The Prof G Pod with Scott Galloway - Prof G Markets: Upheaval at Twitter, Airbnb and Uber Earnings, and the Chinese Markets

Episode Date: November 7, 2022

This week on Prof G Markets, Scott shares his thoughts on Elon’s proposed changes to Twitter so far and explains why enabling paywalled videos like OnlyFans is a good idea. He then makes the argument for why Airbnb is one of the best-performing companies in the world, and how Uber might turn profitable at long last. Finally, Ed and Scott check in on the state of the Chinese markets under the relentless zero-covid policy. Show notes: Twitter Airbnb Uber China's PMI Music: https://www.davidcuttermusic.com / @dcuttermusic Learn more about your ad choices. Visit podcastchoices.com/adchoices

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cards, savings accounts, mortgage rates, and more. NerdWallet, finance smarter. NerdWallet Compare Incorporated. NMLS 1617539. This week's number, $220 billion. That's a total cost of hosting the World Cup in Qatar this year. It will be the most expensive World Cup ever. No shocker there. For context, the World Cup in Brazil in 2014 cost just $15 billion. I have two tickets to the World Cup, but I just found out it's the day of my anniversary. So if anyone would like to go in my place, just let me know. Her name is Susan, and we have reservations at Granger's. Welcome to Prop G Markets. Today, we're discussing Elon's Twitter upheaval so far,

Uber and Airbnb's earnings, and the pain in the Chinese markets. Here with the news is Prof G Media analyst, Ed Elson. Ed, what is the good word, my brother? It's a very special day at Prof G Media. Happy birthday, Scott. Thank you, Ed. And we should also point out that I thought it was my birthday yesterday. I was just going to bring that up. And put out a tweet and was feeling sorry for myself because my family had called me and then recognized that it was, in fact, not my birthday.

So I think that's what it means to get old. I think that's fitting that you start forgetting which day is your birthday. Anyways, thank you. How old are you, 27? No, no, Ed, I just turned 41. Okay, good. And naked, I look 40 and 7 8s. Anyways, get to the news. I don't want to talk about my birthday.

Let's start with our weekly review of market vitals. The S&P 500 fell after the Fed indicated interest rate hikes would continue. The dollar moved higher. Bitcoin fell slightly. And the yield on 10-year treasuries rose again, remaining elevated above 4%. Shifting to the headlines. Amazon's market value fell below $1 trillion for the first time since the pandemic. The stock declined 6% on Tuesday, erasing almost all of its pandemic gains.

The company also announced a hiring freeze across its corporate workforce, citing macroeconomic conditions. Meanwhile, Lyft and Stripe are reducing their headcounts by 13% and 14% respectively. There's that Patagonia recession you were talking about last week. And as expected, the Fed raised interest rates by 75 basis points for the fourth time this year. The Fed funds rate is now at its highest level since January 2008. And Fed Chair Jerome Powell said rate hikes will continue, but indicated a slowdown could be imminent. At some point, it will become appropriate to slow the pace of increases as we approach the level of interest rates that will be sufficiently restrictive to bring inflation down to our 2% goal. There is significant uncertainty around

that level of interest rates. Even so, we still have some ways to go, and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected. The Bank of England also delivered a rate hike of 75 basis points the following day. That's its largest increase since 1989. Scott, any thoughts? Chairman Powell, he's come to play. He's not messing around. And there's some, we were talking last week about parsing language. So saying we still have some ways to go is, you know, pretty aggressive language. And I think growthy stocks that are especially susceptible to interest rates have, again, really taken it in the short. So why

do we care or why do growth stocks get hit harder? Because you're basically betting on the future. Growth stocks are valued based on future cash flows, which are worth less in a high interest rate environment because you have to discount those cash flows in the future back at a higher discount rate. In addition, if they're growth companies, they still need to raise capital oftentimes and it's more expensive to buy that capital.

So their future cash flows are worth less and their current business costs more to finance, thereby hitting their equity value. But you're seeing it across tech right now. It's getting hit pretty hard. After just one week of owning the company, Elon Musk is already shaking things up at Twitter. Musk has fired the CEO Parag Agarwal, as well as the CFO and the General Counsel, and at least five other executives have left, including the Chief Marketing Officer and the

Head of Product. Elon has also proposed many changes, including mass layoffs, as we discussed last week, enabling video paywalls similar to OnlyFans, bringing back Vine, that's the short-form video app that Twitter shut down in 2016, and charging users $8 per month for the blue check. Right now, the blue check is a symbol that a user is verified, i.e. a celebrity or a journalist. But under the paid model, Elon said blue check users will also get access to exclusive features. And crucially, he believes this will help solve the bot problem.

