The Canadian Investor - The Business of OnlyFans & the Contrarian Case for Chinese Stocks

Episode Date: September 30, 2024

  In this episode, Braden dives into the company behind OnlyFans. Despite being a controversial name, OnlyFans is an economic powerhouse, boasting $1.3 billion in revenue and an impressive 37% net margin. We break down its unique subscription-based business model and the staggering amount of dividends paid last year. Then, we shift gears to explore the case for investing in Chinese stocks. Despite a volatile regulatory environment, Simon discusses why bearish sentiment and low valuations could present a contrarian opportunity for savvy investors. Tickers of Stocks & ETF discussed: KWEB, BABA, AAPL, TSLA, MSFT, NVDA, META, GOOG, AMZN Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Web player - The Canadian Real Estate Investor Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.  See omnystudio.com/listener for privacy information.

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

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. The Canadian Investor Podcast, welcome into the show. My name is Brayden Dennis and joined by the dynamic Simon Belanger. Dynamic because I cannot believe what you have written on the doc here for your topic yeah i'm just seeing this now live this is my reaction right now i am shocked but i'm impressed

uh you know of your ability to be water to be fluid yeah i mean you know you got to be fluid. Yeah. I mean, you got to be able to change your mind sometimes, although I will caveat that I'll go through this segment and there's a lot of logic behind it and it's not kind of one line answer. It's a bit more detailed than that. Yeah. Before that, I promised last episode I would talk about a controversial privately held business, none other than OnlyFans. And I'm going to go through the business here. I am shocked. The unit economics of this business are absolutely stunning. And there are some stats here that will have your jaw on the floor, including how much these guys who own it are paying themselves. It is unbelievable. All right. So in the UK, they have something

called company's house, which is where even private companies, the public can look through the businesses filings and their financials that they have with Companies House. And so you can look up the company we're talking about, Phoenix International Limited, Phoenix with an F, so F-E-N-I-X, International Limited. It's operating the infamous, largely not safe for work website, OnlyFans. Matthew Ball wrote during my research, I found some research Matthew Ball has done. Quote, it is probably the most successful UK company founded since DeepMind in 2010.

And the most significant media platform founded since TikTok. That's a big deal, right? These are some strong words. The business was founded by a guy named Tim Stokely. And here on Wikipedia, what I could find about him was he founded it with his brother in 2016 with a 10,000 pound loan from his father who told him, quote, Tim, this is going to be the last time, end quote. Oh, wow. Okay. It was indeed. It turns out it was going to be the last time. Obviously, him and his brother and the family, the Stokely family, got it up working. He had worked on a couple of other mostly not safe for work websites in the past, but this one clearly was the big hit. And he sold 75% of the company to Phoenix International owned by Leonid Radvinsky in 2018.

And then Stokely stepped down as CEO and Radvinsky got some other folks to come in and run it with him. and run it with him. Since Radvinsky has taken over the business, it has blown up into being well-known in pop culture, in just being an infamous website. Everyone kind of knows about it. And when he took over it in 2018, it was around low tens of millions in revenue to then 30 to then 200, then 500. Now, 1.3 billion in revenue as of their latest filing. They're doing 6.6 billion in total volume last year that is absurd amounts of volume moving through this platform and payment volume yeah and i was i asked chad gpt while you were talking i'm like what percentage of their content is adult content because obviously i think that's what most people kind of associate OnlyFans with when they hear the word.

