The Prof G Pod with Scott Galloway - Office Hours: What’s Next for Peloton, The Hidden Value of B2B, and Diversifying your Investments

Episode Date: November 22, 2021

Scott answers a question on Peloton’s recent collapse in value and explains why it’s the perfect opportunity for Nike or Apple to acquire the company. He then shares why he likes to invest in the picks-and-shovels of booming industries and offers advice on geographically diversifying your portfolio. Music: https://www.davidcuttermusic.com / @dcuttermusic Learn more about your ad choices. Visit podcastchoices.com/adchoices

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NMLS 1617539. Welcome to the Prop 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 visit officehours.propgmedia.com. Again, that's officehours.propgmedia.com. that's officehours.profgmedia.com first question hey scott this is matt in seattle after 20 plus months of the pandemic i feel like we're truly at an inflection point despite historic inflation and supply chain moves we've got 79 percent of americans over the age of 12 with at least one dose not including the youngest cohort that's most recently become available in addition to multiple oral treatments whose approvals are on the horizon and appear to be

absolute game changers. So very intrigued to revisit a stock that's been one of the themes of America's pandemic, Peloton. I know you've given them quite a bit of scrutiny, but in the past week plus, it's seen a ton of movement. Market cap boomerang to pre-COVID levels as it lost $10 million in valuation upon their earnings call. Prices being slashed, ad spend skyrocketing. I know you praise the brand following and community fervor, but aren't we seeing their growth dissipate before our eyes now that COVID is almost in our rearview mirror? What's your confidence level in sustaining current users as well as future growth? Do you see this as a discounted opportunity for long-term potential or perhaps slowing to a crawl of a COVID-induced ride?

Thanks so much. Huge fan of your work, Matt. Matt, thanks. So I do not listen to these questions before they're asked, so I can be raw and authentic. And as soon as you mentioned Peloton, I immediately pulled it up on my phone to try and look at the market cap.

So right now it's about a $16 billion market cap. It's trading at 53 bucks a share. It's 52 week high as $171. So it's literally shed two-thirds of its value from its 52-week high. It was obviously a pandemic favorite. And it's near its 52-week low. It's really right around its 52-week low. So we're in an attention economy.

Every incremental minute you get of an American's attention is worth tens of billions of dollars to somebody. And that's where Peloton really shines is that among its user base, they have an incredibly influential user base, and they're capturing their attention. To me, that says with a market cap now of $17 billion or $16 billion, you don't do a bottoms-up valuation of this company. You do a top-down valuation, and that is what is the attention of the most influential people one to four hours a week worth to someone else? So I think Peloton gets acquired. And I've been predicting this for 18 months, and I've been wrong. I think the most natural acquirer is Apple, because at a $2.5 trillion market cap, even if they pay a 50% premium, they end up with a 1% dilution, meaning that this is not a bet the ranch acquisition. The acquisition could fail and it would be just a, I mean, they'd get a lot of

heckling from the cheap seats, but it'd be a net hitting the windshield that is Apple. Another potential acquirer, I think, is Nike. I think Nike is probably coming to the realization that at a quarter of a trillion dollar market cap, they're going to start running out of people to sell shoes to. And that is shoes and athletic wear will only take you so far that they need to get into a business that's more digital, more scalable, and takes advantage of their brand. One of the things that strikes me about Nike is that if 10 years ago I had said to you, there's going to be a program that's going to kind of light the world on fire, that's the ultimate sports drama about an American

who goes to coach a British football club, would it be produced by Nike or Apple? Nine out of 10 people would have said Nike. If you looked at their commercials, their creative resources, obviously, there are incredible assets around their endorsed athletes. They would say, well, of course, Nike's going to do that, not Apple. And Apple's done it. So I think Nike needs to forward integrate into either some sort of connected device or some sort of content. So I can see Nike at a $250 billion market cap. That would be a much bigger bite for them. That would be like an 8% to 10% dilution.

So that would be the kind of acquisition that if they got it wrong, that would probably push, I don't know if it would push the CEO out of the door, but it would be a big overhang. But it also would be, it could potentially, if they think they spun it right and said, we're forward integrating into the home of connected fitness with the greatest athletic brand in the world, Nike, and one of the greatest

or the greatest connected fitness brand, Peloton, that would make sense. Let's talk about fit though. I think the fit is actually probably stronger with Apple. And that is, one, it's less of a bet for them because they just have such incredibly deep pockets, see above only 1% dilution. Two, Peloton's biggest issue, I think, is around supply chain. It is not easy to bring all those parts together in a way such that you can get 50 points of gross margin. And the thing that's one of the things that's so impressive about Peloton is they've been able to bring together a manufactured device, a technological and a feel, self-expressive benefit, whatever it might be, the results in that type of margin for a tech hardware product. And Peloton has accomplished that. However, the friction is their supply chain. They've had some supply chain interruptions.