Scott, you've been saying Twitter should switch to a paid model for years now. So I assume you like what Elon's doing? There's a lot to like here. So first off, just coming up with new innovative or being open to new innovative ideas and trying to jab the corpus with a big EpiPen or shot of adrenaline is probably good for the company right now. I think they should and can take a lot of business away from a great business called OnlyFans. Could you explain a little further what you mean there? I think OnlyFans is a great business. And I think there's a large segment of the population that doesn't want to be associated with OnlyFans. And that is they would

be embarrassed. I think it's a safe assumption to assume that your entire credit card history will be made public someday. And having a charge for whatever it is, $20, $30, $100 or whatever you spend that says OnlyFans or whatever the merchant identification is that is OnlyFans is probably not something people are excited to do. But if it was seamless and sort of present on Twitter, I think adult content is a huge business. I think OnlyFans is a great business. It's kind of opened up a lot of job opportunities for people or ways to make money that I'm sure some people don't agree with or find offensive. I think people should get to do whatever the heck they want with their own bodies. And if they make money, good for them. So Twitter has such ubiquity. And if they built the technology that made it easy,

built in a micropayments platform, I think it's one of those niche businesses that's highly profitable, a great business that they or someone else should absolutely be in. But it seems to me that's kind of a natural fit for a social network like Twitter, a kind of business that they should be in. And what do you think about that $8 number? Do you think that he just pulled that out of thin air or do you think that's a calculated number or what do you think of that number?

Quite frankly, the $8 a month hubbub right now just isn't worth it because if every currently verified user, that's 400,000 accounts signed up and paid $8 a month, that would generate just $40 million a year. That doesn't move the needle for them. But if 10% of Twitter's 238 million daily active users paid, and I think they should pay more, or an average of call it 10 bucks, they'd get an incremental $2.5 billion. That's a game changer. So the bottom line is they need to charge, and the blue check will largely indicate somebody who's capturing a lot of value or creating a lot

of value. But it shouldn't be limited to blue check. I don't understand that as a segmentation strategy. Again, it should be the people with the most followers who are garnering the most economic value if they want to move the needle here. How much would you pay? Generally speaking, there's consumer dissonance. People will say they will pay less or more than they actually would. I think that if they charged us $100 to a thousand dollars a month, I think if they said, all right, to maintain a direct line of communication with a half a million people that you want to be cognizant of your work to hire you for, or give you opportunities to invest or bring some sunlight to your research or create awareness for your speaking gigs or your books or whatever it might be, I think we would probably pay a thousand bucks a month.

And that's for the blue check or for being on Twitter? For being on Twitter. I think that verification, identification, or you could add additional features or maybe say my content gets elevated above other people's content, whatever it might be. They could come up with a series of features to try and justify it. But a one price or one size-all is the wrong strategy. Just as airlines charge wildly different prices for the same seat on the same plane, but it's worth different amounts to different people at different times, pricing

should be based on some sort of assessment of the economic surplus they are not capturing. And they should take 10, 20, 30 percent of that economic value that they are not capturing. Sorry to break up the sausage fest, but it's time for Mia on the Street. Today, I took to the streets of Brooklyn to ask people if they knew what a blue check was and if they would pay for a blue check. And I got some opinions on Elon Musk himself. All right. So do you use Twitter? No.

Do you know what a blue check is? No. Would you pay to have one? No. Probably not. No. Me personally, no. However, if having a blue check had some like,

I don't know, financial net positive, then maybe. No. Fuck no. Hell fuck no. Oh, is that the Elon Musk shit is going on? Yeah, he tripped it. Why do you feel about Elon Musk? He's kind of based.