And apparently there's no official data, but like the estimates are 70 to 80 percent. Yeah. And I think that that's probably low. Yeah. Yeah. I don't know. That's apparently that these are the estimates of adult or explicit content. So obviously, like, you know, I think there's other content. I just wanted to be fair to, you know, other creators that are not doing, you know, adult or explicit content. But it seems to be fair to other creators that are not doing adult or explicit content, but it seems to be predominantly that. Yeah. Definitely. And that's what people know it as. That's the brand. So very interesting. They're doing 6.6 billion total volume. This is year ending November 30th, 2023 is their fiscal. And this data came out earlier in September. So this is

last year's data, but it's new news in terms of this data being available. Next September, we'll get their year ending November 30th, 2024 data on Companies House. I went on FinChat and I said, give me companies that are doing revenue between six and a half billion and $8 billion today, because that is the volume moving through the platform. 80% of that is being paid out to creators. OnlyFan takes the remaining 20%. It's almost like their're gmv basically it's the gmv it's the gmv so it's not a like for like yeah comparison revenue versus because net revenue on on only fans is 1.3 billion but to give you a some context of companies on the top line that are in that neck of the woods of volume, Intuitive Surgical, Palo Alto Networks, Shopify, Moody's, Ferrari, Transdime, Equinix, Workday, Roper, Thomson Reuters. We're talking about some of the biggest billion dollar corporations on earth here, some of these. And so it is nothing short of spectacular, the scale that they reach.

Just to specify, I did throw GMV, but for New York listeners, that's like gross merchandise volume. And it's typically used for like payment processors, for example. So it's just a sum of total transactions that go through that payment processor. Their revenues will typically be a percentage, a small percentage of that. So just to put some context. Yeah. I'm going to look up right now, Wise's total volume, because that's another UK based FinTech. They're doing 123 billion in volume. Holy smokes. A little bigger. A little bigger. But that's the business of payments.

Exactly, yeah. That's the business of payments. And the take rate on that is 0.9% compared to 20. So it's literally 20 times the take rate. So it is, again, these are not all like for like comparisons, but now you have a bit of a scale of what's happening here. Fair review of the business, of their business and performance section of their annual report. Gross payments on the platform increased a billion dollars. The group's revenue increased $217 million to $1.3 billion. The gross profit of $658 million,

which is bonkers. The number of creator accounts, so people making content on the platform is 4.1 million. And the number of fan accounts, so people consuming the content is 305 million. The group has no external financing on the balance sheet. Here's where things get crazy, Simone. They paid themselves $472 million in dividends between the two owners of the two directors of the company. Radvinsky, which owns most of it, and Lee Taylor, who's the CFO, owns a good amount of it too. But Radvinsky owns the bulk of the company here. Yeah.

That's an increase from $338 million he paid himself in 2022. Yeah, he's doing okay. He's doing okay. Here's where things get nuts. They have a section called events after the reporting date, meaning like since, you know, this is November 30th ending, but we're writing this report for in April, they've disclosed how much they've paid themselves in dividends by month. January, $43 million. February, $40 million. March, $47 million. So they're paying themselves, Vinsky's basically paying himself, $40 million a month. Yeah.

Well, you missed the December one. That was a small payment of $29 million. Oh, yeah, yeah, yeah. Well, he had to pay off some Christmas loans. Yeah, exactly. Get his boys something nice. Probably a few lawsuits here and there. A couple lawsuits.

So it's $47 share dividends, but this is the most private company thing ever, just having a million outstanding shares. Like all VC-backed companies, public companies, the share count is gigantic. And this is just a million shares, clean and simple, 47 a share per month. He's doing okay. Look at the balance sheet 680 million dollars on the balance sheet so the dividend's pretty well covered here especially when it's making uh you know probably run rate to net today now is probably three quarters of a billion of profit a year, I would suspect. If they finished the last year at

600, where's the number? They finished last year at 658 million of pre-tax profit. That's absurd. Yeah, this is nuts. 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. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income.

But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. All right, next up here, we have some other stats from Matthew Ball. In 2023, payments exceeded $5.3 billion, which is are making more than nba players of course off a much larger number of people but there are people at the top percent of earners on this platform that are getting paid steph curry type money yeah absolutely stunning yeah and it's not obviously it's like it's probably still like the you know even like professional sports right like a lot of people criticize the players for making a whole lot of money but oftentimes you know the top five ten percent or even less are making the bulk of it

and then the ones you know you know the players who only have a cup of tea and stuff like that they're you know they're not set for life definitely not. Yeah. Especially like you go in the NFL entry-level contract, tear your ACL. You better have a backup plan. Yeah. Yeah. All right. So the unit economics for a marketplace business, this is nothing short of remarkable. Gross margins are over 60%. Operating margins are 50% on the dot. 37% net margin after tax. Wow.

