The Prof G Pod with Scott Galloway - Prof G Markets: Peloton’s Management Shake-up, SoftBank’s Vision Funds, and Walmart’s Banking Play
Episode Date: September 19, 2022This week on Prof G Markets, Scott checks in on Peloton’s stock in light of a few executive departures, and shares his thoughts on what it would mean if Masayoshi Son launched a third vision fund af...ter two previous failures. Scott then explains why Walmart is moving into the personal finance space. Peloton Vision Funds Walmart Learn more about your ad choices. Visit podcastchoices.com/adchoices
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This week's number, $23 billion.
That's the loss reported by SoftBank last quarter.
So get this, SoftBank lost the value of Kia Motors.
A fantastic automobile that's not only a great value and surprisingly fun to drive,
but also birth control. Roll up in a Kia, no sex for you. That's good.
Welcome to Prop G Markets. Today, we're discussing Peloton's management shakeup, SoftBank's vision funds, and Walmart's banking play.
Here with the news is Prop G media analyst, Ed Elson. Ed, what's going on?
Not much. I drank the wine you gave me last night. It was pretty good.
That's right. That's the most adult thing you could say. I gave the wine you drank. All of it? I gave you like six bottles.
I drank one bottle with my mates.
I'll send you a selfie next time.
I'd like that.
What's going on?
Talk about the business news, you alcohol.
What's going on?
So let's start with our weekly review of market vitals.
The S&P tumbled in response to higher-than-expected inflation data.
Tuesday was the stock market's worst day since June 2020.
The dollar held stable and remains very strong.
Bitcoin fell in line with the stock market on the inflation news.
That's more evidence that Bitcoin may not be a great hedge against inflation after all.
And finally, the yield on 10-year US Treasuries soared on Tuesday.
It's also a reaction to high inflation.
Shifting to the headlines.
The Ethereum merge, which we discussed last week, was a success.
The blockchain platform is now operating on a proof-of-stake model
instead of a proof-of-work or mining model,
and that will reduce its energy consumption by
99.9%. The Consumer Price Index, or CPI, increased 0.1% between July and August,
a slight gain after coming in flat the month before. But when you look at the details,
the numbers are a lot more concerning. Food prices were up 0.8% month over month,
and the so-called core CPI,
which is everything except food and energy,
was up 0.6%.
So why was the overall number relatively low?
Energy.
Energy prices decreased 5%, but almost everything else has gotten more expensive.
And that's why the market threw up on the news.
So Scott, what are your thoughts on this?
My favorite description of our economy right now is our friend Todd Benson described it as
the Elvis economy that's being so pumped full of steroids. It's being given pills to wake up.
It's being given pills to go to sleep, that it's just fat and sick. And that we haven't
let the markets take over. We're trying to constantly manipulate it
with these doctors and Fed chairman
and interest rate policy.
Not to say that I am a Keynesian.
I do think you do need some government intervention
around this stuff.
But it just feels as if the economy feels like a,
I don't know, a rock star who's going to have a stroke
while taking a dump.
That's good economics.
You're a good audience, ladies and gentlemen. Thank you very much. Anyways, these numbers sound little, but when you compound them
over a year, they start to get scary. So I think you can expect the markets to really throw up
if we don't start to see a decrease or a moderation of inflation over the next two or three months. Last week, Peloton announced major changes to its leadership.
Two of the company's co-founders, John Foley and Hisao Kushi,
are stepping down from their respective positions as chairman and chief legal
officer. This is yet another shakeup in a difficult year for Peloton. It recently posted a $1.2
billion quarterly loss on a nearly 30% drop in revenue, and it also announced plans to cut
3,600 jobs. The stock has also gotten crushed this year. It's down more than 90% from its pandemic
high of almost $50 billion, and it's now trading well below its IPO price. Now, Scott, I know you
have a lot of opinions on Peloton. You once suggested Nike or Apple should acquire it, but
let's start with a more general question here. So in your experience, what does a management
shakeup usually mean for a
company and its shareholders? It means things aren't going well. What's often interesting is
that a lot of times when the CEO leaves or is fired, the stock goes up. In this case,
it's a little bit different because this company has been Vietnam minus the charm.