They've had some recalls. Who has the best supply chain in the world? It's not Nike. Nike's actually had some problems around their supply chain. It's Apple because it's run by a supply chain guy. That's where Tim Cook, that's kind of his ballywick that he's, I think he's going to go down probably, maybe with the exception of Bezos, who's kind of the supply chain king. Anyways, I don't know. Both of my guests, you're talking about Ali Frazier here. Long-winded way of saying, I think Peloton at these price levels, I mean, they're probably going to get taken to the woodshed for a while, but it feels to me that I don't even look at the earnings here or the PE because I look at it and think, okay, at $16 billion, there's just a lot of companies that will say, I want the attention

of those users. That's worth more than $16 billion to me. So what happens here? I like this as a stock because I think there's a floor just in terms of acquisition here by a bigger player. I do think it gets taken out. And I think right now, someone's going to look at it and go, okay, this is a really good deal. Thank you for the question. Next question. Hi, Scott. This is Austin from Kansas City, Missouri. I'm a product manager with a large enterprise software vendor, so I'm going to pull you over to the enterprise for a minute. We've heard a lot about lasting changes in consumer markets

brought on and really accelerated by the pandemic. I'm curious to hear your thoughts on a similar shifting landscape in the enterprise or traditional B2B space. Examples could be things like a wave of new technology investment as firms rush to deliver new digital offerings. And for us on the vendor side, maybe some new channels or paths to market that disrupt the traditional enterprise sales cycle. What major shifts or lasting impact are you seeing that the pandemic forced or accelerated for this segment? And if we haven't seen those really manifest yet, any predictions?

Thanks for taking my question. I'm a big fan. Take care. Austin from Kansas City. Thanks for the thoughtful question. I've always considered myself a B2C guy. And the moment we started talking about B2B, I kind of pulled, you know,

basic adages and kind of, I don't know, conventional wisdom. I don't think I have a ton of insight. According to Statista, global IT spending on enterprise software should reach about $600 billion in 2021, growing almost 14% from the previous year. Just some observations. While I'm a B2C person and feel as if I understand B2C companies better,

my book, The Four, should have been called probably The Five. It should have included Microsoft in addition to Amazon, Apple, Facebook, and Google. But I didn't write about Microsoft because I see Microsoft as B2B and I feel like I don't really understand enterprise. The advice I would have though is that all else being equal, I would go to work for a B2B company. I've always started B2B companies. I shouldn't say that. I started a company called Red Envelope, and B2C is more difficult. Why is it more difficult? Because there's an overinvestment in B2C and an underinvestment in B2B. Why? Because B2C is cooler. People would rather go to work for Netflix or for Apple than for the chip company or the technology surrounding the AI or the recommendation engine. People would rather go to work for Epic or Fortnite than go to work for

Unity, although that might be changing the underlying... I think Unity makes environments to program these metaverses in, which takes me to my next thing. One, if you're an entrepreneur, I think B2B is the way to go. So Red Envelope was my fucking Vietnam and no disrespect to Vietnam vets. I realized that it was actually worse to be there than it was to start an e-commerce company in the 90s. But it was a really difficult business because B2C usually gets overfunded. It's more sexy. And when you have overfunding of human and financial capital, that lowers and drives down returns. Whereas B2B sounds more boring,

you know, healthcare software as a service maintenance platforms don't sound that sexy. So they don't get as much human or financial capital. Actually, they probably get a decent amount of financial capital. And I find that there are better ways

to make a living. My most successful company for me personally, or my two most successful were Profit, a strategy firm, B2B, and L2, which basically did kind specifically, or where I'm thinking of investing in B2B is we'll bring on Mike Novogratz to talk about different coins. I don't own a single coin, but I am investing in the picks and the shovels. And it seems to me when you talk about global IT, what do we know? We know that there's going to be massive, massive investment in consumer apps around technology. But I think the people who on a risk-adjusted basis are going to do the best here. There'll be some really well-publicized winners on the front end of B2C who will make a shit ton of money. But I think on a risk-adjusted basis, the place you want to invest your human or financial capital is in the infrastructure

play, sort of the Cisco's, if you will, or who's selling the picks and shovels. I've danced around this a lot and it's my way of saying, I don't really understand the enterprise. What I can say is I think B2B is a better place to invest your human or your financial capital. You wanna be investing in the picks and shovels. And I think there's gonna be tremendous opportunity

for these infrastructure players who kind of sell into everybody. Facebook and Google take 40% of all venture capital raise. So you want to get in front of all the money that's going to be raised. You want to be the service selling into that crazy cool little startup. Thanks for the question. We have one quick break before our final question. Stay with us. 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. 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. Welcome back. Question number three. Hey, Prof G.