It brings me to my final point and something that you can actually take home from this because this is a privately held business and probably doesn't meet too many ESG mandates for your portfolio or client portfolios. This business model is subscription plus transaction on top plus marketplace. So you have like this beautiful network effect marketplace, but you have recurring revenue and transaction usage revenue on top. Because right now, subscription business is 41% of revenues and 59% is transaction revenue on the platform. So last year, it actually passed being mostly one-off and transaction revenues more than the subscriptions.

Because I think you can also do one-off transactions. Can you buy merch? Is that why? Do creators sell merch from there? I think the creators sell one-off... I don't know. Yeah, I know. That's just kind of the marketplace thing.

Because this is what Matthew Ball's thing says. Yeah. One-off slash transaction revenues is 59% and 41% is subscription recurring revenue. Okay, okay. Merch probably? I don't know. That's a good guess. That's a good guess. take rate is shopify of course mercato libre apple cloudflare toast and basically all like point of sale services or basically any vertical finteched, those kinds of ideas. Unity as well, the game designing software, the gaming engine software.

It's like, it's ARR, but then there's also all these transaction revenues that you can do if you want to monetize your game. I really, really like that business model. On a second note of if you're selling physical goods and then have recurring services on top, ASML, of course, with the sale of lithography machines, and then you have these perpetual income streams via services, TerraVest, the Canadian company with services on their products

like propane tanks. It's even better when it's regulated that there's services, Regulated that there's services, like a dangerous goods carrying propane tank on the 401. There's regulated maintenance on this stuff. Fire services is another example of this. Intuitive surgical is one I've brought up quite a bit. You have recurring instruments that you have to keep paying for once you have the robotic surgery system in the hospital. Axon stock, you know, you have the body cams and the tasers, and then you got to supplement that with evidence.com to bundle it all together for police forces. These business models I've talked about it time and time

again, it's the razor and blades idea and they work so, so good. And it's why you see a lot of software companies really work if you have usage revenue on top, as well as like expansion revenue you can bring in. You have like net negative churn over time. Yeah. The one thing I would say too, if obviously it's not a publicly traded company, but if at war, I think one of the risk, and I've seen headlines, I've not read any of the articles, but, you know, that there is like potential sexual exploitation by, you know, individuals or kind of sex trafficking being done on OnlyFans. So that could be probably so much bad stuff. Yeah, a lot of bad stuff. So I just wanted to make sure, you know, we did mention that.

Like, I've not read and, you know we did mention that like i i've not read and you know dug into that so i know but i've seen enough headlines to know it you know it's probably a a substantial issue for them and that is something if it were publicly traded i think that would be a bear of risk factor that you know uh enforcement authorities or regulators would kind of come in and impose some restrictions on the business. Do you recall when there were allegations like that on Montreal-based MindGeek adult content company? Bill Ackman, a very famous hedge fund billionaire investor, spoke out about this and made a big scene about it and it caught a lot of headlines. And he basically made a call saying, shame on Visa and MasterCard for allowing payments on these platforms because of all of these-

Yeah, I remember that. Crimes that they're committing and all these gray areas and trafficking things that they're involved with. And right, basically in a day, Visa and MasterCard flexed their power on this company and said, you guys can't take payments anymore until you fix this. And that's like code red for any business, right?

