The Canadian Investor - Panic Alarm on Big Tech?

Episode Date: October 31, 2022

This earnings season is turning out to be tough for many publicly listed companies. During this special episode, we go over earnings from Visa, Microsoft and Google. We then talk about Chinese stocks and if they have become uninvestable following the 20th National Congress of the CCP.  Tickers of stocks discussed: V, MSFT, GOOG, KWEB, BABA, TCEHY, JD, PDD 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. Today is October 26, 2022. Welcome into the show. As always, it is myself, Brayden Dennis, joined by the GOAT, Simon Bélanger. And the reason I'm saying that, Simon, is I want to highlight a listener

review that said, a couple of goats. Which I don't... I take this very seriously, and I think that that is a very kind thing to say. For those who are not familiar with the term, it means greatest of all time. It says here,

great listeners, Braden and Simon, are very knowledgeable and Those are familiar with the term means greatest of all time. It says here, great listen. Braden and Simone are very knowledgeable and great at breaking down things in a manner that even beginner like me can grasp. They've helped me build my confidence in the world of investing and made it a lot more tangible. And I've since became a paid member of stratosphere.io and I use it, put it to work. Thanks so much. BNAC456, we appreciate you. And this is a good reminder. If you have not given the pod a rating on Apple or Spotify, we have 550 ratings on Apple and 1.4K on Spotify. Let's try to hit 1000 on Apple. Thank you very

much to the kind people rating the show. Simon, how you doing, buddy? It's good to see you. It is earnings season. We are full swing. Yeah, yeah. No, it's great today. I mean, I don't know about Toronto, but it's like 27 degrees outside in Ottawa. We had that yesterday and then today it's raining. Oh man, it's crazy. Yeah, I was telling you I had a physio appointment and I walked to it and I had to put shorts on and t-shirt was just like I was sweating this morning going to the doctor with Sophia our baby girl you love it October late October too not even like early October yeah I played golf on Sunday and I thought the same thing to myself I went hmm shorts was the play sometimes Sometimes you get snow, yeah. We do get snow sometimes at this time of year, at least in Ottawa. Yeah, knock on wood.

Yeah, no, I agree. Like Sunday, I was like, man, shorts should have been the play. I just want to highlight one more thing here. A review here said from DTCG from the U.S. And they said, this podcast, not just for Canadians. They talk about all markets. I'm from the U.S. and I love this show. Hey, we appreciate you. So let's get right into some Canadian relevant news. We just had a Bank of Canada hike this morning. I know you probably haven't had a ton of time to

look at it, just coming off your physio appointment. But if there's one person I'd like to lead the segment, it would be you. Yeah, I actually had a decent amount of time to look at it just because I had to wait a bit for the physio appointment. So I found an article and I kind of read what was going on and what Tiff McLean said. So I'm going most on memory here, but I think it's pretty accurate. So they hiked the rate obviously by 50 basis points to 3.75%. That was below, I think, what was the consensus I was reading mostly was 75 basis points. But what was the most interesting here was some of the things he did say. The economy is showing signs of slowing down and

they expect the economy to have no growth in the next two quarter. I think they mentioned that it could be positive, but it could be slightly negative, but no major slowdown. So I think reading between the lines here is obviously we may not meet the technical definition of a recession, but we might still see it. And even if we don't, I think they're safe to say there's going to be pain for some people, unfortunately. And the rate hike cycle is closer to the end, but we're not there yet. That was a quote that I got from that article. So I took some, I script notes there, whatever that means. I mean, that's some classic kind of central bank term where it's like, yeah, okay, no shit.

You're closer to the end because obviously you are. There's been a couple of rate hikes. I'm going to assume that we're closer than where we started. Exactly. We're closer than the last one. I always find it funny when they say that. And they are seeing demand still outpacing supply for goods and services. And that's, I know Dan from our real estate podcast, the Canadian real estate investor, will harp on that a lot is basically they want to destroy demand, not like necessarily destroy, but slow it to an extent where there's no more higher prices because of that demand being much greater than the supply. So they're still seeing that. However, they are seeing sign of demand slowing

for more durable or expensive goods on large purchases because those are more impacted by interest rates. And obviously, they're seeing some pretty major impacts in the housing market, which we're all aware of by at this point. Yeah, well put. Thank you for the update. I do like you enjoy some of the terminology they use on these updates. And so we got 50 bips, 0.5% for removing some of the jargon. And hey, look, the variable rates, it's painful for a lot of people. And I'm with you. I feel you. I think a lot of people are in that situation. Just hold tight. I think that there's brighter days ahead. But this is the name of the game.