Very cool, great. Well, listen, appreciate your time. What do you think? Like I said, I'll... Like ridiculous and awesome. Do you have any thoughts on him? And... That guy could fucking save it. He's a fucking dork okay sweet thank you you're welcome

we saw earnings from two big sharing economy platforms last week airbnb and uber and both beat expectations airbnb posted record quarterly revenues of 2.9 billion. That's up 29% from a year ago. Earnings came in at $179 per share versus $147 expected. However, the company also fell short on its guidance. It projects around $1.8 billion in revenue next quarter, while Wall Street expected $1.85 billion. Airbnb shares fell around 10% as a result. Now, Scott, we'll get to Uber in a minute, but let's just focus on Airbnb for now. I know that you're a long-term shareholder in the company. I know you like the company. So what do you think of this? Were you impressed with these earnings? Yeah, I would argue right now Airbnb is one of the best performing companies in the world.

You have two types of companies. You have very profitable companies, such as a Meta or a Google or a Microsoft that have kind of low growth. Apple is at 8%, which is super impressive, but they're kind of flat to single digit growth. Then you have high growth companies like an Uber that still lose money. So it's not easy to find a company that does over a billion dollars in revenue and is profitable and is growing more than 20, and in this case, more than 30, almost 30% a year. So I would argue the air is pretty thin up here. There just aren't a lot of people performing the way Airbnb is. Now, the question is why have shares fallen 20% in the last couple of trading days? I think interest rates hurt a company like this. I think the fear of a recession, when interest rates go up, if a recession comes, people

seem to be ripping through their savings, which means they'll likely decrease their discretionary spend, which you think would probably hurt Airbnb. They took their guidance down, which spooked everybody. And I think the markets are just looking for a reason to hit growth stocks and take them down to kind of more traditional multiples. And while Airbnb is sort of the fastest tortoise, if you will, it also is getting its turn at the woodshed. And I think this shows more than anything that market dynamics trump individual performance. It's hard to find anything bad in these earnings. And yet the stock's been taken down 20%. So it got hit really hard.

Do you think the market reacted incorrectly? I mean, you mentioned that there might be a recession, sort of these macro conditions that could hurt Airbnb. But it also seems like those conditions can hurt any company. I mean, why is Airbnb being singled out here? That's an interesting question. I wouldn't have, the day before earnings, I thought that there was a decent chance. I knew it was gonna be volatile, but I thought it was more likely to be volatile on the upside.

They had record revenue of 2.9 billion. That's up 29%. They had record profits of 1.2 billion. That's up 46%. And also when we look at the earnings call, the transcript of Brian Chesky used the term record five times in his earnings call. And the fixed costs are lower due to COVID restructuring. He had a great line. He said

that we've gone from being the Navy to the Navy SEALs, a small, lean, elite group. I thought that was fantastic. I thought the markets were going to like this earnings call, but they didn't. Now, the marketing costs are low. More than 90% of customers come directly to the site. I think this is a huge overlooked attribute of Airbnb, and that is Meta and Google essentially have a stranglehold on anyone who wants to acquire customers online. You have to go through them. They pit you against each other in this genius bidding and auction format such that sometimes Meta and Google get 30%, 50%, 60% of the margin for a new customer.

And what has Airbnb been able to do? They've been able to escape this stranglehold. People go direct to the site, Airbnb, so they don't have to pay this toll for 90% of their business. The result of that is that their margins are much greater. They have 41% net margins. Expedia has negative margins. They had a loss. Booking.com had 20% and Marriott had 13%. So Airbnb has triple the margins of Marriott. And it's largely because they are online, but don't have to pay these massive kind of monopoly-like toll booths. They also have incredible cash reserves, $12 billion in cash versus $8 billion in Expedia. Bookings.com also has $12 billion. Marriott just has half a million. Now, a lot of this,

you asked about why it's come down. Airbnb, by many metrics, looked expensive. Its price to sales was about 10x. It's probably down to 8 or 9x. Bookings is at 5x, and Marriott is at 3x. So what you have is a bit of a normalization where the people have said, okay, Airbnb is an amazing company. There's no denying that. But should it be trading at twice the multiple of Bookings and three times Marriott? And I think the marketplace has said, no, it deserves a premium, but not this level of premium. But I really like it here. I'm not selling any stock. I already think that Airbnb is the best brand in the history of travel and hospitality. And I don't see, who's the number two to Airbnb? What is it, VRBO? It just seems like every number two is a distant number two. I like the leadership. I like the margins. I like the

growth. They're profitable. I like the fact. I like the margins. I like the growth. They're profitable. I like the fact they've exited the stranglehold of Google and Meta. I'm just, I'm very bullish on the company and it remains my biggest investment. So do you feel like it's undervalued right now? I don't know if it's undervalued because that multiple is still pretty strong. What I am comfortable with saying is I like it as a long-term hold. I think to own the biggest and best profitable company that's growing 30% a year,

I think eventually those metrics or those numbers grow into the valuation and take it up from here. So, you know, don't do as I say, do as I do. I'm still holding. It's still my biggest position. I haven't sold any. You also mentioned that $12 billion of cash on the balance sheet.

