The Canadian Investor - Twilio, Canadian Investment Vehicles and Concentration

Episode Date: June 28, 2021

In this episode of the Canadian Investor Podcast, we talk about: Investment concentration and signs that might signal too many individual stock holdings The pros and cons of a TFSA, RRSP and taxable accounts What drives stock returns in the short, medium and long term Braden talks about the fast growing story that is Twilio Tickers of stocks discussed: TWLO  Getstockmarket.com Canadian Investor Podcast Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital RESP episode: https://omny.fm/shows/the-canadian-investor/resp-and-12-stocks-to-watch-for-a-reopening-econom See omnystudio.com/listener for privacy information.

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I'm here as always joined by my co-host Simon Belanger. Simon, we got lots of fun stuff to talk about today. We're going to talk about what I'm doing in my portfolio. Some stuff, TFSA, RSPs. We're going to talk about what drives stock returns, and we will finish off with Twilio. How are we doing, Simon? It's going well, going well. Excited with those subjects and to get started for another episode.

And you're feeling all good because your Habs won last night. Good for you. It's looking more and more like I'm going to be wearing a Habs jersey for one of these recordings as promised on Twitter. If you're not following us on Twitter, it is at CDN underscore investing. And yeah, we talk about all kinds of stuff about the podcast and other fun stuff, so you can follow us there. All right, let's talk about what I'm doing. I don't really have a whole lot of notes prepared because I want to talk about this in a kind of candid way of what I'm doing with my portfolio. So through the years, you develop more positions naturally, unless you're constantly like, one goes in the portfolio,

and you're like, okay, I got to take another one out. And as a rule, for myself, I say do less, if I don't need to sell anything, don't sell anything. You know, let that stuff compound. If you bought it for a reason, chances are, you want to just hold it for the next, you know, however many years. And I agree with that sentiment. It's fully a good sentiment to have. However, knowing yourself as you get more experienced and have more conviction in the companies that you own, and perhaps becoming a business owner myself, I feel very comfortable with a lot of concentration, running a more concentrated portfolio. And all that means when I say portfolio concentration is putting my wealth into fewer stocks than having a portfolio that, you know, the street will call a diversified portfolio of stocks. Now, what does concentration do?

Concentration can really create a lot of wealth if you're right. And it can also destroy a lot of wealth if you're wrong, because you have so much of your net worth tied up into less stocks. You are less diversified. Now, it doesn't mean I'm putting my whole, you know, betting the house on two names. I'm just talking about moving to something more like 10 names from a typical stock portfolio of 25. Now, there are pros and cons to this, of course. There are definitely pros and cons. One of those 10 names I could be dead wrong about and it'll make a significant dent in my portfolio. Whereas if I was just wrong about one name out of 25, it's not going to be that big of a deal. I'll totally fine now you have to know yourself and you have to do what makes sense for you i personally feel much more comfortable holding less names and i know

simon you're probably pretty you're you're aligned on that right that's because you do a lot of work on the names though right yeah yeah exactly and took that decision. We've been texting this week. And I took that decision last year that I needed to get rid of a few old things because I just couldn't keep up with all of them. And it really made me realize which company I really had a strong conviction for. And those are the ones I kept. Right. And it's a useful exercise to think about which ones do you feel really good owning. So a couple of things I want to bring up. I feel more comfortable owning less stocks in terms of number of stocks into my highest conviction names that I, if the stock market closed for the next

10 years, I'm really happy to own them. And that's important. Number two is something I want to talk about, which is called shiny object syndrome. And the fact that there's always going to be some hot stock you might want to add to your portfolio. And you have to think like, if you do that a lot, you're just going to end up with tons of different stock names. And there's nothing wrong with having lots of names in your portfolio. There really isn't. It's just not for me. So shiny object syndrome is some hot stock that you end up buying, small piece, and then all of a sudden you have 30, 40, 50 stocks.

Tracking that many names and being an expert in that many names is impossible. It literally is impossible. I don't care if you're the best equity analyst ever. You cannot know a business like the back of your hand for 50 different names. It's just not possible. It takes years for you to work at a company and know all the ins and outs of a business. Number three, do what makes sense for you. And the reason that this is important is because there are so many different investing strategies.

