The Prof G Pod with Scott Galloway - 2023 Predictions Part I

Episode Date: January 2, 2023

This week on Prof G Markets, we hear part one of Scott’s predictions for 2023. Tune in on Thursday for part two.  Music: https://www.davidcuttermusic.com / @dcuttermusic Learn more about your ad choices. Visit podcastchoices.com/adchoices

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cards, savings accounts, mortgage rates, and more. NerdWallet, finance smarter. NerdWallet Compare Incorporated. NMLS 1617539. Welcome to the Property Markets. It's the first episode of 2023, and we are on vacation. So today we're running part one of our 2023 predictions live stream. Tune in on Thursday for part two. Okay, some predictions for 2023. The Patagonia Vest recession is just getting started. We're going to see substantially more layoffs in the part of the economy that has kept on giving, and that is the growth economy. Recessions are usually one of two things. They're usually either called a blue-collar recession, executives, or a white-collar recession. The place in the economy that's really going to register the most damage is going to be the growth

part of the economy, or loosely speaking, overfunded tech. The majority of CEOs in this space, or a lot of employees are still in denial as if they've never really experienced a downturn. I'm on the board of several private company unicorns and they go through sort of four stages. They'll go through denial. Oh, it's a V, we're going to snap back and everything's going to be fine. And then they go to a hiring freeze, then they go to their first layoff, and then they go to their second layoff. And my advice to entrepreneurs when they see the cloud or the storm clouds forming is to skip right to the second layoff and go deeper than you naturally would otherwise, not to trust your

instincts on this. Because the faster you get in fighting shape, the faster you can get off your heels and onto your toes. And also, the more generous you can be with people you are laying off. I've gotten criticized for being so matter-of-fact about layoffs. I think a key component of capitalism is to move human capital to its best use, if you will. Also, we're talking about some of the most overeducated and talented people in the economy. They're going to be just fine. Okay, we've also seen this part of the economy has more to give back. It used to be 7% of the GDP. Now it's 12. There used to be 3 million jobs. Now there's 18 million. So this has become a very large part of the economy. And it just makes sense that at some point, it's going to give back some of these extraordinary, unparalleled, unprecedented historic gains. Okay, so the party stops, right? We're seeing a lot of

CEOs who were sort of begging their workers to come back to the office. Power is somewhat, or leverage is moving back to management versus the employee base. And it's going to be, I think, a pretty big shock for a lot of employees who grew up in sort of the age of unprecedented growth. We're seeing a lot of pushback. It won't last very long. And when people have a difficult time paying their rent. And also we're seeing categories that normally weren't considered very cool or very interesting are registering the strongest job growth because they've been over and underinvested as all capital was going into the growth parts of the economy. We're starting to see tech layoffs, a lot of noise here, more noise than news. I think

it becomes news in 2023. The big story in 2022 is inflation. I believe the big story in 2023 is going to be the economy. And we're going to see, we're just getting started with respect to layoffs as it relates to the growth economy. And it would be impossible that CEOs aren't taking notice of what Elon Musk has done at Twitter. In terms of the actual service, and I predicted I thought the site would crash. It has not. The Twitter has been able to maintain a minimal acceptable standard. The site is still up. It's still running. I don't see any difference in the site. People say you can see edge of edge cases of bugs. I have not seen it. And he's doing it with 60% and less employees. And I think it's going to go down to 80% less employees. There's

no way that everyone from Meta to Google to Salesforce to Adobe to you name your e-commerce company or tech or SaaS company hasn't taken notice and hasn't thought we've been shoving so much ice cream down the throat of this company that perhaps we built up pretty large fatty deposits. And I think you're going to see dramatic layoffs, even across companies that are doing well and still growing. It's pretty easy to figure out who goes next, right? You look at revenue, you look at that cost of revenue, and then you look at headcount. So when a company's revenue is up 9% and its cost of that revenue is up 26% and its headcount is up 40%, and most tech companies, the majority of their SG&A comes from people, that just spells the layoffs are coming. And that is

that they assumed that the market would catch up to their hiring, and it hasn't. They've gotten way out over their skis. Meta, flat revenue, cost of revenue, headcount up 19%. Even with the layoffs of 10,500 people, which was triple the layoffs at Twitter, that only takes them back to November of 2022. So if they were to go back to, say, pre-pandemic levels, that means they would lay off another 30,000 to 40,000 people. Pinterest, revenue up 11%, but costs up 27%, as was headcount. Roblox, up 22% revenue, cost of revenue up 17%, headcount up 29%. So there'll be layoffs here, they just won't be as severe. It's fairly straightforward math. Amazon Alphabet Meta will have their most profitable year despite a slowdown in revenue. Why?

