The Prof G Pod with Scott Galloway - Prof G Markets: Third Quarter Review — with Aswath Damodaran

Episode Date: November 6, 2023

Scott shares his thoughts on WeWork’s bankruptcy, Saudi Arabia’s World Cup bid, and Disney’s full ownership of Hulu. Then Aswath Damodaran returns to the show to break down third quarter earnings season. They discuss Meta, Netflix and streaming, Instacart, the Ozempic effect, Birkenstock, Google, and Aswath’s new valuation for Tesla. Learn more about your ad choices. Visit podcastchoices.com/adchoices

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NMLS 1617539. This week's number, 30%. That's the share of American homebuyers who say they'd be more likely to buy a house if it's haunted. True story, my friends refer to me as the exorcist, as when I leave, there's no spirits left. That's good! No me diga no, me lo presiento. Todo lo que cambia lo hará diferente en el año que nace la serpiente. Welcome to Prop G Markets. Today, we're discussing third quarter earnings season with Aswath Damodaran, professor of finance at NYU Stern School of Business.

But here first, with the news, is Prop G media analyst Ed Elson. Ed, have you ever seen the movie The Exorcist? I have not. Do not. It will scar you for the rest of your life. I snuck into The Exorcist. That's what I did during the week after school is we'd go into Westwood Village, me and my friend Adam Markman, and we would sneak into movies. We'd hang out in the exit, and then we'd sneak in, and half the time we'd get kicked out. But we made the mistake of sneaking into The Exorcist.

And I'm not exaggerating. I would have to, like, put on my socks in the morning in the corner. I slept at the foot of my mother's bed. I was just... That is the most terrifying movie. Anyways,

don't take your children to see the movie. The actual Ellen Burstyn, Linda Blair. I forget who else. Oh, Max von Sydow, fantastic actor. You don't know any of these people.

Don't know any of those names. Anyways, okay. Selena Gomez wasn't in it. Get on with the news. Get on with the news. Sorry, before we move on to the news, can we just talk about the fact that it's your birthday tomorrow?

No. I'm turning 49. I'm pulling a Nancy Reagan. From this point forward, I'm taking 10 years off. Between the testosterone, the Botox, the Pico laser on my face, the Cialis. I don't know. I feel, I don't feel like I'm hanging in there.

The HGH is working. Yeah. I haven't tried the human growth hormone. I would, I just don't know how to get it. You got to talk to Bezos. God, that guy looks ripped. That's good, man. Get to the headlines. Oh my God. Happy birthday to me.

You're not celebrating or what? No. Honestly, what I do is every year I do the same thing. Happy birthday to me. You're not celebrating or what? No. Honestly, what I do is every year I do the same thing. I want to have dinner with my boys and hang out. But no, I'm not a big birthday person. You'll see. Birthdays are literally horrific once you get to my age. It's like, I'm getting all these birthday wishes and I have to respond. Thanks. Great to see you. Oh God. All right. On with the headlines. Let's start with our weekly review of market vitals. The S&P 500 rose, the dollar fell, Bitcoin gained, and the yield on 10-year treasuries dropped. Shifting to the headlines.

The Federal Reserve held interest rates steady at a 22-year high. Still, one last rate hike could be on the table before the year is up. A federal jury ruled the National Association of Realtors conspired to inflate real estate agent commissions. The association, along with several brokerages, were fined $1.8 billion of damages, and the ruling could potentially lower the cost of home buying in the U.S. WeWork is filing for Chapter 11 bankruptcy. Shares fell around 50% on the news, and they're down almost 100% this year. Saudi Arabia is set to host the 2034 World Cup. It was the only country to show interest after Australia decided not to bid. Disney agreed to purchase Comcast's remaining one-third stake in Hulu for $8.6 billion.

That deal will give Disney full ownership over the streamer. And finally, Airbnb reported third-quarter results that beat on revenue. Still, the stock fell around 3% on weaker-than-expected guidance for the rest of the year. Scott, any thoughts? So the jury ruling on the National Association of Realtors, people are economists, investors, VCs are all flummoxed by what appears or feels like it should be highly disruptible, and that is real estate commissions. Barbara, down the road, puts up signs and balloons and figures out a way to take 2.5%, 5% if she's representing both sides on what is one of the largest asset classes in the world. It's just every time you sell a home, you think, Jesus, this is inefficient that I lose 5%

of it. And if you look at the commissions on stocks, almost any industry with a commission, you generally see them get kind of starched out. So it'll be interesting to see if this has any impact on actual costs. WeWork, this is the end of an era. WeWork has peaked at about $47 billion, which is even greater than the impulse purchase of $45 billion of Musk and Twitter. Masayoshi Son, I believe, will go down in history as the world's worst investor, that after the world's luckiest investment in Alibaba, was able to raise $100 billion and has lost a great deal of it. And I remember being at the code conference and talking to these soft bank backed companies and thinking, okay, this is an interesting, intelligent bed started by a young,