Yeah. And actually, the last thing I read while I was reading on it is that they're now changing their forecast in terms of inflation. So they lowered it a little bit for 2023 and 2024. I think now I'm going on memory here purely. So I think they lowered it to about 4.1% for 2023 as a whole. It was higher than that, obviously, before that. So we'll see whatever happens. The Bank of Canada has not been the best at predicting and most central banks have not been either. So take that with a grain of salt. But

I guess it's, you know, somewhat good news. It sounds like things are slowly going in the direction they want it to go. I just want them to stop letting their intern tweet on the official verified bank of Canada Twitter account. I think they stop. I actually did a check yesterday. Remember that tweet you were referencing about them like peoples are saying we're printing money and blah blah blah and they got really roasted for that they as they should have yes yeah they have not done a tweet like that ever since now it's just like official announcement promoting some of their student programs and stuff like that but nothing since so. So I think, yeah.

They had to pivot, no pun intended. Yeah. Yeah. That tweet, it was like, let me treat you like a five-year-old and explain how inflation works and then tell you why it's your fault about halfway through and then triple down on why that is true in the later part of the tweet. So yeah, I think that it would be smart for them to not do that. I have some news I'd like to share with the podcast listeners. I just completed my first acquisition. So this is very exciting for me. We just inked the deal. I'm pretty pumped. There's going to be more details coming soon and we're going to be merging a lot of stuff. And so it's going to be great. And ultimately, we're going to give you better tools for investment research on the web

as part of this. So next announcement and then post launch, I think next month, you're going to really like it as well as a bunch of new free tools that we're going to be giving people. But that is the news that I've been kind of hiding and keeping close to the chest is that I completed an acquisition and I'm pumped. It was not the easiest process, but I'm glad I went through it. And now I know what it's like from the side of buying a company. So yeah, very cool. Zimon, let's get into big tech here. Let's just do it. very cool. Zimon, let's get into big tech here. Let's just do it. Yeah. So first, I mean, I think we probably will talk at the end what we think about what we've seen so far. But for Alphabet, or obviously those not familiar with the parent company, it's Google, essentially. And their revenues were up 6%. YouTube ads, which made the headlines,

those were down 2%. Google ads were up 2.5%. Probably the best spot of all in this earnings release was Google Cloud Revenues, which were up 38%. Which was a re-acceleration as well from, I think, 36% last quarter. Yeah, yeah, exactly. And operating margins dropped 700 basis points from 32% to 25%. This is not overly surprising in my view, because we had seen some, not rumblings, but actually accounts where I think I had talked about it. Google Alphabet had a all staff meeting and Sundar Pichai was basically saying that they had to rein in expenses. I think that was about a month and a month and a half ago. So I think most people that were paying attention on what was kind of happening in the past couple months, I don't think this should really be a surprise. That's just my opinion on it.

Because I saw this earnings release and I looked into the actual numbers and I was just kind of like, yeah, I kind of expected something like that, I'll be honest. So the big line items in terms of cost, so R&D was up 33%, which I think that's perfectly fine for a company. For like Google, you want them to keep investing in research and development. Sales and marketing was up 25% and SG&A was up 10%. Now, net income, so the bottom line was down 27%. Free cash flow was actually better. So they generated 14% less than last year during the same quarter.

But they also bought back $15 billion in stock during the quarter compared to $12 billion last year. So I think all in all, I mean, obviously, it's not the best quarter for Google. But I think this quote sends it pretty well from Sundar Pichai is, we're sharpening our focus on a clear set of products and business priorities. Product announcement we've made in just the past month alone have shown that very clearly, including significant improvements to both search and cloud powered by AI and new ways to monetize YouTube's shorts. We are focused on both investing responsibly for the long term and being responsive to the

economic environment. And as we've seen recently, Google will be slowing down their hiring and they want to also slow the growth of expenses, especially since ad spending has slowed down for most businesses. And we were talking about this, you and I, before we got on is it's not overly surprising. We're clearly entering a period of lower growth when it comes to the global economy and businesses cutting ad spend is something pretty logical for a business. If you want to reduce your expenses, I don't think most businesses will cut them if you want to reduce your expenses. I don't think most businesses will cut them entirely, but you reduce that budget. But at the end of the day, when things start picking up again, I think Alphabet is positioned as well as any company

to benefit from that. I totally agree with that sentiment. I mean, look, the reality here is that ads is a cyclical business and it should be treated as such. But the core search business, like you said, is better positioned than most digital ad platforms I can think of long-term in terms of competition. I mean, look at all the other players in digital ads who are selling attention, that are monetizing eyeballs. And Google is the only name in town in terms of monetizing the most valuable gatekeeping of information on the internet via search. And there are not no risks to search. I don't think that anyone should think that.

