would certainly slow, but not this badly. I think I thought maybe the food box type situation

during the pandemic, it might get more people to the business that would stick around, but I think when food inflation started ramping up, profitability just completely got crushed, and then I think interest rates as well really hurt the company because I mean, people just don't have the money to be

spending on food boxes right now, and I know there was a big issue with the company as well where people were just abusing discounts. Oh yeah. Yeah, it's, I mean, I personally myself did that. Yeah, I mean, it was, you know, there's so much churn at that business, I would imagine, that they just always have to have those offers.

And I mean, they're, I can't imagine they make any money on those discounts. And ultimately people are just gonna exploit them and use them lots. And I think they were just really lax on like, who would qualify for one. So I mean, you could just indefinitely use those discounts and effectively get,

I mean, the cost that I was paying during the pandemic, it would be borderline free food. Cause it was like 45 bucks and you'd get four meals from it. But yeah, I mean. Yeah, I think now they are making it so you can only get the offer once in a while. So I think you have to wait a few months until you get the offer again. But we've we've used it on and off. We basically will use it when we're eligible

for the offer. Usually it's like 50% off for the first week, 30 for the second week, 20 and then 10%. Usually we'll use it for the first three weeks and then we just stop it and we're like, okay, we got some good value out of it and we'll restart it later. It's crazy good value on the initial discounts. You can't get food that cheap. The convenience to a certain point is worth it,

especially when you get four meals delivered to your door for like $45. But then once it gets up to regular price, and it's like 130, 140 bucks, people just cancel. So, I mean, who knows, maybe interest rates come down, you know, things improve a bit, but I mean, I think there's a pretty big cost of living crisis here in Canada, I just can't see food boxes being you know on the top of the priority for many people and it's kind of showing in the in the results. Yeah and it's convenient to some extent.

I mean you still have to do the meal and prepare it right. There's stuff that's cut but not everything is cut. So yes it does save you time. It also saves you the time of not having to think of what to make for the meal. But again, you still have to choose what you want. If not, you'll get random stuff that you might not like. So it is convenient, but it's also not like, it's not a meal that's already prepared

that you just put in the oven. Yeah, you still have to do some stuff. I mean, I don't see an easy path to, you know, getting things back on track for this company. I just can't see it returning to popularity. Yeah, no, that's a good way to end it. Now we'll move on. I think we'll just talk about this last company.

I think it'll be an episode. We're getting on the 40 minute mark, so we weren't sure exactly how much time we'd spent on the whole deep sea things. So it was good to have a couple extra companies to talk about. The next one on the slate here is American Express, Q4 2020 earnings.

Now revenues, net of interest expense were up 8% to 17.2 billion. Net income was up 12% $17.2 billion. Net Income was up 12% to $2.2 billion. Earnings Per Share was up 16% to $3.04. And these are all the results for the quarter. Provisions for Credit Losses were $1.29 billion, which was 5% less than last year, which is a good trend to see for American Express. And people may be wondering, we've talked about it again, but I know we get new listeners

at this time of the year. American Express is different and similar in some ways than Visa and MasterCard. So it's a hybrid between a Visa MasterCard and a bank. That's the best way to see it. So it has its own network. So the American Express network. So that's why you can go to like a Scotiabank for example, or BMO or whichever bank you want to choose in Canada. I think most of them will offer some Amex cards that are issued by them. So the cards can be issued by banks,

third parties, that will use the American Express network. But where Amex is different from Visa or MasterCard is they also issue their own card. So you can get an American Express, not with another bank. It's American Express and the bank is actually American Express. And they actually, that's where they differentiate it because they are a bank, so they're a charter bank.

