The Prof G Pod with Scott Galloway - Prof G Markets: Arm’s IPO, Instacart’s Valuation, and Salesforce’s Year of Efficiency

Episode Date: September 11, 2023

This week on Prof G Markets, Scott shares his thoughts on Arm’s imminent IPO and what it will mean for the company’s largest shareholder, Softbank. He then takes a look at Instacart’s business model and valuation as it waits in the wings to go public as well. Finally, Scott discusses the biggest learnings from Salesforce’s latest earnings.  Learn more about your ad choices. Visit podcastchoices.com/adchoices

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NMLS 1617539. This week's number one. Gen Z's number one most searched term on spotify is get this sad as a result spotify created a playlist called bummer summer no joke i have a child that is gen z and when i ground him i force him to go outside and socialize. Welcome to PropGMarkets. Today, we're discussing Arms IPO, Instacart's S1 filing, and Salesforce's earnings. Here with the news is PropG Media analyst Ed Elson. Ed, I have this new sensation. I'm happy to see you. It's great to hear. I've been so sad without you. Life's been meaningless and dull for

all of August. I'm glad you're back. I get it. I understand. I think everyone can empathize with that. Are you going to keep doing this, this whole take an entire month off of work thing? Yeah, I've done it for a few years you don't get anxious that you're not working yeah i get restless i try and do some writing i'm actually really good at doing nothing it's like a core competence but i like to at least have some deadlines and try and do some stuff i think i did less this august than i have done i don't know since i was in college where did, I was outstanding at doing nothing in college, but now I'm glad to be back at work.

Any exotic experiences? Not really. We're in Colorado and then we were in Nantucket. Nothing that interesting. I was in Mykonos. How was Mykonos for you? It was epic. Epic?

What does that mean? Seven days of not drinking and not partying. Just hanging out. wholesome fun. What? What happened? It was all a blur. It was great. The only thing I know for certain was that dude.

Never mind. Break down the news, Ed. Save me from myself here. All right, let's start with our weekly review of Market Vitals. The S&P was down, the dollar rose, Bitcoin dropped, and the yield on 10-year treasuries climbed. Shifting to the headlines. China expanded a ban on government worker use of iPhones due to cybersecurity concerns. The country is one of Apple's largest markets, accounting for 19% of its revenue. Shares fell as much as 7%, wiping out more than $200 billion in market value. Warner Brothers Discovery slashed its full-year adjusted earnings guidance by $500

million. The company says that cut is owed to the writer's strike. Meanwhile, CNN is launching 24-7 live news on the Max streaming app. CNN Max will arrive just more than a year after CNN Plus was shut down. And finally, Lionel Messi's Inter-Miami debut drove 110,000 new signups in one day to MLS Season Pass, which Apple has exclusive rights to distribute.

Apple CEO Tim Cook credited Messi on the last earnings call for his contribution to Apple TV's subscriber growth. Scott, I actually saw Messi play at the Red Bull Arena a couple weeks ago. Do you have any thoughts on this? So we'll go in reverse order. American soccer, the MLS, whatever they call it, everyone's waiting for tomorrow to be today, and a lot of people think the league will never reach the same heights as other leagues in Europe. But I just think it's wonderful. I

think it's a win for him. It's a win for the MLS. It's a win for his family because they get to hang out in Miami. And just the power of celebrity and social media, you know, celebrity just continues to be something that's very monetizable. So nothing really there other than it's fascinating and fun. That's news that happened in a while. In terms of China, we're in a full-blown shooting match trading war now with China where Montana bans TikTok, and we're talking about banning TikTok. And this was an attempt to say, okay, the most valuable company in the world that's headquartered in the US actually has more employees in China, and it's also the second largest consumer market for your phones just beyond the U.S. So Apple's been largely protected by Xi, I think,

in the CCP because they see the company's just so integral to their growth, and I think they have a great relationship with them, their supply chain. I just kind of think there's literally millions of people who are directly or indirectly get their living in China from Apple. But I think they've decided, look, we need to send a signal that every time they punch us and, you know, fuck with us, specifically ByteDance, we're going to fuck with them. But this is a full-on kind of non-shooting war, if you will. And it's a shame because, I mean, there's few things that could lift more people out of poverty than China and the US getting along. Because the cocaine and champagne of our incredible consumption culture, their emerging economy, their manufacturing and

