The Prof G Pod with Scott Galloway - Prof G Markets: Arm’s AI Rally, Lyft’s Earnings Mistake, and Airbnb’s Trading Premium

Episode Date: February 19, 2024

Scott breaks down why Airbnb’s stock fell despite strong earnings, and explains why he’s considering selling some of his largest holding. He then discusses Lyft’s earnings report typo and shares a similar personal story. Finally, he takes a look at Arm’s stock and questions whether its rally is owed to AI hype or AI washing. Learn more about your ad choices. Visit podcastchoices.com/adchoices

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NMLS 1617539. This week's number, 882. That's how many private jets flew into Las Vegas over Super Bowl weekend. Ed, trust me on this one. The next time you're on a flight and the flight attendant asks if you'd like headphones, say yes and ask him how he knew your name was phones. Welcome to Prof G Markets. Today, we're discussing Airbnb's earnings, Lyft's earnings report typo, and Arm's AI hype. You're still thinking about the joke. You didn't even hear what we're discussing, Ed.

Here with the news is PropG Media analyst and frequent flyer, Ed Elson. Ed, what did you think? Well, first off, first off, Ed, how are you? How are you? I'm very well. I'm a little jealous of you right now. I'm looking at your- Biceps? Sunburn and your background. Oh, no, man. Okay. Got it. Drinking, what is that? A Mai Tai? What are you drinking? I'm drinking a Tiger beer and a chocolate shake,

which makes no fucking sense. I panicked. The guy came up and said, what do you want to eat? I ordered chicken fried rice, a chocolate shake, and a tiger beer, which either means I have just the right chemistry going on or I'm going to have volcano-like diarrhea. I don't know what's going on here. On a scale of 1 to 10, how drunk are you right now?

How drunk am I? I'm not drunk. I've actually, unfortunately here. On a scale of one to 10, how drunk are you right now? How drunk am I? I'm not drunk. I've actually, unfortunately, I drink a lot of alcohol, but it's not easy for me to be inebriated, which is a curse because I have to drink a shit ton of alcohol because I don't drink for taste. I drink to feel better about myself and the world. And unfortunately, that requires a lot of the devil water. And so, actually, I went in for

my physical and he's like, everything's great except for how much alcohol you drink. I'm like, well, tell me something I don't know, Dr. Shithead, Captain Obvious. So, yeah, but no, two Tiger beers don't do much for me. Fair enough. What'd you think of our conversation with Demodaran? I thought one of the most interesting things he said was that the thing he's most focused on this year from a valuation perspective is the elections. And what he said was that the elections will drive the market this year more than people think they will. I think we do a really good job of avoiding politics on this podcast. I think we're generally pretty apolitical, or at least we try to be. But I'm thinking now that maybe this year we should actually be incorporating politics more into

this podcast and more into our analysis than we have done in the past. Because it's possible that in our mission to avoid politics, we actually might be creating some blind spots for ourselves. And the reality he points out with those comments is actually markets and politics are intrinsically linked. I've been reflecting on a couple of things he said. One, that the biggest story that people are talking about is that the second largest economy is basically imploding and that the stock market there has lost 40% of its value. And you said something that struck me, that just blew me away, that NVIDIA is now worth about the same as all of the Chinese companies listed on the Hong Kong Stock Exchange. That's just dramatic. My first job on TV, I don't know if you know this, Ed, but I've been on TV quite a bit.

You've been on CNN Plus. It's different. Those are fighting words. That's true. CNBC, that counts. True. By the way, I've also been on Fox probably 100 plus times. I like the people over at Fox. Sue me. Anyways, but my first kind of gig on TV was I was a contributing editor for Bloomberg. I used to come on and talk about technology and economy, and it seemed for like six months, and this was back in the early part of the millennium, everyone was talking about Greek sovereign debt and how they were in danger of default. And if Greek debt defaulted,

it was going to create this contagion and the whole world was going to, you know, go into an enormous depression. And it was such ridiculous bullshit. The entire Greek economy represented 2% of GDP of Europe. And yet no one is talking about the fact that the second largest economy has a real estate crisis unfolding. Supposedly every publicly traded real estate company is effectively default. And if you look at the amount of leverage on real estate in China, it's three and a half times what the leverage was on US real estate before the great financial recession. I thought that was super fascinating. The other thing he said that kind of reframed things, the thing I like about Aswath is I have no idea what his politics are,

