The Canadian Investor - Why Capital Allocation is so Important and More Retail Earnings

Episode Date: August 24, 2023

In this episode of the Canadian Investor Podcast, we look at the earnings of Walmart and Target to see if they are seeing similar trends to Canadian Tire. We also look at Zoom’s earnings, Evergrande filing for chapter 15 bankruptcy and some of the crucial mistakes made by Algonquin Power and Utilities.  Symbols of stocks discussed: AQN.TO, WMT, TGT, ZM Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

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

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Bélanger. The Canadian Investor Podcast. Welcome into the show. Today is August 22nd, 2023. My name is Brayden Dennis, as always joined by the legendary Simon Bélanger. Buddy, we got a good episode today. uh before we do that if you have not checked

out join tci.com that is the patreon for the listeners of this show to support the show and see us on video as you can see my setup's a little different today we got uh we got the full close-up right now you can see every crevasse in my face today well it's more like half face you're like like half in and out of it yeah exactly so you can see uh braden's partial face expressions that's right uh you know we are audio experts uh video is still still coming along but uh you can come see us and our monthly portfolio updates most importantly at join tci.com um man how was your weekend because i just bought some new uh cd's some new toys and i got one my brother got one so if you're a if

you're a shareholder of uh brp you're welcome. Yeah, I haven't bought any new recreational vehicles or bikes or anything like that. However, I am shopping for a new used car. So we'll be buying that probably in the next couple of weeks just because with our baby girl going to daycare it's gonna be a convenient to have a second car so mom and dad can you know alternate the pickups or whoever can make it work look at you adulting and stuff i'm just over here buying toys that suck up fuel and strictly for fun um you have your first segment today, which is about U.S. retail. It seems to be a tale of two businesses here. And I'm curious to see what you got. Yeah, so I'm going to put my bear hat back on.

Or no, semi-bear, I would probably say. 50% bear. 50% bear after last week when I spoke about Canadian Tire. But yeah, it was interesting. So I'll talk about Walmart and Target earnings, a bit more about Walmart, but I think we can get some good insights on what Target reported as well. So obviously, as I mentioned, alluded to Canadian Tire's results were definitely showing a shift in consumer spending in Canada, specifically more towards essentials or non-discretionary goods. And Walmart reported Q2 2024, they just have a little bit of a wonky reporting schedule,

so don't mind the 2024 here. Revenue growth was 5.7%. The U.S. comparable sales were up 6.4%. Walmart U.S. saw strength in their grocery and health and wellness while they saw modest decline in general merchandise sale. I'll touch more on that later when I talk about Target. Sam's Club, their Costco competitor. For those who haven't seen a Sam's Club, it's very similar to a Costco. I remember going when I was a kid and I actually thought it was a. They saw strong sales in food and healthcare there as well. And what's really

telling us here is that I think Walmart is starting to see something a bit similar to Canadian Tire. The reason that Walmart is more resilient though is because they are seen as more a value proposition, but also they are a massive grocer. So for those not aware, Walmart is actually the largest grocer in the US. A lot of people don't realize that, but they are the largest grocer. And what that allows them to do is that people actually go into their store, will buy food and essentials, but they may end up shopping, you know, buying a couple other things while they are at Walmart because it's convenient. So that grocery is kind of pulling consumers in.

And that's why Walmart, I think, will probably be more resilient. Anything you want to add there before I continue? Yeah, I mean, it doesn't seem that long ago, and maybe it was earlier in the States, but it doesn't seem that long ago when all of a sudden so much of the Walmart footprint in the store became grocery. Do you kind of remember that? Because early in my, I'd say, childhood visits to Walmart, I don't remember seeing groceries. groceries. And then all of a sudden, they introduced it and it became such a big part of the footprint. And now it's come out such a big part of their financials across the board and all the regions that they serve. And I'm not surprised that there's such a large issue of grocers. Now, I find their groceries to obviously be quite a good deal but i don't see the appeal of shopping there given the in-house brands and the quality like you're not saving that much like it's not like substantial savings i feel like but i but i could just be very anecdotal right now yeah i know i

mean i think that's a fair point to your first question. I think it was about at least in Canada about 10 years ago, if I remember correctly, about a decade ago. Yeah, where they started popping up at least in the Ottawa region with these like super centers, I think that they call them where there's a pretty significant grocery area. I mean, I think as a generally like as a general rule, I think Walmart is definitely, you know, more cost effective than a loblaws for example or oh for sure yeah yeah they're probably comparable to their discount brands that they have i think i'm kind of losing the the ones yeah no frills and i think and i i know metro has i think super c in quebec and they have something similar in Ontario and the rest of Canada.