thoughtful woman who's an innovator, but there's no fucking way this thing's worth $600 million. I mean, Wirecard, just all of this stuff was just kind of insane. He also disrupted in sort of a bad way, like a disruptive child, the entire VC ecosystem. I'm still dealing with it. I'm on the board of companies and these entrepreneurs who grew up in sort of the soft bank era think, okay, we got a company doing 40 million in revenue. We're still worth $1.3 billion. And it's like, no, you're not. Maybe Masayoshi-san thought you were worth $1.3 billion four years ago, but no one else does, including him right now. The thing that'll be interesting here is that I believe the new owners of WeWork,

and that is the bondholders who will get to seize the company's assets and declare bankruptcy, I think they're going to make money. I think this company was tailor-made for bankruptcy because what you can do under the auspices of bankruptcy protection is get out of all of your leases. I think the company has $2 or $3 billion in short-term debt. That gets crushed, or you can buy it for 10 cents on the dollar or something, along with more than, get this, $13 billion of long-term lease obligations. It can go to every one of these leases, at least in the U.S. I don't know how bankruptcy law works overseas. And it can say to them,

you need to cut my lease payments or our agreement costs by my lease costs by 40 or 60 percent, or I'm just out of here. And I no longer am obligated to pay you for another seven years. And where I would go with this is I would take their whatever it is, 1,100 locations down to the most profitable two or 300, and I would move to a franchise model. We charge you 6%, 8%, 10% of top-line revenue. You get our brand. You get our tech platform. We have a certain amount of standards you have to keep, similar to the way the Four Seasons operates. The Four Seasons only owns, I think, one of its hotels. It's flagship in Toronto. And the rest is a licensing model. You get the flag.

You get the reservation system. You get the quality standards. You get the brand. And they collect, I think it's like 8% or 10% of top-line gross revenue. And it's an amazing business for them. It's a high-margin, wildly profitable business. Just want to add, quick victory lap. Four years ago, you wrote this blog post titled,

We What the Fuck? You did this massive breakdown of the WeWork business model, how it doesn't make any sense, how the valuation is ridiculous. At that time, WeWork's valuation was $47 billion. Today, it's $60 million. So just props to you. Thanks for saying that. I was in Nantucket, and I got a copy of the S1. Someone sent it to me, and I read it. And I remember saying to my family, we were all set to go to Nobadir and go surfing, and it was a beautiful day. And you want to talk about some of the hate from my family. I went out

and said, I'm sorry. I just got the WeWork S1, and I have to write about this. Because I read the thing, I thought it was a joke. I thought it was something from The Onion. It said, our mission is to elevate the world's consciousness. And they had community-based EBITDA, which was basically stripping out all the expenses. I called it earnings before everything else. But that's what, after working my ass off for 30 years, made me an overnight success. But that was an easy one. Anyways, Saudi Arabia, I will be there in 2034. I just think, you know, the deepest pocket in the world has decided that it is a strategic baller move, rather than running ads on CNN or on Bloomberg that say, invest in the kingdom,

they buy sports and get enormous visibility and goodwill. And it's like running a commercial for 10 years. And at the end of the 10 years, all of the investment they've made in these commercials, they get it back plus two or three X. So this is the ultimate branding move. And they figured that out. Disney, they initially thought that Hulu would be Switzerland, that there are all these big companies that couldn't compete on their own with Netflix because they didn't have access to cheap capital, but they wanted to be in the game. So they thought, let's create Switzerland and we'll all give our content

and we'll come together and we'll build a great platform. You're talking about this was Disney's position? Hulu was co-owned by Disney, I believe Discovery Time Warner and Comcast. And then it kind of came down to, it ended up being a Frankenstein where it was a bunch of companies. And the problem was, was that nobody was getting full credit for it. Hulu has actually built a nice brand. I think it has something like 45 million subscribers. It's got a decent following. It's actually profitable, I think. But the problem is no one was getting credit for it because when you don't control something and you're not getting

cash flows from it, you don't get credit for it. And so it was either somebody here needs to pony up and own the whole thing such that they get the credit they deserve. And Disney is moving to a more consolidated business around streaming, movies, and parks. So this makes sense for them. Comcast is obviously saying it should be worth more. You're in a bit of a tussle or negotiation, but this is absolutely the right move. Airbnb, as you know, I'm a shareholder. It's one of my largest holdings. I think it's a great company. It has great leadership. The question is, is it already fully valued? I wonder if this war in the Middle East is going to put a chill on travel, but at the same time, the stat that's always just impressed me about Airbnb is that the vast

majority of its traffic is direct to site. So they get to exit the stranglehold that Meta and Amazon and Alphabet have on every other travel company that has to buy search terms. And as a result, their margins are just much greater than every other travel company. So I buy search terms. And as a result, their margins are just much greater than every other travel company. So I'm a huge fan of Airbnb. I can't speak to the valuation. You know, I hope it goes up. We'll be right back after the break

for a conversation with Aswath Damodaran. We're back with ProfitG Markets. Third quarter earnings season is well underway and most of big tech results are in. So for our quarterly review, we're checking in with Professor Aswath Damodaran, the Kirshner Family Chair in Finance Education and Professor of Finance at NYU's Stern School of Business. Aswath, thanks so much for joining us. Thank you for having me.