supply chain prowess with our innovation and intellectual property creativity, we could create just a ton of shareholder value, a ton of jobs that would absolutely lift both boats and lift all boats globally. War is expensive. And this is the type of war that it's felt a thousand different ways where the cost of something, costs are going to go up. And that means fewer people. I mean, it's a standard of living for everyone across the world is going to go up. And that means fewer people. I mean, it's a standard of living for everyone across the world is going to go down when we have trade wars like this. At the same time, I think China has definitely kind of outed itself. It's not our enemy, but

they used to be our competitor. And now I would see them squarely as our adversary. And I think what will be really interesting is how they respond if we do, in fact, get close to a TikTok ban. Let's move on to Warner Brothers discovery. So this notion, and it's just hilarious, that it's the writer's strike is the reason why they've lost $500 million. This is David Zaslav. I mean, here's the real story. I'm David Zaslav. I wanted to live in Hollywood and have a Porsche and get invited to the Academy Awards. And I was willing to do a stupid deal and overpay and bail out AT&T, who did even a stupider deal and overpaid even more. And now I'm going to blame my melting ice cube of a shitty business, specifically cable television, where the ad rates continue to fall

and advertising revenues continue to fall. I'm going to blame it on the writer's strike. And I don't doubt that the writer's strike hurt these guys. And what's interesting is that the notion that Netflix is on the same quote unquote side of the table as Time Warner producing content in just Madrid alone and a content queue that is just so dramatically deep. I think Netflix loves this strike. Their cash hoard, their cash pile has grown so fast because they have this kind of reduction in content production that they're going to do additional share buybacks and the stock is up. So it's just hilarious that Time Warner and Disney, at least initially, are pretending to be on the same side as Netflix. If I were Netflix, I would just come up with all these reasons, thoughtful reasons around why we shouldn't end the strike. Netflix comes out of this a big winner, Time Warner a big loser. But that half a billion dollar loss, it's just to be an ad supported cable,

it's just a shitty business. I think where the model is headed is I have read something super interesting. The guy who started Five Hour Energy is now a multi-billionaire is going and buying these regional sports networks and essentially firing everybody and using AI to produce minimum viable content at a fraction of the cost. I think you're going to see a lot of that. I mean, here at Prop G, we're talking about using AI to expand into different languages at what would have been several thousand dollars an episode to get an actor to read and try and exhibit the sort of good looks and charm of Scott and Ed, respectively, respectively. Now with AI, our crack tech team here has found the right technology

where we can do this for much lower costs. And if it works, we're going to do it in Portuguese. And anyways, that to me is kind of the new model of media, ground up using technology to do stuff kind of that's not as good, but 90% is good for 2%, 10% of the price. So what I think is going to happen, what I think is going to happen is that we're going to go good bank, bad bank. And that is there's going to be consolidation. I think it'll start at Viacom. I think Sherry Redstone has to find a strategy here. And Paramount Plus actually does have a story. But what happens is in all of these earnings calls at Time Warner, Disney, Viacom, is they talk about subscriber growth and they can kind of explain, you know, they can say, look, we're growing our streaming

things. That's the future. It's really expensive. But I think the market will say, all right, we'll give you the benefit of the doubt. At least it's growing. And then they spend the rest of the earnings call apologizing for the decline in business at their traditional cash cows that is cable. I think what they're going to do is spin those assets into new co, there'll be consolidation. Someone will come in and buy up all of these assets, whether it's the cartoon network or the learning channel or the food network, just all of these things and cut costs and stop this consensual hallucination that these things are ever going to grow again and try and cut costs faster than the decline in revenues. Because the thing about these businesses, they usually go out of business more slowly than you think. I mean, Disney,

Iger has basically said FX and ABC, he's put them in the front of the lawn and said, best offer, no reasonable offer refused. Because what happens in these multi-headed hydras with different companies or different business models is that people or investors hate conglomerates. And they'll look at these things and they'll find the shittiest business, which is the ad-supported cable businesses, and they'll assign that multiple or that value to the entire thing. When Peacock or Paramount Plus or HBO should trade at much higher multiples. So I believe that Paramount, Time Warner, Disney could probably shed these cable assets or sell them for a dollar. And within a year, their stocks would be higher than they are now, even without those cash flows, or if they could strike a good deal to get monetized or securitized those cash flows in the sale, because their story would just be cleaner. I think the CNN launching a 24-7 live news on the