I think that there are real risks to every business and searches can't escape that. I mean, that's just the laws of competition and capitalism. However, it is currently today positioned as the name in town for monetizing search. And so I do want them to really actually commit to reducing costs. I know they said they're going to slow down hiring in half, commit to reducing costs. I know they said they're going to slow down hiring in half, but they added 13,000 employees in the quarter. So what? Half was going to add 6,500 employees next quarter? They've been vocalizing about reducing costs and stopping the incineration of capital with other bets and being more prudent about this. And I'm just not seeing that. It's been not just one quarter of this. It's been many, many quarters now. And so this is something that I'm pretty

persistent on wanting to see. What do these 13,000 people that they just added do? For real, what do they actually do? And I know 2, 2000 of them are coming from an acquisition, but some of these companies are just getting so bloated. And I don't know if you've ever seen people flexing on TikTok about what they do in a day who work for these big tech companies. And they're like, today I showed up and we did breakfast and a team meeting and team building exercises. And then I went for lunch and then we did happy hour in the afternoon.

And of course, it's just picking out people making themselves look cooler on social media than what they really do. But like how many of these people are just hiding in these gigantic companies now? And I worry that big tech is facing a similar issue that a lot of these lethargic large corporations face over time. And so I do really want them to address that. And then I'll round this out with cloud profitability. I said, I think a couple of quarters ago that I was thinking they were going to reach operating leverage in a couple quarters based on the top line that I've seen. And that's not true yet. So it's not to say that it won't happen. But yeah, I'm looking for that to really kind of kick in over the next year or two.

Yeah, no, I think those are valid points. I mean, they have started cutting projects. I think they announced that a couple of months ago that were just not profitable and not really going anywhere. So I think it sounds like Google leadership is serious about this. So we'll have to see. But at the end of the day, it's still generating so much cash flow right now. I own some shares. I'm looking at probably adding some more, knowing that it may be a rough year in terms of the returns for Google if you're looking at the share price. But I think longer term, they'll be just fine.

And like I said, I think just the ad business is just so strong here that I think it'll pick up once the economy picks up back again. Yeah, for sure. I'm saying all these things as like the short term and things to consider. And I want them to start doing what they say they're going to do. But long term, I mean, come on. Yeah. I mean, it's one of your largest positions, right? Yeah. It is one of my largest positions. I'm a bigger fan of this business than most. 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. All right, let's talk about Microsoft, another tiny business that just reported earnings. Now, they have that interesting schedule. So this is the first quarter of fiscal 23. And revenue was a cool $50 billion for the quarter. And we run this podcast and we tend to cover some of these mega cap names four times a

year, every quarter. And it really never gets easier to comprehend that type of top line sales figure, like 50 billion for a single quarter. So that was up 11% and 16% in constant currency. I saw across the board, just like that kept coming up, how big the discrepancy of FX is. Usually it's just a percentage or two, right? And that's not been the case. Same thing for Google, by the way. They saw some big currency headwinds. So I didn't mention it, but I mean, any company that's multi-internationally diversified

in terms of their revenue stream, you can just take it as a fair compli, as you would say in French. They're going to have some currency headwinds right now. Yeah, fair enough. Yeah. So just looking across the main line items here is that the Microsoft cloud business and Azure continues to be a beast. Like realistically, there was a deceleration in growth, but I think that that's normal. I think that's a theme of today's show is like, yeah, there's been some deceleration in growth, but are you surprised? And does it affect the long-term story? And of course, they were never going to grow at those rates forever, right?

These are trillion dollar in market cap companies to begin with. You can't be expecting 40% top line every single time for the cloud biz, even though it's pretty damn close. So yeah, top line was 11% in constant currency. The $25.7 billion in sales for the quarter for the cloud business now represents a over $100 billion run rate. What do you make of that? $100 billion run rate, they hit it for the Microsoft Cloud business. That on its own is a huge mega cap on its own. That's right there, right? Yeah. No, it's pretty amazing. I mean, obviously, it's starting to be carved out as Microsoft and Amazon pretty much. Google's doing all right, but they're not even close compared to those two. Yeah, I'm going to talk about scale here in a second with the cloud run rates.

So there's certainly some deceleration and growth across a lot of the major segments, including total cloud and Azure, Office 365 seats, both on the consumer and the commercial side. There was actually a net negative growth in commercial bookings year over year. For the first time since we've been tracking the data on stratosphere.io, which is now more than 12 quarters of data from Microsoft. So that was surprising to see, but again, deceleration, right? The gaming segment, Xbox and content was basically flat. It grew less than 1% to actually a record high for the business, which is interesting. So things are stable there, which I think overall is a good result coming off heightened demand for gaming. And look, the reality here is that gaming is a long-term tailwind. Gaming is here to stay. So looking even quarter to quarter seems silly.