Aswath, I asked you two questions, or I'll tell you, last week at a conference, and I had two questions for you. The first is, the upper decile of companies as segmented by market capitalization seem to be kind of running with it. They've just outperformed the lower 90, which would logically lead you to believe that if markets are cyclical, that the bottom 90 should outperform over the next several years. And I put forward to you that that may not be the case. What are your thoughts? Now, I think that the nature of business has changed. I think that it took a while for us to do this, but we've shifted from

the 20th century economy to a very different economy in the 21st century. In almost every sector, you've got winner-take-all economics, where the largest player, there's networking benefits of one type or the other. So the larger you get, the easier it becomes for you to grow and deliver profits. And I think as you see that unfold in sector after sector, the market's recognizing it and rewarding those companies with higher market caps. Is there a downside to that? We seem to have lost our legacy of antitrust, recognizing when these companies begin to run away with it, it's not good for the ecosystem. Do you think, what are you using on antitrust? Or is this okay? Is this a healthy economy?

I think the problem with traditional antitrust, it's built on the presumption that if you build monopoly power, it shows up as higher prices and that consumers immediately suffer. But that's not the way these big companies operate. They actually give away their stuff for free. They build up these ecosystems where effectively you think you're getting bargains at the prices you're paying. So it's very difficult to marshal people to go against these companies when they look and say, look at what I'm getting for my $129 Amazon Prime on my $25 Netflix subscription. So it becomes more difficult, I think, to marshal the forces. Traditional antitrust was built on monopolies using higher prices. This, if you want to move against these companies, has to be built on a

different logic. And I'm not sure what that logic is and whether it'll hold up in court. And that's going to be the test that you're going to see played out as the regulators go against these companies. One thing we've been discussing a lot on this program is this notion that the IPO market is dying. And there's obviously the fact that actual deal activity has come way down. It's picked up a tiny bit this quarter. We saw IPOs from Arm and Klaviyo, Instacart, Birkenstock.

But those deals haven't really thawed the IPO market in the way that I think people expected. And in addition, they're all trading down from their issuance price. But the thing that we've been more focused on on this program is the quality of the companies going public. So there's just this one stat that I'd love to get your reaction to. In 1980, 78% of VC-backed IPOs were profitable when they went public. In 2021, that number was 10%, and last year it was zero. So would you consider it a fair statement to say that the IPO has transformed from a financing

instrument for companies to build their businesses to a liquidity instrument for existing private investors to cash out and, for lack of a better term, dump the bag? Actually, there's an internal contradiction in the way you set it up, because if you're a money-making company, you need access to capital less. In the 1980s, by the time Apple and Microsoft went public, the need for capital had shrunk because they had an established business model, but they were willing to be patient. What we've had in the last 10 or 20 years in particular is an emphasis on scaling up and essentially putting business models in the backseat. Do you know that the typical IPO now, in terms of revenues, is five times larger than the IPOs in the 1980s? So it's a very strange

phenomenon. The companies going public actually are much bigger than the companies that went public 50 years ago, but they're also less formed in terms of the business models. And I think this started a while back. It started with the dot-com boom in the 90s, and essentially it reflected a shift in perception that, you know, until the 1990s, the perception was you had to be established as a company in terms of business models before you went public. The 1990s, companies started to jump that step, go directly to the market, even though their business models had not been formed. So part of that is just that shift. But I think one reason bigger companies with less formed business models are more likely to hit the market is because of the way VCs are rewarded in the VC market.

VCs are being rewarded for scaling up much more than building business models. So they're going to do what they're incentivized to do, which is scale up, get more users, get more subscribers. Don't worry about making money yet. That can be down the road. And that could be a very dangerous process for both businesses and

the overall economy. Just an example, let's talk about Instacart, which you recently valued at $29 per share before the IPO. And that was roughly equal to its offering price of $30. It got a pop on its first day of trading, but it's now down to around $25 per share. And it feels like this is a theme with a lot of these companies with probably big revenue, but maybe their business models are less built out. One, do you think that Instacart is a sustainable business that can grow? And two, do you think that the market is undervaluing Instacart at this point? I think of three high-profile IPOs. You've got Instacart, you've got Arm, and you've got Birkenstock. Two of those three companies have

business models. They're making money. Arm and Birkenstock actually are more established. Instacart is a strange beast. It's a COVID phenomenon. It's a company that in 2019 was expected to be a niche company that somehow during COVID people decided could become a company for everybody. So I think what you're seeing with Instacart is still working through of what exactly online grocery shopping is going to look like. Because unlike the rest of retail, grocery retail has been impervious for the most part to online shopping for good reasons, right? Which is if you're going to buy produce, you want to see your produce before you get it rather than