Do you think that they'll do anything with that? Do you think they'll reinvest it in the company, maybe a stock buyback? Do you think that maybe they'll acquire a company? I would bet they use it for stock buybacks. The more interesting question would be, will they make an acquisition? What is to Airbnb what Whole Foods was to Amazon? And that is, would Airbnb ever go vertical? Would they ever acquire another hotel company? Because there's a large segment, a large, very profitable segment, mostly business travelers, but also people on vacation that want a hotel, want the amenities of a hotel. So do they add those amenities in to an Airbnb experience, no matter what they're doing?

Or do they acquire some kind of sole purpose or single purpose properties known as hotels? I think it'd be really interesting for them. I would predict in the next two to three years they make an acquisition in the physical hotel space. We'll be right back after the break to look at Uber's earnings and check in on the Chinese markets. The Capital Ideas Podcast now features a series hosted by Capital Group CEO, Mike Gitlin. Through the words and experiences of investment professionals, you'll discover what differentiates their investment approach, what learnings have shifted their career trajectories, and how do they find their next great idea? Invest 30 minutes in an episode today. Subscribe wherever you get your podcasts. Published by Capital Client Group, Inc.

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Ready, set, grow. Go to ConstantContact.ca and start your free trial today. Go to ConstantContact.ca for your free trial. ConstantContact.ca. We're back with Prof G Markets. Let's move on to Uber. Uber also had a really, really good quarter. The company posted $8.3 billion in revenue. That's a year-on-year increase of 72%. It also registered $1.2 billion in losses. A year ago, that number was $2.4 billion, so that's a big improvement. And unlike Airbnb, the market reacted well. Uber shares jumped more than 10% after the earnings call. What do you think of Uber as a company right now?

Uber's always been the company that's more promise than performance. And that is, it's never been profitable, but it looks like the light at the end of the tunnel has been illuminated again and it's brighter than it's ever been. And when I say the light at the end of the tunnel, that is the prospect of it becoming a profitable company.

Revenues, as you said, up 72%. Net loss cut in half. Every time we were doubled in revenue, its losses kept pace with its revenue growth. It wasn't getting any scale. Here we see the net benefits of scale, that the company's growing 72%. And as a result of that growth, it's able to spread its revenue across a fixed asset base, which means more is flowing to the bottom line or at least reducing the negative bottom line. And we saw their loss get cut in half. $512 million of the net loss was attributed to revaluations of Uber's equity investments and other ride-hailing companies, specifically China's Didi and Southeast Asia's Grab Holdings and self-driving startup Aurora Innovation. So if you net those out, it really lost around $700 million. Now that's starting to feel like a company when it does $8.3 billion, that's about 10% net loss,

that if they can grow another 72% year on year, there's a shot they go profitable. And that's what the market's looking for. Its gross bookings are up 26% year on year. Its monthly active users, 124 million, was up 14% year on year. Their freight revenue was 1.8 billion. That's up from 400 million a year ago, growth of 350%. That's impressive, mostly due to the acquisition of Transplace, a freight company. Its market cap is $56 billion. Lyft's market cap is $5 billion. The most obvious observation, the easy layup prediction here, Ed, is that Lyft will not be an independent company within the next 12 months. Either Uber acquires it or another company looking for super app status, or maybe an automobile company that wants to go vertical into ride hailing, like a General Motors maybe thinks we can, for $6 billion, buy Lyft.