Whether you're a growth investor, whether you're a value investor, whether you own 30 stocks, and whether you own five stocks, you could do well with all of them. Like Peter Lynch had like over a thousand stocks in the Magellan fund and it was, you know, crushed the market. It was the best performing mutual fund for over a decade, but it's the one that made sense for him and that he knew well. I mean, there was some names that were highly concentrated, even though there's tons of holdings, but there are so many ways to be successful. And the one that's going to be the most successful is the one that makes sense for you. And that you're going to actually be able to carry out, not for a year, not for two years, but 10, 20 years.

That strategy that you're able to stick to and can keep doing repeatedly over and over again, that's the one that's going to yield the best results. In the short term, there might be value outperforming, growth outperforming, whatever it is. But long term, it's the one that you're going to be able to actually execute well is going to work the best. And I wish I knew that a long time ago. So I figured I'd share that with you guys on the podcast. Yeah, that's a great point. It's also being truthful with yourself. Make sure you're honest with yourself when you look at the time commitment you're ready to put in your investments. We've talked about it before. If you're not willing to put a lot of time, probably index

funds are the way to go. If you're willing to put a bit more time, then you might want to start picking stocks, or you might want to do a combination of both where a majority of your portfolio could be in index funds, and then you have a handful of stocks that you can stay on top of. There's not a perfect way to do it. It's really a personal preference, risk tolerance, and really the time commitment that you want to put in there. Because I personally, I love working on investment, researching companies, but I also like mountain biking, playing golf, spending time with my fiance, going outside in the summer, especially with the pandemic. And at some point, something's got to give, right? I can't stay on top of 25 different companies that I own. I know I'll just lose track of them.

So personally, I know 15 is kind of the max in terms of companies that I own. And I could go even a bit lower than that. So that's what works well for me. Maybe someone else listening tells himself or herself, you know what, for me, 25 is fine. I can stay on top of it. I have enough time to do so. I'm comfortable with that. Yeah, well put. That's well put. All right, Simone, you're a bit of an expert when it comes to different investment vehicles, the pros and cons of each of them. And we've talked about all of them in detail many times on the history of this podcast, but it's always nice to get a refresher, especially for Canadians.

Let's start with the TFSA, the pros and cons. I still really believe, like with a passion, that the CRA would do Canadians a service by calling it the TFIA because the amount of Canadians that think it's a cash account because of that savings word, as soon as you hear savings, you think cash. But if we were to put it at TFIA, a tax-free investment account, I am convinced the uptake of using a tax-free savings account as an investment vehicle would dramatically increase. And that would be a good thing for Canadians, in my opinion. So let's talk about the TFSA, which should be called the TFIA. The TFSA. So before I start talking about the different accounts, I just want to say it's someone that messaged me on Twitter.

I was asking questions about what type of stocks to own in which account, Canadian versus US stocks, and so on. I know we've talked about this before, so some of you may already know this information. But I thought it was a good idea to bring that back because it is a question I do get a lot from people, whether it's online or even with my work. I get a lot of people that are still confused how these different accounts work and there's pros and cons for each of them.

Tax-free savings account. So the pros, it's tax-free for capital gains on eligible investments. So typically that will be stocks, bonds, mutual funds. Obviously, you can open just a savings account that pays you little to nothing interest. I would not recommend that. Includes most US and international stocks that are listed on international exchanges. It has to be approved exchanges, but if you're buying anything listed on the TSX or any of the major US exchanges there's no issues there it's tax-free on dividends for Canadian listed companies only for US listed companies you will have a withholding tax and I'll talk about that in the cons here withdrawals do not add to your taxable income and that's a big big advantage so the TFSAs might not

have a lot of pros here but the pros are very very important the taxable income piece plays a big part especially when you retire and you're trying to get other sources of incomes that are not taxable could impact old age security for, if you're in that bracket where you'd be eligible. So it's really important that non-taxable portion. There's less tax implication as well if you pass away for your estate or beneficiaries. Again, I'm not an expert when it comes to this. So if you have more questions about that, don't ask me on Twitter, consult with a professional, they'll be able to let you know someone who specializes in that. Don't ask me on Twitter. Consult with a professional. They'll be able to let you know someone who specializes in that. The cons of a TFSA. It should not be used for day trading or