But they're probably comparable to that. But I think it's also the perception, right? If people see overall value there as they're getting squeezed and they have less disposable income, it's just a logical choice to go over to Walmart. And if you're shopping for the family or something, you can get every single item

you could possibly imagine in one trip. And that can't like that. And that needs to be stated as like a key value proposition of, of what Walmart is offering here. Like, you know, you need some, some clothes, you need some diapers, you need groceries, you need household appliances, you need cutlery or like a blender, you know, it doesn't matter. You can get it there. Yeah, exactly. And the rest of the results were actually, you know, pretty good, especially considering what's been coming out

from a retail standpoint. So gross margins increased 50 basis point to 24%. Operating income was up 6.7%. Earnings per share was up 55% to $2.92. Although I would take that with a grain of salt because they did have some inventory issues last year. So that's probably a bit of an impact there. And free cash flow was up 400% to $9 billion, much better, obviously, than last year. So overall, I think a very good quarter. If we're thinking of comparing this with Canadian Tire, obviously, there's some massive differences here. First of all, Walmart is just a global retailer. Like I mentioned earlier, they're a large grocer, so it attracts customers, and they're definitely more on the value side.

So I think that's why you've seen their sales actually grow. But they did mention, like I said, some similar trends to what Canadian Tire noticed. So people are focusing more on essentials and less on discretionary goods. Now, to move on to Target, which is clearly a competitor in the US, but definitely has a much smaller grocery area. They do have some groceries. I've been to many Targets in the US, but So very similar to, again, Walmart and Canadian Tire. This was offset by declines in discretionary spending. Earnings per share was massively up by 358%. But that was mostly because of their lower inventory levels and higher profitability margins. Inventory levels, for those who don don't remember last year, similar to Walmart, they

actually had to do a lot of discounting because they overordered to fulfill some of the pandemic needs that people have. So for example, when that comes to mind, let's say like patio or furniture in your house, that was very popular when there was lockdowns because there was nothing else to spend on. And then they overordered. So they had to pay some discounts. So that put some pressure on their margins last year. And the positive here for Target is also free cash flow was positive for the first six months of the year. More than $570 million of free cash flow compared to a negative free cash flow last year for the same period. What was not good is they lowered their full year guidance for profits and sales. Comparable sales are expected to be declining in the mid single digits for the rest of the year.

And they also lowered their mid range of their guidance by 8-9% of adjusted earnings per share. So some common themes between both of them, but for the most part, obviously Walmart way more resilient. But I think we're starting to see a little bit of a common theme for retailers here where you're starting to see consumers shift their spending a bit more to essentials. And I haven't researched that, but it'll be interesting to look at when some data comes out in terms of people's savings rate and the total amount of savings that people have on hand in Canada and the US, because I have a feeling that's probably been sustaining some people's spending. And when you

have savings and cost of living is more and more, at some point, you don't have as many savings available to you. That's a good summary i mean it's so we got walmart grew the top line at 5.7 percent and then almost the exact same number of down 5.4 percent so that's you know net net that's a pretty big spread in performance that you know i i don't expect these companies to perform you know like, but that's a pretty significant spread. Yeah. Yeah. And I mean, I think it just reinforces how Walmart has done.