Especially an online business it shows you how powerful visa and mastercard are to just be like uh yeah by the way you can't accept payments anymore i think there was a netflix documentary on that as well um how like um you know there was yeah the content like producers for that and how like a lot of them can make a living and they said i think after that they went into really a more very more much more intense verification process to be able to post videos on the platform so i don't know what only fan uses but i think that's always when you get into this kind of content that's always going to be a risk and it would probably i mean even if

you're trying to be as legitimate as possible, it would be really hard to completely eradicate that risk. I don't know how you would be able to do that aside from, I don't know, like going door to door and visiting the actual creators. Like, I don't know, right? Regardless, it's a private company. Yeah. It's not a... You're not investing in it, but he's making $47 million a month. Absolutely absurd. But it talks about two great business models

and the fact that a lot of people don't know that you're able to look up private companies on the UK on Companies House. And I find it fun doing research on businesses that you might not know about, public, private. I think that there's always something kind of fascinating that I've been drawn to around really... This is not a comment on OnlyFans. It's a comment on like asml for instance i love doing research on a company like asml that's so important to the world that i can

walk onto the street and i feel like 99 of people won't know what that is yeah and they're like oh it's like one of the largest companies in the world it's like like 300 billion i don't know what it is today it's all 300 billion in market cap. The only reason that they have this powerful phone in their hand is because of these important companies like the Dutch company, ASML. There's so much stuff in our world, like how do these things work? And the internet and podcasts like this

just make it so much easier to find information these days. I don't know. I'm very bullish on just people being able to educate themselves on topics like this. That's why I think it's never been a better time to be a self-directed investor. Yeah, as long as you're willing to put the work in. There's so many good tools out there. A lot of them are free. So many good YouTube videos too.

Good YouTube videos, podcasts, books. I mean, you don't have to spend a whole lot of money to learn as long as you're willing to put the time in. I think that's the most important thing. As long as you're willing to put the time in and the effort, I think you can learn a whole lot. So I guess we'll go to the teaser segment that you alluded to.

Sounds good, but I have one side note. Okay, let the tease go. I want to give a shout out to a, on that same topic, there's a YouTube channel called Asianometry. It's like Asianometry. And it's this guy who does awesome in-depth videos that are fairly easy to understand about technology and semiconductors. And he has awesome videos about the world of semiconductors, things like lithography

with ASML. There's a video called How ASML Builds an $150 Million EUV Machine. It's 14 minutes long. Guys like this making this content, I'm just so happy they exist. Like it's just, it's such a service to the world to be able to share this information. And this is an awesome YouTube channel.

It's got almost a million subscribers now. Yeah, just added one more. I'll have a look. I wasn't aware Just added one more. I'll have a look. I wasn't aware of it. So definitely we'll have a look at that. Now, speaking, I guess, of Asia. So my next segment is the case for investing in Chinese stocks. So you were surprised, rightfully so, with this segment, because I've been quite critical

of investing in the Chinese stock market over the last couple years on the podcast. If you've been listening for a while, you would remember that I used to own some Chinese stock, not a big portion of my portfolio. I own Tencent, KWeb ETF, which is the technology ETF, and then JD.com a bit earlier than that. So by January of 2022, I had sold all of those shares. Now, there's a lot of reasons for not wanting to invest in China. And I'll start with that. And it's a pretty lengthy segment. And so, Brayden, feel free to stop me if you have anything to add. But the first thing is, you know, why you would not want to invest in China.

Well, here's a few examples. If you just started investing, you probably aren't aware of this. But in 2020, the Ant Group IPO, which was the financial arm of Alibaba, essentially they abruptly suspended their IPO. So there was a lot of drama surrounding, you know, Jack Ma, where he was, especially because he gave a speech before his, I would say, temporary disappearance. That he was very critical of the CPP. And yeah, or his transitory.

That's the word I wanted to use. So transitory disappearance. Where he was very critical of the CCP, which is the Chinese Communist Party. A lot of people just, like, you know, a lot of people were speculating maybe he was dead. Like, I'm sure you remember that, right? And then he kind of resurfaced in early, mid-2021. He just, I guess, laid low and probably the CCP told him, like, you have to shut up. If not, we'll take care of you.