have an Instacart shopper do it for you. The difference between 25 and 29 is not a huge difference. Markets are still trying to figure out what the company is worth. And it was actually valued, I think, relatively conservatively. And that's the other thing to factor in. Two years ago, if Instacart had gone public in 2021, which is a peak year for IPOs, assuming the share count had stayed the same, they'd have been priced at $60, they'd have opened at $80 and gone up to $100. What's changed is the market has shifted between then and now, and you're seeing that play out with each of these IPOs. Now, I call this risk capital. Risk capital is always a part of every market. And risk capital went to the sidelines in the middle of last year. It stayed on the sidelines since. It's not come back. Even if the market's been a little healthier this year, risk capital has not come back. And I think these IPOs are suffering because of that phenomenon. So, Aswath, I saw something I don't think I've ever seen before, mostly meta, but also

to a lesser extent, Netflix. And that is a company grows its revenue 23% while having reduced costs of 7%, resulting in an increase in earnings of 170%. That's meta. I've just never seen that before. What are your thoughts on meta and Netflix's earnings, and have you ever seen performance like that? You know, it reminds me of somebody who's 400 pounds in weight and goes out and eats 3,000 calories and still loses weight because they were eating 7,000 calories before.

These companies had built up a huge amount of fat in the last decade. They had a lot of slack. I mean, I remember walking around Google's campus and wondering what all these people do because they seem to be out there sitting on benches. And when you're doing really well and the market's rewarding you for basically doing nothing, you can keep these people around. So what you're seeing in these companies, and this is something I mentioned towards the middle of last year when I talked about why these big tech companies were likely to see higher profits, even in the face of inflation, is they can cut 20% of the workforce and not even notice the effects on their revenues because I won't say they're doing nothing, but what they're doing is very difficult to trace through to the bottom line. So I think eventually the fat will run out

and then you'll have to do real cost cutting, which is always painful because there are trade-offs. But for the moment, they're getting to have their cake and eat it too, cut their costs and show higher revenues and the market's judging them accordingly. Talk a little bit about the streaming market and the valuations of some of these companies. Are Disney and Warner Brothers Discovery, are they now in, because of the destruction of value there, are they now attractive investments? Two or three of the big, you know, the legacy players, two or three of them are going to survive and perhaps prosper. I would pick Disney as one of those simply because, I mean, I'd go for the companies

which have immense amounts of content that they can repackage and deliver. The reality is right now the streaming market is up for grabs in many ways because people haven't figured out how to make this market work as a business model. Even Netflix, which has been the most successful of the streamers, I don't think it's a steady state model. It's a model where you throw immense amounts of content at the wall and hope something sticks. Eventually, we'll figure out the right mix for streaming, the mix of original and old content. But I think that until we get there, we're going to have this back and forth. But I do think that if you're going to pick one of the legacy players, I would say Disney would be my first pick, followed by Warner, and everybody else falls to the wayside after that.

Have you valued Warner Brothers Discovery? I've valued Disney and I've valued Netflix, but I haven't valued Warner Brothers specifically. And how do Netflix and Disney look? Netflix looks overvalued. Disney looks undervalued, partly because I think the market is building in expectations that Netflix will figure a way out of the problem, but that Disney will not. And that reflects the mood of the moment about Disney, which is the company is in flux. We don't know who's going to be running it three years from now. They've created a mess for themselves in terms of succession to Bob Iger and it's self-inflicted. If in 2015, Bob Iger had retired as he originally intended to, and the board did not talk him into staying on, my guess is we'd

be looking at a very different Disney today than we're looking at right now. I mean, this is the consequence of telling somebody that without them, the company cannot make, making an individual indispensable to the future of the company. And by doing so, they've created a ripple effect that's still playing through at that company. So we talk a lot here about this Ozempic effect. And I looked at the stock performance of McDonald's, General Mills, PepsiCo. And since, and over the last 20 years, they're up between kind of six and tenfold, all of them. And at the same time, you can't escape noticing that obesity, morbid obesity, has gone from 5% to 10% of the population in that same time period, and obesity has gone from 30% to 40%. If, in fact, these drugs are going to make America less heavier,

isn't there just an entire cadre of entire sectors that are going to register enormous value destruction? Less heavy and less hungry. The hungry part is what affects them. It's not the less heavy part because if they had to eat light food and that's how you lost weight, it'd be very different. The only company right now that has benefited from these drugs is Nova Nordisk because it produces the drugs.

Everybody else you're looking at, what will the effect be? Now, I think glory days for all of these companies were behind them anyway. You look at whether you're looking at the fast food companies or the processed food companies. It's true they've gone up five, six, tenfold over the last 40 years, but over the last decade, they've been very average investments. So I think that if these drugs are going to have an effect on their business, it'll be small and it'll be over time, but we'll notice some eating away at their revenues and profits. They have the benefit

of large portions of the world that are still underweight that they can work on to make obese, I guess. So that's, you know, that's our hope. There are 2 billion people, 3 billion people in Asia that we can work on. That's a, you know, it's a terrible characterization of a growth plan. But fast food has a way to go still, if you think about, you know, Asia and Latin America's potential markets. And my fear is that you're going to see the obesity epidemic that has kind of gripped the U.S., kind of spread into the rest of the world as well, if it hasn't already.