And you could say that a lot about all these segments and a lot of these businesses as well. Overall, I do think a pretty solid quarter from both of these companies. I mean, not amazing, not like Q2 2021, but if you normalize it all out, very solid. These businesses are doing as solid as you can expect because they're rock solid businesses. And they're down a lot based on deceleration and some weaker guidance given from Microsoft here on the call as well. So they beat expectations, but you give a down guide. And so investors, what do they make of that? Simone, so I'm going to just go through here. I've been trying to grind out some insights for

y'all on the pod, which of course we do that. And this is a look into cloud comps because we're just talking about Google. We're just talking about Microsoft and Amazon reports tomorrow. So a run rate, when I say run rates for cloud, it's just multiplying their current quarter by four. And the reason that you're able to do that as the run rate is because this is recurring revenue. There's not going to be huge fluctuations quarter to quarter. And in fact, this just goes up every quarter very consistently. So that's why people use run rates. It's not like a business where there's huge cyclicality quarter by quarter in seasons. It's very core.

And so run rates on Microsoft are 103 billion now. Amazon is 83.2 billion, which is an estimate from consensus. We'll see tomorrow where that sits. And Google's now at 27 billion. So about a quarter of Microsoft's run rate. A simple 10x sales multiple exercise. Now, it ain't perfect, but I think it works, and it's useful for our purposes here. If you put a 10x multiple on Microsoft's cloud biz, you have a clean $1 trillion in value, which represent 57% of today's market cap for Microsoft, $830 billion for Amazon Web Services, which represents 70%

of Amazon's current market cap, and $280 billion for GCP, which represents 23% of Google's market cap today. So when you look at those, they're certainly looking at a sum of parts valuation exercise for all of these businesses, which is not a new concept, but I have a gut feeling that for most of them, if not all three of them, you're just not really seeing that reflective

in the share price. And that's why I think that the bulls will say these big companies, even though at $1 trillion in market cap, look quite attractive on a valuation perspective. Is because I don't see $830 billion in market cap for AWS being reflective in Amazon's share price today. That's just my gut feeling and assessment right now. Yeah. I mean, 10X may be a little rich, but even if you drop it at seven or eight or even five, it's still pretty impressive. Just the value, right? 500 billion, even just at 5X multiple for Azure. So no, I mean, I think people kind of take it for granted maybe a little bit and they don't necessarily comprehend how large these businesses are already within those larger entity. The reason is just sustained growth with no reason to think that that's not a very long-term trend, right? And so that's why I'm willing to throw on a pretty frothy multiple.

But again, it's just for a simple exercise here. Yeah, exactly. And I mean, I would probably go on the more conservative side just because I think the market now is probably going to be not necessarily where we're at now and not necessarily where we were in 2021. But I think the market will probably place a bit of a premium on profitability going forward. So I think a bit less of a premium on just pure top line growth. So that's just my opinion. I know, like, obviously, we have slightly different opinions there. But regardless, obviously, obviously, we have slightly different opinions there. But regardless, obviously, whether you agree with us or not there, it's still substantially

large businesses if they were to be spun off on their own. That's right. Yeah. And that's the point of drawing some sort of multiple on them is to really give people context of just how gigantic these businesses within the mothership of these big tech companies are, how important it is for their future as well, and really puts into context just the gigantic scale of them. Yeah, absolutely. Simo, before you get into what's happening with the Chinese tech companies, we have Visa.

Do you want to do the Chinese tech now? I just rifled off a pretty long segment. No, go for it. You can do Visa and then we'll wrap it up with Chinese stocks just because the Chinese stock will be a bit longer. I know we have some people who own Chinese stocks that may be interested and then we can have that discussion. For Visa, I'll be probably a bit listening. I know they had a good quarter. I haven't had the chance to look at it

just now. Yeah, that's fair. I think good quarter, if not very, very good quarter, I would say just because, I mean, you look at the slowdowns that everyone else is seeing, some of these large cap companies, and investors are asking themselves questions. And I think all of those kind of pessimistic questions have been asked about Visa and MasterCard in the trailing 12 months before this. And now the numbers are coming out and it's saying, was all of that pessimism, where was it coming from? Because the numbers tell a completely different story. So I just look at them in terms of timing wise, as the last year, everyone has been so bullish on big tech. And now they're asking questions. The previous year was so bearish on Visa and

MasterCard with the crypto being a huge boom. And now they're delivering insanely good numbers. So it just feels like a sentiment shift compared to what we were just talking about in the positive direction. Is that somewhat fair to say? Yeah, yeah, I think that's fair to say. Yeah. And I think too, just the fact that they're delivering on good results, despite consensus, I would say out there that we're heading towards a global recession. I think that's also positive. But again, I think it may be a bit different in the next couple of quarters. But I mean, you'll go over it. I don't's also positive. But again, I think it may be a bit different in the next couple of quarters, but I mean, you'll go over it. I don't think they're seeing anything right now. Yeah, that's right. And we talked about that with Amex last week too, right?

