The Prof G Pod with Scott Galloway - Office Hours: Betting on Alibaba, When to Sell Your Start-Up, and Going to College Abroad

Episode Date: September 20, 2021

Scott answers a question about investing in Alibaba amid regulatory uncertainty in China. Scott then explains when to sell a company, discusses the state of the online tutoring space in China (which is also facing regulatory disruptions), and gives his thoughts on pursuing a university degree overseas.  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 Prof G Pod's Office Hours. This is the part of the show where we answer your questions about business, big tech, entrepreneurship, and whatever else is on your mind. If you'd like to submit a question, please email a voice recording to officehours at profgmedia.com. Again, that's officehours at profgmedia.com. First question. Hi, Scott. This is Amrit from Houston.

I wanted to get your thoughts on investing in Alibaba stock with a five-year horizon. Revenue has nearly tripled in the last four years, but stock is still at 2017 levels. Wanted to get your thoughts on cloud and the impact of recent China regulation on the business and the more. Amrit, from Houston, thanks for the question. I've thought a lot about this. And occasionally I make the mistake of making a stock recommendation on Pivot and then all the trolls and their flying monkeys come out and cherry pick my losers and so they can highlight their own winners. Anyways, that's just part of doing what you do. Anyways, I recommended Alibaba stock about three months ago.

I recommended also Peloton when it puked and went down to 70 off of the controversy over the recall on the treadmill. I recommended Twitter. I forget what else I recommended. But anyways, I recommended Alibaba about two, three months ago, and it's off 30% since then. Simply put, I think a basket of Chinese internet stocks, I think right now, are an incredible opportunity. Now, why is that? Essentially, with Alibaba, what you're getting is you're getting Amazon that's growing faster than Amazon, but trades at a forward PE of 17 versus Amazon at 60. So growing faster than Amazon, more dominant, in many ways more innovative, and it's trading at a third of the valuation. I think it's an incredible buy right

now. CNN reported Alibaba stock has dropped 46% since last November when Chinese regulators stopped Ant Group's IPO at the last minute, chopping about $380 billion from Alibaba's market cap. In April, Chinese antitrust regulators fined Alibaba about $3 billion or 4% of its domestic annual sales for anti-competitive practices in which Alibaba punishes merchants who sell products on rival platforms as well as its own. Shares slipped again after a report from the Financial Times said Chinese regulators are planning to break up Alipay, the payment app that its financial affiliate Ant Group owns. Currently, the market is severely discounting many Chinese companies based on a very real fear that the heavy hand of the regulatory state will suppress growth

and strand capital. Last month, SEC Chairman Gary Gensler announced that the regulator was applying additional scrutiny to Chinese IPO listings and strengthening the disclosure requirements around the risks of government interference. These are significant headwinds. And as a result, both Baidu and Alibaba trade at lower multiples earnings than their US counterparts. So in my view, this is an incredible moment to buy beachfront property, which is on sale right now. She may have wrapped the knuckles of Jack Ma and the tech entrepreneur class, but it's difficult to imagine that he's going to cut off their fingers. Xi needs the engine of economic growth to keep humming

as there are still 300 million people living on less than $5.50 a day in China. And this economic miracle is kind of only half complete. Whatever Xi does, there's a real possibility that the Chinese system, as morally flawed as it is, might produce greater prosperity than the U.S. model. We don't like to talk about this, but one of the greatest achievements of modern mankind is probably China bringing 750 million people out of poverty. Now, I'm going to get a lot of people who are going to wane and say, yes, but they're committing

genocide. Is it worth it? I want to acknowledge there are some things about China that are very unsettling and just plain wrong, plain inhuman, but you would just have to acknowledge there are some things about China that are very unsettling and just plain wrong, plain inhuman. But you would just have to acknowledge that bringing three quarters of a billion people out of poverty at least warrants pause to say, what are they doing right and what can we learn from it? This is kind of the mother of all macro bets right now. You would buy, in my view, a basket of internet stocks because I think the key here is diversity. As our guest Bill Silber said, you want to be diversified. You don't need to be a hero. But if you believe that the Chinese government is wrapping the knuckles, not cutting off the fingers, these are amazing companies that are on sale. And it feels like a fire sale.