high frequency trading because you could end up being taxed on that. There's limited contribution room overall. It'll vary depending on when you turned 18, what you've contributed so far you may have a bit less if you've had some significant losses as well US international listed stocks will have a withholding tax so that is a tax that will be taken directly from that government and you will not see that money it's typically 15% for US stocks you lose a contribution room until the following year when you withdraw money so if you withdraw $5,000, you're already at your limit. Don't recontribute it the same year because you'll be penalized for that. But you will regain it the following year, plus anything else that you would get an additional room,

because every year you get a bit more additional room as well. It cannot be used for options trading. Losses cannot be used for tax loss harvesting. And there is some pretty salty penalties if you're over contributing to it. Yeah, well put. And the TFSA is just such a good vehicle for Canadians. Unfortunately, there is that like $6, dollar per year contribution room right now but you can catch up but still that that's six thousand I wish it was more it used to be ten thousand uh when I came out with the conservative government but such a good vehicle for for Canadians to take advantage of and I get questions all time, should I be doing this in my TFSA

and RRSP? And obviously it matters on your situation when it comes with an RRSP, depends on how much you're earning and your plan in retirement, or you can have income later in retirement. You can talk about that with your RRSP. But I tend to lean TFSA first. I tend to lean, as a general rule of thumb, TFA first for most people. That might not be for you, but for most people, max out that TFSA. It's an amazing vehicle. It's going to become a big ton of money when you retire so use that use that vehicle yeah and there's a lot of value in paying your taxes now and having them tax-free going going forward right a lot of people will tend to like the RSP because they say the logic behind it is your higher tax bracket now you retire you'll be a lower tax

bracket the problem with that is there's a lot of assumptions based there there's a lot of things that are out of your control for example you don't know what the tax brackets will be as good as a financial planner advisor whoever is helping you with that they do not know what the tax brackets will be 5 10 15 20 years down the line you know it could change so that's always a gamble that you'll be taking whereas the tfsa yes you may be paying a lot of taxes now but then you're done there's a lot of value and then you let that compound tax free exactly um so now we'll switch over to an RRSP. And obviously, I'm doing just pros and cons here. I'm not exactly saying how they're working of each account in and out, just some high-level pros and cons for each to consider when you're wanting to invest in TFSA,

RRSP, or taxable account. So in RRSP, some of the pros, of course, you reduce your taxable account. So in RRSP some of the pros of course you reduce your taxable income now when you contribute to your RRSP. So if you contribute with money that you've been taxed on that's why you'll get a income tax return so a tax refund when you file your taxes the following year. Capital gains are tax-free as long as you do not withdraw the funds from your RRSP. So obviously if you make 300% on a stock, you sell it, you keep the money within that RRSP, you're not taxed on it until you actually start withdrawing it. Canadian and US dividends are tax-free as long as you don't withdraw them. So same reasoning. That's because there is a treaty between the US and Canada specifically for retirement accounts. That's why it does not apply to the TFSA because it is not considered a retirement account. Some of the cons, and it's a pretty long list,

but again, it really depends how much weighing you put on each pro and con. So some of the cons, no matter how well you plan your withdrawal, you never know what your future tax rate will be. There's limited contribution room. Depending on when you withdraw the funds, it could impact your old age security if you're within that bracket where you'd be eligible to some old age security adds to your taxable income withholding tax when withdrawing the money can be a bit misleading so when you call the bank to actually withdraw RSPs they have withholding tax or a certain amount of tax that they are required to take off when you withdraw the money the main issue here is for a lot of people they think they're in the clear whereas their

actual taxable income is much lower. So for example, the bank may take 15% withholding tax, but in reality, you're at a 35% taxable income. So you have to make sure you keep some money aside when you file your taxes, because the CRA will ask you to pay those taxes. Again, it cannot be used for options trading. Losses cannot be used for tax loss harvesting. You're forced to withdraw the money when you turn 71. Not all of it,

but you'll have to withdraw a certain portion. So that is one of the things that I don't love because you lose control on the money where it's not an issue with the TFSA for example. There's some major tax implication if you pass away and you have a substantial amount left in your RRSP. You lose a contribution room if you withdraw the money and there's salty penalties if you over contribute. Yeah well put. There's lots of reasons to use an RRSP. And there's also, as you mentioned, lots of reasons where it just doesn't make sense. And that comes as a shocker to Canadians. It has been drilled into our minds that the RRSP is some holy grail of retirement account. It's just really not true. I don't know how to be more blunt about it. It just really not true. Like, I don't know how to be more blunt about it. Like, it's,

it's really not, it's really not true. There's lots of reasons where it would make zero sense to keep contributing to it. Just off the top of my head, those two things would be, if you have a pension or a business where you have lots of income, later in retirement, you're going to be withdrawing it at a high tax bracket. And two, if you have a big RRSP, like over a million bucks, for instance, you're going to be withdrawing it at a fairly high tax bracket. And that's the number that we have been told we need to save in our RRSP. And when it comes down to it, the money that you actually need to retire, if it was all in an RRSP, is just too much. There is a number that you pass it off into a RRIF when you're 71.