which I find really refreshing. And I have very much a bias against Tesla and Musk. And I think everybody that listens to this thing knows that, even though I try to call balls and strikes. And he said something very interesting about the Delaware Treasury Court's decision to reject the compensation. He's like, look, it was the number that scared everybody. But if you go back to when they made the actual award, because the company only had about a $50 billion market cap, the actual options award, probably the value of it at that point, which is how we should be evaluating it in terms of size, probably was nowhere near $50 billion. And I just, that's

the right frame to look at it. It's simple, but it just makes a ton of sense. Definitely. Well, shall we get into our market vitals? No, let's talk about my chocolate shake. Yeah, go. Let's start with our weekly review of market vitals. The S&P 500 fell, the dollar rose, Bitcoin crossed $50,000 for the first time since 2021, and the yield on 10-year treasuries was volatile. Shifting to the headlines. Inflation slowed to 3.1% in January, but that was higher than economists' predictions of 2.9%. The S&P and Dow fell sharply on that news, but rate cuts are still expected in 2024. Carl Icahn has built a near 10% stake in JetBlue. He said the stock was, quote,

undervalued and represented an attractive investment opportunity. JetBlue shares rose more than 18% after that announcement. Diamondback Energy is acquiring Endeavor Energy Resources for about $26 billion. That's the latest deal in the consolidating energy industry. The combined company will be the third largest oil and gas producer in the Permian Basin, and Diamondback shares rose 10% on that announcement. And finally, Jeff Bezos sold $4 billion in Amazon shares last week. The sales followed an announcement from Bezos that he's moving from Seattle to Miami, where he could save more than $600 million in taxes.

Scott, thoughts? So inflation, my understanding is that it was shelter costs that were the largest contributor to the uptick, and everyone freaked out, and the market, I think, was down 400 points or something because they thought maybe those rate cuts, the punch bowl won't be back as soon as we'd hoped. The only thing we know,

the best contraindicator in history is survey economists, and if they all agree on something, go the other way. 100% are economists, and they'd never had total unanimity around anything, predicted recession for 2023, and guess what? It never showed up. And in this instance, they've been talking about, is it three cuts or is it five cuts? And the only thing we know is it's not going to be what they predict. And the market just freaked out when it was like, oh, our date is our data's off with a rate cut or our data might be off with a rate cut. But I still, when I looked into the data, it didn't really look as if inflation was spiking. Carl Icahn, what struck me is 200 million bucks isn't a lot of money. Carl did something interesting a few years ago. He returned every investor's money and said, I'm sick of managing

other people's money. I'm just going to do my own. But $200 million, unless it was Carl Icahn, probably wouldn't get much news. That's not a large investment. JetBlue, I'm fascinated by this. I think JetBlue is a great brand. I think they're the best product in the domestic market. As you know, I fly a lot. And the stock has been a real underperformer. The merger got called off and then boom, he comes in 22%. I mean, you know, this is a classic activist play. I'd be curious to know, and I don't know if you've read his deck, what does he think they need to be doing that they're not doing? Yeah, he hasn't said anything about this.

And so that we can only speculate. All he's done is submitted the filing and he said it's an attractive investment but he hasn't said anything about strategy or what he plans to do but it feels like the merger with spirit which was cancelled and which we discussed on a previous episode it feels like that must have played some part in the investment thesis here and i'm wondering if you have any thoughts on how it would have played a part, like specifically, in what way would JetBlue failing to acquire Spirit make it an attractive investment? Well, because I think the stock got cut. So at some point, everything's attractive. At some point, everything's unattractive. And I

think this stock has been a veritable underperformer. And so I think he's coming in and saying, okay, he may just be coming in and saying, we can all agree that the stock is undervalued and I'm going to come in on the board and I'm going to decide whether the CEO needs to be replaced. We need to cut costs. You know, we need to be acquired, whatever it might be. You come in with a series. I mean, having been an activist, what I generally found is you have a thesis and then you show up and you get on the board and you find out that you're not as smart as you thought and they're not as dumb as you'd hoped. And typically your ideas aren't, I don't know. The idea that every activist has had that's has been the gift of Gibson giving, but you should cut costs. Whether it was the activist play at Salesforce or an activist banging around at Disney, they've

all said, look, you need to get more serious about cost cutting. That's powerful, but it's not necessarily that novel. The other thing to remember is that he has done this before with TWA, which he acquired, I think, a 20% stake in in 1985. And then he built up that stake over time, and then eventually he cashed out on it. But at the same time, he ran the company into the ground. I mean, when he sold the company, it had hundreds of millions of dollars in debt. And then pretty soon after it filed for bankruptcy. And that LBO was sort of the quintessential corporate raider example that people look to in history. And it feels like a lot of people might start arguing that he could be about to do the same with JetBlue.