Because growth will slow, but they'll still be growing, and they're going to massively decrease costs, which will result in a slowdown in revenue growth across the big players and massive profitability. A lot of this hinges on what if Meta wakes up from this, from their kind of big gulp Vente Ayahuasca trip of the Metaverse. But there is so much revenue that could fall to the bottom line with the layoffs that the economy and to a certain extent, Twitter has provided cloud cover for. You're going to see chaos in traditional ad supported media. When I say chaos, I mean layoffs, consolidation,

mergers, and some restructurings. The two biggest elephants in the room are Apple, which is kind of filled the void of a lack of regulation. Tim Cook is now more powerful than Lena Kahn or the head of the DOJ and is stepping in and deciding when a company gets so out of line that they need to step in and kind of regulate them, if you will, as we saw with their giving people the ability to opt out of tracking. Advertising is unusually stable as a percentage of GDP. It kind of toggles between 1.5% and 1.8% of GDP since the end of World War II. Because when there's a recession and ad spending goes down, brands that are doing well see as an opportunity to go in and try and acquire shares. So it actually stays relatively consistent. because when there's a recession and ad spending goes down, brands that are doing well see us as

an opportunity to go in and try and acquire shares. So it actually stays relatively consistent. That's the good news. The bad news is that it's a zero-sum game and that if people are spending more money on TikTok, which they are, they're taking it away from somewhere else. So we're going to see a fairly serious decline in old media ad spending, which has gone from bad to worse because all of a sudden there are new competitors, there are new predators looking for those dollars. We had a lot of people opt out of ad tracking. Apple has now become big tech. And that is, we talk about big tech, it's really big Apple in the seven dwarves, but Apple is now worth as much as the rest of big tech combined.

We're going to see huge impact on traditional and new media companies that are ad supported. Everyone from Twitter. Twitter has supposedly lost about 70 to 80 percent of its ad revenue overnight, mostly because of the reckless childish behavior of its new owner. But also, everyone is just looking for an excuse to stop spending money here so they can spend a little bit of money on TikTok or maybe a little bit of money on Netflix, which is going to begin running ads. ByteDance, or specifically TikTok, is the most ascendant technology company in history. Its growth is just unprecedented. It is dramatically, exponentially further along than Meta or Google were at this point. This just gives you a sense.

They did a buyback of shares of employees in a private round that valued it more than Disney, Snap, Pinterest, IPG, WPP, Omnicom, and Twitter combined. We're also seeing huge displacement. And that is, this is, to me, just staggering data. When asked if they would rather have TikTok or TV and streaming, millennials and Gen Z, who are ground zero for advertisers, advertisers love young people because young people are stupid and spend money on high-margin products as they're in the mating period of their life and want to buy expensive shoes, expensive coffee, and spend money on high-margin products. Old people get smarter and stop spending money on dumb things

to try and attract mates. So as a result, advertisers love spend a disproportionate amount of money on Gen Z and millennials. CNN does not get the viewership of Fox, but makes substantially more money because they get a younger viewer. So look at this. Two-thirds of Gen Z would give up all TV, all streaming media before they gave up TikTok. They'd rather have TikTok and shut off all cable television and all streaming media. The majority of millennials would opt for the same thing. So you could rationally say that all media right now across Gen Z and millennial is worth less than what ByteDance is worth. So next prediction, I think ByteDance will hit $1 trillion in valuation in 2023. I believe that TikTok is the ultimate propaganda tool. I believe it should either be banned or spun in the US. I think it's going to raise a generation of Americans that feel a little bit shittier about our government and about the

United States. If I was the CCP, which is synonymous with any Chinese company, I would be putting my thumb on the scale of anti-American content. I believe they're doing that and will continue to do it. But there is so much money involved that they will figure out a way, they meaning the backers of ByteDance and the management team there that would will figure out a way, they meaning the backers of ByteDance and the management team there that would like to create a Chinese wall. I do believe they'll come to some sort of arrangement with CFIUS or the White House that enables them to continue to operate in the United States. And we are going to see ByteDance hit a trillion dollars in valuation by the end of 2023.

