We Study Billionaires - The Investor’s Podcast Network - TIP234: Mastermind Discussion 1Q 2019 (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey, how's everyone doing out there? On today's show, we have reassembled our investing mastermind and have new stock picks for the first quarter of 2019. Since the last time that we've talked about the stock market, it's had a very strong drop and an equally strong recovery. The purpose of our mastermind discussion is to demonstrate to the community how we think about different investing ideas.

Starting point is 00:00:23 Some of the picks that we talk about are not selected for investment, while other times they are. The thing we really want listeners to walk away from the conversation is the methodology and the questions that the group is proposing to troubleshoot assumptions and identify risks associated with different investment ideas. So with that said, here's our discussion with Toby Carlisle from the Acquireers Multiple and Hari Ramachandra from Bits Business. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you in formed and prepared for the unexpected.

Starting point is 00:01:10 Hey everyone, welcome to the Investors podcast. I'm your host, Preston Pish and, as always, I'm accompanied by my co-host, Stig Broderson. Like we said in the introduction, we're going to be doing the mastermind discussion for the first quarter of 2019. And we have our good friends, Toby Carlisle and Hari Ramachandra here with us. And guys, welcome back to the show. Excited to hear your picks. Hey, happy to be back. Looking forward to it. Thank you. Like we always do here, we always try to figure out who's going to be the first.

Starting point is 00:01:36 victim in the queue. So do we have any volunteers? And if not, I guess I can go. Yeah, why don't you take it away, Prest. Oh, boy. I anchored that one. So last time we were on the show, I want to start off by talking about the last time we were in the mastermind. I made a bold call with a short on the S&P 500. As ugly as the, what is it, like a 17 to 18% bounce that we've seen since Christmas Eve. This play worked out fairly well for me because I offloaded some of the position there at around the Christmas. Literally the day after Christmas, I was up quite a bit. I'd say 15% in the position or something like that. I took a little bit of money off the table. And as it kept coming back up after that point, man, it was painful to watch a bounce.

Starting point is 00:02:26 I was expected maybe a 5 to 10% bounce on the S&P 500. But it came back and literally went back to my entry point. And at that point, I literally sold the remaining position that was still on there. So although I made a little bit of money on the position, I can't say it was, it was like a cash cow by any means. But man, you don't fight the market. I've learned that. I did not keep the position on after it sort of went past my entry point. So just kind of an interesting experience. I think I was a little lucky when I put it on and was ahead in the position and it was easier to kind of keep it on. And then after We had such a huge movement. That's just how I was playing it, especially because it was assured I took some gains

Starting point is 00:03:05 while I had them. And unfortunately, I don't have the position, even though I still have a bearish sentiment across the market. With all that said, I'm here to pitch a new stock pick. And, man, this one, I sent a message to the guys really late last night. And I said, here I am. It's late. And I'm recommending a retail company that we have recommended in the past.

Starting point is 00:03:28 And it just, it does not feel right to recommend this company, but I'm going to do it anyway. Bed, Bath, and Beyond. We have talked about this pick multiple times on the show. Every time it comes up, it just sounds uglier and uglier. When I look at this pick from whenever we talked about it the first time, the price has come down tremendously. It's at around $16.70 today. the thing that I am impressed with with this company, there's some things that I like and then there's some things that I don't like. The thing that I like is that the revenue has not

Starting point is 00:04:04 gone down when you look at the top line of the company's performing. This company's still banging out $12 billion a year and it hasn't gone down. When you look at, let me just spout off some numbers here. You go back to 2014. They were at $11.5 billion the year after that. They were at 11.8, the year after that, 12.1, 12.2, 12.3. The last 12 months are at 12.4. So when you look at the company's ability to keep earning revenues, they're definitely not growing, like, in a major way. If anything, they're just sustaining what they've got. But what I really like about the company is they're still kicking off decent cash flows. I would argue that the last year was probably not one of their best, but they're still kicking

Starting point is 00:04:49 off very meaningful cash flows. And whenever I go in and I do an intrinsic value on this, and I mean, my intrinsic value assessment is extremely pessimistic to the point where I have factored in that the free cash flow is going to continue to diminish by negative 5% for a majority of my estimate. 80% of my estimate was that the cash flows were going to go down by 5%. So with this negative of trending free cash flow model that I've come up with and the price that you can buy this for at $16.69. I'm getting an IRA and I hate to say this, but I'm getting an IRA over 15% on this. And that's extremely high with a very pessimistic view of the future cash flows on it. That's kind of my narrative on why I think that this is going to perform better than cash.

Starting point is 00:05:42 And if we look at how Buffett's allocating a lot of his investments these days, almost everything's going into cash. So this is my bold call for a retailer. The last thing I want to talk is the trend or the momentum on the company. When you look at the momentum on this one, you're really starting to see what appears to be price stability. I'm not going to say that you're out of the woods yet here on this one. But I think when you're looking at the price momentum, typically the volatility on this is

Starting point is 00:06:10 around 20%. If you're looking at the volatility over an annualized basis, it'll move around 20 to 25%. And when we look at where the price kind of bottomed out, it hit like mid-10 range, like 10-50-ish, somewhere around in there. And now it's at $16.70. It hit that bottom. It looks like December 17. So right around the Christmas time frame is when it bottomed out at about $10. And so this thing's already up 60%. since December. That was like a really, I mean, you've seen the market bounce 17%. This thing's jumped nearly 60%. And so I think that that's a pretty strong bounce above the volatility range. So I'm saying that the momentum and the trend might be seeing a break. So with that said,

Starting point is 00:06:59 I'm very curious to hear y'all's comments. It's just way too cheap. Acquires multiple of about five for something that's got revenue growth like that. Yeah, I really like it. I think it's a I think it's a good pick. You know what's painful for me is Jesse Felder. I was talking to Jesse. I want to say like December time frame. I can't remember when we had our conversation. But he brought up this pick again.