And by the way, I'm not actually comparing it to a war. It's a metaphor. It's
an exaggeration. But they were the pandemic darling, and they've just been getting the
shit kicked out of them. And everything is headed in the wrong direction, supply chain problems.
Not only are there kind of macro trends that they are exogenous factors that are out of their
control, specifically the pandemic ending and people getting back into the gym.
But a lot of these wounds are self-inflicted.
A lot of the supply chain just isn't working.
They're going to absolutely need to right-size the company.
They're going to need to cut costs.
But a management shakeup was actually due here.
And I can't imagine that John and his sow aren't happy to be out of there.
People all aspire to be a CEO,
or a lot of people aspire to be a CEO or a lot of people aspire
to be a CEO. It's hands down the most difficult business or the most difficult role I've ever
witnessed. And when I first started going on public company boards 20 years ago, I saw my
role as to question the CEO and play gotcha in board meetings and why aren't we doing this?
And then what you realize is that the CEO's inbox is never empty. They're managing up their board.
They're managing sideways shareholders.
They're trying to manage down their employees and at the same time build a business that
appeals to consumers.
It is a very difficult job.
And now what I do on boards is I just try to be supportive.
But generally speaking, there's two board meetings.
There's a board meeting you're all in together, including the CEO.
And there's a second board meeting, which usually takes place in the hallway of the parking lot, where the two
or three people who have the biggest stakes or are kind of considered the wisest or most sage board
members get together and say, hey, how do you think Bob is doing? And that's where kind of the
beginning of the end starts. With this one, we don't know if this was John's idea or the board
came to him and said, we think you should step down. He could have said no, because he has sort of a near controlling stake. So at a minimum, he agreed to this. And my guess is he just wants a reprieve for what has to be just the seventh circle of hell right now. And that is trying to manage Peloton and explain to investors what's gone on here. What's interesting is it was worth
50 billion and now it's worth, I don't know, closer to five, but that's still a big company.
That's still a company worth a lot. What'll be interesting is to see if they can, again,
pivot into more services or get their supply chain figured out. If he's willing to step down,
I got to believe he's willing to have his company acquired. So I would be, I just wouldn't
be surprised. And again, I've been predicting this for a couple of years now, if they got acquired.
Yeah. What do you think they can do? I mean, they have, I think a great product. They have a very
strong, loyal community. They have all these celebrity instructors who have massive influence.
Where could Peloton go from here?
When your revenue is off 30% quarter on quarter and you're burning a half a billion dollars a
quarter in cash, all roads lead to the same place immediately. And that is you have to cut costs
like crazy. My guess is they're going to close stores. My guess is they're going to narrow the
product line, although I don't think they have that many products. And they're going to have to
lay off a lot of people
and cut back marketing.
But a lot of times what happens is before you sell your company,
you clean it up to make it, you know, you pretty it up
or put a bow on it to try and make it more acquirable.
If it's at $5 billion market cap now or it's $4 billion now,
someone would have to pay $6 or $7.
Like Nike, Apple, or Amazon, it feels to me at this price,
it would just make a
lot of sense. And quite frankly, I'd be shocked if all three of those companies haven't reached
out to Peloton and the controlling shareholders said, no, call us back. I'm not going to sell on
the cheap. Because you anchor off the highs. And this is something that people should learn. And
that is, I look at my portfolio every day and I know how much my stocks are worth. And I anchor off the high.
I feel like that's the normal state of the world.
That's where the world, you know, rests at its natural state of equilibrium.
When it's at its high.
And so when I'm down, I'm like, oh my gosh, I'm 30% off the high.
Well, no, maybe you're doing really well.
And over the last five years, you've doubled your money.
Maybe the stocks you have have gone up.
So you always have to look back at perspective because if you're only going to be
satisfied with the high, you're going to be satisfied one day unless it just keeps making
new highs. And the same thing happens when you're the CEO of a company is you anchor off the high.