Okay. So this is their full year 2022 results since it is their fourth quarter. I'm going to go over full year because anytime I have Q4 numbers, I just like to talk full year. We're long-term investors, quarter over quarter. It's important for tracking and understanding, but really we like looking at the long-term. Full year results, net income of $15 billion flat. That is in gap net earnings of $15 billion or $7 per share, and on the non-gap side, $16 and $7.50 per share. Net revenues for the full year of $29.3 billion. Look at the margins on that, where it's more than half. You have more than half of non-gap net income going from the top line. The total margins are just incredible. So the total sales was up 22% or 24% in constant currency. And the KPIs that are really important for this business are payments volume, cross-border volume, process transaction, and they were just all fantastic. Total payments volume for full

year 2022 was up 15%. Cross border volume was up 38%. And process transactions in total up 17%. And talk about hard to comprehend numbers today, talking about these large caps. How is $14 trillion in transaction volume sound to you? That's what this business just did for the full year. And it's really just on the back of a, I'll say, quote unquote, air quotes, tougher economy, right? And they increased the quarterly dividend by 20%. They authorized $12 billion in share repurchases. Really, really hard to find a weak spot on this earnings report. It was really solid pretty much across the board, especially as we mentioned on the backdrop of uncertainty, I'll call it, for lack of a better term. Yeah, I think what will be very interesting are the next of uncertainty, I'll call it, for lack of a better term. Yeah, I think what will be very interesting are the next two quarters, because I have a

feeling that Visa really benefited from higher prices in general too this year. So inflation, obviously, if you have higher prices, it's a percentage of what their take rate is, a percentage on the whole transaction, right? So it's more expensive. The amount of money that they take per transaction will go up, although the percentage stays the same. And I'll be interested next year, for me, just the next two quarters to see, have these two competing forces, right? You'll have probably still somewhat higher prices. I'm hoping not too high that inflation comes down, but you'll have kind of those higher prices, hoping not too high that inflation comes down, but you'll have kind of those higher prices potentially head-butting with people slowing down their spending. Exactly. So I don't know.

I think these will probably still have some really good results, but I think the next two quarters will be super fascinating to see what happens for them. Yeah. Yeah. And I think we talked about this last week with Amex is like, for them. Yeah. Yeah. And I think we talked about this last week with Amex is like, it's hard to decipher what these numbers, if it's a good proxy for the economy, or it's just a great proxy for them being a toll road of inflation and increased secular demand for digital payments. And I think it's probably that, right? And that's why it's such a good business in inflationary times is they just, you know they just go with the flow. It takes a take rate on the toll road of payments. So that's a good position to be in.

I'm just going to round this out with a quote from Alfred Kelly, which is a statement that he's probably sick of saying because he's said it now for how many quarters? Quote, as we look ahead, while some short-term uncertainty exists, we remain confident in Visa's long-term trajectory across consumer payments, new flows, and value-added services. So, you know, the classic just political, if you will, statement, which is, we're doing pretty solid. I don't know if you can tell, but I can't see that with also not saying there are uncertainties, which is just the buzzword of today's show. Yeah, no, exactly. And I think I haven't listened to their call, but just seeing the quote, they are acknowledging

it that there are uncertainties ahead and there's definitely some broader macroeconomic potential headwinds going forward. So they're not saying that everything's necessarily rose-colored glasses type of thing. So they're acknowledging it. I think they're probably just making sure that they're covered and then they'd rather under promise and over deliver than the other way around, which that's probably the best approach to take. Yeah, I totally agree. He's not going to come out and say anything except for exactly that, right? Yeah, exactly. And, you know, it wouldn't sound great if they're like, well, you know,

we'll do awesome while a lot of people are struggling financially either. So you have to kind of massage things correctly. So I think a smart move on those executives. Yeah, especially because consumers like merchants hate Visa and MasterCard for the most part. Exactly. Hey, we're crushing it, guys. How are you doing? Yeah. They pretty much are unloved, even though you and I both know that the real compression and take rate should be coming from the banks. That's how I see it personally. But I mean, you could probably argue it both ways when you look at the margins here. So you know what?

I think that they're going to remain pretty firm on not saying silly things. I think that every PR person at Visa and MasterCard are just hoping that Alfre doesn't boast too much about how good the business is doing. Yeah, no, exactly. I think it's a smart move. 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. So now I guess we'll finish on with what we started last Thursday talking about Chinese stocks. Clearly, as people know by now, it's not looking great for Chinese businesses. So full disclosure, we own a couple. Well, you own Tencent. I own Tencent and K-Web, which is a Chinese internet ETF. They've both been really crushed. Essentially, what happened is there was the 20th National Congress of the Chinese Communist Party, also known as the CCP. So I'll be referring to the CCP a lot,

just so people are on board here with the acronym. And after that, the following day, tech stocks were down around 15% on Monday, actually down even more than that, depending on when you check during that day. Now, the reason why Chinese stocks took a big hit is because Xi Jinping really consolidated his power. So a little bit of context. And again, I've been reading quite a bit on this. I'm not an expert, but I've been reading a lot of stuff that experts are talking about. And the thing is, obviously, China was never a democracy, but they were trending towards having a maximum of two terms for their leader.