I am probably going to do this. I only buy one or two stocks a year and I try to buy things that I want to hold for at least five or 10 years, but I'm thinking of buying a basket of Chinese internet stocks because I do think this is the equivalent of beachfront property on sale. You have to go into this knowing that there's real risk here, that this capital could get stranded. I do not believe it is in Xi's best interest or the Chinese state's interest to basically take its champions and its winners and not let them run. And part of letting them run is having access to global markets, global capital markets, and also having some semblance of reasonable corporate governance. In my view, it was a goodbye three months ago, and now it's 30%, another 30% off. It's a great opportunity.

Disclosure, disclosure, I get this wrong all the time. Next question. Hi, Pachi. Love the show. My name is Sam from your hometown of West LA, and I stop at Vicente Foods every now and then and wonder what it would be like if I had asked a young scat guy away for help with finding something. Anyways, my partners and I own and operate a successful e-commerce business and were recently approached by a large industry aggregator with an offer of a complete buyout. We never thought or considered this as an option, but became very intrigued by the multiples they propose. This has now left us with a dilemma on

whether we should sell or not. So my questions to you are, where do you see e-commerce in the next five to 10 years? And what advice do you have for young professionals to sell what they consider their baby and abandoning the industry that they came to master? Thank you. Oh my gosh, I love this question. And it bears repeating, I don't see the questions before they are asked. So I can be more authentic. You get to know the real me. What's inside here? What's inside here as I tap on my chest? So by the way, the reference to Vicente Foods is I was a box boy at Vicente Foods. And I was really struck a couple of things about Vicente Foods.

I was a member of a union, which was really important. I made nine bucks an hour instead of four bucks an hour, which was enough money to save to go to UCLA. And two, I was always struck by the generosity of people. I was in a wealthy neighborhood. And while we like to have a cartoon about wealthy people burning dollar bills and smoking cigars and being jerks, I have generally found, and I've always worked in services companies in places that serve wealthy people, that in general, wealthy people are very generous. And a lot of them were very generous with me. I remember specifically going out to helping a woman. I think she was the woman who was in Bewitched

who played the mother. There were actresses all the time and loading up her car and her saying something nice about me and then putting $10 in my pocket. And 10 bucks in 19, you know, the mid 80s when you're in high school, that was the difference between, I don't know, being able to go to the movies

or maybe even take a date to the movies. Not that I ever did that, but if the moons lined up and lightning struck, I could actually do that. So this was really meaningful. I have a lot of fondness for Vicente Foods. Anyways, that's not what you asked about. The question is when to sell.

And I don't think you're looking at this the right way. So you sort of identified that the fulcrum of your decision should be around e-commerce. Okay, so fine. Let's answer that first. COVID was an obvious accelerant for e-commerce. According to Statista, 2020 registered almost $4.3 trillion in global e-commerce sales, about a trillion more than in 2019. And the industry should continue to ride that momentum with global e-commerce sales expected to top $6 trillion in 2024. For context, that number was just above $1 trillion a decade earlier in 2014.

One trend I'm paying attention to is the consumer shift towards buy now, pay later platforms. I still think it's debt. I don't care. They can call it the debit generation versus credit. I just don't buy it. But Forbes reported buy now, pay later purchases were up 166% year over year in March. I also see social commerce and live shopping as an area for massive growth, what I kind of call e-commerce, but maybe you should call it live commerce. I think TikTok is just going to be a freaking juggernaut. I think TikTok could be one of the three or four most valuable companies in the world in the next 36 months. McKinsey Research

indicates that live shopping sales could account for as much as 10% to 20% of all e-commerce by 2026. But I think that answers the wrong question. You're thinking about selling your company. And this is what the fulcrum, or this is what the levers, if you will, for that decision should be. And it's situational or specifically it's personal. And that is, where are you in your life?