Starting point is 00:07:22 And it had completely dropped off my radar from whenever we were talking about on the show. Because when we talked about it last, it was a screaming buy. I mean, it was, in my opinion, it was a great buyback whenever we were talking about it on the show. And then the price, just the market was saying, nope, it's going lower. And sure enough, it did. And so when Jesse had mentioned, mentioned that he was buying it back in whatever it was, December, November or something. I was just like, oh, this company just continues the abuse everybody who talks about it. And here I am

Starting point is 00:07:51 talking about it. Sure enough, you look at when Jesse entered this thing, he's already up 60% in like a month. So Stig, I really want to hear your thoughts on it because I know you've played with this thing before. Well, I sort of played with it. I used to own it back when it was in the 60s or 70s. And I think by purely by chance, some divine powers, probably Jesse told me to sell it because even though that the numbers looked good, it was not. I think I pitched it back in 2017, something like second quarter. We'll just make sure to link to that pitch in the show notes.

Starting point is 00:08:23 The stock was trading in the low 20s. For me, that was just so obvious to buy that. Luckily, we're accompanied by some smart guys. Jesse was like stick minus 5 or minus 10. whatever I put into my sheet, it was like, no, this is not a good business. But you know, it is an ugly business, but the price is so good. Oh my God, the price is good. So this is just the balance that here we are looking at. If you look at some of the numbers that you also punged out Preston, you know, the top line around 12 billion, you would expect that to slide.

Starting point is 00:08:54 But what we have seen with retail and almost everyone in retail is that they have lower margins. And the same is the case for Bethbeth Beyond. So if you go back to 2016, the revenue is $12.1 billion. Trading 12 months is 12.4. But today, the operating margins 4.4 was it was 11.7 a few years ago. There are a few reasons for that. One of the reasons is that to sustain that revenue, they're providing more and more discounts, typically informed from coupons. That's kind of like I heard them. And then they have been doing a massive investment in North Carolina and the data centers because they are slowly moving into e-commerce, which they're not doing that well and where the margins are also lower. I was doing some of the numbers too, and I think I was even more pessimistic

Starting point is 00:09:38 than Preston. I think it put in minus 10 and even allow for minus 20 in my model. And it still looks like a decent pick. Even if you do that, which is like minus, I think I have like 12% return or something. So there are quite a few things to be said about that. Perhaps we're doing the calculations wrong. Perhaps it's not a, if I had to play devil's advocate, it's not a minus five, it's not a minus 10. It's not minus 15. It's a company that will experience negative cash flows. I think what I don't like about BethBeth Beyond, and obviously, whenever something is trading at, the price Beth, Beth, Beyond is at compared to the earnings. There is always something wrong. I think the management of the company is something I am quite worried about. I think they're compensated

Starting point is 00:10:22 massively and they have been for quite a few years. I don't think they have performed and they're still making a ton of money. There's just a few weird decisions in terms of capital allocation. Back in 2015, when they took on $1.5 billion in debt, why were they doing that? And then they started to paying out dividend at a time where they should be buying a lot more stock. It seems a bit silly the way they've been allocating the capital over the past five, seven years, which is just more like general concern about the management. I can easily see why Preston would pitch this. I mean, it is a very, very attractive pick. And I don't know if it's a value trap today. Your discussion about the margin, I think, is really the key point that if you're looking just

Starting point is 00:11:03 at the top line, it's going to be like, oh, well, it's, it's hanging in there. It's still doing good. But you're not talking about all the extra marketing dollars, all the things that they're doing that's chewing into the free cash flow of the business relative to three or four years ago or five years ago. It's taking a lot more effort and a lot of friction for them to continue to generate that top line. And I think that's maybe why it's been penalized so much in the last couple years. And I think it's yet to be determined whether this trend continues to persist. Maybe we're just seeing a quick bounce in the price because maybe the selling got ahead of itself. And maybe the trend is that the price is going to keep getting punished moving forward.

Starting point is 00:11:41 I don't know. I just think that it's something that is worthy of assessment for somebody else out there to kind of dig into the financials. Come up with your own assessment of whether you think that this trend is going to override the current balance that we've seen in the price since December. I find it interesting, and I think that the momentum is just a little bit different than when we looked at it previously. I'm assuming that this is not a long-term recommendation. I'm just wondering about your timeline for this. I don't know how to answer that. I mean, when I look at it and I look at the revenues, if the revenues weren't growing, I probably wouldn't even recommend the company. And I can't even say that they're growing. I'd say that they're remaining flat. So I think that's what

Starting point is 00:12:20 makes this so tricky is you're seeing them devour their margin, okay, and the trend on the margin is not good. I think the next thing that you're going to start to see maybe start trending in the negative direction is the revenue. So that's where it's really hard to be able to say whether they're out of the woods or not. I don't know, Pari. So last time whenever we discussed this, and Toby, I'm sorry to put you on the spot here. I think you said that you put that in a basket of very, very cheap stock. So it was not a qualitative assessment, so much of Bath Bath Beyond, more that it would be a mean reversion type of bet. You put in with all the retail picks for that matter. Something like Bed Bath and Beyond that it's left in the bargain pile. The revenues

Starting point is 00:13:04 are still pretty good for Bed Bath and Beyond. So that's a positive in its favor. There's clearly some discounting going on to get people, you know, that's because it's much, much easier to buy everything on Amazon. But it is very, very cheap on the sort of multiples that I like to look at. So it's one of those things that I would put it on as a small position and not worry about it too much. Just look at it in a quarter or a year and you'll probably find that it's had a little bounce. Reassess it then. Sell your loss at that point. Is that what you're saying? Crystalized a loss in December.

Starting point is 00:13:33 It's such a tricky thing to figure out. One of the things I was pretty excited about was whenever they wanted to enter e-commerce and invest all that money into it. And it just didn't seem to have panned out. And I'm not really sure where the strategy is or what they're. can do? I mean, I know what the strategy is. I just don't think that their new e-commerce strategy is really going to make a lot of sense. Why would you be able to ask BethBathion to compete with Amazon? They used to have that mode, and perhaps you might argue that still do,

Starting point is 00:14:00 in terms of breaking mortar. Amazon is coming to that. They have close to 600 fiscal locations now, and it's all better data-driven. So it's not only the online part of it, but also the offline part of it. They have all the data they need in terms of making their best stores, which it just don't see BethBeth Beyond keep up. Another thing, and I know I'm not. I'm just, just not the target group here, but it's not a good experience to enter a store. I even went into one with Preston. I always feel like after I go there, I kind of feel like I'm getting ripped off or that I'm paying a higher price than what I could get somewhere else. And it's always, anytime I have gone there, it's because I needed whatever it was I was getting that day.