You do that forced withdrawal, and you're in this high tax bracket again. It's like, what did I do this for? I guess I dodged some tax earlier in my working years, but there are many reasons when it's just not what it's meant to, like made up to be in what this dream of an RRSP retirement is sold as. So I think that there's some important things you're bringing up here. Yeah. And I think for me, before I get to taxable accounts or margin accounts, one of the big reasons, the two main reasons why I prefer the TFSA over an RSP in the general rule,

obviously each situation will be different, but from my own view, my own perspective, is TFSA offers certainty. You pay your taxes now. You know what it is, and you have a lot more control over the money. Those are the two main things for me that are the biggest pros in my opinion. Again, everyone's situation is different, so maybe for you, it makes more sense to contribute more to an RRSP. But there is still, you know, whether you contribute to RRSP and you think that's better for you or not. Reality is there are a lot of projections and unknowns that you will not know until you get there and you start withdrawing it. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense,

and with them you can buy all North American ETFs, not just a few select ones, all commission-free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money.

Visit questrade.com for details. That is questrade.com. So now on to taxable and margin accounts. So those will be very useful if you've used all your room, for example, from TFSA and RSP. So you don't have the option of those types of accounts, then you don't really have a choice for a taxable account. But it may be right in certain situations, even if you have room in your TFSA or RSP. Some of the pros, you can use it for options trading. You can use it for day trading. It can be used for tax loss harvesting.

There are no contribution limits like the other two accounts. Can trade on margin as well. Obviously, it's a pros. I'm not saying that I value that as a pro. I'm not saying we do that, but you can do it. Yeah, exactly. It is something you can do versus the other that you won't be able to some of the cons capital gains are taxable dividend income is taxable can be risky when day trading options trading so if you don't know what you're doing you can really get burned pretty badly here again if you're using, you could be completely wiped out.

And that's one of the bigger risks, using margin and not understanding it. I went over the margin risks and what to consider if you're trading on margin a few episodes back. So if you want to learn a bit more, by all means, you can refer to that episode. But in a nutshell, these are the pros and cons for all the three main types of accounts. If you would like me to do the pros and cons for an RESP, I will not be doing it in this episode. But I did like almost a half episode talking about RESPs a few months ago. So you can just go back to our older episode if you'd like to know a bit more about the registered education savings plans account especially for parents obviously and that'll be uh they'll give you kind of the lowdown on that yeah that's always the one that's just and oh yeah there's the resp because you know there's

the main three it's like oh by the way resp yeah simon did a dive into the details of that one if you want to listen to that as well. And so if you're thinking about these things, there's three main accounts to utilize. And in almost every case, it makes sense to max out the TFSA. In almost every single case, it makes sense to max out that TFSA. It really every single case, it makes sense to max out that TFSA. It really does. And then from there, once that's done, you figure out what makes sense on the other two. If you have a ton, this is what I was telling my parents,

if you have a ton of money in your RRSP, you want to invest, throw it in a taxable account, pay capital gains tax. It'll be actually more tax efficient than your withdrawals on your RRSP, especially if you're in your non-earning years when you're investing. Okay. I want to do a segment on what drives stock returns in the short term and in the long term.