It's been a really great call for them to have that grocery stickiness to their business. Yeah, absolutely. I'm just looking at the performance of the business. So since about this time, two years ago, oh man, Target's lost about half of its value during that. It's been a rough time for this stock. Yeah, they had a big run up during the pandemic up to probably just on memory, I think up until maybe late 2021. And then it's been a bit of a pullback since then. Maybe I'm a bit wrong on the timing but i think it's about that yeah yeah and you know you've had a pretty solid positive return owning walmart during the same period so

uh gigantic difference in the performance of the stock as well yeah and some people may be wondering who were watching target so when they released their earnings the stock was actually up but now it's been kind of trending down pretty well since the earnings release. And I think it's just good for people to remember the market sometimes will just focus on one thing. So the market wasn't necessarily focusing as much on the guidance. It was more focusing when the earnings came out on the profitability. But now I think the market is shifting and kind of looking a bit more at the guidance and what's to come. So that just shows how short term the market can be at times where that focus will literally on a difference of a week will change the focus that the market is taking. Mr. Market, you know, never ceases to amaze market participants, which is Mr. Market.

Market participants, which is Mr. Market. And if you haven't read the good old anecdote of Mr. Market, it's probably the first 50, 60 pages of The Intelligent Investor. And it's the most important part of the book in my view. And of course, if you don't want to read the book, just Google Mr. Market and you'll learn all about the anecdote. And it's something that you'll never forget when you see short-termism that makes no sense to you. You might think to yourself, am I the dumb one here? Is there something that I don't get? And then you just remember Mr. Market and you go back to staying rational and living your life and investing for the long term. 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. Xtrade.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 or 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 Algonquin Power. It's a great Q&A.

I'm looking forward to that one, yeah. Let's talk about Algonquin Power. popular Canadian stock because it's had an element of growth, dividend growth, and dividend yield, which is like Canadians are drunk on dividend yield. I am sure of it based on the discourse online. And this was one of my better calls on the stock because a while back here on the podcast, sometime maybe early last year, late the year before that, I told people on the pod and I told you that I was selling the stock because the capital allocation made no sense. Like no sense. And the stock was 20 bucks at the time. This was before the market realized that it made no sense. And so this is me patting myself on the back here, but it's more so

about the discussion around capital allocation as a whole, rather than their earnings, which the results I'm not going to get too much into. But Algonquin has now hired a new CEO. They're kind of doing a bit of a clean house in terms of the upper management. They're selling this green energy group, a part of the business at a $25 million loss, or sorry, after it generated a $25 million loss, excuse me. And you and I share a very similar philosophy around evaluating management teams. Now, this is more art than science when evaluating their skill and their track record. But you can't unsee red flags, or at least like amber flags, yellow flags that potentially turn into red flags. I sold the stock when they had this

huge $600 million stock issuance. And a stock where the capital allocation decision making makes no sense is not a stock that you should own, right? Is that an overgeneralization or do you think that that's fair? I think that's fair. Yeah. I mean, it should be pretty easy to make sense of their, at least their general vision in terms of stock or capital allocation. Yeah. Right. So here you have this regulated rate utility in a basically at the time, zero interest

rate environment and renewable utilities. Even if your whole business is not a renewable they had the renewable aspect of it um they can issue something called green bonds you get like a 25 year plus note from large institutions like canadian banks and and others at extremely low low two percent high two percent low three percent at the most interest rates, depending on the duration. Because these banks and these large institutions need to pad their stats on ESG investing in capital allocation. So these utilities can take advantage of it. And almost all of them have, And almost all of them have, except for these idiots who just don't understand it, I guess.

And so that's when I was like, I am so out on this. I should feel a little bit more confident that you're going to know how to raise funds. And so I have here on the document here, Simone, it's Algonquin total shares outstanding have gone from 194 million to almost 700 million since 2013. That is an astounding amount of dilution for a utility to say the least, right? And so this is a business that is now in turnaround mode and has been a bit of a falling knife on people who tried to buy it after the last print because it got sold off heavily after the last print and people wanted to jump on the stock. It felt like 30% in a day. And you've lost money even from there at this point, this stock's trading at sub $10. So there's a couple of important lessons here. Don't sprint for yield traps because all of a sudden this name started trading at like nearly a 6% dividend yield after the last print when the stock got decimated. And you've lost money net,