I assume that's pretty much how it worked, how it was. And then you had China that started cracking down on the tech sector around that time as well. They also banned for-profit tutoring companies in 2021. They all imposed stricter regulations on Chinese real estate developers by putting in place a three red line policy in 2021, which essentially limited the amount of leverage that real estate developers could take. And they had to increase their short term liquidity requirement. I mean, the Chinese real estate market is still reeling. This has increased,

obviously, the stress in the real estate sector in China ever since, although I mean, it was definitely not good before that. So I wouldn't kind of blame the issues necessarily on that alone. There was also the DDi failed US listing. So Didi is essentially like an equivalent of Uber, predominantly in China. So they offer ride hailing services and things like that. They were listed in the US and shortly after Chinese regulator launch an investigation into the company over data security concerns. And then obviously, if you look at COVID and the lockdowns in China, I mean, I know a lot of people, especially in hindsight, are now like very critical of the lockdowns that we saw in North America and Canada as well, like obviously in

Canada. But I mean, just based on the footage we saw, like our lockdowns were like nothing compared to what was happening in China. So it just goes to show that these examples highlight one thing that the CCP, first of all, it's not a democracy. Xi Jinping is the person that decides and probably a handful of carefully selected lieutenant over there. And if they decide to take a decision or go a certain direction, it's going to happen. Whereas here, whether it's going to happen. Whereas here, whether it's Canada, a lot of things have to go through Parliament. The U.S., it has to be approved by the Senate and Congress. So there are check and balances that you have here.

Sometimes things move slower because of that. But one of the risks when you have a dictatorship is things can also move very rapidly in a way you're not expecting. And then you add in the increased tensions between China and the West, and particularly the United States, which adds even more uncertainty to investing in China as a Western investor. So am I convincing you that it's good to invest in China? You've certainly laid out all the reasons why you've been particularly not interested in this space for sure. Yeah. So after all of that, a lot of people might wonder, okay, so aren't you trying to make the case? I will. And I will towards the end here. 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. Here on the show, we talk about companies with strong two-sided networks make for the best products. sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests.

It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at Airbnb.ca forward slash host. That is Airbnb.ca forward slash host. The next thing here is part of the potential bullish case for China is don't believe me, just Google China uninvestable and see what comes up. There is a whole lot of articles that will have these two words in from Western publications. So North American, Western Europe publication, basically saying, arguing that China is uninvestable. I mean, I saw a recent video, I think it was posted yesterday by Michael Kovrig.

He's the diplomat that was detained for like three years in China. And he has a whole lot of experience with, you know, being in China, investing. That's what he, you know, supporting companies. I don't think necessarily it's investing in stocks, but investing in general. And he had an interesting video just saying that, look, basically, there are CCP members that are very pro market that are focusing on the economy.

But the reality is they're not driving the bus. Those who are driving the bus are the ones that are, you know, Xi Jinping and his close group of advisors, they're more hawkish. They believe more in the greater good of the Chinese people, China, increasing China's influence into the world. And the economy is more kind of this, kind of more of an afterthought than it used to be. So that's clearly, you know, on top of that, you know, the sentiment is very bearish, but that's clearly, you know, on top of that, you know, the sentiment is very bearish.

But that's the thing. When you start seeing things so far on the one hand of the spectrum, that's where I start usually thinking, OK, it may be worth looking at in terms of being a contrarian investor because it's so bearish and it's so far on one side that there could be some opportunities to be had there. Now, before I continue any... If I'm able to read between the lines, right? You've been the most bearish. You have been the bear. I've been very bearish on China, yeah. Yeah. On the pod, for years now, you've been, and you've been right, without a doubt. So I guess what you're saying is, if I'm able to zoom out now, it can't get uglier, so maybe I'm interested in taking a look again. It could get uglier, but- It could get uglier, but sentiment is incredibly poor.