Where are you in your life? People will always cloak their own personal desires and decisions in corporate strategy. And that is the following, and I'll give you an example. When L2 got several offers to be acquired, first we were offered $30 million, $15 up front and $15. And this was 2014, over three or four years in an earn out from some of the big communications conglomerates. And I called a group of people, never make a big decision like this without calling several people because you can't trust your emotions. I don't care how smart you are. You might have great business instincts. You might be the smartest person all of your friends know. What involves you, emotions turn into your enemies and you have a

tough time reading the label from inside the bottle. So you always want to have a kitchen cabinet of people to give you advice on a big decision and selling your company is a big decision. When I was offered that money for L2 in 2014, I went to one of the gentlemen I know, Paul Sagan, who's a friend and someone who I think has an incredible blue flame approach to decision-making. And he asked me to describe the business, asked a ton of questions, and then came back and said, well, two things.

One, I don't think you should sell. I think this is your best idea and there's a lot of room to run here. And two, I'm joining General Catalyst as a partner and this will be my first deal. And I swore off VCs for the rest of my life. I thought I'd never raise money. Anyways, ended up raising money.

And then fast forward three years later, two and a half years later, and we got an offer to sell or to be acquired for 160 million. So obviously a lot of value accretion in those two years or two and a half years. And here's the fulcrum around the decision. One, you want to look at the market and you know, is it a great price? But specifically, as it relates to you, if you're in a position to make that decision with your founder, I think everybody has an obligation to bust a move, no matter what, to financial security. Now, what is that? That's enough money in the bank such that if the rest of your career doesn't work out, the interest or the logical growth on that income could be enough to pay for your lifestyle. That is what it means to be rich and financially secure, meaning that your

passive income or the growth on that nest egg you have, the growth on that pocket of money, your savings, your investments could potentially pay for your lifestyle, assuming your career does not work out from that moment forward. That is a definition of rich. I have several friends, several friends who make between $5 and $10 million a year as partners at kind of the premier law firms, partners at Goldman Sachs, kind of very high paying jobs. But between their ex-wives, alimony, private schools, masters of the universe lifestyles, homes in the Hamptons, they spend almost all of it. They are poor.

My father makes $48,000 a year from his Royal Navy pension, Social Security, and some of his dividend income on savings. Makes $48,000 a year. He spends 40. He spends 40. My dad, I went and took him out for Mexican food for his 91st birthday last month. makes $48,000 a year. He spends 40. He spends 40. My dad, I went, took him out for Mexican food for his 91st birthday last month. And he asked me, we ordered a margarita, which was a lot of fun for him.

Like that was our big celebration as we both had margaritas at one in the afternoon. And he kept yelling out, day drinking, in this thick Scottish accent and then busting into laughing. He thought it was hilarious that we were drinking alcohol during the day. He only drank about half of it and then asked, and then busting into laughing. He thought it was hilarious that we were drinking alcohol during the day. He only drank about half of it and then asked,

and then asked, and I mean, this is a frozen margarita that's now like this weird slushy thing. He asked if we could take it home. Think about that. A half-consumed margarita, and my father wants to take it home. Anyway, that's why he is rich. That is what it means to be rich. So this is your decision. Do you have money? Do you have financial security? Because if you don't,

even if you think this company is going to triple in value, and if you're smart and you can hire a good deal attorney or a good banker, you'll be able to figure out a way to participate in the upside post the transaction. You want to bust a move. You want to bust a move to financial security. So there's a lot of well-publicized stories about Mark Zuckerberg turning down $30 billion, and now he's worth $160 billion personally. He turned down,

I think, $10 or $20 billion from Steve Ballmer. Those stories get a lot of press. Assume you are not that person. Bust a move to financial security. America becomes more American every day. And that is life gets better in America for people with money and worse for those who don't have it. And that sounds awful and it's not aspirational and it's 100% fucking true. So guess what, boss? If you have rich parents or you already have a bunch of money socked away, then fine, go for it. Continue to swing for the fence.

If you don't and you have the opportunity to make bank or specifically bank bank, then hit the bid. This is your ball, my friend. Your ball is to get to economic security. And if you have the chance, if you ever have the chance to hit the bid and get economic security, even if it means you might not be a baller or a billionaire instead, you absolutely take that trade. And then once you have economic security, you can start swinging for the fence. This is what you call a good problem. Congratulations on this. Thanks for the question.

We have one quick break before our final two questions. Stay with us. 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. Support for this show comes from Constant Contact. You know what's not easy?