If Peloton had just grown much more slowly and was now worth $5 billion, the folks at Peloton
would be like, wow, that's amazing. We're worth $5 billion, the folks at Peloton would be like, wow, that's
amazing. We're worth $5 billion. The problem is when it goes to 50 and they're like, oh shit,
we're down 90%. So it really is a function of perspective. But I think that's a decent metaphor
for your own life. You're always going to anchor off your highest earnings where your stock's been
highest. Just pull back and go, okay, but where is it over the last three or five years? And usually in the market, most of your stuff,
if you have a long-term perspective, will be up. SoftBank's founder Masayoshi Son is considering launching a third Vision Fund.
Considering his track record, this is surprising.
SoftBank's first Vision Fund lost more than $10 billion on investments in WeWork.
The second fund, which was intended to be more cautious, is down about 20% now.
Last month, Son said he was, quote, embarrassed and remorseful about the performance of his funds.
And the final red flag is this.
SoftBank plans to lay off 20% of its Vision Fund staff.
So, Scott, why would Son start a new fund?
Because he can.
I don't know.
It strikes me that the smart thing to do would be to lay off 100% of its Vision Fund staff.
I just think this thing's been a train wreck.
I think Masayoshi San and Cathie Wood are the most overrated investors in history.
The deck that was circulating explaining the Vision Fund would have a slide on processing power and then a slide on the
internet. And then the next slide would say, cure loneliness. It was as if a 15-year-old who
had done their first hit of mushroom chocolates decided to pull together some sort of weird
investment document. I mean, it just made no sense whatsoever. And if you look at their track record
and the amount of crazy amounts of
capital they've put to work and things that weren't working, I just don't, I absolutely don't
understand how SoftBank has lasted this long. If you look at where they've been successful,
it's been in the boring stuff and they're clearly, SoftBank has operated the core telco business
pretty well. But it does strike me as strange that the Vision Fund is still a thing.
So just some stats here.
At the end of Q2, SoftBank's total portfolio, companies that went up in value, there were 35 of them.
And the number of public and private companies that were marked down was 284.
And they've had just a huge history of investments gone wrong.
WeWork, it had a private valuation of $47 billion, now worth $3 billion. Greensill Capital was insolvent. Katerra went bankrupt. And as you referenced earlier, SoftBank lost $23 billion as of Q2. And $17 billion of that was owed to the Vision Fund. That's 74% of their total losses.
So I guess my question is, who's going to trust Son to manage their capital here?
I mean, do you know anyone in your circles who has confidence in him?
I don't know anyone that invested in SoftBank.
They do get a lot of access because everybody wants a big, deep-pocketed player as a VC company.
They have had some wins.
They've had some big wins.
But I can't imagine a lot of institutions would want to be part of Vision 3.
But who knows?
Maybe because they have a global brand.
Maybe if they were focused on certain types of investments.
How might the Vision Fund survive?
It gets anchored by an investment from, wait for it, SoftBank, who has more than $50 billion on its balance sheet, or maybe, actually, no, $60 billion now having sold down at stake in Alibaba. So, you know, it's great to be wealthy. You can be a hedge fund manager and never go out of business as long as you, as the founder, keep putting your own money in. Do you think that this is maybe a signal that there's going to be a turning point in the startup ecosystem? I mean, VC funding is down almost 40%
from the end of last year, deal flows down 20%. Is this sort of a signal of a bottom and we're
going to see a revival? No, I just think the deceleration is getting started because even
if you look at that number, you said, okay, global VC funding is down almost 40%. It's probably still up if you go back five years. VC funding is still really robust. They have raised a lot of money. What you're going to see is it's essentially the week will get cleared off the deck. Not even the week, but the new ones. The thing about alternative investments, if you're in that business,
is it's so much a matter of timing and luck.
And that is, you're like a plane taking off
and you need to get a certain level of altitude
because eventually you're gonna hit an air pocket.
If you hit an air pocket at 50 feet
and it takes you down 80 feet, you're dead.
But once you get to 30,000 feet,
if you're fortunate enough to invest
into a productive or a bull cycle and you have some big wins and you get more than a billion, two billion, three billion dollars, and you have multiple funds, more than one fund that shows a positive return, if fund three is awful, it's okay because you're already raising fund four based on the track record of funds one and two.