Starting point is 00:14:38 And I would also say, I think a lot of people go there for bedding. They go there for something that they kind of need to see instead of ordering online. I don't know. I, the numbers, I just cannot get over the numbers when I'm looking at the intrinsic value and I'm using such a terrible future cash flow and I'm still coming up with 15%. It's like, holy moly. I'll make sure to link to the episode where we pitched it. And we also created a stock analysis, I think was back in 2018, about Beth Bath Beyond. You can take that out also. We're also going to link to that. Everyone can sign up at tipemail.com if they won't like these to be sent directly. All right, guys. Any volunteers? I'm happy to give it a lash. I'll let you guys laugh at this one.

Starting point is 00:15:23 I was running my screens and the thing that really stands out to me is how many steel companies have popped up in the screens. And it's a pretty long list. US steel, Arceloomatal, ternium, new core steel dynamics. And so I went through and I found my two favorites out of that list. And there's a, I'll talk a little bit about steel and why these two in particular are my favorites from that list. So my two favorites are new core, N-U-E and steel dynamics, which is SDLD. I'll just start with steel dynamics because it's the, in my opinion, it's the cheaper of the two, but it is also the smaller of the two. Let's start out first. Steel is an incredibly cyclical business that moves around a lot. And if you look at the steel prices at the moment, they do look like

Starting point is 00:16:07 they're at the higher end of the range than at the lower end of the range. So that might give you some pause. The other thing to mention is that at the moment there's this, the trade war is going on. And that's a 25% tariff that's been slapped on Chinese imports about a year ago. So I think that that might start turning up in the financials sometime soon. So the reason I like New Corps and Steel Dynamics, partially it's because I think the downside is a little bit more protected than other companies like US Steel. are saw or metal. The main reason for that is that new core and steel dynamics use these electric

Starting point is 00:16:42 arc furnaces, which is technology that basically uses the electricity to make steel. So they use smaller mills, the blast furnaces, a little bit less efficient at this at lower level. So I think they can basically they can turn the on and off more easily. So if the steel cycle goes down, then there's a little bit of protection there. The two companies that I like, particularly steel dynamics enterprise value is $9.7 billion. Market cap is $8.5 billion. So there's a little bit of debt, modest amount of debt in their new core is a little bit bigger. It's enterprise value around $21.7 billion market caps about $18 billion. Both of them are trading on acquires multiples. New core's on about 6.4. Steel dynamics a little bit cheaper at about 5.5.

Starting point is 00:17:29 Both the balance sheets look really good. Lots of free cash flow at this point. I think it's just, it's a way to play any sort of, if a whole lot of infrastructure, spending comes in. I think these two are going to perform very well. I think they're undervalued where they are right now. So I don't mind a little basket of steel stocks. New Corrin Steel Dynamics being my two favorite. But you could also look at US Steel, Arsenal Mattal, Turney and various others that I mentioned there. That's my macro pick. That's what I was thinking. I was like this is a very macrocentric play here. Is your expectation that these prices are going to keep going up? I'm assuming. At the moment they're priced, they're all priced at the very lowest multiples that they have had over the last decade or so.

Starting point is 00:18:13 It's low multiples on peak earnings or high earnings. I appreciate that. So that's the risk that everybody sort of assumes that there's going to be pretty significant downturn here. So if the five-year average, and that's true for all of its ratios, just cheap on a ratio basis relative to its price sales, 0.75 versus 0.8 for its five-year average. So the question is, if the steel prices sort of maintain or rise from here, then these are going to be way too cheap. If still prices go down, then these two are the better ones to be in because they're going to be able to, it's a cyclical business and they can, you know, sort of switch off their mills, which gives them some protection on the downside. Could you talk to us a bit more about the trade war? You talked about this terrorist that was about to be imposed.

Starting point is 00:18:55 And is that even a competitive advantage, giving that you have so many steel producers in China, some of the biggest in the world, and typically state-owned. And it's so important for the Chinese economy that just keep on producing steel, whether or not they need it. How can I look at this trade war where we look at right now? That's a great question. I don't think there's any competitive advantage in these businesses, their commodity businesses. It's just a matter of being reasonably priced relative to where their operating income is right now. now. And my view that steel prices probably maintain are a little bit higher than this in a year or so.

Starting point is 00:19:32 I was curious to know, are these picks based on just valuation or based on their location in terms of where they're headquartered because of obviously the trade war because there are companies like Costco, which are not in your basket. So I want to understand how you are picking them. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the high of the somber. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is

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Starting point is 00:23:48 Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. I was using the acquires multiple screens. If you look at the screens that they're filled at the moment with these steel and steel input type companies. And so when I see a whole industry and its inputs getting cheap, I think that's interesting. I think that means that there's some potential for something to happen there.

Starting point is 00:24:16 You know, something that I'm seeing that's interesting with this pick, Toby, is you You've seen the top line increased by a substantial margin in the last four to five years. And through that same period of time, their operating margin has also gone up, which typically you're not seeing, and just to kind of put apples to apples here, in 2015, the operating margin was 6.8. And today, it's at 13.7%. So, I mean, you've practically doubled the operating margin as the revenues have grown tremendously over that same period of time. They went from 16 billion to 25 billion. So that's not something you typically see, I don't think, with such robust growth on the top line to see the margin go with it. Is that something that specific to the steel industry?

Starting point is 00:24:59 Yeah, I mean, steel prices are up a little bit over the last five years, although they're down over the last, like close to year, six months. That might be, it's a short term sort of, that's the risk of something like the way that I do my valuations, that the underlying is just not sustainable. We go back to pricing. It was more like in 2015. when the entire steel industry was really struggling. At the moment, I think they're cheap based on where the steel price is. I've got no real view on the steel price other than there's tariffs and some plans for infrastructure spending in the States. Just one way to capture that. And just so people know, I was in my mind, I was looking at New Corps and I was just talking the

Starting point is 00:25:36 numbers and I know you had recommended multiple things, but the numbers that I was quoting there, just so people know was New Core, N-U-E is the ticker. Or Steel Dynamics, N-U-E or STLD are my two favorite. All right, Stig. I'm kidding. curious to hear about your pick. My pick is Alibaba, Tigger is B-A-B-A, traded as an ADR in the States. And it's a huge Chinese conglomerate. The market cap is $480 billion. So it's just massive, just to give you some numbers. Apple is 850, Amazon 800. Facebook actually is slightly smaller at $460 billion. So it's a massive company. And most of that revenue comes from e-commerce. And is primarily in China.