net, even after the dividend payout. And so it's important to remember just like, yes, dividends are great. Yes, I love them. Yes, they feel nice to get into your account, but they are not free money. It is the company moving its cash on its balance sheet onto your balance sheet. And there's no net net value creation there. It is just a distribution of cash from the business that they can no longer use to reinvest in the business or in this case, pay off debt or, you know, have a long variety of things that they should probably be using the cash for instead. If I was the owner, that's how I would do it. And so there's so many different lessons here in the past two years of Algonquin Power that I think, you know, these are

the things that we can't forget. We got to remember these important lessons because they keep coming up time and time again. Yeah. And as you were saying that, I pulled up on Stratosphere the, you know, the total assets and the long term debt. So it's not like they they were just issuing equity and not issuing any debt. They were still issuing debt and was still growing, too. still growing too. So yeah, I mean, definitely, typically, utilities will make they'll make good use of debt because they have stable revenues. And, you know, it's easy for them stable cash flow. So it's easy to them for to service that. But this management, yeah, it's very confusing, the strategy they were using. And clearly, when they were issuing that they were not issuing the cheapest debt that they could actually

issue. I am looking up here. I shouldn't speak without proper facts. They did offer green bonds in the spring of 2021. But now this is ironic because now they've divested that portion of the business. So they're no longer eligible to issue them. So, man, it's a turnaround at this point. New management's coming in. There's lots of important decisions to make. Selling off the renewable business is probably wise given the fact that the debt load is accumulating. The dilution's gone out of hand. And you could say that it's short-sighted selling off that asset, and I can understand that position, but it's operating at a loss today. And that's just not something that they're in a position to afford today. So when a business is not in the position to make long term decisions,

that's not great for investors. No, definitely. And I think it just reinforces the importance, especially right now, you want to be investing in companies that have strong balance sheets. Because, you know, a dividend is nice. And they have a dividend or not, having a strong balance sheet is nice, but it is actually not nice, but very important. It's crucial right now, especially with the interest rates that we have and, you know, making sure the payout ratio is sustainable. If you're into dividend stocks, I think it's something that everyone should be looking at, not only from a profit basis, but from a free cash flow basis. And you want to make sure that is sustainable because if it's not, unfortunately, usually what happens is

management will have to cut the dividend. Oftentimes they wait too long to cut it and then you take a significant haircut with the stock and you end up losing money even when you factor in those juicy dividends that you got in the meantime. Okay, so now we'll move on to, I guess, some big news that came in last week. So Evergrande, I don't know how to really pronounce it, but I'll say Evergrande for now on. I think that's correct. Yeah. I don't believe it's like Grande, like a, you know, grande frappuccino. Yeah, I think I've been too often to Starbucks, but they filed for Chapter 15 bankruptcy last week.

So before I get started, I just wanted to mention this is an overview of the situation. And like I was talking with you, Brayden, before we started recording, I'll try to get a guess that's an expert on the Chinese economy and what's happening probably in at some point this fall. So I want to have a good guess here where they can go into really what's happening with the Chinese market because there's a lot of stuff happening, not just this. So Chapter 15 bankruptcy is a type of bankruptcy that allows for cooperation between U.S. courts and foreign courts when foreign bankruptcy proceeding touch on U.S. financial interests. So although it is pretty big news here, it's not that unexpected since they had already defaulted on some of their loans back in 2021. I'm pretty sure we had talked about that on the podcast too. And you know, their bankruptcy

is important, but what is looming over the Chinese housing market right now and the financial markets as a whole, especially the Chinese financial markets, is the potential trouble facing Country Garden. So Country Garden has almost four times more housing projects than Evergrande. The company has promised to deliver 700,000 units this year, but with more than half of the year completed, they're still below that based on the recent filings. And what is getting investors worried here is that the company missed two US dollar dominated bond payments last week and has until early September to make those payments. There's a grace period. I couldn't find the exact date though. So I know it is early September. So let's say just a couple of weeks from today. Chinese developers have been under a lot of