So, so much of it is about when you start and if you can get good returns out of the
gates and start raising more than one fund. But we're going to see an enormous pullback from
venture capital investing because the asset class is overperformed. They started chasing crazy stuff
with too much capital, which took returns way down. In sum, a lot of investors will pull in
their horns and reallocate out of venture capital. More pain for founders.
We'll be right back after a quick break with a look at an interesting new player in the banking space, Walmart.
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I just don't get it.
Just wish someone could do the research on it.
Can we figure this out?
Hey, y'all.
I'm John Blenhill, and I'm hosting a new podcast at Vox called Explain It To Me.
Here's how it works.
You call our hotline with questions
you can't quite answer on your own.
We'll investigate and call you back
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We'll bring you the answers you need
every Wednesday starting September 18th.
So follow Explain It To Me.
Presented by Klaviyo. We're back with Prof G Markets.
When you think of a bank, you might think of an ATM, a local branch in your town, or a famous institution like J.P. Morgan.
You probably would not think of Walmart. However, the biggest retailer in the
world recently announced it will launch checking accounts and debit cards in partnership with One
Finance, an independent company that is majority owned by Walmart. Walmart plans to eventually
offer other products such as loans and investing and soon become a one-stop shop for all consumer
banking needs. Scott, why is Walmart doing this?
Just as I think every senator wakes up in the morning and goes to the mirror and says,
hello, Mr. or Madam President, I think every company wakes up that's over,
call it $200 or $300 billion in market capitalization and says, hello,
global operating system. And that is they want to be the primary interface between you
and a variety of services. And if you think about what's so powerful about Apple, they have the
billion wealthiest people on the planet kind of ingrained or have adopted the iOS operating system.
Amazon is your operating system for e-commerce. The operating system for finance or for banking
has been ATMs and branches. That operating system feels clunky and out of date
for anyone under the age of 40. What Walmart says is we have an operating system called our stores.
We have 1.6 million employees. We have more than 200 million customers who come into this
operating system called a store. 90% of the U.S. population, get this, live within a 10-minute
drive of a Walmart.
So they're using that operating system or that interface with those hundreds of millions of consumers, with 200 million consumers in America to be exact, to get into adjacent products.
Just as Apple said, we're going to get into finance.
Just as Amazon said, we're going to get into video or streaming networks.
Walmart is getting into healthcare, they're opening clinics, and they're also getting into finance. Yeah. Do you feel like it's a similar situation to Amazon
where they're not doing it because they want to, but because they have to? They have to enter a new
space in order to grow their revenues and grow the top line? So there's a difference. Walmart
trades at a much lower multiple on earnings as Apple or Amazon, meaning the growth expectations
for Walmart aren't as great.
Now, it's bad to have a stock that's lower than the other guys with an equivalent amount of
revenue or profits, but it's good in the sense that you don't have the same gun to your head
to grow 20% a year. They just need to grow kind of high single digits. So I don't know if they
have to do this, but it makes a lot of sense for them. Over half of Walmart shoppers have annual income less than $50,000 a year. And I bet a large proportion of those
folks don't have a bank. So offering a convenient, friendly bank where maybe they start to rack up
rewards or coupons or dollars off for shopping at Walmart will probably be successful. The stock is effectively flat
over the last two years. Amazon is off 14% and the S&P 500 is up 19%. But Walmart is also one
of the best run companies in the world. Doug McMillan is an outstanding CEO. But what's
strange about it is like imagine JP Morgan getting into selling consumables or consumer goods or
groceries. That would feel strange. This feels more natural. But
finance is an incredible area of opportunity because so many people, middle and lower income,
are unbanked. So I think that these big guys smell blood in the water. And if they can get
someone to shop more at Walmart or then get them to be on their Android or iOS interface
more, it'll take the value of their entire ecosystem up.