So what drives stock returns in the short term on a specific stock? Well, in the short term, there's actually a lot of luck. If you were to put like the scale of luck and skill in the short term, you know, we're talking like less than a year, in the short term, we're talking like less than a year, you could probably say luck and skill are 50-50, honestly. I really truly believe that. In the short term, stocks move on a momentum basis. They move on a street sentiment and narrative basis. And that is what will drive multiple contraction or expansion. So your entry price that you pay for or entry multiple, say 20 times earnings, 25 times earnings, when I'm talking about a multiple or a multiple of sales, that is going to matter a lot because that will expand or contract based on street sentiment and momentum quite a bit in the short term because business results only come out every quarter. So in between that,

businesses are moving off news and the overall feeling of how much the market likes that stock in the short term, the price you pay matters a lot. And then also stocks, a specific stock will perform a lot in the short term based on a macro environment or stocks as a group. So if stocks as a group perform incredibly well, like they did after the coronavirus crash and you know everything you bought went up it didn't even matter what you bought it stocks just went up so in the short term there's a lot of luck and some skill there's just no other way to put it yeah yeah and that's like sorry go ahead yeah yeah and the one thing uh i would add to that is you mentioned coronavirus and black swan events like covid will have a much bigger impact if you're looking short term um and obviously there's been black swan events it's

not the first one there's going to be more in the future it might not be a pandemic might be something else we were i was just kind of spitballing. Maybe it's a big solar flare that impacts the electric grid for, you know, a few weeks or something like that. Those black swan events will have a much bigger impact the shorter term you're looking at. And the other thing I wanted to ask you, put you on the spot, is what is short term for you? I know we talk about it a lot. I mean, I have my own view, so we'll see if we're kind of that same in ballpark. I would say short term is less than a year. Medium term is less than three years. Anything long term, you're thinking about a holding period of at least three years. Now, when I when I think really long term, I'm thinking actually 10 years.

But if I'm holding something three years out, yeah, you've been a holder of the stock. 10 years is like you're bag holding something 20, 30. That's when you're going to really see some compounding. But yeah, I mean, I would say anything less than a year is definitely short term. You could even say anything less than three years is short term. Yeah, yeah, I was going to go there a bit more. And, you know, it's fine. I think it's just semantics a little bit, but it's fun to see how people define it.

So personally, I kind of use short term anything within, you know, a few years. I would say for me, it's like a short term, medium term, maybe two to five years, and then anything five plus years, in my mind tends to be more long term focus. Probably, you know, very long term, I would say 10 plus years. Yeah, that's, that's Yeah, we're Yeah, 100%. We're completely aligned there. So if you think about it, in the short term, lots of things can happen. And a lot of it's going to be valuation-based. You're going to see that multiple contract or expand.

All right. Now, what about on the long term? Now, we're talking about real business results. If you own a stock, it's actual real fundamentals improving. And a stock can be actually more attractively priced, even if the share price has moved up a lot. For instance, I don't think Google stock has ever been cheaper. And it's at an all time high, because the value of the business has increased so much. And it trades at like 19 times next year's earnings, like it's not a crazy multiple, it really isn't, even though the stock has done incredibly well. You know, it's a multi trillion dollar business now. That's that's an example. So long term, businesses improve their fundamentals, improve

their value from a few things. So one in my short little list here is sustained return on invested capital. So that's that ROIC number you see. And then how often they're able to invest at that ROIC, so like that reinvestment rate and some opportunities that come up during the time of compounding. So what's that long-term sustained return on invested capital? Number two, growth of revenue, earnings, and free cash flow. So those big income statement numbers, if they're increasing, chances are the business is executing and doing well long term.

And I'm talking about sustained growth for decades. Not many businesses can do it, but if you find some that can, you will make a lot of money. Number three, their moat is widening or strengthening. So their competitive position is only getting stronger over time. So think about businesses that have really, really strong network effects, really strong moat. Competitors are just not there with it. Going back to Google. I mean, Google search had all these different competitors come up throughout its time. There was Microsoft coming out with a new product. There was, you know, there's this duck, duck, go thing that happened. I don't even know what that is. No one uses that. Over time, Google strengthened their position as the search engine of choice. So over time, the business got better and more profitable. Number four, improving the value of the stock through stock buybacks. It's incredible what stock buybacks have done for returns over time. And that's been a big trend in the last decade. Number five, optionality and total addressable

market growth. If you think about Amazon, you could have never predicted them to come out with Amazon web services. There's no possible way an analyst had that modeled in their discounted cash flow model. There's just no possible way you could have known that they'd come out with Amazon web services. It would be a beast and drive a lot of the free cash in the business. Like you could have just never really known that, but that optionality matters. And that total addressable market, is it growing? And that's going to be really beneficial. Number six, your entry multiple matters. You're paying 25 times earnings. That entry multiple matters, but it matters less as time goes on. So it matters a lot in the short term. It matters quite a bit in the medium term. It matters in the long term, but it matters less