Starting point is 00:26:20 The market share is 58% of all online retail in China. They really have a dominant position there. Other than that, they're also known for Alipay. Together with Tencent, they are doing all the mobile payments, more or less, in China. That is through a company called Am Financial, which is the Fulian company of Alibaba, its own 33% of Alibaba, and it's controlled by the founder, Jack Ma. It's also the highest valued FinTech company in the world. twice the size of Goldman Sachs, just to give you an idea of how massive it really is.

Starting point is 00:26:52 Another very interesting segment is the cloud business. I know we're going to talk more about the cloud here later with Harris Pick also, but it's a very interesting business unit that Alibaba is investing heavily in. That's also why we see some of the hidden in the margin. Elibaba is already the fourth or fifth largest globally, depending on how we mentioned it, after Amazon, Microsoft, IBM, Google, but by far the largest Chinese provider. Very interesting, especially now that we can expect China to go into the cloud as well. And we saw this grow with 84% year over year. Very, very interesting that we might go back to later.

Starting point is 00:27:30 Talking about the industry and business model, Adibaba is typically referred to as the Amazon of China, which is partly true, but not quite. It's primarily selling through Taubow, the site Taubo. It means search for treasure. It's probably not a very known site in the West, but it's the largest. in China, and it's the ranked, the eighth most popular website in the world. So there's massive traffic there. It's launched in 2003, and there's just hundreds of millions of products and services from millions of sellers. The interesting thing is that Taaba doesn't charge transaction fees and

Starting point is 00:28:04 is free for merchants to join. The way that Alibaba makes money is through advertising and different features to boost sales. For instance, you can message the vendor directly through Alibaba's system. If you look at some of the competitors and threats, you might say that Alabama has close to no threats, giving the size. Just to give you, in comparison, you know, Amazon claims up towards 50% of all online retail in the US. I would say that they do, or at least they can expect to get into trouble.

Starting point is 00:28:37 Primarily from Tencent, the other Chinese huge conglomerate. We had John Huber from Basit investing, who pitched that not too long ago, and we will make sure to link to that episode. Tencent is slowly moving into the retail space, not only through the stake that they have in Jadj.com, which is 16% of Magistia in China, but simply just through their size. You can kind of compare this to the states where, you know, back in the day, Apple did this, Facebook did another thing, Google did a third thing, and now they're slowly starting to compete with each other, like in the same space.

Starting point is 00:29:09 And we see the same thing with Alibaba and Tencent. So for me, that is the main threat. The other reason why I'm saying that is I think that data is really going to be the key in the decades to come. Data is the main drive of AI. You have no other country in the world has more data than China and no other companies in China than Idaaba and Tencent. So I think that those two companies are going to compete on the retail market. Amazon China is less than one percent market share and I think it will be very difficult for a Western company to compete in China. Quite a few companies have tried and failed. If you talk about the mode. One of the modes I would like to talk about is that Adibaba has sort of its own universe. You don't go to Alibaba to something else. It's not like what we have in the States that you have a Facebook's app and you can get that through Apple or through Google. No, it's the own closed system. To give you an example of that, Baidu, which can be preferred to as the Google of China, so it's the China's leading

Starting point is 00:30:09 search engine. Adibaba purposefully blocks Baidu spiders from indexing Taubal. So it It doesn't display in the search rankings. You might be like, that's stupid. Why wouldn't they that exposure? But it's simply to force people to start everything on Alibaba's website. I think it would be very difficult for Amazon to do to Google, but it has been a successful strategy for Alibaba. Another type of mode that's being highlighted is that it's much cheaper to retain software engineers

Starting point is 00:30:37 for Alibaba than it is in Silicon Valley. And I think those are actually companies that are competing with. They're competing with Tencent and they're competing with the American conglomerates. Even though we talk commerce, that's really where the next battle is going to be. Talk about cloud, video, streaming, whatever you want to call it. It's a very interesting thing. They have a very different cost structure, primarily because the input, really the labor is much cheaper. It's ten times cheaper.

Starting point is 00:31:02 And they even, to make sure that they can retain their employees, they're not in Beijing, they're not in Shanghai, they're in Hangshu. That was purposefully done by Jack Ma, so he wouldn't lose his best employees, because there are not too many competitors around. Talk about valuation. This is tricky. I have been looking at Alba for quite some time, and it pains me to say that while I've been looking at Alibaba,

Starting point is 00:31:24 the price is just starting to climb leading up to this mastermind meaning, which obviously also means less return. I did manage to take a position, luckily, but not with as much as I wanted to, because the stock is right now trading just short of $184. If I put in my inputs here, most likely scenario, 15% growth. I also assign 20% probability to 30% and to 0% if I'm negative. I get around 9% expected return for Adibaba. I know that 15% sounds extremely generous. Just like to highlight the growth on this company. It's just massive.

Starting point is 00:32:03 We're looking at more than 50% here from 2017 to 2018. 58%. 58%. and the year before was 56% growth in top line. It's absolutely amazing. But guys, I'm ready to get beaten up, especially about the price and my growth assumptions here. That's the first thing that occurs to me. You said a 15% growth rate gets you a 9% return? Yes.

Starting point is 00:32:27 That's just my bias, as always. That makes me very nervous. So just full and frank disclosure, these sort of companies are going to be always too hard for me to kind of get any view on because I don't trust really high growth. That's just a bias of mine. So you can take all of my comments with a grain of salt, just ignore them all as they come through. The other thing that always makes me a little bit nervous about Alibaba.

Starting point is 00:32:46 And I've looked at this a few years ago, I haven't looked at it more recently, but they score close to manipulator on the Benisham score, which looks at earnings manipulation. And then if you dig into the filings, which are always a little bit odd, they create huge numbers of subsidiaries, which I just don't really know. I think they create a subsidiary at a rate faster than one a day, which just seems to me like, I get it's a very big business, but it's just a way for a. to create sort of some accounting shenanigans if your intentions are bad and if their intentions are good, then it just kind of complicates the financials. So those are my two comments,

Starting point is 00:33:17 just that the growth rate is very, very high and the financials are a little bit opaque. So in a country like China, do you think that some of that stuff even matters, Toby? Because whenever I'm looking at this, I just, in my mind, and a lot of it's based on the events that have kind of unfolded more recently with the Yahweh company in the U.S. with the mobile company and seeing how the government responded to the CFO of that company getting held in Canada. I just, for me, when I'm looking at any type of large cap and you can't get any bigger than Alibaba and China, when you're looking at a large cap company in China, I see it as just total complete indoctrination with the government at this point, this business. People at the highest level are borderline government officials.