Exactly. I agree completely. It feels completely uninvestable. And that word, uninvestable, should get any contrarian very excited just in general. Yeah, exactly. And before, like, now I think what really starts getting interesting here is when you start comparing big tech in the US with Chinese big tech. So let's start with the US. So US, I think, you know, most people who've been investing for a while, and I'm sure you kind of you agree with that, like, you know, big tech is definitely richly valued. Yes, I mean, they are, for the most part, wonderful businesses, but, you know,

they're not cheap. And I think Apple is probably the best example here. As good of a business Apple is, few people probably realize that sales have actually declined on a year over year basis for six of the last seven quarters for Apple, which is, I'm not, you know, I'm not making this up. This is actually their sales have declined six of the last seven quarter on a year over year basis. And with the launch of the iPhone 16, I mean, the discourse out there, you have these all these analysts that are like really bullish about Apple. And you can see it's like all this new AI, like Apple intelligence, it's going to spur a wave of upgrade. And I always thought that was a bit far fetchfetched personally because I mean I use AI,

chat GPT and other tools pretty frequently. I have an iPhone 13. I am not interested whatsoever to upgrade to an iPhone 16 just because when my phone is up and the battery is so bad and the apps don't work well I will update upgrade then but at the end of the day, I don't want to be spending $1,500 or $1,000 on a phone when I can use it with ChatGPT and pretty much get most of the same results. And sure, it's not integrated in the phone like Apple Intelligence would be, but I feel like they're a bit too optimistic there. And so far, what I've seen is there's some real concerns that the iPhone 16 sales could actually be weaker than the iPhone 15 based on early manufacturer data. So

we'll have to see. We'll probably won't know until they release the next quarter or two how the sales are going. I know there's been anecdotal evidence that Apple employees can get the new iPhones way sooner than they could last year. Usually employees have to wait a little bit because they have preferred pricing. So that's another indicator that potentially the demand is not as strong as some analysts were anticipating. And in terms of free cash flow and earnings growth, I mean, it's really slowed in the last few years.

Even if you look at it on a per share basis, the reality is it just has not grown all that much. And I say per share because, you know, Brayden, I don't need to tell you, but, you know, Apple likes to buy back shares, right? I mean, they do so hand over fist. And, you know, I'm showing here for joint TCI, like you see that EPS and also free cash flow per share has kind of flattened out. And that's despite them buying back aggressively their shares. Now, Apple is still trading at some of the highest valuation it has been trading over the last 10 years. It currently trades at around 35 on a P and price to fee cash flow basis. I used a trailing 12 months because I personally think the earnings in the free cash flow have a risk of declining or

at least stagnating going forward. So I'm actually thinking I'm being generous here, although analysts may disagree with me, but I think they're being a bit too optimistic. And you can pick your big tech company, whether it's Google, Microsoft, NVIDIA, Meta, Apple, Tesla, Amazon. I mean, they're all trading at pretty high multiple. It obviously varies. Google, I think, is a bit cheaper than all of them because of the regulatory concerns and also the concerns about how AI could disrupt shirts without going into too much detail. But don't get me wrong. they're all great businesses. They're very good businesses.

But what I'm getting at here is that the market doesn't seem to account for a lot of risk for these big tech companies. And I think Nvidia is probably the poster boy, poster child for that, where investors are almost like discounting any of the potential risk, whether it's geopolitical risk with China. Yes, I'm talking about China, but that is a risk. Competitive risk, regulatory risk, demand shifts. If their large clients just decide that, you know what, this AI thing is costing way too much and we're going to scale back our purchases.