because if the business executes and grows a lot, it's going to matter less what that entry multiple is. So overall, if you think about it, luck drops off a cliff and it's not in the conversation anymore. It really isn't. It comes down to your ability to hold in your conviction and your analysis upfront. So your skill outshines in the long term and luck matters less and less. And I think that overall, that's a pretty good synopsis of what moves stocks

over the short and long term. And there's all kinds of other things, but those are going to matter a lot. Those are going to really, really matter in the short term and in the long term. Yeah. And I would add to that, that long term too, you can really find opportunities where the market is short term focus and where a company will be, whether they're transitioning the business or they're going through a tougher shorter term period because they are for example investing a lot in the business it's impacting free cash flow it's impacting earnings and the markets is down on them but when you're a long-term investor if you do realize

that that company has a lot of tailwinds going for them and that these short-term pains can actually lead to oversized long-term gains. That's where it really creates an opportunity as a long-term investor because you're competing with a lot of people that are short-term focused, including institutional managers, for example, fund managers, all different kinds of managers that will probably tend to be more short-term for kids because they don't have a choice really. It is in their, it is, they're obligated. They have career risk. Exactly. They have career risk. It's also oftentimes in their mandate. So they have to edge your risks as well. That's where it really creates an opportunity for you where, you know, they may be selling a certain position because they don't see it turning around the next two years. Whereas you don't have that same obligation.

You invest in that business. It may thread water for a few years and you may not make much. But then 10 years later, you have a 10 bagger, for example. Yeah. And if you're a money manager, you you got to report to clients on a monthly, quarterly, whatever basis it is. And so you're under pressure to perform in the short term when really you could be the best money manager in the world and lose to the market in a one month timeframe. That doesn't mean anything. I don't think it means anything on a one month basis

and this is i'm getting sidetracked but this is a problem that i see with the education system in terms of people who go on to learn about finance in university for instance is they have these everyone who did finance in school knows what I'm talking about. They have these competitions that'll be part of class or outside of class to do like a trading competition. And it's based on maybe the semester. So you have to perform really well in four months, it's a simulation where it's you know the the event happens over four hours and you're basically in and out of stuff the whole time you're trading a lot and that does two things i mean trading a lot does not lead to better investment returns we

we know that and the other thing is in four months, it would be the best performing asset during that time is crappy stocks like GameStop and AMC. So the people who made terrible analysis ended up winning in that short timeframe. You have AMC coming out and saying, hey, management management comes out and says our stock is literally junk compared to what it's worth how often has that ever happened that a management team have gone out and said our stock is a joke it is not worth this um i actually respect them a lot for doing that but yeah wasn't there a one of the u.s uh car rental companies i can't there one of the U.S. car rental companies? I can't remember one that went bankrupt. Hertz. I think it was Hertz.

It was management who basically wanted to issue more shares but telling people that, oh, yeah, we're probably going bankrupt, by the way, soon. Yeah, but we may as well issue a ton of shares and raise a bunch of capital in the short term. Yeah. issue a ton of shares and raise a bunch of capital in the short term. Yeah. I mean, so it goes back to that is complete luck in the short term, like a four month time basis. What's going to be the best performing stock in four months? Like, God, I don't know. That's the silliest thing ever, right? So these things matter in terms of long-term, you'll do really well, but you got to focus on the businesses you own and you got to stomach volatility. You're going to see tons of volatility along the way. 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. Okay. Let's do Twilio, Simon. Twilio is a business that just came out on Stratosphere in terms of a company report. My team's coming out with new reports every single day on the companies we cover in our database. We're about 80% done the database. If you go to getstockmarket.com, you can read the full report. All right, Twilio. So Twilio is what is called an API first company. Now, what does API mean? API stands for application programming interface, which is software tech bro jargon for, I have an app and there's another app. How do we make them communicate to each other? Let me give you an example of Twilio's API being used by a company like Uber. When an Uber shows up to your