That is, he's not actually going to grow the airline and grow the business. He's just going to use it as a financial vehicle to enrich himself. Well, but there's some gating factors here. I think what you're talking about with TWA was he got control, and then he convinced a bunch of creditors to loan him a shit ton of money. He then made distributions to himself, so he made a ton of money, took his money off the table. A lot of times private equity will go in and buy a company,

create some operational efficiencies, maybe it does a little better the next year, and the first thing they do is they go and they issue a ton of debt and they take their money out again. So anything that happens from that point forward, they've either gotten all their money out or they've already made money. And so it's kind of financial engineering, and a lot of people think these companies just come in, pile it up with debt, take their money out, and then put the company under huge strain, you know, sometimes reduce the pensions, don't invest, whatever it might be. That's the argument against private equity, that they come in and they basically suck the corpus dry, they feed on it, and then they move on to the next corpus and leave just kind of the wreckage behind them.

Which feels fair for this situation, for the TWA situation. I mean, there's instances where private equity comes in and literally ruins a company. But the difference here with JetBlue is that he doesn't own, he doesn't have a control stake. And even if he gets a board seat, they're not going to let him just lever up the company and walk away with his back. They're not going to do that. I don't know what the market cap on it is,

but $200 million, I would imagine, is not a control stake. Yeah, $2.5 billion market cap. Yeah, so he owns about, right now with $200 million, I would imagine, is not a control stake. Yeah, $2.5 billion market cap. Yeah. So he owns about, right now with $200 million, he owns about- 10%, yeah. He'll probably, I would imagine, get a board seat, but he's not going to be able to say, okay, everybody, let's issue a bunch of debt, distribute it out to us, and then turn it over to someone else to try and figure this shit out with a terrible cap structure. I don't think he's going to do that. Diamondback?

Consolidation, like crazy. There's obviously huge efficiency here. These companies' stocks have run up, so they're looking for ways to add more efficiency, which is Latin for scale and layoffs. And I think these guys just see size matters. It kind of goes back to what DeModern said that the biggest players are kind of running away with it and the number four and five players are saying,

hey, let's get together and be the number two. My sense is as these fields get a little bit more, I don't know if the term is mined or, you know, basically overfished, if you will, that the costs of extraction are probably getting greater. I don't know. The honest answer is I don't, this is one market I don't know a lot about. Do you have any thoughts? I mean, the last time we talked about the energy sector, Exxon was buying Pioneer for $60 billion. Later that month, Chevron bought Hess for $53 billion.

Occidental bought Crown Rock for $11 billion. Occidental bought Crown Rock for $11 billion. APA bought Callan for $5 billion. And now here we are again. So yeah, massive consolidation. It looks like it's just a flat-out race for market share. And as, yeah, as Athwath said, the small guy loses, the big guy wins. How do you get bigger? Well, the fastest way to do that is you just bulk up and buy.

It just makes a ton of sense. The question is, at what point does the result increase prices to the consumer? And does the FTC or the DOJ need to step in? I don't know if they're anywhere near that breaking point. Bezos, you know, I wish one of these guys would just move to Florida and say, I did it for tax reasons. He said that he wanted to be closer to his dad, which is really sweet, but it's not true. I don't even know his dad, and I don't know his relationship with his dad. And what do you know? He sold a shit ton of stock about 30 days after establishing residency in Florida. Look, I like that Florida and Texas and other low-tax states are putting pressure on high-tax states. I like—competition is a good thing. Massachusetts, California, the northeastern states and California need to have pressure placed on their leadership that, in my opinion, are spending a shit ton of money and creating a really bad product. If you go into parts of LA and you see the homeless problem or in San Francisco, and then you have to pay 13% taxes on top of federal taxes, it's like, okay, California right now feels expensive but bad. And if they continue to hemorrhage people, and also this is true of