There's not a lot of risk priced into these big tech stocks, which in my opinion makes them risky. Because if there's not a lot of risk, despite them being great businesses, the fact that the market is not pricing in a lot of risk and it's clear just by the valuation makes them risky if you kind of come in into these price points. I guess the counter example is like,

yeah, the lag of growth for iPhone install-based is probably pretty stagnant, maybe grows at GDP, but services grows at 20%. But it's tiny. That's a problem, right? Compared to the rest of the business, that's a problem. They'll have to go- Oh, don't get me wrong. I'm with you. I think it's an incredibly high price to pay. I mean, it's still one of the most fantastic businesses of all time. But you have to be, if you're paying those multiples, I want to see a little bit more growth. And I was just looking while you were talking. So I was like, let me just look at Tencent.

That's another company that's really lost a lot of growth. And the multiple is compressed, not only because China's unloved, Chinese equities are heavily unloved, but the growth has also really stalled out from high double digits up to like 30% top line to single digits. But it's still TTM at 8%. Last year was 10%.

The year before that was negative 1%, 16.2%. It's still growing a lot faster than Apple is. Yeah, yeah, exactly. And I'm a bit tight on time, so I have only 10 minutes left. So I'll try to wrap this up here because I have a hard stop in 10 minutes. But let's take Alibaba and compare them to Amazon because, you know, they are relatively similar. Like, I know they're not exactly the same and that's not the point. But I'll just compare them just to see, like, just to illustrate the difference in pricing between both companies. Well, trailing 12 months, Alibaba has seen its revenue increase 6%, if I round up, and Amazon has seen it increase 12%. And net income has been between 8 and 11 billion over the last two years and trailing 12 months for Alibaba. And Amazon,

although it's much higher at 44 billion for the trailing 12 months, it also had a net loss of 2.7 billion 2022. So a lot bigger swings here in terms of net income and free cash flow. Again, Alibaba has been pretty stable, $17 billion and $23 billion in the same period. And that's obviously converting the Chinese yuan to US dollars. So these are all US dollar figures, while Amazon has seen a year of negative $17 billion in free cash flow during that time span, but also as high as 48 billion in the trailing 12 months. So Amazon is currently. Yeah, they've turned on the cash printing machine. The CapEx spend has come down a lot.

Yeah, exactly. But I mean, it is still some pretty wild swings here where something like Alibaba. Granted, I mean, there's always that doubt whether are the numbers truly accurate for Chinese companies. And that is definitely another risk to keep in mind. But Amazon is being priced at $36 and $37 on a forward price to free cash flow and price to earning basis. Looking at the trailing 12 months, Amazon is in the high 40s in both metrics. So Alibaba, on the other hand, it's priced at a 10 for a forward P basis and 23 on a trailing basis and nine on a forward price to free cash flow basis and 12 on a trailing basis. So granted,

like I said, the business are not exactly the same, but the argument to invest in China is I think the valuations are so low and there's so much risk baked in is that you can make a case that there is a decent amount of upside. Clearly, there's still potentially more downside, especially if there's a conflict that happens. What would happen with the ADR, so American Depository Receipts, so the Chinese companies that are listed in the US, for example, that's a whole kind of can of worms. But you can mitigate that risk with a proper allocation. So my view would be, you know, if it is something I, you know, something I'm looking at, you know, you, I would probably look at two and a half, 5% max, probably get a basket of companies

or, you know, use a K-Web ETF again, just to get, you know, exposure to a broader base of companies and not be so dependent on one Chinese tech company. That's probably the way I would approach it. And you have to remember to, you know, with a small enough allocation, you're definitely mitigating the risk because if you have, let's say 5% and it goes down 50%, I mean, you're not crushed, right? Like, obviously no one would want to see that. But it's still a small enough allocation that you're mitigating the risk. And I think a lot of investors are, you know, are taking on a lot of risk with the big tech because it's not I've seen

a lot of people being like 35 40%, even 50% plus in those mag7 names. And if you ask me what's riskier, I would say for sure it's that approach. It's the US companies, although the upside might still be really good, so don't get me wrong, but the valuation and their price so high with seemingly very little risk, you know, baked into the prize that, you know, I think the big