door and you get a message saying, hey, I've arrived, that is Twilio's API communicating with you via text message. So what Uber has done is they've said, screw this, we're not going to build out a communication platform that someone else has already done. We're going to tap into Twilio's API, pay a penny for every text that is sent out, and we're going to have a great communication with our customers and the experience is going to be amazing. communication with our customers and the experience is going to be amazing. So instead of building out that infrastructure in their technology stack, with a few lines of code, developers can have this functionality through Twilio's API seamlessly right out of the gate. And then you're going to be able to communicate with customers. So that's a perfect example of what Twilio does with Uber services. Now they do other things like email communication, actually like programmable voice and video as well. So think of different communication channels. They're making acquisitions to become this omni-channel API company. But if you are a developer, you're a startup, you're a developer in a mid-level company, and you want to build out this functionality, Twilio is the name in town. Jeff Lawson, the CEO and a fantastic entrepreneur, him, Evan Cook, and a guy named Joel Wolfius started Twilio. And Jeff Lawson actually built Twilio

to Rickroll people. It's a funny, these, these entrepreneur stories always start with some, someone messing around. And this is this kind of what happens. It was literally him making this platform to send out SMSs and rickroll his friends. Now, there's this communication gap between the telephone network and people who hold smartphones. So the networks that are run by carriers operating on cell towers across a certain region give users the ability to communicate with their towers and communicate with others. Now, for the average customer, this is all it takes,

is the Twilio API to connect the carrier, the telephone network, and a company's application. Now, this is all done with HTTP requests, and I'm not going to get into the tech right now. I'm not even going to get into the super network of what makes Twilio's kind of competitive advantage happen. But let me talk about what makes the business kind of interesting is it's a usage-based model. So if you go and sign up for some software as a service, you're going to pay some, you know, 50 bucks a month,

or you're going to pay for a seat. You're going to say, okay, the amount of customers you have, you're going to pay in this tier of pricing. Twilio says, no, it's completely free, but it's a usage based model based on how much you use of the platform. So if Uber sends one text, they collect a penny. Now, this does something interesting because both businesses scale together. So Simon, if I'm a developer and I'm trying to get this communication platform integrated into my technology stack, I don't have to go to middle management and say, hey, I need approval to buy this new software as a service platform. I can just get it going, get it working, and saying, hey, we're going to pay a penny for this. Our customers are going to

love it. Okay, that's an easy sell. Or if you're a startup, you do not have to be well capitalized to get this working in your technology stack. Now, once you have an API set up in your company's technology stack, it becomes incredibly sticky. It's really sticky. If it works, why change? And it's so integrated into your application now, that changing it is really a pain point. So the switching costs are really high. I believe that Twilio's competitive advantages are very strong as a software business. The friction for developers to start using the platform is very low, and then they keep them with low churn. And then as every, you like to see in technology companies is customers spend more and more on the platform every year. So you're seeing

organic growth just by your company's succeeding. I like that model because it aligns incentives really, really well. Now what's happening is you're seeing this nuts growth. I mean, Twilio's revenue chart is obscene. Just go check it out. It's disgusting. This company is growing really fast. Now what they're doing is they're actually doing a lot of acquisitions. They're well capitalizing, good balance sheet. The company's not free cash flow positive, by the way. Not free cash flow positive. But they're doing these acquisitions. And what those acquisitions do is then Twilio becomes the omni-channel platform for communicating with all their customers. So they've acquired

this company called Segment. They've acquired SendGrid. I've actually had some experience using SendGrid, which is email communications with customers. And you can automate all of this stuff so well to have a customer experience that really works and provides a ton of value. All right. Now thinking about what some of the risks are is their margins are pretty terrible for a software company. And I don't really know how they flex pricing power. It's so low right now. But I believe that their plan to under earn in the short term is a smart one. They want to win large customer sets like they have Airbnb and Uber. When these big customer sets do this like land grab and do this acquisition strategy, I think focusing on profitability is not in their best interest and they are not. So that's smart. And then also another risk is why can't some of these companies just build out some of this functionality in itself? This is with any API first company, you have to think about that. For example, Stripe runs all of Shopify's payments

and they pay Stripe a lot of money. Now you're thinking, okay, there's a lot of engineering staff at Shopify. Couldn't they just build out their own payment platform and take more margin? That's been the word on the street all this time. You know what Shopify did? They're just buying some of Stripe. They invested $350 million in Stripe the other day. So that's been the word on the street all this time you know what shopify did they're just buying some of stripe they invested 350 million dollars in stripe the other day so that's basically saying hey we're going to keep using this api but it is a risk that you need to think about in terms of an api first company if the if your big customers are well capitalized and they have a lot of engineering staff they can build out that functionality and say, bye-bye, we don't need you anymore. So that can happen. There's new competition coming out. So just be aware of that. But I think the M&A strategy will work. And I think they're buying competitors.