Washington State, they're making up a large part of their tax base. They're going to have to think about cost cuts or how they make the state more attractive. What always struck me about Manhattan was even with 13% additional taxes, it was worth it. Manhattan is so singular. I think Manhattan's actually a very well-run city, but there's certain parts of California that aren't. Now, having said that, what bothers me about this, I like the competition, what bothers me is that this has nothing to do with competition. This is an individual who's built $60 or $80 billion in wealth, and now in order to monetize it, wants to move to a low-tax state. There is something inherently wrong about that. And what I would suggest, and I think the solution here is pretty obvious, and that is the tax treatment we apply to options. So if Bezos had options that were $10 billion in the money, and they were vesting over four years, and he moved in his third year, regardless of when he monetizes or sell those shares, three quarters or seven and a half billion of that gain would be taxed at Washington rates, and that revenue would go back to Washington. I think the same should be true of his stock holdings. And that is, if he's made $60 or

$80 billion in equity value from Amazon stock, and he's leveraged the great University of Washington school system, the great community colleges there, the Seattle-Tacoma airport, the hospital system, the elementary school system, the roads, the culture, the fact that a ton of people in tech move to Seattle, he needs to pay for it. He benefited from it. It built a huge wealth for him. He needs to pay the piper. Now, if he were to move to Florida and his Amazon stock were to go from $80 to $100 billion in wealth, that incremental $20, fine. It should be taxed at the 0% state tax rate that is Florida. But the $80 billion in wealth that was created by him and in

large part by the incredible infrastructure investments made by the state of Washington and taxpayers, he needs to pay them back. So I think we're looking at some point, hopefully, at some sort of cross-border tax agreement. For example, there's now a minimum tax on corporations, right? We said to Ireland, enough of this shit. You letting people come over there and pay 8% taxes. We're not going to build amazing companies here so you can build better schools in Ireland or, you know, dress up the Guinness brewery. Is that wrong, Ed? Did I immediately assume the Irish should, you know, do nothing but drink beer? Is that wrong? I think we need something domestically. If you build a great company in California, I can't stand these entrepreneurs, these VCs who

move to Miami and pretend they give a flying fuck about the Miami ecosystem and just want to monetize their gains in whatever it is they built in California or in Washington. And that's fine if they want to move somewhere else. They should enjoy the tax rates from that moment forward. But the value accreted to that point, they should pay the piper. We'll be right back after the break with a look at Airbnb's earnings. We're back with Profit Markets. Airbnb reported better than expected earnings for the fourth quarter, with revenue up 17% from a year earlier. The number of nights and experiences booked were up 12%,

also surpassing expectations. Because of a one-time expense related to a previously announced tax settlement, the company reported a net loss of $350 million for the quarter, compared to net income of $320 million a year ago. It also stated that Booking's growth would moderate this quarter, and the stock fell more than four percent scott on last week's show you predicted that airbnb stock would pop after the earnings what do you make of these results actually ed i predicted that they would have a monster earnings beat i don't think i predicted that the stock would pop but anyways well no no hold on let's let's play the tape so airbnb's earnings, I believe, are on Tuesday, and I think they're going to beat their earnings, and I think you're going to see a pop in the stock.

It's impossible to predict the stock price. I said— Was this a monster earnings beat? I think this was a strong beat. I don't think it was a monster beat. But it was a beat. I mean, it was a significant beat. Let me put it this way. 498 of the Fortune 500 CEOs would pray for this beat. What was interesting is, I don't know if you followed the stock after hours, it went up 8% immediately. And then by the end of the day, it was down, or the after hours was down 4%. I think it ended up, as we sit here today on Thursday, I don't know what time it is there. It's midnight. It's 1241 here, a.m. here in the Maldives. God, that's the chocolate shake speaking. I don't know what time it is. The stock is up nine bucks today. It's about, I think it's at its 52-week high.

It just hit a new 52-week high. Anyways, the stock is rocketing. And I think it goes to a lot of the things we were talking about with Demodaran, big leader in its space, asset light, the use of AI. They're not building their own AI, but they bought a small good folks at Goldman, they said, look, this thing is expensive. And I wonder, I mean, I own Airbnb and I'm trying to figure out if I should be at some point taking some chips off the table here because it's starting, I don't know, every time I sell a stock, it goes up 20 or 30%. So maybe if I just think about it enough, it'll go up. But look, Airbnb is now trading at enterprise value at EBITDA, Alphabet 18, Meta 20, Booking 16 times, Expedia 10 times, Airbnb 30 times. So it's definitely feeling like it's getting pretty fully valued. I was going to ask if you have any thoughts on why the stock initially dipped 4%.