financial pressure because of the high indebtedness levels that they're facing or that they have. That was exacerbated in 2020 when the Chinese Communist Party, the CCP, introduced the three red lines financial regulatory guidelines. So those three red lines are the following. So they're basically ways that new guidelines that they impose on these developers to make sure that they were not too leveraged. So the first one is that liabilities should not exceed 70% of assets. Net debt should not be greater than 100% of equity. Money reserves might be at least 100% of short-term debt. So the problems in China's real estate market has created some real problems

for the CCP. And obviously this is not necessarily helping. I'm not sure it was a bad idea for them to have those three red lines. I think it makes sense that you want them in good financial health. But the fact that they imposed that actually put more stress on these companies. Before I get going, anything you want to add? So I'm just trying to catch up because in 2021 there was the big news that they defaulted on their debt correct and then that's correct yeah and then what has what has transpired between then and now in like the easiest way for the listeners to end me. I'm just like, you're asking for a friend. What has transpired between then and now?

That's a good question. I would assume they were able to make arrangement with some of their debtors to potentially restructure the debt or have different payment arrangement. I'm just speculating, but that would be my assumption. I could be completely, you know, out for, out to lunch on that. But that's my assumption is that most likely debt bondholders and such, they were probably to make some kind of arrangements. And then, you know, at some point,

they said, okay, you'll have to come up with some money and they weren't able to. And now they're filing for bankruptcy. Most likely it's because I didn't dig into that. That's a good question. But it's probably because some of the debt was coming due. So not just interest payments. So typically if you're defaulting on your debt, usually it could just be that you're not making the interest payments. But once the debt comes due, then it's a bit different.

payments. But once the debt comes due, then it's a bit different. So you either have to repay it or you go you look at some of their alternatives, bankruptcy being one of them. So now to continue here in terms of some of the problems facing the Chinese economy. So China's real estate market represent approximately 30% of their economy. So it's it's massive. I believe it's the single largest asset class in the world, if you're looking at just like a specific asset class. That's what I've been reading. The Chinese economy had a GDP for context of 18 trillion in 2022. That was only trailing the US's 25.5 trillion. And so if we apply some basic math, that would be approximately 5.4 trillion tied to real estate for their GDP. So it's very significant. There is more trouble in the sector that could have major impacts on suppliers to those large developers if they go under,

with some of them also being large businesses. So all those suppliers, so all the ripple effects that you could have if you have a country garden, for example, that goes also files for bankruptcy or is facing some significant issues. And they're not the only large developer facing some issues in China. It could also have major impacts on regular Chinese citizens who have a tendency to store their wealth in hard assets. That's because it is difficult to invest in stocks when you live in China. And it's virtually, well, it's not impossible, but extremely difficult to invest in foreign companies because of capital controls. Capital controls just means that the government prevents you from using the capital in certain types of assets or investments. The value of real estate of existing real estate and new homes is falling pretty rapidly as well.

So official data is a bit misleading from what I've read. So the official CCP data is that there's been a drop in the low single digits in terms of value, but private data shows that it may be closer to 15% to 25% depending on the areas. And even in some higher end or more demand areas, even closer to 30%. I saw some quotes of close to 28% down near the Alibaba headquarters. And the drop could lead to Chinese consumers to spend less because they don't feel as wealthy, also known as the wealth effect. The wealth effect is just, you know, for example, let's say in 2021, right?

Everything was going up and people could just throw a dart on the board, buy that stock, it would go up. So people may be inclined to spend more just because they see the value of their investments going up. So they can just say, well, I might not have a lot of cash, but I can buy it on credit because my meme stock 10x, so I have that money available to me. So that's what the wealth effect is. But the opposite is true. So if you're the value of your assets goes down, then you're less likely to be willing to spend because you don't have that backstop available to you. And to add to that China's CPI print for July came in at a

negative 0.3%, which means they are in a deflation environment, not disinflation, deflation, so negative 0.3%. They've also seen their export decline because of companies shifting away from China to other regions. Obviously, there was also all the supply chain issues that encouraged to do that, but also all the geopolitical concerns, especially when we're thinking about the US. Can just think about Apple, for example, they're looking to start and shift their projection away from China, just in in small increments, but still, you know, over time, more and more companies potentially doing that with on shoring, you could definitely see some