This would put them just ahead of Amazon and just behind Microsoft. TikTok has basically entered a void or entered into an enormous white space. The majority of people feel worse about themselves and worse about the world and worse about their friends. You want to like your friends less, start following them on Instagram. It's mostly wealth porn, fake wealth, and then you find out that politically they're really fucked up in the head. It makes you feel worse about our government. It makes you feel worse about yourself. TikTok has come in and said, this is not going to be social. We're going to use algorithms and AI to create the ultimate streaming network that also foots to a major myth or a major misunderstanding in business. And that is people

think that choice is a good thing. It's not. Choice is a tap. It's on consumers. We don't want more choice. We want to be more confident in the choices presented. And TikTok really presents you with just one choice. And that is you want to tap on the logo and then be entertained for two or three hours because it figures out exactly what you want. I like watching people get adjusted, stories about dogs and really hot people talking about social justice issues. We'll be right back. Support for this show comes from Constant Contact. Thank you. If customers don't know about you, the rest of it doesn't really matter. Luckily, there's Constant Contact. Constant Contact's award-winning marketing platform can help your businesses stand out,

stay top of mind, and see big results. Sell more, raise more, and build more genuine relationships with your audience through a suite of digital marketing tools made to fast track your growth. With Constant Contact, you can get email marketing that helps you create and send the perfect email to every customer, and create, promote, and manage your events with ease, all in one place. Get all the automation, integration, and reporting tools that get your marketing running seamlessly, all backed by Constant Contact's expert live customer support. Ready, set, grow. Go to constantcontact.ca and start your free trial today. Go to constantcontact.ca for your free trial. Constantcontact.ca. The Capital Ideas Podcast now features a series hosted by Capital Group CEO, Mike Gitlin.

Through the words and experiences of investment professionals, you'll discover what differentiates their investment approach, what learnings have shifted their career trajectories, and how do they find their next great idea? Invest 30 minutes in an episode today. Subscribe wherever you get your podcasts. Published by Capital Client Group, Inc. So we're going to see a decline in value. This is a prediction across both old and new media companies. It used to be new media companies kicking the shit out of old media companies. Now you're going to see TikTok, Apple TV, Netflix, Hulu, Amazon Prime, who are now showing up to Unilever and P&G and say, why don't you run an Adidas ad against Euphoria?

All showing up and competing with new media or traditional ad-supported digital media and old media. So you're going to see incredible pain across any ad-supported business in 2023. I believe every one of these brands will register a decline in value. The big three will mostly be fine because see above, they have a lot of costs they can cut. If you have operating margins of 20%, for every dollar in expenses you cut, that's like getting another $5 in revenue. So

they will make up for those revenue shortfalls by cutting costs and trimming some of the incredible fat they've built up over the last 13 years. Taking a cue from Twitter, they will, as we referenced before, they will decide that they just don't need as many employees. You'll see margins improve with headcount reduction, which will more than compensate for their revenue declines. It's terrible to talk about stocks. I'm not suggesting you trade on this.

I'm just telling you what I'm doing. I think the best performing stocks for 2023 relative to its competitive base will be Airbnb, Chinese Interstocks, and, and I hate to say this, Meta. I believe Meta has been overly punished in terms of its stock price. Airbnb is the most successful dominant brand in the history of travel and hospitality already. It gets a dramatic direct to site traffic. So it's been able to exit the stranglehold of Google and Meta and doesn't have to pay that tax. Essentially, Google and Meta place the tax on every digital media company consumer brand in the world and starch most of the margin out and capture it themselves.

But Airbnb doesn't have to. People go straight to the Airbnb site, which has resulted in unparalleled margins in the hospitality industry, whereas Marriott has to pay these enormous tolls to Facebook or to Google. I like what Brian Chesky said, disclosure, I'm an investor in Airbnb, that they've gone from the Navy to Navy SEALs. He actually laid off a substantial percent of his workforce almost two years ago, which turns out looks prescient right now. And while the multiple is still fairly rich, if they have

another year of the growth that they have, the stock will look fairly reasonable and will still be growing faster than its peers, which I believe will attract additional investor demand. Also, I don't know this. I have no inside information. I haven't spoken to Brian about this, but I think there's a decent chance that Airbnb might decide to go vertical and might experiment with acquisitions because there are some people, a large community, especially in the business traveling market that wants the amenities of a hotel. So I wouldn't be surprised if Airbnb ventures into adjacent categories ranging from experiences to dating to actual physical hotels. Okay. Meta, in my view, has been overly punished.