Starting point is 00:34:07 This is an arm of the government as far as I'm concerned. And when you look at the growth rate on the top line revenue, I mean, the thing's exploding, like Stig said, 50%. So can we as investors treat our analysis of this company the same way as looking at an Apple or a Google here in the United States where you don't necessarily have that complete buy-in from the government. I just think that it's an advantage personally for ownership of this business as an outsider. I agree with what you're saying that the earnings or whatever numbers they're producing might be manipulated, but it's kind of like, so what? What impact

Starting point is 00:34:52 is that actually going to have? Maybe that's a strength instead of a weakness for owning it. I think it's an interesting point you bring up. I think for most investors out there that might be thinking China, no, it's too risk because it's China. And I'm kind of like side with Preston here. I don't know if it's good or bad. If anything, I think it's a good thing for Adibaba. And so please allow me to elaborate on that because it might seem a bit odd. I read through this interview with Kai Fu Lee, which is very interesting person. He used to be CEO of Google China. And he talks about the competitive advantage of being one of those big Chinese conglomerates. And he's saying in the States, everyone talks about antitrust. You don't have that here. Not the

Starting point is 00:35:33 same way. Talking about the opposite. Yeah. So it's like, it's not like, oh, we're going to break this up into like five different companies. You're making too much money. No, that's not what's going to happen. If that's not what the government wants. It's sort of like a protection here.

Starting point is 00:35:45 And I think Google also experienced that whenever they tried the first time to go to China, I know they're trying here again. It's just very difficult to deal with the authorities. Let me just give you one simple example. Sites that are hosted outside of China, they're slower to load, just by definition, compared to Chinese companies. To me, that's just very interesting. I think if anything, it might be an advantage.

Starting point is 00:36:07 It's a Chinese company made by Chinese for Chinese people. I think that is bound to be an advantage, if anything. And perhaps it doesn't matter, but I don't see that as a disadvantage. So I really like your comment about perhaps we can't use our conventional thoughts in terms of thinking about the risk of a company like this. We're through the looking glass, fellas. We're not using conventional metrics anywhere. Look, I have no real view. I think it's very, very expensive. So the only way you justify

Starting point is 00:36:37 that valuation is if you have very high rates of growth. It seems to be delivering very high rates of growth, but I have a little bit of trouble with the financials. But I've been wrong on this for a long time, so my two cents aren't worth much here. Toby, please don't get me wrong. Whenever I say conventional measures, it's in terms of private policy, for instance. You know, it's a big deal for Facebook in the States. It's only an advantage for a debaba, and there is no criticism in terms of how much data they have in terms of the customers. So is that what I mean about the conventional metrics, that it's more, as President said,

Starting point is 00:37:08 an arm of the government. And it's, if anything, it's fueling the growth. It's not stopping it like we would conventionally see in the States. And Stig, I think that your big buying opportunity on this one was back in December. The price had come off significantly from its high. I think what was the high here? Let me see real fast. It was around $208 in December this past.

Starting point is 00:37:31 December, it went clear down the $132. I would tell you, my expectation on this one is that the revenue just keeps exploding to the upside. I really believe that China is in a boom. This is the golden child of quote unquote capitalism over there. I don't see anything slowing this train down anytime soon. And so what it really comes down to is as long as that growth continues to chug away, it's really the magnitude of the multiple that you're paying and kind of looking at the range of that multiple of what it's performed out over the last five years. And when you're at the lower end of that multiple, I would say this is probably a buying opportunity. And when you're at the high end of that multiple, then maybe you offload a little bit of it to minimize risk or whatever.

Starting point is 00:38:14 But I'm with you. I think that this thing has room to go. Just to give you some numbers on that. So we're sitting here in the States and we're talking about how online retail is just taking over. At least that's the impression that I have. And I think in perhaps a few others, online retail in the States is like 10% of all recently. It's not a lot if you think about it. It's up from 7.3% in 2015 and expect to be 11.1% in 2019. And it seems like it's just growing so fast. So let's talk about China. Back in 2015, it was 15.9. In 2018, it was 28.6. And 2019 is 33.6. Think about that. It's massive. Just the tail when they're getting for people just following the trend. And you don't even, you're not even talking about the amount of the population.

Starting point is 00:39:00 it's coming into an urban setting and all of that. So I think you combine those two things, the point that you're making, and then you just look at how many cities in China are coming into a very modern type setting. It's happening very aggressively. China, for all intents of purposes, is still an extremely rural country, giving the size of development they're in. Like, we're still seeing more and more urbanization in China. And the reason why we really haven't seen that to a full extent is because you can't can't necessarily move from the rural area into the city. You lose your privileges and there quite a few things that the Chinese government put in place so you just don't see all this

Starting point is 00:39:38 flocking to the big cities. Well, one thing in your favor, I did just look this up. Lee Liu, who's Charlie Munger's right-hand man in China, his Himalaya capital management has two holdings, Baidu and Alibaba, and it's like 87% Alibaba. Wow. So that's a conviction bet by a man who should know. It's interesting, you should also bring up by the Google of China, whatever we want to call it. It has the most AI scientists in China by number. They haven't had the best results with AI.