So most experts said that basically the consolidation in power from Xi Jinping has not been seen since Mao Zedong. Mao Zedong had a total of five terms from 1949 until his death in 1976. And Xi Jinping secured his third term here as China's leader and he also promoted some supporters while putting aside those who were not seen as loyal to him. Did you see that video? I don't know. Probably not, no. The video where Xi Jinping basically calls on like the security to come take away this guy that's sitting beside him. That like it was clearly like older gentleman who doesn't see eye to eye. Retired. Yes.

Yeah. He retired him in front of the entire auditorium. That video is just very symbolic of what is happening in my opinion. And it's gone viral for sure. Yeah. And just to put that even further into context. So since Mao Zedong, there is only one other Chinese leader that had three terms. And that was Jiang Zemin, probably butchering the name here, but from 1987 to 2002, I believe, because I put 2022. So that's not correct.

Probably a typo. So I believe it was. Yeah, yeah, exactly. So 2002. And it looks from all the experts that I've read on that know China quite well, it really looks like Xi Jinping is setting himself up to be CCP leader for life. So I think that's pretty broad consensus there. And of course, that's led a lot of Chinese tech names to be smashed in the past year. The percentages are probably a bit off now because I did this a couple of days ago, but Alibaba down 65%, Tencent 61%, JD.com 60%, Pinduoduo 56%, and the K-Web ETF that I own down 66%. And clearly needless to say here that Chinese stocks have been getting crushed as a whole. Here are some reasons that they have been getting crushed for those who are not super well versed. I may be missing some, but these are the ones that

come to mind. So the first one is under Xi Jinping's leadership, China is focusing less and less on economic growth as a priority. So it's still a priority, yes, but it's not the top priority because that's the motherland, if you like, in terms of terms. So where Chinese pride takes precedent over economic growth. And what you just mentioned about them taking away one of the old, let's say, brass or someone that was pretty high up in the CCP. Well, one of the things that's been happening is, yes, they've been putting people that are closest to Xi Jinping and those who were promoters of economic growth and engaging with foreign businesses are no longer in the position of power. So they've basically removed those people to put people that are more in line with Xi Jinping.

Any comments on that before I continue? No, it's more of just what we were talking about before, which was, I think I kind of misspoke and I said, it's more of the same is the news. What I meant to say is it's more of the same trend that has been occurring, which is him getting more power and his stances being more prevalent and removing anything that kind of disagrees with his rhetoric. And so that is what is really scared investors in these names and rightfully so, including myself. Yeah, no, exactly. And a good example here of where Xi Jinping is going is, I think, to me, it's just the China zero COVID policy.

Because that really hurt their economy, especially this year when most of the world was reopening. And that policy was- It's still going on, man. It's absolutely madness. It is madness. And it was initially, if you remember when the pandemic started, like China was actually like, or initially kind of praise in terms of trying to get on top of it. They were doing these massive lockdowns. But we all know with the data now that's been coming out for the past two plus years is that zero COVID is just not achievable unless you like everyone isolates and there's no contact whatsoever. And even then it's probably going to not even be achievable. It's just totally pride and ego.

Exactly. For the leaders and or should I say leader, that that still exists. Because my least favorite type of person, I'll just say it bluntly, is those who are not willing to change their mind when new data is presented. That is the absolute superpower as being a decent human and being a good investor, I believe, is being able to change your mind, put away your biases and your ego when new data is presented. I look at the zero COVID policy in China, and it is like the complete opposite of that and is complete madness. And it's hurting and ruining the lives of people who live there. Yeah, exactly. And early on, obviously, when they just discovered the virus, they didn't know what it was and all that.

So obviously that made more sense. But now throwing this out the window for the CCP would mean that essentially, like you just said, China's leadership would be admitting that they were wrong. And dictatorships and dictators have a very hard time doing that traditionally. Politicians as a whole probably don't love saying they were wrong, but clearly this is to an other extreme. And another example here is also the crackdown on tech companies that we have seen in the past few years, because they've essentially been saying that this was for the greater good, for example, to like putting some restrictions on the amount of hours that teenagers can play

video games, right? So these are all things that they're basically telling their population, we're doing this because we know better than you. So those are kind of things that are concerning. Another one that touches a bit more the crypto space, but very interesting, I've been reading a bit on that is the Chinese CBDC. So CBDC is Central Bank Digital Currency. And China is one of the countries that has their digital yuan is the most advanced. And what this will allow them to do is really get even more control on the spending habits of the population. So they could do something like say say, Braden is Chinese, he lives in China, and they would say, okay, Braden, and 1000 more people were sending you

1000 yuan, but you have to spend it in the next month. If not, it's no longer valid. So trying to play with the economy to get the results that they want by doing that. So that's something else. But a lot of people are raising red flags here because of the digital yuan and just the sheer tracking that they'll be able to do. The tracking is spooky. And this is not a Chinese isolation, a problem isolated to that. It's really around people being concerned about tracking. And this is like just the extreme, right? And so this is on another level and I'm already spooked about what's happening without this kind of stuff. Right. So it's just one of those things where what I'll say is as a young adult, which I am, what do you got? You got 10 years on me.