Because as you say, it was a beat. I mean, from my research, what I've seen is that some analysts may have been concerned about the room night guidance. The shareholder letter said, quote, expect the growth rate of nights booked in Q1 2024 to moderate relative to Q4 2023. But that's kind of it. I'm just wondering, from your perspective, as a pretty significant shareholder in this company, is that the kind of guidance that actually gets you concerned, that actually is a sell signal to you? Because it, I mean, people sold. Yeah, but you got to look at it, you got to look at the track record of the town. And that is Brian Chesky does what every good CEO does. And that is he sandbags.

And that is he always tempers expectations and the stock goes down a little bit such that he can, you want a surprise to the upside. You don't want to, in relationships specifically with your investors and also, quite frankly, any relationship, you don't want to overpromise. And so I find the best CEOs, like the CFO of Apple would always play down their earnings like, yeah, we got lucky this quarter, but next quarter, it's going to be really hard. They would always say that because what you want to do is any surprise, almost any surprise should be a good one. And that is people don't mind relationships that are hard. What

people mind is really negative surprises. I think what good CEOs do is they really temper expectations such that every quarter, analysts are sort of saying, congrats on the beat. And if you look at, I think 12 of the last 14 quarters, Airbnb has beat estimates, which either means they're bad at making estimates or the gestalt across senior management and their investor relations is we're going to temper our forward guidance. It's also really difficult to diagnose short-term movements unless there's an obvious thing like you have a typo and your margins or something. But I'm still kind of a demotor and disciple. I think that valuation, bottoms-up valuation is still like

gravity. And that is, you could ignore gravity for a while. Michael Jordan looks like he can literally ignore gravity, but even Michael Jordan has to come down to earth at some point. And over the long term, most companies eventually start trading like their peers. And the only thing I'm looking at, the only reason I'm even considering paring back my stake here is that 30 EV to EBITDA number. Lyft shares soared more than 60%, hitting a 52-week high, but that was based on a mistake in its earnings report. According to the initial release, adjusted earnings margins were expected to increase by 500 basis points in 2024. Turns

out that was a typo. The CFO clarified on the earnings call, it's actually only expected to increase 50 basis points, not 500. The stock retreated on that correction, but was still up more than 30% above its previous closing price. Scott, this was kind of wild to me. Have you ever seen anything like this before? Oh, I've lived it before. So I don't know if you know this, Ed, but I started a company called Red Envelope back in the 90s. And we took the company public. And I was chairman. And then Mike Moritz, who's arguably the most successful venture capitalist in history, came on as our investor. And then he took my job as chairman. And then my partner, Ian Chaplin, who is a technologist and kind of the substance of our partnership, if you will, did an analysis of the technology of the company because there were some glitches when he was trying to order stuff. And he basically wrote up an email and sent it to the board and said, I've reviewed all the technology. And as far as I can tell, we have the shittiest tech stack of any e-commerce company of our size. The only justification or

rationale I can see for these purchases we've made is that they all seem to be companies backed by Sequoia Capital. And our CTO, what do you know, came from Webvan, another Sequoia backed company. And of course, the board just went apeshit that they were accusing Mike of this. And Mike was the billionaire in the room. And so I immediately responded saying, this is a total abdication of your duties as a fiduciary and a board member that you're using Red Envelope as a dumping ground for the failed products of your portfolio companies. And two days later, I was kicked off the board. And I decided to run a full-scale proxy fight to replace the entire board of Red Envelope. And an election, what happens is you go to the annual meeting, and it's like an election.

And they vote for my slate or the existing slate. And I called all the shareholders, made my case. This guy doesn't know what he's doing, da, da, da, and dereliction of duty. I owned 8% of the company, I think. And we ended up with a total of 12% voted for my slate. And my proxy solicitor said the additional 4% we got was probably a mistake. The form is complicated. So people didn't realize they were voting for you. So basically, I had not only been kicked out of the band I started, but every shareholder thought, okay, this guy's crazy. We're sticking with Moritz and this crew. That was, I think, arguably, that was probably the lowest moment I've ever had professionally. And then about two months later in an earnings call, the CEO, who was a

total incompetent, she announced on an earnings call that they had overestimated gross margins, which is really important in a retail company, that they had overestimated gross margins by a thousand basis points. And their gross margins weren't 48 points, but 38. And I think the stock went from 12 to 7 at the open of the market the next day. And right then margins weren't 48 points, but 38. And I think the stock went from 12 to 7 at the open of the market the next day. And right then I thought, okay, I don't know if it's this next annual board meeting, but I've won. I'm going to get back on the board and I'm going to sweep out these fucking sycophants. Anyways, and so I have direct experience with a management team. This was a typo. This was a typo.