Starting point is 00:40:11 But I also think we like to bring that up. And again, I know I'm quoting Kai Fulie and he might be wrong on this, but he's talking about these seven conglomerates who are just looking to be in a poll position to kind of like crack the AI code. So in the States, you would have Google, Amazon, Apple and Facebook. In China, you have 10 cents, Alibaba, and Baidu. I think this is a bet on AI, really more than anything. And they have so much data on retail. So that's why I'm thinking like, you know, the tailwind just from following general trend

Starting point is 00:40:43 might be, you know, already double digits. But then for them to more efficiently make money based on AI, it's just, I think that's massive. And then I won't say more positive things about Eddie Barber for now. Stig, I think that last point is your strongest point of all. If we're buying into this idea or this narrative that they're totally indoctrinated with the government, so whether you agree with that or not, I think it's important whether you do. But if you do buy into that argument and they are a leading expert in artificial intelligence and

Starting point is 00:41:11 big data and what big data is able to predict through all these neural network models, the government is absolutely nuts to not sustain that relationship or ensure the success of this growth. From what I understand, the government's just completely reliant on understanding everything that they can possibly understand about every single citizen within the country. So what better arm than Alibaba who's processing financial payments, who's basically your entire commerce arm for the entire country for online purchases? The government can't afford to allow this company to fail to succeed. I can say one thing. This is way better than my pick. That's for sure. It's also way more expensive. We're talking about 50% growth rate and not like,

Starting point is 00:42:04 how much is this company going to contract? Yeah, no, I agree, but look at the trend. Look at this trend and my expectation for that trend to change is this is not changing in a year. That's for sure. If this trend does change, I mean, I would say at a minimum, you're five years out from now. at a minimum. I don't know. I like it, though. I can tell you that. I like it a lot.

Starting point is 00:42:28 This was a very interesting discussion, guys. And I see Alibaba a bit differently. What do you see in the prize is what we all talked about. They're indoctrinated with the government. Their massive e-commerce platform. In fact, their revenues are bigger than Amazon and eBay combined today. And their model is different than Amazon, but still they're in the same space. So all that is baked in.

Starting point is 00:42:54 What is the optionality we are getting with Alibaba and also the risk there is I see them more like a venture capital company than just an e-commerce company. If you look at all the investments they make in companies across Asia, they're betting on every startup and many startups, India, Thailand, Philippines, you name it. They have their venture capital arm, which is much more aggressive. Same with Tencent. Tencent won shares in Tesla, for example. That's just a popular one, but they won't part of many companies.

Starting point is 00:43:29 The other part is that that can sometimes backfire, and also that can give you upside that is not seen in price today. So that's the drawback. Unlike, for example, the way Alphabet operates, wherein they also do a lot of venture, but they're more organic. The model that Alibaba and Tencent follow is different. The second thing is, I want to be a little bit skeptical too, even though I drink the Kool-Aid of cloud, big data, everything. What I fear, not just about Alibaba, but in general, is it almost feels like the dot-com around thing.

Starting point is 00:44:03 Like, you know, anything.com, we kind of, you know, suspend our critical analysis for a while and say, no, this AI is coming. They're very strong in AI. and then if they have machine learning or if they have a big data platform, we have to be a little bit careful. I'm not saying that applies to Alibaba, but I'm just in general saying that just because somebody is good in AI, it will translate into gains. Everybody is into AI right now.

Starting point is 00:44:33 Any company you take, they will have AIR within their company. So that's where we have to be a bit careful because we don't know what they're doing. Of course, they're doing a lot of stuff. Like, for example, Ali Pei is also giving us scores to their customers, based on their purchasing habit and based on their transactions and stuff like that. So they're reshaping the way the Chinese society operates. They're really high growth right now. And their growth depends on the growth of Chinese economy.

Starting point is 00:45:02 Their growth depends on how the Chinese economy does in the short term as well as in the long term. If you believe that China might be twice the size of U.S. economy one day, then Alibaba is probably well suited to capitalize on that growth. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust

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Starting point is 00:48:45 skeptical. I think that that's much needed. You know, it's interesting when you said about the venture capital that, well, they do operate like Tencent. They're buying up a lot, but also like to talk about the difference. So Tencent would buy stakes in various companies or even take them more, but they won't really do anything with it. Whereas Al-Baba has a very operating mindset. And I think it's because of the data. But again, I'm not the one to say that Alibaba's approach is smarter than 10 cents or any other. I think that's a very interesting dynamic that they're trying to really include those companies in a different ways than, you know, company like Berksa Holloway, whatever you might say. This is now a part of this data machine that they are doing.

Starting point is 00:49:25 I think you're right then it's a bet on China, but it's also a bet on the world. It's really embedded into Adibaba from the very beginning. Jagmar's publicly stated then 24-hour delivery in all of China. If you've been to China, you would know how insane that sounds. And then 72 hours delivery worldwide. They're already in 200 different countries. Not that efficiently, not the same way as they are in China, but that is definitely the goal.

Starting point is 00:49:50 And also, I think that Toby's right whenever he's talking about. It's difficult to value a company of this size. Like, what's worth? Let me just give you one example. We talked about Ann Financial that owns Allie Pay. They also run the biggest money market fund in the world. One than $200 billion. This is really the go-to place for so many Chinese. They have so many different things that they're doing. I know we're primarily talking about e-commerce, which is really the driver, but there's a good chance that they might start making their money somewhere else. I really like to talk

Starting point is 00:50:24 about the cloud here and throw it over to you. Hari, perhaps you have a comment on, perhaps you want to do your own pick afterwards. But it seems to me, you know, if I'm looking at the cloud and I'm sitting here with my company, I would, you know, I might be considering Amazon, Google, Microsoft, whatnot. I don't think I would ever think about Alibaba. I think there's, there might just be some kind of a, I don't know, culture of barrier there. And I feel that way and perhaps I'm wrong. Is it the other way around also? Like if I'm sitting here in China's booming economy and, you know, it's growing so and so on that fast, would my go-to place, would they just be Alibaba or potentially 10 cents as also starting up cloud? Would I even consider moving.

Starting point is 00:50:58 to Amazon, Google, in your shoes. Is that the way to look at the cloud market in the future? The way I see is most companies in the West will find it really hard to choose Alibaba or 10 cents as their cloud pick, Azure, Microsoft Azure or Google compute, GCP over here. And also, most of the companies would never stick to one cloud vendor. They would always try to diversify just to make sure that you don't have vendor lock-ins. That's my understanding, at least at this current stage. However, the story might be different in Asia.

Starting point is 00:51:33 There might be countries who are more willing to try Alibaba and Tencent's cloud offerings. All right, guys. Well, let's go ahead and transition over to Hari's pick here. Hari, you were bouncing all around on the email. Curious what you're going to come up with here. One of the things that I think, Kristen, you already spoke about it during the beginning of the podcast, that I'm really not so comfortable with the valuations today in any asset class. Recently, I think Harvard Marks has come up with a book in his interviews.