So let me wrap this up. Twilio has changed the communication game for the better. Their advancements in bridging the gap between businesses and the telephony network have helped companies expand their customer experience. It provides developers, software engineers the ability to deploy a good solution for customer communication. And once you're on the platform, it's really sticky once you're in that modern technology stack. They're currently, by a wide margin, the leader in this communications API. And oh my God, this company's growing incredibly fast. I'm not even going to talk about valuation because you know all these SaaS,

fast-growing companies trade at ridiculous sales multiples. So I'm not going to tell you here right now if I think this is a buy or sell. I not going to tell you here right now if I think this is a buy or sell. I'm here to tell you about the business. And it's trading crazy expensive, but if it can sustain the growth, who knows? Yeah, the one question I would have, I don't know if you know the answer. Do they break down their revenue for their major customers? or do they break down their revenue for their major customers? Like what percentage comes from Uber? What percentage comes from Airbnb, for example?

I haven't seen it on their 10K, but it is a fantastic question. You know, what kind of customer concentration risk do they have? And I bet you it's not as high as you'd think. Like they have, you know,. They operate in over 180 countries. Here's some stats. To date, Twilio is accessible in over 180 countries, used by 9 million different developers. And some of Twilio's biggest clients include Salesforce, eBay, Shopify, and Airbnb. So they might have some customer concentration on those big names, but you know what? These companies aren't in a rush to build out something

as complex as working with the communications infrastructure, right? It's complicated and they have this first mover advantage. And I think the competitive advantage is really strong. I think they're building a pretty big moat. No, it's an interesting company. That would be probably my only question. Whenever I see businesses, specifically in software, I always want to check if there's a large concentration of their revenue just to understand the risk.

It's not necessarily a bad thing. It's just when you're too concentrated with one or a handful of customers, if you lose one of them, then it has a big impact, right? So that would be the only thing for me. Yeah, it's a great point, especially when you're an API-first company and you've been kind of carried by a big win like Stripe and Shopify. You get carried by this huge business. It's on this transaction-based usage model that if they were to go away, it's like, oh my God, all my revenue just gets wiped. So you got to be aware of customer concentration

risk. But Twilio has gotten to the point now where, you know, they've, they're, they're a big company now. They're a really big company now. And very highly valued on the stock market. What a shocker that a fast growing software name is highly valued on the stock market these days. Can you believe it? Yeah, yeah, I can believe it. It's not a surprise. It really isn't. Okay, that does it for this episode, guys. Thank you so much for listening. We appreciate it. If you haven't given us five stars or followed us on your podcast platform, we do truly appreciate that you do that. If you go to getstockmarket.com, you'll be directed to stratosphereinvesting.com, or you can just type in stratosphereinvesting.com.

It'll bring you to my business, Stratosphere. You can see deep dives like Twilio and more on there and get all the analytics you could ever want. You have their 10-year financial statement. You can graph it all out. It is a beautiful thing. Simon, I'm seeing you raise your hand on the Zoom call. What's up? Yeah, I'm trying to use the video to our advantage. Just one last thing I wanted to add. For those of you who listen to this podcast when it comes out

on Monday or this week, have a look at our Twitter. We'll have a poll up for four options of businesses you'd like us to review. So we sent out a tweet asking people to reply, give us names of companies they'd like us to review. We'll pick four that we like out of them that we've never talked about before. And we'll put the poll up. So we'll keep the poll up for a whole week. So if you're here this on Tuesday, Wednesday, Thursday, that's fine, you'll have time to go vote. So give it a vote and we'll review it in the upcoming weeks. Yeah, just like we did with BlackBerry. Oh, that was terrible.

BlackBerry. I really didn't want to. You handled that. I'm like, I really don't want to talk about BlackBerry. But we'll be doing something similar. So if you want to give us our feedback and by voting, by all means, check out our Twitter at CDN underscore investing. That does it for this week, guys. We'll see you next week.

Take care. Bye bye. The Canadian investor is not to be taken as investment advice. Braden or Simon may own securities mentioned on this podcast. Always make sure to do your own research and due diligence before making investment decisions.