Marketing. And when you're starting your small business, while you're so focused on the day-to-day, the personnel, and the finances, marketing is the last thing on your mind. But 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. Welcome back. Question number three. Hi, Prof G. My name's Kevin, and I am a special education teacher from Alberta, Canada. My wife is also a teacher, but she teaches online for students in China teaching English for companies like Magic Ears and VIP Kids. Recent changes in the industry from the government of China has banned foreign teachers from engaging in online tutoring.

My question is, what changes do you think geopolitical influences such as this have on the industry of online education? And would you recommend my wife look at other online opportunities or perhaps go towards more traditional education locally? Kevin from Alberta, Canada. That's a super interesting question. And first and foremost, thank you for your service. You're a special ed teacher, which I imagine is very rewarding, but there's just no getting around it. That shit is hard. That has got to be an incredibly taxing job. And I trust that you get a lot of reward every night for knowing that what you're doing is not just meaningful, it's profound. With respect to the question, it's interesting. It kind of feeds in a lot of stuff we've been talking about. First off, just as I call out China's incredible achievement of bringing 750 million people out of poverty, there is sort of a, to put it lightly, a pretty heavy hand here.

So this is part of kind of a bigger trend or what's happened here, and that is the Chinese private tutoring industry is valued upwards of $100 billion. But just like with Alibaba and some of the other Chinese tech stocks, regulations have hit this market pretty hard. Under China's new rules, for-profit companies cannot teach China's school curriculum, foreign investors cannot hold stakes in firms offering such classes, and after-school tutoring on weekends or during vacation is forbidden. That's wild. You know, you can argue this both ways, but China has basically said, we're not down with companies that are basically gaming the situation or gaming the college admissions game and helping the kids of rich people kind of occupy or disproportionately occupy the seats at the best schools. Back to your wife. I would think that somebody who is good

can find a variety of opportunities in online education domestically or in other nations. But my sense is if she's really good at what she does, she's going to be just fine. And online, what online has done is tutoring is it's given people all over the world going to be just fine. And online, what online has done is tutoring, is it's given people all over the world access to great tutors. So if your wife, and it sounds like she is as good at what she does, I think that's just fine. Now, whether or not she wants to take political risk and continue to work for China, that's kind of disturbing that they decide that non-nationals can't tutor for fear of outside influence. It reminds me of when they banned or tried to suppress Chinese nationals from listening to K-pop music because they were worried that Korean cultural influence would start to permeate China.

I don't know. I don't find that shit that compelling. I'm not sure. I'm not sure. I'm trying to think. I don't know if it would have melted my kid's brain if they listened to K-pop. I don't know. They kind of—the Justin Timberlake of Korea,

those bands are just incredibly popular and impressive. Don't know where I'm going with this. Don't know where I'm going with this in some. I think your wife has a ton of opportunities in online education and she should just weigh them against the current ones working for a Chinese company. But my gut is she should probably check out

other opportunities. And if she's good at what she does, there's going to be a lot of them in tutoring and online instruction. Thanks so much for the question. Question number four. Hi, Prof G. This is Val from Colorado. I've been hearing you talk a lot lately on your podcasts and in interviews about the university system in the states and issues in regards to acceptance rates and student loans and corruption, quite frankly. And I have a question because my daughter is 14 years old. She's a sophomore in high school. And thinking about college, she feels like an education in the States isn't worth it at this point. She is very interested

in going to a university in Europe. And right now she's focused on the University of Edinburgh. So I would love to know your thoughts about American citizens studying at a university in Europe. Is it worth it? Does the education transfer back to America? Do business owners see that and think that their education is less than what they would get here? I look forward to hearing what you have to say. Thank you so much. Bye. Val from Colorado. So first off, congratulations.

If you have a 14-year-old that's thinking about college in Europe and has already identified the University of Edinburgh as a potential or aspirationally a university, it sounds to me like you've got a very impressive 14-year-old. My 14-year-olds are mostly thinking about Fortnite. Anyways, so it sounds like wherever she ends up, she's tracking to do really well. So the thing about college, it's like any other very, very expensive, complicated purchase. It's very situational. What I would argue is that if she gets into a great university, It's like any other very, very expensive, complicated purchase. It's very situational.