Starting point is 00:52:05 He has famously said that, you know, this is probably one of the longest recovery cycles, almost 10 years now. The time now is to be more defensive. He's not asking us to sell all over stock, but he's saying like, this is a time to think defensive and not play offensive. And the reason I was bouncing around was as an individual investor, today my focus is to protect my downside. I'm not looking at too much of upside as long as I remember a tweet, Preston,

Starting point is 00:52:33 that you had some time back that Fed is mulling over the thought of making quantitative using as a regular tool in their arsenal. And that always makes me nervous holding the cash. It's like the inverse of buyback. We are holding a stock. So as an individual investor, since we are only talking about equities in this mastermind, so I thought I want to take a pick that satisfies the following criteria. Number one, it has a reasonably strong moat and a proven track record to withstand restrictions and competition over a period of time.

Starting point is 00:53:02 It has a good strong balance sheet so that it can survive any financial disruptions or liquidity crunch. And also, number three, it is not going to be adversely impacted by trade conflicts and is reasonably valued. I mean, it's really hard to find bargains. Only Toby can do that. So I don't have his. magic screen. And I was looking, looking at one of my previous picks back in 2016, 15 and 16, I had pitched Union Pacific, which is a railroad. Then I thought Microsoft might be a better pick after I saw stick pitching Alibaba in his, in the email. So that's why I'm going to

Starting point is 00:53:43 talk about Microsoft. Maybe Union Pacific later in some of the mastermind. Microsoft kind of fits all the five criteria I just laid out. I do know about the valuation. That's where I will it to you guys or the experts. The thing about Microsoft is that it's a old dog. Tried and tested has gone through many cycles. Has an 88% market share in office and productivity. That's their biggest mode. Every Fortune 500 company pretty much uses Microsoft Office.

Starting point is 00:54:13 With Satya coming on board in 2014, they went through a long period where they lost the direction. That's all behind them now. What Satya has done is put Azure or cloud and front and center. He's using their current strengths and assets very well. For example, Microsoft getting into Zulu, which is a music player, their misadventure, whereas cloud is right in their circle of competence. The reason being there are already so much of on-premise installations,

Starting point is 00:54:46 whether it is their servers or databases, that it's much easier for them to migrate their customers to cloud. Number two, a lot of customers trust them more compared to AWS because of some of the competitive dynamics. So those tailwinds. And Azure is growing at a rate of 75% annually. Of course, it's a small base now, like $5 to $7 billion, but it's expected to grow. When I say Azure, I'm only talking about their infrastructure as a service. If you talk about what they call as intelligent cloud, which is their entire cloud business,

Starting point is 00:55:20 which includes both infrastructure as a service, software as a service, and platform as a service. That's $32 billion today. So they're actually the leaders in SaaS today with 22% market share. And the SaaS business over a period of next few years, by 2022, just a SaaS business is, according to Gartner, is projected to be around $114 billion in terms of time. And the overall cloud is expected to be around $280 to $300 billion in total addressable market. I'm talking about infrastructure, software, platform, and business process as a service. So Microsoft is in that market.

Starting point is 00:56:01 They have really good pricing power, both in their traditional market, the productivity by acquiring LinkedIn and now GitHub. They're also closing in on their developer tools market. Gaming is kind of their 9% of their revenue, not big deal. still, they have 56 monthly active users for Xbox Live. I mean, just to give you a context in 2016, when LinkedIn was still public, monthly active users were around 100 million. So in terms of valuation, I think so far, in the past 10 years, their revenues has grown close to 7%.

Starting point is 00:56:37 I expect the current tailwinds. And with Azure, it will be definitely more than 6 to 7%. I have no idea how much it will be. Their operating margins were are close to 30% now, but as Azure scales, the reason I'm expecting the operating margin to improve over the next 5 to 10 years is that as Azure scales, they're building a lot of data centers. They're putting in a lot of capital to do that. So their operating margins should improve with scale. Based on all this information, I believe price to sales around 7 compared to say Amazon 82 price through earnings. based on all these factors, I feel safer parking my cash in Microsoft compared to, say,

Starting point is 00:57:22 just having it in cash. So I'm not expecting huge returns. I'm expecting decent returns that will beat inflation. That's on the downside. On the upside, if my hypothesis of more than 8% tagger in terms of revenue and margin improvement all holds true, it might give me some pleasant surprises in the next five years. Microsoft's a spectacular business. There's no question about that. The issue for me is the valuation. On all the ratios, it's really expensive, which, you know, it's got very high rates of growth.

Starting point is 00:57:54 So that might compensate you for it, but I kind of struggle to get to the valuation where it is. I think fair value could be, you know, kind of half where it is. I hate to say that it's kind of assuming very high rates of growth. But deep value guys are struggling a little bit in this market, and I'm one of them. So I freely admit that this is, once again, I just don't trust those high rates of growth. So that's my two cents. Harry, I didn't get much of a return on this one either. I echo Toby's comment where this is a fantastic, fantastic business. It's hard to find a business that can fire on all cylinders and produce the stability that they have at the growth rate that they have at the market cap that they have.

Starting point is 00:58:36 I find it quite impressive. But unfortunately, there's a lot of people in the market that, agree with that opinion and they're bidding the price higher, which is pushing your yield a lot lower. Whenever I did the intrinsic value on this, I'm assuming that the company grows at about a 5% growth rate. And I'm getting a similar IRA to what I think you'd get out of the S&P 500. My analysis is if I feel like I'm going to get the same return of an individual stock that I would get out of the S&P 500, it's lower risk, in my opinion, to just own the S&P than to push myself into an individual company that I expect the same return out of.

Starting point is 00:59:16 That's kind of where it's hard for me to buy into it. Now, you might be right. If we would go into a correction, a company like Microsoft might outperform the market because it's not going to be penalized as bad because it's, it is so consistent in its revenues. It's so consistent in its net income and its cash flows that it might bear a downturn better than other businesses. And in that case, you beat the market. So that's something that somebody's going to have to analyze themselves of whether that's worth it or not.