This is Steven from Rochester, New York. And I have a question about investment diversification. I'm in my late 20s and I work in tech. Therefore, I have a good salary, but I only invest in index funds that cover U.S. stocks. And so my question to you is, do you consider index funds a good enough means of diversification? Steven from Rochester. So I love diversification. I love index funds.

And that is one of the things that's the key in the algebra of wealth. You want to focus so you can find a talent that people will pay you for. You want to live like a stoic, which is my way of saying save more than you invest. Your wealth is not a function of how much you make. It's a function of how much you save. You want to let time take over. I believe you want to buy stocks in great companies or buy index funds. You want to pay low fees and you want to get the fuck out of the way and let the most powerful force in the universe take over. And that is time. And if you day trade, 80 to 95% of you will lose money. No one has ever lost money if they pick five stocks in the S&P and they hold onto them for at least

10 years. Everyone has made money. And people say, if anyone says, oh, you have to be prepared to lose it all, that's not investing, that's gambling. You should not be prepared to lose it all. And I think index funds are a great way of having someone rebalance for you, low fees. I think it's a great way to go. I think your second question is, should you have greater diversification beyond US stocks? I wonder, and I'll just tell you what I'm doing. I'm starting to slowly but surely rotate out of the US tech trade. It's been on fire for 13 years. There's a ton of evidence, a ton of support for why it will continue to rock on,

why software is eating the world. We are still the innovators. The number of unicorns is still dominated by U.S. companies. It's come up in China. Who's really fallen is actually Europe. But you can make an incredible argument for why U.S. technology companies will continue to march on. And I think that is reflected in their current valuations, where you look at these valuations as a multiple of revenues or earnings, whatever you want to call it, and they're just at, it's just crazy town. I'm at a stage in my life where I want to take less risk. I'm not looking to get rich. I'm looking to not get poor. So I'm probably at a different stage than you, and I want diversification. And one of the ways I'm going to start diversifying

is going into ETFs and index funds outside of the US and outside of tech. When I look at my life, when I look at my economic history, it frighteningly mimics the NASDAQ. And that is in 1999, I was looking at jets, no joke. And then the marketplace reminded me I wasn't the genius I thought I was in 2000 and didn't go broke, but had a lot less money than I thought. Climbed my way back, 2007, started thinking I'm smarter than I actually am. And the markets reminded me again in 2008 that I'm not that smart. And then finally, I've kind of gotten back to that financial security again as the NASDAQ has absolutely ripped up. And I'm thinking, okay, I need to be smarter this time. And so I love that you're in index funds. I love that you're paying low fees and you're diversified.

I guess the question is, at some point, do you diversify geographically? And I wonder when the US tech trade starts to lose some steam. I think tech could continue to eat the planet. And you could see tech stocks or these index funds go down because market dynamics trump individual performance. I still believe ultimately over time things do return to fundamentals. And I do believe the markets are cyclical. And I think these emerging markets will have their day in the sun again. And I like to sell stuff when the narrative is just overwhelmingly bullish, because I think that's reflected in the prices. Long-winded way of saying, yeah, US tech, I bet you've done really well. But my brother,

once I think you get to a certain level of economic security or just maybe before then, it's not a bad idea to place a few bets around different industries, different sectors, and maybe even different geographies. But again, diversification through index, low fees, right on my brother. I think that's the way you build wealth. I would say to young people, the good news is I know how to get you rich. The bad news is the answer is slowly.

That's all for this episode. Again, if you'd like to submit a question, please visit officehours.profetymedia.com. Our producers are Caroline Shagrin and Drew Burrows. Claire Miller is our assistant producer. As a reminder, we answer your questions regarding business trends, big tech, entrepreneurship, career pivots, and whatever else is on your mind on the pod every Monday. If you'd like to submit a question, please visit officehours.profgmedia.com. Again, that's officehours.profgmedia.com to submit a question.

If you like what you heard, please follow, download, and subscribe. Thank you for listening to the Prof G Pod from the Vox Media Podcast Network. We will catch you on Thursday. Support for this podcast comes from Klaviyo. You know that feeling when your favorite brand really gets you. Deliver that feeling to your customers every time. Klaviyo turns your customer data into real-time connections across relationships with their customers during Black Friday, Cyber Monday, and beyond. Make every moment count with Klaviyo. Learn more at klaviyo.com slash BFCM. Thank you. In Alex Partners' 2024 Digital Disruption Report, you can learn the best path to turning that disruption into growth for your business.

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