So last week on your blog, Musings on Markets, you published your Tesla valuation. You landed at $180 per share, which is 15% below its current trading price of $213. And I have to admit, I would have expected a lower valuation from you, considering the extent to which narrative plays a part in the market's valuation of this company. I mean, narratives about software and about robots and Elon's overall vision and genius. But in this valuation, you actually applied numbers to those narratives. And you said that the software business, which is nascent at best, is worth $50 billion. And you said that the robo-taxi business, which doesn't exist at all right now, is worth $120 billion. Could you take us through your thinking here?

I think that the fact that something is nascent doesn't mean it doesn't have value. I mean, let's face it, our cars are increasingly computers and software runs them. So we know auto software is going to be a growth business. Part of it is going to be AI, part of it is going to be FSD, part of it is going to be something else. And much as people like to take Tesla's FSD efforts apart, and I think that they're often rushed to the market, they're overhyped, the reality is it's the only automobile company that seems to be taking FSD seriously as a business model. So much as we'd like to say, this isn't ready, and in fact, I don't start the revenues from robo-taxis to 2027 because I think it'll take a while for them to work their way through

the technological barriers and the regulatory barriers. But I think that the connecting narrative numbers is always something I've emphasized. I've said, look, I'm willing to listen to your story, but I want to make sure that the story doesn't become a fairy tale. Maybe I'm pushing the limits of these narratives with the numbers I'm attaching to them. But I think these businesses are going to shop. It's not a question of whether there will be a robo-taxi business or whether there will be an auto software business. The question is, who's going to be lead players in the business? I think Tesla is going to be one of those lead players. Now, but if I value Tesla just as an automobile company, my value per share is 120. So when people often say, look, this looks high, it's because those side businesses are where the value comes from. I'll tell you the one thing that Tesla is doing

that makes me believe that they believe the side businesses are where the money is going to be made is the price cuts, which is that they're cutting prices on cars, effectively lowering the margins in the hope. The hope might be misplaced that selling more cars is going to allow them to do other stuff. And what I'm trying to do is bring that other stuff into the equation. I mean, the 180 is with every lever in full throttle. And if it's at 200, even with every lever in full throttle, he's saying, what do I do next? In fact, I've already got pushback from Tesla Optimus saying, where's the bot business, the Optimist business? I mean, it's amazing. Each time you hit a business that Tesla's in, they come up with three other businesses. Two out of the three will never make it out. I don't think the insurance business is a good business for anybody to be in, least of all Tesla. And I actually, in my corporate finance class last semester,

pulled all the numbers I could about Tesla bots and said, value Tesla bots alone as a project. And I got values in the billions, maybe a few tens of billions, not hundreds of billions. So if it's a business, I don't see it as the kind of trillion dollar business that people are making it out to be. It's a B2B business. You're selling these robots to other companies that are manufacturing companies, mining companies, as replacements for the workers. An entire social cost we're not talking about here. What happens to all those workers, assuming these bots actually make it, that we displace?

But that's a mistake we've made over and over again in the last 40 years. We talk about progress as an unmitigated plus, and we don't talk about the costs we create as side costs for everybody else yeah i mean this feels like the ultimate question with tesla right it's like which which business narratives do you choose to believe and i guess my follow-up question would be like why do you eliminate what's your line in terms of eliminating the bots business you you're down to value the robo-taxi business. I'm not sure if that's a new decision this quarter, but where do

you draw that line on what counts and what doesn't? I have a divide which I use in valuation of possibilities, plausibilities, and probabilities. Possibilities are options. It could happen, but you don't have enough substance around it to put numbers on it now until about two years ago the robot taxi for me was a possibility it was an option i was willing to listen but i said look i can't put any numbers because you're not far enough along the way this year in particular i'm willing to open the door that these businesses are starting to become plausible that That's a judgment call. Will that happen with the robot business? I'm not sure. Now, it might just fade away because

there are other businesses that Tesla has claimed it will enter that really never materialized. So you start with the possibilities, you view them as options. If they play out, then you convert them into plausible scenarios, bring them into the numbers. And the end game is ultimately they start to show up in your financials as actual revenues, actual operating income, actual cash flows. So let's talk about the other auto guys and the energy companies. It appears they got out too far over their skis. They're scaling back their kind of EV ambitions. When I look at their valuations, they just look cheap.