Starting point is 00:59:44 And, you know, I would, I'd tell you that's a coin toss, whether that's a true statement or not. So on the valuation side, Toby and Preston both, you guys pointed out that your fair value, if I'm correct, will be half of what it is today. So around in the 60s or 70s. The question I have for you is, let's say you got it at 60 or 70. What would you do? Would you still keep it at these levels or sell it? I mean, that's a really tricky question because it comes down to what your capital gains is. If you realize that as a long-term gain, then you're going to be in a lower tax bracket. So you've got to figure out

Starting point is 01:00:16 that friction of how much you're going to lose in your tax bill. And then more importantly, what asset are you then shoving that the capital that you generated from the sale? What return are you getting on what your opportunity is? It's a opportunity cost kind of question after you account for the friction of paying your tax bill for that gain. So without knowing the yield that I would expect to get on the buy side after the sale of that company, I can't intelligently answer that question. Yeah, it's probably a hold. If you've bought it cheaply and you've got it here, I'd probably still getting reasonable and you don't want to pay those taxes. I'd keep on holding it, but I think Preston's points are right. Let's say you're going to make a venture capital investment with the money

Starting point is 01:00:59 and you have a lot of faith in whatever you're doing and you're going to get a high yield. your expectations you're getting a high yield for low risk. That's where you would say, okay, this thing's only going to yield at 3%. The tax that I'm going to have to pay is substantial for something like that, especially if it's a short-term gain. But you have to do all that mental gymnastics and all that math to kind of figure out whether that'd be a good decision or not. Got it. Thanks. Steve, you had a question. I really like your thought process about saying, oh, is this just a placeholder for cash? And I think that's worth a note. I also did the numbers on

Starting point is 01:01:32 Microsoft. And I think, you know, I probably get around just short of 4% return. This is not super attractive. And, you know, it's not too much more than what I expect out of the S&P 500, as Preston mentioned. So one might argue, should I do that? Should I get the 500 stocks instead? I have been considering for my own portfolio, just what you mentioned there, you know, instead of just holding it in cash, which just seems to be a, you are paying the opportunity cost on that, Would it make sense to, while you wait, hold them in 10, 20 different high quality stocks that might yield slightly more than the market? Knowing that if the market does take a hit, as I think most of us expect, will it then just not slide as much and you can take some of that cash and put

Starting point is 01:02:14 into a different company? Is that a good approach? I think it's an interesting discussion you bring up. I don't think there's anything wrong with that, especially if you're not actively or too actively looking at the market. You have a very long time horizon. You just want to take that monthly cash flow because that strategy, just always plow that into something. Doing something like Microsoft might not be too bad if you feel that, you know, three or four percent and not too much of a downside is what you're looking for. I don't see this pick for obvious reasons going anywhere. You mentioned Microsoft position in the cloud right now, which is just, you know, the cloud in itself, is just the growth rate you see is just amazing.

Starting point is 01:02:52 Who do you think our position best? Do you think that is Microsoft also giving the results you've seen from Microsoft in the cloud business over the past 12, 14 months? I have been looking into who are the major players? And the way cloud, unfortunately, it's a very heterogeneous market in the sense that you have software as a service or infrastructure as a service. AWS is by far the dominant leading player in infrastructure as a service with almost 50% market share and Microsoft like around 18% market share.

Starting point is 01:03:24 So that's number two. Google is a distant third with three to four percent market share. In fact, in 2017, Alibaba and Google were kind of tied at the third spot. IBM has completely lost its IAS position. Of course, it's distant fourth or so. When I see the tailwinds, I see Microsoft as one of the leading players because of their presence in all the stacks, whether it's infrastructure, which is, when I say infrastructure as a service, it is basically think of it as like computers for hire on the cloud. Basically, it's storage, it's compute, that is CPUs. And then when I say platform as a service, it's add-ons on top of these infrastructure, like whether you have a virtualization or an operating platform on top of this basic compute infrastructure.

Starting point is 01:04:13 And then on top of that, when you provide certain software, whether it can be CRM, like the way Salesforce workday, all these guys do, or ERP, or even productivity suite, like Office 365 that Microsoft is providing. And then there is also data as a service that's a new category that Gartner introduced recently, wherein Oracle, Microsoft and other companies, even at AWS, they're providing their data infrastructure or think of it like database on the cloud, basically. to be simplistic so that you don't have to maintain the big data infrastructure on premise. And I have seen that there is a huge consolidation in this market in the last two to three years.

Starting point is 01:04:55 And Google, Amazon, and Microsoft are emerging as the three players who are of significance. And the order is Amazon, Microsoft, and Google. We're just always so thankful to have Toby and Hari on the show. Guys, I want to give you the opportunity to tell our audience about where they can. can learn more about you. And I think it's really important to highlight. Toby's got a new podcast that he's going to be starting. I don't know what kind of consistency Toby plans on doing shows, but Toby, tell us about that and tell the audience where they can learn more about you guys. I've got a new podcast called The Acquireers Podcast that will be popping up on the Acquires Multiple

Starting point is 01:05:32 website, acquireasmultable.com slash podcast. First episode goes out March 11. We're going to be recording on video, put onto YouTube and on audio distributed through all of your favorite podcast platforms. Basically, I'm going to be interviewing other entrepreneurs, investors, authors to see if I can figure out that little insight that they've had that helps them to beat the market or to beat their competitors or to manage risk. So it's going to be the type of stuff that I'm focused on, deep value investing, buyouts, activism, special situations. And I want to know how to pick stocks, how to manage risk, how to deal with bad luck, how to maximize success. If you can get any of it, it's been a long time between drinks for me. So see me make a fool of myself on my new podcast.

Starting point is 01:06:17 Ari. Business.com, that's my blog. And on Twitter, my handle is Harry Rama and look forward to the conversation. All right, guys. Well, we really appreciate you guys coming on the show and sharing your comments and your feedback and your knowledge. We just always look forward to these. All right, guys. So before I let you go, please remember to sign up. to our newsletter at tipemail.com, and we will automatically send all our intrinsic value assessments directly to your inbox. But guys, that was all that Preston and I had for this week's episode of The Investors Podcast. You see each other again next week. Thanks for listening to TIP.

Starting point is 01:06:53 To access the show notes, courses or forums, go to theinvestorspodcast.com. To get your questions played on the show, go to Asktheinvestors.com and win a free subscription to any our courses on TIP Academy. This show is for entertainment purposes only. Before making investment decisions, consult a professional. This show is copyrighted by the TIP Network. Written permission must be granted before syndication or rebroadcasting.

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