So that's the biggest difference between the Visa MasterCard where Visa MasterCard they just have the network and they get take a percentage of the fees where American Express does issue their own cards and they get revenues in other ways that interest expense interest revenues and things like that. Expenses were up 9% which is a bit of a concern since it was a bit more than revenue so definitely something that if it's a company that you're interested in you'll want to keep an eye on. The CET1 ratio remained high so that's a ratio that's used for bank at 13.2% but it was down a little bit compared to last year. Compared to last year, they had 4% more total active cards, with 50% of those being issued

directly by Amex. So that's what I was talking earlier. So they were directly issued by Amex, and then 43% are issued by third-party banks. The total Amex network had 7% more volume in the quarter versus the previous year. Ride-off rates were pretty much unchanged compared to last year. So that is something to, that's definitely a good thing because we've seen write-off rates for banks and credit card companies, subprime letters, we've seen those rates definitely go up in the last year. So the fact that they're pretty stable depending, and there's a bunch of different write-off rates that they use, but they're pretty much identical compared to last year. And they had a few interesting things on the call that I wanted to just mention before

we wrap up over here and I'm just pulling up a chart at the same time. They mentioned that small business sentiment improved during the quarter which resulted in higher spend from these small and medium sized businesses. They're focusing on adding merchants around the globe and they added more than 1 million new merchants during the year. Their focus is international growth, millennials and SMEs. They have 25% of all US fee based premium cards, which is pretty impressive because clearly Visa and MasterCard are much larger, but the fact that they have 25% and you can see here,

I'm showing the average card, average fee card, which is a pretty good portion of the revenue that they get. And it's just steadily, it's a line, it's up into the right. Yeah, this is a it's impressive to me because like so many cards are coming out now that are offering a ton of features but but no fees I mean American Express must have some pretty impressive like rewards to be able to generate you know a lot of fees from their cards. I've looked at them I've had one in the past I haven't had it for several years now, but they do have some of the best rewards.

At least I've looked at them. I've seen the past. The problem with Amex, and I think they're trying to address that based on the call, is you need a backup credit card if you like to pay by credit card. Yeah, because they're not. So you need a backup MasterCard or a Visa. It's not as big of a network Like I know like not a lot of places even take amex. It's a little more than discover, but yeah

Yeah, not a lot of places take him and I found when I had them and I think there was more places that take him Now but still back then I would always get into this awkward like I Situation where I'd be at the restaurant ready to pay, I'm like, oh, do you take Amex? Question mark, you know, in my face. And that was the annoying thing is you couldn't always pay with it. But they are also putting a focus on refreshing their offerings,

and they refresh over 30 products last year and are looking to do the same thing about the same amount of product refresh this year. They are celebrating their 175th year. I don't know if you knew that. They set it on call. So they got founded in 1850, which I was, I had no idea, but they pivoted to the credit card business in the 1960s and back when they were founded they were actually a freight forwarding company. Oh, that's weird.

Yeah, very weird. But the CEO actually talked about that on the call. American Express, yeah. Yeah, exactly. That's where it came from. So I was just, you know, you listen to the call on 50% increased speed, 1.5X, and I had to rewind a few times just to listen to that part, which I thought was interesting. And for 2025 in terms of guidance, they expect revenue grow between 8 and 10% and earnings

per share increase of 12 to 16%. So definitely, definitely really good results I don't think there's much to say that's bad for American Express I think every time I talk about them I wonder why I I don't own them I'm not a big fan of banks but the fact that it gives me a little bit of a hybrid between a card network and a bank I do like that it's always trading at a pretty high valuation. Not crazy, but still on the higher end. So I think that's what's been preventing me

from pulling the trigger. But every time we do them on the podcast, I do wonder, why don't I own this stuff? Yeah, they're cheaper than the payment networks. Like Visa and Mastercard typically trade higher, but I think that's kinda, cause they have similar growth rates, but obviously not as much risk because,

and probably higher margins as well, just because they're not, you know, they don't have that financing side, whereas American Express does. But yeah, like I've always just found the limitation in terms of usage. Maybe it's gotten better over the last while. I'm sure it has.