Mac streaming app is actually the beginning of a very innovative idea. And that is, if I were CNN, I would become like Intel inside. And then I would say, okay, I have a newsroom. I have the best newsroom in the world. And if Netflix, you Netflix, or Apple TV, or Amazon pay us X dollars, in exchange for that, you can put a little CNN logo on your app or on your service or on your platform. And at any point, someone can just click on it and click business, politics, culture, and get a 10, 15, 20-minute loop that's updated twice a day during a normal day, 12 times a day during the insurrection. Because the thing that kills these things is the cost of having 16 hours a day of programming. And what they really should do is

people don't want all that programming. CNN should say, we're going to bring you the best news in the world because we have the best newsroom in the world. But for two, five, a hundred, $300 million a year, Apple TV Plus, you can have access to just plug and play news. So, and I think this is a start. I think having the ability to be on, you know, HBO Max and just click a button and have over-the-top, tighter, commercial-free news, I think that makes a lot of sense. I think it's smart, and I think that's, if you will, how CNN creates a lot of value. We'll be right back after the break with a look at Arm's IPO. 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? sponsored by AWS, wherever you get your podcasts. 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 presented by AWS. Check it out wherever you get your podcasts. We're back with Profit Markets. The biggest IPO of the past two years is just around the corner. Last week, British chipmaker ARM, spelled A-R-M, kicked off its roadshow and revealed it will go public at a target valuation of $52 billion. For context, other companies of that size include Chipotle, Lululemon, and Dell. ARM specializes in smartphone processor designs. Its clients include

Apple, Google, Nvidia, and Samsung, and each of those companies have agreed to buy shares at the IPO. Its largest shareholder, though, is SoftBank, a Japanese investment firm run by Masayoshi Son. We'll get to SoftBank's involvement in this deal in a moment. But first, Scott, you predicted that the IPO market would pick back up in the second half of this year. It looks like you were right. We've seen a slight pickup recently. There were 15 US IPOs in July, 11 in August. That's up from 2022. Do you have any initial thoughts on either ARM as a business or on this IPO? So, I mean, there's two things here. The first thing is indisputable. It's a great business. Their chips power 99% of the world's smartphones. 70% of the world's population uses an ARM-based product. Their chips aren't just in smartphones. They're in other

things, smart speakers, TVs, surveillance cameras, thermostats. And they also see growth in cloud computing. They receive royalty payments for chips, which have incredible margins. Licensing is 37% of their revenue, royalty is 63% of their revenue. This also comes down to valuation. And that is, there has never been a drunken sailor like SoftBank in terms of just throwing cash at the wallet with crazy valuations. And there's Fuzzy targeting an IPO price range of 47 to about 51 bucks a share, which would give it 18 times its trailing 12-month revenue. And NVIDIA trades at 37, but I would argue NVIDIA is radically overvalued.

So what would be interesting is if SoftBank gets their money back or makes money, because at some point, this is an amazing company, but at some point it was a bad investment. The context here is that SoftBank, which is the Japanese investment firm we've talked about a lot on this show, largely because of how poorly they perform, they own around 90% of the company. And last month, they valued the company at $64 billion, which is around 30% higher than the expected valuation at the IPO. You were talking about that mismatch in valuation, the fact that

they're going to go into the public markets 30% lower. What are your thoughts on that? Well, you know, it sucks to be a grown-up. They got to get money back to their investors. They have to fund stuff. They're not meant to be, you know, they're not, they're in the moving business, not in the storage business. And that is they need to move shares at some point out and recognize valuation for them. And the market has just changed dramatically. In addition, I would argue Masayoshi San is the worst investor in history. He got incredibly lucky on his stake in Alibaba. And let's be honest, that was luck. And then everyone assumed, oh, he must be a genius. And he began to prove that he's a terrible investor over

and over and over again. And that the people who invested in SoftBank, I mean, it's just, show me a company that just makes no fucking sense but raised money at a billion dollar valuation and there's a one in two chance it was funded by SoftBank. It's just this craziness infected all aspects of the organization. So I doubt they'll get their money back. It feels like at least not for a while. So just the history of SoftBank's involvement in Arm. They acquired Arm back in 2016. They acquired it for $32 billion. And then they immediately sold 25% of that stake to their own vision fund,