Yeah. I just look at this and I go, I can't believe we have children in power over billions of people. And that's what this feels like to me. And at the end of the day, you and I don't, we don't get political. It's like Thanksgiving dinner here. We don't talk about politics or religion, but this is a direct impact to the businesses that are trading on the exchange. And for us that own the US listings of these large technology companies, which have been historically great businesses. But the fundamentals of how they operate have changed drastically. And I can no longer not recognize that. And so I've got to make a decision on what I'm going to do with Tencent because I guess it doesn't matter. What I'm saying is it doesn't matter how good

the business is, is if they're not allowed to operate the way that they historically have, which I define as great, then the fundamentals are just so vastly different than the past 10 years. Yeah. And I'll go over a few more points here, I think, for people just to consider. So another thing here with China is it's becoming increasingly isolated versus Western nations. So they are also becoming friendlier with countries like Russia. And obviously, Russia, we know what's happening with Ukraine. Another point here is since the Trump presidency, the U.S. has been imposing restrictions on trade with China. So this has continued with Biden in power. So I'm not meaning to get political here, whether whatever you think about Trump or Biden doesn't really matter. I'm just saying that this has continued. It started under Trump and it's continuing under Biden. continuing under Biden. And the one that comes to mind, the easiest here is the increasing tariffs, but also preventing certain types of US businesses of doing business in China. And I'm thinking about

those semiconductors here. So more and more restrictions. And we're also seeing US companies starting to look elsewhere for production. Apple has been starting to assemble some of its devices in india i think it's a two prong thing to get away from some of the supply chain issues in china but also to not be as overly reliant on china for producing their devices but i echo what you're saying i think for me i'm going to give it a week or two yeah just to just to kind of digest the information, see if there's any more coming out. If we have other nuggets of information that could potentially impact that, but I'm probably 90% decided at this point that I'll be selling that KWeb ETF and Tencent. We were always aware of some of these risks. I think it's just taken a turn for the worse. And if you were

investing in China, you should have been aware of these type of risks, political risk and what the CCP could do unilaterally, very different than what we are used to in Canada or the US. You had to be aware of that. And unfortunately, our premise, at least I won't talk for you, but my premise was incorrect. I thought that they did a bit of a crackdown and they would actually pull back a bit because they wouldn't want the economy to take too much of a hit. But now clearly the economy is more, you know, it's important, but it's a bit more of an afterthought here. They definitely want China first, even if that means slowing down their economy, which is not great for businesses either. So yeah, I'm definitely leaning towards selling my positions, unfortunately. I'm just pulling up Alibaba, for instance,

on historical PE. For me, I guess my mistake wasn't that I didn't price in this risk, because I think I did have a pretty good grasp on this and kind of a grasp of the unknown, which is hard to really quantify. But I thought it was baked in. I think that that's really the mistake that was made and it clearly was not, right? I think that that's pretty easy to say, pretty black and white to say that it just wasn't priced in. And so I think that that's the mistake. Now, you bring up a good point here, whereas like semis is the big question.

I think on a global scale in terms of business and supply chain and this global economy that we've built, semis is a big, big question mark. I think the biggest question mark that remains today in terms of importance, and that's why there's been so much stress about bringing that Western in terms of having actual foundry capacity. It just seems so like there's ultimate concentration risk with Taiwan semiconductor. Yeah. And I'm not trying to scare people or anything, but if there is a war between the US and China, it's going to be over Taiwan. Like I think this is clear. It's clear as day. And the main reason, obviously, China sees Taiwan as a part of China that still needs to come back to them. But I think the semiconductor portion of

this is also what makes the US forced to get involved. I think they would not. I mean, I don't think they have a choice to not get involved if it happens because of TSMC. There's such an important business from like we talked talked about it, from a national defense standpoint for the US and also for China. So I mean, it's fascinating if people want to learn more about it. Globally, it is, right? It's like this gold mine, really, it is. Yeah, exactly. And I don't know what will happen. I'm hoping for the best. I'm always positive. And hopefully, I think China, just to add to what we were saying, I think one of the big things that wasn't baked in for these Chinese companies is I don't think

people were thinking a couple years ago, let's say before COVID started, that Chinese leadership would be willing to slow the economy down just to push Chinese nationalist agendas forward. I think people were thinking as a general rule that that was the line they would not cross. And obviously, in the past couple of years, we're seeing that they are more than willing to cross that line. Right. And then this news is just solidifying that there's really not an alternate course that they're pursuing, is how I read it. Just rounding, I know you have one more little part here, or is that it? No, I think that was about it. I finished, we're kind of going back and forth, but that's about it for that. Yeah, what my notes on the China question. I mean, I'm sure we'll talk about