Granted, they're auto companies and they're not sexy, and they're not Tesla, I should say. And then I look at the energy guys, the Chevrons and the Exxons in the world, and the fact that, okay, EVs are now up to 2% of the world's automobiles, and if you assume the world's going to keep growing, it's going to need fossil fuels. Are automobile companies and energy companies on a risk-adjusted basis a good buy? The energy companies might be. The automobile companies, I'm not sure the legacy automakers have an endgame here that I am comfortable with. So we talk about stories. I'm not sure that I can tell you an upbeat story about any of these legacy automobile companies. Maybe BMW, maybe Daimler, but every other automobile company I look at, and I can't think of a good

ending to this story. You know, you're paying 20. I mean, you've already gone through a strike. You've agreed to pay 25% more for, you know, I think it's an increase of 25%, which the workers might deserve. But at the same time, these companies are not exactly healthy, flush with cash companies. So I think that they're going to be playing defense. And when all you're doing is playing defense in any sport, it doesn't end well. So I think their scaling back of EV suggests to me that they're conceding that this EV business is not as easy as you might have imagined by looking at what Tesla was managing to do. So nothing that's happened this year makes me more upbeat about these companies.

And every time I read a news story, I actually get less upbeat about these companies. On fossil fuels, the difference is, unlike Tesla and the automobile business, we've seen a real change in the economics on the ground. Alternative energies, in spite of all of the money we've poured into, you know, different kinds of alternative energy, trillions of dollars, has barely made a dent in how much of our energy comes from non-fossil fuels. I mean, I just did a piece on impact investing where I looked at the percentage of energy we got from fossil fuels in 1971, 1991, and 2021. Between 1971 and 91, the dependence in fossil fuels dropped by about 5%, from 82% to 77%. All of it came from the growth of nuclear energy. Between 1991 and

2021, the percentage of energy we get from fossil fuels has remained unchanged. There's been a small gain in solar and wind, wind in particular, but it's come at the expense of nuclear energy. It's almost like they're cannibalizing each other and you're still dependent on oil, gas, and coal for your energy. So I think it's, you know, it's part of the reason I think we need to rethink how we approach climate change. The reason I think impact investing, the only thing it's impacting

are your returns and how much money goes into these businesses. It doesn't seem to be impacting the output that we're getting, the changes that we claim we wanted to make because of this investment.

We'll be right back. We're back with ProfitG Markets. So if you think about search, I think the genius of search is that it's so ubiquitous and so accessible that they democratized it. And it didn't end up really creating strategic advantage for everyone. Everyone had to use it. And it became a tax that everyone paid to one company. So it increased the stakeholder value of one company and kind of lowered the costs and the profits of everybody else is the thesis I would put forward. Is the same thing going to happen with AI, where there's a small number of extraordinary winners and everybody else just has, you know, more efficient but lower profits?

I think that's a safe assumption to make because that's the way every one of these big tech, you know, revolutions seem to have paid out over the last 40 years. PCs, you know, the internet, social media, every one of these, at the end of the process, you look back and say, let's count the winners and the losers for the bulk of the companies. 90% plus of the companies, it becomes an additional cost. It's something they have to pay for

because everybody else is doing it. And none of them benefit because if everybody has it, nobody has it. It's not like you're the only one using AI. It's like the SAT, right? 30, 40 years ago, my wife, I didn't take the SAT, but my wife did in 1981. And she said she just walked in and took the SAT. There were no prep courses, nothing. 40 years later, we've got this elaborate system of SAT prep, but everybody goes through it. And in the end, there's no gain because if everybody has it, nobody has it. My guess with AI is it's going to become this

ubiquitous part of every company's toolkit. They're going to be paying vendors and software makers, and they're going to benefit. But the bulk of companies, I don't see the net economic gain from AI changing the way you do business. Something a bit more serious. What, if any, impact do you think the war in the Middle East is going to have on markets or specific sectors? Have you found any specific companies you think is going to be especially good or bad for them? The last three years have been good for weapons manufacturers, right? No matter how you dress this up, all of a sudden they're back. Outside of that, this war, the direct effects,

I mean, I think potentially will be on oil prices and companies dependent on oil will see the effects. We haven't really seen a surge in oil prices yet, but that could be the one item that I would keep my eye on is how will this play out in terms of how OPEC behaves going forward, what will happen to oil prices going forward. But for the moment, it's had a surprisingly small impact on markets. Maybe it should be larger, but it's almost like people are not building in expectations of this expanding out from where it is today. Yeah, just to touch on that, I feel like this wouldn't be a quarterly review if we didn't talk a little bit about macro data. So just a few interesting things this quarter.

GDP growth hit 5%, fast-paced expansion in two years. Interest rates remain steady. Fed hasn't raised them since July. And then we've seen some more focus on fiscal policy. The deficit expanded to $4.5 trillion. The Treasury recently said that they were going to borrow nearly $800 billion this quarter. That's the most the U.S. has ever borrowed in Q4. How have those developments and just macroeconomics as a whole, how have they changed your approach to valuation, if at all? You know, I think that you said rates haven't changed because the Fed hasn't changed rates. The reality is rates are changing. They are market set rates and market set rates are going up.