which is SoftBank's tech-focused venture fund, basically. And just a side note, when they made that trade, Master Sun told analysts, you can say, quote, you can say almost with confidence that it will grow 5x in five years. That obviously didn't happen. But something strange is that last month, SoftBank bought back that stake from its own Vision Fund unit. That's where we saw this $64 billion valuation. My question to you, have you seen that before? Why would SoftBank be transferring its stake in a company between different units and essentially buying it back

from the Vision Fund? What's the point in that? There might be something administrative here around tax treatment or a change in strategy in one asset makes more sense than the other. What it also might be is a purposeful head fake to the markets. And that is they want to send a signal that smart people value this company at $64 billion. The last two rounds that we worked were nothing in my opinion, but jazz hands to say, oh no, this company is worth $35 or $40 billion because smart people are investing capital at this valuation and you dump shit retail investor should value it at 55 because here's the momentum. I think that's probably what happened here is it wants to send a signal to the market. It wants to send a mark. In addition, they might be out

raising money. And when you're raising money, the potential investors want to look at your returns and your returns are based on marks and you get to mark your assets at the most recent valuation. I'm on the board right now of a company and we just closed around and I found, I said, this is ridiculous that we're raising, trying to raise this valuation. Let's raise it a more sane valuation, even if it's a down round and go raise more money because the company needs capital and i think things are going to get worse and what was clear is that the previous investor who was the largest shareholder would rather raise less money and would rather

participate himself at a higher valuation so he can mark his book and his stake at a higher valuation even if that valuation doesn't make any fucking sense. So he can then try and fly to Riyadh and say, I'm up 22%, not 11%, and you should invest more money. So you really have to look. These related party transactions are fake marks. The only marks you can trust are marks where a round is led by fresh capital that is new capital into the company. And they can get it wrong, but at least they think that is what the company is worth and that they're going to get a return on that investment. So there's another company that's about to IPO, and that's Instacart.

They just filed their S1. And they're in a similar situation. So in 2021, they raised $265 million at a $39 billion valuation. But last year, they ran into some trouble, and they slashed that valuation first down to $24 billion, and then to $10 billion. Now, they haven't disclosed any price targets for this IPO, but this firm Meritech Capital did a nice analysis and they found that at a roughly 20x multiple on EBITDA, and that's around where most of these grocery delivery stocks trade at, the enterprise

value would be 15 billion. Point being, it's likely going to be another massive reduction from the $39 billion valuation they received in 2021. Do you have any thoughts on Instacart's valuation journey? We're going to see a lot of this. Again, this is a great company. A pandemic darling, they execute well. There's no reason, in my opinion, unless you enjoy it, for anyone to go into a grocery store. I think other than gas stations, grocery stores may be the worst retail. And they have innovated and they save people time. We've always said that the fastest way go into a grocery store. I think other than gas stations, grocery stores may be the worst retail. And they have innovated and they save people time. We've always said that the fastest way to build a unicorn is to build a time machine. This is a time machine. It saves people time.

It's not worth $39 billion. It got out in front of its skis. What's interesting here, and I've been in this situation several times, is the unnatural acts that are spawned by down rounds. So an example, when you invest in a company and you're the last money in, you're paying a higher valuation, all right? I'm in the C round. The A round was done at a valuation of 10 million, the B round, 50 million, the C round, 150 million. And that's bad. You're paying more, right? But the good news is you get something called a liquidity preference, meaning that if you invest 10 million bucks, or let's call it 25 million bucks in the C round at a valuation of 150 million, and then things don't go as well, and the company gets sold for 30 million to another private company, the last investors get

their full 25 million back before anyone else gets anything. And a waterfalls back until all the prefs have been met. And then the common shareholders start to participate, parry, pursue with everybody else. That is a wonderful thing to have. Now, what happens is if a company is going public, and this happened to be a red envelope at a lower valuation than what investors invested in the last round, they're kind of pissed off. And they think, well, actually, we'd rather you sell it to somebody else. And then we'll get 100 cents on the dollar instead of 70 cents on the dollar. But the previous investors wanted to go public. And so there's some arm wrestling and some wrangling and sometimes some dealing. But generally speaking, what I say to entrepreneurs is be