impacts more pronounced on China. And economists are also revising their GDP growth estimates for China downwards in the low single digits, which hasn't been seen in years. If you roll out the COVID years that obviously there was a massive lockdowns in China. So there's a lot of things happening. It could also I think it's important to understand that because it can definitely impact some businesses that have some pretty significant part of their business in China. So I'm thinking here like a company, even like Apple. Apple could see some pretty big impacts there. Tesla has been making some pretty big push in China. I know they've been slashing their prices too. So that's something to keep an eye on. It's also important

that you know the businesses you own and know what percentage of your their business is tied to those regions. I'm not saying that it means like, you know, sell the business or anything like that. But there's some pretty serious headwind that could be facing those type of businesses. And if people want to learn a bit more, especially more on the real estate front, Dan and Nick of the Canadian Real Estate Investor Podcast under the TCI Podcast Network. So they did a really good episode on that. And like I said, I'll try to bring a guest on to look at the more general macroeconomic, but also how it can impact for people who are investing in China or investing in Chinese businesses or businesses that have pretty big operation in China try to get an expert in the field because as much as I like to do research China is one that it can be quite difficult at times to do research just because you're never sure whether the data is accurate or not yeah and if you're just so away from it and you have no real kind of anecdotal experience or understanding, it becomes very difficult. And this goes to know what you own type lessons, right?

Where it's like, yeah, I might think that there's some really cheap exposure in like, let's say Eastern Europe or some emerging markets. I think like, you know, stocks are a lot cheaper there than the U.S. And that's probably true. I don't think anyone's going to really argue with that fact. Like objectively, they definitely are cheaper than U.S. stocks. But are you in a position to own them and hold them? Maybe you are. But like, you know, you have to ask yourself that, right got since mid 2021 a company's accounting for 40 of chinese home sales have defaulted most of them private property developers yeah long for group china's second largest private developer said on friday it would try to boost profitability

in response to supply and demand in july when they're uh from another report here, I'm just on their financials, Evergrande in the last two years has reported about 81, over 80 billion in net losses. Yeah. Holy smokes. And, you know, that's what makes investing in China so hard. Because if we look back at just, let's just look back at the last three years and what's happened there. So they had a massive crackdown on their tech industry because they thought the tech industry was getting too big and they were losing control over it. And we saw what happened with Jack Ma. And, you know, he was what, like, no one could find him for, what, two, three months after a speech he gave when they were looking to IPO

and financial and that got completely canceled. So there was that, there was then the massive lockdowns. Obviously there were lockdowns, you know, in most parts of the world, but China really was another level, right? So they went on massive lockdowns and, you know, you're also seeing now, you know, the decision they took in 2020 for, you know, which probably in their view made sense to try and get these companies' debt levels lower, but now the impacts that's having. So there's a lot of, you know, there's not anything changing in Canada, the US,

and kind of the Western world, but there's so many, many like unforeseen variables that can happen in China. But clearly the housing market, the real estate market, that one, like I think a lot of people has been flagging that as a potential kind of big problem brewing for China at least. 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. The next name I'm not also particularly optimistic about so we need some sort of you know look at me scrambling on the internet here

here's a good news story the ocean cleanup project removed 55 tons of plastic from the ocean last week yeah okay yeah hey good work good work people doing good stuff welcome back to the canadian bear show canadian bear cave hey uh thank you ocean cleanup project i just was like googling online and there's the good news network.org they just only have good news on the website that is incredible idea i'm gonna sign up for this newsletter that is that is such a good idea i don't know ah i'm actually mad i didn't come up with this website idea i wonder if there's room for me to aggregate a bunch of good news remember when the pandemic started like there was the guy from the office jim yeah yeah started like the uh youtube channel about like john krasinski yeah yeah so uh

he started i know him as jim he married pam that's right yeah but he started like uh some good news i think it was when everyone was kind of locked in. I remember that. Yeah. And everyone was locked in, depressed, and all that. So he started that. Yeah. Some good news on YouTube. Yeah. It looks like, yeah. He had bigger, better projects, I guess, after that.