If you assume all of their meta investments are a write-off, they won't result in one additional dollar in value, you could probably still make an argument that the stock has been overpunished. In the last 12 months, they've lost all of the gains that they registered in the previous five years. And a capex and then amortize it over several years. Meta has not done that. Meta has expensed them real time, meaning the moment they start to reduce expenditures in reality labs, their earnings take a dramatic tick up. So they have taken the most conservative accounting route possible. And as a result, their numbers look artificially bad or artificially negative. And if and when they decide to wake up again from this hallucination or the psychedelic,

whatever you want to call it, immediately they're going to register enormous gains in profitability. I think Chinese internet stocks, I think a basket of Chinese internet stocks on a risk-adjusted basis is a great buy. What effectively has happened in China is that Chinese internet stocks had the wind at their back. Specifically, people thought that the CCP was in the room with them, helping them. And all of a sudden, the ally that was the CCP has turned into the enemy. And that is, they are no longer, they look at America, I believe, and they look at individuals becoming more powerful than the government, and they look at data being weaponized, and they say, you know, and they look at income inequality, and they say, you know, it works for you, it's not going to work for us, and they disappear,

Jack Ma. Can you imagine if Jeff Bezos began shitposting the government and letting his views be known as he does, and then he disappeared for four weeks and then showed up in Tokyo later saying, oh, I'm not interested in tech. I'm just going to paint. That's what's happened in China. So again, the government has gone from friend to foe and it's taken an enormous toll on stocks. Again, similar to Meta, I think these stocks have been unfairly punished. On any reasonable metric, you're getting a company that has a similar competitive position

in cash flows and growth as an American internet company, but it's trading at a fraction of the valuation. Long shot, I think Disney could acquire Roblox. Most of Disney's acquisitions have been sucking up characters into the parks. Let's take Star Wars characters, make rides in the parks, extend our franchise and our distribution and our creative capital across different IP, whether it's the Mandalorian. Bob Iger's there. He's 73. He's got a ton of credibility. He's got to make a big move. He's got to do something pretty big and bold here. And he has the license to do that from investors. What if he were to take the parks, if you will, and move it to Roblox? In other words, make Roblox kind of the Disneyverse because any other acquisition

he would make around content, around media, around just being able to buy one business in decline, buying another business in decline. So I think this would be an interesting acquisition. Also, Roblox, about 50% of American kids under the age of 18 are on Roblox. Their engagement continues to skyrocket. And we've also seen the company make huge investments, which seem to pay off. And we also have a company that's beginning not to look cheap by any stretch of the imagination, but it's actually for the first time sort of acquirable for a company with the market cap of Disney. So assume they have to pay up for it, $25 billion. You're talking about a 10% or a 14% dilution, which is doable. This isn't a bet the ranch acquisition. It's a big acquisition.

But Roblox is now acquirable. And it strikes me that Disney needs to do something. And you have a 73-year-old returning as CEO who needs to make a big, bold bet. Okay, consolidation of the subscale. There's just too many companies out there that were pretending to be standalones with the wind at their back that all of a sudden wake up and don't have a bathing suit on. Lyft should not be an independent company. Subscale, it's a number two in a shitty, unprofitable business called ride hailing, but they do have IP. They do have an infrastructure. They do have a relationship with millions of drivers. And a lot of companies want to get into autonomous or go vertical.

I can see a lot of different companies deciding that they would be interested in Lyft's IP. And as we said, Lyft is entirely subscale and just makes no sense. I'd be shocked if they aren't already have bankers trying to think creatively. They also have a decent asset base in terms of their IP around autonomous driving, which I think would be almost worth the acquisition price on its own. So we're going to see dramatic consolidation across some of these companies that sort of make no sense. I think Robinhood will probably go down another 60 to 80% and then be bought for its customer list. AMC, I'm not sure there's anything to acquire there, but at some point, that stock will be off another 50% to 80%.

Lyft makes no sense. Companies like Hulu, Peloton, Carvana, AMC Networks, these companies just don't make any sense as independent companies. They've been a 10-year experiment that they don't survive on their own. Our producers are Caroline Chagrin, Claire Miller, and Drew Burrow. Special thanks to Emile Silverio for all her work on our 2023 predictions presentation. If you like what you heard, please follow, download, and subscribe. Thank you for listening to the Prop G Pod from the Vox Media Podcast Network.

We will catch you next week. Hey, it's Scott Galloway, and on our podcast, Pivot, we are bringing you a special series about the basics of artificial intelligence. We're answering all your questions. What should you use it for? What tools are right for you? And what privacy issues should you ultimately watch out for? And to help us out, we are joined by Kylie Robeson, the senior AI reporter for The Verge, to give you a primer on how to integrate AI into your life. So tune into AI Basics, How and When to Use AI, a special series from Pivot sponsored by AWS, wherever you get your podcasts. What software do you use at work? Series and Pivot sponsored by AWS, wherever you get your podcasts. we use to do it. So what is enterprise software anyway? What is productivity software? How will AI affect both? And how are these tools changing the way we use our computers to make stuff,

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