Do you think Jamie Dimon and David Solomon, all these big bank executives, see this and get
worried? I think they're always worried because they're good CEOs. And as Andy Grove said,
only the paranoid survive. But JP Morgan has done really well. And the nice thing about these
businesses is that the majority of their expenses can be dialed up or dialed down. Specifically,
they can hire and fire people. There's not huge infrastructure payments here. J.P. Morgan has
more because they have actual bank branches. But Goldman Sachs, who just announced they're
laying off people, that's just a standard part of the cycle in investment banking. But they also do
a lot of back-end stuff. My understanding is that J.P. Morgan and Goldman work with a lot of these
players. So for example, the Apple credit card is a joint venture with Goldman Sachs.
I don't understand why, but Goldman is involved, as is MasterCard.
So these companies have great technology.
They have great leadership.
They have great brands.
And they always seem to be involved in a lot of this type of innovation.
So, sure, are they worried?
Absolutely.
But their stocks and their companies continue to perform. Okay, let's check in on your predictions. So last week, I asked you
what you thought would happen with Rent the Runway's earnings report. And your response was
one word, pain. Pain was sort of right. The company beat earnings expectations. but it also announced it will lay off nearly a quarter of its workforce
and reported an 8% drop in subscriptions from the previous quarter. Do you have any thoughts here?
Well, yeah, the stock went public at 21 bucks a share, and it's now trading at just over $3.
So it's off 85%. The forecast is what I think took their stock down. It's flat. They're forecasting flat
revenue for this quarter. New subscriber signups are slowing and more subscribers are canceling
or holding their accounts. So what do you have? You have a company whose current business model
doesn't work. And some, they're losing a shit ton of money and they're not growing that fast.
And a lot of people are churning out. So this is a company that probably goes below two bucks a share, which will give it a market cap, I think, with cash of
somewhere between $100 and $200 million. And someone like an Urban Outfitters comes in and
takes them out for $150 million. At some point, this company is going to have an enterprise value
of almost zero. I think they have quite a bit of cash on hand. I wouldn't be surprised if they lay
off another 30% to 50% of their staff,
because whoever acquires them is going to want them to do the dirty work of rightsizing the business.
What's the team focused on this week, Ed?
All eyes are on Jerome Powell this Thursday, when the Fed meets to determine the next interest rate hike.
Economists are expecting an increase of 75 basis points,
but after last week's disappointing inflation print, some are
expecting it to be as high as 100. Scott, any predictions? My prediction is there's been a ton
of activity and rhetoric and controversy around TikTok. And the clip that I keep seeing is Josh
or Senator Hawley questioning Vanessa Pappas, the CEO of,
I think it's TikTok America, saying, can you guarantee that no engineer in China is a member
of the Chinese Communist Party? And she just refused to answer the question.
Senator, I'm saying nobody that's sitting on this panel could tell you a political affiliation.
I'm not interested about anybody's opinion. I'm asking you a factual question.
Are there members of the Chinese Communist Party employed by TikTok and ByteDance, yes or no?
I wouldn't be able to tell you the political affiliation of any individual.
She came across very Zuckerbergian, very slippery. It felt like, oh my God, meta part two.
And my prediction is that in the next 90 days, we either see a dramatic change in ownership,
meaning a very large investor.
And when I say a change in ownership, I mean a change in ownership to an American entity,
or we see an outright acquisition.
I think something that would solve all problems for TikTok would be if Microsoft acquired
it.
And there's so much money on the line here, and the heat is getting ratcheted up so quickly
that I think
the shareholders at ByteDance are going to say, okay, we're willing to cash in and make someone
else the largest shareholder here in exchange for creating some distinction between the CCP
and an unbelievable product. Because this company is probably worth $500 billion to a trillion
dollars right now. If that doesn't happen, if that doesn't happen, in my view, that reflects
that the CCP is already having influence on this company and not letting them pursue a sale.
And I think you're going to see regulation. Okay, that's all for this episode. Our producers
are Claire Miller and Jason Staver. Special thanks to Catherine Dillon and the PropG Media team.
If you like what you heard, please follow, download, and subscribe. Thank you for listening to PropG Markets
from the Vox Media Podcast Network.
We will catch you next week. Hey, it's Scott Galloway, and on our podcast, Pivot,
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