careful about raising money at a really big valuation because granted, most investors, I'm looking at an investment right now and we're arguing over valuation. I'm like, all right, you have to prove to me or show me how I'm going to get 5X on this if it goes well. So, okay, be careful what you ask for. If you raise money at $150 million valuation, keep in mind those investors are expecting you to have a liquidity event in three to seven years at 750 million. And if you don't- What stage is this company that you're looking at? It's a growth stage company. So it's a company that's doing, it's a small VC-backed company

in a business very similar to L2, so I understand it. The company's killing it. The founder's great. It just feels, smells, and looks like L2. And I'm like, okay, you want to raise money at a $30 million valuation. How does this get worth 150 million? And with dilution of employees, how's it going to be worth 200 million? Because if it's not, your last round of investors, unless this goes south, are going to tell you to just stick with it and aren't going to be open to conversations around an IPO or an acquisition until you get there. And I imagine there's a lot of that here because what happens when you go public is all of those liquidity preferences disappear and every share becomes the same. So anyone who's underwater or invested a large valuation would rather them keep going and not

do the IPO unless they're fatigued and they just want to get their money out and they want some liquidity and the company will be worth more and have the currency and the capital to grow the business. And the early investors are dying for everyone to convert to one class of stock because then all those liquidity preferences ahead of them dissolve and go away. So there ends up being a lot of arguments and very pointed conversations and intransigence in the boardroom. When we were going public at Red Envelope, the last investor had invested at a higher valuation than the IPO, and they wouldn't approve the IPO until finally it became clear, like, we have no other options. And keep in mind, it's lower than you'd like, but it's going to end up being zero if we don't raise capital at some point.

The capital markets are friendly, so you're going to get, you know, would you rather get 70 or 80 cents on the dollar or 30 in two years if we don't maintain momentum, have the currency for acquisitions and the capital to fund the business? This is going to be a really interesting one because while they're trying to position as technology, it sort of is. But where I think they get most of their money is from advertising on the platform. And what's interesting is that the margins that drive grocery and even Amazon are not actual the sale of groceries. It's the equivalent of shopper marketing. So what do we mean by that? You buy diapers, there's like no margin on it. The store doesn't make much money. will set up a cardboard cutout end cap and they pay the store to try and gain market share. Picture of a cute baby cut out of Tom Brady and a Bud Light end cap. They actually, shopper marketing or in-store marketing is actually a bigger business than brand-based marketing or advertising, which was shocking to me. And Amazon makes just a shit ton of money going to Pepsi and saying, when someone types in or searches for Coca-Cola on the Amazon platform, would you like a Pepsi ad to come up? It's just an amazing business. And my understanding is the

same is true of Instacart. I mean, just some stats on them. They have grown eight straight quarters, their revenue, their gap profitable for the last five quarters. So this is a good business. Online grocery, the category is growing. It represented 12% of the grocery market, and that's up from 3%. We were really slow in the U.S. to get there, and it was obvious it was going to happen at some point. They've got about a 2.6% share of the overall U.S. grocery market and 22% online. And their gross margins exceed that of Amazon and Walmart at 75% versus 48% and 24% at Amazon and Walmart, respectively. But again, great business growing. It just got out over its skis as a lot of companies did in terms of in terms of valuation it looks like it's going to go out at 15 billion

so what is that that's a haircut of 50 or 60 at you know i mean at some point they had a 40 billion dollar valuation i mean that's a 60 point haircut and the analogy i would use is the grocery stores are sort of the cable companies of the 90s. And that is, they don't make money selling content, they make money advertising against it. So think of the groceries, think of the produce, think of the meat, think of the cereal as content, and then they run commercials against that content. 72% of Instacart's revenue came from transactions and 28% from advertising. But that's probably misleading because I would bet the margins on that 28 percent are 90 percent. And they've shifted that revenue. So that's been growing. I'm not sure what the original number was,