T-bill rates are up. T-bond rates are up. Those are the rates that matter. Who cares what the Fed funds rate is? And I think the FOMC might be watched by everybody, but the reality is rates have risen. And the question is, what's the message in those higher rates? What I'm getting as a message out of this is markets collectively seem to believe that we will continue without a recession, but with inflation, that this is here to stay. This notion that if the Fed decides rates can come down to 2%, I think is misplaced. I don't

think we're going to go back to low rates. What I do think we have right now is an economy that hasn't adjusted psychologically and economically to those higher rates. I mean, let's take the simplest example, 8% mortgage rates, right? You'd expect with 8% mortgage rates that housing prices would drop off, but you're not seeing that. You're seeing fewer houses hit the market, housing prices staying intact, and homeowners almost saying this too shall pass. But what if it doesn't? You can't sit on your house for the next 10 years. Your mortgages are eventually going, that 3% mortgage is'll have to get paid. There's an adjustment we haven't made to the higher rates.

And this is separate from a recession or what I think about the economy. Companies, homeowners, individuals, consumers haven't adjusted to a world where rates are not just high for the moment, they might stay high for the long term. They were closer to where we were pre-2008 when we embarked on this lower rates, lower inflation scenario that played out for more than a decade. And I think as companies adjust, you're going to see some pain along the way. It might not show up at a macro level, but it's going to show up at a micro level. Are you, in your valuations, taking those adjustments into account? And if so, how? How do you take those adjustments into account? If you leave the T-bond rate at 5%, you're effectively saying inflation is going to be 3.5% for the long term, right? Sometimes we make implicit assumptions. In fact,

let me take the sometimes out. We often make implicit assumptions. When I leave the rates at 5%, I'm saying, look, for better or worse, if I decided in my valuation to lower the rates to 2% 10 years from now, I'm effectively saying that this is temporary and it'll pass. I'm not doing that. I'm just leaving the rates where they are because I think the market, in its collective judgment at least, believes that higher inflation and higher rates are here to stay. And I'm not going to fight that. Why not fight that? Because that's just out of your station? No, it's because it's an opportunity cost.

What's the point of fighting it? If I don't invest in Birkenstock or I don't invest in Tesla, I can't make up a rate of 2% investment. I'm going to invest in what I have available. And right now, I can lock in almost a 5% return for the next 30 years. This is not an abstraction. It's not an estimation. And everything I in NVIDIA, that there's always an opportunity to buy great companies. At some point, almost every great company, for whatever reason, gets inexpensive. It strikes me that there's been a transfer of value from Alphabet to OpenAI and to Microsoft as Alphabet has been perceived as flat-footed. So one, what companies do you think there's opportunity in? And two, do you think Alphabet would fall under that theme? I think Alphabet actually, outside of the search box, it has amazed me how

inept the company has been about all of its other stuff. I mean, I remember when they renamed themselves Alphabet saying, look, you know, we're a multi-business company. That was, what, 2015, 16? Seven years later, you look at where the revenues come from. It still comes from the search box. It's like Snow White and the Seven Dwarfs, right? Seven small businesses you can't even find in the financials. And so there's something in the company, I think, that gets in the way of them taking what they've built. Because I'm sure they have great ideas in the company, I think, that gets in the way of them taking what they've built. I mean,

because I'm sure they have great ideas in the company, smart people. But there's a big question, and I think it's a question worth examining. What is it about Alphabet that makes it so difficult for the company to take advantage of all of these other, you know, smaller, promising businesses that they built up but never seem to get bigger. I call it the sugar daddy effect, which is if you're a startup, one reason you succeed is desperation. You know that if you don't pull it off, you're not going to make it through the next quarter, the next year.

I don't think any of Google's businesses, and I'd include AI as one of its businesses, has enough desperation in its DNA because they've all been trained to expect a sugar daddy treatment, a billion dollars a year, another two billion, three billion. Maybe that's getting in the way of development. So maybe they need to kind of restructure in a way that makes their AI business a little more desperate about the future, makes it more urgent for them to develop. Because I think part of what the market's punishing them for is a lack of urgency.

No, but among the big tech, it is perhaps the most reasonably priced one because the market seems to be pricing it still as a search engine that will never figure out a way to make money on these other businesses. And that could be fixed. And if it's fixed, I think there's a potential for upside. Do you see any other great companies that you believe are on sale? I'd say consumer discretionary.