I guess so. It says, there's an article here. Why some good news that John Krasinski disappeared? Well, it was a pandemic project. If you think he's going to work on that forever, you're out of your mind. No, that's a great. I just opened up the YouTube page and it auto played a video.

He just screamed into my ear. So that's good. Thank you so much, Sean Krzynski. All right, Zoom. Zoom video. You know, chances are people listening to this podcast might have used Zoom today. And there's no doubt that it has become a very well-known business. I just think that it's been

a particularly horrible idea to own the stock. And I've been very vocal about that. I've been super vocal about that. The price didn't make sense. There's no real moat and the competition, it's become a commoditized service. And for enterprise software, that works for a while, but if it's not truly, truly sticky, you get to see quite a bit of churn. And they're actually growing the enterprise business, but I'm here to tell you, I'm still not super bullish on the business. So second quarter total revs was up 3.6%. So pretty meager growth there on the top line. And the enterprise revenue, so like business customers, was up 10% year over year. up 10% year over year. So what that tells you is you have a ton, a ton of churn on the non-enterprise segment of the business, which makes sense. People bought subscriptions so they could call

their grandmother in the pandemic, right? Like those people are all churning off eventually. And you're seeing that come out in the numbers here because the enterprise revenue is growing significantly or not significantly, it's going 10%. But you have this huge net churn on the business to consumer segment of the business. So that's something to watch for. If that keeps kind of bleeding out, you basically just get just the enterprise business and a tiny B2C business. I guess my main concern is that the enterprise business is not growing fast enough. And I don't think it's going to have enough stickiness

at just like roughly 105% net expansion on the top line to actually have really any material growth in this business. That's, that's what I think. So number of customers contributing more than a hundred thousand grew 17.8%. So yeah, they're seeing some, some success on like the most extremely high end up version up market version of, of the product, which makes sense. And that's probably where the product market fit exists here. And so I just have here, you know, number of customers, customers and net dollar retention, kind of all trending down on growth rates, which, you know, it's not too surprising but i'm not starting that in 2021 like i've purposely started that in jan 22 as the basis here on the graph there for you simone like you're seeing a

pretty significant deceleration across the board i don't have a whole lot more to add here but it's not hard for large enterprises to switch off here. If they're already using the Microsoft suite, they're just going to use the Teams embedded. If they're already using Google Meets, they're just going to, or sorry, already using the G suite, they're just going to use the Google Meets. I actually think Zoom has the best product and it makes, I don't know about you, but I'm like better looking on Zoom than Google Meets. It like, it like gives me a nice little feel. It looks like I'm wearing a little makeup or something. I like just fantastic on Zoom and like, I'm in like 180p on Google

Meets. So I'm, I'm a big fan of the product of the product the problem is just no one cares when it's commoditized and you have to pay for it yeah the the difference is not big enough right to make to make it worthwhile or to to make sure you don't switch to another product i mean i think we're a great example for smaller businesses they're usually much more nimble so you know we had a zoom we had a zoom account for our podcast recording and when we wanted to start videos we went for a more niche platform that's well not specific for podcasts but i think more geared towards podcasters creators creators exactly if you will and you know it's way better than zoom for what we do it makes way more sense the audio is much better uh you know the video it's just made in a way where you can extract it

and get some really good quality and zoom that it's not made for that where you know you get separate audio tracks for those interested how like a podcast kind of works. So they're kind of recorded each on their sides. So you don't get as much lag if there is, that's not possible with Zoom. So I think there's, to what you were saying, I think people, the enterprises, it's easy for them to switch. There's a lot of products that already have it integrated.