but they've been focusing a lot more on advertising because of the difference in margins. And just look at an analog here. Amazon's advertising sales are growing faster than AWS revenue. The Amazon Media Group, which sell ads on the platform, brought in $11 billion in Q2. Let me think about that, $11 billion in one quarter, up 22%, while AWS revenue increased 12%. And the margins on those revenues must be enormous. So Instacart is not in the business of grocery. It's in the business of selling you groceries such that it can sell ads against that content of produce and meat. We'll be right back after the break with takeaways from Salesforce's latest earnings. Thank you. Klaviyo turns your customer data into real-time connections across AI-powered email, SMS, and more, making every moment count. Over 100,000 brands trust Klaviyo's unified data and marketing platform to build smarter digital relationships with their customers during Black Friday, Cyber Monday, and beyond. Make every moment count with Klaviyo. Learn more at klaviyo.com slash BFCM. Support for this show comes from Indeed. If you need to hire, you may need Indeed. Indeed is a

matching and hiring platform with over 350 million global monthly visitors, according to Indeed data, and a matching engine that helps you find quality candidates fast. Listeners of this show can get a $75 sponsored job credit to get your jobs more visibility at Indeed.com slash podcast. Just go to Indeed.com slash podcast right now and say you heard about Indeed on this podcast. Indeed.com slash podcast. Terms and conditions apply. Need to hire? You need Indeed. We're back with Prof G Markets. For the past year, Salesforce has been through the ringer. In December, the co-CEO Brett Taylor resigned. The next month, they laid off 10% of the staff. And just weeks later, they were targeted by activist investment firm,

Elliott Management. Elliott's demands were simple, focus on profits and cut costs dramatically. Well, it appears Salesforce has listened. The company's Q2 earnings report showed that quarterly net income rose from $68 million to $1.3 billion. That's a near 20-fold increase. Salesforce also reported a 31.6% operating margin and raised its annual margin guidance to 30%. CEO Mark Benioff had aimed to hit this milestone in 2025 and said that reaching it this year was, quote, nothing short of a miracle. Salesforce shares jumped 6% on the news. Scott, reactions to that? So 2023 was supposed to be, or has been coined the year of efficiencies, and there's sort of

bad, better, best. So the bad of this is Elon Musk, who laid off 80% of his force, and that's not the bad part of it. It's that he also incurred a 60% revenue decline. And then there's better, and that is meta has cut costs dramatically. And here's the thing, cost cutting is a lot of fun from a shareholder standpoint if there's costs to be cut. And when you stuff so many calories down the esophagus of a growth company that it develops fat everywhere, you can do one or two things to add the same amount of earnings. Say the operating margins are 20 points, which is very healthy operating margins. You can either grow your top line by 5 billion or cut costs 1 billion, same effect to your earnings. So when you actually come to the conclusion that we're a little bit overweight, maybe even obese here, and we're going to go on a diet and it's not fun and there's so much pattern recognition and expectation that we're going to keep investing, keep hiring, keep spending, keep growing.

The cost cutting can be just incredibly powerful, especially if it doesn't have an impact on frontline sales. So as we predicted last year, and we're sticking to this prediction, I think in Q4 of this year, you're going to see record earnings across big tech because they've discovered the great taste of cost cutting without the calories of losing revenue growth because there appeared to be just thousands, if not tens of thousands of people doing almost no fucking work. And then this is kind of the perfect activist play. And Salesforce is really sort of embodies the best of this year of efficiency. And it also is sort of a testament to the power and the importance that activists play in the ecosystem. Elliot came in. Elliot needs a company where they can put billions of dollars to work because they raised a shit ton of money because of their

success. And they look at Salesforce and they're like, great company, great leadership. You just spent too much money and you're drunk and you got to tighten the ship. And to a certain extent, I don't want to say it's a favor to Benioff, but it creates cloud cover for him to make really difficult decisions. And what they found is these difficult decisions were difficult from a personal standpoint, difficult from a cultural standpoint that's never known anything but growth and investment. But oh my gosh, was this a spring waiting to be sprung? And that is, does not appear to have affected their growth. So if you can maintain growth and cut costs at the same time, oh my God, champagne and cocaine for earnings as evidenced by the fact their earnings went up 20 fold. And this is perfect for Elliot. Elliot

doesn't have to fire the CEO. They don't have to stick around a long time. They just go in and say, you obviously have room to cut costs. Mark says, I get it. He does it. Elliot makes a shit ton of money. The stock recovers. And Benioff is seen as the CEO who's kind of taking him through the, you know, the haunted forest here and come out the other end, fine. So I think this is, you know, this is where you say the market is a wonderful thing and capitalism works, but this is an activist play that appears to be working out for all parties. And while everyone's focused on meta's cost cutting, I think the real example of kind of where it worked out for everybody, obviously, except for the people who got laid off, but my guess is they're going to be just fine in an economy that has historically low unemployment.