This was a clerical error that sent the stock on a temporary wild ride. Mine was kind of intrinsic incompetence supported by what I call kind of reckless directors. If I sound bitter 20 years later, I am, Ed. I am. Yeah. Yeah, because, I mean, there could be many people at Lyft who feel the same way, that this is structural incompetence from within management. Yeah, but this was a typo. This is somebody making a mistake. But surely it was, was it not, was it not a red envelope? No, this was.

I'm sure they amended it afterwards. Yeah, but to overestimate margins by 1,000 basis points, that's management. That's not someone adding a zero. Management said, our gross margins are 48 points earlier in the quarter. And then they had to come on and go, oh, no, that was a mistake. We calculated it incorrectly. So it was the CFO and the CEO and nobody asking it. I mean, this is just total incompetence on the part of the management team.

It's not somebody in IR putting out the wrong number in a press release. I wouldn't be surprised if there's some shareholder lawsuits here, but I don't know how many people made or lost money in the aftermarket. I don't, it'll be interesting to see what happens here. The more specific news are quite frankly, the more important news other than hearing about

my unresolved anger issues is Lyft had a great quarter. And it's really surprising to me because I would have thought that Lyft would just be slowly but surely getting crushed by Uber. And they're not. They appear to have benefited from the same kind of secular trends or wind in their sales that Uber's benefiting from. And I've always kind of liked Lyft. They're sort of the, I don't know, we try harder, we're Avis, whatever it is, but good for them. A good quarter. Yeah, it was a great quarter. Gross bookings up 17%, ridership up 10%, trips per rider up 15%. And the CEO went on CNBC and the first thing he said was,

my bad, which I thought was pretty funny. But then he also made the point that actually the thing that should get investors more confident about the company is the fact that they responded to it so quickly. And they immediately made it clear to investors that this was a typo. They explained it. They apologized. This is the first time I've seen something like this. But as I think about it, I'm honestly surprised it doesn't happen more often. I mean, it was literally one number. And I realized after that, it's like, I take every single number and every from happening in their earnings reports? How are they so good just across the board at reporting their earnings and not submitting typos? One word, fear.

My first job out of UCLA was Morgan Stanley. And basically the kind of entire culture was here's's a prospectus, and you're going to read it frontwards and backwards, and if there's any mistakes in there, we're going to fire you. I mean, that was basically the kind of implicit agreement, that if you read the word base rental payment in a paragraph later, it said base rental payments, Which one is it? And then go through and find every time they say base rental payment and make sure that it's singular or plural. And every time there's a number in there, look at wherever that number was, the true interest cost, make sure it foots to where you set it on page 13. Now there's tools now. I mean, just basic tools around control search or

whatever the fuck it is we use now. But I mean, I took a lot from investment banking. One, it's a terrible job full of sad people who are stuck there because they're making so much money, they can't go do anything else. It's a terribly sad group of people. And two, what I got out of it was an incredible attention to detail. It was everything has to be perfect. And quite frankly, that has served me really well through my career. But it's fear. It's whoever puts out those press releases. Someone got fired here. They may not know it, but they're going to be fired. Maybe it's okay, get through it, whatever. They're out. What IR does is they go through these press releases and they go word by word and say, can we say that? And double check this number again because the markets will move on it. So the fact that they miss this is really unusual. But what happens is, unless people like the CFO take responsibility, the problem when there's a lot of people responsible for it is no one is accountable.