What I would argue is that if she gets into a great university, the reality is that almost any – if you get into a top 20 or even a top 50 university, even as expensive as it is, it's worth it. And generally speaking, there's one interesting factor. There's a lot of information around why young men are not going to college. There are now in U.S. universities, it's 60% women, 40% males. So that sounds like a lot, but it sounds like a lot more when you think about there, you go walk into your freshman class, there's 50% more women than men.

And it's for a lot of reasons. One, women are catching up. It's about time we offer them the same opportunities. Two, they're more, quite frankly, they're just more qualified. Seven in 10 high school valedictorians are girls. And also though, I think men have more opportunities at that young age. Most of the jobs at 18 that pay pretty well are more physical in nature or over-indexed male, if you will, whether it's being a plumber or a bartender. I don't know.

It just strikes me that the kind of work in construction, the kind of jobs where you can make 50, 60, or 100 grand a year without a college degree at that age over-index in terms of opportunities for males. So where I'm headed with this is I do think that tracking your daughter, especially someone as thoughtful as your daughter towards college, is absolutely the way you should go. I'm a bit of a snob around college. It was transformative for me, and I've often said if my kids didn't go to college, I'd be heartbroken. At the same time, I recognize we absolutely have to invest in on-ramps to a great middle-class lifestyle that doesn't involve education.

But at this point, I'm hoping that they track towards college. So more than 84,000 American students pursued degrees abroad in 2020, according to the Institute of International Education. By comparison, nearly 1 million Chinese students studied internationally. So the US has the best colleges in the world. So I think we tend to keep them more here. I think there's also a lot of, I don't know what it is. I was going to say we don't travel as much, but that's not true. We do travel. The United States is the top host country for foreign students. In 2020, the U.S. hosted 20% of the world's international students, twice as many as the second largest in the United Kingdom. I think to go to a place like the University of Edinburgh from the age of 18 to 22,

oh my gosh, I think that's an amazing experience. The advice I would have is the following. One, it sounds like your kid is tracking. Two, lean into that desire. If you can and you have the resources to do a tour of colleges in the US, and oh my gosh, what a gift if you can take your daughter for a tour of great universities in Europe.

I mean, if you have the resources and the time to do that, I think regardless of whether she ends up at a university in Europe or not, that would just be something you'd both remember the rest of your life. And I think any kid who has the self-awareness and the courage and the resources to get to a European university, especially one of a certain brand equity, oh my gosh, what a gift. That would be so impressive and an experience she would never forget. I just don't think many people look back and think, oh, you know, I'm from Kansas

or I don't know where you're from. Oh, you're from Colorado. Big difference, big difference. By the way, I was gonna go to UC Boulder if I didn't get into UCLA. UC Boulder used to be a safety school. Now that's impossible to get into. Anyway, that's not what you asked.

My second piece of advice is apply to a lot of schools and then treat it like a product and trade them off against each other. There's seven people trying to sell you a similar car. Who can give you the best deal? Who can give you the best financial aid? Maybe scholarships, whatever it might be. But this is a product.

And once you get in, it's their job to get you because they want yields. But oh my gosh, congratulations to you. It sounds like you've raised a wonderful daughter who has a lot of self-awareness and any 14-year-old who's thinking about the University of Edinburgh. By the way, a fantastic university, a fantastic place to live, a fantastic place to spend four years. And I'm not just saying that because my last name is Galloway and I expect to own the Glasgow Rangers. You heard it here. You heard it here. That would be great fodder for an original scripted television series,

an American that owns the Glasgow Rangers. Anyway, University of Edinburgh for a 14-year-old, that's a fantastic aspiration. Tell her to apply to as many schools as possible, then figure out what the best trade-off is in terms of brand equity, experience, and the cost and the debt that you and your daughter will have to take on. Thank you for the question, Val from Colorado. That's all for this episode. Again, if you'd like to submit a question, please email a voice recording

to officehoursatprofitmedia.com. Thank you. Thursday. 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? The answer to that question is probably more complicated than you want it to be. The average US company deploys more than 100 apps, and ideas about the work we do can be radically changed by the tools 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, communicate, and plan for the future? In this three-part special series, Decoder is surveying the IT landscape

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