You know, this just kind of, this felt like win, win, win across the board. So you mentioned this idea of cutting costs without having to sacrifice anything on the top line on your revenue, which is true of some companies. It's currently true of Salesforce. We are seeing revenue growth, but we'll see if that lasts over the next few quarters. But if you look at the entire SaaS ecosystem, it's sort of a different story. So they're all pursuing the same strategy, which is cut costs, focus on profitability. Three years ago, SaaS companies were averaging around 5% in free cash flow margins. That number is up to 13%. But it does appear that it has come at a sacrifice to revenue growth.

So in 2020, in that same period, average revenue growth across SaaS firms was 22%. That number is now down to 15%. So is there an argument to be made here that maybe these software and SaaS companies are overcorrecting, that they're playing too defensive in terms of pursuing profitability, and maybe they should be taking risks and investing in new technologies and finding new growth opportunities so that they can expand revenue in the top line. Well, so the question comes down to this, is that decline in revenue growth a function of a lack of investment or the fact that the economy has just slowed down, things have gotten more competitive, and the kind of crazy big gulp grande venti ayahuasca trip that every small company was on with cheap capital, that that is always a big part of a customer base for a SaaS company. There just aren't as many of them signing up more and more people for the Salesforce platform or what have you, or the Snowflake or name it. And so SaaS, just the SaaS market, which grew exponentially, that growth is

slowing down regardless of how much money they threw at it. I would argue that the incremental or the cuts in expenditure did not have, at least in the SaaS market, it's not the culprit. The culprit is the larger economy and the macro environment. And had they continued to make those investments, their growth wouldn't have been much greater. It's just their bottom line would have been much, much smaller. So my gut and the data I've seen is that these cost cuts were prudent and have had actually very little impact on what the top line growth would have been otherwise. All right. Thank you, Scott. Let's take a look at the week ahead. We'll see inflation data from the Consumer Price Index and the Producer Price Index.

And separately, another strike is brewing. 150,000 members of the United Auto Workers are set to walk out later this week if a new contract agreement cannot be reached with Detroit automakers. That includes Stellantis, General Motors, and Ford. Do you have any predictions this week, Scott? Yeah, I'm sort of into this idea of consolidation and good bank, bad bank across cable TV assets. And that is if you look at Viacom, if you look at Time Warner, if you look at Disney, they all have good businesses and growing businesses. Their streaming platforms are too expensive, but there's a good story there. Like Paramount Plus is actually an interesting streaming network that's growing. Disney Plus is losing too much money, but is a very solid value proposition. HBO is an incredible story. There needs to be recognition that cable TV assets are no longer teenagers that are going to keep growing, that they're in fact Nana and Pop-Pop and need to be made comfortable, these things are dying. And they need to be managed for cash flow, not starved of investment, but stop the hallucination

that these things are ever going to reignite growth again. So my prediction is you're going to see one or more players shed their assets into a different hold code to clean up their story and also for consolidation and scale. There needs to be a bunch of these things wrapped together so there's one sales rep in Czechoslovakia selling ads on the Cartoon Network or what have you, and unmuck or, you know, unfuck the story that is media companies now that have growth but also have declining assets in the same portfolio. I know you've had conversations with a bunch of big players in media recently. Do you have any inside scoop from those executives?

I think everyone's landing at the same place, that they have to do something. Whether it's the strike, whether it's the war between Charter and Disney right now, the model is just broken. And the place it'll probably start will be Viacom. Sherry Redstone has seen her stock, I think, off, I think it's lost three quarters of its value in the last five years. She's got to do something. And that's where it'll probably start. But I think all of them are going to start shedding their cable assets or donating them. I mean, these assets are now getting cheap enough where they become distressed assets where private equity will

probably start getting their pencils out and looking at them. And I think that's going to happen in the next 12 to 24 months. This episode is produced by Claire Miller and engineered by Benjamin Spencer. Our executive producers are Jason Stavers and Catherine Dillon. Miel Silverio is our research lead and Drew Burrows is our technical director. Thank you for listening to Property and Markets on the Vox Media Podcast Network. Join us Wednesday for office hours and we'll be back with a fresh take on markets every monday In kind reunion As the world turns

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