And there's a lot of, I think, businesses that will turn to more niche products that fit their needs better than Zoom would. Yeah, well put. Yeah, you're right. This is a perfect example. We're in that churn number that's not enterprise. Exactly. Small biz, just the people using it to talk to their friends. They've probably all churned out from the 2020 era. So they're facing a difficult task. And I'm just going to pull up some valuation numbers here. Like if I look on Stratosphere now, all this data is so good now. If I look at EV to sales, this business traded at 119 times enterprise value to sales in October of 2020. It went full disconnect

from reality, of course, right? People were just trying to make a trade. And now the business trades for three times enterprise value to sales. So you're seeing a gigantic drop off. And I don't know if I have any really hard opinions on the stock from here. I just, I don't know how anyone can get excited owning it. And maybe I'm missing something huge. There's a good chance of that, but I don't know how anyone gets really excited about the name from here. No, I think I agree with you. I mean, maybe we see, who knows, with the regulatory environment right now might be hard, but maybe they just get bought out by a larger company, even one that already has some video products, but maybe it's not as good and they

just decide to integrate something like Zoom, maybe even a Salesforce, right? They seem to be able to get some acquisitions through. They got Slack through. Maybe they can kind of integrate that. I know Slack has some video options. I haven't really used it all that much, but maybe it would make sense. I don't know. But yeah, to me, it's not a good reason to buy a business if you think the most upside you'll get is if they get a buyout offer. Yeah, you're right. I think Slack's actually probably the best likely acquirer, which is part of Salesforce.

But I think the days of those companies paying up for huge tech acquisitions are over. I mean, a lot of them are regretting some of the decisions that they made in 2021 and i think i think slack's a pretty good business and i think that they're probably net net pretty happy with it but they probably overpaid i mean yeah but also there's an expert to yeah to think well you probably overpaid yeah and there's also well the regulatory question is pretty big right why would you first of all you're not sure that the acquisition will pan out, you know,

if it gets regulatory approval because, you know, sometimes things don't go as planned. It's not integrated as well as you thought it would in your business. And those synergies that they always talk about don't really pan out as well as you thought. about don't really pan out as as well as you thought but then the added layer of the regulatory issues is you may go through all this headache all the lawyer costs associated with that I mean it's not a nothing burger to try and make an acquisition that's then denied by regulators like it costs you money to do that so if you're gonna try and purchase something that you're not even sure that regular regulators will approve and if they do it may still not

pan out for you if I am a CEO or you know the c-suite I'm thinking really more than twice three four or five times before I make an acquisition or an offer to buy another business yeah a good good point. They're making close to a billion and a half of free cash flow every year. Pretty impressive. So from that perspective, I mean, they're churning off quite a bit of cash, more than I would have thought. Yeah. I mean, it's not a terrible business, but I just don't, you know, will they be able to continue that, you know, to generate that kind of cash flow in five years from now? I don't know.

Do you know? No. And in 10 years, are they able to reinvent themselves enough in the enterprise stack? Because like I just said, right, the entire revs is going to become increasingly more concentrated in the top end enterprise customers as that B2C and B2 small business kind of churns off because there's no differentiation. How do they reinvent themselves in the next 10 years to add value to the enterprise stack? I don't know. I'm not sure. And I don't know if they know either. That's the problem. So anyway, some good questions if you're considering Zoom. I think that's about it for today, huh? Yeah. Are you going to punt this last one for next time?

Yeah, I think it would be too long. So we'll do that next time. Some notes already done for the next episode we'll be recording. Thanks so much for listening to the podcast we really do appreciate you uh as i mentioned at the top of the show join tci.com is our patreon page and right on the patreon page there's there's two kind of tiers there's the supporters tier which is three canadian dollars a month which just says like hey buy us a coffee and then there's the nine dollars a month one which you which obviously supports the show. You get our faces on the video and you get to track our personal holdings that we update every single month. I did basically nothing last month, but I have already lots planned for this week in terms of what I'm going to do and dollar cost averaging so that'll come out at the top of next month usually on the first the first business day when in the

summer when i unless you forget about it yeah when i get myself to actually upload it yeah yeah yeah it feels like hey you can upload that oh boy no i didn't do it. But I posted to the quarterly update for the retirement dividend portfolio as well. Oh, did you? Yeah, I did that this week. Yeah. Oh, unreal. Okay. So there you go. Another freebie there. So that is that join TCI.com. Thanks for listening. We'll see you in a few days. 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.