Look at companies outside of the automobile space, which I think are, because they've not done as well as the rest of the market. So stay with the big companies because I think this phenomenon are, you know, because they've not done as well as the rest of the market. So, you know, so stay with the big companies, though, because I think this phenomenon of big over small is not going to go away. So even in those sectors which have done badly, I would look at the bigger companies

and look at those, you know, look at the companies that are flat this year and quite a few, in fact, five of the 11 S&P 500 sectors are down this year. This is a market that's been unbalanced, and this was a month ago before you had a further drop in the market. So I would say that look in those sectors for your potential benefits. Speaking of consumer discretionary, we've been discussing the Birkenstock IPO on this program, and you did a valuation. I think you valued the company around 10% lower than its issue price and it's trading around there. But I thought

the most interesting insight that you had on Birkenstock was this idea of valuing the intangible assets. Could you give us the breakdown on your thoughts on intangibles and how to value them? About 30 years ago, an accountant started obsessing about intangibles. And you can see why, right? Because their balance sheets are built around things you can see. My reaction is, leave it alone. Because to value intangibles, you can't look at the balance sheet. You've got to look at earnings power. You've got to look at earnings and cash flows. And if you do an intrinsic valuation, you're factoring earnings and cash flows, the intangibles are already in there. So when you value Coca-Cola, the intangibles already show up

as higher margins and higher return on capital and a higher growth rate for much of the last 50 years. But accountants say, well, I don't believe you. That's a reaction they get. I don't believe you. We have to value intangibles separately. So I use Birkenstock because it's a perfect case study of a company where intangibles drive the bulk of its value. Because if you strip it down to product, it's a sandal that's either the ugliest sandal ever made or the most comfortable sandal ever made, depending on who's wearing it. But it's a company that's built on a brand name that's tough to replicate. I mean, because it has history going for it, right?

The hippies, you got Kate Moss in, I think, 1990 wearing it on a cover. Basically, it's got 50 years of history driving it. So there's brand name, there's a change in management. If somebody asks, can management make a difference, Birkenstock would be a perfect example. A family-run company that in 2011 and 12 transferred that management to an outsider who happens to have taken all the right decisions, at least for the last decade. And of course, this summer, you had the Barbie movie and Barbie wearing pink Birkenstock, another intangible because it pushed up search for Birkenstock, sales for Birkenstock. So what I did was I took the intrinsic valuation. I valued the company as a whole first. Then I said, let me just break out

how much of this value comes from brand name, how much from great management, how much from the Barbie buzz. And it's not because I want to put them on the balance sheet. I couldn't care less what's on the balance sheet. It's to show that if you do a good intrinsic valuation, all the intangibles should be in there. In fact, we talked about Tesla. Lots of intangibles we can talk about, but the biggest intangible is a man, right? Elon Musk. And that intangible brings good things and bad things to Tesla,

depending on the day. And the question is, does that intangible make Tesla a more valuable company or a less valuable company? And this is where I think the great divide on Tesla comes about. So I think that the Birkenstock example was just my entree into saying, let's talk about intangibles in a sensible way by looking at what contributes the bottom line. Because many companies that claim to talk about intangibles, those intangibles don't show up in value. Where do you land on the, does the manager of Tesla provide negative or positive shareholder value? Net positive, but less so than five years ago, perhaps.

And I think in a sense, you know, it's, you know, the mix of effects he brings in now, perhaps there's a lot more negative now than it used to be. But still, I think it's a net positive. I don't see Tesla valued at the same amount with somebody else in charge, partly because he's never allowed anybody else in the company to get a high enough profile. If he picked another CEO, it'd be somebody you've never heard of. And you're going to turn over a $600 billion company to somebody you've never heard of. Now, that's going to be the tough, tough transition. And I'm

not sure he has a board of directors that's prodding him to think about, hey, who would run this company if you're not around? You just ruined the word intangible for me. Aswath Damodaran is the Kirshner Family Chair in Finance Education and Professor of Finance at NYU Stern School of Business, where he teaches corporate finance and valuation. He joins us from his home in San Diego. Aswath, as always, we really appreciate your time. Thank you, Scott. Okay, let's take a look at the week ahead. We've got earnings from Uber, Lyft, Disney,

and Warner Brothers Discovery. Do you have any predictions for us, Scott? My prediction, again, I'm GLP-1 fanatic here. This is not only an appetite suppressant, it's a craving suppressant. And I wonder, I think my prediction is, Ed, we're going to start to see stories, I believe, that show that the most religious, avid, obsessed users of social media consume less social media when they're on these drugs. And I wonder what, if any, impact that might have on social media. I don't know if it's the 20-80 rule, but I would be shocked, especially on Twitter, if we didn't find that people like me who are addicted to it, that a small percentage of us, something like, the median number of tweets is zero. The vast majority of Twitter accounts don't post.

But there's a small minority of people, I bet, I don't know if it's 1080 or 2080. And I wonder if people like me, who it was getting in the way of other parts of their lives, are at some point going to find that if they're on these GLP-1 drugs, they are no longer crave the dope a hit they get from how many likes did I get or can I see, you know, whoever it is, Emily Ratajkowski talking about social justice and she forgot to put on her bra. Is that wrong? Is that wrong, Ed? Anyways, so I think that the blast zone around GLP-1's impact on companies that are largely based on your addictions and your cravings, I wonder if the blast zone is going to get broad enough to start impacting stocks in the social media space. This episode was produced by Claire Miller and engineered by

Benjamin Spencer. Our executive producers are Jason Stavros and Catherine Dillon. Mia Silverio is our research lead and Drew Burrows is our technical director. Thank you for listening to Property 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 dark flies In love, love, love, love.