it at some point again, because I think it's fascinating. I'm always learning on it. So I know we may have some people that even assuming that we both sell our positions, I'm sure we'll have some listeners that may keep theirs. So they might want to hear what we think about it. You and I touch on so much, provide so much emphasis on the importance of knowing what you own. And I look at the amount of hours I put into Tencent is a lot. It is 5X what my position sizing has it as in terms of building conviction. Luckily, thankfully, thankfully, I've done outsized work on it compared to what is waiting in my portfolio. And so I built very strong conviction in the stakes that they own in the investment wing, whether it be like the 680 billion in market cap at one point that it was marked at. I'm just spitballing

a number. It was somewhere in that wheelhouse, which almost justified the entire market cap. It being like the largest gaming company in the world. They own 50% of Epic Games, which is Unreal Engine, which I think is an important technology for the next 20 years. And so all of those pieces make me super excited about the business. But what I didn't know, and what I think you and I can put into the lessons learned category, which is very important for documenting lessons learned as an investor, is knowing what you own implies also knowing where it is what you own. And I know nothing about life over there. I've been to Hong Kong. I've never been to mainland. It's just so out of my circle of competence and venturing outside of that circle of competence, even if it is looking at the investment wing and the companies they own and their main core assets like WeChat and QQ. I can understand those till the cows come home. But if I underestimate the relationship with business and government there, then I don't know

enough, right? And I think that we can log that down into the lessons learned category. Yeah, no, I think that's a great point. And I mean, I'll probably round this up too by just saying, look, you can still get exposure to China with just the US listed businesses that have part of their operations in China, aside from investing directly into Chinese companies through ADR, American Depository Receipts. So that's just for people to keep that in mind. But also, whether that's good or bad, you'll have to decide that because clearly, if businesses are doing business in China, they have increased risks now with the information that we just talked about. And the last thing I'll say is I don't know exactly what your position sizing was. But for me, it was relatively small for both the K web and 10 cents.

So I think that's a reminder that you can always mitigate risk by allocation. So not allocating too much. That way, if something like this happens, it doesn't hurt you too much. Today, it's 2.1% for me. I think it existed somewhere at around $3.5 at its peak. My cost basis is somewhere around $60, which I thought was buying an extremely discounted version of it. Oh boy. Yeah, I don't know for me. You win some, you lose some. For those who are wondering what we're looking at,

we're looking at the exact portfolio tracking sheet that we use, not only for us calculating our performance and our returns and keeping track of our progress and everything like that, it's to the exact two decimal places of portfolio positioning. And you can see it every single month updated at join tci.com. So you can see really what we're doing and what we're saying. So that monthly update will go out in five days from today. So if you're listening, three days-ish. And so yeah, that's at joinTCI.com. What is the number for you? Yeah, 1.3%. Now, I think at the peak, I bought Tencent, if I remember correctly, around $40. And the K-Web shares, though, I'm down more than 50%. But I think at the peak,

they both represented about 3%, I would say, total. Okay. So yeah, it gives you context of scale. We were not- My cause basis would have been less than that. So at the peak of their value where I was profiting on 10 cent and a bit up on the K-Web shares, now, I'm down both. So it was never a big position for me. Yeah. It just sucks because I can't get to myself to sell it when you look at the assets that they own. It's just unbelievable. It's like they own the ecosystem that every 1 billion person who live there actively using WeChat. And that's literally how they live their digital life is on that asset. And then you look at the investment wing and

the gaming company. It's hard to bring myself to be bearish on the name, right? It's so counterintuitive. But to give us some credit here, you can see in our sizing that we were kind of inherently sizing it risk adjusted, right? Yeah. Yeah, exactly. We made sure that we weren't exposing ourselves too much to the Chinese market with those. So it is what it is. Like I said, I'm going to digest it for a couple of weeks, but I'm probably going to be selling both of them. I think that that's the right approach. You and I both are pretty keen on that, which is no knee-jerk reactions. If it costs you a couple percentage by waiting, then so be it. And sometimes

it goes the other way, but you need to be able to make the right decisions with capital and acting on impulses almost never the right idea. It might be the right move looking in hindsight, but I don't think it's the right idea, if you can understand what I'm saying there. That's the way I look at it. Thank you so much for listening to today's release of the podcast. Usually today we talk about our investment frameworks and models and things that we're thinking about with our portfolio, but with earnings season being here and big tech reporting today, it just felt right to give you guys the updates on that. But yeah, every Monday and Tuesday here on the show, thank you so much for listening. As I recalled in the top of

the show, if you can throw us a rating on your podcast player, we really appreciate it. That would be fantastic. So go hammer five stars there. It helps us grow the show and helps more people find it. We'll see you in a few days. Take care. Bye-bye. The Canadian Investor Podcast should not be taken as investment or financial advice. Brayden and Simone may own securities or assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.