And you need to assign one person and say, you're quality control for this press release. And that person needs to be nervous. Otherwise, everyone assumes everyone else has done the checking. And it's amazing how many really big errors can slip through when there's no one who has kind of end game accountability. Is this a genuine red flag for investors? Should you be seeing this and thinking, oh my God, they don't have their shit together because they got this wrong? Or is it, you know, a one-off clerical error? Because that seems to be the question here. It's like they had a great quarter, but then it's marred by this issue. And it's unclear to what extent you should be weighting that. How big of a fuck up is it

really? It's a yellow card. And that is, it's a warning and it makes them look bad. They get a second yellow card. It's a red card, right? So as long as this is an isolated incident, and you can bet they're going to be all low over their shit the next few quarters, as long as it doesn't come across as a pattern, it's a bad look. In a weird way, and I hate to say this, it might have actually brought more attention to their good quarter, where this really would have been bad. Kind of an automatic red card is if they had overestimated if they'd made the clerical error in the midst of a really bad earnings report. Because in a weird way, what this did was bring

more attention to the report, to the earnings, which were very strong. If this error had happened in the midst of a shitty miss, oh God, that would have been ugly. The CFO, he might have, his job might have been on the line, but all is forgiven when the stock is up and you're reporting a good earnings. Having said that, you got to bet they're going to go over this shit with a fine tooth and comb for the next several quarters. And by the way, we probably would not be reporting Lyft earnings on this podcast if this fuck up hadn't happened. But the data is, and we'll move on after this, but the data is Lyft has 25% market share on the US ride share market, yet it's 4% of Uber's market cap. Lyft is a $6 billion company. Uber is a $160 billion company. So Uber is kind of the elephant

in the room here. The other thing is they authorized a $7 billion share buyback, and that sent the stock up another 14%. It's now sitting at a record high. Do you have any thoughts on that and what it says about Uber, who is also having basically just had its best year ever? This feels like an absolute hard turn to profitability. Well-run company, firing on all cylinders, iconic. I think Uber is just a phenomena. I think it's incredible that I can be almost anywhere in the world. I had this amazing Uber experience. I landed in Cannes. I immediately pulled up an Uber and this icon of a chopper came up. And I'm like, well, what the fuck? And I hit that. And they said, Uber chopped her into Cannes, you know, 120 euro. And I'm like, okay, hit it again. And it said, Francois, we'll meet you at, you know, baggage claim four. 11 in a pilot's uniform. It looked like he was dressed up for Halloween as a pilot. Came up and said, Monsieur Galloway. And I'm like, yeah. And he put me in a lawnmower that had a blade attached

to it. And I'm not exaggerating. We flew across the Côte d'Azur and landed on the Palais. And I got out of that fucking helicopter. I'm like, I am James Bond. Bond, James Bond. It just was amazing. I thought Uber is just incredible. Anyways, obviously that was a marketing ploy, but I love, I'm fascinated. When I order an Uber, I love seeing where the car is. I'm like, good, he's three blocks away now. Now he's two and a half blocks. I just, it's fascinating. I think they do a great job. We'll be right back after the break with a look at last week's hottest stock. We're back with ProfitG Markets.

Chip designer Arm reported earnings more than a week ago, and the stock has been on a tear. After posting better than expected earnings, shares jumped nearly 50%. By the next week, though, the stock was still rallying. And at its peak, Arm was trading at triple its IPO price from September, and it's now settled at double where it was before the earnings report. Scott, what do you make of this? It feels like, is this AI washing or is this the next shoe to drop or the next rocket to explode in what has been kind of the AI NVIDIA inspired, you know, massive updraft in market capitalization. So its revenue was up 14%. It also has a very asset-light business model, which we love. And it has, I mean, check this out, gross margins of 96%.

That's like, I don't know, software or Coca-Cola-like margins. And its revenue for the full year ending in March, or its revenue forecast in March, represents a 19% increase year over year. And it's now trying to bill itself. It's moved away from smartphones, and it's trying to bill itself as an AI company. That's the only thing that scares me a little bit is, again, AI washing. It gets two-thirds of its revenue from other sectors. One of those sectors is AI. This is a company that's obviously doing well. The thing that scares me about it is NVIDIA trades at a forward earnings of 37 and and arm trades at 90 and it's year-on-year revenue growth is 14 versus 206 at nvidia it just strikes me as it's it's drafting

off the ai hype and it feels like quite frankly i hate it feels a little bit overvalued to me what do you think totally overvalued i mean yeah What do you think? Totally overvalued. I mean, yeah, the revenue increased 14%. That's pretty good. That's around what Google did last quarter, which we discussed a couple of weeks ago. It's close, but not quite to what Airbnb did, which we just discussed. Airbnb was up 17%.