risk here for investors is being overly concentrated. And when I say like, I'm sure you've seen it, like I've seen literally people show their portfolio, and it's almost just a mag seven, that's it. So I think it's just keeping that in mind that yes, I would never put a big chunk of my portfolio into Chinese tech stock, but a small bet because there's so much pessimism around it, that's something I could definitely consider. Well, I'm impressed you have your ability to change your mind. I do think, oh yeah. I mean, they're certainly objectively cheap. I mean, look, here's a quick, easy fact for people to wrap their head around. Alibaba stock, which I think is, is that the largest one by market cap on? Well, I'll just say it's up there. Let's just say. the Amazon of China. The revenues are up in the last 10 years, revenues are up 15 and a half times. Operating income EBIT went from in US dollars, 2.3 billion to 18.9 in the last

trailing 12 months. And the stock's down 30%. In that 10 year period. Stock's down 30%, revenue's up 15 and a half times, operating incomes down, I'm sorry, operating incomes up around eight and a half times in US dollars, in Chinese currency, yeah, 8.2. Yeah, very similar. It's like nine times. I mean, you can see it here, right? Like with the drawdown, it's massive.

So it's structurally the governance that has compressed multiples so aggressively in addition to the growth slowing down. I mean, that is happening. There's no question. no question. And their willingness to play nice with the public markets, just not being there. Foreign investors and US capital have just said, I can't be treated like this as an investor, therefore you can't have my capital. And it's just flooded out. And then there's questions around, like, you know, if you're buying the ADR, is that really a claim to equity in the way that their securities laws work? There's a lot of gray areas.

And I think so many investors have just gone, this is too hard. There's so many awesome places I can put my capital into domestically. What am I doing messing around with these companies still? And I think that's a fair question for them to ask. But to your point, has it swung too far? That's the question we're trying to answer in this segment. Has it swung too far? We know it swung. We know there's reasons that it swung. Our job is to decide,

has it swung too far exactly and it's not i mean obviously it wouldn't be for everyone it's something i saw i've been i've been thinking for a little bit i'm just doing my own research and clearly again there's still risk even at these prices so don't say i'm not saying there's any risk like there is that's why i would not start a huge position if i would you know start a position and even something like k-web i would not be a large position but again at some point you have to wonder like hasn't been overdone maybe maybe not but i mean i think there's a strong case to be made that it can it may have been overdone but there was also a case that you know it could

also get worse but again i think my whole point here is that you know don't necessarily think that they're less risky than the big tech either because the big tech their issue is their valuation it's like the other end of the spectrum basically you can say like the opposite of this is like is it actually overdone for the MAG-7 on the kind of overvaluation basis? Maybe, maybe not. Maybe they keep growing. But today we saw, I don't know if you saw that, Brayden, but apparently the U.S. is thinking about an antitrust probe into Visa now. So the U.S. government seems to be a bit more aggressive on big tech.

And from the rhetoric I've seen from Trump as well, I think that does not appear to be something that the Republicans would be willing to drop either. It seems like they're not super favorable to big tech for probably other reasons than Democrats. So keep that in mind as well. I think a lot of investors followed the late great Charlie Munger into Chinese tech stocks when they got beaten down so bad. And I think it's a valuable lesson for a lot of people. One, build your own conviction, but because a stock's down 50% doesn't mean it can't go in half again yeah and in half again and again like that mathematically that happens yeah hey all the time even nvidia could double from here right like i'm not saying like nothing's impossible but i think just just be aware of what you're getting into regardless

whether it's the mag 7 whether it's chinese, I think that's kind of the main thing, whether making the case to invest in China, I think it's just understanding the risk in the companies that you're looking into. I got burnt on Tencent. I'm going to let other people go into that one and I'm going to chill. Thanks for listening, folks. We really appreciate you tuning into the podcast. We're here Mondays and Thursdays. Shout out to everyone on joinTCI.com, the Patreon supporters. We're coming up on a new month, so you'll see our monthly portfolio updates every single

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Take care. Bye-bye. 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.