And then we have kind of this vertical autonomous driving or vertical ride hailing company that just buys GM cars as a means of showing off our new electric vehicles. The obvious one here, though, is if the DOJ would clear it that Uber acquires Lyft. Lyft should not be an independent company. And every day that goes on,

its valuation is probably going to go down. You also mentioned their freight business. Here are just some numbers that I thought were pretty crazy. Lyft should not be an independent company. And every day that goes on, its valuation is probably going to go down. freight was 21%. In the same quarter last year, freight only made up 8%. So it feels like this is a pretty massive business now. And maybe this is why Uber is suddenly on this path to profitability. What do you think of that unit of the freight business? Well, I think some of that was because of the acquisition, but it's really interesting. About 10 years ago at DLD, I got pilloried because I said that I thought a competitor to Amazon was Uber, that the big advantage of Amazon was last mile delivery, and that Uber would ultimately leverage their infrastructure and get into that.

And it looks as if to a certain extent they are. And my friend Richard Kramer would say, who's the media and tech analyst, would say that Uber is a platform for connecting buyers and sellers. Right now, it's mostly people who want to hail a car and drivers who own a car, but they're also getting into freight, right? They're also getting into people who want to buy food from a restaurant and have it delivered.

So this was a staggering quarter for them. There's just no getting around it. And I've been very critical of Uber. I hope that they continue to get hit hard for their classification of workers. Their workers should be classified, in my view, as employees. The good thing about this, or the hopeful thing about this that should help Uber and make it less of a mendacious company is that prices have gone up and they have pricing power, which means they can pay their drivers more, which maybe means that

a driver, when you adjust for the maintenance and gasoline, isn't making less than minimum wage and that Uber isn't using software and preying on people who may not have many other employment options to pay them substandard wages. So I see Uber is less mendacious than I used to. Now it's just mendacious with a small M, not a capital M. China's factory activity declined in October due to the government's tight control on COVID outbreaks. The Purchasing Managers Index, which measures factory production, employment, and inventory, fell from 50.1 in September to 49.2. That might not seem like much, but any reading below 50 indicates that these activities are contracting. And despite that troubling drop, President Xi Jinping has doubled down on his zero COVID policy. During China's twice-a-decade National People's Congress, Xi Jinping said

that China was waging a, quote, all-out people's war to stop the spread of the virus. He also made no mention of how this was all stifling economic growth or its impact on the markets. Scott, what do you make of this? What's interesting is if you look at the Chinese stock market, all right, it's off 34% year-to-date versus the Dow off 12%. The Hang Seng is the second worst performing major global index after Russia's. And in the average forward PE ratio of stocks in the S&P 500 is 15 times versus the Hang Seng at five times. And essentially what the CCP and Xi have said is that we've, I think, we've looked at America and we've looked at these individuals who amass so much wealth, they become more powerful than government. No to that. We look

at companies that collect a ton of data and have more insight into consumer patterns than we, the government. No, we're not down with that. We look at entire sectors that may be helping just rich people, such as the tutoring industrial complex. No, we don't like that. And they are willing to kneecap the markets and even dampen their own economy if it means putting what they believe is the right version of their society first, which oftentimes includes control or command and control from the CCP. So it's just interesting that we're all about dollars first. We're all about the markets first.

And the CCP has said, no, we're all about China slash the CCP slash the middle class first. I think it's fascinating. They're sort of decoupling, which is a little bit dangerous for us. Relationships haven't been this cold and frosty with China in a long time. And some of that is they appear to have disentangled from this Western capitalist focus on the dollar and economic growth model at any cost. So the test of time will tell whether it was a good or a bad move. In the short run, it's bad for the world because US-Cino relations

are at a low. And when the two largest economies in the world get cross-eyed, it's not good for anybody. Okay. Thanks, Scott. Let's take a look at the week ahead. We've got earnings from Lyft, Disney, Rivian, and Roblox. And we're also watching the midterms on Tuesday and inflation data for October on Thursday. Do you have any predictions, Scott? Well, we already made our prediction. Lyft is acquired within the next 12 months. It makes no sense as an independent company.

And just as exciting, my Deadpool 2 costume came today. Everybody tells me I look like Ryan Reynolds after he survived a horrific fire, but I'm excited about that. So my prediction is definitely next year in exactly 11 months, three weeks and two days, I will be Deadpool. That's all for this episode. You can find an unfiltered version on YouTube each week. Our producers are Claire Miller and Jason Stavros. Special thanks to Catherine Dillon, Ed Elson 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. Thank you. 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.

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