And those stocks didn't move that much. In fact, they initially declined. This stock is up 100%. 100%, which is crazy. I think there are two explanations. One is that the float is very small. So SoftBank owns around 90% of this company, which means that less than 10% of the shares

are actually trading on the open market. And as we've discussed before, if you have a lower float, that means greater volatility. But two is the point you mentioned, which is the open market. And as we've discussed before, if you have a lower float, that means greater volatility. But two is the point you mentioned, which is the AI washing. This company mentioned AI 30 times on the earnings call

and 30 times in the shareholder letter. They said, quote, AI on ARM is everywhere. So it basically turned into an AI NVIDIA type stock overnight. Now the question is, as you bring up, is it actually an AI NVIDIA type stock overnight. Now, the question is, as you bring up, is it actually an AI company? Or like, to what extent is it an AI company? And I'm with you that this

is AI washing because AI runs on these things called graphics processing units, so these chips or GPUs. But ARM doesn't make GPUs. It makes CPUs, which are designed for smartphones and in some cases, data centers. They're not designed specifically for AI. Now, what they can do is play an assisting role in AI compute. What you can do with a CPU is you can attach it to a GPU to boost the processing power, but it's not going to be handling the bulk of the AI compute. I don't think that you can look at that 90 times forward earnings and say, yeah, that's justified, especially when you compare it to NVIDIA. I mean, even look at NVIDIA's revenue. NVIDIA's revenue is up 200% year over year. That's a company that's directly benefiting from AI.

And then you look at this company, it's up 14%. I mean, it's performing the same as any other tech company. So I think this is a great demonstration of AI hype gone kind of haywire. I wouldn't be that surprised if we started seeing a lot of short interest on this stock. And I wouldn't be surprised if a year from now, the stock's down 50, 60, 70% from where it is now. It just looks a little insane. Yeah. So you're going to learn the hardware as I did. It's dangerous to make specific predictions around stock prices, but because the market, the market is just a very unpredictable girlfriend or boyfriend. Like if it's expensive relative to

Nvidia, then it just feels like we're in crazy town because NVIDIA, the thing that Aswath pointed out about NVIDIA that just struck me is he said that when he looks at the valuation and the earnings expectation to justify the current stock price of NVIDIA, investors are assuming that there is another market as big as AI that NVIDIA will dominate the same way it dominates AI. In other words, NVIDIA's stock represents the expectation built into its current price that there's another AI boom in an entirely unrelated technology that NVIDIA will also own. And so NVIDIA itself appears dramatically, or let's just say fully valued, and ARM looks expensive relative to NVIDIA. Yeah, ARM would need four AI booms to justify the current price. But here's the thing. The economists in 1998 perfectly called the dot-com implosion. The problem is they called it in like 97 or 98, and all of these stocks went up 40 or 60 percent after that. It is very hard to call the top, and momentum and hype

are really powerful drugs. So, you know, I wouldn't get near this thing, but at the same time, I wouldn't want to short it because these kinds of companies can just trade up irrationally. They can just, people can just say, oh, AI is the future. Let's just play it out. It's central to AI. It's a key supplier. Let's just buy. But I agree with you.

If the thing does get cut in half, we're going to say, well, of course it did. Let's take a look at the week ahead. We'll see earnings from Walmart, Home Depot, Warner Brothers Discovery, and of course, NVIDIA. We'll also see the minutes from the Federal Reserve's January meeting. Scott, do you have any predictions? Yeah, my prediction is that Warner Brothers is going to surprise to the upside, Warner Brothers Discovery. I think some of those cost cuts are going to pay off.

I think they're starting to get the narrative back around CNN. I think CNN will start to show an updraft because we're going into an election season and all of the terrifying news coming out about these old men running for president and all the tumult in the world. I mean, it's the perfect scenario for CNN, war everywhere in an election year. And in addition, I think that Zaslav has shown himself to be a really determined cost cutter. The stock has gone down, I think it's sub 10 bucks. I think it's going to show a decent quarter because Netflix is essentially giving them cloud cover to raise prices and for pricing power.

So anyways, my prediction is that Warner Brothers Discovery is going to show, similar to Disney, and Netflix surprisingly strong earnings. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our executive producers are Jason Stavros and Catherine Dillon. Mia Saverio is our research lead and Drew Burrows is our technical director. Thank you for listening to Prop 2 Markets from the Vox Media Podcast Network. Join us on Wednesday for office hours, and we'll be back with a fresh take on markets every Monday. You have me In kind Reunion

As the world turns And the dove flies In love, love, love, love