I mean, I know they had the Costco card for a bit, but then I think they lost that. Or maybe they still do in the US, I don't know. But MasterCard has it now, like CIBC has it. But I remember thinking like American Express, Costco CIBC has it, but I remember thinking American Express, Costco would have been the first thing I thought of for a while just because they had that card, but that's one of the main reasons

I've never really thought about owning them, just because of the, I wouldn't say limited network, they probably still have a ton of places you can use the card, but it's definitely more limited than something like Visa and MasterCard plus it just takes on that extra financing side of things. Yeah and so I just Google in the US it's Visa by City Group. Oh yeah yeah so they lost it both here. They lost that one too. Yeah. Yeah which I think they've it's fair to say they've recovered from but I think it was a big blow to them

Yeah when Costco ended up going with I guess Visa and MasterCard here in Canada But it's it's a really good company It's definitely trading more expensive than banks, but like you said less than the Visa and MasterCard and the one thing it probably has Visa and MasterCard and the one thing it probably has going for it is that it will likely not face as much scrutiny from a competitive standpoint as a Visa and MasterCard. I know it's a new administration now with Trump in the US, so we'll have to see, but I wouldn't be surprised if they go at Visa and MasterCard because a lot of small businesses have had gripes with the fees that they pay on those credit cards and I think it could be I think it would probably serve the Trump administration pretty well to

continue with going after I know they're going after Visa but maybe a MasterCard as well so we'll have to see. But Amex, because it's smaller and it's also a competitor to those two big players, it may not be in the same kind of scrutiny as the other two are. No, I would say probably not. I mean, they don't have as dominant of a market share and probably can't do the things that Visa has done over the last while. That's kind of got it in trouble.

But I mean, you look at the margins there, you have the sheet up, you're looking gross margins, 60% for MX Well Visa is 81%. So I mean, there's a big difference there. There's no operating margins listed there, but I mean, Visa has 67% operating margins. So I mean, it's just, there's just less, fewer things going on, I guess with something like Visa,

which is probably why it tends to trade at a premium. Yeah. Yeah. No, I think that's fair. But given the regulatory risk associated with Visa and MasterCard, I think I would be more comfortable. I think owning with going with American Express. I mean, I own Visa and MasterCard in small portion. So maybe it is as simple for me as doing a basket approach and adding MasterCard to the mix and keeping my positions in Visa and MasterCard kind of unchanged. Something I you know I wasn't thinking about but now that we looked at them and I'm pretty impressed with the results and knowing that it's a hybrid too between a bank and impressed with the results and knowing that it's a hybrid too between a bank and a Visa MasterCard, a lot to like.

So I think that's about it for today, Dan. Anything else you wanted to chat before we sign off? Nope, that's it. I'm sure we'll have more to talk about next week when this DeepSeek, I'm sure there's going to be new stuff every single day on this. Well, aren't you away next week? Oh yeah. Is that next week?

Yeah. Yeah, maybe you'll bring your podcast equipment. Yeah maybe you'll bring your podcast equipment on vacation and and going to that golf tournament. Yeah. Have with a few beers in you. We'll unleash Dan Kent. Yeah. Yeah I doubt it but I'll be busy golfing and enjoying hopefully warm weather, although it's plus ten here today. So I mean, it's probably. Oh, wow. Okay.

Yeah. Very nice. Like minus 20 here. So yeah, I'm definitely jealous there, but I think we'll wrap it up here before we start rambling too much. Thanks again, everyone, for listening. Was a fun episode to do. Definitely came out a bit of left field.

I wouldn't have expected that we would do such a big segment on AI if you asked me last week but again, this is news and earnings. A lot of development happened. It was really interesting doing the research. I learned a lot. Looking forward to try DeepSeek as well. Once the registration is back open, maybe it is now, I'm not quite sure but definitely The Canadian Investor podcast should not be construed as investment or financial advice. The hosts and guests featured may own securities or assets discussed on this podcast. Always do

your own due diligence or consult with a financial professional before making any financial or investment decisions.